康明斯 (CMI) 2008 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the third quarter 2008 Cummins Incorporated earnings conference call. My name is Eric and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We'll facilitate the question-and-answer session at the end of the presentation. (OPERATOR INSTRUCTIONS)

I would now like to turn your presentation over to your host, Mr. Dean Cantrell, Director of Investor Relations. Please proceed.

Thank you, Eric. Welcome everyone to our teleconference today to discuss Cummins' results for the third quarter of 2008. Participating with me today are Chairman and Chief Executive Officer, Tim Solso; our Vice Chairman, Joe Loughrey; our Chief Financial Officer, Pat Ward; and our President and Chief Operating Officer, 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 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 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 are available on our website at www.cummins.com, under the heading of Investors and Media. Before I turn the call over to Tim, I would like to remind you of our upcoming Analyst Day on November 12th in Charleston, South Carolina. There is still time to RSVP. My contact information is included in today's webcast presentation.

Good morning. I'm very pleased to report that Cummins had the best third quarter in its history. We believe 2008 will be the fifth straight year of record sales and profits. Other highlights from the quarter include the following. All four of our operating segments had improved revenues, with the largest percentage increases coming from Power Generation and Distribution. Cummins' Power Generation experienced significant growth in China, India, Africa, the Middle East, and Latin America, compared to the same period in 2007. Cummins improved its market share in the North American heavy duty truck market. It now exceeds 45% year-to-date, nearly 9 points above last year. The company continued to see strong international demand for its medium duty truck engines, especially in Latin America. Joint venture income of $66 million was the highest ever for the third quarter. For the fourth year in a row, Cummins was named to the Dow Jones Sustainability Index, which represents the top 10% of the world's largest 2,500 companies in corporate sustainability. We are proud of the outstanding results our business segments are delivering, particularly given the challenges facing many companies in today's economy.

One of the primary reasons for our continued run of record sales and profits is our global diversification. In the last nine months of this year, 60% of our sales came from outside the United States, compared to 52% during the same period last year. Geographic diversification has put Cummins in a better position to deal with market downturns than we were in the earlier part of this decade. This is especially true in the Power Generation and Distribution segments, which have done well for us.

During the quarter, all four operating segments increased their EBIT versus last year, and Power Generation and Components expanded their operating margins. Power Generation's EBIT margin was 1.5 percentage points better than the third quarter last year. That performance is even more impressive because the segment had to deal with supply constraints as well as higher commodity costs. Components also continues to face higher material costs, but has made good strides in improving pricing and the manufacturing efficiency of its turbo charger and catalytic exhaust businesses. As a result, Components' EBIT margins grew by 3 percentage points over a year ago. Components had an EBIT margin of 7.6% and it is making progress towards its target of 9%. The engine business also benefited from diversification in its end markets. It grew operating earnings year-over-year, despite the 75% decline in the Dodge Ram pickup truck market, very low RV and recreational marine sales, and increased material costs.

There is no doubt we are entering a much more difficult economic environment. The last time we experienced these conditions was in the 2000 to 2003 time frame. But I can say that in my 38 years with the company, we have never been in a better position to ride through uncertain times. From a market perspective, we have the advantage of geographic and end market diversification, increasing market share in most of our markets, and the adoption of more stringent emissions standards around the world. These standards create more growth opportunities for both our engine and component businesses, which include our emission reduction technologies.

In addition to our market prospects around the world, our company is very strong financially. Our debt is less than 15% of our total capital. We have healthy cash balances. Even as certain markets have declined such as our consumer businesses, our global operations continue to generate cash, and for additional liquidity we have $1.1 billion revolving credit line.

Despite these positive advantages and strong balance sheet, we are not complacent. We are well aware of the problems facing us because of the downturn and we've taken steps to deal with the troubled times ahead. For example, we have significantly cut discretionary spending, reduced hiring plans including the reduction of temporary employees in the plants that have cut production, cut and delayed several IT initiatives, and postponed our capital spending capacity expansion in some areas. We can and will do more if necessary. We have been through challenging times before and know how to deal with them. We are a very different company than we were as recently eight years ago. We are less cyclical, more diversified, more results-oriented and committed to turning a greater share of or sales into profits. Compared to the last downturn, we have a portfolio of profitable joint ventures, a very successful Distribution business, and substantial market share increases in most markets. It is critical to our shareholders that we demonstrate solid financial performance, regardless of economic circumstances, and we will do this. This will positively impact our stock more than anything else we do. Now I'll turn the meeting over to Pat, who will discuss in more detail the results from each operating segment and will also provide some initial insight into our end markets for 2009.

Thank you, Tim. Our third quarter was strong, sales were up 10% and profits grew 24% compared to a year ago, despite the expected material cost increases and further softening in some markets as economic conditions worsen. As Tim mentioned, our performance is closely tied to diversification in our end markets and in the geographic regions in which we compete. That has improved our ability to weather down times like we are experiencing in the North America consumer markets. This diversification is evident in the performance of each operating segment.

I'll start with Power Generation which continued to deliver excellent results. Revenues were up 14% and segment profits increased 30%, as price realization and favorable volume leverage more than offset higher material costs. Demand in the commercial rental and alternator businesses remain strong. International sales were up 29%. However, North America was down 15%, largely due to the 34% drop in the consumer business. For the full year, we expect Power Generation to exceed its target EBIT margin with sales predicted to be up 15% to 16%, and segment earnings above 11% of sales. Looking at next year, we anticipate Power Generation demand will continue expanding globally. With lead times for units of above 1 megawatt exceeding 12 months, we're well positioned in the following markets -- infrastructure development in the Middle East and China, data center expansion in Europe and India, and distributor generation projects for oil and gas fields in the CIS and the Middle East and power shortages in South Africa and Latin America.

In our Distribution segment, revenues this quarter were up 47%. The increase is primarily due to organic growth in all product categories and in every geographic region. Acquisitions in North America added $80 million to revenue this quarter. Distribution segment earnings increased by 33%. Gross margins and operating expenses, measured as a percent of sales, improved year-over-year. However, profitability was negatively impacted as a result of currency translation related to the strengthening of the US dollar during the quarter. We are forecasting revenue for Distribution segment to grow 42% to 43% over last year and EBIT margin to be close to the 11% target for the full year. This projected growth is based on continued strong demand for Power Generation and industrial engines, as well as aftermarket opportunities from the growth in engine population.

The engine segment reported 6% higher sales and 3% higher profits, despite weakening on-highway markets and higher commodity costs as well as investments for future growth. We continue to benefit from share gains in the heavy duty truck market in North America. Share now exceeds 45% year-to-date, nearly 9 points above last year, and was greater than 50% during August. In the medium duty truck and bus businesses, the strength in Brazil and in Turkey and the share gains in the US bus market offset softer truck demand in North America and Europe. Pickup truck shipments to Chrysler were down 75% from a year ago. However, in September, there was a significant decline in dealer truck inventory to less than a 100 day supply. Overall, industrial revenues were up 19%, despite weaker demand in North America, construction engine sales grew 19%, mainly driven by infrastructure development in the emerging markets of Africa, China, India, Russia, and Brazil. Agricultural engine sales were up 26%, with growth in North America and overseas. Commercial marine engine sales to support oil and gas demand in North America and Southeast Asia almost doubled. As a result of the weakening truck and construction markets in North America and Europe and the strengthening US dollar, we are now projecting revenue growth at 10% to 11% this year, and EBIT below the segment target at 7.5% of sales.

Looking into 2009, we continue to see opportunities for growth in the engine segment, despite the current economic environment. We forecast the North American heavy duty truck market will increase 10% to 15% in 2009, with the opportunity of additional market share gains for us. The Brazilian medium duty truck and bus markets are projected to deliver modest growth as agriculture demand expands and the general economy grows, and with lead times for the high horsepower engines exceeding 12 months we expect strong demand from mining and commercial marine to continue. However, construction demand will be flat, as weaker demand in North America and Western Europe will be offset by modest growth in the emerging economies and we are not anticipating any recovery in the pickup truck and recreational vehicle markets until late 2009.

The component segment reported another quarter of significant year-over-year improvement. Sales were up 8%, and profits improved by 79%. Although still below the segment earnings target of 9%, we are very pleased with the profitability improvement from our emissions solutions and turbo technology businesses in particular through price realization and increased manufacturing efficiencies. Increased demand for twin diesel engines in North America led to a 27% revenue growth in the emissions solutions business. Demand in Europe was flat compared to a year ago. Revenues for the Turbo technology business increased 9%, driven by growth in the top markets in North America and China, as well as pricing actions. Fuel systems experienced 7% higher revenues. Truck engine sales into North America and higher aftermarket demand more than offset lower demand in Europe. Filtration reported flat sales; however, excluding revenues from the exit of the universal silencer business last year, sales increased by 8%. All international markets reported growth over last year.

Because truck OEMs in North America and Europe have announced recent production cuts, we are now forecasting revenues to be up 10% to 11%, slightly below our previous guidance. We project segment earnings of 7% of sales. Overall for the company, we now expect revenues to grow 12% this year, below our previous estimate. This expectation reflects a softer truck and construction markets in North America and Europe. We project earnings before interest and tax of 10% of sales, which equates to 20% year-over-year growth.

As we discussed in July, we will be less profitable in the second half of the year for two reasons. First, because we lagged the metal market indices by six months, we will see higher material input costs, and secondly we anticipate a significant drop in joint venture income from China following the prebuy in the truck market. Both will impact our results in the fourth quarter. In addition, our volume outlook for truck and construction markets has weakened in recent weeks. And currency movements in Europe and Brazil are affecting our foreign operations and are putting pressure on our margins through the end of the year. We are also revising our 2008 full year effective tax rate downward to 32%. Congress retroactively extended the US Federal Research Tax Credit during October, meaning the tax rate adjustment from 33% to 32% will be booked in our fourth quarter results.

Before we open the teleconference to your questions, let me remind you how we are prioritizing our use of cash. One, we will maintain a strong balance sheet. We have reduced our debt to a much healthier level and are comfortable with our capital structure in this uncertain economy. We still have opportunities to improve working capital. Two, we will continue to invest in profitable growth opportunities. And three, we remain focused on returning value to our shareholders, through both the share repurchase program and sustainable growth in our dividend. As detailed on slide 16, we generated positive operating cash flow, actively repurchased 1.4 million shares, and increased our dividend by 40% during the quarter. At the beginning of the third quarter, we increased our credit revolver to $1.1 billion, which now gives us total liquidity of nearly $2 billion. As Tim mentioned earlier, we have never been in a better position to manage through the uncertainties ahead. We will now take your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Jamie Cook with Credit Suisse. Please proceed.

Hi, good morning. My first question is just a clarification on the slides. If you look at slide 17 and 18, when you're talking about guidance, you're saying revenues here are down -- in your presentation you say up 12%, on the slide it says down 12%. And then I think the segment results too, also you're saying different things versus what's on the slides so can we just review what is right?

Not following you, Jamie.

If you look at slide 18 --

We tried to make sure we vetted each of that so the slide was consistent with what we were saying publicly.

Slide 18 it says engine sales are going to be down. I'm sorry. No, that's my fault. I apologize. Let me get to my real question. Your slides are right. Tim, can you just address -- if you look at your fourth quarter guidance, that implies based on what you're seeing a 10% decline in EPS year-over-year for the fourth quarter. And that's at a point where still the emerging markets and the commodity markets are holding together. Can you give us a sense on how we should -- is there any -- can you help us with how we should think about trough margins or trough EPS and what your expectations of the emerging and commodity markets are as we look out over the next 12 to 18 months?

The first question was the bridge on earnings from Q3 to Q4?

I guess my point is in Q4 your earnings it looks like are going to be down 10% year-over-year and that's at a point where the emerging markets and the commodity markets probably don't decline. They're still strong. If Q4 is down only 10% in terms of earnings, how I look longer term at your business in terms of margins by segment? I'm assuming in '09 those markets aren't going to hold together, which means earnings have to come down more dramatically for the full year versus the fourth quarter.

We're not giving guidance for '09 so I can talk in generalities. We'll give more specific information in the teleconference for our fourth quarter results. I can just say that I think in the last month, the volumes have -- particularly in certain markets -- have really changed significantly and this is a very volatile time. So it's very hard to predict specific margins by business segment. I can tell you that the Power Generation business is doing very well right now and as we look out for next year, we think that will continue to grow and we have order boards in certain segments that are basically filled for 2009 and Power Generation still remains very strong in the emerging markets, whether it's Brazil, China, or India. Our Distribution business will continue to do very well. The components business that is tied to automotive markets I think will have some decline. Although they're gaining market share. And then if you look at the automotive markets, both in North America and Europe, clearly they're in a state of flux. And we adjusted our heavy duty truck volumes from about 240,000 down to 200,000 and I understand yesterday ACT came out with 175,000, so that gives you an idea of just how much change is going on.

But is there any way you can help us -- I mean, we can make our own assumptions on what the markets will do or what your top line will do by segment. Is there any way you can help us with how we should think about decremental margins by segment, given -- I mean, you're a much better run company this time versus previous cycle and I think we need to give you credit for that. But I'm just trying to figure out how I should think about detrimental margins based on my own volume assumption.

It's a great question. This is Tom. I think, again, I just repeat what Tim said, that we're really not -- we're not done with our plan. We're not prepared to give guidance. And I think it would be a mistake to just say well we reached this place in fourth quarter so there's only ways to go down. We still have in mind that our operating margin target is 10% and we're going to do our best to come up with a plan that hits that. The environment's really difficult. It's not clear what we're going to be able to do but we have some things against us in Q4, like commodity costs and like the deterioration in joint venture income which may not repeat in the same way through next year. So we're a diverse company with a lot of markets. So even as some are going to be weaker and some things are going against us, we expect some things that we'll be able to improve on next year. So give us a chance to put that together and we'll be able to talk more about how close we can get to our target and how we do in '09.

Okay. I'll get back in queue. Thank you.

Your next question comes from the line of Ann Duignan with JPMorgan. Please proceed.

Hi, good morning. It's Ann Duignan.

Good morning, Ann.

Good morning, how are you guys? I just wanted to clarify your outlook and your implied EBIT for Q4. I think there may be some misinterpretation out there. You reiterated EBIT for the year of 10% and if we back into Q4, given what you've done year-to-date, it would imply that your EBIT is going to fall to something close to about 7.4%. Is that what you implied in your guidance or were you really trying to say that you can still continue to deliver 10% EBIT despite the headwinds in Q4? Could you just clarify that for us so we get it right?

This is Pat. Let me try and clarify that. We do not expect our EBIT in Q4 to decline to 7.4%. It will decline from what you've seen in Q3 and it will decline probably by around 2%. Let me walk through the four reasons why it will decline. First of all, as Tom just mentioned, we will continue to see metal market pressure on the fourth quarter. We lag the headline cost increases by six months. So as we indicated in July, we expected the second half of the year to see more of those costs and that will come through more so in the fourth quarter than in the third quarter. Joint venture income will be down and that will be down around 0.5 percentage point when you look as a percent of sales. And again, that's consistent with what we said back in July too, following the prebuy, the year three implementation in China in July. The two new areas I would describe this impacting the fourth quarter are the recent drop in volumes that we are seeing in truck and construction markets in Europe and North America, and some foreign exchange pressure that we're seeing in Brazil and Europe. So combined, those four areas will amount to under 2% drop third quarter to fourth quarter. So you should expect somewhere in the 8% range, not the 7% range.

Okay. That's great. That's wonderful. That's exactly was we were looking for. And then a follow-up. Can you talk a little bit about working capital, it looked to us like days on hand, days sales outstanding, and days payables all deteriorated somewhat. Could you just walk us through what's happening there and whether that's just ones off or FX related or part of the acquisition of Distribution businesses, if you could just help us understand what's going on in working capital, that would be great.

This is Pat again. It got a little bit worse in Q4. We were disappointed with it. In Q3, rather. I wouldn't say there was much related to foreign exchange. I would say most of the growth we've seen came through through inventory. We've seen some growth in accounts receivable but past dues did not go up significantly. But past dues did not go up significantly. They did go up from around 7.5%, to 8.5% to 9% of sales. But at the end of the third quarter we had not seen a significant lengthening in our receivable totals. There is nothing significant going on with accounts payable. So we will continue to watch our working capital as we have been trying to do over the past couple of years, but you're right, it remains an area where we have not yet met our target. We've got more work to do there.

And just real quick, if you could just clarify where you were disappointed on the inventory front, that would be helpful, which specific businesses?

I think it's pretty much across the board. I think we've seen inventory growth in the engine business, we had some supply issues impacted our ability to ship high horsepower engines out at the end of the third quarter. We had some issues in our components business and really -- and the Power Generation business. So it was across the board. I wouldn't point the finger at one particular segment.

Thank you very much. I'll get back in line.

Your next question comes from the line of Henry Kirn with UBS. Please proceed.

Good morning, guys.

Hey, Henry.

How much of the delta in your guidance is from currency changes and could you discuss a little bit what would you expect the impact of a strengthening dollar to be on your results going forward?

Going forward, we're looking at the fourth quarter versus the third quarter of somewhere around 0.5% or 50 basis points, 40 to 50 basis points of deterioration in our margins -- if a couple of the currencies, the Brazilian and the Euro remain as weak as what they currently are against the dollar, although that's moving around quite a bit, even in the last few days. In the third quarter, the currency year-over-year I think accounted for 2% of our sales growth and about $2 million or $3 million negative on the bottom line. If you look over the last couple of years, currency has not been a significant issue at the bottom line and as I think we've said to you before, it has impacted favorably some of the growth, 3% or 4%, although this quarter it was a little bit less than that.

How much of the reduction in sales came from currency changes?

Very little. I don't think there was much. If you're talking --

In the guidance going forward.

Oh, going forward?

Right.

We need to come back to you on that one to give you a specific answer. I don't have that number at hand just now.

Could you talk about the market response so far with your decision to go with SCR for heavy duty engines?

I think -- this is Tom. The market response has been generally positive. The discussion that we've had with our OEMs about the advantages of the SCR technology combined with EGR, I think has gone well. Our program's going well in terms of preparing ourselves, getting ready for launch, getting testing done, field tests done, and as a general matter I think the potential for a high reliability launch and good fuel economy has got the market excited. So as a general matter, good response.

I would add that several of the large fleets that we have long-standing relationships are also having a positive reaction. And some of the concerns about the infrastructure around delivering urea seemed to be going away. So I think that generally speaking, as Tom said, we're ready and I think that the market's going to respond positively to that.

Great. Thanks a lot.

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

Thanks, good morning, everybody. First question, if we could go back to the near term guidance, the foreign currency assumptions, are they as of the end of Q3?

Yes.

So the impact might be a little bit more severe if they stay at current levels; is that right?

We actually forecast together around the first week of October so if they stay as high as they were last week, possibly. If you look at what's happening this week with the two currencies I talked about, they are strengthening against the US dollar.

Okay. Thank you. And then on Brazil and Europe, what are your truck customers telling you to expect for truck volumes? It seems like it's moving all over the place.

Brazil will be up somewhere around 20% this year and our plan is right now is it would not go up as much next year, but somewhere around half that amount, maybe 10%. That market remains very strong. The Brazilian economy is strong. It's driven by not only commodities but the agriculture boom that's going there. So -- and also in Brazil, we think there will be some energy shortages next year so the Power Generation market will be available. The European market, construction is down. On the automotive side, it's really been hit very hard. We have -- our medium duty engines go into the DAF truck as well as the Nissan truck in Spain and we've gained some market share, so we haven't seen the same kinds of declines that the overall market has, but we think that's going to be pretty soft. Power Generation still remains good, particularly in Eastern Europe. So the Power Generation market and our Distribution businesses are growing over there. So Brazil's going to be strong. Europe is mixed with probably more down than up.

Okay. Thanks. And just to drill into the European truck piece for a second, without getting into the customer specific, if you could just look at the market, is it -- are you looking for something a little bit worse than normal as you go into '09 instead of the normal kind of 10% ish for a couple years down and then things get a little better?

I think what our -- what we're hearing from our European managers is that we should expect the commercial vehicle volumes in the European Union to be down 15% to 20% in 2009.

Okay, thanks, Dean. And then if we could look out -- I know this isn't really relevant to the quarter, per se, but there's a lot of buzz around ownership structure of some of the light vehicle area. Does the fluidity in that, meaning Chrysler, GM, et al, does that affect any of your CapEx plans for the 2010 and beyond timeframe?

No.

Okay. Thank you.

Your next question comes from the line of Joel Tiss with Buckingham. Please proceed.

Good morning, how's it going?

Hey, Joel.

Just two things. One, can you talk a little bit about the pricing discussions that you're having with customers around 2009? Are you seeing a lot of reluctance on their side to accepting more raw material increases or are they going along with it? Just a characterization.

Hi, Joel, it's Tom. As you know, there's a wide variety of markets and it's very difficult to answer in general. But much of our stuff in the truck market, our pricing with OEMs is under agreement, so the agreements allow for some price increases. And we have those, but those are fixed and those that don't allow, don't allow. And then with regard to some of the stronger markets like in the high horsepower industrial and power gen markets, we intend to increase prices again next year and we think we'll be able to get them. So it does range by market. But as a general matter, we are continuing to push price across markets where we don't have agreements that prevent us from doing so, but there are quite a few of our customers that are under agreement.

Okay.

Keep in mind, Joel, as Pat indicated in his remarks, we do see a lag from when the commodity indice moves to when it actually flows through in our businesses. So we're feeling that increase in the material cost right now, and that's part of the reason we're out there talking to our customers about price increases.

Right. Right. Just seems like there could be a little bit of squeeze that holds on a little bit longer than just the fourth quarter.

Pricing discussions, Joel, are always difficult, particularly with big OEMs. It's never an easy discussion and it won't be easy in this environment. It wasn't easy in any other environment. But that's just the environment we live in and we work it all the time.

Right. That's true. And you've got some good backlogs too. Can we zero in on China? Do you sense any structural changes there or is it more just a post Olympic hangover? Just a sense there also.

Well, again, you can see different numbers, but our assumptions are the China market's going to continue to grow around 8% and there will be continued investment in infrastructure, which plays into our hands. So we're going to grow our China market. Right now we're thinking we'll grow it another 20% next year. As Tom said, the truck market -- or I think maybe it was Pat said the truck market is soft right now because of the Euro 3, the change to Euro 3 but we think that will recover. Power Generation still remains good. Our components businesses are growing over there and our Distribution business is growing over there and then we have our Foton joint venture which will be producing engines at the end of 2009, so that will be a new business that we're going into. So again, I think China and India, and I was out on the road a few weeks ago, there were a lot of questions about that. But we're seeing really strong business in both countries, both now and looking forward.

Joel, we have read reports, as I'm sure you have, that there's some sectors in China which are feeling it in the south where a lot of the export oriented companies are, there's no question that their business has dropped and there's a lot of articles about that, about -- we've even heard about layoffs and things like that in some of those industries. So there is no question that some industries are going to do worse and that may affect regions of the country. Joe Loughrey and I are going next week to China and we'll get a much better on the ground feel for where things are, but Tim's high level comments about how we're thinking about it, that its growth rate is going to slow but still high relative to other economies is where we're planning today.

And just -- sorry for the last one. Free cash flow in 2009, can you just talk about some of the levers you have to keep that growing, reducing inventories and other sorts of things? Thank you.

Well, we are, as you guessed, doing a lot of work on our '09 plan to make sure that we can both capture the strong markets that appear to still be there, but be very prudent in the environment we're in, both in terms of our spending, and our growth and hiring and things like that, we're doing significant reductions in those. We're also, though, looking at our cash flow and thinking about what kind of opportunities we have to reduce capital or postpone capital. We do still see the growth prospects for the company to be strong over the long run so we're wanting to make sure that we make needed capital investments that represent platforms for growth. But places where capacity may not be needed as soon, we'll definitely be delaying investments and we're going through line by line to figure out how we can reduce capital and Pat and I have been going through that now for several weeks and we'll be going through it for several weeks more and I'm pretty confident we'll be able to reduce capital spending. Working capital, as Pat mentioned, is a really big opportunity for us. We are definitely not where we want to be in terms of inventory turns and some of those other kind of operating issues but also as -- if volumes do start to come down in some of our markets, that is typically where our company can begin to rein in working capital. So we have both expectations with regard to just normal operating as well as just improved performance in working capital which we think will reduce our cash use in '09.

Thank you very much. That's great.

Next question comes from the line of Seth Weber with Bank of America. These proceed.

Good morning, everybody.

Hey, Seth.

On the power gen business, can you give us a sense on how secure is that order book? Some of the drivers that you cited in the prepared comments talked about strength in the Middle East or oil and gas markets. Is that a market where you typically take deposits or do you ever -- do you see cancellations in that space? Can you just flush that out a little bit?

Seth, it's Tom. It is a good question. The order boards are so long and they are not secured by deposits. They're basically secured by the fact that because the market's been sold out for so long, people are loathe to give up slots, they're loathe to delay or cancel for fear that it will take them a long time to get their generators. I'm talking about large ones in particular here. So that has kept people staying in line and not delaying even if other parts of their project might be delayed. There is always the possibility that as markets soften that that order board shortens up because there is no payment that they have to make for cancellation. So we keep a really close eye on that. As you know, most of our product is sold through our Distribution system, very close to the market and understands when things might be getting softer, so we regularly look at that and we'll be watching it really closely.

The other thing I'd say is that while Pat and I put together our plans for 2009, which do show still good growth in Power Generation and Distribution, we're having each of of our business units put together a contingency plan as well -- so that if indeed volumes do start to soften, we know exactly what we're going to do to reduce costs accordingly, so we can still put together a good profit performance for the year. We've done that before. We know how to do it. We're going to do it again. And we're going to have those plans ready even before we enter '09. I don't anticipate that power gen volumes will soften. But they could, and if they do, we'll be ready.

In addition, on the opposite end of the spectrum, in the low KVA product that we've been selling out of a new product offering that we've been manufacturing out of India and selling into a lot of the telecom markets, we've had very strong success with that product launch and in fact that size of [gen set] is in high demand and another area where we're trying to manage through long lead times to respond to the market opportunity that we see in a lot of the telecom markets outside of the US as well.

Okay. Thank you. And if I could ask a follow-up to Pat. Can you maybe just walk us through the pricing versus input cost parity by segment -- is it possible to talk about each segment, where you're at parity, where you're below?

Let me talk first of all from an overall Cummins perspective. Then we can dive into a couple of the individual segments. The guidance we gave back in July, we're still pretty consistent with that, that from a net basis I think we said 150 basis points, 1.5% of sales was going to be the year-over-year impact on commodity costs. If you go into it by segment, I think the engine business and components in particular are the two segments that are seeing most of the impact in 2008. Power Generation has managed to do a pretty good job in pricing. I don't think there has been overlay stretch by the material costs as much as the other two. The engine segment currently and the component segment currently are the two because they don't have the ability to up prices as quickly as their colleagues in power gen are probably suffering more at this time than the other, and as we go into 2009 we'll have an opportunity to recover some of that with pricing.

Okay. Thank you very much.

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

I want to go back to Chrysler. Can you comment on the status of the light duty engine program in Columbus, Indiana? Is it continuing as planned?

Yes.

Yes.

Okay. And secondly, could you comment about where you see your share of the US heavy duty truck engine market going over the next 14 to 15 months?

As you know, Charlie, we've been running in low 40s to mid-40s recently now and we do think we have some opportunity to grow that across 2009. Not a whole bunch more. Not at the same rate we've been. But we do think we can grow it based on just engineering our engine into a few places left in the heavy duty market, where there were still some Caterpillar engines being sold. But as a general matter, we expect to get our share up in that same -- a little bit above 45% through the year and maybe a little bit beyond that. And then mid-range truck, a little bit more opportunity, although our share has grown a lot. We have more applications where we can -- where with agreements we already have in place, we'll be able to engineer our engine into more applications within those OEMs and grow our market share, so we expect both to grow in '09, but more in mid-range than in heavy duty in terms of market share numbers.

Can I skip back to the -- your answer to the Chrysler question, which seemed to come awfully quick, but that -- those engines are supposed to be coming off the line end of next year, early 2010?

2010, right.

2010. But everything seems green so far?

Yes.

Okay.

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

Good morning.

Good morning.

Good morning, Eli.

A couple clarifications. What are the actual shares outstanding at the end of the quarter, is that roughly 195 million ish?

196 million I think is the number.

196 million. The attach rate, the 32% implied, the 29% to 30% tax rate in the fourth quarter, are we assuming 32% for next year too?

We'll give that guidance in our fourth quarter earnings call.

In the guidance you say in engine, guidance for the year is that the margins will be less than 7.5%, is that what -- I think that's what you said during the call, I want to make sure, not 7.5%, but it was less than 7.5% target?

Yes, the engine business, 7.5% is what I thought I said. Maybe I misspoke.

Will it be 7.5% for the year or less than 7.5%?

7.5%.

Slide 18 is pretty clear, 7.5%.

7.5%, okay. The implication, power gen will have a reasonable chance of getting a double digit gain in '09. Can you talk about it?

Yes. That's right.

And can you talk a little bit about your SCR engine, I mean, you made some public comments that you'll get at least 4% in certain cases of better fuel economy. Are you expecting it to be better fuel economy versus the current engine from SCR at this point?

Yes, we said up to 5% over the current engine.

During your comments you talked about you expected heavy duty truck to be up 10% to 15% next year and if we have a recession, you don't move freight, fuel economy is going up in '10, why would there be a prebuy at all? Why wouldn't the 175,000 number for ACT, which is down from 203,000 at this point, why wouldn't the market go down 10%? There's not going to be Mexico and there's not going to be exports to the same degree.

It's a good question, Eli. What ends up in the prebuy is very difficult to predict, as you know. It's something that -- it's an art, not a science. So we don't exactly know what's going into prebuy. We've been using the 200,000 as a planning now for a couple of months. And we may adjust that planning number down, now that we're looking at what ACT has. All we were saying there is where we've been working with is 200,000. That's been where everyone's been for a little while. The new number's out there and we'll take a look and see what we think. The fact is, the less of a prebuy, in fact the better it is for industry participants. We'll be okay with that if there's not a big prebuy too, and we'll adjust our production and et cetera as we need to.

One final question. You keep talking, you're going to get hit with costs at least for a while because you lag six months. We've had a plummeting of costs that is unbelievable in the last couple of weeks. That order comes through at some point into your numbers also. Can you talk about how you're looking at it over the next year? Why would anybody give you a price increase if the costs are going to come down, you'll have to give it back in a couple months? I don't understand why you're still [fighting] when the cost pressures probably are disappearing completely.

The important thing to think about there, again the market by market issue. From the point of view of cost, you are correct. We are hoping to capitalize on the fact that some of the metal market prices are coming down and some, as you said, pretty dramatically. So that we hope to be able to roll that into lower input costs next year and there's a bunch of volatility and we'll see where we get on them. We're hoping that that's one of the good things that come through in terms of our plan for next year. And in terms of pricing, we'll be looking for price increases on the basis of the fact that we think we can sell value in a whole bunch of markets. So some of that's linked to markets but a lot of it isn't. And within our agreements, places that are pure based on pricing agreements linked to metals, then some of those lag and they would be adjusted accordingly and some as you say wouldn't be if material comes down, then we lower the prices there. So it's a whole range of things. But what Pat noted to you was that in components and engines, there's a lag and the input costs were mostly negative relative to price. If input costs come down, the reverse should be true.

All right. Thank you very much.

Ladies and gentlemen, this concludes the Q&A session. I would like to turn the call over for closing remarks.

Thank you. Once again, if there's any questions that you have, I'll be available throughout the day, and once again I would also encourage you to RSVP for the upcoming Analyst Day that's less than two weeks away in Charleston, South Carolina where we'll talk about the component segment in more detail. Thank you once again.

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