As a reminder, today's conference is being recorded. I would like to introduce your host for today's conference, Mr. Mark Smith, Vice President of Finance. Sir, please go ahead.
Thank you. Good morning, everyone, and welcome to our teleconference today to discuss Cummins results for the third quarter of 2018. Joining me today are our Chairman and Chief Executive Officer, Tom Linebarger, our Chief Financial Officer, Pat Ward, and our President and Chief Operating Officer, Rich Freeland. We'll all be available for your questions after our prepared remarks. Before we start, please note that some of the information 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-K. 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 are available on our website at cummins.com under the heading of Investor Media. Now I'll turn it over to Tom.
Thank you, Mark. Good morning. I'll start with a summary of our third quarter results and finish with a discussion of our outlook for 2018. Pat will then take you through more details of both our third quarter financial performance and our forecast for this year. We delivered strong quarterly sales and record profits in the third quarter. Revenues were $5.9 billion, an increase of 12% compared to the third quarter of 2017, with growth in all of our operating segments and most major geographic markets. EBITDA was a record $983 million, or 16.5% of sales, compared to $788 million or 14.9% of sales a year ago. Engine business revenues increased 17% compared to a year ago, due to strong demand in on-highway markets in North America and growth in construction both in China and North America.
EBITDA for the quarter was 14.9% of sales, compared to 11.8% a year ago. EBITDA percent increased with the impact of higher material costs, more than offset by the benefit of higher volumes, improved pricing, and lower warranties. Sales for our distribution segment grew by 10% year-over-year, driven by higher demand for new engines and for parts of service in off-highway markets. Third quarter EBITDA was 8% of sales, compared to 6.8% in the third quarter of 2017. EBITDA percent and dollars have improved throughout 2018 because of targeted price increases and cost control measures. Third quarter revenues for the component segment rose by 14%. Sales in North America increased 25%, and revenues in international markets grew 2%. Increased truck build rates in North America, along with sales from the automated transmission business, drove domestic growth.
International sales increased as strength in European truck markets offset lower demand in China. The automated transmission business contributed 5% to segment growth. EBITDA for the third quarter in the component segment was a record $288 million, or 16.4% of sales, compared to 16.9% in the same quarter a year ago. EBITDA margin declined due to the dilutive effect of the automated transmission business, which reached its one-year anniversary in the third quarter. The share of heavy-duty trucks in North America with an automated transmission has risen steadily over the last year, with adoption rates now at 73% in new trucks. Fuel economy benefits and improvement in drivability have led to the strong adoption of the technology, and Eaton Cummins is the market share leader in North America.
Power systems sales in the third quarter grew 5% year-over-year, with higher demand for power generation equipment and an increase in sales to oil and gas customers, partially offset by a reduction in marine revenues. EBITDA in the third quarter was 14.7% of sales, compared to 10.5% a year ago, driven by the positive impact of higher sales and the benefits of previous restructuring actions. In our electrified powertrain business, third quarter EBITDA was a loss of $30 million. There is strong customer interest in our technology, and we are actively developing products for urban and shorter-range applications, where we expect the quickest adoption of this technology. Now I will comment on the performance in some of our key markets for the third quarter of 2018, starting with North America, and then I will cover some of our largest international markets.
Our revenues in North America grew 17% in the third quarter due to growth and demand in most end markets and ramp up of the automated transmission business. Industry production of North American heavy-duty trucks grew 23% in the third quarter of 2018, while sales of our heavy-duty engines increased by 30%. Our year-to-date market share through August was 34%, up 1.5% from last year. Demand in the medium-duty truck market remains near record levels, with industry production of medium-duty trucks improving 24% in the third quarter and up 17% year -to -date. Our market share in the medium-duty truck market is 81% year -to -date through August, up from 79% a year ago. Total shipments to our North American pickup truck customers increased 17% compared to a year ago and are on track to be flat for the full year.
Engine sales for construction equipment in North America increased 36% in the third quarter, reflecting general strength in the economy and a 6% increase in U.S. construction spend. Engine sales to high horsepower markets in North America were flat compared to a year ago. Higher demand from oil and gas customers was offset by lower marine sales, while mining revenues were flat. Current oil prices will support continued investment in fracking, an important market for us in North America. While fundamentals for this market remain strong, we have seen OEMs reduce their orders in the second half of 2018 due to pipeline constraints in the Permian Basin, impacting the ability to increase production. Revenues for power generation grew by 10% due to higher demand in the global data center and North American recreational vehicle markets.
Orders were above shipments for the third consecutive quarter, with industry supply chain challenges constraining production. Our international revenues increased by 6% in the third quarter of 2018 compared to a year ago. Third-quarter revenues in China, including joint ventures, were $1.1 billion, a decrease of 7% due to lower sales in our highway markets. Industry demand for medium and heavy-duty trucks in China decreased by 24% compared to a year ago, in line with our expectations. Year-to-date, our market share was 12% through September, compared to 14% last year. Third-quarter market share improved to 16%, from 11% in the first half of the year, as we increased power penetration of our engines at our OEM partners. We continue to work diligently with our partners in preparation of new product launches for NS6 emission standards in 2019.
For example, we recently received certification on our 12-L heavy-duty engine, fitted with a Cummins fuel system, turbocharger, and after-treatment system, making the ISX12 the first heavy-duty engine certified to the NS6 standards in China. Industry sales of light-duty trucks grew by 8% in the third quarter, and our engine market share was 7%, in line with our full-year guidance. Demand for excavators in China in the third quarter increased 34% from a year ago. Our market share through September increased to 15%, up 1% year-over-year. Revenues for our power systems business in China increased 8% due to growth in engine shipments to mining customers, higher demand for power generation equipment for data centers, and increased sales into the domestic oil and gas market. Third-quarter revenues in India, including joint ventures, were $543 million, an increase of 20% from the third quarter a year ago.
Industry truck production increased 39% compared to a year ago, driven by strong economic growth and domestic infrastructure investment. Year-to-date, our market share is 40%, unchanged from 2017. In Brazil, our revenues increased by 16%, primarily due to a recovering economy resulting in improved demand for trucks compared to a weak 2017. Third-quarter revenues were the strongest in four years. Now let me provide our overall outlook for 2018, and then comment on individual regions and end markets. We continue to forecast total company revenues for 2018 to be up 15%-17%. We are maintaining our forecast for industry production of heavy-duty trucks in North America at 286,000 units, up 29% compared to 2017. We continue to expect our market share to be at the high end of the market share range we gave of 31%-34%.
In the medium-duty truck market, we are maintaining our forecast for industry production to reach 133,000 units, up 13% year-over-year. We are increasing our market share expectations in this market to the top end of our prior guidance range of 75%-78%. We continue to expect our engine shipments for pickup trucks in North America to be flat for the full year, compared to a very strong 2017, and at the highest level in 10 years. In China, we expect domestic revenues, including joint ventures, to be up 1%, unchanged from our prior guidance. We are maintaining our outlook for medium and heavy-duty truck sales of 1.3 million units, 1% lower than 2017. Having said that, there is uncertainty about the demand for medium and heavy-duty trucks in China over the next 9 - 12 months.
Given the impact of China's Blue Sky Plan initiative, which includes certain incentives to replace older NSIII trucks and the potential for a pre-buy of NS5 vehicles before the implementation of the more stringent NS6 regulation in the middle of 2019. Our year-to-date market share in the medium and heavy-duty truck segment in China is 12%, and we expect full-year market share to be 12%, consistent with our prior forecast. In the light-duty truck market, we now expect growth of 10% in 2018, up from our previous guidance of 5%, primarily due to government policy changes designed to increase demand. In the light-duty truck market, we expect our full-year share to be 7%, consistent with our prior projection. In India, we expect total revenues, including joint ventures, to be up 20% year-over-year, higher than our previous forecast of 18% due to higher outlook for truck demand.
In July, the Indian government surprised the industry by introducing regulations that allow higher loads per vehicle. The new regulations caused a sharp decline in truck sales in July, followed by a recovery in August and September. Underlying demand for trucks remains strong, and we expect the industry to produce a record number of trucks in 2018. In Brazil, we continue to forecast truck production to increase 20% in 2018 compared to a weak 2017. Improved domestic demand for trucks in Brazil offset lower demand for exported Brazilian trucks in Argentina. We expect our global high horsepower engine shipments to increase 20%, down from our previous forecast of 35% growth, with oil and gas shipments up 66% and mining shipments up 30%. These compare to our prior guidance of oil and gas up 100% and mining up 40%, respectively.
While engine shipment growth has moderated from levels seen in the first half of the year, we continue to benefit from higher rebuild and parts sales due to the size and utilization of the engine population in the field. In summary, we have maintained our full-year outlook and expect to deliver record sales, EBITDA, operating cash flow, and earnings per share in 2018. Our full-year EBITDA range of 14.8%-15.2% represents incremental EBITDA margins of 20% at the midpoint, excluding the impact of our two startup businesses, automated transmissions and electrified powertrains, but including the campaign and tariff-related costs. We expect tariff-related costs of $80 million in 2018, down from our previous estimate of $100 million, and our plans and estimated costs for the aftertreatment campaign in North America remain unchanged.
Tariff-related costs in 2019 are expected to be $50 million more than our prior projections due to the finalization of Section 301, List 3. We expect to offset the majority of the tariff costs through a combination of pricing and supply chain adjustments. During the quarter, we delivered just under $1 billion of operating cash flow, allowing us to invest in our business and return cash to shareholders. In Q3, we returned $682 million in cash to shareholders in the form of dividends and share repurchases, consistent with our plans to return 75% of operating cash flow this year. Our board of directors recently approved a new $2 billion share repurchase authorization, underscoring our plans to continue returning cash to shareholders in the future. We also continue to actively pursue opportunities for acquisitions and partnerships that will add to our profitable growth while maintaining strong returns.
Last week, we received regulatory approval for the previously announced purchase of Navistar's 50% equity of the JAC-Navistar Diesel Engine Company. The new joint venture will continue its operations at its manufacturing facility in Hefei. Cummins already supplies some light-duty, mid-range, and heavy-duty engines to JAC Motors for its domestic market in China, as well as its global operations. This joint venture will continue offering leading NS5 diesel engines and focus on developing new products to meet NS6 standards.
In October, we also announced that we've signed a letter of intent with Isuzu Motors to explore partnership opportunities in the powertrain area. We are optimistic that this partnership will result in increased growth and profitability for both companies. With that, I would like to thank you for your interest today. We had a strong quarter. We're on track for record full-year results, extending our track record of improving performance over prior cycles and continuing to return cash to shareholders. We are also making significant strides in executing our strategy to drive more profitable growth in the future. Now, let me turn it over to Pat.
Thank you, Tom. Good morning, everyone. I will start with a review of the company's third quarter financial results before discussing the performance of the operating segments in some more detail. I will then provide an update on our outlook for the remainder of 2018. Third quarter revenues were $5.9 billion, an increase of 12% from a year ago. Sales improved in each of our operating segments, driven by stronger demand in global on-highway, industrial, and power generation markets. Sales in North America, which represented 61% of our third quarter revenues, grew 17% from a year ago due to increased demand for our engines and our components to meet higher levels of truck production and for construction equipment. International sales increased by 6% from last year due to higher demand in India, Latin America, and in China from on-highway and construction markets.
A stronger U.S. dollar negatively impacted international sales by 3%. Gross margins were 26.1% of sales, up from 25.4% a year ago as a result of the stronger volumes, lower warranty expense, and favorable pricing, which more than offset the headwinds from currency and from tariffs. Selling, admin, and research and development costs of $833 million were $13 million lower than last year and 200 basis points lower as a percent of sales. Increased research and development spend related to investment in new technologies was more than offset by a lower variable compensation expense. Joint venture income of $90 million, decreased by $5 million compared to last year, due mainly to weaker truck demand in China. Other income decreased by $23 million due to the absence of a gain recognized in the third quarter of last year from the sale of power generation rental assets by our distribution business.
Earnings before interest, tax, depreciation, and amortization were a record $983 million or 16.5% of sales for the quarter, compared to $788 million or 14.9% a year ago. EBITDA as a percent of sales improved primarily due to the positive impact of the higher sales, lower warranty and variable compensation expense, partially offset by a stronger U.S. dollar. Net earnings for the quarter were a record $692 million, or $4.28 per diluted share, compared to $453 million or $2.71 from a year ago. Our tax rate in the quarter was 13.3%, which included $37 million or $0.23 per share of favorable discrete items, most of which related to the 2017 tax reform bill. In addition to this, we have now lowered our projected full-year effective tax rate to 21%, excluding discrete items, compared to our prior guidance of 23%.
Excluding the discrete tax items, the net income attributable to Cummins in the third quarter was $655 million, or $4.05 per diluted share. Moving on to the operating segments, let me summarize their performance in the quarter and then the outlook for the full year. Then I will review the company's revenue and profitability expectations for the full year and conclude with some comments on cash flow. In the Engine segment, revenues were $2.7 billion in the quarter, an increase of 17% from last year. On-highway revenues grew by 17%, driven primarily by increased truck production in North America. Off-highway revenues increased by 14% as a result of stronger demand for construction equipment in both China and in North America. Segment EBITDA in the quarter was $405 million or 14.9% of sales. This compares to $276 million or 11.8% a year ago.
Benefits from stronger volumes, lower warranty expense, and favorable pricing actions more than offset increased material costs. We expect full-year Engine segment revenues to be up 17.5%-18.5% compared to our prior guidance of 17%-19%. Our forecast for EBITDA margins remains in the range of 13.25%-13.75% of sales. For the Distribution segment, third quarter revenues were $1.9 billion, an increase of 10% compared to last year. The growth in sales was primarily driven by higher demand across all product lines in North America and favorable pricing, partially offset by the impact of the stronger U.S. dollar. EBIT for the quarter increased by 29% to $155 million or 8% of sales, compared to $120 million or 6.8% a year ago.
Benefits from the higher sales, favorable pricing, and lower variable compensation expense more than offset unfavorable currency movements and the absence of the gain from a divestiture of assets related to the power generation rental equipment last year. For 2018, Distribution revenue and EBITDA guidance is unchanged, with revenues projected to increase 9%-11% and EBITDA margins to be in the range of 7%-7.5% of sales. For the Component segment, revenues were $1.8 billion in the quarter, a 14% increase from a year ago. The Eaton Cummins joint venture contributed 5% to growth. Sales in North America increased 25% due to higher heavy- and medium-duty truck production, while international revenues grew 2% with lower demand in China offset by stronger sales in Europe.
Segment EBITDA for the quarter increased by 11% to $288 million or 16.4% of sales compared to $259 million or 16.9% of sales last year. The decline in the EBITDA percentage is due to the impact of the Eaton Cummins joint venture. For 2018, we expect revenue to increase 22%-24% compared to our prior guidance of up 23%-25% due to the negative impact of the stronger U.S. dollar. We continue to expect EBITDA to be in the range of 14%-14.5% of sales in line with our prior guidance. In the Power Systems segment, third quarter revenues were $1.1 billion, an increase of 5% from a year ago. Power generation sales grew by 10% as a result of higher demand for power generation equipment in North America, the Middle East, and in India.
Industrial sales declined by 1% as increased sales to oil and gas customers were offset by a reduced demand for marine equipment. EBITDA increased by 47% to $163 million or 14.7% of sales in the quarter, up from $111 million or 10.5% last year, driven by the positive impact of the higher sales and benefits of the previous restructuring actions. For 2018, we now expect Power Systems segment revenues to increase 12%-14% versus our prior guidance of up 15%-17%. Although demand in mining and oil and gas markets remains strong, we have seen a modest decline in near-term orders as customers focus on redeploying recently purchased equipment. EBITDA margins are forecasted to be between 13.75%-14.25% of sales compared to our previous guidance of 13.5%-14% as a result of continued improvements in our operational performance.
In the Electrified Power segment, EBITDA losses were $30 million as we continue to invest in new products and get closer to the launch of the 2019 products. For the full year, we now expect a net expense of $85 million-$95 million. For the company, we continue to project revenue growth of 15%-17% this year. Foreign currency headwinds in the second half of the year are now expected to fully offset the benefit to revenue that we experienced in the first half of the year compared to our prior estimate of an increase of $100 million for the full year. Our third quarter revenues were negatively impacted by $70 million compared to a year ago, and we expect a headwind in the fourth quarter of $150 million at current rates.
Income from our joint ventures is expected to be flat in 2018, in line with our previous guidance. We are forecasting EBITDA margins to be in the range of 14.8%-15.3% for 2018, unchanged from our previous guidance. Full year incremental EBITDA margins are projected to be 20%, excluding the impact of the Eaton Cummins joint venture and the electrified powertrain business, but including all the campaign and tariff-related costs. Turning to cash flow, cash generated from operating activities for the third quarter was $915 million, $270 million higher than last year. We anticipate operating cash flow performance for the year will remain within our long-term guidance of 10%-15% of sales. Capital expenditure during the quarter was $175 million, bringing the year-to-date total to $361 million, and we still expect our full year capital expenditure will be in the range of $730 million-$760 million.
As we indicated during our previous earnings teleconference, we plan to return approximately 75% of the cash generated from operations to our shareholders in the forms of dividend and share buybacks this year. In the third quarter, we repurchased 2.8 million shares through the previously announced $500 million accelerated share repurchase program and made dividend payments totaling $182 million. For the first nine months of the year, we have returned $1.4 billion, which includes the repurchase of approximately 5.3 million shares. In summary, we delivered very strong operating performance in the third quarter, with 12% growth in sales, EBITDA up 25% from last year, and operating cash flow of over $900 million. We remain on track to deliver record sales, EBITDA, operating cash flow, and earnings per share in 2018. Now let me turn it back over to Mark.
Okay. Thanks, Pat. Now we are ready to move to the Q&A portion of the call. If you can please try and limit your questions to an initial question and a related follow-up, and then get back in queue, please.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then the number one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from the line of Jerry Revich with Goldman Sachs. Your line is open. Please go ahead.
Yes, hi. Good morning, everyone.
Hi, Jerry.
Good morning.
Tom, I am wondering if you could expand on the China National VI opportunity set for you folks. What is the incremental components opportunity? As you see it, what is the timing of the line reviews, if you will? Then in terms of the enforcement actions next year, how do you expect the enforcement to play out on this emission cycle compared to others?
Yeah. Let me just first talk about how the NS6 thing will play out. I'll ask Mark to comment a little bit on the numbers for each of the components and engines. How the NS6 is going to go now is, originally the plan was for 2020, with some cities going earlier, and then the country going across to 2020. The Blue Sky Plan, which is China's effort to obviously reduce pollution and clean up the environment, many cities have pulled forward now, and the national implementation is now moved up to the middle of 2019. What'll actually happen? How will it be implemented across the country, cities versus the full country? I think there's still some uncertainty about that, actually.
Even though I would've said that they were locked down on the middle of 2019, I think given economic challenges and other things, I'm not as clear as I was then. So we'll see. We are driving our programs to be ready for the middle of 2019. In addition to that, they've also launched this program I mentioned in my script about offering incentives to turn in NSIII vehicles. If you have an older truck, you can get compensated for turning it in and purchasing a newer truck, which of course is trying to drive older, more polluting trucks off the road. We're not sure what impact that's going to have on demand, but it has already had a positive impact on demand to date. So we'll see what happens over the next 9 - 12 months.
There's also, of course, this general decline in the need for trucks, given that the economy is not growing as strongly. All these factors are coming in together, and that's why I mentioned in my remarks, it's just not clear to me, especially over the next 12 months, what demand's likely to do. Our opportunity, though, is pretty clear, and we see both opportunity for market share gain and components addition into each of our engines that we sell, which represents a big sales growth opportunity for us. Mark, you might want to highlight some of the numbers.
Yeah. Over China and India, because we've got similar regulations coming in India as well, we've got about an incremental $700 million of components revenue opportunity there, Jerry, and about 70% of that plus is going to be in China.
Okay. Thank you. In Power Systems, really strong margin performance this quarter, despite what I would imagine was a negative surprise from a demand standpoint in mining in particular. Can you just talk about the year-over-year improvement? How much of that was the restructuring benefits, and any other moving pieces that played out in the quarter for Power Systems?
I think there's no one factor really, Jerry. It's just a combination of good operating performance in a tight supply chain environment. Most of it's really on the cost reduction side and the volume.
Yeah, I guess to add to that, as you know, we've had a pretty strong program now over several years, and the restructuring benefits that we mentioned, we've been tracking over time, and those are now playing through. There's still some yet to get in the alternator business, but broadly speaking, we've worked through most of those restructuring activities. With volumes increasing, even when they are not as much as we were originally expecting in mining and oil and gas, we're still seeing benefits of higher volumes in a lower cost structure. That's fundamentally what's going on, and why we're seeing improved margins.
Okay. Thank you.
Yeah.
Thank you. Our next question comes from the line of Jamie Cook with Credit Suisse. Your line is open. Please go ahead.
Hi. Good morning. I guess two questions. Tom, probably understanding you do not want to talk about 2019, but a lot of your customers are talking about extended visibility into 2019, in particular on the heavy-duty truck side. Can you just talk to which markets you feel most comfortable with that we could see growth next year? The other question I keep getting from investors is as they think about 2019, they are trying to understand the correct earnings base to grow earnings off of. When we think about 2019 and the right base, can we add back the product campaign costs, or do we include that in the base as we think about things? Thank you.
Okay. Let me let Rich talk a little bit about markets, since he has been putting together the plan and has been paying pretty close attention to where markets are, and then I will come back and talk a little bit about the campaign.
Okay. Thank you.
Hey, Jamie. Let me just circle around two or three of the bigger markets, Jamie, then you can follow up. We'll start with the truck North America. You see the numbers. It still looks really good. Retail sales are strong. The freight data continues very strong. I'd say we have seen maybe some leveling of what the spot rates are that we pay attention to. We're right now at a backlog of 286,000 units. I don't see that backlog going down significantly between now and the end of the year. I think we're going to enter 2019 in a pretty strong position on North America trucks. I don't think we're done there. Kind of the same story on medium-duty truck in North America. I think Tom talked about China, so I think there's more downside in China.
We've seen kind of potentially offset by this Blue Sky Plan on NS5. We think that could be as much as 100,000 units incremental to what it would've been next year in China. I think that'll help shore that up a little bit. The power generation business, we think still has more momentum going into 2019. We're going to end the year there again with over the last three quarters, we've added about $150 million of future orders going into next year, which is as strong as we've been in five or six years.
We touched a little bit, mining and oil and gas. We've seen a pause in both of them. I think in the second half of the year, we do view that as a pause right now based on what we see capital spending going in those industries. Actual rates going up from where we are in the second half of the year. That's some of the bigger markets that we've got out there.
I'll let Rich comment more on the warranty and the emissions campaign, but we do not expect the emissions campaign to repeat as a P&L item. Obviously, we have to still execute the campaign, so that's going to happen over several years. We do expect that we will not repeat the expenses there. That was a big hit to us in 2018. So of our total warranty numbers, which were something like 4.1% for the year, 1.6% of that is this emissions campaign.
As Rich has talked about, we're kind of at this 2.5%, 2.4% level, and we're trying to drive that down. As we put together the plan, we'll be trying to put a warranty plan together and the actions that we're taking, we hope to drive that number down for 2019. We haven't finished our plan yet, so we'll see where we come out. But we do not expect that significant hit of 1.6% to continue.
Okay. Thank you. I will get back in queue.
Yeah. Thanks.
Thank you. And our next question comes from the line of Steven Fisher with UBS. Your line is open. Please go ahead.
Thanks. Good morning.
Morning, Steven.
Good. Thanks. Just on the Eaton JV, I think last quarter you said you were looking at profitability in 2020. It seems like you maybe hit the breakeven a little bit faster than expected. Was that just volume related? How does achieving the breakeven earlier change your view of timing of profitability?
I think we had a really good Q3. I will say there were a couple one-time positives in Q3, Steven, that helped us out. But we are generally ahead of schedule. We've talked about 2020 as a breakeven, and I'm optimistic that we will certainly achieve that and potentially beat that. But there was a couple unusuals in Q3. Small, but helped us get to breakeven a little sooner.
Okay. You guys have done a handful of deals and partnerships, but it sounds like you had a much longer list of things that you have been reviewing in the hopper. Can you just give us a sense of how that pipeline looks for deals and JVs, and how many of these partnerships, as we think about over 2019, would be additive to earnings versus just net cost adders until the technology or the partnership blossoms and develops?
Steve, it is a great question. What I will do, just given time, is I will try to give a reasonably short answer, and then obviously we could talk more about it in Investor Day or through calls. Broadly speaking, we have got several major growth initiatives, which I laid out at the last Investor Day, where we have a set of candidates that we are looking for. It is not a gigantic universe. We started with a big universe, but we have really narrowed down the places that we would like to grow through acquisition or partnership. What we are looking for is the opportunity so that we can make that partnership or acquisition at a cost that we think drives positive return for shareholders and grow profitable growth for our company. Given asset prices and things, that is not that easy to do, right?
We are just going to make sure that we get the right spot on that, and so it is not a gigantic universe. The second area that we are looking is in these new technology areas, we need to build capabilities. That is a very big universe. There is a lot of companies. But then again, we want to make sure that we are getting capabilities that add to the ones we have. The example was the battery companies we purchased and just recently, EDI. Very good acquisitions. Not very large in size, and as you mentioned, tend to have more technical capability than they have earnings. So those are kind of the ones that produce earnings in the future and basically produce expenses today.
The third category is the partnerships you see with JAC and now this letter of intent we have with Isuzu, which are basically trying to make sure that in our core business, there is a lot of companies looking around trying to figure out what they are going to spend their investment on. We want to make sure that as those companies think about investing less in diesel or natural gas, or want some support on their new investments in electrification and other technologies, that they see us as a potential partner. So we are very active in that space.
We have a discussion, at least I do, at least twice a month, and I think Rich is about the same, with different large OEMs around the world thinking about this issue. So those are very active, and there is a lot of potential partnerships there. It's just the people in our industry, but those are very active discussions. That's kind of the field. In total, it's a pretty large set of potential, but each one's pretty focused on either building capabilities, forming partnerships to add to our base, or looking for these particular growth opportunities at the right price. Those are kind of the combination of things we're looking for.
That's very helpful, Tom. Just any sense of whether it's sort of net additive to earnings or dilutive or-
I would say this, that the partnerships that we form are, generally speaking, additive to earnings or neutral. The technology investments for the most part are not. The opportunities for growth I mentioned at the start, those would be additive to earnings significantly, but they're fewer and harder to do.
Got it. Thanks, Tom.
Yeah, you bet you.
Thank you. Our next question comes from the line of Joe O'Dea with Vertical Research Partners. Your line is open. Please go ahead.
Hi, good morning. First, just on the incremental margins in the engines and components segment, if we back out some of the charges from a year ago and looking at double-digit top-line growth, the incrementals seem to come in a little bit below target range and from quarter -to -quarter, any number of swings. Just wanted to understand supply chain related pressures, anything that was specific to the quarter and kind of general outlook for seeing a little bit better flow through moving forward.
Hey, Joe, you're right. There's a lot of moving parts. I would say both took a little bit of a hit on FX, and both segments had some challenges from supply chain, probably around $10 million in each business in the quarter from kind of expedited costs and things like that. The rest is natural variation.
Is there anything in general that you see as preventing you from getting closer to 20%+ kind of incrementals on the EBIT line moving forward in those segments?
Not in the base business. We've got the Eaton joint venture, which we've talked about separately, but no, not in the base business.
Okay.
Joe, I'd add one more thing, just kind of for this year and then looking forward. Tariffs is a bit that hits both of those businesses, too. We got hit with about $30 million in Q3, and we'll get another $50 million in Q4 in tariffs. Tariffs either direct through the tax, if you will, or through indirect through metal market increases. Those are a little bit of a headwind we've got in this year. We have very active plans to mitigate those going forward. Okay, so just from a modeling standpoint. We are going to hit those incremental margins. There's no question about that. We got a little bit of headwind there. It's probably worth just spending a minute on how it looks going forward.
Tom mentioned in his statement, the gross tariff impact, either direct or indirect, now is at $250 million annually. Think of that as $150 million of that is direct tariffs and $100 million in metal market increases. We will manage the metal market like we always do, through suppliers and through contractual arrangers. That $100 million in metal markets will go away through the course of 2019. $150 million on direct tariffs, we are actively working on that.
We have got pretty aggressive plans short term to address about 1/3 of that. Where we can address it quickly is where we already have capacity set up someplace in the world. We have capability and capacity where we can move production. One example that in our power system business, we do alternators in China. We have got capacity in India. We are in the process. Those will be moved yet this year. We have got actions like that are moving forward. A bit of a hit the second half of the year. The impact of that will decrease as we go forward in 2019.
When you think about some of the actions you can take, both on the direct and the metal markets, we are running right now at $250 million, just because there is timing sensitivity to some of this and how quickly you can reroute supply chains, change suppliers. What do you think of that $250 million being in 2019? Just given the timing sensitivity to the actions you can take.
Just repeating, I said $150 million of that is direct impact with tariffs. We will get rid of $50 million of that with the actions we have got in place, short term. Then through the course of the year, we will work on the additional $100 million. The actual metal markets, those will go down through the course of the year, just on normal contractual agreements that we have.
Got it. Okay.
The majority of it being managed out each quarter, getting a little better.
If you just kind of do the math, roughly speaking, Joe, we said, "Hey, we think there's kind of like an $80 million-ish kind of this year number," and not that much opportunity to mitigate. Right? A little bit through pricing, a little bit through metal market, but not much because it's all delayed. Next year it's $250 million for a full year number. Again, you're comparing a half year number with a full year number, but it's a full year number, $250 million. $100 million of it we think we'll address through metal market. Not everything happens on the first day of the year, but it, we think, will decrease it to zero over the course of the year. You can kind of average that. Then of the $150 million, he's got $50 million mitigated now, and then he's going to keep going.
If we think we have $80 million this year, we're something over $100 million right now without our secondary mitigation factor. We're hoping to get the year-over-year number to be not much of an increase year-over-year, but it won't be zero impact next year. Again, trying to get it down to a number that's not much of an increase over this year. That's with piles more new tariffs coming in. We're being as agile as we can on it and moving fast. But as you've mentioned, things take time. That's what we're trying to manage through.
Yeah, that's really helpful. One other question on the AMT and the JV and with the Endurant out over a year now, just trying to think about your kind of primary area of focus within that market. I think one is probably just keeping up with demand with higher penetration rates, but when you think about some medium-duty opportunities there, some overseas opportunities there, are you pivoting at all and putting a little bit more attention on some other growth areas in the AMT world at this point?
Definitely. That's a little bit when we were talking about profitability and when it reaches profitability. Part of that is the heavy duty Endurant is doing terrifically well. Sales are going well. But we're also investing in the JV. We're also investing in engineering. We're building out more versions of the transmission to meet more markets. Then also we are looking at other markets around the world and medium-duty markets. So we're very active in that. As you know, each market's kind of got their own plan for when the price reaches the customer point where they want to adopt. But our experience so far is once it does, it adopts pretty quickly. So I just got back from India, for example, and right now I don't think a full-blown AMT is really at the price point that the market will accept.
But it's a matter of time, and I don't think it's a matter of a decade either. I think it's a matter of a couple of years before the fuel economy benefit begins to look like it works for a bunch of professional fleets that are growing there. So again, each market will be different, but we are positioning ourselves to be part of those markets as well, developing country markets as well.
Thanks very much.
Thank you. Our next question comes from the line of Rob Wertheimer with Melius Research. Your line is open. Please go ahead.
Hi. Good morning. There's obviously a lot of moving parts in China and obviously a bunch of different markets you serve, but could you give your general impressions on whether you think that the tariff, the trade war, has affected demand in a material way, in an accelerating way, and then whether Blue Sky Plan or other things are offsetting it or whether there's worse ahead? I'm just curious about how big an impact you're seeing there.
Yeah. I guess, generally speaking, the tariffs have not been good for Cummins. I just speak about that, then I'll come to the general economy. In the following ways we just discussed. They've just driven up costs. They're just more taxes to Cummins as we try to because we are a global company, and we serve markets all over the world, and we move parts back and forth. Again, we generally build in the regions that we sell, so we're not moving most of our products, but there's some number that we're better to build in one place than all places. Of course, as we increase tariffs, it just means that we have less markets that we can serve from one place to another. For example, you know our light-duty engine, 2.8 and 3.8 engines that we make in our Foton Cummins joint venture.
We make several hundred thousand engines there. We have an opportunity to probably sell some of those in the U.S., a few thousand, though. But with a big tariff, we don't. So that's just an opportunity we probably won't be able to pursue, and we're not going to set up a plant for a few thousand. So that's a good example. I would also say that in general it appears to me that the Chinese companies that we compete with are not paying as much in the tax. Because of currency weakening and stuff, their costs are not increasing at the same rate that ours are.
So generally speaking, I think we're becoming less competitive against them, not more. Your specific question might have been more about demand in China, though. I would say that the economy in China, it is not growing at the same rate. How much that has to do with the trade war versus all the other trends in China is not at all clear to me. What we are not seeing is that the Chinese government or Chinese customers are yet saying, "Well, we are not going to buy from that American company or that American company," which we are of course very fearful of.
We do not know if and when that is going to happen, but we have not seen that at all so far. So that is a good thing. We are seeing decreased demand, as Rich said, in the truck market and the Blue Sky Plan, all that stuff is kind of making things more complicated. It is hard to read the exact signal, but it looks like we are seeing decreased demand. But again, we cannot tell what that is due to. I know that the Chinese government is worried, though. I know that some of their activities to promote in our industry are to kind of offset potential weakness from trade and other kind of economic weakening.
Great. Thank you for the answer. A clarification, I am sorry, the $150 million in tariff incremental cost next year, on which bucket and at what rate is that? Is that 25% on $200 billion, or are you able to give clarity on what that is?
Not really, no.
I don't think so at this time.
We can-
Pardon me. We can talk offline. Yeah, we can talk offline on that.
We're going to have to do some math on that to get an exact number.
Okay. Yep. All right. Thank you.
Thank you. Our next question comes from the line of Ross Gilardi with Bank of America. Your line is open. Please go ahead.
Hey, good morning, guys.
Morning, Ross.
Tom, how should we think about the EBITDA losses in electrification? You've increased them a little bit. I think you've made some acquisitions in that area. I'm not sure where you put some of those acquisitions, but I think that maybe it's related to that. But more importantly, over the next several years, what is the general trajectory we should be thinking about? You've talked about commercialization of electrified powertrains in, I think, late 2019, early 2020. Correct me on that if I'm wrong. But what about the losses here? Do they get wider before they narrow? Because I think most people are just sort of linearly taking this up to a flat number in the next several years, and I'm wondering if you actually have to invest more first before you can actually see that inflection.
Yeah. It's a great question. You are right, that the reason this year is up a little bit is because we purchased EDI. So the purchase of EDI just added more expenses, and since they were in a profit position when we acquired them, that just meant that our third and fourth quarters are a little higher in expense levels than we had originally intended. You remember we laid out kind of our $500 million investment, which included R&D investment and acquisitions over three years, and we still think that's going to be roughly correct. We don't have exact number, because there's some moving parts, which I'll talk about, but that feels about right to us still. But to your P&L question, I do think the losses widen before they narrow. And I think that reflects the number of product programs and prototype and other demonstrator projects that we're doing.
Because essentially, it's a market that's burgeoning. It's being created as opposed to existing. We're trying to basically ensure that customers, OEM customers, and end user customers that are thinking about using electrification products think that Cummins is a good supplier for them. If you're just absent all those demonstrators and all those different kind of projects, then they don't think that you're a supplier. We want to make sure that we're in those. But frankly, most people are ordering some number and then not ordering again for a while because the economics aren't perfect. The markets that look like they're ripe for actually buying some, at some numbers, are urban buses and then short-range vehicles, like things that work in warehouses and on ports. We are overwhelmingly focusing our attention on those.
The launch that you mentioned, which you did have the timing right, end of 2019, beginning of 2020, is buses. We have a launch again a year later, another version of a powertrain for buses. Then following right after that will be these other short-range vehicles. We will be investing, and what's widening the expense is really the prototype demonstrators for down the road, plus the investment in these product programs to make sure we're ready for production launch in those few markets. Then the revenue side is the side that's very difficult to say. The hard part about calling the break even or cash break even in this business is we just don't know what the revenue side is.
We know a bunch of bus fleets, big ones, that want to buy a lot of them, but we don't know the rate of adoption that goes more broadly across the bus market. It looks like to us like it's going to go pretty fast, but you just don't know, and then you don't know how much you're going to win. The break-even point's kind of hard to predict. What is easy to predict is the loss is likely to widen a little bit before it goes, and I do expect to begin to earn revenues, though. Significant ones in the sense that they'll begin to offset some of these losses beginning in 2020 and probably more so even in 2021 when we have multiple versions of our powertrain out for buses.
The implied loss for the fourth quarter in electrification, I think electrified power, I think, is about $30 million. Do you think that is a good run rate to use for next year, or does it actually widen even more than that?
I think that's a good base to work from.
Yeah.
So maybe a slight widening, but not a big exponential growth.
Exactly.
I think a 5% or 10% up off of that, maybe.
Precisely. Yeah. So we'll be adding some engineering, but again, right now we've got our programs in place, and they're funded and going. So it's not a big change.
Okay. I just want to ask you a little bit more about the slowing you are talking about in mining. Can you give a little bit more color on that? When did that start for the order slowdown? Is it any particular geographies or anything like that that you could add?
I will take a shot at that. We are trying to understand a little better ourselves. We are now saying mining up 30% for the year. We were saying up 40%. We have seen most of the slowdown is in new production, so in new equipment going to the field. Utilization still looks pretty good. The CapEx for next year that we are hearing from the mining sites is growing 7% a year. I just think there is a lot of history there where people got carried away the last cycle and bought a lot of equipment.
There is a little more cautiousness out there right now. I do not think it is necessarily a bad thing. Again, we are seeing the parts and service strong. Our estimate is that we will see it bouncing back from where we are in the second half of the year next year. We talk in regular communications. It is not a long list of OEMs that we sell to and not a long list of mine sites. We do not think we are done on this cycle yet, I guess, is where I think we are right now.
Rich, is it more in North America, or is it in China or Australia, or is it global?
It's pretty broad-based.
Got it. Thanks very much.
Yep.
Thank you. Our next question comes from the line of Noah Kaye with Oppenheimer. Your line is open. Please go ahead.
Thanks so much. We've had a lot of questions about incremental margins. I just want to see if I can possibly ask you to simplify for everyone all these puts and takes. Electrification campaign costs are positive. Maybe a headwind on variable comp costs, even a little bit better than expected. Just how should we think about overall incremental margins for 2019 at this point?
Well, I think it is pretty consistent with what we said at Investor Day, that in the base business that we commit to delivering at least 20% incremental EBITDA margins on the base business. We will continue to invest in the JV, and we will continue to invest in electrification beyond that. So no change really from what we said this time last year. We will give more specific guidance, as we always do, on our fourth quarter call at the end of January.
We have delivered the 20% incrementals on the base, even while absorbing the after-treatment campaign costs earlier in the year.
Right. Much appreciated. Just to go back to the electrification, there does seem to be appetite both internationally, and on road you have the agreement with Hyundai you announced for off-road. You are investing more heavily in the space. Tom, I think you said that you are having a more frequent number of partnership discussions versus a year ago. So can you just sort of frame for us basically how you are framing to the customers Cummins' value proposition here? Is it really on the integration side? Is it around power conversion? Where do you see Cummins best able to compete versus what may be out there in the market?
That is a good question. There is basically three big areas I think customers see us as an add in their powertrain strategy, including electrification, by the way, is that we have focus on the powertrain. Basically, at this point in time, most OEMs are looking for partners here. It is just very difficult to figure out how to invest in all the things they have to invest in, be it autonomous, new vehicles, meeting emissions in all these locations, all the investments they need to make in capacity and different kinds of vehicles, and then all the powertrains they need. Most of them are going to do some powertrains. Even when they get to electrification, they are looking at this and saying, "I need to be in it, but I need partners.
I just don't think I can do it on my own." I am talking about partners from parts of the world that never wanted partners on anything, those kind of people. Even they look at this and say, "It's just too much." We are playing our role we've always played, which is we will say, and we'll do the bits, the parts of this that you don't want to do. So we'll sell you components, we'll sell you engines, we'll sell you systems, we'll sell you parts of our battery system, we'll sell you all of it, et c. With regard to specific technologies within the electrification space, we've kind of laid out our focus areas, and we are definitely investing in battery packs and our value proposition there is that we will develop battery packs that work for commercial vehicles.
It doesn't mean that we won't use battery cells that cars also use, but we won't just make car battery packs, and the reason is they just don't work as well for commercial vehicles. Different power, different energy, different durability and life. So much like engines, there are diesel engines made for cars in higher volume, but because we are focused on commercial vehicles, we can essentially not only apply the system but design the system to better work with the applications and the duty cycles that apply for commercial vehicles.
Second thing we're going to do is we're going to have a service network and support network that can support your vehicles and your use of electrified powertrains. That's a pretty big benefit in a market where the new players don't really have anything like that. Again, you might think, well, there's less service and less parts, and there are, but there's still stuff to do. There's still a bunch of service and support work to do, even if it's only recharging or replacing batteries, but it's a lot. So our service network is a big adder for both OEMs and also end user partners. So big bus fleets are worried if they use somebody who doesn't have any support or any presence in the market, that they'll buy the things and they'll be stranded, and they'll have nothing. So I think those are kind of the key value propositions. I think it's working well. As I mentioned earlier, the challenge for us is there looks like a lot of investment at the front end for a good opportunity, but where the revenue's coming, at which pace is still a few years off. I think that's what we're dealing with today.
Okay. That call was very helpful. Thank you so much.
You're welcome. Yep.
Thank you.
Okay. Thank you very much. Appreciate all your time. Thanks.