My name is Adam Seiden, and I lead the U.S. Machinery and Construction franchise for Barclays. This session here, we're very thankful to have the folks from Cummins joining us. So, immediately to my right, you have Jeff Wiltrout from Corporate Strategy, and then also, everyone in the room probably knows Chris from the IR side. So the format of this session is going to be a fireside chat between myself and the folks to my right. We would invite your participation, though. Certainly, if you have a question, please raise a hand, we'll get a mic to you.
And then, at the very minimum though, one of the great things about a Barclays conference is we have, we do an audience response question, which we'll do towards the middle to the end. In order to participate in that, there's a remote on your desk there or table, let's call it. So please, feel free to participate, and we'd love to share your answers with you. So, with that, Team Cummins, thanks so much for being here.
Thanks, Adam.
Awesome. So, maybe, maybe to start, I just wanted to start actually on headlines. So, over this past weekend, there were some headlines out of, I guess, out of D.C. per se, that the Biden administration is looking at some of their, you know, EV rules, into, you know, 2030 and beyond, and talking about potentially pushing them back. Now, a lot of those headlines were concentrated more on the - it seemed like for the passenger vehicle side as opposed to necessarily your world. But I'm just curious, you know, your guys's, you know, your guys's thoughts around that. You know, does that reinforce, you know, Cummins' view that this will be a decades-long transition here?
And then, you know, what does it also say about some of the complexities that you can see, you know, as, you know, the broader on-highway world adapts to, you know, a new alternative propulsion world?
Yeah. Yeah, I'll start.
Yeah, sure.
You can add, Chris. So yeah, well, I think it is a marker, as you said, of what I think we've been pretty consistent in saying certainly in our commercial and industrial spaces that the transition towards decarbonization will be a long one , and will likely be a little messy and bumpy along the way. And that's informed our strategic direction, where we really wanted to set up our business to be able to win, grow, deliver cash flow generation in our traditional core business, as well as to be able to invest in some of those technologies that we think will be part of the recipe in the future going forward in our Accelera business.
But to be able to do both and fund both at the same time, to prepare ourselves to win and grow profitability in the near, medium, and long term, through all the phases of that long, messy transition. So what we've seen with that headline and the general tenor of the last six to 12 months is, we think, reinforcing that strategic posture and enabling us to manage that pretty effectively, and we think that's starting to show itself. The challenge for us is of course, then managing the investment cadence, the investment timing, to make sure we do have the right technology at the right time as we go through that, like you said, that long transition.
That will vary by region, by end-use market, and so that's a complex answer, but one we spend a lot of time evaluating and analyzing and making decisions on an ongoing basis.
Yeah. I think the only thing I'd add is, in some ways, it's encouraging for regulators to or the government to acknowledge that it's like in. Because we have adoption trends, and we have, like, what's the economics say and what the regulations say, and they're not real close at this point when you look at a decade. And so, you know, it, it's good to see, you know, some movement there for us.
Yeah, sure. Definitely, you know, the more the government's thinking with an economics hat, the better for all of us, I think. So then, you know, maybe taking a step into from the, you know, trying to read into that headline and see if there's any, like, parallels from the truck side. So you guys, as an industry, the heavy, you know, heavy truck folks, you know, they signed on to what, the Clean Truck Partnership in Cali. So I think part of that was, to, you know, to align, essentially, CARB with the EPA. Now, if we're in a situation here where the EPA is moving the bar, at least on passenger side, we'll see what they're talking about there.
You know, how, if at all, like, what sort of implications, you know, is there, you know, if you think about trucks, like, if the EPA were to, you know, move some things around there, too, you know, does the agreement give you guys flexibility to also see some of those CARB initiatives push out, though?
Yeah, it's, I mean, that's gotten really complicated since CARB and EPA deviated, you're, like, trying to meet both. And so when it came back together for 2027, that is very helpful on the NOx emissions. So you're shooting at one target, you're not looking at multiple products and multiple pieces to meet two markets. So, we're encouraged by that. We're hopeful that that kind of stays in sync. There's other pieces in there that, you know, part of that CTP was CARB kind of acknowledging that we need some time before they put in regulations. So, like, there, there's like, they're working collaboratively to make sure that, you know, they're, they are realistic, they are achievable, and you get like a, a, you know, three or four years of lead time versus three or four months, you know.
So I think in having that level of clarity will help us. You know, our perspective is, you know, at this point, a big change in EPA is not our expectation. You know, I think it is something we would closely monitor. It seems like the industry is moving full speed ahead to meet that, and as are we.
Got it. And we'll talk a bit about the truck cycle here in a second, but, you know, connecting, you know, connecting some of what we're talking about around headlines and regulations and so forth. You know, one of the things that I think a lot of folks that are sitting out there in that seat, and also myself, and I see we look at, you know, 2027, and we do see, you know, how there could be some increased demand and pre-buy potential. So when you think about- you know, you think about, you know, that pre-buy, like, you know, how, how impactful, how meaningful of a delay would there have to be in anything on the EPA side in order to, you know, push back some of that expectation?
I mean, how far in advance, I guess, are customers going to get ahead and order? Is maybe another way to look at that?
Yeah, I would say, you know, our expectation is, and it's kind of driven from the experience people went through the pandemic, where they might not have a truck for a couple of years.
Yeah.
The supply chain for the whole industry is not kind of like, we don't want to ramp up for one year, which it used to be the old behavior, where everybody, like, sprint the year before, ramp it up, and it was very costly and not very healthy. I think that there may be a little bit of a sanity has been introduced there, where suppliers are pushing back, and not just, you know, on us, but on the, on the OEMs themselves to say, "Hey, we're not going to sprint up to 400,000 for a year and spend a bunch of money to do it." So I think it does balance that out. That does just prolong it. It just draws it out, and that's why we think there'll be so probably some level of activity in 2025.
The other piece of it is, you know, for our heavy-duty engines with the, on our Fuel Agnostic Platform, for the diesel side, we'll be launching, we expect in 2026. You know, we're going to stage our launch out, over the course of, a little bit of time just to make sure that we're not launching everything new at the same time.
Yeah, and maybe on that, we'll touch on that maybe now, just that when you think about the fuel agnostic, you know, platform and so forth. So you just mentioned as far as that phased, you know, that phase out, phase in, let's call it, not phase out, phase in, you know, of those platforms. So over the last, you know, over the last year or two, you certainly, it feels like you're extending the range of that. And so I guess the question is, what are some of, you know, what are some of the inefficiencies that you've seen in the past during, like, prior rollouts around emission cycles? And, you know, how can you best get ahead of that, you know, today?
Do you want to take it?
Sure.
Yeah.
Yeah. So I would say in this one, I think it's a different rollout, one that's because of the investment needed to get down to this NOx level. Going from 0.2 to 0.035 NOx is a big investment.
Yeah.
Couple that with having three platform-level investments. Platform-level investments are the ones you do every 20-25 years. We're doing those now. It's fortuitous timing because it can extend the useful life of internal combustion for many years to come. So I think it is, you know, as we manage these kind of efficiencies of the rollout, if we can stretch this out, if, like, the pre-buy stretches out, it kind of takes out the ebb and flow, the big, big swings in the market, and that, that drives efficiency through the whole industry. OEMs have gotten used to more steady builds, suppliers have, we have, and it's just better for the industry. It's just healthier for margins. It's also healthier for just kind of overall performance.
Got it. So, maybe let's shift gears just for a sec. So if we, you know, we think about from the strategy side, you know, clearly, Cummins has been pretty active. You know, in prepping for this, I was looking through just your news releases, and it's at least three pages worth of things that have gone on in the last year. And, you know, so I guess maybe to start just on Meritor, right? So, you know, we're at around the two-year anniversary of the announcement there. So generally, I guess, how has performance been? Certainly, you guys do give some disclosure on that, but how's performance been versus maybe Cummins' own expectations, internally?
Sure. Yeah, we're really pleased with the progress since we closed on the acquisition later in 2022, so we're coming up on 1.5 years of owning it. And we're quite pleased, both financially and strategically, with the outcomes that we've seen so far. So on the financial front, we're very much on track to deliver our three-year synergy targets, to have $130 million of run rate synergies. So we left 2023 at about 60% towards meeting that target, which I think is very solid, and it's showing up in the P&L. Meritor had the highest EBITDA dollars in 2023 as it has in the last 15 years as a company.
So it, I think, proves that we've been able to manage that business quite effectively and is representative of the strategic posture I articulated, which is strong core business that can generate cash flow. And then additive to that is obviously what we got through the eAxle side of that business as part of what we think is going to be an important technological piece of increasing value, as the integration point for electrified powertrains in the medium to long term. And so we've been pleased on both fronts, like I said, the performance of the core business and an ability to grow it, an ability to improve profitability, and the long-term optionality associated with the eAxle platforms we acquired. So we're very pleased.
From a margin standpoint, so 14%-15% margins within Meritor, is that still the goal there?
We're still certainly looking to drive, and once we layer in all those synergies and obviously digest some of the cyclical implications, to the extent we have those in some of those core markets, we'll kind of see where exactly that lands. But yeah, I think that's a fair point that we want to aim to try and drive towards.
Got it. Maybe it does tail off that too, just on M&A. So, you know, Meritor was a fairly sizable acquisition for, for you guys, historically. Just, you know, does... You know, having taken on Meritor, seems like things are going well. You know, does that, you know, does that give the organization confidence to maybe, as you're thinking about your pipeline and the funnel that I'm, I'm sure the organization builds, you know, to, to look at other, other things out there that are similar size or, or there?
Sure. I mean, we think it has been important. We've been able to demonstrate over the last few years that when we feel like it's strategically critical, that we can grow inorganically and we can deliver on the promise of that activity.
In the current state, we're at a position where we do kind of wanna, like you said, we've had a lot going on. We wanna digest that, we wanna execute, we wanna deliver on the promise of the engine platforms Chris was alluding to. And so we're not necessarily in a big hurry to, you know, kind of add another big multibillion-dollar acquisition here in the near term. We do wanna, you know, reduce leverage. We wanna pay down the debt we got associated with that Meritor acquisition and go execute and drive some profitability improvement. As we think out medium, longer term, and we start planning for the growth trajectory of the next decade, you know, decent chance that inorganic growth partnership will be part of that equation.
But that's something we'll continue to pursue and evaluate in a disciplined way. So yeah, looking to take a bit of a breath, but we do think that helps us be confident in our ability to execute on future inorganic growth to the extent it's required for us to deliver profitable growth.
Yes. So keeping with the, you know, the theme of keeping busy, when you think about the, you know, some of the partnerships that you, that you guys have announced or some of the different, you know, arrangements that you have with some customers. I think last year when we were here, we talked a little bit about, you know, Hino, Isuzu, and so forth. I wanted to focus on one, particularly this year, just on Daimler and see, you know, ultimately, where, you know, if we can start seeing some acceleration and, you know, some of the volumes coming off of Daimler in 2024 and 2025, and, you know, how that, how that varies by region, so.
Sure. Yeah, I can start. Yeah, so I think we still have a little ways to go in North America. So they, you know, given some of our constraints last year, we weren't able to pick up all of that. Now that medium duty is maybe more flattening out, we've added capacity. We feel we can continue that journey to pick up that remaining 6,000-8,000 units in North America. And then I think the next step would likely be in India for Southeast Asia. That can be in the neighborhood of 30,000-40,000. We'll start some production this year, but more like a few thousand, and that will ramp up over the next couple of years. The last two pieces would be Europe, which comes in EPA 2027.
That's more like 10,000, not EPA 2027, Euro 7, comes in towards the end of the decade. And then Brazil would be probably also the latter part of the decade. In addition to that, it's kind of been developing over time; Japan's kind of opened up as well for us, and that actually, you know, it's through Fuso, but it's also through—you mentioned Isuzu and Hino—where we haven't had much of a presence in the on-highway market, and now we're with the top three players. So that's starting to open up towards the latter part of the decade as well.
Got it. So when you guys think of the guide, or we go back to the guide that you guys put out, you know, I assume it's North America, volume's a little more left to North America. Is that in that number, that you have?
It is. I would say when we looked at, we give a medium-duty market guide of maybe down five to flat, and I would say we'll be flat to a little bit up, given we can take on a little more volume. So yeah, I'd say we've got it built in taking on more volume.
Got it. So now everyone's favorite topic, the heavy-duty truck cycle. So, when I think about the heavy-duty truck cycle, in a lot of ways, it reminds me of what's been a lot of like broader calls, is that we've all been waiting for slowdowns, whether it's the broader economy and recession. You know, I see in some other industries and now in trucks, it's like just kind of waiting for it to slow. And here we are the beginning of, you know, 2024, and, you know, things are still relatively good. I think your guide even calls for the first half of the year to, you know, not to see any material deceleration until the back half. Let's just play devil's advocate, because I know what the narrative has been. Why, you know, why do things need to slow in the second half of the year?
It's a great comment because we had the same exact conversation last year at this time. Really, we were looking at second half kind of slowing down, and I think we've all been expecting. When you operate in a cyclical market, you expect cycles. And I think this is one where we think where freight rates are and where we're getting the feedback from end customers, that we do think it will be a gentle downturn in the second half.
But even, you know, sequentially, it's been about the same coming off the back half of last year, which is down from that first half of last year. So it is down a little bit, maybe 5% or so. And, you know, a further step down in the second half would not be unheard of, as people are kind of taking a breath before maybe launching in a pre-buy, as we talked about.
Yeah.
So, I can't point with any certainty by any stretch of the imagination that it is coming down, I think you made the comment to me in a call the other day. It's like, "Is going to replacement level really a downturn?" And it's a really good comment because it, and that is the one market where a little bit weaker in construction in China, but that's the one market in our industries that we're seeing is maybe facing those headwinds.
Yeah. No, that's there. I mean, look, if all downturns are going to replacement, then you know, that's a good thing. We'll take that for sure. Yeah, I bet, I bet we would. So if we're thinking on, you know, into that pre-buy and, you know, prior emission cycles have certainly been, you know, strong value, you know, what's called value creation points, for Cummins. You know, should this time be any different? You guys are investing a whole lot. Certainly, you know, it's fair that you get paid for some of that. So just curious, you know, if this time could be any different and then if there's any way to quantify it at these early stages which I know is tough to do.
Yeah. Yeah, I'll,
Yeah.
Sorry, you can add, probably predictably, but a little disappointingly, it's going to be hard to quantify right now. But there's a couple of things we're certainly looking forward to that we think are going to be important pieces as we introduce these new engines in a staged way over the coming years. A couple of things. One, as we've seen in previous cycles, is we will be adding content, right? So it will need different after-treatment solutions. We will need different, you know, obviously, engine designs that drive a content associated with meeting those regulations, which is good for our business, right?
In addition to that, you know, given our what we think is strong performance, deep customer relationships, and the finer tuning of these engines, we will, you know, kind of expect to be able to price for the value add that we deliver through the channel and to our customers. And so both of those elements, we expect to offer an opportunity for us to, you know, take advantage of the significant development we've done, that we think have industry-leading products, and to improve margins and add content. So we're pretty excited about the opportunity that presents as we get deeper into the decade. Exactly how much is hard to pin down quite yet, and we'll have to have those conversations as we move forward.
Yeah, and I think I would say just the cycles and where we're delivering these new products are our opportunity to take bigger bites of price and expand our margins. And, you know, we have been reminded many times that our pricing is lagging behind what the OEMs are doing. It's a different market you're facing, of course. And so I think this is our opportunity to kind of, you know, work on expanding our margins. The theme that we're kind of driving through the company is how do we continue to drive profitability growth and cash flow generation.
Got it. And, and I guess we were talking about price quite a bit. Certainly, that was the, the nexus of the question, and margins. Now, how about from the share side? Like, you know, it's some, you know, medium duty, obviously very good share already, to begin with. But, you know, generally, is there a, is there a share opportunity, as I, I'd assume some of your customers, some who may produce their own engines, are probably looking at themselves saying, like, "Do we need to? How much do we want to spend right now?
Yeah. Yeah, I think what we expect is a couple drivers. So the OEMs will be, again, delivering their own engine platforms as well, right? And so in terms of fundamental shifts in the share profile in North America, we wouldn't expect that, you know, to drive fundamental shifts. What we do hope and expect is to be able to continue to drive incremental share gains. Part of that will be a function of using these investments to drive some of the benefits of the Fuel Agnostic Platform, a specific example being introducing the 15-liter natural gas.
Yeah.
Right, which, if we think that can generate some improved uptake, in the market, will serve to our advantage from a market share perspective. So there's going to be some pieces like that where we want to drive incremental, you know, market share wins, but, you know, significant, you know, leapfrog-type changes we wouldn't expect in the near term.
Got it. So at this point, I wanted to pivot to the audience response questions, if we could get those on the screen. Reminder again for the audience, there's the remote on your table in front of you. We certainly would welcome your participation here. So first question is, "Do you currently own the stock? Yes, overweight, market weight, underweight, or no?" Remember this from last year.
Oh, yeah.
Yeah.
I was trying to remember what the answers were last year. Maybe better that I forgot.
There you go. So 60% of the room says no. Next question, please. So what is your general bias towards the stock right now? Positive, negative, or neutral?
In the real-time feedback category, I suppose.
That's right.
That's right. Neutral. All right. So about 50% say neutral, 33% say positive. I was thinking about doing a live audience poll here, but we're not going to do that. Next question, please. In your opinion, through cycle EPS growth for Cummins will be above peers, in line with peers, or below peers? And the context of that is, I think some of these questions are also marred by thoughts around cycles as opposed to necessarily the company. So in this question, we've got about 65% above peers. All right.
Yeah.
For EPS growth. Next question, please. So, in your opinion, what should Cummins do with excess cash? Focus on M&A, larger M&A, repos, dividends, debt pay down, or internal investment.
Bet I can predict this one.
Yeah.
Jeff needs a break, so don't vote 1 and 2.
Yeah, this is the strategy guy's got. We need to keep him busy. All right. So about a quarter of the room says, repos and debt pay down, so you could hang tight for a little bit here.
All right.
All right, moving to the next question, second to last question. In your opinion, on what multiple of 2024 earnings should Cummins trade? There's bands from less than 10x to higher than 21x. And again, a reminder for the room, for folks probably seeing this today, these are standardized ranges for every company at this call. I know what you're hoping for.
Yeah, that's right.
All right, so about 40% of the room is four, so it's about 16x-18x. I will say one thing, you know, multiples are, you know, multiples across the board so far, I feel like there's been a good enough sample set, today that I've seen. And, you know, most of them are to the, you know, to the mid, to the right of that screen, which, you know, thinking about last year, we were more on the left of that screen.
Yeah.
So quite a bit different. All right, moving to the last one here. So, what do you see as the most significant share price headwind facing Cummins? Is it core growth? Is it margin performance, capital deployment, or execution and strategy? Don't kill the messenger.
I would say. I know, yeah. My answer.
All right, so about half the room says core growth, probably reflecting some of that cycle, and about a third of the room is in the margin performance camp. So that is a good segue, actually, to move into some of the margin side. So, you know, the most generic question first, how are you guys thinking about price cost this year without the, the background? And then, you know, more so, where do you guys see price in aftermarket and really power systems, where the company has been able to get some, you know, some incremental gains over the last couple of years?
Yeah, I can take that one to start. So I right now, price costs were 200 basis points positive, now higher than our normal average, which is probably more like 100 across the company. I think we continue to drive more and more pricing. We are long-term pricers versus big bites, so I think we will continue to drive that, and it varies across the business. Power Systems, as an example, yeah, is higher than that. That's been a very strategic pricing. We've taken, like, pointed efforts in the last couple of years to improve that margin, drive pricing, particularly in the power gen segment. So it used to be a negative mix on first-fit sales, much more comparable to industrial margins now. And it's at 60% of the volume, so that's very helpful.
So we've been kinda making this march towards improved pricing. On the cost side, I would say it's relatively stable, a little bit still a headwind on materials, and that is, historically speaking, when you have a lower downturn, that materials would start coming off, but that's been stickier than normal. It's not a surprise, but it's—we have that as still a minor headwind this year for the company.
Got it. And, I'd be remiss if we didn't talk Accelera. Just in general, though, and it's—and this relates to margins, so we'll connect the two. You know, clearly, the business is investing a lot, you know, in itself. So if you, like, think, you know, if you look at, like, cycle on cycle, you know, how much more, if any, you know, is the company investing this cycle versus the priors? And what I'm trying to get to is to try and get a sense of where, like where margins could be without some of that investment. I don't know if there's a way to level set that.
Yeah, absolutely. I'd start, and then you talk on the Accelera side. On the core business, it's certainly more because it's the It's what I talked about, those platform-level investments. Just looking at the raw numbers, our R&D and engine business, as an example, is about $200 million higher than it was in 2021. So that's like, it is a considerable piece. We're in this bubble that once you get towards the latter part of next year and beyond, that starts dropping back to more normalized levels. So that's a, you know, we knew we had to make this investment, and then it'll kinda come back down. That helps us on the margin expansion. Maybe you can talk Accelera.
Yeah, the Accelera one's a little harder to put in a cycle-over-cycle perspective, just because, I mean, those are very much as you'd expect, you know, multiyear, decade-long type foundational investments we wanna build. So, as I alluded to at the beginning, you know, the, the art and Accelera is to make sure we're getting those foundations built, credible, sufficiently operational, that we can start to see the adoption as we head into the back end of the decade. That will drive gross margin positivity, drive towards break even, really drive that business to develop into a scale such that we can start to show some of the, the cycle over cycle demands. It's a little premature to say that because those are certainly longer term, more strategic investments we're making.
Yeah, but no, for sure on Accelera side, it makes sense on the core that drives. And then maybe just to wrap up, could you talk a little bit about the Daimler PACCAR JV that you guys have on the battery cell production, and just maybe some of the economics behind it? That'd be curious.
Yeah, sure. So, that's a 21 GWh battery cell manufacturing plant. The Daimler, PACCAR, as our other volume partners, we each own 30%, and then EVE is a 10% owner there. That joint venture will be set up to, you know, be a profit-making entity, right? So, and of course, alignment with that ownership percentage, and then we, as the volume partners, will use the offtake of that plant, the cells, to use in our own applications to make into battery packs and the, and themselves going forward. The overall capital investment of that plant is roughly $2 billion. So we'll be splitting the price tag, you know, along those lines that we just talked about. And we expect to start production there in 2027 as our plan, right?
We still have not yet gotten that close, but hope to quite, quite quickly, at which time we'll obviously begin to break ground in Northern Mississippi and move towards that 2027 production date.
Yeah, sounds like a good investor event at some point.
Yeah, exactly. I think it's important on, just on that one. I know we're wrapping up time, but that only represents a small, like a sliver of the market. So, like, if this is a step along the way, it doesn't presume we're going battery electric in 2027 by any stretch. So.
Completely fair. All right, great. So like you said, we're about out of time, so, I wanted to thank the Cummins guys, and certainly, please, give them a round of applause.
Thanks, Adam. Thanks, Adam. Thank you all.