Cummins Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2021

Key Takeaways

  • Strong demand drove Q2 revenues to $6.1 billion (up 59% year-over-year) and EBITDA to $974 million (15.9% margin vs. 14.3% a year ago).
  • Global supply chain disruptions resulted in approximately $295 million of incremental premium freight and logistics costs for the year, expected to persist through year-end.
  • Cummins maintained 2021 guidance of 20–24% revenue growth and 15.5–16% EBITDA margin, with a plan to return 75% of operating cash flow to shareholders.
  • The company secured strategic hydrogen and renewable energy partnerships (Iberdrola, Sinopec JV, Chevron, Air Products) and is expanding electrolyzer capacity toward 2 GW by mid-decade.
  • Cummins is exploring a potential spin-off of its Filtration business to unlock shareholder value, with no related costs included in current financial outlook.
AI Generated. May Contain Errors.
Earnings Conference Call
Cummins Q2 2021
00:00 / 00:00

There are 11 speakers on the call.

Operator

Greetings. Welcome to the Quarter 2 2021 Cummins Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Operator

Please note that this conference is being recorded. I will now turn the floor the conference over to your host, Jack Kinsler, Executive Director of Investor Relations. You may begin, Jack.

Speaker 1

Thank you, and good morning, everyone. Welcome to our teleconference today to discuss Cummins' results for the Q2 of 2021. Participating with me today are our Chairman and Chief Executive Officer, Tom Linebarger our President and Chief Operating Officer, Jennifer Rumsey And our Chief Financial Officer, Mark Smith. We will all be available for your questions at the end of the teleconference. Before we 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.

Speaker 1

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 our 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.cummins.com under the heading of Investors and Media.

Speaker 1

With that out of the way, we will begin with our Chairman and CEO, Tom Lineberger.

Speaker 2

Thanks, Jack, and good morning, everybody. I'll start with a summary of our Q2 financial results and our market trends by region and then finish with a discussion of our outlook for 2021. Mark will then take you through more details of both our Q2 financial performance and our forecast for this year. Demand remains strong in the Q2 as the global economy continued to improve, driving strong sales growth across most businesses and regions resulting in solid profitability. We are encouraged by economic trends across a number of our key end markets, which point to Strong demand for the remainder of this year and extending into 2022.

Speaker 2

In North America, freight activity continues to grow, Leading to elevated spot and contract rates and driving fleet profitability and a rising backlog of truck orders. Leading indicators for non residential construction continue to improve and fiscal support for investment in capital projects is robust, led by North America and Europe. Iron ore, copper and thermal coal prices also remain high, Supporting a positive outlook for mining. Cummins is well positioned to benefit as these markets gain momentum due to our leading global position across a number of end markets and we continue to see demand for our products outpace our competition. Before getting into our results, I want to take a moment to highlight a number of partnerships and strategic milestones in the evolution of our next generation technologies.

Speaker 2

In May, we formed a partnership with Iberdrola, a leading global producer of renewable power to accelerate the global growth of business opportunities in Cummins is a leading supplier of electrolyzer systems for large scale projects in Europe. As part of our alliance, Cummins will be the electrolyzer supplier for a 2 30 Megawatt project for a leading fertilizer producer that will serve as a benchmark for large We signed a joint venture with Sinopec's NZ Fund In June, which will accelerate the affordability and availability of green hydrogen in China through development of hydrogen generation projects And increasing manufacturing capacity of electrolyzers and other key products in the green hydrogen supply chain. As one of the largest hydrogen suppliers in China, Sinopec's annual hydrogen production reaches 3,500,000 tons, accounting for 14% of China's total hydrogen production. China's embrace of green hydrogen is great for the planet. And Cummins and Sinopec joining together to realize the potential of Green hydrogen is a huge leap forward for scaling our innovative PEM electrolyzer systems.

Speaker 2

We recently announced a strategic collaboration with Chevron to develop commercially viable business opportunities in hydrogen and other alternative energy sources. The MOU provides the framework for Chevron and Cummins to initially collaborate on 4 main objectives. 1st, advancing public policy that promotes Hydrogen is a decarbonizing solution for transportation and industry building market demand for commercial vehicles and industrial locations powered by hydrogen developing infrastructure to support the use of hydrogen for industry and fuel cell vehicles And 4th, exploring opportunities to leverage Cummins electrolyzer and fuel cell technologies at 1 or more of Chevron's domestic refineries. The partnership with Chevron allows us to scale low carbon fuel delivery and build hydrogen corridors for use by fuel cell vehicles. In addition, we can work with Chevron to decarbonize parts of their operations using our green hydrogen technology.

Speaker 2

Finally, lastly, Cummins announced the signing of an MoU with Air Products to work together to begin the transition of Air Products' heavy duty tractor fleet to 0 emissions vehicles in the Americas, Europe and Asia. Cummins will provide hydrogen fuel cell electric powertrains integrated into Selected OEM Partners Heavy Duty Trucks for use by Air Products. The project will take a phased approach to transition Air Products' fleet to hydrogen fuel cell electric powertrains, starting with 5 demonstration units to be delivered in Europe and North America by the end of next year. Following successful demonstration, the project includes ramp ups, which work with a total of 2,000 trucks to be delivered by the middle of the decade. This represents among the largest orders for fuel cell vehicles to date, and we will be working with a partner that has We've now deployed more than 2,000 fuel cells And 600 electrolyzers around the world as we continue the development of our Hydrogen business.

Speaker 2

In addition to accelerating our revenue momentum via these important strategic We are also building out our electrolyzer capacity, targeting the regions which we expect to be at the forefront of green hydrogen production and commercial adoption. A site selection search within the Guadalajara area of Castilla La Mancha in Spain is Currently underway for Cummins new approximately $60,000,000 PEM electrolyzer manufacturing plant that will house system assembly and testing For approximately 500 megawatts per year of electrolyzer production and will be scalable to more than 1 gigawatt per year. Cummins Enzi, the JV we signed in conjunction with Sinotech will be located in Foshan, Guangdong Province in China. The JV will initially invest $47,000,000 to locate a manufacturing plant to produce PAM electrolyzers. The plant will open with a manufacturing capacity of 500 Megawatts of Electrolyzers per year, but will also be scalable to more than 1 gigawatt per year.

Speaker 2

These investments, in addition to our build outs underway at our current facilities in Belgium and Canada, We'll position us to have nearly 2 gigawatts of capacity by the middle of the decade with the flexibility to scale up as demand accelerates. In the battery electric space, we continue to produce and sell fully electric powertrains in 1st mover markets such as transit, school bus And yard spotters. Cummins is collaborating with PepsiCo's Frito Lay on a battery electric demonstration truck For a pickup and delivery application that has been running daily routes since last November. This truck will be showcased at the upcoming North American Council for Freight Efficiency's electric truck demonstration. We are well positioned with our deep market expertise And electric powertrain technology and are continuously evaluating how we can adapt and improve to meet customer demand and market trends as the technology matures.

Speaker 2

This includes next generation battery electric systems to balance the durability needs of our customers, while focusing on delivering products at a compelling price point. We are also continuing to explore new partnerships to enhance our capabilities, improve our cost position and drive more volume and scale In addition to these important milestones for our new power business, we are investing in our engine and Components businesses to develop advanced diesel and alternative fuel products, which will be critical to meeting customer and regulatory requirements in the coming years. We announced the signing of an LOI to acquire 50 percent equity interest in Momentum Fuel Technologies. The joint venture between Rush Enterprises and Cummins We'll produce Cummins branded natural gas fuel delivery systems for the commercial vehicle market in North America, combining the strengths of Lumentum Fuel Technologies, compressed natural gas fuel delivery systems, Cummins powertrain expertise and the engineering and support infrastructure of both companies. We have seen increasing interest over last year and expect natural gas powertrains to become an increasingly popular choice for end users due to both the compelling total cost of ownership as well as the environmental benefit of such powertrains, especially when utilizing renewable natural gas sources.

Speaker 2

We also began testing of a hydrogen fueled internal combustion engine for heavy duty truck applications, building on Cummins' existing technology leadership in gaseous Fuel applications and powertrain leadership to create a new power solution that helps customers meet the energy environmental needs of the future. The hydrogen engine program can potentially expand the technology options available to achieve a more sustainable transport sector, complementing our capabilities in hydrogen fuel cell, battery electric and renewable gas powertrains. We are committed to bringing customers the right solution at the right time. Doing so requires us to maintain a broad portfolio of power solutions to meet our diverse customers' needs and to minimize total carbon emissions throughout the energy transition. Now, I'll comment on the overall company performance for the Q2 of 2021 and cover some of our key markets, starting with North America before moving on to our largest international markets.

Speaker 2

Revenues for the Q2 of 2021 were $6,100,000,000 an increase of 59% compared to the Q2 of 2020. EBITDA was $974,000,000 or 15.9 percent compared to $549,000,000 or 14.3 percent a year ago. EBITDA increased as a result of stronger global demand and higher joint venture income, partly offset by significantly higher premium freight and other costs associated with supply chain disruptions, in addition to higher compensation costs. Our global markets Experienced an unprecedented shock from the impact of COVID-nineteen during the Q2 of last year. And while we have been encouraged by the ongoing recovery across all of inefficiencies and higher cost.

Speaker 2

Despite these supply chain impacts though, we are continuing to deliver strong financial performance, while supporting our customers. The ability to supply our customers remains our key focus now. And while we are optimistic that the supply chain constraints will ease with time, They are likely to persist through the end of the year. Our 2nd quarter revenues in North America grew 74% to $3,500,000,000 driven by higher industry build rates across all on highway markets. Industry production of heavy duty trucks in the 2nd quarter was 67,000 units, an increase of 180% from 2020 levels, While our heavy duty unit sales were 23,000, an increase of 2 17% from 2020.

Speaker 2

Industry production of medium duty trucks was 29,000 units in the Q2 of 2021, an increase of 94% from 2020 levels, while our unit sales were 22,000 units, an increase of 85% from 2020. We shipped 42,000 engines to Stellantis for use in the Ram pickups in the Q2 of 2021, an increase of 2 72% from 20 levels. Revenues for power generation grew by 48% due to higher demand in recreational vehicle, standby power and data center markets. Our international revenues increased by 42% in the Q2 of 2021 compared to a year ago. 2nd quarter revenues in China, including joint ventures, were $2,100,000,000 an increase of 8% due to higher sales in power generation and mining markets.

Speaker 2

We also experienced a higher penetration rate with our joint venture partners in the heavy and medium duty on highway markets as they prepare for broader implementation of NS VI in July of this year. Industry demand for medium and heavy duty trucks in China was 566,000 units, a decrease of 4%, but still well above replacement, driven by continued pre buy of NS5 trucks ahead of the broader implementation of the new NS6 standards in July of this year. Our sales in units, including joint ventures, were 85,000 units, a decrease of 5% versus the Q2 of 2020. The light duty market in China decreased 8% from 2020 levels to 614,000 units, While our units sold, including joint ventures, were 38,000, a decrease of 28%, driven by supply chain constraints, particularly in these lighter Industry demand for excavators in the 2nd quarter was 97,000 units, a decrease of 5% from very high 2020 levels. Our units sold were 16,800 units, a decrease of 7%.

Speaker 2

Demand for power generation equipment in China increased 47% in the 2nd quarter, driven by growth in data center markets and other standby power markets. We continue to hold a leading market position in the Data Center segment, driven by strong end user relationships and a compelling product offering in that space. 2nd quarter revenues in India, including joint ventures, were $392,000,000 an increase of 2 19% from the Q2 of 2020, despite experiencing a terrible second wave of COVID-nineteen during this period. Industry truck production increased by 468%, While our shipments increased 5 35 percent as our joint venture partner continued to gain share. Demand for power generation and Construction Equipment rebounded strongly in the 2nd quarter compared to a very low base a year ago.

Speaker 2

We remain encouraged by the continued economic recovery, driven by anticipated government infrastructure spending. In Brazil, our revenues increased 175%, driven by increased demand in most end markets. Now let me quickly cover our outlook for 21. Based on our current forecast, we are maintaining full year 2021 revenue guidance of up 20% to 24% versus last year. EBITDA is still expected to be in the range of 15.5% to 16%, and the company expects to return 75% of operating cash flow to shareholders in 2021 in the form of dividends and share repurchases.

Speaker 2

And summing up the quarter, Strong demand across many of our key markets drove continued sales growth in the Q2 and resulted in solid profitability. We have secured important new partnerships in our new Power segment. At the same time, we continue to invest in bringing new technologies to customers, outgrowing our end markets and providing strong cash return to our shareholders. Before passing it over to Mark, I want to take a moment to highlight an important announcement we included Cummins Filtration is a premier filtration platform and a technology leader specializing in filtration products used in heavy, medium duty and light duty trucks, Industrial Equipment and Power Generation Systems. The business generated revenues of approximately $1,200,000,000 in 2020 and remains well positioned for continued growth, sustained margin performance and strong free cash flow generation.

Speaker 2

Cummins Filtration has a strong global footprint with leading positions in North America, India and China and a significant presence in other key markets supported by longstanding local partnerships. We are exploring a range of options to unlock significant shareholder value, including the separation of filtration into a standalone company with a dedicated management team who are well positioned to drive the business forward and diversify its business, leveraging its strong technology portfolio and footprint. The execution of this exploration process is dependent upon business and market conditions, of course, along with a number of other factors and considerations. And any costs associated with the evaluation of these alternatives for the filtration business Has been excluded from our financial outlook. We plan to share a lot more about this and other elements of our strategy during our Analyst Day on February 23.

Speaker 2

Our purpose in delaying this event from November this year until spring is to be able to hold it in person, and we will provide more details as we get closer to the February 23 date. Thank you for your time today, and let me turn it over to Mark.

Speaker 3

Thank you, Tom, and good morning, everyone. There are 4 key takeaways from our Q2 operating results. First, underlying demand remains Strong outpacing supply and increasing backlogs in some of our largest markets. Number 2, global supply chains remain constrained due to the elevated levels Demand and complications arising from COVID resulting in higher premium freight costs and other associated inefficiencies than we anticipated 3 months ago. We delivered solid profitability and cash flows in the first half of the year Despite the continued cost headwinds associated with tight supply chain and for the full year, we are maintaining our revenue and profitability guidance.

Speaker 3

And fourthly, we returned $860,000,000 to shareholders in the quarter through cash dividends and share repurchases And $1,480,000,000 for the first half of the year consistent with our plan to return 75% of operating cash flow to shareholders this year. Now let me go into more details on the Q2. 2nd quarter revenues were $6,100,000,000 an increase of 59% from a year ago when the impact of COVID-nineteen was at its most severe. Sales in North America grew 74% And international revenues rose 42%. Currency positively impacted revenues by 3%, driven primarily by a weaker U.

Speaker 3

S. Dollar. EBITDA was $974,000,000 or 15.9 percent of sales for the quarter Compared to $549,000,000 or 14.3 percent of sales a year ago. EBITDA increased primarily due to the benefits of higher volumes and Stronger earnings from our joint ventures in China and India, partially offset by higher product coverage costs and higher compensation expenses, primarily variable compensation. Gross margin of $1,500,000,000 or 24.2 percent of sales increased By $588,000,000 or 110 basis points, primarily driven by the higher volumes.

Speaker 3

Global supply chain tightness continued in the 2nd quarter and resulted in approximately $100,000,000 of additional freight labor and logistics costs. We expect these costs to remain elevated in the second half of the year with demand projected to remain strong, supply tight and some increase in Selling, general and administrative expenses increased by $130,000,000 or 28% due to higher compensation Expenses and research expenses increased by $87,000,000 or 46% from a year ago. As a reminder, Due to the significant uncertainty at the onset of COVID-nineteen, we implemented temporary salary reductions in April of last year that lasted through the end of September last year. Salary reductions resulted in approximately $75,000,000 of pre tax Savings for the company in the Q2 of 2020 across gross margin, selling, admin and research expenses. In addition, our variable compensation plan worked as designed, flexing down in the face of weaker economic conditions last year and flexing up with stronger financial All operating segments experienced higher compensation costs than a year ago for these two primary reasons.

Speaker 3

Joint venture income was $137,000,000 in the 2nd quarter, up from $115,000,000 a year ago. Strong demand for Trucks and construction equipment in China as well as a broad recovery in other international markets led to the improved profitability versus a year ago. Other income increased by $30,000,000 from a year ago due to a number of positive items, including a one time $18,000,000 gain on the sale Some land in India, which benefited our distribution segment. Net earnings for the quarter were $600,000,000 or $4.10 per diluted share Compared to $276,000,000 or $1.86 from a year ago, primarily due to stronger after tax Earnings driven by stronger volumes. The gain on the sale of land in India contributed $0.05 of earnings per share this quarter.

Speaker 3

The effective tax rate in the quarter was 21.4%. Operating cash flow in the quarter was an inflow of I'll now comment on segment performance and our guidance for 2021, which is unchanged from 3 months ago. For the Engine segment, 2nd quarter revenues increased by 75%, driven by increased demand for trucks in the U. S. Construction Equipment in U.

Speaker 3

S. And Europe. EBITDA increased from 10.5% to 16.1% of sales, primarily driven by higher volumes and lower product coverage expense, which more than offset higher costs and inefficiencies We expect full year revenues to be at 23% to 27% and EBITDA margins to be in the range 14.5% to 15% for the Engine segment. In distribution, revenues increased 20% from a year ago And EBITDA increased as a percent of sales from 10% to 10.5%, primarily due to stronger performance in North America. We have maintained our outlook for segment revenue growth to be up 6% to 10% and EBITDA margins to be 9% at the midpoint of our guidance.

Speaker 3

In the components business, revenues increased 73% in the 2nd quarter, driven primarily by stronger demand Trucks in North America, EBITDA increased from 12.3% of sales to 15.1% due to the benefits of stronger volumes, partially offset by higher product coverage costs. For the full year 2021, we expect components revenue to increase 30% to 34% And EBITDA to be 17% at the midpoint. In the Power Systems segment, revenues increased 47% in the 2nd quarter, Driven by stronger global demand for power generation and mining equipment, EBITDA increased from 11.7% to 12.2% of sales, primarily due to the benefits of higher volumes and lower product coverage expenses. We are maintaining our Power Systems guidance of revenues up 16% to 20 percent and EBITDA margin in the range of 11% to 11.5% of sales. In the New Power segment, revenues increased to $24,000,000 up Expectations as we continue to invest in new products and scale up ahead of widespread adoption of the new technologies.

Speaker 3

Full year, we currently project new power revenues of $110,000,000 to $130,000,000 and EBITDA losses to be in the range of $190,000,000 to $210,000,000 Total company guidance remains unchanged with revenues to grow between 20% 24% And EBITDA margin to be between 15.5% 16% for the full year. EBITDA percent for the first half of the year 16%. Some of the key factors expected to influence second half profitability are the pace of improvement in truck production in North America, The rate of decline in demand in China and the performance of the global supply chain. We now expect earnings from joint ventures to be 10% in 2021 compared to our prior year guidance of down 5%. Stronger than expected demand in China truck and construction markets, especially in the Q2 is the primary reason for the increase in our forecast.

Speaker 3

Joint venture earnings are expected to ease in the second half of the year, With industry truck sales expected to decline following the broader adoption of the new National Standard 6 on highway emissions regulations in China in July. And we also anticipate a softening of demand for construction equipment coming off all time high levels in the first half of the year. Our effective tax rate is expected to be approximately 21.5%, Excluding discrete items, down from our prior guidance of 22.5% due to the mix of geographic earnings. CapEx, Capital expenditures were $125,000,000 in the quarter, up from $77,000,000 a year ago. We expect our full year capital expenditures to be at the high end of our range of $725,000,000 to $775,000,000 for the full year.

Speaker 3

We returned $869,000,000 to shareholders through dividends and share repurchases in the 2nd quarter, bringing our total cash returns to $1,480,000,000 for the first half. Excuse me for my dry Strong results in the Q2 despite continued supply chain constraints and elevated costs. Demand currently exceeds supply in a number of important markets, pointing to strong demand for our products into 2022. I want to thank our global employees for their ongoing commitment to meet the needs of our customers while delivering solid financial performance. We continue to extend our leadership position through advancing the technologies that power the profitability of our customers today and will continue to do so for some time to come.

Speaker 3

This sets the company up to further increase the earnings power of our core business, while we continue to invest in a range of new technologies Our strong balance sheet focused on improving performance cycle over cycle and consistent cash flow generation Ensure that we can sustain important investments for the future through periods of economic uncertainty and distribute excess cash to shareholders. Thank you for your interest today. Now I'll turn it back over to Jack.

Speaker 1

Thank you, Mark. Out of consideration to others on the call, I would ask that you limit yourself Operator, we are now ready for our first question.

Speaker 2

At this time, we

Operator

will be conducting a question and answer session. We ask that you limit yourself to one question and one follow-up. One moment please while we poll for the questions. Our first question comes from Jamie Cook with Credit Suisse. Jamie, you may ask your question.

Speaker 4

Hi, good morning. And nice quarter. I guess, Tom, a Couple more strategic questions. Just on the filtration business, can you remind us where the margins of this business are? And just your thoughts on timing And what this business could achieve as a standalone public company versus being part of Cummins or is it more likely that this asset would be interesting to someone else?

Speaker 4

And then I guess my second question, I appreciate a lot of the color that you spent on new power systems and some of the relationships that have emerged. I'm just wondering, as you're thinking about this business today, a lot of the growth obviously has been organic. Is there an inorganic opportunity here within new power systems over the next sort of 12 to 18 months that could potentially perhaps Accelerate where this business would go longer term in terms of earning a profit, etcetera or in technology? Thanks.

Speaker 2

Thanks, Jamie. Good morning to you. So let me start with your filtration question first. The answer is that the profitability of filtration is Pretty much in line with the components business. The segment and the business are very similar.

Speaker 2

And the Strategic logic is simple. It's a great business, by the way, very profitable, great cash flow, terrific leadership team. And We've done a lot of improvement in that business over the last few years, which has really improved its financial performance as well as its operating performance. And so we feel like it's operating on all cylinders really just for an engine analogy there. But The challenge is that looking forward, the opportunities to grow shareholder value look primarily to us in diversification.

Speaker 2

The number of technology innovations for the truck business or for our end markets look like they're limited in front of us, Whereas the opportunities to take that technology platform and global footprint to other filtration segments look significant. And when we think about using our shareholders' capital to invest in those other segments, the logic isn't as clear. What is clear though that the company has come to a size and performance level now where we think it can stand on its own Or it could be part of another bigger company that plans more diversification in other end markets. We are looking at all those options. We're exploring everything from a sale to a spin to some other kind of strategic option.

Speaker 2

What we want to do most of all though is Realize value for Cummins shareholders. We know that when we're the best owner and can make the most of the assets, We're going to do that. And when we're no longer the best owner, then we need to confront that too. And that's what we're trying to do here is just create value for shareholders and be direct about it. Again, the business is doing great.

Speaker 2

The management team is outstanding. We're really proud of the achievements of that business. We just think it can operate separately from us more effectively going forward. Then with regard to New Power, and thanks for your comments On the strategic milestones, we have achieved a lot already and we are exploring organic, inorganic partnership options All the time. It is such a fast moving area.

Speaker 2

There's so much development to do in infrastructure, just the product technology, The availability of fuel, there's so much to do to decarbonize the automotive industry, no less all the other Commercial industrial industries that we're in that there's no lack of potential partnerships and opportunities. We are though scanning always For inorganic options too. As you know, some of the valuations were elevated to a point where they were really just Almost silly. But that said, that isn't always true now, and we are always scanning for acquisitions that we think can Position us strategically more better position us from a scale point of view. You heard me mention that in our battery electric That there is a scale advantage, to be gained both in hydrogen and electric.

Speaker 2

If we can get enough Volume on some of those products, we can drive down costs significantly. That depends in part on whether the technology is Viable in the application or not, and that's why we're doing so much focus on what are the first mover markets and where can we actually get scale. And if we can do that and an acquisition can help, we'll do it.

Speaker 4

Okay. Thank you. I appreciate the color. I'll let someone else ask

Speaker 3

a question.

Operator

Our next question comes from Ann Duignan with JPMorgan. Please proceed with your question. And your line is live. You may please proceed with your question.

Speaker 5

I'm sorry, I hit mute, but I didn't see it. It didn't work.

Speaker 2

Hi, Ann.

Speaker 5

Apologies. Maybe a little bit more color on JV income, I know in your comments you said that most of the raise in the JV income was on the back of Q2 China performance, but just beyond that, maybe you'd walk us through the JV income And maybe a little bit more color on India, JV income and fully consolidated, just what you're seeing there from the fundamentals. That will be helpful. Thank you.

Speaker 3

Thanks. Yes, so we delivered about just over $300,000,000 of JV income in the first half of the year, which was up from $244,000,000 a year ago, and we're Expecting that first half of the performance to drop off between 30% 40% at the midpoint of the guidance, we're Down to 100 and just under $200,000,000 of earnings in the second half of the year. We have started to see some slowing orders for both Construction and truck, it's too early to say, yet with absolute conviction where we'll end up for the year, but that's our latest forecast. In India, underlying demand we think is robust, but it's been very complicated there with The COVID situation, so yes, we think India earnings should improve. China, of course, is a bigger contributor across

Operator

Our next question comes from Jerry Revich with Goldman Sachs. Jerry, you may ask your question.

Speaker 6

Yes. Hi. Good morning, everyone.

Speaker 2

Hi, Jerry.

Speaker 6

Nice to hear really nice to hear about the Sinopec partnership. I'm wondering if you Just give us an update on what the order bookings for electrolyzers were for you folks in the quarter. And if you can just talk to us about The size of that pipeline and when do we expect the additional bookings as we look out? Thanks.

Speaker 2

Jerry, we haven't reported bookings from electrolyzer markets. What I can do though is take that in Something you'd like to see and start to see if we can publish those that data, but we have not been doing that. So I can't really answer your question on bookings for the quarter. But what I can say is that, as I mentioned in my announcement that the project that we've got planned With Iberdrola in Spain for the fertilizer will be the largest of its kind. And so we are seeing significant ramp up Already, especially in Europe.

Speaker 2

That's where in Europe, there's the combination of low cost renewable Power combined with European money supporting projects that decarbonize industrial uses Hydrogen is really driving is the primary driver of demand, and we see some of that now beginning to They already people already buy a lot, but it's produced using natural gas through SMR and this Supply chain, this green hydrogen supply chain takes renewable power through a PEM electrolyzer like ours and then turns it makes the hydrogen low carbon Or 0 carbon, and that's kind of the biggest drive for electrolyzers today.

Speaker 6

Okay. Thank you. And then I'm wondering on the hydrogen Truck announcement with Air Products. Can you just talk about your anticipated business model on the initial hydrogen truck orders? Is it going to be primarily Retrofit or are there any OEM partnerships that you can talk about?

Speaker 6

How is that business model evolving versus Your traditional powertrains?

Speaker 2

Yes. We think the business model is going to be very similar. These are not retrofit Vehicles, which will be built for a purpose to have Fuel cell electric vehicle powertrains, as you guess, the big development area there is to have an electric And that's still under development. Most of the trucks that we put out now, the electric infrastructure is either A prototype version or has not been fully productionized yet. And I'd say Our early versions will still be that.

Speaker 2

But truck makers are electrifying vehicles at a reasonably rapid rate, at least for in relatively Small volumes, so we expect those platforms to improve over time. And we will be forming partnerships with OEMs to deliver those trucks. And my view is that the reason you haven't seen more partnerships already is there just isn't very Chips already, it just isn't very much demand. So and everyone's trying to figure out what to do with their scarce engineering resources. Do I use them on developing advanced diesel, natural gas, renewable natural gas, electric, Fuel, cell, electric and since I can't do all at once, which ones do I do first, second and third?

Speaker 2

So we believe that Truckmakers will be ready to work with us on fuel cell vehicles when there's demand. So that's why we're excited about an end user like Air Products. High quality company knows hydrogen really well, wants to make their fleet fuel cells. So I think that's

Operator

Our next question comes from David Raso with Evercore ISI. Please proceed with your question.

Speaker 7

Hi, good morning. I'm trying to think about the supply chain and your ability to react to it with pricing. When you look at the second half of the year and you sort I made a comment we should expect continued constraints through the end of the year. What are you hearing from the supply chain about the early Part of 'twenty two that makes you feel more comfortable and your ability to price into that market in 'twenty two?

Speaker 8

Yes, David, Jennifer here. I'll comment a little bit about what we're seeing right now. As you heard from Mark and Tom and is happening across the industry In the supply chain and really ramping up to keep up with the demand we see in both First Fit and Aftermarket has paced our ability to Our teams have done a phenomenal job working closely with customers and suppliers to minimize that impact to deliver the results that we did in the second quarter. We see that easing in many places quarter over quarter, so improving through the back half of the year and into 'twenty two. Microprocessors like other in our industry and other industries continues to be the biggest constraint.

Speaker 8

Our demands are relatively Small, in the broader picture of microprocessor supply and we had expected to see some improvement in June With COVID in Malaysia, that's delayed slightly, but that we think will ease in the second half of the year. So we're From a price perspective, right now, we're anticipating our price to cost to be 30 basis points favorable for this year, and that is down from 40 to 50 basis Point positive in our prior guidance really because of those increased costs that we're seeing in materials, logistics And we are working to mitigate that with some of our contractual things on the material side, Hedging and also looking at pricing and surcharges where possible and first bid and aftermarket. So we won't comment more on 2022 at this point, but we do To see some improvements both in cost coming down and getting some more recovery, into the second half of the year.

Speaker 7

All right. Thank you very much.

Operator

Our next question comes from Steven Fisher with UBS. Please proceed with your question.

Speaker 9

Thanks. Good morning. Just wanted to follow-up that discussion about some of the costs. I know we talked about $105,000,000 of costs in the Q1 related to logistics and it sounds like they're coming down a little bit. Wondering if you can quantify that, what you experienced in the Q2 and where you see that going in the next couple of quarters?

Speaker 8

Yes. So we did see those costs come down slightly in the Q2. Our engine business cost improved more, but we saw some increase in the Power Systems business due to some issues that came into that business and we do expect that to improve Again, each quarter in the second half of the year, overall, though, we're projecting $295,000,000 in incremental logistics Cost for the full year, which is $105,000,000 more than our prior guidance, just based on what we're seeing.

Speaker 9

Okay. Sounds very helpful.

Speaker 2

Maybe just to say one more word about that. I think, like a lot of companies, The continued outbreaks of COVID around the world and now the Delta variant just keeps throwing more curveballs into the system because We see labor shortages, we see other things. And so some of these costs, as Jen mentioned, we had expected it to go from $100,000,000 in the Q1 to $30,000,000 in the second And so now we're talking about almost $300,000,000 for the year. So that just I want to be clear, that's a big hit to what we really generally expected. The thing I guess I wanted to highlight is that our company continues to earn good margins despite that by finding other ways to do it.

Speaker 2

We've We've been able to price in the aftermarket and we still have a big opportunity going forward in that. We're as Jen said, we'll be able to add material Cost adjustments to our contractually as we move forward, roll forward in the quarter and just the sheer effort by our teams to get products out at the least Cost as we can, I think and in fact, so therefore, we get revenue up, which includes which improves our incremental margins in the plant? And so I guess we're We're kind of running up a down escalator, if you will, and doing a decent job of it. And so as those things start to get better and even in the markets where we're still Seeing disruptions, our supply base gets better at operating under the same lousy conditions if they stay stable. Even stable lousy is better than changing all the time.

Speaker 2

So all of them are doing better and so we are seeing improvements. It's just wherever the new flare up is, is where we're seeing the cost being driven.

Speaker 9

Makes sense. Thanks, Tom. And then just maybe a follow-up on China. I know you're anticipating the weakness in the second half. I'm wondering if you're sensing Any policy tides turning more positively there in a bigger picture that may influence sort of infrastructure Your spending and demand for trucks and construction equipment that might make your kind of second half weakness Somewhat of a lagging indicator actually.

Speaker 2

Yes, it's a good question. As a Chinese policy prognosticator, I would be, of course, fired immediately. But I'll just say this that I believe, Based on my conversations with government officials there that they are concerned about where the economy is and are going to continue to try to figure out ways boost economic activity, especially given what's happening internationally to demand. So I do think it's entirely possible we'll see government responses to try to keep business moving during this time. And to your point, that might offset some of what we see as a sort of structural issues like the The changes of the emission standards and the price increases of trucks.

Speaker 2

We don't the signals aren't evident to us yet, but that doesn't mean it won't happen. And we've been talking about this all year like We called this wrong before. We've said China is going to fall off a lot and then it hasn't. And we said the reverse, China is going to grow a lot and then it fell off some. So What we think is that generally speaking with this emissions change, prices are going to go up.

Speaker 2

People bought a lot of trucks last Second half of last year, first half of this year. So we see diminishing demand and not just trucks, also excavators. We see diminishing demand as the most likely expectation and we are beginning to see signs of that. And so even if the policies started to change now, I think we'd still see some demand drops in at least the Q3 and Q4 until those things start to take effect.

Speaker 8

Well, I'll just add, we feel really well positioned with the Products that we're launching in China this year for the NS VI submission. So as that does take effect and customers start to buy, we think we have really good products Out there that will position us well in the market and of course we also have some outgrowth in the components business with both after treatment and transmissions that we'll start to see increasing there. So we're feeling good about where we are in that market.

Speaker 9

Perfect. Thank you both.

Operator

Our next question comes from Ross Gilardi with Bank of America. Please proceed with your question.

Speaker 7

Good morning, everybody. Can you hear me okay?

Speaker 2

Yes, Ross. How are you doing?

Speaker 7

Great, Tom. Thank you. I wanted to go back to your hydrogen event that you hosted earlier in the year and the target you had for, I think it was $400,000,000 in electrolyzer sales within 5 years. Correct me if I have that wrong, but I'm just wondering If all the wins, all the collaborations you've announced, like do you already feel like you've got wins in hand That take you to that target within 5 years? And is there an upside case based on Collaborations already announced that takes this to say $1,000,000,000 in 5 years.

Speaker 7

I mean, I realize all this is fluid and subject to very unpredictable timing issues and so forth. But it seems like you've got a lot in the hopper there already. And Just wondering like how much visibility you even have on that target at this point?

Speaker 2

Yes. It's a great question, Ross. The answer is depends on if I give you the answer from a CEO of a 100 year old engine company or from a new startup. The CEO of an old engine company says We don't have the orders in hand yet, because I think of orders as actual orders. But to your point though, We project that the sum of these partnerships and where we see this decarbonizing Of industries using hydrogen already, we'll take our demand significantly over our estimate we gave at the Hydrogen Day.

Speaker 2

Again, the orders aren't in hand. They depend on European money and all these things, all of which has been promised, but it's not all done, right? So And the same thing in China. There's projected policy investments that will Encourage Green Hydrogen, but the orders aren't there yet. So that's why when you ask like do you have orders in hand, the engine guy says no.

Speaker 2

But if you ask me as the CEO over New Power, I'd say, I feel really good about it, and I think we're going to

Speaker 7

Okay. Thanks a lot. That's helpful. And then just kind of nearer term, Also, just based on everything you've announced, when do we see like a real inflection in sort of the Quarterly run rate revenue for New Power, I mean, you kept your outlook unchanged for this year. I realize all these Things take a lot of time.

Speaker 7

But do we see like a meaningful step up do you think in just sort of the quarterly run rate into next Here at some point in 2022?

Speaker 2

Let us hold on our 2022 guidance until we get there. But basically, what we think the revenue guidance is going to be driven by most is This electrolyzer demand, this is the thing that's kind of going the fastest. Everything else is moving. You know that. These are moving, Fuel cell trucks are moving, just as I said.

Speaker 2

But to your point, those are all being driven by costs coming down, infrastructure being built, All of which takes a long time. The electrolyzer demand is the thing that's right in front of us. So if we can get the projects locked down, all The European money subsidies in place, as you heard from my remarks, we are building the capacity to produce these units. What that means with regard to the quarters of 2022, we have some work yet to do to do that. I'd like to tell you, yes, but I think we need to do the work and we need to see some of these projects locked down before we say to ourselves Exactly this quarter and that quarter.

Speaker 2

So give us some time to work that, but I understand the question well and we'll definitely give you visibility to that as we get it.

Speaker 7

Thanks so much.

Speaker 2

Thank you, Rob.

Operator

Our next question comes from Rob Wertheimer with Amelius Research. Please proceed with your question.

Speaker 10

Thanks. I had a couple and thank you Tom for the overview on the new power stuff. I understand the comments on old versus new world, but it's helpful to have the updates.

Speaker 5

Can I ask you

Speaker 10

to I don't know if you're willing to, but if you were to go a step further, Could you characterize how strong you feel on your I mean, you have a lot of things you can choose to invest in, whether it's Drivetrain's motors, whether it's electrolyzers, whether it's fuel cells, whether it's batteries, etcetera? Are you leading in some of those and sort of Keeping up in others and maybe you can show us where you feel most confident. And then I had a question on engines as well.

Speaker 2

Yes, that is definitely a longer conversation about each technology area, where we're leading and where we're not, which would be significant disputed by The competitors in the industry, I'm sure, Rob. Let's just let me say it this way. I think that we have a position in the market, which has been built over a long time, where we understand the applications as well or better than anybody in the industry. We understand the technical ways in which 2nd thing I'd say is that we've invested significantly in both hydrogen fuel cells and battery electric fuel powertrains, Meaning that we have as much experienced technology investment as anybody in the industry, Not in straight battery cells or that kind of thing, but in the application of those units to commercial vehicles. So we're not behind anybody It was in commercial, industrial, and in various markets.

Speaker 2

So I believe that we have we are well positioned, But I also think the industry is moving quickly. As I said in my remarks, where the strategic advantage will be gained will depend not only on The product development, but on where the infrastructure is, where the what the cost of electricity is versus the cost of hydrogen, A whole bunch of other factors that require us and other industry participants to be pretty nimble about how you think about what products are going to win and how advantage is going to be created. So that's why I think it's important for us to say, we like these investments. We feel like we're at the forefront of all of them, but we also need to keep thinking about where the puck is moving to and make sure we're We're thinking about how to get advantage. That's a little bit why you heard my comments on investing in low carbon engine technologies, because right now, We can produce hybrid diesel engines and hybrid and natural gas engines at significantly lower cost either BEV or fuel cell powertrains that are significant improvements in both carbon and criteria pollutants.

Speaker 2

That's worth a lot to either depending on whether you're an EPA or a regulator or you're a customer. I know how to use those. They're a lot cheaper. I understand how to fuel them and operate them. And meanwhile, they still significantly There are positive impact on the environment.

Speaker 2

So that's why I think we're trying to make sure that we stay at the forefront of all these and not just Up down a bet in one big pile on one place, because I think that's not a winning strategy in this market. All right. That was a

Speaker 10

helpful answer. And I don't know, this will be another tough one. But on the flip side, you guys have the opportunity to provide your expertise in Scale in the last stages of diesel engines and you've done it a little bit, I guess, on medium duty already.

Speaker 2

How do we, on our side

Speaker 10

of the fence, think about What happens? You see some of the mandates coming forward in time on auto. That's a whole lot easier to do than on truck, I understand. Should we just expect maybe there's a big announcement And we all kind of guess as to how long the tail end of these is or are there are you willing to do that or is there a risk sharing or I don't know if you're willing to Sort of characterize how those investments may go, and I will stop there. Thank you.

Speaker 2

Yes, yes. Rob, thanks for that. It's a great question. Our view is that the Tail end of diesel will be a lot longer than people expected. And that's not because we have some we sit around and hope for the preservation of diesel.

Speaker 2

It's because The diesel market is so complicated. There are so many applications, 100 years of applications. And it's not like the cars where there's just one application. There 100 or 1000 and each one of them has unique demand and scale is very difficult to achieve in some of these. And so we see the demand for diesel lasting a long time and that's why this investment in both helping customers that are trying to Move out of diesel as well as trying to think through how do we invest in those technologies to decarbonize through Renewable natural gas or hydrogen ICE engines or hybrids or other things is a good investment because it allows these applications To move down the carbon curve, have less carbon out, lower criteria pollutants in an engineering way that's going to drive and cost way that's going to drive utilization and people are going to actually use it and not just delay purchases.

Speaker 2

So we think both for regulators and for customers, that's a good investment And that curve is likely to last a long time. And the answer about how long is unfortunately for people that want a simple answer. It depends on how it's complicated. It will last a really long time if you mean all of them. If you mean like the one truck Application that the largest volume that might happen sooner than the last Unusual kind of truck that's a very small volume, but the accumulation of all those curves of all those applications means diesel is around a long time.

Speaker 2

And So are and these new applications, the lower carbon ones are going to be introduced, starting now and all the way through the 2030s.

Speaker 10

Wonderful. Thank you.

Operator

We have reached the end of the question and answer session. And I will now turn the call over to management for closing remarks.

Speaker 1

Very good. Thank you. And thank you everyone for your interest as always in Cummins. We appreciate your attendance and that concludes our teleconference today. I will be available per usual for questions after the call.

Speaker 1

And I hope everyone has a great day.

Powered by Quartr