Thomas Linebarger
Executive Chairman at Cummins
Thank you, Chris, Brilliant. Good morning, everybody. I just -- I had to start by telling you about some rough math I did before I walked in today. And I believe this is my 70th earnings call. It's also going to be my last. I'm very grateful to the analysts and investors who are part of this journey with me. Many of you help me better understand the perspective of our shareholders, which influenced how we ran the Company, how we developed our strategies and priorities, and how we communicated about our results and plans for the future.
I always try to ensure that the senior leaders in the Company understood your views and perspectives, and they understood who they were really working for. Some of you have been at this work almost as long as I have, and your commitment to understanding our company and its potential has been remarkable. I just want you to know that it meant a lot to me. I'm very proud to have served as the CEO for this Company for 10 years, as a Senior Executive for more than 20 years. It was an honor and a privilege.
This Company stands for more than its products and technology, its revenue or its earnings, and even its performance for customers all over the world. The people that work here are exceptional humans, not just exceptional workers. That's why this transition was so important to me. It is perhaps the most important work of my entire career. And I have a smile a mile wide today because of the quality of the individual that replaces me and the strength of the team beneath her.
Jennifer Rumsey is a once in a generation leader. She combines the leadership and technical skills needed, with the characters and values required and the inspiration of a CEO that can take this Company to places where I could not. I'm as proud as I was on the day I took the job to see her succeed me. Jen? Thank you, Tom. Good morning. I'm excited to join you this morning in this new capacity as President and CEO for Cummins. In July, we announced that Tom would end his term as CEO effective August 1st. It is a bittersweet moment for me as he's been one of the most significant influences in my career and leadership. Tom has been an incredible leader for this Company and a true partner and coach to me. Because of his leadership, we are in a strong position to navigate what comes next and execute our Destination Zero strategy. Tom and I share a common vision for Cummins and the role that our Company plays empowering a more prosperous world. I feel deeply honored and proud to serve as the new CEO of Cummins, the first woman and just the seventh CEO of this great Company. My life and leadership have prepared me for this role at this moment during the critical period for Cummins and our planet. A focus on purpose, people and impact has shaped my career and will influence how I lead. I look forward to working with all of you as we move forward. I'll start with a summary of our second quarter financial results. Then I will discuss our sales and end market trends by region, and I will finish with a discussion of our outlook for 2022. Mark will then take you through more details of both our second quarter financial performance and our forecast for the year. Before getting into the detail on our performance, I wanted to take a moment to highlight a few major events from the second quarter. The Company achieved significant milestones related to two previously announced acquisitions: Jacobs Vehicle Systems, or JVS, and Meritor. In April, Cummins completed the acquisition of JVS, adding engine braking, cylinder deactivation, start-stop control and thermal management technologies, which are key components to meeting current and future emissions regulations. On May 26th, Meritor's shareholders voted in favor of the Cummins acquisition bid, further validating the potential of what Cummins and Meritor can achieve together. The companies are working together to complete the acquisition this week as we have received all regulatory approvals to close the transaction. During the second quarter, Cummins announced collaborations with Daimler Truck, North America and Scania to deliver fuel cell electric powertrains for heavy-duty truck applications and with Komatsu on development of zero-emission haulage equipment, including hydrogen fuel cell solutions for large mining haul truck applications. Cummins, Chevron and Walmart also share plans to integrate Cummins X15N natural gas engines, powered by renewable natural gas into Walmart's heavy-duty truck fleet. These customer collaborations are significant steps in alignment with our Destination Zero strategy to evolve our Company, our products and our customers' products to the technologies needed for a decarbonized world. This strategy, which represents a significant growth opportunity for Cummins, includes reducing carbon emissions now by making improvements in engine-based solutions that are broadly available today while rapidly advancing the zero emissions technologies of the future. We continue to focus on our people and their development as a strategic advantage for the Company. In the second quarter, the company posted its first human capital management report, detailing our commitment to creating and maintaining a dynamic and exciting work environment for our employees. Now I will comment on the overall Company performance for the second quarter of 2022 and cover some of our key markets, starting with North America before moving on to our largest international markets. Demand for our products remained strong across all of our key markets and regions, with the notable exception of China, resulting in record revenues in the second quarter. Revenues for the second quarter of 2022 were $6.6 billion, an increase of 8% compared to the second quarter of 2021. EBITDA was $1.1 billion or 16% compared to $974 million or 15.9% a year ago. Second quarter results included costs of $29 million related to the preparations for the separation of the Filtration business. As discussed previously, we recorded a charge of $158 million in the first quarter related to the indefinite suspension of our operations in Russia. In the second quarter, received certain inventory and other expense amounts reserved previously and incurred some small additional charges, resulting in a net recovery of $47 million. Adjusting for these items, EBITDA was $1 billion or 15.7% of sales. My comments moving forward will exclude the financial impact of the suspension of our Russia operations and the costs associated with the separation of our Filtration business. EBITDA percentage declined in the second quarter as strength in sales and increased gross margin were offset by a 31% drop in joint venture income from the second quarter of 2021, driven primarily by the slowdown in China markets. Research and development expenses also increased slightly in the second quarter of 2022 as we continued to invest in products and technologies that will create advantage in the future, particularly in the engine and new power segment. Gross margin percentage improved compared to second quarter of 2021 as the benefit of pricing and higher volumes exceeded the manufacturing, logistics and materials cost increases during the quarter. This pricing only partially offset the impact of elevated supply chain and other inflationary costs that we carried through from 2021 and experienced in the first half of 2022. Our second quarter revenues in North America grew 15% to $4 billion, driven by improved pricing, higher volumes and higher aftermarket demand. Industry production of heavy-duty trucks in the second quarter was 62,000 units, up 9% from 2021 levels, while our heavy-duty unit sales were 26,000, up 12% from 2021. Industry production of medium-duty trucks was 30,000 units in the second quarter of 2022, an increase of 5% from the 2021 levels, while our unit sales were up -- 27,000, up 21% from 2021. We shipped 38,000 engines to Stellantis for the use on the Ram pickups in the second quarter of 2022, down 9% from 2021 levels due to supply chain issues, which temporarily limited truck production. Engine sales to construction customers in North America increased by 9% as other companies maintained strong capital spending. Power Systems North America sales were flat compared to 2021 as strength in aftermarket offset lower volumes. Demand remains high in North America markets for Power Systems, but revenues for North America power generation declined by 3% as supply chain constraints limited our production for both US military and mobile power applications. Our international revenues decreased by 2% in the second quarter of 2022 compared to a year ago. Second quarter revenues in China, including joint ventures, were $1.2 billion, a decrease of 43% due to lower sales in the on-highway and construction markets. Industry demand for medium and heavy-duty trucks in China was 173,000 units, a decrease of 70% from 2021. Last year's numbers were strong, supported by a prebuy ahead of NS VI, weaker new vehicle demand and economic impacts from shutdowns as the country is responding to a COVID-19 resurgence have pushed the market to the lowest level since 2007. Our sales and units, including joint ventures, were 25,000, a decrease of 70% despite the very difficult environment in China. We did see growth in some of our power systems markets, particularly mining and oil and gas. The light-duty market in China decreased 38% from 2021 levels to 380,000 units. While our units sold, including joint ventures, were 23,000, a decrease of 40%. Industry demand for excavators in the second quarter was 66,000 units, a decrease of 32% from 2021 levels. The decrease was driven by declining demand within the property market and the COVID-19 impact on infrastructure demand. Our units sold were 9,900 units, a decrease of 41%. Sales of power generation equipment in China decreased 5% in the second quarter due to the economic impacts of the COVID-19 resurgence. Second quarter revenues in India, including joint ventures, were a record $594 million, an increase of 51% from the second quarter a year ago. Industry truck production increased by 131%, while our shipments increased 78%, lagging the industry production due to lower growth in the heavy commercial vehicle segment. The high level of growth in the second quarter is coming off a very low base when India was experiencing a COVID-19 peak in 2021. Demand for power generation and construction equipment increased in the second quarter as economic activity continued to improve. In Brazil, our revenue increased 7%, driven by improved demand in most end markets. Now let me provide our outlook for 2022, including some comments on individual regions and end markets. Based on our current forecast, we are maintaining full year 2022 revenue guidance of up 8% versus last year. This guidance reflects stronger performance in North America and a weaker market outlook in China as well as the indefinite suspension of our operations in Russia. We are forecasting higher demand in global oil and gas and power generation markets and expect aftermarket revenues to increase compared with 2021. We are maintaining our forecast for heavy-duty trucks in North America to be 250,000 units to 260,000 units in 2022, a 10% to 15% increase over a year ago. The supply chain constraints our industry is experiencing continue to limit our collective ability to fully meet strong end-customer demand. In North America medium-duty truck market, we are continuing to project the market size to be 120,000 to 130,000 units, a 5% to 10% increase from 2021. We are now projecting our engine shipments for pickup trucks in North America to be flat compared to 2021, an update to our previous guidance of down 5%. In China, we are now projecting total revenue, including joint ventures, to decrease 20% to 25% in 2022, an update to our previous guidance of down 10%. We now project a 50% reduction in the heavy and medium-duty truck demand and a 15% reduction in demand for the light-duty truck market compared to a 40% decline and a 12% reduction, respectively, in our previous guidance. Industry sales of excavators in China are expected to decline 30% from record levels in 2021, consistent with our prior guidance. Despite the difficult economic and market environment in China, we have significantly improved our presence and profitability in the region compared to prior cycles and are well positioned for continued outgrowth across our end markets in the region. As an illustration from 2019 to 2022, the demand for heavy and medium-duty trucks is projected to be down 40%, while across the same period, we are forecasting an increase in earnings from joint ventures in China. As we look ahead, industry volume of NF VI product will increase through 2022 as the new regulations are implemented more broadly. Our technological expertise and emissions experience positions us well to continue to outgrow the market and support our partners through this transition. We also continue to ramp production and expand our presence in automated manual transmissions as our market share increases and the heavy-duty market is increasingly adopting this technology. In India, we project total revenue, including joint ventures to increase 15% in 2022, an improvement from our previous guidance of up 10%. We expect industry demand for trucks to increase approximately 30% in 2022. We continue to project most major global high horsepower markets will improve in 2022. Sales of mining engines are expected to be flat in 2022 compared to the prior year, consistent with previous guidance. Demand for new oil and gas engines is expected to increase by 120%, an update from our previous guidance of up 95%. Strong demand in the US and other oil and gas markets have fueled this improved outlook. Revenue in global power generation markets are expected to increase 5%, driven by increases in non-residential construction, consistent with our prior guidance. We are now projecting aftermarket sales to increase 15% to 20% from 2021, an improvement from our previous estimate of up 15%. This is driven by parts demand within our North America On-Highway business as well as global Power Systems markets. In New Power, we continue to expect full-year sales to be approximately $200 million. We have a growing pipeline of electrolyzers, which we expect to convert to backlog and be delivered over the course of the next 12 months to 18 months. Additionally, we will continue to accelerate our collaboration with OEMs on both electrified power and fuel cells for applications in 2022 as highlighted by the announcements I noted previously. We are maintaining our full-year 2022 EBITDA guidance of approximately 15.5%, excluding the impacts of the indefinite suspension of our operations in Russia, the costs associated with preparing for the expected separation of our filtration business and the expected costs associated with the pending acquisition of Meritor. We expect to deliver the strong profitability despite the supply chain constraints and rising inflationary costs that we are experiencing. During the quarter, we returned $240 million to shareholders in the form of dividends and share repurchases, consistent with our plan to return approximately 50% of operating cash flow to shareholders for the year. Strong execution resulted in record sales in the quarter despite very difficult operating environment. The ongoing supply chain constraints and rising costs throughout the industry, continued COVID-19-related impacts and the effect of the conflict in Ukraine, all present challenges to operating our business. I am grateful for the commitment of our employees across the organization who have worked tirelessly to overcome these challenges. Their efforts resulted in a strong quarter, enabling us to support our customers while generating solid returns. Cummins is in an excellent position to continue to execute our Destination Zero strategy, invest in the products and technologies that will fund future growth and drive advantage for our customers. We will accomplish this while generating strong financial results and meeting our commitment to return cash to shareholders. It's an exciting time to become CEO. Thank you for joining us today. Now let me turn it over to Mark. Thank you, Jen, and good morning, everyone. We delivered strong results in the second quarter, especially in the context of a challenging global business environment. As Jen mentioned, our second quarter results included a $47 million benefit from adjusting the reserves related to the suspension of our operations in Russia and $29 million of costs related to the separation of the Filtration business. To provide clarity on operational performance, I'm going to exclude the impact of these items in my comments. We have provided a breakdown of the costs associated with Russia and the filtration separation costs by line item and by segment in our earnings material to help you understand the underlying performance more clearly. Now let me go into more details on the second quarter performance. Second quarter revenues of $6.6 billion were up 8% from a year ago. Sales in North America were up 15%, while international revenues declined by 2% due to a sharp slowdown in China. Foreign currency fluctuations, primarily a stronger US dollar, reduced sales by 1%. EBITDA was $1 billion or 15.7% of sales for the quarter compared to $974 million or 15.9% a year ago. The lower EBITDA percent was driven primarily by negative other income and lower joint venture earnings in China. Gross margins improved year-over-year and from the first quarter. Now let me go into more detail by line item. Gross margin of $1.7 billion or 25.6% of sales increased by $208 million or 140 basis points. The benefits of stronger volumes and higher pricing more than offset higher freight and material costs for this quarter. Of course, we have been facing increased costs for an extended period of time and now our gross margins have returned back to 2019 of pre-COVID levels. Selling, admin and research expenses increased by $16 million or 2%, primarily due to higher research costs supporting future growth, partially offset by lower variable compensation expense. Joint venture income declined by $42 million versus a year ago. Lower demand for trucks and construction equipment in China was the primary driver of the decline in earnings. Other income was a negative $18 million, $87 million worse than a year ago. We experienced $48 million of mark-to-market losses on investments that underpin our unqualified benefit plans in the second quarter, and this compares to gains of $20 million a year ago. This variation in this one category explains most of the change in other income. Net earnings for the quarter were $678 million or $4.77 per diluted share compared to $600 million or $4.10 from a year ago. The earnings per share increased due to higher earnings, lower taxes and a reduced share count resulting from share repurchase activity. The all-in effective tax rate in the second quarter was 17.3%, including $36 million or $0.25 per diluted share of favorable discrete items. Operating cash flow in the quarter was an inflow of $599 million compared to $616 million a year ago. I will now comment on segment performance and our guidance for 2022. For the Engine segment, second quarter revenues increased a 11% from a year ago, while EBITDA decreased from 16.1% of sales to 15.2% of sales, as the benefits of stronger volumes and pricing actions in our consolidated earnings were more than offset by lower joint venture income in China. In 2022, we expect the revenues to be up 10%, up 2% from our prior guidance. The increase in sales primarily driven by higher demand for engines and parts in North America. 2022 EBITDA is projected to be approximately 14.5%, in line with our prior guidance. In the Distribution segment, revenues increased 17% from a year ago to $2.3 billion, a record quarter for the segment. EBITDA increased as a percent of sales to 11.2% compared to 10.5% sales a year ago, primarily due to stronger parts, whole goods, and sales and pricing actions. We expect 2022 Distribution revenues to be up 11% year-over-year and EBITDA margins in the range of 10.5% of sales, both in line with our prior guidance. Components segment revenue decreased 2% in the second quarter, primarily driven by weaker demand in China. EBITDA increased from 15.1% of sales to 18.2% of sales, driven by the benefits of pricing actions which offset material cost increases and lower warranty expense. We expect revenues to increase 3% for the year, down from an increase of 6% in our prior guidance, primarily to a lower outlook in China. EBITDA margin is expected to be 16.75% of sales, in line with our prior guidance. In the Power Systems segment, revenues increased by 5% and EBITDA decreased from 12.2% to 10.6% of sales as the benefit of stronger volumes and pricing were more than offset by higher material and logistics expenses. In 2022, we expect revenues to be up 8% and EBITDA is projected to be approximately 11% for Power Systems, unchanged from our prior year guidance. In the New Power segment, revenues were $42 million, up 75% from a year ago due to stronger demand for battery electric systems. Our EBITDA loss was $80 million in the quarter, as we continue to invest in the products infrastructure and capabilities to support future growth and was in line with our expectations. In 2022, we still expect revenues for the New Power business to be approximately $200 million, up 72%. And net EBITDA losses are still expected to be in the range of $290 million for New Power, also unchanged from our prior guidance. As Jen mentioned, we are maintaining our '22 expectations of company revenues to be up 8% and our EBITDA margins of approximately 15.5% of sales. This guidance excludes expenses outside of the normal course of business associated with the separation of the Filtration business, the pending acquisition of Meritor or the indefinite suspension of our operations in Russia. We expect earnings from joint ventures to decline 25% in 2022, excluding the impact of suspension of our business in Russia. And this is down from our prior guide of a decline of 20% due to continued weakness or further weakness, in fact, in the China truck market. We are projecting our effective tax rate to be approximately 21.5% for this year, excluding discrete items. Capital expenditures were $147 million in the quarter, up from $125 million a year ago. We still expect that our full year capital investments will be in the range of $850 million to $900 million. We returned $240 million to shareholders through dividends and repurchase of shares in the second quarter, bringing our total cash returns of $758 million for the first half of the year. We still anticipate returning approximately 50% of operating cash flow to shareholders in the form of dividends and share repurchases. While high inflation and rising global interest rates present risks to global economic growth, we did not experience any significant changes in aggregate demand from our customers over the past quarter. Our focus remains on raising financial performance cycle-over-cycle in our core business, while investing in technologies that will deliver future profitable growth, including in new markets, new applications and with new customers. We continue to advance our strategy in the second quarter, delivered record quarterly revenues and earnings per share, and recently announced an 8% increase in our quarterly cash dividend, the 13th straight year of dividend increases. Thank you for your interest today. Now let me turn it back over to Chris.
