A Cummins Inc. logo is pictured outside one of the company’s manufacturing plants. Press photo from Cummins.com

Lesser demand for trucks and construction equipment has driven a 3% decrease in third quarter revenues for Cummins Inc.

Third quarter revenues for the company were $5.8 billion. Cummins officials said this week in a conference call with investors and media that the company projects 2019 revenue to decline by 2% compared to prior guidance of no decline in revenue in 2019. That reduction is driven by lower truck production in North America, India, Brazil, and Europe, as well as lower demand in off-highway markets, including North America construction and global mining markets.

“I would just say that broadly speaking, we’ve seen a number of our markets (have) been at cyclical peaks over the last couple of years, which has been terrific for the company,” said Thomas Linebarger, Cummins Inc. chairman and chief executive officer, said in response to an investor question. “We’ve generated strong earnings and cash flows as a result, but indeed some of those markets are beginning to turn down and we’ve been seeing signs of that. Typical signs that we’re used to reading things like slowing orders, inventory build, et cetera. And now what we’re seeing is those things starting to come to fruition. Maybe what’s surprising to me is it’s broader than I thought. Like we are seeing challenges in India, challenges in China, challenges in — even in Europe is slowing. We saw North America coming, that was all part of what we expected, but some of the challenges in some of the other markets, how quickly we’ve seen in the large engine markets sort of peak out and begin to turn the other way has been a little surprising.”

James Hopkins, Cummins executive director of investor relations, said the decrease in demand in China came from construction equipment dealers in China misreading the second half of 2018 and thinking 2019 would be another busy year for sales of construction equipment, including those produced by Cummins. Chinese construction equipment dealers are selling dealer inventory and their own manufactured inventory, leading to a decline for demand for Cummins’ construction products at the same time the Chinese truck market is solid. Sales in India have struggled, Hopkins said, while Europe is adjusting downward.

Nearly every Cummins’ marketplace in Latin America is struggling with the exception of Brazil. In North America, Hopkins said Cummins’ market share will likely fall for a couple of quarters while truck makers use their own engines and get their truck production down, then Cummins’ North American market share should return to normal.

One investor asked what level of restructuring is embedded in the company’s third quarter financial guidance. Linebarger said the decremental margins expected in the fourth quarter are the result of a situation when markets contract quickly while the company is still spending money on future investments. Linebarger, in response to a different investor question, said the light-duty diesel business should still be positive for Cummins through its partnership with Isuzu — not that there haven’t been bumps in the road with the use for the ISV engine that had been offered in North America in the Nissan Titan XD.

“Having said that, we think the transition is going to be relatively slow and we think the opportunity to consolidate and earn returns over many, many years to come is there for Cummins and ideally there for the Cummins, Isuzu partnership,” Linebarger said. “So we are investing there and trying to see what we can do to consolidate in the industry in the light-duty segment. It’s just that, with the one — the ISV, we’re after a certain segment in the U.S., it just didn’t appear to offer scale for the engine.”

Tony Satterthwaite, president of Cummins distribution business, said the company is seeing less freight growth than it had been seeing as well as slower orders, which means production has to come down to match the backlog. North America, he said, is in a cyclical downturn, but company officials were surprised by how quickly the international market declined. The international decline is one of the reasons company officials decreased the company’s 2019 earnings forecast.

“We’ve been ready for this all year,” Satterthwaite said. “We are committed to flexing our costs down with demand. We’re committed to managing the cycle. We’ve been tight on discretionary spending and hiring all year and we actually really started to take things out in the third quarter. We’ve been analyzing underperforming businesses and as Mark said, we decided to close one in the third quarter, we’ve launched a voluntary retirement program here in the U.S., and so these are all actions we’re taking, the majority of which will bear fruit in 2020, but we are moving now to take out cost as demand drops.