Greetings, and welcome to the Cummins Inc. First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Jack Kinsler, Executive Director of Investor Relations. Thank you. You may begin.
Thank you. Good morning, everyone, and welcome to our teleconference today to discuss Cummins' results for the Q1 of 2021. Participating with me today are our Chairman and Chief Executive Officer, Tom Linebarger our President and Chief Operating Officer, Jennifer Ferrumze And our Chief Financial Officer, Mark Smith. We will all be available for your 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 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 ks 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 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 at www.commons.com under the heading of Investors and Media.
With that out of the way, we will begin with our Chairman and CEO, Tom Landberger.
Thank you, Jack. Good morning, everyone. I'll start with a summary of our Q1 financial results and then I'll talk about our sales and end market trends by region and finish with a discussion of our outlook for 2021. Mark will then take you through more details of both our Q1 financial performance and our forecast for this year. Demand accelerated in the Q1 as the global economy continued to improve driving strong sales growth across most businesses and regions and resulting in solid profitability.
The strength and breadth of the rebound in demand Has surpassed our original expectations and we've raised our full year outlook. We were particularly encouraged by the significant growth of our components business in the Q1, which is now clearly capturing the benefits of the increasing content we are able to offer our customers and partners as they move towards more complex And stringent emissions regulations in China and India. This business is also benefiting from its global leadership position as truck markets recover. While the strong demand across our end markets generated strong revenues, the pace of recovery has placed a strain on global supply chains, leading to increased costs and significant challenges in fulfilling all of our customers' orders. The shortage of key components such as semiconductor chips Has been the primary challenge with adverse weather conditions, labor shortages in some regions and bottlenecks in global logistics further adding to order backlogs.
The ability to supply is our key focus now, and we are doing everything we can to mitigate the impact. I want to thank our global employees, especially those in our supply chain and manufacturing operations and our committed suppliers for their extraordinary efforts to manage through these challenges and supply our customers. We are optimistic that the situation will improve in the second half of the year. However, we expect demand to remain strong, making it difficult for the supply chain to catch up unless the industry extends the order cycle. Before moving to our Q1 financial performance, I wanted to take a moment to highlight a few important strategic partnerships that we announced during the Q1.
These new and expanded partnerships are consistent with our strategy to deepen our relationships with key customers in existing segments, while continuing to invest in new and alternative power solutions. As the leading independent global power solutions provider, Cummins is committed to ensuring our customers have the right solution anywhere and everywhere our customers operate by offering them a broad range of power Solutions from advanced diesel, near zero natural gas, fully electric, hydrogen and other technologies. In February, we announced a global strategic partnership for medium duty engine systems with Daimler Truck and Bus. As part of the partnership, Cummins will invest in the further development and global production of medium duty engines and components for Daimler Trucks and Buses. The partnership builds on our strong existing relationship with Daimler's North American brands.
In North America, Daimler will replace their vertically integrated engines with Cummins engines ahead of CARB regulations in 2024 and EPA regulations in 2027. In addition, Cummins engines will be used in Daimler medium duty chassis In Europe, Brazil and India, coinciding with next generation emissions regulations in those regions. In the future, global medium duty engine systems We also announced a global medium duty partnership and advanced engineering collaboration with Isuzu, Building upon the Isuzu Cummins Power Partnership formed in 2019, Isuzu Trucks powered by Cummins B6.7 Diesel Platform Finally in March, we announced a medium duty engine offering with Hino, will come in 6.7 and L9 engines will be available in Hino trucks in North America by the end of this year. In addition to the above announcements, we continue to investigate areas in which we can strategically collaborate With global OEMs across a number of regions, technologies and power solutions, we believe these collaborations will not only allow us to significantly grow our Engine and Components businesses will also further strengthen the important relationships we have with a number of OEMs and end users. These relationships coupled with our application expertise and broad sales and service channel will position us well to manage the transition From internal combustion engines to lower carbon hybrids and eventually to 0 emissions products in the future.
Now, I will comment on the overall company's performance for the Q1 of 2021 and we'll cover some of our key markets starting with North America before moving on to our largest international markets. Revenues for the Q1 of 2021 were $6,100,000,000 An increase of 22% compared to the Q1 of 2020. EBITDA was $980,000,000 or 16.1 percent Compared to $846,000,000 or 16.9 percent a year ago, EBITDA dollars increased as a result of stronger sales and record joint venture income, partially offset by significantly higher premium freight and other costs associated with supply chain disruptions as well as higher variable compensation expense. Our profitability, especially in the engine business, was impacted more than expected by supply chain disruptions due to the extraordinary measures we had to take to meet customer commitments. Our first quarter revenues in North Grew 7 percent to $3,300,000,000 driven by higher industry build rates of heavy duty trucks and light duty pickups.
Industry production of heavy duty trucks in the Q1 was 60,000 units, an increase of 15% from 2020 levels, While our heavy duty unit sales were 23,000, an increase of 25% from 2020. Industry production of medium duty trucks 32,000 units in the Q1 of 2021, an increase of 2% from 2020, while our unit sales were 27,000 units, An increase of 5% from 2020. We shipped 42,000 engines to Solontis for use in their Ram pickups in the Q1 of 2021, An increase of 49% from the 2020 level. Revenues for power generation grew by 10% due to higher demand in recreational vehicle and data center Our international revenues increased by 45% in the Q1 of 2021 compared to a year ago. 1st quarter revenues in China, including joint ventures, were $2,100,000,000 an increase of 95% due to the higher sales in on highway and construction markets.
Industry demand for medium and heavy duty trucks in China was 587,000 units, an increase of 95% driven by increased NS5 pre buy ahead of a broader NS6 implementation in July of this year and an effort to secure inventory amid supply chain concerns. Our sales in units, including joint ventures were 91,000 or an increase of 146%. The light duty market in China increased 73 percent from 2020 levels to 581,000 units, while our units sold, including joint ventures for 45,000 units, an increase of 63%. Industry demand for excavators set another quarterly record Of 127,000 units in the Q1, an increase of 84% from last year, our units sold were 21,800 units, an increase of 107% as our customers continued to gain market share. Demand for power generation equipment in China Increased 41% in the Q1, driven by growth in data center markets and higher demand for standby power.
1st quarter revenues in India, including joint ventures, were $577,000,000 an increase of 82% from the Q1 a year ago. Industry truck production increased 63%, while our shipments increased 88%, driven by better penetration with our JV partner As the Heavy Duty Commercial Vehicle segment recovered from a year ago, demand for power generation driven by increased demand in most end markets. Now, let me provide our outlook for 2021, including some Comments on individual regions and end markets. We have raised our forecast for total company revenues for 2021 to be up 20% to 24% compared to our prior guidance of up 10% at the midpoint. This guidance reflects a stronger outlook in most markets and regions.
We've raised our forecast for industry production of heavy duty trucks in North America to 264,000 units, up 45% compared to 2020 and above our prior guidance of 255,000 units. Despite the supply chain Our industry is experiencing. Demand has continued to outpace our expectations from the beginning of the year. In the medium duty truck market, we are increasing our forecast for industry production to 140,000 units, up 35% year over year and above our prior guidance of 125,000 units. We expect our engine shipments for pickup trucks In North America to be up 15% compared to 2020, an increase of 10% from our expectations 3 months ago.
In China, we continue to expect domestic on highway demand to decline from record levels a year ago despite the strong start to the year. However, we are increasing our outlook for medium and heavy duty truck market demand to 1,500,000 units
Compared
to our expectations of 1,300,000 units at the beginning of the year, this would still represent a 15% decline from 2020. In the light duty truck market, we continue to expect a 7% reduction in demand in line with our previous guidance. We now expect industry sales of excavators to decline 10% from the record levels achieved in 2020. This compares to our prior guidance of down 20%. In India, we continue to project broad recovery versus 2020.
We anticipate industry demand to be up 90% compared to levels experienced in 2020 and our other businesses are showing promising growth due to continued infrastructure investment. We do anticipate lower demand in all end markets in the Q2 due to new lockdowns as a result of an increase in COVID-nineteen cases We are monitoring the events in the ground closely. Given the rapid increase in COVID cases in India, we are very concerned about the health and safety of our employees And those of our suppliers and partners, we are continuing to operate all of our manufacturing facilities, but with robust safety measures in place. In Brazil, we continue to forecast truck production to increase 25% in 2021. We now expect demand for mining to increase 45% in 2021, up from our expectation of 15% 3 months ago, And that's due to continued strength in commodity prices.
Demand for power generation equipment increased 18% in the Q1 We continue to see strong order activity in most geographies and segments. We are now expecting global power generation revenues to increase 15% Compared to our previous forecast of up 5%, primarily driven by data center and recreational vehicle markets. In summary, we are increasing our revenue outlook for the year with year over year growth expected to be expected in most major regions except China. Demand in China remained very strong in the Q1, but we do anticipate a weaker second half of the year, driven in part by the transition to the new National Standard submissions regulations for trucks beginning in July. We are increasing our EBITDA guidance range from 15.5% to 16% Compared to 15% to 15.5% at the beginning of the year due to stronger volumes and improved outlook for JV Income, which we expect to more than offset significantly higher supply chain costs.
During the quarter, we returned $615,000,000 to shareholders We continue to take necessary precautions at all of our facilities to mitigate the spread of COVID-nineteen and our focus remains on the health and safety of our employees. We are optimistic that continued vaccination distribution globally will reduce the impact of the virus in the second half of the year, but there is still a risk of an increase in cases Somewhere in the world that could result in lower customer demand, additional facility shutdowns or additional supply chain constraints in the future. Having managed through an extremely challenging 2020 and a dramatic ramp up in the Q1 of 2021, Cummins is in a strong position. We have secured some important new business wins in our engine and components businesses. At the same time, we continue to invest in future growth, bringing new technologies to customers and generating strong return for shareholders.
Thank you for your time today. And now let
me turn it over to Mark.
Thank you, Tom, and good morning, everyone. There are 4 key takeaways from our Q1 results. First, we saw continued recovery in demand in most major end markets and regions, resulting in record revenues for the Q1 and a much stronger full year outlook. 2nd, the elevated level of demand across our markets Has strained global supply chains in our industry, resulting in higher premium freight costs and other associated inefficiencies Higher than we anticipated at the start of the year. The strength of demand or the backlogs and lack of inventory in the pipeline indicate that some level of elevated costs are likely to continue in the coming quarters.
Despite the cost headwinds Associated with the tight supply chain, we delivered solid profitability and cash flows in the Q1 and have raised significantly our outlook for the full year. And finally, we'll return $615,000,000 to shareholders through cash dividends and share repurchases consistent with our plan to return 75% of operating cash flow to shareholders this year. Now let me go into more details on the Q1. 1st quarter revenues were $6,100,000,000 an An increase of 22% from a year ago. Sales in North America grew 7% and international revenues rose 45%.
Currency movements positively impacted revenues by around 1%. Earnings before interest, taxes, Change amortization or EBITDA was $980,000,000 or 16.1 percent of sales for the quarter Compared to $846,000,000 or 16.9 percent of sales a year ago. EBITDA dollars increased Due to the benefits of higher volumes and stronger earnings from joint ventures in China, EBITDA percent declined primarily due to A weaker gross margin percent. Gross margin of $1,500,000,000 or 24.4 percent of sales Increased by $192,000,000 but declined as a percent of sales by 140 basis points. 1st quarter gross margins included approximately $105,000,000 of additional freight, labor and logistics costs Associated with disruptions across our supply chain, we expect elevated costs to continue at least through the second quarter and have incorporated additional costs into our full year guidance.
Partially offsetting these supply chain This was a $44,000,000 positive change in estimate and our product coverage expense, reflecting lower costs across several products, primarily in our Components and Power Systems businesses. Selling, general and administrative expenses increased by $28,000,000 and our research expenses increased by $22,000,000 And both increased primarily due to higher variable compensation expense. In 2020, our variable compensation plan worked as designed, Flexing down due to the weaker outlook associated with the impact of the global pandemic. And in 2021, variable compensation expenses are expected to be higher for the company and all individual segments consistent with our forecast for improved full year profitability this year. Joint venture income was a record $166,000,000 in the Q1, up from $129,000,000 a year ago.
Continued strong demand for trucks and construction equipment in China led to the strong performance. And as a reminder, joint venture income in the Q1 last year Included a $37,000,000 benefit related to changes in tax law in India and income of $18,000,000 from a technical fee Also in India that did not repeat this year. Adjusting for these one time items in 2020 underscores just how strong the earnings growth was in the Q1 Other income decreased by $46,000,000 from a year ago, primarily driven by mark to market losses $32,000,000 on the investments that underpin our non qualified benefit plans and this compares to a $17,000,000 Mark to market gain in the Q1 last year. The mark to market losses were recorded within eliminations and not allocated Net earnings for the quarter was $603,000,000 or 4.07 dollars per diluted share compared to $511,000,000 or $3.41 a year ago. The increase is primarily due to stronger after tax earnings and a lower share count as a result of those share repurchase activity.
The effective tax rate in the quarter was 22%. Operating cash flow in the quarter was an inflow of $339,000,000 Compared to $379,000,000 a year ago, stronger earnings were more than offset by an increase in working capital associated with our revenue growth this year. I'll now comment on segment performance and our revised guidance for 2021. For the Engine segment, 1st quarter revenues increased by 14% from a year ago, driven by growth in demand for trucks in the U. S.
Construction Equipment in China. EBITDA decreased from 16.9% to 14.4% of sales. The engine business bore the brunt of the premium freight costs and other associated efficiencies arising from supply chain disruptions. We now expect full year revenues to be up 23% to 27%, an increase from our prior guidance of up 12%, Primarily driven by stronger demand in North American Truck and Global Construction Markets. We have increased our forecast For EBITDA margins to be in the range of 14.5% to 15% as we anticipate stronger volumes and higher and previously expected joint venture income will more than offset the additional supply chain costs.
In the Distribution segment, revenues increased 1% from a year ago in the Q1. EBITDA was flat as a percent of sales at 8.7% The benefits of our North American transformation work and improvements in some of our international businesses Somewhat offset by weaker parts sales resulting from supply chain challenges. Underlying demand for parts We have maintained our 2021 outlook for distribution, revenues to be up 6% to 10% And we now expect EBITDA to be 9% at the midpoint of our guidance, below our prior guidance of 10.1 percent due to a reduced outlook for parts and stronger demand for power generation, Components revenues increased 43% in the 1st quarter, driven by stronger demand for trucks in North America, China, India and Europe. EBITDA increased from 18.6 Sales to 19.6 percent due to the benefit from stronger sales and lower product coverage costs. 2021, we now expect components revenues to increase 30% to 34%, up from our prior guidance We've raised our forecast for EBITDA margins to 17% at the midpoint, up from 14.9%.
In Power Systems, revenues increased 16% in the Q1, driven by stronger global demand for Power Generation of Mining Equipment EBITDA increased from 8.7% to 12.3% of sales, primarily due to the benefits of higher volumes and lower product coverage costs. We now expect Power Systems revenues We'll be up 18% at the midpoint compared to our prior guidance of 9%. EBITDA margins are projected to be in the range of 11% to 11.5% of sales, Up from our prior guidance of 10.6 percent due primarily to the stronger sales outlook and lower cost of quality. In the New Power segment, revenues increased to $35,000,000 up 2.50 percent, just due to stronger sales of battery electric systems, Fuel cells and electrolyzers. EBITDA losses for the quarter were $51,000,000 in line with our expectations For the full year, we're maintaining our new power revenue outlook at $110,000,000 to $130,000,000 and we also expect The net impact of the changes to individual segment Projection is that we forecast total company revenues to be up 20% to 24% in 2021, up from our prior guidance of up 10%.
We're raising our forecast for company EBITDA margins to be between 15.5% 16% compared to our previous guidance of This increase is primarily driven by the stronger sales outlook, which we anticipate will drive incremental earnings that more than offset The increased supply chain costs. We now expect earnings from joint ventures to be down 5% this year compared to our prior forecast of down 25 to 30. Continued strength in China truck and construction markets, especially in the first half of the year The primary reason for the increase in our forecast. We currently project that the Q1 will mark the high point for joint venture earnings this year, With results expected to ease in subsequent quarters and particularly the second half of the year post adoption of the new Standard 6 On Highway Emissions Regulations in China in July. We're projecting our effective tax rate to be 20%, 25 This year, 22.5 percent excluding any discrete items.
Capital expenditures were $87,000,000 in the quarter, up from 7 5 a year ago. We expect that our 2021 capital investments will be in the range of $725,000,000 to 7 $75,000,000 unchanged from prior guidance. As Tom mentioned, we returned $615,000,000 to shareholders through dividends and share repurchase, In line with our plan to return 75 percent of operating cash flow this year. To summarize, we We delivered strong results in the Q1 and have increased both our sales and profitability outlook for the year. Supply chain tightness along with the ongoing impact of COVID-nineteen will continue to present challenges in the coming weeks months.
I want to thank all of our employees for their commitment to support our customers through these challenges and deliver strong full year financial results. We will continue to prioritize investing in the products and technologies that will drive profitable growth and return capital to shareholders while improving the day to day performance of the company. Thank you for your interest today. And let me turn it back now to Jack.
Thanks, Mark. Out of consideration to others on the call, I would ask that you limit yourselves to one question and a related follow-up. Operator, we are now ready for our first question.
Thank you. Our first question is coming from the line of Ann Duignan with JPMorgan. Please proceed with your question.
Hi, good morning and thank you. Could you just provide more color on your change in guidance on the components business? It does sound like Most of the change has been driven by a higher than expected pre buy in China. Am I reading too much into that? And then My follow-up is, based on that, could you provide some color on the cadence of your revenue and Profitability over the next couple of quarters, just balancing the pre buy versus India and then what the back half might look like as input costs
This is Mark. I'll take the first pass at that. We are seeing a rising outlook for most end markets that are going to benefit the components business, which has a leadership position in global markets. So it's not China, you're right, China has definitely helped that business where we have consolidated operations, it's benefited our results. That's primarily in the first half of the year.
The impact of that strength in China is expected to ease in subsequent quarters and second half I'll come back and talk about the overall joint venture income for the company rather than just components in a moment. So yes, that's stronger volume, the components business doing a good job of consolidating that to additional profitability. And then the second thing is the components Did benefit from lower quality costs and a positive change in estimate in our product coverage or warranty expense in the first Quarter, which boosted the results a little bit, which is why the full year margins are a little bit below the Q1 level of performance. India was an important contributor. We had consolidated revenues of around about $600,000,000 in China and India combined for the components business in the Q1, so kind of an annualized $2,500,000,000 business.
We expect that could drop from that rate in the second half of the year by as much as 40% depending on the impact On the other hand, supply chain permitting, we're expecting obviously the North America demand to continue to improve. If I now circle back up to the total company picture, really the story is the same on China that we expect a significant drop off In the second half of the year, we don't have great visibility into that. That's an assumption right now. Q1 remains stronger than we'd anticipated 3 months ago. But there are some signs of concern.
There's elevated inventory levels. Obviously, the price of trucks goes up with the introduction of the new So we've baked in kind of a 40% to 50% drop off in the earnings run rate quarterly in the 2nd half of the year from where we are today. So hopefully that wraps up the big picture on China.
Thank you. Our next question comes from Jerry Revich with Goldman Sachs. Please proceed with your question.
Hi, good morning everyone.
Good morning, Jerry.
Tom, congratulations on the medium duty engine wins announced over the course of I'm wondering, can you talk about how the collaboration discussions are going with some existing medium duty engine customers for Providing more services on the electrification side, to what extent does that help the discussions? Could you just give us some context on whether there's any impact as a result of working closer here? Thanks.
Thanks, Jerry. Here's what I would say is broadly speaking, as we've said in previous calls, we are talking now to every OEM about There are technology requirements going from today all the way through the eventual transition to 0 carbon. And those technologies include diesel and more advanced versions of diesel, natural gas, hybrid, Electric and fuel cell. And as I've also said before, for many of them, the diesel side Looks less viable from an investment point of view just because their volumes are relatively smaller than ours In most ranges, but certainly in mid range. So that's I think why you're seeing the announcements you're seeing.
In addition though, we are offering The other technologies, including transition technologies to help them figure out how to get from where they are now to a place that's a viable 0 carbon solution down the road. I would say that all those conversations are all going on, but it's difficult Now for OEMs to understand what the timing of those transitions look like and exactly what their technology approach wants to be, just as it is For most market watchers, it's hard because the viability of those technologies in terms of cost depends on either Carbon tax or regulations or something else coming into play because still diesel is quite a bit cheaper Those other solutions today and of course is providing improved fuel economy with every generation. So yes, those conversations as you suggest are going on. But I would just say that for the most part, we're doing work with folks, but what exactly their plans are going to be and what role we're going to play in those future technologies is Still being talked about, whereas the diesel stuff is moving now because they have to make investment choices today. Do I invest in the new platform or do I have someone else invest?
Okay. Thank you. And Tom, on the light duty diesel side, can you talk about your level of optimism about similar opportunities that we're seeing falling in your favor on the medium duty side? What's your level of optimism about the opportunity set in light duty?
I would say, If you're thinking about passenger cars and that sort of thing, my view is that there are limited opportunities there. It's not zero that we are having conversations with people, but it's less. And I think primarily because I think most passenger car companies see investing in new diesel platforms is probably not a good investment. They're Thinking themselves that they're trying to invest more for a nearer term future of conversion to hybrids or electric vehicles. Again, that It isn't true across the board.
We want to be clear pickup trucks and some of the others are the transition is less clear. But even there, I'd say The movement is more of that direction than it is towards, let me think about what my next CECL platform is.
Thank you.
Thanks, Jerry.
Thank you. The next question comes from the line of Ross Gilardi with Bank of America. Please proceed with your question.
Yes. Good morning, guys. I just wanted to expand on Jerry's question, maybe the other way. What about heavy duty engines and just the likelihood of Daimler outsourcing It's heavy duty diesel engines 2. And on the medium duty side, have you said how much additional content You will potentially get on the component side or is that still determined still to be determined?
Yes. So let me first address the heavy duty question, Ross. Thanks for that. On heavy duty, of course, what Daymer's decision would Then that would be best to ask them, not us. But I would just say that we are having conversation on heavy duty with a number of partners.
As you guess, the volume discussion that I mentioned earlier about trying to invest For limited volume, it's much more dramatic in medium duty. The relative volume of our customers versus ours is dramatically different in mid range. It is different in Heavy Duty 2. We clearly have a larger position, but it's not as big a difference. So those conversations are likely to take longer, And it's not as easy a call for an OEM on heavy duty as it is on medium duty.
That said, they still have platform investments to make And as do we. And so the question is how many of us want to make those. So I do expect, more partnerships to occur on heavy duty. It's just that those conversations are Still ongoing.
Let me just talk
a little bit on the components businesses, Jennifer, probably don't need to identify myself. Of course, our strategy with our partners has been to offer engines where that's what they would like us to And when we don't fly engines, we often supply components to them from our components business. So when we look at these new partnerships In some cases, we have the components business already for some of our other components. So it will provide an incremental Growth opportunity for us. And then of course, we also extend those partnership conversations on components where they So we do see good growth opportunity, as a result of these deeper partnerships on both the engine and component side.
Thank you. And then just more broadly, do you think all the supply chain concerns out there plus Perhaps some of the controversies on some of the newer entrants to the truck market is shifting customer interest on EV and hydrogen more towards some of the incumbents like
I would say, Ross, it's Hard to say. Here's what I think is that, not surprisingly, some of the new companies that are starting up that are pure plays In Low Carbon Technologies, having trouble demonstrating a business model that works now. That's not surprising because Volume is really low. I mean, it's people know the transitions are coming at some point, but they're not viable without regs or some other kind of Carbon tax or something that moves the needle. So they're struggling to show a business model.
That shouldn't surprise anyone. That's how it is. And our view is that We are well positioned to provide people with solutions today, solutions that are kind of transition kind of solutions, natural gas and hybrid and then Final Solutions, and so we hope that proves to be the best answer, and we think investors do well to find companies like us You can take the whole make the whole lap. But again, I think the timing of how that's going to work and what's going to Whether supply chain is changing people's mind or it's just the business models that don't look viable, I'm not sure. But I noticed the same thing you do that there is volatility Both in the capital flows and the values of these companies and also in their perception of success.
And I'm sure they'll have a brighter day as well as they have a cloudy day today. We just think we have the most robust solution at Cummins.
And as we always do, we're communicating transparently with our customers and doing everything we can to meet There are demand even with all the supply challenges. And so I think continuing to do that is an important part of maintaining strong relationships.
Thank you. Thanks, Ross.
Thank you. Our next question comes from Rob Wertheimer with Melius Research. Please proceed with your question.
Hi, Kevin. My question after the strategic strategy is up. Just within Power Systems, Power Gen, is that recovery broad based or is A little bit data center focused. I don't know if data centers have probably been climbing in the relative mix. And then just the rest of the business in mining seems like a pretty strong Is there anything particular to call out?
We all know commodity prices are strong. I don't know if there's any one off there. Thank you.
Hi, Rob. It's Mark. I would say, yes, data centers are the enduring secular growth stream, but we have seen a broader recovery In PowerGen demand this quarter versus a year ago, U. S, China, India and Asia Pacific are the regions. And certainly within the U.
S, China data centers are an important element of that, but it's a little bit broader. And then in mining, most of our growth in engine sales are originating Yes, definitely, the outlook has improved. The confidence has improved a little bit on mining. Thanks.
Thank you. Our next question is coming from the line of Steven Fisher with UBS.
Wondering what you have assumed for freight and other costs in the next Few quarters relative to that $105,000,000 that you incurred in the Q1 and how that then translates to the cadence of the engine margins over the course Just wondering if that maybe gets a little bit weaker before it gets a little bit better.
Yes. This is Jennifer Rumpy. Thanks for the question. Yes, we saw higher than anticipated premium freight in Q1 just as we dealt with growing Revenue and just trying to keep up in the supply chain and various disruptions, we do expect that that's going to improve. So we ran 1.7% of sales in Q1.
We think that will improve as we go into Q2, so down from $105,000,000 to more like $60,000,000 and then continue to improve over the course of the year. We will continue to see disruptions that are higher than Just as there's a back order and we're trying to chase the situation up. And I'll add that The situation in India is a bit of uncertainty for us right now and how that might impact both our Local markets there as well as export from India, our engines and other components and supply chain.
And then on the engine business margin, Steve, there are 2 swing factors. So one, yes, we've assumed some improvement, particularly in the second half and some of these Excess costs, not all of them, but most of them are showing up in the engine business. And then measured against that is the Expected decline in China truck demand in particular, which will impact the joint venture earnings. So the net of the there are 2 moving parts, but the net says Not a dramatic change quarter to quarter, but those are the 2 big assumptions that mostly play out in a different way
And then just curious how a bigger picture, how you think about how natural gas And how does that drive the investments you're making in natural gas today?
So we have a leading position today in North America with natural gas products and our engines in the U. S. Are already Certified to be the CARB 24 ultra low NOx regulation, so that may create some additional Demand there and we also are offering natural gas products in other parts of the world. So we think it's a bridge solution And we'll plan to continue to offer products to meet our customers' needs as a bridge between Diesel engines and future 0 carbon
solutions.
Steve, I mentioned in my remarks, these transition solutions are important because The 0 carbon solutions that we're working on are those are the eventual solutions that will win the day. But eventual is the hard part. Again, the cost and the infrastructure requirements of electric fleets And or fuel cell hydrogen fleets are significant. And so we believe working with OEMs that we'll be able to get those costs and those We'll need infrastructure, we'll need other investments by governments and other things to get that done. So in the meantime, these interim solutions are going to play a significant role and how long interim is, isn't clear and it could be extended.
So our view is that natural gas and hybrid and some of these other technologies that we have will really help our customers get through those periods, which again could be We could sell across our range of 1,000,000,000 engines in those ranges before transition could be 1,000,000,000 engines. Mean, it's a lot of engines over the years, right, across the entire industry, across multi years. So it's really it's important to be Thoughtful about those transition technologies just like it is the final solutions. Makes sense. Thanks so much.
Thank you. Our next question comes from Jamie Cook with Credit Suisse. Please proceed with your question.
Hi, good morning. This is Colton Zimmer on for Jamie Cook. Our first question is on China. In your outlook, are you assuming that the downturn in this market isn't as bad as maybe you initially thought? Or is it just pushed to the right and 2022 could be another down year?
And then our second question is just on the setup for incrementals next year. As these supply chain headwinds and costs go away, is there a chance to earn outsized incrementals in 2022? Or did we miss it this cycle? Thank you.
Thanks. I'll talk a little bit about China. So the market for the year is a little bit higher than we had originally forecasted, and we really think that is Strong demand in the first half of the year. So we're seeing growing demand for the NS5 product ahead of the transition that happens in July. And that pre buy as well as the challenges in the supply chain is driving our OEMs to build as much as possible At this point, one other dynamic that we think is going to impact going into the second half of the year is that some regions have extended the period With which NS5 product can be registered.
So as we go into Q3, we're going to see inventory of NS5 product Starting to reduce. And then we're really watching to see how quickly customers start to buy that NSVI Given it will come at a higher price with the added content. And so that is really the dynamic strength in the first half of the year. And then we're anticipating the drop in the second half of the year. 2020 was a record year.
We've been saying we think it'll Come back in line, of course, it's continued to stay strong. So it's a bit been a bit unpredictable, but we do think we'll see a fall off in the second half of the year.
I mean, it's too early to say much about next year as we've seen in the past couple of years. The government's been able to Effectively set up some incentive programs that have really been taken up well by truck customers. So there's all it's just hard to say What the future plans are basically to take older emissions trucks Out of circulation, so it's too early to say. Certainly, second half of the year, we're expecting a big drop off, but wouldn't like to comment yet on 2022. And then I see a comment about the incremental margins.
And certainly, the longer these inefficiencies Eventually, that is a head clearly a headwind for this year. We've called it out. We expect they're going to improve in the second half of the year. We do expect that there's going to be improvement going into next year on that particular line item. There are a lot of moving parts and incremental margins, but yes, That line item alone sitting here today, we'd hope and expect to be better next year than it is this year.
The rest will leave for a later day.
Great. Thank you.
Thank you. Our next question comes from Steve Volkmann with Jefferies. Please proceed with your question.
Great. I wanted to go back to, Tom, your discussion around transition solutions, because it seems like a lot of people are forecasting Seeing some pretty significant hybrid solutions over the next decade or so, but we never really seem to discuss those Kind of projects, are you working on those projects? Do you have customers? And I'm wondering if that actually plays to your strength because Hybrid would presumably have a little bit smaller engine, all things being considered. Just curious about your commentary there.
Steve, the answer to the first question is yes. We are definitely working on projects now. They're Specific they're very specific. They have launch dates and they will be launched in these next several years. We will have hybrids on the road.
We will be selling them through our key strategic OEMs. So the hybrids are On the move as you suggested. And again, their life mostly depends on how the 0 carbon solutions Come down in cost and durability, reliability and how the infrastructure gets built up and we'll need both. So I think that's I said that these transition solutions that are going in place will maybe in there for a while and they may be in there
For a shorter period
depending on which country, which application, which region you're in because those two things, both the infrastructure and the Costs depend on application and of course country and how much infrastructure is being built. But the hybrid programs are real. They are getting launched. It's happening now. And with regard to engine size, I think initially what we'll see with hybrids is they'll be relatively mild hybrids, the first step, And those won't make a big difference on engine.
How big the engine is won't be impacted very much The size of the battery, but you are right that as you add larger batteries, then you need less engine to carry the same load. But I think that's those are probably Generation 2 solutions rather than Generation 1.
Super. And just a quick follow-up maybe for Mark. You talked a lot about increases in costs, logistics, etcetera, but you didn't really mention price. Are you guys following this with increased pricing? I would assume this is a pretty good environment.
Just any thoughts there?
Thanks. Great question, Steve. So excluding the premium costs, we talked at the start of the year about Positive forty basis points from price and material cost, the combination of those. We're hanging on to those 40 basis points, but I would say there is signs of a little bit of creeping inflation overall. So yes, we had pricing in place, We had assumptions about cost increase.
Overall, we're just about hanging in there right now, but that's it.
Steve, can I just add one thing? It's Our costs, as you saw, were significantly higher than we anticipated even 3 months ago. And just to Call it out directly. The big problem is semiconductors.
There is
a lot of supply chain challenges. There's everything, weather in Texas and now new challenges with India. You name it and we have a shortage on it. But semiconductors is the biggie. That's the one that's really hard to deal with.
And in this quarter, we ended up buying chips on the market through the aftermarket and bringing them back into production. We rescheduled and rescheduled and rescheduled to meet our customers' demand. Our customers after a pretty tough first half of last year Are finally seeing demand go up and really want to ship trucks to their customers and we really want to help them do that. So frankly, We took it on the chin. We basically brought in everything we could as fast as we could and shipped it out to them and didn't raise prices or didn't do any of those things.
We just shipped them And we took it hard this quarter. And that's just the honest truth, and it's because we felt a commitment to those customers to get them the product best we could Well, the going was good. And so we're not really changing any of that other than hopefully, as Jennifer said, we're going to get Are these costs better under control as we don't have to reschedule so much? We understand where our chips still aren't enough, but we understand where they're more now and we understand how many we have really and we'll be able to level some schedules some and reduce premium freight. It's still awful, But it will be less awful in Q2 and less awful again in Q3 as we get more set up.
But it was a rough quarter and I feel good about what we did for customers and it was hard to get there.
I appreciate it. Thanks.
Thank you. Our next question is coming from the line of David Raso with Evercore. Please proceed with your question.
Hi, thank you. First a clarification.
Component growth, right, 43% of Q1 slows to 28% the rest of the year, while engines the opposite 14% growth for the quarter, 29 for the rest of the year. That is simply all related to China, India in the second half because obviously components is twice the Exposure to China, India, then the engine division, correct? It's nothing related to how maybe your customers are taking product
The main answer is no. It's a structured question. So it's not that the company has twice as much exposure. It's Structured in a different way, so the engine business is principally through joint ventures in China and India. And yes, you're right, otherwise that's The main factor, there can be some small timing differences, but that's not the point here, David.
It's just the way our business is set up.
My question, the supply And tightness that we're seeing and maybe Tom, how you usually think about year 1 of a recovery than year 2. Given the supply chain issues, how are you perceiving the How are you perceiving inventories at the end of year 1? I'm just trying to get in your head a little bit about how you're trying to digest This cycle, given it looks like the inventory is going to be tight throughout the year and that also dovetails into a pricing question. Not trying to get 'twenty 23 guidance from you, but just bigger picture.
No, I get your point there. I'll let Jen talk a little bit more about how she sees customers' Orders. But I would just say broadly speaking, our view is that things that don't get shipped this year will be shipped next year Because there is a supply constraint. There's strong demand out there and that if the cycle takes longer To recover or people can't get all the trucks they want, they'll get them next year. I mean, and we've seen that in other regions Where the capacity of the truck manufacturers doesn't ramp up as quickly.
In Europe, for example, in the last upturn we saw that, it just took them longer to finish the cycle. And I think that's What will happen here will take longer to finish to the extent that the truck demand can't be fully supplied, which would not be a bad thing per se, If it extended further. I think that's the way we're seeing it. It's a longer extended cycle just because we can't we're And I'll let Jen talk about what she's seeing from customers in that respect.
Yes, for sure. As Tom said, Customers are really trying to get everything they can because they see high demand. Inventories are low, back orders are growing. And I And our customers allow them to build and meet the demand. And as I talk to customers, they think it's going to extend into next year because it's just not going to be able to build enough
All right. Thank you.
Thanks, David.
Thank you. Our final question will come The line of Chad Dillard with Bernstein. Please proceed with your question.
Hi, good morning guys. Thanks for squeezing me in. So just following your Daimler Can you talk about the cadence of the transition for medium duty? I know you mentioned that 2024 car will be one catalyst, but
Yes. As we build out that partnership, primarily the emissions regulation changeover is what's going to drive additional position with So that will happen in the U. S. Starting in 'twenty four time period and then in other regions of the world as emissions That will primarily drive the cadence of growth.
Got it. And then can you talk about your components Just beyond the China and India transition that we're seeing this year, where do you see like further opportunities to increase your content intensity? Yes. So as you said, I
mean, a big growth opportunity for us in the components business has been China and India with emissions growth and new customers. So we're growing content with existing customers and then we're also gaining new customers. Additional opportunity That I want to highlight also in China is we're launching the Endurance transmission that's a part of our Eaton Cummins joint venture in China this year. And the market in China for Automated manual transmission, we think it's growing from 8% to 22% this year. We have a low volume mine that we now have Starting to produce products, so we'll ramp that up this year.
That's another growth opportunity in the components business. In China this year, we're also Launching 18 speed version of that transmission later this year. And then as regulations continue to evolve and we
And Jen mentioned earlier, Chad, that when we get Stronger partnerships, we not only get more components because our engines go in, which have, of course, all of our components, but also we just introduced more of our components to the remaining engines because It just also reduces their technical investment to be able to use some of our components and our recipes on their engine. So that will just continue. That's been ongoing trend and that will continue. Okay. Thank you.
Thank you.
Thank you. We have reached the end of our question and answer session. So I'd like Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.