Cummins Inc (CMI) September 2026 Conference Transcript

All right, perfect. Thank you, everybody, for joining us.

For those who don't know me, I'm Angel Castillo. I'm the head of U.S. Machinery and Construction here at Morgan Stanley. And again, welcome to our 14th Laguna Conference here. So with me today, it's my pleasure to have James Hopkins, who was just recently named VP of Financial Planning, Capital Management, and IR. So got a lot on your plate.

Yeah, I love how to abbreviate the title.

Exactly. And then also Nick Errant, of course, with Investor Relations. So before we get started, just a quick disclaimer. For important disclosures, please see Morgan Stanley Research Disclosure website at www.morganstanley.com forward slash research disclosures. If you have any questions, please reach out to your Morgan Stanley representative. And with that, again, gentlemen, thank you so much for joining us. Obviously, we've been getting a lot of questions about every aspect of your business, very topical in a lot of ways. but maybe just to start out with the 2027-2026 dynamic around trucks, right? The North American cycle, there's a lot happening there. So maybe starting at a little bit of a higher level, what are the customers telling you? What are you hearing in terms of what this emissions enforcement changes that has kind of been implemented by the EPA or that they've proposed? What does that all mean, and what are you hearing customers tell you about how they're planning to use that?

Yeah, we live in a complicated space right now, I think. So first of all, thank you for the invitation. Happy to be here, Angel. A great conference as always, so appreciate that. You know, as many of you know, Cummins participates very strongly in the North America truck market, both in medium duty and heavy duty. It's an area we've had a franchise for over 100 years, and we have some very good long-term trusted partnerships with OEMs. Generally, the market over the last year has been soft, but it's been improving, especially over the last six months, and anticipated to continue improving throughout the end of this year. And it's really been driven by a couple of different things, as you mentioned. I'd say, one, we have seen a move to the upside of the general truck cycle. So fleets are generally making a little bit more money, and as we all know, that tends to drive more purchases of vehicles. On top of that, however, we have had this uncertainty around emissions regulations and product availability in 2027. And that's drove, I'd say, some externalities that have impacted the ordering patterns of many of the customers. So as we sit here today, we're, I'd say, privileged to have a little bit more certainty than we did a couple of months ago. And the primary reduction in uncertainty has been the EPA providing, let's say, a semifinal rule clarifying what the rules for powertrains will be in 2027. And essentially what the EPA has stated is that they're providing the industry flexibility to both sell historic powertrains with an NCP, or a non-conforming penalty, or to move forward with new powertrains that hit the 35 milligram NOx rule. And that industry flexibility has led, I would say, to a lot of conversation across the industry about what demand patterns will look like in the second half of this year and into next year. As we sit here today, I'd say not much has fundamentally changed about those demand patterns. Because of the general strength of the fleets, demand remains high in the second half of this year. And also, given the fact that NCPs will kick in on January 1st next year, and or people will have the availability to buy new powertrains, there's going to be a significant increase in cost to the end user in 2027, regardless of what product you buy, which I think supports continued strong demand in the second half of 2026. maybe that demand could be a little bit less than some people were estimating several months ago for those that were really worried about only having the option to buy new powertrains in their trucks that risk is really off the table now but fundamentally I think the industry at this point is already capacity constrained so I don't think that's going to be particularly relevant in impacting the second half demand as we see it right now And what are customers, to your point, what are customers telling you about the 2027 demand trajectory?

I think the industry expectation is that you're now going to see a step change higher by continuation of the second half demand into 2027 versus previously there was maybe an expectation to pre-buy, then you fall off a cliff. What are customers telling you around that, to your point, especially since costs are going up regardless of which engine they're buying?

Yeah, absolutely. I think the industry appreciates the flexibility that the EPA is providing. on product availability, and so that likely leads to people purchasing more product than they would have otherwise. This is an industry that really values uptime. People buy trucks to make money. Uptime is key. And the industry is generally nervous about the manifestation of potential quality risks with new products. So the availability of current product, which generally across the industry is more reliable than it has ever been. They think we'll put their minds at ease. They'll probably buy more of those products. And importantly, I think as the industry starts selling some of the new technology into markets, that will also give the industry an option to buy some of that product, get comfortable with the technology. I think it'll let the industry get through any teething problems with the technology. And so when the industry does fully transition to the new technology, the industry will have some experience with it, we'll be more comfortable with it. And so when that does happen, it should have less of a cliff event in terms of demand than maybe we've had in prior cycles over the last 20 years.

I understand. That makes sense. And I do want to remind the audience, I forgot to mention at the beginning, but if you have any questions at any point, raise your hand. We'll get a mic to you. We want to make sure that everybody has a chance as well to get a question if they have one. But in the meantime, I want to continue down that line. So what is your strategy? What has come into the approach to this? I know you've talked about the phasing in of certain engines. Can you just kind of give us an overview of that strategy and also the implications of that on your financials? Because I think as we get all of these changes, there's been concerns that maybe there's now higher costs, but you don't get the price, and therefore more of a headwind to your margins. So if you could talk about kind of the impact on the financials as well as your strategy.

Yeah, absolutely. You know, I'll head off the first item where, you know, a lot of people are asking about NCPs and the ability to pass those on. We will fully pass on NCPs through the market. So the average selling price of the historical product will go up. We will fully offset that with pricing. Profit dollars will be flat. Percent will be down just due to the math. I'll state that clearly before we move forward. I'd say the strategy of Cummins has always in this market been consistent to produce the highest value to the end user through total cost of ownership. Quality, that's fluid economy, both diesel and def. And it's having a product that also provides the best resale value in the market. And if we can do those things, it will drive the best market share in the industry and it will drive profit both in the first fit business and then in the aftermarket. And so our product strategy and the products that we will be launching over the next 18 months or so are a continuation of that product strategy. These are units that we've been working on for many, many years. They will provide better fluid economy to the customer base. that bring other new technological innovations that will improve the driver experience and also improve the profitability of end users. And with millions of miles on these vehicles and these powertrains, we expect to have a good quality launch that will be further bolstered by the more tactical strategy of starting production of these products at low volumes. And so we're excited to partner both of OEMs and end users to get these new products into people's hands in early 2027. These products will be connected to the grid. We'll be getting all of the quality data in to the organization immediately. And we'll be able to iterate and get through any teething pains so that when we do fully transition to the new products, we expect the launch to be of a very high quality, which I think fundamentally is what fleets and end users are most interested in protecting their business model. So that's what we'll do. I'm also excited, while we already have a very competitive position in North America, in terms of our availability, these products will be available in more chassis with more OEMs on launch than even we have today, which is not an easy feat given our already strong position in the market.

So you indicated you will be passing on that in CPs. What about the ability to get the price on the new engine? To your point, you get a little bit of, I guess, a different strategy by different OEMs as to what approach they're going to take to rolling out the new engine and meeting the EPA 27. Any risk to not being able to get that price for the value you're adding and ultimately deliver a margin-accretive product after that's fully rolled out.

We have a multi-decade history being able to increase price and expand margin upon the launch of new, more complex technology to meet emissions regulations and to add value to the customer. And I don't anticipate this to be any different than those prior cycles. So there will be incremental price, there will be incremental margin. In the short run, you'll see some modest increase in some of the warranty accruals, which always happens when we launch new products. I would anticipate that to be moderated by the fact that we'll launch at low volumes versus a light switch event. But no, absolutely, we have decades of experience at doing this, and we always raise the price appropriately for the value we're providing and expand margins. That's the job of the business, that's what we're executing, and I'm confident we'll do that over the next 18 months. That's very helpful.

Again, if anyone has any questions, we have a question up here up front. You can get a mic.

Yes, thank you. Danny van Duisburg, APG in the Netherlands. Maybe for not knowing, coming so much in detail, but could you maybe elaborate on where you were 10 years ago and today and next in terms of your unique position in the OEM market in the U.S., because for us, as a bit of outsiders, it's a bit difficult to understand how to value this, whether it's a risk or opportunity, whether sort of the integrated OEM strategy of Daimler, Volvo, if their owners have to sort of commit to the integrated OEM truck market guys, engine producers, or whether for Cummings there's also an opportunity and how you struggle or even maybe can win over that proposition they can. So because that's the most difficult question for us, I think, to value your position in the U.S. market and abroad.

Yeah, it's a great question and one that's been asked for the full 100 years of the history of the company. So Cummins is an independent manufacturer of engines and powertrain components, and we sell those into truck OEMs who all make their own powertrains. The value that we provide the OEMs and the reason they install us in their chassis are multiple different reasons. One, we tend to leverage scale, especially in subsegments where OEMs really don't have the scale to make the significant investments in powertrain. North America medium duty truck is a really good example of that of a market of say 130,000 units it has multiple sub-segments which if all of the four or five mono EMS made their own engine in that space it just is not economical so Cummins can leverage that scale provide a product to the industry that actually is less expensive than everybody doing it themselves secondarily the value that we create to the industry is a technologically superior product and then a service and support network that is more robust than the alternatives. So if you buy a truck with a Cummins powertrain in it, you can take that truck to be serviced, the powertrain to be serviced, not only at that OEM dealer, but at any other OEM dealer because they can all fix the Cummins powertrain. So over the years, there have always been many questions about isn't the biggest risk to Cummins that the OEMs will simply do more of their engines. What history has proven out is that today Cummins has the highest customer pull, as we say it, in its entire history. Over nine of ten medium duty engines in North America are Cummins. About four in ten heavy duty engines are Cummins. And as I said, as we launch these new products, we will be available in more chassis across OEMs, not less. So it's still something that we have to work on, ensuring we maintain that value add, that we maintain the relationships with OEMs and end users, but our competitive position and the utilization of our technology in North America has never been higher. Yeah, a huge key of our engineering organization is to make sure that we have the best fluid economy, so both diesel and death. And I can't speak to what everybody else is launching here for the next 18 months, but that's a critical part of our engineering and the product portfolio that we need to execute. And I'd say history suggests we're quite competitive in there, and that's why we're in the position that we're in. And secondly, yes, resale value, especially in heavy-duty truck North America, is very important. And so for a sustained period of time, you can sell a truck with a Cummins heavy duty engine for a premium over a truck with a non-Cummins engine. And that's important for many of the large fleets because they sell that vehicle after three to four years. And given the genuinely razor-thin margins that they experience, the fact that a Cummins-powered truck can frankly be used in more applications, that premium that they're able to get in the resale market is a relevant part of their initial purchase decision.

Maybe just one last book when I get on that to tie it out with the truck side. One thing that's interesting is even in these new engines, even on the heavy-duty side, some of your partners have talked about this is the most closely they've worked with with Cummins that are in history. And I think one of the things you've talked about at Investrate was just the amount of content continuing to increase in these engines, even if it's a customer's engine. So what does that mean ultimately from a longer-term perspective for you, even if you don't have, for instance, a full engine but you have more content in these products from a parts standpoint from an overall aftermarket?

Yeah, no, I would just say we have longstanding good relationships with the OEMs in North America and we're able and willing to support them in different ways. And so we always want and desire to sell a full powertrain package to the OEMs and we think that that full powertrain package creates value to the end user. So we have a collection of engines, turbochargers, aftertreatments, axles, brakes, other components that as a system, we think we can maximize that system in a way that creates more value. However, there are instances where we don't sell that full powertrain and we're more than happy to sell just the engine and the aftertreatment, maybe just the turbocharger, maybe just the axle. And so we will always look to partner with people and produce the entire system to support them and the end user. But when that doesn't manifest, we're more than happy to sell the component parts. And so that's been a strategy over a number of years. I think it's helped both Cummins grow and be profitable, but it's also helped our most important key partners grow their business and increase their profitability over time as well.

That's very helpful. And I think it's a smaller part of your business, Power Systems, but it certainly gets a lot of focus with data centers. So I feel like people will be pissed at me if I leave less than 15 minutes for that. So maybe just, yeah, stepping into that, dynamic, right? Lots of happening in the news right now about whether it's slowing CapEx or slowing down the speed at which we're ultimately investing in this. Can you talk about your business in particular? I think we get a lot of questions particularly on the diesel side and just the implications of new architecture and the world going forward. So maybe before we dive deeper into it, just what are you seeing from the demand side on the diesel backup engine and if you could talk to the orders and the framework agreements that gives you visibility, that'd be helpful.

Yeah, I'll take that one. So I think fundamentally, to be as direct as we can, demand remains extremely strong. We announced in Q2 earnings, we just re-signed one of the large hyperscalers to a multi-year agreement, and demand fundamentally remains extremely strong. With that being said, we do see the headlines that you guys are also reading, and we're actively monitoring those things. But fundamentally, if you look out to our order board, second half of 28 is where we're taking orders for our 95-liter solution, so demand is firm out to that. We're also seeing folks move down in displacement when they can't get a 95-liter. They're moving down to a 78-liter or a 60-liter or even a 50-liter solution. So if anything, the demand is extremely healthy. It is out multiple years. And fundamentally, probably the most important thing to communicate here is the targets that we outlined at our analyst day just a few months ago for 2030, $9 billion plus exposure to this space by 2030, we remain very confident in that, and that is largely underpinned by the diesel standby story, and I'm sure we'll get to it, but we're also excited about the other areas that we're participating in the data center space, which is the prime power space and also the battery energy storage solutions.

Yeah, I definitely want to get to that, because I think you've had a couple of very interesting announcements come out of that in the last few months, but maybe just one last one on the ReSIP or diesel ReSIP side. there's a lot of concerns around the amount of capacity that you're getting from players that are maybe a little bit further down in terms of the tiers, just the degree of competition that that might bring, the degree of pressure in terms of the bidding activity. What are you seeing? Are these actual contenders when you're seeing bids for orders? Or just what does that capacity mean for your ability to sell and ability to get price?

Yeah, so we're never dismissive of competition, but if you step back and frame the competitive landscape globally, there's only a handful of players that actually have the high-speed diesel reciprocating engine, high-horsepower engine technology to actually service this market. So you know who the players are. The second element is that we have established relationships in this space over decades, and those relationships fundamentally matter to these players. They know what they're going to get from Cummins, they know who to call if they have an issue, and they know that we're going to support the product. And the third element there is our distribution presence globally. And that's extremely important when you think about these hyperscalers knowing that no matter where they're putting a data center, they've got capable people that can come out there and commission and install these units and then also support them if they need any support going forward. So fundamentally, we feel very well positioned, and we have multi-year framework agreements with these large hyperscalers. With that being said, there is a competitive pressure from these other parties that are trying to move into the space where we've driven mid- to high single-digit pricing the last few years. The ability to continue to drive incremental pricing is going to somewhat moderate, but we do still feel confident in favorable price costs through the end of the decade, and that was reflected in our 2030 targets we outlined at Analyst Day.

Very helpful, and I guess maybe just to expand on that, you're not new to these competitors, right? You have a business in China. You have been competing against them for a while. So what are you seeing there, and how does that inform your ability to compete with them globally, but specifically in China, the opportunity is set there as well?

Yeah, so we're the number one position in China for data center diesel standby. The most important thing of how we compete in China is that we are producing locally. So we produce through one of our local joint ventures, local supply chain, and we are competitive from a cost perspective, but then also with the technology that we use globally. It's the same technology. So very uniquely positioned with all of your large hyperscalers in China. We are seeing Wei Chai and Yuchai in particular come into that space, but largely where we're seeing them be successful is where there's been smaller Chinese players historically, they tend to be displacing them, whereas we've maintained our number one position overall from that favorable cost position and established relationship. That's very helpful.

And then maybe pivoting to your point, the announcement around the 20 gigawatts of high horsepower capacity by 2030 that was primarily, or, you know, that's where you were announcing also your natural gas engine as well, more for prime power. Curious, first, how is that progressing in terms of the development and the expansion of capacity? And, two, can you talk about what degree of visibility your framework agreements give you toward, you know, being able to have demand for those products and orders?

Yeah, so we're deploying capital now. And you're going to start to see the first elements of that incremental capacity come online next year. Think of that 20 gigawatts as somewhat linear through 2030 with an outsized move up in 2028 from the general shape of that capacity coming online. And fundamentally, when you step back and look at those multi-year framework agreements, those open up conversations with these hyperscalers around what their plans are through the end of the decade. and fundamentally we feel very confident about the investments that we're making. They will pay back very quickly and we also feel very confident that demand associated with those in supporting the 2030 targets that we outlined at Analyst Day.

And maybe related to that, because you mentioned battery or even people moving down in terms of the size, you had the order for 60 liter and 78 liter on the natural gas front. How's the demand for those type of products just given the speed to power area and the value in that. For the battery specifically or the lower displacement? Yeah, just the different solutions that you have before you actually get that capacity coming online.

Yeah, so I mean what we've seen this year again is we raised our guidance coming out of Q1. We're in a supply-constrained environment. So the 95-liter supply constraint through the second half of 28, so what we're seeing is customers come in and go for the 78, 60, and the 50 liters, and that's what caused us to raise our guidance coming out of Q1 in particular. So that's the exact nature that we're seeing. And then that will continue as we bring on this incremental 20 gigawatts over the next few years. That's across these different power nodes. It's not just isolated to only the 95 liter.

And then maybe switching to the battery storage side, you announced a win there. Can you talk about the battery storage solution, how meaningful you think that technology is in terms of data center applications for Cummins and just the implications of that in terms of a margin-mix impact to your business.

Yeah, we're really excited about that particular product offering, and I would say it's the most emerging space that we're still kind of seeing how customers want to use that. But essentially what that technology is allowing us to do with the application that we announced is there are utility requirements at this particular data center where they need a level load coming from the data center. So they are looking for a solution, battery energy storage solution, that's allowing them to pull electricity off the grid and charge when there's below peak, and then whenever the data center has higher demand, they're load leveling for a constant load back to the grid. And we're really excited about our positioning there, but still evolving in terms of how hyperscalers are thinking about that technology at different sites. To your question, that's going to be low, hundreds of millions of dollars of revenue for that particular application over the next couple of years. and it's going to be dilutive to overall margin. When you look at where we're adding value, we're sourcing those cells, but ultimately we're adding value on the microgrid level. We're looking at the different demand needs and figuring out where to deploy that particular battery technology within the microgrid. That's helpful, and I think we have a question over here.

You talk about your total capacity. I forget, is it 25 gigawatts, something like that? How much do you envisage your prime business will be of that by the time we get to 2030. And then the second part of the question is, when I think about the margin differential between prime versus backup, given some of that capacity is fungible, does it make sense for you to push the size of the prime business as much as you can, or does it not really make a difference from a profitability standpoint?

So I'll start out first. By 2030, 55 gigawatts of high horsepower engine capacity, and that's going to go across your mining applications, your standby power generator applications as well as your prime power applications and if you were to come to one of our engine plants what you would see is they're somewhat flexible and fungible across that capacity in terms of the 2030 targets that we outlined a small subset of those are specific to prime the reason for that is where we're at in our development cycle for that 130 liter product second half of next year We reached development milestones and maturity that give us confidence that we would actually take a pilot customer order, second half of 28 to be in limited production with those prototype units, and then you're opening up the order book and starting to ramp into 29 and 30. So think of it more as ramping into 2030, and your real opportunity for the prime space is going to be kind of beyond 2030 as you've got a more mature product. In terms of margin profile, on the first fit side of things I would say that the diesel standby relative to the gas prime are somewhat comparable the real difference is the aftermarket proportion and you're going to have a much stronger aftermarket for that gas prime that as you build out the installed base over time would be quite profitable much more so than the diesel standby space Yes, thank you on the data center subject for hyperscalers as an example.

How important is the product Cummings can deliver to hyperscalers in light of political sensitive issues like air permits or CO2 emission versus like coal plants, highest CO2 per megawatt, like 90 grams per kilowatt. And gas-fired is maybe one-third, and efficiency of Cummings in a sort of single cycle versus maybe in combination with co-generation, or is it also possible with Cummings products, also with the CO2 or some other mitigating measures for getting the air pollution down? because I think that's the most sensitive subject today. So how advanced is Cummings' product portfolio for the hyperscalers?

Yes, I'll start out by framing two different areas. Again, the diesel standby space. In order for that to be a low-emissions product, you have to add an after-treatment, typically. And we have a lot of experience and a dedicated business to doing that in the on-highway side that James was talking about earlier. So we have capabilities to do that. the realities are that the diesel standby units very rarely run. So there's a very low number of hours they're running per year. As long as they're below a certain threshold, they don't require after-treatment. We shift over to the prime power side of the equation. One of the reasons you're not seeing diesel run on the prime power side is because you then would be above that threshold. you would need more advanced after-treatment for the emissions that you're talking about, and also diesel fuel is quite expensive to burn for primary power. So you shift to the prime power side, and you say, okay, for a natural gas engine, the differentiating factors, and the reason that we're investing in this 130-liter platform, efficiency becomes extremely important because you're burning so much fuel, and you've got the emissions criteria as well. That's why we're investing substantially in that product to make sure that it's fit for that market, that it's going to have leading efficiency, and then also power output for that space. And that's why, again, second half of next year to reach development milestones, second half of 28, limited production, and ramping 29 into 30 for that particular development.

I know we could keep going on data centers for much longer than we have. So the last couple of minutes, I wanted to make sure to ask, in terms of third quarter to date, as you've seen the market evolve in terms of orders, in terms of demand and also just operations over the last few months. Any changes versus your expectations, anything that's kind of surprised or that we should be mindful of? I know there's been, obviously, changes on geopolitics. Yeah, just anything you could kind of provide that would be helpful.

Yeah, no, I mean, I would say, in general, a lot of the fundamentals in our key markets haven't shifted. I would say I hear diesel out here is $10 a gallon, six-something in Indiana. probably not the best thing in the world in the short run. And, of course, some of this certainty around the emission standards next year I think is very good for the industry. I think it's good for Cummins. But some of that certainty might mean people take a couple less because they're less scared about next year. But I think that's all within the rounding. But those are probably just the two things I'd mention.

And maybe just one on capital allocation, you know, same dynamic, I guess. But if you could overlay as well, you know, what's happening with Accelera in terms of investments, how you see that progressing in terms of are there more areas that you can start, you know, kind of reducing how much you're investing into it? Or how we should think about that and just more broadly capital allocation, how you're kind of thinking about that into next year?

Yeah, I think we've made the right and the difficult decisions to reduce the losses in Accelera, lowering R&D, exiting certain businesses like the electrolyzer business. and we've done that in order to allocate the capital to other areas of the business that have very strong growth profiles, both in terms of revenue and profits. I think you'll see us continue to right-size that organization based on where the technology adoption curves are, but we retain the base technology that we've built within Accelera so that when the time comes in our key markets for battery, electric, other technologies, we will be ready. and that's been the strategy from day one. I think as we stand here today, generally from a capital allocation perspective, for the company, no changes. We have a significant number of opportunities to reinvest in the business, to make some really good returns. We've talked about data centers and all the myriad of that market and sub-markets where we participate. We've talked about the new emissions regulations in North America, new products there, Our emissions regs will increase around the rest of the world towards the end of the decade. And then in the aftermarket, where we have significant opportunities to go in the aftermarket through our whole distribution business as well. I think you'll see us continue to invest in the business with high rates of returns from those projects. And then we'll have a significant amount of cash that will be generated by the business. We have a strong record of increasing dividends and doing share repurchase, which I expect to continue as well in that environment.

Well, I think that brings us to the end of time. Again, gentlemen, thank you so much for standing there. Thanks so much.