Cummins Inc (Ex. Cummins Engine Inc) (CMI) Q1 2021 Earnings Call Transcript

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Cummins Inc (Ex. Cummins Engine Inc) (CMI 0.49%)
Q1 2021 Earnings Call
May 4, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Cummins Inc First Quarter 2021 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Jack Kienzler, Executive Director of Investor Relations. Thank you. You may begin.

Jack Kienzler -- Executive Director of Investor Relations

Thank you. Good morning everyone, and welcome to our teleconference today to discuss Cummins' results for the first quarter of 2021. Participating with me today are 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 a 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 and Chief Executive Officer

Thank you, Jack. Good morning, everyone. I'll start with a summary of our first quarter financial results and then I'll talk about our sales and end market trends by region, and finish with a discussion of our outlook for 2021. Mark will then take you through more details about our first quarter financial performance and our forecast for this year.

Demand accelerated in the first quarter as the global economy continued to improve, driving strong sales growth about across -- most businesses and regions and resulting in solid profitability. The strength and breadth of the rebound in demand has surpassed our original expectations and we've raised our full year outlook. We were particularly encouraged by the significant growth of our components business in the first quarter, which is now clearly capturing the benefits of the increasing content we are able to offer our customers and partners as they move toward more complex and stringent emissions regulations in China and India. This business is also benefiting from its global leadership position as truck markets recover. While the strong demand across our end markets generated strong revenues, the pace of recovery has placed a strain on global supply chains leading to increased cost and significant challenges in fulfilling all of our customers' orders. The shortage of key components such as semiconductor chips has been the primary challenge with adverse weather conditions, labor shortages in some regions, and bottlenecks in global logistics further adding to order backlogs. The ability to supply is our key focus now and we are doing everything we can to mitigate the impact. I want to thank our global employees, especially those in our supply chain and manufacturing operations and our committed suppliers for their extraordinary efforts to manage through these challenges and supply our customers. We are optimistic that the situation will improve in the second half of the year, however, we expect to -- demand to remain strong, making it difficult for the supply chain to catch up unless the industry extends the order cycle.

Before moving to our first quarter financial performance. I want to take a moment to highlight a few important strategic partnerships that we announced during the first quarter. These new and expanded partnerships are consistent with our strategy to deepen our relationships with key customers and existing segments while continuing to invest in new and alternative power solutions. As the leading independent global power solutions provider, Cummins is committed to ensuring our customers have the right solution anywhere and everywhere our customers operate by offering them a broad range of power solutions from advanced diesel, near zero natural gas, fully electric hydrogen, and other technologies.

In February, we announced a global strategic partnership for medium-duty engine systems with Daimler Truck and Bus. As part of the partnership, Cummins will invest in the further development and global production of medium-duty engines and components for Daimler Trucks and Buses. The partnership builds on our strong existing relationship with Daimler's North American brands. In North America, Daimler will replace their vertically integrated engines with Cummins' engines ahead of CARB regulations in 2024 and EPA regulations in 2027. In addition, Cummins' engines will be used in Daimler medium-duty chassis in Europe, Brazil and India coinciding with next generation emissions regulations in those regions. In the future. Global Medium Duty Engine Systems for Daimler Trucks and Buses all over the world will be provided by Cummins. We also announced a global medium-duty partnership and advanced engineering collaboration with Isuzu, building upon the Isuzu Cummins Power partnership formed in 2019. Isuzu Trucks powered by Cummins B6.7 diesel platform engines will be introduced in North America first in 2021, and in Japan, Southeast Asia and other regions at later dates.

Finally, in March, we announced the medium-duty engine offering with Hino where Cummins 6.7 and L9 engines will be available in Hino trucks in North America by the end of this year. In addition to the above announcements, we continue to investigate areas in which we can strategically collaborate with global OEMs across a number of regions, technologies, and Power Solutions. We believe these collaborations will not only allow us to significantly grow our core engine and components businesses, but will also further strengthen the important relationships we have with a number of OEMs and end users. These relationships coupled with our application expertise in broad sales and service channel will position us well to manage the transition from internal combustion engines to lower carbon hybrids and eventually to zero emissions products in the future.

Now I will comment on the overall company performance for the first quarter of '21 and will cover some of our key markets starting with North America before moving on to our largest international markets. Revenues for the first quarter of 2021 were $6.1 billion, an increase of 22% compared to the first quarter of 2020. EBITDA was $980 million or 16.1% compared to $846 million or 16.9% a year ago. EBITDA dollars increased as a result of stronger sales and record joint venture income partially offset by significantly higher premium freight and other costs associated with supply chain disruptions as well as higher variable compensation expense. Our profitability, especially in the engine business was impacted more than expected by supply chain disruptions due to the extraordinary measures we had to take to meet customer commitments.

Our first quarter revenues in North America grew 7% to $3.3 billion, driven by higher industry build rates of heavy-duty trucks and light duty pickups. Industry production of heavy-duty trucks in the first quarter was 60,000 units, an increase of 15% from 2020 levels. While our heavy-duty unit sales were 23,000, an increase of 25% from 2020. Industry production of medium-duty trucks was 32,000 units in the first quarter of 2021, an increase of 2% from 2020, while our unit sales were 27,000 units, an increase of 5% from 2020. We shipped 42,000 engines to [indecipherable] for use in their RAM pickups in the first quarter of '21, an increase of 49% from the 2020 level. Revenues for power generation grew by 10% due to higher demand in recreational vehicle and data center markets. Our international revenues increased by 45% in the first quarter of 2021 compared to a year ago. First quarter revenues in China including joint ventures were $2.1 billion, an increase of 95% due to the higher sales in on-highway and construction markets. Industry demand for medium and heavy-duty trucks in China was 587,000 units, an increase of 95% driven by increased and NS V pre-buy ahead of a broader NS VI implementation in July of this year and in effort to secure inventory amid supply chain concerns. Our sales in units, including joint ventures were 91,000, or an increase of 146%. The light duty market in China increased 73% from 2020 levels to 581,000 units, while our units sold including joint ventures were 45,000 units, an increase of 63%. Industry demand for excavators set another quarterly record of 127,000 units in the first quarter, an increase of 84% from last year. Our units sold were 21,800 units, an increase of 107% as our customers continued to gain market share. Demand for power generation equipment in China increased 41% in the first quarter, driven by our -- growth in data center markets and higher demand for standby power. First quarter revenues in India, including joint ventures were $577 million, an increase of 82% from the first quarter a year ago. Industry truck production increased 63% while our shipments increased 88% driven by better penetration with our JV partner as a heavy duty commercial vehicle segment recovered from a year ago. Demand for power generation and construction equipment rebounded strongly in the first quarter as economic activity continued to improve. In Brazil, our revenues increased 31% driven by increased demand in most end markets.

Now let me provide our outlook for 2021 including some comments on our individual regions and end markets. We have raised our forecast for total company revenues for 2021 to be up 20% to 24% compared to our prior guidance of up 10% at the midpoint. This guidance reflects a stronger outlook in most markets and regions. We've raised our forecast for industry production of heavy-duty trucks in North America to 264,000 units, up 45% compared to 2020, and above our prior guidance of 255,000 units. Despite the supply chain constraints our industry is experiencing, demand has continued to outpace our expectations from the beginning of the year. In the medium-duty truck market, we are increasing our forecast for industry production to 140,000 units, up 35% year-over-year and above our prior guidance of 125,000 units. We expect our engine shipments for pickup trucks in North America to be up 15% compared to 2020, an increase of 10% from our expectations three months ago. In China, we continue to expect domestic on-highway demand to decline from record levels a year ago despite the strong start to the year. However, we are increasing our outlook for medium and heavy-duty truck market demand to 1.5 million units, compared to our expectations of 1.3 million units at the beginning of the year. This would still represent a 15% decline from 2020. In the light-duty truck market, we continue to expect a 7% reduction in demand in line with our previous guidance. We now expect industry sales of excavators to decline 10% from the record levels achieved in 2020. This compares to our prior guidance of down 20%. In India, we continue to project broad recovery versus 2020. We anticipate industry demand for trucks to be up 90%, compared to levels experienced in 2020 and our other businesses are showing promising growth due to continued infrastructure investment. We do anticipate lower demand in all end markets in the second quarter due to new lockdowns as a result of an increase in COVID 19 cases, and are monitoring the events on the ground closely. Given the rapid increase in COVID cases in India, we are very concerned about the health and safety of our employees and those of our suppliers and partners. We are continuing to operate all of our manufacturing facilities, but with robust safety measures in place. In Brazil, we continue to forecast truck production to increase 25% in 2021. We now expect demand for mining engines to increase 45% in 2021, up from our expectation of 15% three months ago, and that's due to continued strength in commodity prices.

Demand for power generation equipment increased 18% in the first quarter and we continue to see strong order activity in most geographies and segments. We are now expecting global power generation revenues to increase 15% compared to our previous forecast of up 5%, primarily driven by data center and recreational vehicle markets. In summary, we are increasing our revenue outlook for the year with year-over-year growth expected to be -- expected in most major regions except China. Demand in China remained very strong in the fourth quarter, but we do anticipate a weaker second half of the year driven in part by the transition to the new national Standard 6 Emissions regulations for trucks beginning in July. We are increasing our EBITDA guidance range from 15.5% to 16% compared to 15% to 15.5% at the beginning of the year due to stronger volumes and improved outlook for JV income, which we expect to more than offset significantly higher supply chain costs.

During the quarter we returned $615 million to shareholders in the form of dividends and share repurchases, consistent with our plan to return 75% of operating cash flow to shareholders for the year. We continue to take necessary precautions at all of our facilities to mitigate the spread of COVID 19 and our focus remains on the health and safety of our employees. We are optimistic that continued vaccination distribution globally will reduce the impact of the virus in the second half of the year, but there is still a risk of an increase in cases somewhere in the world that could result in lower customer demand, additional facility shutdowns, or additional supply chain constraints in the future. Having managed through an extremely challenging 2020 and a dramatic ramp up in the first quarter of 2021, Cummins is in a strong position. We have secured some important new business wins in our engine and components businesses. At the same time, we continue to invest in future growth, bringing new technologies to customers and generating strong returns for shareholders. Thank you for your time today, and now let me turn it over to Mark.

Mark Smith -- Vice President and Chief Financial Officer

Thank you, Tom, and good morning everyone. There are four key takeaways from our first quarter results. First, we saw continued recovery in demand in most major end markets and regions resulting in record revenues for the first quarter and a much stronger full-year outlook. Second, the elevated level of demand across our markets have strained global supply chains in our industry, resulting in higher premium freight costs and other associated inefficiencies higher than we anticipated at the start of the year. The strength of demand or the backlogs and lack of inventory in the pipeline indicate that some level of elevated costs are likely to continue in the coming quarters. Despite the cost headwinds associated with the tight supply chain, we delivered solid profitability and cash flows in the first quarter, and have raised significantly our outlook for the full year. And finally, we returned $615 million to shareholders through cash dividends and share repurchases, consistent with our plan to return 75% of operating cash flow to shareholders this year.

Now let me go into more details on the first quarter. First quarter revenues were $6.1 billion, an increase of 22% from a year ago. Sales in North America grew 7%, and international revenues rose 45%. Currency movements positively impacted revenues by around 1%. Earnings before interest, taxes, depreciation, amortization or EBITDA were $980 million or 16.1% of sales for the quarter compared to $846 million or 16.9% of sales a year ago. EBITDA dollars increased due to the benefits of higher volumes and stronger earnings from joint ventures in China. EBITDA percent declined primarily due to a weaker gross margin percent. Gross margin of $1.5 billion or 24.4% of sales increased by $192 million, but declined as a percent of sales by 140 basis points. First quarter gross margins included approximately $105 million of additional, freight, labor, and logistics costs associated with disruptions across our supply chain. We expect elevated cost to continue at least through the second quarter, and have incorporated additional cost into our full year guidance. Partially offsetting these supply chain efficiencies was a $44 million positive change in estimate and our product coverage expense reflecting lower cost across several products primarily in our Components and Power Systems businesses.

Selling, general and administrative expenses increased by $28 million, and our research expenses increased by $22 million, and both increased primarily due to higher variable compensation expense. In 2020, our variable compensation plan worked as designed, flexing down due to the weaker outlook associated with the impact of the global pandemic. In 2021, variable compensation expenses are expected to be high for the company and all individual segments, consistent with our forecast for improved full year profitability this year. Joint venture income was a record $166 million in the first quarter, up from $129 million a year ago. Continued strong demand for trucks and construction equipment in China led to the strong performance. And as a reminder, joint venture income in the first quarter last year included a $37 million benefit related to tech changes in tax law in India, and income of $18 million from a technical fee also in India that did not repeat this year. Adjusting for these one-time items in 2020 underscores just how strongly earnings growth was in the first quarter from our joint ventures.

Other income decreased by $46 million from a year ago, primarily driven by mark-to-market losses of $32 million on the investments that underpin our non-qualified benefit plans, and this compares to a $17 million mark-to-market gain in the first quarter last year. The mark to market losses were recorded within eliminations and not allocated to our operating segments. Net earnings for the quarter were $603 million or $4.07 per diluted share compared to $511 million or $3.41 a year ago. And the increase was primarily due to stronger after-tax earnings and a lower share count as a result of the share repurchase activity. The effective tax rate in the quarter was 22%. Operating cash flow in the quarter was an inflow of $339 million compared to $379 million a year ago. Stronger earnings were more than offset by an increase in working capital associated with our revenue growth this year.

I will now comment on segment performance and our revised guidance for 2021. The Engine segment first quarter revenues increased by 14% from a year ago, driven by growth in demand for trucks in the US and construction equipment in China. EBITDA decreased from 16.9% to 14.4% of sales. The Engine business bore the brunt of the premium freight costs and other associated efficiencies arising from supply chain disruptions. We now expect full year revenues to be up 23% to 27%, an increase from our prior guidance of up 12% primarily driven by stronger demand in North American truck and global construction markets.

We have increased our forecast for EBIT margins to be in the range of 14.5% to 15%, as we anticipate stronger volumes and higher than previously expected joint venture income will more than offset the additional supply chain costs. The Distribution segment, revenues increased 1% from a year ago in the first quarter. EBITDA was flat as a percent of sales at 8.7% of the benefits of our North American transformation work and improvements in some of our international businesses, somewhat offset by weaker part sales resulting from supply chain challenges. Underlying demand for parts remained strong. We have maintained our 2021 outlook for distribution revenues to be up 6% to 10%, and we now expect EBITDA to be 9% at the midpoint of our guidance, below our prior guidance of 10.1% due to a reduced outlook for parts and stronger demand for power generation equipment and other engine sales.

Components revenues increased 43% in the first quarter driven by stronger demand for trucks in North America, China, India, and Europe. EBITDA increased from 18.6% of sales to 19.6% due to the benefit from stronger sales and lower product coverage costs. 2021, we now expect components revenues to increase 30% to 34%, up from our prior guidance of up 11%, and we've raised our forecast for EBITDA margins to 17% at the midpoint, up from 14.9%. In Power Systems, revenues increased 16% in the first quarter, driven by stronger global demand for power generation and mining equipment EBITDAR increased from 8.7% to 12.3% of sales, primarily due to the benefits of higher volumes and lower product coverage costs. We now expect power systems revenues to be up 18% at the midpoint, compared to our prior guidance of 9, EBITDA margins are projected to be in the range of 11% to 11.5% of sales, up from our prior guidance of 10.6 due primarily to the stronger sales outlook and lower cost of quality.

And in the New Power segment revenues increased to $35 million or 250%, just due to stronger sales of battery electric systems, fuel cells, and electrolyzers. EBITDA losses for the quarter were $51 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. For the full year, we are maintaining our New Power revenue outlook at $110 million to $130 million and we also expect a net expense to be in the range of $200 million at the midpoint of our guidance. The net impact of the changes to individual segment projections is that we forecast total company revenues to be up 20% to 24% in 2021, up from our prior guidance of up 10%. We are raising our forecast for company EBITDA margins to be between 15.5% to 16% compared to our previous guidance of 15% to 15.5%. This increase is primarily driven by the stronger sales outlook, which we anticipate will drive incremental earnings that more than offset the increased supply chain costs. We now expect earnings from joint ventures to be down 5% this year compared to our prior forecast of down 25% to 30%. Continued strength in China truck and construction markets, especially in the first half of the year is the primary reason for the increase in our forecast. We currently project that the first quarter will mark the high point for joint venture earnings this year with results expected to ease in subsequent quarters and particularly the second half of the year post adoption of the new national Standard 6 on Highway emissions regulations in China in July. We are projecting our effective tax rate to be 20%, 25% this year -- 22.5% excluding any discrete items. [Indecipherable] expenditures were $87 million in the quarter, up from 75% a year ago. We expect that our 2021 capital investments will be in the range of $725 to $775 million, unchanged from prior guidance. As Tom mentioned, we returned $650 million to shareholders through dividends and share repurchase, in line with our plan to return 75% of operating cash flow this year.

To summarize, we delivered strong results in the first quarter, have increased both our sales and profitability outlook for the year. Supply chain tightness along with the ongoing impact of COVID 19 will continue to present challenges in the coming weeks and months. I want to thank all of our employees for their commitment to support our customers through these challenges and deliver strong full year financial results. We will continue to prioritize investing in the products and technologies that will drive profitable growth and return capital to shareholders while improving the day to day [indecipherable] of the company. Thank you for your interest today, and let me turn it back now to Jack.

Jack Kienzler -- Executive Director of Investor Relations

Thanks, Mark. Out of consideration for 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.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is coming from the line of Ann Duignan with JP Morgan. Please proceed with your question.

Ann Duignan -- J.P. Morgan -- Analyst

Hi, good morning and thank you. Could you just provide more color on your change in guidance on the Components business. It does sound like most of the change has been driven by a higher than expected pre-buy in China. Am I reading too much into that? And then my follow up is, based on that, could you provide some color on the cadence of your revenue and profitability over the next couple of quarters, you know, just balancing the pre-buy versus India and then what the back half might look like as input costs dissipate potentially? Thank you.

Mark Smith -- Vice President and Chief Financial Officer

Thanks, Ann. This is Mark. I'll take the first part of that. We are seeing a rising outlook for most end markets that are going to benefit the Components business which has a leadership position in global markets. So it's not just China. You're right, China has definitely helped that business where we have consolidated operations, it's benefited our results. That's primarily in the first half of the year, the impact of that strength in China is expected to ease in subsequent quarters in the second half of the year. I'll come back and talk about the overall joint venture income for the company rather than just components in a moment. So, yes, that's stronger volume, the Components business is doing a good job of converting that to additional profitability. And then the second thing is the Components business did benefit from lower quality costs, so the positive change in estimate -- in our product coverage or warranty expense in the first quarter, which yeah, boosted the results a little bit, which is why the full-year margin is a little bit below the first quarter level of performance.

India, yeah India was an important contributor. We had consolidated revenues of around about $600 million in China and India combined for the Components business in the first quarter, so kind of an annualized $2.5 billion business. We expect that could drop from that rate in the second half of the year by as much as 40% depending on the impact of demand. On the other hand, supply chain permitting, we're expecting obviously the North America demand to continue to improve. If I now circle back up to the total company picture really the story is the same on China that we expect a significant drop-off in the second half of the year. We don't have great visibility into that, that's an assumption right now. Q1 remained stronger than we'd anticipated three months ago, but there is -- there are some signs of concern. There's elevated inventory levels, obviously the price of trucks goes up with the introduction of the new emissions regulation. So we've baked in kind of a 40% to 50% drop-off in the earnings run rate quarterly in the second half of the year from where we are today. So hopefully that wraps up the big picture on China.

Operator

Thank you. Our next question comes from Jerry Revich with Goldman Sachs. Please proceed with your question.

Jerry Revich -- Goldman Sachs -- Analyst

Hi, good morning everyone.

Tom Linebarger -- Chairman and Chief Executive Officer

Good morning, Jerry.

Jerry Revich -- Goldman Sachs -- Analyst

Tom, congratulations on the -- a medium-duty engine wins announced over the course of the quarter. I'm wondering, can you talk about how the collaboration discussions are going with some existing medium-duty engine customers for providing more services on the electrification side, to what extent does that help the discussions. Could you just give us some context on whether there is any impact as a result of working closer here? Thanks.

Tom Linebarger -- Chairman and Chief Executive Officer

Yeah. Thanks, Jerry. Here's what I would say is, broadly speaking, as we said in previous call, we are talking now to every OEM about their technology requirements going from today, all the way through the eventual [Phonetic] transition to zero carbon. Those technologies include diesel and more advanced versions of diesel, natural gas, hybrid, electric, and fuel cell. And it's I've also said before for many of them the diesel side looks less, less viable from an investment point of view, just because their volumes are relatively smaller than ours in most ranges, but certainly in mid-range. So that's I think why you're seeing the announcements you're seeing. In addition though, we are offering them the other technologies, including transition technologies to help them figure out how to get from where they are now to a place it's a viable yield [Phonetic] carbon solution down the road. I would say that all those -- those conversations are all going on, but it's difficult now for OEMs to understand what the timing of those transitions look like and exactly what their technology approach wants to be, just as it is for most market watchers. It's hard because the viability of those technologies in terms of cost depends on either a carbon tax or regulations or something else coming into play because still diesel is quite a bit cheaper than those other solutions today, and of course is providing improved fuel economy with every generation. So yeah, those conversations as you suggest are going on, but I would just say that for the most part we're doing work with folks, but what exactly their plans are going to be and what role we're going to play in those future technologies is still being talked about, whereas the diesel stuff is moving now because they have to make investment choices today, do I invest in the new platform or do I have somewhere else invest?

Jerry Revich -- Goldman Sachs -- Analyst

Thank you. And Tom, on the light-duty diesel side, can you talk about your level of optimism about similar opportunities that we're seeing falling in your favor on the medium-duty side, what's your level of optimism about the opportunity set in light duty?

Tom Linebarger -- Chairman and Chief Executive Officer

I would say, if you're thinking about passenger cars and that sort of thing, my view is that there are limited opportunities there. It's not zero, we are having conversations with people but it's less, and I think primarily because I think most of the passenger car companies see investing in new diesel platforms is probably not a good investment. They are thinking themselves that they are trying to invest more for a nearer term future of conversion to hybrids or electric vehicles. Again, that isn't true across the board, I want to be clear, pickup trucks and some of the others are -- the transition is less clear. But even there, I'd say that the movement is more in that direction than it is toward I mean think about what my next diesel platform is.

Jerry Revich -- Goldman Sachs -- Analyst

Thank you.

Tom Linebarger -- Chairman and Chief Executive Officer

Thanks, Jerry.

Operator

Thank you. The next question comes from the line of Ross Gilardi with Bank of America. Please proceed with your question.

Ross Gilardi -- Bank of America -- Analyst

Hey, good morning guys. I just wanted to expand on Jerry's question maybe the other way. What about heavy-duty engines and just the likelihood of Daimler outsourcing it's heavy-duty diesel engines too? And on the medium-duty side, have you said how much additional content you will potentially get on the component side or is that still determined -- still to be determined?

Tom Linebarger -- Chairman and Chief Executive Officer

Yeah, so let me first address the heavy-duty question, Ross. Thanks for that. Our heavy duty -- of course what Daimler's decision would be, that would be best to ask them, not us, but I would just say that we are having conversation on heavy-duty with a number of partners. As you guess, the volume discussion that I mentioned earlier about trying to invest for limited volume, it's much more dramatic in medium-duty. If -- the relative volume of our customers versus ours is dramatically different in mid range. It's not -- it is different in heavy-duty too, we clearly have a larger position but it's not as big a difference. So those conversations are likely to take longer and it's not as easy a call for an OEM on heavy duty as it is for our medium-duty. That said, they still have a platform investment to make and as do we. And so the question is how many of us want to make those. So, I do expect more partnerships to occur on heavy duty. It's just that those conversations are still ongoing.

Jennifer Rumsey -- President and Chief Operating Officer

Let me just talk a little bit on the Components business. This is Jennifer, probably don't need to identify myself [indecipherable] Of course, our strategy with our partners has been to offer engines where that's what they would like us to supply, and when we don't supply engines we often supply components to them from our Components business. So when we look at these new partnerships on the engine side, in some cases we have the Components business already for some of our other components. So it will provide an incremental growth opportunity for us. And then of course we also extend those partnership conversations on components where they continue to do their own engine. So we do see good growth opportunity as a result of these deeper partnerships on both the engine and components side.

Ross Gilardi -- Bank of America -- Analyst

Thank you. And then just more broadly, do you think all those supply chain concerns out there plus perhaps some of the controversies on some of the newer entrants to the truck market is shifting customer interest on EV and hydrogen more toward some of the incumbents like yourselves that have established and diversified manufacturing capability around the world?

Tom Linebarger -- Chairman and Chief Executive Officer

I would say, Ross, it's hard to say. Here's what I think, is that not surprisingly, some of the new companies that are starting up, that are pure-plays and in low carbon technologies having trouble demonstrating a business model that works. Now that's not surprising because the volumes are really low, I mean it's --people know the transitions are coming at some point, but they are not viable without regs or some other kind of the carbon tax or something that moves the needle. So they're struggling to show a business now, that shouldn't surprise anyone, that's how it is. And our view is that we are well positioned to provide people with solutions today, solutions that are kind of transition kind of solutions, natural gas and hybrid and then final solutions. And so we hope that proves to be the best answer, and we think investors do well to find companies like us who can take the whole -- make the whole lap. But again, I think the timing of how that's going to work and what's going to -- whether supply chain is changing people's mind or it's just the business models that don't apply, I'm not sure. But I noticed the same thing you do, that there is volatility both in the capital flows, in the values of these companies, and also in their perception of success, and I'm sure they'll have a brighter day as well as they have a cloudy day today. We just think we have the most robust solution at Cummins.

Ross Gilardi -- Bank of America -- Analyst

Thanks very much.

Jennifer Rumsey -- President and Chief Operating Officer

And as we always do, we are communicating transparently with our customers and doing everything we can to meet their demand even with all the supply challenges. So, I think continuing to do that is an important part of maintaining strong relationships.

Ross Gilardi -- Bank of America -- Analyst

Thank you.

Tom Linebarger -- Chairman and Chief Executive Officer

Thanks, Ross.

Operator

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

Rob Wertheimer -- Melius Research -- Analyst

How do you kind of [Technical Speech] just within Power Systems, Power Gen, is that recovery broad based or is it a little bit data center focused, and how data centers are [indecipherable] climbing in their relative mix. And then just on the rest of the business, in mining, seems like a pretty strong recovery. Is there anything particular to call out? We all know, commodity prices are strong that will help these -- anything one-off. Thank you.

Mark Smith -- Vice President and Chief Financial Officer

Hi, Rob, it's Mark. I would say yes data centers are the enduring secular growth stream [Phonetic] but we have seen a broader recovery in power Gen demand this quarter versus a year ago, US, China, India, and Asia-Pacific are the regions. And certainly within the US, China, data centers are an important element of that, but it's a little bit broader. And then in mining, most of our growth in engine sales are originating in international markets right now.

Rob Wertheimer -- Melius Research -- Analyst

Okay, and the outlook?

Mark Smith -- Vice President and Chief Financial Officer

Yes, definitely the outlook has improved, the confidence has improved a little bit on mining, yeah.

Rob Wertheimer -- Melius Research -- Analyst

Thanks.

Operator

Thank you. Our next question is coming from the line of Steven Fisher with UBS. Please proceed with your question.

Steven Fisher -- UBS -- Analyst

Thanks, good morning guys. I'm wondering what you have assumed for freight and other costs in the next few quarters relative to that $105 million that you incurred in the first quarter and how that then translate to the cadence of the engine margins over the course of the year? Just wondering if that -- if it gets a little bit weaker before it gets a little bit better.

Jennifer Rumsey -- President and Chief Operating Officer

Yeah. This is Jennifer Rumsey. Thanks for the question. Yeah, we saw higher than anticipated freemium freight in Q1 just as we dealt with growing revenue, and just trying to keep up in the supply chain and various disruptions. We do expect that that's going to improve. So we ran a 1.7% of sales in Q1. We think that will improve as we go into Q2, so down from around $105 million to more like $60 million and then continue to improve over the course of the year, we will continue to see disruptions that are higher than typical, just that the back order and we're trying to chase -- kind of chase the situation up. And I'll add that the situation in India is a bit of uncertainty for us right now and how that might impact both our local markets there as well as the export from India of our own engines and other components in supply chain.

Tom Linebarger -- Chairman and Chief Executive Officer

And then on the Engine business margin, Steve, there two swing factors. So one, yes we've assumed some improvement particularly in the second half in some of these excess costs, and not all of them but most of them are showing up in the engine business. And then measured against that is the expected decline in China truck demand in particular, which will impact the joint venture earnings. So the net of the -- there are two moving parts, but the net is it's not a dramatic change quarter to quarter, but those are the two biggest functions that mostly play out in a different way in the second half of the year.

Steven Fisher -- UBS -- Analyst

And then just curious how a bigger picture, how you think about how natural gas fits into the picture long term, and how does that drive the investments you're making in natural gas today?

Jennifer Rumsey -- President and Chief Operating Officer

Yeah. So we have a leading position today in North America with natural gas products. And our engines in the US are already certified to beat the CARB 24 ultra low NOx regulation, so that may create some additional demand there. And we also are offering natural gas products in other parts of the world. So we think it's a bridge solution, and we'll plan to continue to offer products to meet our customers' needs as a bridge between diesel engines and our future zero carbon solution.

Mark Smith -- Vice President and Chief Financial Officer

Steve, I mentioned in my remarks, these transition solutions are important because the zero carbon solution that we're working on, those are the eventual solutions that will win the day, but eventual is the hard part, that again, the costs and the infrastructure requirements of electric fleets and/or fuel cell, or hydrogen fleets are significant. And so we believe working with OEMs that we'll be able to get those costs and those infrastructure in place, but we'll will need infrastructure, we'll need other investments by government and other things to get that done. So in the meantime, these interim solutions are going to play a significant role and how long interim is isn't clear, and it could be extended. So our view is that natural gas and hybrid and some of these other technologies that we have will really help our customers get through those periods, which again could be -- we could sell across our range of 1 billion engines, in those ranges before transition could be a billion engines. I mean, it's a lot of engines over the years, right, with -- across the entire industry, across multi-year. So it's really, it's important to be thoughtful about those transition technologies just like it is the final solutions.

Steven Fisher -- UBS -- Analyst

Makes sense. Thanks so much.

Operator

Thank you. Our next question comes from Jamie Cook with Credit Suisse. Please proceed with your question.

Colton Zimmer -- Credit Suisse -- Analyst

Hi, good morning Colton Zimmer on for Jamie Cook. Our first question is on China. In your outlook, are you assuming that the downturn in this market isn't as bad as maybe you initially thought, or is that just pushed to the right and 2022 could be another down-year? And then our second question is just on the set ups for incrementals next year. As we've supply chain headwinds and costs go away, is there a chance to earn outsized incrementals in 2022 or did we miss it this cycle? Thank you.

Jennifer Rumsey -- President and Chief Operating Officer

Thanks. I'll talk a little bit about China. So the market for the year is a little bit higher than we had originally forecast. And that -- we really think that is strong demand in the first half of the year. So we're seeing growing demand for the NS5 product ahead of the transition that happens in July, and that pre-buy as well as the challenges in the supply chain is driving our OEMs to build -- it's not just possible at this point. One other dynamic that we think is going to impact going into the second half of the year is that some regions have extended the period with which NS5 product can be registered. So as we go into Q3, we're going to see an inventory of NS5 product starting to reduce, and then we're really watching to see how quickly customers start to buy that NS VI product, given it will come at a higher price with added content. And so that is really that dynamic strength in the first half of the year, and then we aren't sustaining the drop in the second half of year. 2020 was a record year. We've been saying we think that will come back in line, of course we've continued to to stay strong. So it's a bit -- it's been a bit unpredictable, but we do think we'll see a fall-off in the second half of the year.

Mark Smith -- Vice President and Chief Financial Officer

And then it's too early to say much about next year, as we've seen in the past couple of years the government has been able to effectively set up some incentive programs that have really been taken up well by customers. So there's all -- it's just hard to say what the future plans are basically to take older emissions trucks out of circulation. So it's too early to say. Certainly, second half of the year, we're expecting a big drop-off, but we wouldn't like to comment yet on 2022. And then obviously your comment about the incremental margins, and certainly, the longer these inefficiencies persist, eventually that is ahead -- clearly a headwind for this year, we have called it out. We expect we're going to improve in the second half of the year. We do expect that there's going to be improvement going into next year on that particular line item. There are a lot of moving parts in incremental margins. But yes, that line item alone, sitting here today, we would hope and expect to be better next year than it is this year. The rest, we'll leave for a later day.

Colton Zimmer -- Credit Suisse -- Analyst

Right. Thank you.

Operator

Thank you. Our next question comes from Steve Volkmann with Jefferies. Please proceed with your question.

Steve Volkmann -- Jefferies -- Analyst

Great. I wanted to go back to Tom, your discussion around transition solutions, because it seems like a lot of people are forecasting some pretty significant hybrid solutions over the next decade or so, but we never really seem to discuss those kind of projects. Are you working on those projects? Do you have customers? And I'm wondering if that actually plays to your strength because hybrid would presumably have a little bit smaller engine, all things being considered. Just curious about your commentary there.

Tom Linebarger -- Chairman and Chief Executive Officer

Steve, the answer to the first questions is, yes, we are definitely working on projects now. There are specific, they're are very specific, they have launch dates and they will be launched this -- in these next several years. We will have hybrids on the road. We will be selling them through our key strategic OEM. So the hybrids are on the move as you suggested, and again, their life mostly depends on how the zero carbon solutions come down in cost and durability, reliability, and how the infrastructure gets built up and we'll need both. So I think that's why I said that these transition solutions that are going in place will be in there for a while and they may be in there for a shorter period depending on which country, which application, which region you're in because those two things, both the infrastructure and the cost depend on application and of course country and how much infrastructure is being built. But the hybrid programs are real. They are getting launched, it's happening now. And with regard to engine size, I think initially what we'll see with hybrids is there'll be relatively mild hybrid, the first step, and those won't make a big difference on engine -- how big the engine is, won't be impacted very much by the size of the battery. But you are right that as you add larger batteries, then you need less engine to carry the same load. But I think that's -- those are probably generation two solutions rather than generation one.

Steve Volkmann -- Jefferies -- Analyst

Super. And just a quick follow-up maybe for Mark. You talked a lot about increases in costs, logistics, et cetera, but you didn't really mention price. Are you guys following this with increased pricing? I would assume this is a pretty good environment. Just any thoughts there.

Mark Smith -- Vice President and Chief Financial Officer

Thanks. Great question, Steve. So excluding the premium costs we talked at the start of the year about positive 40 basis points from price and material cost, the combination of those, we are hanging onto those 40 basis points. But I would say there is signs of a little bit of creeping inflation overall. So yes, we had pricing in place, had assumptions about cost increase, overall we're just about hanging in there right now. But that's it.

Tom Linebarger -- Chairman and Chief Executive Officer

Can I just add one thing? It's -- our cost as you saw were significantly higher than we anticipated even three months ago. And just to call it out directly, the big problem is the semiconductors. There is a lot of supply chain challenges, there is --everything, weather in Texas and now new challenges with India, you name it, and we have a shortage on it. But semiconductors is the biggie, that's the one that's really hard to deal with. And in this quarter, we ended up buying chips on the market through the aftermarket and bring them back into production. We rescheduled and rescheduled and rescheduled to meet our customers' demand. Our customers after a pretty tough first half of last year are finally seeing demand go up and really want to ship trucks to their customers and we really want to help them do that. So frankly, we took it on the chin. We basically brought in everything we could as fast as we could and shipped it out to them and didn't raise prices or didn't do any of things. We just shipped them and we took it hard this quarter. And that's just the honest truth. And it's because we felt our commitment to those customers to get them the product best we could while the going was good. And so we're not really changing any of that other than hopefully as Jennifer said we're going to get our -- these costs better under control as we don't have to reschedule so much, we understand where -- our chips, there aren't enough, but we understand where they're coming from more now and we understand how many we have really, and we'll be able to level some, schedule some and reduce premium freight. Still awful, but it will be less awful in Q2 and less awful again in Q3 as we get more set up. But it was a rough quarter and I feel good about what we did for customers, and it was hard to get there.

Steve Volkmann -- Jefferies -- Analyst

I appreciate it, thanks.

Operator

Thank you. Our next question is coming from the line of David Raso with Evercore. Please proceed with your question.

David Raso -- Evercore -- Analyst

Hi, thank you. First a clarification, the component growth, right, 43% of first quarter slows to 28% the rest of the year, while engines the opposite, 14% growth for the quarter, 29% for the rest of the year. That is simply all related to China, India, in the second half, because obviously components is twice the exposure to China, India, than the engine division. Correct? It's nothing related to how maybe your customers are taking product at this point of the [indecipherable] is that right?

Mark Smith -- Vice President and Chief Financial Officer

The main answer is no. It's a structure question, so it's not that the component has this twice as much exposure, it's structured in a different way. So the engine business is principally through joint ventures in China, India. And yes, you right that -- otherwise that's the main factor. There can be some small timing differences, but that's not the point here, David. It's just the way our business is set up.

David Raso -- Evercore -- Analyst

My question, the supply chain tightness that we're seeing, and maybe Tom how you usually think about year one of a recovery then year two? Given the supply chain issues, how are you perceiving the cycle differently? How are you perceiving inventories at the end of year one? I'm just trying to get in your head a little bit about how you're trying to digest this cycle given its -- [indecipherable] the inventories are going to be tight throughout the year and that also dovetails into a pricing question, not trying to get 2023 guidance from you, but just bigger picture.

Tom Linebarger -- Chairman and Chief Executive Officer

So I get your point David, I'll let Jen talk a little bit more about how she sees customers orders, but I would just say broadly speaking, our view is the things that don't get shipped this year will be shipped next year because there is a supply constraint. There is strong demand out there and that if the cycle takes longer to recover or people can't get all the trucks they want, they'll get them next year. I mean -- and we've seen that in other regions where the capacity of the truck manufacturers doesn't ramp up as quickly. In Europe, for example, in the last upturn we saw that. It just took them longer to finish the cycle and I think that's what will happen here. It will take longer to finish to the extent that the truck demand can't be fully supplied, which would not be a bad thing per se if extended further. So I think that's the way we're seeing, is a longer extended cycle just because we can't -- we're supply constrained. And I'll let Jen talk to you about what she's seeing from customers in that respect.

Jennifer Rumsey -- President and Chief Operating Officer

Yeah, for sure. As Tom said, customers are really trying to get everything they can because they see high demand. Inventories are, low-back orders are growing, and we've -- I think the inventory would stay largely supply constrained through the year, which is why we want to ship everything that we can to our customers, so rather than to build and meet the demand. and as I talk to customers, they think it's going to extend into next year because it's just not going to be able to build enough traffic to meet all of that demand [indecipherable]

David Raso -- Evercore -- Analyst

All right, thank you.

Tom Linebarger -- Chairman and Chief Executive Officer

Thanks, David.

Operator

Thank you. Our final question will come from the line of Chad Dillard with Bernstein. Please proceed with your question.

Chad Dillard -- Bernstein -- Analyst

Hi, good morning guys. Thanks for squeezing me in. So just following your Daimler announcement, can you talk about the cadence of the transition for [indecipherable] And I know you mentioned that 2024 car will be one catalyst for major opportunity to gain incremental share between I guess next year [indecipherable].

Jennifer Rumsey -- President and Chief Operating Officer

Yeah, as we build out that partnership, primarily the emissions regulation changeover is what's going to drive additional [indecipherable] with Daimler. So it's going to happen in the US, starting in 24 time period and then in other regions of the world as emissions change. So that will primarily drive the [indecipherable] cadence of growth.

Chad Dillard -- Bernstein -- Analyst

Git it. I mean, can you talk about your components opportunity just beyond the China and India and the transition that we're seeing this year, where do you see like further opportunity to increase your content intensity?

Jennifer Rumsey -- President and Chief Operating Officer

Yeah, so as you said, I mean a big growth opportunity for us in the components business has been China and India with the emissions growth and new customers. So we're growing content with existing customers and then we're also gaining new customers. Additional opportunity that I want to highlight also in China as we're launching the Endurant transmission, that's a part of our Eaton Cummins joint venture in China this year, and the market in China for our automated manual transmissions, we think it's grown from 8% to 22% this year. We have a low volume line that we now have starting to produce products. So we'll ramp that up this year, that's another growth opportunity in the components business. In China this year we're also launching 18th Speed [Phonetic] version of that transmission later this year. And then as regulations continue to evolve and we expand some of these partnerships, that will bring further growth opportunities for the components business.

Mark Smith -- Vice President and Chief Financial Officer

And Jen mentioned earlier, Chad, that when we get stronger partnerships, we not only get more components because our engines go in which have of course all of our components, but also we just introduce more of our component to the remaining engines because it just also reduces their technical investment to be able to use some of our components and our recipes on their engine. So that will just continue. That's been ongoing trend and that will continue.

Chad Dillard -- Bernstein -- Analyst

Thank you.

Mark Smith -- Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. We have reached the end of our question-and-answer session. So I'd like to turn the floor back over to management for any additional closing comments.

Tom Linebarger -- Chairman and Chief Executive Officer

Thank you very much. As always, thanks to everybody for your continued interest in Cummins. I'll be available for questions after the call. I. Yeah. I hope you all have a very good day.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Jack Kienzler -- Executive Director of Investor Relations

Tom Linebarger -- Chairman and Chief Executive Officer

Mark Smith -- Vice President and Chief Financial Officer

Jennifer Rumsey -- President and Chief Operating Officer

Ann Duignan -- J.P. Morgan -- Analyst

Jerry Revich -- Goldman Sachs -- Analyst

Ross Gilardi -- Bank of America -- Analyst

Rob Wertheimer -- Melius Research -- Analyst

Steven Fisher -- UBS -- Analyst

Colton Zimmer -- Credit Suisse -- Analyst

Steve Volkmann -- Jefferies -- Analyst

David Raso -- Evercore -- Analyst

Chad Dillard -- Bernstein -- Analyst

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