Cummins Inc. (CMI) Earnings Call Transcript & Summary

Greetings, and welcome to the Second Quarter 2026 Cummins Inc. Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Nick Arens, Executive Director of Investor Relations. Please go ahead.

Thank you, Paul. Good morning, everyone, and welcome to our teleconference today to discuss Cummins results for the second quarter of 2026. Participating with me today are Jennifer Rumsey, our Chair and Chief Executive Officer; and Mark Smith, our Chief Financial Officer. We will all be available to answer questions at the end of the teleconference. Before we start, please note that some of the information that you will hear or be given today will consist of forward-looking statements within the meaning of the Securities and Exchange Act of 1934. Such statements express our forecasts, expectations, hopes, beliefs and intentions on strategies regarding the future. Our actual future results could differ materially from those projected in such forward-looking statements because of the several risks and uncertainties. More information regarding such risks and uncertainties is available in the forward-looking disclosure statement in the slide deck and our filings with the Securities and Exchange Commission, particularly the Risk Factors section of our most recently filed annual report on Form 10-K and any subsequently filed quarterly reports on Form 10-Q. During this call, we will be discussing certain non-GAAP financial measures and we'll refer you to our website for the reconciliation of those measures to GAAP financial measures. Our press release, with a copy of the financial statements and a copy of today's webcast presentation, are available on our website within the Investor Relations section at cummins.com. With that out of the way, I will turn you over to our Chair and CEO, Jennifer Rumsey, to kick us off.

Thank you, Nick. Good morning. I'll start with a summary of our second quarter accomplishments and financial results, then discuss our sales and end market trends by region. I will finish with a discussion of our outlook for 2026. Mark will then walk you through additional details on our second quarter performance and our full year forecast. Before getting into the details of our performance, I want to highlight a few major events from the quarter. In May, we hosted our 2026 Analyst Day, where we raised our 2030 financial targets and reinforced our commitment to returning capital to shareholders. This reflects that our strategy is working. We are advancing our position in key markets and experiencing increasing demand for our products. In response to growing global investments in data centers, we also announced plans to further expand our global capacity and broaden our power generation portfolio with integrated power solutions and the development of 130-liter natural gas genset, extending our reach into the growing prime power market. Since Analyst Day, we have continued to build momentum in the data center market. We recently signed a multiyear agreement with a global hyperscaler, expanding a long-standing partnership and securing visibility into several gigawatts of future backup power genset demand. This agreement reinforces our confidence in our growth outlook and supports the capacity expansion already underway. In June, we announced an agreement with Circe Energy to provide QSK60 and HSK78 natural gas generator sets and integrated microgrid technology for a behind-the-meter prime power solution, supporting a high-performance computing data center in Texas. The project highlights our ability to deliver integrated power solutions, deepen customer partnerships, and expand our presence in the growing prime power market. Finally, the EPA released its much-awaited proposed rule last month that provides greater clarity on the implementation of the North America On-Highway 2027 emissions regulations for our industry. Based on the proposed rule, we announced our intention to use the implementation flexibilities outlined by the EPA to support a measured transition to our new home engine platforms. This approach is designed to satisfy the proposed regulatory framework and support OEM customer production schedules while providing additional real-world operating experience to help build end user confidence in our new engines. This balanced approach also helps maintain product availability, continue bringing new innovative products to market and support a successful industry transition. As a part of our phased transition, we plan to begin limited production of the model year 2027 X15 engine in January 2027 based on individual OEM launch plans with production ramping progressively and full production expected to begin in the fourth quarter of 2027. We also plan to begin limited production of the model year 2027 X10 in January 2027 with full production expected by the third quarter of 2027 based on OEM launch plans. During the transition, the current X12 and L9 engines used in truck and transit bus applications are expected to remain available under EPA's proposed rule. Consistent with our previous announcement, our next-generation B platform is expected to launch in January 2028, and the current B platform will be available for all of 2027. As we execute this phase transition, we will continue to work closely with our OEM partners, dealers, fleets and other end customers to align product availability and launch timing. We will also continue to stay actively engaged with the EPA and monitor its rulemaking and implementation flexibilities to support a successful transition for our customers and the industry. Together, these actions reflect our commitment to deliver for our customers, execute with discipline and invest in products and technologies that will support long-term profitable growth. Now I will turn to our overall company performance for the second quarter of 2026 and cover some of our key markets. We delivered record second quarter sales of $9.5 billion, an increase of 9% compared to the second quarter of 2025. Growth was driven primarily by higher global demand and power generation markets, particularly from data centers and international construction markets. EBITDA for the quarter was a record $1.7 billion or 17.5% of sales compared to $1.6 billion or 18.4% of sales a year ago. The increase in EBITDA was primarily due to higher volumes, increased joint venture earnings and positive pricing, partially offset by tariffs and higher variable compensation expenses associated with our projections for record full year earnings. Our second quarter revenues in North America increased 8% compared to the second quarter of 2025. Industry production of heavy-duty trucks in the second quarter was 60,000 units, down 4% from 2025 levels, while our heavy-duty unit sales were 23,000, up 2% year-over-year. Industry production of medium-duty trucks was 32,000 units in the second quarter of 2026, an increase of 8% from 2025 levels, while our unit sales were up 29,000, up 19% year-over-year. We shipped 33,000 engines to Stellantis for use in the ramp pickups in the second quarter of 2026, down 2% from a year ago. Revenues for North America power generation increased by 19%, driven primarily by continued strong data center demand and supported by the additional manufacturing capacity we brought online at the end of 2025 to meet that growing customer demand. Our international revenues increased 12% during the second quarter compared to a year ago. Second quarter revenues in China, including joint ventures, were $2.3 billion, an increase of 30% year-over-year, driven by accelerating data center demand as well as improving on-highway and construction markets. Industry demand for medium- and heavy-duty trucks in China was 378,000 units, an increase of 24% from last year, driven by strong export demand, particularly in Africa and Southeast Asia, as well as improving domestic replacement demand and increase in battery electric powered trucks. Our sales and units, including joint ventures, were 53,000 units, an increase of 2%. Industry demand for excavators in China in the second quarter was 79,000 units, an increase of 34% from 2025 levels. We sold 15,000 units up 35%, driven by export demand associated with mining investments in Africa and Indonesia. Results also benefited from OEM inventory stocking to mitigate potential logistics risks in the Middle East as well as continued domestic demand supported by rural development projects. Sales of power generation equipment in China increased 88% in the second quarter due to accelerating data center demand. Second quarter revenues in India, including joint ventures, was $742 million, an increase of 6% from a year ago. Industry truck production increased 5% from 2025, driven by increased freight availability, infrastructure and mining activity. Now let me provide our outlook for 2026, including comments on several of our key markets. We have raised our full year outlook once again as demand continues to build across several key markets. We now expect total company revenues to increase 10% to 13% in 2026 compared to our prior guidance of 8% to 11%. This improved outlook reflects higher demand in North America on-highway markets, continued strength in power generation driven by data center markets and improved on and off-highway demand in China. We are raising the midpoint of our 2026 North America heavy-duty truck forecast to a range of 240,000 to 250,000 units, up from our prior guidance of 230,000 to 250,000 units. This reflects strong recent order activity and improving fleet profitability, which drove better-than-expected second quarter production and improved visibility into demand in the second half of the year. In the North America medium-duty truck market, we are increasing our forecast to 130,000 to 140,000 units in 2026 compared to our prior guidance of 125,000 to 135,000 units. This reflects stronger-than-expected demand in the second half of the year, supported by improving OEM outlook and a modestly higher prebuy following the recent regulatory clarification. For both heavy and medium-duty trucks, we anticipate that the industry production is largely set for the second half of this year. Consistent with our prior guidance, our engine shipments for pickup trucks in North America are expected to be 125,000 to 140,000 units in 2026. In China, we now expect total revenue, including joint ventures, to increase approximately 15% in 2026, an improvement from our prior outlook of up 10%. The higher outlook reflects stronger-than-expected on- and off-highway demand, particularly during the second quarter. While we expect normal seasonal moderation during the second half of the year, we continue to expect full year demand to exceed our prior expectations. For China heavy and medium-duty truck demand, we now expect a range of down 5% to up 5% compared to our prior guidance of down 10% to flat. This reflects stronger-than-expected export demand, particularly in Africa and Southeast Asia. In India, consistent with our prior guidance, we expect total revenue, including joint ventures, to increase 2% in 2026. This includes our expectation for industry demand for trucks to be flat at the midpoint of our guidance, supported by tax rate reductions, improving underlying demand. For Global Construction, we now expect demand to range from flat to up 10%, an improvement from our prior outlook of down 10% to flat. In China construction, export demand is stronger than we previously anticipated with relatively flat domestic demand. In North America, we expect demand to remain largely flat given ongoing tariffs and interest rate uncertainty. We expect our major global high horsepower markets to remain strong in 2026. Consistent with our prior outlook, we continue to expect global power generation revenues to increase 15% to 25%. While customer demand remains exceptionally strong, particularly for data center applications, our growth in 2026 will continue to be constrained by capacity. Our outlook reflects the capacity we brought online in North America at the end of 2025, continued international growth, particularly in China and the broader Asia Pacific region, and increased demand for lower output generator sets as customers seek solutions amid ongoing capacity constraints for larger configurations. The sustained strength in customer demand continues to support our long-term investment and expanding our power generation portfolio and global capacity as we discussed in May. In mining, we now expect engine sales to range from down 5% to up 5% for the year compared with our prior guidance of flat to up 10%. While fleet replacement activity remains supportive in several markets, elevated inventory levels and others are expected to moderate demand through the remainder of the year. For aftermarket reflecting the slight adjustment in our prior guidance, we expect growth of 3% to 8% for 2026, supported by aging fleets and higher parts consumption. In summary, we delivered a strong second quarter and are raising our full year revenue growth outlook to 10% to 13% up, while increasing the midpoint of our EBITDA guidance to a range of 18% to 18.5%. Our outlook reflects our expectation for improving operating performance in the second half of the year, led by stronger North America on-highway markets and continued high demand in power generation. We entered the second half of the year with positive momentum and greater regulatory clarity and we remain focused on executing our strategy, investing for long-term growth, helping our customers succeed in a rapidly evolving market. I want to thank our employees and leaders around the world for their commitment to our customers and each other. Their dedication, teamwork and focus on execution continues to differentiate Cummins and position us to deliver for our customers while creating long-term value for our shareholders. Now let me turn it over to Mark.

Thank you, Jen, and good morning, everyone. Our second quarter financial performance and other important business developments built on the themes from our recent Analyst Day. We delivered record quarterly sales and EBITDA dollars and strong operating cash flow in the second quarter extending our track record of raising performance cycle over cycle. We returned over $0.5 billion of cash to shareholders in the form of share repurchases and cash dividends. The Power Systems business was awarded new prime power business here in the U.S., and we significantly expanded our opportunities for growth in data center backup power with one of our existing global hyperscaler customers, as Jen summarized. Having reflected on our strong performance in Q2 and the record demand for Cummins products globally, we've raised our full year forecast from 3 months ago. In another sign of confidence, our Board of Directors approved a 10% increase in our quarterly cash dividend, the 17th straight year of dividend growth. Second quarter revenues were $9.5 billion, up 9% from a year ago. Sales in North America increased 8%, while international revenues grew 12%, led by China. EBITDA was $1.7 billion or 17.5% compared to $1.6 billion or 18.4% a year ago. The increase in EBITDA dollars was primarily driven by higher global power generation volumes and stronger international construction demand. The net impact of tariffs was immaterial to EBITDA dollars in the quarter. Now let's go into each line item, but with a little more detail. Gross margin for the quarter was $2.5 billion or 26.1% of sales up from $2.3 billion or 26.4% last year. The increase in dollars was primarily driven by higher volumes, an increase in joint venture earnings and positive pricing partially offset by tariffs and an increase in higher incentive compensation, which is related to our projections for record full year financial performance this year. To avoid me repeating myself several times, I will simply note that the higher incentive compensation impacts cost of sales and operating expenses for all of our operating segments. The run rate for incentive compensation should be lower for the second half of the year than we incurred in the second quarter based on our current forecast. Selling, administrative and research expenses were $1.3 billion or 13.5% of sales, compared to $1.1 billion or 13.1% a year ago. The increase was driven primarily by higher development cost to support our upcoming on-highway platform launches in North America, a new mining and natural gas power generation programs. Joint venture income of $154 million increased $36 million from the prior year primarily due to stronger performance in our China joint ventures, benefiting the engine and Power Systems segments. Other income was $32 million compared to $49 million from the prior year. Interest expense was $80 million, a decrease of $7 million from a year ago. The all-in effective tax rate in the second quarter was 25.1%, which has included $29 million of unfavorable discrete items or $0.21 per diluted share. All-in net earnings for the quarter were $932 million or $6.73 per diluted share compared to $890 million or $6.43 per diluted share a year ago. Our operating cash flow was $1.5 billion, a record for a second quarter, compares favorably to $785 million a year ago, driven primarily by improved working capital. During the quarter, we returned $501 million to shareholders consistent with our long-standing commitment to return approximately 50% of operating cash flow. This included $225 million of share repurchases and $276 million in cash dividends. I'll now comment on the segment performance and our guidance for the full year '26. For the Engine segment, second quarter revenues were $3.1 billion, an increase of 6% from a year ago. EBITDA was 12.5%, a decrease from 13.8% a year ago, as higher research and development and freight costs were partially offset by stronger North American medium-duty truck volumes, China construction demand and improved tariff recovery. In 2026, we project revenues for the engine business to be at 9% to 14%, up from our prior year guide of 7% to 12%, driven primarily by higher expectations for North America heavy and medium-duty truck. We expect EBITDA to be in the range of 12.5% to 13.25% compared to our prior year guidance of 12.5% to 13.5%. Components segment revenue was $2.9 billion, an increase of 7% from a year ago. EBITDA was 13.2%, a decrease from 14.7% a year ago as higher product coverage costs were partially offset by stronger North American truck volumes, higher China on and off-highway volumes, favorable pricing. Components, we expect 2026 revenues to be up 8% to 13%, up from our prior outlook of growth of 7.5% at the midpoint due to stronger demand, the trucks in North America, stronger demand in on- and off-highway markets in China. We expect EBITDA to be in the range of 13.5% to 14.25% compared to our prior guide of 13.5% to 14.5%. In the Distribution segment, revenues increased 9% from a year ago to a record $3.3 billion. EBITDA decreased as a percent of sales to 13.6% compared to 14.6% a year ago, driven by the higher incentive compensation and freight expenses, which were partially offset by higher power generation volumes. We expect 2026 distribution revenues to be up 9% to 14%, consistent with our prior guide. We also expect EBITDA margins to be in the range of 13.5% to 14.25% compared to our prior -- previous guidance of 14% to 14.25% at the midpoint. In the Power Systems segment revenues were a record $2.3 billion, an increase of 19% and EBITDA increased from 22.8% to 24.5% of sales primarily driven by strong global power generation demand, especially in the U.S. and China. The 2026, we expect Power Systems revenues to grow 14% to 19%, unchanged from 3 months ago. We also expect EBITDA margins in the range of 25% to 25.75% compared to our previous guide of 25.5% at the midpoint, reflecting continued strong performance across the business as well as increased investments during the second half of the year to support development of our new [ 130-liter natural ] gas generator platform and expand our position in the growing prime power market. Accelerator revenues increased 38% to $145 million, driven by higher electrified powertrain and electrolyzer sales. EBITDA was a loss of $69 million, an improvement from a loss of $100 million in the prior year, reflecting targeted cost reduction actions previously implemented in this segment. In 2026, we now anticipate accelerated revenues to be in the range of $350 million to $400 million, an increase from our prior guide of $300 million to $350 million, and we now expect net losses in the range of $260 million to $290 million compared to our prior guide of a negative $270 million to $300 million. In summary, we've raised our full year outlook and now expect total company revenues to increase between 10% and 13%, with EBITDA in the range of 18% to 18.5%. Our effective tax rate is expected to be approximately 23% for the full year excluding any discrete items. Capital investments will be in the range of $1.35 billion to $1.45 billion as we continue to make critical investments to support future growth. In summary, we delivered a strong quarter, supported by continued growth in demand for power generation equipment, improving North America truck markets and growth in China in most end markets, especially data centers. Thanks to the excellence and commitment of our employees in what remains a complex global economic environment, we enter the second half of the year with positive momentum and focused on supporting our customers with their growth plans and further improving our already strong financial position. Our strong balance sheet provides the financial flexibility to invest in the growth opportunities ahead, which you've heard a little more today while continuing to allocate capital with discipline and return excess capital to shareholders. Thank you. Now let me turn it back over to Nick.

Thank you, Mark. Out of consideration to others on the call, I would ask that you limit yourself to 1 question and a related follow-up. If you have an additional question, please rejoin the queue. Operator, we are ready for our first question.

[Operator Instructions] Our first question is from Jamie Cook with Truist Securities.

I guess 2 questions. One, just given the incremental clarity we have now on EPA 2027, how are you thinking about the setup for 2027? I know at the Analyst Day expected a down first half for 2027. So how you're thinking about that? And then I guess, Mark, how -- if you look at your earnings in the back half of the year, it implies earnings probably $16, $17 of earnings power in the back half of the year? I'm trying to think, is that a good way to think about a base you mean for 2027. And then my second question, just the distribution margins, I think you lowered quite a bit -- so if you could just talk around the change in margin guidance for distribution?

Jamie, obviously, we raised [indiscernible] for the year and the outlook for the American truck market. So we continue to expect strength in the second half of the year. With the EPA draft rule and with the phased transition that we've announced, the key thing is the destination doesn't change the growth opportunity that will exist for us in engines and components with this new platform launches remains the same, and we think the transition will be smoother. So while we would expect some moderation in demand next year, we won't give specific guidance, of course, today on what that is, it will not be as abrupt as we might have previously anticipated as we continue to offer the current product for part of next year or in the case [indiscernible] for all the next year and then ramp up the new product. So it's going to smooth that overall transition and really, I think, make less variation of what year-to-year demand looks like, more driven just by the fundamental economics.

Yes. And then to your other questions, Jamie. Yes, there's nothing -- there's no onetime or anything nonroutine in the second half of the year. So we're expecting strong EBITDA for the second half of the year, up from the first half of the year, up from a year ago in both Q3 and Q4. The top-up in outlook for incentive compensation gets created a little bit of noise in the second quarter results, but that's going to be lower going into the second half. But the underlying story is one of significant revenue growth and margin expansion on an underlying and as you'll see, hopefully, on a reported basis in the second half of the year. And then distribution is really 2 things going on and maybe 1 thing not going on and 1 thing going on in that the mix of the business isn't really changing. There's obviously a lot of momentum in their execution of the installation of a lot of these big power generation contracts. The parts business isn't growing at the same rate, probably that would be the thing that would need to see a significant step-up in the margin percent probably. The other factor is, as we've increased our outlook for total company profitability along with that goes the higher incentive compensation, which unfortunately, the distribution disproportionately impacts them as they've got -- it's more of a people business. So that's just a natural consequence. I would -- as a starting point, I would say when we go into next year, we reset our plans at target, our incentive plan is operating above target right now for the current year because of the record performance and that gets reset going into next year. So that would be one thing that probably a bit of a tailwind, what happens to demand too early to say as our best guess would be less volatility than we might have imagined in the -- certainly in the first half of the year in North America and highway. Unquestionably, we've got robust backup in power generation, primarily from standby diesel for data centers [indiscernible] that continues to grow. So not seeing any significant changes at this point in time, but it's a very early commentary on what we see going forward. So I hope that helped. There's nothing significantly changing. The distribution business, yes, could get close to kind of 10% earnings growth this year. And on an underlying basis, we see a lot of growth there and margin expansion going forward.

Our next question is from Steve Volkmann with Jefferies.

Mark, can I just take that one step further, what would roughly be the reset in the incentive comp, I guess, I don't know, in dollar terms, just so we can think about what that good guy might look like next year?

Well, next year, it could be in the order of -- it could be in the order of like $200 million.

Perfect. Okay. And then...

Just to try and bring clarity because, obviously, that's created little bit of, I would say, distortion is a wrong word, but we have to top it in the second quarter. For the second half, it will be about $25 million a quarter lower in Q3 and Q4 than the Q2 expense.

Got it. Okay. And then can I just ask on power gen. I'm interested that your target is up 15% to 25% because my interpretation is your kind of capacity constrained there. Why such a big range for that target? What could really kind of move that from bottom to top of the range?

Yes. Thanks, Steve. So our guide obviously stayed the same this quarter to what we talked about last quarter to largely underpinned by increased capacity, that investments that we made in the 95-liter in particular that we completed last year and then growing demand in China out of our businesses in China, for a product in China and Southeast Asia. And as I said in my remarks, because of the capacity constraints on the large gensets, we're seeing some customers taking some of the smaller gensets, but that trend is basically staying the same in the last 3 months is what we saw previously. So there is still some range in that. But it really depends on that. I think the large gensets will be basically at capacity and then how much we see at some of the smaller product sale will drive that variation.

It's fair to say, it's unlikely to be a 10% swing from here to there. I think the one thing that's been a positive surprise is really the rapid acceleration in China. We were already expecting strong demand in North America, but China has really picked up as well. So whatever extra we can squeeze out with our amazing supply chain team and power systems, probably we can sell it for this year and certainly into next year.

Our next question is from Jerry Revich with Wells Fargo.

I'm wondering if we could just talk about given the performance ramp ahead of plan this year in Power Systems. How are you thinking about how much the team can ramp up deliveries, '27 versus '26 in this teens type of growth rate as the supply base continues to ramp up? Any updated thoughts on the cadence would be helpful.

Yes. At this point, the cadence we see is really the same as what Jenny talked about in the May Analyst Day, where we announced, of course, the additional investment in capacity, 20 gigawatt incremental capacity across basically all of our plants and our supply chain. And we'll see some of that coming online next year. So we'd expect some step-up and then the bigger step-up happening in '28 and then continuing to phase in through 2030. And then recall that, that capacity is pretty flexible across size of engines, size of genset application between -- for engines between industrial markets and power gen markets, including the natural gas prime demand. But really, we're starting to see -- as you heard, we're starting to see some prime demand for the products that we have while we work on developing the new 130 liter, but that's going to grow a little bit, but still the predominant revenue for Power Gen this decade is going to be diesel standby.

Super. And then [indiscernible] topics in engines, the guidance implies 14% type margins in the fourth quarter. On prior engine transitions, you folks have executed pretty seamlessly from 1 product to the next. Can you just talk about expectations into '27? How hard is the product transition that you folks are dealing with producing some new products and older product? How should we be thinking about the impact on operations over the course of '27?

Yes. I mean we -- of course, in our plants, we're used to producing different products, but this ability to have a longer limited production transition is something that we've not had in the past. So with the flexibility in the draft rule, and we anticipate this will stay in place based on all of our conversations with the EPA. It really helps us and the industry ramp through that limited production phase between the old and the new products. So we're going to continue to sell the current product next year and anticipate pretty solid demand for that and then ramp up. And then what we've had the forever rising tour out, we've been doing field tests. We've had customers seeing the new home platform launches. I spent time with customers last week, and they're really excited about the opportunity to start to buy at the beginning of the year and build confidence and move in a more measured way between the old and the new products. So I think it's going to be a positive for us, and it's going to let us really gain confidence and capability in that new product with -- across our different OEMs and end customers.

Our next question is from Steven Fisher with UBS.

Just on the power side of things, the incremental margins seem to be better than the 25% to 30% expectations that you've talked about. I'm just curious kind of what's surprising you there. And it looks like in the second half implied to be better than that as well. Any color there would be helpful.

I think the main driver has probably been stronger demand in China, which helps on the JV earnings side. But overall, not a big surprise. It's really just -- it's a question of efficiency during the ramp-up and how well we work with the supply chain, the pricing set. So I think generally, things have been going well there. There is going to be a step-up in engineering. It's not extraordinary. But as we -- we're bringing to market more new platforms that will be effective. But certainly, we expect the strong gross margin performance to continue.

Okay. And then just as a follow-up to maybe one of the prior questions. In terms of this -- the engine transition in 2027, I'm curious to what extent you thought maybe about whether there's likely to be a prebuy in 2027 as well for those that might be a little more concerned about the technology, but also still some higher cost. Do you think the sort of the phased ramp-up will help alleviate some of the desire potentially for a prebuy on the technology side? Or do you think we could still see a prebuy in '27 out of '28?

I think it really enables just an overall smoother transition. That -- the industry is coming off of cyclical low. The fundamentals are improving, I would describe it as cautious optimism. So we're -- the fleet is aging. We're starting to see customers just the fundamental economics are allowing them to buy, which is support and demand and some prebuy is coming in, and I think we would anticipate that would continue into next year. But I would think of it as just generally smoother year-over-year versus, well, if you we were to go back a year or 2 years ago, what we would have anticipated.

Our next question is from Angel Castillo with Morgan Stanley.

Just wanted to continue on the EPA '27 dynamic. You mentioned that overall, the shape of the curve and the demand likely ends up being a little bit better for you. But just curious if we could put a little bit more of a financial kind of details around that just in terms of any implications on your pricing ability on the new engine as you roll that out or phase that in. Any implications on cost as we think about kind of this new more layered approach or slow ramp-up, what does that mean for margins versus what you had kind of anticipated before? And just lastly on that, like any implications on market share? I don't know if others can use credit or any other dynamics you'd expect?

Well, I think on economics, we're still working through all of the pricing. But what we said at Analyst Day for the new products, but what we said at Analyst Day is the industry expects that the largest contributor to the increased value and price of the trucks is going to be the powertrain. So we still believe that to be the case. And we expect when we're launching new products with new value, we're appropriately compensated for that. Regarding current products, obviously, going into next year. I'll be surprised I didn't get a question on this already, but there'll be NCPs or nonconforming penalties. Those we expect to pass on to the market. So we don't expect a significant financial impact from those. So yes, those are the things that I would say overall in terms of economics of what we know now. But I think this -- the benefit of this staged or staggered transition is obviously that we get -- we get to trial those products longer. And yes, it should be better for the industry overall. One of the consequences, of course, of staggering is that our R&D cost will stay elevated for a little bit longer. Again, it won't be hundreds of millions of dollars more than the current rate. We're already spending a bit more. But our product coverage cost for next year would be lower than we would have anticipated with the full launch on January 1. So quite a few moving parts, but I've tried to cover them all.

Understood. That's very helpful. And then just curious on the backup or diesel power backlog. Just could you give us any color in terms of what you're seeing in the shape of your backlog? How much maybe it's growing sequentially or year-over-year in the quarter? And any kind of color that you can provide on kind of the regional demand as well as just the underlying backdrop that you see there for that -- for that product?