康明斯 (CMI) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cummins Incorporated first quarter 2007 earnings teleconference. (OPERATOR INSTRUCTIONS) During the presentation, all participants will be in listen-only mode. We will facilitate an audio question and answer session towards the end of this conference.

I would now like to turn the presentation over to your host for today's call, Mr. Dean Cantrell. Please proceed.

Welcome, everyone, to our teleconference today to discuss Cummins results for 2007. Participating with me are Chairman Tim Solso, our Chief Financial Officer Jean Blackwell, our President and Chief Operating Officer Joe Loughrey, and President of our Power Generation business Tom Linebarger. We will all be available for your questions at the end of the teleconference.

This teleconference will include certain forward-looking information. Any forward-looking statement involves risks 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 61 of our 2006 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 you to our website for the reconciliation of those measures to GAAP financial measures. Our press release, with a copy of the financial statement and a copy of today's webcast presentation, is available on our website at www.Cummins.com under the heading of Investors in Media. Now some comments regarding each of our four operating segments, beginning with the Power Generation segment.

Segment revenue and earnings were both records for power generation. Each line of business experienced growth, especially the commercial generator and alternator businesses. Excluding the sale of SEG in the fourth quarter of last year, segment revenue in the first quarter increased 29% over last year. We now expect segment sales to grow 15 to 18% in 2007. Demand for commercial generator equipment, including alternators, remains strong due to construction spending on data centers in North America and India and on general infrastructure development in the Middle East. Consumer sales are projected to increase as a result of growth in portable genset sales and the launch of auxiliary power units for commercial trucks. Segment earnings increased 71%, benefiting from significant price realization and continued focus on cost. Price increases on new emission compliant product in North America and on commercial and alternator products in international markets are remaining ahead of new product cost and the commodity cost pressures. Combined with the robust demand outlook and the usual seasonality of our consumer business, earnings for this segment are forecasted to strengthen for the year and remain above the top end of its targeted range of 7 to 9% of sales.

Engine segment growth in international on-highway markets and global industrial markets offset nearly the entire decline in North America on-highway markets, demonstrating the end market diversity of our business. As expected, revenue for the segment was down slightly compared to the first quarter of 2006, due to new on-highway diesel emission regulations in North America. Despite significantly lower heavy-duty volumes, earnings were within the segment's targeted range, demonstrating the effectiveness of our actions to lower the cost structure of this business. Gross margins were lower because of higher initial costs for our new 2007 products. For the full year, we expect increased shipments in the off-highway and medium-duty truck and bus markets to balance decreased shipments in the North American heavy-duty truck market. Segments earnings for the full year are expected to be slightly below or equal to the bottom end of the targeted range of 7 to 10% of sales. First quarter volumes of heavy-duty truck engines benefited from strong export markets and market share gains in North America. International shipments were up 54% this quarter, while our North American market share improved to nearly 28% from 26% a year ago.

Our market outlook for NAFTA Class 8 Group 2 truck sales remains essentially the same as we expect the truck market to be down 40 to 45% this year. Engine shipments may be down more than 50% due to stockpiling in 2006. However, we believe those industry stockpiles are depleted at this point. We expect our volumes to improve in the second half of the year as demand increases in North America and we maintain current market share. While global shipments to our medium-duty truck and bus markets were down this quarter compared to last year, volumes rebounded in Brazil as a recovery in the agricultural market drove demand for medium-duty trucks to transport produce. We still expect global medium-duty truck and bus shipments to be up approximately 25% this year, due to market share gains in North America and our new supply relationship with Nissan in Europe.

Global light-duty automotive and RV shipments decreased 29% due to lower shipments in North America. Shipments to the recreational vehicle market will grow solidly this year due to the increased availability at key OEMs. Light-duty automotive shipments will be flat in 2007, as increased availability of our product in a new class of commercial vehicles will offset softness in shipments to the heavy-duty pick-up truck market. Shipments to the global off-highway markets were up 19% on strength and construction, primarily outside of North America. Global non-residential construction, high commodity prices and sustained prices for oil and natural gas continue to be positive drivers for our global off-highway markets. We will continue to grow in these markets as we increase our high-horsepower manufacturing capacity by 15% over the next 18 months.

Distribution revenue was up 12%, excluding the impact of the reporting change of a North American distributor. Global investments and non-residential construction and overall economic expansion drove revenue growth in power generation and off-highway engine markets, especially in Eastern and Western Europe. Joint venture income nearly doubled, driven primarily by orders for power generation equipment in North America. We still expect the distribution segment to grow this year between 7 and 10%, excluding the reporting change. In the first quarter, we added joint ventures in southeastern United States, Nigeria, and Thailand. Later this year, we will add joint ventures in Brazil and Columbia. These new joint ventures, plus strong performance from our consolidated entities, will keep segment earnings above the top end of distribution's targeted range of 8 to 10% of sales.

Component segment revenue increased 18% from the same period last year. Both Cummins Emissions Solutions and Cummins Turbo Technologies benefited from sales of new products to help customers meet new on-highway emissions standards in U.S. and Europe. Emissions Solutions Margins improved as they leveraged higher volumes to the bottom line. However, fuel systems margins fell, due to lower heavy volumes and start-up losses from their new joint venture. Turbo Technologies margins were unfavorable due to higher material costs and increased production spending as they bring on new capacity and ramp up new product manufacturing. As a result, segment earnings for the quarter fell 23% from the first quarter of 2006. Revenue is expected to grow 18 to 22% for the year as a result of growth in emission related products. As we gain experience with the new products and begin to benefit from restructuring actions initiated last year, we expect margins to increase and reach the targeted range of 7 to 9% of sales by Q4 of this year. Now I'll turn it over to Jean to comment on our consolidated income statement, cash flow, and guidance.

Good morning. Our results this quarter demonstrate that the changes we've made to our business model are working. Strong demand for our products globally and an improved cost structure allowed us to deliver earnings before interest and taxes of 8.6% of sales, well within our targeted range of 7 to 10%. Net earnings for the quarter grew 6% over last year, benefiting from lower interest expense as a result of our debt reductions over the last few years. Gross margins were slightly lower than the first quarter of last year, declining from 21.1% of sales to 19.6% of sales. Improved gross margins in Power Generation and strong performance in Distribution offset some of the lower gross margins in the engine segment. Gross margins will improve throughout the year, particularly in the engine and component segments, as we increase volumes and gain manufacturing experience with our new products. Product coverage was lower in the first quarter as our pre-2007 heavy-duty engines continue to perform well and warranty rates continue to decline. We expect higher product coverage as a percent of sales for the full year as the mix of new 2007 engines increases. These emission-compliant engines carry a higher accrual rate initially until we gain experience in the marketplace.

Total selling, admin, and research and engineering in the first quarter was 12.9% of sales, down from 13.1% in the first quarter of last year. We expect to continue this trend of growing SAR slower than sales during the year. Research and engineering spend will continue to be about 3% of sales as we support the profitable growth opportunities we've announced over the last several quarters. Income from joint ventures grew on strong performance in North America. As a result of stronger distributor orders for Power Generation equipment, we now expect joint venture income in 2007 to increase nearly 10% over 2006. Cash flow from operating activities was an outflow of $113 million, as was seasonally expected in the first quarter. The growth in inventory at the end of the quarter was not unexpected as our primary focus was on delivery of new products to our customers. Also, accounts receivables grew because of the very strong third month of the quarter. In addition to higher pension contributions and an increase in working capital, we invested in new distributors, acquired the remaining equity of Tata Holset joint venture, and built capacity for future growth. We also paid down some puttable debt and repurchased more of our shares. Focused cash management is a key piece of our strategy. We will continue to use our cash wisely to invest in profitable growth opportunities and improve our return to shareholders.

In summary, we had a great first quarter. I'm proud of our performance. While there remains some volatility in some of our markets and our early growth is stretching, we are increasingly confident in our ability to perform in 2007. Based on this confidence, we are increasing our revenue and earnings outlook for the year. We now expect revenue to grow between 5 and 7% and annual earnings per share to be between $6.00 and $6.50. Our guidance suggests that the EBIT will be around the midpoint of our targeted range of 7 to 10% of sales. We believe our guidance represents the appropriate balance of the risks and opportunities we face as we introduce new products this year and as emissions-related markets in the U.S. remain volatile. Now I'll turn it over to Tim.

Good morning. Many people in the investment community expected us to have a down quarter as we headed into 2007 because of the predicted decline in the North American heavy-duty truck market. But while the truck market business dropped off as expected, Cummins had a good and in some cases record-setting 3-month performance. The last few years, we've talked about how we've changed our business model and become a much different company. One that is less cyclical, more diversified, more results oriented and less dependent on the North American heavy-duty truck market. We've said that 2007 was an opportunity to prove that we have been saying is true. Cummins' first quarter performance is early confirmation that we are a different company, and we expect these good results to continue the rest of the year and into 2008 and 2009. Our first quarter results reflect the benefits of Cummins' diversified business model. Our international markets provided the balance we needed for success in this quarter. Nearly every market outside of the United States was significantly up this quarter. Our Industrial Engine and Power Generation markets performed well and offset a $300 million decline in the on-highway markets. Industrial and Power Generation markets are prospering in the United States as well as in Europe, the Middle East, India and China. The Power Generation business also contributed healthy margin increases this quarter and achieved record revenue and operating margins. We expect these results to continue.

As further evidence of Cummins' diversification, all of our businesses experienced sales increases over last year, except for some of the North American automotive markets. While we continue to diversify our participation in global heavy-duty truck engine markets, the more important story this quarter is the benefits we are receiving as a result of the cost structure improvements in all of our businesses since 2001. Let me give you an example evident in our results today. Those of you who follow us will remember that more than 4 years ago, we significantly reduced the fixed cost structure of the heavy-duty engine business by consolidating two assembly and test operations into one in Jamestown, New York. We entered into long-term agreements with truck OEMs that allowed us to eliminate discounting of engines at multiple points on the path to market. We also focused on cost reduction through global sourcing, Six Sigma and Lean manufacturing techniques. As a result, we created an extremely flexible and profitable heavy-duty engine business today and a vastly different operation from the one that existed as recently as 2002. We have executed a similar restructuring of our Power Generation business which has performed at record levels for several quarters. As proof of my point, the heavy-duty engine business generated a noticeable profit this quarter, despite the nearly 60% decline in our North American heavy-duty truck engine shipments. This has proved our business is very different than it was five years ago.

Even as we focus on improving our margins and increasing profit, we also are committed to providing superior products and service to our customers. Delighting our customers starts with a superior emissions-certified and compliant portfolio of products, engines, generator sets, turbochargers, aftertreatment systems and more. Although it is too early to claim victory on the success of the new products in the marketplace, we have benefited from engines that were compliant and ready to build on January 1st. We shipped nearly 40,000 2007 emission compliant on-highway engines during the first quarter, and we gained market share because our customers asked us for additional volume when other manufacturers in our industry were unable to meet their needs.

Taking care of our customer also means providing great service to our products in the field. We want customers to know they can count on Cummins. As part of the 2007 launch, we did extensive preparation work for our distributors and OEM dealers could properly support our new products. We currently have more than 1500 distributor and dealer locations and over 3200 service technicians qualified to service Cummins 2007 products. Helping our customers succeed is another component of our Customer Support Excellence initiative. Last year we completed 146 customer-focused Six Sigma projects, resulting in savings of more than $20 million for our customers and another $20 million for Cummins. We will do significantly more customer focused Six Sigma products with better results. Six Sigma is also enabling us to drive out variation in product design, manufacturing and in our supply base. This creates better products, another critical aspect of operating successfully in a global marketplace. As good as we feel about this quarter, we are not ready to relax because of these early '07 results. Cummins is committed to making all of our current product launches and engines, power generation, and components the most successful ever. We continue to stress the value of keeping costs low and quality and service high.

Now that I've shared some of the reasons for our ongoing success today, I would like to address some of your questions about profitable growth and the use of cash. Given the early positive response of our customers, we are expanding our manufacturing capacity to support future demand. We produced nearly 850,000 engines last year across all of our operations. By 2010, we expect to produce more than 1.3 million engines, with 25% of that production coming from engine platforms not manufactured today. The good news is, we will have the engine capacity and the component capacity in place to support this growth. We are investing nearly two-thirds of our capital budget or $210 million this year to support growth in current and new products. We are also directing our joint ventures to increase capital spending an additional $275 million to $350 million, of which nearly 75% will be to expand our manufacturing capacity through existing and future products. Some of these growth projects include expansion of aftertreatment assembly capacity in the United States to triple the daily production rates this year; expansion of fuel system machining and assembly capacity in the United States and Mexico by over 50% this year and a new plan in China by the end of 2008; expansion of turbocharger assembly capacity in the United States, China, and India by 60% by the end of this year; increase in high horsepower assembly capacity by 15% in 2008 in the U.K. and India -- we have already raised the capacity by 30% since the beginning of 2005; 36% increase in mid-range engine assembly in the United States this year and nearly doubling a block in head machining capacity in Brazil by 2008; machining and assembly capacity of nearly 150,000 light-duty diesel engines coming online beginning in 2010 in the United States; acquisition of company owned distributors in Spain and Turkey and formation of joint ventures in the southeastern United States, Nigeria, Thailand and Latin America; and 50% more genset assembly capacity by 2008 to serve the specifically the Power Generation market in India.

I am really excited about our future opportunities. We are demonstrating solid performance in markets outside of North America and outside of the heavy-duty truck market. Our diversification is working. We are less cyclical. We are delivering on our commitments to customers in the on-highway markets and gaining market share. We're giving customers more technologically advanced engines around the world, on-time, and with a service network to support them. For all our stakeholders, we are investing in more growth opportunities than ever in the history of the company. This investment will sustain our improved performance for many years to come. Finally, Dean would not let me finish without promoting our upcoming Analyst Day. Mark your calendars for September 18 to attend an Analyst Day at Cummins Heavy-Duty Engine Plant in Jamestown, New York. You can see our progress with your own eyes. Please contact Investor Relations for additional information. Now we'll take your questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Peter Nesvold with Bear Stearns. Please proceed.

Morning, guys.

Morning, Peter.

Not bad.

Coming from you, that means a lot.

Tim, I was going to ask you if you're going to go on Cramer tonight.

No.

All right, let's dive into this a little bit. Tim, maybe I have a convenient memory right now, but on the third quarter call or maybe shortly thereafter, I asked you whether it was feasible that earnings might be flat in '07 versus '06. As I recall, you said no, it would not be feasible. Here, we're looking at something that's awfully close for the full year to being flat year-over-year. So you were highly optimistic in third quarter about where the world was. It feels like something has changed for the better. Can you elaborate on what happened in the last three or four months?

Well, clearly the Power Generation business is performing at levels that we didn't anticipate last year. They got good pricing, their volumes are up and the component business is very strong. So I think that's something that we hadn't anticipated four or five months ago. I think our distribution business is also doing better than what we'd anticipated. In the first quarter this year, our heavy-duty volumes were higher than what we expected, although down considerably from a year ago. Our export business and international business was really strong in Mexico, Australia, and South Africa. We picked up market share in the North American heavy-duty truck market. So clearly the volume helped offset some of the deterioration you automatically get in the gross margins. So I think our business is better than what we'd anticipated and that's one of the reasons our results were what they were. I still think it's early in the year and there's still a lot of uncertainty in the markets that we have right now.

Maybe if I could follow up on the Power Gen comment. Can you maybe flesh it out a bit more and tell us where regionally you might be seeing a much greater than expected growth and maybe characterize it based on the size of the units that you're seeing growth or better than expected strength, sorry.

This is Tom Linebarger. I would say that in fact from a regional point of view, we've seen regional growth rates at the high end of our estimates kind of everywhere. So China would be the one exception, but otherwise we had growth expectations for the year by region and all that's really happened is they've all pushed into the high end. Nobody's growing that we didn't expect to grow. Everything seems to be at the good side. Definitely in the size range, there's more mix towards the larger product. I think I've mentioned in previous calls, there's not as much of a difference as there used to be in margins between size ranges. So that's not really a margin point I'm making -- it's much more of where we're seeing growth. There's a lot of infrastructure growth going on. We mentioned Middle East. There's also data center growth going on, that's a U.S. and Europe comment. Those tend to be larger units. There's strength across the board, but larger units are stronger.

And maybe another high level question. Earnings were up about 5% year-over-year in the quarter, but if I take the mid point of the guidance, it implies down 8% year-over-year. Certainly a lot of the strength you're talking about doesn't seem like it's going to stall. And if anything, if the U.S. follows the rest of the world, maybe we see a second half recovery in truck engines. So why do you anticipate -- why is the back half of the guidance not as strong year-over-year relative to the first quarter?

First of all, I mean, we've had this question or similar questions in the past about how aggressive or non-aggressive or lack of aggression in our guidance, and I think generally we want to be very certain about our meeting our guidance when we give it out. And generally speaking, there's still a lot of uncertainty in some of our key markets for the rest of this year. As I said, I think Distribution and Power Generation are at record levels and I don't think it's necessarily realistic to think that they're going to stay at record levels every quarter. I think people have very strong years. I think there's still a big question mark about heavy-duty volumes -- in our case light-duty volumes -- around the Chrysler business. Our components businesses are --many a start-up situation. We have operational issues where we're moving production from one plant to another or we're starting up new plants and the demand on our components right now is very, very high. Which gives us some operational inefficiencies. I think we'll sort that out over the years. We'll get to the 7 to 9%. But we're just -- it's early in the day and we're very pleased with the first quarter and we want to knock off a couple other quarters. We're comfortable with our guidance where it is.

Okay, last question. I know there's a lot of interest. I'll get out of the way. Jean, your slide, I can't access it on working capital, but I think you said working capital as a percent of sales was up about 3 percentage points year-over-year. And if I apply that spread to about $2.8 billion in revenue, I get about $85 million of increased working capital. That explains about two-thirds of the swing in cash flow from operating activities, but not all of it. I would have expected perhaps it would have been a little bit stronger. What's the other third of the cash flow absorption in the quarter? It doesn't seem like Cap Ex. It's cash from operating activities.

There's a fair number of things that are moving it around at this point. And as far as I said, working capital is up and, as I said, not totally expected. We also had, I'm trying to read some of my notes here -- capital was up, a fair amount. We are investing pretty heavily. We also -- let's see what else would have been --

We purchased the remainder -- 50% of Holset --

Tata Holset, right.

Our pensions contribution were a significant number. We paid off some additional debt that we had. I think that was -- how much was the debt? $60 million?

About $100 million.

$100 million. So those were some of the issues.

The pension contribution makes sense from operating activities. Okay, thank you for the time.

Our next question comes from the line of Andy Casey with Wachovia Securities. Please proceed.

Thanks, good morning. And congratulations on the visible results of your past efforts.

Thanks.

A few questions. First on light commercial. The down draft in the first quarter -- could you try to delineate in terms of the Dodge Ram what might have been ramp up of the new engine emission solution piece of that -- what might have been market?

This is Joe, Andy. I'm not sure we can delineate it quite so precisely between the two, but I think couple sort of factors. One, Chrysler did have a lot of trucks in inventory towards the end of the year, which they were working with their dealer system to deal with at the beginning of the year. Our ramp up objective in working with them on the truck was to fill dealer lots in the March timeframe so in fact, uh, they were shut down. Our ramp up objective in working with them on the truck was to fill dealer lots in the March timeframe so in fact, they were shut down. Chrysler was shut down in the beginning of the year for a couple of weeks. We didn't start ramping up on '07 engine ship for the truck until middle of the quarter and had a very strong March. I think you know Chrysler right now --at least for the full model year -- right now is probably at one of its highest levels of share on the diesel side, up around 34%. Which is certainly the highest in the last half a dozen years or so. And we, at the moment during the model year so far at one of our highest rates as well. We're about 83% of that volume. We think the truck is well-positioned, particularly with the new engine we released on January 1st. And as we've sort of said in our advertising, because it's true, it's the strongest, quietest, cleanest engine in the business and meets the 2010 emission standards already. We're getting great feedback from some of the early buyers about drivability and performance of the truck. So we expect -- subject to anything that goes on more generally in the marketplace, we expect our volumes to increase in the next quarter and thereafter as we go through the year versus the volumes we had in Q1.

Okay, thanks for that. And a couple detailed questions and a bit of a longer term one. The components margin in the quarter -- you've explained why that happened. As you go forward and look at the turbo piece of it and the rest of the non-emissions solution piece -- what has to happen there for those to start becoming additives so you can hit that 7 to 10% goal by Q4?

Couple things, first it's maybe a top level. As Dean said in his remarks -- I think it was Dean -- 18 to 22% growth is what we're expecting in the segment this year versus last year. There's some possibility we could do a little better than that. It is still our anticipation that we will hit the 7 to 9% range in the 4th quarter of this year. And so the plan that we've put together business by business, despite what it might look like from an external point of view, is actually coming together. And we expect to be within the 7 to 9% range in Q4 of this year still. Two of the businesses will in fact -- in that quarter, we expect to be above the range to below the range. One of the two close to the bottom end of the range. There's a lot going on in components right now. A lot of it, if you go one by one a little bit -- in Emissions Solutions business right now, we could see that business from a sales point of view being 4 times as big as it was in 2005.

We have a new plant in South Africa that is ramping up that has higher volumes than expected from its European customers. So far, the closure of the Hinckley plant and move of that operation to Darlington which we announced earlier is going very well. And Mineral Point, which we've rearranged in terms of the products it makes -- we're still moving products out of Mineral Plant to other plants within our filtration businesses and the demand placed on them is also much higher than they expected. A lot going on right now and we're spending more money than we would like at the moment to keep up with demand on premium freight. We expect as capacity comes up, cycle times come down, that we'll be well eating into the premium freight number. Which will make a big difference on margins, particularly but not only on the emissions side of the business.

In filtration, we don't see as much growth, somewhere around the 5% number. But within that number, while the business is within target range, we'd like to see performance to be even better. We've been working over the last year or so at identifying those portions of the filtration business that aren't performing as well as it needs to. We've been deep into each of those sections. We closed one plant last year. We have another plant we're completing that we announced in Ohio that will be closing next week. It's announced. We're going through the process. And we're dealing with one business which is sort of aimed at smaller engines in the filtration side that has been unprofitable for us and we've been working with the customers and our plants at improving productivity and getting out of that portion of the business that we're just not going to be able to improve productivity and therefore margins. So we expect that while they're already well within range, that they'll continue to improve.

Fuel system sides have already been mentioned. We don't expect much growth there. A little -- maybe in the 2 to 4% range this year. It's clearly coming down because heavy-duty truck volumes will be down this year. But Scania volumes are up, our medium-duty truck volumes are up, we're supplying the fuel systems for both of those. We're aggressively increasing capacity both in expectation of volume growth and heavy-duty as we go through the next three years and improvement and the expansion of the XPI system. We're making significant investments both in Columbus and in Mexico. And this year we're also in the process of investing in a fuel systems plant in China to keep up with our expected growth in that market as well. So while they're down from a profitability point of view versus where they were last year, they are still profitable and we expect that as we go through the year and invest in the capacity, it will come out of the year pretty strong as we move into the next couple of years thereafter.

On the Turbo side, one of the big issues we have there is our volume growth this year is significantly higher than we anticipated it to be. We could see our Turbo business grow up to, on the order -- not too far off of 50%. It's driven in part by what's doing on in Cummins, but also significantly by how well the product has positioned itself with European OEMs. You kind of referred to it as a non-emissions product when you asked your question, Andy, if I heard it right. It isn't a non-emissions product. The turbo and how you manage the air is integral to creating an engine that not only delivers against the emissions requirements, but with better performance and fuel economy. And that's been recognized by a number of OEM customers in Europe -- engine folks in Europe -- that the system that Holset offers is significantly better than the alternative and very much related to making the emissions recipe work. We've invested -- we're ramping up a new plant in Palmetto, in Charleston which is going well. It's been mentioned already. We've kind of bought the other half of our partner -- other half of our business in India, which we'll be using as a platform already for growth in capacity there and we're very focused on improving productivity both at our existing Turbo plant in Charleston and our Turbo plant in Huntersfield. This is an area where I'm spending significant personal time in plants and with customers to make sure that we're going to be -- we'll deliver not only to support Cummins, but to support a growing number of non-Cummins customers for this business. And we view it as a huge opportunity for significant growth in the future and doing everything that we can possibly do to end up with a terrific year that puts us in a great position next year.

Well, doesn't sound like you'll be playing a lot of golf there, Joe.

Andy, what's golf?

My wife makes fun of my accent sometimes. The longer term question, and then I'll get off. Thank you for that much detail. Tim, when you talked about tripling the capacity of the emissions area -- and thanks for the correction on the turbos, Joe -- is that all going to be hitting production prior to 2010 or does that extend 2010 to 12 period?

Yes, basically everything that Tim mentioned is all stuff that's happening to go after business we've won or might additionally be able to win on the component side between now and 2010. This is not -- a very small piece of it is oriented to new products in 2010 and beyond. It's pretty much oriented to opportunities we have '07, '08, '09.

Thank you very much.

Our next question comes from the line of Chase Becker with Credit Suisse. Please proceed.

It's Chase Becker in for Jamie. Just had a followup question regarding the margins in the Power Gen. If you look back over the last few years, you've seen in the first quarter that's typically been the lowest margin quarter of the year, and now you're coming in around 11.5%. Just trying to understand your new guidance basically saying above the target range of 7 to 9%. What's to say that you can't really get double digits or is that what you're really implying? I'm trying to ask -- what does slightly above basically mean?

This is Tom Linebarger. Tim asked me the same question by the way. Why my margin couldn't be stronger. You are correct -- our typical seasonal pattern is lower volume in the first quarter as well as lower margins, followed by three stronger quarters typically of similar size and margin 2 through 4. What we saw in Q1 to the points we made earlier was definitely at the high end of our expectations too. And what drove that? A couple things. First, I mentioned we were at the high range of our volume expectations across nearly every market. I failed to mention our alternator business which is really very, very strong and knocking the doors off in terms of both production rates and therefore absorption and therefore margins. All those were at the high expectations. That drove volume up which drove strong margins.

The second thing I'd say is that we worked really effectively as a company. We've been driving much stronger synergies between our businesses as part of our strategy over the last few years. We had to overhaul our entire product range for U.S. Power Gen equipment as a result of emissions. Between the engine business and ourselves, we were able to do that I think as effectively as any player in the market. Therefore we were able to earn higher prices for emissions equipment and have good products in the market quickly. That was a good thing for margins. My view is that as competitors come on board, that'll make prices slightly more competitive. That's another issue that may balance out, but we're still in a good position there.

I guess the last thing to mention is that we had stronger cost positions in the first quarter as a result of a whole bunch of work we did last year. That helped us as volumes ramped up to make sure we were earning good margins. That was mostly a result of protecting commodity costs and other work like that that helped us. I do think the fact that we are trying to keep up with strong orders at the high end of the market is what drove Q1 volumes to be higher than seasonal patterns. There was so much backlog, frankly, from last year that it's all the plants can do to keep up with it. So we had an unusual first quarter. I don't expect the seasonal pattern to change forever. I think it's changing this year because we had such a strong backlog.

I can appreciate that. I understand what your comments were in terms of pricing and the volume. I'm just trying to get a better understanding of what slightly above means. This is very strong results and much more significant than what we thought. That was basically my question. I understand what happened in the first quarter and I can understand that you're not expecting a run of the 11.5% range, but that's what I was trying to get at. And then also, did you comment on how currency impacted the profitability?

On currency?

Yes.

This is Dean. I believe on revenue, we were, I'll find it here quickly. $89 million favorable impact year-over-year on revenue line and it had a $13 million favorable impact on our EBIT year-over-year.

Great, thank you.

Our next question is a follow-up from the line of Peter Nesvold with Bear Stearns. Please proceed.

Tim, follow-up question. You're basically net debt free now, and it seems like you're trending towards maybe $1.3 billion, $1.4 billion in EBITDA in 2008. Clearly the credit rating is lagging the balance sheet here. But do you really think that the capital structure here is optimized?

Over a long period of time no. I think we're good where we are now. We wanted to pay down debt -- that was a message we had. We want a strong balance sheet. That's why we're getting pensions in order. We increased the dividend, we've done a stock buyback, completed $100 million stock buyback and bought last year another 500,000 shares. We did a little bit in the first quarter of this year. It's a combination of basically we want to pay down debt, we want to grow the business, and we want to give a return back to the shareholders and we're trying to balance that. I think we're in a good position right now. So we get the question about -- are you going to have excess cash, what are you going to do with it? As I said earlier in one-on-one meetings and all that is that we're developing future growth strategies and that's why I tried to address some of that in my prepared remarks. We'll be talking more about that in September when we have the investor conference.

Clearly paying down debts been terrific, you've been terrificly tempered in terms of acquisitions, but the debt repayment is done. You have a couple hundred million in net debt. I imagine this question will accelerate. You're looking ahead to strong '08 and '09, but it seems like you could actually accelerate some of the returns here by taking on a very prudent small amount of debt and doing something shareholder friendly or otherwise -- acquisitions or something.

Well, this is Jean, you are correct. Our focus is not so much on paying down debt anymore. There was a small amount of debt we had to pay down this first quarter. What I think our shareholders would really want us to do is focus on growth that is profitable. That's why you heard Tim talk about a lot of things we're focused on that is very profitable. We will have -- we're looking at a variety of strategies on how to continue to grow more profitably and how to return value to our shareholders, but taking on debt just to take on debt is not something we're focused on at this time.

I guess one last question on the truck side. When do you anticipate making announcements to the OEMs or to the public regarding what the technology is going to be for 2010 and for what different applications, whether it's SCR/NOx absorbers or whatnot for North America?

Most of our partner OEMs across markets, we're already in discussions with them because many of them have been involved all along in evaluating alternatives anyway. But what choices we're making -- we're working it through with them to make sure they're okay with the choices we're making. And once we get through that process with all of them, which will probably actually frankly be more towards of end of this year, we'll become more public as to what our strategy is. It's very -- I think as I've said in these conferences before, from an emissions point of view, our view for some time has been focused on where do we need to be come 2013, all right? And a lot of our decisions that we began to make in pre-2002 and the path we chose to take both frankly on-highway and off-highway was with an eye to where do we want to be come 2013 and have tried to work with our long-term OEM partners on that basis. So when we get a little bit clearer with them and a little bit more towards the end of the year, we'll be clearer more publicly about what choices we've made by market. And you should not assume that we will make one choice. As we've said in the past, market by market, the right technology matters. And that is still very much our approach -- building off common building blocks on the both the engine structure side and on the sub system and electronics side to make this all work. So that's kind of where we are.

And quick follow-up on that and I'll get off. I'm sure you saw the EPA proposed guidelines about three weeks ago, and from our perspective they seemed a little more onerous than I was expecting for the use SCR. That basically the truck makers would have to certify that urea would be available on a widespread basis. From your perspective, did the EPA guidelines -- were they roughly in line with your expectations, or were you also thinking that while this seemed stricter than what we were anticipating?

No big surprise on the guidelines. They got pretty clear about what it is they're looking for. The issues they're trying to deal with -- they're issues that have been on their mind for years. We've been talking to them for years about it. We have some familiarity with some of these issues based on things being a little bit further along on the SCR side in Europe so, no. They are onerous, but no surprise. We were anticipating what they ended up doing.

Thank you again.

Our next question comes from the line of Eli Lustgarten with Longbow Capital. Please proceed.

Good morning and terrific quarter.

Thank you.

Two quick questions. One -- we talk about the aseasonal Power Gen quarter. Was the same thing true from an aseasonal point of view in the industrial part of the engine business? It was probably a growth phenomenal number, much greater than anybody expected -- or is that something that is more in line with the market expectations for the rest of the year?

The year started off better than we thought it was going to start off, both on the heavy-duty engine side -- in terms of heavy-duty engines and medium-duty engines. But right now we're feeling pretty good about the outlook on the engine side off-highway. Both in the U.S. and outside the U.S. -- particularly in construction, light construction, oil and gas. Those are markets that had a very good quarter and we anticipate those continuing. We may -- we're not sure we'll see the same volume level we got on the heavy-duty side in all of the off-highway markets there. But right now, outlook both from a market and from a share point of view, is looking to be better than we expected it late last year.

One thing Eli is that we have broadened our product line considerably, particularly at the lower end on the industrial side, and we have gained share with OEMs that -- as we broaden our product line, we gain share there. So a lot of this progress I think is sustainable.

We're not expecting at this point for the first quarter to be the best of the year? You're expecting further growth for the year from these levels? The industrial -- the $617 million that we saw should improve for the rest of the year?

At least on the medium-duty side, the answer's yes. I haven't rolled up to your point -- I haven't rolled up in my head here both the heavy-duty and the medium-duty side. But from a medium-duty engine side, yes.

And one other follow-up question. We talked about 2010 emissions and you're talking 2013 and your solution. Is the aftermarket treatment solutions that are looked at besides urea being developed internally at Cummins or is it using external processes? Can you give a feel of where the technology comes from or how it's being developed?

I think you're talking about our Emissions Solutions business. And the core technical group of that is a group we developed in the engine business and then work put it together with some of the capabilities that we picked up and frankly in the Nelson purchase. And so the core group, in terms of development of the system, the design of the system, the spec of the system, the control aspect of the system -- are really Cummins engineers. Now we have partners we work with, depending upon which aftertreatment device you're talking about -- they're not all the same -- that we work with quite closely in terms of developing the system as a whole. This is a business where we're very strong technically, have a great core of designers and engineers as well as controls people working on developing our system for the future.

Is Eaton part of that? Eaton, at its analysts meeting, announced their aftermarket treatment solution. Is that any way incorporated in partnership with yours or totally independent.

Not that I'm aware of.

Thank you very much.

Our next question comes from the line of Charlie Rentschler with Wall Street Access. Please proceed.

Good morning, everybody.

Hi, Charlie.

As you said, Cummins' heavy-duty market share grew in the first quarter from 26% to 28%. Help me reconcile Jean's comment that the new engines are performing well with Dean's, where I think he said that he expects you'll maintain market share. Why wouldn't you continue to grow market share, given all that?

We might, Charlie, and I think at least based on -- there's a couple. Like Tim said, there's a lot of uncertainty still on market size. There's uncertainty relative to competitive positioning -- how well will our products stack up versus the other guy's in the final analysis -- but I'll be personally a little surprised if we don't see our share pop up a good bit in Q2. Now, how relevant that is to volumes will depend a lot on how many trucks actually go out the door, and as you know, many of the truck manufacturers have taken their build rates down in Q2. We could see a market share gain in Q2 and as I say, I'll be surprised if we don't on the heavy-duty side. What happens the rest of the year will depend a lot on how our product stacks up with the alternatives as everyone gets a little more field experience and end users begin talking about how well the products and the trucks are working for them.

Well, it's looking like Q2 might be the most difficult comp, so a further share gain would be very welcome.

Yes, we won't complain.

And then, separately, just one last question. What's your thinking about what CapEx will be for all of this year, and can you give us a little peek into your thinking about next year on CapEx?

What we're seeing for Cummins is somewhere between $320 million and $350 million and I would expect that level to be about the same. Our target is to be 3% of sales. It might go up a little bit depending on how we increase the capacity, but we are also -- and again, this is not readily visible, we're trying to make it more visible, we're spending a lot of capital in our joint ventures, not all of which but the vast majority is self funding. That's why you're seeing the increases in capacity there. So we're, we're putting more money into the business and more money into growth opportunities than we have for a long, long time.

Thank you and keep up the tremendous job.

And one last point I wanted to correct. We had a slight typo on one of our sheets. It's correct on your slide. The joint venture capital is anticipated to be $250 million to $325 million.

Okay, thank you.

Our next question is a follow-up from the line of Andy Casey with Wachovia Securities. Please proceed.

Hello again. You may need to split your stock again. Question again on the component --

You know Andy, you can change your recommendation any time you want.

You guys keep beating me over the head about that. One of these times I'll learn. Anyways, on the components, the 7 to 9% EBIT margin by Q4, are you suggesting that that should be a run rate?

Yes, we're suggesting that in Q4, the EBIT margins for the components group will be within the range, yes. And second, that we expect that to continue as we go into and through '08 and '09.

Okay, the reason I keep coming back to it and just to clarify is that looks like it's going to be bigger than -- that components line in total is going to be bigger than the heavy truck engine line over time. So it's increasingly a very important part of the company.

Yes.

That's a really good observation. We think that's going to be one of our major growth engines. We'll be talking more about that later in the year.

Now on Power Gen, the pricing -- was that instituted end of last year or during Q1?

For the emissions side, we instituted it -- we announced it last year. And depending on when people purchased it, it was on all the new purchases. But the answer on generally across the industry is it depends on the region and the product. We introduced price increases across our alternator business in Q4 and some in Q1. And in the genset business, depending on which region, it was mostly last year, with effect this year. Because the emissions products are being purchased over time and some have been -- our mix is still increasing in those, so we do expect price benefits to continue throughout the year. We still think we'll get more price realization on increases we've instituted now as we go through the year.

Tom and his group have done a couple of things that again may not be obvious over the last two years. One is they have really sliced and diced markets -- both application and region very finely -- and then redesigned the product specifically for that market. It isn't one-size-fits-all. And that way, they've been able to take a lot of cost out of their product. And they've also had very specific pricing strategies by market and that hasn't been a one-time event. It's been ongoing and they're much more sophisticated and much more disciplined than they have been in the past.

I'd also say, Andy, by the way, just noting what you said about the components business -- if I don't get my act together, the components business is going to pass me up in sales by the end of this year in profits. I'm going to have to keep my action going or they're going to pass me up.

I told Tom, that's a definite until he does get better and better.

I've got my challenge out there, Andy.

Okay, I think that's all the time we have for questions today. I appreciate everyone's participation in our call today. I'll be available for questions after the call. Thank you everyone.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.