Prepared remarks
Greetings, and welcome to the Second Quarter 2026 Cummins Inc. Earnings Conference Call. Operator Instructions. As a reminder, this conference is being recorded. It is now my pleasure to introduce Nick Arens, Executive Director of Investor Relations. Please go ahead.
Thank you, Paul. Good morning, everyone, and welcome to our teleconference today to discuss Cummins results for the second quarter of 2026. Participating with me today are Jennifer Rumsey, our Chair and Chief Executive Officer; and Mark Smith, our Chief Financial Officer. We will all be available to answer questions at the end of the teleconference. Before we start, please note that some of the information that you will hear or be given today will consist of forward-looking statements within the meaning of the Securities and Exchange Act of 1934. Such statements express our forecasts, expectations, hopes, beliefs and intentions on strategies regarding the future. Our actual future results could differ materially from those projected in such forward-looking statements because of the several risks and uncertainties. More information regarding such risks and uncertainties is available in the forward-looking disclosure statement in the slide deck and our filings with the Securities and Exchange Commission, particularly the Risk Factors section of our most recently filed annual report on Form 10-K and any subsequently filed quarterly reports on Form 10-Q. During this call, we will be discussing certain non-GAAP financial measures, and we will refer you to our website for the reconciliation of those measures to GAAP financial measures. Our press release with a copy of the financial statements and a copy of today's webcast presentation are available on our website within the Investor Relations section at cummins.com. With that out of the way, I will turn you over to our Chair and CEO, Jennifer Rumsey, to kick us off.
Thank you, Nick. Good morning. I'll start with a summary of our second quarter accomplishments and financial results, then discuss our sales and end market trends by region. I will finish with a discussion of our outlook for 2026. Mark will then walk you through additional details on our second quarter performance and our full year forecast. Before getting into the details of our performance, I want to highlight a few major events from the quarter. In May, we hosted our 2026 Analyst Day, where we raised our 2030 financial targets and reinforced our commitment to returning capital to shareholders. This reflects that our strategy is working. We are advancing our position in key markets and experiencing increasing demand for our products. In response to growing global investments in data centers, we also announced plans to further expand our global capacity and broaden our power generation portfolio with integrated power solutions and the development of a 130-liter natural gas genset, extending our reach into the growing prime power market. Since Analyst Day, we have continued to build momentum in the data center market. We recently signed a multiyear agreement with a global hyperscaler, expanding a long-standing partnership and securing visibility into several gigawatts of future backup power genset demand. This agreement reinforces our confidence in our growth outlook and supports the capacity expansion already underway. In June, we announced an agreement with Circe Energy to provide QSK60 and HSK78 natural gas generator sets and integrated microgrid technology for a behind-the-meter prime power solution supporting a high-performance computing data center in Texas. The project highlights our ability to deliver integrated power solutions, deepen customer partnerships and expand our presence in the growing prime power market. Finally, the EPA released its much-awaited proposed rule last month that provides greater clarity on the implementation of the North America On-Highway 2027 emissions regulations for our industry. Based on the proposed rule, we announced our intention to use the implementation flexibilities outlined by the EPA to support a measured transition to our new helm engine platforms. This approach is designed to satisfy the proposed regulatory framework and support OEM customer production schedules while providing additional real-world operating experience to help build end-user confidence in our new engines. This balanced approach also helps maintain product availability, continue bringing new innovative products to market and support a successful industry transition. As a part of our phased transition, we plan to begin limited production of the model year 2027 X15 engine in January 2027 based on individual OEM launch plans, with production ramping progressively and full production expected to begin in the fourth quarter of 2027. We also plan to begin limited production of the model year 2027 X10 in January 2027, with full production expected by the third quarter of 2027 based on OEM launch plans. During the transition, the current X12 and L9 engines used in truck and transit bus applications are expected to remain available under the EPA's proposed rule. Consistent with our previous announcement, our next-generation B platform is expected to launch in January 2028, and the current B platform will be available for all of 2027. As we execute this phased transition, we will continue to work closely with our OEM partners, dealers, fleets and other end customers to align product availability and launch timing. We will also continue to stay actively engaged with the EPA and monitor its rule-making and implementation flexibilities to support a successful transition for our customers in the industry. Together, these actions reflect our commitment to deliver for our customers, execute with discipline and invest in products and technologies that will support long-term profitable growth. Now I will turn to our overall company performance for the second quarter of 2026 and cover some of our key markets. We delivered record second quarter sales of $9.5 billion, an increase of 9% compared to the second quarter of 2025. Growth was driven primarily by higher global demand in power generation markets, particularly from data centers and international construction markets. EBITDA for the quarter was a record $1.7 billion or 17.5% of sales compared to $1.6 billion or 18.4% of sales a year ago. The increase in EBITDA was primarily due to higher volumes, increased joint venture earnings and positive pricing, partially offset by tariffs and higher variable compensation expenses associated with our projections for record full year earnings. Our second quarter revenues in North America increased 8% compared to the second quarter of 2025. Industry production of heavy-duty trucks in the second quarter was 60,000 units, down 4% from 2025 levels, while our heavy-duty unit sales were 23,000, up 2% year-over-year. Industry production of medium-duty trucks was 32,000 units in the second quarter of 2026, an increase of 8% from 2025 levels, while our unit sales were 29,000, up 19% year-over-year. We shipped 33,000 engines to Stellantis for use in their Ram pickups in the second quarter of 2026, down 2% from a year ago. Revenues for North America power generation increased by 19%, driven primarily by continued strong data center demand and supported by the additional manufacturing capacity we brought online at the end of 2025 to meet that growing customer demand. Our international revenues increased 12% during the second quarter compared to a year ago. Second quarter revenues in China, including joint ventures, were $2.3 billion, an increase of 30% year-over-year, driven by accelerating data center demand as well as improving on-highway and construction markets. Industry demand for medium- and heavy-duty trucks in China was 378,000 units, an increase of 24% from last year, driven by strong export demand, particularly in Africa and Southeast Asia, as well as improving domestic replacement demand and an increase in battery electric-powered trucks. Our sales in units, including joint ventures, were 53,000 units, an increase of 2%. Industry demand for excavators in China in the second quarter was 79,000 units, an increase of 34% from 2025 levels. We sold 15,000 units, up 35%, driven by export demand associated with mining investments in Africa and Indonesia. Results also benefited from OEM inventory stocking to mitigate potential logistics risks in the Middle East as well as continued domestic demand supported by rural development projects. Sales of power generation equipment in China increased 88% in the second quarter due to accelerating data center demand. Second quarter revenues in India, including joint ventures, were $742 million, an increase of 6% from a year ago. Industry truck production increased 5% from 2025, driven by increased freight availability, infrastructure and mining activity. Now let me provide our outlook for 2026, including comments on several of our key markets. We have raised our full year outlook once again as demand continues to build across several key markets. We now expect total company revenues to increase 10% to 13% in 2026 compared to our prior guidance of 8% to 11%. This improved outlook reflects higher demand in North America on-highway markets, continued strength in power generation driven by data center markets and improved on- and off-highway demand in China. We are raising the midpoint of our 2026 North America heavy-duty truck forecast to a range of 240,000 to 250,000 units, up from our prior guidance of 230,000 to 250,000 units. This reflects strong recent order activity and improving fleet profitability, which drove better-than-expected second quarter production and improved visibility into demand in the second half of the year. In the North America medium-duty truck market, we are increasing our forecast to 130,000 to 140,000 units in 2026 compared to our prior guidance of 125,000 to 135,000 units. This reflects stronger-than-expected demand in the second half of the year, supported by improving OEM outlooks and a modestly higher prebuy following the recent regulatory clarification. For both heavy and medium-duty trucks, we anticipate that industry production is largely set for the second half of this year. Consistent with our prior guidance, our engine shipments for pickup trucks in North America are expected to be 125,000 to 140,000 units in 2026. In China, we now expect total revenue, including joint ventures, to increase approximately 15% in 2026, an improvement from our prior outlook of up 10%. The higher outlook reflects stronger-than-expected on- and off-highway demand, particularly during the second quarter. While we expect normal seasonal moderation during the second half of the year, we continue to expect full year demand to exceed our prior expectations. For China heavy and medium-duty truck demand, we now expect a range of down 5% to up 5% compared to our prior guidance of down 10% to flat. This reflects stronger-than-expected export demand, particularly in Africa and Southeast Asia. In India, consistent with our prior guidance, we expect total revenue, including joint ventures, to increase 2% in 2026. This includes our expectation for industry demand for trucks to be flat at the midpoint of our guidance, supported by tax rate reductions and improving underlying demand. For global construction, we now expect demand to range from flat to up 10%, an improvement from our prior outlook of down 10% to flat. In China construction, export demand is stronger than we previously anticipated with relatively flat domestic demand. In North America, we expect demand to remain largely flat given ongoing tariffs and interest rate uncertainty. We expect our major global high horsepower markets to remain strong in 2026. Consistent with our prior outlook, we continue to expect global power generation revenues to increase 15% to 25%, while customer demand remains exceptionally strong, particularly for data center applications. Our growth in 2026 will continue to be constrained by capacity. Our outlook reflects the capacity we brought online in North America at the end of 2025, continued international growth, particularly in China and the broader Asia Pacific region and increased demand for lower output generator sets as customers seek solutions amid ongoing capacity constraints for larger configurations. The sustained strength in customer demand continues to support our long-term investments in expanding our power generation portfolio and global capacity as we discussed in May. In mining, we now expect engine sales to range from down 5% to up 5% for the year compared with our prior guidance of flat to up 10%. While fleet replacement activity remains supportive in several markets, elevated inventory levels in others are expected to moderate demand through the remainder of the year. For aftermarket, reflecting the slight adjustment in our prior guidance, we expect growth of 3% to 8% for 2026, supported by aging fleets and higher parts consumption. In summary, we delivered a strong second quarter and are raising our full year revenue growth outlook to 10% to 13% while increasing the midpoint of our EBITDA guidance to a range of 18% to 18.5%. Our outlook reflects our expectation for improving operating performance in the second half of the year, led by stronger North America on-highway markets and continued high demand in power generation. We enter the second half of the year with positive momentum and greater regulatory clarity, and we remain focused on executing our strategy, investing for long-term growth and helping our customers succeed in a rapidly evolving market. I want to thank our employees and leaders around the world for their commitment to our customers and each other. Their dedication, teamwork and focus on execution continues to differentiate Cummins and position us to deliver for our customers while creating long-term value for our shareholders. Now let me turn it over to Mark.
Thank you, Jen, and good morning, everyone. Our second quarter financial performance and other important business developments built on the themes from our recent Analyst Day. We delivered record quarterly sales and EBITDA dollars and strong operating cash flow in the second quarter, extending our track record of raising performance cycle over cycle. We returned over $0.5 billion of cash to shareholders in the form of share repurchases and cash dividends. The Power Systems business was awarded new prime power business here in the U.S., and we significantly expanded our opportunities for growth in data center backup power with one of our existing global hyperscaler customers, as Jen summarized. Having reflected on our strong performance in Q2 and the record demand for Cummins products globally, we've raised our full year forecast from 3 months ago. In another sign of confidence, our Board of Directors approved a 10% increase in our quarterly cash dividend, the 17th straight year of dividend growth. Second quarter revenues were $9.5 billion, up 9% from a year ago. Sales in North America increased 8%, while international revenues grew 12%, led by China. EBITDA was $1.7 billion or 17.5% compared to $1.6 billion or 18.4% a year ago. The increase in EBITDA dollars was primarily driven by higher global power generation volumes and stronger international construction demand. The net impact of tariffs was immaterial to EBITDA dollars in the quarter. Now let's go into each line item with a little more detail. Gross margin for the quarter was $2.5 billion or 26.1% of sales, up from $2.3 billion or 26.4% last year. The increase in dollars was primarily driven by higher volumes, an increase in joint venture earnings and positive pricing, partially offset by tariffs and an increase in higher incentive compensation, which is related to our projections for record full year financial performance this year. To avoid repeating myself several times, I will simply note that the higher incentive compensation impacts cost of sales and operating expenses for all of our operating segments. The run rate for incentive compensation should be lower for the second half of the year than we incurred in the second quarter based on our current forecast. Selling, administrative and research expenses were $1.3 billion or 13.5% of sales compared to $1.1 billion or 13.1% a year ago. The increase was driven primarily by higher development costs to support our upcoming on-highway platform launches in North America and new mining and natural gas power generation programs. Joint venture income of $154 million increased $36 million from the prior year, primarily due to stronger performance in our China joint ventures, benefiting the Engine and Power Systems segments. Other income was $32 million compared to $49 million from the prior year. Interest expense was $80 million, a decrease of $7 million from a year ago. The all-in effective tax rate in the second quarter was 25.1%, which included $29 million of unfavorable discrete items or $0.21 per diluted share. All-in net earnings for the quarter were $932 million or $6.73 per diluted share compared to $890 million or $6.43 per diluted share a year ago. Our operating cash flow was $1.5 billion, a record for a second quarter, and compares favorably to $785 million a year ago, driven primarily by improved working capital. During the quarter, we returned $501 million to shareholders, consistent with our long-standing commitment to return approximately 50% of operating cash flow. This included $225 million of share repurchases and $276 million in cash dividends. I'll now comment on the segment performance and our guidance for the full year '26. For the Engine segment, second quarter revenues were $3.1 billion, an increase of 6% from a year ago. EBITDA was 12.5%, a decrease from 13.8% a year ago as higher research and development and freight costs were partially offset by stronger North American medium-duty truck volumes, China construction demand and improved tariff recovery. In 2026, we project revenues for the Engine business to be up 9% to 14%, up from our prior guide of 7% to 12%, driven primarily by higher expectations for North America heavy and medium-duty truck. We expect EBITDA to be in the range of 12.5% to 13.25% compared to our prior guidance of 12.5% to 13.5%. Components segment revenue was $2.9 billion, an increase of 7% from a year ago. EBITDA was 13.2%, a decrease from 14.7% a year ago as higher product coverage costs were partially offset by stronger North American truck volumes and higher China on- and off-highway volumes and favorable pricing. For Components, we expect 2026 revenues to be up 8% to 13%, up from our prior outlook of growth of 7.5% at the midpoint due to stronger demand for trucks in North America and stronger demand in on- and off-highway markets in China. We expect EBITDA to be in the range of 13.5% to 14.25% compared to our prior guide of 13.5% to 14.5%. In the Distribution segment, revenues increased 9% from a year ago to a record $3.3 billion, EBITDA decreased as a percent of sales to 13.6% compared to 14.6% a year ago, driven by the higher incentive compensation and freight expenses, which were partially offset by higher power generation volumes. We expect 2026 distribution revenues to be up 9% to 14%, consistent with our prior guide. We also expect EBITDA margins to be in the range of 13.5% to 14.25% compared to our previous guidance of 14.25% at the midpoint. In the Power Systems segment, revenues were a record $2.3 billion, an increase of 19% and EBITDA increased from 22.8% to 24.5% of sales, primarily driven by strong global power generation demand, especially in the U.S. and China. For 2026, we expect Power Systems revenues to grow 14% to 19%, unchanged from 3 months ago. We also expect EBITDA margins in the range of 25% to 25.75% compared to our previous guide of 25.5% at the midpoint, reflecting continued strong performance across the business as well as increased investments during the second half of the year to support development of our new 130-liter natural gas generator platform and expand our position in the growing prime power market. Accelera revenues increased 38% to $145 million, driven by higher electrified powertrain and electrolyzer sales. EBITDA was a loss of $69 million, an improvement from a loss of $100 million in the prior year, reflecting targeted cost reduction actions previously implemented in this segment. In 2026, we now anticipate Accelera revenues to be in the range of $350 million to $400 million, an increase from our prior guide of $300 million to $350 million, and we now expect net losses in the range of $260 million to $290 million compared to our prior guide of a negative $270 million to $300 million. In summary, we've raised our full year outlook and now expect total company revenues to increase between 10% and 13% with EBITDA in the range of 18% to 18.5%. Our effective tax rate is expected to be approximately 23% for the full year, excluding any discrete items. Capital investments will be in the range of $1.35 billion to $1.45 billion as we continue to make critical investments to support future growth. In summary, we delivered a strong quarter supported by continued growth in demand for power generation equipment, improving North America truck markets and growth in China in most end markets, especially data centers. Thanks to the excellence and commitment of our employees in what remains a complex global economic environment, we entered the second half of the year with positive momentum and focused on supporting our customers with their growth plans and further improving our already strong financial position. Our strong balance sheet provides the financial flexibility to invest in the growth opportunities ahead, of which you've heard a little more today, while continuing to allocate capital with discipline and return excess capital to shareholders. Thank you. Now let me turn it back over to Nick.
Thank you, Mark. Out of consideration to others on the call, I would ask that you limit yourself to one question and a related follow-up. If you have an additional question, please rejoin the queue. Operator, we are ready for our first question.
Questions and answers
Operator Instructions. Our first question is from Jamie Cook with Truist Securities.
I have two questions. One, given the incremental clarity we have now on EPA 2027, how are you thinking about the setup for 2027? I know at the Analyst Day, you expected a down first half for 2027, so how are you thinking about that? And then, Mark, when I look at your earnings in the back half of the year, it implies earnings probably $16 to $17 of earnings power in the back half. Is that a reasonable way to think about a base for 2027? My second question is on distribution margins — you lowered guidance quite a bit. Could you talk around the change in margin guidance for distribution?
As I mentioned, we raised our guide for the year and the outlook for the North American truck market. So we continue to expect strength in the second half of the year. With the EPA draft rule and with the phased transition that we've announced, the key thing is the destination doesn't change the growth opportunity that will exist for us in engines and components. The trajectory with those new platform launches remains the same, and we think the transition will be smoother. While we would expect some moderation in demand next year — and we won't give specific guidance today on what that is — it will not be as abrupt as we might have previously anticipated because we will continue to offer the current product for part of next year, and in the case of the B platform, for all of next year, and then ramp up the new product. So it's going to smooth the overall transition and make year-to-year demand less variable and more driven by the fundamental economics.
Yes. To your other questions, Jamie, there's nothing one-time or nonroutine in the second half of the year. We expect strong EBITDA percent for the second half, up from the first half and up from a year ago in both Q3 and Q4. The top-up in outlook for incentive compensation created some noise in the second quarter results, but that will be lower going into the second half. The underlying story is significant revenue growth and margin expansion on both an underlying and reported basis in the second half of the year. Regarding distribution, there are a couple of factors. The mix of the business isn't really changing. There's momentum in installing many of the big power generation contracts, but the parts business isn't growing at the same rate, and that would be needed to see a significant step-up in margin percent. Also, as we've increased our outlook for total company profitability, incentive compensation went up, and distribution is disproportionately impacted because it is more of a people business. That's a natural consequence. Looking ahead, when we reset plans for next year, the incentive plan resets and that will likely be a tailwind. Demand is uncertain at this point; too early to tell. As Jen said, our best guess is less volatility than we might have imagined. North America on-highway is strong, and power generation remains robust, primarily from standby diesel for data centers. There's nothing significantly changing, and distribution could get close to 10% earnings growth this year. On an underlying basis, we see a lot of growth there and margin expansion going forward.
Our next question is from Steve Volkmann with Jefferies.
Mark, can I take that one step further? What would roughly be the reset in the incentive compensation, in dollar terms, so we can think about what that guide might look like next year?
Well, next year, it could be in the order of about $200 million.
Perfect. Okay. And then can I ask on power generation? I'm interested that your target is up 15% to 25% because my interpretation is you're capacity constrained there. Why such a big range for that target? What could move it from the bottom to the top of the range?
It's fair to say it's unlikely to be a 10% swing from here to there. One positive surprise has been the rapid acceleration in China. We were already expecting strong demand in North America, but China has really picked up as well. Whatever extra we can squeeze out with our supply chain in Power Systems, we will likely sell it this year and certainly into next year.
Our next question is from Jerry Revich with Wells Fargo.
Given the performance ramp ahead of plan this year in Power Systems, how are you thinking about how much the team can ramp up deliveries in 2027 versus 2026? Can we sustain this teens-type growth rate as the supply base continues to ramp up? Any updated thoughts on cadence would be helpful.
At this point, the cadence we see is really the same as what we talked about at Analyst Day, where we announced additional investment in capacity — 20 gigawatts of incremental capacity across our plants and supply chain. We'll see some of that coming online next year, with a bigger step-up in 2028, and continued phasing through 2030. That capacity is flexible across engine and genset sizes and applications between industrial and power generation markets, including natural gas prime demand. We're starting to see prime demand for the products we have while we develop the new 130-liter, but diesel standby will remain the predominant revenue for power generation this decade.
And on engines, the guidance implies about 14% margins in the fourth quarter. On prior engine transitions, you have executed seamlessly. Can you talk about expectations into 2027? How hard is the product transition — producing some new products and some older products — and how should we think about the impact on operations over 2027?
Our plants are used to producing different products, and the ability to have a longer limited production transition is something we haven't had in the past. The flexibility in the draft rule helps us and the industry ramp through the limited production phase between old and new products. We'll continue to sell the current product next year and expect solid demand for it, then ramp up the new product. We've done extensive field tests and customers are excited to start buying at the beginning of the year to build confidence and move in a more measured way between old and new products. I think it will be positive for us and will help us gain confidence and capability with different OEMs and end customers.
Our next question is from Steven Fisher with UBS.
On the power side, the incremental margins seem to be better than the 25% to 30% expectations you've discussed. What's surprising you there? It looks like in the second half it might be better than that as well. Any color would be helpful.
The main driver has probably been stronger demand in China, which helps on the joint venture earnings side. Overall, it's a question of efficiency during ramp-up, supply chain performance and pricing. Things have been going well. There will be increased engineering as we bring more new platforms to market. We expect the strong gross margin performance to continue.
As a follow-up on the engine transition in 2027, to what extent might there be a prebuy in 2027? Does the phased ramp-up help alleviate prebuy demand, or could we still see a prebuy from 2027 out of 2028?
The phased approach enables a smoother transition. The industry is coming off a cyclical low and fundamentals are improving — I'd describe it as cautious optimism. Fleets are aging and economics are allowing purchases, which supports demand and some prebuy activity that we expect to continue into next year. I would think of it as a generally smoother year-over-year transition rather than a sudden spike or drop.
Our next question is from Angel Castillo with Morgan Stanley.
Continuing on the EPA27 dynamic: you mentioned the shape of the curve and demand likely ends up a little better for you. Could you provide financial detail on implications for pricing on the new engine as you roll that out and phase it in? Any implications on costs from a slower ramp-up, and what that means for margins versus what you anticipated before? Lastly on market share — do you expect any dynamics such as competitors using credits that could affect market share?
On economics, we're still working through pricing. At Analyst Day, we said the largest contributor to increased truck value is likely the powertrain, and we still expect to be appropriately compensated for the new product value. Regarding nonconforming penalties (NCPs), we expect to pass those on to the market and do not expect a significant financial impact from them. The staged transition allows us to trial products longer and should be better for the industry overall. One consequence of staggering is that our R&D costs will stay elevated a bit longer — not hundreds of millions more than current rates, but higher — though product coverage costs for next year should be lower than if we had a full launch on January 1. There are many moving parts, but that's the overall view.
Understood. On backup diesel power backlog, can you provide color on how the backlog is shaping — growth sequentially or year-over-year this quarter? Any color on regional demand and the underlying backdrop for that product?
Demand continues to be capacity-constrained and very strong. You heard strength in the U.S., China and Southeast Asia. We recently held a summit with customers and leaders across the Americas for power generation. The consistent message is to continue expanding capacity — demand for backup power is ahead of industry supply availability and customers want more. Backlog is very strong. We are confident in our capacity investments and feel pressure to accelerate where possible.
Our next question is from Kyle Menges with Citi.
For the 95-liter at this point, how far out are you booking orders? One competitor said lead times are extending for diesel gensets. Are you seeing the same?
Demand continues to grow. We're selling further out into the second half of 2027 overall. We have seen no pausing in demand — the general trend is still growing. If you want one now, the timing will be into the back half of 2028 in some cases.
Any changes in pricing as you're signing new agreements, or is pricing consistent with what you've been putting through so far?
Our expectation is that as we grow, we'll continue to raise margin performance over time. That comes from a combination of factors: improved production efficiency, appropriate pricing for the technology we provide and parts growth from industrial applications. We have ambitions to keep growing margins. The Power Systems team has strong momentum, and demand is high. There aren't many players who can provide products, service and installation on a global basis, so demand remains strong.
Our next question is from David Raso with Evercore ISI.
For 2027, regarding the North American truck market, are customers showing appetite to buy the 200-milligram full-penalty engine to avoid a technology change, or are they more inclined toward a lower-milligram option that is noncompliant but can use credits to offset, so there's no price increase? I'm trying to understand customer appetite for new technology at a higher price versus keeping current technology and paying penalties. Also, can you help with power generation next year — the level of capacity versus this year so we have a sense of volume? I know mix matters, but just the capacity you think you'll have next year versus this year.
A caution: we expect NCPs and regulatory flexibility to stay in the final rule, but details may change. Customers are interested in both options: continuing to buy current products next year and starting to buy the new products to gain experience. We're working with OEMs on their plans for availability in different truck models and end customer preferences. Initially, customers will likely buy more of the current offering while also starting to ramp into the new product.
I don't think most conversation is on an individual engine basis. Ultimately, the industry needs to transition to new products. This is unprecedented in recent cycles: regulations being finalized so close to implementation. It will be an interesting dynamic along the way.
On power generation capacity next year?
I'll punt that one until later in the year to avoid getting into too many levels of guidance right now. But yes, it will be higher.
Our next question is from Tim Thein with Raymond James.
Two-part question. First, in the engine business, can you comment on the outlook for parts demand in North America, specifically the on-highway piece? The guidance came up marginally; with healthier freight markets and stronger customers, are you seeing pull-through in parts? Second, on the China data center market, how does your visibility there compare to North America, given Chongqing joint venture growth?
On parts, the market is up; we raised the bottom end of the guide slightly. We're seeing some strengthening as fleets age and economics improve. It hasn't moved fundamentally from a quarter ago, but it's better this year than last year. Regarding China, we have strategic customers in China and Southeast Asia and regular conversations about multiyear plans and demand. The interactions are similar to North America: customers asking for more and faster delivery compared to prior meetings.
Core large customers are consistent in each market, with broader market participation from others.
Our next question is from Rob Wertheimer with Melius Research.
On NCPs and the EPA 2027 rule, if a competitor has credits, they can avoid passing the cost of that on. Do you anticipate difficulty in passing that through yourselves or any margin impact from that next year?
How credits will work in the end remains to be seen, but generally you cannot simply use credits to offset NCPs. We don't expect a large use of credits to offset NCPs. We can't comment on what others will do, but we do not expect a significant impact from credit usage to offset NCPs.
That's not specific to Cummins.
Our next question is from Kristen Owen with Oppenheimer & Company.
First, it's difficult to parse underlying demand versus prebuy given changes, but how are you thinking about underlying replacement demand outside of the EPA transition? Second, follow-up on warranty accruals: how are you thinking about warranty accruals as you build the bridge into 2027, and how will that impact incremental margins with the more measured cadence of production?
We see underlying demand and replacement improving. There is some prebuy, but fundamentals have improved and that's driving underlying demand. The regulatory uncertainty that existed until last month caused customers to be cautious on prebuy. We are seeing some prebuy in the second half, but it's more driven by market improvement.
I'm trying to square that with the increase in the prebuy expectation in your medium-duty guidance; I may follow up offline. On warranty accruals: that was favorable from a pricing standpoint for the buyer in the past. How are you thinking about warranty accruals as you transition in 2027 and the impact on incremental margins?
Typically, launching a new platform comes with higher warranty accrual that we adjust over time as we get field experience. Our current warranty costs are running in the low 2% of sales range across the company, at historical lows despite product complexity. We expect warranty to go up as the mix shifts to new products in North America. Relative to six months ago, next year's warranty costs will be similar to this year's for the first half, maybe a slight uptick for limited launches, and then move to a higher rate as launches expand in Q4 and into 2028. Historically, those costs either haven't played out as high as initially anticipated or we've addressed issues as they emerged. For the new products, there's more value and content, and there is scaling and efficiency that helps over time. By and large, the first nine months will resemble current performance assuming equal demand, then change for a short period and improve again over time.
The extended limited production period will allow us to identify any issues quickly and address them as volume ramps, which should be positive for quality in the long term.
Thank you. We have reached the end of our question-and-answer session. I would like to hand the floor back over to Nick Arens for any closing comments.
Thank you. That concludes our teleconference for today. Thank you all for participating and your continued interest in Cummins. As always, the Investor Relations team will be available for questions after the call.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.