Cummins Inc (CMI) — Q2 2024 Earnings Call Transcript

Thanks very much. Good morning, everyone, and welcome to our teleconference today to discuss Cummins’ results for the second 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 will 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. I will turn you over to our Chair and CEO, Jennifer Rumsey, to kick us off.

Thank you, Chris, and good morning. I'm excited to be with all of you today as I celebrate my two-year anniversary of becoming CEO of Cummins. I'll start with a summary of our second quarter financial results. 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 second quarter financial performance and our forecast for the year. Before getting into the details on our performance, I want to take a moment to highlight a few major accomplishments from the second quarter. At our recent Analyst Day, I shared that we are raising our long-term financial targets as a result of our strengthening portfolio and continued execution of our Destination Zero strategy. The strong partnerships that we have with customers and stakeholders are key to driving our strategy and growth profile forward. In this quarter, we strengthened those partnerships even further. In May, we announced with Isuzu Motors Limited the launch of a new 6.7-liter engine designed for use in Isuzu’s medium-duty truck lineup. This engine will power on-highway truck applications for the Japan market and will be available for Asia-Pacific markets and other global markets later this year. We also announced plans to launch a battery electric powertrain for Isuzu's F-Series in North America. Availability of the medium-duty truck is expected in 2026 and will include Accelera's next-generation lithium-ion phosphate or LFP battery technology. These advancements mark an important milestone for both Cummins and Isuzu as Cummins enters the Japan on-highway market for the first time in our history. We are proud of the partnership our two companies have built, and I'm excited to leverage our collective strength and scale to deliver profitable growth for both partners. Also this quarter, we further progressed our partnership with Daimler Trucks and Buses and PACCAR as we completed the formation of a joint venture now known as Amplify Cell Technologies, to localize battery cell production in the battery supply chain in the United States. This included naming the Chief Executive Officer of the joint venture and breaking ground at a new manufacturing plant in Marshall County, Mississippi. Amplify Cell Technologies will enable Accelera by Cummins and our partners to advance battery cells focused on commercial and industrial applications in North America and serve our customers' evolving needs. This is a significant step forward as we continue leading our industry into the next era of smarter, cleaner power. And in July, Accelera was awarded $75 million from the Department of Energy to convert approximately 360,000 square feet of existing manufacturing space at our Columbus, Indiana engine plant for zero-emissions components, including battery packs and electric powertrain systems. The $75 million grant is the largest federal grant ever awarded solely to Cummins and is part of appropriations related to the Inflation Reduction Act. The Columbus engine plant is also where we manufacture blocks and heads for our current and next-generation engine-based solutions, further showcasing our Destination Zero strategy in action. Now, I will comment on the overall company performance for the second quarter of 2024 and cover some of our key markets, starting with North America before moving on to our largest international markets. Demand for our products remains strong across many of our key markets and regions, resulting in record revenues for the second quarter of 2024. Sales for the quarter were $8.8 billion, an increase of 2% compared to the second quarter of 2023, driven by continued high demand and improved pricing. EBITDA was $1.35 billion or 15.3% compared to $1.3 billion or 15.1% a year ago. Second quarter 2023 results included $23 million of costs related to the separation of Atmus. EBITDA and gross margin dollars improved compared to the second quarter of 2023 as the benefits of higher volume and pricing exceeded supply chain cost increases and offset the impact of the Atmus separation. Our second quarter revenues in North America grew 4% to $5.5 billion, driven by the strong demand in our core markets more than offsetting the impact of the separation of Atmus. Industry production of heavy-duty trucks in the second quarter was 75,000 units, up 1% from 2023 levels. While our heavy-duty unit sales were 31,000, up 7% from a year ago. The second quarter marked record production volume for our heavy-duty engines at the Jamestown Engine plant. Industry production of medium-duty trucks was 41,000 units in the second quarter of 2024, an increase of 4% from 2023 levels, while our unit sales were 38,000, up 13% and also outpacing the market growth. We shipped 41,000 engines to Stellantis for use in the Ram pickups in the second quarter of 2024, up 8% from 2023. Revenues in North America power generation increased by 23% and were driven by continued strong demand for data centers and mission-critical power. The impressive power generation performance in North America and across the globe helped us achieve record sales and profitability in the Power Systems segment. Our second quarter international revenues decreased 2% compared to last year. Second quarter revenues in China, including joint ventures, were $1.6 billion, a decrease of 2% as weaker domestic volumes were partially offset by higher data center demand. Industry demand for medium and heavy-duty trucks in China was 270,000 units, a decrease of 3% from last year. Demand in the China truck market continues to run at low levels with higher orders for natural gas engines and strong exports offsetting weak domestic diesel demand. In the light-duty market in China, we were up 4% from 2023 levels at 480,000 units while our units sold, including joint ventures, were 33,000, an increase of 18%. The industry demand for excavators in China in the second quarter was 53,000 units, an increase of 4% from 2023 levels. Our units sold were 10,000 units, an increase of 19% as a result of QSM15 penetration at both new and existing OEM partners and export growth. Sales of power generation equipment in China increased 36% in the second quarter, primarily driven by accelerating demand in data centers. This helped drive impressive financial performance at our Cummins Chongqing joint venture within our Power Systems business. Second quarter revenues in India, including joint ventures, were $649 million, a decrease of 10% from the second quarter a year ago. Industry truck production increased by 11%, while our shipments increased by 5%. Power Generation revenues decreased by 17% year-on-year as the second quarter of 2023 benefited from pre-buy demand ahead of emissions regulation changes. Now, let me provide our outlook for 2024, including some comments on individual regions and end markets. We have raised our expectations for 2024 while still anticipating the second half to be weaker than the first half, primarily in the North America heavy-duty truck market. We are increasing our revenue guidance to down 3% to flat compared to our prior guidance of down 2% to down 5%. We are also increasing our EBITDA guidance to be 15% to 15.5%, compared to our prior guide of 14.5% to 15.5%. We now expect higher revenue in our Engine, Power Systems, and Distribution segments, offsetting slightly lower revenue expectations for the Accelera business. We also expect stronger profitability in our Engine and Power Systems segments driving most of the improvement in EBITDA. We are maintaining our forecast for heavy-duty trucks in North America to be 255,000 to 275,000 units in 2024 as we still expect softening in the second half of the year. In the North America medium-duty truck market, we are raising our forecast to be 150,000 to 160,000 units, flat to up 5% from 2023. This is an increase from our previous guidance by 10,000 units as we continue to benefit from an elevated backlog and strength in vocational orders. 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, with a planned model year changeover likely to drive a temporary dip in production in the second half. In China, we project total revenue, including joint ventures, to increase 3% in 2024, consistent with our prior guidance. In India, we project total revenue, including joint ventures, to increase 8% in 2024, primarily driven by strong power generation and on-highway demand. We expect industry demand for trucks to be flat to up 5% for the year. For global construction, we project a decline of 10% to flat year-over-year, consistent with our prior guidance. We continue to expect slightly weaker property investment and slowing export demand in China. We are raising our guidance for the global power generation market to be up 15% to 20% compared to our prior guidance of up 10% to 15%, 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. For aftermarket, we have improved our guidance to flat to up 5% for 2024, raising the bottom end of our previous guidance of a decline of 5%, with demand holding up better than expected in on- and off-highway markets. In Accelera, we expect full-year sales to be $400 million to $450 million, a reduction of $50 million from the prior guide. As we noted at our Analyst Day, the energy transition is progressing more slowly, impacting both our e-mobility and electrolyzer revenues. In summary, coming off a strong first half of the year, we are raising our guidance on sales to down 3% to flat and raising our EBITDA guidance to 15% to 15.5%. While we anticipate softening in the North America heavy-duty market in the second half of the year, demand in several of our core markets remains strong. Should economic momentum slow, Cummins is in a strong position to keep investing in future growth, bringing new technologies to customers and returning cash to shareholders. In July, we announced an 8.3% increase in the quarterly dividend from $1.68 to $1.82 per share, the 15th consecutive year in which we have increased the dividend. During the quarter, we returned $230 million to shareholders in the form of dividends consistent with our long-term plan to return approximately 50% of operating cash flow to our shareholders. Our diluted earnings per share benefited from a lower number of shares outstanding with the impact of the Atmus split more fully reflected in the weighted average share count in the second quarter. In summary, we had a strong performance in the first half of 2024, driven by record demand for Cummins products in our core markets. It is exciting to see our business grow with long-established customers in existing markets and to see newer partnerships yield additional opportunities in previously untapped markets for Cummins. I'm grateful for our employees who continue to execute on our strategy and deliver solutions that help our customers win wherever they operate. Our results reflect our dedication to delivering strong financial performance while also investing in our future growth, bringing sustainable solutions to decarbonize our industry and returning cash to our shareholders. As we discussed at Analyst Day, there is a lot to be excited about in our future. Now let me turn it over to Mark.

Thank you, Jen, and good morning, everyone. We delivered strong results in the second quarter. Given the strength of those results and our improved outlook, we've raised the midpoint of our full-year expectations for 2024. Second quarter revenues were $8.8 billion, up 2% from a year ago, as organic growth more than offset the reduction in sales driven by the separation of Atmus. Sales in North America increased 4%, while international revenues decreased 2%. Foreign currency fluctuations negatively impacted sales by 1%. EBITDA was $1.35 billion or 15.3% of sales for the quarter compared to $1.3 billion or 15.1% a year ago. The year-ago numbers included $23 million of costs related to the separation of Atmus. The benefits of higher volumes and pricing as well as the absence of the separation costs were the primary drivers behind the improved profitability. Now I'll go into a little more detail by line item. Gross margin for the quarter was $2.19 billion or 24.9% of sales compared to $2.15 billion or also 24.9% a year ago. Flat margins were primarily driven by favorable pricing and operational improvements, offset by the removal of Atmus and higher compensation expenses. Selling, administrative, and research expenses were $1.21 billion or 13.7% of sales compared to $1.26 billion or 14.6% last year. Joint venture income of $103 million decreased $30 million from the prior year, primarily driven by lower technology fees and the weak domestic truck market in China. Other income was negative $3 million, a decrease of $27 million a year ago. Interest expense was $109 million, an increase of $10 million from the prior year, primarily driven by higher weighted average interest rates. The all-in effective tax rate in the quarter was 23%, including $9 million or $0.07 per diluted share of favorable discrete tax items. All-in, net earnings for the quarter were $726 million or $5.26 per diluted share compared to $720 million or $5.05 per diluted share in Q2 last year. The second quarter reflected the lower weighted average share count as a result of the tax-free share exchange that marked the final separation of Atmus, which was completed in the first quarter. All-in, operating cash flow was an outflow of $851 million compared to an inflow of $483 million in the second quarter last year, and the decrease was driven mainly by the $1.9 billion payment required by the previously disclosed settlement agreements with the regulatory agencies. Excluding the settlement, operating cash flow was an inflow of $1.1 billion, more than double the cash generated in the second quarter last year. I will now comment on segment performance and our guidance for 2024. As a reminder, guidance for 2024 includes the operations of Atmus in our consolidated results up until the full separation that occurred on March 18th. Components segment revenue was $3 billion, a decrease of 13% from the prior year, while EBITDA decreased from 14.2% of sales to 13.6%, with both sales and EBITDA primarily impacted by the Atmus separation. For Components, we expect 2024 revenues to decrease 9% to 14%, consistent with our prior projections, and EBITDA margins in the range of 13.7% to 14.2%, narrowing the range from our previous guidance of 13.5% to 14.5%. For the Engine segment, second quarter revenues were a record $3.2 billion, an increase of 5% from a year ago. EBITDA was 14.1%, a slight decrease from 14.2% a year ago. The benefit from pricing and record on-highway volumes in North America was offset by higher research costs and lower joint venture income, primarily in China. In 2024, we now project revenues for the Engine business to be down 3% to up 2%, an increase of 2% from the prior midpoint, driven by a revised outlook in the North American medium-duty truck market. Full-year Engine EBITDA is projected to be in the range of $13.7 million to $14.2 million, an increase of 75 basis points at the midpoint from our prior projections due to higher volumes and ongoing operational efficiencies. In the Distribution segment, revenues increased 9% from a year ago to a record $2.8 billion. EBITDA as a percent of sales decreased to 11.1% compared to 11.4% a year ago, primarily due to higher compensation expenses and a higher mix of power generation sales, which are positive for the company overall, but have a dilutive impact on the Distribution segment margins. We now expect 2024 Distribution revenues to be up 5% to 10%, an increase of 5% from the prior midpoint, mainly due to stronger power generation markets. And we've revised our EBITDA margin expectations to be in the range of 11.3% to 11.8%, down a little from our prior range of 11.5% to 12.5%. Results for the Power Systems segment set a new quarterly record. Revenues were $1.6 billion, an increase of 9% and EBITDA increased from 13.8% to 18.9%, driven by higher volumes, particularly in power generation markets, improved pricing, and other operational improvements and cost reductions. For 2024, we expect Power Systems revenues to be up 3% to 8%, an increase of 3% from the prior year guide. EBITDA is now projected to be approximately 17.5% to 18% and up from the previous projections of 16% to 17%. Accelera revenues increased 31% to $111 million, driven by increased electrolyzer installations. Our EBITDA loss was $117 million compared to an EBITDA loss of $114 million a year ago as we continue to invest in the products and capabilities to support those parts of the business where strong growth is expected, while reducing costs in areas where we accept the prospects for growth have extended into the future. In 2024, we expect Accelera revenues to be in the range of $400 million to $450 million, down $50 million from our prior guide. As Jen mentioned, given the strong performance in the second quarter and the revised outlook in our key region end markets, we have raised our full-year company guidance. We now expect revenues to be down 3% to flat, which is better than our previous guidance of down 2% to down 5%. EBITDA margins are now projected to be approximately 15% to 15.5%, narrowing the range and increasing the midpoint by 25 basis points from our prior guide. Our effective tax rate is expected to be approximately 24% in 2024, excluding the tax-free gain related to Atmus and other discrete items. Capital investments will be in the range of $1.2 billion to $1.3 billion, unchanged from three months ago, as we continue to make critical investments in new products and capacity expansion to support future growth. In summary, we delivered record sales and solid profitability in the second quarter of 2024. We still do expect some moderation in some key markets in the second half of the year, especially North American heavy-duty truck, as we pointed out at our recent Analyst Day also. We've taken some steps to reduce costs in the fourth quarter of 2023 and the first quarter of 2024 and continue to identify ways to streamline our business going forward, leaving us well-positioned to navigate any economic cyclicality that we may experience. We continue to deliver strong financial results, raising our performance cycle over cycle while still investing for future growth. Our priorities for this year for capital allocation remain to reinvest for growth, increase the dividend, and reduce debt. Overall, a very strong quarter. Thanks for your time today. Now, let me turn it back over to Chris.

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

Thanks. Good morning. Just on China truck, you didn't change your expectations there. Wondering how you're thinking about some of the new incentives that the government put in place there to support the second half of the year. Is that a potential point of conservatism in your outlook? Or do you think it may not materialize?

Yes. Thanks for the question, Steven. Good morning. We've seen pretty consistent performance out of China and the economic conditions over the last 18 to 24 months, and there's been previous indications of actions the government may take, none of which has really translated into any meaningful change in our industry. So really, we're seeing strong performance still with natural gas products and exports and a relatively weak domestic diesel market and are not anticipating that changing in the near term.

Hi, congratulations on a solid quarter. I have two questions. First, Mark, the margins in Power Systems are impressive given the expected slow sales growth for 2024. Can you help us understand what factors are structural, and do you think there is room for margins to increase from these levels in the coming years, considering you are already projecting nearly an 18% margin this year? Secondly, Jen, while I know you don't want to provide guidance for 2025, how are you viewing the markets? In light of the upcoming U.S. election and the Chevron overruling, are you more cautious about a possible pre-buy, or do you think that will be delayed? On a positive note, there’s the potential recovery in China and the power system. So, I'm curious if the additional margin potential for 2025 looks better with these assumptions of a subdued pre-buy and a favorable mix from Power Systems in China. Thank you.

Okay. Good questions. We'll try and fit in our answers with the time available for us this evening. On Power Systems, there's really three elements to the margins. And to answer the last part of your question, yes, we do expect there's still more to come. So, the team there is doing a fantastic job, started with some cost reduction, reprioritizing where we're investing, investing less, strong pricing environment on the Power Systems side and then yes, there's more to do on the operational efficiency. So really, it's several strings to the bow in terms of what's been driving the results and still more to come. So we're really, really excited. Hopefully, you felt the confidence from Jenny Bush and the team from the Analyst Day and have continued to deliver here in the second quarter, and we're bullish on that segment. Those are really the main drivers on Power Systems.

Yes. On the market outlook, what I would say is in the power gen market, the continued growth that we see there, in particular the data center, I don't see that letting up anytime soon, and where we have strong demand and a high backlog. And as you know, we talked about in May, making some capacity investments to take advantage of the growing market there. In the U.S. on-highway, the medium-duty truck has continued to be strong. We see strong backlog and demand and don't see that letting up in the foreseeable future. In heavy-duty, we do see build rates coming down, projecting about 10% down in the third quarter and 20% overall for the second half of the year. The question is what will happen next year with the broader economic environment because while stabilized spot rates and these truck prices are at a lower level than they've been historically, and that's impacted some of our customers' demand. So how that comes together with a pre-buy. The Supreme Court overturning the Chevron deference, we don't anticipate any impacting regulations in the near-term. We believe that 2027 regulations will continue to move forward. And probably the bigger question is what we see with Phase 3 greenhouse gas in the 2030 timeframe. We still anticipate some amount of pre-buy ahead of that emissions changeover. But the industry has also demonstrated there's capacity constraints that we've seen in the last couple of years. So how large that pre-buy will be, I think is still a question, but we're preparing to have strong demand as we go into the 2027 regulation change.

Great. Thank you, guys. Mark, I think you mentioned maybe both of your pricing being positive. It sounds like it was positive in truck. It sounds like it's positive in Power Gen. Can you just double-click on that for us a little bit? I mean, how much pricing are you seeing? And sort of how should we think about that for the rest of the year?

Yes. Great questions. So on average, across the company, very, very much by segment, but 2.5% for the year, and that really hasn't changed. That's not changed in the results, but it definitely has been an important driver of the Power Systems results. And I don't think it's going to vary a lot; that year-over-year increase should mostly hold across all the quarters.

Yes, hi. Good morning, everyone. And Jennifer, Happy Anniversary.

Thank you.

I wanted to ask about the medium-duty engine platforms worldwide. You are taking over Daimler's business and now acquiring Isuzu's business in Japan. Can you provide more details on how many additional medium-duty engines you anticipate shipping globally in 2026 compared to two or three years ago, considering the timing of the transition? Additionally, could you comment on Japan? Is it challenging to import products there due to currency issues? How are you managing to do this economically? Thank you.

Yeah, sure. So you've seen this trend and some of the announcements that we made over the last few years playing out now as regulations start to occur. So we're seeing growing medium-duty demand in the U.S., of course, with Daimler transitioning to us and us as well as some other customers like Keno here in the U.S. So we're growing our position in the medium-duty market here. We've now launched the medium-duty product in India with Daimler. So we'll start to see some volume there. Their strategy is really driven by regulation change. So when you see regulation change in Europe and Brazil, we will continue to grow volume with Daimler. On the Isuzu business, we are building that new B6.7 engine in their Tohoku plant in Japan. So we're not importing that engine; we're building it in the market. This is the first time we've been in the on-highway market; we've been in the off-highway market there, of course, for many years. And so we'll see some slow volume growth there in Japan. And then as I noted, they'll then launch that truck into other Asia-Pacific and global markets later this year. So you're just going to see steady growth, I would say, from Cummins year-over-year in the medium-duty space as these new customer partnerships grow and emissions regulations change.

In India and Brazil to the later 2027.

Hi. Thanks for taking my question, and congrats on the strong quarter. I was hoping we could just unpack a little bit more the engine segment. You raised the outlook there on margins, and you've been talking about medium duty, but just as we think about your second half that is expected to decelerate on the heavy-duty side, can you talk about the components driving your margin improvement there? And just helping us kind of quantify what's ultimately driving that and how are you thinking about kind of 2025 margin improvement?

We have received some support and improved our parts outlook, which is beneficial overall. We've implemented some measured actions throughout the company since the second half of last year, extending into this year, which should help reduce costs in the latter half of the year. Additionally, we have a more optimistic outlook for medium-duty trucks. These are the main factors contributing to our improvement. The volume conversion in the second quarter demonstrated that there is still potential for enhancing our operating efficiencies. Notably, there were no significant pricing changes across most segments.

Hi. Thank you. My question is about the guidance. I'm a bit skeptical about one area where it seems like there could be some upside. In the engine business, for the second half of the year, you're predicting revenues to decrease by only 3% year-over-year. However, considering that heavy truck builds are down significantly and the parts business is muted, along with a soft fourth quarter for light-duty due to model changes, plus declines in agriculture and some in construction, I'm trying to understand the reasoning behind the 3% revenue decline. Is it that there's enough new customer acquisition to offset these challenges? Additionally, you're indicating that engine margins only decrease by 30 basis points sequentially despite lower revenues. Moreover, the PowerGen revenue growth is less than 5% year-over-year in the second half, whereas it was over 6% in the first half, with margins decreasing sequentially. I understand that the industrial segment within Power can decline, but there are still comparable fees. I'm trying to grasp why this is the case and whether PowerGen is being treated conservatively. Can you clarify the situation regarding the engine performance? Thank you.

Thanks, David. Good question. So I think on Power Systems, I don't think there's any fundamental changes. So it's really key, like how much product do we deliver to our customers and the conversion. We've given a range of outcomes for the margin. The business is performing well. And quite frankly, we're raising capacity. So I don't think the sales will go a lot above, but yet we're leaning on the profitability strongly; the business is really doing well. So I don't think there's much to be concerned about there, and we've raised the outlook. On the engine business, I think what's helping mitigate the margins, which is, I guess, the most important part is really some of the cost reduction actions that we've taken during the year, slightly better outlook for parts. And then there's just some of the puts and takes on the revenue. But those are the reasons why the margins at those revenue levels, we expect to hold up. Next question, please.

Hi, good morning. Very nice quarter. I have two quick clarification questions. One is on the distribution segment. I think margins were lower, but sales were great. So is that margin guide prudently conservative? Or is this a function of the mix headwind from PowerGen? Or is there anything I need to be aware of for that? And then the other question is on price costs. I think you just said price still you expect 2.5% at the enterprise level. Since some of the raw material prices are coming down, do you expect some improvement in price cost for the year?

In terms of the distribution segment, there hasn't been a significant impact, but we've experienced about 50 basis points of cost pressure across various categories, which differs by business and segment. You are correct about the margins in distribution; while PowerGen does have a slight dilutive effect compared to the rest of the segment, within Power Systems, it is quite beneficial. We've noted that. Additionally, in the first and second quarters, there were some minor charges that weren't substantial enough to be highlighted in the overall results, which have slightly affected the margins. Thus, we are simply stating our current position for the year. We remain optimistic that distribution margins have considerable potential for improvement over time.

Hi. Good morning. I'll maybe combine these before I get the hook. Actually both pertaining to the North America heavy-duty segment. And the first part is just around market shares, Mark. Obviously, those can and do shift around quarter-to-quarter. And I'm just thinking big picture as we get into a softer back half of the year where the sleeper segment likely is disproportionately impacted from a production standpoint at the expense of vocational. I would imagine that favors Cummins from a share perspective, just absent any kind of specific OEM programs and other factors. So, maybe just your thoughts on that. And then the second part is just on the parts business, obviously, has been kind of a choppy past few quarters, but the commentary seems to be more positive, whereas some of the dealers and OEMs that have reported recently have flagged softness there. So I'm just curious, is that just kind of an absence of customer destocking that you went through last year or better just fleet utilization? What's driving that? If you can, please.

Thank you for the question. As you mentioned, we are working to generate demand for our heavy-duty products across various segments. Generally, we see stronger demand in the vocational segment compared to truckload, which is currently performing better. Our aim is always to offer the best products and generate demand for Cummins items. However, market dynamics and changes in incentives from OEMs can lead to shifts in different segments over time. Regarding parts, demand is a key driver, and inventory destocking has played a significant role. Last year, we focused on reducing inventory levels that had accumulated due to disruptions, bringing them back to normal levels. It has been a bit challenging to differentiate between destocking and actual demand. Currently, we are experiencing stable and solid demand in both our on- and off-highway markets.

Thanks. Maybe hoping to get an update on demand in the order books for the X15? And how is it looking for the back half? How is it tracking the expectations and basically what's the response so far from the OEs?

Yes. Great. Thanks for the question. No, we are launching that product this month with PACCAR; excited to get it out to market and then we'll launch it next year with DTNA, so have more offerings there. We've got some early demand from some of the big fleet customers that have sustainability goals in the market, and we'll see how that develops over time, really with those fleet and other customers. And so we've projected we could get up to about 8% in the market, but I think it's going to take some time for us to get up to that level and for that market to develop in these operating costs and sustainability goals to drive demand up.

Thank you very much. I just wanted to follow up on the engine slowdown that you're projecting for the second half of the year and maybe try and carry this into early 2025 because I think there's a perception that we're weak for a quarter or two and then the pre-buy kicks in and we're off to the races. When do you believe we start to show positive comparisons potentially in North American engines? And then we have an election this November, and I don't really know which way it's going, but just any thoughts on how a Republican victory or a Democratic victory might change the outlook for engines or new power?

Yes. So in terms of the heavy-duty demand, we all wish we had a crystal ball that could project how this is going to play out. This cycle has been very different than past cycles because of the pent-up demand that we had seen and then, of course, getting into pre-buy expectations. So it's really difficult to predict at what point next year we'll start to see improvement and economic conditions will certainly play a role in that. So I'm not going to project exactly when, but I think at some point next year, we'll see recovery. And we've taken the steps to be prepared for that softening over the next few quarters. In terms of the election, again, I'm not going to make a prediction on that one either. What I will say is, as always, we worked in the past with the Trump administration, and we worked with the Biden administration. We've worked across party lines to make sure that the opportunities and the challenges in our industry are understood and that regulation and policy reflects appropriately what those are. We will continue to do that in particular with the regulations that are in front of us. And our Destination strategy, at its core, is about recognizing the economic importance of commercial and industrial applications and a need to decarbonize that industry over time, and how do you take the appropriate steps to regulation and incentives to do that. So we're going to continue to advocate for that. And some of the money that has come out of the Inflation Reduction Act has been allocated and is flowing into the market and creating jobs across the United States. So we'll continue to address those points and the opportunities and challenges that we're facing and how we navigate the energy transition. I think Cummins is really well positioned, regardless of how that plays out, but the industry, of course, is making investments in preparing for that. And so we want to make sure that we have stability in regulation, most importantly.

I know there are many questions regarding heavy-duty vehicles. However, as we noted previously, demand for medium-duty vehicles is increasing. We are investing to improve our capacity over time, partly due to market strength and partly because of the new business we have acquired. Currently, we expect that there will be less volatility and sustained high demand based on what we are hearing now. While circumstances might change depending on the economy, there are more uncertainties surrounding heavy-duty vehicles, which seem to be declining in the short term, whereas there are far fewer uncertainties about medium-duty vehicles for the time being.

Thank you. I just wanted to dive a little bit deeper into the power systems and really focus on the unit outlook and how to think about capacity for the remainder of the year and then how you think about you could exit the year from a capacity standpoint or just doing the math, it seems like, and assuming you're running pretty hot from a capacity standpoint, it seems like unit shipments capacity for the year would be around 20,000 or so units. I'm curious what that might look like the capacity on an annualized basis exiting the year and looking into 2025 with some of the investments you're making?

There is a lot of variability in that business due to the wide range of engines and applications. Unfortunately, it's not a simple explanation like it would be for on-highway markets where the range of products is narrower. I don't expect dramatic capacity increases this year, but we are focusing on supporting the key global trend of data center capacity that Jenny Bush mentioned at Analyst Day. This varies by segment; some of our consumer-facing segments have seen a drop in demand over the last 18 months, leading to more capacity in those areas. The situation really depends on the end market. Generally, we are looking at some investment in capacity and reorganizing our production globally. We are confident about our revenue guidance for this year and believe we can sustain production revenue heading into next year. However, because of product variation, pricing, and applications, a standard unit rule of thumb is not as applicable in this segment.

Yeah. The only thing I'll add to Mark's comments, which are absolutely accurate, is, in particular, the data center market. What you've seen happen in the first half of the year was we worked really hard on our supply base and production and the 95 liter, which is running now at capacity, and then we launched the Symptoms product, which adds additional platforms, including a 78-liter that's able to run at this 3-megawatt key data center point. And so helped us; the supply chain improvement as well as the new product launches helped us increase revenue and what we're selling into the market. But we're continuing to run into capacity constraints on some of the platforms in that data center market, in particular, which is why we're making some modest investments to be able to take up capacity over the next couple of years.

Thanks, everybody, for participating today. That concludes it for today. As always, the Investor Relations team will be available for questions further after the call and throughout the rest of the week. Thank you. Bye.