Good afternoon, everybody. Once again, I'm Jerry Revich, and we're really excited to have with us from Cummins, Nick Aarons, Executive Director, Investor Relations. We also have Colin Curtis in the audience here, Senior Analyst, Investor Relations. Nick, thank you so much for joining our conference. Thanks for having us. Appreciate it. So we'll run the conversation in the fireside chat format, you know, maybe as a starting point. So one of the big news items from the analysts today was Cummins introducing a new natural gas, a large 120 liter engine platform aimed at prime power. Can you talk to us about the development curve? You know, are you folks essentially dusting off the hedgehog design and that's why the time to market is so fast or is it more complex than that?

Yeah, you've got the general idea exactly right. So when we design these engine architectures, I would say the underlying 80% of it is a common architecture. When we think about that 95 liter diesel that we designed and we've gone to market with, that's our primary product in the standby backup power space. And when we designed that architecture, we did it in a fuel agnostic way that offered us the opportunity that as and when the gas prime opportunity arose, that we could make that further 20% investment to customize it into that gas prime application so that's exactly what we're doing and what that allows us to do is make a very efficient incremental investment on that core architecture get to market sooner and then also leverage a common supply chain for many of the parts as we think about the risk profile associated with that investment so to kind of bring a little bit more color to that that shorter time to market we're really looking at second half of 27 as being our development milestones and hitting those development milestones that would allow us to then take that prototype or pilot customer order which we do have strong demand for right now but we're gonna wait till we hit those milestones to actually take those orders and then we would be looking to go into limited production second half of 28 on those same limited production pilot orders and then assuming the development and all of the pilot efforts go according to plan we look to scale production 29 and into 30 as we think about the shape of that coming online and and in terms of the key development milestones what exactly do we need to see relative to where we are now in

in the process because you folks had the hedgehog essentially designed 15 years ago So do you have any prototypes that are running already or we're truly talking about first prototypes back at 27?

Yeah, I mean, we're going to have different prototypes as we naturally go through our development cycle. But really what you're talking about is getting to a maturity level with your development program where you're looking at really driving improved fuel efficiency, which is incredibly important for this particular space. also then expanding the number of cylinders on that core block as we think about expanding to that 130 liter solution driving fuel efficiency and then durability is another key element you want to make sure that your durability is operating at a very peak level before you get those pilot units out so those are really the development milestones that we're working towards is to get the pilot the prototypes we have now performing at that level that then more comfortable putting that into a customer application.

And in terms of the strong customer demand, I'm assuming we're talking major hyperscalers. Very interesting. And the industry is shifting towards, in terms of engine production, 30% plus prime power, 70% backup.

It sounds like customer demand is there it sounds like it's possible instead of the five percent that we spoke about at the analyst day if things go well 2030 we could have 30 that's prime sure so i think the important way to characterize this first to talk what is in the nine billion dollar number that we put out at our analyst day and the key thing is underpinning that is we see very clear demand in the diesel standby product growing from where we're at this year to that nine billion dollar number that we that we talked through so the 20 gigawatts of incremental capacity is largely underpinned by strong diesel standby and that nine billion dollars is largely underpinned by diesel standby where the opportunity lies is incremental to that the the gas prime playing in as we talk about 29 and 30 and ramping that product is really a portion of 2030 can be gas prime but the gas prime opportunity is really 2031 and beyond as you think about ramping full-scale production and the potential to utilize that capacity that same 55 gigawatts of capacity and then yeah so you know you folks are adding 20 gigawatts cats adding a similar amount MTU is adding capacity is industry banking on 100 gigawatts of data center demand is that what people are solving for? Sure. We're watching the things play out in the industry and we see the same announcements. I think the most important thing is to flip it back from a Cummins lens. What are we seeing? And we see very strong demand from our customers out through the end of the decade and even believe that that will sustain into the early 2030s from a diesel standby space. The more important equation is the capital efficiency of how we're looking at meeting that demand, the $450 million for the incremental 20 gigawatts will largely be within the four walls of existing facilities, and we see very strong demand to pay that back very quickly, and we are doing it in a capital-efficient way where we're not adding substantial cost to our underlying cost structure. So as and when we get to those outer stages of demand potentially waning, we haven't added a lot of cost, and we've more than paid that investment back very quickly. The last thing I would call out is where Cummins is positioned relative to some of these other folks that are bringing capacity in. And when we talk about what a hyperscaler looks for, when they're looking at where am I going to place that order for that standby unit, they're really looking at who has the best quality engine. And there's only a handful of players globally when we talk about high-speed diesel reciprocating engines. Cummins is one of the keys. We've also talked a lot at our investor day about how we're vertically integrated around that with alternators, switch gear, controls, radiators. That vertical integration allows the performance of that unit to actually be differentiated. You then look at the fact we've been in these markets for decades now, and we have strong established relationships with many of these hyperscale players. The third element is then our industrial channel that can both commission these, service these, and make sure that as and when there's a need for parts, they're on site very quickly. And if you go through that algorithm, the key element is that as and when demand wanes, we still think that Cummins will be one of the first stops for these folks for any lingering needs they have.

And, you know, the 20 gigawatts of additional capacity, you know, just over 400 million, that's $20 million per gigawatt, super efficient. If you were to add more capacity, what would the economics look like on the next 20 gigawatts? How much CapEx would that be just to help us understand what it looks like?

Yeah, it remains to be seen. I think the important thing is we look back to 2024 through the end of last year. We added nine gigawatts for 200 million. So we have a history of demonstrating taking this in increments rather than wholesale changes. And again, to your point, we've done that the last tranche we did was about 20 million per gigawatt. We're now doing that again where it's another 20 million per gigawatt. We would look, if demand continues to build from where we're at, to take a similar incremental step, the balancing act that we're looking at here is what can we continue to do within our existing four walls and down in our supply chain versus when do you reach that point where you actually need to do more of a greenfield investment? And that's the Constant Balancing Act we're looking at in terms of what would be incrementally next.

And then, you know, when we're talking about the adding 20 gigawatts, that's across the power categories. But is it fair to assume that we're talking about greater percentage capacity additions for the three megawatt units for data centers? So the percentage increases is higher than 50 percent. it's more significant for the three megawatt units?

Well, I think the bigger thing is where we're adding the capacity is across our 95 liter, 78 liter, and 60 liter solutions. It's also across our global footprint when we think about Seymour, Indiana, Fridley, Minnesota, UK, India, China, and then some aspects of Brazil. So you're really looking at across those engine displacements, where do we have existing capabilities within our footprint? what is the local supply chain ability to bring on incremental capacity across those is how I'd characterize it.

And then the 95 liter when we visited you folks at Seymour that was the only place where we were making the 95 liter I believe at the time.

At that time yep.

What's that look like now?

So we'll be expanding that to Daventry and then we're also looking across that broader footprint if there's other opportunities where we look to expand that.

And that's included in the 400 million the third site it is okay so we're trying to decide between India and China the two sites are within the 400 and remains to be seen if we push it beyond that to a third site okay I understand so 400 is includes one more site not two more sites correct yep okay very interesting and then in terms of the right application the US is 95 liter we've spoken about 60 liter has been being used more in China? Is that still happening or with the additional capacity as the idea they really shouldn't be using the 60, they should be using the 78?

Yeah, so the incumbent solution in China is two 60 liters paired together to essentially create a 120 liter equivalent solution. The reason for that is you have a lot of 60 liter capacity within China that was easy to pair together to meet their needs. As that market continues to evolve, we do see that that could migrate up in terms of the displacement, but that would be an area that we continue to evaluate as we think about our product offerings.

Okay, and then in terms of lead time, so we've heard that the lead times for reciprocating engines are now out into 2029. Is that the case for diesel resips as well?

Yeah, we are taking orders out to 2028. What I would say is that demand remains strong beyond that. The reason orders are in 28 is that's how far out we've opened up our order book.

And Nick, at the end of the day, you know, you, Jenny, and I spoke about the industry data point that maybe 200 megawatts for our competitors' capacity was moving around. Have you since then heard about any of that? Are you seeing that at all in terms of maybe people double ordering? There was, you know, a large-scale project that was just canceled. Any movement in the backlog?

We have not had any significant movements in the backlog. It's been more of you know one hyperscaler may have thought when they placed the order a couple of years back we wanted to go to a certain site in a certain location and it's been more shifting the same order to a different site in a different location rather than a wholesale change or cancellation of our orders so you have not had to place from one customer to another customer it's the single customer who says it's largely shifting within the same customers yeah and that's a function of them playing the permit race across multiple sites? Yes, there's just different things that are driving their timing at different locations.

And then you mentioned you're taking orders out to 2028. What steps are you taking to make sure people don't place speculative orders?

So if you look at our, they take different structures across our contracts, but we tend to have global framework agreements with these hyperscalers, broadly speaking. and then on the specific orders there will be different punitive elements of that if they were to cancel orders that we would receive different compensation for that any chance we get down payments and progress payments implemented in this market something we're always striving for at this point in time it's not a prevailing approach but something we're always striving for and continuing to look at and then in terms of how much availability do you have left in 28 In 28, so this latest round of capacity that we're announcing will certainly help in 28. I'm sure we'll talk a little bit about the trajectory of how that capacity comes online, but that will help us continue to keep the order book open for 28. But again, we see that strong demand coming through it. So I think relatively soon we'll be tipping into 29 from an order book perspective.

Yeah, please, we'd love to unpack the timing of the capacity. What's that look like?

So the easiest way to talk to it is really when you look, we are starting to deploy different capital now, and we would start to see that capacity come online beginning in 27. And think of it somewhat linearly, 27 through 30, with a little bit of an outsized step up in 2028 is the key element. The other piece that I just want to make sure that we articulate within this is, remember, within that trajectory I just talked through, is you have capacity coming online in 2029 that will be contributing to that $9 billion of revenue in 2030, and you also have capacity coming online in 2030 that would not yet be meaningfully contributing to that 2030 revenue number. So more importantly, when you think about last year, we exited the year with capacity. As that translates to revenue this year, there's been a little bit of a lag as that capacity translates through to power systems, then translates through to our distribution business. more distinctly put, in 29, as we exit capacity in 29, the full run rate of that capacity won't really be all the way online until you get into the back half of 2030. And then 2030 capacity that you're bringing online won't fully be producing the revenue within 2030. It's going to be lagged into 2031 and beyond.

I think it's fair to say you beat your last plan by about six to nine months. So we'll see on that. And then, you know, in terms of just the $9 billion number, so 20 gigawatts, I think PowerGen pricing is about $600 per kilowatt. So that would suggest $12 billion revenue opportunity. I just want to make sure I'm not missing any moving pieces when we talk about the $9 billion, maybe some intercompany transactions, but can we just unpack Yes.

I mean, I think that the bigger element to talk about there is where we're starting at this year with our broader power systems business, that total capacity that we talked about, the 55 gigawatts is across all applications within power systems. And then we talked about the proportion of that coming online in 29 and 30 that may not contribute to your full run rate in 2030 that you alluded to. But really the key growth drivers within that power systems business are 2% to 3% across the broader company, which is about $4 billion revenue profile from data centers in particular. Then you have our mining business that will also continue to grow, and then the aftermarket proportion within mining. And the $4 billion I said for data centers does include a proportion for distribution. So there's a subset of that that's in the power systems piece that you alluded to for the $12 billion.

And I just want to make sure I'm on the same page with you. So $4 billion, and call it a billion for mining, that's well short of roughly the $12 billion revenue capacity. I just want to make sure.

Yeah, I'm talking growth from where we're at right now. So the total run rate in that business is about $8.5 to $9 billion with our guidance this year. You're bringing on the incremental capacity to get to your $12 billion, as I understand it, total run rate for power systems. So as we talk about the growth algorithm, maybe I'm misunderstanding your $12 billion. So if you can step back.

Sure. So, yeah, that's why I wanted to get on the same page with you. So market price for re-sips, we're told, is about $600 million per gigawatt. And we're adding 20 gigawatts. So that would suggest $12 billion of additional revenue capacity for companies.

So you're talking the $5 billion of revenue that's power systems and distribution today. And then the $12 billion number you're talking about is also power systems and distribution price out. It's not just power systems, to clarify. The important nuance here to really outline for the broader group is our power systems business today is about a $3 billion data center business within power systems. a proportion of that is sold through our distribution business where it's essentially doubled from a content and our total external sales to power to data centers are five billion dollars today I think the number you're quoting for 2030 is all in distribution and power systems and the key element that I would call out there is again you've got 29 and 30 a portion of that capacity you're bringing online in those years won't really pay off within 2030 would be the key element that I would call out there.

Okay, super. And then in terms of what we've seen with the data center pulling power away from other applications, we see a scarcity of power all the way down through much smaller gen sets. How are you folks thinking about adding capacity in those areas? Is the supply chain any different at all versus the high end? Is that an incremental opportunity?

It could be. I think the biggest way to point to is 95 liter is the first priority for these customers. That's supply constrained right now, pushing orders out to 28, like we talked about. When we revised our guidance at the end of Q1, it was largely because people weren't able to get the 95 and they're moving down into the 60 liter and the 50 liter solution. So now we're largely tapped out in that particular space. Back to where we're adding the capacity, it's really in that 60, 78, 95 liter space. We're not seeing them drastically move into the lower displacements at this point in time.

Okay, and then from a supply chain standpoint, with the adding the 120 liter capacity, can you just talk about the steps that you're taking to make sure you can essentially provide enough supply to both areas?

So if you look at where supply constraints typically happen, it's your large components, blocks, heads, crankshafts, and then even your injectors. So at any given point in time, one may be a limiting factor. You resolve that. The next one becomes your limiting factor. So when you look globally across U.S., U.K., India, China as well, depending on the displacement depending on your local supply chain you're going to run into any one of those as your limiting factor so we're constantly working to bring that capacity online through suppliers and then what we're doing within our four walls are increasing our throughput down these production lines and also increasing our ability for local machining mainly of the blocks because that is something when we brought it in-house we've been able vertically integrate that and increase our capacity by relying on that internally rather than external providers.

And in terms of the margin opportunity within power systems, you spoke about EBITDA margins being sustainably north of 25 percent.

Incremental margins have been over 40 percent. And so as we add this additional supply, you know, incremental margins should really be pretty close to gross margins, which would take up you've done margins even higher i just want to make sure we're not getting up over our skis as we because the world doesn't run the spreadsheet yeah exactly so the the key element is you're exactly right we've driven very strong incremental margins the last few years the key element to call out within that is we've actually taken costs out of our underlying cost structure at the same time we've increased throughput which has allowed us some outsized incremental margins within our cost structure as we bring additional capacity online we think that it's going to be at a floor 25 which is what we got into the broader company at our investor day at a minimum it'll be 25 but it will not be nearly the 40 that we've been driving in the prior few years because we just can't continue to reduce our cost structure and um how are you managing price in terms of what price we've pushed price a lot the last few years but they're diminishing returns in terms of how much further we can drive that so when you look at price cost we would still anticipate being favorable over the next few years but it won't be outsized got it and then they could I just want to make sure I'm triangulating the lead times common appropriately so we're out into 2028

we're gonna add between now and then somewhere between 5 to 10 gigawatts of capacity, so we're sold out relative to 5 to 10 gigawatts of higher capacity than today.

We are in the process. We're taking orders out to 28. We're in the process of filling up that order book for that incremental capacity right now.

Got it. Super. Can we shift gears and talk about EPA 27?

Yeah.

The EPA was supposed to give us an update in the spring. I think it's June 10th today. So what's the latest?

What are you hearing? It's funny. We've been talking to investors all day, and it's the same thing we've been saying for the last five or six months. We anticipate hearing in the next couple of weeks is the latest message. So truly, this time, we do think in the next few weeks, we should get clarity around EPA 27. Largely, what we're hearing is the same thing we've been communicating. The 35 milligram NOx, also the extended warranty falling off, are the key elements that we anticipate will come through. And what's taking them longer? That's a great question. I do not know. What I would say is that we continue to be actively engaged with them, as well as the broader industry, to try to get resolution to this as quickly as possible.

Any chance that they say June 2027 instead of January 2027 for implementation? Is that possible at all?

I would say never say never, but our best guess at this stage is 35 milligram NOx, extended warranty falls off, and we have a pretty high degree of confidence in that at this point in time.

And I think your guidance embeds higher pre-buy and medium duty than heavy duty. Is that a fair characterization of how you folks thought about it?

A bit. I think the bigger thing to characterize is in our guidance, we have about 10,000 to 20,000 units of pre-buy for heavy duty, which is actually not very much given where we've traditionally been and the reality is we're in a condensed timeline here of only another six months to get that pre-buy in and we do think we'll be in a supply constrained environment to fulfill that pre-buy because demand is starting to pick up and the question is really going to be how quickly can supply chains ramp in order to meet that demand and the heavy-duty and what about medium-duty less less pronounced in medium duty is still some pre-buy, but we have announced that we're pushing out our EPA 27 product to January 1st of 2028. So I do think that has alleviated a little bit of the pre-buy dynamics. And then again, the key element there is we're waiting for clarity around the EPA 27 to understand how we should be pricing our existing product into next year. And once we get clarity on that, that could be what could drive some pre-buy behavior this year.

And when you say clarity Nick it's a question around warranty because the the Knox is all set right there's no technical elements that are gonna change it'll be the same product but when you look at what it will be is since it won't be compliant with the 35 milligram of Knox what will be the regulations and any potential impact to our cost that then dictates our pricing into the market right yeah and obviously you folks manage tariffs completely seamlessly so that's probably a fair way to think about how it'll flow through.

Yes, fair.

And then, you know, on the TerraPoint, so obviously pure pass-through for you folks, but does the recent change in terms of including some products, and obviously you don't make construction equipment, you don't make farm equipment, but are there any impacts of the recent regulatory changes that maybe reduce the total cost to Cummins customers, or is there anything at all in the supply chain that's impacted by this last round of move from 25% to 15%?

Yeah, I mean, the biggest element here is I think we've had over 70 iterations impacting our cost structure that we've been then priced through to our customers to negate those. We've largely got our internal machine going in terms of digesting these things and quickly turning around to pass those through to customers. So there will inevitably be puts and takes across these things, But the key thing for all of you to understand is really we intend to be neutral on these in terms of overall EBITDA impact.

And what about just in terms of it would just be helpful if the cost came down per engine? Is there anything that in this last round of revisions is going to be helpful at all or not much?

Still digesting. I don't think it'll be meaningful compared to everything we've dealt with the last year. Cool.

Accelera, so you folks, as a joint venture, paused the investment in battery plants. Ford's using its battery plants capacity to supply data center batteries. Is that an opportunity or is that a different type of specification? How are you and the joint venture partners thinking about it?

Yeah, we've looked at it. It's always going to be an opportunity. But we've made the decision that the right capital choice for the partners was to pause further investments. And really, we're looking at that joint venture at this point in time, largely being focused in on highway battery cells and waiting for the right time when we see demand picking up there before we make that capital investment. our battery energy storage solution that we talked about an investor day that's targeting the power generation space is really you know the cells within that are more of a commodity okay when you look at deploying it in battery energy storage so to deploy a significant amount of capital to produce those didn't make a lot of sense at this point in time so we'd rather source those in and where we add the value is the integration of that into a system that then operates with high-speed gas reciprocating engines on the diesel side, the gas side, or even the grid. And that's where we're able to add value within that solution more so than the cells.

And then in Accelera, when you folks made investments initially and started moving forward on electrolyzers, the regulatory backdrop was different. As we take a look at the impact of the electrolyzer business today, where you folks essentially will complete or exit projects, what's the revenue and cost contribution of electrolyzers to the results in 26 and the pace of project completions that we should be thinking about?

Yeah. So I won't talk specifically to electrolyzers because we don't guide within Xcelera. The key thing I would tell you is that our original guidance, you saw us revise that favorably down to 270 to 300 million this year. And I would say that within that 270 to 300 million, you still have legacy costs from our fuel cell business that will come out as we move into next year and then you also have electrolyzer costs within the 270 to 300 this year that as we move into next year will also allow us to continue to improve the cost trajectory in that particular business. So we are laser focused on taking those costs out that are still opportunity to drive that into next year and then what remains is we will continue to invest in what we call our e-mobility business. So battery electric solutions, traction systems, and then also e-axels, where we do see some limited adoption in transit bus and school bus applications. The challenge we have is there's not enough volume for the positive gross margin products we have in that space to offset the underlying costs of those. But we will continue to invest in that space, but that's the entitlement to move the losses down from the $270 to $300 this year down to a much lower level as we move forward.

And roughly speaking, the losses on those projects, are they a small subset of the 270 to 300?

We're not characterizing specifically, but I'd say there's a great opportunity to continue to move those losses considerably lower from where we're at this year.

And in terms of the pace of that, is it similar to the pace of improvement we saw this year versus last?

Yeah, that's a fair way to characterize it, yes.

And then in terms of the engine margins, so a number of moving pieces, assuming EPA 27 happens on January 1, you folks are delivering 5% higher fuel economy. On prior regulations, you folks repriced your product for the value that you're generating, where even with warranty costs, margins still expand. Is that a reasonable paradigm based on history for us to focus on for 27?

Yeah, I think it's the right approach when you look over the product life cycle. The key nuance within 27 to look at is you're in your first year of your product life cycle that we've talked through here. So you're going to have your average selling price increase quite considerably from the higher content. Within that, though, you're also going to have higher warranty accruals because we're in the first year of that product life cycle. And over time, 28, 29, and into 30, as the product performs, we would anticipate those warranty accruals improve, and you're also going to have a volume dimension to navigate in 2027 where you're naturally going to have lower volumes because of the pre-buy happening in 20 and 26. So when you look over the lifecycle, yes, we would anticipate those margin profiles improving with a key element within 2027 that we've got to be careful on what that first year looks like from a product lifecycle perspective and also the lower volumes from the market cycle.

Got it. And, you know, given the challenges in financing for some trucking customers, given what the trailing results would look like, it's possible that this will be more like 2010 than 2007 from a Cummins transition standpoint if we're not able to get much of a pre-buy. Is that a reasonable way of thinking about it?

Yeah, I think that's right. So any pre-buy that we get this year simply means that the first half of next year lower demand. So the fact that we have 10,000 to 20,000 units of pre-buy this year is not nearly as pronounced as we've seen in the past. So you would expect less of a cycle going into next year.

And what's the scope for customer stocking, particularly in medium duty, to avoid the additional costs?

It remains to be seen as we look at kind of how things play out over the second half. But what I would say is we've seen production and demand for our medium-duty engines pick up quite a bit within Q2, which we alluded to at the end of our Q1 earnings. So we're seeing production ramp in the medium-duty space as far as how that shows up in the channel versus end retail sales remains to be seen over the second half.

And in terms of cadence of demand, so we're hearing because of how fast diesel prices move, you know, the first half of May was pretty rough. And then we had just a step change higher and spot rates in the back half of May. Is that consistent with the cadence of order activity that you saw and with your parts business as well? Did you see that massive acceleration that we've heard about from the channel? Is that a fair characterization of the way the market played out?

Yeah, I would talk more in terms of our first fit production. We are seeing the production demand scale, which is what led to our higher guidance coming out of Q1. on the aftermarket side of things, I would say that we've yet to really see a significant step forward consistent with what you've outlined.

Okay, got it. And in terms of, you know, thinking about the cash that we're going to be generating, you folks have been very clear in terms of cash return to shareholders. If we're sitting here in two years and Cummins has made a big acquisition, what would drive that? What type of business would that be? Are turbines completely off the table? Just talk to us. If we do see a meaningful acquisition, what would that look like?

Yeah, I think first and foremost, the key thing is really our capital allocation strategy is 50% of operating cash flow return to shareholders dividend and share repurchase. That remains our core focus. When you look at acquisitions, you know, really where you should anticipate we could be active is our smaller acquisitions that supplement our existing portfolio more so than a big step out like a turbine or something like that. The simple fact of the matter is we've not historically had very many transformative acquisitions, and generally those tend to be more closer to the core rather than something that's a further step out.

Got it. And Nick, since the last time you and I caught up, Deere had a big IEPA recovery, and I know for you folks, it's a pass-through. Any nuance from a timing standpoint? And I know you had a little bit of IEPA timing in the first quarter. Just calibrate us on if there are any moving pieces we should think about, knowing that ultimately you'll be neutral.

Yeah, the bigger element that we called out within our Q1 is we were neutral and immaterial across the company within Q1. We did call out that within our power systems business in particular, when you look at that margin profile there, there was a little bit of outsized IEPA benefit there. Going forward, again, we would expect to be neutral and not have much noise in the P&L when it comes to those things.

Well, well done by the team in taking that noise out. Please join me in thanking Nick for coming out. Thank you for sharing. Thanks.