Cummins Inc. Price & Performance (CMI)

Such statements express our forecast, expectations, hopes, beliefs and intentions on strategies regarding the futures. Our actual future results could differ materially from those projected in such forward looking statements, because of a number of risks and uncertainties. More information regarding such risks and uncertainties is available in the forward looking disclosure slide deck and our filings with the Securities and Exchange Cummins. Particularly the Risk Factors section of our most recently filed annual report on Form 10 ks and any subsequently filed quarterly reports on Form 10 Q. During the course of this call, we will be discussing certain non GAAP financial measures and we will refer you to our website for the reconciliation of those measures to GAAP Financial Measures. Our press release with a copy of the financial statements and a copy of today's webcast presentation are available on our Web within the Investor Relations section Cummins.

Out of the way, I'll turn you over to our Chair and CEO, Jennifer Rumsey to start us off.

Thank you, Chris. Good morning. I'll start with a summary of 2024, discuss our Q4 and full year results and finish with a discussion of our outlook for 2025. Mark will then take you through more details of our 4th quarter and full year financial performance and our forecast for this year.

As I reflect back on 2024, I am pleased to share that we delivered strong financial results while also making significant progress in the execution of our Destination 0 I am incredibly proud of what Cummins and our employees accomplished for our stakeholders. And I feel energized about the opportunities ahead for us as we continue to demonstrate our relentless focus on advancing our strategy and executing our financial Cummins, as we lead the energy transition. It continues to be clear that our multi solution Destination 0 strategy that leverages advancements and solutions from both our core and Accelera by Cummins will continue to position us to succeed. We demonstrated this in 2024 as we further strengthen our position through evolving our portfolio, and expanding and establishing relationships with new and longstanding key stakeholders and partners. Most notably for our core business in 2024, we introduced the Cummins Helm engine platforms. Applied across Cummins' legendary VX10 and series engine portfolios, Helm platforms provide customers with the option to choose the fuel type either advanced diesel or alternate fuels like natural gas and hydrogen that best suits their business needs and offers the power and performance to customers [indiscernible] Cummins began full production of the X15 N natural gas engine at the Jamestown engine plant earlier this year.

And we are actively engaged with some of North America's largest and most demanding heavy duty fleets as they look to reduce their carbon footprint. Additionally, in our core business, we introduced 4 new generator sets to the award winning Sentum series. 2 each powered by Cummins QSK50 and QSK78 engines. In response to high market demand, these new models have been engineered specifically for the most critical applications such as data centers. In order to further raise our capacity to meet rising power generation demand, we also intend to invest $200,000,000 across our U. S, England and India manufacturing sites. As you will see in our full year financial performance details and 25 guidance, we are excited about the continued impressive performance and growth potential for our power [indiscernible] Cummins also successfully completed the separation of our filtration business Atmos Filtration Technologies. Cummins will continue its focus on advancing innovative power solutions, while Atmos is now well positioned to pursue its own plans for profitable growth. The separation of Atmos resulted in the tax free exchange of shares which reduced Cummins shares outstanding by approximately 5,600,000 in the first quarter. In our Accelerate business, we completed the formation of our joint venture, Amplify Cell [indiscernible] with Daimler Trucks and Buses, PACCAR and EV Energy.

To localize battery cell production and the battery cell supply chain in the United States. This strategic collaboration will advance 0 emissions technology for electric commercial vehicles and industrial applications. Amplify began construction this year of a 21 gigawatt hour FACT [indiscernible] and is targeting start up production in 2027. Lastly, as we navigate this long and messy transition for our customers, we remain committed to pacing and refocusing our investments on the most promising paths. As the adoption of 0 emission solution slows in some regions around the world. Of our Accelerate Business segment. As we underwent a strategic review to streamline the business. While also ensuring we are set up for long term success. We remain committed to Accelera and its mission, and this business continues to play an important role in our Destination 0 strategy. Now I will comment on overall company performance for the Q4 of 20 24 and cover some of our key markets. Demand for our products Cummins strong across many of our key markets and regions. Offsetting the softening in the North America heavy duty truck market. Revenues for the quarter totaled $8,400,000,000 a decrease as lower North America heavy duty and pickup truck volumes and the reduction in sales from the separation of Atmos were partially offset by continued high demand in our global power generation markets.

Stronger aftermarket and North America medium duty truck volumes as well as improved pricing. EBITDA was $1,000,000,000 or 12.1 percent compared to a loss of $878,000,000 or negative 10.3 percent a year ago. 4th quarter 2024 results included $312,000,000 of charges related to the strategic reorganization of our Accelera business This compares to the Q4 2023 results which included $2,000,000,000 of costs related to the agreement to resolve U. S. Regulatory claims, $42,000,000 of costs related to our voluntary retirement and [indiscernible] and $33,000,000 of costs related to the separation of the Amaz business. Excluding those items, EBITDA was $1,300,000,000 or 15.8 percent compared to $1,200,000,000 or 14.4 percent year ago. EBITDA and gross margin dollars improved compared to the Q4 of 2023 as the benefits of higher power generation volume, pricing and operational efficiency more than exceeded lower North America truck volumes and the separation of Atmos. 2024 revenues were a record $34,100,000,000 essentially flat with 2023 despite the decline in North America heavy duty truck demand in the second half of the year, and reduction of sales from the Atmos separation. EBITDA was a record $6,300,000,000 or 18 point 6 percent of sales compared to $3,000,000,000 or 8.9 percent of sales in 2023. 2024 results include a gain net of transaction cost and other expenses of $1,300,000,000 related to the Atmos divestiture. $312,000,000 of charges related to the Accelerator reorganization and $29,000,000 of 1st quarter restructuring expenses.

This compares to the 2023 results that included $2,000,000,000 of costs related to the agreement to resolve U. S. Regulatory claims, $100,000,000 of costs related to the separation of Atmos and forty $2,000,000 of costs related to the voluntary retirement and separation program. Excluding those items, EBITDA was a record $5,400,000,000 or 15.7 percent of sales for 20 24. Compared to $5,200,000,000 or 15.3 percent of sales for 2023 as the benefits of higher power generation volumes, pricing and operational efficiencies more than exceeded lower second half North America truck volumes and the reduction in margin from the Atmos separation. EBITDA dollars were a record in Power Systems, Distribution and Engine segment. Our Power Systems business in particular finished 2024 with a record full year EBITDA of 18.4 percent of sales, up from 14.7% in 2023. I am very pleased with the performance across our core business segments and you will see from our guidance that we are excited to continue to build on this momentum. Now let me provide our overall outlook for 2025 and then comment on individual regions and end markets. We are forecasting total company revenues for 2025 to be down 2% to up 3%. Compared to 2024.

And EBITDA to be 16.2% to 17.2 percent of sales up from 15.7% in 2024. While we expect weaker first half demand in our North America on highway truck [indiscernible] We expect many of our markets, particularly power generation to remain strong throughout the year. Industry production for heavy duty trucks in North [indiscernible] percent flat to down 10% year over year.

We anticipate weaker first half demand and while we do expect a pre buy in the second half of the year, the uncertainty on the exact timing and extent is driving our wider guidance range.

In the medium duty truck market, we expect to marketize be 140,000 to 155,000 units. Down 5% to 15% compared to 2024. Primarily driven by weaker than expected recent net orders and a depleting backlog. Our engine shipments for pickup trucks in North America are expected to be 130,000 to 140,000 in 2025. Flat to up 5%. Year over year. In China, we project total revenue including joint ventures to increase 5% in 2025. We are projecting a range of down 5% to up 10% and heavy and medium duty truck demand in China. While export demand is expected to decline slightly, are hopeful that the recent NS4 scrapping policy and other stimulus actions may lead to domestic demand growth.

We have not, however, seen a meaningful recovery thus far. While there is still uncertainty around the China truck market for 2025, we expect strength in other markets, particularly power generation, where demand is In NDO, we project total revenue including joint venture to increase 10% in 2024 primarily driven by stronger power generation demand. We expect industry demand for trucks to be down 5% to up 5% for the year. For Global Construction, we expect flat to down 10% year over year, primarily driven by weak property investment. And shrinking export demand in China. We project our major global high risk car markets remain strong in 2025 Revenues in global power generation markets are expected to increase 5% to 15% driven by continued high demand in the data center market. Sales of mining engines are expected to be down 5% to up [indiscernible] For aftermarket, we expect revenue improvement with a range of flat to an increase of 5% for 2025. In Accelera, we expect full year sales to be $400,000,000 to $450,000,000 compared to 4 $14,000,000 in 20 24. In summary, 2024 was a record year for revenues, net income, EBITDA and earnings per share. In 2025, we anticipate that demand will be slightly weaker in the North America on highway truck markets particularly in the first half of the year, but offset by continued strength in the power generation market and resiliency in our distribution business given our strong aftermarket presence.

Despite our relatively flat revenue forecast, Mirac expecting to improve profitability and cash flow. We remain committed to our multi solution approach that is proving to be the right strategy for our customers for the environment and for the continued growth of Cummins while also returning cash to investors. Now let me turn it over to Mark, who will discuss our financial results in more Thank you, Jen, and good morning, everyone.

We delivered strong operational results in the 4th quarter which resulted in revenue achieving the top end of our prior guidance and EBITDA margins exceeding our projections. 2024 was a record year for revenues, EBITDA and earnings per share. Reflecting the strong demand for our products, and the strong hard work of our employees. Now let me go into more details on Q4 and the full year performance. There were some notable non routine transactions in 20242023 and I'll quantify those and describe our underlying results give a better understanding of the performance from regular operations. 4th quarter reported revenues were 8,400,000,000 And EBITDA was $1,000,000,000 or 12.1 percent of sales. As Jen mentioned, we underwent a strategic review of our Accelera segment which resulted in charges of $312,000,000 of which $305,000,000 were non cash.

Excluding this charge, we delivered EBITDA of $1,300,000,000 dollars or 15.8 percent of sales. In the Q4 of 'twenty three, we reported sales of 8,400,000,000 dollars and an EBITDA loss of $878,000,000 Excluding the regulatory settlement, Atmos separation costs and voluntary retirement and separation program costs in Q4 2023 EBITDA was positive $1,200,000,000 or 14.4 percent I know that's a lot to digest, In summary, on an underlying basis, EBITDA improved by 140 basis points on slightly lower sales.

Excluding those charges I just described. 4th quarter revenues decreased by 1% from a year ago with organic growth was more than offset by the reduction in sales driven by the separation of Atmos. Sales in North America were flat, while international revenues decreased 3%. Foreign currency movements negatively impacted sales by less than 1%. The EBITDA improvement of 100 and 40 basis points was primarily due to higher power generation volumes, pricing and operational efficiency partially offset by lower North America truck volumes and the separation of Atlas. Now let me summarize some of the impacts by line item in the income statement. Gross margin was 2.1 $1,000,000,000 or 25.4 percent of sales compared to $2,000,000,000 or 23.7 percent last year.

The improved margins were driven by stronger power generation aftermarket demand favorable pricing, particularly in Power Systems and Distribution, and improved operational efficiency. Selling, administrative and research expenses were $1,100,000,000 or 13.6 percent of sales compared to $1,200,000,000 or 14.2 percent last year. Due to lower research and development costs. Joint venture income of $87,000,000 decreased 26,000,000 primarily driven by lower technology fees from some of our international partnerships and costs incurred in the ramp up of the Amplify Cell technology [indiscernible] here in the U. S. Which was formed in the Q2 of 'twenty 4. Other income was negative $25,000,000 a decrease of $75,000,000 from a year ago primarily driven by mark to market losses on investments, related to company owned life insurance.

Interest expense was $89,000,000 a decrease of $3,000,000 from a prior year driven by lower weighted average interest rates. The all in effective tax rate in the 4th quarter was 32.8 percent principally due to non deductible costs related to the Accelerator reorganization. All in net earnings for the quarter were $418,000,000 or 3 point $0.02 per diluted share includes $312,000,000 or $2.14 per diluted share of accelerated reorganization charges. Excluding the accelerated charges, EPS was $5.16 per diluted share. Operating cash flow was an inflow of 1 point $4,000,000,000 just $37,000,000 lower than the level we saw in the Q1 last year. For the full year 2024, revenues were a record 34 $100,000,000 slightly above a year ago and reflecting 4% growth if we exclude Atmos from both 202324. EBITDA in 2024 was 6 $300,000,000 or 18.6 percent Excluding the gain in costs associated with the separation of Atmos, the accelerated charge in the 4th quarter and first quarter restructuring expenses EBITDA in 2024 was 5,400,000,000 or 15.7 percent 2023 EBITDA was 3,000,000,000 dollars or $5,200,000,000 and 15.3 percent excluding the regulatory settlement Atmos separation costs and voluntary retirement separation programs. The increase in EBITDA percent was primarily driven by higher generation volumes pricing and operational efficiencies more than offsetting the impact of lower North American heavy duty truck volumes the reduction in margin from the Atlas separation. [indiscernible] All in net earnings were $3,900,000,000 or $28.37 per diluted share compared to $735,000,000 or $5.15 per diluted share a year ago. 20 24 results included the gain related to the separation of Atmos, net of transaction costs and other expenses, of $1,300,000,000 or 9.28 dollars per diluted share charges related to Accela reorganization of $2.12 per diluted share of 1st quarter restructuring costs of $0.16 per diluted share.

Capital expenditures in 2024 were $1,200,000,000 flat compared to 2023 as we continue to invest in the new products and capabilities to drive growth.

Particularly related to the Helm platforms within our core business in North America. Our long term goal is to deliver at least 50 percent of operating cash flow to shareholders over the and over the past 5 years, we returned 54% in the form of share repurchase and dividends even while we are [indiscernible] Into 2024, we focused our capital allocation on our and returning $969,000,000 to shareholders via the cash debt reduction. We also reduced our shares outstanding by approximately 5 point 6,000,000 shares from the tax free separation share exchange. I will now summarize the 2024 results for the operating segments and provide guidance for 2025. And thankfully for you and for me, I'm going to exclude all those non routine items in the following pages. And thanks for staying with me as I work through that. For the Engine segment, 2024 revenues were 11,700,000,000 [indiscernible] up $28,000,000 compared to last year.

EBITDA was 14.1 percent of sales flat compared to a year ago. In 2025, we project revenues for the engine business will be down 2% to up 3% due to expected weakness in North American truck market particularly in the first half of the year, slightly offset by improved demand in pickup and some international markets. 2024 EBITDA is expected to improve with projections in the range of 14.2 to 15.2% Components segment revenues were 11 point $7,000,000,000 in 2024 13% lower than the prior year and EBITDA was 13 point percent of sales compared to 14.4% in 'twenty 3. There are a lot of work done to improve existing operations but that was offset in the year over year comparisons due to the separation of Atlas. For 2025, we expect total revenue for the components business to range from down 5 percent to flat as 2024 included Atmos the Q1 through March 18. EBITDA margins are expected to be between 13.8% and 14.8% In the Distribution segment, revenues increased 11% in 20 4 compared to 2023 and were at a record $11,400,000,000 EBITDA was 12.1% compared to 11 point 8% of year ago driven by higher power generation volumes and pricing.

We expect 2025 distribution revenues to increase 2% to 7% and EBITDA margins to be in the range of 12% to 13%. In the Power Systems segment, revenues were a record up 13% over 2023 driven primarily by power generation demand especially data center applications. EBITDA was 18.4 percent or 370 basis points higher than 2023 driven by stronger volume, favorable pricing, and a continued focus on operational performance and cost reduction. In 2025, we expect Power Systems revenues to and EBITDA to improve again and be in the range of 19% to 20%. Accelera revenues increased to 4 $14,000,000 in 2024 with a net operating loss of $452,000,000 as we lower costs in existing operations partially offset by additional losses in the Amplify Cell Joint Venture, as it advances its operations. In 2025, we anticipate revenues to be in the range of $400,000,000 to $450,000,000 and net losses to reduce to $385,000,000 to 415,000,000 [indiscernible] as we continue to make targeted investments aligned with market demand whilst reducing cost. Currently project 2025 company revenues to be down 2% to 3% Company EBITDA margins are projected to be approximately 16 point [indiscernible] percent to 17.2 percent compared to an equivalent 15 point 7% in 2024.

Our effective tax rate this year is Capital investments will be in the range of $1,400,000,000 to $1,500,000,000 we continue to make critical investments to support future growth, To summarize, we delivered record sales and profitability in 2024 including strong results in the second half of the year even as demand in the North American heavy duty truck market declined. Cash generation has been and will continue to be a focus as we enter 2025 enabling us to continue investing in new products, for new and existing markets returning cash to shareholders and maintaining a strong balance sheet. Last May, we laid out our updated financial targets 20 through 2,030. Our strong performance in 2024 represented an towards those targets and despite a relatively flat revenue forecast, and expected weakness in North American heavy duty truck, we expect to further improve profitability and cash flow in 2025 Thanks for joining us today. And let me turn it back over to Chris.

Thank you, Mark. Out of consideration to others on the call, I would ask that you limit yourself to one question and a related follow-up.

Our first question today is coming from Angel Castillo from Morgan Stanley. Your line is now live.

Hi, thanks for taking my question and congrats on another strong quarter here. Just wanted to unpack the power generation guide of 5% to 15% a little bit more. Could you just split that up between kind of price and volume? And then maybe just tying into that, I think you mentioned a new investment of $200,000,000 in PowerGen. You just talk about maybe what's entailed in that? I thought I guess there was already an expansion or doubling capacity. So what is kind of the incremental being done?

Yes. So as you said, we're currently in the midst of a $200,000,000 investment across our plants in Seymour and Minnesota at U. K. And India to ramp up capacity to meet what is a growing demand for power generation. Products. And so you're seeing in that guide an expectation that we have been able to take up capacity. We're continuing to look at strategic pricing and where we can bring value to the customer. So you've got some price in there as well, but really it's about capacity ramp up and continued sales of larger engines in the power generation and data center market market, it's really the 50, the 60 liter, the 78 and 95 liter These are large engines as we're able to bring more capacity online in our supply chain and our plants see that flowing through in revenue. And we expect trend to continue over time. And so we're tracking on plan or even slightly ahead of plan to double our capacity by end of this year and looking forward to being able to meet what is a really strong demand from those customers.

That's very helpful. And then maybe as a follow-up just on separate on the trucks. Can you just give us your latest thoughts on EPA 27? It sounds like you're still assuming some pre buy in the second half, but just given, I guess, what we've seen from the administration so far, any thoughts on the likelihood of any kind of challenges to the APA 27 rule?

Yes. Our current view is that we expect the EPA 27 regulations will stay in place in any companies including us have been investing over multiple years in those products to bring those products to market and we're looking forward to having a nationwide standard again in 'twenty seven. And with that, we are still anticipating some both economic recovery and pre buy happening in the North America trucking market that helped bring higher revenue in the second half this year and into next year.

We do anticipate there will be more discussion and potential challenge over the greenhouse gas regulations that we see out into the 2030 and beyond. [indiscernible] Thank you. Next question is coming from Stephen Volkmann from Jefferies. Your line is now live. Great. Good morning, everyone. Maybe starting off, can you just talk a little bit more about the Accelerator restructuring and how have you changed the focus of that business? And what are you doing less of or more of or just some color around that? Yes, I'll start and then Mark can add as he long been about remaining agile and investing as we see technology advancing and market starting to move in these 0 emissions technologies and we formed it through a number of acquisitions as well So what that meant was we had kind of a distributed footprint and investment coming from those different acquisitions. And so we really looked at where we see market moving. We expect that battery electric vehicles will be important in some of our commercial vehicle and industrial applications and we feel well the battery cell joint venture and some of the wins that we have with customers as that market So we're continuing to invest there.

We're continuing to invest, but pace investment in electrolyzers as we've seen some slowing in customer demand and uncertainty around incentives there. And then being selective in fuel cells and some of the other technologies where adoption can But we think we're well positioned. Frankly, the slower and messier this goes, my view is the better it is strategically for our Cummins. And so we're positioning ourselves in the places where we see that market and technology beginning to [indiscernible] Okay, good. Sorry, I thought Mark was going to add something. Well, you've been talking a lot as it is. Hopefully, you'll be doing less of that this year on all these adjustments. Can I just follow-up? Can I follow-up on the helm platform? Do you have targets relative Natgas side or on any of the other engine sorry, any of the other fuel options that that you can use with that platform?

We've get the rate of the beauty of the home platform is it's got that fuel flexibility. And so the reality is we're still going to sell lot of the diesel version of that and it will be a higher efficiency version, which means lower CO2, and lower fuel costs for our customers. We've set a goal of getting to 8% on the natural gas version of that. We're starting to see customers adopt PACCAR has launched at Daimler Trucks will launch that 15 liter natural gas this year. Fleets are testing it. I was with a big customer last week. They've They're finishing their field testing. They feel good about the product and they're looking to start to increase penetration, but it really depends on diesel fuel prices and regulation and customer CO2 goals and so it's hard to give specific numbers on the rate of natural gas or hydrogen. Adoption because of that dependency on infrastructure cost and regulation.

Thank you. Next question today is coming from Cheri Yvesh from Goldman Sachs. Your line is now live. Yes. Hi. Good morning, everyone. Hi, Gary. Hi, Gary. Hi. In Power Systems, you had really excellent 30% year over year growth in revenue per unit. In the quarter or in the quarter. So the ramp in the supply base is progressing nicely. I'm wondering if you just update us on how much more throughput you expect to get out of the supply base in 2025 for those large products? And I appreciate there could be a wide range of outcomes, but would love to your updated views on that.

Well, I think it's important to remember that that the revenue growth in particular for 20 24 was also about launching those new Centum products. So we're seeing new products coming online that serve the market in addition to ramping up capacity And for this year, it really is focused on continuing to max out our capacity capability that we have while we're making the investment in more capacity across that range of of products and the team has done a really phenomenal job of of doing that, improving operating efficiency, working with the supply base to try to get as much out of what we have. But there's some some major investments that need to happen by the end of this year to really get to the full doubling of capacity.

Unfortunately, Jerry, units are not a great indicator just because the size of the generator set we've been selling is right. So the average selling prices gone up a lot over and above pricing just the size of the set that we're selling. So the revenues outgrown the unit significantly.

Nice problem to have. And so prepared remarks, there's some optimism in the market about strong demand. Can you just calibrate us, I believe, including the JV and wholly owned business, China truck profits are maybe 10% of total company profits at this point. And given we're at the trough of cycle, is it fair to think about pretty attractive incremental margins if demand does indeed surprise the upside?

Yes, on the latter. I mean China in total more normal run rate would be in the range of 15% to 20% of our earnings and yes, on highway would typically be more than half of that. So you're in the ballpark. Gerry. Yes, and there's no no massive structural investments going on there in the current year. So get more volume, we'd expect to convert that into more profits. There's also just some lumpiness around tech fees and other things, but think the underlying operational business is well set as it's done in prior cycles when demand improves. [indiscernible] [indiscernible] just reinforces how well the engine business and components did in 'twenty four, not just did we have weakening heavy duty truck in the second half of the year, but we had weaker China throughout the year. So hopefully, at some point, confident China is going to turn. We don't have a lot other visibility into that right now. Hopefully, that's another leg to come.

Next question today is coming from Tim Fye from Raymond James. Your line is now live.

Thank you. Good morning. Maybe I'll ask one to start on components.

Mark, just as you think about margin outlook for 25% on kind of flat to down revenues, pretty nice improvement. I'm wondering how much of that is is maybe a benefit from kind of lapping Atmos spin or separation or is there obviously there's more to it than that. So maybe just a line or 2 in terms of what you're projecting there for components?

I think when you look across the Cummins, We've done a lot on cost reduction that hasn't been enormous in any given quarter, but we've been working at it really since the Q4 of 2023 when we announced voluntary separation package We did a lot of work internally during 2024 to look at how we lines of business functions, regional structures, And a lot of this work has paid off in terms of improving our cost structure and focus. So yes, the components business is going to benefit from some of that. We're not breaking it out separately, but was formerly known as Meritor Drivetrain and Braking Systems business, results have continued to improve their underlying So I think there are a number of things, but we're working incredibly hard on flattish revenue in Viagra to drive cost and efficiency where we can.

Okay. And then Mark on the Accelerate just in light of the the restructuring and given what's how the global kind of just backdrop is changing or has changed The expectation to get that business to EBITDA breakeven by 27, is that is that still in the cards or are we thinking that maybe as a tougher Yes. I think overall relative to our 2030 targets for the total company, we feel like we've had a really good start in 2024 and on track. And we're doing a bit better on the core business and headwinds have come more frequently and more severely to Accela. So we are committed to significant loss reduction to towards that breakeven but we do feel we're very much on track for the overall company targets That's really the reason why we took more pronounced actions or the Accelerate team did in the 4th quarter recognizing that we're not going to get enormous help from demand here in the near term, Tim. So we're managing what we can and in the context of overall company results, we feel confident we are not right now on track to get. To breakeven. As we sit here today. [indiscernible] Thank you.

Next question is coming from Kyle Mendez from Citi. Your Thank you.

I was hoping if you could just comment on how you're thinking about R and D spend in 2025 versus 2024, maybe more specifically within Engine and And then just beyond 2025, how you're kind of thinking about that? How we should be thinking Yes. Good question. So I think beyond 2020 5 is where we should see more momentum to the downside on engineering expense We did see some improvement through the year in the engine business. We've got a lot of new product launches both in engines and components. In 2025. But we have to we get through those launches and through 2027 that's definitely part of our margin expansion story. In those 2 businesses, but not a dramatic shift this year, some puts and takes between engines and components.

That's helpful. And then just could you comment a little bit on how you're thinking about the parts outlook for 2025?

Thank you.

Yes, parts held up pretty well, in fact, pretty little bit better than expected in the 4th quarter across our businesses And so we think in the range of flat to up 5%, probably some pricing baked in there. So yes, growing in line with the economy, I would say at least. On par with the economy. With what we know today.

Thank you. Next question is coming from Jamie Cook from Truist Securities. Your line is now live.

Hi, good morning. Nice quarter. Guess similar question that Tim asked on think it was the components business, just the margins mark in Power Systems are are very good despite sort of what I would call a muted top line forecast. So is that just pricing in some of the new products? And then I guess how do you think about margin targets relative to the ones you just gave us, I guess, last year? Is it looking conservative? And then my second question, obviously lots of puts and takes around tariffs and who knows what happens. [indiscernible] Are there any changes And your how your terms and conditions or contracts with your customers that if we do get into an environment where tariffs and that causes price increases that we're able to absorb cost or increase price more frequently relative to last time? Within engines, I guess.

Great. So yes, Power Systems doing well. I think continuing to focus on supply chain, efficient output that did a great job last year. So I don't want to sound like we're dissatisfied quite the opposite, very impressed, but still think there's more to come on raising volume, raising productivity and a little bit on price in Power Systems.

So all of those things contribute to us raising the margin guidance for the year and quite a bit above the 4th quarter levels, And I guess if we really had a robust U. S. Economy, we could see growth in some of the smaller generator sets we have high market share in some of the consumer segments that aren't particularly robust. So I guess that we don't see signs of that, but if we wanted to get on to the bullish side, and so more strength in the U. S. Economy, that could be that could be another leg to help On tariffs, by and large, our strategy is to make most of our products in the market in which they're sold. But of course, we do have a global supply chain and of course, nobody knows exactly what the tariff situation is going to be. But to the extent that we do incur them, then we think it's important that the market feels those and we'll look to pass those on. Let's hope that's not significant for everybody involved. But really, we're just focused on controlling what we can control And I think, yes, we've got secular tailwinds in Power Systems, but the biggest driver is being able to scale growth effectively and pushing out cost.

And then you don't see it on the inside, but work we've done inside to try and simplify our structure prove the speed of decision making all of those things help. And have helped kind of raise the bar in 2024.

Question is coming from David Raso from Evercore. Your line is now live.

Hi, thank you. I'm trying to better understand the margin expansion in engines and really for that matter components.

First, the DNA the growth in the DNA, is that mostly in engines or components? It's just the margin improvement is impressive. I'm just [indiscernible] do I have to move it down a little bit because there's more D and A than it is operational?

If you go Well, there is an increase in dealer because that's where we're investing most of the capital in North America, particularly in the engine business over the last Couple of years. So of the 100 D and A increase, is it 50 engines, 25 components, just some sense so I can get a sense of the underlying operating. Yes.

I mean, it won't be significantly in distribution. Power Systems, whilst we're increasing investment, it's still modest relative those two segments. [indiscernible] incremental basis, most of it's going to go through engines and components little bit in corporate which ends up mostly in engines and components, yes.

Okay. That's helpful. And then even with even with that, it looks like there still is some slight operating, let's say, non DNA margin improvement in engines. What's driving that? Is it a little bit of mix? Is it just trying to think about maybe the new medium engines, you're outperforming the market, how to think about those margins versus heavy? Because it's all wrapped in the idea of trying to figure out where do you think engine margins are as we sort of move out of 25 and people start to pontificate about earnings power in 26% with a pre buy. In the Engine division? Yes, I think it those are all really important questions and will be big contributors to the long term performance. In the near term, I think we continue to do well in the aftermarket side of which the engine business is our biggest single driver. So that's probably where there's still some pricing opportunity into 2025. And then yes, the engineering has stopped it's not coming down enormously, but come down off the peak there. Components probably going up a little bit. But those would be the the main drivers. And as you can see, we haven't factored a lot in from China yet.

So really it's cost control and aftermarket in the near term. Thank you. Next question is coming from Abi Rozavich from UBS. Your line is now live.

I guess In terms of your guidance for the market outlook for North America heavy duty trucks this year, Sounds like if for whatever reason you hope to materialize this year that you'd expect retail demand to maybe still be negative in the second half?

So I guess, 1, am I interpreting that correctly? And So can you just discuss how you're thinking about it?

Yes.

I mean, I think if you look at the underlying market spot rates dropped early in 'twenty three, so truckload carriers have really had challenges now for 2 years and I think there's a very real chance that we'll see improvement in that over the course of year just depending on what the underlying economy and interest rates do So there's some potential upside in the second half for that in addition to this pre buy phenomenon. Lead to stronger second half versus first half. How the range is quite wide because how high that goes is real dependent on the pre buy and when that starts.

Got it. Okay. And then in terms of medium duty, Just breaking down kind of market share gains versus market growth for 2024, how did those net against each other and then in terms of your sales guidance for this year within engines, how Are we thinking about further share gains this year or as much?

I think really, I think we're talking about following the market in 2025 there's been a long track record of significant market share gains in that market. There's [indiscernible] And there was some share gains. But going forward, it's very much primarily going to be tracked in the market, but can be modest changes around that from where we are now.

The year, I think reflective of what we've seen in order Yes. Back It's industry the industry orders we will feel that, yes.

From a product perspective, we continue to feel really positive about how our product is performing in the market. And our position across media and heavy duty.

Thank you. Our next question is coming from Rob Wertheimer from Melius Research. Your line is now live.

Thank you.

I had 2 questions around Power Systems, if I may. And one is, as this data center market continues to develop, Historically, at least, I suppose selling an engine is one thing and then servicing is another. And if you have backup power, it doesn't get turned on that much and it's not as profitable. But obviously, there's a high uptime, high criticality kind of operations. Do you see any opportunity to change that profit algorithm such that you'll be making more recurring revenue or otherwise on on that massive build out of engines that you're going to do? And then secondly, if I can just wrap it in, you've had excellent results in Power Systems I'm not sure if all of it's really this surge in data center or maybe the stuff you've touched on a couple of times in the call already operational improvements. I wonder if you could just expand how you've made that business better? Thank you.

Sure.

So first on the data center market, with power generation and data centers, we have engine and genset And then a good portion of that business also flows through the distribution business. The strong performance see in the distribution business last year, and the outlook is reflecting the strength in power generation as well as aftermarket. But as you noted that they don't today run a lot for backup Power, so typically parts revenue is relatively low as We look at shortage of power availability and how do you meet power demand in the U. S. And around the world. There's potential for some shift in that. And so strategically worth we're considering how we think about our our role in that, which was part of the the discussion on microgrids and what we do there today. But today, still very much heavily backup power and because of the high reliability demand for those applications. In terms of the power systems performance, we undertook now 2 years ago focused effort to really look at operating performance structure how we made sure we were investing in the right products and getting returns on the investments we were making for our customers.

And working through some of the supply challenges that have built up through the pandemic and then the rebound and the market after that. And so that really has come together at exactly the time when this data center trend has also happened. And so we really had strong underlying operating structure and performance in the business that we continue to drive improvement in as we're also taking up volumes. And so both of those are contributing to really the remarkable profitability improvement that you've seen in Power Systems. [indiscernible] slice of revenue on Datacenter and in fact is fundamental to winning and support in this data center business around the world. I think that's one of the strengths we have and few others have and that's why you see that the market demand is concentrated amongst a couple of large engine manufacturers like us. Because of that service capability. But just to underline what you said, Rob, and your intuition, it would be very wrong to attribute Power Systems Improvement just to data centers. That's a journey that's still got legs left at the tide The performance level has been elevated across that segment including in the alternator business, which supplies [indiscernible] really across that supply chain.

So we're credibly pleased with the way that business has improved.

Thank you. Our final question is coming from Timmy Zakaria from JPMorgan. Your line is now live.

Hi, good morning. Thank you so much. So the Distribution segment guide 2% to 7 Given the underlying truck market outlook, Are you able to comment on the core distribution outlook versus the power generation related services? The reason I ask is power generation demand holds at these levels, it seems like distribution could see another double digit growth year in 2025. So any comments there would be helpful.

Yes, I think you're typically seeing Parts growth maybe slightly above the rate of economic growth And then in this cycle, you're right, the power generation demand in data centers and in some other applications has really provided that [indiscernible] So I would say in the short run, yes, PowerGen will be the main swing factor. I would say that some of the other segments, mining, oil and gas, if we look beyond this year, we'd expect to see more growth in the future. There's not enormous momentum in those businesses, but they're also important end markets for distribution One of the reasons that we like distribution, it generates a lot of cash It's less volatile. In other parts of the business and have that really strong aftermarket piece, which doesn't get the same extraordinary growth rates but underpins the kind of year to year level of performance. So yes, distribution is doing well. And hopefully the global economy strengthens and then all of our businesses will do well.

Got it. That's very helpful. And then one follow-up question on the [indiscernible] that you expect some pre buy in the back half. But the timing is uncertain. I'm curious what pre buy lift is embedded in current heavy duty and medium duty outlook for North America? I'm just trying to understand what the market could look like let's say, if there is no pre buy.

Well, there are so many factors at play but that's one of the factors we believe could help. We're going to start off at a fairly [indiscernible] Although orders here yet in the Q4 of 'twenty four were little better than expected, I would say. But it's really we're anticipating that strengthen in the second half to come somewhat from demand ahead of the regulations and understanding of how flexible the supply chain is for that industry Again, I think we've all got fairly consistent views of the market at this point. We'll see how it plays out. A big factor of course is going to be the strength of the U. S. Economy. Spot rates and freight activity. All these factors weigh in The main thing to know is we've got a stronger second half [indiscernible] built into our forecasts, Q1 yes, is going to probably be the low point of the year with what we expect right now. The question is will we get the improvement in the second half?

We've reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments.

Thank you, everyone, for joining our teleconference today. That concludes the question and answer session. Session. As always, the Investor Relations team will be available for questions after the call. Thank you.

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