Cummins Inc (CMI) — Q4 2024 Earnings Call Transcript

Thank you, Kevin. Good morning, everyone, and welcome to our teleconference today to discuss Cummins' results for the fourth quarter and full year 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. With that out of the way, I'll turn you over to our Chair and CEO, Jennifer Rumsey, to start us off.

Thank you, Chris. Good morning. I'll start with a summary of 2024, discuss our fourth quarter and full year results and finish with a discussion of our outlook for 2025. Mark will then take you through more details of our fourth quarter and full year financial performance and our forecast for this year. As I reflect back on 2024, I am pleased to share that we delivered strong financial results with records in several parts of the business while also making significant progress in the execution of our Destination Zero strategy. I am incredibly proud of what Cummins and our employees accomplished for our stakeholders, and I feel energized about the opportunities ahead for us as we continue to demonstrate our relentless focus on advancing our strategy and executing our financial commitments as we lead the energy transition. It continues to be clear that our multi-solution Destination Zero strategy that leverages advancements and solutions from both our core and Accelera by Cummins businesses will continue to position us to succeed. We demonstrated this in 2024 as we further strengthened our position through evolving our portfolio and expanding and establishing relationships with new and longstanding key stakeholders and partners. Most notably for our core business in 2024, we introduced the Cummins HELM engine platform. Applied across Cummins' legendary B, X10, and X15 series engine portfolios, the HELM platforms provide customers with the option to choose the fuel type, either advanced diesel or alternate fuels like natural gas and hydrogen, that best suits their business needs and offers the power and performance customers expect while also reducing emissions. Cummins began full production of the X15N natural gas engine at the Jamestown Engine Plant earlier this year. We are actively engaged with some of North America's largest and most demanding heavy-duty fleets as they look to reduce their carbon footprint. Additionally, in our core business, we introduced four new generator sets to the award-winning Centum Series, two each powered by Cummins' QSK50 and QSK78 engines. In response to high market demand, these new models have been engineered specifically for the most critical applications such as data centers. In order to further raise our capacity to meet rising power generation demand, we also intend to invest $200 million across our U.S., England, and India manufacturing sites. As you will see in our full year financial performance details and 2025 guidance, we are excited about the continued impressive performance and growth potential for our Power Systems business. Cummins also 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. The separation of Atmus resulted in the tax-free exchange of shares, which reduced Cummins' shares outstanding by approximately 5.6 million in the first quarter. In our Accelera business, we completed the formation of our joint venture, Amplify Cell Technologies with Daimler Trucks & Buses PACCAR and EVE Energy to localize battery cell production and the battery cell supply chain in the United States. This strategic collaboration will advance zero emissions technology for electric commercial vehicles and industrial applications. Amplify began construction this year of a 21-gigawatt hour factory in Mississippi with potential for future expansion as demand grows and is targeting start of production in 2027. Lastly, as we navigate this long and messy transition for our customers, we remain committed to pacing and refocusing our investments on the most promising paths as the adoption of zero-emission solutions slows in some regions around the world. As you can see in our fourth quarter results, we recorded charges related to the reorganization of our Accelera business segment as we underwent a strategic review to streamline the business while also ensuring we are set up for long-term success. We remain committed to Accelera and its mission, and this business continues to play an important role in our Destination Zero strategy. Now I will comment on overall company performance for the fourth quarter of 2024 and cover some of our key markets. Demand for our products remained strong across many of our key markets and regions, offsetting the softening in the North America heavy-duty truck market. Revenues for the quarter totaled $8.4 billion, a decrease of 1% compared to 2023 as lower North America heavy-duty and pickup truck volumes and the reduction in sales from the separation of Atmus were partially offset by continued high demand in our global power generation markets, stronger aftermarket, and North America medium-duty truck volumes as well as improved pricing. EBITDA was $1 billion or 12.1% compared to a loss of $878 million or negative 10.3% a year ago. Fourth quarter 2024 results included $312 million of charges related to the strategic reorganization of our Accelera business segment. This compares to the fourth quarter 2023 results, which included $2 billion of costs related to the agreement to resolve U.S. regulatory claims, $42 million of costs related to our voluntary retirement and separation programs, and $33 million of costs related to the separation of the Atmus business. Excluding those items, EBITDA was $1.3 billion or 15.8% compared to $1.2 billion or 14.4% a year ago. EBITDA and gross margin dollars improved compared to the fourth quarter of 2023 as the benefits of higher power generation volume, pricing, and operational efficiency more than exceeded lower North America truck volumes and the separation of Atmus. 2024 revenues were a record $34.1 billion, essentially flat with 2023 despite the decline in North America heavy-duty truck demand in the second half of the year and reduction of sales from the Atmus separation. EBITDA was a record $6.3 billion or 18.6% of sales compared to $3 billion or 8.9% of sales in 2023. 2024 results include a gain, net of transaction costs and other expenses, of $1.3 billion related to the Atmus divestiture, $312 million of charges related to the Accelera reorganization, and $29 million of first quarter restructuring expenses. This compares to the 2023 results that included $2 billion of costs related to the agreement to resolve U.S. regulatory claims, $100 million of costs related to the separation of Atmus, and $42 million of costs related to the voluntary retirement and separation programs. Excluding those items, EBITDA was a record $5.4 billion or 15.7% of sales for 2024 compared to $5.2 billion or 15.3% of sales for 2023 as the benefits of higher power generation volumes, pricing, and operational efficiency more than exceeded lower second half North America truck volumes and the reduction in margin from the Atmus separation. EBITDA dollars were a record in Power Systems, Distribution, and Engine segments. Our Power Systems business, in particular, finished 2024 with a record full-year EBITDA of 18.4% of sales, up from 14.7% in 2023. I'm very pleased with the performance across our core business segments, and you will see from our guidance that we are excited to continue to build on this momentum. Now let me provide our overall outlook for 2025 and then comment on individual regions and end markets. We are forecasting total company revenues for 2025 to be down 2% to up 3% compared to 2024, and EBITDA to be 16.2% to 17.2% of sales, up from 15.7% in 2024. While we expect weaker first half demand in our North America on-highway truck markets, we expect many of our markets, particularly power generation, to remain strong throughout the year. Industry production for heavy-duty trucks in North America is projected to be 260,000 to 290,000 units in 2025, flat to down 10% year-over-year. We anticipate weaker first half demand. And while we do expect a prebuy in the second half of the year, the uncertainty on the exact timing and extent is driving our wider guidance range. In the medium-duty truck market, we expect the market size to be 140,000 to 155,000 units, down 5% to 15% compared to 2024, primarily driven by weaker-than-expected recent net orders and a depleting backlog. Our engine shipments for pickup trucks in North America are expected to be 130,000 to 140,000 in 2025, flat to up 5% year-over-year. In China, we project total revenue, including joint ventures, to increase 5% in 2025. We are projecting a range of down 5% to up 10% in heavy and medium-duty truck demand in China. While export demand is expected to decline slightly, we are hopeful that the recent NS4 scrapping policy and other stimulus actions may lead to domestic demand growth. We have not, however, seen a meaningful recovery thus far. While there is still uncertainty around the China truck market for 2025, we expect strength in other markets, particularly power generation, where demand is expected to remain high as data center momentum continues. In India, we project total revenue, including joint ventures to increase 10% in 2024, primarily driven by stronger power generation demand. We expect industry demand for trucks to be down 5% to up 5% for the year. For global construction, we expect flat to down 10% year-over-year, primarily driven by weak property investment and shrinking export demand in China. We project our major global high horsepower markets to remain strong in 2025. Revenues in global power generation markets are expected to increase 5% to 15%, driven by continued high demand in the data center market. Sales of mining engines are expected to be down 5% to up 5%. For aftermarket, we expect revenue improvement with a range of flat to an increase of 5% for 2025. In Accelera, we expect full year sales to be $400 million to $450 million compared to $414 million in 2024. In summary, 2024 was a record year for revenues, net income, EBITDA, and earnings per share. In 2025, we anticipate that demand will be slightly weaker in the North America on-highway truck markets, particularly in the first half of the year, but offset by continued strength in the power generation market and resiliency in our Distribution business, given our strong aftermarket presence. Despite a relatively flat revenue forecast, we are expecting to improve profitability and cash flow. We remain committed to our multi-solution approach that is proving to be the right strategy for our customers, for the environment, and for the continued growth of Cummins while also returning cash to investors. Now let me turn it over to Mark who will discuss our financial results in more detail.

Thank you, Jen, and good morning, everyone. We delivered strong operational results in the fourth quarter, which resulted in revenue achieving the top end of our prior guidance and EBITDA margins exceeding our projections. 2024 was a record year for revenues, EBITDA, and earnings per share, reflecting the strong demand for our products and the strong hard work of our employees. Now let me go into more details on Q4 and the full year performance. There were some notable non-routine transactions in '24 and 2023, and I'll quantify those and describe our underlying results to give a better understanding of the performance from regular operations. Fourth quarter reported revenues were $8.4 billion, and EBITDA was $1 billion or 12.1% of sales. As Jen mentioned, we underwent a strategic review of our Accelera segment, which resulted in charges of $312 million, of which $305 million were non-cash. Excluding this charge, we delivered EBITDA of $1.3 billion or 15.8% of sales. In the fourth quarter of '23, we reported sales of $8.4 billion and an EBITDA loss of $878 million. Excluding the regulatory settlement, Atmus separation costs, and voluntary retirement and separation program costs in Q4 2023, EBITDA was a positive $1.2 billion or 14.4%. I know that's a lot to digest. In summary, on an underlying basis, EBITDA improved by 140 basis points on slightly lower sales, excluding those charges I just described. Fourth quarter revenues decreased by 1% from a year ago as organic growth was more than offset by the reduction in sales driven by the separation of Atmus. Sales in North America were flat while international revenues decreased 3%. Foreign currency movements negatively impacted sales by less than 1%. The EBITDA improvement of 140 basis points was primarily due to higher power generation volumes, pricing, and operational efficiency, partially offset by lower North America truck volumes and the separation of Atmus. Now let me summarize some of the impacts by line item in the income statement. Gross margin was $2.1 billion or 25.4% of sales compared to $2 billion or 23.7% last year. The improved margins were driven by stronger power generation aftermarket demand, favorable pricing, particularly in Power Systems and Distribution, and improved operational efficiency. Selling, administrative, and research expenses were $1.1 billion or 13.6% of sales compared to $1.2 billion or 14.2% last year due to lower research and development costs. Joint venture income of $87 million decreased $26 million primarily driven by lower technology fees from some of our international partnerships and costs incurred in the ramp-up of the Amplify Cell Technology battery joint venture here in the U.S., which was formed in the second quarter of '24. Other income was negative $25 million, a decrease of $75 million from a year ago, primarily driven by mark-to-market losses on investments related to company-owned life insurance. Interest expense was $89 million, a decrease of $3 million from a prior year, driven by lower weighted average interest rates. The all-in effective tax rate in the fourth quarter was 32.8%, principally due to non-deductible costs related to the Accelera reorganization. All-in, net earnings for the quarter were $418 million or $3.02 per diluted share, which includes $312 million or $2.14 per diluted share of Accelera reorganization charges. Excluding the Accelera charges, EPS was $5.16 per diluted share. Operating cash flow was an inflow of $1.4 billion, just $37 million lower than the level we saw in the first quarter last year. For the full year 2024, revenues were a record $34.1 billion, slightly above a year ago and reflecting 4% growth if we exclude Atmus from both 2023 and '24. EBITDA in '24 was $6.3 billion or 18.6%. Excluding the gain in costs associated with the separation of Atmus, the Accelera charge in the fourth quarter, and first-quarter restructuring expenses, EBITDA in 2024 was $5.4 billion or 15.7%. 2023 EBITDA was $3 billion or $5.2 billion and 15.3% excluding the regulatory settlement, Atmus separation costs, and voluntary retirement and separation programs. The increase in the EBITDA percent was primarily driven by higher power generation volumes, pricing, and operational efficiencies, more than offsetting the impact of lower North American heavy-duty truck volumes and the reduction in margin from the Atmus separation. All-in net earnings were $3.9 billion or $28.37 per diluted share compared to $735 million or $5.15 per diluted share a year ago. 2024 results included the gain related to the separation of Atmus, net of transaction costs and other expenses of $1.3 billion or $9.28 per diluted share, charges related to Accelera reorganization of $2.12 per diluted share, and first-quarter restructuring costs of $0.16 per diluted share. Capital expenditures in 2024 were $1.2 billion, flat compared to 2023 as we continue to invest in the new products and capabilities to drive growth, particularly related to the HELM platforms within our core business in North America. Our long-term goal is to deliver at least 50% of operating cash flow to shareholders. Over the past five years, we've returned 54% in the form of share repurchase and dividends even while we absorbed the significant acquisition in the form of Meritor. In 2024, we focused our capital allocation on organic investments, dividend growth, and returning $969 million to shareholders via cash dividend and debt reduction. We also reduced our shares outstanding by approximately 5.6 million shares from the tax-free Atmus separation share exchange. I will now summarize the 2024 results for the operating segments and provide guidance for 2025. For the Engine segment, 2024 revenues were a record $11.7 billion, or up $28 million compared to last year. EBITDA was 14.1% of sales, flat compared to a year ago. In 2025, we project revenues for the Engine business will be down 2% to up 3% due to expected weakness in the North American truck market, particularly in the first half of the year, slightly offset by improved demand in pickup and some international markets. 2024 EBITDA is expected to improve with projections in the range of 14.2% to 15.2%. Components segment revenues were $11.7 billion in 2024, 13% lower than the prior year, and EBITDA was 13.8% of sales compared to 14.4% in '23. There were a lot of work done to improve existing operations but that was offset in the year-over-year comparisons due to the separation of Atmus. For 2025, we expect total revenue for the Components business to range from down 5% to flat as 2024 included Atmus in the first quarter through March 18. EBITDA margins are expected to be between 13.8% and 14.8%. In the Distribution segment, revenues increased 11% in '24 compared to 2023 and were a record $11.4 billion. EBITDA was 12.1% compared to 11.8% a year ago, driven by higher power generation volumes and pricing. We expect 2025 distribution revenues to increase 2% to 7% and EBITDA margins to be in the range of 12% to 13%. In the Power Systems segment, revenues were a record $6.4 billion, up 13% over 2023 driven primarily by power generation demand, especially data center applications. EBITDA was 18.4% or 370 basis points higher than 2023, driven by stronger volume, favorable pricing, and a continued focus on operational performance and cost reduction. In 2025, we expect Power Systems revenues to be at 2% to 7% and EBITDA to improve again and be in the range of 19% to 20%. Accelera revenues increased to $414 million in 2024 with a net operating loss of $452 million as we lowered costs in existing operations, partially offset by additional losses in the Amplify cell joint venture as it advances its operations. In 2025, we anticipate revenues to be in the range of $400 million to $450 million and net losses to reduce to $385 million to $415 million as we continue to make targeted investments aligned with market demand whilst reducing cost. We currently project 2025 company revenues to be down 2% to 3%. Company EBITDA margins are projected to be approximately 16.2% to 17.2% compared to an equivalent 15.7% in 2024. Our effective tax rate this year is expected to be 24.5%, excluding any discrete items. Capital investments will be in the range of $1.4 billion to $1.5 billion as we continue to make critical investments to support future growth. To summarize, we delivered record sales and profitability in 2024, including strong results in the second half of the year even as demand in the North American heavy-duty truck market declined. Cash generation has been and will continue to be a focus as we enter 2025, enabling us to continue investing in new products for new and existing markets, returning cash to shareholders, and maintaining a strong balance sheet. Last May, we laid out our updated financial targets through 2030. Our strong performance in 2024 represented encouraging progress towards those targets. Despite a relatively flat revenue forecast and expected weakness in North American heavy-duty trucks, we expect to further improve profitability and cash flow in 2025.

Now let me turn it back over to Chris.

Hi. Thanks for taking my question, and congrats on another strong quarter here. Just wanted to unpack the power generation guide of 5% to 15% a little bit more. Could you just split that out between price and volume? And then maybe just tying into that, I think you mentioned a new investment of $200 million in power generation. Can you just talk about maybe what's entailed in that? I thought, I guess there was already an expansion of doubling capacity so what is kind of the incremental being done?

Yes. So as you said, we're currently in the midst of a $200 million investment across our plants in Minnesota, the UK, and India to ramp up capacity to meet what is a growing demand for power generation products. So you're seeing in that guide an expectation that we have been able to take up capacity. We're continuing to look at strategic pricing and where we can bring value to the customer, so you've got some price in there as well. But really, it's about capacity ramp-up and continued sales of larger engines. In the power generation and data center market, it's really the 50 to 60 liter, the 78, and the 95 liters, so these are large engines. As we're able to bring more capacity online in our supply chain and our plants, you see that flowing through in revenue. We expect that trend to continue over time. We're tracking on plan or even slightly ahead of plan to double our capacity by the end of this year and looking forward to being able to meet what is a really strong demand from those customers.

That's very helpful. And then maybe as a follow-up, just on separate on the trucks. Can you just give us your latest thoughts on EPA27? It sounds like you're still assuming some prebuy in the second half. But just given, I guess, what we've seen from the administration so far, any thoughts on the likelihood of any kind of challenges to the EPA27 rule?

Yes, our current view is that we expect the EPA27 regulations will stay in place. Many companies, including us, have been investing over multiple years in those products to bring those products to market, and we're looking forward to having a nationwide standard again in '27. With that, we are still anticipating some economic recovery and prebuy happening in the North America trucking market that could help bring higher revenue in the second half this year and into next year. We do anticipate there'll be more discussion and potential challenge over the greenhouse gas regulations that we see out into the 2030 and beyond time frame.

Great. Good morning, everyone. Maybe starting off, can you just talk a little bit more about the Accelera restructuring? And how have you changed the focus of that business? What are you doing less of or more of, or just some color around that?

Yes, I'll start and then Mark can add if he wants to share more detail. This business has all along been about remaining agile and investing as we see technology advancing and markets starting to move in these zero emissions technologies. We formed it through a number of acquisitions as well. What that meant was we had a distributed footprint and investment coming from those different acquisitions, so we really looked at where we see the market moving. We expect that battery electric vehicles will be important in some of our commercial vehicle and industrial applications, and we feel well positioned with the battery cell joint venture and some of the wins that we have with customers as that market develops. We're continuing to invest there, pace investment in electrolyzers as we've seen some slowing in customer demand and uncertainty around incentives there, and then being selective in fuel cells and some of the other technologies where adoption continues to push out. We think we're well positioned. Frankly, the slower and messier this goes, my view is, the better it is strategically for Cummins. We're positioning ourselves in the places where we see that market and technology beginning to increase.

Okay, good. Sorry, I thought Mark was going to add something. Can I ask, you've been talking a lot as it is. Hopefully, you'll be doing less of that this year on all these adjustments. Can I just follow up on the HELM platform? Do you have targets regarding the types of unit volumes you might expect on the natural gas side or on any of the other fuel options that you can use with that platform?

The beauty of the HELM platform is its fuel flexibility. We will continue to sell a significant amount of the diesel version, which will be more efficient, resulting in lower CO2 emissions and reduced fuel costs for our customers. We aim to achieve an 8% adoption rate for the natural gas version. We are beginning to see customer adoption; PACCAR has already launched it, and Daimler Trucks will introduce the 15-liter natural gas model this year. Fleets are currently testing it. I met with a major customer last week who is completing their field testing. They are optimistic about the product and are looking to increase penetration, but this largely depends on diesel fuel prices, regulations, and customer CO2 goals. It is challenging to provide specific figures on the adoption rate of natural gas or hydrogen due to the influence of infrastructure costs and regulations.

Yes. Hi. Good morning, everyone. In Power Systems, you had a really excellent 30% year-over-year growth in revenue per unit in the quarter, so the ramp in the supply base was progressing nicely. I'm wondering if you could just update us on how much more throughput you expect to get out of the supply base in 2025 for those large products. I appreciate there could be a wide range of outcomes, but would love to get your updated views on that.

It's important to remember that the revenue growth, particularly for 2024, was also about launching those new Centum products. We're seeing new products coming online that serve the market in addition to ramping up capacity. For this year, it really focuses on maximizing our capability to ramp up across that range of products. The team has done a phenomenal job of improving operating efficiency and working with the supply base to try to get as much out of what we have. There are significant investments that need to happen by the end of this year to truly achieve the full doubling of capacity.

So unfortunately, Jerry, units are not a great indicator just because the size of the generator set we've been selling is going up. The average selling price has gone up significantly over and above pricing, just the size of the set that we're selling. The revenue has outgrown the units significantly.

Nice problem to have. Separately on the China truck market, as you mentioned in the prepared remarks, there is some optimism in the market about potentially stronger demand. Can you just calibrate us, I believe, including the JV and wholly-owned business, China truck profits are maybe 10% of total company profits at this point. Given we're at the trough of the cycle, is it fair to think about pretty attractive incremental margins if demand does indeed surprise the upside?

Yes on the latter. I mean, China in total, maybe on a more normal run rate, would be in the range of 15% to 20% of our earnings. On-highway would typically be more than half of that, so you're in the ballpark, Jerry, yes. There are no massive structural investments going on there in the current year. If we get more volume, we'd expect to convert that into more profits. There’s also some lumpiness around tech fees and other things. But I think the underlying operational business is well set as it's done in prior cycles when demand improves, we see positive performance. That reinforces how well the Engine business and Components did in '24. Not just did we have weakening heavy-duty truck in the second half of the year but we had weaker China throughout the year. We're confident China is going to turn, though we don't have a lot of visibility into that yet.

Thank you. Good morning. I would like to start by asking about components, Mark. Considering the margin outlook for 2025 with flat to declining revenues, it shows a significant improvement. I'm curious how much of this can be attributed to the impact of the Atmus spin or separation, or if there are additional factors at play. Could you provide a brief overview of your projections for Components?

I think when you look across the company, we've done a lot on cost reduction. It hasn't been enormous in any given quarter, but we've been working at it really since the fourth quarter of 2023 when we announced the voluntary separation package. We did a lot of work during 2024 to look at how we weighted the amount of resources we put between lines of business, functions, and regional structures. A lot of this work has paid off in improving our cost structure and focus. Yes, the Components business is going to benefit from some of that. We're not breaking that out separately, but what was formerly known as Meritor, the Drivetrain and Braking Systems business, continues to improve their underlying results here.

Okay. And then Mark, on the Accelera, just in light of the restructuring and given how the global backdrop has changed or is changing, the expectation to get that business to EBITDA breakeven by '27, is that still in the cards, or are you thinking that might be a tougher one to hit?

Yes. I think overall, relative to our 2030 targets for the total company, we feel like we've had a really good start in 2024 and are on track. We're doing a bit better on the core business, but headwinds have come more frequently and more severely to Accelera. We're committed to significant loss reduction. Right now, we're not on track toward that breakeven, but we feel very much on track for the overall company targets. That’s really the reason why we took more pronounced actions in the fourth quarter, recognizing that we're not going to get enormous help from demand here in the near term.

Thank you. I was hoping if you could just comment on how you're thinking about R&D spend in 2025 versus 2024, maybe more specifically within Engine and Components. And then just beyond 2025, how you're thinking about that and how we should be thinking?

Beyond 2025 is where we should see more momentum to the downside on Engine expense. We did see some improvement through the year in the Engine business. We've got a lot of new product launches, both in Engines and Components in 2025. But after we get through those launches and through 2027, that's definitely part of our margin expansion story in those two businesses, but there won't be a dramatic shift this year, just some puts and takes between Engines and Components.

Thanks. That's helpful. And then just could you comment a little bit on how you're thinking about the parts outlook for 2025?

Yes, Parts held up pretty well, in fact, a little bit better than expected in the fourth quarter across our businesses. We think in the range of flat to up 5%. Probably some pricing is baked in there. So yes, we see it growing in line with the economy.

Hi, good morning. Nice quarter. I guess similar question that Tim asked on, I think it was the Components business. Just the margins, Mark, in Power Systems are very good despite sort of what I would call a muted top line forecast. So is that just pricing in some of the new products? And I guess, how do you think about margin targets relative to the ones you just gave us last year? Is it looking conservative?

Great. So yes, Power Systems is doing well. We continue to focus on supply chain efficient output. They did a great job last year. I don't want it to sound like we're dissatisfied. Quite the opposite, very impressed, but still think there's more to come on raising volume, productivity, and a little bit on pricing Power Systems. We don't see signs of that, but if we want to get on the bullish side and saw more strength in the U.S. economy, that could be another leg to help. On tariffs, by and large, our strategy is to make most of our products in the market in which they're sold. Of course, we have a global supply chain. Nobody knows exactly what the tariff situation is going to be. But to the extent that we do incur them, we think it's important that the market feels those, and we'll look to pass those on. Let's hope that's not significant for everybody involved. We're focused on controlling what we can control. We've got secular tailwinds in Power Systems, but the biggest driver is being able to scale growth effectively and pushing out cost.

Hi, thank you. I'm trying to better understand the margin expansion in Engines and, for that matter, of Components. First, the D&A, the growth in the D&A, is that mostly in Engines or Components? It's just the margin improvement is impressive, but I'm just wondering if it drives it down a little bit because there's more D&A than operational.

Yes, there is an increase in D&A because that's where we've been investing most of the capital in North America, particularly in the Engine business over the last couple of years.

So of the 100 D&A increase, is it 50 Engines, 25 Components? Just some sense so I can get a better sense of the underlying operation.

Yes, I mean, it won't be significantly in distribution. Power Systems, whilst we're increasing investment, is still modest relative to those two segments. On an incremental basis, most of it is going to go through Engines and Components, a little bit in corporate, which ends up mostly in Engines and Components.

Okay, that's helpful. Even with that, it looks like there still is some slight operating, let's say, non-D&A margin improvement in Engines. What's driving that? Is it a little bit of mix? I'm just trying to think about maybe the new medium engines you're outperforming the market. How to think about those margins versus heavy? Because it's all wrapped in the idea of trying to figure out where do you think Engine margins are as we sort of move out of '25 and people start to pontificate about earnings power in '26 with the prebuy in the Engine division.

Yes, I think those are all really important questions and will be big contributors to the long-term performance. In the near term, we continue to expect strong performance in the aftermarket side, of which the Engine business is our biggest single driver. That's probably where there's still some pricing opportunity into 2025. The engineering starts coming down enormously, but we've come down off the peak there, with Components probably going up a little bit. Those would be the main drivers. As you can see, we haven't factored a lot in from China yet, so really, it's cost control and aftermarket in the near term.

Hi, good morning, guys. I guess in terms of your guidance for the market outlook for North America heavy-duty trucks this year, it sounds like if you don't get a pre-buy materializing this year, you'd expect retail demand to be still negative in the second half. Am I interpreting that correctly? Could you discuss how you're thinking about it?

Yes. If you look at the underlying performance in the heavy-duty market, spot rates dropped early in '23, so truckload carriers have had real challenges now for two years. There’s a chance that we’ll see an improvement in that over the course of this year, just depending on what the underlying economy and interest rates do. There's potential upside in the second half for that in addition to this prebuy phenomenon that we would anticipate leading to stronger demand in the second half versus first half. The range is quite wide because how high that goes really depends on the prebuy and when that starts.

Got it, okay. And then in terms of medium-duty, just breaking down kind of market share gains versus market growth for 2024. How did those net against each other? And then in terms of your sales guidance for this year within Engines, are we thinking about further share gains this year or not as much?

I think really, we’re talking about following the market in 2025. There’s been a long record of significant market share gains in that market. Our engine is clearly the leader in that market and there were share gains. For the future, it’s primarily going to be truck in the market, but there can be some modest changes around that from where we are now.

There is a buy down for the year; it's reflective of what we've seen in order made in backlog.

Yes, it's the industry orders, and we will feel that.

From a product perspective, we continue to feel really positive about how our products are performing in the market and our position across medium and heavy duty.

Thank you. I had two questions around Power Systems, if I may. The data center market continues to develop; historically, selling an engine is one thing and servicing is another. If you have backup power, it doesn't get turned on that much and it's not as profitable. Do you see any opportunity to change that profit algorithm, such that you'll be making more recurring revenue or otherwise on that massive build-out of engines that you're going to do? And then secondly, if I can just wrap it in. You've had excellent results in Power Systems. I'm not sure if all of it's really this surge in data center or maybe the stuff you've touched on a couple of times on this call already regarding operational improvements. I wonder if you could just expand on how you've made that business better.

Sure. First, with power generation and data centers, we have engine, gen sets, and a good portion of that business flows through the distribution business. The strong performance you see in the distribution business last year and the outlook reflects the strength in power generation as well as aftermarket. As you noted, they typically don’t run a lot for backup power, so Parts revenue is low for those applications. There's a potential for some shifts in that. We're considering how we think about our role in that, which is part of discussions on micro-grids and what we do today, but right now, those applications heavily rely on backup power due to reliability demand. For Power Systems performance, we undertook focused efforts two years ago to look at operating performance structure, ensuring we were investing in the right products and getting returns on our investments for customers, all while working through some lingering supply challenges from the pandemic and a market rebound thereafter. That work has come together at the right time with the data center trend happening. We've had strong underlying operational performance that we're continuing to improve while also taking up volumes. Both of those factors contribute to the profitability improvement seen in Power Systems.

Just to add, Rob, distribution adds that extra slice of revenue on data centers. It’s fundamental to winning and supporting this data center business around the world. A few others have strengths in this area as well, and that’s why market demand is concentrated among a couple of large engine manufacturers like us due to that service capability. Just to underline what you said, it would be very wrong to attribute Power Systems improvement solely to data centers. That journey has more legs left, but we’ve elevated performance across that segment, including in the alternator business, which supplies across that supply chain.

Hi, good morning. Thank you so much. The distribution segment guide, the 2% to 7%, seems quite healthy. Given the underlying truck market outlook, are you able to comment on the core distribution outlook versus the power generation-related services? It seems like distribution could see another double-digit growth year in 2025 if demand holds at these levels. Any comments would be helpful.

Yes. Typically, you will see Parts growth slightly above the rate of economic growth. This cycle, the demand in power generation from data centers and other applications has really provided that extra leg. In the short run, yes, power generation will be the main swing factor. Some of the other segments, mining, oil and gas, if we look beyond this year, we'd anticipate seeing more growth in the future. Distribution generates a lot of cash. It's less volatile than other parts of the business and has that really strong aftermarket piece, which doesn't get the extraordinary growth rates that underpin overall performance. So yes, distribution is doing well, and hopefully, the global economy strengthens and then all of our businesses will do well.

That's very helpful. Then one follow-up question on that comment that you expect some pre-buy in the back half, but the timing is uncertain. I'm curious what pre-buy lift is embedded in the current heavy-duty and medium-duty outlook for North America? I'm just trying to understand what the market could look like if there is no pre-buy.

There are so many factors at play, but that’s one of the factors we believe can help. We’re starting off at a fairly modest level in the first quarter. Orders in the fourth quarter of '24 were a little better than expected, but we're anticipating that strength in the second half will come from demand ahead of the regulations as well as understanding the flexibility of the supply chain for that industry. A big factor will be the strength of the U.S. economy, spot rates, and freight activity. The main thing is we have a stronger second half in heavy-duty trucks built into our forecasts. Q1 will be the low point of the year based on what we expect right now. The question is whether we’ll get the improvement in the second half.

Thank you, everyone, for joining our teleconference today. That concludes the question-and-answer session. As always, the Investor Relations team will be available for questions after the call. Thank you.