康明斯 (CMI) 2009 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the first-quarter 2009 earnings release for Cummins, Inc. conference call. My name is Tonya and I will be your coordinator for today. (Operator Instructions)

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

Thank you, Tonya. Welcome everyone to our teleconference today to discuss Cummins's results for the first-quarter of 2009. Participating with me today to our Chairman and Chief Executive Officer, Tim Solso, our President and Chief Operating Office,Tom Linebarger, and our Chief Financial Officer, Pat Ward. We will be all be available for your questions at the end of this teleconference.

This teleconference will include forward-looking information. Any forward-looking statements involve 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 a forward-looking statements. A more complete disclosure about forward-looking statements begins on page three of our 2008 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 web site 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 web site at www.cummins.com, under the heading of Investors and Media.

Before we review our first-quarter performance and updated guidance for 2009, I would like Tim to say a few words.

Good morning. As we expected, the first quarter was extremely challenging due to the ongoing global recession. Demand for our products has fallen in nearly every market in geographic region around the world. Pat Ward will offer more details about the first quarter, but here are the high-level facts.

Sales declined by 30%, more than $1 billion compared to the first quarter of 2008. Sales dropped in all four segments during the quarter. The Engine and Component segments were the hardest hit. Earnings before interest and tax for the Company was $3.9% of sales excluding a $66 million severance charge relating to actions taken throughout the quarter.

We don't expect the global economy to bottom out until late this year at the earliest, and we are not expecting any improvement in our markets in 2010. We remain confident that the Company is well positioned to take advantage of a number of long-term market trends, and will resume its growth once the recession ends. In the short-term, however, we are assuming the worst from the economy and are continuing to aggressively manage cost and capacity across the Company.

Our goals for this year have not changed. They are to align costs and capacity with the real demand for our products so that we maintain solid profit through the downturn, manage the business in such a way that generates positive cash flow, and continue to invest in critical technologies and products for 2010 and beyond. We already have moved quickly to address each of these goals and Tom Linebarger will talk in more detail about some of our actions. I want to emphasize though that our management team has the experience and the willingness to make the difficult decisions necessary to get us through this recession.

As I said last quarter, managing cash through this downturn will be critical to our future growth. We had a cash outflow in the first quarter mainly as a result of paying out variable compensation earned on record 2008 results as expected. But I am confident that the actions we have taken and will continue to take will allow us to generate positive cash flow for the year.

I would like to remind everyone that we entered this recession in the best financial shape in the Company's history. Our record results from 2004 to 2008 allowed us to lower our debt-to-capital to below 20%, build our liquidity, and invest in several profitable growth opportunities. In addition to our available cash, we also have $1.1 billion credit revolver which we did not need to use in the first quarter despite the challenging conditions. We are taking necessary steps to ensure that Cummins emerges from this downturn as a stronger Company, which will be well-positioned to take advantage of the recovery when it begins.

Given our outlook on the economy and end markets, we have revised our guidance for 2009. Our guidance for this year is now for sales to decline slightly more than 30% from our record year in 2008 and for EBIT to be approximately 5% of sales excluding restructuring charges. Now Tom will share some additional details on the actions we have taken, and why we think the Company is well-positioned for the future.

Thank you, Tim. We began taking aggressive actions to lower our costs in the first quarter of 2008 when it became clear the recession was going to lead to a significant decline in our volumes in most markets around the world. As Tim said, we took additional actions in the first quarter of this year including further reducing our global workforce by approximately 4100 people. These reductions include 800 professional job cuts announced in February, approximately 2,000 hourly workers at our manufacturing facilities around the world, and 1300 contract and temporary workers. Included in those actions was the closure of an exhaust manufacturing plant in Wautoma, Wisconsin. We also announced the consolidation of our two turbocharger operations in Charleston, South Carolina, into a single facility.

When combined with reductions made in the fourth quarter of 2008, we have lowered our global workforce by about 7,000 people or 15% since October of 2008. Many of the job actions taken in the first quarter occurred in February and March, so we should begin to realize the full cost benefit of those actions in the second quarter of this year.

We expect that the reductions taken in the professional workforce in the last two quarters will save the Company approximately $80 million in 2009 and more than $100 million on an annualized basis. Based on the latest information we have, I am hopeful that we will not need to make additional global cuts in our workforce in 2009 as a result of the recession. We will, however, likely to continue to reduce or reorganize manufacturing capacity in response to volume declines for some products and this may still have impacts on our people.

In addition to the employee reduction, we have worked hard to manage expenses to keep our costs aligned with the lower volumes we are experiencing. Those efforts are reflected in our Selling, Administrative and Research expense for the first quarter which fell by $69 million compared to the same period in 2008 and was $116 million lower than third quarter of 2008.

We have also scrutinized our capital spending, prioritizing our critical projects while reducing spending in other areas. For example, we will continue to fund time-sensitive projects such as those related to our 2010 product launches where we are pushing hard to define what is truly critical and what can be delayed. As a result, our capital spending the first quarter was $64 million, nearly 30% less within that we spent in the same period a year-ago and 70% less than our spending in the fourth quarter of last year.

Pat will talk in more detail about working capital in his remarks, but I wanted to say a few words about the importance that we are placing on lowering working capital, and, in particular, on reducing our inventory as part of our strategy to generate cash during the downturn. We believe that reducing inventory without sacrificing sales or delivery performance is our single largest opportunity to lower working capital, improve cash flow for Cummins this year. Over the next three quarters we expect to reduce our inventory by $200 million and we have people at all levels across the Company working on this issue.

We have established corporate supply chain team made up of people from all parts of the Company to identify opportunities to improve supply chain efficiency, eliminate waste and reduce inventory. We expect to begin seeing the result of this work in the second quarter and this effort will remain a priority for Cummins throughout 2009.

I would like to close my remarks by echoing what Tim has already said about our long-term prospects. The Company is fundamentally strong and there will be a number of significant macro trends working in our favor once the recovery begins. For example, our technological leadership positions us very well for future growth as emission standards become more stringent around the world and the demand for cleaner, more fuel-efficient vehicles increases.

The expected global shortage of electricity especially in developing regions, such as the Middle East, India, Latin America and Africa will benefit our Power Generation business which is posed to capture many of these opportunities. Increased infrastructure spending, especially in the large developing markets such as China and India, will increase demand for all of our products. Even in the shorter-term, economic stimulus efforts in these countries may provide some business opportunities for Cummins later in the year.

As the first quarter clearly showed, 2009 is going to be a challenging year. But I am confident that our current financial strength along with our plans to manage through the global recession will position Cummins to emerge an even stronger company. Now I will turn it over to Pat who will provide more details about the first quarter.

Thank you, Tom. As mentioned earlier, we saw further deterioration in global market conditions this quarter which affected all of our businesses. (inaudible) negatively impacted our sales by 5%, the majority of the drop was from lower volumes across all four segments, but particularly in Engines and Components.

Sales were down 30%, a drop of over $1 billion compared to the first quarter in 2008, which contributed to a decrease of $263 million in gross margins. Joint venture income was down $34 million as expected, mainly impacting the Engine segment. Spend reductions in Selling, Administration and Research and Development resulted in a $69 million decrease in expenses from a year-ago.

EBIT margins excluding the restructuring charge, dropped from 9% last year to just under 4% in the first quarter. We recorded a $66 million restructuring charge in the quarter of which $60 million was related to severance cost. Net income was $7 million, up $0.04 per share, excluding the restructuring charge, net income was $51 million or $0.26 per share.

Let me provide details for each of our segments starting with Distribution. Revenues from this segment were down 7% year-over-year. Cummins had the greatest negative impact on sales in this segment contracting 11% as a result of the stronger US dollar. Excluding the unfavorable currency effect and benefit from acquisitions last year, organic revenue was down only 3%. Aftermarket sales and services were relatively stable, while industrial engine and Power Generation sales began to turn negative.

The combination of increased pricing, higher joint venture earnings, and the absence of acquisition expenses in the prior year led to the improvement in EBIT margin to 14% of sales. In Power Generation, sales declined 17% versus a year-ago with nearly a third of the decline due to unfavorable currency movements. The demand for commercial products and alternators was lower in the US, India, Western Europe, and Russia. EBIT margins improved to 10.5% of sales and were positively impacted by increased pricing and lower Selling, Admin and Research and Development costs.

The Engine segment experienced a decline of 32% in sales from a year-ago, as all end markets were negatively affected by the global recession. As a result of the significant volume deterioration in gross margins and in arranging joint ventures, the Engine segment EBIT margin dropped to a negative 1.1% of sales for the quarter.

And finally, revenues from our Component segment declined by 35% from a year-ago. All four businesses were down significantly. Volume was a primary contributor to the EBIT margin decline to 0.2% of sales.

Looking ahead for the remainder of the year and as Tim mentioned earlier, we are now forecasting a revenue decline of slightly over 30% this year and an EBIT margin of 5% of sales, excluding this quarter's restructuring charge.

Here's how we see the segments for 2009. For the Engine segment, we project revenues to fall more than 30% but are still forecasting the segment to generate a positive EBIT margin of 1% to 1.5% of sales. We expect margins to improve sequentially in the second half of the year as production volumes stabilize, joint venture income improves, and we fully realize the benefit of the restructuring actions we have taken as well as lower material cost.

We highlighted the revenue outlook for the major end markets on slide 16. We now project North American classic heavy-duty truck production at 113,000 units and a market share to hold at 45%. Within the medium-duty truck and bus markets, we expect the truck shipments to decline 20% in North America, with even sharper declines of 30% in Brazil and 60% in Europe.

Globally, our shipments to bus markets will decrease; however, stimulus spending in the US and in India will benefit transit bus markets as both governments have announced specific plans to renew or expand bus routes. Shipments for Dodge Ram pickup trucks will be down nearly 10%, and shipments to the recreational vehicle market will deteriorate close to 40%.

Revenues for the industrial engine market are expected to decline nearly 40% as OEMs continue to reduce excess inventory in the channel. We experienced significant cancellations during the first quarter, and now expect our engine shipments to global mining and construction markets to be down 50% and 60%, respectively.

Our Component segment revenues will fall more than 30%, primarily due to the same weakness in truck and construction markets in North America, Europe, China and India. We are forecasting the segment to deliver EBIT margins in the range of 1% to 2% of sales with sequential improvement in the second half of the year as end market demand stabilizes and we realize the cost benefit of the restructuring actions.

For Power Generation, we project sales to decline by more than 25% in 2009, with segment EBIT in the range of 9% to 9.5% of sales. Inventory corrections in the channel will continue to affect sales through the summer, but we expect demand to stabilize in the second half of the year. We are projecting some level of pricing pressure to our margins going forward due to the inventory in the channel, which is implied in our margin guidance. For our global commercial gensets business, chain of demand is expected to fare better than the rest of the world and soften only slightly from 2008 levels.

Our stimulus package spending continues to drive demand in the country. Western Europe and Russia are expected to experience the steepest declines as the recession and credit availability are limiting investments in these regions. We anticipate additional deterioration to the already depressed consumer market for gensets as recreational vehicles and recreational green markets continue to drop in North America in 2009.

In distribution, sales are expected to drop between 15% and 20% with half of the decrease coming from the impact of a stronger US dollar. About half of the segment sales are exposed to industrial engines and Power Generation where we expect a decline in demand. We also anticipate the aftermarket sales and service revenues will be slightly lower similar to past cycles. Segment profitability as a percent of sales will improve slightly from 2008 levels to between 11% and 12% of sales. The benefit of increased pricing, the restructuring actions and lower spending levels are expected to mitigate the decline in revenue.

And finally, cash management remains a top priority for the Company this year. Despite the challenging economic environment, we remain well-positioned with a strong balance sheet, relatively low debt, and access to a significant level of liquidity. We were pleased to manage through the first quarter without having to use any of the $1.1 billion revolving credit facility that we put in place last summer.

Although inventory levels continue to decline in the first quarter, we expect to see more significant reductions as we move through the second quarter. In addition, we continue to review our capital investment needs for this year and are reducing our guidance to the range of $300 million to $350 million. We are committed to generating positive cash flow in 2009 so that we can continue to invest in future growth opportunities. We will now take your questions.

( Operator Instructions ) And your first question will come from the line of Henry Kirn with UBS. Please proceed.

Hey, good morning, guys.

Good morning, Henry.

A question about end-market price discipline. You mention some pricing pressure in Power Gen, could you talk about it more generally across your businesses?

I think as we have talked about before, in many of our segments pricing is something relatively stable as a result of agreements that we have with OEMs over significant periods of time. And where we see more short-term pricing pressure as in those markets where we sell directly to the end user such as Power Gen. Again, I will just reiterate that we have been increasing prices over several years now in those markets. And so what we are anticipating is that that's going to be more difficult, and we may see some - - even some retraction in the second half of the year, but we are still, at this point, experiencing some of the increases we put in last year. So it's kind of an anticipation point as opposed to what we have experienced so far . Is that close enough? Henry or do you want

Yes, is there any way could you talk about maybe geographic expectations for pricing?

I don't think I have a geographic view of it. I mean, our anticipation in Power Gen market is we will see pressure in various parts of the world. I don't think it is a geographically driven issue.

I think where we have seen probably the most pricing pressure in Power Gen is in China and India where it's been much more competitive than let's say in western Europe at this point on pricing. But it is not predictable, I think, going forward where the most pricing pressure is going to be.

That's fair. And could you talk a little about the 2010 engine feedback. How many do you have in testing? The customer response. And have you gotten any early order indication that fleets are going to go with your engine.

Dean do you want to - - I can add some if you - - Our view is we have - - rather than talk about details of our program which I think would not be smart on our part, we have got very positive response. We have a lot out already. We anticipate very strong quality performance and so do our OEMs and so what I say is we are on track and feeling really good where we are on our 2010 launches. I just don't want to be more specific from a competitive point of view.

Okay. Thanks a lot.

All right.

Your next question will come from the line of Adam Uhlman with Cleveland Research. Please proceed.

Hi, good morning, guys.

Good morning, Adam.

I have a question regarding the earnings guidance for the year. Could you talk about the expected seasonality of earnings noting that you are not giving quarterly earnings guidance here. But there seems to be a lot of moving parts here with restructuring and accelerating on the back half of the year but presumably many of your customers are going to be having extended shutdown days. Can you talk about just generally how you would expect earnings to unfold as the year progresses?

Yes, Adam, this is Pat. You are right. I am not going to give you quarterly guidance, but what I would say, we do expect the second half of the year to be stronger than the first half of the year. And let me give you a bridge from 2008 to 2009 that might help illustrate why we think that's the case.

When we looked at the volume impact year-over-year, when we translate that to EBIT margins, we think the volume drop of over $4 billion is going to cost us about 9 percentage points in EBIT margin. We also, as we said on the comments earlier, expect joint venture income to be less in 2009 and 2008. And that is going to cost us about another 7/10ths of a point in EBIT margins. Between price and cost reductions and material cost improvements, we expect to get 6% of that margin drop back. So if you net the 9 for volume and net the almost 1% for joint ventures and take the 6% back, that's how you get to a 4% drop year-over-year what we are looking at.

Pricing has been strong in the first quarter and as Tom just commented, we are anticipating some pressure as we see the rest of the year in pricing. We will see joint venture income improve sequentially as we go through the year, and we do expect to see material costs improve sequentially as we go through the next four quarters too.

Okay. Got it. And then just a follow-up on that. The guidance for the Power Generation business is coming quite a bit on the top-line, but seems like the decremental margin that is assumed is a bit lower than what were talking about 90 days ago. So, there was a comment that pricing was going to be coming under pressure in the Power Gen business. Could you bridge is what is unfolding in the Power Gen business that might be offsetting that pricing pressure.

Yes, absolutely. We are definitely seeing material cost improvement as we go through the year that is going to help the Power Gen business. And I think that segment has done a pretty good job to date and will continue to do a good job in reducing its Selling, Admin. and Research and Development costs. I think that will help offset some of the pricing pressure that we are anticipating for the second half of the year.

If I could just add two things. In the Power Gen, this is back to our pricing point, we are seeing - - we are anticipating some price decrease but we are benefiting from some price increases we put in coming into this year. And the one material cost that is negative for us is copper. Where although copper prices are decreasing, we have a hedge program in n our alternator business which has benefited us over many years now. Now it is acting against us in terms of benefiting fully from the decreasing copper. We are still going to be paying prices from previous years.

So I think all in all, while the price is anticipated to be worse, as a general matter, pricing over the course of the year is not much worse, and material costs will have some benefit but not as much as we anticipated. Most of the benefit we are seeing in cost is because of actions we are taking within the business to reduce cost in the current demand environment.

Okay. Got it. Thanks very much.

And your next question will come from the line of Ann Duignan with JPMorgan. Please proceed.

Good morning, it's Ann Duignan. How are you guys?

Good morning, Ann.

Tim, I think it was new your opening remarks you mentioned that you are not anticipating any economic recovery until late 2009. And I think you said no improvement in your end markets in 2010. Could you just dig into that a little bit more and is that a blanket statement that you don't expect any of your end markets to recover next year or you think on balance on some of the early cycle businesses might decline but the later cycle businesses may continue to deteriorate. If you could just give us a little bit more color in what your thinking is, I would appreciate it.

Yes, I said that we wouldn't see the bottom at the earliest would be at the end of this year and it might be in 2010. I think that yes - - our markets and our business is in a very, very uncertain time right now. And we want to assume and be very conservative about our forecast in order that we run the business and manage both costs and manufacturing capacity to what we think is a real demand. And I think we have done a reasonable job and we have done it faster than we have ever done before.

If, in fact, some of the markets return in the latter half of 2010, then we are just going to benefit from that. But both internally and externally, we are taking the point of view that this recession is going to last for a couple of years, actually nine quarters, and we want to manage our business that way. But I don't think we know anything more about the economy and whether it is - - our end markets or geography than anybody else does. We need to make sure we are running our business in a very effective way.

So you are setting the tone for the organization internally, not to plan and to right-size your business for today's level of activity?

Exactly. And, in particular, there is a big emphasis on managing cash. And while inventories are not where they need to be, that will be an area emphasis for the rest of the year. And I think as Tom said, we expect to generate a couple hundred million dollars from inventory and we expect to be cash positive. I think we have a cost structure right for today and we are going to see some benefit because of restructuring we have done. If, in fact, we have an impact in the other parts of the organization, we see more deterioration, we are prepared to take further action.

We are, though - - the tone setting that Tim talked about helps us organize our prioritization activities and that sort of thing. But we are at the lower level positioning ourselves to be able to capture early recovery kind of markets. If, for example, we do see China coming back a little faster and India coming back a little faster, we are focused on those markets to make sure we are seeing if there is stimulus package stuff we can get or whatever and making sure we have resources ready to go in those areas.

So we are keeping our mind on places that might recover more quickly and those place where there might be longer cycle recoveries or late cycle businesses, were trying to be even more conservative of how we are planning capacity. So, we are taking the tone that Tim said and differentiating a little bit down when we get down to what markets we might able to benefit earlier and later. But I think the tone setting helps us not lose track of what we need to be prepared for.

This is my fifth recession in a leadership position. And the most common mistake we have made in the past is we have waited too long to react, and then when we reacted we were too optimistic about what we thought the demand was going to be. So we are trying to avoid that common mistake we have made and other businesses have made and be as realistic that we possibly can and right-size the organization.

That is helpful, and I sympathize that you are on your fifth recession. It can't be easy. Just a quick follow-up on the inventories. Could you just describe what specific challenges you face because I know your fifth downturn. You've been through this before. Pulling inventories that quickly is always a challenge. What lessons have you learned this time, and is there anything unique about your supply chain that just causes the lag in the ability to get those inventories down?

Let me comment. I don't have five recessions behind me yet, but I feel like I do because Tim reminds me frequently. But in inventory, we do have challenges in supply chain. It is a long one because we do have to go from components all the way out to distribution. We are trying to make sure that we are keeping track of what the end markets are all the back to our components group is challenging from an inventory point of view. As you guess, the market has fallen, particularly some of the late cycle markets and, therefore, we have seen some cancellations. We see inventories run up in some areas just as we make improvements and bringing the inventory down other parts of the Company.

Our biggest challenge in the short run has been as sales have fallen so rapidly, and we have been unable to get the order rates and inventory ramped down as fast as the sales have fallen. We will get that managed, and we have done a lot of work in the last three or four months to figure out where we are on that. But that is why we are disappointed a little bit with where we are in inventory today is the sales drop has happened quickly enough that we haven't gotten our inventory back to where we want. And that's another reason why we put this cross business effort in so we can find out where all of the pockets were and make sure we were clean on all of the order boards and knew where we stood, and could start working inventory down from there.

The one thing I would add. If you go back and look at inventory levels at the end of the third quarter, we were just under $2 billion. And today at the end of the first quarter we are somewhat around 1.75. So, what has been going on and some of that reduction is due to currency movements. But inventory has been coming out primarily in the early cycle businesses in components and the engine business. What we expect to see going forward is more improvement in those businesses but also in the later cycle, high horsepower engine, Power Generation, distribution businesses to see improvement there. You are absolutely right. There is more work that we have to do to get inventory where it needs to be.

Okay. So my takeaway is that it is a lot about your mix of businesses, early cycle versus late. I will leave it at that just because I have taken enough time and I will get back in queue. Thank you so much for the color.

Your next question will come from the line of Steve Altman with Jefferies & Company. Please proceed.

Hi, good morning.

Good morning, Steve.

It sounds like if you were really focused on inventories, that the second quarter could be significantly weaker than the first. Are we willing to make any comments in that regard?

No, I am not going to tell you what the second quarter is going to look like. I want - - I wouldn't expect it to be much different from the first quarter. As I said, the second half of the year is when we expect to see more improvement in our margins and in our EBIT margin at the bottom line. We are anticipating, I think, from the remarks we just said that Power Generation and some elements of the high horsepower markets will come under more pressure in the second quarter than what we have seen in the first. But I am going to avoid trying to give you too much guidance on exactly what the second quarter is going to look like.

And you definitely don't want to read into our comments about inventory sales forecast. I mean, what we are saying is we have given you an annual look and what we are really responding to in our inventory goals is trying to respond to the fact that we expect sales to be down now significantly year-over-year and we want to get working capital levels commensurate with where our production in sales levels are. That is what we are talking about as opposed to a quarter-to-quarter look.

Okay, great. Thanks, Tom. And just to follow-up on the cash flow. Assuming you hit your inventory targets, what do we think of networking capital. I assume you will have to give a bunch of that back on payables. How should we think about networking capital?

Networking capital will come down. We will see a cash inflow this year. You are quite correct. Payables will be an outflow, receivables will be an inflow. And those two I would expect to somewhat offset. Most of the improvement that we expect to generate will come through the inventory with what we are doing.

Okay. Great. And just a final color question, I guess. A number of industrial companies have made comments this quarter that business fell off a cliff around year-end and was extremely difficult thereafter, but really hasn't deteriorated much since then. Any color you can give us with respect to how the monthly progression of the quarter went that might be worth calling out?

Yes, I would say that we would even say business fell off a pretty stiff cliff in the fourth quarter.

It was the second week of October.

Just to give the date. So, I wouldn't say first - - January was not that significant in terms of - - we really start in the fourth quarter. But we do have this early cycle, late cycle situation where Power Generation business and the distribution, the whole good sales of those components in our distribution business did hold up longer. And, frankly, when we started the year, we expected it to hold up a little longer than it did.

So what we saw that business deteriorate more quickly as we started going through this quarter than we had anticipated. That's the major -- if you want to talk about what shifted during the quarter, everything got a little worse definitely. You heard from Pat in terms of that everything, in terms of outlook got a little worse looking across the year. And the Power Gen business fell off more quickly as a late cycle business than we had anticipated when we entered the year.

Okay, Tom, roughly what do you think of in terms of early cycle, late cycle mix for Cummins?

Late cycle really is - - I mean the Power Gen business, some of the high horsepower businesses like mining and oil and gas fell a little bit later and then distribution - - part of the distribution itself, but I don't really have a percentage of those. You can call later, but I don't have a number that I can give you off the top of my head.

Great, thanks, guys.

Your next question will come from the line of Andrew Casey with Wachovia Securities. Please proceed.

Good morning, everybody.

Good morning, Andy.

Question on the restructuring benefits. The $100 million that you are talking about projecting for 2010 and appreciating that you really don't want to recognize any positive things that you may or may not be seeing. But in the $100 million, if you do see some recovery in the early cycle markets, mainly on the on highway piece, do you expect to maintain that $100 million? Or would you give some of that back as variable costs go up?

My goal would to be maintain it all. So I don't anticipate giving any of that back.

Okay. And then Pat, if you can comment - - there is a lot of discussion on working capital and cash flow and all that which I understand you are managing to that. Are you close to any of your covenants at all.

We have got bags of it, ample room with regard to all of our covenants that we would oblige to comply with. Plenty of them.

Okay. Thanks a lot.

Thank you.

And your next question will come from the line of Jamie Cook with Credit Suisse. Please proceed.

Good morning.

Good morning, Jamie.

I guess my first question, just to follow up on Steve's question. Tom, a lot of companies also comment - - you gave good color on the quarter, but as you look to - -II guess after the quarter, as we look to April did you guy see any signs of stabilization after Q1? And then my - - two other quick questions. On the distributor side, I am surprised that we are maintaining margins comparable to last year. So how you think about that?

And then, Tim, you are talking about a 5% margin or so at the trough. How is that relative to, I guess, your expectation? Is that a better job than you thought would you do? Is it about in line? Or are you disappointed with that?

Well, let me start and I want to make sure - - I appreciate you not telling me I told you about with Power Gen, by the way.

Every once in a while I get something right.

April - - I write a monthly note to all of our employees talking about where we are and trying to help everyone in the Company understand our situation and and what is going well and what is not going well. Needless to say, there's not too much in the what's going well column lately. But I get a lot of questions about that. And I reviewed all the economic data and sales data that we are seeing and my view is that April, it is really hard to say.

There are a few things make it if you really want to be optimistic, you can look at them and stare close and say things are stabilizing. It's fine. There are a few other things you could say which say they are not. I fall back to Tim's point. It is just really difficult to tell, and I think our goal is to say we think we have a reasonable view for the year, and for 2010, if it is sensible, and we are going to continue to do it and are going to be ready to react to whether it stabilizes or it doesn't. Sorry to be - - I don't mean to dismiss the question, I just have - - all the stuff I look at says --

Was inconclusive.

Yes, could go either way.

Okay. That's fine.

Remind me, your second question was again?

The second question margins on the distribution side.

The DBU margins have done quite well. We are pleased with it. We were, frankly, a little positively surprise about it as well. Two or three things working in our favor. One is that we have over the last several years expanding territories while at the same time reducing cost by aligning our businesses better in the distribution; finding synergies, expanding our business at each of our regions, improving distributions.

So, we have positive trends coming into the year about things that we are doing better in the distribution business which are offsetting some negative things like falls in sales particularly and things like Power Gen and engines. The issue is we have some mixed benefits here as whole good sales go down and parts sales go down less, you have a margin mixed benefit in the distribution business. It is still - - from the dollar margin point of view it is down, but from a percentage, it is up. Those are a couple of things working in the distribution business that are making the numbers a little better.

And the question about how I feel about the 5%. I just begin with, I'm never satisfied. And I think --

He is not, really.

I think we need to do better. If you look at performance from a historical standpoint, first of all, the drop in sales is the steepest and the fastest I have ever seen. So we clearly didn't expect it to be as significant as it is. But if you look at any point in time in our history prior to this, we would be losing money and losing a lot of cash, or using a lot of cash right now. From a historical perspective, we have had a very, very solid quarter and that's because we assumed the worst and we acted very quickly.

Going forward, I would hope that we can do better, but I wouldn't forecast that, because I think we have to demonstrate what we can do quarter by quarter. Long-term, I am still very comfortable with our guidance on profits and I do feel that we haven't sacrificed. The biggest concern I have is to sacrifice on our new products on introduction and we have continued on invest in that. We have gained market share, and the products that we got out on test right now are doing very well. So, I still am very bullish on our future, but what we need to do the very best we can. I think we had a solid quarter and I hope that we can do better in the next few quarters.

If it helps, I am pleased. Congratulations.

Thank you, Jamie. I don't think I have ever heard you say that.

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

Good morning, everyone.

Hi Eli.

Can we talk a little bit more about Power Generation. As we go through the year with margins going down and the odds are one - - as Power Generation decline likely to continue through 2010 or are you expecting 2010 to be lower than 2009? Do you have any sense for what trough margins will look like for Power Gen as you go through this downturn.

Eli, first, with regards to 2010 versus 2009. I would say we really just don't know. What we are saying now is that as Power Gen as a later cycle area is likely to have a longer negative as well. What we don't know is whether 2010 is going to be better than 2009 or worse. It is just too far out to say. And there is - - you may remember from previous years, there is some significant variables in Power Generation that are very difficult to forecast. For example, energy crisis in one area , the other caused very large spikes in orders for us.

Development in some of the earlier stage development, some of the economies like China, India could have had significant positive impacts. So it is really difficult to say. I am not dodging it. We are wondering ourselves. But right now what we are assuming is that 2010 will be another tough year for Power Generation in terms of volume. So that's kind of how we are thinking about it.

With regard to trough margins, I don't have a number to give you, because, of course, it depends on the size of the trough, but our view is that we have significantly changed the structure of our business. You remember in the last downturn, we were losing money in that business. We were having very difficult time making very much money even at the gross margin level, and we have significantly changed that. We can see now in quite a low quarter that we are still making good margins and the way we have done that is we lowered the cost of all of our products to be much more competitive.

We diversified our business across a whole bunch of markets so we are not dependent on one or two markets, and we improved our market share and market position so that we can maintain prices in markets across the world. All of those three things, I think, are sitting in our favor in regards to maintaining good margins as we go through this cycle. But I just don't have a number to give to you say this is the bottom, but suffice it to say, my expectation of the Power Generation business is they will maintain strong margins in their target range throughout the entire cycle. That's what I am trying to get them to

Have you seen any change in Power Generation business from the China stimulus program and the movement that is going on there. We hear a lot of companies talking about that and you have a big exposure to China.

Yes.

Have you seen any benefits yet or any flow through from the programs?

What I say is we have participated now in a number of bids and projects. So now we are seeing projects. What I can't tell if you is there is any sales booked yet from significant projects related to stimulus, but there are definitely a number projects being bid. I talked to Tony recently and he said we are at least in three significant bids, not all in China, but across the world and a couple on China that are - - that could be real business for Cummins. So we will see how those play out, but we are now seeing projects, whether or not they will result in significant business remains to be seen.

And one final question. We have been through the last couple of years talking about the component sector and achieving, I guess, 7% operating profitability. Now the world, granted, has changed dramatically and just to stay above break-even is probably quite attributed to a lot of the changes there. But any thought processes of how you look at components over the next couple of years? Is it true you have to wait for volume to come back, or will Cummins see some real improvement in profitability from a breakeven - - just slightly over breakeven level as just the 2010 markets develop even though not huge volume changes.

Eli, this is Pat. Yes, we expect components profitability to improve as we go through this year without any significant volume recovery. I think you will recall in the second and third quarter last year when volumes were much stronger, components were hitting and meeting that 7% number you just quoted. Our target for components is 9% and we are not backing off that. Clearly, we aren't going to be anywhere near that just now. But you should expect to see the business improve as we go through the second half of this year.

And if volume doesn't change a whole lot industry-wide indicating in 2010, can that improvement continue in the component sector just on the basis of the change in mix to the new emissions engine?

That is my expectation.

Eli, I will point you back to what we talked about in the Analysts Day in November in Charleston and the number of businesses we have visibility to in terms of content increase. For every engine sale that will benefit the component segment and some of of the commercial pricing discussions we are having about 2010 product that we both believe are going to help improve the margin situations as we go into 2010.

All right, thank you.

Your next question will come from the line of Meredith Taylor with Barclays Capital. Please proceed.

Hi, good morning. I am hoping you can help us think through mix a little bit, particularly in some of the late cycle businesses, industrial engines where it seems that you are still looking for quite a dramatic falloff in mining as well as Power Gen. As we think about the adjustments to EBIT targets for both of those businesses, how should we think of the role that the mix is playing there over the balance of the year and perhaps ahead to 2010?

On the Power Gen side I talked about mix before. It's not a significant determinant of margin. At one time as I was talking to Eli, back in 2003 we were very reliant on a few business units or business segments I would say, markets to generate most of our profit and when those went down, we went down under a zero. But in today's Power Gen business we have strong profitability across each of the segments. I don't expect a significant deterioration in margin based on mix in any of the segments that you mentioned. There are definitely volume impacts from those segments, but I don't expect a margin deterioration.

With regard to the engine business, there are, I would say, the same thing generally speaking, although there clearly are mixed differences by end market and customer. Overall our speaking though, the big impact on engine business margins today is volume. I mean, there are mix impacts that are hurting us today, but the biggest impact is volume. Pat, would you add anything with regard to what you have commented before?

No, I think you summarized it perfectly. I don't think mix is something that we see improving or deteriorating as margins as we look forward. It's all a volume story just now.

Okay. That's helpful. Thanks. And then, in terms of heavy-duty engines. It doesn't seem like you're looking for much in the way of improvement over the balance of the year in terms of some prebuy activity. Can you talk about what your expectations are, though, for business from Navistar as they are seeking to fill some of their 2010 15 litre requirements from you in the back half of the year. What has been built into your model?

Well, I won't comment on specific orders from customers, but I will say this, as the heavy-duty market, our view of the market has fallen significantly since late last year even from very low level to an extra very low level. But we will still have customers trying to plan for the transition to 2010 and each of them has a number truck models and another of challenges with regards to how they plan to engineer those engines into their new models . And each have a different plan and, frankly, it's a plan by truck model.

And so we are supporting each of our customers in that way. And they have been modifying those plans over the course of the year as their own volumes drops. And it is actually quite a volatile situation on how they plan to for it. But they all have plans and we are responding to all those plans to make sure they can run their transmissions to 2010. That includes Navistar. We are talking actively with them on how they plan their transition but other than that I wouldn't want to comment on specific levels with

I would say that we are also not planning on any prebuy whatsoever. There is no indication now that there will be. If there is some prebuy later on in the year, then we will benefit greatly from that. But, again, we are going to take the most conservative point of view we can in terms of how we are doing our cost structure in the business today.

Okay. That's helpful, thanks. Great execution in a tough environment.

Your next question will come from the line of Kristine Kubacki with Avondale Partners. Please proceed.

Good morning.

Good morning, Christine.

Just a follow-up question on the on-highway business. Can you give us some color perhaps then on with those plans on what the inventories are looking like with the engines at the truck OEMs and if that will forestall your business further?

Unfortunately that's a difficult one for us to comment on too. I think it is much better to ask them about their inventory levels than us for obvious reasons. But what I would say is that throughout the industry there is no question that sales have fallen off quickly and everyone is trying to figure out how to deal with previous - - their production levels have come down, there is more inventory throughout the chain and everybody is adjusting their production level is down.

You have seen announcements about people in terms of production levels and that is all them adjusting to lower demand and inventory levels throughout their supply chains. So that is definitely a big issue in the industry, and that's another reason why, as Tim said, we just have to manage really conservatively because everyone is dealing with that and we are back in the chain a little ways in term of how we respond.

But we are actively talking with every OEM about their order rates, why they are ordering those, what they are doing with inventory, what they are doing on transition. We talk every day with them to make sure we understand what they need and why. So I think we are current with it, but it is definitely an issue throughout the supply chain, not just engines on overhang.

Generally speaking I would say that the truck OEMs have been more responsible in this recession than perhaps in historical times, particularly in a year prior to an emissions change. And I think they have in the past sometimes built inventory in anticipation, and they haven't done it this time. So I don't think that there is as much inventory in this recession as we have seen in previous ones.

Okay. That's helpful. And then my last question would be with the automotive group making news, even this morning, of a potential bankruptcy. Are there any issues within the supply chain that you are already working on? Are there any issues we should think about as that progresses.

Well, I am surprised it took almost a full hour before we got that question. We have been working with Chrysler for some time. I've had personal conversations with Bob Nardelli exactly where we are. The pick-up truck business is a very important one to us. Chrysler is an important customer. We will continue to work with them.

I don't think a Chapter 11 restructuring is necessarily a bad thing and we have dealt with customers in this kind of situation before. And we have done several things to protect our business and mitigate the risk. Tom got into it this morning to make sure we would have the most up-to-date details, so I am going to turn it over to Tom and let him give you some specific facts.

I will talk first about our relationship with Chrysler and then I will talk about the supply chain which I think was maybe your specific question. On our - - with Chrysler, we have now been preparing for this potential eventuality for a long time, and that is really on the customer and supplier side. And we have done work to protect our exposure with Chrysler. We participated in this US Treasury Supplier Support program which allowed us to ensure our receivables after March 19. We got a receivable - - it cost us a 3% discount, but we were able to get all of our receivables after March 19 into this program which leaves with us less than $8 million in receivables prior to the March 19 program. Which we are happy that we were able to do that.

In addition, on the supply side, there are a number of suppliers that supply us that also supply the auto industry. And we have for the last six months had a special program where we evaluate all suppliers for financial stability. We have had always done that on an annual basis, but now we are doing that on a monthly basis where we look through financial stability. And those who fall into a set of criteria, which most of the automotive suppliers do, we do extra work on those and we have a report that we put out each week on status. And so we have a bunch of those we are working with to make sure that we have continuity of supply and if, for some reason, we don't think we will be able to, that we have made other arrangements to get continued supply with another supplier or some other arrangement with another suppliers. We have been actively working that for months.

I really don't see anything new happening as a result of things today with those suppliers, because the ones that have been potentially exposed we have been tracking now for several months. I am worried about it. I think supply base is a big concern out of general downturn, but I don't think Chrysler going into bankruptcy changes very much of that. I think it is a result of the fact that volumes are so much lower in the automotive that caused the problem. So we are very close to it. It is a big issue to the Company, and we are taking action all the time on supply base.

I appreciate the color. Thank you very much.

Okay. I think that is all the time that we have for questions today. I appreciate everyone tuning in to our Q1 earnings call and I will be available throughout the day for questions. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. And have a great day.