康明斯 (CMI) 2026年第三季度财报电话会：创纪录EBITDA与数据中心业务增长

核心要点

• 康明斯（Cummins Inc.，NYSE: CMI）公布2026年第三季度营收为 94亿美元，同比增长13%， 得益于北美中重型卡车需求走强 以及全球发电业务销售增长。
• 季度EBITDA达到创纪录的18亿美元，占 销售额的18.9%。若剔除上年同期的Accelera费用， EBITDA利润率提升约170个 基点，此前为17.2%。
• 动力系统业务实现创纪录营收达23亿 美元，同比增长15%，其EBITDA利润率升 至25.4%。数据中心需求仍是主要的 增长驱动力。
• 康明斯将全年前景预期收窄至约10%的 营收增长以及18.2%的EBITDA利润率。 北美皮卡需求下滑是营收指引移至此前预测区间下限的主要原因。
• 管理层预计将在第四季度弥补因第三季度供应限制 而延期的大部分动力系统出货量。约有 2亿美元的预期营收从 第三季度递延至第四季度。
• 公司实现14亿美元的经营 现金流，并返还6.61亿美元予股东， 在季度内通过股份回购和股息落实。

核心财务业绩

出货量增加和发电业务有利的定价支撑了盈利能力。但这些有利因素被货运及原材料成本上升、研发支出增加以及与预期的创纪录全年收益挂钩的可变薪酬所部分抵消。

关税对该季度的净影响微乎其微。管理层表示，价格、成本和关税的综合影响略呈负面，因此出货量和运营执行力成为利润率扩张的主要驱动因素。

业务与运营表现

动力系统与数据中心

动力系统业务营收增长15%，达到创纪录的23亿美元，而EBITDA利润率提升了250个基点至25.4%。全球发电需求和有利的定价推动了这一业绩改善。

北美发电业务营收增长22%，而在中国的发电设备销售额增长42%。康明斯表示，北美、中国以及更广泛的亚太地区的数据中心订单依然异常强劲。大型发电机组的订单已排至2028年下半年。

据管理层介绍，国际与美国本土的数据中心订单量基本相当，其中中国和东南亚属于增长最快的市场。康明斯还表示，由于大型配置机组的供货依然受限，对小排量发电机组的需求日益增加。

动力系统业务某家供应商的供应问题延误了发动机生产，并影响了下游分销部门的安装业务。管理层预计大部分延期出货将在第四季度得到弥补。

康明斯正在扩大现有工厂的产能，并于近期投产了一座50万平方英尺的IEA冷却系统工厂，厂址位于威斯康星州萨默斯。这项约1亿美元的投资将使IEA的产能增加一倍以上。

该公司还为一个美国大型数据中心项目敲定了迄今为止规模最大的电池储能系统部署。管理层将固定式储能描述为早期发展机遇，并表示预计这不会成为动力系统业务指引中最重大的影响因素。

发动机与零部件

发动机业务营收增长20%，达到31亿美元，其EBITDA利润率提升至13.5%，此前为10%。北美重型和中型卡车出货量的增长完全抵消了皮卡业务的疲软。

零部件业务营收增长23%，达到29亿美元，而其EBITDA利润率升至14.3%，上年同期为12.5%。主要驱动因素是北美重型和中型卡车产量走强。

北美重型卡车行业产量达到70,000辆，同比增长62%。康明斯重型卡车销量增长68%至24,000辆。中型卡车行业产量增长77%至36,000辆。

皮卡发动机出货量下降16%至34,000台，主要由于柴油价格和利率高企令需求承压。

分销与Accelera业务

分销业务营收增长4%至33亿美元，但其EBITDA利润率降至13.9%，低于上年同期的15.5%，主要是由于后市场业务在业务结构中的占比下降。管理层预计，随着延期的发电设备安装项目完工，第四季度营收将实现显著环比增长。

Accelera业务营收降至1.03亿美元，低于上年同期的1.21亿美元，主要是由于电解槽销售额下滑。其EBITDA亏损收窄至5600万美元，低于上年同期的9600万美元亏损（不含非现金费用），这得益于降本措施。

国际市场

中国市场营收（含合资企业）增长9%至19亿美元。中重型卡车行业需求下降5%至297,000辆，而康明斯销量（含合资企业）下降15%至42,000辆，主要是由于纯电动卡车的普及率提高。

中国挖掘机行业需求增长15%至62,000台。康明斯销量增长28%至12,000台，得益于非洲和印度尼西亚的采矿业投资，以及中国农村建设需求。

印度市场营收（含合资企业）增长13%至8.03亿美元。卡车行业产量增长30%，受货运、基建和采矿业活动推动。

管理层业绩指引

康明斯将2026年北美重卡市场预测维持在24万至25万辆。公司将中卡市场预测下调至12.5万至13万辆，低于此前的13万至14万辆，原因是监管不确定性导致采购决策推迟。

皮卡发动机出货量预测下调至11.8万至12.2万台，低于此前的12.5万至14万台。管理层预计，受柴油价格和利率影响，第四季度需求将进一步放缓。

针对2027年，管理层提出了几项初步展望方向，而非发布具体的业绩指引。康明斯预计，数据中心相关的发电业务将保持强劲，电力系统和分销业务营收将实现增长，且经营现金流将迎来又一个强劲年份。公司还计划继续将约50%的经营现金流回馈给股东。

管理层表示，行业预期2027年北美卡车产量将大致持平。明年康明斯的大部分卡车发动机生产预计仍将基于现有传统平台，并逐步向新产品过渡。

风险与关注要点

• 供应限制：电力系统供应商问题导致约2亿美元营收延期，同时零部件和车桥受限也对公路用车生产造成了影响。
• 皮卡市场疲软：柴油价格高企叠加利率上升，导致康明斯下调了全年出货量预期。
• 监管不确定性：在预计出台的EPA最终规则下，NCP（不合规罚金）的实施时间与金额正在影响客户的采购决策以及向EPA 2027标准产品的过渡。
• 成本压力：运费、原材料成本以及更广泛的供应瓶颈在下半年带来了一定的价格-成本逆风。
• 动力系统执行情况：康明斯必须扩大产能并强化其供应商网络，以满足延续至2028年的数据中心需求。
• 电解槽问题：Hydrogenics及其欧洲子公司Hydrogenics Europe NV针对部分电解槽产品发布了停用建议。潜在的财务影响仍在评估中，尚未纳入业绩指引。

分析师问答要点

管理层表示，尽管外界对能源消耗和环境影响存在争议，但数据中心需求仍在持续增长。第三季度接单量超出康明斯预期，且与部分超大规模客户签订的合同承诺已超出目前的确认在手订单范围。

谈及动力系统业务利润率时，管理层提醒称，由于新产品投资、产能扩建以及生产天数减少，第四季度利润率可能低于创纪录的第三季度水平。然而，管理层表示这不应被视为该业务未来的常态化基准，其盈利能力的增长轨迹并未发生根本性改变。

根据当前掌握的信息，康明斯预计动力系统和分销业务的收入将在2027年实现增长。管理层表示需求正在增强而非走弱，但具体指引将在发布第四季度业绩时一并提供。

在北美卡车市场方面，管理层认为2026年的市场表现主要是从周期性低谷中复苏，而非大规模的提前采购。监管不确定性仍可能导致部分客户推迟订单。

公司计划从1月开始限量生产X10和X15平台产品，随后在第三和第四季度展开更广泛的过渡。管理层预计2027年的大部分产量仍将采用现有平台，并计划将适用的NCP成本转嫁给客户。

康明斯还在继续研发其130升天然气发动机。试验机型预计将于2028年推出，但管理层表示在2029年之前不太可能产生实质性收入。

财报电话会议完整实录

完整财报电话会议逐字稿

管理层陈述

Operator

Greetings, and welcome to Cummins Inc. Third Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, James Hopkins, Vice President, Financial Planning, Capital Management and Investor Relations. Please go ahead.

James Hopkins

Thank you, Donna. Good morning, everyone, and welcome to our teleconference today to discuss Cummins' results for the third quarter of 2026. Participating with me today are Jennifer Rumsey, our Chair and Chief Executive Officer; and Mark Smith, our Chief Financial Officer. We will all be available to answer questions at the end of the teleconference. Before we start, please note that some of the information you will hear or be given today will consist of forward-looking statements within the meaning of the Securities Exchange Act of 1934. Such statements express our forecasts, expectations, hopes, beliefs and intentions on strategies regarding the future. .

Our actual future results could differ materially from these projected in such forward-looking statements because of several risks and uncertainties. More information regarding such risks and uncertainties is available in the forward-looking disclosure statement in the slide deck and our filings with the Securities and Exchange Commission, particularly the Risk Factors section of our most recently filed annual report on Form 10-K and any subsequently filed quarterly reports on Form 10-Q. During this call, we'll 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 the website within the Investor Relations section of cummins.com.

With that out of the way, I wanted to share that I look forward to reconnecting with the investment community in my previously announced role overseeing Investor Relations as the Vice President of Financial Planning, Capital Management and Investor Relations and continue our dialogue about Cummins performance and future prospects for profitable growth. I look forward to speaking with many of you in our follow-up conversations after today's call. With that, I will turn it over to our Chair and CEO, Jennifer Rumsey, to kick us off.

Jennifer Rumsey

Thank you, James. It's great to have you back on our earnings call as a part of your new role. Good morning, everyone. I'll start with a few highlights from the third quarter and an overview of our financial results. I'll then discuss key trends across our markets and provide an update on our outlook for the remainder of 2026. Mark will follow with additional details on our third quarter results and full year forecast. Before turning to our financial performance, I want to highlight a few important milestones from the quarter. In August, we announced that our Power Systems business was selected to supply battery energy storage systems for a large U.S. data center project. These systems will help manage AI-driven fluctuations in power demand, improve grid stability and enhance power reliability. .

This will be our largest battery energy storage system deployment to date and an important milestone as we expand our capabilities to meet the evolving power needs of data center customers. We continue to make meaningful progress and remain on track with the power generation capacity expansion plans we outlined at our recent Analyst Day. This includes strengthening our global supply chain, which remains a key pacing item as we bring additional capacity online to meet exceptionally strong demand in power generation, particularly from data center customers.

Recently, we celebrated the opening of a 500,000 square foot manufacturing facility for our IEA cooling systems business in Somers, Wisconsin. This approximately $100 million investment will more than double IEA's production capacity and strengthen our ability to supply critical cooling systems for our generator sets. We also made important progress preparing for the upcoming launch of our helm engine platforms. During the quarter, we completed our 2026 forever rising tour, giving more than 500 customers and dealers the opportunity to experience our 2027 X15 engine, alongside our X10 and natural gas X15 engines. Customer feedback has been very positive, particularly around performance, drivability and confidence in Cummins reliability and support network.

Hearing directly from customers is an important part of our launch preparations, and reinforces our confidence in these products as we prepare to bring them to market. Together, these milestones demonstrate the progress we're making against our strategic priorities, strengthening our core business, expanding our capabilities and investing in technologies and capacity needed to support our customers and drive long-term growth.

Now let me turn to our third quarter financial performance in key markets. We delivered third quarter revenues of $9.4 billion, an increase of 13% compared to the third quarter of 2025. Growth was driven primarily by improved demand in North America heavy and medium-duty truck markets. and continued strength in global power generation, particularly from data center customers, contributing to record sales in our Power Systems segment. We achieved record quarterly EBITDA of $1.8 billion or 18.9% of sales compared to $1.2 billion or 14.3% of sales a year ago. Last year's results include a $240 million goodwill impairment charge and inventory write-down related to our Accelero business. Excluding these charges, EBITDA margin improved approximately 170 basis points year-over-year, primarily reflecting higher volumes, partially offset by increased variable compensation expenses associated with our expectations for a full year record earnings. Turning to our key markets.

Third quarter revenues in North America increased 15% compared to third quarter of 2025. The Industry production of heavy-duty trucks in the third quarter was in line with our expectations at 70,000 units, up 62% from 2025 loans, while our heavy-duty unit sales were 24,000, up 68% year-over-year. In the medium-duty truck market, industry production increased 77% to 36,000 units while our unit sales were up $33,000, up 88% year-over-year. Despite the strong year-over-year growth, demand was below our expectations as regulatory uncertainty and the anticipated phased transition to EPA 27 products continued to delay some customer purchasing decisions. We shipped 34,000 engines for pickup trucks in the third quarter of 2026, down 16% from a year ago. Demand was weaker than anticipated amid elevated diesel prices and interest rates. North America Power Generation revenues increased 22%, driven primarily by continued strong data center demand and supported by the additional manufacturing capacity we brought online at the end of 2025.

While we achieved record power generation sales this quarter, revenues were below our expectations as supply chain constraints, limited shipments across both Power Systems and distribution, which we expect to largely catch up in the fourth quarter. We continue to see robust order intake and engaged a multiyear strategic planning discussions with large data center customers.

Turning to our international markets. Revenues increased 11% compared to the third quarter of last year. In China, third quarter revenues, including joint ventures, increased 9% to $1.9 billion, supported by accelerating data center demand. Industry demand for medium- and heavy-duty trucks in China was 297,000 units, a decrease of 5% compared to last year. Domestic demand remained challenged by elevated fuel costs, partially offset by strong export demand, particularly in Africa and Southeast Asia. Our sales and units, including joint ventures, were 42,000, a decrease of 15%, reflecting increased adoption of battery electric trucks in the domestic market. Industry demand for excavators in China in the third quarter was 62,000 units, an increase of 15% from 2025 levels.

We sold 12,000 units up 28%, driven by export demand associated with mining investments in Africa and Indonesia as well as domestic demand for rural development. Sales of power generation equipment in China increased 42% in the third quarter due to accelerating data center demand. In India, third quarter revenues, including joint ventures, were $803 million, an increase of 13% from a year ago. Industry truck production increased 30% from 2025, driven by increased freight, infrastructure and mining activity.

Now let me provide our outlook for 2026, including comments on several of our key markets. We have updated our full year 2026 outlook and now expect revenue growth of approximately 10% and an EBITDA margin of approximately 18.2%, compared to our prior guidance ranges of 10% to 13% revenue growth and 18% to 18.5% EBITDA margin. In North America, we are maintaining our 2026 heavy-duty truck market forecast of 240,000 to 250,000 units. For medium-duty trucks, we are lowering our forecast to 125,000 to 130,000 units, compared to our prior outlook of 130,000 to 140,000 units, reflecting weaker-than-expected third quarter demand as regulatory uncertainty delayed customer purchasing decisions.

Looking ahead, we expect fourth quarter production in both markets to remain strong near third quarter levels, with supply chain constraints limiting the potential for additional upside. For our North America pickup truck engine business, we are now lowering our 2026 shipment forecast to 118,000 to 122,000 units compared to our prior guidance of 125,000 to 140,000 units. We expect demand to moderate further in the fourth quarter, reflecting continued pressure from elevated diesel prices and interest rates. In China, we continue to expect total revenue, including joint ventures, to increase approximately 15% in 2026, consistent with our prior outlook, primarily driven by strong demand in power generation, particularly from data center customers.

For China heavy and medium-duty truck demand, we continue to expect industry demand to range from a decline of 5% to an increase of 5%. As we saw in the third quarter, elevated fuel prices have contributed to a shift toward battery electric trucks, while export demand for diesel-powered trucks remain strong, particularly in Africa and Southeast Asia. In India, we expect total revenue, including joint ventures, to increase approximately 5% in 2026. We continue to expect full year industry truck demand to be approximately flat at the midpoint of our forecasted range, supported by recent tax rate reduction.

For global construction markets, we are maintaining our outlook for demand to increase 10% to 20%. In China, we expect export demand to remain strong, while demand in North America is expected to remain relatively flat amid elevated interest rates. In power generation, we continue to expect global revenue to increase 15% to 25% this year, consistent with our prior guidance. We expect to recover most of the shipments delayed by third quarter supply constraints in the fourth quarter, and demand remains exceptionally strong across North America, China and the broader Asia Pacific region. We're expanding our manufacturing capacity and demand continues to grow with customers increasingly ordering smaller displacement generator sets as availability of larger configurations remains constrained.

In mining, we continue to expect engine sales to range from a decline of 5% to an increase of 5% for the year, consistent with our prior guidance. Fleet replacement activity remains supportive in several markets. although elevated inventory levels and others are expected to moderate demand through the remainder of the year. For aftermarket, we are maintaining our outlook for revenue growth of 3% to 8% in 2026, supported by aging fleets and increased parts consumption.

In summary, we delivered a strong third quarter with record profitability and continued growth across several of our key markets. Our updated full year outlook reflects continued strength across most of our business, tempered by lower-than-expected pickup truck demand. As we enter the fourth quarter, we remain focused on executing our strategy and delivering our commitments to customers and shareholders. We remain on track with the commitments outlined at our recent Analyst Day, including expanding our production capacity and investing in new products and technologies to strengthen our product portfolio.

Finally, I want to thank our employees and leaders around the world for their continued commitment to our customers and to each other through a dynamic time. Their dedication, teamwork and focus on execution continue to differentiate Cummins and position us to deliver for our customers while creating long-term value for our shareholders. Now I'll turn it over to Mark.

Mark Smith

Thank you, Jen, and good morning, everyone. Before reviewing our third quarter financial results in detail, I'd like to summarize 5 key takeaways. First, we delivered record profitability and strong operating cash flow putting us on track to extend our record of raising performance cycle over cycle. Second, our year-over-year revenue growth rate continues to accelerate. After reporting a 3% growth in Q1 and 9% in Q2, we reported 13% top line increase in the third quarter and implied in our updated full year guidance is 15% growth in the fourth quarter. Third quarter growth was underpinned by exceptionally strong demand for power generation equipment, particularly among global data center customers, along with improving orders for North America medium heavy-duty trucks. Our fourth key takeaway is that we returned $661 million to shareholders through share repurchases and cash dividends. And as we enter the fourth quarter and expect to generate record full year operating cash flow, returning excess cash to shareholders remains an important priority.

Finally, we've updated our full year 2026 outlook. We now expect revenue growth of approximately 10% at the lower end of the prior range and an EBITDA margin of approximately 18.2%, consistent with our prior range of 18% to 18.5%. Lower-than-expected pickup truck volumes in North America are the primary reason for the downward revision to revenue guidance.

Let me now walk through the financials in a little more detail. Third quarter revenues were $9.4 billion, up 13% from a year ago. Sales in North America increased 15%, while international revenues grew 11%. EBITDA was a record $1.8 billion or 18.9% of sales compared with $1.2 billion or 14.3% of sales a year ago. Excluding the $240 million in Accelera goodwill impairment and inventory charges recorded in the prior year, EBITDA margin improved 170 basis points from 17.2% to 18.9%. Higher volumes contributed to the improved profitability partially offset by increased variable compensation expense, reflecting our outlook for record full year earnings. The net impact of tariffs, if we're still asking about that, was immaterial in the quarter. Gross margin was $2.6 billion or a record 27.7% of sales compared with $2.1 billion or 25.6% of sales a year ago.

The prior year included a $30 million noncash inventory write-down related to our electrolyzer business included in the accelerated charges discussed earlier. Excluding the inventory charge, gross margin improved from 26% to 27.7%. Higher volumes and favorable pricing, particularly in power generation, drove the improvement, partially offset by higher freight cost, some material costs and increased variable compensation expense. Selling, administrative and research expenses were $1.3 billion or 13.4% of sales compared with $1.1 billion or 13.6% of sales a year ago. The increase in dollars was driven primarily by higher development spending for upcoming North America On-Highway platform launches as well as the new mining and natural gas power generation platforms. Higher variable compensation expense affected both cost of sales and operating expenses across our segments, in the year-over-year comparisons. And I won't repeat that driver in each segment discussion, unless it's the principal driver of the variation in results.

Joint venture income was $127 million, up $23 million from the prior year, primarily driven by a stronger performance in our Chongqing joint venture within Power Systems in China. Other income was positive $27 million compared with a loss of $186 million in the prior year. Excluding the prior year $210 million noncash goodwill impairment charge, other income was roughly flat year-over-year. Interest expense was $81 million, down $2 million from a year ago. The all-in effective tax rate was 17.7%, including $75 million favorable discrete tax items or $0.54 per diluted share. All-in net earnings were $1.1 billion or $8.25 per diluted share compared with $536 million or $3.86 per diluted share a year ago. The prior year included $240 million in noncash accelerated charges equivalent to $1.73 per diluted share.

All in operating cash flow was $1.4 billion compared with $1.3 billion a year ago. During the quarter, we returned $661 million to shareholders consistent with our long-standing commitment to return approximately 50% of operating cash flow to shareholders. The quarterly returns included $359 million in share repurchases and $300 million in cash dividends. I will now review segment performance briefly on our guidance for 2026. Engine business third quarter revenues were $3.1 billion, up 20% from a year ago. EBITDA margin improved 350 basis points to 13.5% from 10% a year ago. primarily due to higher North America heavy and medium-duty truck volumes more than offsetting weakness in the pickup truck market.

For 2026, we now expect revenue growth of 8% to 11%, and compared to our prior guide of 9% to 14% and EBITDA margins of 12.25% to 12.75% compared with 12.5% to 13.25% previously. This updated outlook primarily reflects lower pickup truck demand. Components revenues were $2.9 billion, up 23% from a year ago. EBITDA margin improved 180 basis points to 14.3% from 12.5%, primarily driven by higher North American heavy- and medium-duty truck volumes. For 2026, we now expect Components revenue growth of 8% to 11% compared with our prior guide of 8% to 13%. We have updated our EBITDA margin outlook to 13.25% to 13.75% compared with 13.5% to 14.25% previously. These revisions primarily reflect lower-than-expected pickup demand as well as weaker domestic on-highway demand in China. Distribution revenues increased 4% from a year ago to $3.3 billion, and EBITDA margin declined to 13.9% from 15.5% a year ago, driven by a lower mix of aftermarket revenues.

For 2026, we now expect revenue growth of 10% to 13% compared with our prior guidance of $9 million to $14 million and EBITDA margins of 13.6% to 14.1%, a tightening of the prior range of 13.5% to 14.25%. Power Systems revenues were a record $2.3 billion, up 15% year-over-year, and EBITDA margin increased 250 basis points to 25.4% from 22.9% a year ago, driven primarily by stronger power generation demand globally and favorable pricing. For 2026, we now expect Power Systems revenue growth 15% to 18% compared with our prior range of 14% to 19% and EBITDA margins at 25.1% to 25.6% which is a slight tightening compared to the prior range of 25% to 25.75% unchanged for both Power Systems and distribution, the outlook reflects the anticipated fourth quarter recovery of most of the shipments that were delayed from the third quarter.

Accelerated revenues were $103 million compared with $121 million a year ago, mainly due to a lower electrolyzer sales. EBITDA was a loss of $56 million compared with a loss of $96 million a year ago, excluding the noncash charges described earlier. This improvement reflects the benefits of previously implemented cost reduction actions. For 2026, we now expect accelerated revenues of $350 million to $400 million and net losses -- net EBITDA loss of $260 million to $290 million, consistent with our prior guidance. I also want to highlight an update on our high live or electrolyzer products. During the third quarter, 2 wholly-owned subsidiaries, Hydrogenics and Hydrogenics Europe NV issued a stop use recommendation to customers of high laser electrolyzer products following a planned review of operational data from the installed fleet.

At this time, Hydrogenics has not initiated a recall campaign and continues to evaluate whether any modifications are required to return the electrolyzers to service. The potential financial impact of this remains under evaluation and is not reflected in our guidance.

In summary, we've updated our full year 2026 outlook for the company. We now expect revenue growth of approximately 10% at the lower end of the prior range an EBITDA margin of approximately 18.2% within the prior range of 18% to 18.5%. Our effective tax rate is expected to be approximately 23% in '26, excluding any discrete items. Our outlook for capital investments is unchanged between $1.35 billion and $1.45 billion we continue to make critical investments to support future growth.

Overall, we delivered a strong third quarter. The record profitability, solid cash generation and continued growth across several key markets demonstrating progress to our 2030 Analyst Day targets. Revenues in Q3 were a little below our own expectations. Implied in our guidance a stronger fourth quarter revenue with a key step up in distribution revenues, an important driver tied to power generation products, especially data centers. Our strong balance sheet and record cash flow generation give us the financial flexibility to fund long-term growth investments while continuing to prioritize returning excess cash to shareholders. So far this year, we returned a total of $1.681 billion in the form of cash dividends and share repurchases, reflecting our confidence in our future prospects. I want to thank our employees around the world for their continued dedication and commitment to customers. Now let me turn it back over to James who assures me is greatly missed Earnings Day and all the call backs he's looking forward to after this call. Thank you.

James Hopkins

Thanks, Mark. Out of consideration to others on the call, I'd ask that you limit yourself to 1 question and a related follow-up. And if you have an additional question, please rejoin the queue. Donna, with that, we're ready for our first question. .

Operator

[Operator Instructions] Today's first question is coming from Angel Castillo of Morgan Stanley. .

分析师问答

Unknown Analyst

This is Oliver on for Angel this morning. I know you guys talked about fully passing through CPs next year. I guess 2-part question. One, is that predicated on a disciplined OEM market? And then two, is there a chance that the EPA won't make its final ruling until after 2027? Any color there would be helpful.

Jennifer Rumsey

So we currently anticipate that the EPA will come out with their final rule, as you are well aware, they initiated the draft rule in July. -- comment period closed at the end of August and they're making their way through these comments and our understanding is we'll likely see that in December and we anticipate that NCPs will be included in the final rule the question and what's driving some underlying market uncertainty is will they change the amount of those NCPs from the draft rule. We have been working closely with all of our OEM customers around product availability and plans, and we anticipate largely in the next year, we'll sell more of the current products, but we have a phased transition that we've announced over the course of the year. launching limited production of X10 and X15 in January and then transitioning in the third and fourth quarter to full production of the new product and then to be, we'll move to the new product at the beginning of '28.

Mark Smith

And our comments about recovering NCPs are from our customers, right, where those apply on the new older products. .

Unknown Analyst

Understood. And then maybe just a follow-up on the supply chain constraints you mentioned. Can you just share some color on the nature of those bottlenecks? And then as they're resolved, I mean, which kind of -- which products do you see or which segments do you think should see the most benefit there?

Mark Smith

Yes. We experienced -- we identified a challenge with 1 of our suppliers in the third quarter in Power Systems. That's been worked on. We expect to recover most of those -- the production engine production, which then flows into distribution for installation to our customers in the fourth quarter. So that's the primary one. It is fair to say demand is tight, given the demand is high. And so increasing supply, investing in capacity, along with our suppliers is a key focus going forward, not just for the fourth quarter, but generally, I would say supply is tight, both in Power Systems and in some of the on-highway markets. Specifically for the third quarter, the impact was within Power Systems, which had a knock-on impact the distribution. And that's why you've seen such a step-up in revenue in the fourth quarter in distribution, we would have expected, let's say, about $200 million more of that revenue to incur in the third quarter that's rolled into the fourth quarter.

The other part of our revenue miss in the third quarter was market-driven, which we tried to be clear, as tied to the North American pickup -- heavy-duty part of the pickup truck market.

Operator

The next question is coming from Jerry Revich of Wells Fargo Securities.

Jerry Revich

I'm wondering if you could just talk about within Power Systems, if you've seen any movement in the backlog, given the election news and -- and otherwise, and if you could just comment on the ability to ship production to deliver more into other regions we do see movement on the backlog. Just would love you to comment on the broader puts and takes as you look at the production plan?

Jennifer Rumsey

Yes. Jerry. Sure. I understand the question. I think a lot of people have that question, and we, of course, recognize the conversation that's happening in the U.S. right now around energy use and environmental impact of data centers. Our focus remains on meeting our customers' demands. And what I can tell you is those demands continue to grow. Our order intake and the third quarter exceeded what we thought it would be. We continue to see exceptionally strong demand on our larger engine gen sets with orders extending out into the second half of 2028 as well as interest in the next size down from those where we can't meet customer needs with the larger gen sets. We have multi strategic conversations to plan expectations with our customers and those remain very strong, and we have contractual commitments with some of our big hyperscaler customers that extend beyond when we have firm order board.

So what I'll tell you is we continue to see strong demand. And recall that, that demand is global. We've seen significant rise in China and Asia Pacific this year in addition to the already growing demand in North America. And our investments are in existing plants and assets that have a lot of flexibility to meet various customer global needs in industrial markets as well as various power generation markets. .

Mark Smith

And that's 1 of the other advantages of having a global in-house distribution system than our global customers have that confidence of the support they're going to get wherever they operate. .

Jerry Revich

Super. And can I ask you on the capacity expansion, obviously, super CapEx efficient plan to add capacity. Can you just update us on how additional production is coming online, how that's going? And Mark, I believe if I've got the math right, fourth quarter implies potentially a step down in Power Systems margins. want to make sure that's right. It looks like that's about 22.5%, but maybe there are moving pieces to think about. .

Jennifer Rumsey

So I'll talk just about the investments we're making. We're really making good progress. Please on track with those investments, really to key areas, the capacity investment that we're making, and we will see -- start to see a step-up in capacity next year and then further step up most of that coming in, in the 2. time frame that we can use for both backup power as well as prime power applications. And then we're also making good progress with the development of our new 130-liter natural gas engine. So you've seen announcements of selling some of our existing natural gas products into prime power applications as well as BEST and then we'll have some key development milestones and start to have pilot product in the market for the larger engine in 2028.

So that revenue really doesn't start to come in, in a more meaningful way until 2029. But all of that is tracking to the plans that we had. And as I said, we feel we're well on track for what we committed for 2030 and our May Analyst Day. .

Mark Smith

Yes. And then on the margin question, yes, of course, your math's right, Jerry, I think Q4 is not going to be a forward-looking run rate. There's always a bit of natural variation when you're investing in new products, bringing on capacity. You've got a few shorter production days in the fourth quarter. So yes, the Q4 margins could be a little bit lower. But that's not the run rate going forward. There's no fundamental change in the underlying trajectory of the Power Systems profitability. It's been a great story, and we're very confident global demand and the prospects for that business. .

Operator

The next question is coming from Jamie Cook of Truist Securities.

Jamie Cook

I guess my first question, just, Mark, there's a lot of debate in 2027 and 2028 with just complications around EPA 2027 and phasing in and your investments on your ability to put up the targeted 25% incremental margins that you guys talked about at your Analyst Day this year. So -- just trying to understand your confidence level with Cummins ability to do that? And is it more back-end loaded? So just thoughts there. And then I guess just my second question, I guess what struck me about the quarter. As we miss on revenues, the margin performance, you mean, was very strong. So was there anything unusual that allowed you to put up good margins on softer revenue base. And then the margins implied in the fourth quarter are pretty strong, too. So I'm just wondering if the back half of 2026 margins is a good way to think about a starting point for 2027.

Mark Smith

Yes, so good, that's a wide range of related comments. So what I'd say is, number one, when we had our Analyst Day, best of my recollection, I tried to paint a picture across the different segments, that Power Systems and distribution would be more of a continuous story that there would be part of a transition to new products on the Engine business and component store, it's possible people are misinterpreting some of the comments we've tried to make about migrating to the new products. We are making great progress on revenues. We're making great progress on margins set aside the individual quarter nuances towards our 2030 Analyst Day. And any comments I've tried to make about this transition in product on the engine business.

I tried to flag that early at the Analyst Day and our comments remain consistent with that. We knew we didn't have the EPA rulings when we had Analyst Day. We still don't have the final rulings now, and we're just trying to provide you with an ongoing description of what we expect to happen given more information but still incomplete information. So the key takeaway overall is that 2030, we're making great progress towards those targets. And we're not in any way trying to signal anything other than strong progress. towards them. We'll get to the very specific site next year. There is nothing significant in the Q3 results, which is why Q4 also looks strong.

I mentioned in Q2, we'd have to update our incentive compensation plan expenses, which happens every single quarter, it just stood out more because of the year-over-year comparison but the trajectory of that incentive compensation is the same as I mentioned 3 months ago. The absolute expense was up year-over-year, consistent with record profitability this year, it was down sequentially because we had to true up the full year view. But in the grand scheme of things, not material. The underlying story is very strong performance. We didn't get quite out as much revenue as we'd hoped. Our expectations were similar to consensus for what we thought our revenues would be, half of its supply chain issues, which we believe will catch up in the fourth quarter. and roughly half of it market conditions primarily related to lower pickup trucks.

So we feel very good about the profitability and the progress. We feel very confident that we can do better as we continue to expand our revenues over the next few years. And also as the CFO, particularly excited about generating record operating cash flow and returning that back on a disciplined basis. So I hope that as clear as I can make it. Next year, we'll get into details -- next year. Of course, the complexities, but you should feel like we're entering with a very strong underlying margin base as we exit this year.

Operator

The next question is coming from Kyle Menges of Citigroup.

Kyle Menges

Great. I was hoping if we could dig into Power Systems margins and maybe a framework to think about it exiting 2026 and the incrementals. I think you've talked about maybe 25% to 30% incrementals for that segment going forward and understand there's a lot of moving pieces around the capacity ramp, maybe some incremental demand for smaller products and then this battery opportunity coming in -- but just any color you can provide on how to think about the incrementals in that business moving forward with all the puts and takes, seemingly.

Mark Smith

I would say all those smaller comments are exactly the same. We -- when we've taken the range by fractions of a percent factors, that's the same guidance, we just got 1 quarter left. So we're just tightening up the range with 2.5 months to go. But nothing's changed. Stand by all of those comments, we'll give you the very specific guidance. It will be -- if you ask me today, do I expect revenues of Power Systems and distribution next year to be higher, lower or the same than this year, they're going to be higher with what we know today. And we expect over time that those businesses are going to deliver more earnings. There's going to be variation in individual quarters. given the balance of investment and other things, but we're very excited about the prospects of Power Systems and distribution will give you very specific guidance in February when we get there, nothing's changed. If anything, demand has gone up.

Kyle Menges

Got it. That's good to hear. And then just a follow-up on -- maybe on North America, on the highway. Curious what how you're thinking about any potential prebuy or pre-build of inventory in the back half of 2026 and managing through a potential air pocket in 1Q '27 in production. I'm curious how you're thinking about that. .

Jennifer Rumsey

Yes. Really, what we've seen this year is been, we believe, pretty limited prebuy in the U.S. truck market and actual growing underlying demand of a cyclical low. Of course, it stepped up year-over-year significantly in the third quarter. and the industry, and we are managing through some supply hiccups and challenges through that. So in the fourth quarter, in Jamestown, where we build X15, we're really building out the capacity, we believe that this year is largely sold out. We're navigating some of our own supply challenges and components and axles in particular, and really focused on trying to deliver to customers through the end of this year and into next. And so we anticipate there will be continued underlying demand as we go into 2027. But of course, the uncertainty around where NCPs will be is causing some customers to wait. We believe the fundamentals have improved and the demand out there is real and will continue and to really just focus on trying to execute through the big step-up we've seen. .

Operator

The next question is coming from David Raso of Evercore ISI.

David Raso

I was curious, can you help us with your power demand today? The domestic versus international? And any color around the profitability? And if you can incorporate the China JV in that answer because back in the day with the geographic color was usually minority U.S., Canada for power. But just given the recent trends and there's obviously more in the business than just power. Can you help us with that mix? And obviously, any sense of the profitability domestic versus international would be interesting.

Jennifer Rumsey

Let us start with how we see the global business and demand. So we've seen really strong demand here in the U.S. and also in China and Asia Pacific. And of course, that's where you see a lot of the AI model development happening that's driving that strong demand. One of the benefits of Cummins is with our global product and manufacturing footprint and the distribution network, we can support those big customers wherever they go in the world. and we have projects happening around the world. In fact, I was in Spain in September and visiting a couple of our data center customers there. So they really are global, but a larger percentage of them sit in U.S. China and Asia Pacific, and the demand continues to grow. And as AI use grows in application, we think globally, we'll see growing data center demand. Mark, you can talk a little bit more about how you think about margins.

Mark Smith

Yes. I think we definitely have strong margins, whether that's domestically or internationally. We're not a company that makes only margins in 1 particular region. Depends what the application is. If it's a data center then the -- typically the EBITDA dollars are great at another applicate because we get all the extra installation in our distribution business. But I would say there's no significant difference and the order intake has been very strong in North America for quite some time. It is picking up at a faster pace outside of the U.S. such that the orders are almost on at par now between international and domestic. That's not going to be a discussion point in our earnings calls in terms of the Power Systems performance on margins. That's not been a bit of principal drive out. But we share some of that engine margin depending on which engines we're talking about in the gen set in China, if it's made in the joint venture is anything through our distribution, of course, is 100% Cummins extra slice of the pie.

David Raso

What you just said about international versus domestic on the orders. Were you talking about magnitude of growth? Or the absolute dollars now international as big as domestic?

Mark Smith

I would say the absolute dollars on data centers, I'm not talking about other power gen, I think it's probably even bigger internationally. But in data centers, it's now reached at par across all International market -- U.S. versus international, which China, Southeast Asia is the most fastest accelerating piece, and we're in a very strong position there. .

Operator

The next question is coming from Rob Wertheimer of Melius Research.

Robert Wertheimer

I had a couple of questions around evolving capabilities for data center. And specifically, on the battery backup announcement. How repeatable is that? Is there a big pipeline for that? And does that, in any way, intersect with your potential JV to make cells. And then just more generally, Jennifer, I think you touched on the rollout of the 130 liter. Any early indications? I don't know if you're taking indications of demand at this point? I know you're doing pilot production not this year and in the '28, but how are you thinking about the commercial gathering of orders and when you start that?

Jennifer Rumsey

Yes. So on the question around stationery energy storage, obviously, early days for us. We have a big announcement. What I would say is the conversations and the interest in how to bridge the grid, grid availability as well as grid under liability continue only strengthen, especially here in the U.S., we think there's a real demand there. And so the places that we get a lot of interest, of course, is that the stationary energy storage battery system. And to your question on the AMPLIFY joint venture, that joint venture is planning to make a sell for commercial vehicle on-highway that's different than what we're using in those. So we're sourcing that elsewhere. .

And on the natural gas product, you've seen a couple of announcements that we've already made around multiyear agreements and use of some of our natural gas product. That's largely the 78-liter that we have in production today. So yes, there remains a lot of interest in the 130 liter, the larger version of Jen said will better meet that market need, and we're not taking specific orders at this point, really just talking about customer interest and where we want to pilot and build confidence in that. that process. We're excited to be growing there. It's really going to be late this decade that we'll see that start to ramp up.

Operator

The next question is coming from Tami Zakaria of JPMorgan.

Tami Zakaria

I wanted to ask you about the best contract you recently won which seems exciting. Was this best opportunity embedded in your multiyear target? And if not, what kind of incremental revenue lift should we expect over that time frame that you have? And then would incremental margins on this type of revenues be similar to the enterprise target of over 25% through 2030?

Mark Smith

I think that's an exciting project. Obviously, there are different forms of these projects evolving over time, but I would just say that's likely to grow, but not be the most significant factor in our Power Systems guidance. So that we're just by communicating that. We're just letting you know we'll continue to expand our participation in meeting power flexible power needs of our customers, but it's not a fundamental change to the direction of Power Systems or changing in our outlook, which is very bullish for the top line and margin expansion going forward in aggregate.

Tami Zakaria

Got it. That's helpful. And then I wanted to ask you about the price/cost dynamic in the quarter? And has it changed versus the first half of the year, especially as it relates to the engine segment?

Mark Smith

I would say, generally, we're starting to see some creeping cost increases, right, freight's gone up. There's various bottlenecks around the world or areas of conflict shortages. I would just say, generally, there's a little bit more creeping cost. There's positive pricing for the company in total, but I would say between price, cost, tariffs, -- in an environment where we significantly improved gross margins, that was not a significant. All of that washed out to a slight negative. And really, it's the volumes and the execution of our operations that's driven the margin improvement. It is more of a slight headwind on price costs in the second half for now. .

Operator

The next question is coming from Kristen Owen of Oppenheimer.

Kristen Owen

And forgive me if I'm asking you to repeat yourself here. But I did want to start with the updated guidance for distribution that midpoint assumes sequential growth 3Q to 4Q of 23%. Can you just help us unpack what supports that increase? Is that generator deliveries, installation milestones, service activity? Just a little additional color there, please.

Mark Smith

Yes. It's -- the step-up is really driven by the distribution didn't receive all of the large engines expected at the end of the third quarter. And so a lot of their installation -- some of the installations were pushed into the fourth quarter. So you're right. It is an outsized number. I tried to call that out, so it's really just catching up the slight delays in the third quarter. The full year outlook has not changed. It is not a demand issue. The demand is there.

Jennifer Rumsey

And I think it's important when you think about our distribution business, there's a few things that this business does. Of course, we have aftermarket and parts and service that happens through that business. And then they're also doing projects, and they're doing a growing number of these large data center power generation projects. And broadly, we see higher margins in the aftermarket parts part of that business versus the power generation part of that business, which, of course, has been growing and very attractive, but just a way to think about that business and margin.

Kristen Owen

Great. And then my follow-up relates to the Sears order, the 2 gigawatts there in Texas. Just what milestones determine the delivery schedule there? And what needs to be in place at the customer level before that equipment shifts?

Jennifer Rumsey

Yes. So those -- that order is existing products. So we're really working with them in terms of their installation plans and providing that product to them and then potential for that to continue to grow and evolve as we bring the new product into the market over time. .

Mark Smith

Just overall project schedule, nothing particularly unique about the delivery of that. exciting but not unique. .

Operator

At this time, I'd like to turn the floor back over to Mr. Hopkins for closing comments.

James Hopkins

Thanks, Donna. I want to summarize 5 key points as we think now about 2027 and themes that we're anticipating, many of which we've discussed throughout the teleconference. Number one, we expect continued strength in power generation related to data center customers that will positively impact both Power Systems and Distribution revenue next year as we bring incremental capacity online and is consistent with our data center revenue targets for 2030. Number two, Industry expectations are for truck production in North America to be flattish in 2027 versus 2026. I supported by increased freight rates in the second half of this year and improved fleet profitability.

Number three, the vast majority of our North America truck engine production next year will be on our legacy platforms. Number four, we plan to pass on NCPs to our customers. And number five, we expect another year of strong operating cash flow and returning 50% of that operating cash flow to investors as we are on track to do this year. We'll give more detailed guidance, as Mark mentioned, when we get to our Q4 earnings call in next February, but those are some of the key themes that we're anticipating that will drive profitable growth as we head into 2027.

That concludes our teleconference for the day. I want to thank you all for participating and your continued interest as well as the Investor Relations team will be available for questions after the call.

Operator

Thank you. Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.