Cummins Inc. (NYSE:CMI) Deutsch Bank 14th Annual Global Industrials & Materials Summit Conference Transcript June 7, 2023 2:00 PM ET
Executives
Tony Satterthwaite – Vice Chairman
Chris Clulow – Head, Investor Relations
Analysts
Nicole DeBlase – Deutsche Bank
Nicole DeBlase
Okay. I think we are live again. So for those of you that don’t know me or haven’t been in all the sessions today, I am Nicole DeBlase. I cover multi-industry electrical equipment, as well as machinery at DB.
Next up on the presentation schedule is Cummins. I am very pleased to introduce Tony Satterthwaite, who is Vice Chairman. Tony has been with Cummins since 1988 and was previously President and COO and has also led two business segments, both Distribution and PowerGen. And then we also have Chris Clulow, who’s Head of Investor Relations.
Question-and-Answer Session
Q – Nicole DeBlase
So we are going to dive right into the fireside chat. I will open up the — open up questions to the audience a bit later, so please don’t be shy. All right. So what are your thoughts on the recent weakness in North America Class 8 truck orders and what could this mean for production in second half of 2023 and into 2024?
Chris Clulow
Yeah. So we have been watching this Nicole, and of course, we have probably answered this question a million times, But — it is — I mean, we saw the April truck orders were a little over 11,000, May was 15,500 and it’s not unexpected. perspective. The 2024 order boards are still closed by the OEMs for the most part and 2023 is pretty full. So as we are looking at in our guidance, we had assumed moderation towards the fourth quarter.
Nicole DeBlase
Right.
Chris Clulow
And as we go day-by-day, we have a pretty good visibility six months out. It seems probably less likely. It seems like it continues to push out. So I think it’s looking like the second half will be pretty close to — as equal on the truck market and we don’t see any slowdown in builds as we talk to the OEMs, they are just asking for more.
Nicole DeBlase
And it seems like then they are not really planning for a slowdown in builds in the back half based on what they are seeing today in backlog?
Chris Clulow
Correct. Yeah. Backlog just keeps building with more orders.
Nicole DeBlase
Okay. Okay. Got it. And then, I mean, as North America Class 8 builds potentially come down at some point, let’s say that happens in 2024, who knows, do you think North America medium-duty production can still remain robust?
Tony Satterthwaite
Okay.
Chris Clulow
I think you can, yes. In particular, I think, more so than the heavy-duty side, I think, the fleet — the medium-duty fleets are older. I think they have also been more underserved as the supply chain challenges have hit the OEMs and have hit us.
I would say, we have all prioritized heavy-duty over medium-duty and so I think there’s a lot of pent-up demand. We have an 80,000-unit backlog in medium-duty in the industry and that’s a little unheard of. So I do think that we definitely could be quite a bit stronger…
Nicole DeBlase
Yeah. I mean the fire alarm going to go on, happened twice in the last session.
Tony Satterthwaite
Good to know.
Chris Clulow
Okay.
Nicole DeBlase
Okay. Let’s give the 5 seconds because it does tend to clear out. Okay. Let’s hope that, that’s the only one this session and let’s hope that the mics come back. But otherwise, I will talk a little louder. There we go. Okay. So one question that I get from investors pretty often and I am not sure I have a great answer for it is, we have been in this freight recession for a while now, yet backlogs haven’t come down, cancellations rates aren’t going up. What is going on with this dislocation between the freight markets and the North America truck market?
Tony Satterthwaite
So what I think we have learned from talking to the fleet is a couple of things. First of all, in the war for drivers, new trucks is a big weapon. So we think as the driver war continues among fleets, fleets keep wanting to modernize and upgrade their fleet so they can offer drivers the best trucks.
Secondly, most of the fleets we talk to feel the average age of their fleet is a bit long and so they are working to bring down the average age, which is about bringing in more new trucks and possibly then parking or taken out of their fleet older trucks, right?
And then the third thing I think is that, this freight recession is generally viewed by most of the fleets we talk to as temporary. They are seeing there’s this big inventory over build and then there’s a big inventory correction at least at the retail level and most of the fleets we talk to see, maybe that’s coming back more towards normal and we won’t see — we don’t see a big drop — they don’t see a big drop in volume…
Nicole DeBlase
Okay.
Tony Satterthwaite
…against volume, even though I get spot rates are down, volume is not down that much.
Nicole DeBlase
Okay. Okay. That makes sense. And I guess, like if you were to look at the average age of the fleet today, are we getting close to the point where it’s back to normal or is it still very extended?
Tony Satterthwaite
I would say, based on conversations with fleet, it’s extended. I think — whether it’s vary or just extended.
Nicole DeBlase
Okay.
Tony Satterthwaite
I think they are still looking to bring in more new vehicles, right, and continue to want to reduce the average age of their fleet.
Nicole DeBlase
Okay. Okay. Got it. Let’s talk about China for a little bit. So, I guess, I feel like this whole China reopening theme has really just fallen flat. What are you guys seeing in the China truck market and maybe could we at least say that demand has bottomed?
Chris Clulow
Yeah. No. I think it really bottomed last year. I think as we looked at the outset of this year, we said it’s going to be a slow and steady recovery and everybody thought we were being conservative and I thought we were being a little conservative, but we saw a good first quarter, but it was restocked.
As we talked to our China team, they are like just wait, just hold and see if they start flowing off the lots and that’s where it’s just not moving as quickly. So it is recovering. It is more towards the bottom end of the market and probably will stay there this year.
I think it’s just more slow and steady gains. And it’s going to be a couple of reasons. One, we don’t see any stimulus, lots of rumors about it, but nothing of substance. And it’s not real estate construction driven, because of the real estate reform.
So it’s more just a consumer confidence and that just takes longer. And based on what we are hearing from both the government, from our teams, from the fleet owners that now have built up in China, it doesn’t seem like it’s going to rapidly bounce back.
Nicole DeBlase
Okay.
Chris Clulow
I guess — on the positive side for us, I guess, we — in the meantime, we have gained some share and NS VI we also gained some share in off-highway. So we are making better inroads and putting more content on the trucks, but it’s just going to take a while to recover.
Nicole DeBlase
Okay. And as we move towards recovery at some point, is there any reason why we couldn’t see a recovery back to like prior peak levels in that market or is that just too robust of an assumption?
Chris Clulow
I think, I would say, probably, the prior healthy peak. Prior peak is probably in the 2021 when they built 1.7 million trucks, it’s just…
Nicole DeBlase
Okay. They…
Chris Clulow
They scrapped or moved out the NS III trucks and overbuilt, and it was unhealthy for the whole thing. So we think that the range is probably more like 900,000 to 1.4 million now…
Nicole DeBlase
Okay.
Chris Clulow
… with 2021 being too high and last year being too low.
Nicole DeBlase
Okay.
Chris Clulow
And it will be probably gravitate more to 1.1 million, 1.2 million…
Nicole DeBlase
Okay.
Chris Clulow
… on average.
Nicole DeBlase
Okay. Got it.
Tony Satterthwaite
One thing I’d add super quick. Natural gas, which is not a big part of the North American heavy-duty truck market is a reasonably big part of China’s truck market and approximately 30% or so of the market is natural gas. We have got some new products that have done pretty well there. We have already launched the 15-liter natural gas in China. That’s in the market. We have got a 12-liter natural gas as well and our market share in the natural gas space is up to about 15% to 20%.
Nicole DeBlase
Wow!
Tony Satterthwaite
That’s been a good growth area for Cummins.
Nicole DeBlase
This might be a stupid question, but why has natural gas has been so successful in China when it hasn’t been as much so in North America?
Tony Satterthwaite
It’s a very good question. And I’d say there’s a couple of things. First of all, China decided they wanted the natural gas market to grow. They are much more adept at that than we are in the U.S. But I think infrastructure and then I think the OEMs have gone after it and made it a lot more competitive from a price cost perspective. The other thing is the price arbitrage in China between natural gas and diesel is big enough to make it very attractive for fleet.
Nicole DeBlase
I see.
Tony Satterthwaite
I think those are the three things that have motivated that market much more so than we have in the U.S.
Nicole DeBlase
Understood.
Tony Satterthwaite
At least we could do more in the U.S., but that’s conversation for another day.
Nicole DeBlase
Perfect. Yeah. We will see. And what about trends in South America, I feel like we have seen kind of more broad-based weakness there year-to-date? Is that what you guys are seeing as well?
Chris Clulow
Yeah. I would say we are seeing weakness. There is not a huge market for us right now.
Nicole DeBlase
Okay.
Chris Clulow
I mean, I think, we do — it will be once we get the Daimler medium business in the coming couple of years. But it is a relatively small market and it is weak. I would say Brazil’s weak, Argentina has consistently been pretty up and down.
Nicole DeBlase
Okay.
Chris Clulow
It’s consistently erratic as Argentina. But Chile is doing okay on the mining back, but Brazil is what drives the trucks and that’s been weak.
Nicole DeBlase
Weak. Okay. And you reminded me, I don’t think I have this on the list, but the Daimler medium-duty ramp for you guys, what is the timing on that?
Chris Clulow
Yeah. it’s a good question, and Tony, do you want to take that or…
Tony Satterthwaite
Well, so we originally agreed with Daimler, the deal and we were going to start in Germany and build a product in their factory. We have changed direction now. We are going to build the product in our factory in the U.K. and provide it to them. That is roughly at the Euro VII timeframe.
What we said is that deal is a global deal. It affects all of Daimler’s medium-duty volume around the world. Obviously, we have the opportunity to move first in the U.S. where we have it. But we said end of the decade for India, Japan, Brazil, and I would now say, all those dates are coming soon.
Nicole DeBlase
Got it. That’s great.
Tony Satterthwaite
That’s pretty exciting.
Nicole DeBlase
Yeah. Yeah. Definitely. Okay. And then just thinking about Daimler medium-duty is a good example of this. You guys have been gaining share with ICE platform in the past few years. Is there more opportunity to continue driving wins going forward?
Tony Satterthwaite
Yeah. In short, yes. There’s some significant opportunities in Japan. So with the Daimler business that’s FUSO as their Japanese brand. We have already announced our agreement with Isuzu. We are now shipping our Engines to Isuzu use in their trucks in Japan and we will be following with their export business. So Japan is a big opportunity, right?
And we think also in India and then in Brazil, the other opportunities with our friends at Traton, where we continue to talk. We are talking to everyone in the industry pretty consistently, right? And our view is some of them decide to keep their in-house Engines and we think the Daimler agreement has been in a huge plus. But if you just look in Japan, I think, we have a big potential in Japan specifically.
Nicole DeBlase
Okay. And that would be medium, heavy, like, what part of the market?
Tony Satterthwaite
Both medium and then — so our VI, VII, which is kind of and then maybe the 9-liter as well.
Nicole DeBlase
Oh! Okay.
Tony Satterthwaite
6-liter, 7-liter and 9-liter where the opportunity are.
Nicole DeBlase
Okay. Excellent.
Chris Clulow
And maybe I’d add on the North American market, I think, we continue to work with the OEMs. We think the OEMs and they have said they will be there for 27 for their heavy-duty, but there’s — we have the 10-liter and the 15-liter, so we will continue to work the edges.
Nicole DeBlase
Okay.
Chris Clulow
I think there’s opportunity to pick up some of those pieces. And with natural gas with the 15-liter coming over from China next year, we think that’s going to continue to grow and that will be a share gain because we are the only provider.
Nicole DeBlase
Okay. Okay. Understood. Let’s talk about EBITDA margin guidance, a favorite topic. So I think you guys have embedded some deterioration through the rest of the year versus what you ended up reporting in the first quarter. Is there any chance that could be conservative, if you could just like walk us through the drivers?
Chris Clulow
Yeah. I think, like, I mentioned earlier the — for the Engine business, if it sustains through the fourth quarter that — it should come in a bit better than what we guided to, because we did have softening there.
Nicole DeBlase
Okay.
Chris Clulow
We do — we are facing some continued cost pressures there though. So material cost pressures and more supplier inflation continues to be an issue in the Engine business and a little lesser extent, Components business.
Nicole DeBlase
Okay.
Chris Clulow
And it’s more driven by smaller suppliers where they have labor costs or interest rate costs, things like that, that we have held them off for a while and we just — we will pay — continue to pay them.
So that’s a piece. I would say, when you look at our first quarter results, we put up really great results in Distribution and Power Systems. Some of that had some positive one-off type things in it. I — we don’t think those are necessarily sustainable long-term, but we do see improved results there and that’s why we bumped up the guidance in each of those segments there.
Nicole DeBlase
Okay. Okay. Got it. And you brought up cost inflation. So I am going to guess the answer to this may be no then. Do you think that you are getting close to being caught up from a price cost perspective?
Chris Clulow
Yeah. I think we are pretty close. I think we are still — we are price cost positive this year about 250 basis points. We are positive last year. We were behind in going back into 2021. So we are getting there.
That — we will continue to drive it from a value perspective and as while there’s a little bit more open pricing, we will continue to push it. I think Power Systems is a space where we have used that to kind of catch up on margins. We continue to price and that’s priced that order. So that will drive further. I think most of our pricing for this year is in January.
Nicole DeBlase
Okay.
Chris Clulow
So it’s like when do costs really start abating, we are seeing it, of course, in freight, but labor has flattened and materials, like I said, a bit up.
Nicole DeBlase
Okay. Okay. Got it. Okay. So you brought up Distribution segment EBITDA margins. That’s the next question I have on this list. They are reaching new highs for the full year within the new guidance. So, do you see further margin expansion opportunity if we look out over the next three years to five years in Distribution and what could drive that?
Tony Satterthwaite
What we are trying to do in Distribution since I ran that business until 2019 and they have performed much better since I left. I had to get full credit for that. But we launched a transformation initiative in our North American business, which has really paid off.
We have started to bring some of those learnings to the International business. That’s actually performing really well. That’s what’s led to kind of where we are. Going forward, we are trying to focus more on growth in the Distribution business.
Remember, we are a complementary business with the product businesses, as we call it. And so there’s always some margin challenges between the businesses and we are trying to maximize overall opportunity for Cummins.
So to me, the key with Distribution is get the margins right and then figure out how to grow the business. And as I say, pull — right, pull product through all the rest of the Cummins and sell it out of Distribution.
So that’s really what we are kind of focusing on from here on out, right? It’s much more about growing the topline, not so much about trying to further improve margins. We think we have got the business in a pretty good space right now.
Nicole DeBlase
Okay. Okay. Understood. Just going to turn it to the audience. Any questions out there? Okay. We will keep going. I should have asked about this in the beginning and I forgot so I am going to come back to it now and that’s supply chain. Are you in a place where you feel like we are pretty close to normalize, where are we in that process?
Chris Clulow
In terms of throughput, I think, it’s improving, but we are not quite back. I think a good example is in North America plants where on-time delivery for suppliers would normally be like going back three years or four years in the 80%s, like high 80% or mid-to-high 80%. It got down into the 50%s in the pandemic. It’s only up to about 70% now.
Nicole DeBlase
Oh!
Chris Clulow
So it’s not all the way back. So we are still getting short shipped. And so what that leads to is just not great efficiencies. You are going to be — while we are producing as many as we can, there is a ceiling. There’s a better floor now on supply chain.
Nicole DeBlase
Okay.
Chris Clulow
We are not — it’s not every day 6:30 a.m. war room on chips or things like that. But it’s like we are just kind of in this band of what we are able to produce and sometimes it’s not as efficient, because of the like on-time delivery and other things where you are holding it back.
Tony Satterthwaite
I…
Chris Clulow
So it’s going to take some time still.
Tony Satterthwaite
I will put a finer point need to apply. It is not back to normal. It is not back to normal. And part of the question is when and how does it get back to normal? Like the challenges that companies have, labor challenges, material challenges, geopolitics is changing, right?
It’s — I am worried it’s going to take a while before we find the new normal, whatever that is. Inventory is elevated. That’s the other thing that we see — as we say, we have been grabbing everything we can when we can get it.
Nicole DeBlase
Yeah.
Tony Satterthwaite
And I am just maximize output, but now we have really got a pivot and start to say what — exactly what do we need, when do we need it, how do we get it come at the right time So inventory is an opportunity for us going forward, but it’s only an opportunity if we can get the supply base to settle down.
Nicole DeBlase
Right. And I guess, let’s say, you just sparked an interesting thought, which is if we stay in this environment, we don’t just return back to normal, like everyone thinks we might in 2024. How does that change the way Cummins operates facilities and thinks about productivity?
Tony Satterthwaite
Well, it will force us to go figure out how to operate effectively in this new normal. Instead of waiting for it to get back to the way it was, it will make us say, okay, this is the way it is. What do we need to do differently now? How do we need to rethink? How we run our plants? How we run our material planning, right? Because I do think it has changed, right? And I don’t think we are going to see a coming of the seas, I am thinking — things are still going to continue to be pretty rough, right?
The other thing that’s happening is in the internal combustion engine supply base broadly, there’s lots of stress in that in that supply base, particularly as PACCAR volumes, gasoline PACCAR volume starts to go down. So that’s — I just see the future of a lot of stress in our supply base going forward.
Nicole DeBlase
Okay. Okay. Got it. So there’s probably potential for some productivity-driven improvement in margins as this gets figured out over a multiyear period.
Tony Satterthwaite
Yeah.
Nicole DeBlase
Okay.
Tony Satterthwaite
Yeah.
Nicole DeBlase
Okay. Let’s talk about Components. So do you think that the Components segment is now seeing the benefit of emission standard changes in China and India or not? Like to what extent versus what you had expected?
Chris Clulow
Definitely. I think it’s — with BSVI in India, NS VI in China, that’s a pretty big opportunity. And now it’s fully implemented, so you have after treatments on everything, like, and you have enhanced fuel systems, turbos. So they are continuing to expand out. And I think it’s what it’s — that business is now kind of applied to everything in operation in China and India. So that’s grown quite a bit.
There’s still some potential for growth more. As emissions continue to progress at a really strong pace. When you think of — I will take the China market, 10 years ago, people were questioning whether emissions was actually enforced and how is — now it’s moving really quickly and technology is becoming more and more meaningful and it’s an opportunity for us to gain some share as well.
Tony Satterthwaite
The other opportunity in China is automated manual transmissions…
Nicole DeBlase
Right.
Tony Satterthwaite
So transmission business is growing in China. Penetration of AMT is up. That’s another opportunity in our Components business, right? And then all the share we gain in Engines with Isuzu and Daimler, all carries with it, Components.
Nicole DeBlase
Right. Oh!
Tony Satterthwaite
So it’s just — that’s another adder for their business as we get more share with Engines, Components revenue will grow.
Nicole DeBlase
Is it fair to say then that the Components growth could be among the higher growth pieces of the portfolio, putting New Power or Accelera side, could be one of the higher growth aspects to the ICE-driven portfolio?
Chris Clulow
Yeah. I think that’s fair to say. I think as we go to like 2027 emissions…
Nicole DeBlase
Yeah.
Chris Clulow
… enhanced after treatment, you are going to have more on after treatment, you have more revenue on that side. You will have other pieces that will be going on and our Components business really contains some of the key differentiating Components. So, of course, of an Engine and internal combustion, so I think it will continue to grow.
Nicole DeBlase
Do you see the potential for a prebuy in 2026 ahead of the 2027 changes, hot topic?
Tony Satterthwaite
I would be surprised if there wasn’t a prebuy. I mean, given how given how harsh or how difficult really maybe the better, how difficult the 2027 emissions regulations are, I think, it would be foolish not to expect some degree of prebuy.
Nicole DeBlase
And I assume it comes with a pretty, there’s a cost uplift associated with all of these.
Tony Satterthwaite
So there’s a bunch of things. There’s technology, there’s content and then there’s the warranty change, which is significant as well, right? That changes in 2027, goes from 100,000 miles to 450,000 miles, which is…
Nicole DeBlase
A huge.
Tony Satterthwaite
Yeah.
Nicole DeBlase
Yeah.
Chris Clulow
So I’d add is, the only thing I’d question is whether it’s just 2026.
Nicole DeBlase
Yeah.
Chris Clulow
I think the conversation has already started about prebuy like now like we wouldn’t have done this in previous cycles. And so I think with people missing out on Engines as they went through the pandemic, they couldn’t get a truck for two years, fresh wounds. So they are like, do I have to buy earlier than that?
Nicole DeBlase
Interesting. So there might not be like a big down cycle that people are afraid of in North America.
Chris Clulow
Yeah. It’s kind of help in supporting what we think is when it cycles, it will be more gentle.
Tony Satterthwaite
I am always alive and well in truck market…
Nicole DeBlase
Meritor, how is the integration progressing so far?
Tony Satterthwaite
It’s progressing well. We are on track with our synergy projections what we laid out when we bought the business. We found a number of things that were different than we thought as always happens and we found a number of other opportunities that we think will bring more benefit.
Two areas we found a bunch of benefit in tax that we didn’t expect, which I think we are going after. And then Meritor had a strategy of many small plants and this is not our understanding of how you run an Engine business. We have few big plants.
And we are actually going through an exercise now to understand should we run Meritor more like Cummins? They have a couple of big plants or do we keep with this many small plant strategy and just that’s a really interesting piece of work that I think has the potential to be a big thing that we hadn’t thought about when we bought it. So, we are pretty excited about what we got with Meritor. We are very excited about the eAxles business, which we put in the Accelera space.
Nicole DeBlase
Yeah.
Tony Satterthwaite
Right. And so that’s got customers, that’s growing, that’s — I think that’s called a post-revenue business. But anyway, we are pretty excited about the opportunities with that. And so — and then the eAxles business, they have — it’s a lot of the same customers, but it’s — they have got bigger positions in some customers where we don’t have as big an Engine position. So that’s also been interesting just kind of get to know some of those other OEMs a little better.
Nicole DeBlase
Okay. Okay. Got it. That’s great. And I mean how would you think about over the long-term, what the profitability of that business could look like?
Tony Satterthwaite
So our goal is to get Meritor.
Nicole DeBlase
Okay.
Tony Satterthwaite
Is to get Meritor to the Components average and we think that’s doable.
Nicole DeBlase
Okay.
Tony Satterthwaite
We think that’s a reasonable target. We have got set on that and we think we can deliver that.
Nicole DeBlase
Okay. Great. Power Systems, another business where margins were really strong in the first quarter and I think we are just also seeing early signs of recovery over the past few quarters. So maybe you could just give some color on what’s been strong driving that recovery?
Chris Clulow
Yeah. So, yeah, I think, the — one of the big drivers there is pricing. So it’s a long lead time business and your price at order. So it took a little while to catch up there and that’s when it started getting traction in Q3 and then in Q4 and then really, really strong results in the first quarter of this year.
And so we continue to drive that, continue to drive pricing, and at the same time, we are even in midstream trying to take cost out, trying to make it sustainable for the long-term. So we have a big effort going on there for transforming kind of our structure and how we go to market and so forth. So I think that’s kind of adding up. It went — we went for a number of years where no one even asked about Power Systems, because it was like kind of steady…
Nicole DeBlase
Yeah.
Chris Clulow
… in margins and so now it’s kind of graduated up and starting to see better margins.
Tony Satterthwaite
So I told you, we ran this transformation in the North American part of Distribution business. The women who love that now leads the Power Systems business. So she’s launched on a similar effort to try to transform the PowerGen — Power Systems business.
And I think that’s — she — I was like, oh, that’s pretty fast work. So she told me the best is yet to come. But still it was — there were some one-offs and some factors in the first quarter. But we are confident that business is on an improving trend.
Nicole DeBlase
Any thoughts on the longer term profitability potential?
Chris Clulow
Well, we think right now markets are quite strong and I think a sustainable guidance about 14% EBITDA.
Nicole DeBlase
Okay.
Chris Clulow
And then we will continue to work to improve on that regardless of where the market is and kind of working our way through the way.
Nicole DeBlase
There’s more to go beyond.
Chris Clulow
More to go.
Nicole DeBlase
Right. Okay. So you recently announced the acquisition of two Faurecia’s CV manufacturing plants in Indiana and the Netherlands. Can you just shed some light on the strategy there and the plans for those facilities?
Chris Clulow
Yeah. So this is — yeah, we just announced this and it’s kind of in line with a few of the acquisitions we have made recently, where we are securing our supply chain. It’s securing our supply chain at — usually at pretty good prices.
And so things that are key components where maybe you are a little bit more at risk and we need to make sure that we can keep the supply going. We bought a foundry in the first quarter, which is — I never thought I would say that. I was actually present when we closed our last in China and so — but it made sense.
We can need the continuity of block supply in internal combustion. So we will continue to make those investments. They are not — we don’t expect to make big ones, but there’s going to be a series of small Jacobs last year was also in line with that.
Nicole DeBlase
Okay. That makes sense.
Tony Satterthwaite
So during COVID, we actually — we divided our management team into two. I ran a group with another Cummins leader and we actually ran the day-to-day business when I was CEO. We set up — we call this the plan-ahead team and they did a bunch of work saying, what’s going to be different when the pandemic clears.
And we started to look at our supply base in some depth. And so what Chris has laid out is the first couple of steps of kind of shoring up key parts of our supply base and ensuring we have kind of long-term stable supply
It also has been key in making sure we can meet USMCA content. So this is the other critical thing that most of those purchases have been in North America where we need USMCA, which we will start to abide in 2027, right? So again, the strategy is all kind of coming together…
Nicole DeBlase
Okay.
Tony Satterthwaite
… about securing the supply base, right, making sure we are in control of critical components and making sure we can meet USMCA.
Nicole DeBlase
Got it. Okay. Okay. Clear. So to move on to Accelera New Power electrolyzers. You also recently announced that you started electrolyzer production in Minnesota. When do you think we will start to see critical mass of electrolyzer revenue start to come through the segment?
Tony Satterthwaite
So electrolyzer demand is — let me go back a couple of years. We have been excited about the electrolyzer business for some time. In our Analyst Day last year, on Hydrogen Day, we talked about building towards a backlog and then getting the business to breakeven by 2027 overall, but building towards kind of a 400-megawatt backlog kind of a number.
We thought all that was going to come out of Europe, right? All of a sudden, the IRA, Inflation Reduction Act comes out of nowhere, and all of a sudden, all the action is in the U.S. And frankly, Europe is moving super slow. The money has been slow to flow.
There’s been all kinds of challenges in getting projects off the ground, and of course, the IRA is a very different incentive driver and so lots of interest, all of a sudden really fast. We did the biggest electrolyzer project in 2021 at 20 megawatts and we have just closed our first 90-megawatt…
Nicole DeBlase
Wow!
Chris Clulow
Right.
Tony Satterthwaite
And close the order for the 90-megawatt plant. Now we are about a year to year and a half out in terms of those projects being completed, right? So that’s the other thing to remember is, we have got a backlog, we have got to set orders.
Now it’s all about the supply chain. So that’s why we have increased U.S. capacity that’s Minnesota investment. But there’s — these are complicated projects, not just a product. So there’s a lot of work to be done to actually get these things installed, commissioned up and running.
Nicole DeBlase
Okay. And I guess your market expectations that you laid out at the Investor Day, does this mean that the expectation hasn’t changed, but it’s just coming from North America rather than Europe?
Chris Clulow
Yeah. I think that’s fair. I think, I mean, Europe will come along. It is…
Nicole DeBlase
Yeah.
Chris Clulow
It is just moving slowly. We did two capacity expansions in Europe are underway as well. So it will move along. I think it probably U.S. will play a bigger role than we expected.
Nicole DeBlase
Any thoughts on the size of the U.S. pipeline, if that’s the right way to put it back post-IRA or is it too early to size?
Chris Clulow
It’s early to size. I know when we did our Analyst Day that the worldwide was about $8 billion for and it’s obviously increased from there, but I wouldn’t hazard guess on that for U.S.
Nicole DeBlase
Okay. Encouraging that you are already seeing customer conversations from that though in actual orders. Yeah.
Tony Satterthwaite
Yeah.
Nicole DeBlase
What about the margin potential of that business and maybe initial production versus where this can go over time?
Chris Clulow
Sure. Sure. So like right now we and it’s a sub-$100 million business fledgling business and — but we are already quoting at gross margin positive, gives us a good feel that we can work our way up to Cummins average margin.
Nicole DeBlase
Okay.
Chris Clulow
And when we look at it, you are going to be taking costs out of the product, there’s a lot of work to be done as we scale up manufacturing. It is a piece build. It’s a cell build thing. It’s not automated working through that and we will bring in some more key components in-house and kind of continue to build that up. So we see a good path to get good margins here.
And it’s going to scale up pretty rapidly. We said $400 million in revenue by 2025. We feel really comfortable with that target as that increase. And then as we talk about our 2030 numbers, this is $3 billion to $4 billion.
Nicole DeBlase
Okay.
Chris Clulow
So sizable outgrowth for us.
Nicole DeBlase
And what about the competitive environment for electrolyzers, is that changing at all?
Chris Clulow
Yeah. I would say, it’s very much changing, particularly as Tony mentioned, the projects are getting bigger. The people that are — the partners we are working with want somebody they can rely on, someone is going to be there in a really top quality technological product.
So it’s now kind of gravitated to maybe four or five big companies us included. And so it’s a lot of — there’s a lot of competitors in the marketplace, but it’s cleaning up quickly, a lot of consolidation.
If you talk to our strategy leader, he would say gets calls every day for battery electric, fuel cell, people looking for us to buy them. So I think it’s just going to be a continued consolidation in that market.
Nicole DeBlase
Is that something that Cummins is interested in doing deals in that space?
Chris Clulow
I would say it’s a buyer’s market. So if there’s something interesting in there from technology, we feel really good with our portfolio, like, we feel we have a complete portfolio, but if there’s something interesting in there, we will certainly entertain it and we would expect them to be relatively small and probably at a pretty good price.
Nicole DeBlase
Okay. Any questions from the audience? Okay. I am just going to round out the M&A question while we are on the topic. I mean, Meritor was a sizable deal for you guys. You are not the most acquisitive company in the world when it comes to larger deals.
Chris Clulow
Yeah.
Nicole DeBlase
So what’s the plan with respect to future acquisitions, let’s put Accelera aside since we already discussed that piece?
Tony Satterthwaite
So Meritor was big, Meritor was the right thing in terms of diversifying our participation in the commercial vehicle market. If there were other opportunities to continue to do that, we might look at that.
Everyone says breaks is the one thing we don’t have that we need. Those companies sold for rather attractive sort of multiple, so we will see. We don’t — we will not do anything crazy. I am fairly confident of that.
We will continue to look for opportunities to further diversify the company in the space as we know and particularly in technologies that are going to last past the end of ICE whenever that is.
Nicole DeBlase
Yeah.
Tony Satterthwaite
Right. I do think we have some opportunities. As I said, growth in Distribution. There’s still some opportunities there, get not big, right? Accelera is the other place and you should continue to see us be strategic and very focused in a few places in our supply…
Nicole DeBlase
Okay.
Tony Satterthwaite
… where we want to take control of technology or production, right, and make sure we can meet our needs in the long -term.
Nicole DeBlase
Makes sense. Filtration IPO is coming.
Tony Satterthwaite
Yeah.
Nicole DeBlase
Congratulations on that.
Chris Clulow
Yeah. Yeah. Thanks.
Nicole DeBlase
A lot of work.
Tony Satterthwaite
Yes.
Nicole DeBlase
Will Cummins continue to work with the Filtration business at all, like, how does that relationship work?
Tony Satterthwaite
So we have been one company since they started in the 1950s and right or since Cummins started that business in the 1950s. We have a long-term first-fit supply agreement between what we call the product companies, the Engine business in particular and Filt — and Atmus.
And then we have an aftermarket agreement between our Distribution business and Atmus since they sell the products, right? They have been exclusive. We have been exclusive sellers, not exclusive, we have been — the Distribution business has only sold Fleetguard filters, even though Fleetguard has a multichannel distribution strategy.
And so, but we have contracts with them, right? And we are looking forward to working with them in a different way going forward. There was a lot of interesting tension in negotiating those agreements, but that’s all behind us now and we are actually moving forward.
And I think both groups are pretty excited about what the new world will bring with different opportunities. And so we are going to continue to work together closely, at the same time, we will become a separate independent company.
Nicole DeBlase
Okay. Makes sense. And are there additional creative ways to kind of do things with the portfolio like you did with Filtration or was that a one-off?
Chris Clulow
I think it’s something we evaluate all the time. So and we have for several years with Filtration — actually we have been looking at for several years. And it just has to be the right structure. So, but nothing really jumps out of this, maybe some small pieces here or they probably not worth relatively small pieces of the business that aren’t in the core, but not anything significant.
Nicole DeBlase
Okay.
Chris Clulow
I think that’s the biggest piece for a while.
Nicole DeBlase
Okay. Great. Well, I think unless there’s any questions from the audience, we will go ahead and wrap it there. Thanks so much, Tony and Chris.
Tony Satterthwaite
Okay. Thank you, Nicole.
Chris Clulow
Thanks, Nicole.
Tony Satterthwaite
Thank you very much.
