Cummins Inc. (CMI)
Citi’s 2023 Global Industrial Tech & Mobility Conference
February 21, 2023 10:30 AM ET
Company Participants
Chris Clulow - VP, IR
Jeff Wiltrout - Corporate Strategy
Conference Call Participants
Tim Thein - Citi
Presentation
Tim Thein
We’re moving along here. Thanks, everyone, for coming out. I’m really excited to have the team from Cummins here. A brief hiatus last year, but they have been long and loyal supporters for this conference.
So, thank you guys for being here. Chris Clulow, directly to my left, heads up IR. And then Jeff Wiltrout runs Corporate Strategy for Cummins. So well, I’ve got to work through a series of questions, but if anyone has anything they want to get to just put your hand up and make sure I see you.
Question-and-Answer Session
Q - Tim Thein
So with that, maybe I’ll start with you, Jeff. As Head of Strategy, Cummins, it probably keeps you pretty busy just given all the things the moving pieces and all these evolving technologies. But I’m curious from your perspective, having worked under Tom and now the transition to Jen, just any difference in terms of approach or philosophies and again, from your standpoint that you would call out? Or is this just kind of a continuation of a lot of the work that Tom had put in place?
Jeff Wiltrout
Yes, sure. So there are, of course, some differences as you would expect with any leadership change. Tom and Jenner very different people. Jen comes with a different background, a much deeper technical background in particular, CTO and kind of coming out of the engineering organization, which was different than Tom’s background, of course.
What I would say from my vantage point perspective, from my responsibilities as Tom and Jen and the leader team did a lot of work in leading up to the transition some of the destination strategic principles we’ve put together. And so from that perspective, a lot of consistency. They built that together with the leadership team. And so that has been, like I said, consistent positive and no big changes or swings in our strategic direction, we still feel comfortable and confident with kind of where we’re headed. So personal dynamics and differences, as you’d expect and -- but broadly, what it means for us and where we’re protein investments, no big changes.
Tim Thein
Got it. If we went back, it was about a year ago, almost to the day, I think when you had your Analyst Day, and you guys put forth some of the zero emission vehicle kind of adoption curves. A lot has happened from a regulatory perspective, just level of interest rates, et cetera. The world looks quite a bit different. I’m just curious if you were drawing those curves today, would they look much different in terms of -- again, we all expected that different markets and geographies are going to move at different speeds. But has any of that kind of changed up or back since we looked at that a year ago.
Jeff Wiltrout
Yes. As you broadly speaking, I mean, it’s hard to extrapolate at such a high level. We tried to do that last year. We do run those curves with a high regularity and go pretty granular by market, by geography and cut it slice and dice in various different ways. What I would say over the last 12 months, especially relative to what certainly others are saying is we, I think, have been relatively consistent in the message that our belief is this transition towards kind of zero carbon solutions is going to be -- take a long time. It’s going to take a while.
And that’s a function, of course, improving the reliability of the underlying technology, getting the cost right, getting the infrastructure in a place where it’s ready to suit broad commercial and industrial applications, that’s a long time horizon. So I guess at the simplistic level, I would say those curves that underpin what we said a year ago have not fundamentally changed from the sense that we were kind of saying, and we continue to say this is a pretty long transition in our end markets. I think if anything, what we’re seeing is that that’s getting more broadly, I think acknowledged, I might say.
And then secondly is, what does that mean for how we’re obviously pacing our discrete investments now with our engine programs, with our new power investments to kind of have -- be well positioned alongside those curves. So anyway, no big changes. And for us, that uncertainty because we can, we think, have a breadth of solutions and the cash flow to make the entire journey, we actually think that uncertainty at some we will plays to our advantage.
Tim Thein
Interesting. And maybe if we move to Meritor several months into that integration, just how has that gone relative to your expectations? And then you have being -- I’ve always thought of truck design typically starts kind of at the eAxles move forward and now you’re at the early stages of that having owning Meritor, but just how is that experience going? I know it’s only so much of this happens in 9 months, but just what are your views on that?
Jeff Wiltrout
Yes, sure. So I’ll start with the base strategic and financial thesis for us has held true, and we continue to believe in it. And that was, of course, based on a couple of different things. First of which is it’s a business that generates cash flow is well positioned, has solid market share, and there are some synergies to be delivered and how we serve that market, serve our customers in those spaces and things like that. And so of course, we have been working very hard and making solid progress in conjunction with the stated synergy targets we articulated to help finance the deal. That’s point one.
And then, of course, point to is as we transition to zero emissions technology that it is our belief that, that kind of integrated eAxles becomes increasingly important, increasingly valuable in the architecture, which you rightly alluded to and that’s us being in there and leading in that space and working with current OEM customers and potential future customers on developing, refining and delivering that technology at scale actually puts us in a pretty good position in the near, medium and long term. So across all those funds, like so the basic thesis for why we did the deal to begin with still holds. We are on track with where we intended to be from the pure near-term financial synergies to help make sure that the math works.
Some near-term performance in 2022 is not quite as solid as we’d like from a margin perspective, but we have taken actions to make sure that gets back in line with where we want. And then thirdly, kind of that longer-term positioning relative to these new vehicle architectures and the importance of that eAxles, ePowertrain technology, we still believe is important and is where we’re focusing a lot of our energy and investments to help supplement that.
Tim Thein
In terms of steps you can take, is that more on the pricing side or what -- in terms of the underlying performance.
Jeff Wiltrout
Yes. So the near term -- and Chris, you can speak to that if you want. So what we saw in 2022, which I’ll do a little bit at kind of the weaker than certainly our preferred performance in the back half of this year was a combination of things, but pricing was certainly one of them that didn’t quite get delivered through all of 2022 to the extent that it was probably fully expected.
So we did a lot of work once we kind of took the keys in August and closed on the transaction to drive very quickly to address that. And so what we start to see heading into this year is to kind of return that business to the margin profile that’s more consistent with what it was and start to now layer on, like you said, some of the cost synergies that we’ve been aiming and delivering on to kind of get this back to where it needs to be and on a trajectory to operating much more close to the margin profile of our components business and Cummins more broadly.
Chris Clulow
Yes. The only thing I’d add, Tim, is there’s also a lot of headway you’re going to make this year on cost. So -- and it’s not necessarily a big driver of revolutionizing their supply base, but just getting them on to our freight contracts as an example, we’re moving and making progress there. It’s about 180 basis points improvement on just the supply chain costs, which we’re not seeing that same level of improvement in our core business quite yet. We do expect that on the come as freight and material costs come down.
Tim Thein
Okay. Maybe we can dig into some of the bigger markets for you, starting with the largest being the North America On-Highway. I was -- I spent time last week at your largest customer and the mood there was would to be expected pretty upbeat. And I think their outlook while quantifying it is a bit more optimistic than it seems to be in terms of your market forecast for North American Class 8. So they’re not your only customers obviously, but maybe just dig into that.
Jeff Wiltrout
Yes. So I would say our outlook for 2023 assumes like we have good visibility in the first half, see very good strength, and that is going into the third quarter now. I’d say we have less visibility as we get into the fourth quarter. It’s starting to firm up some. I mean we’re still seeing decent orders come through month by month. We really saw very strong ordering, of course, in the second half of last year and a strong backlog. I would say we’re just -- we -- our guidance is based on some moderation in the fourth quarter. Whether that happens or not, I think it remains to be seen. But I think that’s probably the differentiation between us and maybe some of the OEMs. We’re about in line with where ACT is right now. But it’s -- I guess that’s something we continue to watch is whether that continues.
It’s a tough one these days because all of our -- we’re saying earlier today, all of our rules of thumb on cycles are kind of turned upside down because we never had a peak. So how long does this last? And then we have a very large change in emissions coming up in 2027, which seems really far -- but given the turbulence in the last couple of years is playing into people’s decisions now.
Tim Thein
Yes. Maybe shift to parts. You went out of your way a couple of years ago to highlight, hey, everyone talks about North American engine share, but parts has become a bigger and bigger piece of that revenue pie for you. And one of the -- or probably the largest public truckload fleet just presented this morning, and they were talking about how they used to target x years from an average age perspective, and they’ve gotten more comfortable with us extending that out and just because they have better visibility in terms of the repairs and the work they’ve done with preventative maintenance.
What do -- you guys have a good lens into that through your distributors. Is that something that’s more widespread in terms of -- and could be getting now to the point where those trade cycles maybe have elongated.
Jeff Wiltrout
Yes. I think that is the case, certainly in the heavy-duty space, where things are just -- they’re in use longer. It used to be like a 10-year rule of thumb is getting closer to 12 years now. And it is -- it speaks to the durability of the products. And it is, I would say, as a finance guy who’s been involved in some warranty and product coverage issues in the past. It’s somewhat surprising given the complexity and ongoing challenges from an emissions perspective, but this is the best products we put out in a long time.
These are -- you can see it in our product coverage rates are quite low, continue to have really high quality, which helps the customers and it elongates that cycle. But it does, to your point, along against the parts consumption cycle as well, increasing because heavy-duty is one of the bigger drivers of our parts sales alongside with our Power Systems business probably being the other big driver in parts.
Tim Thein
For NAFTA and from a market share perspective, as we move towards and you begin to push more of this fuel agnostic products. What do you think that -- obviously, market share predicting next month is difficult. Where could that -- where do you think that could play out as we look out over the next several years?
Chris Clulow
Yes, that’s a big question for us [indiscernible] Jeffrey welcome your thoughts as well. But it is -- we’ve made really good headway in medium-duty space, where that used to be a space where it was difficult to gain market share. We’ve gained very, very strong market share. I expect to hold that for as long as diesels remain. And then heavy duty is the big opportunity. It is heavy duty or what niches can we help the OEMs play where it’s just more and more challenging for them to meet one of the emissions that are coming in 2027, but also in terms of what are the other investments they need to make.
So I think that’s -- there is some opportunity for us to continue to grow on the share side even with assuming everything remains equal, natural gas will become a more -- a bigger piece of the pie we expect over the next few years, helps on the emissions side and strong durable product. And that will -- as we’re the only provider on natural gas, that will help us along as well on the share side. So I think there’s some opportunities for us to make continued headway. Do you have anything…
Jeff Wiltrout
Yes, that is. I mean I think now that we do start to get clarity on some of the emissions regulations in 2027, it’s starting to kind of work its way through all the decision-making and prioritization for the engine requirements to meet those fairly stringent regulations on that time horizon. So I think that’s -- it’s a little too early to say. We certainly think there’s upside exactly to Chris’ point, but that’s what’s the conversations that are going to happen in the next 6, 12, 18 months is around who is going to be prepared to meet those rigs and what that means.
We certainly intend to be, and this is why we’ve got some of the big R&D spending you see coming through to be ready with the right engine platforms across the breadth of medium-duty, heavy-duty and in between when we get there.
Tim Thein
That dovetails into the question. As we went back from your fourth quarter results far and away, the biggest question I’ve had from investors just revolves around the engine margin outlook and just kind of the lack of operating leverage. Just what you mentioned presumably plays a part of that in terms of a step-up in R&D, but maybe you can talk through that and other factors.
Chris Clulow
Yes, that is definitely the biggest factor in terms of -- from a financial perspective, a headwind. So we do get strong pricing as we continue into this year. That is offset by our continued investment in this field agnostic program because we’re renewing our whole engine lineup, the 6.7-liter, 10 liter, which we just announced and a 15 liter. So I think that takes a good amount of work. This is a heavy spend year, particularly with prototypes and other investments that we will continue to make the investment.
For us, it’s -- I guess the amount we need to invest is just another point to [indiscernible] adjusting. It’s like -- it takes a lot to meet this 27 emissions regulation. It’s a big capital investment, big R&D investment, and it shows our commitment to make [indiscernible] there. We’re going to be there, and we’re going to be playing in come 2027. So it just gives an indication of what it takes. But it is certainly from a margin perspective, but a headwind for us this year, along with there’s some other small ones like product coverage is a little bit higher as we just expect a little bit moving back towards the norm and a few other things.
Tim Thein
And so in that -- presumably, that stays with you looking beyond ‘23 or.
Chris Clulow
Yes, it will take us into ‘24. We’ll -- we’re not saying if it will be higher or lower in ‘24. I think it’s going to be a continued investment because we’ll start launching the products in ‘25, ‘26, ‘27. We’re not going to launch them all January 1 ‘27. That’s a lot to ask for our distribution network and others to support. So we’ll be launching them in stages, but that’s leading up into that. It starts to -- the development curve tends to come off about a year ahead of launch.
Tim Thein
Do you think on those 27 rigs, do you think there’s -- in order to meet that meet them. Do you think there will be a shift towards smaller -- you mentioned the 10 liter do you think smaller displacement engines are part of the way to get there? Or is that still TBD?
Chris Clulow
Yes I think it’s TBD. I think it’s -- I don’t -- we don’t think it’s going to move the 15-liter needs much. I think that 15 liters are still needed for -- particularly for the long-haul trucking when you’re crossing going across mountains, taking a long distance carrying heavy loads, the 15 liters need it, and you can -- we can get it to the right emissions level. So I don’t think it’s going to change it too much, but we will certainly be using a lot of the technology we’ve gained over the years.
I think of the acquisition we made of Jacobs just last year, has a cylinder deactivation technology, which will become a key part of lowering emissions, meeting emissions as we go forth in which we can apply to the 15-liter. So there’s different methodologies you can get to get to the same space.
Tim Thein
Got it. Before I move on, if anyone has a question, just put your hand up. Go ahead.
Chris Clulow
Sorry, I didn’t catch the last piece of that.
Tim Thein
Parity levels.
Chris Clulow
Parity levels?
Tim Thein
[Indiscernible] Question is around the TCO of your zero-emission products relative to diesel, right?
Chris Clulow
Yes, it’s a great question because you will have an increase in cost as we get to the 27 emissions, the price of fuel -- internal combustion engine is going to continue to increase. At the same time, as Jeff pointed out, we’re going to -- the cost of the 0 emissions is going to come down. That’s kind of what we balance in our cycle. So it’s not we have to make it all the way down from the 0 emissions down to become where diesel is now, as an example. It’s going to be meet somewhere in the middle.
It will vary depending on the geographies. So it will meet sooner probably in a place like Europe that has carbon taxes. I don’t foresee any carbon taxes coming soon in the U.S., for example, but I think that’s an area where it’s going to be different, why we have to assess it, our curves are by geography as well as by application.
Jeff Wiltrout
The only point I’d add is, I think -- and maybe there’s certain examples that I’m not aware of Nowhere this decade does it ever get upfront cost like-for-like to parity? Just to be clear, like it’s a TCO equation, total cost of ownership, not a upfront cost equation. Again, there may be an exception here or there in certain sub-applications and in Europe with carbon taxes, things like that, but usually, it is higher upfront cost or the EV solution traded off through a lower operating footprint across a number of different productions. I just want to make sure the TCO crosses sooner rather than later but the upfront is not -- doesn’t happen the ticket in the vast majority of applications there.
Chris Clulow
Yes. I think that’s a great point, Jeff. And I think that does play into the equation on adoption because if you’re a trucker, and you’re making pennies a mile, it’s hard to bet on the upfront cost and assuming it’s going to come in the back end. So I think that actually even slows adoption even a little bit further is where they need to see it play out in order for TCO to be really positive for them. So it’s going to be -- this is a very cautious customer base because of just the economics they have to deal with. So I think that does play into our adoption scenarios as well.
Tim Thein
[Maybe] a shift to Power Systems, I mean, that’s a segment that you’ve kind of had some fits and starts over the years from a margin perspective. But from an end demand standpoint, you probably have as good of visibility and as you’ve had in some time. Is there -- are there company-specific initiatives that are helping to support the margins? Or is it just, hey, where demand is really good in a lot of these higher-margin segments for us, and that’s -- it’s more of a cyclical listen it is kind of a common specific factor?
Chris Clulow
Yes. Maybe I can start and then you can add in about what we’re doing on like transformation work. So I would say we did have a breakthrough in about the third quarter where we kind of stepped up in margins and a lot of it had to do with pricing lag because these are long lead time markets. You’re right, we have visibility into demand, but the order boards are taking orders well into 2024 now as our competitors, but the pricing lagged a bit and that caught up in the third quarter.
So most of the step-up we saw in the latter part of last year and going into this year is on pricing. So we’re continuing to get more value there. At the same time, we’re doing some good work on trying to drive further margin improvement for that business. Maybe you can talk on...
Jeff Wiltrout
Yes, that’s exactly right. I think the answer is both, to your question, and there’s a bit of cyclicality mix dynamics with pricing that Chris just alluded to. And then a quite concerted effort in flight as we speak to make sure that we’re driving, I’d say, noncyclical and sustained margin improvement in that business.
Jenny Busch now runs that segment, who ran the distribution segment over the last several years and was in charge of helping us to drive a similar kind of sustained margin improvement profile through that business. And so that is a very specific effort to not just ride the cyclical waves, but to make sure we can drive profitability improvement.
Tim Thein
An important market for data centers have become more and more important over the years. And I feel like every 6 months, someone is calling the top for the center market and semiconductor companies have been warning for 2 years and yet it seems like the business view just continues to hum along. And it’s more global. So maybe just spend a minute on that.
Chris Clulow
Yes. It’s become a really large piece of our business for -- in our power generation. It’s an approach $1 billion in revenues across its life cycle. And it’s I think we’ve been calling the top for like 4 or 5 years, like it’s got to drop out. But what is happening is it continues to just move around geographically. And I think they continue to make the investments, even like with we’ve all seen what’s happening in the tech sector with job reductions and so forth, they’re still spending the capital. They’re going to need that long term.
So I think that’s -- I think the data center market continues to be robust. It’s looking strong for ‘23 and into ‘24 already. We’re starting to see that. And China, which was down a little bit last year on the data center side, we’re hopeful we’ll start to bounce back as we get further into this year.
Tim Thein
Yes. Mining, the very customer specific in BELAZ and [indiscernible]. I think at one point, it was the largest customer of the mining business. Again, the world has changed quite a bit there. Is that impacting the outlook for you for mining this year is just is more of a customer thing that...
Jeff Wiltrout
Yes, it is. Because we gave the guidance essentially mining flat this year, but that took out about 1/4 of sales into Russia, which is a big piece of the business with BELAZ Belarus-based. So that has dropped off for a very long foreseeable future. And I think we’re seeing strength elsewhere in the world. So making it up. So I think you’re still seeing strength across commodities, even as though they moderated some have continued to drive strong mining volumes, both in first fit as well as our rebuild.
Rebuild demand is really high in the mining space because these are engines oftentimes used for 20 years, they might rebuild them 4x in the segment. So I think that it is -- we’ve seen continued strength. And it’s hard to see how the gap of BELAZ being filled, but we’re seeing it being filled by some other OEMs. It’s not -- you can’t quite specifically track it, but we’re seeing -- they’re not making the sales out as well. They don’t have engines for their trucks.
Tim Thein
And a lot of those rebuild decisions are they in part -- we have this kind of bridge until we get to what the new world looks like from a BAM standpoint, but I don’t want to commit to a 20-year asset, if I think that Cummins is going to be out with a 0 emission product in 3 years. Is that some of that driving the decision or...
Chris Clulow
No. I think the rebuilder just -- I think they continue because they just have a lot of volume. They don’t want to get the utilization out of that capital. I don’t think there’s been any shift and Jeff, you can jump in if you’ve seen anything different of them really thinking in-depth about deploying the 0 emissions in that space. They’re trying it out. [indiscernible] working fuel cells with certain customers or battery electric seems like a hard technology to fit given the weight demands. But I think that’s more in the testing phase, but it isn’t slowing down their capital investment in the internal combustion power.
Tim Thein
Got it. Got it. Maybe on distribution, if you look back over time, kind of a mid- to high single digits and then it just gapped up a couple of years ago, and it seems like it’s kind of maybe leveling off a bit even on pretty good revenue growth that you’re projecting. Is it some of that of a tech spending related in terms of -- you did all this integration work, but maybe there was behind the scenes more investment that needed to occur that couldn’t when you had all these different operating units. Is that ...
Chris Clulow
Yes, I think that’s a piece -- and Jeff alluded to it with Jenny Bush, who’s now our power systems leader. She led our North America distribution group and did a huge transformation, which would allowed us to step up our margins, consolidate our business and drive that across. We’re in a more stable state right now on our margins. We are taking some of the learnings we learned in North America and applying them internationally. So there is some upside there. But we’re also in a place where like the pricing is you don’t have as much pricing power in distribution itself because it’s pass-through pricing.
So that might flow to our more product businesses and so forth. So I think it tends to be more stable margins. I think within distribution, we can move things around between segments, but most of that flows into the aftermarket side on our product segments.
Tim Thein
Yes. Is that a dynamic? You mentioned, I mean, is that -- as you look at some of the public distributors that have different margin structures, is part of the relationship that you have with the different business units? Is that kind of obscured a bit relative to looking at, again, a public distribution.
Chris Clulow
Yes, it is. It’s not completely apples and oranges, but it is different because we have those different pricing dynamics and how we share the price increases and so forth is going to be different because they’re wholly owned.
Jeff Wiltrout
Yes. And the future benefits start to come. Jenny did a good job of is truly get the integration right across the North American footprint and get the cost structure right to the -- and now the benefit comes from implementing some of the sales and technology-based solutions that continue to drive efficiency that takes investment to go unlock and things like that. To the extent that there’s additional upside that’s going to come a little bit longer and will some investment to unlock in addition to some of the global pieces to reinforce the same model that we delivered in North America.
Tim Thein
On new power, I mean, have you been able to -- the IRA in theory looks to be a big catalyst for hydrogen. It’s getting to the actual dollars and the investment is a little tricky because of all the grants, et cetera. But do you guys have any -- can you size that a little better now, just given some time in this past.
Chris Clulow
Yes. I think the IRA was -- had really between that and the infrastructure bill had really everything we wanted in it. So I think it does drive a lot of investment in hydrogen. We knew that in our -- as we put together our 2030 goals in our Analyst Day, we knew there’s going to have to be government incentive to help drive this infrastructure investment. And the IRI definitely helps that. It just has created more momentum in this particularly electrolyzer space, where people want to keep building out. It does take some time to get that into revenue. I can get those into use, but it is gaining good strong momentum. We’re continuing to see that. It is a complex proposition to pull together the whole investment thing for this infrastructure build-out, but IRA is certainly helping incentivize that.
Tim Thein
Got it. From a competitive standpoint, I mean as the cost of money has gone up, some of these things that were financed and kind of a hope and a dream that becomes a little bit more difficult, especially to the extent some of this revenue potential maybe is a little longer dated? How do you see that playing out just in terms of the competitive space? I mean, it’s -- there’s quite a lot of folks trying to get a piece of that. How do you see that playing out?
Jeff Wiltrout
Yes. There are a lot of folks here right, many of whom are trying to play this game, especially through the lens of kind of the one technology that they believe is going to be the winner. I guess our view is that especially next several years, where we expect capital to be a little bit more expensive, where I think the realization of this may be a longer path to scale. Is it -- there almost has to be some kind of consolidation of those folks to kind of get to the right economic profile to kind of see it do that journey. And that’s what we kind of expect to see happen, which is also why, like I said, we are quite happy with the set of investments we have made that we think gives us the right breadth of technologies and experience to, again, both fund and then position ourselves for the near, medium and long term.
As that happens, we will, of course, continue to evaluate where there is technology that may be additive, supplemental as those companies potentially need to find -- consolidate or find a new home to enable them to make that journey. And so this will be an ongoing conversation that we will have to just identify are there ways to move more quickly, move with better agility in a pretty highly dynamic technical space to invest appropriately.
Tim Thein
If we went back a year ago, the inflation and supply chain were the big kind of discussion points probably still are pretty much today. Where do you guys sit into both maybe just high level from an inflation standpoint as to seeing any signs of plateauing there? What are the things that are giving you more concern as you look into ‘23.
Chris Clulow
Yes. I think it is definitely plateauing. I think we’re seeing that the freight rates have come down ocean flow under contract rates are starting to get a little bit of benefit there. Material costs haven’t come down as quickly as we thought. They’re not going up dramatically, but they’re -- while commodities have come down, suppliers are still struggling with labor, still struggling with throughput. And so I think you’re still seeing our costs which are for the materials still be relatively high, but not going up, which is a positive thing.
The other piece of the puzzle is on the labor side also seems to be plateauing out. Still a little bit of a headwind but not as much as we were seeing probably midyear last year with the slowdown in the other parts of the economy, I think that, that does help in terms of labor demand. And so I think that’s moderated somewhat, but it’s a little bit of a headwind. So I think the cost-wise, it’s slightly positive for us as going into ‘23 and there’s probably some more to gain as we continue to move forward.
It’s also stabilized just from a predictability. So like we are getting more of the supply that we need. It’s less uncertainty on that side. So the stabilization is probably even more helpful than the cost side at this point because we can -- we know what we can build.
Tim Thein
I’ll see if there’s anyone have a question. Go ahead, [indiscernible].
Unidentified Analyst
I was wondering if you could touch on maybe some of the initiatives in the medium-duty space within new power. I know that the heavy duty is kind of further out, but medium-duty seems a little closer, and you guys have pretty high market share on the ICE side. So I’m curious kind of how that’s progressed since the Investor Day last year? And any kind of outlook for this year?
Chris Clulow
Do you want to take [indiscernible].
Jeff Wiltrout
I’ll start you can add. I mean, I think you’re right, if you look across the breadth of the applications we serve, the medium-duty space, you would expect to move more quickly. This was, I think, so we continue to make investments across our battery business across -- this is, of course, part of the rationale for the Meritor acquisition, like I talked about, which is this whole eAxles and the supplemental Siemens commercial vehicle business that we acquired as well as to have the right kind of integrated package to go work with OEMs.
That is the content that will differentiate to the extent that medium-duty trucks is going to move to battery electric sooner rather than later. And we do a lot of work on the math equation as it relates to market size and adoption rates and content per vehicle and our share relative to all that. And that’s, as you can imagine, pretty highly dynamic and one we’re working. I think not surprisingly, our models don’t say we’re going to replicate our engine share in that space as it goes through that transition. But we do think there is a viable and even attractive kind of content story kind of through the decade when it starts to see meaningful adoption towards the back half of this decade in that space.
So -- but that’s something that we look at every 3, 6 months, the math moves around a little bit, but that is kind of informing the investments and the pacing of the investments in the new power space most out of way. I don’t know if there’s anything more specific you want to talk about it.
Chris Clulow
Yes. I would just say, I don’t think it’s moved faster than we thought. I think it’s not probably in the high end of our scenario where we had -- I think it was 37% of adoption in medium duty by 2030, probably in the -- more in the middle right now. I don’t think it’s trending towards the high end. It’s just not moving quickly. Infrastructure is facing it as well as just battery prices.
Tim Thein
I’ll ask the obligatory China question. There’s some optimism flagged by some of our colleagues in Hong Kong about just what they’ve seen from a freight rate perspective and it’s leading to a bit more optimism around orders. Obviously, that doesn’t get transmitted to Cummins right away. But just what are you hearing from the team post New Year? And then we can touch more, not just an on-highway market, but just what you’re seeing across the other verticals and what you compete?
Chris Clulow
Sure. Yes, I think you’re right. There is more optimism. It is compared to complete pessimism last year. So it is hard to gauge. But it is -- it does feel like it’s turned the corner the change in the policy, certainly helped. And now the vast majority of the population is already headcount so we don’t expect further spikes in the near term. So it is set up to move. It’s just how quickly does it take off? I think that’s the wildcard. If you listen to some of the OEMs, they like us are kind of readying their supply base for a rapid bounce back, but you have to just play by.
We have more of a gradual improvement that we expect this year. But there is kind of growing optimism in the space. And it’s just how rapidly does consumer confidence come back and start -- and then you start moving more and more goods and then it starts taking off. But I think we’re ready with the rate and pace of when it comes back. We’ve proven back in 2020, we can come back really fast. Us and our supply base, and we’ve been doing that preparation over the last several months, and we’re ready for it. It’s just -- the OEMs are telling us build a lot, but we’re not quite believe in them yet because we haven’t seen it come through in the orders. But we still -- we haven’t seen our February results, we’ll see between -- we’ll get a couple of months and we’ll have a much better view.
Tim Thein
Got it. Got it. And beyond -- I don’t know if you’ve quantified this in terms of your total China revenues, consolidated plus on consolidated. What doesn’t -- what isn’t -- what is not accounted for by the on-highway?
Chris Clulow
Yes. So I think the construction space excavators in particular, is going to be down this year, and it’s just driven by emissions change. So they had emissions change December 1, and they always just tail off a little bit. So we expect that to be low for the next few quarters. On the Power Systems, the large industrial space, actually had a very strong year last year. It wasn’t -- it was about flat with the prior year. So mining and oil and gas, both were up considerably in China. Power generation held pretty well, and that continues to do well. It speaks to the kind of the heavy industry part of China just continued to be strong regardless of the consumer confidence. It gives us a little bit more optimism on the solid base, the foundation for the economy.
Tim Thein
Got it. All right. So with less than a minute left. So if we just sum everything up -- I mean, call was just a couple of weeks ago, but no dramatic -- not dramatic. But any tweaks around the edges? Or is it just still pretty much the messaging in line with what you can to.
Chris Clulow
I would really say it’s still the messaging. I think China is maybe a little more optimistic than even a few weeks ago. And I think the more we can get into ‘23 and see the strong orders, if we can see that, we’ll be more and more comfortable with Q4. But right now, we’re probably sticking with the same guide.
Tim Thein
Very good. Thanks, guys.
Chris Clulow
Thanks. Appreciate it.
Jeff Wiltrout
Thanks, Tim. Thanks all.
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Cummins Inc. (CMI) Presents at Citi's 2023 Global Industrial Tech & Mobility Conference (Transcript)