All right. Great. Thanks so much, everyone, for being here. My name is Adam Seiden, and I lead the U.S. machinery and construction effort here at Barclays. For this session, we're thankful to have the folks from Cummins joining us, so we've got Jeff Wiltrout, Vice President, Corporate Strategy, and Chris Clulow, VP of Investor Relations. The format of this session, like a lot of the others here at this conference, are a fireside chat, so most of the dialogue will be between the fellows and I. We will be doing an audience response system at the later portions of this session, so we would invite your participation through the nice widgets you've got on your tables there, so with those ground rules out of the way, Team Cummins, thanks so much for being here, and welcome back to Miami.
Thanks, Adam.
Thanks, Adam.
Yeah, so every year, I kinda use the first question to table-set a little bit, and, particularly for first-timers, and I think for this session, just given through a lot of the headlines that we've heard, could you walk through for us and level-set a little bit about the regulatory outlook and the regulatory things that are in play here, just because they tend to get jumbled together in the conversation?
Yeah. I'll get started, Chris, and of course, that's a big, broad, global question, but I think typically we get this aimed most specifically at U.S., North America kinda truck, and most notably the EPA and CARB regulations, and so you know, in our industry, of course, we have driven over a long period of time towards every three-year or so cycles to continue to drive stringency and reduction and [audio distortion] things like that, and 2027 is no different. We expect the next regulatory hurdle to come, and we've been preparing with significant investments to be ready to launch engines into that regulation and regime, and of course, there is some uncertainty with change in administration and some of what we see going on.
We continue to expect that the primary and most critical elements of that regulatory change in 2027 likely remain consistent with some potential uncertainty there, but that's our current view. And as you look beyond that into 2030 and beyond, where we expected to see a much more significant turn towards regulation of greenhouse gas emissions, I think there's a huge amount of uncertainty going out past 2027 that we as of right now have very little clarity on how that will play itself out.
That's great. And when you think about whether it's GHG or the 2027 regulations, how do those independently impact your business and how Cummins has been, you know, preparing for, I guess, particularly on the 2027 side?
Yeah, sure. So we made the decision several years ago knowing that we expected to see one, ongoing stringency in NOx and other pollutant emissions, as well as this transition towards decarbonization greenhouse gas emissions to launch new engine platforms, right? So we're going through the highest amount of R&D and capital expenditures in our company's history aimed at launching three new platforms to hit those 2027 regs, and we think that provides the foundation not only to meet those regulations, but enable ongoing improvement through the balance of this decade and beyond. These for us are 20+ year investments that we then make ongoing incremental improvements on, so it's been a critical piece.
Over time, what we've been able to do quite successfully is not only get the engine piece right to win market share, quite frankly, in a way that's very challenging for everyone to continue to compete and do so at scale, but then add content through those engines as we go through the regulatory environment. Even in 2027, what we will see is significantly increased aftertreatment to make sure it is, you know, cleaning up the emissions from those engines, different and new turbochargers, a modification of the content going on in those engines that has proven to be a pretty successful recipe in terms of market share, content growth, and associated profitability improvement for the latter better part of the latter couple decades, and one we're excited to continue.
Excellent. And rounding out maybe the conversation on regs, the really exciting conversation on regs, if you think about, in the last couple days even, there's been some headlines around Trump and, you know, his EPA team potentially looking to challenge CARB. And, so maybe could you level-set for the audience here? I mean, you know, how impactful has CARB been to, you know, setting the direction of the, you know, the on-highway market and so forth? And does this uncertainty at all, does that change or challenge the way you, you know, you operate the business and you're thinking about your own and developing R&D?
Yeah. Again, I'll start you. Yeah. So as a general rule, the dynamic has been CARB has consistently usually been a little bit more forward-leading in terms of driving the regulatory environment. CARB is, of course, California's equivalent to the EPA. And there have been numerous states around the country who have followed more closely to California than elsewhere. We have consistently and continue to urge, advocate as much alignment as possible to have a unified regulatory structure as much as we possibly can. And by and large, with some exceptions, that has proven to be pretty close to be true. There are some dynamics now, like you said, as you think through the current administration and California, that we do have some concerns that that becomes more divergent, but we will be advocating for stable regulation, pragmatic regulation, and aligned regulation across the country.
That's what we hope to see. If there are changes in divergence, it does have significant implications for how we, of course, you know, go to market. I would just wanna reiterate these engine platforms are multi-year investments. So, we still do and continue to believe in the viability of those business models. The near-term commercial dynamics, the, you know, the path to market dynamics, things like that, of course, would have significant modifications as we see any ongoing uncertainty or change to that dynamic. Do you, Adam?
No. Perfect. So stable, pragmatic, and aligned. That's, that's the punchline.
So let's hope that's what would be helpful. Yeah.
There you go. So now bringing more into the business and how things are playing out. So lots of discussion, of course, around pre-buy that you could or couldn't see, you know, on the 2027 move. You know, I guess just given what you're hearing now, I mean, what are the latest thoughts on the prospects of a pre-buy emerging, based on what's out there?
Yeah. I can take that one. Our expectation is that there is gonna be some level of pre-buy this year. It's really driven by even any level of regulation change. When even small ones, there's a pre-buy impact 'cause this is a customer base that doesn't like change, and they wanna make sure they have the tried and true technology. I think that we do think there's gonna be some element in this case, even if there were some changes, for example, in like warranty piece of this regulation. It's still enough of a change and a hardware change that it's a significant cost increase coupled with a technology change that'll drive some pre-buy. We think basically volumes will ramp throughout the year. We're in the midst of a downturn.
I think you observed this last year, Adam, that if you don't get to replacement level, are you really in a downturn?
Yeah.
That's where we've seen the kind of a buildup in orders and some positive momentum even in freight where we think the bottom end is at about replacement level. And then the rest, I think we think is just some pre-buy behavior. When it starts, we think is probably in the back half of the year. But, you know, we remain ready. We haven't made any M&A because of the short and shallow nature of this downturn. We haven't made any major structural changes in our plants or in our supply base. So I think we're ready.
Yeah. Yeah. You remembered that line around the replacement side. So, and that did happen, for everyone out there. As far as, you know, we also talked probably a little bit about like, you know, R&D cycles and how it's also been value creation points for Cummins. So, and partly you guys, you know, you invest a lot of R&D and so forth and technology into preparing for it. So, you know, based on what you see, given that view of the pre-buy ramp and so forth, is the upcoming emissions, you know, or is this upcoming cycle any different? And then more broadly, like if you think about the Cummins has done some work on its own cost structure here. So how do incrementals look, you know, compared to, you know, prior cycles?
Yeah. I think we're seeing really good improvement in profitability. A lot of cost efficiencies coming through. We even set our 2030 targets, you know, back at our analyst day in May last year, and we're getting close to in the range even this year. It's not gonna be a linear path, but we think we're seeing good momentum to move towards that. And I think, you know, as we get to emission cycles, that is our opportunity where we can price for a little bit more value. It's just a little bit at a time every year. We tend not to give it back, and we just kinda work our way up. We don't, given our kinda B2B relationship, there's not as much of a opportunity to drive big price increases.
But then as we're adding value with this, as, as Jeff mentioned, we're these are new platform launches. With that comes, it's not just emissions that we're achieving in 2027. These are gonna be more efficient by 5%-7% for a heavy-duty engine. That's a, that's a sizable step, given that's a big piece of the cost and operation. So we can price for that value that we're bringing. So this is, this is when we can take a little bit more leap, both in expanding our margin dollars as well as our percentage.
Got it. So we talked a little bit about R&D and the value creation. Now, in an area where there has been some spend, on the Accelera side, you guys made some news your last quarter and, you know, how you're thinking about the business. So I guess just point blank, you know, how committed is Cummins to Accelera today? And are there parts of Accelera you're more committed to than others?
Yeah, I'll start. I mean, I do what I would say is, of course, we do remain committed. Our approach to Accelera has been to make sure to position our entire portfolio in a way that we could win near, medium, and long-term regardless of the pace of the energy transition, right? So that is why we made some of the foundational technology investments that currently inform Accelera batteries and hydrogen and elements like that. Of course, we're now seeing some of the early innings, and there are many places where the expected volume adoption is happening more slowly than even what our relatively conservative projections from a couple years ago forecast.
That drove what you referred to, which is some active work within that Accelera business to reduce overhead, to consolidate operating footprints, to increasingly leverage some of the resources that the broader core business has, manufacturing asset, manufacturing footprint and the like, to try and enable that business to be as efficient as possible, but also to protect the core critical kinda technology investments that we still believe are gonna be part of a long-term decarbonization journey that we still are supportive of and believe the world will continue to pursue, although at a multi-decade kind of pace. So we remain committed. The challenge is, of course, it is right technology at right, right time through what we expect to be a pretty messy transition. Everyone in our industry's gonna face a similar dynamic and challenge.
What I have said often to internal stakeholders, this long, choppy energy transition is really, really difficult to manage. It's, it's hard. Our view is that while it's difficult, it, it's also strategically advantageous for Cummins to be able to make the right investments at the right time and, and, and win, share, and position ourselves effectively through the long term. We remain committed, but we will continue to evaluate in the near- to- medium term to ensure we've got the right investment profile to, you know, to reduce the operating losses, get a path towards profitability, and reinforce long-term positioning, through that long journey.
Got it. And maybe on some of those investments, right? So the Amplify JV that you have with a few other folks, similar sort of thought process there that you remain committed to it. And then just maybe has, you know, has there been any changes in the shape of the expectations or investment that you're expecting on that project?
Yeah. What I would say is that we do, of course, actively engage with our other, you know, volume partners in that partnership, Daimler and PACCAR. And I would say we all remain committed that we think this is the right move structurally and strategically and want to pursue it. Of course, as we think about volume dynamics, we do look at the plan. And while we still are aiming to start production in 2027, we're, of course, gauging, you know, how much and how we ramp up the capacity within that operation to make sure it is appropriate just given the demand we see. So, of course, as with any big investment with that, we continue to evaluate the sequencing and timing, but still believe and think we share the view overall a positive strategic development for us.
Fair enough. And so now thinking it's all kinda related to, you know, the direction of where, you know, regs and the world was going, and now there's been a little bit of a shift in that thinking. So do you think that does the shift in participation around alternative combustion have any material shift in how some of your customers? I'm thinking a little bit about that because Cummins has been able to take on additional volumes and gain some share in the last couple of years, particularly when there were some big investments some of your customers were thinking about having on their side.
Yeah. I think it has. I mean, the slow pace of adoption, and we said this in our earnings calls, it's to our advantage. Not only does it, I mean, we are playing, selling more in internal combustion space, continuing to gain share in those spaces, but the competitive landscape in this new power is much cleaner than it was two years ago. I mean, the pure plays are pretty much gone, and the OEMs are not rushing to do it themselves.
It gives us a space for us to continue to grow and, you know, although volume is lower, it is, we're making some good progress here that we think is gonna be valuable for the future, as we're moving forward and getting really good valuable experience, particularly when you're in new technology, things out in the field, seeing how they work. It puts you so far ahead, and that's where we're feeling like we're in a good position right now.
Got it. And so thinking about some of that growth that you have, I'm thinking of your investor day slides, and it was like essentially content and a bunch of different pictures of the content you're adding. So you know, maybe walk through for us, you know, where are you guys on the content story? And then in with the backdrop of everything that we just spoke about, how things are evolving.
Yeah.
You know, yeah, I can give it a shot. On the content side, it has been our journey in the last, you know, five, 10 years of continuing to add content. I mean, it probably goes back further when we added the aftertreatment on and have been growing our components business with these key engine components, the key engine system components. And then you add in the joint venture with Eaton Cummins for transmissions. You add in the Meritor acquisition, and you look at the schematic of a truck, and it's a lot of Cummins equipment on it. And it what it allows us is to you can optimize that whole system.
So it's not, you know, if you're driving for fuel efficiency, having all those pieces under your control is a big advantage. And we're gonna continue to do that as you progress up and get into alternate fuels like natural gas. You're adding tank systems on that are quite a good profit center and then battery electric and so forth. So it just continues to drive content up on the truck. And it's been a very helpful piece of our growth in the last several years.
Yeah. I think the Streets, you know, notice that you guys have done a good job of playing multiple options in terms of the future direction of technologies and so forth. So we can see the investments that you've made to some extent. There's zero chance we could see the investments you didn't make. So I'm curious if maybe you think through and particularly, you know, strategy, you know, if you think through some like high-level examples of areas that, you know, just didn't make sense for, you know, for the company that, you know, were smart decisions and so forth.
Yeah. I mean, the most obvious place to kinda talk a lot about that is, of course, in the, in the new energy, kinda zero emission space, right? There's been a lot of opportunity. There's been a lot of companies and at various stages of this kind of hype cycle we've lived through for the last few years, you know, and going back two or three years when it was kinda like this concern that we were gonna get run over by some of that competition. More recently, less concern and more interest is there assets that you can pick up. So we have tried really, really hard to be as disciplined as we can to get the right critical technology solutions in our portfolio to continue to explore if there's ways to be more additive to that.
And we have said no to a lot of opportunities to kind of extend and expand, you know, some of those elements, you know, with companies you would've seen that have, especially like Chris said, those pure play companies that, in the de-SPAC world and things like that. And so I think by and large, we would say we feel from where we stand today, pretty well positioned and have done so in a reasonably capital efficient way. The one we'll continue to try and drive, but we've said no more than we've said yes on that in that area. And then we, of course, continue to look and evaluate places in other adjacent spaces around where we operate. And that often, as you would guess, comes down to evaluation and price to pay versus other alternatives.
I think we've gotten everyone right? No, probably not. But I think we've probably said more than we've said yes, and we're probably on balance happy with most of the answers we've had to those questions. So.
Yeah. Well, evaluations have come down on some things here and there.
That's correct.
That have been reasonable too, so maybe let's shift gears onto the power system side of the portfolio. Clearly a standout, a lot of focus among data centers, so forth, what that means for folks like yourselves. You know, maybe touching the capacity side first and the supply side, maybe if you could walk through some of what you're doing there, what you've announced previously, and then kind of updated a bit for us on the most recent earnings call.
Yeah. So what we announced last year was that we were looking to double our capacity for our 95L engine and the gensets associated. That's our largest genset, 3.5 MW , serves the data center market in North American and to some extent other parts of the world. So we are continuing on with that. We made it about 30% of the way there last year and expect to get there by the end of the year at that doubling. Then just most recently, we announced we're expanding out in other areas, like anything 50 L, 60 L, 78 L in our plants in the U.K., in the U.S. and in India. And that those not only hit the. They do hit data centers, it allows us to grow in that space, but it also, they hit multiple markets.
So we see a good pathway there. And these are, I mean, relatively speaking, it's a $200 million investment for this level of potential revenue generation. I think we're feeling really confident. And it's not much of the work is working with suppliers to get them there 'cause we, you know, we've designed our plants to be flexible and can largely add onto that without new plants and major investments. And so just getting our suppliers there is gonna be our production.
Got it. And within the data center side specifically, there's exposure directly through the power systems business and then also through distribution. Can you just remind us a bit of what that, you know, what that split is and then the path to grow? Is it even across both or is there, you know, one area that's growing a bit more than the other?
Yeah. I can take that one. So it's about 2/3 of our revenue is in the power systems. It's the generator set itself. But the distribution business is a nice asset for us to have. It's unique for us in the competitive landscape where we can take the genset, do the installation, the upfit, the wiring, everything, balance the plant and commission it and, you know, the data center's ready to go. So we're a one-stop shop. And so they get about 1/3 of the revenue and both are growing at about the same pace because that's how we're kinda pushing all our sales. We don't, you know, have to use outside contractors or anything like that to get these things going.
And that's it, you know, it's a bit of a relief for the hyperscalers as they got enough to worry about then, and then managing that as well. So we're feeling like it's a good add for us.
Got it. And just a lot of positivity around data centers and for good reason, a lot of positivity around power systems also for, you know, for good reason. Just one thing that has come up on the data center side is, you know, that there's around the tail of aftermarket that comes off the back of that. So just curious, you know, how you look at it, how you look at it. Is it essentially paying more for today for a little less later or is it just the demand is so great? I'm just curious your perspective on that.
Yeah. That business is certainly compared to more of our, you know, industrial or even on-highway businesses. So these are predominantly standby gensets, right? So they don't run. And so as such, the aftermarket parts footprint is relatively light. So we see the vast majority of the value capture for us in the power gen data center space, most specifically on the front end sale. These gensets tend to have a 20-year lifecycle. There's a little bit of parts and aftermarket service that goes with it, but the balance is much more limited than what you would see in an on-highway truck engine or a mining truck engine or anything like that.
That's why what Chris alluded to, the first fit distribution sales service kinda installation and commissioning is a really nice, kind of value creator for us to supplement what is primarily a first fit sale, and we are, of course, chasing everything we can to build capacity and drive profitable growth on that front, but not as much coming in the aftermarket.
Got it. So we stayed away from doing the walk around the world here. So I'm just gonna ask, you know, just if you were to think about, you know, among China and India, you know, from the emerging market side, I mean, which areas has the ability to surprise, you know, surprise the most? And does that vary based on, you know, what part of the business on-highway?
Yeah. Good. Yeah. I'll start with China, of course, a massive market, big for us. You know, in the power systems relevant space, power generation on data centers and the mining space, that's actually remained quite strong for the last several years. We see, we expect that to continue this year. The on-highway truck markets have been much more muted, a little bit more stagnant over the last couple of years. Domestic demand has fallen off, but it's been supplemented by export volume.
So it will remain, we think, likely 1,000,000 unit volume, pretty limited upside that with obviously the exception that I think everyone's waiting and watching to see is to what extent, you know, any stimulus measures that might get implemented here over the back half of the year coming out of the March Congress and in response to the geopolitical dynamics. I would say, you know, potential some upside there, probably more limited this year. I would expect that likely to take shape more in 2026 and 2027. India has obviously a very attractive kind of structural growth proposition and option, and they continue to build out infrastructure and things like that. I guess on that one, we remain quite bullish and optimistic for the growth prospects in India.
Not obvious to me what near-term surprises to the upside would be beneficial in India, other than what we expect to see is just continued steady, expansive growth in that market.
Yeah. I don't think it's. I think it's more of a long-term play, but India's got, of all the markets in the world, probably the clearest path to growth. I see their infrastructure build out some of the efforts they're making. It's not gonna go as fast as China did 15 years ago, but it's the same path that they're taking where, you know, started out with limited infrastructure, roads, highways, and seven liter engines being the biggest. Now they're super highways and 15L in China. So it's a ways away in India, but I think that's really good potential.
So there you mentioned India and Prime Minister Modi was, you know, just here in Washington, D.C., not that long ago. And while he was there, you know, there's the President Trump talking about tariffs. So, I'm sure you've gotten inundated with this all through the day today. But curious as to, you know, what type of risk Cummins sees from tariffs and how they could potentially counter it.
Yeah. It's something, you know. We know how to navigate and we've been through this before. I think the China tariffs are much more straightforward. We fully expected those and largely we, you know, operate with the strategy of we produce and source where we sell. So like China for China, U.S. for U.S. But there are some cases where you have to source, you know, some components from China that there isn't another global source. So there is a bit of an exposure there, but if it's, you know, those costs continue, that becomes something to pass on to customers. Most of our long-term agreements are tailored to include clauses for that. So I think we'll watch that.
I think the other ones that we're watching, it's just more uncertain, you know, like I think we've been asked about a hundred hypotheticals in the last couple of days and it's like, it's hard to play that out 'cause really no one knows. I think Mexico is it, you know, if it's at the headline number, it's quite disruptive. It's a very much integrated supply chain. I don't think Cummins is more exposed, probably less exposed than most in the industrials, but the potential disruption is not to be understated.
No, fair enough. All right. So let's shift over to the audience response questions here for a second. It's a reminder the thing in front of you is the device to use. So for the first question here, we've got, do you currently own this stock? Yes, overweight, market weight, underweight, or no?
I'm one.
All right. Sorry. When the clock starts, you could input it. So.
Oh, interesting.
All right. About 60% of the room says no. Moving on to the next question. What is your general bias towards the stock right now? Positive, negative, or neutral? You start the clock. All right. Relatively even split across the board between positive and neutral. Next question please. In your opinion, through-cycle EPS growth for Cummins will be above peers, in line with peers, or below peers? You start the clock. All right. About half say above peers. The rest split. Next question please. In your opinion, what should Cummins do with excess cash? Bolt-on M&A, larger M&A, repos, divvies, debt paydown, or internal investment? Start the clock. The ghost of Mark Smith is in the room.
Uh-huh. That's right. He just, his ears are burning.
Exactly. Very even split, across the board. So maybe let's touch on that for a second. When you think about, when you think about Cummins, a key part of the message, right, has been about, you know, return of excess cash to shareholders. So when you see an answer like this that's very much kind of scattershot across the board, you know, how, how does that jive with where the, the business is set up to do over the next year or two?
Yeah. No, it's. I was actually slightly surprised. It's. I think we are, you know, Jeff can talk more about the M & A, but we're very happy with our portfolio now and actually very happy with our debt position. We've been paying that down from the Meritor acquisition over the last couple of years. And so we have, I would say, more flexibility and a really keen focus on cash improvement. I mean, I think that's been heard loud and clear from investors and that's Mark. Mark is certainly beating the drum on that one. So, I think we can. It's an interesting response for me. I don't know if you have any.
Yeah. What I would say is at least from the M&A front, like, like Chris said, we feel like we got a path to solid profitable growth through the decade based on what we have in-house. So, you know, not a lot of urgency. We will continue, of course, to think about ways, technological advancements and the Accelera space in the supply chain, largely of kind of a bolt-on nature that we'll continue to evaluate opportunistically what that might look like. And then we'll continue to think about long-term strategic positioning, right? And if there's ways to continue to shift our portfolio, supplement where we're at, get exposed to the right trends. But really thinking about that too, very much a long-term lens for how we continue to think through that into the next decade.
And so, yeah, I think what you'll see likely is, yeah, the return to cash to shareholders consistent with our long-term goals, some bolt-on M&A and evaluation of other M&A, but feeling no urgency to pursue that and we'll continue to be disciplined as we've always tried to be. So.
Fair enough. Let's move to the next two here and wrap up on, in your opinion, on what multiple of 2025 earnings should Cummins trade. And these are standardized ranges from less than 10 to higher than 20. Start the clock, please.
Chris is voting for six. Hit for six. I killed cricket.
All right. In the middle of the range-ish. What do you see as the most significant share price headwinds, capital deployment or execution? You can start the clock. I'm noticing a theme at this conference. So 75% is core growth. So let's talk about that, right? If you think about the targets that you guys laid out at your investor day, you know, the company raised the targets for the core. And you know, essentially you have the targets for the base business went up and then lowered for Accelera. We all talked a lot about in this conversation how things have unfolded here, but you know, given where things are, does you know in the go-forward environment can the base business offset what's been lost by Accelera in those go-forward targets?
I would say through 2030, I think the short answer is yes. We feel and we even saw as we revised those targets, you know, the total went, you know, up, right, and so we think that this decade that remains true and we continue to wanna reinforce the growth profile of that core business, which we still think has a lot of legs to it and to make Accelera a multi-billion dollar kind of supplement in our portfolio as quickly as we possibly can and in a profitable way.
And so I think what we're trying to do is make sure, like I said, to reiterate that we're gonna win across all the phases of this energy transition and we can hedge, to be effective, either in our core or in Accelera, but ultimately in the appropriate combination that does drive top-line growth in a really compelling way. We feel we're pretty well positioned to do that.
Excellent. All right. Well, with that, I think we'll wrap it up here and, team Cummins, thanks so much for being here.
Thank you.