Greetings, and welcome to the Cummins Incorporated First Quarter Earnings Release. At this time, all participants are in listen-only mode. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. Chris Clulow, Vice President, Investor Relations.

Thank you, Rob. Good morning, everyone, and welcome to our teleconference today to discuss Cummins' results for the first quarter of 2025. 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 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 is 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.

Thank you, Chris, and good morning, everyone. As you can see from our press release and earnings material, we delivered very strong results in the first quarter, led by record performance in our Power Systems segment. We are entering uncharted territory as the trade tariffs start to have a more significant impact beginning in the second quarter. The breadth and changing nature of the tariffs have introduced a great degree of uncertainty and mean that at this time, we are unable to predict with confidence our expected performance for the year. It is important to note that we serve many different end markets, some with long backlogs and clear secular themes in our Power Systems business, some less sensitive to short-term economic sentiment such as our Aftermarket business and other markets where customers tend to flex demand more quickly when business confidence weakens. The duration of uncertainty and extent of tariffs will influence how much and for how long demand is impacted. Cummins is in a strong position, strategically and financially, with an experienced leadership team, well-versed in navigating through periods of uncertainty. We look forward to restoring our guidance when we have more stability in the outlook. Now I will move on to some of our highlights from our first quarter. Then I will discuss our sales and end market trends by region. I will then provide an update on how uncertainties in our current environment may impact our end markets. Mark will then take you through more details of our first quarter financial performance. In the first quarter, we continued to make progress in the execution of our Destination Zero strategy. In our Engine segment, we introduced the much-anticipated X10 as a part of our Cummins HELM platforms. This engine replaces both the L9 and X12 engine platforms and will deliver a new level of performance, durability and efficiency for heavy and medium-duty customers. Alongside the X15 and B Series, the X10 provides customers with the power solution to meet their unique operational requirements while maintaining the performance and reliability for which Cummins is known. In addition, we unveiled the new Cummins B7.2 diesel engine that brings the latest technology and advancements to one our most proven platforms. The new engine will feature a slightly higher displacement and is designed to be a global platform, which creates flexibility for different applications and duty cycles. Both the B7.2 and X10 engines will be manufactured at Rocky Mount Engine Plant in North Carolina and will go into production in North America in 2027. In our Power Systems segment, we announced the acquisition of assets of First Mode, a leader in retrofit hybrid solutions for mining and rail operations. This technology represents the first commercially available retrofit hybrid system for mining equipment, significantly reducing total cost of ownership while advancing decarbonization and operations. This acquisition reinforces Cummins' commitment to providing innovative and effective decarbonization solutions while meeting the needs of our customers on their transition to a lower carbon future. Lastly, our Accelera by Cummins segment announced a supply of 100 megawatts proton exchange membrane or PEM electrolyzer system for bp's Lingen green hydrogen project in Germany. The hydrogen generation system will be the largest electrolyzer system assembled by Accelera to date and will be manufactured in Accelera's new electrolyzer plant in Spain. Once fully commissioned in 2027, the 100-megawatt electrolyzer system will produce up to 11,000 tons of green hydrogen per year. Now I will comment on the overall company performance for the first quarter of 2025 and cover some of our key markets. Demand for our products remain strong across many of our key markets and regions, offset by softening in the North America truck market. Revenues for the first quarter were $8.2 billion, a decrease of 3% compared to the first quarter of 2024. EBITDA was $1.5 billion or 17.9% compared with $2.6 billion or 30.6% a year ago. First quarter 2024 results included a gain net of transaction costs and other expenses of $1.3 billion related to the Atmus divestiture and $29 million of restructuring expenses. Excluding the one-time gain and the costs related to the separation of Atmus as well as restructuring expenses, EBITDA and gross margin dollars improved compared to the first quarter of 2024. This improvement in profitability was driven by the benefit of higher power generation and aftermarket volumes, pricing and operational efficiency, which more than exceeded the impact of lower North America truck volumes and the separation of Atmus. For our Power Systems business, in particular, we had record performance in both EBITDA dollars and percentage in the first quarter as we continue to benefit from operational improvements and strong end markets. Our first quarter revenues in North America decreased by 1% compared to 2024. Industry production of heavy-duty trucks for the first quarter was 63,000 units, down 18% from 2024 levels, while our heavy-duty unit sales were down 21,000 or 21% from 2024. Industry production of medium-duty trucks was 32,000 units in the first quarter of 2025, a decrease of 21%, while our unit sales were 31,000, down 14% from 2024. We shipped 29,000 engines to Stellantis for use in their RAM pickups in the first quarter of 2025, down 25% from 2024 level. Revenues for North America power generation increased by 12%, driven primarily by continued strong data center demand. Our international revenues decreased by 5% in the first quarter of 2025 compared to a year ago. First quarter revenues in China, including joint ventures, were $1.8 billion, an increase of 9% as accelerating data center demand and high domestic infrastructure demand more than offset lower export demand. Industry demand for medium and heavy-duty trucks in China was 294,000 units, a decrease of 4% from last year. Our sales in units, including joint ventures, were 42,000, an increase of 6%. Industry demand for excavators in China in the first quarter was 61,000 units, an increase of 23% from 2024 levels. Our units sold were 11,000, an increase of 19%. The increase in the China market size is primarily due to domestic cyclical replacement demand, rural development and farmland renovation demand. Sales of power generation equipment in China increased 68% in the first quarter due to accelerating data center demand. First quarter revenues in India, including joint ventures, were $725 million, a decrease of 14% from the first quarter a year ago. Industry truck production was flat with 2024. Power generation revenues decreased by 11% in the first quarter as the prior year included a pre-buy ahead of emissions regulations change. To summarize, we achieved impressive results in the first quarter with record financial performance in our Power Systems business. Looking ahead, there's heightened uncertainty about the pace of growth in the global economy due to tariffs, which could negatively impact demand for capital goods. Absent more clarity about the likely duration of elevated tariffs, we are not able to provide a reliable forecast for the remainder of this year. As a large U.S. headquartered company with significant manufacturing in the U.S., we appreciate the administration's support for American manufacturing. This support is crucial as we invest more than $1 billion in our engine and power systems manufacturing operations in the U.S. over the next few years, employing people in nearly every state through our manufacturing plants and sales and service branches. As we evaluate our current manufacturing footprint and our exposure to tariff regulations, we believe we are well-positioned because we primarily produce engines and gensets in the markets where we sell them. For instance, our medium-duty, heavy-duty and high-horsepower engines, as well as power generation products for U.S. customers, are manufactured in our plants located in Indiana, North Carolina, New York and Minnesota. However, like much of our industry, our component and supplier manufacturing would be affected by current tariff regulations, which could disrupt the global economy and ultimately lead to higher costs for consumers. In addition to trade and economic uncertainty, there is also uncertainty in North America emissions regulations for 2027. We continue to expect new NOx regulation to go in place in 2027 and are focused on launching our products on schedule, while also working with the administration as they explore options to lower the cost of existing regulations. While we believe our product plan is well-positioned, the uncertainty in regulation along with economic uncertainties have led to a weaker than anticipated recent order and also made pre-buy for the second half of the year unlikely. In summary, we had a strong first quarter and continued our progress in improving EBITDA margins as we shared in our Analyst Day almost a year ago, with tariffs not a significant factor in our results. The economic environment has changed significantly over the past three months. We have an experienced leadership team that has demonstrated capability in managing through periods of uncertainty, and we will maintain focus on our customers, our employees and shareholders. We enter this period of heightened uncertainty in a position of strength and look forward to reinstating our guidance when some of the uncertainty has subsided. Now let me turn it over to Mark.

Thank you, Jen, and good morning, everyone. We delivered strong revenue and profitability in the first quarter. First quarter revenues were $8.2 billion, down 3% from a year ago. Sales in North America decreased 1%, while international revenues declined 5%. The separation of Atmus in mid-March and the prior year resulted in a year-over-year sales decline of around 4% to the total consolidated sales, meaning that we were close to flat on an underlying basis. EBITDA was $1.5 billion or 17.9% of sales for the quarter, compared to $2.6 billion or 30.6% of sales a year ago, which of course included a one-time gain on the divestiture of the Atmus business of $1.3 billion net of transaction costs. Also a year ago, we incurred $29 million of restructuring expenses. To provide clarity on operational performance and allow comparison to the prior year, I'm excluding the one-time gain and the costs related to the separation of Atmus and the restructuring expenses in my following comments. EBITDA was $1.5 billion or 17.9% of sales for the quarter compared to adjusted $1.3 billion or 15.5% of sales a year ago. The higher EBITDA was driven by higher power generation and aftermarket volumes, positive price cost driven by operational improvements, partially offset by lower North America truck volumes and the separation of Atmus. Now let's look at each line item a little more. Gross margin for the quarter was $2.2 billion or 26.4% of sales, up from $2.1 billion or 24.5% last year. The improved margins were driven by favorable pricing, higher aftermarket and operational improvements, especially in Power Systems. Selling, administrative and research expenses were $1.1 billion or 13.6% of sales compared to $1.2 billion or 13.8% of sales a year ago. Joint venture income of $131 million increased $8 million from the prior year, primarily driven by higher technology fees within our engine business and higher volumes in our Cummins Chongqing joint venture within Power Systems. Other income was $23 million, compared to $21 million from the prior year, as gains on investments related to company-owned life insurance more than offset the negative impact of foreign currency revaluation. Interest expense was $77 million, a decrease of $12 million from the prior year, primarily driven by a lower average debt balance, as a result of the separation of Atmus and lower weighted average interest rates. The all-in effective tax rate in the first quarter was 23.9%, including $7 million or $0.05 per diluted share of favorable discrete tax items. All-in, net earnings for the quarter were $824 million or $5.96 per diluted share compared to $2 billion or $14.03 per diluted share a year ago, which includes the net gain on the separation of Atmus, which was $1.3 billion or $9.08 per diluted share and restructuring expenses of $29 million or $0.15 per diluted share. But hopefully, we've now lapped all of those exclusions and adjustments and look forward to having less words around those in future quarters. All-in operating cash flow was an outflow of $3 million compared to an inflow of $276 million a year ago, primarily driven by higher working capital. Now let me comment a little more on segment performance. For the Engine segment, first quarter revenues were $2.8 billion, a decrease of 5% from a year ago. EBITDA was 16.5%, up from 14.1% a year even on the lower truck volumes. The Engine business benefited from pricing related to the launch of updated products in our Light Duty segment, stronger aftermarket volumes, operational efficiencies, good cost control and a modest increase in joint venture income. Components segment revenue was $2.7 billion, a decrease of 20%, while EBITDA, excluding costs related to the separation of Atmus, decreased to 14.3% from 14.8% a year ago, as lower on-highway demand in North America and Europe and the diluted impact of Atmus separation were partially offset by the benefit from operational efficiencies. In the Distribution segment, revenues increased 15% from a year ago to $2.9 billion. EBITDA also increased as a percent of sales to 12.9% compared to 11.6% of sales a year ago, driven by higher power generation volumes, higher aftermarket and favorable pricing. In the Power Systems segment, revenues were $1.6 billion, an increase of 19%. And EBITDA was a record increasing from 17.1% to 23.6% of sales, driven by strong volume, particularly in data center applications and rebuilds, favorable pricing and continued focus on operational improvement. Accelera revenues increased 11% to $103 million, driven by increased e-mobility sales and electrolyzer installations arising from prior period orders. Our EBITDA loss was $86 million compared to an EBITDA loss of $101 million a year ago, as we lowered costs in existing operations, partially offset by additional losses in the Amplify Cell joint venture as it advances its operations. In summary, we delivered impressive profitability for the first quarter even as demand in North America truck markets declined. Uncertainty has increased due to trade tariffs, resulting in a slowdown in the global movement of goods, particularly between China and the U.S. It remains to be seen how long the tariffs remain in place and the impact that they have on business confidence and the demand for capital goods. Cummins is in a strong financial position to navigate through uncertainty. With our industry-leading portfolio of products and our global network, we are well placed to support our customers. We look forward to reinstating our outlook when the economic conditions become clearer, along with hopefully a return to growth and greater prosperity here in the U.S. and in the global economy. In the meantime, we'll continue to focus on areas we can control in managing costs and optimizing working capital while meeting our customer commitments. We'll stay focused on our strategic priorities in what is likely to be a more complex operating environment in the coming months as the full impact of the current tariff levels has not yet been felt in our opinion. I want to close my prepared remarks by thanking Chris Clulow for his leadership in Investor Relations. He's moving to a new finance leadership role in operations and supply chain and will remain a key advisor to me and our business leaders as we navigate through the current challenges. Congratulations to Nick Arens in assuming the Investor Relations role. Nick and I look forward to meeting with investors and analysts in person in the coming weeks and months. We're very fortunate to have such a strong finance team at Cummins. Now, let me turn it back over to Chris.

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.

Our first question comes from Jamie Cook with Truist Securities.

Hi. Good morning and nice quarter. I guess just my first question, understanding you're not providing guidance, but based on what's been announced so far, is there any way you can sort of help us quantify the gross or net tariff cost, you know what I mean, that would impact your business and which segments are impacted the most? And then, I guess my second question, just trying to understand, which businesses have the most visibility like where your backlog sits today, and just how you're handling pricing, just concerned with some of the businesses that have greater backlog, perhaps there's pricing risk associated with tariffs?

Thank you, Jamie. I'll address the first question and then turn it over to Jen. The circumstances regarding the tariffs are very uncertain and constantly changing, so we won't provide a specific quantification today. The primary concern is the overall effect on the economic environment. We've taken proactive measures without having clarity on the tariffs. We've done what we can to reduce the impact. However, if we incur tariffs, we will need to pass those costs on. As we obtain actual results, we will share the tariff impacts. There will likely be some delay between incurring costs and recovering them, and we will provide further details as we move forward.

Yes. And in terms of what we're seeing in different markets, as I noted, we do have some different markets that we expect to be impacted in different ways by uncertainty in the economy. So we have a multi-year order board in our Power Generation business and where there are customers that want to cancel or push out builds, we're able to reallocate those to other customers. So for the foreseeable future, we're feeling pretty confident in that part of the business. Aftermarket, of course, as customers may delay purchase decisions that can drive aftermarket business for us. And the real market that is very sensitive is in the Engine business and Components, some of those on-highway markets and we're seeing that, right? You saw that on Friday with the heavy-duty truck orders for April where customers are waiting to see what happens and pausing in many cases on placing orders for new trucks. And so it's a little bit varied in different parts of our business with a big question of what will happen over the next couple of months. As Mark said, we're looking at passing on tariff costs where we can't mitigate those and continuing to invest in our new products and price for value that we're able to offer through those.

It's certainly not a case that we're seeing a widespread change in short-term momentum. There are obviously pockets where uncertainty seems to be more evident and if that lack of clarity lets us to believe that the right thing to do right now is withdraw guidance versus constantly tweaking it for every latest change in momentum. So we didn't do that lightly. It's not we're not trying to foreshadow anything other than that the uncertainty is high, but it's very much varied, and hopefully there's going to be a change and we'll be happy to reinstate that guidance as quickly as we can.

Our next question comes from Jerry Revich with Goldman Sachs.

Yes. Hi, good morning everyone and Chris and Nick, congratulations. I want to ask in Power Systems, really fantastic performance from a baseline and also relative to the Analyst Day targets sitting here today, obviously, got some volatility on cost over next year. But can you talk about where we should be thinking about margins moving forward for this business? Is the level of performance that we saw in this quarter, should we be thinking about that as the run rate going forward as we think about what incremental volumes could look like over the next couple of years once we do get through this low visibility spot, Mark, that you spoke to?

Yes. First, thanks and good morning, Jerry. What I'd say is there are no significant one-off items in those results, so those are pure operating results. Of course, they're going to depend to some extent on the ebbs and flows of demand in individual segments. The only thing I'd point to in those results is that the aftermarket sales were very high. They're probably higher than we would have anticipated three months ago. So right now, that's the only thing that I would say looks, yes, probably higher than we expected. But other than that, the business has made tremendous improvement and it's continued to improve quarter-on-quarter. I would say the results were a little bit better than we expected, but mostly down to the strength in aftermarket, not the underlying performance of the business. So again, as long as the demand trends continue, then it will be continuing a push to maintain very strong margins and improve where we can.

Super. And then separately, you mentioned, Jennifer, in the prepared remarks just the uncertainty around EPA27. In the scenario that EPA27 doesn't move forward, can you just talk about Cummins' response in that environment because obviously you folks have invested a lot in the next engine family and how should we think about potential contract renegotiations 27 plus if we don't get a changeover with your large customers on-highway?

Yeah, great. Thanks, Jerry. Our current view is likely we'll see revision and a rulemaking process around greenhouse gas Phase 3. And so those regulations will change from what we have currently on the books and those go into effect, of course, starting in 2030. We still anticipate a NOx regulation in 2027. We're actively working with EPA on their work to look at opportunities to lower cost and impact of those. And probably one likely thing that will be looked at is this requirement for a longer emissions warranty that customers purchase. So today customers have the option when they buy a new vehicle to purchase an extended warranty. Some of them do, in particular in heavy-duty, but the regulations as they are today would require everybody to purchase that. So we're continuing to invest in bringing these new platforms to market with that 27 regulation. It's difficult for me to speculate beyond that on other changes. But of course, if there are further changes, we'll look at revisiting what we're launching. But we intend to continue to launch as planned currently.

Right. And that's the same question for all engine manufacturers, right? The whole industry has been investing in new products that we're all wondering, hoping for clarity.

Our next question comes from Angel Castillo with Morgan Stanley.

Thank you for taking my question. Listen, I know it's incredibly a lot of or a lot of uncertainty out there, incredible amount of uncertainty and just very wide range of outcomes. But I was wondering if you could perhaps talk a little bit more about one specific scenario for 2Q, meaning, there's tariffs that are already in place today that you have a little bit more visibility to. So if we just kind of put aside maybe some of the reciprocal or areas that are paused, can you just talk to what is the impact or kind of margin and sales volume that you kind of see, based on orders backlog in terms of paying today for 2Q? Just want to get a better sense kind of directionally what that implies very near-term accepting that you're in term there might be more?

The impact of tariffs on our financial results in the first quarter was minimal. The strong results we posted had almost no financial effect related to tariffs. However, this situation is likely to change, particularly as we move into the second quarter, which may contribute significantly to uncertainty regarding demand in the latter half of the year. While there is already some uncertainty, our visibility into the second half is limited. We will report the impacts of the tariffs as we progress with our financial results. It’s important to note that we expect these impacts to accumulate over the next few months, and there will be some delay between ordering, incurring costs, and mitigating those expenses. Therefore, during the second half of the year, we anticipate seeing the full extent of the impact, provided that the tariffs remain unchanged, although that is a significant assumption. Ideally, that assumption won’t hold, but if it does, consumers of equipment and suppliers will begin feeling the effects in the second half. We will keep you updated along the way, as there are many factors at play. While everyone is focused on calculations, our main concern lies in the economic environment and overall demand. Currently, tariffs will have a notable impact on our costs at Cummins given their present levels. We have strategies in place to manage this situation and will communicate those plans going forward. As previously mentioned, we are taking steps to mitigate costs where we incur them, and we will seek to pass these costs on, albeit with some delay.

Understood. That's very helpful. I have a broader question regarding Power Systems. You mentioned some strength in the aftermarket, particularly related to data centers. I usually think that large backup generators don't have much aftermarket demand, especially in the data center segment. Could you explain what is driving the growth in demand for aftermarket parts in Power Systems? Additionally, if there are more purchases related to data centers, what does that indicate about the operation of your assets? Is there a possibility that they are substituting for primary power due to shortages or are there other factors affecting the usage of your assets?

Yes, I appreciate the question. I think what's happening with Power Systems, which is I understand why I'm not being critical, like the lens is all zoned in on data centers. What you see in aftermarket parts is the use of all of the applications, mining, oil and gas, marine, gen power gen for the broader economy, rebuild activity, all those things are contributing and in fact some price increases and aftermarket are all contributing to the strong revenue. It is not a data center driven phenomenon in the moment. Eventually, there will be some parts consumption on this, but it will be nothing like a mining engine or a frac rig. So I just wanted to clear that up. And I would just take this opportunity to remind people, the performance improvement in the Power Systems business is not driven by fair winds in the data center, right. There's been a broad-based improvement. We're very appreciative of the opportunity to serve the data center customers and that's positive for our business. But the Power Systems leadership team has done a great job in driving margins in most parts of what they do below the surface. So I just want to make sure we're enthusiastic about data center demand. We're not changing that enthusiasm. But this is a much bigger story; the improvement, and the aftermarket really relates to what's gone on in years before. I hope that helped him.

And maybe just one other reminder as we think about the Power Systems business and its markets is there's a strong partnership between Power Systems and our distribution business. So just in PowerGen, about half of the revenue shows up in Power Systems, the other half in the distribution business similar in aftermarket, the distribution business plays an important role in the service that's provided to those customers.

Our next question comes from Tim Thein with Raymond James.

Thank you. Good morning. And Mark, it was nice of Chris to cook up these new snazzy slides on his way. So it was good.

They told me I was very old-fashioned.

Just on Mark on the business, maybe we can dig a bit more on the margin performance there and specifically on, you mentioned aftermarket being a contributor, so maybe just a comment in terms of your expectations for parts as we look forward. And then, I guess related to that on the JV income, I know those technology fees can move around a bit, but that was a nice tailwind. What just as you think about kind of the balance of the year, if you're still expecting this is not just the engine business, but JV income to be a headwind to profits for the year, is that still the expectation just given some of the uptick in China? So thank you. Those are my two-part questions.

The engine business margins have increased, and we are focused on improving them further. In this quarter, JV income has risen due to some tech fees, though these may fluctuate and might not maintain this rate. Demand from China has remained steady without significant changes for some time, and looking ahead, we might see a slight decline. Our product coverage, also known as warranty, has been very successful over the years, especially in the engine segment, which contributed positively in the second quarter. Product coverage costs were 1.9% this quarter, which is better than our typical range of 2% to 2.5%. We are optimistic about strong parts demand continuing despite the uncertain environment, but the future remains uncertain. We also introduced new pricing in the light-duty sector, contributing to the improved engine business. While the year has started well, we anticipated some increased truck demand in the second half, but recent trends in truck orders have been disappointing. We will need to monitor the situation closely, as many factors may influence our performance moving forward, particularly overall volume, which poses a key question.

And I just want to remind you, as you look at overall really strong performance in Q1, even with softening in North America truck, we remain focused on the key areas we've been talking to you about, including in our last Analyst Day, even as we manage through uncertainty and tariffs and work to mitigate tariffs. So improving gross margin in the business, we have a growing aftermarket population that allows that aftermarket market revenue to continue to grow over time, and we're still investing in critical areas. We continue to invest in capacity expansion in the Power Systems business and these next generation engine platforms while also monitoring the pace of decarbonization and regulation and pacing investment in other areas. And so, we continue to be focused on that even as we navigate through this uncertain time.

Our next question comes from David Raso with Evercore ISI.

Hi, thank you. The comment earlier about more worried about demand destruction, just curious, a very understandable view just from a broad macro view, I can appreciate that. But I'm just curious, are these comments based off of already communicating maybe what your cost increases would need to be and a pushback from your truck customers, or is it even the end-user of the truck saying, 'Hey, at that price increase, we'll cancel backlog?' I'm just curious how much is this a ready sort of floated price increase that would be needed to cover your cost that's getting that reaction, or, again, is it more just a broad and again understandable, just a broad macro view of course these tariffs can hurt the economy?

Yes. David, what I'd say it's really uncertainty and a broader thing. I was at ACT Expo a week ago today, talked to many both OEM and fleet customers. They just don't know, right? They're just waiting, because there's huge amounts of uncertainty on what's going to happen both economically and with tariffs. And so, that's really it. It's the wait-and-see.

And that said, I know you don't want to go into a real exact quantification, but just to level set everybody, can you help us with your greatest exposures to cost, be it 6%, 7% of global COGS is Mexico and China, something like that so we can at least quantify it? And at the same time, hopefully, if the tariffs come down, quantify in a positive way? And also, what mitigating factors have already been put in place, or at least are imminent based off the tariffs of today?

Yes, I'm just going to be honest and say I'm not going to answer all of those questions for some of the reasons I said earlier. What I can say is, our U.S. on-highway engine plants, our MCA complied, right. So in the terms of the operations that we do for our on-highway markets, which is the largest proportion of our business, we're in many markets, but that's the largest proportion. We are MCA compliant for all of those large engine plants. It's really what happens here from these tariffs. Yes, there's some exposure to China. Yes, there's some exposure to Mexico. Yes, there's some exposure to all some of the other countries as well. But we're going to quantify that on a quarter-by-quarter basis. We're working through all of that with suppliers, with customers, and we'll provide an update as we go forward.

Our next question comes from Rob Wertheimer with Melius Research.

Hi, good morning. It was a remarkable quarter on margin on a lot of fronts and I understand the comments within Power System on all the work you've done. Nonetheless, I do have a data center question. You mentioned China, I wonder if you'd be willing to sort of talk about for one, I'm not 100% sure how you serve data centers there, whether it's direct or through JV? And two, I wonder if you could provide any context or color around size geographically in the data center market or momentum et cetera? Is this largely a U.S. phenomenon or are there other areas that are importantly big?

Well, the trends that are driving data center growth are global trends, right, increasing use of AI, data storage going into cloud digitization. And so those underlying trends are global trends. Our market we have global markets, but in particular, U.S. and China have been areas where we've seen a lot of growth. And like we serve the U.S. market through our U.S. plants, we primarily serve the China market through plants in China including joint venture plants that we have there.

Yeah, just to add on that Rob, the primary backup gensets in China are run with the 60 liter engines, which are made in our Cummins Chongqing engine plant there. So, that's the primary source.

Yeah. And like other major markets, we are one of the very leading players, right? It's a very select group of companies that are relied upon in this industry for backup power.

Our next question comes from Kyle Menges with Citigroup.

Thank you. Jen, I wanted to touch on the comment you made just about the PowerGen business and you had just mentioned about cancellations and push-outs and being able to reallocate those orders. Hypothetical or is that something that you're seeing today?

We're not seeing significant changes, but it's not atypical for some of that to happen, which we have seen. And as I said, we have when it happens and expect that we continue to be able to reallocate. We have a lot of customers that would like us to deliver some of these products sooner than is currently scheduled. And so I wouldn't describe it as a broad trend, but a limited one that we're seeing.

And another one, it's the business with the least visibility to any changing economic sentiment overall so far.

Right. Makes sense. And then could you guys just touch on a little bit any sort of tariff mitigation actions you've taken already? And then just any mitigation steps you're exploring? And can you remind us, is there any sort of tariff pass-through baked into any of your contracts? That would also be helpful.

Yes. Mitigating during times of significant uncertainty can be challenging as we await more clarity on the future of tariffs. I can say we have implemented some mitigation strategies, including changes to our inventory management, anticipating higher tariffs, and dual sourcing within our supply chain. These are proactive steps we've taken. As we gain more insight into how tariffs will change, we may adjust our dual sourcing strategy accordingly. There are alternative options available, but developing these will take time. Overall, we have a comprehensive strategy in place and are actively exploring different options to determine the right timing for implementation.

And as we said, we're working through all of this, which I think if you're not in the business, it'd be hard to appreciate how much work it is for supply chain and other groups. Yes, we're working through all of that with suppliers and customers right now. So we're not going to comment anymore.

Our next question comes from Tami Zakaria with JPMorgan.

Hi, good morning. Thank you so much. My first question is on price cost. Are you able to share what price cost was in the first quarter?

Yes. So we had about 2% well, almost exactly 2% gross margin improvement year-over-year, of which we had about 3% of price cost improvement and 1% of negative volume impacts. That price cost impact varies quite a lot between segment and you can figure that out from some of the improvements we've driven over time. And costs include many things including the improved warranty cost over time. But that's the macro picture.

Understood. That's very helpful. And then the second question is, I understand Cummins engines are primarily made in the U.S. for the U.S., which is great news long term, given all that's going on. But for the distribution and component segments, are those primarily made in the U.S. as well or what's the mix of imports that serve the U.S. market for those two segments?

The distribution business mainly involves reselling parts produced by other parts of the company. The specifics vary depending on the applications. We have manufacturing sites for after-treatment systems in Wisconsin and turbochargers in Charleston, but the complexity arises from the supply base and the suppliers we work with, which contributes to exposure related to tariffs. That's my perspective on the matter.

Our next question comes from Steven Fisher with UBS.

Thanks. Good morning and impressive quarter. I think you said that you are on track with the timing of your product launches. Can you just clarify kind of some of the timing of those launches that you had in mind, particularly around the 2027 engine and then how the outcome of these NOx rules may impact the timing there?

Yes. As I said, right now, we have not changed our launch plans on any of those products. We are planning to launch the new 10 liter and the B7.2 in 2027 as those regulations go in place. And we plan to launch the X15 diesel version in the 2026 timeframe. We'll have a kind of a split strategy across the year with the current X15 and the new one. Remember, we already have launched the natural gas variant of that new platform. And the diesel version is going to bring significant fuel efficiency improvement, so value to the customer that we believe is worth bringing into the market early. So that's our plan.

Terrific. And then just in terms of the guidance, curious kind of what do you think you need to see in order to actually reinstate the guidance? Is it actual kind of signed trade agreements? Or what degree of certainty do you think you need to be able to bring that guidance back?

I believe having a few more data points would be beneficial. The truck orders from April were disappointing. Can we expect them to return to normal trend levels? The tariffs are intended to disrupt trade, and we have observed a significant slowdown in freight activity on the West Coast, which directly affects road freight in the U.S. Even if conditions stabilize and improve, there has been a slowdown in the global supply chain. This situation causes delays at ports, making it challenging to regain momentum. Those outside the industry might not fully appreciate this. The shorter the period of uncertainty, the quicker we can achieve clarity and confidence. Conversely, a prolonged uncertainty will complicate matters. We won't be left without guidance indefinitely, but we'll eventually gauge the purchasing of capital goods and assess whether confidence is shaken or if it's just a temporary lull before positive economic activity resumes. Our commentary focuses on specific segments rather than the entire global or U.S. economy, noting an increase in uncertainty. Therefore, we would like to see more data related to the broader economy, particularly concerning the On Highway segment, which would be helpful.

Our next question comes from Chad Dillard with Bernstein.

Hey, good morning, guys. So totally appreciate that it's difficult to quantify the impact of tariffs, but I was hoping you could lay out a timeline for that impact on the P&L. So how much component inventory did you pull forward? When does it run out? When will you need to raise price to offset the cost? And then if you could share the percentage of U.S. COGS that are imports?

There are too many variables to provide a precise answer. Just to remind you, there was no impact in the first quarter due to the pause in some tariffs and certain mitigation actions. However, we expect to see a gradual and increasing impact as the second quarter progresses. There will inevitably be some delays between our predictions and actual outcomes, along with ongoing work with our customers and suppliers. We will provide updates on the impact in our second quarter results, and we hope to have more clarity then. We will also share what the second quarter impact was and our expectations for the remainder of the year. It's important to note that no one has complete certainty about the direct flow of products through the supply chain, and this situation is still developing. We are not the only manufacturer of engines, powertrains, and power systems in our markets.

Got it. Okay. So just one more. So just on Section 232, assuming that does eventually get applied, how does that impact your relative positioning? And from your perspective, like, would you consider it good, bad, or neutral versus the status quo of what we are right now?

So for those that maybe haven't been paying attention, maybe you've all been paying attention maybe 232, the U.S. Commerce Department launched a 232 investigation two weeks ago on foreign production of medium and heavy-duty trucks and parts. And so, that has the potential to result in additional tariffs on trucks and parts that come from outside the U.S. Of course, we've seen an announcement of we're in the middle of the public comment period and we'll be providing comments of course as a part of that and just emphasizing the U.S. manufacturing that we make and advocating for exemptions on imports to U.S. manufacturing through a robust exemption process and ensuring that we reflect the impact that any tariffs could have on the underlying U.S. economy. So stay tuned there, but that's the potential with 232 investigation.

Our next question is from Jeff Kauffman with Vertical Research Partners.

Thank you and thank you for signing me in here and Chris, it's been great working with you and Nick look forward to getting to know you. Mark, thank you for all the detail that you were able to give. I have one on currency. Given that so much of your business occurs outside the U.S., was currency translation a good guy, a bad guy? Can you give us an idea of magnitude? And then, you explain the price increase on the light-duty engines well with the new product at Stellantis. Can we talk a little bit more about the ASP increase on the Power Systems side? Was that also new products, product mix, larger products? You did mention aftermarket, just kind of understand what's driving that increase as well.

Sorry, you caught my attention with the pricing. Repeat the first part.

Currency.

Yes, currency. So the answer is, generally, if we could choose and we didn't deploy hedging techniques, then a weaker dollar except against the pound would be our perfect choice of combinations. But we do deploy we have natural hedges from the way we're globally organized, and then we do use some very simple vanilla derivatives. So the net impact is, no. If you ask any individual business leader, distribution in particular are more exposed to a strengthening dollar, but the net result is very, very modest to the P&L, like less than $10 million when you look at all the impacts that are the hedges. And that's generally been the case for a long time. Sharp shifts where we get caught is when there's like capital constraints and currency revaluations like Nigeria, Argentina is a common topic of conversation about what to do there. But net-net, Jeff, for the company, we're fortunate that we're close to neutral.

And on your second question, Jeff, on the ASP for the Power Systems Power Generation product, that's it's a tough one to gauge. That's really kind of a bit of a red herring because the size is so different across that portfolio. You could we have lower demand in the small stuff, think RVs or power or backup gensets at home versus strong growth in data centers. So that can flex quite a bit and it's usually not a really great indicator. But we continue to see strength, I guess through the first quarter in that big stuff, and that drives a higher ASP.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Chris Clulow for closing comments.

Great. Thank you everybody for joining and thanks. It's been a pleasure working with you all over the last couple of years. That concludes our teleconference for the day. We will be available as an Investor Relations team for the remainder of the day should you have any follow-ups. Thank you.

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