Cummins Inc (CMI) — Q1 2024 Earnings Call Transcript

Thanks very much. Good morning, everyone, and welcome to our teleconference today to discuss Cummins results for the first quarter of 2024. 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 a number of 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 the course of 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, Chris, and good morning, everyone. I'll start with a summary of our first quarter financial results, and then I will discuss our sales and end market trends by region. I will finish with a discussion of our outlook for 2024. Mark will then take you through more details of both our first quarter financial performance and our forecast for this year. Before getting into the details on our performance, I want to take a moment to highlight a few major events from the first quarter. In March, Cummins successfully completed the separation of our Filtration business, Atmus Filtration Technologies. Cummins will continue its focus on advancing innovative power solutions, while Atmus is now well positioned to pursue its own plans for profitable growth. We are proud of our employees' hard work and all who were involved to ensure successful separation, and we are excited to see what the future holds for both Cummins and Atmus. The final step in the separation of Atmus resulted in a tax-free exchange of shares, which reduced Cummins shares outstanding by 5.6 million. In addition, we reintroduced our fuel-agnostic platforms with a name that captures the innovation that powers us forward, Cummins HELM platform. With higher efficiency, lower emissions and multiple fuels, the Cummins HELM platforms give our customers control of how they navigate their own journeys as part of the energy transition. As the next product in the Cummins HELM 15-liter platform, we announced we will launch the next-generation diesel X15 in North America for the heavy-duty on-highway market, which will be compliant with the U.S. EPA and CARB 2027 aligned regulations at launch. Lastly, in April, Cummins Power Generation introduced 4 new generator sets to the award-winning Centum Series, powered by Cummins QSK50 and QSK78 engines. These new models have been engineered specifically for the most critical applications such as data centers, health care facilities and wastewater treatment plants. I was excited to attend the launch event with our customers and hear about the growing demand for these critical applications and the high interest in our genset products, which build on decades of experience meeting our customers' needs and deliver a step change improvement in power density, assured reliability, sustainability, and low emissions. Now I will comment on the overall company performance for the first quarter of 2024 and cover some of our key markets. Demand for our products remained strong across many of our key markets and regions. Revenues for the first quarter were $8.4 billion, a decrease of 1% compared to the first quarter of 2023. EBITDA was $2.6 billion or 30.6% compared to $1.4 billion or 16.1% a year ago. First quarter 2024 results include a gain net of transaction costs and other expenses of $1.3 billion related to the Atmus divestiture and $29 million of restructuring expenses as we continue to work to simplify our operating structure and improve the efficiency of our business for the long term. This compares to the first quarter 2023 results, which included $18 million of costs related to the separation of the Atmus business. Excluding the one-time gain and the costs related to the separation of Atmus as well as the restructuring expenses, EBITDA percentage decreased by 80 basis points as improved pricing partially offset lower volumes and higher research and development expenses as we continue to invest in the products and technologies that will create advantages in the future. Gross margin dollars improved compared to the first quarter of 2023 as the benefits of pricing more than offset the impact of lower volumes and supply chain cost increases. Our first quarter revenues in North America were flat with 2023. Industry production of heavy-duty trucks in the first quarter was 73,000 units, down 5% from 2023 levels, while our heavy-duty unit sales were 26,000, down 7% from 2023. Industry production of medium-duty trucks was 41,000 units in the first quarter of 2024, an increase of 8%, while our unit sales were 36,000, up 22% from 2023. We shipped 38,000 engines to Stellantis for use in the Ram pickups in the first quarter of 2024, down 2% from 2023 levels. Revenues for North America power generation increased by 21%, driven by continued strong data center and mission-critical power demand. Our international revenues decreased by 1% in the first quarter of 2024 compared to a year ago. First quarter revenues in China, including joint ventures, were $1.6 billion, a decrease of 5% as weaker domestic volumes were partially offset by accelerating data center demand. Industry demand for medium- and heavy-duty trucks in China was 305,000 units, an increase of 14% from last year. However, shifts in the market share during the first quarter led to a decline in our volumes year-over-year. The light-duty market in China was up 2% from 2023 levels at 486,000 units, while our units sold, including joint ventures, were 37,000, an increase of 3%. Industry demand for excavators in the first quarter was 50,000 units, a decrease of 13% from 2023 levels. The decrease in the market size is due to weak property investment, high equipment population, and slowing export demand. Our units sold were 9,000 units, an increase of 10% as a result of the QSM15 penetration and export growth. Sales of power generation equipment in China decreased 7% in the first quarter as accelerating data center demand was offset by softening in other markets. First quarter revenues in India, including joint ventures, were $758 million, an increase of 1% from the first quarter a year ago. Industry truck production decreased by 7%, while our shipments decreased by 5% as the market slowed ahead of elections in April. Power generation revenues increased by 37% in the first quarter as economic activity remains strong. Now let me provide an outlook for 2024, including some comments on individual regions and end markets. Our full-year guidance now excludes Atmus from the March 18 separation date onwards and also excludes the first quarter gain related to the divestiture. The guidance provided previously included Atmus for the full year as it preceded the transaction announcement. We are happy to share that our expectations for 2024 have improved from our initial guidance issued in February. Our forecast for total company revenue in 2024 remains the same, down 2% to 5%, which implies higher base business revenues of approximately $1.3 billion compared to our prior guidance as Atmus is now excluded from future quarters. We are increasing our forecast for heavy-duty trucks in North America to 255,000 to 275,000 units in 2024 compared to our prior guidance of 245,000 to 265,000 units, though we do still expect softening in the second half of the year. In North America, medium-duty truck market, we maintain our prior guidance of 140,000 to 150,000 units, down 5% to flat from 2023, consistent with our prior guidance. Our engine shipments for pickup trucks in North America are expected to be 135,000 to 145,000 in 2024, down 5% to 10% from 2023 as we prepare to launch our model year 2025 in the fourth quarter. In China, we project total revenue, including joint ventures, to increase 3% in 2024, consistent with our prior guidance. We project a range of down 5% to up 10% in heavy- and medium-duty truck demand and expect a range of down 5% to up 5% in demand in the light-duty truck market. We expect replacement demand to be the biggest driver, but the effect may be weakened by a sluggish economy and potentially slower export demand. The short-term shifts in the market share that I noted earlier are expected to normalize as we progress through the remainder of the year. In India, we project total revenue, including joint ventures, to increase 9% in 2024, primarily driven by strong power generation and on-highway demand, consistent with our prior guidance. We expect industry demand for trucks to be flat to up 5% for the year. For global construction, we project down 10% to flat year-over-year, up from our previous guidance of down 5% to 15%. We continue to expect weak property investment and slowing export demand in China. We project our major global high-horsepower markets to remain strong in 2024. We are raising our guidance for global power generation markets to be up 10% to 15% compared to our prior guidance of about 5% to 10%, driven by continued increases in the data center and mission-critical markets. Sales of mining engines are expected to be down 5% to up 5%, consistent with our prior guidance. While a smaller market for us, we continue to anticipate demand for oil and gas engines to decrease by 40% to 50% in 2024, primarily driven by decreased demand in North America. For aftermarket, we've maintained our guidance of down 5% to up 5% for 2024, as we are through the inventory management efforts and destocking that happened throughout the industry in the second half of 2023. In Accelera, we expect full-year sales to be $450 million to $500 million compared to $354 million in 2023, consistent with our prior guidance. We are ramping up electrolyzer manufacturing capacity and capability to deliver orders to our customers as well as expect continued growth in electrified components. In summary, coming off a strong first quarter, we are maintaining our sales growth outlook for the year of down 2% to 5% as stronger demand in our base business has offset the removal of Atmus for future quarters from our guidance. We have also revised our forecast for EBITDA to be in the range of 14.5% to 15.5% compared to our previous guidance of 14.4% to 15.4%, reflecting stronger North America heavy-duty truck and power generation markets, which more than offsets the loss of profitability of Atmus. In addition, we are taking steps to reduce costs, optimize our business and position Cummins for continued success in 2024. We are in a strong position to keep investing in the future, bringing new technologies to customers and returning cash to our investors. During the quarter, we returned $239 million to shareholders in the form of dividends, consistent with our long-term plan to return approximately 50% of operating cash flow to shareholders. In addition, we reduced the overall Cummins share count by 5.6 million as we completed the Atmus share exchange, which will be more fully reflected in the average share count in the second quarter and beyond. I am impressed and grateful for the commitment of our employees and leaders around the world for delivering for our customers and generating strong financial performance at the same time. Our results further enhance Cummins' ability to keep investing in the future growth, bringing sustainable solutions that will protect our planet for future generations and returning cash to our shareholders. I look forward to discussing our long-term strategy further in our upcoming Analyst Day on May 16 and now let me turn it over to Mark.

Thank you, Jen, and good morning, everyone. We achieved strong revenue and profitability in the first quarter and generated positive operating cash flow. Due to the robust first-quarter results and our improved outlook, we have raised our full-year expectations for 2024 after accounting for the separation of Atmus. First-quarter revenues were $8.4 billion, which is a 1% decline compared to last year. The separation of Atmus in mid-March contributed to a year-over-year sales decline of around 1% for our consolidated sales. Our core revenues grew in North America and Latin America but were offset by decreased demand in China and Europe. EBITDA reached $2.6 billion, representing 30.6% of sales for the quarter. We finalized the tax-free full separation of Atmus in March, resulting in a one-time gain of $1.3 billion after transaction costs and other expenses. The first quarter expenses also included $29 million related to restructuring. In contrast, the first quarter of 2023 had $18 million in costs associated with the separation of Atmus. I will exclude the one-time gain, the separation costs of Atmus, and restructuring expenses in the following comments to clarify our operational performance and allow comparisons to the previous year. Atmus's financial results up until March 18 are included in our first-quarter consolidated sales and EBITDA. EBITDA for this quarter was $1.3 billion, or 15.5% of sales, down from $1.4 billion or 16.3% of sales last year. The lower percentage was primarily due to investments in new products and capabilities along with reduced sales volumes. Now, let’s examine the details by line item. The gross margin for the quarter was $2.1 billion, or 24.5% of sales, compared to $2 billion, or 24%, last year. The improved margins were mainly driven by favorable pricing and operational enhancements, particularly in the Power Systems business. Selling, administrative, and research expenses rose by $72 million due to the higher costs associated with developing new products and capabilities that support future profitable growth, especially in the HELM product line within the Engine business. Joint venture income increased by $4 million to $123 million from the prior year, mainly due to higher earnings in the Power Systems segment. Other income decreased by $50 million to $21 million compared to last year, primarily attributed to a negative impact from foreign currency revaluation and fewer gains on investments linked to company-owned life insurance. Interest expense increased by $2 million to $89 million from the previous year, driven by higher long-term borrowings following our bond issuance in February. The effective tax rate for the first quarter was 8.7%, largely due to the tax-free gain from the Atmus separation. Overall, net earnings for the quarter were $2 billion, or $14.03 per diluted share, which includes the net gain related to the Atmus separation of $1.3 billion, or $9.08 per diluted share, and restructuring expenses of $29 million, or $0.15 per share. I want to emphasize that the full effect of the lower share count from the Atmus separation will be visible in upcoming quarters as the diluted share count is based on a weighted average. The total operating cash flow was an inflow of $276 million, compared to an inflow of $495 million in the first quarter of last year. Now, let's discuss segment performance and our guidance for 2024. As a reminder, the previous guidance for 2024 assumed that Atmus’s operations would be factored into our consolidated results for the entire year. The Components segment reported revenue of $3.3 billion, a 6% decrease, but EBITDA, excluding the costs tied to Atmus’s separation, improved from 14.6% of sales to 14.8%, mainly due to better performance in Cummins Components. For the Components segment, we’ve adjusted our guidance following Atmus’s separation, expecting 2024 revenues to drop by 9% to 14% and EBITDA margins to fall between 13.5% and 14.5%. Our latest guidance reflects an increase in both revenues and EBITDA margins after adjusting for Atmus’s separation. For the Engine segment, first-quarter revenues declined by 2% to $2.9 billion. EBITDA was 14.1%, down from 15.3% a year ago, as pricing benefits were countered by lower volumes and rising research costs. For 2024, we project Engine business revenues to be down 5% to flat, which is an improvement of 2% at the midpoint compared to our previous projections, reflecting a revised outlook for the North American truck markets and stronger-than-expected demand from construction customers. The EBITDA for 2024 is projected to be between 12.7% and 13.7%, reflecting a 20 basis point increase at the midpoint due to higher volumes. In the Distribution segment, revenues grew by 5% year-over-year to $2.5 billion. However, EBITDA as a percentage of sales fell to 11.6% from 13.9% last year, primarily due to a decline in aftermarket sales to industrial customers from last year’s record levels. We expect 2024 distribution revenues to be flat to up 5%, with EBITDA margins in the range of 11.5% to 12.5%, showing an increase from the previous guidance for revenues and a modest improvement in margins for the full year. Power Systems segment revenues rose by 3% to $1.4 billion, and EBITDA improved from 16.3% to 17.1% of sales, primarily due to increased volumes in the power generation markets, improved pricing, and operational advancements, leading to a favorable performance trend in this segment. For 2024, we now anticipate Power Systems revenues to remain flat to up 5%, with an EBITDA range of roughly 16% to 17%, reflecting an 80 basis point increase from our prior estimate. Accelera revenues increased by 9% to $93 million due to higher electrolyzer installations. Our EBITDA loss was $101 million, compared to a loss of $94 million last year, as we continue to invest in products and capabilities for future growth. Our guidance for 2024 remains unchanged, expecting revenues between $450 million to $500 million and net losses between $400 million to $433 million, consistent with prior guidance. As mentioned, due to the strong performance in the first quarter and the outlook in key regions and markets, we are adjusting our company guidance for the full year, forecasting consolidated revenues to decline by 2% to 5%, in line with prior guidance despite the Atmus separation. Company EBITDA margins are now expected to be approximately 14.5% to 15.5%, indicating a 10 basis point increase from prior guidance, excluding the net gain related to the Atmus separation and restructuring expenses. Our effective tax rate is anticipated to be 24%, excluding the tax-free gain associated with Atmus and other discrete items. Capital investments are expected to be between $1.2 billion and $1.3 billion, unchanged from our outlook three months ago, as we continue to invest in new products and expand capacity to support future growth. In conclusion, we delivered solid sales, profitability, and positive cash flow in the first quarter. While we expect some moderation in key markets during the latter half of 2024, we have increased our performance expectations compared to prior guidance. We took measures to reduce costs in the fourth quarter of 2023 and will persist in identifying opportunities to streamline our business. This positions us well to navigate any economic fluctuations while continuing to invest and achieve strong financial performance. Our priorities for capital allocation in 2024 remain the same: reinvest for growth, raise the dividend, and reduce debt. Thank you for your interest today, and I look forward to seeing some of you in person in New York at our upcoming Analyst Day.

Thank you, Mark. Operator, we're ready for our first question.

I think I'd like to start off with power generation, if we could. That business seems to be going well. So sort of 2 things I'm curious to hear about exactly kind of what you think your position is in the data center market. How much of your business is data centers? And then how are you thinking about increasing capacity over the next, whatever, few quarters or years, however that's going to play out? What should we be thinking about in terms of capacity additions and your ability to kind of grow that business over time?

Great. Thanks, Steve. And as you heard in the guidance, we're projecting the power generation business to be up 10% to 15% for the year, and data center, mission-critical is really the driver of that. And we've had a very strong demand from data center customers, have had historically a strong position in that market, and that market is obviously growing. We're sold out on our 95-liter through 2025 right now. And I mentioned the launch of the new Centum product, which uses our 50 and 78-liter engine. So that's providing additional solution to those customers. And then, of course, we're continuing to look at capacity of the 95-liter and how we plan to support what we think will be continuing strong and growing market.

So sorry, do you have any concrete plans to increase capacity of 95 yet? Or is that still in process?

Yes, we do have concrete plans to increase the capacity that we have in place to-date for the 95-liter.

I wonder if I just ask the cadence of earnings over the course of this year, nice to see an upwards revision to both top line and margins. Mark, can you just talk about where the quarter came in versus your expectations because obviously, the quarter was light versus where the consensus was set up, and I'm just wondering how the quarter developed versus your internal plan. And what's the cadence of the acceleration that you folks are seeing to raise the guidance higher?

Yes. To be fair to everyone involved, there are many factors in the separation of Atmus. From my viewpoint, overall, we aligned with our expectations, and when considering the mid-quarter separation of Atmus, we are generally on track. It's worth noting that the Distribution business margins are somewhat lower, especially compared to last year. We see them at the lower end of the range in Q1, but we expect improvement moving forward, mainly due to a decline in parts sales, particularly in industrial off-highway applications. This issue is not new; it has persisted for a couple of months. However, we feel optimistic about the year-over-year gross margin improvement. As indicated by our announcements, we are actively seeking ways to streamline our organization and enhance efficiency where possible. Overall, we are in line, Jerry, but we anticipate that Distribution, in particular, will see improved margins in the future. We've always expected this, possibly with some anticipation last year, but it didn’t occur as expected. We are forecasting a decline in heavy-duty truck production in the third quarter, as you may have heard from other industry players. The Engine business and Components will probably experience some impact in Q3. However, Power Systems and Distribution should not see significant revenue fluctuations. In fact, Power Systems is trending positively moving forward and into next year. Distribution, as you know, comprises mainly parts and service, which are quite predictable and reliable. We have experienced a slight mix shift with lower parts, but we believe this is temporary.

Super. And can I just ask from a bigger picture standpoint, so new regulations 2027 will have embedded warranties essentially. What does that mean for your parts market share? Is that an opportunity when that field population increases for you folks to have higher engine parts market share because of that warranty dynamic on the new regulations, how significant is that opportunity?

Yes. I mean, as you noted, there's a requirement starting with the EPA 2027 regulations for longer emissions warranty for heavy-duty 10 years or 450,000 miles, most of that application is going to mile out. So it's essentially what our 5-year extended warranty that some customers are already purchasing. And then that will mean that everybody will need that warranty that will be embedded into pricing on those engine systems and then, of course, we'll drive customers to genuine part throughout that period, which will provide some further benefit to us.

I'm going to ask mine together because they're related. So and they're both around Power Systems. So I think in the guidance, you guys are embedding full-year margins below 1Q levels. I think it's a lumpy business, but if I look back historically, it's more common that the second half is higher. And then similar question on growth, the comps slightly in the second half, but your full-year growth guidance is, for an outcome less than the growth you saw in the first quarter. So if you could address both of those items.

We do tend to see some seasonality on revenue in the fourth quarter, a little bit in the second half. But I think the point of your question is essentially right, Nicole, there's positive momentum there. We've been raising the guidance as the performance is improving. There is some modest variation depending on how the parts flow in that business. But overall, our messages, we're confident in the business and the improvements that we have Jenny Bush and her team have really worked hard on over the last 18 months. And if we get more revenue, we're confident we'll be able to turn that in higher earnings. But there's nothing dramatically structurally different. Going forward, we expect improvement over time.

May 16, the meeting, can you just give us some expectations around the meeting? I think particularly around the margins. I think people are just trying to figure out the operating leverage in the company in the last couple of years, maybe not quite the margins people were expecting. Even the guide today, it was nice to see the power gen margin increase. But overall, the relative increase in earnings relative to the increase implicit in the sales guide. Still not that tremendous. So I'm just curious if you can sort of tee up a little bit what should we expect May 16. not trying to steal the thunder of the meeting but just to level set...

Yes. Well, obviously, I won't tell you what we're going to tell you specifically, but certainly, you can expect us to talk about overall strategy for the company where we think we're at against some of the 2030 goals that we shared in our last Analyst Day and certainly talking about revenue and margin expectations and what the drivers for that will be within that. So I think you'll hear more about that for sure, David, at our Analyst Day.

Okay. And 1 quick one. The JV income in the first quarter was up year-over-year, but you're still guiding the year down. And I'm just trying to make sure we know why it is down? Is it China not continuing some of the improvement? Is there other parts of the royalty income? I know it's a pretty lumpy line item within the JV income. If you can help us with that would be great.

Yes, I think you're correct, David. There are two main factors affecting our operating performance, which typically tracks in line with or better than the market rate. Additionally, we experience fluctuations in tech fees from the joint venture that impact Cummins' consolidated results as we introduce new products. Last year was particularly strong in terms of new product launches and hitting development milestones. Therefore, tech fees are expected to decline, especially in the Engine business, which balances out any predictions we have concerning market growth. There were some increases in truck OEM builds in the first quarter, but that’s based more on expectations than actual momentum. We're still looking for clearer indications of growth as China remains the key driver of earnings. Ultimately, it’s the reduction in tech fees that had a significant positive impact last year, particularly in the Engine business and somewhat in components.

One quick add there, David. And we also have built in our plan the launch of the battery joint venture later on this year post approval. So that will have some losses as well as that comes back online in the second half.

Which is embedded in Accelera.

Yes, we're expecting that. We have final regulatory approval for that battery JV. So we're expecting that's going to start flowing in Q2.

Just back to the Power Generation segment. I think you raised your guidance to 10% to 15% versus a 5% to 10% previously. Can you just talk about the price versus volume mix makeup of that versus prior expectations? Is this a matter of getting better production than you kind of anticipated? Or is pricing growing and just kind of what are you seeing from that perspective?

Yes. So there's a couple of dynamics to keep in mind in that market. So first of all, as I articulated, the order board is pretty long. And so some of the work to improve price costs in response to inflation and performance of the business takes some time to play out. So we're starting to see stronger pricing leverage come into that market. And then we're continuing to, of course, drive improvements in the Power Systems business and efficiency in manufacturing and supply chain. And I noted the launch of the new products that we've also designed to be able to sell at some higher margins. So there are some favorable dynamics that have been happening in the power gen market compared to historically where we would have been in margin performance.

That's very helpful. Regarding new products, you mentioned the upcoming X15 diesel engine designed to meet emissions regulations. Could you elaborate on your expectations for pricing guardrails and potential margin improvements? I know you usually implement emission cycles to adjust and recover some margin. As we consider the impact of these products on your pricing and margins as they are introduced, what are your thoughts?

Yes. So certainly, like in past emissions regulations, our goal is to deliver incremental value to the customer, to have margin improvement associated with that. You will see with the 27 EPA regulations, we already talked about the emissions warranty dynamic. You will also see added content, in particular, after-treatment system to meet those regulations has notable additional content. And then you will also have the warranty dynamic that we always have as we launch new products where we began at least to launch to accrue at a higher rate from a warranty perspective until the product is out in the market, and we've demonstrated warranty. So those are the moving parts that you'll see. We have not yet shared specific numbers on what we expect around exact pricing for those products.

I would like to gain a clearer understanding of the margin guidance. It appears that excluding Atmus, which has likely become a headwind, you have raised the full-year guidance by about 10 basis points, anticipating better margins in Engines and Power Systems. Could you clarify what is truly driving this improved margin expectation? Is it due to higher volumes, increased cost savings, or adjustments in price and cost? Any additional insights would be appreciated.

Good question. You're right that the Atmus separation is a little bit dilutive to margins. So yes, good that you picked up on that. It's really volume and a little bit of cost reduction activity. Those are the 2 primary drivers.

My question is going to be around your competitive positioning in the 2027 EPA from what you can see today. There's a bunch of questions we get on whether there's a prebuy on what the cost increase would be and maybe the warranty should be stripped out of that, I'm not sure. And there may also be more subtle things that you guys would understand better than most of us around how the standards can be met, whether having an additional nat gas where you guys do pretty well can offset other emissions and so forth. So that's the general question. Price increase, whether share gain and whether there's any subtleties around your mix in your early preparedness that will help you in 2027 transition?

Yes. Great. Thanks for the question. And we are investing, as we've talked about in the new HELM engine platforms. And we're in a unique position because of our scale to continue to invest in what will be market-leading engine solutions to meet those future regulations. And so we expect that, that will provide some advantage for us as we go into those regulations. There will be a dynamic we think that's going to play out in the '25 and '26 time period as end customers anticipate a major regulation change and what that will mean to them. And so we expect that's going to drive some things beyond the normal cycle in the U.S. truck market. And then as we go into 2027, there'll be some period of uptake, but we think we're well positioned. Obviously, our position in medium-duty has continued to strengthen, and we'll have a next-generation 15-liter natural gas that will go into the market later this year that is of high interest to some of our customers that have sustainability ambitions and see this as the best way, most cost-effective and reliable way to meet those ambitions and then we'll have a new high-efficiency 15-liter platform and 10-liter platform as well. So we're excited about our position with those products and really focused on the execution of development and launching them into the market.

Just sticking with the EPA 2027 for a minute here. If the final rules continue to provide nice crediting of hydrogen trucks. And just given your offerings in this space, wondering if you started to see more of a pickup for hydrogen fuel cell or whether most of sort of the Accelera inbounds at this point are primarily both.

Yes. Looking beyond 2027, the EPA has announced the Phase 3 greenhouse gas regulation, which will significantly influence the industry as we move towards 2030 and beyond. While we didn’t face any major surprises with this regulation, it represents an unprecedented level of ambition regarding zero emissions vehicle adoption. Success will require close collaboration between the industry and the government. In regard to your question, there are several aspects of the regulation that we find encouraging. One key point is that it acknowledges hydrogen engines as a zero-emission solution. We believe this will create an opportunity for hydrogen-fueled engines, while also recognizing that hydrogen fuel cells will remain a viable solution in the long run, although their adoption may take some time. Additionally, the EPA has committed to streamlining hybrid powertrain certification, which we see as a potential attractive solution given the challenges related to infrastructure availability. We are monitoring this closely. While we are observing an increase in battery electric powertrains currently, it is important to note that electrolyzers and fuel cells are still at relatively low adoption levels. Yes, our partners have been collaborating to prepare for the final regulatory approval. Earlier this year, we chose a site in Mississippi, just outside of Memphis, and we are starting the preparations for the supply chain and plant construction. With regulatory approval now in hand, we believe we can finalize the entity within this quarter. We will proceed with phased investments as we build the plant, aiming to start production in 2027. This investment in a 21-gigawatt hour plant is shared among our partners and is designed to allow us to introduce new lines and scale production as the industry evolves. We remain optimistic about our market position, especially with the LFP cell designed specifically for the commercial vehicle market, and we are looking to leverage available incentives to encourage adoption in this sector.

So sorry, I'm managing through like 7 calls. I hope this hasn't been asked. But Mark, the question is to you, I guess, understanding you have your guys' Analyst Day coming up this month. I'm just looking at Cummins and thinking, okay, perhaps there's a cost story there, you have market share gains that should be helping you maybe less spend on Accelera. I'm just wondering, as you think about margins over the medium term, do you think there's an opportunity to structurally improve incremental margins? Or as you think about sort of the next couple of years, it is more so taking these actions to hit Cummins' historic targeted incremental margins? And then my second question would be, and if this is addressed, I apologize. Can you just talk to the visibility you have across like in terms of backlog across your portfolio, in particular, for the engine side and the Power Systems side.

So I understand that we will specifically discuss incremental margins in May. For everyone asking, it's a very important topic for us. You can expect to hear more about it very soon.

Yes, it's great to have you back, Jamie. We're actively working on the integration of Meritor and ramping up Accelera, which is showing improvements. We'll discuss revenue in more detail later. Regarding the market, we're experiencing steady demand in the heavy-duty sector due to significant backlogs, and the vocational market remains strong. However, truckload has been declining for a while, and we expect some softening in the second half, as indicated by our OEM customers. This expectation is reflected in our adjusted guidance, which is lower but not as much as previously anticipated. As for power generation, we have sold out of the 95-liter model through 2025, and we are exploring ways to increase capacity, especially with the new Centum launch, which will allow us to market some of our other engines in that sector. Overall, we're very optimistic about power generation, medium-duty, and vocational on-highway segments. The area we're monitoring closely is the truckload and fleet customers in the heavy-duty market, which we expect to soften before we see the next upswing in their cycle.

Yes. What you may have heard earlier was some industry consensus developing about 2025 and 2026 in relation to 2027. Our current baseline assumption is that this downturn will not be as sharp or steep as typical cyclical downturns. This is an assumption, not a fact, but it's what we have incorporated into our outlook for this year. We are still waiting for more momentum in China.

I was just curious your thoughts. It's apparent that the downturn, I think a lot of us feared in '24 on the heavy-duty engine side isn't going to be as bad as originally feared. I know ACT Research has taken up their forecast. You did mention some weakness beginning in 3Q, but are we taking from what would have been otherwise prebuy in '26 if we have a better '24? Or do you think the 2 are unrelated?

I'm not sure they're connected. We're closely monitoring production rates, backlog, and some spot rate dynamics in the market. Freight carriers have faced challenges for the past 18 months, and that's what informs our outlook. It's really the supply chain dynamics that have made this cycle different and even unpredictable. This situation has certainly lasted longer than we initially anticipated, and we still expect to see some softening in the second half.

This is Federico filling in for Chad. I would like to double click on the R&D intensity and how to think about this on the medium-term basis.

Sorry, can you repeat that? I don't think we got the first part.

Sorry. We would like to double-click on the R&D intensity and how to think about this on a medium-term basis.

Yes. We have increased our R&D investments, particularly in new fuel-agnostic engine platforms. We are currently at a high level of R&D for these new platform investments. These products are starting to launch and will continue to do so through 2026 and 2027. Additionally, we are investing in the Accelera business as we work to launch new products and increase revenue there.

Thanks, everybody, for your participation today. That concludes our teleconference. Really appreciate the interest. And as always, the Investor Relations team will be available for questions after the call. Have a good day.

Look forward to seeing many of you in person in a couple of weeks.