Yahoo Finance Cummins Inc. (NYSE:CMI) Q1 2024 Earnings Call Transcript
Cummins Inc. (NYSE:CMI) Q1 2024 Earnings Call Transcript May 2, 2024
Cummins Inc. beats earnings expectations. Reported EPS is $5.1, expectations were $5.09. CMI isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to Q1 2024 Cummins Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Chris Clulow, Vice President of Investor Relations. Thank you, Chris. You may begin.
Chris Clulow: Thanks very much. Good morning, everyone, and welcome to our teleconference today to discuss Cummins’ results for the first quarter of 2024. Participating with me today are Jennifer Rumsey, our Chair and Chief Executive Officer; and Mark Smith, our Chief Financial Officer. We will all be available to answer questions at the end of the teleconference. Before we start, please note that some of the information that you will hear or be given today will consist of forward-looking statements within the meaning of the Securities and Exchange Act of 1934. Such statements express our forecasts, expectations, hopes, beliefs and intentions on strategies regarding the future. Our actual future results could differ materially from those projected in such forward-looking statements because of a number of risks and uncertainties.
More information regarding such risks and uncertainties is available in the forward-looking disclosure statement in the slide deck and our filings with the Securities and Exchange Commission, particularly the Risk Factors section of our most recently filed annual report on Form 10-K and any subsequently filed quarterly reports on Form 10-Q. During the course of this call, we will be discussing certain non-GAAP financial measures and we will refer you to our website for the reconciliation of those measures to GAAP financial measures. Our press release with a copy of the financial statements and a copy of today’s webcast presentation are available on our website within the Investor Relations section at cummins.com. With that out of the way, I’ll turn you over to our Chair and CEO, Jennifer Rumsey, to kick us off.
Jennifer Rumsey: Thank you, Chris and good morning everyone. I’ll start with a summary of our first quarter financial results, and then I will discuss our sales and end market trends by region. I will finish with a discussion of our outlook for 2024. Mark will then take you through more details of both our first quarter financial performance and our forecast for this year. Before getting into the details on our performance, I want to take a moment to highlight a few major events from the first quarter. In March, Cummins successfully completed the separation of our Filtration business, Atmus Filtration Technologies. Cummins will continue its focus on advancing innovative power solutions, while Atmus is now well-positioned to pursue its own plans for profitable growth.
We are proud of our employees' hard work and all who were involved to ensure successful separation, and we are excited to see what the future holds for both Cummins and Atmus. The final step in the separation of Atmus resulted in a tax-free exchange of shares, which reduced common shares outstanding by 5.6 million. In addition, we reintroduced our fuel-agnostic platforms with the name that captures the innovation that powers us forward, Cummins HELM platform. With higher efficiency, lower emissions and multiple fuels, the Cummins HELM platforms give our customers control of how they navigate their own journeys as part of the energy transition. As the next product in the Cummins HELM 15-liter platform, we announced we will launch the next-generation diesel X15 in North America for the heavy duty on-highway market, which will be compliant with the U.S. EPA and CARB 2027 aligned regulations at launch.
Lastly, in April, Cummins Power Generation introduced four new generator sets to the award-winning CentumTM Series, powered by Cummins QSK50 and QSK78 engines. These new models have been engineered specifically for the most critical applications such as data centers, health care facilities and wastewater treatment plant. I was excited to attend the launch event with our customers and hear about the growing demand for these critical applications and high interest in our genset products, which build on decades of experience meeting our customers' needs and deliver a step change improvement in power density, assured reliability, sustainability and low emissions. Now, I will comment on the overall company performance for the first quarter of 2024 and cover some of our key markets.
Demand for our products remained strong across many of our key markets and regions. Revenues for the first quarter were $8.4 billion, a decrease of 1% compared to the first quarter of 2023. EBITDA was $2.6 billion or 30.6% compared to $1.4 billion or 16.1% a year ago. First quarter 2024 results include a gain net of transaction costs and other expenses of $1.3 billion related to the Atmus divestiture and $29 million of restructuring expenses as we continue to work to simplify our operating structure and improve the efficiency of our business for the long term. This compares to the first quarter 2023 results, which included $18 million of costs related to the separation of the Atmus business. Excluding the onetime gain and the costs related to the separation of Atmus as well as the restructuring expenses, EBITDA percentage decreased by 80 basis points as improved pricing partially offset lower volumes and higher research and development expenses as we continue to invest in the products and technologies that will create advantages in the future.
Gross margin dollars improved compared to the first quarter of 2023 as the benefits of pricing more than offset the impact of lower volumes and supply chain cost increases. Our first quarter revenues in North America were flat with 2023. Industry production of heavy-duty trucks in the first quarter was 73,000 units down 5% from 2023 levels, while our heavy-duty unit sales were 26,000 down 7% from 2023. Industry production of medium duty trucks was 41,000 units in the first quarter of 2024, an increase of 8%, while our unit sales were 36,000, up 22% from 2023. We shipped 38,000 engines to Stellantis for use in their RAM pickups in the first quarter of 2024, down 2% from the 2023 levels. Revenues for North America power generation increased by 21%, driven by continued strong data center and mission-critical power demand. Our international revenues decreased by 1% in the first quarter of 2024 compared to a year ago.
First quarter revenues in China, including joint ventures, were $1.6 billion, a decrease of 5% as weaker domestic volumes were partially offset with the accelerating data center demand. Industry demand for medium and heavy duty trucks in China was 305,000 units, an increase of 14% from last year. However, shifts in the market share during the first quarter led to a decline in our volumes year-over-year. The light duty market in China was up 2% from 2023 levels at 486,000 units, while our units sold, including joint ventures, were 37,000, an increase of 3%. Industry demand for excavators in the first quarter was 50,000 units, a decrease of 13% from 2023 levels. The decrease in the market size is due to weak property investment, high equipment population, and slowing export demand.
Our units sold were 9,000 units, an increase of 10% as a result of the QSM15 penetration and export growth. Sales of power generation equipment in China decreased 7% in the first quarter as accelerating data center demand was offset by softening in other markets. First quarter revenues in India, including joint ventures, were $758 million, an increase of 1% from the first quarter a year ago. Industry truck production decreased by 7%, while our shipments decreased by 5% as the market slowed ahead of elections in April. Power Generation revenues increased by 37% in the first quarter as economic activity remains strong. Now, let me provide an outlook for 2024, including some comments on individual regions and end markets. Our full year guidance now excludes Atmus from the March 18 separation date onwards and also include -- excludes the first quarter gain related to the divestiture.
The guidance provided previously included Atmus for the full year as it preceded the transaction announcement. We are happy to share that our expectations for 2024 have improved from our initial guidance issued in February. Our forecast for total company revenue in 2024 remains the same at down 2% to 5%, which implies higher base business revenues of approximately $1.3 billion compared to our prior guidance as Atmus is now excluded from future quarters. We are increasing our forecast for heavy-duty trucks in North America to 255,000 to 275,000 units in 2024 compared to our prior guide of 245,000 to 265,000 units, though we do still expect softening in the second half of the year. In North America, medium-duty truck market, we maintain our prior guidance of 140,000 to 150,000 units, down 5% to flat from 2023, consistent with our prior guidance, our engine shipments for pickup trucks in North America are expected to be 135,000 to 145,000 in 2024, down 5% to 10% from 2023 as we prepare to launch our model year 2025 in the fourth quarter.
In China, we project total revenue, including joint ventures, to increase 3% in 2024, consistent with our prior guidance. We project a range of down 5% to up 10% in heavy- and medium-duty truck demand and expect a range of down 5% to up 5% in demand in the light-duty truck market. We expect replacement demand to be in the range -- to be the biggest driver, but the effect may be weakened by a sluggish economy and potentially slower export demand. The short-term shifts in the market share that I noted earlier are expected to normalize as we progress through the remainder of the year. In India, we project total revenue, including joint ventures, to increase 9% in 2024, primarily driven by strong power generation and on-highway demand, consistent with our prior guidance.
We expect industry demand for trucks to be flat to up 5% for the year. For global construction, we project down 10% to flat year-over-year, up from our previous guidance of down 5% to 15%. We continue to expect weak property investment and slowing export demand in China. We project our major global high horsepower markets to remain strong in 2024. We are raising our guidance for global power generation markets to be up 10% to 15% compared to our prior guidance of about 5% to 10%, driven by continued increases in the data center and mission-critical markets. Sales of mining engines are expected to be down 5% to up 5%, consistent with our prior guidance. While a smaller market for us, we continue to anticipate demand for oil and gas engines to decrease by 40% to 50% in 2024, primarily driven by decreased demand in North America.
For aftermarket, we've maintained our guidance of down 5% to up 5% for 2024, as we are through the inventory management efforts and de-stocking that happened throughout the industry in the second half of 2023. In Accelera, we expect full year sales to be $450 million to $500 million compared to $354 million in 2023, consistent with our prior guidance. We are ramping up electrolyzer manufacturing capacity and capability to deliver orders to our customers as well as expect continued growth in electrified components. In summary, coming off a strong first quarter, we are maintaining our sales growth outlook for the year of down 2% to 5% as stronger demand in our base business has offset the removal of Atmus for future quarters from our guidance.
We have also revised our forecast for EBITDA to be in the range of 14.5% to 15.5% compared to our previous guidance of 14.4% to 15.4%, reflecting stronger North America heavy-duty truck and power generation markets, which more than offsets the loss of profitability of Atmus. In addition, we are taking steps to reduce cost, optimize our business and position Cummins for continued success in 2024. We are in a strong position to keep investing in the future, bringing new technologies to customers and returning cash to our investors. During the quarter, we returned $239 million to shareholders in the form of dividends, consistent with our long-term plan to return approximately 50% of operating cash flow to shareholders. In addition, we reduced the overall Cummins share count by $5.6 million as we completed the Atmus share exchange, which will be more fully reflected in the average share count in the second quarter and beyond.
I am impressed and grateful for the commitment of our employees and leaders around the world for delivering for our customers and generating strong financial performance at the same time. Our results further enhance Cummins' ability to keep investing in the future growth, bringing sustainable solutions that will protect our planet for future generations and returning cash to our shareholders. I look forward to discussing our long-term strategy further in our upcoming Analyst Day on May 16. And now let me turn it over to Mark.
Mark Smith: Thank you, Jen, and good morning, everyone. We delivered solid first quarter revenue and profitability and generated positive operating cash flow. Given the strength of first quarter results and our improved outlook, we've raised our full year expectations for 2024 after adjusting for the separation of Atmus. First quarter revenues were $8.4 billion, down 1% from a year ago. The separation of Atmus in mid-March resulted in a year-over-year sales decline of around 1% to our -- to Cummins consolidated sales. Our underlying revenues increased in North America and Latin America and were offset by weaker demand in China and Europe. EBITDA was $2.6 billion or 30.6% of sales for the quarter. We completed the tax-free full separation of Atmus in March, which resulted in a onetime gain on the divestiture of $1.3 billion, net of transaction costs and other expenses.
First quarter results also included $29 million of restructuring expenses. This compares to first quarter of 2023, which included $18 million of costs related to the separation of Atmus. To provide clarity on operational performance and allow comparison to prior year, I am excluding the one-time gain and the costs related to the separation of Atmus as well as the restructuring expenses in my following comments. Financial results of Atmus through March 18 are included in our first quarter consolidated sales and EBITDA. EBITDA was $1.3 billion or 15.5% of sales for the quarter compared to $1.4 billion or 16.3% of sales a year ago. The lower EBITDA percentage was driven by investment in new products and capabilities and lower sales volumes. Now let's look into more detailed by line item.
Gross margin for the quarter was $2.1 billion or 24.5% of sales compared to $2 billion or 24% even last year. The improved margins were primarily driven by favorable pricing and operational improvements, especially in the Power Systems business. Selling, administrative and research expenses increased by $72 million, driven by higher research costs as we continue to bring to market new products and capabilities to support future profitable growth, particularly the development of the HELM product line within the Engine business. Joint venture income of $123 million increased $4 million from the prior year, primarily due to increased earnings in the Power Systems segment. Other income was $21 million, a decrease of $50 million from a year ago.
The decrease in other income is driven by the relative negative impact of foreign currency revaluation and lower gains on investments related to company-owned life insurance compared to a year ago. Interest expense was $89 million, an increase of $2 million from the prior year, driven by higher outstanding, long-term borrowings related to the bond issuance we completed in February. The all-in effective tax rate in the first quarter was 8.7%, mainly due to the tax-free gain on the separation of Atmus. All in, net earnings for the quarter were $2 billion or $14.03 per diluted share, which includes the net gain related to the separation of Atmus of $1.3 billion or $9.08 per diluted share and restructuring expenses of $29 million or $0.15 per share.
Just to reinforce what Jen said, full impact of the lower share count from the Atmus separation will be seen in future quarters since the diluted share counts counted on a weighted average basis. All-in operating cash flow was an inflow of $276 million compared to an inflow of $495 million in the first quarter last year. Now let me comment on segment performance and our guidance for 2024. As a reminder, prior guidance for 2024 assume that the operations of Atmus would be included in our consolidated results for the full year. Components segment revenue was $3.3 billion, a decrease of 6%, while EBITDA, excluding costs related to the separation of Atmus, increased from 14.6% of sales to 14.8% driven primarily by improved performance within Cummins Meritor.
For Components, we've updated the guidance for the segment following the separation of Atmus and expect 2024 revenues to decrease 9% to 14% and EBITDA margins in the range of 13.5% to 14.5%. Our latest guidance reflects an increase in both revenues and EBITDA margins after adjusting for the separation of Atmus. For the Engine segment, first quarter revenues were $2.9 billion, a decrease of 2% from a year ago. EBITDA was 14.1%, a decrease from 15.3% a year ago as the benefit of pricing offset by lower volumes and higher research costs. 2024, we now project revenues for the Engine business to be down 5% to flat, an improvement of 2% at the midpoint from our prior year projections, reflecting a revised outlook in the North American truck markets and stronger-than-expected demand from our construction customers.
2024 EBITDA is projected to be in the range of 12.7% to 13.7%, an increase of 20 basis points at the midpoint due to higher volumes. In the Distribution segment, revenues increased 5% from a year ago to $2.5 billion. EBITDA decreased as a percent of sales to 11.6% compared to 13.9% of sales a year ago as aftermarket sales, particularly to industrial customers declined from the record levels that we experienced a year ago. We expect 2024 distribution revenues to be flat to up 5% and EBITDA margins to be in the range of 11.5% to 12.5%, an increase from the prior guide of 3% for revenues and a modest improvement to margins for the full year. Power Systems segment revenues were $1.4 billion, an increase of 3% and EBITDA increased from 16.3% to 17.1% of sales driven by higher volumes, particularly in the power generation markets, improved pricing and operating improvements, all of which contributed to a strong trend of improving performance in that segment.
2024, we now expect Power Systems revenues to be flat to 5%, up 3% at the midpoint and EBITDA has also increased to be approximately 16% to 17%, up 80 basis points from our previous guide. Accelera revenues increased 9% to $93 million, driven by increased electrolyzer installations. Our EBITDA loss was $101 million compared to an EBITDA loss of $94 million a year ago as we continue to invest in the products and capabilities to support future growth. In 2024, our guidance is unchanged. We expect revenues to be in the range of $450 million to $500 million and net losses to be in the range of $400 million to $433 million consistent with our prior guide. As Jen mentioned, given the strong performance in the first quarter and the outlook in our key regions, end markets, we are adjusting the full year company guidance, and we project company revenue -- consolidated company revenues to be down 2% to 5%, consistent with the prior year guidance despite the separation of ass.
Company EBITDA margins are now projected to be approximately 14.5% to 15.5%, up 10 basis points from prior guidance, all of which excludes the net gain related to the separation of Atmus and the restructuring expenses. Our effective tax rate is expected to be 24%, excluding the tax-free gain related to Atmus and other discrete items. Capital investments will be in the range of $1.2 billion to $1.3 billion, unchanged from our outlook three months ago as we continue to make critical investments in new products, capacity expansion to support future growth. In summary, we delivered solid sales, profitability, and positive cash flow in the first quarter. We do still expect moderation in some of our key markets in the second half of 2024, but we have raised our expectations of our own performance relative to our prior guide.
We took some steps to reduce costs in the fourth quarter of 2023 and continue to identify ways to streamline our business going forward leaving us well positioned to navigate any economic cyclicality and continue investing and delivering strong financial performance. Our priorities in 2024 for capital allocation are unchanged. We will reinvest for growth, plan to raise the dividend, and reduce debt. Thank you for your interest today, and I look forward to seeing some of you in person in New York at our upcoming Analyst Day. Now, let me turn it over to Chris.
Chris Clulow: Thank you, Mark. Out of consideration to others on the call, I would ask that you limit yourself to one question and a related follow-up. If you have an additional question, please rejoin the queue. Operator, we're ready for our first question.
Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Steve Volkmann with Jefferies. Please proceed with your question.
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