Q2 2026 Cummins Inc. Earnings Conference Call

David Rosso with Evercore ISI.

Hi, thank you. Two quick ones. For 2027, I'm just curious your thoughts on the North American truck market, the appetite for, are you finding customers have more desire to buy the 200 milligram full penalty engine, so no tech change, but they're paying the penalty, or a lower milligram that's still non-compliant, but then you can use credits to offset it so there's no price increase. I'm just trying to get a sense of the appetite of the customer for new tech but at a lower price versus I'd rather just have the current tech and pay the penalty and not sweat the technology change. And the second question, can you help us with PowerGen next year, the level of capacity versus this year, just so we have a sense of volume? I know mix is an important part of that question, but just a little of the capacity you think you'll have next year versus this year for Power General ReCEPs. Thank you.

I'll start and then let Mark build on that. David, thanks for the question. And just a little bit of a caution to say we expect that NCPs and that regulatory flexibility will stay in place in the final rule. We have a proposed rule, and some of the details of how that will work will move around. So how you described what could happen in terms of product availability, credit offsets, all that may not exactly be correct. Fundamentally, though, what I would say is that customers are interested in both. They're very excited to be able to continue buying the current products that we are offering and extending into next year, and they want to start buying the new product and gain more experience with that, and we're working right now across our different OEMs on their plans and what will be available in different truck models at what time. So there will be, you know, multiple moving parts in how this plays out. But fundamentally, we are talking with OEMs about what they want from current product, new product, what the selling of the market and the end customers that we talk to, you know, I would anticipate initially we'll buy more of the current offering, but they want both. They want to start ramping into the new product as well.

Essentially, I don't think most of them have come in the conversation on an individual base saying I want one of those or I want one of those. right but ultimately the industry is moving towards the new products it's on an extended time frame and in a fashion that we haven't seen before over recent cycles so it is somewhat unprecedented certainly over the last 15 years that for whatever the reasons the regulations are being finalized so close to the actual date of implementation but I don't think it's a per engine calculation that's really really going on ultimately we all about the entire industry not just Cummins needs to transition to the new product, so it'll be an interesting dynamic along the way.

On the power gen capacity question?

Otherwise, we're getting into too many levels of guidance right now, but yes, it'll be higher.

Our next question is from Tim Thien with Raymond James.

Thank you. Good morning. Maybe I'll just pair these two together. So, question one is just on the engine business. Curious if you can comment to the outlook for parts demand in North America, just, again, the on-highway piece specifically. I think if I read it correctly, the guidance came up just marginally, but just curious if, in general, the healthier freight markets and stronger customers, if you're seeing any pull through in parts. And then the second part is just on the China data center market has gotten a lot of airtime. And I'm just curious if you have, just from a visibility standpoint, how that compares just – you talked a lot about North America, but just do you have a similar level of kind of visibility or not in China? And obviously, that has implications for the Chongqing joint venture, which is growing and important. So maybe just those two questions. Thank you.

Yeah, on the parts, the market's up. As you said, we raised the bottom end of the guide a little bit. So we're seeing some strengthening of parts as the fleet has aged and economics are improving a little bit. It hasn't moved fundamentally from what we talked about a quarter ago, but better certainly this year than last year. And just as in North America, you know, we have strategic customers in China and Southeast Asia, and we have conversations with them about multi-year plans and demand there. So I would say the conversations are very similar. We go sit down and they say, more than the last time we met, please, how quick can you do it? Those are pretty consistent in both of those customer bases.

Call large customers in each market and a broader market participation with others.

Our next question is from Rob Wertheimer with Mellius Research.

Thanks. Hey, Mark, you touched on this earlier on the MCPs and the ETAs, 2027. But just to understand it right, if a competitor has credits, they can avoid passing the cost of that on. and do you anticipate any difficulty in passing that through yourselves or any margin impact that might arise from that next year?

Yeah, well, so how the credits will work in the end, it remains to be seen, but it's not generally you can't just use credits to offset NCPs. I just kind of correct you on that and our expectation there.

That's not specific to Cummins.

Yeah, and, of course, we can't comment on what everybody plans to do in terms of NCPs and credit usage and all of that, but we don't expect that there's going to be kind of a big use of credits to offset NCPs.

Perfect. Thank you for that.

Our next question is from Kristen Owen with Oppenheimer & Company.

Hi, good morning. Thank you for the question. Two quick ones from me. First, I understand it's probably difficult to parse out underlying demand versus pre-buy given the changes, But I do want to try to pull at the threads for underlying demand, because it does seem like the economics are improving on tightening supply, not necessarily freight increase in volume. So I'm just wondering how you're thinking about underlying replacement demand outside of the EPA transition. And then I have a follow-up.

Yeah, a lot of what we see right now is that underlying demand and replacement improving. So there is some pre-buy happening, certainly, but the fundamentals have improved, and that's driving underlying demand up. And the uncertainty that existed, you know, really until last month around regulations and all of the details that are associated with that has caused people to be cautious around pre-buy as well. So we are seeing some in the second half, but I would say it's more driven by just market improvement.

Okay. I'm just trying to square that with the increase in the pre-buy expectation in your medium-duty guidance. So maybe I can follow up with that offline. My second question is, since we've covered NCPs pretty well, I wanted to ask about the warranty accruals. That was obviously favorable from a pricing standpoint for the buyer.

But just how you're thinking about warranty accruals as we start to build this bridge in 2027, how that's going to impact your incremental margins with the more measured cadence of production right so typically when we launch a new platform of which will be launching several between 27 and 28 those come with a higher warranty accrual and then we adjust that over time as we get actual field experience our current warranty costs are running you know in the low 2% of sales range across the entire company pretty much at historical lows despite what are called historical complexity the products so we'd expect that to go up as we get more of a mix of new products in North America and then over time historically those costs either have not played out quite as high as anticipated or we've just you know addressed any field issues as we've gone along that's just a typical part of launching new products so i would say relics months ago next year's warranty costs will be more like this year's for the first half of the year maybe a slight tick up for the limited launches and then we'll move to a higher rate as we get more into the fuller launches in fourth quarter and into 2028 we're just focusing on that of course on the new products we've got more value more value more content and there's also a scaling and efficiency factor to some extent on some of the components as we go through but by and large the first nine months are going to look if we just assume equal demand are going to look more similar to how we're performing now and then it'll start to change in a for a short period of time and then improve again over time, that would be the goal.

The extended limit of production, though, will allow us to, you know, get on any issues that we see quickly and address those as volume starts to ramp. So over the long term, it should provide a positive from a quality perspective.

Thank you. We have reached the end of our question and answer session. I would like to hand the floor back over to Nick Ahrens for any closing comments.

Thank you. That concludes our teleconference for the day. Thank you all for participating in your continued interest in Cummins. As always, the investor relations team will be available for questions after the call.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.