康明斯 (CMI) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Cummins Inc. earnings conference call. My name is Eric, and I'll be your audio audio coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this of this presentation.

(Operator Instructions)

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

Thank you, Eric. Welcome everyone to our teleconference today to discuss Cummins' results for the first quarter of 2010.

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 affected by changes in general economic conditions, and by the actions of customers and competitors. Actual outcomes may differ materially from what is expressed in any forward-looking statement. A more complete disclosure about forward-looking statements begins on page 3 of our 2009 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 disclosures on our website for the reconciliation of those measures to GAAP financial measures. Our press release with a copy of the financial statements and a copy of today's webcast presentation is available on our website at www.Cummins.com, under the heading of Investors and Media.

With those formalities out of the way, we'll begin our remarks with our President and Chief Operating Officer, Tom Linebarger.

Thank you, Dean. Good morning.

I'll start today by sharing some thoughts on our performance in the first quarter. Pat will then provide greater detail on the quarter and our updated 2010 outlook, and Tim will build on the comments we made at last month's analyst day regarding our long-term prospects.

Clearly, it was a very strong quarter despite the weakness in key US and European markets. Sales of $2.5 billion in the first quarter were 2% higher than the same period a year ago, with gains in our distribution and components businesses offsetting declines in the engine and power-generation segments. Despite the modest revenue growth from last year, our earnings before interest and taxes improved significantly to $266 million or 10.7% of sales, compared to $94 million or just under 4% of sales.

In terms of the first quarter volumes, the North American truck market turned out as we had expected. As you know, we experienced strong demand in the final months of 2009 in advance of the US emissions change, reducing demand in the first half of this year. Our shipments fell by approximately 90% from fourth quarter levels in the heavy and medium-duty truck, bus and RV markets, and were down about 80% in the same markets compared to the first quarter of 2009.

On the other hand, our business improved significantly in several markets outside the US in the quarter, particularly in China, India, and Brazil, where their economies are recovering quickly from the recession. Our strong global position has enabled us to quickly capture the growth now occurring in these regions.

Cummins' first quarter results represent a continuation of our strong performance throughout the downturn. We have generated consecutively higher margins in relatively weak revenue environments, by lowering our cost structure and improving the productivity of our manufacturing operations. As mentioned in previous quarters, we have worked hard to align our manufacturing capacity with the real demand for our products. Our employees have done an outstanding job executing the Company's strategies for dealing with the volatility in our markets during the recession.

We also took advantage of the downturn in the first half of last year to better synchronize the flow of products through out plants, making heavy use of Six Sigma. The improved efficiency in our manufacturing operations is most evidenced in the performance of our engine and components segment in the first quarter. For example, our high-horsepower engine plant in Daventry, England, instituted operational improvements last year that have allowed us to manufacture almost the same number of engines in a single shift that took three shifts to complete a year ago.

We have also seen productivity gains at our other high-horsepower plants around the world, which will be crucial to meeting expected future demand in this market. Engine production per hour at our mid-range engine plants in Columbus and Rocky Mount, North Carolina improved 13% and 10% respectively from the same period a year ago. Productivity has also improved at our turbocharger manufacturing facilities around the world. For example, the per person equivalent production rate at our turbocharger plant in Huddersfield, England has improved by 67% from the first quarter of last year, and 27% in our plant in Dewas, India. And production of exhaust after-treatment devices at our emissions solutions plant in Mineral Point, Wisconsin increased 31% in the first quarter compared to the same period last year, with only a modest increase in head count. This productivity improvement comes at a time when the plant has transitioned to manufacturing to more complex 2010 products.

These are just a few examples of the tremendous work our people have done in our manufacturing plants to improve productivity and operating leverage. Such improvements have helped us to keep our first quarter EBIT at similar levels to what we delivered in the fourth quarter, despite a 27% sales drop. From a geographic perspective, our strength in China, India and Brazil continues to be an advantage, as the economies in those countries were even stronger than we expected in the first quarter. We are seeing improving demand in the truck, construction, mining and distributed power generation markets in all three countries.

In addition, business has increased with OEM customers in Europe and Korea that export to China, India and the Middle East. Tim will talk in greater detail about the importance of these markets to our future success. So let me give you a few examples of the current strength in these countries. China's commercial truck and industrial markets continue their strong recovery. Compared to the first quarter of 2009, our truck engine sales in China grew by more than 4 times, and were up nearly 10% from the strong fourth quarter levels. Sales to the industrial engine markets increased 74% from the first quarter of 2009, and 24% from the fourth quarter. In India, our truck engine sales more than tripled compared to the same period a year ago, and increased 26% from the fourth quarter of 2009. Industrial engine sales increased 41% compared to first quarter of 2009. We also continued to benefit from the strength in the Brazil truck and construction markets. Our truck engine shipments in the first quarter improved 81% from the first quarter in 2009, and 14% from the fourth quarter of 2009.

As we look ahead to the rest of 2010, our priorities and outlook have not changed. We remain well positioned to take advantage of the continued strong economic growth we are forecasting for China, India and Brazil. We expect revenue in the US this year to be flat to 2009 levels, with some improvement coming in the second half of the year. In Europe, we do expect modest improvement in demand year-over-year. We will continue to focus on cost reduction productivity improvements, working capital management, and investment in new products and critical technologies. We are positioning the Company to take advantage of growth opportunities that we are seeing already in some markets, and expect to see in others once the economic recovery takes hold.

Finally, we are committed to serving our customers better than anyone else every time. In particular, we are working hard to ensure that our 2010 product introductions are as successful as possible for our customers. As of mid-April, we have shipped 3,500 2010-compliant engines, and the early reviews have been very positive. We logged more than 8 million test miles on the 2010 engines before putting them into production, and the feedback from that work is being confirmed by our customers in the field today. We are seeing the type of fuel economy improvements we expected; a 5% improvement from our 2007 heavy duty engine and a 3% gain on medium duty engines. Many customers are seeing even larger fuel economy gains, and some have even reported double-digit percentage improvements.

I believe we're well on our way toward delivering on our promise to produce a better-performing, more reliable and more fuel-efficient engine in 2010. We are devoting significant resources to supporting these products during their launch periods to ensure that our customers are able to realize the benefits of these improvements in their businesses. We are very pleased with how the Company has weathered the downtown, and the first quarter of 2010 is no exception. We still have some significant challenges ahead of us in many of our major markets, but I'm confident that we are focused on the right things, and have solid plans in place to build on our performance in the first quarter.

I will now turn it over to Pat, who will give you some additional details about the first quarter.

Thank you, Tom, and good morning, everyone.

First quarter revenues of $2.5 billion were relatively flat from a year ago, but the geographic mix was significantly different. Revenues in our international markets increased by 28% due to stronger demand in China, India and Brazil, which offset a drop of 23% in our North American markets. Compared to the prior quarter total revenues were down 27%, with sales in the US down almost 50%, mostly due to the transition to the 2010 emissions standards in the U.S.

EBIT margins of 10.7% were significantly better than a year ago, and remain strong compared to the prior quarter on much lower revenues. The main reasons for the strong EBIT margin performance were the operational improvements as mentioned by Tom, lower material costs compared to the first quarter of last year, pricing increases, stronger joint venture income, particularly engine joint ventures in China and India, and lower warranty costs. The effective tax rate for the quarter was 34%, which was 3% higher than our projected full-year tax rate, due to a $7 million discrete item related to a deferred tax writedown, as a result of the recent tax changes in Federal healthcare laws. Earnings per share were $0.75 in the quarter.

Now, turning to each of our four business segments, I will highlight their performance in the first quarter and the updated 2010 revenue and profitability for each of them. Starting with the engine segment, revenues of $1.4 billion were 34% lower than the prior quarter. Engine shipments to the truck, bus and RV markets in North America were down 90% as expected, due to the effect of EPA on high emission changes. This decline was slightly offset by demand improvement in most industrial markets, particularly in mining and construction. Compared to the prior year, revenues were down 5%. The drop in the North America truck and bus markets was offset by stronger truck markets outside of North America, by improvement in demand in construction and mining markets, and by increased shipments to Chrysler. Segment EBIT margin of 9.3% was slightly down from from the 9.7% reported in the prior quarter, on revenues which were 34% lower.

Margins were much better than the first quarter of 2009, when the segment reported a loss of [$16 million]. The improvement in margins were mainly driven by operational improvements in our manufacturing plants, stronger joint venture income, more material costs, benefits from pricing actions, a favorable after-market mix, and lower warranty costs.

For the full year, we now expect revenues to grow at 10%. Heavy duty truck revenue will decline 19% in 2010. We continue to forecast reduction of NAFTA Class 8 heavy duty trucks to grow 30% this year, while as a result of the EPA 2010 transition, our global heavy duty truck engine shipments will drop 35%. Revenues from the medium duty truck and bus markets will be 10% higher this year. Strong demand in Brazil, and the recovery of OEM truck production in Europe, will more than offset the drop in North America due to the EPA '10 transition. LIght duty automotive and recreational vehicle revenues are projected to grow 31%, due to the RAM pickup truck recovery in North America and strong demand for Ford pickup trucks in Brazil.

We are now forecasting industrial revenues to increase 40% this year; much stronger demand from mining and oil and gas markets, driven by rising commodity and oil prices; and a recovery in construction markets in emerging economies, supported by infrastructure projects and economic growth. Our engine joint ventures are expected to perform at record levels of production this year. Our Dongfeng/Cummins joint venture in China and our Tata/Cummins joint venture in India were both running at record levels in the first quarter. While volumes in our joint ventures with Komatsu in Japan supporting global industrial markets are recovering nearly back to 2008 levels after declining 60% in 2009.

We now project full year engine segment EBIT margins in the range of 7.5% to 8.5% of sales. Margins in the second half of the year will face some challenges, from the production ramp up of new EPA 2010 engines, which initially will carry warranty rates; from higher research and development investment and the reinstatement of merit increases; the potential slowing of demand in China and India as a result of government efforts to control economic growth; and rising commodity costs as we see metals market prices increasing, and do expect some impact from that in the second half of the year.

In the components segment, revenues were down 14% from the prior quarter, driven by the EPA '10 transition in North America on highway markets, particularly impacting the turbocharger and fuel systems businesses. Compared to the prior year, revenues were up 19% as a result of strong orders from truck OEMs in China and India, global after-market demand improvement, production recovery from European truck OEMs, and favorable currency movements. EBIT margins of 9% of sales this quarter compares well, both to the 10% EBIT margins in the prior quarter given the 14% drop in revenue, and to the break-even performance of a year ago. Compared to the first quarter of 2009, margins improved due to stronger volumes and operational improvements, arising from the restructuring actions taken last year.

For the full year, we are now forecasting revenues for the component segment to increase 20%, as a result of higher price in technology content on EPA 2010 products, recovering global after-market demand, and stronger demand from OEMs in China, India and Europe. Component EBIT margins for the year are now expected to be between 8% and 9% of sales. Revenues for the distribution segment were slightly down sequentially, and up 15% from the prior year.

The consolidation of our Western Canada distributor added $54 million in revenue, and favorably impacted the profitability of the segment due to a one-time gain of $12 million in the quarter. Excluding the consolidation impact, sales were relatively flat from a year ago. Year-over-year, excluding the distributor consolidation, the revenues for after-market parts and services improved by 17%, while wholesale revenue of power generation and engines declined by 16%. The EBIT margin of 15% of sales this quarter includes the $12 million one-time gain, and if you exclude this, the segment would have reported 12.5% margins. For the full year, we forecast revenues to be up 25%, with about half of the growth coming from the recent distributor consolidation. EBIT margins are now projected at between 12% and 13% of sales.

Finally, revenues for our power generation segment were down 21% from the first quarter of last year, and down 14% from the prior quarter, which was in line with our expectations. Compared to the first quarter of last year, we have seen much lower demand in Western Europe, the Middle East and North America, partially offset by stronger demand in China and India. Sequential EBIT margins for the power gen segment improved from 5.7% to 6.6% of sales this quarter despite lower revenues, with cost reduction initiatives, operational improvements and lower material costs more than offsetting the sales volume decline. For the year, revenues for the power gen segment are now expected to grow 10% from the recovery in most markets outside of North America and Western Europe. Orders, particularly for larger gen sets are increasing, backed by infrastructure projects and economic growth in emerging economies, as well as some benefit from the channel inventory correction in the prior year. Segment EBIT margins are now projected to be in the range of 7.5% to 8.5% of sales for the year. As a result of the improved outlook for all four operating segments, we now expect the Company to deliver $12 billion in revenue and EBIT margins of 10% of sales in 2010, compared to a previous guidance of $11 billion in revenue and 7% EBIT margins.

Finally, let me turn to the balance sheet and cash flow. Working capital levels were lower in the first quarter, mainly due to strong collections from receivables. This was partly offset by an increase in inventory levels, as we begin to ramp up to meet stronger demand. Cash balances remain strong, even after contributing $111 million into a pension fund, and our debt to capital ratio was 15.8% at the end of the quarter. For the full year, we do expect further investment in working capital to support the increase in demand that we now project. We will invest $400 million in capital expenditure, a 30% increase over 2009 levels, in order to support capacity expansion and new product introductions. We will continue to focus on returning value to our shareholders through further stock repurchases, and we remain committed to sustainable increases in our dividend, and we will review this with our Board over the next few months. As Tom said, it has been a very good start to the year, particularly given the challenges we face in our North American markets. And the increase in guidance reflects our confidence that we will continue to see further improvement in the months to come.

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

Thanks, Pat, and good morning.

I would like to start by reinforcing a couple of themes you already have heard from Tom and Pat this morning. Our first quarter performance was good. Our leadership position in the emerging markets, particularly in China, India, and Brazil, enabled us to take advantage of the strong growth in these economies. The first quarter results illustrate the success of our geographic diversification strategy over the past two years, especially considering the significant slowdown in the North America heavy and medium duty trucks. Remember what Tom and Pat said -- our North American heavy duty truck -- medium duty truck and RVs were down 90% in the first quarter compared to the fourth quarter last year. That's the biggest drop I can remember.

As I said during our last quarterly call, our ability to handle the volatility in demand over the past several months is an indicator of the type of performance you can expect from us in the future. The actions we have taken before and during this recession have resulted in excellent performance through the economic cycle, and also will serve us well for what we think will be an extended period of profitable growth over the next several years.

As you may recall from our recent analyst day presentation, Cummins has identified four long-term macro trends working in our favor. Let me quickly recap them, because they will have a significant positive impact on the performance of the Company over the next few years. The first is price and availability of energy. Over the long term, fuel prices are almost certain to increase, which is driving our research and development to dramatically improve fuel economy. As you've heard Tom already say, our 2010 engines are delivering 5% better fuel economy than our 2007 engines. We have ongoing technology projects that will further improve fuel efficiency. Over the long run, we expect this to result in dramatic improvements in the efficiency of our customers' products. At the same time, demand for electrical power is expected to increase by as much as 8% a year in developing regions and 4% overall. This will increase the gap between supply and demand, offering great opportunities for our power generation business.

The second trend is the implementation of more stringent emission standards around the world. We've talked a lot about 2010 emission changes in the United States, but that is really just the start of broad wave of new and tougher emission regulations around the world over the next few years. Every major economy in the world is going to be adopting tighter emissions standards over the next five years, for both on-highway and off-highway applications. Those standards are going to require our OEM customers to adopt new technologies, which Cummins is well positioned to provide. That means more engine sales for Cummins, an increased use of our components on our own engines, as well as by our OEM customers who make their own engines this. This will also continue to draw key partners to Cummins who want technical help in meeting these standards.

The third trend is the increase in infrastructure spending around the world. An estimated $35 trillion is forecast to be spent on infrastructure development, such as for roads, bridges, power supply and telecommunication facilities over the next 20 years. These are all markets in which Cummins has a leadership position. In fact, the increased infrastructure spending in China and India, as part of economic stimulus packages implemented last year, was a primary reason for our increased sales and profits in the first quarter. In China, the total construction equipment market grew 55% in the first two months of the year compared to the same period last year. We are also seeing increased demand in key power generation segments supporting transportation and data center investment. The story is similar in India. Road construction has increased across the country, approaching an average of 20 kilometers of new highways being built every day. In addition, the Indian government said it expects $20 billion worth of highway construction contracts to be awarded this year.

The final trend is the globalization of our business, especially as it relates to our strength in the large emerging markets of China, India and Brazil. All of these economies are expected to grow faster than the more developed markets of the US and Europe for the foreseeable future. Annual GDP growth in China is expected to average between 8.5% and 9.5% over the next five years, between 7% and 8% in India, and between 4.5% and 5.5% in Brazil. In addition to the infrastructure investments I've already mentioned, all three countries have a large and growing middle class, which is increasing demand for a wide range of products and services. Also, our OEM customers in these countries are beginning to export from their domestic markets. This is especially true in China and India, where companies are aggressively looking to export their products. As these customers become more global, their demand for our products and our distribution and support network will increase.

As Tom has said, we are already seeing strong demand increases in China, India and Brazil, as those countries have rebounded quickly from the downturn. We expect that growth to continue well into the future, and we are making the necessary investments to capture the additional demand in our plants and distribution channel as well with our joint venture partners. As we've been saying for more than a year now, our emphasis is earning a solid profit, generating cash, investing in critical technologies, and providing outstanding support for our customers.

As the economic recovery takes hold, we have some significant growth opportunities in front of us. Our market share is strong in most markets around the world, giving us a solid foundation from which to grow. We also have developed excellent relationships with our key OEMs and joint venture partners, with whom we are growing. We have demonstrated technology leadership, not in just meeting emissions standards on time every time, but also providing the most reliable and best performing products for our customers.

As we have said, our long-term plan is to grow revenues to $20 billion in 2014, and earn an average EBIT margin of 10% across the next business cycle. Given our current strong financial condition, the outstanding performance of our employees during the recent global downturn, and the opportunities we have in front of us, I am confident that we are well positioned for just that kind of growth long term.

Thank you, Tim.

As an improvement to our last quarterly call, and out of consideration to others on the call, I would ask that you limit yourself to one question and a related follow-up. If you have additional questions, you are free to rejoin the queue.

Eric, we're now ready for our first question.

(Operator Instructions)

First question from Jamie Cook with Credit Suisse. Please proceed.

Good morning, congratulations. I guess my first quarter -- my first question, I guess, you know, just in general is related to, you know, when I think about the quarter, how it played out relative to the Stree, revenues were essentially in line but the margin performance was much better. So in general, I guess what surprised you guys about the quarter, you know, on the margin front, and what do you view is sustainable versus nonsustainable?

And I guess the related question to that is just the engine margins. I have a hard time believing your engine margin target for 2010 and your engine margin target for 2014 that you provided at your analyst day, given we haven't even really seen a huge recovery volume from the truck side I would assume some of the, you know, emerging markets or commodity markets remain strong? So if you can help me out on those two measures?

I'll try, Jamie. The first part of your question, in terms of what surprised us, I think the areas where I was most surprised, the performance of our manufacturing plants and the conversion costs that they achieved given the volatile volumes was just astounding, across all four businesses, so that was definitely better than what I anticipated going into the quarter.

Secondly, I think the strength of the emerging marks and the flow-through that we've seen in joint venture income was, quite honestly, better than what we anticipated at the start of the year. We did anticipate improved material costs, we knew we were going to get some benefits following the cost restructuring actions we took a year ago, so it's really joint venture income and the fact that our plants really did so well in the engine segment, the component segment, and power gen segment.

But there wasn't a material cost benefit -- was material cost a big benefit in the Q in the first quarter that we're not -- or can you quantify that?

Sure I can. If you look at material costs year-over-year it was about a 1.7% benefit Q1 to Q1. So it was significant. It wasn't so significant versus the fourth quarter, but it was definitely much better year-over-year. The second part of the question --

I don't believe your engine margin targets.

You don't believe them? I don't know why. Let me just say a few words, because I think this question might come up from a few people as to why the first quarter margins of 10.7% are higher than the full year guidance of 10%. We are going to see some headwinds, I guess is the word we'd use, coming at us. Our warranty costs are going to be higher in Q2, Q3, and Q4, as we introduce more of the new 2010 products. Warranty cost were 1.7% sales in the first quarter. Our previous guidance, when the question came up three months ago, we said we would be running at 4%, and now it's going to be closer to 3.5%, but they will increase.

Commodity costs are going to be higher in the second half of the year. We still expect over all material costs to be favorable year-over-year, but we've already seen much of that benefit in the first quarter, and our projection just now is that commodity costs could be as high in Q3 and Q4 by as much $20 million, $25 million higher a quarter than what we've seen in the first quarter. So again, that's another 0.6, 0.7 of a percentage point.

And then anything specific to, you know, just engines in particular in your -- your 9% to 10%, I think, goal that you spoke about?

As Pat said, warranties will go up in the engine business as we add more -- I mean, the mix of 2010 engines in the first quarter is relatively -- very low, and it will start to increase over the year, and so our warranty [accruals] will go up in that. That's the major one.

I'm talking more about your 2014?

Oh, yes. Well, 2014, it's a long way to go to 2014. As we talked about in our targets, we're going -- we've got another set of introductions, we've got a lot of stuff to do between now and then. So we'll continue to update our margin targets as we see things beginning to move and change. But starting from, you know, our recessionary period, I think we set out some targets that were aggressive, that represent significant improvement, and we'll continue to look at those and we will talk to you about them.

As we stand now, what I think we feel good about is if you just compared this first quarter to fourth quarter, what you see is a continuation. It looks very dramatic compared to Q1. But compared to fourth quarter, what we said is we are doing a whole bunch of work in our plants, in our engineering areas, even in our overhead areas, to try to improve productivity, keep costs down, so even in a relatively weak recessionary revenue environment, we can continue to improve margins, and I think that's what you really see in Q1. And as Pat said, the China, India and Brazil markets definitely went faster than we thought. We knew they'd recover, they recovered faster, and we really benefited from that because we were positioned to capture them.

All right. I'll look for those upward revisions. Congratulations.

Thanks.

Next question?

The next question comes from the line of Tim Denoyer from Wolfe Trahan. Please proceed.

Hey, good morning, guys.

Hey, Tim, how are you?

Good, thanks. Can you provide a bit more color on the second half recovery you were expecting in North American truck demand, and relative to that it sounds like you're kind of expecting the China and India growth to maybe decelerate in the second half; so can you discuss those two?

Sure. The way I would look at North American truck demand for the year, second quarter going to look somewhat similar to the first quarter. If you look full year volumes, I would project that 30% will be shipped in the first half of the year, and 70% will be shipped in the second half. So that gives you a kind of feel for how this is going to grow as we get into the third and fourth quarter of the year. And your second question on China and India, the question was why is it going to soften?

Yes.

Well, I think you've read about both the Indian authorities and Chinese authorities have been a little bit concerned about inflation in India, and just how fast the economy is growing in China, and both are taking monetary actions to not turn off the growth completely, but just to manage it better, and I think listening to our Chinese customers, we're going to see a little bit of a slowdown in the second half of the year, but it's not going to turn off completely.

Sure.

Our projection for the full year now for China, I think we're looking at sales, consolidated and joint venture sales in the range of $2.6 billion; that's up from $1.7 billion last year, so close to a 30% increase. And in India, we're looking at close to a 40% increase year-over-year. So first quarter (inaudible), it's going to be a great year in both countries; we might see a little bit of a slowdown as we go into the second half of the year, though.

Great. One quick follow-up. Tata has been reported as looking to sell a 24% stake in Tata/Cummins Limited. Can you give us a sense of if there is any limitations on your size of that stake, or what your involvement is there?

You know, that report by the way was false. We have followed up with our (inaudible). We have a very good and deep relationship with Tata. We were able to call them right away. Tata has been going through a review of their holdings, to figure out what's core and what's not, which I think is probably the origin of the report, and they have indeed sold off some businesses over the course -- this is not one of those that they're interested in selling, and our relationship with them remains solid. That joint venture is really key to both parties.

As evidence of that, I think the relationship is as strong today as I can ever remember. The evidence is that we're just completing a second joint venture plant that will have a capacity of 60,000 units a year, with the ability to go to 120,000, and remember the first plan has 120,000 units per year capacity, which is operating at full capacity. So if we had any issues with TATA, we wouldn't be making those investments. So I agree with Tom, we checked up on it. There's no truth to those rumors, or the articles.

Got it. Thank you very much.

Thanks, Tim.

Next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed.

Good morning. Tim, for Tier 4 [interim] products, can you talk about any platforms or customers that will be using Cummins engines or components perhaps in the context of a new piece of equipment that included Cummins products at [BAMA] if it haven't been formal product announcement releases? Thank you.

Let me give a broad answer, and then we can follow-up with you with specific pieces of equipment. I guess what I want to say Tier 4, both interim and Tier 4 final, is that's another part of the overwhelming trend Tim talked about about emissions spreading across the world. Tier 4 interim and final and their equivalents will affect both European and American manufacturers in significant ways. Unlike the U.S. EPA thing we just went through, it's not going to be a cliff event. There are requirements by horsepower range that begin to hit at different phases. There's also this complex [TPAM] arrangement, where people can sort of do fleet mixing and figure out how they want to deploy which level of emissions. So we expect manufacturers to get on the bus, if you will, at different points time, and we are working with all our major OEMs on this. We've made announcements with Komatsu, for example; but many of the other OEMs are actually still figuring out what they want to do, and how they want to do it. We are actively talking with all of them. We are in fact doing more than talking, we are working on emissions releases with them, but they haven't announced theirs, and I don't want to get ahead of them on that.

But in terms of specific product announcements, we can definitely get back to you on specific ones that were announced at BAMA, for example, if there are any. But what you should expect from Cummins is, this is our strength, this is where we're good. We are good in emissions, both in terms of the engines and the components. We will see increased business as a result of Tier 4 interim and final by the end, and we will see expansion of OEM partnerships that we have, as well as some new pieces of equipment. But in terms of how it's going to play out between now and 2014, there's a lot of ground to cover, and the OEMs are still doing a lot of planning about how they want to manage it.

As a follow-up, can you talk about if you're more optimistic on the engine part of the business or on the component side, as part of your 2014 plan? Can you tell us roughly what proportion you expect of the increased business to be, both on engine and components versus just the components? Thanks.

Yes. I'm optimistic about both, as you probably expected me to say. But we are projecting higher growth rates in the components areas broadly, and that's -- our targets are set that way than in the engine business, and the reason of course is we're sort of starting from a smaller base, right? We're really adding some of the after-treatment technologies to off-highway engines for the first time in Tier 4. So we'll begin to see higher component growth rates, really, than engine growth rates.

So from that point of view that's -- I guess if that's more optimistic, that's more optimistic, but both will be growing and both will be benefiting from the fact that we have technologies that we think our customers can use, and we intend to help them make their equipment successful by deploying them with those customers.

Thank you.

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

Good morning, guys, let me to the round of congratulations.

Thank you.

Is there any way you can address how your share may have progressed in China, India and Brazil compared -- especially given the outperformance, how did your share progress during the quarter?

Let me first talk about China, I don't think there was significant share moves during the quarter, for example. Over time, our expectation is we will continue to expand share in China, primarily by -- because we are entering now in the light commercial vehicle market, which is a new area for us. So we will continue to expand share in the truck market by, you know, entering into different parts of the market. But with regard to the primary truck market that we've been in for some time, there were not significant share movements, and we really don't expect significant share movements in the near term, anyway. Over the long run, of course, we're trying to pursue with our customers gaining share, but I think it's not a short-term issue.

With India, I mentioned before that while the truck share movements are not so dramatic, what we have done is grown share with Tata, and really over the last 18 months I'd say is a better comparison period, we have increased the share of our engines in their trucks by making our engines more and more competitive from a cost point of view, as well as, you know, improving the quality of those engines, and they are finding that more and more customers are ready to pay a little bit more for engines with newer technology as the roads develop in India; that's part of the (inaudible) on the thing that Tim talked about, as infrastructure improves and wealth grows in those countries, their willingness to pay for technology is increasing. So I guess from a share point of view, that's driving up our share, but mostly as we think about share at Tata.

Brazil, which I did not mention yet, is again relatively level from a total market point of view. We are with some leading customers there in Ford and Volkswagen MAN, where their share is about even, but we are seeing very, very good volume as that market growth there.

So really, I think all the Q1 stories are market stories, but our position has grown over the years and remains strong.

One thing I would add in China, what has been helping is we are seeing more of the enforcement of the Euro [3] compliant engines using electronic fuel systems, and so as that compliance or that enforcement increases, that helps to benefit our sales out of the Dong Feng/Cummins joint venture.

That's helpful. And for my unrelated related follow-up, what are your north American fleet customers saying about the timeframe for when they're going to start placing orders in higher numbers?

Well, as you'd guess, it varies a lot by fleet, and what we are seeing is that almost all fleets want to start trying, so they're all in the market trying to figure out when they can start trying the technology, which I think is a positive sign, because our view is once they try it, and they begin to see the benefits in fuel economy and that sort of thing, then they'll begin to see why it's worthwhile despite the higher prices to invest in new trucks, and that's what we want to see happen.

Our -- it is -- there is a high price hurdle, so it's going to take some folks time to get used to that, and figure out how they want to utilize this, particularly in this still difficult freight environment. But we are seeing putting orders in, we are seeing people try it much more aggressively across the market, and some are buying -- making larger orders. But I don't think there's one comment I can make that averages across all the fleets; I think some are going in right now, some are going in with their toe in the water, and some are still waiting to figure out what they want to do.

Let me add a little by to the new product introduction. We produced 3,100 2010 engines in the first quarter, and Tom said it's increased to 3,500 to date. They've gone to 80 end users, 90,000 hours of testing, 8 million miles, as Tom said, and over 180 vehicle installations with 63 OEMs. So we're out there; and the feedback we're getting from these early customers is very, very positive. And I think, you know, as more try it, we'll start to see the orders come in, and I would hope we'll start to see that in the second quarter but certainly in the second half of the year.

That's helpful, thanks a lot, guys.

Next question comes from the line with Ann Duignan with JPMorgan. Please proceed.

Good morning, guys. It's Ann Duignan.

Hi, Ann.

I just wanted to build on your comments that you just completed there. You said that -- in your opening remarks that in some applications, you're seeing as much double-digit fuel improvements. Could you be a little more explicit? Is it in certain applications, is it in over the road, over short haul, or -- maybe you could just give us a little bit of color, or are there too few engines out there to really get a grasp on that?

Yes it is, it was -- those are comments I made, we had a couple of fleet customers who actually saw very, very large benefits, and if I think about the situation with them, I think that the way they were using their engines and the way they had them set up in their trucks, we were able to do a lot with them with the new ones that really made a big benefit. So I think the intent is just to say we think the engines are offering very good fuel economy improvements, and we want to help customers realize those -- the maximum benefits. So we did see -- those were customer-specific, as opposed to application-specific kind of improvements. So right now, there's too few out there to say which ones are going to see the best.

I think the important technical point, though, Ann, is that with this SCR technology, the copper zeolite that we're deploying, we see a very wide map that people can operate in and still capture this fuel economy benefit. That's been kind of a challenge for the industry before. You find a good fuel economy point, but as soon as a different driver drives it, or they do a different route, they don't realize those fuel economy benefits.

One of the real positives of this technology is the map they can operate in is wider and still get the benefit. So we think we're going to see more customers realizing the full benefit of the fuel economy with this technology, which again we think as we kind of finish the deployment, the industry is really going to be pleased with what's out there.

You know, funny, when I was at the [work truck], they said the exact same thing, so good that you're all consistent, at least.

They're an excellent partner, by the way, and I think they utilize the technology as well as anybody.

Yes. Just my follow up on that (inaudible) is, you know, on the 15-meter you had anticipated regaining the [Navistar] share; do you still feel that way? I mean, Navistar and [Kenwith] and Peterbilt are all out there aggressively trying to promote 13-liter engines; what's your color on the 15-liter segment, and whether customers will really migrate?

I think the 15-liter or 13-liter discussion really comes down to how the customer wants to use it, and secondly, how good each engine is. So we are, of course -- we recognize that our 15-liter will compete with 13-liters on the road. A whole bunch of them have loads that a 15-liter just handles better, and in fact that trend has been going more that way for many years. So our view is a whole bunch of those customers that have got used to 15-liters and seen what they can do for them are reluctant, frankly, to switch. They've got a lot of benefits after -- of moving to 15-liter.

Second thing is that if we continue to produce engines with leading fuel economy, including being competitive with 13-liters on fuel economy, it's doing to reduce the number of reasons to switch. There is no question that a good 13-liter engine will do well in the market; but we also think there's going to be a place, both short run and long run, for 15-liters, again provided that we continue to make the offering competitive. And that's really the thing we've said all along, the game here is trying to introduce technology reliably and with -- working closely with your customers, so the integration goes well, and as long as we continue to do that we think we'll have a place for the 15-liter.

If you historically, I mean over a long period of time, look at the mix between 15-liter and 13-liter, it has not changed. I don't see anything in the marketplace today that that's going to change today. So I think if you want some more data, you can do some research in that area and be able to predict it.

Okay. So you're still confident that you can regain the lost Navistar share?

Well, I think the lost Navistar share, that's less of a 13, 15 point, and more a question about which truck customers are going to gain which share. What we said is, we think we have a very good partnership with [PACA], and we'll continue to work with them to make sure they have good trucks to sell. We are also working closely with Freightliner and Volvo to make sure that their offerings are competitive.

Our view is those three truck manufacturers that use our engine will be competing with Navistar with their engine offerings, and our view is that our truck customers are pretty well positioned with our technology and their own technology to compete, and we'll be helping them every place they can to compete in the market. So I think that's what will finally drive share. Whether or not we fully recover every percentage point or not is not clear. There's a lot of ground to play out. We just think we have a good offering and good partners, and we're going to go out there and fight it out in the market.

Right. Okay. Thanks so much. I'll get back in line. Appreciate it.

Thanks, Ann.

Your next questions comes from line of Andrew Casey. Please proceed.

Good morning. Nice transformation over the last decade. Look forward to seeing what impact actual improvement in developed markets would have on performance, so congratulations.

Thanks, Andy.

Thank you, Andy.

Similar to Jamie's engines question on the 2010 components EBIT margin 8% to 9% outlook versus kind of bouncing around the 4% to 5% range over the last few years, and then longer term the 10% to 11% view given at analyst day, if we look out directionally, do you think margins would benefit from full year of develop market truck and off-highway equipment recovery, with the incremental content for vehicle that you touched on, along with the pricing, but holding everything else equal?

Yes, and this Pat, I think the answer is yes to that. We've seen a very good first quarter. We've raised our guidance for the full year. As we start to see more of the components products go into both developed and developing markets, I think we would expect to see that business continue to grow, top line and bottom line.

Okay. Thanks. Then kind of in that spirit of the last decade comment, you've really improved your capital structure, and as you're determining how to allocate your cash, at what sort of net debt to total cap do you really feel is optimal for Cummins at this point?

We talked a little bit about three or four weeks ago in New York, and today, yes, it is relative low at 15%, 16% and we're not trying to stay there for ever, but we now have sufficient flexibility in our capital structure to do a number of different things. We are very focused on returning value to the shareholder. We are buying stock again. We repurchased 650,000 shares in the first quarter, and we'll do more as we go through the year. We didn't increase the dividend last year; that was the first year in the last four we didn't increase it, and clearly we'll be talking to the Board again, as I said in my earlier remarks, over the next few weeks.

But there's a significant amount of investment that we're going to be putting back into the Company, both in terms of capital investment would be $400 million this year, and you'd expect to see that continue to grow as the business expands over the next few years. Working capital investment is going to have to go up, too; we can't become a $20 billion company by 2014 without seeing further investment in working capital. I also look at research and development as investment, and not necessarily an expense. So we're going to find plenty of ways to utilize our money to grow the business effectively.

Okay. Thank you.

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

Good morning. I think this is more of a "wow" quarter for everybody here, besides congratulations.

Good morning, Eli.

Can we talk a little bit more about components? I know you touched on it. Your volume's up 20%, you were up similar to that in the first quarter, so you've had pretty good volume gains all year. You've got margins flowing off; how much of that -- is that material costs or is that new product introduction cycle that has low margins? What, you know -- you had great margin in the first quarter and keeping that going -- you know, to fall off as much as you are suggesting it?

I don't think it's going to fall off dramatically. We've given guidance of 8% to 9%, and Q1 was just a little bit above that. We will see increasing material costs as we go through the year, there's absolutely no question about that. First quarter, the comments we made earlier on about after-market mix certainly impact the components business, so as we start to sell more products to OEM customers, that margin is in after-market, which is better than (inaudible) OEM will dilute a little bit. So it's not going to be a great year for component, and it's really not moving an awful lot off first quarter levels.

I think we're also going to see higher research and development as the year progresses in components as well, again thinking about the work that they're doing to get ready for Tier 4 interim, as well as work that we talked about at the analyst day that's more longer term, thinking about fuel efficiency improvements that we want to get.

A quick follow-up with use of capital, you know, acquisitions is not something we've talked much about for quite awhile. Is that something that's coming back on the horizon? Is it something that you'd like to fill in anywhere around the world or new ventures that you would like to start around the world?

No.

(Laughter)

Our view, as we've talked about before, Eli, acquisitions are not a particularly successful strategy in our industry, in our view. We're not particularly good at them, and we don't think they've generally been very successful for most folks. So what we're thinking about, though, is trying to expand our global position, which has involved us either creating or buying into new distribution businesses across the world. So you'll still see that. Those are small pieces of -- small acquisitions, but you still can see us enhancing our distribution and support position around the world, in order to meet some of the trends that Tim talked about.

We're looking for opportunities to expand our components business in the most strategic areas. But I really don't think you should be looking at acquisitions as significant use of capital by the Company, or significant additions to revenue in terms of driving growth. What we should see is organic growth is our -- overwhelmingly the way we'll be growing the Company. We see enough in our organic growth plan that we think we can meet our targets using that.

The alternative to acquisitions, from our perspective, is joint ventures. Over the last ten years, I think we've become much better joint venture partners, and we have selected and have been selected by excellent companies. And I think if you watch us in the future you'll see more of that; new joint ventures, perhaps in new geographic territories, and you'll also see us grow the joint ventures we have, and that's where our emphasis is going to be. Historically when we've done acquisitions, we've paid too much money, and we take too long to integrate into the Company. So we're going to play on our strengths, which is the joint venture management process, rather than do acquisitions.

Thank you.

Your next question comes from Meredith Taylor with Barclays Capital. Please proceed.

Good morning. I'm hoping we can talk a little bit more on the power gen business, could you give us a sense of how the order board progressed over the course of the quarter, and a little more specific detail about regionally where you saw the greatest area of strength within the emerging markets?

We just happened to have Tony Satterthwaite with us, so we're going to let him -- who runs our gen business, we'll let him answer that.

Hi, Meredith, thanks for the question. The order board took us by surprise in the first quarter, and we saw a much bigger jump than we had expected when we talked about 2010, you know, in the fourth quarter. The strength was entirely outside of North America and Western Europe. China and India were very strong, Brazil was incredibly strong, and we also started to see some comeback in orders at least in the Middle East, and in some of our very important rental customers like [Greco] have started to see the business come back. And so it was pretty broad, but I do want to say it was all emerging market. It was really nothing of interest in North America and Western Europe, but we are seeing much stronger order board than we had expected, and that's playing into our guidance pretty clearly.

Okay, so basically no change over the course of the quarter in terms of the tone of orders that you were seeing in the developed markets?

No. It's -- the developed markets have pretty much done exactly what we expected, and that is they're continuing to drift kind of downwards, North America and Western Europe are coming in lower, which is exactly what we expected, and really it's been the emerging markets that have come in much stronger from an order perspective.

Great. Then can you just remind us, specific to maybe North America and then Europe, how much your revenues in power gen last year were tracking below end market retail sales, just given the inventory reduction dynamics in the markets?

That's a good question, Meredith. We don't know exactly; that's kind of hard to track. We think the inventory reduction was fairly significant throughout the channel last year, but not so much in North America. It's not an inventory market in North America, it's much more an inventory market outside of North America. So we think that was less the case in North America than it was in, for instance, the Middle East.

Meredith, the proxy that I've used that I think best answers that question, if you track the factory sales from power gen that run through our own distribution channel, you could see that factory was down about 30% last year. But when you looked in the distribution channel, their power generation sales were only probably down 19% or 20%. So there was about a 10, 11 percentage point difference between the factory and what we were seeing in the channel. Obviously this year, there was a little bit different mix there as the factories back up. But the -- depending upon where you are in the distribution channel, you're seeing either flat or, you know, continued weakness in power generation sales if you're in the developed markets, but emerging markets there's restocking as well as real demand taking place.

That's great. Thanks so much, and like everybody else, congratulations on the quarter.

Thanks, everyone, for your attendance today on our earnings call. Again, we'll be available for your questions after the call all day.

Thank you.

Ladies and gentlemen, thank you for your patience in today's conference. This concludes our presentation. You may now disconnect, and have a good day.