康明斯 (CMI) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the fourth quarter 2008 Cummins, Inc. earnings conference call. My name is Eric. I'll be your audio coordinator for today. At this time all participants are in a listen-only mode. We will facilitate the question-and-answer session towards the end of the conference.

(Operator Instructions)

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

Thank you, Eric. Welcome, everyone, to our teleconference today to discuss Cummins' results for the fourth quarter of 2008.

Participating with me today are Chairman and Chief Executive Officer, Tim Solso; our President and COO, Tom Linebarger; our Chief FInancial Officer, Pat Ward; and our Vice Chairman, Joe Loughrey. We will all be available for your questions at the end of the teleconference.

The 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 our 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 fourth quarter performance and guidance for 2009, Tim would like to frame the quarter and our recent actions in the context of the current economic environment.

Good morning.

I'll begin on a positive note by saying that 2008 was our fifth straight year of record sales. Overall revenues for the Company were $14.3 billion compared to $13 billion for 2007, or nearly a 10% growth in sales for the year. Earnings before interest and taxes, or EBIT, was $1.3 billion or 9% of sales, compared to $1.2 billion or 9.4% of sales for the previous year. Unfortunately, and as you are all aware, most of our gains in 2008 were made in the first three quarters of the year.

Pat Ward will offer more specifics about the fourth quarter in a few moments, but here are the high-level facts. Sales declined by 6% year-over-year and 11% from the third quarter. EBIT was 5% of sales ,excluding the severance charge relating to actions we announced in December. This was below our target of 10%. Sales declined year-over-year in the engine and component segments, but all four segments saw sales weaken during the fourth quarter.

We have moved quickly to respond to what has become the worst global recession since World War II, and we are prepared to take further significant action in 2009 if necessary. Our goal is to maintain a solid profit level through the downturn, and to preserve our ability to grow profitably in the future. Still, we expect 2009 to be extremely challenging. The recession almost certainly will last through the end of this year, and we are assuming it could take until 2011 for the global economy to fully recover. We remain confident that our Company is well positioned to achieve its long-term growth targets once our global markets improve; but for the short-term, our focus will be on reducing costs to earn a respectable level of profit through the downturn, manage the business to ensure that we are generating positive cash flow, and continuing to invest in critical technologies and products for 2010 and beyond.

Tom Linebarger will provide further details on the actions we have taken to reduce costs. But I want to emphasize that we have already taken a number of steps to cut discretionary spending, lower capital expenditures, and reduce our workforce to bring it in line for expected demand for 2009. Our experienced management team has made the necessary tough decisions, and we are committed to further action as needed. These actions and others, such as aggressively moving to lower our working capital and suspend suspending our stock repurchase program, while maintaining a sustainable growing dividend, will allow us to generate cash this year. Cash will be critical to our future growth. We must be in a position to continue investing and key products and technologies, such as those related to meeting new emission standards in the United States, and the launch of four new engine platforms in the United States and China.

I would like to remind everyone that we ended this recession in the best financial condition in the Company's history. Five years of record sales and profits have allowed us to lower our debt to below 20% of capital, and to build a sizable cash reserve. We also have access to $1 billion in liquidity as we look to invest in our future. So while I do not think we have seen the worst of the current recession, I'm also convinced that Cummins will emerge from this downturn, however long it lasts, an even stronger Company. Our guidance for 2009 is that sales will be down approximately 20% from our record performance this past year, and EBIT will be 6.5% of sales.

Now, Tom will provide you with additional details on some of the actions we took, and why we think we are well positioned for the future.

Thank you, Tim.

As Tim said, when we began to see this rapid and steep decline in the fourth quarter, we started taking aggressive action to lower our costs, including the painful step of reducing our workforce around the world. Those actions have continued into 2009. We will continue to monitor demand for our products closely, and adjust our capacity and the size of our workforce as necessary.

With the actions we have announced so far, we will reduce our worldwide workforce by about 2,800 people, or more than 6%, by the end of March. Of the 2,800 people approximately 1,500 will be salaried professionals, and the remainder will come from our hourly workforce. In addition, we have cut approximately 2,500 contracted temporary jobs, eliminated merit raises for professional workers, and cut officer salaries by 10% in 2009. Based on what we know today, we believe the reductions we made for the professional staff will be appropriate for the demand we expect in 2009. It is likely, however, that we will need to take further action actions at individual manufacturing locations to react to changing demand. We'll continue to use our rings of defense approach to react to these changes.

In addition to the people actions, we have worked hard to lower our costs in other ways. For example, we reduced our monthly travel expenses during the fourth quarter by half, and cut a number of other discretionary expenses. Capital spending in the fourth quarter was approximately $48 million lower than our forecast in October, and our capital plan for 2009 calls for a 30% reduction in spending from 2008. We have closed three distributor branches in the United Kingdom, and plan to close six more locations outside the U.S. in the first half of this year.

In addition, as a result of weaker performance in the fourth quarter, our variable compensation expense for 2008 was approximately $44 million less than originally planned. As Tim said, we remain optimistic about the fundamental strength of our Company and our market advantages going forward. As a result, our basic strategy is not changing. Our long-term targets of 12% sales growth and 10% EBIT are still in place. We remain committed to investing in our key growth platforms in the downturn, to ensure that we can meet our profitable growth targets through the cycle. For example, work is progressing on our four critical engine platforms and the related components that go with those, despite the significant reduction in capital spending plan for the year.

In addition, Cummins' technology leadership continues to position our Company well for future growth. Market-share gains for our engines, components and power-generation equipment around the world are the clear clearest sign that our customers recognize the value that our technology brings to their products. New fuel efficiency standards offer Cummins another opportunity to leverage our technology leadership for business advantage. For example, our 2010 on-highway engine will offer industry-leading fuel economy, while investing in new light-duty diesel engine platforms in the U.S. and China will open new markets for clean diesel engines for the Company. Our immediate challenge is to get through this global recession by producing a reasonable level of profit, and generating significant cash to allow us to invest in the future. The actions we have taken so far, our plans for 2009, and our current financial strength position Cummins to emerge from this significant downturn stronger than when we entered it, and in terrific shape to resume the growth we've seen in recent years.

Now, Pat will provide more specifics about the quarter.

Thank you, Tom.

As we warned in December, global market conditions deteriorated rapidly in the fourth quarter, especially in the truck and construction businesses. Fourth quarter sales for the Company were $3.3 billion, or 6% below the same period of 2007 and 11% lower than the fourth quarter of 2008. Despite the fourth quarter slowdown, full-year sales increased 10%, which was slightly better than guidance. Although we moved quickly to address the Company's fixed cost structure, we were unable to offset the impact of the volume decline in the quarter. Along with lower joint venture income, negative impact from currency movements and other one-time charges, EBIT margins dropped to 5% in the quarter and finished at 9.3% in the year. Both numbers exclude the $37 million restructuring charge related to workforce reduction actions initiated in the fourth quarter.

Due to a more favorable geographic mix of profits, our full-year effective tax rate of 31% was lower than our prior expectation of 32%. The full-year adjustment, along with the recognition of a research tax credit, lowered the fourth quarter effective tax rate to 12%. Including the $37 million restructuring charge, which equates to $0.13 per share, net income was $89 million or $0.45 per share for the fourth quarter.

To give you a clearer picture of what's happened during the quarter, let me provide details for each of our operating segments. Our distribution segment had another solid quarter. Revenues were up 19%, and there was strength in all of our regions as a result of sales in industrial high-horsepower engines and power-generation equipment. While our EBIT margin was negatively impacted by currency translation, it remained above its 11% target.

In power generation, sales increased by 6% versus a year ago. Demand for commercial generators and alternators, primarily in China and Western Europe, more than offset the decline in the U.S. consumer markets. Price realization remained ahead of increasing commodity costs. However, the impact of a less favorable mix of products sold and unfavorable currency movements pressured the EBIT margin downward to 8.5% of sales in the fourth quarter.

We experienced a significant reduction in demand in the engine segment, where revenues dropped 10% versus the same quarter a year ago. Sales in all on-highway applications declined, particularly in the pickup truck and RV markets in North America and global medium-duty truck markets. Sales to industrial applications were also down, with a slump in construction markets offsetting the stronger demand in agricultural and marine markets. Engine segment EBIT dropped to 1.3% of sales for the quarter as a result of the rapid decline in volume, higher material costs, unfavorable currency movement, and the drop in income from our joint ventures. The segment results were also impacted in the fourth quarter by a net charge of $38 million related to a warranty liability associated with the increasing cost of repairs to engines sold in prior periods.

Hardest hit in the fourth quarter was the component segment. Revenues dropped 13% and EBIT declined by $45 million, finishing just above break-even. As we previously warned, the demand decline from truck and construction equipment OEMs in North America, Europe, China and India accelerated as the quarter progressed. In addition, the gain associated with the sale of a business in the fourth quarter of 2007 contributed to the lower EBIT year-over-year.

The challenging market conditions we experienced in the fourth quarter will not improve improving in 2009, and we anticipate further deterioration in most of our end markets. For the engine segment, we project 2009 revenues will fall close to 20%, and EBIT will be around 4% of sales. Nearly every on-highway market will be smaller in 2009, as freight tonnage and credit availability weigh heavily on the purchasing decisions of end users.

We project the North American heavy-duty truck market at 137,000 trucks, down almost 20% from 2008; but we forecast our shipments to drop less than the market, due to share gains. Within the medium-duty truck market we expect our shipments to decline around 30%, from softness in North America and sharp declines in Brazil and Europe. Demand for Dodge Ram pickup trucks stabilized in the last few quarters, and we anticipate engine shipments to Chrysler will remain flat, while the recreational vehicle market will continue to deteriorate in 2009.

Revenue from global industrial engine markets is expected to decline nearly 30%. In spite of infrastructure stimulus spending programs around the world, we believe demand for new construction equipment will be reduced by about 40% over 2008. Demand from mining, marine and agriculture is also forecasted to drop significantly in 2009.

In our component segment, we expect sales to decline about 25%, primarily due to weakness in truck and construction markets in North America, Europe, China and India. Because of the impact of the lower volumes, we are forecasting the segment to deliver EBIT margins in the range of 2.5% to 3% of sales.

For power generation, we project sales to decline by 10% in 2009, with EBIT in the range of 9.5 to 10% of sales. In our global commercial genset business, we are experiencing a slowdown in order intakes. However, the very high-end markets of prime power, served by our project and alternator businesses, have not yet seen an increase in backlog cancellations. In the consumer market, we anticipate further deterioration this year from an already weak position in 2008.

In distribution, sales are expected to drop 10%, and the segment profitability as a percent of sales is forecasted to remain flat with 2008 levels at 11%. About half of the segment sales are exposed to industrial engines and power generation, where we expect a decline in demand. However, we anticipate that after-market sales and service revenues will be flat to slightly down, similar to past downturn cycles.

Overall for the Company, as Tim mentioned before, we expect sales to drop approximately 20% compared to 2008, and the EBIT margin to be 6.5% of revenues. The first quarter is anticipated to be our lowest quarter of the year. The 2009 guidance excludes restructuring charges related to additional workforce reductions and plant-closing activities announced in January, which will be included in our first quarter results.

We also project to generate positive cash flow in 2009. We have capital investment at about 3% of sales, a significant reduction from last year. We will continue to invest in key projects related to emission compliance, fuel economy, and new platforms, which are critical for our future profitable growth. In addition, we are taking a hard look at reducing our working capital, and have improvement plans in place that will benefit our cash flow in 2009. In light of the current economic conditions, we have also suspended our stock repurchase program, but remain committed to maintaining our current dividend. We have worked hard to build a strong balance sheet and keep debt levels low, and that remains our goal in 2009.

We will now take your questions.

(Operator Instructions)

The first question comes from the line of Jamie Cook with Credit Suisse. Please proceed.

Hi. Good morning.

Good morning, Jamie.

My first question relates to your guidance within the power gen segment, with sales decline declines, I think, of about 10%. I'm just wondering what type of -- you know, what's your visibility at this point? How far into 2009 do you have visibility? You also mentioned you weren't seeing cancellations yet on the higher end, and wondering what your -- what your expectations are in terms of what you are seeing geographically. Because that to me, along with the margin assumption, based on what I'm hearing on the power gen, seems a little optimistic. So I'm just wondering, you know, how you're thinking about that guidance for 2009, within power gen?

Jamie, this is Tom. In power gen, we have some orders that stretch out still a long way. As you know the order board was very long for a period of time, and it has come in. Our new lead times are much shorter than the old ones were, but there's still orders out quite a way. So we have some visibility out for some orders through the year; but as you guessed, the books aren't full like they were through the whole year. So it is more --

Is it through Q2, or is it --

Yes, it's more like a -- 90 to 180 days now, and that's a broad statement across larger gen sets. It depends, as you said, by region and size and all that kind of thing. But as a broad matter, it's more like a quarter or two, as opposed to a full year.

So I'm assuming that -- so would that imply that the first half of the year maybe you're hoping for modest growth or [back load] growth, with more dramatic declines in the back half to get to your down 10% in the year? Is that the way I should be thinking about it, given what you're seeing now -- given your visibility?

I think we're seeing the year pretty flat across the year. It's a broad statement. It doesn't mean there's not variation, you know, up or down depending on place. But as a broad statement, we're seeing it as generally flat through the year. You know, although you might think it might get weaker in the second half, in fact, because the first quarter is normally a slower quarter for us, there's some seasonality, you know, it's kind of playing itself through to be roughly flat through the year. There's some negative currency movement year-over-year that's also affecting revenues. But as a general matter, even quarters would be closer than what you said.

Okay. And then can you comment specifically -- I mean, part of the strength that you were seeing was sort of, you know, in emerging markets. What are you seeing within power gen, or what is your assumption for 2009 within the emerging markets within power gen?

Yes, emerging markets are still a significant part of our business. You know, as I think you are suggesting, emerging markets are not as strong as they were a year ago. The economic growth rates in both China and India, for example, are down. But still, you know, markets are reasonable there from both markets for power generation. We saw some pickup in China, actually, in the fourth quarter in power generation. So, you know, as a general matter, both regions will remain strong in the fourth -- I mean, in 2009, but not as strong as they've been in previous years.

So you're not assuming any material cancellations in your forecast?

No. There will be order board shifting. We do expect order board shifting. That's kind of how we -- what we've seen, but not major cancellations, no.

And, Jamie, this is Dean. Just to clarify on the comments that were made in the scripted remarks about not seeing cancellations at the very high end, keep in mind that some of the markets in which our alternator business through -- that it serves, with some very large alternators that go into independent power producers, that's where we're specifically not seeing the cancellations yet. I think with a lot of the product that we supply through our commercial line of business, we have been seeing some cancellations there. As Tom indicated, you know, it's not as full. The lead times have come in. And it's not like it was 90 days ago when we talked to you. It's -- the comments were more specific to the very high-end alternators that actually don't even oftentimes marry up with some of our own engines.

Okay. And then my last question also, you know, on the engine side of the business, you know, I sort of agree with -- or I don't find your top-line forecast too unreasonable on the engine side, given some of the declines we've seen so far, but it sort of implies to get to your operating margins at 20% decremental margin for 2009, which again, to me seems -- can you just walk me through your assumptions? I would have thought the operating side, the decrementals would have been a lot worse than 20%?

Yes, let me -- this is Pat. Let me take that question, and let me kind of take it in two ways. Let me talk about the Company, first of all, and then answer your question on the engine business.

Sure.

The bridge for the company -- we're going to go from 9.3% sales in 2008 to 6.5% in 2009. The volume drop of 20% on the top line will cost us about 5% drop in EBIT. We expect probably close to another 1% drop from the combination of lower joint venture income, and still some higher material costs year-over-year; not to the same extent we've seen in 2008, but it still will be higher.

Offsetting that, we expect to see benefits from pricing, and from our cost-reduction actions that we were taking in the fourth quarter, and that we're taking through the first quarter, and the combination of those two should bring back 3% of EBIT. So that's how you can get a higher level from a 9% EBIT down to 6.5%. If you think of the engine business, to your specific question, the cost reduction actions in particular, I think, will play a significant role in helping the engine business minimize the decremental margins it's going to see in 2009.

All right. I have a couple more questions, but I'll get back in queue.

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

Good morning.

Good morning, Eli.

Just a clarification. This 20% forecasted decline in revenue, is that including currency and which currency assumption, or is that excluding currency?

That includes currency. The 20% is an all-in number. The currency element of the 20% is about 5%.

It's 5%. So your volume is down 15%, plus the currency effect, is what you're saying?

Yes.

And warranty -- it was $38 million in the quarter. Can you give us an idea of what the warranty assumption is for 2009? Is there any change in that assumption whatsoever, a percentage?

Yes. Our total warranty expense in 2008, including campaigns and change in estimates, is 3.5% of sales. It was higher in the fourth quarter. The fourth quarter was 3.8%. We -- again, we don't give specific guidance on warranty for '09; but you shouldn't expect it to be much different from the full-year number for 2008.

As a percentage or the full-year number, as an absolute total for the --

As a percentage.

As a percentage. And did I hear correctly Tom say that in power generation, you expect some business -- you're betting on some business sustaining itself for the rest of the year to keep you on the board relatively flat? It's a 180-day window, so in the first half, you have some visibility, where you are expecting continuation of current levels of demand. Is that the assumption?

Yes.

Going on? And can we talk a little bit about the engine business? You gave us down 20% in North America in trucks, and down 30%, you know, in the global markets. Can you talk a little bit about where your market share is in trucks at this point, where do you expect to hold it, and what is your forecast for international, heavy trucks particularly in Europe? You started indicating what's going on in ag and construction. Can you give us some sense and color of what's going on in those markets?

I missed the first -- what was the first part?

Market share in trucks. We finished the year, Eli, on the [awards] data, came out just shy of 45% for the full year. So that's up from the 2007 levels that were in kind of the upper 30s, and our expectations as we go out into 2008 -- or 2009 is that we would be in the 48% market share for the full year in 2009. So we'll -- obviously we were running in the first six months of 2008 more like 43%. So there is about a 5% swing there in the first half of '09 before we would anniversary.

You know, the medium-duty, I think we're at 33%. If you break it down, we're assuming a drop in North America between 5 and 15%. Brazil will be down 30%, and Europe will be down 40%. So that's where the total number adds up.

And the construction market -- you know, basically we see that down, literally, all over the world. We've been asked about the stimulus packages not only here in the United States, but there's been two in India already, and $600 billion in China, and they will obviously help us in terms of infrastructure investments, transportation and so forth, but we think that's going take some time, so we'll probably see that more at the end of the year or in 2010. So we still see the construction in ag markets being down from where they have been.

Okay. Just one question. Could you talk about your 2010 engine fuel economy, how much better? I mean, Navistar is out today with a big deal trying to make that their EGR is less complicated and getting better economy than the SER that everybody is going to. Can you talk a little bit about what is going on in technology for 2010?

Yes. I can comment on that. We do expect our 2010 engine to have a fuel economy improvement over our 2007 engine, and we do expect it to have fuel-economy advantages over the competition. And so -- in both cases. We are well advanced in those programs. As you know, we made a significant switch to SER in the middle of the year on heavy-duty; mid-range, we're continuing the same strategy. We are well progressed with those programs. We are active in testing, and we are seeing the results -- in fact, slightly better than the results being projected from our analysis in terms of fuel economy. So we still think we're going to be able to offer customers an advantage over our '07 and over competition in 2010.

And you applied the 10% in fuel economy, and that's what the numbers seem to be at this point?

5% to 10% over what?

Over '07 engines?

That's at the high end. But --

5% is the number, the quoting around the industry, that is the level to expect?

Yes, that's reasonable.

All right. Thank you. I'll get back in the queue.

And your next question comes from the line of Henry Kim with UBS. Please proceed.

Morning, guys.

Morning, Henry.

Could you talk a little bit about the age of the U.S.-class fleet and -- if the build is down 20% in '09, when could this spur a replacement-led rebound?

Well, I think clear, Henry, we are now -- with the expectations that we have for 2009, we're looking at three years now that are below replacement demand. I don't have the numbers in front of me in terms what the specific age of the fleet is. You know, we clearly look to the pundits out there in the world that provide the research on what the age of the fleet is. But clearly it is starting to say that there's, you know, essentially -- or virtually no pre-buy in 2009, and it's continuing to add the expectation that customers will come back into the market in 2010 and beyond to, obviously, try to address the aging fleet, and it does start to build expectations for much sizable markets in 2010 and beyond.

There's more uncertainty right now in all of the markets, but particularly in the truck markets, and I think the way we're thinking about our business is that we're going to assume that this recession is deeper and longer than anything we've seen, and that we've already taken capacity down, and we're going to manage costs and manufacturing capacity to demand, and bet less on the fact that there's going to be a recovery at the end of this year or in 2010, and we'll be prepared when the recovery is there to go ahead and meet the demand. But that's kind of what the management philosophy is now. And I personally don't think anyone really knows for sure exactly when we're going to see a recovery, or what that recovery is going to look like.

Okay. Makes sense. And could you just talk a little bit about where your inventories stand, or where inventories in the channel stand, and how much you may have to underproduce demand in the first half of the year to right-size the global inventory channels?

We don't have a lot of channel inventory issues to deal with anywhere, really. You know, we kind of manage channel inventories on an ongoing basis, and so we don't -- we're not really planning any adjustments anywhere in the world. The place that the inventory that our distributors hold is mostly parts related to service parts and some generator sets, and in both cases we are feeling like our inventory levels are reasonable.

And the Chrysler dealer inventories have come down, and we don't think there's going to be a need for another adjustment there. They were quite high six to eight months ago, but they've brought them down to, I think, what, two to three months right now.

They definitely underproduced in the fourth quarter relative to demand for that reason.

That's why we say we think our Chrysler volumes, while down from 2007 and 2008, will remain flat for this year.

Our truck customers also have be adjusting inventories down for sure, and they did a lot of that in the fourth quarter. I'm not sure how much more each of them are going to -- each case is going to be different, but they are definitely reducing inventories in the truck business, too.

Great. Thanks a lot.

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

Hi. Good morning, everybody.

Good morning.

Can you guys talk about your relationship with Navistar in 2010, and whether you would be supplying them with any 15-liter engines? And then can you talk about -- Navistar today or international represents somewhere between 35 and 40% of your heavy-duty engine volumes, and what do you expect to do in terms of restructuring or right-sizing the business if, indeed, Navistar disappears as a customer?

Ann, this is Tom. Post-2010, our expectation is that we will be still supply engines to Navistar, not for U.S. truck use, not for 2010 emissions, but outside the U.S. Inside the U.S., we don't expect to sell them 2010 engines at this stage. We'd love to change their mind, but right now that's not the plan.

And with regard to adjusting, you know, our view is that we have that already in our expectations and are already building our capital plans and workforce planning plans around that. We don't think it's going to require any further adjustment than things we're already doing, and we think -- you know, we we're highly confident our heavy-duty business can be successful and profitable despite losing Navistar as a customer. We'd sure like to win them back, though, and we're working on it.

Can you help me try and quantify the impact on revenues and potentially earnings for Navistar and Cummins in 2010? It would be a loss of about 25,000 engines, which is about, you know, 30, 35% of your heavy-duty high-end engine business; is that correct?

38%. I think your numbers are roughly right. I think probably you can do your own calculations there. The thing to watch out for is the calculations you're doing, of course, are on the year before as opposed to the current year. So I think we're -- our expectation is -- it depends a whole bunch on what year you're talking about, how much it will -- the actual volume will be. But I think you have the numbers broadly right for last year.

You know, our view is that we will be moving up in share at [Packar]; we have been, as you know, steadily moving up in share in Packar, and after '09 we will essentially represent all of their business. In Freightliner -- all of their outside purchase, anyway, and then Freightliner, we'll begin to move up with Freightliner, both of which we hope to largely offset losses at Navistar.

But at 25,000 units, it is going to be hard to offset that entire volume?

Yes. We're going to try to do it.

Okay.

Is there a question?

Well, I was just thinking that 25,000 units incremental at Packar and Freightliner is probably -- well, it may be possible, if the market is up significantly.

I think you can -- what you can take away from this is what Tom has said, is that, you know, we've anticipated this for a long time, and we have flexible capacities so we can adjust our fixed costs, and we think our heavy-duty engine business for North American trucks in 2010 and beyond will be as profitable as it has been in the past. I mean, at the top end. So we're not planning on some large drop in profits as a result of that. We have a very profitable business. We have great relationships with our customers. We have a super product that's coming out, and we have a good relationship with Navistar. So I think your question implies that there's a doom and gloom out there, and we would not agree with that.

Okay. That's fair. I appreciate the response. Can I just circle back a little bit to your comments on the decline in the agriculture, and the mining and marine end markets? Can you just give us a little bit more color on what you're seeing in those sectors?

Yes. From a mining perspective, obviously, at the end of 2008, when some of the large mine sites started announcing some of their capital expenditure reductions, we did start to see that filter through then on the OEM order boards. We did start to see some cancellations of some of the large high horse-power engines upon our factories. I think it is clearly an expectation that it will be down this year. We're expecting it could be down as much as 30 to 40% for our mining business. There are obviously some spots where we're continuing to deliver to orders in the backlog, but that is an area that it's going to be down this year.

From an agricultural perspective, as you know, where we participate most in the ag segment is really in the four-wheel drive tractors and the larger combines. So mostly with larger displacement engines, mid-range and heavy-duty engines that go into those markets primarily in the Brazil, kind of Eastern Europe and North American markets, and we are seeing some changes in the demand in those markets at this time. So we are expecting that to be a softer market in 2009.

And the marine, I believe, was your third market that you were asking specifically on. Let me address it in both the recreational marine, as well as in the commercial marine, two different stories going on there. Recreational marine, which is part of our joint venture with Brunswick, Cummins MerCruiser clearly has had a very difficult 2008, and we are not expecting any recovery in the recreational marine market. So recreational marine being, you know, pleasure yachts that use 15-liter engines or smaller. That will be -- 2009 will be an additional difficult year for that market.

The commercial marine market has got some pockets right now that are feeling the pinch from availability of credit, where some shipyards are running out of credit availability to continue with the production of commercial marine vessels, and so we are seeing some of those areas in the Asia-Pacific Rim that are dealing with that. There are other areas where we are continuing to see, you know, good backlogs that are continuing, the customers are continuing -- are committed to building out some of those vessels, primarily those that have been supporting a lot of the oil and gas industry. So it's kind of a mixed bag right now in the commercial marine market. But overall, we're expecting that it will be down in 2009 as well.

If you look -- if you look at the consumer markets that we have, the recreational marine, RVs, both the primary engine as well as the gen sets, any of that, a lot of that is right now at 40-year lows, and that's built into our forecast, and we're not counting on any recovery in 2009. Those markets are absolutely dead.

Okay, that's great color. I really do appreciate it. Thanks. I'll get back in queue.

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

Hey, guys. How's it going?

Okay.

That's good. Can you zero-in on one thing that's sort of been danced around? You know, Packar is delaying their engine plans, I guess, in 2010, but can you talk a little bit about your expectations for market share with them in 2010 over '09? Do you think it's going to go up or down?

Yes, I think it will go up in 2010.

And then maybe decline after that when they get fully ramped up?

Yes.

Okay.

You're adding together the two platforms. That's what you're trying to do, figure out market share by -- in total? We expect, over time, that we will -- we will be their sole 15-liter supplier, once they clear out the backlog of Caterpillar engines that they bought, and they will eventually introduce their own engine, and those will be the two engines they'll use.

Okay.

What the market share of each of them is kind of depends on, you know, how they position the trucks and, you know, what customers are trying to get out of them.

Okay. Can you help us also on clarification around the first half, second half? Do you expect the first quarter for the overall company to still be profitable?

Yes. The first quarter, we do anticipate and do expect that to be profitable. If you're looking for guidance, we're not going to give you quarterly guidance for the full year, but certainly we would expect the second half to be better than the first half.

Okay. And then last, can you just help with free cash flow? Maybe you're not going to give guidance on free cash flow, but can you just give relative to 2008 where you'd expect it to be?

Yes. I think for 2008, we had a net outflow. 2009, as you heard from the scripted remarks, we are target targeting a positive inflow of cash. And I think in two areas relative to 2008 that are different, capital expenditure we are taking down from around $540 million to somewhere between $360 and $400 million. So there's a significant improvement in there. In 2009, we are targeting our business to reduce our working capital, and specifically in inventory, and generate cash from working capital in '09, and in '08 that was in outflow.

Also on the stock buyback, I think we spent somewhere around $128 million in 2008. As we said, we've temporarily suspended the stock buyback, and that's just a conservative way of looking that we want to make sure that we're conservative in managing our cash, and once we see the market stabilizing in that, we'll still be committed to the buyback, but we're going to be conservative at this point in time.

That makes sense. And then, with all of those moves, do you think the free cash flow could end up being higher than your earnings?

I'm not going to give guidance on that just now.

Okay.

Joel, we focus on really what we believe the key pieces of the cash flow that you're trying to calculate, and I think on slide 15 in the presentation, as PAT indicated, capital expenditures is one of those larger numbers. The global pension funding numbers are on there as well, and as you can see, much like we talked about at the Analyst Day back in November, are kind of going to be up in about the $30 million range from what they were in 2008. So not as large an impact as maybe what you're expecting at other companies.

Okay. All right. That's helpful. Thank you.

Your next question comes from the line of Andy Casey with Wachovia Capital. Please proceed.

Good morning, everyone.

Good morning.

I guess just to follow up on that pension stuff you just went through, the sequential $494 million decline in shareholders equity from Q3, is that both currency and pension or mostly pension?

The pension was about $433 million of that.

Okay, and maybe you just answered this with Joel, but does that translate into a headwind for the P&L in '09?

For the P&L in '09, we expect the pension expense to be marginally higher than '08. We're looking just now somewhere in the $10 million to $15 million range of an increase in the P&L. From a cash perspective, as you can see from the presentation, we're projecting to be around $30 million higher from a cash contribution perspective.

Okay. Thanks, Pat.

So no, not a headwind.

Okay. Thanks. In '09, with the positive cash flow, are you looking to reduce debt, or are you just keeping that for dry powder?

We have no intention of reducing our debt in 2009.

Okay.

Dried powder is a good explanation of it.

Sometimes I get lucky with this. The pricing benefit that you talked about when you were going through the margin puts and takes, is that mainly in the high horse-power engine business components of distribution?

Yes, I think we can see pricing opportunity across most of our segments. Certainly in the high horsepower segment, there is an element that should help the engine business with its margins, but pretty much across-the-board, we see some opportunity for pricing. Not to the same extent as, I think, that we generated in 2008.

Okay. So within that, Pat, it sound doesn't sound like you're expecting any discounting? Is that an accurate assessment?

Yes.

Okay. And the reason I ask, Tim, you know, some of your competitors seem to have better availability on the high-horsepower engine applications than even, you know, the two-quarter discussion that Tom had in the prime power piece of power gen.

Yes. Andy, be careful about availability here, because what we're coming off of is a long -- you know, where we had listening lead times and very few open slots.

Yes.

And now, as one of the earlier callers asked, you know, are the cancellations -- you know, people are dropping -- they're shifting on the order board. They're postponing projects or they're doing whatever, which is opening slots on the order board. So you might be able to drop it in a week, if just somebody doesn't want one that delays, you may might be able to drop it in a week. So what I gave was average kind of order times. But today, in fact, given how much shifting there is, you might be able to get one or two high-horsepower gens really quickly, or engines. So it's going to -- it's going to keep producing. At some point we'll use a 90 or 120-day lead time, because there's just a practical supply-chain operating lead time. But that doesn't mean that if you just wanted to get one, you might not be able to get one earlier or a distributor might not have one on their lot that they'll sell you.

So I think your real point, though, is will that eventually lead to discounting like it did some time ago, and our intention is not. And I think the industry got some tough lessons in the last downturn about discounting. So I think there's some good learned behavior. And the last thing there's different is you'll remember, in the last downturn, there was a whole bunch of telecoms that had bought a lot of equipment and basically put it back on the market as used equipment, which we just don't see this time. So all of those things, we hope, moderate pricing behavior in the market. But our own behavior is going to be not to pursue discounting as a strategy. Right now, we just don't see a need to do it.

Okay. I'm sure we'll all watch that.

Yes.

And lastly, just want to clarify something I saw in the trade press. On the light-duty automotive, some reports are suggesting a delay in the Dodge Ram 1500 diesel application to 2011. Is that consistent with what you've been told by the customer?

Yes.

Okay. Thank you very much.

Your next question comes from the line of David Raso with ISI Group. Please proceed.

Yes. Two questions, one on '09 and one little bigger picture. For the JV income down 20% in the guidance of '09, I know roughly 40% to 50% of that income is China and India JVs. Can you give us a little breakdown between what you see in those JVs versus the distribution business for '09, you know, within the JV line item?

Yes. I would kind of maybe get you thinking about the JV income in terms of two major buckets, being the engine business and distribution. And, yes, you know, given -- the guidance that we gave in terms of JV income being down, the majority of it is going to be in the engine business. I think you'll see some slight deterioration, just as you would expect during this recessionary period in the distribution segment, but in more like the single digits, probably, in their distributors' markets.

In the engine business, I think that's where you're going to see most of the drop in the JV income, and obviously these are some of the things that we've talked about in prior calls in terms of the Dongfeng joint venture and the challenges with the truck market there they're seeing in China, where we may see volumes, you know, within the joint venture dropping, you know, 25% to 30% there, and that is obviously affecting the level of income that that joint venture contributes.

We're going to see the startup of the joint venture in Beijing with Foton, where we're introducing two new light-duty diesel engines. We will obviously be incurring additional startup expenses until those engines actually go into production here this summer, so that will be an additional negative to joint venture income.

And then there's obviously the Indian truck market, and our joint venture with Tata Motors there. It is, again, expected to be a difficult year for the truck sector in India, and we would expect to see a decline in volume in that joint venture as well. And between those three, I think I've [paradoed] the majority of the decline that you would see in the engine business joint business income.

Okay. Thank you. And the big picture questions, I mean obviously everybody can have their own thoughts about the progression of the truck cycle in the next couple of years. You know, obviously the company faces a lot of questions around market share and heavy truck going forward and so forth. I mean, you've faced it for a long time, of course, it's not a new issue. But clearly more of your competitors have their own -- your customers have their own engines. So it's a legitimate concern.

I mean, the key for your earnings power is going to be, can this component division really become a legit profit contributor? And I know the market obviously didn't work out the way you would have thought for '09; even for that matter, the end of '08. But, you know, a 2.5% to 3% margin in '09, can you take it through a little more detail? And we've kind of seen how difficult '09 is going to be on the revenue. Can you give some guidance on where you think the margins could be, even if I did give you component growth of double-digit in '10 or '11? I mean, what are we missing here that we should think these margins can go to 5%, 6%, 7% anytime soon, let alone this 9% EBIT margin target you have? Because that is going to be critical to the structural earnings power of the company in the next -- really, the next three to five years.

David, one background point, and then I'll get into answer your question. But we definitely believe that the engine business, plus the components business together, is our strategy by which we think we can help our customers succeed. So we don't think it's an either-or question. Our view is that many -- really all, now, of our customers make engines, and they have for some time. The question is which ones they make, and our view is us being able to provide the engines that they need, plus the components and subsystem technologies they need on their engines, will be -- has been and will be a successful long-term strategy.

When it comes to margins on components, our view is that we definitely can see our way, as revenues return, to earning the 7% to 9% range that we talked about, and we have -- as you know, been active in working on and restructuring the parts of the business that have been lower margin in the good years in 2008, and we're making good progress on that, and you saw some of that progress during Q2 and Q3. And I think we'll -- you know, the work that we're doing restructuring the businesses will position them well for when growth returns.

So we remain highly confident that we will hit our 9% EBIT target as growth returns, and we'll, you know, move to 7% pretty quickly as business returns to normal levels. So for us, you know, we're confident we can do it. It's not a difficult bridge to do. This is a rough year for them. I mean just as we were positioning ourselves for growth, volume dropped a lot, and that really had a hard -- took a hard whack at margins in the components business. But we expect as growth returns, we will return to good margins.

I guess I'll ask it a different way. If you didn't -- and I understand why, for the growth opportunity. If you hadn't added the incremental cost to the business, thinking '09 would be a better year than it is going to end up being, how would you have thought of the '09 margin? I mean, I'm just trying to think, did you feel you were on your way to getting 5%, 6%, 7% in '09 if you just let the business run? But understandably you burdened it with costs to seize -- hope for the potential growth opportunity in '09, '10, '11? I'm just trying to think through --

That hypothetical is hard for me to do. But I can answer the other one, which is what was our '09 plan before the volumes dropped off. And yes, we planned to be up in our 7% to 9% range.

The other thing, David, is that if you go back and look at the first three quarters of 2008, the components business across that period delivered around 7% of sales. So yes, we absolutely believe it can hit those type of target margins when the volumes do get up.

I appreciate it. Thank you.

Okay. I think let's stop here on the questions, and I think we've got some closing remarks that we'd like to make.

Yes. I'd like to make a few comments, just to give you a perspective on how we see the world and why we're doing what we're doing.

This is the fifth recession I've seen in my career, and four of them, I was very senior, one running the engine business, one as president. The one earlier in this decade as Chairman, and now this one. This is very different than what we've seen, and it's going to to be deeper and longer, and it's going to be more global. So that's kind of our view of the world. We're going to manage our business with that assumption, and if we're wrong, then we will benefit sooner than what we're anticipating.

The second thing is that the Company is in very good shape right now, in the sense of a very strong balance sheet. We've got great products that are coming out. Our capacity is in place, and so forth. So we are strong, and I truly believe that no matter what happens in this recession that we'll be able to manage it very successfully. Our strategy is simply that we are going to manage costs and manufacturing capacity to meet the demand in the volumes, and so when Tom talks about we're through a couple of people reductions, we'll now look at demand on an ongoing basis at various plants, and we have the flexibility to make adjustments fairly quickly at those plants.

The second thing on strategy is that we are going to manage for cash. We did this earlier in the decade. We've already reduced capital, but not to a silly position. We're still investing in the future. Our discretionary spending is in control. We have work to do on our working capital, but as Pat said, we have plans in place. We've temporarily suspended the stock buyback, but we're going to maintain the dividend.

And finally, in all of that, even in this time, as Thomas said, we're going to invest with a very focused approach for growth in the future. We'll look at pay-back periods, but it's not like we're going to stop planning. So that's where we think we can come out of this. We think this is a really solid approach. It's one that we will continue to report to you on. But I think the company is in good shape. We're going to manage this, and we'll come out of it in even better shape.

Okay. Thank you, everyone for joining us today on the teleconference, and I will be available in the office for additional questions after the call. Thank you.

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