Cummins Inc

NYSE:CMI

Earnings Call Transcript 2021-Q2

[Operator]

Greetings and welcome to the Quarter Two 2021 Cummins Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that, this conference is being recorded.

I will now turn the conference over to your host, Jack Kienzler, Executive Director of Investor Relations. You may begin, Jack.

[Jack Kienzler, Investor Relations]

Thank you. Good morning, everyone. Welcome to our teleconference today to discuss Cummins' results for the second quarter of 2021. Participating with me today are our Chairman and Chief Executive Officer, Tom Linebarger; our President and Chief Operating Officer, Jennifer Rumsey; and our Chief Financial Officer, Mark Smith. We will all be available for your questions at the end of the teleconference.

Before we start, please note that some of the information that 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 those projected in such forward-looking statements because of the number of 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 the course of this call, we will be discussing certain non-GAAP financial measures. And we 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 website at www.cummins.com under the heading of Investors and Media.

With that out of the way, we will begin with our Chairman and CEO, Tom Linebarger.

[Tom Linebarger, Chairman & Chief Executive Officer]

Thank you, Jack. And good morning everybody. I will start with a summary of our second quarter financial results and our market trends by region and then finish with a discussion of our outlook for 2021. Mark will then take you through more details about our second quarter financial performance and our forecast for this year. Demand remained strong in the second quarter as the global economy continued to improve. Driving strong sales growth across most businesses and regions and resulting in solid profitability. We are encouraged by economic trends across a number of our key end markets which point to strong demand for the remainder of this year and extending into 2022.

In North America freight activity continues to grow, leading to elevated spot and contract rates and driving fleet profitability and a rising backlog of truck orders. Leading indicators for non-residential construction continue to improve and fiscal support for investment in capital projects is robust, led by North America and Europe. Iron ore, copper and thermal coal prices also remain high supporting a positive outlook for mining. Cummins is well positioned to benefit as these markets gain momentum due to our leading global position across a number of end markets and we continue to see demand for our products outpace our competition.

Before getting into our results, I want to take a moment to highlight a number of partnerships and strategic milestones in the evolution of our next generation technologies. In May, we formed a partnership with Iberdrola a leading global producer of renewable power to accelerate the global growth of business opportunities in the electrolyzer market and especially in Europe with a focus on the Iberian Peninsula, the alliance will help position Cummins as a leading supplier of electrolyzer systems for large-scale projects in Europe. As part of our alliance Cummins with the electrolyzer supplier for a 30-megawatt project for a leading fertilizer producer that will serve as a benchmark for large-scale electrolysis globally.

We signed a joint venture with Sinopec Enze fund in June, which will accelerate the affordability and availability of green hydrogen in China to development of hydrogen generation projects and increasing manufacturing capacity of electrolyzers and other key products in the green hydrogen supply chain. As one of the largest hydrogen suppliers in China Sinopec's annual hydrogen production, which is 3.5 million tons, accounting for 14% of China's total hydrogen production. China's embrace of green hydrogen is great for the planet and Cummins and Sinopec joining together to realize the potential of green hydrogen is a huge leap forward for scaling our innovative PEM electrolyzer systems. We recently announced a strategic collaboration with Chevron to develop commercially viable business opportunities in hydrogen and other alternative energy sources.

The MAU provides the framework for Chevron a Cummins to initially collaborate on four main objectives. First advancing public policy that promotes hydrogen as a decarbonizing solution for transportation and industry, building market demand for commercial vehicles and industrial applications powered by hydrogen, developing infrastructure to support the use of hydrogen for industry and fuel cell vehicles and fourth, exploring opportunities to leverage Cummins electrolyzer and fuel cell technologies at one or more of Chevron's domestic refineries. The partnership with Chevron allows us to scale low carbon fuel delivery and build hydrogen corridors for use by fuel cell vehicles. In addition, we can work with Chevron to decarbonize parts of their operations using our green hydrogen technology.

Finally last Cummins announced the signing of an MOU with Air Products to work together to begin the transition of Air Products, heavy duty tractor fleet to zero emissions vehicles in the Americas, Europe and Asia. Cummins will provide hydrogen fuel cell electric powertrains integrated into selected OEM partners heavy duty trucks for use by Air Products. The project will take a phased approach to transition Air Products fleet to hydrogen fuel cell electric powertrains starting with five demonstration units to be delivered in Europe and North America by the end of next year.

Following successful demonstration the project includes ramp ups which work with a total of 2000 trucks to be delivered by the middle of the decade. This represents among the largest orders for fuel cell vehicles to date and we will be working with a partner that has deep expertise and the generation transportation and use of hydrogen. We now deployed more than 2000 fuel cells and 600 electrolyzers around the world, as we continued development of our hydrogen business in addition to accelerating our revenue momentum via these important strategic partnerships. We are also building out our electrolyzer capacity targeting the regions, which we expect to be at the forefront of green hydrogen production and commercial adoption. Aside site selection search within the Guadalajara area of the steel and launch in Spain is currently underway for Cummins new approximately $60 million PEM electrolyzer manufacturing plant that will house system assembly and testing for approximately 500 megawatts per year of electrolyzer production and will be scalable to more than 1 gigawatt per year.

Cummins Enze, the JV we signed in conjunction with Sinopec will be located in Foshan, Guangdong province in China. The JV will initially invest $47 million to locate our manufacturing plan to produce PEM electrolyzers. The plant will open with a manufacturing capacity of 500 megawatts of electrolyzers per year, but we'll also be scalable to more than 1 gigawatt per year. These investments in addition to our build-outs underway at our current facilities in Belgium and Canada will position us to have nearly two gigawatts of capacity by the middle of the decade. With the flexibility to scale up as demand accelerates. In the battery electric space, we continue to produce and sell fully electric powertrains in first mover markets such as transit school bus and yard spotters.

Cummins is collaborating with PepsiCo's Frito-Lay on the battery electric demonstration truck for a pickup and delivery application there has been running daily routes since last November, this truck will be showcased at the upcoming North American Council for freight efficiencies electric truck demonstration. We are well positioned with our deep market expertise and electric powertrain technology and are continuously evaluating how we can adapt and improve to meet customer demand and market trends as the technology matures. This includes next generation battery electric systems to balance the durability needs of our customers while focusing on delivering products at a compelling price point. We are also continuing to explore new partnerships to enhance our capabilities, improve our cost position and drive more volume and scale into the business.

In addition to these important milestones for our New Power business, we are investing in our engine and components businesses to develop advanced diesel and alternative fuel products, which will be critical to meeting customer and regulatory requirements in the coming years. We announced the signing of an LOI to acquire 50% equity interest in momentum fuel technologies. The joint venture between Rush Enterprises and Cummins will produce Cummins branded natural gas fuel delivery systems for the commercial vehicle market in North America. Combining the strengths of momentum fuel technologies compressed natural gas fuel delivery systems, Cummins' powertrain expertise and the engineering and support infrastructure of both companies. We have seen increasing interest over last year and expect natural gas powertrains to become an increasingly popular choice for end users, due to both a compelling total cost of ownership as well as the environmental benefit of such powertrains especially when utilizing renewable natural gas sources.

We also began testing of a hydrogen fueled internal combustion engine for heavy-duty truck applications. Building on Cummins existing technology leadership and gaseous fuel applications and powertrain leadership to create a new power solution to help customers meet the energy environmental needs of the future. The hydrogen engine program can potentially expand the technology options available to achieve a more sustainable transport sector complementing our capabilities and hydrogen fuel cell, battery electric and renewable gas powertrains. We are committed to bringing customers the right solution at the right time doing so requires us to maintain a broad portfolio of power solutions to meet our diverse customers' needs and to minimize total carbon emissions throughout the energy transition.

Now, I'll comment on the overall company performance for the second quarter of 2021 and cover some of our key markets starting with North America before moving on to our largest international markets.

Revenues for the second quarter of 2021 were $6.1 billion, an increase of 59% compared to the second quarter of 2020. EBITDA was $974 million or 15.9% compared to $549 million or 40.3% a year ago. EBITDA increased as a result of stronger global demand and higher joint venture income partly offset by significantly higher premium freight and other costs associated with supply chain disruptions in addition to higher compensation costs. Our global markets experienced an unprecedented shock from the impact of COVID 19 during the second quarter of last year. And while we have been encouraged by the ongoing recovery across all of our global markets, our industry continues to experience significant constraints across the supply chain, leading to an extended period of inefficiencies and higher cost, despite the supply chain impacts, though we are continuing to deliver strong financial performance, while supporting our customers. The ability to supply our customers remains our key focus now. And while we are optimistic that the supply chain constraints will ease with time, they are likely to persist through the end of the year.

Our second quarter revenues in North America grew 74% to $3.5 billion driven by higher industry build rates across all on-highway markets. Industry production of heavy-duty trucks in the second quarter was 67,000 units, an increase of 180% from 2020 levels, while our heavy-duty unit sales were 23,000, an increase of 217% from 2020. Industry production of medium-duty trucks was 29,000 units in the second quarter of 2021, an increase of 94% from 2020 levels, while our unit sales were 22,000 units, an increase of 85% from 2020. We shipped 42,000 engines to still launches for use in their RAM pickups in the second quarter of 2021, an increase of 272% from 2020 levels.

Revenues for power generation grew by 48% due to higher demand in recreational vehicle, standby power and data center markets. Our international revenues increased by 42% in the second quarter of 2021 compared to a year ago. Second quarter revenues in China including joint ventures were $2.1 billion, an increase of 8% due to higher sales and power generation and mining markets. We also experienced a higher penetration rate with our joint venture partners in the heavy and medium-duty on-highway markets as they prepare for broader implementation of NS VI in July of this year. Industry demand for medium and heavy-duty trucks in China was 566,000 units, a decrease of 4%, but still well above replacement driven by continued pre-buy of NS 5 trucks ahead of the broader implementation of the new NS VI standards in July of this year.

Our sales in units, including joint ventures were 85,000 units, a decrease of 5% versus the second quarter of 2020. The light duty market in China, decreased 8% from 2020 levels to 614,000 units, while our units sold including joint ventures were 38,000, a decrease of 28% driven by supply chain constraints, particularly in these lighter displacement vehicles. Industry demand for excavators in the second quarter was 97,000 units, a decrease of 5% from very high 2020 levels. Our units sold were 16,800 units, a decrease of 7%. Demand for power generation equipment in China increased 47% in the second quarter driven by growth in data center markets and other standby power markets, we continue to hold a leading market position in the datacenter segment, driven by strong end user relationships and a compelling product offering in that space.

Second quarter revenues in India including joint ventures were $392 million, an increase of 219% from the second quarter of 2020 despite experiencing a terrible second wave of COVID 19 during this period. Industry truck production increased by 468% while our shipments increased 535% as our joint venture partner continued to gain share. Demand for power generation and construction equipment rebounded strongly in the second quarter compared to a very low base a year ago. We remain encouraged by the continued economic recovery driven by anticipated government infrastructure spending. In Brazil, our revenues increased 175% driven by increased demand in most end markets.

Now, let me quickly cover our outlook for 2021. Based on our current forecast, we are maintaining full-year 2021 revenue guidance of up 20% to 24% versus last year. EBITDA is still expected to be in the range of 15.5% to 16% and the company expects to return 75% of operating cash flow to shareholders in 2021 in the form of dividends and share repurchases. And summing up the quarter strong demand across many of our key markets drove continued sales growth in the second quarter and resulted in solid profitability. We have secured important new partnerships in our new power segment. At the same time, we continue to invest in bringing new technologies to customers, outgrowing our end markets and providing strong cash return to our shareholders.

Before passing it over to Mark, I want to take a moment to highlight an important announcement we included in our earnings press release this morning regarding our exploration of our strategic alternatives for the filtration business. Cummins filtration is a premier filtration platform and a technology leader specializing in filtration products use in heavy medium-duty and light-duty trucks, industrial equipment and power generation systems. The business generated revenues of approximately $1.2 billion in 2020 and remains well positioned for continued growth: sustained margin performance and strong free cash flow generation.

Cummins filtration has a strong global footprint with leading positions in North America, India and China and a significant presence in other key markets supported by longstanding local partnerships. We are exploring a range of options to unlock significant shareholder value including the separation or filtration and do a standalone company with a dedicated management team who are well positioned to drive the business forward and diversify its business, leveraging a strong technology portfolio and footprint. The execution of this exploration process is dependent upon business and market conditions of course, along with a number of other factors and considerations. And any cost associated with the evaluation of these alternatives for the filtration business has been excluded from our financial outlook. We plan to share a lot more about this and other elements of our strategy during our Analyst Day on February 23.

Our purpose in delaying this event from November this year until spring is to be able to hold it in person. And we will provide more details as we get closer to the February 23 date.

Thank you for your time today. And let me turn it over to Mark.

[Mark Smith, Chief Financial Officer]

Thank you, Tom, and good morning everyone. There are four key takeaways from our second quarter operating results. First, underlying demand remains strong outpacing supply and increasing backlogs in some of our largest markets. Number two, global supply change remained constrained due to the elevated levels of demand and complications arising from COVID resulting in higher premium freight costs and other associated inefficiencies than we anticipated three months ago. We delivered solid profitability and cash flows in the first half of the year despite the continued cost headwinds associated with tight supply chain and for the full year, we are maintaining our revenue and profitability guidance. And fourthly, we returned $860 million to shareholders in the quarter through cash dividends and share repurchases and 1.48 billion for the first half of the year consistent with our plan to return 75% of operating cash flow to shareholders this year.

Now, let me go into more details on the second quarter. Second quarter revenues were $6.1 billion, an increase of 59% from a year ago when the impact of COVID 19 was at its most severe. Sales in North America grew 74% and international revenues rose 42%. Currency positively impacted revenues by 3% driven primarily by a weaker US dollar. EBITDA was $974 million or 15.9% of sales for the quarter compared to $549 million or 14.6% of sales a year ago. EBITDA increased primarily due to the benefits of higher volumes and stronger earnings from our joint ventures in China and India, partially offset by higher product coverage costs and higher compensation expenses primarily variable compensation.

Gross margin of $1.5 billion or 24.2% of sales increased by $588 million or 110 basis points, primarily driven by the higher volumes. Global supply chain tightness continues in the second quarter and resulted in approximately $100 million of additional freight labor and logistics costs. We expect these costs to remain elevated in the second half of the year with demand projected to remain strong, supply tight and some increase in logistics and transportation costs. Selling, general and administrative expenses increased by $130 million or 28% due to higher compensation expenses and research expenses increased by $87 million or 46% from a year ago.

As a reminder due to the significant uncertainty at the onset of COVID 19 we implemented temporary salary reductions in April of last year that lasted through the end of September. Salary reductions resulted in approximately $75 million of pre-tax savings for the company in the second quarter of 2020 across gross margin, selling, admin, and research expenses. In addition, our variable compensation plan worked as designed flexing down in the face of weak economic conditions last year and flexing up with stronger financial performance this year. All operating segments experienced higher compensation cost on a year-ago for these two primary reasons. Joint venture income was $137 million in the second quarter, up from $115 million a year ago. Strong demand for trucks and construction equipment in China as well as a broad recovery in other international markets led to the improved profitability versus a year ago.

Other income increased by $30 million from a year ago due to a number of positive items including a one-time $18 million gain on the sale of some land in India, which benefited our distribution segment. Net earnings for the quarter was $600 million or $4.10 per diluted share compared to $276 million or $1.86 from a year ago, primarily due to stronger after-tax earnings driven by stronger volumes. The gain on the sale of land in India contributed $0.05 of earnings per share this quarter. The effective tax rate in the quarter was 21.4%. Operating cash flow in the quarter was an inflow of $616 million compared to an outflow of $22 million a year ago, stronger earnings and dividends received from joint ventures more than offset increases in working capital.

I will now comment on segment performance and our guidance for 2021, which is unchanged from three months ago. For the Engine segment second quarter revenues increased by 75% driven by increased demand for trucks in the US and construction equipment in US and Europe. EBITDAR increased from 10.5% to 16.1% of sales, primarily driven by higher volumes and lower product coverage expense, which more than offset higher costs and inefficiencies associated with global supply chain challenges and although supply chain costs in this segment remain elevated from a year ago. They did improve a little from first quarter levels.

We expect full year revenues to be up 23% to 27% and EBITDA margins to be in the range of 14.5%, 15% for the Engine segment and distribution revenues increased 20% from a year ago and EBITDAR increased as a percent of sales from 10% to 10.5% primarily due to stronger performance in North America. We have maintained our outlook for segment revenue growth to be up 6% to 10% and EBITDA margins to be 9% at the midpoint of our guidance. In the components business, revenues increased 73% in the second quarter, driven primarily by stronger demand for trucks in North America. EBITDAR increased from 12.3% of sales to 15.1% due to the benefits of stronger volumes partially offset by higher product coverage costs.

For the full year 2021, we expect components revenue to increase 30% to 34% and EBITDA to be 17% at the midpoint. In the Power Systems segment revenues increased 47% in the second quarter, driven by stronger global demand for power generation and mining equipment. EBITDAR increased from 11.7% to 12.2% of sales primarily due to the benefits of higher volumes and lower product coverage expenses. We are maintaining our Power Systems guidance of revenues up 16% to 20% and EBITDA margin in the range of 11% to 11.5% of sales.

In the New Power segment revenues increased to $24 million, up 140% due to stronger sales of battery electric systems and fuel cells. EBITDA losses for the quarter was $60 million in line with our expectations as we continue to invest in new products and scale up ahead of widespread adoption of the new technologies. Full year, we currently project New Power revenues of $110 million $130 million and EBITDA losses to be in the range of $190 million to $210 million.

Total company guidance remains unchanged with revenues to grow between 20% and 24% and EBITDA margin to be between 15.5% and 16% for the full-year. EBITDA percent for the first half of the year was 16%. Some of the key factors expected influenced second half profitability of the pace of improvement in truck production in North America. The rate of decline in demand in China and the performance of the global supply chain. We now expect earnings from joint ventures to be up 10% in 2021 compared to our prior guidance of down 5%. Stronger-than-expected demand in China truck and construction markets, especially in the second quarter is the primary reason for the increase in our forecast. Joint venture earnings are expected to ease in the second half of the year with industry truck sales expected to decline following the broader adoption of the new national Standard 6 on Highway emissions regulations in China in July. And we also anticipate the softening of demand for construction equipment coming off all-time high levels in the first half of the year.

Our effective tax rate is expected to be approximately 21.5% excluding discrete items, down from our prior guidance of 22.5% due to the mix of geographic earnings. Capital expenditures were $125 million in the quarter, up from $77 million a year ago and we expect our full-year capital expenditures to be at the high end of our range of $725 to $775 million for the full year. We returned $869 million to shareholders through dividends and share repurchases in the second quarter bringing our total cash returns to $1.48 billion for the first half. Excuse me for my dry throat.

To summarize, we delivered strong results in the second quarter despite continued supply chain constraints and elevated costs. Demand currently exceeds supply in a number of important markets pointing to strong demand for our products into 2022. I want to thank our global employees for their ongoing commitment to meet the needs of our customers while delivering solid financial performance. We continue to extend our leadership position through advancing the technologies, the power the profitability of our customers today. And we'll continue to do so for some time to come. This sets the company up to further increase the earnings power of our core business, while we continue to invest in a range of new technologies and develop new partnerships that position company for additional growth.

Our strong balance sheet focus on improving performance cycle over cycle and consistent cash flow generation and that we can sustain important investments for the future through periods of economic uncertainty and distribute excess cash to shareholders.

Thank you for your interest today. And I'll turn it back over to Jack.

[Jack Kienzler, Investor Relations]

Thank you, Mark. Out of consideration to others on the call, I would ask that you limit yourselves to one question and a related follow-up. And if you have additional questions, please rejoin the queue.

Operator, we are now ready for our first question.

[Operator]

[Operator Instructions] Our first question comes from Jamie Cook with Credit Suisse. Jamie, you may ask your question.

[Jamie Cook, Credit Suisse.]

Hi, good morning and nice quarter. I guess, Tom, a couple of more strategic question just on the filtration business, can you remind us where the margins of this business are and just your thoughts on timing and what this business could achieve as a standalone public company versus being part of Cummins or is it more likely that this asset would be interesting to someone else. And then I guess my second question, I appreciate a lot of the color that you spent on New Power Systems and some of the relationships that have emerged. I'm just wondering as you're thinking about this business today, a lot of the growth obviously has been organic. Is there any inorganic opportunity here with the New Power Systems over the next sort of 12 to 18 months that could potentially perhaps accelerate, where this business would go longer term in terms of its earning a profit et cetera or in technology? Thanks.

[Tom Linebarger, Chairman & Chief Executive Officer]

Thanks, Jamie. Good morning to you. So let me start with your filtration question first. The answer is that the profitability or filtration is pretty much in line with the Components business, the segment and that business are very similar. And the strategic logic is simple, it's a great business, by the way very profitable, great cash flow, terrific leadership team and we've done a lot of improvement in that business over the last few years, which is really, really improved its financial performance as well as its operating performance. And so we feel like it's operating on all cylinders really to just for an engine analogy there but the challenge is that looking forward the opportunities to grow shareholder value look, primarily to us in diversification, the number of technology innovations for the truck business or for our end markets look like they are limited in front of us. Whereas the opportunities to take that technology platform and global footprint to other filtration segments look significant and when we think about using our shareholders' capital to invest in those other segments, the logic is in is clear.

What is clear though that the company has come to a size and performance level now where we think it can stand on its own or it could be part of another bigger company that plans more diversification and other end markets. We are looking at all those options, we're exploring, everything from a sale to a spin too to some other kind of strategic option. What we want to do most of all though is realized value for common shareholders. We know that when we're the best owner and can make the most of the assets we're going to do that and when we're no longer the best owner, then we need to confront that too. And that's what we're trying to do here is just create value for shareholders and be direct about it. Again, it's the business is doing great. The management team is outstanding. We're really proud of the achievements of that business. We just think it can operate separately from us effectively going forward.

Then with regard to New Power and thanks for your comments on the strategic milestones, we have achieved a lot already. And we are exploring organic, inorganic partnership options, all the time, it is such a fast-moving area. There is so much development to do an infrastructure just the product technology. The availability of fuel there so much to do to decarbonize the automotive industry, no less all the other commercial, industrial industries that we're in. There is no lack of potential partnerships and opportunities, we are those scanning always for inorganic options to, as you know, some of the valuations were elevated to a point where they were really just almost silly.

But that said, that isn't always true now and we are always scanning for acquisitions that we think can position us strategically more better position us from a scale point of view that you heard me mention that in our battery electric section that there is a scale advantage to be gained both in hydrogen and electric, if we can get enough volume on some of those products, we can drive down cost significantly that depends in part on whether the technology is viable and the application or not, and that's why we're doing so much focus on what are the first mover markets and where can we actually get scale and then if we can do that and an acquisition can help, we'll do it.

[Jamie Cook, Credit Suisse.]

Okay, thank you. I appreciate the color. I'll let someone else ask a question.

[Tom Linebarger, Chairman & Chief Executive Officer]

All right.

[Operator]

Our next question comes from Ann Duignan with JP Morgan. Please proceed with your question. Ann your line is live. You may. Please proceed with your question.

[Ann Duignan, JPMorgan]

I'm sorry, I hit mute button, I didn't see it, didn't work. Apologies, and maybe a little bit more color on the JV income. I know in your comments you said that most of the raise in the JV income was on the back of Q2 China performance but just beyond that maybe you could walk us through, and the JV driven income and maybe a little bit more color on India, JV income and fully consolidated just what you're seeing there from the fundamentals. So that will be helpful. Thank you.

[Tom Linebarger, Chairman & Chief Executive Officer]

Thanks, Ann. So we delivered about just over $300 million of JV income in the first half of the year, which was up from $244 million a year ago and we're expecting that first half performance to drop off between 30% and 40%, with the midpoint of the guidance we're down to just under $200 million of earnings in the second half of the year. We have started to see some slowing orders for both construction and truck. It's too early to say yet with absolute conviction where we'll end up for the year, but that's our latest forecast. In India underlying demand we think is robust. But it's been very complicated with the COVID situation. So yes, we think India earnings should improve, China of course is a bigger contributor across [ph].

[Operator]

Our next question comes from Jerry Revich with Goldman Sachs. Jerry, you may ask your question.

[Jerry Revich, Goldman Sachs]

Yes, hi, good morning everyone. Really nice to hear about the Sinopec partnership, I'm wondering if you just give us an update on what the order bookings for electrolyzers were for you folks in the quarter. And if you can just talk to us about the size of that pipeline, and when do we expect additional bookings, as we look out. Thanks.

[Tom Linebarger, Chairman & Chief Executive Officer]

Jerry, we haven't reported bookings from electrolyzer markets. What I can do though is take that in something you'd like to see and start to see if we can publish those that data, but we have not been doing that. So I can't really answer your question on bookings for the quarter. But what I can say is that, as I mentioned in my announcement that the project that we've got planned with Iberdrola and Spain for the fertilizer is it will be the largest of its kind. And so we are seeing significant ramp up already, especially in Europe, that's where, in Europe the combination of low cost renewable power combined with European money supporting projects that decarbonize industrial uses of hydrogen is really driving, is the primary driver of demand and we see some of that now beginning to form in China, same idea, decarbonizing industrial uses of hydrogen.

So there is already big consumers of hydrogen, people already by a lot. But it's produced using natural gas through SMR and this supply chain, the screen hydrogen supply chain takes renewable power PEM electrolyzer like ours. And then in terms of, it makes the hydrogen low carbon or zero carbon and that's kind of the biggest driver electrolyzers today.

[Jerry Revich, Goldman Sachs]

Okay, thank you. And then, I'm wondering on hydrogen truck announcement with Air Products, can you just talk about your anticipated business model on initial hydrogen truck orders? Is it going to be primarily retrofit or are there any OEM partnerships that you can talk about? How is that business model evolving versus your traditional Powertrains?

[Tom Linebarger, Chairman & Chief Executive Officer]

We think the business model is going to be very similar. These are not retrofit vehicles, these are vehicles will be built for a purpose to have fuel cell electric vehicle powertrains. As you guessed, the big development area there is to have an electric infrastructure in the truck already and then you can put the fuel cell in and take advantage of the electric powertrain or the electric infrastructure in the truck. And that's still under development. Most of the trucks that we put out now, the electric infrastructure is either a prototype version or has not been fully productionized yet. And I'd say our early versions will still be that. But truck makers are electrifying vehicles at a reasonably rapid rate at least in relatively small volumes. So, we expect those platforms to improve over time. And we will be forming partnerships with OEMs to deliver those trucks.

My view is that the reason you haven't seen more partnerships already is there [ph] just isn't very much demand and everyone's trying to figure out what to do with their scarce engineering resources. 'Do I use them on developing advanced diesel? Renewable natural gas? Fuel cell electric? And since I can't do all at once, which ones do I do first, second and third [ph]?' So, we believe that truck makers will be ready to work with us on fuel cell vehicles when there is demand. So, that's why we're excited about and end-user like Air Products, high-quality company, knows hydrogen really well, wants to make their fleet fuel cells. So, I think that's going to increase truck makers' interest in trying to figure out how to fulfill this order.

[Jerry Revich, Goldman Sachs]

Thanks, Tom.

[Tom Linebarger, Chairman & Chief Executive Officer]

Yes.

[Operator]

Our next question comes from David Raso with Evercore ISI. Please, proceed with your question.

[David Raso, Evercore ISI]

Hi, good morning. Trying to think about the supply chain and your ability to react to with pricing. When you look at the second half of the year and you sort of made the comment, we should expect continue constraints through the end of the year, what are you hearing from the supply chain about the early part of 2022 that makes you feel more comfortable, and your ability to price into that market in 2022?

[Jennifer Rumsey]

Yes, David. Jennifer here. I'll comment a little bit about what we're seeing right now. As you heard from Mark and Tom, and it's happening across the industry, supply chain really ramping up to keep up with the demand we see, first fit aftermarket has paved our ability to supply. Our teams have done a phenomenal job working closely with customers and suppliers to minimize that impact to deliver the results that we did in the second quarter, we see that easing in many places quarter-over-quarter, so improving through the back half of the year and into 2022. Microprocessor like other in our industry and other industries continues to be the biggest constraint. Our demands are relatively small on the broader picture of microprocessor supply and we had expected to see some improvement in June with COVID in Malaysia. That's delayed slightly, but that we think will ease in the second half of the year. So, we're seeing improvement in the second half end markets as we see the supply chains ease.

From a price perspective, right now we're anticipating our price to cost to be 30 basis points favorable for this year and that is down from 40 to 50 basis point positive in our prior guidance, really because of those increased costs that we're seeing in materials, logistics and premium freight and we are working to mitigate that with some of our contractual things on the material side, hedging and also looking at pricing and surcharges where possible and first fit and aftermarket. So, we won't comment more on 2022 at this point, but we do expect to see some improvement both and cost coming down and getting some more recovery, end of the second half of the year.

[David Raso, Evercore ISI]

All right, thank you very much.

[Operator]

Our next question comes from Steven Fisher with UBS. Please, proceed with your question.

[Steven Fisher, UBS]

Thanks, good morning. Just wanted to follow up that discussion about some of the costs. I know we talked about $105 million of cost in the first quarter related to logistics and it sounds like they're coming down a little bit. Wondering if you can quantify that with what you experienced in the second quarter and where you see that going in the next couple of quarters?

[Jennifer Rumsey]

Yes. So, we did see those costs come down slightly in the second quarter. Our engine business cost improved more, but we saw some increase in the components in the Power Systems business due to some issues that came into that business, and we do expect that to improve again each quarter in the second half of the year. Overall, though, we're projecting $295 million in incremental logistics costs for the full year, which is $105 million more than our prior guidance, just based on what we're seeing.

[Steven Fisher, UBS]

That's very helpful.

[Tom Linebarger, Chairman & Chief Executive Officer]

Maybe just to say one more word about that. I think like a lot of companies, the continued outbreaks of COVID around the world and now the delta variant just keep throwing more curve balls into the system because we see labor shortages, we see other things. And so, some of these costs as Jen mentioned, we had expected it to go from a $100 million in the first quarter to $30 million in the second quarter and then be gone. And so now we're talking about almost $300 million for the year. So, I want to be clear, that's a big hit to what we really generally expected. The thing I guess I wanted to highlight is that our company continues to earn good margins despite that by finding other ways to do it. We've been able to price in the aftermarket and we still have a big opportunity going forward in that whereas Jen said, we'll be able to add material cost adjustments contractually as we move real forward in the quarter. And just the sheer effort by our teams to get products out at the least cost as we can, I think, and in fact, so therefore we get revenue up which improves our incremental margins in the plant.

So, I guess we're kind of running up and down escalator, if you will, and doing a decent job of it. And so, as those things start to get better - and even in the markets where we're still seeing disruptions our supply base gets better at operating under the same lousy conditions if they stay stable. Even stable lousy is better than changing all the time. So, all of them are doing better. What we are seeing improvement it's just wherever the new flare up is, it's where we're seeing the costs being driven.

[Steven Fisher, UBS]

It makes sense. Thanks, Tom. And then just maybe a follow-up on China. I know you're anticipating the weakness in the second half. I'm wondering if you are sensing any policy tides turning more positively there in a bigger picture on that may influence sort of infrastructure spending and demand for trucks and construction equipment that might make your kind of second half weakness somewhat of a lagging indicator actually?

[Tom Linebarger, Chairman & Chief Executive Officer]

Yes. It's a good question. As a Chinese policy prognosticator, I would be of course prior [ph] immediately, but I'll just say this, that I believe based on my conversations with government officials there, that they are concerned about where the economy is and are going to continue to try to figure out ways to boost economic activity especially given what's happening internationally to demand. So, I do think it's entirely possible. We'll see government responses to try to keep business moving during this time and to your point, that might offset some of what we see as a sort of structural issues like the changing of the emission standards and the price increases of trucks. The signals aren't evident to us yet, but that doesn't mean it won't happen and we've been talking about this all year. We've called this wrong before. We've said China is going to fall off a lot and then it hasn't and we said the reverse. China is going to grow a lot and then it fell off some. So, what we think is that generally speaking with this emissions change, prices are going to go up. People bought a lot of trucks last year, second half of last year, first half of this year.

So, we see diminishing demand - and not just trucks, also excavators - we see diminishing demand as the most likely expectation and we are beginning to see signs of that. And so even if the policy started to change now, I think we'd still see some demand drops in at least the third quarter and the fourth quarter until those things start to take effect.

[Jennifer Rumsey]

I'll just add. We feel really well-positioned with the products that we're launching in China this year for the NS VI submission. So, that does take effect and customers start to buy. We think we have really good products out there that will position us well in the market and of course, we also have some outgrowth in the components business with both after treatment and transmissions that we'll start to see increasing there. So, we're feeling good about where we are in that market.

[Steven Fisher, UBS]

Perfect. Thank you both.

[Operator]

Our next question comes from Ross Gilardi with Bank of America. Please, proceed with your question.

[Ross Gilardi, Bank of America]

Hi. Good morning, everybody. Can you hear me okay?

[Tom Linebarger, Chairman & Chief Executive Officer]

Yes, Ross. How are you doing?

[Ross Gilardi, Bank of America]

Great, Tom. Thank you. I wanted to go back to your hydrogen event that you hosted earlier in the year and the target you had for - I think it was $400 million in electrolyzer sales within five years. Correct me if I have that wrong, but I'm just wondering if all the wins, all the collaborations you've announced, do you already feel like you've got wins in hand that take you to that target within five years and is there an upside case based on collaborations already announced that takes this to say $1 billion in five years? I realize all this is fluid and subject to very unpredictable timing issues and so forth, but it seems like you've got a lot in the hopper there already. I'm just wondering how much visibility you even have on that target at this point?

[Tom Linebarger, Chairman & Chief Executive Officer]

Yes, it's a great question, Ross. The answer is it depends on if I give you the answer from a CEO of 100-year-old engine company or from our new startup. The CEO of an old engine company says, we don't have the orders in hand yet, because I think of orders as actual orders. But to your point though, we project that the sum of these partnerships and where we see this decarbonizing of industries using hydrogen already will take our demand significantly over our estimate we gave at the Hydrogen Day. Again, the orders aren't in-hand. They depend on European money and all these things, all of which has been promised, but it's not all done. And the same thing in China, there is projected policy investments that will encourage green hydrogen, but the orders aren't there yet. So, that's why when you ask like, 'Do you have orders in hand?' The engine guys says no. But if you ask me as the CEO over at New Power, I'd say, I feel really good about it and I think we're going to exceed our target significantly.

[Ross Gilardi, Bank of America]

Okay, thanks a lot. That's helpful. And then just kind of nearer term. Also just based on everything you've announced. When do we see a real inflection in sort of the quarterly run rate revenue for New Power? You kept your outlook unchanged for this year. I realize all these things, they take a lot of time, but do see a meaningful step-up, do you think and just sort of the quarterly run rate into next year at some point in 2022?

[Tom Linebarger, Chairman & Chief Executive Officer]

Let us hold on our 2022 guidance until we get there. But basically what we think the revenue guidance is going to be driven by most is this electrolyzer demand. This is the thing that's kind of going the fastest. Everything else is moving. You know that the EVs are moving, fuel cell trucks are moving just as I said, but to your point, those are all being driven by cost coming down, infrastructure being built, all of which takes a long time. The electrolyzer demand is the thing that's right in front of us. So, if we can get the projects locked down, all of the European money subsidies in place. As you heard from my remarks, we are building the capacity to produce these units. What that means with regard to the quarters of 2022, we have some work yet to do that. I'd like to tell you, yes, but I think we need to do the work and we need to see some of these projects locked down before we say to ourselves, 'It's exactly this quarter and that quarter.' So, give us some time to work that, but I understand the question well and we'll definitely give you visibility to that as we get it.

[Ross Gilardi, Bank of America]

Thanks so much.

[Tom Linebarger, Chairman & Chief Executive Officer]

Thank you, Ross.

[Operator]

Our next question comes from Rob Wertheimer with Melius Research. Please, proceed with your question.

[Rob Wertheimer, Melius Research]

Thanks. I had a couple and thank you, Tom for the overview on the New Power stuff. I understand the comments on the old versus new world, but helpful to have the updates. Can I ask you to - I don't know if you're willing to, but if you were to go a step further, could you characterize how strong you feel on - you have a lot of things you can choose to invest and whether those drive trains, motors, whether it's electrolyzers, whether it's fuel cells, whether it's batteries, et cetera. Are you leading in some of those in sort of keeping up in others? And maybe you can show us where you feel most confident. Then I had a question on engines as well.

[Tom Linebarger, Chairman & Chief Executive Officer]

Yes. That is definitely a longer conversation about each technology area where we're leading and where we're not, which would be significant disputed by other competitors in the industry, I'm sure, Ross. Let's me say it this way. I think that we have a position in the market, which has been built over a long time where we understand the applications as well or better than anybody in the industry. We understand the technical ways in which the applications demand power from the power train. That gives us a significant advantage in developing whatever powertrain ends up winning because we understand what it actually has to do. Second thing I'd say is that we've invested significantly in both hydrogen fuel cells and battery electric fuel powertrains, meaning that we have as much experience technology investment as anybody in the industry. Not in straight battery cells or that kind of thing, but in the application of those units to commercial vehicles. So, we're not behind anybody who's in commercial, industrial markets. So, I believe that we are well-positioned, but I also think the industry is moving quickly.

As I said in my remarks, where the strategic advantage will be gained will depend not only on the product development, but on where the infrastructure is, what the cost of electricity is versus the cost of hydrogen, a whole bunch of other factors that require us and other industry participants to be pretty nimble about how you think about what products are going to win and how advantage is going to be created. So, that's why I think it's important for us to say we like these investments, we feel like we're at the forefront of all of them, but we also need to keep thinking about where the puck is moving to and make sure we're thinking about how to get advantage. That's a little bit why you heard my comments on investing in low carbon engine technologies, because right now, we can produce hybrid diesel engines and hybrid and natural gas engines at significantly lower cost than either BEV or fuel cell powertrains that are significant improvements in both carbon and criteria pollutants. That's worth a lot to either depending on whether you're EPA, or a regulator, or you're a customer, 'I know how to use those; they are a lot cheaper.

I understand how to fuel them and operate them and meanwhile, they still significantly positive impact on the environment.' So, that's why I think we're trying to make sure that we stay at the forefront of all of these and not just pile down [ph] a bit in one big pile on one place because I think that's not a winning strategy in this market.

[Rob Wertheimer, Melius Research]

All right. That was a helpful answer and I don't know if this will be another tough one. But on the flip side, you guys have the opportunity to provide your expertise and scale and the last stages of diesel engine. Then you've done it a little bit, I guess on medium-duty already. How do we, on our side of the fence think about what happens? You see some of the mandates coming forward in time on auto, that's a whole lot easier to do than on truck, I understand. Should we just expect maybe there is a big announcement and we all kind of guess as to how long the tail end of diesel? Are you willing to do that or is there a risk-sharing? I don't know if you're willing to sort of characterize how those investments may go and I will stop there, thank you.

[Tom Linebarger, Chairman & Chief Executive Officer]

Yes, Rob. Thanks for that. It's a great question. Our view is that the tail end of diesel will be a lot longer than people expected. And that's not because we sit around and hope for the preservation of diesel. It's because the diesel market is so complicated. There are so many applications. A 100 years of applications and it's not like the cars where there's just one application. There's hundreds or thousands and each one of them has unique demand and scale. It's very difficult to achieve in some of these. And so we see the demand for diesel lasting a long time and that's why this investment in both helping customers that are trying to move out of diesel as well as trying to think through how do we invest in those technologies to decarbonize through renewable natural gas or hydrogen ICE engines, or hybrids, or other things is a good investment because it allows these applications to move down the carbon curve, have less carbon out, lower criteria pollutants in an engineering way and cost way that's going to drive utilization and people are going to actually use it and not just delay purchases. So, we think both for regulators and for customers, that's a good investment and that curve is likely to last a long time.

And the answer about how long is unfortunately for people that want a simple answer, it depends on how - it's complicated. It will last a really long time if you mean all of them. If you mean the one-truck application, our largest volume, it might happen sooner than the last unusual kind of truck that's a very small volume. But the accumulation of all those curves and all those applications means diesel is around a long time. And these new applications, the lower carbon ones are going to be introduced starting now and all the way through the 2030s.

[Rob Wertheimer, Melius Research]

Wonderful. Thank you.

[Operator]

We have reached the end of the question-and-answer session. And I will now turn the call over to management for closing remarks.

[Jack Kienzler, Investor Relations]

Very good. Thank you and thank you, everyone, for your interest as always in Cummins. We appreciate your attendance, and that concludes our teleconference today. I will be available per usual for questions after the call and I hope everyone has a great day.