康明斯 (CMI) 2009 Q4 法說會逐字稿

Good day, ladies and gentleman, and welcome to the Q4 2009 Cummins, Inc. earnings conference call. At this time, all participants are in listen-only mode. We will conduct a question and answer session towards the end of the conference. (Operator Instructions).

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

Thank you, [Antoine]. Welcome everyone, to our teleconference today to discuss Cummins' results for the fourth quarter of 2009. Participating with me today are Chairman and Chief Executive Officer, Tim Solso; our President and Chief Operating Officer, Tom Linebarger; and our Chief Financial Officer, Pat Ward. We will all be available for your questions at the end of the teleconference.

This teleconference will include certain forward-looking information. Any forward-looking statement involves risk and uncertainty. The Company's future results may be effected 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 statements. A more complete disclosure about our 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 website for the reconciliation of of those measures to GAAP financial measures. Our press release, with a copy of the financial statement and a copy of today's webcast presentation is available on our website at www.cummins.com under the heading of Investors and Media.

With those formalities out of the way, I would like to call your attention to our upcoming Analyst Day at the New York Stock Exchange on March 16. Invitations will be sent out shortly, but please mark the date on your calendars as we will discuss our new five-year outlook for the Company. Turning back to the fourth quarter results, we will begin our remarks with our President and Chief Operating Officer, Tom Linebarger.

Thank you, Dean. Good morning. I want to start today by sharing thoughts about our performance in 2009 which ended with the most profitable quarter in the Company's history, and then give you a high level look at our expectations for the year. Pat Ward will then provide greater detail on both our fourth quarter results and the 2010 outlook, and Tim Solso will share his thoughts about the Company's long-term prospects.

As I mentioned, we had an outstanding fourth quarter. All four business segments reported stronger sales and higher EBIT percentages than in the third quarter. Continuing our pattern of sequential quarter profit improvement throughout 2009. Sales of $3.4 billion in the fourth quarter were 3.4% higher than the fourth quarter of 2008, an increase 34% from the third quarter. Earnings before interest and taxes before restructuring and other charges were 11.4% of sales. Our best quarterly performance since the peak of the previous economic cycle in the second quarter of 2008. As you will recall, we entered this recession in a very strong financial position. And quickly established a plan to manage the business effectively through the downturn. In simple terms, our focus throughout the recessionary period has been to one, reduce costs; two, align manufacturing capacity with real demand; three, earn a solid profit and generate positive tax flow, despite dramatically reduced volumes; four, invest in projects and technologies critical to our growth; and fifth, continue to demonstrate to our customers that we care about their success more than anyone else. I think our results in 2009 speak to our success in managing all these priorities. I'm proud of the work that Cummins employees did to make this year a strong one despite the challenges we face.

Our efforts to lower working capital resulted in a $442 million reduction in inventory in 2009, which contributed significantly to our improved cash position. We also strengthened our supply chain management system, which we expect to yield higher productivity and lower costs in 2010 and beyond. We used a rings of defense approach to lower cost across our manufacturing systems, quickly moving to reduce capacity and becoming more efficient in our manufacturing processes as volumes drop. For example, we took advantage of the volume slowdown in the first half of 2009 to better synchronize flows at a number of our plants and distribution centers. That work paid dividends in the fourth quarter, providing significant leverage as volumes increased.

While we are talking about our manufacturing operations, I want to take a moment to recognize all the people who work in Cummins manufacturing plants or at our supplier's plants around the world. 2009 was a challenging year for our plants and for our suppliers. We began by making deep cuts in our plants to stay in front of rapidly falling demand across most of our markets. Then within a few months of hitting bottom, demand at many of our locations returned to record or near record levels. By working together, we were able to minimize the impact of the steep volume drop early in the year and take full advantage of the rapid increase late in the year. This was especially true in our US engine and components plants, where we worked nearly nonstop to keep up with the temporary spike in demand during the fourth quarter and in advance of the 2010 emissions standards change.

For example, production of our Jamestown engine plant was at its highest level ever during the fourth quarter. Today, just a month later, volumes have dropped by 75%. We now have more than 400 workers on voluntary temporary leave for most of the first half of 2010. That kind of rapid change is exceedingly disruptive to the business and extremely hard on our people and our suppliers. But we managed to do it successfully if 2009, and have plans in place to remain profitable in our engine business in the first half of 2010 despite the very low volumes forecast for North America. Another positive story in 2009 was the value of our strong presence in key emerging markets. Tim will talk more about the impact we expect China, India, and Brazil to have on our long term growth. But these markets continue to play a major role in our current success. All three markets rebounded from the downturn more quickly and more strongly than mature markets such as the US and Western Europe. Domestic demand in China in India have already returned to pre-recession levels. And our India operations report their best results ever in the fourth quarter. Our engine joint ventures in China reported strong improvement in the fourth quarter, leading to an overall increase in JV earnings of 31% compared to the fourth quarter of 2008. In addition, Cummins products continue to perform well in 2009, as can be seen by share gains in many markets around the world.

For example, we ended 2009 with 50% share of a North American Class 8 heavy-duty truck market, up from 45% at the end of 2008. Our share of North American medium-duty truck engine market moved to 41% from 38% at the end of 2008. Our industry leading market share in the Brazilian truck market through from 33% to 36% in 2009. And our share of the medium and heavy duty commercial vehicle engine markets in India jumped from 33% at the end of 2008 to 47% today. Due to greater penetration at Tata Motors and the improved success Tata is having in the market. Finally, we built on our reputation as a technical leader in 2009 by once again being among the first companies in our industry to have the full range of our products certified to the 2010 emissions standards. Our 2010 heavy-duty engines, which are in production today, will provide our customers with a 5% fuel economy improvement over our previous models with no drop in performance or dependability. Medium-duty customers will see a corresponding 3% improvement in fuel economy. In order to achieve those fuel economy gains while meeting significantly tougher emissions standards, we launched our XPI fuel systems for heavy duty engines and our selective catalytic reduction exhaust aftertreatment system. Those problems represent part of our investment in the largest product launch year in Cummins history.

We also began production of a new light-duty engine in China in 2009. A new line of small commercial generator sets manufactured in India and a revolutionary new fuel filter for use on a Dodge Ram pick up truck. 2010 will be another significant year of new products for Cummins, including the launch of the 11.9-liter ISX engine in the US and a second light-duty engine in China. We are very proud of our performance in 2009. But unfortunately, the downturn is not yet completely behind us. In fact, as you have heard us say before, we expect us the first half of 2010 to be at least as challenging as the first six months of 2009. As a result of the large run up in engine sales in North America late last year, and in advance of the emissions changeover, we expect a corresponding drop in engine demand in the first half of 2010. Based on our current orders and forecast for the first part of this year, North American truck and bus engine shipments could fall by as much as 80% in the first half of 2010 compared to the second half of 2009. This translates into a 50% drop in our externally reported revenue for heavy-duty truck and medium-duty truck and bus in the first half of 2010 compared to the second half of 2009.

We do expect the North American truck and bus engine markets to improve in the second half of the year, and we connect to see improvement in other engine markets, including light duty automotive, construction, mining and truck markets outside the US. But we estimate the temporary drop in North America will result in engine segment revenues being flat for the year when we compare to 2009. Our components businesses, which are closely linked to engine sales, also will be affected by the large drop of engine volumes in North America. However, higher content on the 2010 engines, improved costs and increased truck sales in emerging markets, will more than offset this drop in North American demand and improved profitability in our components segment. Strengthening economies in China, India, and Latin America will offset continued weakness in the US and Western Europe for our power generation business. Where we are forecasting 2010 to be flat with 2009 in terms of both sales and EBIT.

Our distribution business is expected to continue performing well. Sales are forecasted to grow by 20% on higher demand in emerging markets, and the Company's decision to acquire a greater ownership stake in a large North American distributor. A major area of focus for us this year is to ensure our new product introductions are as successful as possible. The early reviews for the 2010 engines and components have been very good. We are devoting significant resources to assure the best quality launch for these new products. Despite the challenges we expect this year, our strong financial position will allow us to increase our capital investment and critical technologies and new growth opportunities for 2010 and beyond. In fact, our current plans call for us to invest approximately 30% more capital in the business than we did in 2009. When taken together, we were forecasting 2010 to look a lot like 2009 in terms of sales and profits. Our initial guidance for this year is for sales of $11 billion and EBIT of 7% of sales. With a second half of the year expected to be better than the first half across all of our business segments. We have a lot of work ahead of us this year, but if we continue to manage the business conservatively and execute the strategies we have in place, I'm confident 2010 will be another year of solid financial performance for Cummins.

I will now turn it over to Pat, who will give you more details about our 2009 performance and our plans for this year.

Thank you, Tom, and good morning, everyone. As Tom said, 2009 was a significant challenge given the global economic recession that has impacted every part of the business. We came in to 2009 with two financial goals. One, to deliver solid profits and two, to deliver a positive cash flow. And as you can see from the results we reported today, we delivered on our commitments and achieved both of these financial goals. Two-year revenues for the Company were $10.8 billion, down 25% from the previous year. Despite this unprecedented drop in demand, EBIT, before restructuring and other charges, was $774 million or 7.2% of sales. Compared to $1.26 billion or 8.8% of sales for the previous year. And earnings per share excluding the restructuring and other charges were at $2.49. All four business segments were profitable in 2009, despite the severe drop in demand. The Company also significantly improved its cash position in the year. Which is essential to preserving our ability to pursue profitable growth opportunities in the future. I will talk more on this later.

Now let me move on to the fourth quarter and share some more details on our performance. Revenues of $3.4 billion were 34% higher than the prior quarter and 3% higher than the fourth quarter of 2008. Sequentially, gross margins improved from 19.9% in the third quarter to 22.7% in the fourth quarter. As a result of stronger volumes, the benefit of cost reduction actions, and lower material costs. The main focus on managing selling, admin, and reception development expenditure. Although it came down as a percent of sales in the quarter, we did see an increase in dollar terms in part due to increased investment and research and development and the impact of higher compensation accruals. Join venture income increased to $67 million, an 18% improvement over a third quarter levels from improved results in China and India. EBIT margins before restructuring and other charges improved to 11.4% of sales, marking a fourth consecutive quarter of margin improvements. Earning per share excluding restructuring and other charges were $1.37 in the quarter. In our previous call, we gave that the full year effect of tax rate would be 27%. However, one time tax benefits of $29 million, or $0.15 per share, more than offset upward pressure from stronger domestic earnings in the fourth quarter, resulting in an effective tax rate of 24.4% for 2009 and 22.5% for the fourth quarter.

Turning to each of our four business segments, I would now like to briefly highlight the performance in the fourth quarter and 2010 revenue and profitability. Engine segment revenues of $2.2 billion were 51% higher than the prior quarter as a result of stronger demand in the emerging markets and from the transition engines in North America ahead of 2010 emission deadline. This segment also benefited from increased demand for the Dodge Ram engine, higher after mark revenues, and demand stabilization and industrial and power generation markets. If we compare to the prior year, revenues were up 12%. The demand for engines market share gains in North American truck markets, and the light duty automotive production increase, more than offset the significant drop in later cycle engine sales for the industrial and power generation markets. Segment EBIT margins were 9.7% in the quarter, compared to the 4.2% EBIT margins delivered in the third quarter. The engine segment has clearly benefited from the cost reduction initiatives taken earlier in the year, as well as from lower material costs.

In 2010, we expect another challenging year for the segment. Highway engine shipments were under perform the Boston recreational vehicle markets in North America due to position engine shift in advance of EPA10. We forecast production of [NAFTA Class 8] heavy-duty trucks to grow 30% in 2010; however, our heavy-duty truck engine revenues will be down 18%. Revenues from the medium-duty truck and bus markets are forecasted to be down 19% for the same reason, despite growth in the North American, Brazilian, and European truck production. Revenues to the light-duty automotive and recreational vehicle market are projected to grow 23%. With higher engine shipments for the Ram pick up truck more than offsetting the negative effect of transition engines to the RV market.

For the industrial markets, we forecast revenues to increase by 17% in 2010. Mainly driven by stronger demand in the mining, oil and gas, and construction markets. Higher commodity places are stimulating OEM capital expenditures from new equipment in mining and oil and gas markets, while infrastructure stimulus programs in China, India, and Brazil are supporting domestic OEMs and imports for the construction markets. For the total engine segment, despite the lower volumes, we expect close to flat revenues in 2010, and EBIT margins in the range of 3% to 4% of sales. Now let me move on to the component segment, which also had terrific financial performance in the quarter. Revenues were up 24% from prior quarter, driven by the demand for transition engines in North America. Global after market recovery and sequential OEM improvement in China, India and Europe. EBIT margins improved to 10% of sales on the leverage of the higher volumes. Year-over-year, stronger demand in the own highway markets in North America, China, and India more than offset weakness in Europe and drove revenues up 8%. The component segment EBIT margin benefited from the cost reduction initiatives taken earlier in the year, lower material costs, and higher volumes. Despite the pull forward for the demand for engines in North America into 2009. We expect 2010 components revenues to increase 10% from higher price and technology content on the EPA 2010 products, from higher truck production and emerging markets in Europe, and from growth in aftermarket demand. We were forecasting EBIT margins for the segment between 6.5% and 7.5% of sales.

In the distribution segment, revenues were up 15% sequentially. EBIT margins were up 13% in the prior quarter to 13.8% of sales, mainly from higher volumes and favorable commissary benefits from the weaker US dollar. Compared to the same quarter last year, revenues were down 13% as a global slowdown largely impacted demand for new engines and power generation equipment. However, the favorable mix towards after market and service revenues on effective cost reduction initiatives strengthened EBIT margins. Strong joint venture income and favorable commissary movements also contributed to this performance. In 2010, revenues for the distribution segment are expected to increase by 20%. Half of this growth will come from the consolidation of a western Canada distributor. And what is being increased from ownership of 50& to 80% at the beginning of the year. We are forecasting the segment EBIT margin in the range of 11% to 12% of sales as consolidation will have a dilutive effect of 1%.

And finally, in the power generation segment, revenues were up 9% sequentially. Mainly driven by the demand in emerging markets. Higher volumes and cost reduction initiatives positively impacted EBIT, which improved from 4.2% in the third quarter to 5.7% of sales. Year-over-year, revenues were down 32% with most regions impacted. The lower volumes contributed to a drop in EBIT margins from last year's 8.5% of sales. In 2010, for power jam, we expect flat revenues and EBIT margins between 6.5% and 7.5% of sales. As demand dropped more significantly in the second half of 2009 for this business, we expect end of China be stocking and continue to recovery in the emerging markets to offset continued weakness in North America and Europe in 2010.

As Tom just mentioned, we are projecting total Cummins revenues to be $11 billion in 2010 with EBIT margins of 7% of sales. Compared to 2009 results, the temporary impact on volumes of the 2010 emissions standards has a negative impact on EBIT of 1.3%. This is offset by EBIT improvements of 0.5% from stronger joint venture income, and the net 0.6% from the combination of pricing and cost movements. As was the case in 2009, we expect EBIT to increased sequentially as we move through the year. We are currently projecting the effective tax rate for 2010 to increase to 32%. As a result of the research tax credit not yet being extended.

Finally, let me come to the balance sheet and cash flow. Cash balance improved by over $500 million, more than double the amount at the beginning of the year. We generated more than $1.1 billion in cash from operating activities for the full year. A record for the Company. A large part of this was due to the reduction in inventory levels of over $400 million. Debt to capital was 14.9% at the end of the year. Our strong financial possession gives us the flexibility to invest in future profitable growth opportunities. As you have heard from Tom, we plan to increase capital investments in 2010 to $400 million. Up almost 30% from 2009. As mentioned on a last call, we have lifted the temporary suspension of our stock repurchase program that we had in place during most of 2009 and will accelerate the repurchase bonds in 2010. We also remain committed to sustainable increases in our dividend and will review this with our board during the year.

Before we take your questions, Tim would like to say a few words.

As you have already heard this morning, we had an outstanding fourth quarter and a very strong 2009, given the difficulty economic environment in which we continued to operate. And as Tom has already mentioned, we expect the first half of 2010 to be challenging, especially in the North American truck markets, which will put significant pressure on our engine and components businesses. Looking beyond 2010, however, I believe we are positioned for an extended period of significant growth. And a lot of my confidence in our future comes from the way in which we have performed over the past year. We have talked to you in previous quarters about the impact our early and decisive response to the downturn had on our ability to remain profitability and generate cash during the worst of the recession last year. Those efforts put us in a position to emerge from the recession an even stronger Company. We have taken a significant amount of cost out of our manufacturing system. Which allows us to fully leverage demand increases, such as those you saw in our engine and component businesses in the fourth quarter of 2009. The fact that we are in a position to remain profitable in those businesses in the first half of this year, despite a huge expected downturn swing in volume from the end of last year, also shows just how flexible our manufacturing system has become.

We also continue to make heavy use of [Six Sigma] to drive quality improvements and lower our costs across the company. Our Six Sigma savings in 2009 were nearly $500 million, well above our target, and all of our business units exceeded their goals for the year. Also, our performance in large international markets, such as China, India, and Brazil, contributed significantly to our outstanding performance in the fourth quarter. And will play an even larger role in our future success. In particular, the China and India economies have bounced back strongly from their brief downturn late in 2008 and early in 2009. While our business in those two countries fell in 2009 from record levels in 2008, our fourth quarter results were very strong. In fact, the fourth quarter was our best ever in India, where the total size of our business in 2009 was more than $1.3 billion. We expect our business in India to be close to 2008 levels by the end of 2010. And with the Indian economy projected to grow at a rate of 7% or 8% a year for the next several years, this region will be increasingly important to Cummins in the future.

This story is similar in China, which was a $1.7 billion business for us in 2009. We expect consolidated and unconsolidated sales in China to grow to well over $2.3 billion this year. The long term prospects for Cummins in China also are very good, with the Chinese economy expected to grow at 8% to 9% a year from the 2011 through the 2014. As in India, all our business segments are well represented in China. We are also well positioned to continue our growth in Brazil, where we are the clear market leader in the truck engine market. Prior to 2009, our business in Brazil had grown at 32% a year since 2003 and reached $900 million in 2008. After a slight contraction in 2009, the Brazilian economy is expected to return to solid growth rates of 4% to 6% a year for the next several years starting in 2010. In addition, large international events in Brazil, including the World Cup in 2014, and the Olympics in 2016, will require significant investment in infrastructure, which plays to Cummins strengths in that market.

Our commitment to these large emerging markets has diversified our business and has played a key role in allowing Cummins to remain profitable through the worst global downturn in decades. During the economic growth projected for these markets, the broad reach of our products and technical advantage when it comes to meeting future emissions standards, China, India, and Brazil will play a larger role in our future success. We will share more details of our plans for sustained long-term growth at our Analyst Day in March. But I want to talk a little today about our work to continue to invest in the business throughout the downturn and what it means for our future.

Our strong balance sheet coming into the downturn and our performance during 2009 allowed us to generate the cash we needed to invest in the largest product launch in our history. As you heard Tom say, we have received EPA certification for our 2010 on-highway engines, which are in production now. More importantly for our future growth, we improved our cash position by more than $500 million, which will allow us to invest even more heavily in new products, technologies, and capacity going forward. As you heard Pat say, we will spend $400 million on capital expenditures this year. That money will go toward new products and significant investments and facilities to increase capacity and support of our current products. Finally, we will continue to invest in profitable growth opportunities made possible by our technical leadership. Especially in the components businesses, as well by favorable long-term growth trends. These include increased infrastructure spending in many parts of the world and the expected rise in demand for reliable power and emerging market such as the Middle East and Africa.

As you heard throughout our remarks this morning, 2009 was an outstanding year given the challenging economic environment. We generated a solid profit, significantly increased our cash position, and reduced inventory by more than $400 million. Our performance in 2009, especially in the second half of the year, is an example of what you can expect from Cummins once the recovery takes hold around the world. Our strong position today will allow us to get through a very challenging first half of the year in 2010 and will be the foundation for what I think will be a period of tremendous growth for Cummins beginning next year. Thank you, and we will be happy to take your questions.

(Operator Instructions). Your first question comes from the line of Jerry Revich from Goldman Sachs. Please proceed with your question.

Hi, good morning.

Good morning, Jerry.

You outlined 30% to 40% sales growth for your China businesses in 2010. I am wondering if you could rank order for us businesses that you see the highest growth, power off highway, on highway and can you talk about what kind of top line contribution you are looking for were from [Photon] Cummins within that mix, is that about $100 million or so?

In terms of -- let me start with the point that our business is, as Tim said, we have all of our business represented there, but our automotive businesses far and away are the largest there. The component of dollar sales growth will be in the truck business. From percentage basis, off hand I couldn't give you each one of the growth numbers. But all will be growing significantly in the year, and as we talked about in our remarks, the power generation business there will be growing and will be offsetting weaker markets and developing world.

By individual markets, Jerry, I think obviously a lot of the truck markets that we have there in China that are in the joint venture side of the ledger are going to probably be up to 30%, while power generation will be on the consolidated revenue side of the ledger, will be up more 30% to 35%. Components slightly below that at 25% in some of the industrial engine markets probably in the low teens.

As far as the Photon joint venture, we introduced 3.8-liter engine this past year. Volumes haven't materialized, and now we were introducing the 2.8-liter engine. I would not see Photon contributing a lot but this year our position for growth going forward. This is still a heavy investment time both technically and introducing new products.

Thank you. And Pat, wondering if you can give us preview of your analyst meeting. In the last cycle you meaningfully increased your distribution business investment with very nice returns. Can you give us big picture of you what incremental investment opportunities you are targeting at the early stages of this cycle?

I think, Jerry, I would rather wait until we get to March before we start to divulge what we will invest into the future.

Okay. And Tim, I'm wondering if you could give us an update on opportunities you see for your components business on tier 4 interim now that your customers are closer to the production stages on their tier 4 engines.

Yes, so we are, as you suggest there Jerry, are definitely our components business will be participating in helping engine and equipment makers reach tier 4 interim both US and equivalent in Europe. That represents a growth opportunity for our components business.

And Jerry, this is Dean. To add on, I think as I talk to everyone in the last quarter call, if you look forward to the [Abama] show in Munich Germany in April, I think that's where you will see a lot of the release of each of the engines that we will have for tier 4. Where obviously we will have the variable geometry turbocharger, the XPI fuel system, direct flow filters, as well as diesel particulate fillers on each of those engines out there. I think you will start to see here during the quarter, I have been working with some of the businesses as they are starting to prepare press releases about some of the OEM announcements about using Cummins for tier 4 interim. And whether being the European market or in the US market. And I think you will start to see those press releases start to hit the wire here shortly.

Thank you very much. We will look forward to those.

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

Good morning, guys.

Good morning, Henry.

The power GEN guidance looks like the fourth quarter run rate stays about flat. Could you talk about the cadence or revenues as we go through the year, and maybe some of the sign posts you are looking to that say developed markets could start getting better here?

Henry, the first quarter you probably remember from previous years is seasonally little weaker, so we expect that again here. And then normally we will see -- we normally see the other market seasonally are about equal. Because of the -- we expect to see some recovery, we will expect increases quarter on quarter and that's true for every business and it's also true for power GEN. And I think for the developed markets, the best statistic up out there is nonRES capital spending, which, as you know, is not do so well now in the US or Europe. That's one of the reasons we have a conservative view about those markets and their recovery. I will say that the signs we are seeing on the order boards are that orders have bottomed out. We will see what that means in terms of actual sales next year. But right now we're at least optimistic that things have bottomed out, but nonRES construction spending still not good. What that is going to mean and when that will turn we aren't sure.

And the inventory correction is done now, too.

It's behind us.

Thank you. And what visibility do you have currently into the back half recovery for North America trucks and maybe dove tailing with that, can you talk about what market shares baked into your guidance and maybe when you expect OEMs to begin to take delivery of the 2010 standard engines?

Okay. Three questions. The first question I think was about market size. And we have been assuming for North America 130,000 by our definition, trucks for the 2009 year. And then 2010 year. Then 2010 -- when exactly what month that turns and when it turns back, and what 2011 will be, we aren't sure. Right now what we are reading is 2011 is expected to bounce up quite a bit and maybe even back to replacement demand, which would be terrific. I hope it does. I think there is a lot of people waiting and watching and we will see what happens with that. Was the question number two? Market share?

It was really more about the visibility for the back half recovery -- into the back half recovery. What signs you see today that give you confidence in the back half recovery, and what you expect for your market share and what you bake into guidance.

In terms of signs, obviously the couple things we look for are first, that we are looking at replacement cycles and clearly, there are a lot of trucks that are out there for a long time. So I think replacement cycles would suggest that people want to replace their trucks. On the other hand, with freight business down because the US economy and the fact that some of the trucks have been parked and therefore not being used. That's the counter-effect. We are just watching like everyone else. Henry, I would say I don't think we have any unique insight. There is market data in ACT, I think we are talking to our customers and watching that data, and we do a lot of talking to end customers and not really -- I think the information is widely available on that. I'm sorry. Not much else that you already read, I guess.

I appreciate that. And the market share, did you have any comment there?

I think the way we were viewing market share -- As you guess, we get a lot of questions about that. The way we are think being market share I think we said before -- our view is our goal in the business is to serve our customers effectively and earn a good return on our capital. So market share is not something we see as an objective. We were pleased with where we are, and it helps us that achieve those objectives, but it's not our end goal and it's difficult to predict at this stage. We are -- we think we are in a great position with leading OEMs in the business. We increased our share significantly at Paccar, which is an excellent Company. They are leading in the market today and we expect them to continue their strength, and that will help us a lot. We are also growing our position in freight liner. We come into their heavy-duty trucks we're nearly exclusive on medium-duty tricks, and we have a strong position with Volvo and we expect to leverage those positions and, frankly, the strength of our engine offering in their strong trucks to gain share. The share picture is not only a function of where we are released, but a function of how those trucks and engines do in the marketplace, and we feel really good about where we are with those trucks and engines. I guess the best thing to do is to see what happens, but we are feeling good about where we are.

Thanks a lot. Congratulations on a great quarter.

Your next question comes from the line of Meredith Taylor with Barclays Capital. Please proceed with your question.

Hi. Good morning and congratulations on the quarter. I'm hoping we can talk about the components business. You are clearly looking for some significant margin improvement in 2010. Can you walk us through how much of this is going to be coming from volume? Assumptions around volume leverage versus mix versus the continued progress of cost takeouts. Better price costs, et cetera. If you can kind of walk us through the puts and takes, I think that would be very helpful.

This is Pat. Let me give you the big picture, and then you can chime in with the rest of it. I think from the components in 2010 going from 4% for the full year of 2009 to the guidance of between 6.5% and 7.5% of sales for 2010. Those three or four different factors are driving now. I think they are all pretty much even the way I look at it. The way you will have much to be the same. The impact of the increased content and pricing we can get for that is clearly one of those factors. Likewise, there will be additional volume. And we expect to see one-fifth of the improvement coming from additional volume. Pricing on existing products will increase by pretty much the same factor and in between cost reduction and material costs we expect those to contribute each of them a fifth of the improvement year-over-year. We will go from 4%to say the midpoint of that guidance of 7%, you can look at those five factors and apply and equal weight to five of them to figure out how we get there.

Okay, that's helpful. And then you were quite specific in terms of the cadence of first half of 2010 versus second half of 2009 for the engine business. But a little less clear in terms of what we will be looking for on the component side of the business. Can you give us more clarity there?

In terms of what the fall off is from the second half for components?

First half of 2010 versus second half of 2009 from a revenue perspective, exactly. And how we should think about the Ram as we move through the year.

For components, Meredith, it's not going to be as drastic a fall off as the engine business. And it's partly because of the different mix that each of the four businesses within components has for the EPA 10 emissions standard. On the one hand with our filtration business predominantly aftermarket, so it's not going to be affected by the EPA 10 transition. The turbo charger and the fuel systems business are obviously more exposed to the EPA 10. Fuel systems most exposed to the EPA 10 transition. Turbo chargers at least has exposure to a lot of the emerging markets where we talked about earlier, where we see strengths in the truck market in China and in India and Brazil, and that will help their side of the business there. The US side of their business will fill a similar fall off in demand much like the medium-duty truck and heavy-duty truck businesses will feel. And then emissions solutions is, I think you can think about its revenue moving more in sync with what you might be modeling for the various truck OEMs in the market. Because they are allowed under the EPA regulations to shift the exhaust systems up to 90 days after the engines. They are not going see the precipitous fallout engine business like in the first quarter. Their low point will be in the second quarter as we would expect the truck OEMs. Their build rates in the second quarter of 2010.

Meredith, just to give you some additional information. I think you should expect anywhere between a 5%and 7% drop in revenues if you look at the first half of 2010 compared to the second half of 2009 for the segment.

Okay. That's great. Thanks so much.

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

Hi, Ann Duignan here. Good morning, guys.

Good morning, Ann.

Good morning. I just wanted to take a step back to the heavy-duty market share comments. You said in your opening remarks that you expect to under perform the markets in 2010. Only because of the pull forward, which implies that you really do not anticipate any share loss. You ended the year at 50% market share, about 15% of that share is through [Navistar], which is gone in effect. I know you don't obsess over market share, but you must be using market share as a guidance for your own planning progress. Can you walk us through what your share forecasts are for each quarter or at least first half, back half?

Again, the difficulty we have with that, and I understand the question well. The difficulty of providing the answer is, we know where we are released but what we don't know is what those truck players are going to earn with share. And what relationship our engine has with them getting that share. We don't know the answer to it. We have a view, and we don't know the answer. So I think -- what I don't want you to get is the idea that we don't notice that Navistar -- we know Navistar will not be buying our 2010 engine. That's -- we are clear about that. We are clear that we are adding some share of freight liner versus previous, and we think we have been adding share regularly at Paccar, and believe the offering that we have with those customers will do really, really well in the market. Again, remains to be seen. It's hard to predict exactly what it is. We have an assumption, as you would guess, right now what I guess our projections for the business reflect what we think is going to happen both in terms of the market and what position we will operate in the market, what the market share will have.

The other element that creates uncertainty is that we believe that our engine will have a substantial fuel economy advantage over the EGR engine that Navistar will have. As that plays out in the marketplace, the difference in fuel economy is enough to move market share significantly, so what I say is let's see what happens in the second half of the year. So far, so good for the products that we released. And the way we test them. We have over 5 million miles of testing, so we think we know what we are doing.

Ann, this is Dean. I think it's important what Tim mentioned. The second half of the year around market share is the more relevant thing for everyone to be watching. I think the first half of 2010 is going to be nothing more than reflection of pull forward of demand we saw in fourth quarter of 2009. I don't think when you go to look at the market share outlet, I don't think the data in the first six months of 2010 is going to be reflective of who is buying one. It's going to be more reflective of who bought what the in the fourth quarter of 2009. I think when we get in to the second half of the year, to Tim's point, that's where really the proof is going to be is to customer response to the engines that are available out there and how our engines are helping to make everyone in trucks better in the marketplace, and that's to Tom's point, the performance of those and how the truck OEMs favor in the market share picture in the second half of 2010 i going to be more important.

Yes, I appreciate that and I don't disagree. Just again just to re-iterate then, I think what you are saying is you would anticipate that your existing customers would move with you to other OEMs. Primarily because of the fuel efficiency that your engine can offer. Is that a fair statement?

Yes.

Okay. And then just follow-up on the industrial segment, given the tier 4 interim hurdle we have in 2011, could you expect any stockpiling by any of your industrial customers toward the end of 2010 as they transition? Obviously, probably not as not noticeable as in on-highway. Would you anticipate some stockpiling toward the end of 2010?

In the US we don't expect much at all. Because there is a T-pin structure inside of the rule where people can transition. And that's actually we seen it in place before in previous rule and it didn't -- resulted in not much of a prebuy. In fact, none. And in Europe the rules are a little different, so there may be some prebuy in Europe. And we are anticipating some. We don't have a good estimate for how much, frankly, right now, but we do expect some.

Okay. And any -- just remind me of the mix in the industrial business, Europe versus the US?

We are predominantly more outside the US in recent years. With the strength of a lot of the export activity into the emerging markets. A lot of what we sell in terms of industrial engines into the European markets although some of it is used in domestic markets in Europe. Obviously a lot of our OEM customers in Europe are big exporters to other parts of the world. That's another wrinkle in the equation when you ask us to try to figure out what sort of prebuy, it will obviously depend upon where the engines, and construction, agricultural equipment is being used in the world, and as you know Japan, North America, and Europe are the ones moving to this next emissions standard but the emerging market could still be lacking behind.

There is a significant demand which will not be affected by tier 4 interim at all.

I have taken up enough time. I will get back in line. Thanks, guys.

Your next question comes from the line of Adam Uhlman with Cleveland Research. Please proceed with your question.

Hi, good morning, guys.

Good morning, Adam.

Just to start with a clarification, it looks like the heavy-duty medium-duty volumes were for the fourth quarter were much stronger than the guidance for the quarter. I guess I'm wondering where or how you came up with the extra capacity to ship those units in the fourth quarter, and it seems that the extra shipments in the quarter could raise eyebrows with the EPA with their new anti-stockpiling rules. I was wondering if you could walk through that and talk about any discussions that you had with EPA.

Yes, let me start first with -- the demand did exceed our expectations. We did expect high demand, but it did exceed our expectations to some degree. And we worked hard to meet it, as I talked about in my remarks. It was not easy at all. How frankly, we were at the end stretch just about as thin as we can get both in terms of our own capacity and suppliers' capacity to make it. Again I think what you saw was our plants ramping up very quickly as a result of terrific response by our plants and our suppliers that supply those plants. We were ready and we were wanting to make sure we could capture demand as it came. I guess I feel good about how we reacted to that. It was essentially flexibly adding resources and the plants adding shifts working overtime and the normal things you expect.

Second point is that the EPA has already -- this is not the first time they had a prebuy or transition engines purchased, so they regularly utilize the rule they have to say you people can have reasonable transition. And I think that's basically what the rule of the industry works to. The EPA went to work on a more specific rule but has not released one. There is nothing in play today except the reasonableness rule. And the way that we view that is that we think we get orders from customers, and as long as the customer give us a legitimate order, we ship the legitimate order, and then our customers are really responsible for figuring out what they need to transition. I guess one thing to keep in mind on that is that it sounds straightforward, but they are transitioning many models of vehicles, not just one. They got to understand how to get each engine, engineered into each model, and frankly is a bit of a challenge to get all that done and cut over. So that is what a lot of them are managing is that's the transition especially in an environment where truck demand has been very low and the engineering cost are high. That's a challenging environment for them. That's what they are trying to manage to do, and I'm sure the EPA is thinking through that and trying to make sure people move ahead and get the new engines in. Both are legitimate concerns.

I want to add something. This is Tim -- about the Jamestown plant, which is where we produced the heavy-duty engines. Work rules are incredibly flexible. And we had a work force that really, really understands customers and wants to meet the demands. We had secretaries from the office working out in the shop supporting the assembly lines. We visited that plant during the quarter to witness it as well as thank the employees. They also, the leadership was very straightforward in saying this is going to happen in the first quarter. And one remarkable thing is that people made a lot on overtime, but we had over 450 volunteers to take leave of absence for up to six months, the first six months of this year, so no one had to permanently lose their job. And that's just the kind of atmosphere we have in there, and that's why we were able to raise the bill rates to the level we were. We struggled with the supply base, but they also really came through for us.

And the Rocky Mountain engine plant you can say the same thing. Incredible results for the quarter. CMEP, where we produced a Chrysler engines, which as you know have been an incredibly rocky road for 2009. We produced a whole bunch of engines for them in the fourth quarter too in exactly the same way. When I made my remarks about this, it was remarkable performance by our employees.

Great. Thanks. And then Pat, could you talk about the material cost outlook and thoughts on warranty expense that is baked into the guidance for this year?

Sure. On material cost we are anticipating some favorable movement there. I think on metal markets we would see costs going against us, but the material people have been doing it on volume engineering, low cost country sourcing, ongoing price negotiations. We do think that year-over-year material costs will be somewhere around 0.05 to 0.06 of a point margin improvement. One cost you should expect overall for the Company to continue to be similar to 2009 after around 4% of sales.

Got it. Just a clarification, there is this discussion of the China sales forecast up 30% to 40% in 2010. Can you help reconcile the change in JV earnings this year, up only 10% to 15%. I best the distributor acquisition is diluting that growth a little bit. Are there other investment elements that we should be keeping in mind?

It's a little bit messy to explain on a phone call so that's one you might want to follow with Dean afterwards. When we talk about China revenues back up to $2.3 billion. That's a combination of consolidated revenues and joint ventures. So you can't really take that growth and then look for 30% increase in joint venture. The joint venture income I think this year was $214 million and we are projecting that to be up 10% to 15% in 2010. We do see somewhere around $10 million drop because of the consolidation of Cummins West in Canada. That's one to give you more detail Dean can take that offline and give you more on the China joint venture.

Got it. Thanks.

Your next question comes from the line of Andrew Casey with Wells Fargo Securities. Please proceed with your question.

Thanks a lot. Good morning, everyone. Question, given this fourth quarter performance on longer term earnings power plus whenever share repo is completed. The earnings look like when volumes come back in the developed markets they can be significantly higher than what you just reported this year. I'm trying to understand the impact of this capital investment increase on potential margins. How much of the $400 million is related to capacity increase and is any of that related to increased expectation for unit volume outside of cycle unit volume and NAFTA truck?

Andy, this is Dean. In terms of capacity expansion, as we talked about before. We kind of break that down into whether it's for current product or for new product in growth opportunity. I would say for current expansion of current products, it's probably about 30% of our CapEx spend. And with regard to new products, either new growth products or emission driven products, that's probably closer to 35% of our capital spend. And then the remaining 35% is essentially on maintenance and cost reduction initiative.

I will give you just one example. I was in India earlier this month and our top Cummins plant in [Jimjit] produces 120,000 engines and they are sold out. They on allocation. All of those engines go to Tata motors. We are building a second plant and it's about done. That will ultimately have the capacity for another 120,000, but we will do it in 60,000 increments to 90,000 to 120,000, and then you can think about the components that we make that go on that engine. For example, turbo chargers, so we had to increase our capacity in turbo chargers. I was also in that plant, and we also increased capacity with our power generation business. So those are examples of when we say we are increasing capacity. Right now we are chasing demand in some of those markets.

And the other thing that's important about what you said, and we really are want to focus on our March meeting investors meeting, is what is the potential for where we can get as in terms of sales and earnings whether our growth rates, what potential do we have, and what role will the developing markets play in that. And I just -- without kind of jumping ahead to that meeting I do want to note as you did, that we are increasing capital now even as we see markets not so strong because we believe we can capture some of those growth areas in the future. These general categories of capacity and new product don't tell the whole story. We are definitely investing both R&D dollars, significant R&D dollars, and capital in programs that we think can grow the company in 2011. Also all the way out to 2015. Some of the programs won't recognize revenue until 2015. So there are big opportunities for the Company. I think you hit on a key one, and the fact that we are in a position today to be able to fund those, is a lot about how the Company has changed in the last five years.

The other part that is not as visible is clearly we just have disclosed what the CapEx is in our consolidated rules. There is probably another $200 million to $250 million up of CapEx being spend in those unconsolidated join ventures that doesn't show up in the Cummins GAAP cash flow statement. That's another part of the investment and the opportunity that's taking place that maybe not as visible from a US GAAP perspective.

Okay, thank you. And then just one last question. This drills down a little bit on the components line. The second half of 2009 margin performance was very strong and implies similar to the previous question, potential upside longer term especially to some of the targets you have out there. When you start to layer in the incremental revenue benefit from 2010, meaning the EPA emissions standards, should we expect any delusion, initial delusion to margins with ramp up benefit later on?

Nor should I fill in the question. Let me answer it this way. I expect margins to improve through the year and to be higher than 2010 and 2009 and to be higher beyond that, too.

And I think that the important point that you saw from the fourth quarter and to some degree third quarter, is that we have been making improvement in our components company in terms of cost structure, in terms of engineering the product to meet better requirements for the customer, and so as we begin to get volume because volumes have been very suppressed as we have done that work. Margins have been improving, but not at the rate they could. As we bring volume on to them, their ability to earn -- get leverage on their manufacturing and cost reductions is very, very large. So we do expect, in fact that we will start to break through our hurdles for that company as we now we finish the cost work and the engineering work, now begin to bring volume in, we do expect to start hitting our targets for that business and hopefully surpass them as we get the volumes. That is exactly the formula that we see, Andy. Just want you to raise there.

Thank you very much.

Thank you, everyone. That's all the time we have for questions today. I will be available after the call if you have questions and appreciate everyone's attendance today. Thank you.

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