康明斯 (CMI) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Cummins first quarter 2004 conference call. [OPERATOR INSTRUCTIONS]. It is now my pleasure to turn the floor over to your host, Karen Battin. Ma'am, the floor is yours.

Thank you, Peter. Welcome everyone to our teleconference today to discuss Cummins's results for the first quarter of 2004. Each of you should have received a copy of our press release with the 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 Jean Blackwell and President of our Engine business, Joe Loughrey. We, along with other members of our finance leadership team, will be available for your questions at the end of our teleconference. This morning, first, I will review our income statement and business unit results. Then Jean will cover some cash flow and balance sheet details. Tim will then make a few remarks about the business. And finally we'll have the Q&A period.

This teleconference will include certain forward-looking information. We will talk about Power Generation markets, the outlook for the North American Heavy-duty truck market and other end use markets for our products. We will talk about the prospects for our business in Asia, Europe, Latin America, and other regions. We will discuss product cost, product coverage or warranty cost and profitability improvement initiative. Any forward-looking statement about these and any other topics involve 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 48 of our 2003 Form 10-K and it applies to this teleconference. During the course of this call we will be discussing certain non-GAAP financial measures and we refer to you our Web site for the reconciliation of those measures to GAAP financial measures. I want to remind you that when we discuss earnings before interests and taxes for EBIT in our calls today, that measure also excludes minority interests and preferred dividends. In response to guidance provided by the SEC, we will use GAAP measures where at all practicable and limit our forward guidance to GAAP measures for those that can readily be reconciled to GAAP financial measures. Now I'll turn to the discussion of our results.

In the first quarter of 2004, Cummins recorded sales of $1.771 billion, 28% higher than sales of $1.387 billion in the first quarter of 2003. The higher revenue compared with first quarter last year reflects the broad market recovery with increased volumes across all our businesses. Earnings before interest and taxes for the quarter were $78 million or 4.4% of sales compared with a loss of $10 million in the first quarter of 2003.

Net earnings for the quarter were $33 million or 76 cents per diluted share on 47.3 million average shares for EPS purposes. This compares to a net loss of $31 million or 79 cents per share in the first quarter of last year. Our convertible preferred securities did have a 4-cent per share dilutive effect on earnings for the quarter. And based on our expected level of earnings will be dilutive for the remainder of the year. I will provide comments regarding each of our four-business segments beginning with the Engine business.

Total sales for the Engine business in the first quarter were $1.139 billion, a 40% increase from sales of $816 million a year ago. During the quarter we made a change in our segment reporting to more closely reflect market-based transfer pricing between our business units. We believe this change allows the businesses to better focus on the cost structure and pricing decisions that are within their control. The end result of this change is increased sales in the Engine and Filtration and other businesses with a corresponding offset in eliminations along with somewhat lower EBIT margins for those businesses.

For the Engine business the segment reporting change added approximately $90million in sales in the first quarter. Excluding the change, Engine business sales increased 29% compared to the first quarter of last year. Revenues in automotive markets were 34% higher than Q1 last year with increased demand in all segments driven by the broad market recovery except for bus. Overall revenues from industrial markets were up 10% year-over-year with increases in most segments.

Earnings before interest and taxes for the quarter were $40 million versus a loss of $22 million in the first quarter of last year. This improvement was primarily driven by the significant volume increases and the business's cost reduction activities. 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 up 45% in the first quarter from a year ago while global unit shipments were up 66%. The variance between the revenue and the volume increase was due to the mix of engine versus part sales. Part sales increased 23% compared to first quarter2003, but were a lower percentage of overall revenue in this year's first quarter. Unit shipments in North America were up 75%, driven by the growing acceptance of Cummins's products among truck fleets, who are purchasing new equipment as freight demand is increasing and aging fleets are replaced. Unit shipments to the rest of the world were up 24% with higher sales to OEM's in Mexico.

In the worldwide Medium-duty truck and Bus market, total revenues increased 35% for the first quarter year-over-year. Medium-duty truck engine shipments were up117% in North America with strong sales increases to all OEM customers. International shipments were up 8% with higher OEM sales in Latin America and Europe.

Global Bus Engine shipments were down 11% with a 27% decrease in North America due to general market declines and down 5% internationally. In the light-duty automotive and RV business revenue was up 23% this quarter compared to a year ago. Engine shipments to Daimler-Chrysler for the Dodge Ram pickup truck were 38,300 units, up 21% from the first quarter last year.

Customer demand for our new turbo diesel engine, which became available in January of this year, is very strong. Unit shipments for RV engines increased 22% year-over-year as demand for RV's continues to be strong and Cummins remains the clear market leader for RV engine sales. Sales to industrial engine markets in total were up 10% from a year earlier with increases across most segments.

In the Construction Equipment market, worldwide sales were up 5% compared with first quarter 2003 with continued signs of improving demand in construction equipment markets. Unit shipments in North America were up 31%. And shipments to international markets were up 29% compared to the first quarter of 2003 with particular strength in Korea and East Asia.

Sales for the Agricultural Equipment market were 30% higher than the first quarter last year with increases in Europe and Latin America offsetting declines in North America. Revenue in the Mining segment increased 19% quarter-over-quarter with improved demand for mining equipment driven by increased commodity prices.

Sales in the Power Generation business for the first quarter were $369 million, up 38% from first quarter of 2003. Power Generation's commercial market experienced solid growth in the quarter with increases in North America as well as robust demand in several international markets including China, the Middle East, and South America.

Sales in the Consumer market, primarily related to recreational vehicles, were up from both the previous and prior year quarters.

In the first quarter of 2004, Power Generation reported earnings before interest and taxes of $6 million compared to a loss before interest and taxes of $14 million last year. The profit improvement compared to last year resulted primarily from the benefit of our significant cost reduction action taken during this past year and from the higher volume.

Revenues for the Filtration and Other segment were $347 million for quarter, a 37% increase compared to the first quarter of 2003. Excluding the segment reporting change, sales increased 18%. Sales in North America accounted for nearly half of the revenue increase but the business saw an improvement across most markets. Sales of Turbo Chargers reported as part of this segment were also up strongly. The segments earnings before interest and taxes for quarter were $24 million versus $20 million in the first quarter last year. The positive impact on profits related to the higher volume was adversely impacted by incremental costs to fund the segments targeted growth initiative mixed between OEM. and after-market sales, the increased price of steel and cost-related changes on our manufacturing and distribution operations.

Sales for the International Distributor business were $171 million in the first quarter, an increase of 26% compared to first quarter last year. Currency comprised roughly one half of the total sales increase. Sales in the quarter grew across nearly all regions led by strong contributions from Europe, the South Pacific, the Middle East and Africa. Earnings before interest and tax for the segment were $8 million this quarter compared to earnings of $6 million last year.

Returning to the corporate level, I will review our total sales by region. In the first quarter, our sales mix was 54% U.S. and 46% international compared to 53% U.S. and 47% international in the first quarter last year. For the first quarter compared to a year ago, sales in the U.S. increased 29% while international sales in total increased 26%. The U.S. sales increase was primarily attributable to increased market demand for heavy-duty engines.

International sales increased in all regions with sales to Canada up 31%, due also to a recovery in heavy-duty engine volumes. Sales to the Middle East were more than twice the amount in first quarter of last year with significant increases in the Power Generation and International Distributor businesses. Sales for Latin America were at 47% compared to last year with higher sales in all businesses, particularly the engine business. Sales to Asia in total increased 23% compared to last year with the larger increases in Korea and Southeast Asia.

Next I will review corporate gross margins. The gross margin percentage for the quarter was 19.5% compared to 15.7% in the first quarter of last year. The increase in margin was primarily driven by the absorption impact of the higher North American automotive shipments and increased volume across our businesses. In addition, improvements from our cost reduction initiatives, including Six Sigma, global sourcing and our heavy-duty consolidation benefited margins.

Product coverage costs was 4% of sales or $71 million in the first quarter compared to 3.9% of sales or $54 million a year ago. Our new products are performing as well or better than the engines they replaced. In fact, base warranty, as the percent of sales in Q1 was lower than any quarter in 2003. Nearly half of the absolute dollar increase in product coverage costs was volume related. The remainder of the increase was primarily related to warranty on products no longer being produced. We use estimates to record warranty liabilities at the time products are shipped. We then continue to evaluate the liabilities based on failure rates and claims submitted over the warranty period. Warranty claims during the first quarter indicated a need to increase our recorded accruals on these specific engines. We believe we have adequately provided produce liabilities and expect product coverage expense to return to around 3.5% of sales going forward.

Total selling, admin and research and engineering or SAR spending in the first quarter increased from a year ago but declined as a percentage of sales. SAR spending for the quarter was $279 million or 15.8% of sales compared to spending of $242 million or 17.4% of sales last year. Selling and administrative expenses increased $28 million from the first quarter of last year and research and engineering expenses increased $9 million.

Currency was a major contributor to the increase accounting for $12 million of additional expense. In addition, volume-related spending in the Engine and Filtration businesses drove higher selling and admin expenses along with increased pension costs and a more normalized accrual pattern for variable compensation accrual. Costs associated with tier two development of high horse-powered engines and increased variable compensation accruals in the engine business contributed to the higher research and engineering expense.

Our income from joint ventures and alliances in the first quarter were $18 million compared to $7 million in the first quarter of last year. Roughly half of the increases came from the Dong Phong joint venture in China. In addition, we saw increases in many of our joint ventures, including our North American distributor and Indian joint ventures, offset by a one-time $3 million pension adjustment in one of our joint ventures. We still expect 2004 joint venture income to reflect the solid increase over the 2003 level of $70 million.

Other income and expense in the quarter was expense of $6 million compared to revenue of $7 million in the first quarter last year. The major driver of this change was a write-down of investment in an emissions-related technology company in the amount of $5 million. Interest expense for the quarter was $27 million compared to $20 million of reported interest expense in the first quarter last year. Beginning in the third quarter of 2003, we now reflect the dividends on our preferred securities as interest expense in it our financial statements due to the adoption of a new accounting standard. With both items combined, interest expense increased $1 million compared to the year-ago period. This increase is primarily related to capital leases on some IP equipment.

The income tax provision for the quarter was $14 million compared to a benefit of $9 million in the first quarter of 2003. The increase was driven by the higher tax accrual based upon the higher earnings. We still expect our effective tax rate for 2004 to be 28%. Thank you. Now I will turn it over to Jean.

Good morning. First, I would like to comment on a couple of corporate financial actions we took during the quarter. One is that we adopted the remaining provisions of FIN 46, related to variable interest entities, which we discuss in detail in our 2003 10K. This is an accounting finance that provides additional criteria to be used in determining whether an entity should be consolidated in a company's financial results. If you recall, we had already adopted this through the ISX capital leases in the fourth quarter of 2003 resulting in an increase of long-term debt of $90million.

In the first quarter we consolidated three operating joint ventures. And they are reflected on our balance sheet as of the end of the first quarter. The line-by-line consolidation of these entities in our income statement will be reflected in our second quarter results. The consolidation of the three joint ventures adds an additional $106 million in debt to our balance sheet. Consolidation of these entities will have no impact to the company's net income or earnings per share in future periods. And the increase in debt as a result of the consolidation has no effect on our loan covenants.

During the quarter we entered into a new three-year revolving accounts receivable program with a total program size of $200 million. This facility is very similar to our former one which expired in December of last year with a change that provides us with increased availability with the new financial institution. No amounts were outstanding under this program at the end of the quarter.

Next I would like to make a few comments on cash flow. We were very pleased with the positive cash flow for the quarter, as Cummins has not historically been a cash generator in the first quarter. Cash inflow from operation and investing activities for the quarter was $27 million. Changes in working capital represented a net cash outflow of $22 million for the quarter, driven by the increase in volume. Working capital as a percentage of sales for the quarter was 16.5% compared to 17.5% at year-end.

Accounts receivable increased $110 million during the period but day sales outstanding decreased to 48 days compared to 50 days for the fourth quarter of 2003. Inventory increased $83 million for the period. But our inventory turns decreased somewhat as we built inventory to meet the higher demand forecasted for the second quarter. Accounts payable increased $171 million reflecting increased materials purchases as demand ramps up.

Capital expenditures were $9 million for the quarter, atypically low due to timing. We still expect our capital expenditures to be in the $125 to $135 million range for the year. Investments in and advance of two joint ventures and alliances during the quart was $18 million due to both increased investment and working capital advances. Due to the consolidation of several entities from the adoption of FIN 46, certain activity previously shown on this line will be reflected in our consolidated results going forward.

Lastly, we have been asked many questions regarding the impact of rising commodity prices on our businesses so I would like to provide some information. Steel and copper are the two main commodities affecting our material cost. Most significant usage of steel is in our Filtration business where we use it in both our filtration and exhaust products. We believe we will be able to pass along some of the increase to our customers but the rising cost will have the greatest net effects on this business. We also use steel in our Engine and Power Generation businesses and where possible we will adjust prices to help offset the higher cost.

Copper has a greater effect on our Power Generation business where we use the material in manufacturing alternators. We are adjusting prices where possible in this business as well. While some of these cost increases are significant ,with the pricing actions we are taking, we believe the net impact to Cummins overall in 2004 will be $20 million or less. These increases are already built into our guidance for the year. Now let me turn it over to Tim for some comments on the business.

Good morning. I am pleased with Cummin's performance for the first quarter of 2004. After several years of difficult market conditions and a relentless focus on cost reduction, we are now delivering substantially improved results. Sales increased significantly in each of our business units compared to the first quarter of last year. The Power Generation business reported a profit again this quarter and we expect the business to provide improving profitability for the remainder of 2004. Joint venture earnings continue to be strong with increases across most of our JV operations.

First quarter sales were 28% higher in the first quarter of 2003 reflecting substantial improvement in demand across our businesses. Earnings before interest and taxes for the first quarter was $78 million, a 4.4% of sales compared to a loss of $10 million last year. This represents a 23% profit conversion on the sales level increase, demonstrating the leverage we can achieve with our improved cost structure. Net earnings for the quarter were $33 million or 76 cents a share compared to a net loss of $31 million or 79 cents per share in the first quarter last year.

Engine business results improved considerably from the first quarter 2003 due to a broad improvement in our end markets. We experience the most notable increases in Heavy and Intermediate duty truck shipments, Chrysler volumes, and in demand for our construction equipment. We are expecting continued strong volumes in each of these markets throughout 2004.

Our emission compliant products continue to perform well and our experience advantages winning us new business in the marketplace. We have shipped more than 63,000 engines to satisfy truck, bus and motor home customers without paying penalties for noncompliance. 46,000 of these engines are operating in North American Heavy-duty market and they have accumulated 2.6 billion miles. Our extended uptime guarantee program provides added assurance to our customers and demonstrates our ongoing confidence in the performance of our engines.

Driver reaction to our engines continues to be very positive. And we are seeing evidence that our technology, engine performance and reliability are giving us an immediate advantage in the marketplace. Through the first two months of 2004 we have gained four points a share in the North American Heavy-duty truck market, increasing from 21.5% to 25.5% share.

Current order rates with our OEM customers suggest that trend is likely to continue. Forecasted volumes from the top 100 fleet indicate the Cummin's share with these fleets will grow to between 35% and 40% in 2004 compared to 25% to 30% in 2003. This includes major fleets such as Knight, Swift, USA Trucks, Wal-Mart, FedEx, USF. and many others.

We had record shipments of the Dodge Ram pickup during the quarter of over 38,000 engines. This is 11% higher than our previous volume records set in the third quarter of last year. The excellent performance, quality and brand image of our engines have allowed to us gain share in the diesel pickup market. We are on track to have an outstanding year with Chrysler and we expect to achieve new volume record in 2004.

We had another good quarter of joint venture performance with income of $18 million in the first quarter. Our expanding joint venture with Dong Phong in China continues to be a major contributor providing nearly half of the quarters J.V. income. We are, however, seeing solid earnings across the majority of our joint venture operations and are expecting 2004 joint venture earnings to exceed the record levels set in 2003.

The Power Generation business reported sales of $369 million in the quarter with improvement across nearly all market segments. The business reported segment earnings of $6 million, a $20 million improvement compared to last years first quarter. We are clearly seeing the benefits of our cost reduction work combined with the volume increases we are experiencing. We are confident that 2004 will be a much-improved year for Power Generation.

Our Consumer business had another record sales quarter with particular strength in sales for recreational vehicles. We are gaining penetration in the non-motorized or towable segment of the RV market. This combined with growth in the industry and our strong market share positions us well for another great year for the consumer business.

The Filtration and Other business had very strong sales of $347 million this quarter compared to reported sales of $254 million last year. Excluding the segment reporting change we discussed earlier, sales grew $46 million year-over-year. Segment EBIT was $24 million compared to $20 million last year. The businesses are clearly achieving significant sales growth as a result of its strategic initiatives. Quarterly profit has grown as well although not at the same rate as sales. This is due to several reasons.

Sales mix where we have grown OEM. sales at a faster rate than after market. These sales typically have lower margins than the after market business. We are still targeting growth in the after-market but the sales will lag increases in the OEM business. We are funding growth initiatives in the business. As we believe our Filtration business has significant growth potential, we are investing more to support this growth. We have increased research and selling expenses related to our emissions solutions business and to support our long-term sales agreements. We believe these are the right investments that will reap rewards over time.

We are experiencing significant increases in commodity prices, particularly steel. Our Filtration business is seeing a greater impact from this as it is a sizable purchaser of steel. And lastly, in realigning our manufacturing and distribution we have opened new facilities to better serve our customers. We will be downsizing or closing existing facilities but with the significant ramp up in demand we have not yet been able to complete that work. We expect that to happen in the second half of this year.

Our growth initiatives are providing strong sales increases. The Emission Solutions business continues to generate a profit while investing in technologies required to meet future emissions standards. Our long-term agreements are securing our revenue base well into the future. We will keep a close watch on cost to ensure that the sales growth translates into strong returns for our shareholders.

The International Distributor business reported sales of $171 million for the quarter, a 26% price increase over the first quarter last year with roughly half of the higher sales due to currency. We saw improved sales in nearly, every geographic region. Segment EBIT was $7 million compared to $6 million last year. And keep in mind that this business is seasonably weak in the first quarter yet it still achieved returns of 4.7% of sales.

We are seeing improved demand in almost all of our end markets with significant increases in some areas. We now expect total revenues for 2004 to be 15% to 20% higher than 2003. We are forecasting the North American Heavy-duty truck market to be up at least 30%. And we expect that sales for Dodge Ram pickup will be 10% higher than the record volumes we had in 2003.We continue to see improvement in Industrial markets with the most notable increases coming in demand for the construction and mining equipment. We expect sales growth in the Filtration and Other business to be 15% for the year. And in Power Generation and the International Distributor businesses to be above 10% for 2004.

With the increasing demand and our continued focus on cost reduction, we will achieve significant leverage on the higher volumes. With our solid performance for the first quarter, the current strength of our order board, and the volume outlook for the year, we are raising our earnings guidance for the second quarter to a range of $1.20 to $1.30 per share and our earnings guidance for 2004 to a range of $4.40 to $4.60 per share. With substantially higher cash flow from operations and a continued tight range on capital spending we will make good progress on debt reduction in 2004.

We are coming off of three very difficult years in essentially all of our markets. But we are now experiencing a significant ramp-up in demand. All of our businesses are profitable. Our cost reduction initiatives are in place to provide us with substantial leverage as these volumes improve. We have gained significant experience with our new engines. And that experience offers us a competitive advantage with our customers. Our products to continue to perform well in the field and we are winning new business as a result. A solid prospect for growth and our improved price structure position us well for strong profits going forward. We'll now take your questions.

Thank you. [OPERATOR INSTRUCTIONS] Your first question is from Brian Rayle. Please announce your affiliation then pose your question.

Brian Rayle from FTN Midwest Research. Had a question within power gen. Was wondering within the sales increase what was the actual unit increase as well as was there a mix in terms of the different types of products that you have out there?

I think the consumer business -- this is Tim. The consumer business especially around RV's was a record quarter. And the alternator business, the new age business based in Stanford, England, also had a strong quarter. The commercial gensets in North America were up about 10%. It was better in the northeast and in California, the Midwest is not recovered. We have done some pricing in certain nodes. And the commercial genset standby markets are very good in China right now. We had increased sales in the Mid-East. We have opportunities in the northeast of Brazil and Argentina. The genset, the rental set fleet we had was under utilized in the first quarter. But look at the second quarter and third quarter the utilization will increase significantly.

And this is all going straight to end demand? There is not any sort of rebuilding of any inventories. Right?

No, there is not.

OK Great. Thank you very much.

Thank you. Your next question is coming from Peter Nesvold. Please announce your affiliation, then pose your question.

Quick question on the JV income. Peter Nesvold from Bear Stearns. On the JV income, what would that have been in first quarter if you had consolidated these three JV's?

Let me think about that, Peter. We're still really trying to get our arms around what each of the line item detail on the income statement will be as we consolidate all of our entities. I don't think that there will be a significant change to our joint venture line as a result of that consolidation. But I don't have specific numbers I can give you.

OK. And then if I can ask a question on capitalization. Do you think you can meet the $220 million of repayment next year just from an internal cash flow and is that enough to get you to investment grade?

This is Jean Blackwell. Obviously we're looking at a number of alternatives. The good news is there are number of alternatives considering the strength of the business right now. So we haven't yet made a determination. Obviously strong cash flow always helps. But we haven't made any determinations on that. As far as the return to investment grade, that's something we talk to the rating agencies about regularly. I think, probably justifiably, right now, they're cautious in their upgrades so we're still hoping to be that investment grade by the second half of 2005. We think we need to make more progress on our debt reduction to get there.

One last quick question. I'll let someone else go. Power gen. Are you still thinking 3% to 4% EBIT margins for the year or is that going up?

I think 3% to 4% is OK.

OK. Thanks for the time.

Thank you.

Thank you. Your next question from Andrew Casey. Please announce your affiliation, then pose your question.

Prudential Equity Group. Good morning.

Good morning, Andy.

If I can dig into what I would say the one-off cost things in the quarter, it looks like you have $3 million from a pension adjustment over in Asia. Is that in engines?

Yeah. At least most of it, Andy.

OK.

Some of it I think would be in power generation, most of it is in engine.

OK. Then you had $5 million write-off and $8 to $9 million if I'm doing the math right on warranty adjustment. Was there anything else?

I think you've pretty much called those out. The write-off that you were mentioning on the investment, that would be in the engine business.

Yeah. So you had -- OK. And these should all be -- they'll be in the number. But they should all be looked at as non-recurring from this quarter on. Is that correct?

Yeah. Definitely. The investment is something I mean that's a pretty unusual type of item for us. We don't really see any of that coming in the future. Warranty costs, as we were saying, product coverage costs, we really expect to return to a more normalized level.

OK. Geez, if you didn't have that number, it would have been even better.

That's exactly right.

Into the engines for a second, specifically heavy-duty truck. With the long-term agreements that you have, do you have flexibility to go back to the OEM's if material prices continue to go up? Hypothetically?

Andy, it's Joe. Let me just to answer I'd say it depends. Our agreements aren't all exactly the same. I just want to kind of leave it at that for now. But obviously it's an issue we're paying a lot of attention to.

Thanks a lot. Great quarter.

Thank you.

Thank you. Your next question from John McGinty. Please announce your affiliation then pose your question.

Credit Suisse First Boston. Good morning. A couple of different odds and ends -- on the industrial side, the one number that looked strange was the fact that if I'm reading this correctly, construction equipment shipments in engines were only up 5%. Although you did talk about North America being up 31 and international up 29. So is there a mix issue. It seems was - almost everybody - construction equipment - you reported talked about reported would have been up more than that. So I'm just trying to understand --that number -- the one number just sticks out as being out of whack with everything else.

Hi John, you're exactly right. It's a mix issue there where we sold more of the mid-range type products. More of the lower end products there. We are seeing good volume improvement. It just did not translate as large of sales improvement because of the mix.

This is Joe. Our business essentially with our 3.3 liter engine and our engines below 3.3 liters in terms of units is picking up well.

That's the 31, the 29, those are unit shipment numbers there. Am I right?

Right.

As you look at the equivalent of backlog or what the customers are telling you, would you not expect that number, the 5%, the dollar shipment to pick up fairly substantially?

Yeah. I think it's likely to increase a fair amount above the level you're seeing. Yes. It's a little bit hard to predict mix.

I understand. Let me ask the question someone asked little bit slightly differently. You had $70 until JV income last year. Right?

Correct.

OK. If you take out the three that are going to be consolidated, how much did they contribute? To the $70 million.

They were not large contributors to profitability.

Two of them were manufacturing joint ventures so there was no income associated with them and the third one had losses last year.

That's a solid answer. In terms of Power Generation, you talked about a 3% to 4% margin. Tim, if you take a step back and say at some point in the next several years, Power Generation will pick up, the economy will pick up -- I think you said in the past you see Power Generation margins at 8%. Have you rethought that? I'm not talking about next year. I'm talking about just conceptually in good years and so on. Are you still there? Or are you higher? Where are you in your mind on where Power Generation goes?

We have said between 8% to 10%. I wouldn't change that today, but we are reevaluating some of the businesses in the Power Generation organization this year as Tom looks at how he's restructured the business. But I think 8% is a solid number or a solid target that we're still shooting for.

OK. And then, Joe, -- well, Tim, you talked about Heavy truck being up 30% or more. I guess the question is of supply capability. It's certainly not the OE assembly. That's not that hard to figure out. But in terms of your own production, Joe, where you are, does that 30%, 35% begin to create constraints for you in 2004 or are the constraints -- if there are going to be constraints, be from the tier two the other kinds of suppliers rather than the major components like engines?

From Cummins' point of view, the simple answer is, no, it's not quite so simple. We are working extremely closely and have been for some time with the number of our suppliers as well as our own internal organizations in making sure that we're focused on where this might go and being ready for it. So we're feeling good about the capacity we have inside Cummins. We have identified all of the suppliers. Not just Heavy-duty but all the suppliers who either are or might be a future bottleneck. And we are working -- have been and are working with them to help them break those bottlenecks and do what they got to do to be ready for increased demand, which we're working hard to achieve.

Well, part of this has to be some thought process, clearly, of not just this year but next year. So without making a forecast for next year could you give us some kind of an idea of at least the range that you're trying to plan where next year may end up because you've got to supply chain management and everything else? What kind of a number -- if we're up 30 plus percent this year what are you conceptually thinking about kind of 2005 directionally or order of magnitude?

Higher, John.

I didn't ask you. I knew you were going to say that I asked Joe.

Tricky guy, John.

Final question. Back on the financing side, it sounded to me like - when somebody asked the question about the stock coming - debt coming due and everything else. Sounded to me like you are obviously looking at equity and selling stock - do I assume that that's the conclusion, one would your stock is up and your debt is triply high, on the other hand your cash flow is good. Are you - is stock something that you are looking at in a fairly serious way, I assume?

I don't think that you would necessarily be correct on assuming one-way or another. Right now as I said w've got lots of different alternatives available to us and we are looking at all to make sure what makes most sense for the company and for our shareholders.

Would you talk about issuing stock? Could you give us the pros and cons as you see it?

You know we focus a lot more on ROE as the company John, so we have to kind of balance that. We want to get back to investment grade, but we also you know, want to get goodreturn on equity. So our both kind of like counterintuitives, so I guess its just safe to say we are looking at all our options and really don't have any thing specific we can tell you at this point.

We should not speculate on that John.

Thanks very much.

[OPERATOR INSTRUCTIONS]

No more questions?

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Thank you for joining us today.

Thank you ladies and gentlemen. This does conclude today's conference. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.