Cummins, Inc. (CMI) Presents at 13th Annual Evercore ISI Industrial Conference - Transcript

Cummins, Inc. (NYSE:CMI) 13th Annual Evercore ISI Industrial Conference Call March 2, 2021 2:10 PM ET

Company Participants

Brett Merritt - Vice President, On-Highway Engine Segment, Cummins, Inc.

Jack Kienzler - ‎Executive Director, Investor Relations, ‎Cummins, Inc.

Conference Call Participants

David Raso - Head, Industrial Research, Evercore ISI

David Raso

Thank you, everybody for joining us. David Raso, Head of Industrial Research for Evercore ISI. Excited to have joining us Cummins' Brett kind of become a tradition doing this with us. I appreciate it. So thank you -

Brett Merritt

Great, thanks for inviting me again.

David Raso

Brett Merritt, he runs, he is the VP for the On-Highway business, obviously Cummins' largest business. So definitely appreciate taking the time. And Jack, our first conference together. Welcome. You've been in the seat -

Jack Kienzler

[indiscernible]

David Raso

Four months, three months?

Jack Kienzler

Yeah, end of the third month. So I'm good to be.

David Raso

Well, thank you very much for all the help so far. So thank you for coming. For questions, please just send questions in via the chat room. Send them in as you think of them. They can just be sitting there waiting for me to read on your behalf later, or I can just interject them as we're having a conversation.

Brett, I guess I would just start with that big picture question. I know you look very young. But I remember when I first started here in about The Detroit Diesel Series 60 in a first electronic engine that was going to really hurt Cummins and then from the ACERT engine to obviously Navistar with their EGR. I mean, it's always been the case, Cummins is about to lose market share.

And, you know, obviously, the last couple of weeks, you had another, a couple examples of gaining share. Obviously, this time feels a maybe a little more threatening, you have a more dramatic shift potentially in technology, you actually have new entrants coming in to the truck manufacturing. So just curious, this is in a big picture view. Cummins has always gone through these and there was always a lot of concern and you look up and go, is there markets here at still 75%, 80% making duty? Is it so 35-plus percent and heavy?

And now you're actually getting a foothold in Europe really for the first time on the engine. You always had the fuel injector business, right? And clearly your positions in India and Brazil are still you know, China just you know, especially India and Brazil, terribly strong. Just curious, your perspective. I know you're going to talk your own book a little bit. But -

Brett Merritt

Yeah.

Question-and-Answer Session

Q - David Raso

Just given all those challenges. How do you view this one in the next say, 10, 15, 20 years?

Brett Merritt

That's the matter why I came back to this one, David, because you've been beating me up on vertical integration for a few years. So I had to come back and say, you know, those plans we had are coming to fruition. So, you know, that's long been the overhang for us is, say, well, vertical integration win, and we've had a strategy that, you know, three of our strengths are really the technology advancement and fantastic products.

The second is scale, unrivaled when you look at this industry, we make 1.5 million engines a year versus anyone else's less than half of that. And then the third, we do particularly well are partnerships, which is really a lot of our success in the China and India that we've talked so much over the years.

As you looked at the future. This is five, seven years ago, we began the strategy that said, with automation, with connectivity, with all the new power, needs for investment, new trucks at every market and all the OEMs trying to expand what regions, how would they be able to afford to do all those things? And one or two of them, they'd have to give up. And one thing that Cummins brings to many of the OEMs besides scale and technological advancement and other things is risk mitigation.

And so when you think about, they go through those investments, and they say, wait a minute, there is part of this we could just partner with Cummins, and still be able to win in the market. And then that obviously helps Cummins. And so you've seen this come to fruition with Isuzu, and then our Daimler partnerships, which will just augment our other partnerships we have such as PACCAR and others. But it does, it allows us to grow that share in say, Japan, Southeast Asia, and then Europe, which is net growth for us over the next 20 years.

And in the meantime, you know, we'll continue, my job is to continue to expand and grow share within on-highway and bring profit to the company. So that we make the right investments in the new technologies, which we believe is a path to zero, and not an exact leap. So as you know, we think that we believe in this power of choice. And so it's going to go across the spectrum of technologies, and there's no one silver bullet. And so we'll continue to invest in each of this spaces as they come up. But we think diesel and natural gas have a pretty long run. And being the one who wins in that long run is quite important to us. So we're starting to see those come.

David Raso

If a large player like Daimler can say, better Cummins then us. What's the argument for others to say better us then Cummins? Or what are those conversations like with VW or even a Dongfeng, I'm just curious, where heads are that may Daimler willing to do it, but they're not.

Brett Merritt

It's tough to say where everyone's heads are. What I will say is, we always have those conversations, a goal of ours is always be in the room and always have a good relationship. And I think I've told you this before, a lot of times we walk in and say, where can we help you? Where can we buy breath, buy technology scale, buy geographic scale? And where do you want to invest? And some will always invest in certain areas. We would think that there's some math behind the scale.

So as you start to look at particular areas of medium duty on the upper end of medium duty and in certain segments of heavy duty, we'd say some OEMs are under scaled. And if so, why not do a partnership which both strengthens you and strengthens Cummins, because we think we can bring a better cost at equal or better performance with them not needing to invest in that space at that time. And so I think that is an active question, you should ask many. But we have ongoing conversations. And I think this will be a pretty active space for the next couple of years.

David Raso

You know when you think about hydrogen fuel cell versus battery. And, you know, maybe this is my ignorance of not appreciating all that you're doing on battery. But it feels like the fuel cell side, the hydrogen fuel cell has gotten the greater attention, the greater focus. And you know, I tend to agree with you that that's the better solution for Class 8, but it's not guaranteed. If you get enough infrastructure built that on battery, the total cost of ownership gets at least close enough to hydrogen even if the density power or the power density is not the same. Even the charging is a little longer. But hey, I already built out my battery charging stations better than go through solid again for hydrogen.

Brett Merritt

Yeah.

David Raso

Am I right that there feels like there's a little risk to it, battery is stronger than I would have thought for Class 8, that maybe Cummins isn't making a stronger push, and then on medium that you think would be pretty, you know, good argument for battery? Am I missing something that the medium feels a little, this is down the road? I mean, you just want a ton of meaning. So we're not talking imminent. But how do I think about battery versus hydrogen, especially your medium duty makes the dominance right now.

Brett Merritt

Yeah, and what we think about that. We would say we're making strong movies in both, I do think the Hydrogenics purchase put us in very solid footing regarding fuel cell. And so maybe it's reaction to the strength of that move versus we've aggregated a few plays in battery, and battery, we've got a few more games to be played there, you know, we're kind of in round one or now kind of version two, we really don't think the right architecture or the win will happen in front of probably stages three or four, and we'll be there.

We already are in some school bus OEMs and transit bus OEMs as you know, there's a variety of other applications you'll see over the coming years. But we will not concentrate on just one or the other, we just don't believe in that, we believe in the power of choice and that's very application-driven. So there are particular applications inner-city returned to base. This is great for electric.

And I would agree with you once those electric charging infrastructure is a big project happen, then electric would be very good in those markets. But we do see line-haul as more applicable for fuel cell. And that that's where that long-term play is. So I think you'll see us play in a variety. But don't underestimate that a diesel plus hybrid, 48 volt, where you use the power for either emissions or increase performance, we'll have a lot to play in the next, call it, 5 years to 10 years. And so we think advancements in all three of those is really where our strength lies, because there are some scale across each of them that you can utilize. And then, you know, one of our biggest strengths is less on the technological play, but on the channel.

So this is the old story that you know, who's going to be there 15 years from now when that bus gets repaired or engine and/or at the time electric system swings out, and they put a new one in. And what we'd say is, undoubtedly our global presence and we're unrivaled in our ability to supporting all those applications. And so it's that total package that I think I'll take. And that's a long way to say you'll see continued investments by us in battery. But obviously, we've got a pretty strong start in fuel cell.

David Raso

You know when it comes to investments, and Jack, Mr. M&A from his prior life, how should I think about that statement and saying there's further, you know, moves in the game to be played? What do you - I'm curious, you know, with the balance sheet the company has, what kind of moves should we be thinking about in that arena? Like, what do you need? I guess, is another way to say.

Jack Kienzler

Yeah, thanks for inserting, Brett obviously, to chime in. So I think the way we're thinking about, David is to start with kind of organic R&D, and then identify holes in our path that way, right. So I think, you know, we've been - we've built up the electrification capabilities via a few different acquisitions, but also a significant amount of organic spend, and, you know, even post-Hydrogenics acquisition, we've been deploying a lot of organic spend that way too.

And so when you do that, you kind of look at the whole value chain, and identify which areas that you may need to supplement. So I think the way we're thinking about it right now is, especially in the New Power Sphere, continued R&D, which allows us to get product out into the field and start to harness those technical learnings and then improve our product.

In doing so, you canvass the competition in the market, canvas where your perhaps weak points are and then supplement as needed, which we certainly are in a position to do so given our balance sheet and strong financial position, but you know, I don't know that there's a that moment piece that we're saying and I wish I had that. Let's go [technical difficulty].

David Raso

So given battery, though, is, you know, obviously, I would say are can be adopted faster than hydrogen, right. So we feel we're not falling behind on the battery side? Or is it picking your spot and sort of clamping down on, hey, that's the right solution and then putting the pedal down on that strategy.

So it feels like it's something you - correct me if you think differently, something we can wait two, three, four years on if we don't feel we have maybe the perfect battery solution now, but when do we really go-to-market, because the medium duty market just does feel a little more at risk than I appreciate the diesel hybrid opportunity, but you just think you want a little stronger battery solution in the next three to four years in medium?

Brett Merritt

Yeah, for me, I think it is a pick the spot prioritization. So I think you'll see it. I think you've got to figure out what is that right stopping point, as you're saying to say, yep, we're coming in and we're coming in strong, and we'll do so we have the, you know, the fundamentals are there of our base platforms, our availability and then the idea that we can support it. I think you'll see us make that play. But it's picking the right time.

David Raso

Sure. And when it comes to more components on the vehicle, when you think of an electrified axle or whatever it may be, I mean, your thought of where you want to be on vehicle, and then even going beyond kind of more broadly in the ecosystem from you know obviously, the electrolyzer brings you to a whole another arena, especially if it's not even on vehicle. It's industrial applications. But even from charging stations, whatever it may be, how big do you think when you go, we can go well beyond the vehicle, but even within the vehicle beyond the traditional engine, and of course, over the years, you've now had the AMT on transmission?

Brett Merritt

Yeah, I'll start a little and Jack can chime in specifically with his with past M&A side. I'm not ready to write off the idea that we'll still get some tailwinds from the component additions, as NSVI comes in fully BSVI in a full market once India returns. And then you'll see AMT adopted quickly in China. So it will be a very, very quick transition, because we can bring some advantages there that have yet to be unleashed, and the markets getting more sophisticated and craves fuel economy and performance even more than before.

And then I do think you'll continue to - we'll continue to analyze what are some of the right solutions? And are the applications they apply in large enough to make that investment? And then decide, yeah, we'll make the investment or not. And I would have to say, it would be tough for Cummins to make up a full sail leap to somewhere that's not related. So you're going to see us in kind of the related platforms. And while some of the hydrogen investments with Hydrogenics move us off vehicle, it is definitely in a related way to bring green hydrogen and based on some of the same technology.

David Raso

And the axle that something that would -

Brett Merritt

I think it's impossible we, again, this is the idea behind per application which is the right technology to deliver in each of those applications, is that application niche large enough to make an investment in that area? That would definitely fall in the world of things we'd look at.

David Raso

And don't get offended if I'm saying this incorrectly. But the Weichai-Ballard relationship, was that part of the impetus, I mean, Hydrogenics is working out great. So regardless, the reason I pushed you over the edge to buy it, who cares at this stage, but I'm just curious, Ballard-Weichai relationship do that have some influence on maybe your perspective of China's adoption of hydrogen? And obviously, you wanted to get in on the hydrogen fuel cell once Weichai got in with Ballard?

Brett Merritt

I don't know if those causal or not, what I would say is, as we looked at that landscape, we believe you could either go about it as partnership or full acquisition, we had chosen acquisition and Hydrogenics proved out to be the right partner. I do think, you know, it's going to be a large enough market and a big enough world that there's plenty of space for a couple players. So it doesn't, you know, much like our [technical difficulty] used to come here every time and everybody made it their own engines, and we still found a way to succeed.

So the fact there's another well thought of hydrogen group, I think that's fine. I think it'll promote good competition. And that we can still win with our base partnership. And so that's kind of how we look at things, we'll treat people well. And via our partnership with Hydrogenics, I think we have a full portfolio to be able to offer any of our OEM partners.

David Raso

When I think about the Chinese market in the dominant battery, and then eventually hydrogen, how do you perceive the adoption of hydrogen versus battery in that market where the units are just massive, and I'm curious, wherever maybe China decides to go, it creates such scale, it almost then lowers the cost to then drive that technology and the European market. I'm not saying China's going to drive the entire global market. But those are such huge volumes. If you wanted to get scale on fuel cell, that's the place to get it. But what do you think about China's adoption of hydrogen versus battery over the next, you know, five, 10 years?

Brett Merritt

Yeah, it's interesting. It looks like China will go towards hydrogen, that would be, I mean, they already are battery electric adopted if you look at the transit bus market. And the Chinese transit bus market is as large as the entire global transit bus market and it's been least 50-some percent the EV for some time. What we have not seen that due has been able to translate into larger share elsewhere around the world. There are some bits and places you can go.

But it hasn't exactly been scalable. And so it'd be interesting if hydrogen translates to that or not. And what we'd say is, I think the technology is developing so quickly, that the build scale, this goes back to that there's a few games to be played, and maybe stage four is where scale can actually be built. It doesn't hurt, no doubt. But given our scale on other things, I don't think we're completely reliant on China scale alone.

And so, I do think there will be large success in hydrogen in China, it will be pushed by the government and the market and then we'll likely be a player, whether that scale of whoever starts to win early on there, translates into wins and the rest of the market, I think is a little bit of a big leap based on the precedents.

David Raso

Okay. Well, I like that you have the Hydrogenics then letting Weichai or Renault or Ballard way ahead. So I'm glad you know at least Leisha have it in the Arsenal. On the shorter-term, the supply chain issues in North America. Are you having any customers truly just say, we have enough trucks parked, waiting for final component for assembly that they're actually pushing back on Jamestown volumes being sent? Or is adjusted? And we're just not able to ramp up the way we would have thought. And that's the impediment. It's not a true stop or you know, really very - it's not very disruptive. It's just simply restraining the upside. Is that a fair way to characterize it?

Brett Merritt

Yeah, I wouldn't say any, and it's not any one OEM. And then - and to be honest, it's not any one market, this is going to be a global issue. Definitely the North American market the return to a relatively high is the fastest in 35 years. So we had the most drastic downturn and we've had the most drastic upturn. And what does in the supply chain is quite disruptive. And so it's ripped all the extra inventory that is normally allows us to operate pretty efficiently.

And so it's a bit of a game of Whack 'Em All with the number of issues that the general supply base, including ours has, and this is Tier 3, Tier 4. And so I do think it's your latter case, where there's disruptions, it's not, as you've noted on our financials, it's not operating how we would like to nor most OEMs are operating how they would. But we haven't seen mass shutdowns where someone saying, hey, we won't take any more engines. Likewise, we haven't had mass shutdowns. But it does cause a lot of work. And we've been working this for a long time. And realistically though, there's a fair amount of work left to do, given the number of suppliers that are in this shape.

David Raso

I know that Cummins definition historically did not include the baby aids, but you know like ACT term. So if I asked you, what do you think the max build capacity for the industry is this year in North America?

Brett Merritt

It's a good question. We haven't, you know, us, we haven't exactly answered it, we would say our group two and then you can add on you know we could add on the group one but this range, were given a 245 to 265 group 2 that there's a possible we produce that as an industry. I don't think you go much beyond that. We're going to have to have some time to get the full supply base in better shape to go beyond where we're calling it. So I don't know what JCT number you're referring to. But if it's above that type of basis, that would be difficult.

David Raso

Yeah, no, I'm just curious if that sounds like an ACT terms, and not even quite 300,000 really?

Brett Merritt

No, it wouldn't be 300,000.

David Raso

I'm just thinking if the customer or your customers aren't willing to open their order books for 2022. We know where the backlog is. I mean, how many more orders are they going to take, right I mean, they're already starting to scrub the dealers' orders already, right. So you're going to see some cancellations move up after February? Not February, it's March. But so.

Brett Merritt

Yeah, I think that's the pinch the whole industry is in right now.

David Raso

Yeah.

Brett Merritt

How we deal with this? And then the question is, does it make the cycle last longer? Or, you know, what happens? And I think that'll be decided over the next probably three months?

David Raso

Yeah, the Chinese market, NSVI, NSV. What percent of your orders in China are NSX now?

Brett Merritt

I don't know if I - do you have an aggregated view of that, Jack?

Jack Kienzler

I guess no. Not off the top of my head.

David Raso

Is it a minority? I'm just trying to figure out how much is this V, NSV pre-buy versus the government was providing some incentives to buy the NSVI is the more your order book is NSVI, it feels more. One's view of the second half of China is more of a macro view. If it's, they're just buying a ton of NSVs now, you know, there's a sharp drop off after July 1. And I was just curious, are you majority or minority NSVI?

Brett Merritt

We're a minority NXVI to be open. I do think it ramps up over the next couple of months. And then I do believe it'll be a July conversion to NSVI. It's a little bit why we're calling the market where we call it and we know we're a bit more bearish than most. But we just think that the Chinese market don't support the 1.5 million units that went out last year.

And so at some point that comes a bit down again, we're not calling massive declines or anything, but particularly as you introduce a new emission standard, which we are fully capable, we've been selling them now for over six months, the products will do well. But anytime of product increases in price due to content, which is additional emissions content, we have yet to see a market that has continued to boom with that introduction. And again, it may not be forever, we do think there's some months of impact. But we - it's not emissions alone. It's just based fundamentals of the market, you would think that that has to slow down so.

David Raso

In your comment earlier about the AMT the least suggests to me it's not 1,000 going to 4,000, it's 1000 going at 10,000, 20,000 pretty quickly. What's the average price point on an AMT in China? Is as low as 6,000, 5000, how low?

Brett Merritt

I don't know if we've named what, but it's in that range-ish of an addition. So you'll have to prove it out in fuel economy within the first 18 months to the end user. And why I say fast adoption is, you're starting to see - two dynamics will help it, one, you're starting to see larger and much more sophisticated fleets in China.

They're pulling not only new technologies like that, but they're also pulling for particular performance of brands such as Cummins through the market, much as you've seen in the North America and United States, not near to the degree remember, in the United States, 60 fleets represent 33% in industry, it's nowhere near that, you're talking the top 60 fleets probably represent less than 10% of the industry. But again, 10% of 1.3 million units is a pretty big part of the industry. And so you will see that group of people pull for sophistication in fuel economy and increased performance.

Second, if you've seen the adoption of China of many parts of our business has been rapid. So when I started doing this, you know 15 years ago in China, the average heavy-duty engine is 6.7 liter. Now the average heavy-duty engine is 13 liters. You've not seen that rapid of a conversion into higher technology anywhere else in the world. It took the United States and Europe 30 years to do that, China doesn't intend. And so we would anticipate that AMTs will follow a similar curve which is relatively steep in comparison to the US or Europe.

David Raso

India and Brazil, anything derailing which should be off of terribly easy comps a big bounce back here in India? I feel like there always could be some credit issue or some, you know, political issue that probably arises. But does it feel like it's a pretty safe bet it's a big double-digit growth rate.

Brett Merritt

You would think there'd be pretty strong, there will be pretty strong growth in India. Supply chain concerns. It's global. Remember, we work off a globalized supply chain on many of our core componentry and so that will be the only thing that holds Brazil and India back. But India definitely off of what is incredibly low will be in. We're already seeing it on a month-to-month basis now. This first quarter, our quarter, not the Indian quarter, is a much stronger quarter than say, if you compared it to Q2 and Q3 of last year.

David Raso

And the challenge with the Manheim facility that you're building within the Daimler facility serving, I assume serving more out of your own factories in Brazil and India that there are needs. Anything I should be concerned about a hiccup to, I mean, the German Works Council always brings, you know, unknown let's say. But that said, just your ability to ramp it up and do the Daimler deal. Anything makes you concern like big decisions, you have to add another facility in Brazil or is it not?

Brett Merritt

No, I think you know, unfortunately in 2012, when I first kind of came into this role, we produced more than the entire industry uses in engines right now in Brazil. We have plenty of capacity in Brazil to be able to flex up. We've obviously brought that down due to meeting cost challenges over the past few years. But we can ramp up in Brazil.

And then in India, as you know, we have three plants by which we produce our medium duty engines, and we have the full capacity to do it. So I don't think we will be the issue and we'll have plenty of time to do it.

We feel pretty confident about what's going to go on in Manheim as well. It's early days, lots and lots of work to do. But remember, we've done a wholly new joint ventures all across the world. And this is not a joint venture, it's our own plant within a facility. But at least we have the teams wherewithal and systems to be able to do something like that. So we feel pretty good about it. But particularly good about the three or four regions where we're just adding scale off of investment we've already put into.

David Raso

Last question for me, if I thought of a VW, and you're not going to call out, you know, future partnerships right now on this call, but are we at a point where some of these next wins would actually require significant investment? Or do you still have enough capacity that you can take on another, you name the percentage of global medium or heavy market share, and then you could just fit right into your, you know, generally speaking, within your current footprint.

Brett Merritt

So I think there's a couple of different ways to look at. If you looked at it as our strong markets of US, even taking additional Australian demand, Latin America, India, China, those can be done relatively easily off of current investment. As we expand and the new, the markets where we have been weaker, call it, Europe and Japan, we'll have to look at some investment. That's an investment from a manufacturing capacity perspective, which isn't really our largest drive of investment, the largest drive of investment is, is our research and engineering. And that should be completely synergistic what we're already doing.

So we're already making investments, we're just adding more volume to the investments we're making. And that's the essence behind it. So there will have to be some scale at it in certain regions, depending on the product line. But by and large, we're really leveraging this initial investment we do in corporate.

David Raso

All right, you're at a time. Thank you very much. Really appreciate it. You guys have a great rest of your day with your meetings and if I can help with afterwards, don't hesitate so.

Brett Merritt

Hey, Thanks, David.

Jack Kienzler

Thank you.

David Raso

Thank you, everybody for dialing in. Appreciate it.

Question-and-Answer Session

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