康明斯 (CMI) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Cummins engines fourth quarter 2000 to you earnings release conference call. All participants have been placed on a listen -only mode and we will open the floor for questions and comments following the presentation. It is my pleasure to turn the conference over to our host , Karen Battin.

Welcome to our teleconference today to discuss Cummins results for the fourth quarter of 2002. Each of you should have received a copy of our press re lease with a copy of the financial statements. If you have not received these copies, please let us know and we will fax them or E-mail them to you at the end of the teleconference. Participating with me today are our chairman, Tim Solso, our Chief Financial Officer , Tom Linebarger, our new Chief Financial Officer designate , Jean Blackwell and our vice president finance and chief accounting officer , Sue Carter. We will all be available for your questions at the end of the teleconference.

This morning, I'll take you through a summary of Q4 results then Tim has a few remarks about the business, and finally, we'll have a question-and-answer period. This teleconference will include certain forward-looking information. We will talk about power genration markets, the outlook for the north American heavy-duty truck market and other end use markets for our products . We will talk about prospects for our business in Asia, Europe, Latin America and other regions.

We will discuss product costs, product coverage or warranty cost and profitability improvement initiatives . Any forward looking statement about these and any other topics involves risk and uncertainty. The company's future results may be affected by changes in general economic conditions and by the actions of customers and competitors.

Actual outcomes may differ materially from what is expressed in any forward looking statement. A more complete disclosure about forward looking statements begins on page 20 of our 2001 form 10-K and it applies to this teleconference . Let me begin by summarizing Cummins fourth quarter and full-year results .In the fourth quarter of 2002 , Cummins recorded sales of $ 1,414 million , 3% lower than sales of $1,463 million in the fourth quarter of 2001 , reflect ing decrease ed sales in most north American automotive markets and our power generation business, partially offset by higher sales in our Dodge Ram business.

For the full year 2002, Cummins recorded sales of $ 5,853m compared to sales of $5,861 million in 2001, an increase of 3%. Earnings before interest and taxes for the quarter were $ 19 million, compared to $28 million in Q4, 2001. Excluding restructuring accrual reversals and a prepayment penalty on our ESO P notes, operating earnings for the fourth quarter of 2002 were $14 million.

For the full year, earnings before interest and taxes as reported were $128 million in 2002, compared to a loss before interest and taxes as reported of $ 42 million in 2001. Excluding restructuring items and the ES OP penalty, earnings before interests earnings before interest and taxes were $122 million in 2001, compared to earnings before earnings before interest and taxes of $83 million in 2001 . 2, excuse me, $1 22 million in 2002, compared to ' 83 in '01. Net earnings in 2002 were $47 million or $1 .12 per share, compared to $ 3 million or 8 cents per share in the fourth quarter of 2001.

Excluding the restructuring reversals, the ESOP prepayment penalty and tax benefit adjustments, Cummins reported a net loss of $ 13 million or 3 4 cents per share in the fourth quarter of 2002. For the full year of 2002, Cummins reported net income of $73 million, or $1 .89 per share, compared to a net loss of $102 million or $2.66 cent per share in 2001.

Excluding one- time adjustments, Cummins reported net income of $ $9 million, or 24 cents per share in 2000, compared to a net loss of $18 million or 47 cents per share in 2001 . I will discuss each of our four business segments. First I will begin with the engine business.

Total sales for the engine business in the fourth quarter were $ 776 million, a 3 % decrease from sales of $800 million a year ago. Revenues in automotive markets, which as a whole were down 2 % year over year, reflect decrease across many segments, due to the October emissions change, which were mostly offset by increases in our Dodge Ram business.

Over all revenue from industrial markets was down 6% year over year, with the most significant decreases in mining and marine sales. Operating income for the quarter was a loss of $ 17 million versus a loss of $15 million in the fourth quarter last year.

This represents essentially flat earnings on a $24 million decrease in sales. Benefits from cost reduction programs off set the lower fixed cost absorption at our heavy duty plants and the impact of the shift from mature engines to new engines where margins are typically lower at product introduction. I will briefly review each of the engine business markets. Turning first to the heavy-duty truck business.

Revenues for the heavy duty segment as a whole were down 16 % in the fourth quarter from a year ago while unit shipments globally were down 34 cents 4%. Unit shipments in North America were down 47%, reflecting a fall-off in demand following the October emissions standard change , while unit shipments to the rest of the world were up 16% . The increase in international shipments was due to higher sales to OEMs in Mexico and Europe.

In the world wide medium duty truck and bus market, total revenues decreased 25% for the fourth quarter year over year. Medium duty truck engine shipments were down 70 % in North America due to the new emissions standard. International shipments were up 7 % with higher OEM sales in Latin America. Global bus engine shipments were down 53% with a 75% decrease in North America, due to the change in emissions standards and a 27% decrease internationally, primarily in china.

In the light duty automotive and RV business, revenue was up 50% this quarter, compared to a year ago . Engine shipments to Daimler Chrysler for the Dodge Ram pickup truck were up 13,1 00 units, an increase of 74% from fourth quarter last year , resulting from the launch of Chrysler's new model pickup.

Unit shipments for RV engines decreased 49 % year over year, due to the emissions standard change. The continued strength in consumer markets as well as growth in the diesel powered segment of this market helped to lessen the impact of a new emissions standard. Sales to industrial engine markets in total were down 6% from a year earlier.

In the construction equipment market, worldwide sales were up 5% compared to fourth quarter 2001. Unit shipments of engines in North America were up 4 % despite continued weakness in construction equipment markets. Shipments to international markets were flat compared to the fourth quarter of 2001, with higher sales to china and Korea, offsetting sales decline in Europe.

Sales for the agricultural equipment market decreased 10% from fourth quarter last year, but 2002 total year sales increased 16% compared to 2001 . Revenues from marine markets decreased 16 % compared to fourth quarter last year while unit shipments were up 2%. The difference between the revenue and the volume change was due to a mixture of more mid-range engines that have lower per unit prices. Revenue in the mining segment decrease ed 19% year over year, reflecting continued weak demands resulting from lower commodity prices sales in the power generation business for the fourth quarter were $324 million, down 10% from the fourth quarter of 2001 .

In North America, revenues were down 19% compared to a year ago, with continued weak demand in our commercial jen(ph) set business. This was partially offset by increased demand in our consumer business, primarily recreation al vehicle sales. Consumer business revenues increased 19% compared to the fourth quarter of 2001.

Outside North America, revenues were flat in total, with decrease s in Latin America and Australia being off set by increases in Asia and the Middle East. In the fourth quarter of 2002, power generation had an operating loss of $9m ,compared to an operating profit of $12 million last year . Several factors continue to contribute to this variance.

First, the substantial volume decline particularly in North America and Europe, resulted in under absorption, a fixed over overhead costs , especially in high horsepower plants. Second pricing continues to be under pressure with excess inventory in the marketplace. We believe the inventory levels are coming down, but with the overall weak demand, it is taking longer than expected to burn off the inventory.

Third, the business incurred expenses associated with cost re reduction actions during the quarter that were absorbed through operations. The majority of this was severance related to headcount reductions. Lastly, rental fleet utilization is lower than last year due to overall weaker demand, reducing profitability in our rental business. Revenues for the filtration and other segment were $ 244 million for the quarter, a 3% increase, compared to the fourth quarter of 2001.

Filtration business revenue was relatively flat in North America, with some demand re reduction off set by increased market penetration. Revenues at the Holset ph) Turbocharger business increased from a year ago with continued strong business in China, as well as higher light duty automotive and after-market sales. This segment's operating warnings for quarter were $28 million, versus $23 million last year. This represents a $ 5 million profitability increase on $ 6 million higher sales.

This improvement is primarily due to cost reduction benefits from re structuring and Six Sigma initiatives and the discontinuance of good will amortization. Sales for the international distributor business were $153 million in the quarter, an increase of 2%, compared to sales of $ 150 million last year, with modest improvement across most regions.

Operating earnings for the segment were $12 million this quarter, compared to $8 million in the prior year's quarter. This increase was primarily driven by higher parts and service sales. Returning to the corporate level, I would like to review our total sales by region. In the fourth quarter, our sales mix was 50 % U.S. and 50 % international, compared to 54 % U.S. and 46% international in the fourth quarter of last year.

This change is primarily attributable to decreases in U.S. automotive and commercial generator set markets. For the fourth quarter compared to a year ago, sales in the U.S. decreased 11 %, while international sales in total increased 5 %. The international sales variances were mixed, with decreas ed sales in Canada and Europe, more than off set by increases in Asia , Africa and the Middle East. European sales declined across the majority of our markets.

Sales to Canada were down due to lower shipments to automotive OEMs. Asian sales were higher year over year with increases across all regions. Revenues in china increased, with higher sales in most businesses, more than offsetting declines in bus sales. Next, I'd like to discuss corporate gross margins. The gross margin percentage for the quarter was 15.5 %, compared to 18.1 % in the fourth quarter last year.

Product coverage costs was 3.4% of sales or $48 million, compared to 2.9% of sales or $42 million a year ago. This increase resulted from a higher concentration of new product engine shipments in the quarter.

Excluding warranty costs, gross margin for the quarter was 18.9% versus 21% in the fourth quarter last year. In dollar terms, gross margin was $ 267 million, down from $307 million a year ago a difference of $40 million. The primary drivers of this decrease were product mix, where we transition from mature engines to new engines with lower margins at product introduction and lower fixed cost absorption due to the significant sales decline and very weak power generation demands.

Total selling Admin.(ph) and research and engineering spend spending in the quarter decrease decreased $34 million. Selling and administrative expenses decreased primarily due to the company's cost reduction initiatives and some disposition of businesses. Research and engineering expenses decreas ed $18 million compared to last year, and are expected to remain at lower rates going forward as we have now completed the development work on our new emissions compliant engines.

Our income from joint ventures and alliances in the fourth quarter was $6 million, compared to $3 million in the fourth quarter last year. This increase was primarily a

attributable to improved earnings across most of our joint ventures particularly in China, partially off set by lowering earnings at the AEKSEG joint venture .

Other income was an expense of 4 million compared to an income of $1 million a year ago. This change was primarily related to non-other than temporary loss on securities held. Interests Interest expense on the quarter was $ 17 million, a $ 2 million increase compared to the fourth quarter last year, due to our recent debt issue.

The $13 million credit for restructuring charges in the fourth quarter of 2002 was due to a reversal of excess re restructuring accruals. This write back is comprised of three items, $4 million for severance accruals not needed, due to people leaving through attrition with no severance pay $4 million for equipment write downs for our 12 -liter engine assets that we were able to re deploy, and $5 million for asset write downs not needed.

The $8 million loss on early retirement of debt was a pre prepayment penalty on our ESOP loan. We paid the loan off in November due to a covenant conflict with our new financing arrangement. The income tax provision for the quarter was a benefit of $54 million, compared to an income tax provision of $2 million in the fourth quarter of 2001.

The fourth quarter 2002 benefit includes an income tax provision of $3 million on fourth quarter earnings and a $57 million credit for the write back of tax re serves associated with -- following the settlement of IRS audits for the year's 1994 through 1999. The cumulative effect of account accounting changes of $3 million relates to the net of taxes effect of a change in measurement date for our pension and post employment benefit plans. To better align our measurement date with the date of our financial statements, we changed from September 30th to November 30th for purposes of determining amounts reported in financial statements.

Net earnings for the quarter as reported were $50 million or $1.18 per share on 45. 2 million average shares for EPS purposes -- this compared to earnings of $3 million or 8 cents per share a year ago on 38.5 million average shares . Let's turn to cash flow. Pre-cash flow from an operations perfect perspective was an in -flow of $100 million for the fourth quarter and $ 122 million for the full year of 2002. This compares to $78 million for full year 2001. Our statement of cash flows that you should have received indicates a cash in-flow for the full year of $ 99 million from operating and investing activities.

This includes a $1 01 million in- in-flow for the fourth quarter of 2002. To arrive at the $100 million pre-cash inflow for Q4, we removed the effects of items to that we considered to be financing activities for pre cash flow purposes. For Q 4 the only adjustment needed was a $1 million inflow from disposition of businesses. The biggest driver of the cash inflow was a $202 million decrease in receivables for the quarter, partially offset by a $ $1 20 million decrease in accounts payable.

Capital expenditures were $36 million for the quarter and $90 - million for full year 2002 compared to $206 million for full year 2001 as we continue to aggressively manage capital spending. We still expect capital spending for 2003 to be around $130 million.

Investments and advances to joint ventures and alliances for the fourth quarter of 2002 represented an outflow of $29 million due to working capital funding at several of our joint ventures.

As we reported last quarter, we have adopted a strategy to provide additional funding into our pension plans over a several s-- year period, including approximately $30million in incremental funding in 2003 . Total pension funding in 2003 is expected to be $105 million. Cummins has also taken a more conservative view of asset performance going forward by reducing return assumption in the U.S. from 10% to 8.5%.

These changes have been factored into our guidance for 2003 and remain unchanged from the guidance provided in our Q3 earnings announcement. The December 31, 2002 charge to equity associated with pension under funding was $ 257 million, versus the previous estimate of $3 00 million due to the change in measurement date. Thank you.

Now I'll turn it over to Tim.

Good morning. 2002 was a challenging year, but against this backdrop, I think we performed well. Our engine, filtration and international distributor businesses delivered significantly improved results.

We generated substantial cash flow while still funding key programs. We continued to expand our cost reduction initiatives, providing an improved cost structure that positions us well for the market upturn. I want to thank our people, because they are the ones who day in and day out develop the technologies and meet our customer needs in the most cost- cost-effective way we know how , delivering these solid results for for our shareholders. Now I'd like to review the company's financial performance.

We reported a profit of $47 million or $1 .12 per share for the fourth quarter and $73 million or $1 .89 per share for the full year of 2002. These results include a $ 57 million write back of tax re reserves, due to the settlement of IR S audits for prior years. This demonstrates outstanding work on behalf of our tax department in resolving long-standing issues with the IRS over the valuation of assets and deduction s for tax purposes .

Excluding one-time adjustments, we lost $15 million or 34 cents per share in the fourth quarter, with greater weaknesses, especially in the power generation markets than we had anticipated and a major drop-off in nearly all north American automotive markets. For the full year, we delivered a profit , excluding one-time adjustments of $9 million, or 24 cents per share in the face of the weakest demand conditions across our business that I personally can remember.

Otherwise, we earned money at the bottom of the cycle. We continue to expand our cost-reduction work, providing further operating performance improvement. The filtration and other business reported EBIT margins of 11.5% for the quarter from operations, representing our best quarterly performance in over two years.

This business is meeting its EBIT target of 11% to 13 %, despite very little market improvement. The international distributor business provided solid earnings with EBIT margins of 7.8%, which is at the high end of the businesses 65 to 8% target margin in its first year of existence. Many of our businesses, however experienced substantial quarter.

North American heavy duty, medium duty, bus and RV markets declined to unprecedented levels following the change in emission emissions standards. Q4 north American heavy duty truck volume were 84% off peak involves with worldwide volumes down 78%. Medium duty truck volumes were down 44% from the peak and bus and RV markets were down nearly 70% from the peak.

Power generation markets remain weak with little sign of improvement. High horsepower markets where we typically have very good margins continued at depressed levels with mining sales down 19% for the quarter. Worldwide high horsepower values volumes, which supply both engine and power generation markets were down over 40% from the peak with a 54 % decrease in North America.

I am, however, very pleased with our cash flow performance. We generated positive cash flow of $100 million for the fourth quarter and $122 million for the full year. We held capital expenditures to $90 million for the year, as we continue to aggressively manage capital spending. This level of capital investment is possible because we already have existing engine platforms to meet future emission requirements through at least 2007.

We also reduced working capital, generating $143 million in the fourth quarter. During the fourth quarter, we were successful in completing two major financings that together provide substantial liquidity for the company. First we finalized a new three-year revolving credit facility for $385 million with our bank group. We also issued $250 million of 8-year notes, primarily to re refinance $125 million in bonds, coming due in march of 2003. The debt offering went very well, and there was significant interest among investors.

Additionally, Cummins achieved a number of operational successes during 2002 . First, we released a full line of compliant engines for the October 2002 emissions standards. The launch and early experience with new engines has exceeded our expectations . Cummins was named newsmaker of the year by diesel progress magazine for our new products and our stance on emissions compliance.

We released our new turbo diesel engine for the Dodge Ram pick-up, which was named truck of the year by both motor trend and truck magazines and our sales are off to a strong start. Holset (ph) received the queen’s award for its new heavy duty turbocharger introduced in 2002. The VG turbo a critical component in meeting new emissions standards.

We launch the emissions solution solutions business to develop after-treatment products to meet increasingly stringent emissions standards. We formed the international distributor business which met or exceeded all of its financial targets for the year, and we completed our one thousandth Six Sigma project with total savings of more than $360 million over the last three years.

For 2003 , we still expect top line growth for total company of $5% to 10% above 2002 levels , assuming modest economic recovery in the second half of the year . Due to the continued lower demand in power generation markets, we are setting our earnings expectation for 2003 in the range of $ 1.80 to $ 2 per share.

Due to the seasonality of our businesses and weak near-term demand in key markets, first quarter results are likely to be a loss in the range of 50 to 60 cents per share. Cash flow for the year is expect expected to be in the range of $70 to $80 million dollars after capital expenditures of around $130 million, as we continue to tightly manage our capital investment. This will allow a modest amount of debt reduction in 2003, with more in 2004, as we expect to generate significantly more cash in 2004.

Working capital is protected projected to use a small amount of cash in the range of $10 to $20 million due to the forecast forecasted revenue increase. I want to take a few minutes to offer some perspective regarding the non-cash accounts payable adjustment of $30 to $40 million related to the period 1998 to 2002.

We became aware of the size and scope of the understatement of accounts payable at two plants this month as we worked to close the books for 2002. We immediately informed our awed auditor, Price Waterhouse Coopers and both our internal and external audit teams have conducted an extensive review. We believe that this matter stems primarily from the implementation of an enterprise resource planning system in the 1998-1999 time frame. We have notified the SEC and we will work actively with the SEC and Price Waterhouse Coopers to determine the correct accounting treatment for the adjustment and any impact on historical financials.

Let me emphasize that $30 to $40 million accounts payable adjustment is totally non cash and has no effect on our ongoing operations . In light of the general industry environment, we are taking these matters very seriously. Those of you who know us, know that we are very conservative company on accounting matters. I want to reassure you that we will resolve this matter as quickly as possible, and as always, we are going to do what is right.

Now I think it is important to stand back and revisit the current environment and how Cummins is positioned to perform. We improved profits and cash flow in a year with continued depressed market conditions. Three of our four businesses performed at or above our expectations for the year. Each of our businesses has detailed strategic initiatives on which they are focused.

They have specific metrics by which to measure their progress. The path is clear and we are focused on execution. The international distributor business met or exceeded all of their financial targets in its first year of existence. The filtration another business surpassed its plan for 2002 for profits and cash flow and continues to achieve market penetration gains.

The international distributor and filtration businesses, along with Holset(ph) delivered 50 % of our EBITDA for 2001 and 2002. These businesses are more stable, less cyclical and less capital intensive than our other businesses. The power generation business is in a deep recession. The business has gone from profits of approximately $100 million in 2000 and $80 million in 2001, to a loss of $27 million in 2000.

This resulted from a reduction in market demand. We responded to this down turn with a number of cost reduction actions that we expect to return to business to profitable levels in 2003. Let me remind you, we reduced headcount at our Minnesota plant by nearly 400 people or 20% of their work force.

We outsourced additional component work which will reduce headcount by another 220 people. We reduced headcount at our alternator plant in the UK by 260 people or 25% of their work force. Additional reduction s of 100 people took place in Q4. We reduced headcount in our UK jenset(ph) manufacturing plant by 15%. We redeployed one- third of our technical people to work on improving , operating and reducing the costs on our current based business products and we started moving production to lower cost manufacturing locations in India, Mexico, Brazil, Romania and China.

The engine business delivered substantially improved performance in 2002. They went from a loss of $91 million in 2001 to a profit of $29 million in 2002, on just a sales increase of $314 million. This is proof and confirmation that they have significantly lowered their break- even point. As we have stated repeatedly, with this improved cost structure, the business is very well positioned for the market upturn.

The heavy duty business has made progress in achieving the new business structure. The long-term agreements are accomplishing the desired outcome. Our new certified engines are performing well in the field. We have over 4,000 orders for new engines from over 300 fleets and order rates are continuing to increase. Our cost reduction efforts are delivering results.

We are on track to achieve 5 % EBIT margins without any improvement in market share. Note that our market share did, in fact, increase in 2002, to over 24%. We have made significant progress in lowering our cost structure and continue to implement new programs across all of our businesses. Cost reduction has become a way of life at Cummins. We expect to realize substantial improvement from more global sourcing initiatives across the company Our Six Sigma program has permeated the organization and continues to provide tremendous results as I said , delivering over $360 million of savings in the last three years . We have demonstrated our ability to earn a profit and generate cash with market conditions at the bottom of the cycle.

We will continue to aggressively manage spending providing the opportunity for substantial earnings leverage as our markets recover. Giving -- given our strong cash flow performance, and solid liquidity, we plan to continue our difficult dividend in 2003. We will now move to the question-and-answer period and last time we had some complaints after the teleconference that some people asked more than one question and talked too long, so I'd ask you to keep it short. Thank you.

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press the numbers 1 followed by 4 on your touch tone phone at this time.

Pressing 14 a second time will remove you from the queue should your question be answered. Lastly, we ask that you please pick up your handset if listening on speaker phone for optimum sound quality. Please hold while we poll for questions.

Our first question comes from Andy Casey Casey. Please state your affiliation then pose your question.

Prudential Securities, good morning.

Hi, Andy.

Given the limit on questions, I'll keep it short. The north American performance in fourth quarter for heavy and medium duty was below industry unit production, not shocking. It could be due, obviously to the old engine stockpiling in the customer model care- over or change over at some of your customers. Given the under performance in the fourth quarter, would you expect a better unit shipment relative to the industry unit production, and if so, where is the sequential weakening in your outlook coming from? Thanks.

This is the operator. Our lines have disconnected. We will reconnect them in one moment.

Thank you for your patient then patience. The Cummins conference call will resume momentarily. Again, thank you for your patience. Please continue to hold.

At this time, I am going to make Andy Casey's line live again for his question.

Hi, Andy, sorry about the problem.

It wasn't you, Andy.

We really do want your question there.

The transition from 4Q to 1 Q and I mean, I kind of understand where some of the weakness came from in fourth quarter in terms of heavy and medium duty truck shipments . There was timing issues within with inventory stockpiling potentially and then customer model changeover. Given the under performance given the fourth quarter industry unit production, wouldn't you expect a better unit shipment of engines relative to the unit production, whatever that may be for 1Q, and if so, where are you seeing the sequential weakening in earnings?

Yeah, Andy, it's Tom. We do expect -- if you are talking about truck shipments versus engine shipments, you are right. The ratio should improve. Truck shipments will be worse relative to Q4 and engine shipments will be batter better because of the build-up. That is true. The biggest weakness is power gen. That has a seasonally weak first quarter so not only is our market down, we're seasonally weak . We expect improvement in engine markets, but they are still slow. As we mentioned, we expect the first half to be a slow improvement from the low levels , increasing in the second half and Powergen will remain week in the first quarter.

The international distributor business, its lowest quarter historically is in the first quarter, so they -- and their fourth quarter was their strong strongest quarter .

: Did that get at it, Andy?

Yeah. Power gen, just as a follow-up, at least in North America, it sounded like 1Q, you know, part of 4 Q beginning of 1 Q left year was the trough period. Are we going back to that that trough or below it?

Yeah, I'd say that's right. The RV business remains strong, which is good news. As you know, we started to see benefits from that first quarter last year. That remains strong, but other otherwise, the commercial gen set market is seasonally at a trough , and it has remained similar to last year in terms of basic size. So, yes.

Again, the point we were trying to make on the power generation is that we've done this extensive cost reduction and restructuring and we do think we'll be able to see profit improvement at these levels during the year. It's just that the first quarter is the softest quarter.

Okay, thanks.

Thank you, Andy.

Thank you. Our next question is coming from David Rosseau. Please state your affiliation, then pose your question.

Solomon Smith Barney, good morning. I'll try to keep it quick. The free cash flow guidance , $ 07 to $80m, after the dividend you're left with $25m. Typically you have $50m a year going to investments and VJ s and alliances. But you expect some debt reduction in '03. Should we assume some disposals during year to keep you positive?

: That number, David has already taken out the JV investment, the pre cash flow guidance we gave, the $70 to $80m.

The typical run rate of $50m going to JVs and alliances, you are targeting 125 or so?

That's right. The reason we leave them in there, they are increasingly an element of our operating performance. We use J Vs as operating performance, so we look at both the earnings from those as well as the investment as operating kind of elements.

We will also push to reduce the $130m on capital and try and manage below that , as we did manage be low it this year as well.

And on the power gen swing to profitability [inaudible], what kind of sales are you expecting in '03 to help you get the business back to profitability?

We're expecting relatively flat sales. As we mentioned before, we originally thought sort of 5 to 10% over all kind of improvement and maybe at the lower end of that now. So we don't expect significant increase in sales and to the extent we see them, it'll be the second half of the year. So our improvement is coming on the cost reduction items, Tim talked about. The elements of resizing the business which we've already taken and the efforts to move our engineering folks into working on cost reduction of current products, which is on going and that part of the cost reduction work will phase in over the course of the year.

Caterpillar is announcing lay layoffs at Powergen as well. Are you done given the headcount reduction in Powergen?

I think there may be some moderate changes as we out outsource some material. But they are pretty much through the announcements and the lay layoffs. I also want to just comment on the power generation, because obviously that's been a disappointment for us this year. We do remain bullish in that business. Long-term, we think the demand for electric industries tri city and the growth in population and the need for distributed Generation still makes this a very good business. So I think we progress through cost reduction and delivering the restructuring s that we've talked about already, and then we'll see the growth in 2004. Maybe in the second half of this year. We've also really re focused our distribution system from some of our more traditional markets and they are becoming much more capable in the industry for Generation. This is going to be a good business. It's a matter of managing our way through it and I think we'll be able to achieve the same kind of cost reduction , lower break- break-even that we did in our engine business.

The last point there, heavy-duty truck, what is your industry build rate assumption for North America , and at that level are you profitable in heavy duty truck.

160,000 and yes.

Thank you.

Thank you. Our next question is coming from Gary McManus. Please state your affiliation then pose your question.

It's Gary McManus with JP Morgan.

Following into that question, heavy truck, what was '02, and I want to get industry volume growth assumptions in all of your major end markets, heavies, mediums, the dodge business and power gen.

The numbers that Tim has given in terms of market forecast will be similar to 2002 levels, the way we measure it. Heavy truck, excuse me.

So flat in heavy trucks. How about the other major end markets?

The dodge business for the first half of this year, we think we'll see somewhere between a 30 and 50% increase over the first half of last year. The second half of this year will be like the last half of last year, so we think the volumes will go somewhere between 100,000 to $130 ,000. Construction with modest improvements, but nothing of substance. We've already talked about power generation. I think we might see some improvement in oil and gas and mining markets. Again, it would be helpful, but they're not a huge differences from where we are.

Okay. Powergen is flat. Your sales were flat. That means the industry volume is flat? Flattish?

Right, Powergen?

Yes.

Yes.

Just as a follow-up, your earnings guidance suggested that there is nothing funny in the tax rate assumption or interest expense or anything like that. Maybe something on the order of $8om to $100m increase in the EBIT. I guess you expect to get $30m from Powergen if you are going to small profit. Is the rest going to come in the engine business or primarily?

We think we can see -- if you look at an increase obviously, we will he see improvement in the Dodge Ram pickup. The heavy duty consolidation where we've moved to one single plant in Jamestown is worth about $15m. We think the cost reduction improvement in powergeneration is $25m. We think we'll see $10m each in fleet guard in the ID BU, and we think we have another $10m in corporate cost re reductions around Six Sigma programs.

Right. Thank you very much.

Thank you. Our next question is coming from Mark Koznarek. State your affiliation and then pose your question. Mr. Koznarek, your line is live.

Sorry, can you hear me now?

Hi, Mark.

Hi. Good morning. Sticking with this power generation theme, can you give us a sense of what you think the market decline in 2002 for large commercial power gen units, and then what is the inventory situation at year-end versus where it was at peak levels? Thank you.

Yeah. I'll start with that, Mark. It's hard to give an industry decline that's relevant. The biggest hits for us were in North America, definitely, and it depends on what segment you cut it, but our own declines are on the order of 15 to 20% across all segments and it would be definitely higher in the U.S. and even higher still in the higher end. So just to give you some general sense of the declines. Restate your second question.

Would be the inventory situation up, you know, both at Cummins but more so industry-wide where we ended up the year versus where it had peaked out presumably beginning of the year.

Right. As I'm I've said before, it's very difficult to get a precise handle on the inventory, but our read is as follows. Again, the inventory is overwhelmingly the larger size, the one to two megawatt size. The inventory has come down in our view, there is still inventory out there and that is putting pressure on the markets. Because of the softness in the market, it's even weaker than we expected. It is taking longer to clear than we had hoped. That's why we have, you know, reduced our expectations in power gen for the first half of the year. We think it'll take longer to clear, but our view is that it will clear in the first half of the year.

And the pricing pressure and the discounting especially in that node or that niche that we're talking about has been more severe than what we thought in order to clear the inventory , and we don't expect any relief on that discounting so that's factored into our forecast.

Would you guys then characterize the inventory as something like double that of a normal run rate in terms of, you know, months of expected sales? Is it still in order of magnitude of that much beyond normal?

Again, I really have a hard time putting a number on it. You know, I listened or heard red cat's statement on it. We don't have any more insight than they do. We would echo their comments. It's taking longer to clear because of the lower demand, but we do expect it to clear in the first half of the year.

Okay, and then final Powergen question for you is, as you went through sort of the litany of staff reductions it totaled out to it looks like around a thousand. How many employees in that segment did we end the year at? What kind of reduction did occur on a percent basis?

I would say it was around 15%. I think it was 13% in November and we were seeing another 2% go in December. I also would point out, though, on their operating results, because we've been asked questions before about, you know, restructuring charges. You'll note that we did those redundancies costs and charged the current operations. We did not do a restructuring. That's kind of the way that we're operating. The redone dance see costs were a bit heavier because a lot of those redundancies were in England and in Germany and it tends to be more expensive there.

That's a good point. Thanks.

Thank you. Our next question is coming from Joanna Shatney Goldman Sachs. Please state your affiliation then pose your question.

Goldman Sachs.

Hi, Joanna.

Hi. I'm still confused about power gen. I know your out look is similar to cat. I don't understand it. If we have excess inventory, it implies that you need to under produce inventory, and your rental fleet utilization remains low, so maybe you can consider that -- you know, it's not quote, unquote inventory, but it is overhang on the market. Why can't we -- why not – if you are trying to be conservative, take that business, the expectations of the business down year over year? Is it because of your economic forecast? Or is it really that you think that the business is kind of bottomed out? Are there inquiry levels that is giving you some support on the flattish out look for next year?

We have taken that segment of the business year over year down down. But remember our power gen business is in many segments, including RVs, smaller generator sets and power electronics and then all around the globe. So in total, when I gave you are -- my view over revenues, that's in total. Our view of that segment in North America is indeed weaker in 2003 than it was in 2002, and that was much weaker than 2001.

Okay.

Your analysis has to be below retail right.

And that has to off set the negative shift is this

Yes.

Can you talk about what you expect warranty expense to run you in '03 and also what the accounts receivable securitization balance at the end of the year.

I'll do the second one first. There were no borrowings on the securitization at the end of the year. And on the coverage, we expect that to remain in the mid-3 , you know, close to 3.5 % of sales for '03.

Did you the shift in coverage is, again, you know, the mix is we have newer engines and just the methodology of calculating warranty reserve, newer engines have a higher accrual rate per engine than the more mature engines. The more mature engines, we have had significant improvement, especially in payments. So we think that the quality is improving. I would add that at one of the issues that many of you have raised was concerns with the introduction of our '02 automotive engines, and the reliability of those engines so far has been very, very good. We have over 2000 engines in service right now. In addition, I said that we have over 4,000 more orders with 360-some fleets. One of the reasons the reliability is doing well that I think people lost sight of, that base engine is the same engine we've had for years. The only new technology is the exhaust gas recirculation and as a byline, drivers are very impressed with it.

Do you guys have any feel of all of what your penetration is in class 8 trucks. Are you looking at 24, 25% penetration rate?

Fourth quarter was somewhere around 27% and you know, we don't see it going down. It may be going up off of that. The long -term sales agreements that we have with pack car and international and Volvo, we've gained market share in each of those OEM s in each of the last six months.

I'll follow-up on that, thanks.

Thanks Joanna.

Thank you. Our next question is coming from John McGinty. Please state your affiliation then pose your question.

Credit Suisse First Boston. Good morning. I want to get a clarification. Sales up 5 to 10% and then are we -- closer to -- could you just get me to that 5 to 10% on your four groups as your guidance is, engines, power gen, filtration and international. I'm not talking markets, just what are your specific sales forecasts within those ranges to get to the 5 to 10%?

Fleetguard it's probably around 7 to 10%. The international business unit distributor business unit should be 10% plus. We've talked about power generation being flat, and we think the engine business and again, this is the hardest one to predict, might be up 5%.

Okay. And then second question, on the kind of the recurring non-recurring -- in other words there were nonrecurring things you took. You took the redundancies without taking them as a charge, but SG&A you had some gains. It was incredible decline. Part of that was because of disposition gains and offsets. If you take that in the forth quarter, all of the things that were kind of nonrecurring, recurring, did they wash? Were they a negative? Were they a plus?

John, the way I look at that, the things that we would look at as nonrecurring items would be the tax adjustment.

No, I'm talking about above the line, I'm talking about operating. Your SG&A was down because of disposition gains. In power generation, you took a hit from layoffs and severance costs that you didn't identify. One was a plus, one was a minus. Those pings above the line that you didn't identify, did they net to be no change or are they net plus or net minus.

It's difficult to say. We're basically viewing items like that as operations. We're viewing when we need to take redone dance cease, those are operating deals.

Yeah, but we're not supposed to multiply the fourth quarter. You're not saying that -- you're S and A costs are 170 in the fourth quarter. Are we supposed to say 680 for next year that's a $50m dollar reduction.

That's not miles off. I mean, it's hard for me to do it the way you've done it because I haven't thought of it that way, so let me just tell you how I look at it. We have some going both ways and we consider that -- that's the situation with our company with -- we've got a lot of joint ventures and we do operations through joint ventures. We are consistently looking at ways to cut selling and Admin. costs, sometimes that involves redundancy and we'll eat those costs. I would not put those items in nonrecurring.

Fair enough.

Final question, Tim, to get back to 160, the ACT build is, you know, pick a number. It's around 30, 27 to 32 in the first and second quarter, so let's call it 65 or 70 to get to the 160 which is their number as well. We're talking about 45 or 50 per quarter run rate in the second half. I mean, that's mathematically correct. Have you seen anything from talking to your customers? I mean, you've got 4,000 orders from 360 fleets. Obviously they are evaluating the engines. You say they are great, I'm sure they are, but when are people going to say "okay, I'm now going to start to place real orders"? In other words how comfortable are you in that 160 which is incredibly back half loaded for everybody, not just you, but for everybody.

Well, and I think that I think you need to look at some fundamentals and that is look at the age of the fleet. You look at the availability to borrow money. You look at freight that's being hauled and I think obviously the fourth quarter last year and the first quarter, this year are artificially low because of the pre buy. There was a lot of hoopla put out in the industry about the reliability of the new engines. There's enough of them out there, over 2000, and they are getting enough miles, and the word is going to get around that those fears about battery reliability were mistaken. Right now we're talking to fleets that we've been locked out of for some period of time and they are ordering 20 and 30 and some cases 50, and they are going to run those trucks for probably six months and when they have a positive result, I think they'll go back to normal buying patterns. Based on all of that, I think it is realistic to see 160,000. I've seen some people have forecasts above that. 160 is in some cases is considered low. I think the fact that there is this threat of war and there is some uncertainty among consumer confidence, that could affect that in the second half, and we don't have any control over knowledge about that, so we're only working on what we know about, but I'm very pleased with where we are both in terms of the agreements we have with the OEMs, the fact that the new engines are working well. We haven't seen some of the forecast ed penalties and maintenance intervals or miles per gallon, the equal fuel economy, and you know, I think we're -- one of the big concerns that we had in the first half of last year was what was going to happen, and we're through that now, and I think we're feeling good about where we are. So, right now what we need to do is get -- attack power generation. The rest of it, we're focused and we know what we're about.

Thank you very much.

Thank you.

Thank you. We do have a follow-up question with Andy Casey.

We'll take one more.

Thanks. Hi, Tom. Tom ?: Hi, Andy.

I guess a two -part question, one is following on John's question about the heavy truck market and you talked about the

27% share estimated and backlog. Where do you see those orders playing out? Are those all first half and have you yet to see orders for the second half? And then second, in power genration , with respect to, I think it was Joanna's question

on the rental business , given that pricing has come down on some of the new equipment, are you seeing any pressure on your financing arrangements and, you know, some of the liability that you have on the equipment out there? Thanks.

I'll first talk about the rental business. We aren't seeing any issues with the financing arrangements. What we've seen is lower utilization, as we talked about, on our fourth quarter as a result of the depressed market conditions. I think we have some significant upside in our rental business, though, because we have a number of long- term rentals in place already agreed. So, as we go into 2003, we're basically fulfilling contracts already in place, and that will

significantly improve the performance of our rental business. I'll let Tim take the heavy duty one.

The heavy duty order board is, you know -- we basically sell to the O EM, and the OEM can thank change the orders within a one- week period of time. So, don't consider this like in some businesses that you have a firm order board. I can say that in the first quarter of last year , the heavy duty volumes were at 20- year low lows. In the fourth quarter of last year, they were well below that. This quarter, our build rate, we're getting back to the same level we were last year and the forecast that we have increase each quarter going forward. So, which is what we've been saying or predicting for some period of time. Most of the 4,000 that we're talking about would be in the first half of the year, so, again, I think as fleets get more experience, more positive experience with our products, they'll start order drink in the second half of the year. So far, what we've predicted, I think has happened.

Thanks very much.

Thank you very much. There appears to be no further questions in the queue. Do you have any closing comments you would like to finish with?

No, I don't think so.

Thanks for your attendance. Thanks for joining.

Thank you ladies and gentlemen, this does conclude today's teleconference. You may disconnect your telephone lines at this time and have a great day.