康明斯 (CMI) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 2011 Cummins earnings conference call. My name is Alicia, and I will be your Operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer Session. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Dean Cantrell, Director of Investor Relations. Please proceed.

Thank you, Alicia. Welcome, everyone, to our teleconference today to discuss Cummins' results for the first quarter of 2011. 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 2010 Form 10-K, and it applies to this teleconference. During the course of this call, we will be discussing certain non-GAAP financial measures, and we refer you to our website for the reconciliation of those measures to GAAP financial measures.

Our press release, with a copy of the financial statements and a copy of today's webcast presentation, are 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 Chairman and Chief Executive Officer, Tim Solso.

Good morning. I am going to start today by offering an overview of our first-quarter results. I will then share a few thoughts on how the Company is positioned to take advantage of our long-term opportunities. Tom will discuss our ability to meet the growth and the demand we expect to see this year in all our markets. Pat will then conclude with a detailed look at our performance in the first quarter, and share our updated guidance for 2011.

As you know, there is some debate over the strength and sustainability of the global economic recovery. We have a good perspective on the strength of the global markets, and we are seeing significant growth in demand for our products and services in nearly every geographic market we serve. In fact, we now expect our sales in 2011 to be almost 30% higher than in 2010, compared to our initial forecast of around 20%. Our first-quarter performance was very good. Sales of $3.9 billion represent the third highest quarterly sales in the Company's history, behind only our record performance last quarter and the second quarter of 2008, at the height of the last economic cycle. Our profitability as a percentage of sales represents solid performance and continuing improvement.

Earnings before interest and taxes were 13.8% of sales in the first quarter. These earnings are higher than the fourth quarter 2010, and the best quarterly performance ever at Cummins. All four of our business segments reported improved EBIT percentage from the fourth quarter. The Engine and Components segments also earned record EBIT in the first quarter, both in terms of total dollars and as a percent of sales. Our first-quarter results reflect continued strong growth in key international markets, especially China, India, and Brazil. Consolidated sales in China grew by 66% from the same period in 2010, sales in India increased by 31%, and sales in Brazil rose by 39%.

We also were starting to see signs of recovery in the North American truck markets. Shipment to North America heavy-duty truck market grew by 15% compared to the previous quarter, while medium-duty engine segments increased by 14%. We have now shipped nearly 90,000 engines equipped with selective catalytic reduction aftertreatment systems in North America. Our engines continue to perform very well, and orders for the rest of the year are increasing.

Our performance in the first quarter was further confirmation that our work to keep the Company strong during the recession continues to pay off. It also has strengthened by belief that Cummins is entering into a period of accelerated profitable growth over the next few years, driven by several economic and market trends that we have shared with you over the past few years. Those trends include the continued rapid growth in international markets, especially in emerging markets like India, Brazil, and China; tightening emissions standards around the world; increased infrastructure and investment; and a widening gap between the demand and supply of electricity.

We are beginning to see the impact of some of these trends on our business already. For example, Cummins Global Reach continues to play a large role in our success, and we expect that to continue well into the future. We have talked at some length about our strength in China, India, and Brazil. We have aggressive plans in place to build on our leadership positions in all three countries. We are investing in additional capacity, entering new markets, and launching new products tailored to specific needs within those markets. We also are setting the stage for even longer-term growth by investing in Africa, which we see as an important market for Cummins over the next decade and beyond, much like we did in India and China in the 1970s and 1980s, we are committed to establish a strong presence across Africa early in its economic development.

Another of the global trends benefiting Cummins today that will continue to drive growth in the future is the tightening of emissions standards around the world. As we are already seeing in North America, more stringent emission standards play to Cummins' strength as a technology leader. This is true both for engines and critical components, such as exhaust aftertreatment, fuel systems, and turbochargers. As new emissions standards are introduced for both the on-highway and off-highway markets around the world over the next several years, our Engine and Components segments will benefit significantly. We will see increased sales of our engines, and greater Cummins component content, in both our engines and those made by our OEM customers.

Our performance over the past year has put us ahead of the growth plans we shared with you in March of 2010. We will update our long-term targets at our Analyst Day conference in September, once we have shared them with the Board of Directors. I can tell you, however, that I am extremely bullish on long-term future of the Company. The work we have done over the past two-and-a-half years has created a more global and more productive Company. We enter the global economic recovery in the best financial shape in the Company's history.

One sign of our confidence and of our commitment to creating shareholder value was our decision in February to authorize an additional $1 billion in share repurchases. We repurchased $190 million worth of stock in the first quarter. As further evidence of our confidence in the future, we plan to revisit the topic of sustainable dividend growth with the Board this summer.

Finally, we have the strategic plans and the leadership in place to take advantage of the significant opportunities in front of us. I am confident that you will see a period of accelerated profitable growth from Cummins over the next several years. Now Tom will provide more details about our plans for the rest of 2011, as we work to capture our immediate growth opportunities.

Thanks, Tim. I wanted to start this morning by echoing Tim's comments on our terrific first-quarter results. Sales were significantly higher than the first quarter of 2010, and held up well compared to our record results of the fourth quarter, despite the typical seasonality in our first-quarter volumes. Our gross margin of 24.8% in the first quarter was a full percentage point better than the fourth quarter at its highest level in more than ten years. Similarly, EBIT margins of 13.8% exceeded the fourth quarter, and were a modern record for the Company.

Pat will share our updated guidance for this year in a few minutes, but I did want to say that our performance in the first quarter, especially in terms of profitability, was stronger than we had expected and has improved our outlook for the rest of the year. For Cummins, the recovery appears to have arrived, and the growth opportunities that we began preparing for during the downturn are clearly in front of us. We are now focused squarely on making the most of these significant short- and long-term growth opportunities.

For 2011, that means being ready to meet large demand increases in many of our markets, including in the United States, where we are already starting to see the recovery in the commercial truck and bus markets. Both our heavy-duty and mid-range engines are performing well. Reliability is the best we have delivered at any recent launch, and the fuel economy improvements that we predicted are being realized by our customers.

Cummins' share of the 2011 purchases by the big US trucking fleets remains very high. We expect to receive nearly 60% share of the medium-duty orders and 40% share of the heavy-duty orders from the top 200 fleet customers. Significant orders include Werner, U.S. Xpress, Stevens Transport, Con-Way TL, Penske Truck Leasing, Swift, Melton, Halliburton, Old Dominion, BJ Services, and Waste Management. After a period of widely fluctuating demand in late 2008 through last year, we anticipate that 2011 will be the beginning of a period of sustained growth in our truck engine markets in the US.

Demand is growing in other markets, as well, and our focus has turned toward increasing capacity in key plants in our Engine and Components businesses ahead of the demand. We need to do this while holding on to as many of the efficiencies we have gained over the past 18 months as possible. This will be a challenge, considering the speed with which demand is returning, but the operational improvements we made during the downturn are allowing us to ramp up more quickly and more efficiently than in previous recovery cycles. For example, average daily build rates at our heavy-duty engine plant in Jamestown, New York, are expected to be 35% higher in the second quarter than they were in the first quarter, and more than double what they were a year earlier.

At our turbocharger plant in Charleston, we have moved up the opening of an additional assembly line from the fourth quarter to the second quarter, to meet the increasing demand. The Charleston plant produces turbos for heavy- and medium duty-truck markets, and volumes are expected to increase 25% in the second quarter and remain high for the foreseeable future. I also just returned from a week in Europe, where I visited nearly all of our operations there. As you know, we have a broad manufacturing base in the UK, where we make engines, generator sets, and components for markets across Europe, the Middle East, and Africa.

Production has increased at all of our UK plants, and we have invested in additional capacity in high-horsepower engines and turbochargers there. At each of our plants and technical centers that I visited, we held reviews focused on the same topic -- namely, ramping up production quickly, while maintaining the productivity and cost improvements we gained during the downturn. Our UK plants aren't alone in seeing increased volumes. We are working on projects to increase production in engineering capacity across nearly all of our businesses over the next two to three years.

Here are just a few examples. We are investing $50 million in our Power Generation operations in Fridley, Minnesota, that will add engineering support, production capacity, and office space over the course of this year. In Seymour, Indiana, work is on schedule to add manufacturing and engineering capacity to develop a new, high-horsepower engine, which will extend the upper end of our power range. This is the first completely new high-horsepower engine platform for Cummins in 30 years.

In Turkey, new filtration generator technology plants will be up and running in the next two years, as part of a larger facility being planned in Izmir. Similar across-business complexes are underway in both India and Brazil. In India, we dedicated the first three of ten manufacturing plants at our new complex in January, including a second manufacturing plant for our Tata/Cummins JV that will increase capacity by as much as 90,000 engines a year. In Brazil, we'll invest nearly $100 million over the next five years to upgrade our current manufacturing facilities, and to launch a second location that will house power generation and filtration manufacturing plants, as well as a parts distribution center.

And in China, we are increasing capacity at our Dongfeng Cummins joint venture by 50,000 engines this year. Already in this efforts, though, go beyond making sure we have adequate manufacturing capacity in advance of demand. As we have discussed in recent quarters, we are investing heavily in terms of talent and resources, to create a globally capable supply chain that operates effectively across all our businesses. For more than a year now, we have been working to ensure that we have adequate supplier capacity to meet our production needs in every region of the world. This supplier capacity work has been critical to our ability to ramp up production and to meet rising demand.

We also increased-- we also recognize that customer support is going to be increasingly important to our success in the future. We are continuing our customer support excellence programs, to make further improvements in our customer-facing processes that will make us easier to do business with. We are increasing the use of customer-focused Six Sigma, where we use our talented people and our Six Sigma tools to help our customers increase revenue or lower costs in their businesses.

For example, we work with Paccar, a Cummins partner and one of our most important customers, to improve its ordering process with Cummins emissions solutions plant in Wisconsin. The result was a 50% reduction lead time for parts coming from the Wisconsin plant and a corresponding reduction in inventory for Paccar. In addition, we have expanded our service coverage for on-highway truck customers in China. We have tripled the number of service locations across the country, and have created a customer-context center designed specifically to help our on-highway customers in China. This model will be the basis for future customer support efforts in other end markets in China.

Before I turn it over to Pat to discuss the details of our first-quarter results, I would like to say a few words on the recent events in Japan. First, I want to commend our employees in Japan for their response to this tragedy. We are extremely fortunate that all of our people in Japan are safe. I am personally grateful to them, as they have worked virtually around the clock to ensure that our customers and partners in Japan are well-supported, despite extremely difficult personal circumstances.

Second, let me just talk about the supply situation from Japan. Cummins has a number of suppliers in Japan, though most of them are Tier 2 or Tier 3 suppliers. While many of them have been affected in some way, the disruption to our business in the first quarter was minimal. We have set up a dedicated cross-functional team to identify and resolve all potential supply issues resulting from the disruptions in Japan. This team has been working for weeks, and has been issuing daily reports to my leadership team. More importantly, they have already resolved dozens of potential delays and shortages, and are actively working on the remaining issues.

While it is likely that we will have some supply delays in future quarters, we do not expect the impact of any of these delays to be long-lasting or material at this point. The situation in Japan is dynamic, and especially given the continuing aftershocks and potential power disruptions, so we will continue to actively manage this area. Now, here's Pat.

Thank you, Tom, and good morning, everyone. First-quarter revenues were $3.9 billion, an increase of 56% from a year ago, reflecting strong growth across all regions and all four business segments. US sales, which represented 39% of our first-quarter revenues, were up 70% from a year ago, as a result of stronger demand from our on-highway markets. International sales increased by 48% from a year ago, with significant growth in China, India, Brazil, and Europe through increased demand in the construction, mining, power generation, and truck markets.

Compared to the fourth quarter of 2010, sales were down 7%. However, as we commented in our previous call, the first quarter was shorter than the fourth quarter of last year by two weeks. So, the actual weekly run rate of revenue across all four bus-- improved across all four businesses. Gross margins improved to 24.8% of sales, with stronger volumes, good operating leverage, and some pricing improvements, offsetting the expected cost increases from warranty and material costs. Selling, admin, and research and development costs were up $91 million from last year, as we ramped up spending in some critical areas, most notably in our investment and research and development, which increased by 40%.

Joint venture income of $96 million was 26% higher than a year ago, with continuing growth in our income from joint ventures in China, India, as well as through our North American distributors. Earnings before interest and tax were $532 million, double the amount we reported last year, and reached 13.8% of sales. Compared to a record fourth-quarter performance and despite the lower revenues this quarter, EBIT was virtually flat and increased as a percent of sales. Earnings per share in the first quarter were $1.75, compared to $0.75 from a year ago.

Now, moving on to the operating segments, let me give some more details on the first-quarter performance, as well as the revised guidance for the full year. In the Engine segment, first-quarter sales were $2.4 billion, up 6% to 8% from the prior year, as North American markets begin to improve. The increase in North America is the result of improving economic conditions, as well as a depletion of transition engine inventory bought in advance of the 2010 emission change.

We also experienced strong year-over-year growth from emerging market infrastructure spending, particularly for construction equipment in China and from commodity extraction worldwide for mining and oil and gas. Segment EBIT more than doubled from last year to a record $290 million, or 12.1% of sales. This increase was driven by strong operating leverage with the increased volumes, positive price realization, and higher joint venture income, offset in commodity cost inflation, and higher warranty costs related to the increase in demand for new engines.

As a result of the strong start to the year and our updated outlook, we are increasing both revenue and profit guidance for the Engine segment. Revenues are now forecasted to be up 35% over last year, due to the strong recovery in the US truck market and increased demand for our products in the construction, mining, and oil and gas markets, in particular. While commodity costs will continue to act as a headwind this year, and warranty costs will increase as we see more of a mix [to newer] products as we go through this year, the higher volume and continued strong operating leverage is now projected to lead to EBIT in the range of 11.5% to 12.5% of sales.

Moving on to the Power Generation segment, first-quarter revenue was $795 million, an increase of 54% over the prior year. Sales were up in virtually every region, with significant growth in particular in Europe, the Middle East, India, and in Latin America. Segment EBIT was $89 million, or 11.2% of sales, compared to $34 million, or 6.6% of sales last year, as stronger volumes and operating leverage, along with some price improvements, more than offset commodity cost inflation. The increasing demand for products and services has been driven by infrastructure spending in the emerging markets and commodity-related demand globally.

Demand in North America and Europe has started to recover and we now expect revenue for the Power Gen segment to be up 20% over last year, with EBIT margins of between 11% and 12% of sales. In the Components segment, first-quarter revenues was a record $924 million, an increase of 47% over the prior year. Revenue improved across all businesses within the Components segment, driven by strong recovery in North America and Europe, as well as in our aftermarket business and through higher product content in North America on 2010 emissionized product.

China and India also showed strong growth during this period. Segment EBIT was a record $105 million, or 11.4% of sales, compared to $57 million, or 9% of sales last year. The year-over-year improvement was driven by strong operating leverage, increased content on EPA 10 engines, and productivity improvements. As a result of improved demand and stronger operating leverage, we are now forecasting the Components segment revenue to be up 35% for the year, and profitability for the full year will be between 11% and 12% of sales.

In the Distribution segment, first-quarter revenue was $642 million, an increase of 35% over the prior year. Excluding the impact of acquisitions, the Distribution segment had organic growth of 27% over the first quarter of last year. Driving this growth were oil and gas markets in North and Central America, increased power generation sales in Europe and the Middle East, and stronger parts and service demand. Segment EBIT was a record $89 million or 13.9% of sales. This is an increase of 24% over the prior year, as a result of the higher volumes and increased joint venture income.

Also, last year we recorded a one-time gain of $12 million, as a result of the consolidation of Cummins western Canada. As a result of improving demand for industrial engines and power generation products, we now forecast that revenue for the segment will be up 25% this year, and EBIT will be between 12% and 13% of sales.

So, as we look at the full-year outlook for the Company, we now expect revenues to grow close to 30% this year and reach $17 billion, with earnings before interest and tax of 14% of sales. As we discussed on our last call, our strong balance sheet allows for the strategic investments and increased capital expenditures necessary to achieve a period of sustained profitable growth.

In the first quarter, we invested $91 million in capital expenditure projects, almost double the amount from a year ago, with most of this targeted on new product development and investing in capacity ahead of demand. We expect to invest between $600 million and $650 million for the full year. In addition to this, we expect that unconsolidated joint ventures will invest more than $300 million in capital expenditure projects, most of which is targeted at increasing our capacity.

During the quarter, the Company repurchased almost 2 million shares at a cost of $190 million. And as we reported in the 10-K, we completed the $500 million program announced in 2007, and have begun the repurchasing of shares under the new $1 billion program announced in February. We also announced our intention to sell an exhaust and the light-duty filtration businesses, both of which are within the Components segment. The guidance which we have provided today considers only ongoing operations, and excludes any one-time gain from the sale of these businesses.

Now, before we open the teleconference to questions, I would like to inform you of a transition within our Investor Relations function. As most of you know, Dean Cantrell has been leading the Investor Relations function for the past six years. Dean has been terrific in this role, representing Cummins extremely well with investors and with Wall Street analysts, and I know many of you on the call today will share those sentiments. He has been an outstanding ambassador for the Company in this role, and we are all very appreciative of what he has done. Over the next few months, Dean will be transitioning into a leading finance position within one of our business units.

With that said, I am very pleased to announce that Mark Smith will be taking on the Investor Relations leadership role. Mark has been with Cummins for 15 years and has experience in the Power Generation business, the Engine segment, the Corporate Finance group, the Filtration business, and for the last five years, has been the finance leader for the Components segment. His knowledge of so many parts of the Company, as well as being a strong leader in the finance function, made him an excellent choice to take over in Investor Relations. Now, let us open the call to your questions.

Thank you, Pat. Out of consideration to others on the call, I'd 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. Alicia, we're now ready for our first question.

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

Good morning. Dean, congratulations.

Thanks, Jerry.

Tom, can you say more about the drivers of the sequential margin improvement in Components, perhaps comment by product line? And also, can you talk about what specific parts of the supply chain you're monitoring closely across your business at this point?

Okay, I'll -- what I'll -- let me talk about the supply chain, and I will let Pat say a little bit more about the margins in Components. In the supply chain, essentially, for every one of our major products that we have identified, who are the key suppliers, in terms of -- especially those operations which take longer time to build up adequate capacity. So, there is a lead time to build up capacity, and there is an investment to make. And so, each of our purchasing groups, each have a list of those suppliers. And as I mentioned, about a little over a year ago, we then said that we want each of them to go and start having frequent communication with those suppliers; where necessary, we made commitments or investments; and we have, then, follow-ups -- regular follow-ups with them to make sure we're adding capacity at the right rate.

Lately, we have been spending a fair bit of time in the high-horsepower arena, making sure some of our key component suppliers can keep up. That's been an area that 's -- as you can probably notice in our business, has ramped up very quickly, and so, making sure we have adequate capacity. But those same lists and those same activities go across the Components business, as well. There is key suppliers in fuel systems and turbochargers and emissions solutions, in exactly the same way. I made the comment I did about Japan, because we set up a separate task force just for that. Because there, we're dealing with mostly -- well, really, almost all Tier 2 and Tier 3 suppliers. So, these are suppliers that we normally don't have a direct relationship with, in terms of making sure they have capacity. But now, we are taking that process back a tier to make sure that's also true.

So, Jerry, on the question of Components, I think there's two factors there. First of all, clearly, the increased volume and the more content that we're putting on engines now has been a driver for the increased profit from the segment. But more significantly, I think, given the comments we've had in the last two calls, where we expressed a little bit of disappointment with the profitability of the Components segment, you recall that at 8% profit in Q3, they did 9% in Q4 -- a big part of that was around productivity and a couple of the businesses, notably the Turbo business and the Filtration business. And we said that by the end of the year, we expect it to be through those issues, and we are. And so, that's why I think you have seen the Components margin spike up to 11% as quick as what it has.

And, Pat, you feel comfortable with -- and no productivity issues as you ramp up the Emission Solutions part of the business?

I feel very confident that Emission Solutions business will do very well, as they ramp up their volume.

Okay. And lastly, on your EPA 2010 product lineup, can you talk about where your cash warranty payments are running today, relative to your accrual rates? Or if you can comment on that directionally, if you don't feel comfortable sharing specific numbers, that would be helpful. Thanks, Pat.

You will see some more in the 10-Q when we file it, but payments are running below the accrual rates just now. One of the areas that we are seeing an improvement compared to three months ago is a full-year forecast now for warranty. We expect to be closer to 3.2%, and I think three months ago we said it was going to be closer to 3.6% for the full year. So, I think that recognizes the confidence that we have that the new products are performing well, performing better than we thought, and we have anticipated before. And I think that will be realized in the margin in the quarters to come.

And Jerry, I think it's worth noting that -- I mentioned the reliability of our launch being the best we have had, and I think that's what you're seeing in those numbers. It's -- we're not done yet. It's early enough days that we want to make sure we keep focus on this, we don't count our chickens yet, but our returns so far in terms of how we have seen the numbers come in, what we've -- what kind of issues we're facing, look really good.

So, we are feeling very good about it, and it of course helps our warranty payments. But more importantly, it helps our customers, that they see our product as performing better in the fields; as liability really matters to them, we think it's going to help our volumes and market share, as well as our warranty. So, it's a really good situation for us, from a 2010 launch point of view. We feel very good about it.

Thank you.

Your next question comes from the line of Jamie Cook from Credit Suisse. Please proceed.

Hi, good morning.

Hi, Jamie.

Congratulations, Dean, and welcome to the dark side, Mark. Quick question. Of course, I have to ask the question on guidance. This quarter you put up 13.8% margin, you're guiding to 14% for the year. I guess I struggle with the number. Was there anything unusual in Q1 that helped you, or are there any sort of headwinds in the back half of the year that I don't appreciate? Because I am just thinking, when I look at your volumes in the back half of the year, whether it's heavy-duty, medium-duty, truck, even components, I would think your volumes should be accelerating, based on just what you said about shipments last quarter.

So, can you help me on that? And then, Pat, how do we think about the elimination line for 2011? I am just trying to square your guidance by -- your margin guidance by segment, with the total guidance -- with the margin guidance for the total Company.

Well, okay, let me kick that one off, Jamie, and then Tom can jump in if he wants to. I think -- well, certainly, no unusual items in the first quarter. It was very clean quarter from a results perspective. As we said before, and as I said in my earlier remarks, we do expect warranty rates to increase as we go through the year and ship more 2010 product. That's probably the most significant factor in looking at the 14% guidance for the full year, versus the 13.8% in Q1. Most of that will impact the Engine business more than any of the other three segments.

With regards to eliminations, in terms of guidance for that, I expect that inventory will continue to grow as we go through the year. And therefore, the eliminations, from a sales perspective, we cannot [run it at] 20%. And from a profit -- an EBIT perspective, as expected, eliminations you have seen in Q1, I wouldn't expect that run rate for the full year. I would expect it to be negative, but tailed down from the first-quarter number. Okay?

Great, yes, thank you. I will get back in queue, unless Tom had anything to add.

Oh, yes. So, Jamie, I don't really have much to add. I think Pat has it right. We don't see anything particularly negative going the rest of the year. We're looking at increasing volumes, which accrues to margin. We are having -- we are seeing some slight negative to material costs. I think we said about 0.3% hit as material costs continue to rise.

Again, we're offsetting that in the Power Gen business with price, but we're not getting -- so that's just keeping us even for the year. We're not really gaining much on price during the year. So, it's -- we kind of forecasted with the margin -- sorry, with the warranty increasing and a slight headwind on commodity costs, some increase in margin, based on the volume; but maybe, again, some slight negative in terms of incremental margin, but not much. It's still a good incremental margin. We're still feeling pretty good about that forecast.

All right. Thanks. I will get back in queue. Congratulations.

Your next question comes from the line of Tim Denoyer from Wolf Trahan. Please proceed.

Hi, good morning.

Good morning, Tim.

Quick question on North American markets here. You gave some pretty impressive numbers with the 60% of medium-duty and 40% of heavy-duty with the top 200 fleets, and I am certainly -- there is certainly some -- a lot of talk about shipping down 13-litre, but a lot of truckers seem to be very loyal. Is there any change to your overall guidance, in terms of -- you have talked about sort of a low 30% in terms of overall heavy-duty? And I think it's 50% in medium?

Yes, Tim, we have talked about being 50%, or possibly even better this year, in medium-duty in North America. And with regards to the heavy-duty Class A Group 2 in NAFTA, we've talked about a 36% market share for the full year. So, those are consistent, when I think what we talked about last quarter. We did take our market outlook up for the Class A Group 2, and all of that is -- the particular market share or market numbers are included in the presentation that's out there. So, we are now seeing a 211,000-unit market on Class A Group 2 for NAFTA.

Got you. Thanks. And then, on Power Gen, can you give a sense of the backlog there, and any potential capacity constraints, and any benefit in that segment relative to Japan?

Yes. So, backlogs are not -- they're pretty middle for us, and pretty normal for us now. We're not in a significant backlog situation, but we're not where we were a couple years ago, either, to where backlogs were emptied out because demand was falling. So, we're in a position of increasing demand, rather than decreasing; but backlogs are kind of at normal lead time levels now in most markets.

There is -- there was some extended lead times on large generator sets for a period of time. We've worked most of those down to pretty normal levels -- again, as a result of increases in capacity. So, we're feeling pretty good about that. You asked also about Japan. And what I would say about Japan is, there are increased opportunities. We are actively trying to help our -- obviously, our suppliers and partners with any kind of emergency power we can provide. And we're, of course, generally providing power in the market. There are very strict rules in Japan, that are unique to that country.

So, one of the challenges for us and other providers of power -- or standby power there is, you have to change your equipment or modify your equipment to meet Japanese standards. There are -- so, that just takes a little bit more time, but we are doing that. And we have several partners we're working with on that, and we are providing -- we do see that as a potential improvement in our forecast in the rest of the year.

Okay, great. And just overall, the -- what is an average lead time? Just -- can you give me a rough estimate worldwide? Is it three, six months?

Yes, for which products? For the large ones or small ones?

Both.

Okay. So, I would say on the small ones, you might typically run something like -- it depends on the region, but say, anywhere from four weeks to ten weeks. And on the large ones, you might run anywhere from 10 to 16, depends on which product. And again, they have been out in previous cycles, where you're really sold out, you will go to six months or longer for a large one. And that's why I said when we're back in our 16 weeks or less kind of number, is when we start to feel like we're now right at what the market demand is. Because most people, since they're usually part of a construction project of some kind, there is some sort of lead time which is in -- within the lead time of all the other things they have to do. And therefore, doesn't really -- isn't really the critical path.

All right, got it. And if I could sneak one more in, what's your opinion on solid state SCR for long-term emissions solutions?

We are actually -- we think it's a technology that may have promise. It's a technology that we have evaluated, we have spent significant effort reviewing it. We actually have met the providers and talked with them technically about the opportunities there. At this stage, it's too costly and not ready for -- to be used in the market.

So, again, there may be promise to it, especially in applications where finding SCR or refilling SCR is difficult or challenging. You can imagine a case where you are maybe far from road transport or something, and therefore it's hard to keep or store; or a situation where it's not -- SCR -- [is] not widely available, and for whatever set of reasons. I -- but right now, it's an interesting technology that's just not ready or not cost-effective.

Great. Thanks very much.

Your next question comes from the line of Robert Wertheimer from Morgan Stanley. Please proceed.

I guess, just a couple of questions. Just out of curiosity, the high horsepower, how -- are you anticipating that there could be a capacity crunch, either for the industry or for you guys, later in the year? I mean, and with mining trucks booming and then electric power has been pretty good, I think in oil and gas, maybe headed back up, you guys benefited from that last cycle. Are you able to say how much room you have to the upside? And out of curiosity, on the new platform, what exactly that is targeting?

Yes, high horsepower has already been capacity constrained in this upcycle already -- for the industry, I mean. It's already been an issue; as I mentioned, lead times went out for a while. So, we are now getting our lead times back into where we want them to be, and that just tells you that since we're just now doing it, it's tight. Right? There is no question about it. We're working hard.

And a lot of it is in the supply base, which is why I mentioned the efforts we have been putting in there, to make sure we have enough supplier capacity to make sure we can meet customer requirements. And I do believe that in the industry, those providers who are more -- ramp up more quickly, can keep lead times at reasonable levels, will do better from a market share point of view than those that get stuck from a capacity point of view. So, I guess my feeling is, if markets continue on their certain trend, it will stay tight, and we're going to work really hard to make sure we're the one that has good lead times, as well as best products and best quality. So, I think it's going to be tight for some time.

And what enabled you to bring your lead times in? Because I didn't fully follow, it was more the supplier side than it was factory optimization or capacity you added?

Exactly. We're doing both, as you guessed. But in this period, the biggest issue was getting suppliers ramped up, as opposed to assembly capacity.

That's perfect. And the new high-horsepower platform, is that a particular -- I don't know if you can give the horsepower range, or if that's out yet or not. I didn't remember it. And then, what end market, if one in particular, it's targeting?

Yes, so, we have not yet released information on its actual power range. We've said it's higher than our current products. We are definitely targeting power gen and large industrial markets. So, you probably know those markets we serve today -- oil and gas, marine, et cetera, we'll be targeting those markets. So, same end markets, really, as we provide today, and just larger power range.

Okay.

And [spec] natural gas and diesel, as we're doing with most of our product line today.

That was my follow-up. Thank you very much. That's perfect.

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

Hi, good morning. Trying to look out to 2012 a little bit. Right now, at least near term, there is not a question of demand, it's a question of supply. So, when you think about your capacity, 2012 versus 2011, with all the things in motion -- obviously, [you refunded the] megasite for Tata in India, you mentioned now came on stream a couple weeks ago, and you obviously have the investment store still ongoing in China. But when you add it all up, I know it's hard to generalize across Power Gen and a variety of business segments, but how are you thinking about your capacity additions, full year 2012 versus 2011?

They'll be greater. Yes.

Thank you very much. [Laughter] But when you say -- obviously, the Power Gen, that's a significant step up in capacity.

Yes.

The Tata (inaudible) material, obviously the China on the smaller leader. But I mean, is it --

You just haven't added it up, David. I totally get your question. And I mean, not to be glib, we are definitely seeing an increase, and we're trying to think through, as I mentioned in my remarks, several years ahead, to make sure we have a capacity ramp-up plan across each of our businesses and regions to meet the demand. And then, of course, since we do a lot of inter-company supply, a lot of it is making sure that we're aligned between our companies on how much capacity we need. So, the turbocharger plant has to be aligned with the engine plants that it serves, and -- with the generator set plants that it's serving. So, that kind of alignment, in addition to trying to make sure we're hitting the end market right, is what we are targeting.

We have a process by which we lay out our future capacity requirements for five years. Of course, we're -- as you guessed, a view of a year or two out is a lot better than beyond that, but we look at it long run that way anyway, and we line up all of those. We do that process every year in June, with an update in September, before we put together start putting together our plan. So, we'll do that for several years out here in June, and we'll be able to look for 2012 and beyond. We did that last year, of course, so we had a view about what we needed to add in 2012. I just can't say, based on all the adjustments we have made, what the percentage increase would be, 2012 or 2011, yet.

I guess that's a different way -- it sounds like you're very confident in how you're planning your CapEx, where the demand is going to be there.

Yes.

If we try to think through the individual line item, where are the areas from suppliers you have spoken to, from machine tooling, whatever it may be -- when I look out to 2012, and you have a bullish view on 2012 demand, where are the end markets, your business segments, where you're most constrained, to add as much capacity for 2012 as you would like?

I don't think there is any that we feel are constrained.

Okay. So, it's under your control how much capacity you feel you would like to add, and your suppliers can provide it for you?

Yes, I would just say from a historical standpoint, our capacity planning is much more thorough and robust right now. And the attitude in the past has been to have the capacity -- when we saw the demand, we'd put the capacity in, and so we would have spikes where we were on allocation or on long lead times. And the approach now and has been, really, for the last year is to put in that capacity ahead of demand, and so, we don't have those spikes that we talked about.

And therefore, I think we have much better control. And as Tom said, usually in the past we would look at our manufacturing capacity; now we're looking through the supply chain all the way into Tier 2 and Tier 3 suppliers.

Last quick one, more near-term. On Distribution, the margin degradation that you have guided the full year to, from the first quarter. When I think of how significant JV income is to the Distribution business, and most of that Distribution JV income is domestic, and I think about it as Power Gen, obviously parts and filtration products, and so forth for truck. It wouldn't seem to be a business that would feel much margin degradation the rest of the year. Maybe I don't appreciate how the warranties flow through the distributors. But, can you help us understand -- why would the margins decelerate?

It's a simple one, David. The -- we do -- business is good through the year. What we're expecting is, because we think the whole goods section of the business is going to grow, that's the Power Gen part and the Engine business -- that from a mix point of view, we get a deterioration of margins. It's still a great business, margin dollars and all of that stuff looks great. It's just that if you look at the percentage EBIT, parts make a higher margin percentage than the whole goods do, so we just get a mix decrease. We just have quite a bit -- a pretty high mix of parts in the first quarter, and we think it will just be a little bit higher whole goods as we go the rest of the year. That's --

Understood. Helpful. Thank you very much.

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

Hi, good morning. It's Eric Crawford on for Henry.

Hi, Eric.

Hi. Getting back to your margin profile, it was just touched upon by a couple of different people. But you took up your Power Gen and your distribution revenue guidance, but maintained the EBIT margin outlook, so was just wondering if you could give a little more color on how you expect the mix and distribution that you just touched on and price cost and Power Gen, how you expect those to trend throughout the year.

This is Pat. I will start, I think Thomas will jump in. Tom already covered the Distribution end, and so I think, very well, that we are going to see a mix movement towards the whole good part of the business, away from the aftermarket parts and service, which will dampen the EBIT margins. At the same time, we are also going to continue to ramp up our investments in Distribution to make sure we have a good platform around the world to support our customers. So, you should expect to see higher SCR spend in Distribution as we go forth through the rest of the year, than what you see in the first quarter.

With regards to Power Gen, Power Gen first quarter was 11.2% of sales. We have given guidance in the range of 11% to 12%; so I would expect Power Gen, if you just take the midpoint, that would suggest that we'd go over [better] as we go through the year and see more volumes come through. We do expect pricing to be a little bit better than material costs for the segment as we go through the year, but not significantly. I think pricing, we're looking at maybe in the range of 1.5% in material costs, slightly below that.

But, sorry -- so the pricing will be a little bit better towards the end of the year?

Yes. We'll have a little bit more pricing (inaudible) on Power Gen as we go through the year.

Excellent. And if I could, another. You highlighted growth from Tata/Cummins in India, and was wondering if you could talk about the opportunity from that business in 2011 and beyond?

Yes. So, Tata/Cummins, that joint venture is the primary supplier now to Tata trucks for their on-highway -- on-road trucks that serve the Indian market. So, we started that joint venture many, many years ago, and started with a relatively low share. We're now running at shares -- between 70% and 80% of the Tata trucks will have one of our engines in there. And so, what we're -- our primary driver of growth out of that joint venture has been and will be that Indian truck market, which is expanding significantly as they add roads and infrastructure across the country -- so, that's the primary driver.

This year looks good. The outlook is good, and the long-term outlook is also very, very good, as the road infrastructure gets built. In addition, though, we are now -- because we were limited on capacity for a while, as we increase capacity we also have the opportunity to use that joint venture as a source for engines that we can supply elsewhere in the world in other markets, both on-highway and off-highway. It's a very competitive cost, a very good quality engine. And so, we're going to start -- Cummins is going to start taking engines out of the joint venture to use in other markets, too, which will again allow us to grow more generally as a Company.

That's helpful. Thanks very much.

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

Good morning. Good luck to Dean, and welcome to Mark. A lot has been asked -- just a couple of detailed points, if I could. I am sorry if I missed it, but could you remind me what the warranty accrual cost was in the quarter?

2.9% of sales.

Okay, thanks. And then, for China, still going very strong in a lot of your businesses. Do you have any updated outlook -- maybe you said it already, and I apologize, for what you expect for the year?

We haven't talked about it, Andy. We still expect overall growth in our China markets. And as we -- it -- really, our outlook hasn't changed a lot from a broad point of view -- meaning that we still see -- while some of the end markets may be flat, slightly up, slightly down, our growth is going to continue, because we're adding new -- we have new markets that we're going into, and we're gaining share in a few spots.

So -- but that's the broad -- so, that hasn't really changed. If you get a little bit more focused now, you may have heard the truck market, many people expect a second half of the -- the second half to be weaker than the first half. So, our first quarter was actually quite good, maybe even a little better than we thought. But there is some sentiment that it will decrease and there is end-user or -- sorry, excuse me, end market inventory in the truck markets. The dealers are holding more truck inventory now than they have held historically, which is why people are wondering about that. It remains to be seen, right? That we have been worried about that for some time, and nothing -- it's still continued to grow.

So, we just don't know about that part. But there is some, I think, reasonable likelihood that the market will be weaker in the second half than the first half. That will still probably put it at about equal year-over-year, or maybe slightly down or slightly up, just as we originally anticipated. Construction markets have been consistently strong. We -- in fact, we expected some drop off after last year, given how strong construction markets were last year. But they were -- they absolutely boomed, continued to boom in the first quarter, and we see them continuing at least through the first half of the year, and then we'll keep our eyes open. But nothing on the horizontal that says they're going to soften significantly at this stage.

Thanks a lot, Tom.

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

(Inaudible) in for Ann, JPMorgan, and just wanted to congrat Dean, and thanks for your hard work.

Thank you.

Yes. Just had a quick question. Most of my questions are answered, but around your [all-power] industrial engine segment, it performed very well, and I think as slide 10, it said you guys won share in the oil and gas end market. And I was hoping you could provide more color there, and then, is that sustainable? Thanks.

Sorry, I'm just getting over a cold. The oil and gas market, not only do we think it's sustainable, we kind of think we're just starting oil and gas. So, we are definitely seeing that as an end market that Cummins is going to continue to expand in, and we are putting significant effort in doing so. We are obviously far from the largest player in that market, so although we're expanding, there are others who are much, much larger than we are.

But we are, especially in well servicing, we have a good position that we are using to expand into other segments of the business. When I say most is, the market is growing. There may be some small share gains here and there, but the biggest benefit to us has been that the market is growing and we are growing the number of relationships we have, and our product line is expanding. So, we have more to offer. That's -- those are the biggest changes in the market, and those are continuing.

Okay, thanks, guys.

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

Can you give us a sense of what's changed so dramatically in your emerging markets business, to allow all that capacity? Because you guys were crying at the beginning of the year, you're out of capacity, you don't have much. And now, looking at 25% and 30% growth.

I think at the start of the year, Joel, we said we expected India to grow around 25%, and now we're saying 30%; and China to grow 20%, and now we're saying 25% or 26%. So, we did always think that the emerging markets would grow in 2010, they're just a little -- sorry, 2011, but just growing a little bit faster than what we thought three months ago.

Yes, and I think context-wise, Joel, the -- of the ones that I listed in my remarks of the capacity increases, the ones in the emerging markets were on -- those were unchanged from our original plan. The ones -- some of the ones we have had to speed up, like for example, the Charleston turbo plant, some of the Power Gen stuff, has been driven less by those emerging markets than they have by other markets.

So, I think while we are expanding some things faster than we had planned, those big emerging market ones, the Tata/Cummins and the Dongfeng/Cummins were on the docket -- they're exactly the same projects we had in place when we talked to you about our guidance for the year.

Okay. And structurally, can you give us a sense of what's changing in your Engine business? When you gave us your long-term margins way back, they were 10%. Now you're hitting new highs. Is it pricing? Is it the capacity that you're adding is more efficient? Can you just give us a little flavor for what's shifting under the covers?

So, we'll -- I think that that's a question better answered in our Investor Day, when we get a chance to look long-term perspective. Because we gave -- your comment, I think, is about structure, is one that takes some historical and future perspective to answer properly. There's no question that our outlook today is stronger than our outlook was then. And part of it is just understanding some of the changes that have happened, and trying to figure out what is going to happen with those in the future. So, I think it's a question better answered with that kind of a long-term perspective. Obviously, though, we are, as you have said, feeling like our outlook is stronger.

Okay. Thank you.

Your next question comes from the line of Ben Elias from Sterne Agee. Please proceed.

Thanks. Good morning. Just a couple of follow-up questions. You did mention that your second quarter heavy-duty truck production would be up about 35% versus the first quarter. Is that correct?

Yes, in Jamestown.

Okay. In Jamestown. But the Company, on average, you are averaging about 330 to 350, would that be accurate? Are you close to 4Q '09 levels, and when do you think you're going to be above that 400 a day run rate?

So, Ben, are you asking more specifically to the heavy-duty business, or all engine?

The heavy-duty first.

We're looking it up, Ben, about Q4. Versus Q4 '09, yes, Q2 '11 would look like it would be at a higher per-day build rate.

So, it would be above 400, then?

Yes.

Okay. Okay. Second question, I was wondering if you can update us, similar to sort of what Andy was looking for, update us on production rates in China, at least at your facilities, the ramp-up at Foton. What's been the sequential change, or where you think you are on that light-duty side?

Yes. So, and you remember in Foton, we were delayed about a year off our original plan. We set a target this year for volumes, and I think we'll be close. Whether we'll make it all the way or not, I am not sure, but we'll be close to our target volume this year. We are still struggling hard in the light-duty segment -- this is the minivan and that segment, to get our engine, which is newer, better technology, and stuff, increase the uptake in the end market in China. So that's -- it's still work for us to be done. We are obviously making some progress, because volumes are increasing, but we would like to be making more.

So, I think our challenge remains to -- work with -- remains with our partner Foton to build demand for higher quality, more reliable, more durable product in that low-end segment. In the high-end segments, the move is sort of ongoing and going fast. In the low-end segments it's still a tougher slog. So, while I think we'll hit our volumes, it's still a tough deal. That's probably still work in front of us.

And just to add to that, Ben, we do expect to grow volumes in all four engine joint ventures in China in 2011, so just add that on to Tom's remarks.

Okay. And Foton was about 16,000 or 17,000 last year, and you're looking at about [50,000] this year?

That's right.

That's correct. Okay. And last question, have you found a home for your light-duty diesel engine in the US?

No. The answer is, we have not found a final, workable plan. As we mentioned before, the updates, not much new to say -- that we have several customers who are interested and committed to going forward. And we need to find another large one or another combination of customers that puts the project into the -- enough of a good financial result that we go ahead and go forward. So, we're kind of still in that position. We're having active discussions, which are positive and have good out -- potential outcomes, but not closed yet.

Okay. Thanks a lot.

Yes.

Thank you, everyone. I think that's all the time we have for questions today. Both myself and Mark Smith will be available after the call. If you have any questions, feel free to give us a call in at the IR line of 812-377-3121. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.