康明斯 (CMI) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter Cummins Incorporated earnings conference call. My name is Sarita and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. If at any time during the call you require assistance, star 0, and a coordinator will be happy to assist you.

I would now like to turn the presentation over to your host for today's call, Mr. Dean Cantrell, Director of Investor Relations. You may proceed.

Thank you Sarita. Welcome everyone to our teleconference today to discuss Cummins' results for first quarter of 2008. Participating with me today our 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 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 3 of our 2007 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 statements and a copy of today's webcast presentation is available on our website at www.cummins.com under the heading of Investors and Media. Before we review our first quarter performance, Tim will share his thoughts on the underlying drivers of growth at Cummins, and some recent examples of our technology leadership and investment in the future.

Good morning and thank you, Dean.

Let me begin by saying that I am very pleased with Cummins' first quarter results. Our ongoing success reaffirms my belief in the company's core strengths and our strategy of investing in businesses that are performing well today and have significant promise for profitable growth tomorrow. As many of you will recall, last September we announced new long-term profitable growth targets for our businesses. These targets are aggressive but attainable and are based on a positive impact today's significant mark trends will have on Cummins' future. I would like to review these trends again with you.

The first trend benefiting us is the demand for greater fuel economy and energy independence. In the last three years, the price of oil has more than doubled. This price explosion has led to increased political interest in energy independence and improvements in fuel economy through tougher corporate average fuel economy, or cafe standards for cars and light trucks. Recently the U.S. Department of Transportation announced a proposed rule that would require light trucks to achieve 28.6 miles per gallon up from 23.5 by 2015. Last year, President Bush signed a bill that requires new trucks and passenger cars to meet a fleet wide average of 35 miles per gallon by 2020.

Diesel-powered engines offer positive solutions on both fronts. First, diesel already delivers 30% better fuel economy than gasoline, and as a result, 30% less carbon dioxide emissions. Secondly, the EPA has estimated that if just one-third of our passengers cars were powered by diesel engines, we would save up to 1.4 million barrels of oil per day in the United States. That number is equal to the amount of oil from the United States currently imports daily from Saudi Arabia. Diesel already plays a significant role in the U.S. economy and its reach is growing. J.D. Power is predicting that sales of diesel-powered cars will more than triple by 2015. Expectations are that diesels will move from 3.2% to 10% market share. This expanding interest in the benefits of clean diesel reinforces our expectations for Cummins' new light duty diesel engine which will be available in 2010. Chrysler and now Nissan will be our first customers for this platform.

The second global trend playing to Cummins' strength in our power generation business is the growing demand for power. In this country, shortages or blackouts during times of peak use can often be traced to a lack investment in generation and distribution systems. A recent study showed that if U.S. electric utilities are to meet the country's growing generating and distribution demands, they will need to invest $1.5 trillion dollars between now and 2030. One alternative to power company investments is the use of distributed generation with combined heat and power applications. These campus-like operations, which are located close to the customer, boost reliability and reduce energy costs. In December, President Bush signed into law the energy independence and security act which for most of the use of distributed generation. As a result, we expect to see even more interest in this type of operation in the future.

Shortages also exist globally, particularly in developing countries, where efforts to modernize require significant amounts of power that do not currently exist. For example, South Africa is facing major power shortages and rising prices for electricity, a factor that has interrupted production in the country's gold, platinum, and diamond mines. These and other shortages increase power generation sales by 17% this quarter over last year, with the strongest growth occurring in our international markets. Asia grew 44%, India 36%, Africa 33%. and the Middle East, 21%. The good news for us is that consumers are unwilling to be without power, and as a result, are investing in our generator sets to ensure they have electricity when they need it. Because building power plants and creating distribution systems is complex, costly, and time-consuming, commercial generator sets will be an area of continued future growth for Cummins.

The next trend that provides with us an advantage is the global adoption of tougher diesel engine emission standards, an area which we operate very effectively. While we are all aware of the tough 2010 emission regulations in the United States and Canada, many other countries are moving to euro 4 standards for particulate matter and NOx control between now and 2014. That is occuring in both on and off-highway markets. In addition to these changes, we expect on board diagnostic requirements to get tougher and regulation of carbon emissions and idling to increase. Across our entire lineup of off-highway and on-highway engines, Cummins is able to meet increasingly stringent emission regulations with speed and efficiency primarily because of two competitive advantages.

First, we benefit from an integrated business structure that enables us to tap the core competencies of Cummins' emission solutions, turbo technologies, fuel systems, and filtration. These four businesses, along with the engine business, work together to provide fully integrated systems with superior technology for the markets they serve. Second, we have worldwide experience and leadership with a wide range of proven technologies. Cummins continues to execute its carefully planned product strategy, anticipating changes and investing in research and development necessary to meet customer needs and environmental goals.

Cummins' engines are in more demand around the world as emission requirements become tougher. The final trend that favorably impacts Cummins is the economic growth occurring in several emerging markets. As you know, we are well established in markets like India, which is growing at 8% a year, and China with a growth rate of 9% to 11% a year. We are also successfully expanding our presence in Russia while better positioning ourselves in new emerging markets like Turkey, Nigeria and Vietnam, all of which are growing faster than the world at large. Like other industrial companies, we are negatively effected by rising commodity prices. However, on the flip side, we are benefiting from the growth in iron ore, copper, and oil and gas exports from Russia, Brazil, and South Africa where machinery powered by Cummins is used to extract and transport these materials. In addition, the wealth from commodity exports is being invested in infrastructure development which increases the use of our engines in construction and power generation systems, transit buses and trucks. That situation is unlikely to change in the near term.

So based on these significant trends, the demand for power and fuel economy, tougher emission standards, and growth in emerging markets, we continue to be very optimistic about our long term future. We are equally positive about our prospects for near-term success and continue to believe that 2008 will be another record year for Cummins, our fifth in a row. At the teleconference in January, I said the reason for optimism about 2008 as well for our future is based on our diversification, technical leadership, increased capital investment, improved operating performance, and a strong balance sheet. These continue to be strong. In the area of technology leadership, for example, we unveiled our tier 4 off-highway product line at the recent Con Expo event this past quarter. These products will maintain or increase power outputs compared to tier 3 and will improve fuel efficiency by up to 5% depending on the rating and duty cycles.

Along with technology advantage, our strong balance sheet continues to allows us to invest today in future profitable growth opportunities. Some of the examples of the exciting things happening at Cummins include our investment in the light duty diesel engine platforms, both in the United States and China, is attracting new customers like Nissan. Our new fuel system plant in Wuhan, China began production in April to support advanced fuel system needs of tougher emission standards in that country. Cummins India Limited inaugurated its new high horsepower engine manufacturing facility in Puna in March. CIL has invested $20 million in this facility, and the products manufactured here are for major customers around the world. Finally, our focus on improved operating performance continues to pay off, as we are experiencing greater revenue and profit growth from outside the United States. In fact, 57% of our sales were from outside the U.S. in the first quarter, which illustrates the strength of our global markets. In addition, we are experiencing improvements in engine business and components and ongoing strong contributions from power generation and distribution.

Before turning the teleconference over to Jean, I'd like to take a minute and extend my thanks and gratitude for her outstanding contribution to the company these last five years as Chief Financial Officer. Jean stepped into the position of CFO and head of the finance organization at my strong insistence and helped us navigate through some very tough times into the financial success we are having today. She did a remarkable job and I'd like to thank her. Her new role as CEO of Cummins Foundation and leader of our new corporate responsibility initiatives will also be a challenging one, and I'm glad to have her on board in that position. I'd also like to welcome Pat Ward who becomes our new CFO effective May 1. Pat has had extensive financial experience and several leadership positions throughout Cummins. He has been with the company since 1987 and most recently served as controller of the engine and power generation businesses. I think he will do a great job for us. Now I will turn the teleconference over to Jean who will provide more details on the first quarter and discuss the outlook for 2008.

Thank you.

As Tim said, our first quarter was extremely strong. Revenues rose 23% and even more important, EBIT continued to grow faster than sales. All four operating segments were more profitable than last year. And equally as important, we had significantly higher cash flow from operations than last year in what is seasonally our slowest quarter. Our ability to grow earnings faster than sales is further evidence that our strategies are working.

We continue to rely heavily on six sigma and global sourcing to achieve our goal of being a low-cost producer, which is critical in times like these. Our initiatives to diversify the business through end markets and geographies are leading to further growth in revenues outside the U.S., as Tim just mentioned. Our efforts to deepen relationships with customers are continuing to pay dividends. This is illustrated by our growing market share in the North American heavy and medium-duty truck markets and by Nissan's recent announcement to source engines from Cummins for its new light commercial vehicles in the U.S.

Our leadership position in developing countries remains strong, particularly in areas that are profiting from the export of commodities and investing in their local infrastructure. For example, the engine segment is forecasting double-digit growth this year in the sale of engines for mining, commercial marine, agriculture and construction. The power generation segment has a backlog well into 2009 due to increasing demand for stand by generators and distributed power equipment above one megawatt. The medium duty truck and bus markets in Brazil, China, India and eastern Europe remain strong and also are benefiting our turbocharger and fuel systems businesses. Our distribution channel is enjoying an aftermarket boom from the rapidly growing population of Cummins products worldwide.

All of this good news gives us confidence we will grow earnings 20% this year despite some head winds such as weak consumer mark in the U.S. for both engines and low-end generators, cost pressure from the metal markets and foreign currency, our heavy investment in future growth opportunities and continued high introduction costs associated with 2007 products. Our gross margin looks strong, increasing by 80 basis points year-over-year. The higher gross margin was achieved despite some costs due to higher warranty. The higher warranty charge was due to a change in estimates, primarily due to older products and early introduction issues. These issues have been fixed and do not affect our accrual rates on sales going forward, which is about 3.1% of sales. Our ongoing accrual rate should be in the range of 3.1% of sales for the rest of the year and should continue to improve over time as we expected.

The engine segment had a record quarter for both revenue and EBIT. EBIT was 52% higher on sales that were 25% greater than the same quarter last year. Emission pre-buy demand for on-highway engines in Mexico and China countered a weaker North American truck market. Higher prices and better margins in our industrial markets helped us achieve improved EBIT margin. If you look at the market outlooks on slide 20, you can see we expect OEMs to keep North American Class 8 truck builds at 2007 levels. However, Cummins' production of heavy-duty engine volumes will experience double-digit growth because of our increased share in this market. For this same reason, we expect shipments to the global medium duty truck and bus markets to grow 25% to 30%.

The heavy-duty pickup truck market will likely decline by 15% to 20% this year because of economic uncertainty in the U.S. Still, we continue to enjoy a high diesel share in this market and are selling more engines for the chassis cab trucks. Even though we will have cost increases in steel and its alloys and expenses related to pre-production activity for our new engine platforms, we are confident the engine segment will finish the year close to its 8.5% target margin. The distribution segment also had strong -- also had a strong quarter with 44% higher sales. Organic growth in all product categories and in every geographic region, including North America, represented most of the increase. The acquisition of a distributor at the beginning of 2008 added $37 million to revenue. Compared to last year, distribution reported 26% higher segment EBIT from a strong performance in our international distributors and joint ventures in North America.

For the full year, we expect the segment to run slightly below 11% EBIT due to costs associated with acquisitions and investments in new territories. The component segment reported another quarterly record for revenue. This performance was once again driven by the turbocharger and emission solutions businesses. The turbo business experienced strong growth in North America, Europe, and Asia, a combination of new product, greater share of heavy-duty and mid-range engines in the market, and heavy demand for high horsepower engines contributed to the 49% revenue growth over 2007.

Demand for clean diesel engines in on-highway markets in North America and Europe provided the catalyst for a 63% revenue growth in emission solutions. Fuel systems experienced 15% higher revenues due to the recovery and sales of heavy-duty and mid-range engines. Excluding revenues from the exit of two businesses in 2007, Filtration reported an 11% increase in revenues this quarter. Segment EBIT increased more than 50% due to improvements in three of the four businesses. In addition to volume, the turbocharger business benefited from price realization and cost improvements, while the filtration business continued to prosper, in part because it has exited businesses that were a drag on its profit margins. We are focused on getting emission solutions business on track, new leadership is implementing initiatives to improve manufacturing efficiency, product costs, and pricing. Although we are already seeing is manufacturing improvements, it will take time for the positive impact of these changes to flow to the bottom line. Emission solutions is probably a year behind schedule in achieving its targeted contribution to the component target margin. However, we still expect the overall segment to reach the low end of the 6% to 7% guidance for the full year.

Power generation reported 17% higher revenue than last year, primarily in the commercial and alternator businesses where there's strength in all regions, particularly for generators above one megawatt. In addition, higher metal costs were offset by higher prices for our product. Still, segment EBIT rose only slightly compared to last year. The smaller EBIT increase was primarily due to two reasons. First, weakness in the consumer business in North America and second, the increased investment in sales force and infrastructure cost associated with growth in power generation markets globally. In addition, supply constraints involving high horsepower engines and alternators remained a challenge for this business. However, for the full year, we still expect power generation to perform slightly above its 10% targets EBIT margin.

In summary, we are maintaining our revenue guidance of at least 12% growth, although we anticipate some up side as the year unfolds. We expect to deliver a 10% EBIT margin for the full year and we are adjusting our effective tax rate downward to 34% on stronger foreign earnings, particularly in the U.K. Furthermore, we have reviewed our capital spending plans as part of our ongoing disciplined investment approach and will continue as previously announced. Most of our investment is to keep pace with increased demand for both our existing and new products and to bring new emission compliant product to the market worldwide. We will continue to review our capital spending quarterly, but at this point, we see greater risk in delaying our investments and feel very comfortable moving forward.

So to reiterate, we are maintaining a strong balance sheet and disciplined approach to investing in future growth opportunities. Our focus on being a low-cost producer and expanding into related markets globally has enabled us to achieve our target margin even with the cost pressures that we and everyone else are facing, and the introduction of great new products with the focus on the value to the customer will result in strong growth in 2008 and beyond for Cummins. We will now take your questions.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Jamie Cook of Credit Suisse. You may proceed.

Hi, good morning and congratulations.

Thank you.

I guess my first question has to do with the engine guidance. You're increasing your sales forecast to up 10% to 15% which is higher than the previous year, EBIT forecast isn't really unchanged and your first quarter margins in engine were pretty good at 8.8% which would imply lower margins in the back half of the year. So was there anything unusual in the first quarter margin and why would profitability be declining in the remaining nine months?

There was nothing unusual in the first quarter. This is Tim. I think if we look at some of the challenges for the rest of the year, first of all, we anticipate some commodity increases. I think Jean referred a little bit to that. Our consumer markets in the pickup truck market is down considerably, and I think our view is that there's continued risk in those markets. I think the volumes in Mexico, which have been relatively strong, will change in the second half of the year, and that's because there are emission changes in the middle of the year, so you've got a pre-buy, no-buy situation there. And we continue to invest considerable amounts the four engine platforms that we're developing right now. So you will see some of the JV income lower in the second half as those investments are made from those things. So those are issues that allow us to say that we're going to meet our targets, but we don't want to say that we're going to do better than that.

I might add just a couple of quick points to that. If you look at joint venture, Tim mentioned Mexico, but China also has an emissions standard that goes into effect in the second half of the year that will impact joint venture earnings in the engine business. And also as Tim mentioned, commodities, the impact was not as great in Q1, but we anticipate a larger impact in the rest of the year.

And then should I -- I guess should I -- as I look at your full-year guidance, I guess I have the same issue, because your first quarter was up, your EPS was up 36%. Just looking at your revenue and your margin target implies EPS should probably be up about 20% for the full year, which suggests the remaining nine months are only up 16% to 17% outside of macro and some of the material costs. Is there anything else there that I'm missing when I look at your full-year guidance? We're in the first quarter.

Just a couple things I might mention. First, if you compare, when you're comparing Q1 to Q1, remember Q1 of last year was a very low quarter, it was right after the emissions change. And second, in some markets, there are some capacity constraints that will take awhile. But third, as Tim mentioned, there's a lot of investment, particularly in the second half of the year in a lot of our growth platforms.

So when we look at it, your first quarter came in line basically where you thought, even though you don't give quarterly guidance?

I think I'd just say we're pleased with the first quarter.

Okay. I'll get back in queue. I appreciate it. Congratulations.

Thanks, Jamie.

And your next question comes from the line of Eli Lustgarten of Longbow Securities. You may proceed.

Good morning. Quite a quarter.

Thank you.

A couple of questions. One, can you quantify the impact of foreign currency on revenue and earnings for us? Because you blew away our numbers in the quarter on volume, and how much is currency both in the top line and bottom line?

If you look at, obviously, as you know, it flows through a lot of lines.

Yes,, I know.

But if you look at the top-line growth, it was about $200 million to the --

$120 million.

$120 million. Sorry. I've got my numbers backwards. $120 million to the top line and about $1 million positive to EBIT. So it was fairly negative to the bottom line, but somewhat significant on the top line.

I assume, do you have any currency in this forecast? You have currency changing at all as you go forward? How do you handle that in the outlook? Or you're treating it as currency neutral? This is before currency?

We are not in the business of forecast which is way the currencies are going to move.

So we generally don't build in lots of movements in our forecast going forward.

So your 12% top line is sort of currency neutral at this point?

Yes.

So the up side, obviously, first quarter was currency, you can have some up side from that. Secondly, in the engine numbers, can you give us, in order to get, I guess, the light-duty vehicles to be down 15% to 20%, you've got to have some very negative numbers coming in the next couple quarters in that sector. Just to get heavy-duty up as much, got to have some -- you have to have the rest of the year look as good as the first quarter in heavy-duty. Can you take us through the -- specifically, as I said, in order to get light duty and RV to be down 15% to 20%, you've got to be down 15% to 20%, 25% for the next couple quarters.

Yes, in terms of -- we're not saying that we see volumes further down in the future than they have been recently, first point, right? So Jean's comment earlier in her remarks was not intended to say we see further drops from shipment rates as we look to the future, right? So it's already built into our forecast at this point.

So it's the comparisons -- for example, light-duty auto and vehicles, pardon me for interrupting, stays at similar rates to the first quarter for the next couple quarters which would give you the negative comparisons?

Right. Eli, essential we were down 18% on Chrysler shipments in the first quarter, and although we will have a very -- probably a favorable comp at the end of the year, the intervening quarters are going to be equally as challenging.

15 to 20% is the number that Jean basically gave to you expect as we go through the whole year, and that's kind of right where we're playing out at the moment.

I guess, the second reported down 4.5%, something like that, because you have RV in that, and RV also looks like it's going to be (inaudible). I guess I'm looking at the rest of the year becomes very negative in double-digit comparisons in that line.

Eli, the one thing I'd point out on the RV line, although it's a much smaller piece of volume in revenue in that line item that we report, remember that much like in the truck markets last year in North America, they had a very low first quarter because they were waiting until the beginning of the second quarter to transition to the new EPA '07 engines. So we do have -- although the RVIA forecast is very weak for the full year, we, as an engine manufacturer, are continuing to benefit actually from higher volumes off of a low comp last year.

Okay. And the $37 million if you add it to distributors, is that $37 million a quarter that we're getting now?

He's taking about Baltimore.

For Baltimore?

Yes, is that $37 million a quarter to volume that's being added?

Essentially.

And the profitability is equal to what the division is doing, I guess?

If you remove the equity method of accounting for our JV, yes.

Thank you. I'll get back in queue.

And your next question comes from the line of Andy Casey of Wachovia Securities. You may proceed.

Thanks. Good morning, everybody.

Good morning.

Just a clarification on that question Eli said. Down 10% to 15%. Is that for the total line or is that Dodge Ram?

I think we said down 15% to 20% for the light-duty automotive line, which is slide 20.

Okay, thank you. Now, on the power generation, didn't want you to get off easy, Tom, the input cost inflation, how long do you think it the's going to take to recover that with pricing? Because it looks like international demand remains extremely strong, and then North America, kind of mixed but on the upper end very strong.

Not long. So I think we've got price increases in place already, and we'll see benefits from even next quarter. So I think we'll begin to restore some of the margin drop next quarter and throughout the year. So it won't take us long. We've already -- across all of our markets, really, we've put in price increases. Some of them start a little later than others, but all are in first half of the year.

Okay, thanks. And then on the industrial engines line, can you kind of talk about ability to price in some of those markets? Not necessarily what you're going to price but some of your larger competitors have kind of talked about pretty good pricing environment in some of the petroleum areas and so forth.

And your question is?

Are you looking at the same sort of dynamics?

The simple answer is yes. I mean, and looking at the same sort of dynamics in all of our off-highway business, from pricing point of view, but I think I just want to add, I think through our success with tier 3 and the excitement we've created around our approach to tier 4 and the clarity we've delivered to OEMs about what we're going do and how we're going do it is also creating its own level of excitement in terms of conversations with OEMs as we look to grow share on that side of the business as a result of what we're doing there as well.

Okay. Thanks for that color. And then on the heavy-duty, talking about excitement, in the 2010 time frame, can you share with us what some of the conversations are from your end customers, meaning the fleets, and then, there is -- it appears as if you have a pretty strong advantage, given the differentiation on multiple levels that you have in that market post '09. What sort of potential incremental capacity are you looking at with respect to heavy truck engines for North America? Thanks.

We're putting in15% more capacity for heavy-duty trucks that will be in place by the second half of this year.

Okay. Thank you very much.

And your next question comes from the line of Charlie Rentschler of Wall Street Access. You may proceed.

Good morning, everybody. I'm struck by the increase in R&D expenses, both absolutely and as a percent. As a percent of sales, I guess, year-over-year it rose from 2.8% to 3%, but, my golly, you're $23 million higher year-over-year in the quarter, and John Wall must be doing nothing but interviewing people at this point. But can you --

Talented people, Charlie.

I'm sorry?

Talented people.

Talented people. Well, sure. But is there any way to give us some more understanding? Is there some specific projects going on or facilities you're staffing up for or what?

We've been saying all along, Charlie, that right now we're doing four engine platforms, which is the most we've ever done at any one period of time. So you've got light duty diesel here, you've got light duty diesel with two displacements in China, then you've got the 13-liter engine that we're doing in China as well. So, you're staffing up for that and spending money. In addition to that, if you look at the components, you're also looking at the XPI fuel system, which is doing very well. You've got new turbo charger platforms that are coming out as they gain market share. Emission solutions has got big investments right now.

We've always said that, as a percent of sale, not always, back in the '90s it was 5%, but now for the last several years we've said our R&D expense would be 3% of sales. So we're staying within the guidelines of what our guidance is. But we consider this engineering expense as a bet on the future. We're going from like 890,000 engines produced last year to $1.6 million engines in 2010, and that's due to all these new platforms that we're talking about. So this is a bet on the future.

That's very exciting. In view of the excitement around the light-duty diesel you're building here in the states, in Columbus, I don't believe you've given a whole lot of detail about it, but, I mean, are you ready to tell us like how big it is, how many cylinders, the displacement, and when you're going to roll it out and maybe the kind of chassis it's going to go into?

All we can say is what we've said already so far, Charlie, and that is, we expect the introduction to be around the 2010, beginning of the 2010 time frame that we have announced, as has Chrysler, that it will be in Chrysler pickup truck, basically the 1500 series, but that's about as far as we've taken it publicly. But you should not presume our only customer will be Chrysler, but basically we're continuing to move ahead with the plan we originally laid out (inaudible) plant and the introduction of the engine and nothing has changed from that.

Okay. And finally, and then I'll jump off, can you update us on how you're doing with on-highway tests of your 2010 heavy-duty truck engine? Are you still pleased with what you're seeing there?

Absolutely. Given our approach, I mean, very similar approach in 2010 that we took in 2007, as we've tried to say publicly. For the most part, it varies a little by engine, we're basically building off of what we already have done. So, the reliability experience we have in the intervening years and the improvements we make as a result of that experience is all built into the future product. And so right now, we're feeling real good about where we are in terms of how the test plan is going, both inside the company and in trucks on the road, and also pleased with the great work going on between us and our OEMs and working together to ensure all of this goes well.

Just a reminder, Charlie, that engine will have our new common rail fuel system, the XPI fuel system, which is in production now for both ourselves as well as Scania. And the outside world is telling us that that fuel system is quite remarkable, probably the best in the world, and has a time advantage. So that's one of the key things. And we're very -- that introduction and product launch has gone as well as anything we've ever done. So we're really pleased with that, and that contributes also to our positive thinking about the 2010 heavy-duty engine.

Thank you, and keep up the fantastic job.

Thank you.

And your next question comes from the line of Peter Nesvold of Bear Stearns. You may proceed.

Good morning.

Hi, Peter.

Question for Jean. Jean, I believe historically you've had a pretty sophisticated currency hedging program. And when I look at other companies reporting this quarter, I've been seeing some companies being able to lock in commodity hedge gains in the quarter before they're really getting -- or taking surcharge pass-throughs from their suppliers. So it seems like maybe some unsustainable profits at some other companies. What's been the experience at common this quarter? How extensive are you hedged on commodities? How much of a net hit was that in the quarter? And where would that show up on the income statement?

I'll to have get back to you on the numbers, but we do hedge a number of things. There are some commodities that are difficult to hedge because of how they're packaged, but we hedge copper, we hedge precious metal, we hedge a number of things. Dean, if you've got any technicolor on that. But we don't do anything too aggressive or outrageous.

Your term sophisticated, I would not describe Cummins' hedging efforts as sophisticated. We try and keep it as simple as we possibly can. We're not into exotic derivatives and that type of thing. We do hedge currencies and try and mitigate anything both positive and negative, and do a reasonable job at it.

Same way on commodities.

Peter, I can give you a little color on copper, because that's a big one in the power gen business. We make alternators with a lot of copper in there. All we really do is forecast demand for copper purchases, purchase forward, in a set of layered contracts, and we basically buy forward less than our forecasted demand, some percentage less to make sure that we always -- we never over hedge. We settle the contracts right when we purchase the copper, and that's the end of it. So it's actually quite a simple process. The challenge, of course, is forecasting the demand properly, and then, of course, passing on price increases to your customers, because over time, the price does show up once the contracts are up, you do see the price actually in your purchases. So it's a relatively simple process, but forecasting is important, and that's where we spend our time working on.

Great, I'd love to be able to follow-up off-line. It's an area I'd like to try to get a little smarter about. Jean, also in distribution, you said that a surging aftermarket was driving a very solid top-line growth which we did see in the segment, but the margins were down year-over-year. Intuitively, I would have expected if the aftermarket is growing that fast that you would have seen margin expansion. What drove the year-over-year contraction in the distribution margins?

Well, it's basically, as I mention that they did acquire one distributor earlier in the quarter and they are pretty aggressively investing in building a strong distribution channel around the world, which is a little bit of a drag on their earnings right now, but we see them continuing to improve.

Peter, if you would have excluded the distributor acquisition in the quarter, the return on sales in the distribution segment would have been 12.4.

Okay, that's helpful. Last question. On the component margins, we've taken one step back again, but we still haven't seen the two steps forward. What's been the continued overhang there? Because, I mean, you've been working on moving the capacity around. You have made leadership changes, but we just haven't seen that benefit the margin line yet.

Yes, you will, Peter. This is Joe. I think, as we've tried to characterize in looking at that time four companies, where we stand right now is we have one company that's basically above the 7% to 9% range. We have another company that is at the bottom end of the range, but right where we expect it to be, and we have two that we'd like to be sort of well in the range that are below the range. We think, at least in terms of where we are right now with particularly CTT, the turbocharger company, that things -- we've broken some bottlenecks and things are going much better and much more strongly from the point of view of supply of product. And therefore, reducing particularly cost of goods sold for us. So they've had, in fact, while they're not within the range yet, they've had two good quarters. The fourth quarter of last year, good quarter compared to where they've been the last year and a half or more, and an improved quarter the first quarter of this year. So we're expecting that while -- that they will continue to make improvements based on what we've seen, and we're on our way to moving within the range from a turbo point of view. Our struggle is still the emissions solutions business.

We've got a little bit of a setback as we went into the year because of what's happened in terms of the increase in precious metal prices, and so we've been aggressively going after that in a variety of forms. So that's the place where we're behind plan in terms of getting to the margins where they need to be. I think Jean said in her remarks that we're -- if you go back to I think comments I probably made, at the end of '06 and the beginning of '07, we're probably around 12 months, give or take a few, behind plan, in terms of getting to where we want to be, which is the whole segment within the range, right? And we're pleased with the team we've put in place. We've continued to make some changes in rearrangements in the emission solutions business. We've been rethinking a little bit about what do we do where, and we're making some changes in that regard as well. All of which we think bodes well for the future. And I think, finally, we've become much more aggressive on the pricing side. And so particularly given, but not only because of what's happened in terms of precious metal pricing, and we'll begin to see some of the benefit of that.

If you look at one company, like Tenneco, which arguably is a comp for this business, they look at it on a value-add business. They strip out the substrates and they allow people to evaluate the margins just on the value-add piece, because substrates can be such a growing piece of it. Have you looked at it that way, and is that some kind of -- is that data that you would be able to make publicly available?

Not at this point, Peter. Do we lack at that? Heck, yes, in terms of understanding where we are and therefore, where are our issues in terms of competitive pricing from suppliers as well as where we are from a fixed and variable cost in our plants themselves. So, that's all part of our overall analysis that we've done to try and improve performance, but we're not making that information public at this point.

Okay, thank you for the time.

And your next question comes from the line of Seth Weber of Banc of America Securities. You may proceed.

Hi, it's actually [David Tonen] in for Seth.

Good morning, David.

Good morning. Can I just get an update on what you guys are now expecting for the year in terms of pricing and raw materials for the company?

If you look at the 12% growth that we have, 7% of that has to do with market growth or market share growth. 2% has to do with pricing, and the remaining 3% has to do with new products.

And with respect to the commodity costs, we think that that in connection or combination with the currency issues of sourcing from some of the low-cost countries that are seeing appreciation against the U.S. dollar, we think that's about a 1% drag on earnings this year.

Great. Thank you.

And your next question is a follow-up from the line of Eli Lustgarten of Longbow Securities. You may proceed.

Hi, just a quick follow up. With the ratcheting up of capital spending as we go through the year into next year, how should we think about it affecting the various segments and profitability? There's going to be dislocations in costs. So, do you have any suggestions to us on how we can think about the rest of the year into next year from the impact of the higher step-up in spending?

Well, we have given target by segment, which includes -- maybe I'm not following your question.

Well, I mean, I notice the segments are impacted, the guidance by sector is impacted versus the first quarter. Should we assume that the difference between what the guidance is and probably some expected better volumes as the year goes on versus low margins, is the impact -- is that how you, of the higher capital spending? Because there's going to be dislocations in impact from spending that much more this year.

Eli, obviously large portion of the capital spending increase that's taking place is for the new engine platforms that Tim referred to, which really are coming on line kind of in the late '09, 2010 time period. So, that's when a lot of that capital spend willing actually start to become depreciation in our results.

But there are -- I mean, as we talked about, there are investments we're making in our businesses. We talked about it a little bit in power generation. We've talked about in connection with our joint ventures in China in the second half of the year. So there are investments, and so -- and they impact different businesses differently. Hopefully that helps.

Maybe one other comment. This is Joe again, Eli. One other comment that might help. While the number is bigger than what we've seen most recently, the vast majority of the number we're now investing, based on business we've already won, for 2010 and beyond, alright? And so this is -- you shouldn't be thinking of this as speculative stuff --

Oh, I understand that.

-- but based on business already won, and at volume rates in most cases that have a fast ramp-up with the ability to earn improving margins quickly as opposed to having a number of cases where we're worried about any kind of significant margin deterioration in the 2010 and beyond time frame because of the ramp-up of the new products associated with this investment.

Okay, thank you, and one other follow-up. Is the first quarter joint venture income probably the best we're probably going to he see for the year or is it going to sustain at this level for the rest of there year, given your earlier comments?

It will go down.

It will go down from this level for the rest of the year.

Yes.

Remember, on our guidance in the presentation we put out that we're expecting JV income to be really up 5% to 10% for the full year.

And that hasn't changed.

That has not changed.

Thank you very much.

And your next question is a follow-up from the line of Andy Casey of Wachovia Securities. You may proceed.

I guess another follow-up on one of Eli's questions. The joint venture income from on-highway engines in the quarter was a pretty substantial increase. Was that totally due to market dynamics, or was there any layering in of some of these joint ventures that have been recently starting up?

No Andy, that is purely the dynamics of what's going on in China right now with the on-highway markets or truck markets in China where we're seeing, essentially, a pre-buy as they transition to the Euro 3 emission standard in China.

Okay. And --

Which right now is scheduled to be effective July 1, and so that's one reason why we have said that the China joint venture should be coming down later in the year.

Plus, they're investing in capacity.

Plus the investment in Foton.

And on that, actually, the Foton JV, that company had pretty strong results themselves recently, and I'm wondering if you can kind of give us some timing in terms of introduction of the diesel into their fleets from the joint venture.

We'll start introductions basically the second quarter of '09.

Okay.

And it will take place over a period of time, and so we'll start with one engine family, to be followed later by the second engine family, and we'll be moving into a range of trucks. In fact, a very wide range of trucks from that period forward and our mature volume forecast is in the range of 400,000 units a year.

And is that like a three, four-year ramp, Tim, or is that --

It's hard to predict, but that's a reasonable guess.

Okay. Thank you very much.

And at this time we have no further questions in queue. I would like to turn the call back over to management for closing remarks.

Okay. Thank you very much, everyone, for attending our Q1 earnings call today. Feel free to contact me in the office today if you have questions. Thank you.

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