Cummins Can ‘Flex Down’ If Economy Slows
Cummins Inc. corporate officials are preparing themselves for an economic downturn, if and when it comes.
The topic was broached by an investor during the most recent conference call between Cummins officials, media and investors. In December, Forbes contributor Raul Elizalde wrote that studies show economic forecasters are “generally blindsided by recessions, precisely because they tend to be preceded by economic strength. There is little reason to believe that it is different this time.”
It doesn’t appear Cummins’ business will slow much at least through 2019, according to Tom Linebarger, Cummins chairman and CEO, and Rich Freeland, Cummins president and chief operating officer. Linebarger said the company is watching orders much like financial analysts do to see if there is a slowdown coming. Freeland discussed the company’s existing backlog of orders at nearly 290,000 units.
“We might be being a bit conservative,” Freeland said. “It’s strong through the whole year. We’re going to pay attention to what’s going on with cancellations, what’s going on with freight rates, but I’d say we don’t have any insight beyond that. It actually looks pretety strong and I’d say there’s growing confidence. We had projected a bit of a reduction in the second half of the year, a slight one. There’s more and more confidence that could fill in. We’re just paying attention to it.”
Linebarger, meanwhile, said company officials had been disappointed by a decreasing market share, though Linebarger said there were special factors Cummins dealt with this year that won’t be factors in the future. While Oppenheimer downgraded Cummins’ stock earlier in February based on an increasing likelihood of a down year in 2020 given recent Class 8 truck order/cancellation trends, Linebarger said company officials are paying close attention to orders.
“We’ve seen a lot of these cycles before and we’ve seen before when the order board cancellations happen they can happen fast,” Linebarger said. “We don’t have any reason to think that’s going to happen here but we’re watching the truck orders just like you guys are. We got two not-so-great orders and we want to keep our eyes on it. We’re planning that the year’s going to be a good year and definitely, the order board’s filling up and if we don’t see cancellations, that we’ll have a terrific year.”
Company officials said they are also paying attention to what they termed the “NS6” environmental regulations in China. According to transportpolicy.net, the China 6 standards for tailpipe and evaporative emissions are scheduled to begin being used in July 2020 and July 2023. Linebarger said it would be beneficial for Cummins if the NS6 enforcement happens as scheduled, but conceded that China may back off of immediate enforcement as July 2020 years. That uncertainty was one of the things cited by Oppenheimer.
“That’ll be to our great benefit in the long run,” Linebarger said. “We think we gain share in NS6, we think we gain content and margin in NS6. We think it’s a win for Cummins the faster it moves. … Let’s just say we’re ready for it to be enforced as fast as it can go. That would be the best thing for us financially.”
IF A DOWNTURN HAPPENS
Linebarger said the company has a “pretty forward” stance on cash flow and stock repurchases as it has in the past so that, if there is a financial downturn, the company will be aggressive to support its stock and make sure its cash flow remains strong. North America – visibility through first half of 2019. Backlog of orders, late 2019. how viewing backlog, how long carry us, think of orders and NA truck production back half of year
Freeland said the company has done well in many of its markets during the economic boom, and officials are readying the company to “flex down” if the economy slows down.
“We already have plans in place to do that,” Freeland said. “We’ll also look to structurally change the company during the downturn — things you can’t do when things are going fast — on how we change structurally the way we do business. We have those things that we’re thinking about. And we’ll continue to invest in growth areas throughout the downturn when others don’t so we’ll have a strong balance sheet.”
Additionally, Linebarger said the company will slow its capital spending if the economy slows down and step up share purchases when the company doesn’t need as much cash to invest.
“I think what we’re trying to do is make sure that each time we approach this we capture the things worked well in the previous downturn and improve the things that didn’t work as well as we’d like,” Linebarger said. “Our leadership team is already having significant discussion about that as we enter 2019. Our plan this year is already taking steps in anticipating this thing turning back down at some point. We don’t know when, but we know it’s coming.”