康明斯 (CMI) 2013 Q4 法說會逐字稿

A very good morning, ladies and gentlemen, thank you all for joining. Welcome to the fourth-quarter 2013 Cummins, Inc. earnings conference call.

My name is Lisa, and I will be your coordinator for today. I'd also like to advise you that today's conference is being recorded. At this time, all participants are in listen-only mode. Following the prepared remarks, there will be a question-and-answer session.

(Operator Instructions)

I'd now like to turn the conference over to Mr. Mark Smith, who is the Executive Director of Investor Relations for opening remarks. Please proceed, thank you.

Thank you. Good morning, everyone, and welcome to our teleconference today to discuss Cummins' results for the fourth quarter of 2013. Participating with me today are our Chairman and Chief Executive Officer, Tom Linebarger; our Chief Financial Officer, Pat Ward; and President of our Engine Business, Rich Freeland. We will all be available for your questions after the prepared remarks.

Before we start today, please note that some of the information that you will see or be given today will consist of forward-looking statements within the meaning of the Securities Exchange Act of 1934. Such statements express our forecasts, expectations, hopes, beliefs and intentions on strategies regarding the future. Our actual future results could materially -- differ materially from those projected in such forward-looking statements because of a number of risks and uncertainties.

More information regarding risks and uncertainties is available in the forward-looking disclosure statement in the slide deck and our filings with the Securities and Exchange Commission. Particularly, the risk factors section of our most recently filed annual report on Form 10-K, and any subsequent quarterly reports on Form 10-Q.

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 financials. 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 investor and media. Now, I'd like to turn it over to Chairman and CEO, Tom Linebarger.

Thank you, Mark. Good morning. I will start with a summary of our fourth-quarter and full-year results, and finish with a discussion of our outlook for 2014. Pat will then take you through more details of both our fourth-quarter financial performance and our forecast for this year.

Revenues for the fourth quarter were $4.6 billion, an increase of 7% compared to the fourth quarter of 2012. Fourth quarter EBIT was $566 million compared to $532 million in the same quarter last year excluding restructuring costs. For the full year, Cummins' sales were $17.3 billion, in line with 2012. Our full-year EBIT margin was 12.5% in 2013, a decrease from 13.6% in 2012.

Revenues for the year came in at the high end of our guidance, but EBIT percent was below our original expectations of 13% to 14% for the full year. The most significant drivers of lower EBIT margins were first, lower global demand for power generation equipment especially our larger kilowatt products, weaker demand for high horsepower engines, and weaker-than-expected industry orders for North American heavy-duty trucks in the second half of the year.

There were a number of other factors that influenced our financial results for the year including record performance in our component segment. And, I will let Pat comment on those in more detail. But, I do want to add a few comments on the performance of our power generation business.

In 2013, EBIT percent declined nearly 2 percentage points from the prior year to 7.2%, primarily due to weak demand in most international markets for large power generation projects. Gross margins improved by 80 basis points year-over-year in the fourth quarter and have now improved for three straight quarters as a result of the ongoing restructuring actions and other cost reduction initiatives in the business. The improvement in gross margins, however, was more than offset by one-time items in the quarter, particularly the write-down of an investment in a technology venture and costs associated with a legal settlement.

We fully expect that the actions we've taken -- that we have been taking to reduce costs in the business, including permanently relocating some alternator manufacturing capacity from high-cost locations in Europe to lower cost locations, will drive margin improvement in the power generation business in 2014.

As Tony indicated during our analyst day in September, we expect that the restructuring actions we have underway will be fully completed by the end of the second quarter of 2014. Improvement actions were taken throughout 2013, but some of the early benefits were more than offset by weaker-than-expected demand especially in developing country markets.

Now, I will comment on some of our other key markets in 2013 starting with North America. Our revenues in North America grew 3% in 2013 with approximately 2% of the growth resulting from acquisitions in our distribution business. The North American heavy-duty truck market reached approximately 218,000 units in 2013, a decrease of 13% from 2012 levels and weaker than our original forecast for the year of a 4% decrease.

Our full-year market share was 39%, consistent with 2012. The medium-duty truck market was approximately 112,000 units in 2013, representing an increase of 5% from 2012 and up a little more than our original forecast of a 2% increase. More importantly, we strengthened our market share to 63% during the year, up from 53% a year ago.

Shipments to Chrysler declined by 7% in 2013 as we expected. 2012 shipments were unusually high at the end of the year in anticipation of the 2013 model year change. Also in North America, revenues in our power generation business increased by 21% with shipments to the US military driving 16% growth and sales to our traditional markets, including nonresidential construction, increasing 5% consistent with a slowly improving US economy.

Our international revenues decreased by 4% in 2013 with declines in India, Australia, Mexico, and Europe offsetting growth in China and Brazil. In Brazil, our revenues increased 11% driven by a stronger truck market. Industry truck production increased 43% as demand rebounded after a difficult year in 2012 driving revenue growth in both our engine and component segments. Revenues reported in US dollars were negatively impacted by nearly 10% depreciation of the real against the dollar.

Full-year revenues in China, including joint ventures, were $2.9 billion in 2013, an increase of 14% year-over-year. The growth in 2013 was driven primarily by stronger demand for engines and components for on-Highway markets. Demand for heavy- and medium-duty trucks in China increased by 15% for the full-year, higher than our initial forecast, as demand increased ahead of the expected transition to the NS4 emission standard in 2014. The growth in market demand boosted sales of our joint venture engines and our components business.

Shipments of light-duty engines in China increased by 70% as our partner, Photon, increased a proportion of its trucks powered by the 2.8- and 3.8-liter engines manufactured in our joint venture. Industry demand for excavators in China declined by 3% for the year, reflecting a slower pace of infrastructure spending and higher levels of inventory from overproduction in prior years. Our revenues improved by more than industry retail sales, but fourth-quarter shipments were still quite weak. Unfortunately, we are not seeing evidence of a strong rebound in new equipment production as we head into the peak selling season this year.

Demand for power generation equipment in China remains muted in 2013 with slower growth in infrastructure and weak power needs reflecting underlying weakness in the Chinese economy. Our revenues did increase 5% year-over-year due to relatively easier comparisons in the second half of 2012.

Full-year revenues in India, including joint ventures, were $1.3 billion, down 20% from 2012 due to weaker demand across most end markets as the economy slowed sharply. Revenues were also negatively impacted by the depreciation of the rupee against the US dollar. The truck market in India weakened significantly during the second half of the year with full-year industry production declining 29% to 226,000 units, the lowest level since 2009. Power Generation sales also declined as industrial activity slowed, easing pressure on the grid. In the first half of 2013, Power Generation sales had held up despite the weak economy, but demand collapsed in the third quarter as lending markets tightened and inventories grew.

Total revenues in Europe were down 3% in 2013. Sales to European Power Generation customers were down 33%, partially offset by stronger demand for engines and components ahead of new on-Highway and off-Highway emission standards that took effect on January 1 of 2014. The decline in power generation revenues was a function of weak global demand for large power projects, which reduced the needs of our euro-based -- European-based customers for new equipment.

Now, let me provide our overall outlook for 2014 and then comment on individual regions and end markets. We are currently forecasting total Company revenues to grow between 4% and 8% in 2014, driven by distributor acquisitions, additional revenue, related to new emissions regulations and market share gains including new products. We expect modest growth in most end markets in North America, offset by continued weakness in our key high horsepower markets in some developing economies. We expect EBIT to be in the range of 12.75% to 13.25% of sales reflecting incremental EBIT margins of 22% at the midpoint of our guidance.

In North America, we expect our truck business to grow in 2014. We are forecasting the 2013 market size for heavy-duty trucks -- excuse me, the 2014 market size for heavy-duty trucks to be 236,000 units, an increase of 8% year-over-year. We are projecting our market share to be approximately 38%. In the medium-duty truck market, we expect the market size to increase by 7% to 120,000 units, and we expect our market share to increase to 70%. Shipments to Chrysler are projected to be flat with 2013.

In China, we expect domestic revenues, including joint ventures, to increase 11% in 2014. We expect the market size for heavy- and medium-duty trucks in China to decline by 7% from 2013 levels as the industry steadily moves to wider adoption of NS4-compliant products. Despite the anticipated decline in market size, we currently expect our revenues, including joint ventures, to grow in 2014 as we launch our new heavy-duty engine and increase our components revenues as the new emissions standard is gradually in limited. In addition, demand for our light-duty engines in China is expected to grow by 20% in 2014 as our partner, Photon, continues to increase the number of its vehicles powered by our joint venture engines.

It is important to understand that despite the generally positive statements being made by a number of OEMs regarding the transition to NS4, significant uncertainty still exists. As you are aware, the change to NS4 emissions standard was scheduled for July 1, 2013, and the government has not yet made any announcements regarding a formal time table for enforcement of the regulations. Encouragingly, OEM orders for NS4 products have increased, but the timing and extent of actual sales of compliant trucks to end users is still unclear. We continue to monitor the situation very closely and will provide updates as the transition to NS4 becomes clearer. We expect industry sales of excavators in China to grow by approximately 3% in 2014 as infrastructure spending is projected to grow at a modest pace and inventory levels continue to reduce.

In India, we expect 2014 revenues, including joint ventures, to be flat after a very challenging year in 2013. Demand for trucks is expected to be level with 2013 with no clear drivers of improvement in the market in the near-term.

In Power Generation, we expect unit volumes to decline by up to 10% due to weak economy driving lower power needs. New emissions regulations referred to as CPCB-2 are expected to go in force in the Power Generation market in the second half of the year with prices expected to rise by up to 20% to reflect the addition of new technology. We expect full-year Power Generation revenues to be flat in 2014 with increased prices for the new products offsetting lower unit volumes.

In Brazil, we expect truck production for 2014 to be in line with 2013. The government-subsidized finance program called [Finami] has been an important source of financing for the Brazilian commercial vehicle market. More than 7 out of every 10 trucks sold used Finami-based financing in 2013. While the program was renewed for 2014, interest rates were raised by 150 basis points and the capacity of the program was reduced by 25%. OEMs have been working with commercial lenders to make additional financing options available to their customers, but with GDP growth running at below 2% in the near-term and rising finance costs, we do not anticipate growth in industry volumes in 2014.

While GDP is expected to grow the in the eurozone in 2014 for the first time in three years, we expect our revenues to be relatively flat. Demand from our European-based Power Generation customers will remain weak in 2014 given that most of these products are shipped to developing markets. Our components business will benefit from content growth on engines at new emissions regulations, but this will be offset by weaker engine demand in on- and off-Highway markets after the pre-buy in Q4 of last year.

I think it's also important to comment on our global mining business after a very challenging 2013. Revenues for new mining engines declined by 43% last year with shipments declining sequentially each quarter throughout the year. With no improvement in commodity markets, mining companies remain very focused on reducing capital expenditures and maximizing the productivity of existing equipment. As a result, we expect engine shipments to decline further, between 10% and 20% in 2014. Our high horsepower aftermarket revenues should be in line with 2013.

We are confident about our projections for growth of between 4% and 8% in 2014 with the majority of the growth driven by acquisitions, additional content, and new emissions regulations and market share gains in medium- and light-duty truck markets. We will also see the launch of a number of new important products in 2014. For example, the engine business will launch our new heavy-duty truck engine platform in China, as well as the off-highway tier four light-duty engines, also sourced from China. We will also see the launch of our new 5-liter V-8 product in the US late in the year. ¶ In Power Generation, we have just launched the new connect series generators for residential and light commercial markets in North America. We expect that higher revenues, material cost reduction, supply chain savings, and the benefits of the restructuring in the Power Generation business will more than offset increased investment in selling, admin, and research costs and deliver incremental margins at or above 20% in 2014. We also expect the results this year to benefit from the cost reduction work undertaken in our manufacturing facilities in 2013. In 2014, production will be flat or increasing in most of our plants, whereas last year a number of our largest manufacturing plants were adjusting production rates to lower demand levels.

We delivered record operating cash flows in 2013 of $2.1 billion, and strong cash flow performance allowed us to continue to invest in our business and return more cash to shareholders. In 2014, we will complete the acquisition of several North American distributors, as we communicated in September, and we also expect to return 50% of our operating cash flow to investors in 2014 in the form of dividends and share repurchases. As a result, we expect our net cash balance to decline in 2014.

In closing, I would like to acknowledge the contribution of all of our employees around the world for their hard work in 2013 in the face of a very challenging market. I would also like to thank our customers for their confidence in Cummins. Thank you for your interest today, and now I'll turn over to Pat, who will cover our 2013 performance and 2014 guidance in more detail.

Thank you, Tom, and good morning, everyone. As Tom described, we faced challenges in a number of our end markets in 2013. With very weak demand in international power generation and global mining markets while industry orders in the North American heavy-duty truck market weakened in the second half of the year as did demand in most end markets in India. While several of our largest markets were better than last year, market share gains in the medium-duty truck market in North America, growth in our components business, and acquisitions in our distribution business resulted in full-year revenues of $17.3 billion, flat with 2012. As I review the full-year financial results in more detail, all the numbers and comparisons will exclude the restructuring charges as well as the gains from divestitures that we recorded in 2012.

Full-year revenues for the Company were $17.3 billion, flat compared to the prior year. Revenues were up 3% in North America, but were down 4% in international markets. Gross margins of 25.3%, or 90 basis points lower than last year, were the positive impact of pricing, material cost reductions, and supply chain savings offset by the impact of our 25% decline in high horsepower engine shipments. Selling, admin, and research and development costs increased by $28 million in the year. The acquisitions in our distribution segment accounted for $60 million of additional spend and was offset by reductions in spend in both the engine and power generation segments while the component segment spend remained flat at 2012 levels.

Joint venture income was down $23 million compared to last year, primarily due to the impact of the distribution acquisitions. In total, earnings before interest and tax, or EBIT, was 12.5% of sales in the year, down from 13.6% of sales in the previous year.

Net income was $1.5 billion, or $7.91 per share. This compares to $1.7 billion, or $8.83 per share in the previous year, excluding the restructuring charges and the gains from divestitures. The tax rate for the full-year was 25.1% and was lower than the guidance that we provided in October primarily due to the benefits from the implementation of certain tax strategies and from higher research and development tax credits than we originally anticipated.

Now, let me comment specifically on the fourth quarter and provide some more details on our performance. Revenue of $4.6 billion was 7% higher than the previous year and 8% higher than the third quarter levels, despite weaker demand in mining and international power generation markets. Compared to the prior year, North American revenues were up 11% due to the impact of distributor acquisitions and market share increases in our [after] treatment business. International revenues were up 3% helped by stronger demand in China truck markets and in Europe ahead of the implementation of tier four final and Euro 6 emission regulations. Compared to last quarter, North American revenues increased by 5%, were actually due to seasonal demand in our power generation business while international revenues were up 10% due to stronger truck and construction demand in Europe ahead of the Tier four final and Euro 6 emission regs.

Gross margins for the quarter were slightly higher than a year ago at 25.4% of sales with positive pricing and lower material costs offsetting the product mix headwinds from the decline in high horsepower engine shipments. Sequentially, gross margins declined from the prior quarter primarily due to increased product coverage costs. Selling, admin, and research and development as a percent of sales increased by 10 basis points compared to last year and declined by 80 basis points compared to the prior quarter. Joint venture income was $80 million, 2% lower than last year and 12% lower than the prior quarter.

Earnings before interest and taxes were $566 million, or 12.3% of sales, down from 12.4% a year ago and 12.6% last quarter. Compared to last year, the key profitability issue was a sharp drop in demand for high horsepower engines and gen sets, which was partially offset with positive pricing and material cost reductions. While sequentially the drop in gross margin percent from higher product coverage costs was offset by lower selling and admin cost as a percent of sales.

Net earnings for the quarter were $432 million, or $2.32 per diluted share with an effective tax rate in the fourth quarter of 15.7%. Our tax rate in the quarter was lower than we expected, primarily as a result of the benefits related to legal entities stocks and transactions that we managed to complete in 2013 from the reconciliation of our tax accountants to our state income tax returns that generated some favorable adjustments and from a larger research and development tax credit than we had projected.

Moving on to the operating segments, let me highlight their performance during the year and in the fourth quarter and then conclude with revenue and profitability expectations for 2014. In the engine segment, fourth-quarter revenues were $2.6 billion, an increase of 2% compared to last year and 3% compared to the third quarter. Compared to last year, stronger demand for construction and agriculture engines in North America and Europe along with the higher on-Highway parts sales in North America were partially offset by the reduced amount in global mining and power generation markets.

Sequentially, demand increased in construction and agricultural markets in North America and Europe along with higher shipments to Chrysler. We experienced weaker demand in the North American heavy-duty and Brazilian truck markets. Segment EBIT margins were 9.2% in the quarter compared to 10.9% last year and in the third quarter. Compared to last year, the impact of the drop in high horsepower engine demand more than offset lower material cost and improved pricing. Sequentially, increased product coverage costs, negative mix, and an inventory write-down related to oil and gas market reduced margins by 170 basis points.

In 2014, we expect revenues to be up between 4% and 6%. On-Highway revenues in North America will drive the majority of the growth as industry production grows in both the heavy- and medium-duty truck markets. We will also benefit from increased market share in the medium-duty truck market. Continued weakness in global mining will result in industrial revenues remaining flat when compared to last year.

2014 EBIT margins are forecasted to be in the range of 10.5% to 11.5% of sales compared to 10.4% for the full-year 2013. Positive pricing, material cost savings, and increased volumes will offset the impact of lower high horsepower volumes again in 2014, resulting in gross margin expansion. We anticipate high horsepower volumes to be flat to down 5% this year with the first quarter expected to mark the low point of the year.

The components segment recorded record sales of $1.1 billion in the quarter, up 21% from the prior year and 6% from the prior quarter. Compared to last year, higher revenues were driven by market share gains in our emissions solutions business along with strong demand in European and Chinese truck markets for turbo chargers and aftertreatment systems. Compared to last quarter, sales increased in Europe ahead of the Euro 6 regulations, which took effect on the first of January, and in China where the industry continued to experience strong truck demand ahead of the national standard 4 emission regulation implementation. EBIT margins for the quarter were 12.3% of sales compared to a 8.9% in the prior year and 12.3% last quarter. The increase in margins over the prior year was driven by higher volumes, lower material costs, and very good SAR leverage.

2013 was a record year for the components segment in terms of revenues, EBIT dollars, and EBIT percent. We expect another record year in 2014 with revenues up 8% to 12%, primarily due to increased penetration of aftertreatment systems in the North American medium-duty truck market, stronger demand for all four businesses in the North American heavy-duty truck market, and growth in our European aftertreatment business when trucks transition from Euro 5 to Euro 6 standards at the beginning of 2014. EBIT margins for the segment are expected to be in the range of 12.25% to 13.25% of sales.

In the power generation segment, fourth-quarter sales were $759 million, down 1% compared to last year and up 7% sequentially. Compared to the fourth quarter of 2012, weakness in Europe and India was partially offset by stronger demand in the United States. Sequentially, revenues increased due to stronger demand in North America. EBIT margins were a disappointing 6.1% of sales in the quarter, compared to 7.1% in the prior year and 6.3% last quarter. Compared to last year, improvement in gross margins on lower sales were more than offset by higher selling and admin expenses on lower joint venture earnings. Sequentially, where we continue to see improvement in operating performance in our manufacturing plants, this was offset by higher selling and admin expenses and from negative currency movements, in particular, the British pound, which negatively impacted EBIT margins by over 1% in the quarter.

For 2014, we expect power gen sales growth to be in the range of minus-3% to 3%-plus. In the United States, lower military revenue will be offset by moderate growth in our base business along with the revenue from our new connect line of gen sets. Margins will improve this year to between 7.75% and 8.75% of sales. This compares to 7.2% for the full year of 2013 and 6.2% for the second half of last year. The increase in margins will be driven by savings related to our previously announced actions in Europe and from ongoing operational improvements across the business.

For the distribution segment, fourth-quarter revenues were $1.1 billion, an increase of 18% compared to last year and 14% sequentially. Excluding the impact of acquisitions, fourth-quarter revenue increased by 3% compared to last year and by 13% sequentially. Compared to last year, growth was driven by stronger power generation and aftermarket demand in North America while currency movements negatively impacted distribution revenues by 5%. Revenues increased sequentially in North America and Europe and due to an acquisition in Nigeria.

EBIT margins for the quarter were 10% of sales compared to 10.8% a year ago. Improved margins on same store sales were offset by the impact of foreign currency movements. While the acquisitions completed during this time where accretive in EBIT dollar terms, they were dilutive as a percent of sales as we previously explained. Sequentially, EBIT margins improved by 90 basis points with improvements in both gross margin and selling and admin costs as a percent of sales. For 2013, we are forecasting revenue growth of between 22% and 30% over 2013 levels with 3% organic growth and the balance from acquisitions. And, we expect EBIT margins in the range of 9% to 10% of sales. We are on track with our North American acquisitions, and for the Company, we expect them to add approximately $400 million of revenue this year and earnings of between $0.20 to $0.25 per share.

As Tom mentioned, we are projecting total Company revenues to be up 4% to 8% in 2014. The majority of the growth this year will be related to the previously announced distributor acquisitions, market share increases in the North American medium-duty truck and bus markets, growth in demand in the North American heavy-duty truck market, and increased content in European truck markets related to Euro 6 emission regulations. Revenues will increase sequentially through the year with growth in the first half of the year towards the lower end of our guidance range and growth in the second half of the year towards the upper end of our guidance range.

We expect EBIT margins to between 12.75% and 13.25% for 2014. This compares to 12.5% for full-year 2013 and represents a 22% incremental EBIT margin at the midpoint of the guidance. As was the case in 2013, EBIT margins will be at the low point in the first quarter and will decline from fourth-quarter 2013 levels due to seasonal weakness in power generation markets along with lower shipments in industrial high horsepower markets. Compared to the first quarter of last year, high horsepower engine shipments will be down 23%. As a result of this, we expect EBIT margins in the first quarter to be similar to those in the first quarter of 2013.

We remain focused on driving improvements in our gross margin in 2014 with benefits from lower material costs and from our supply chain initiatives and some improvement from pricing, primarily in aftermarket. We are currently projecting the tax rate to be approximately 28.5% this year, excluding any discrete items. Our tax rate guidance does not assume that the research and developments tax credit is extended into 2014, which will negatively impact the rate by 1.5 percentage points when compared with 2013. Additionally, changes in tax legislation in the UK, one-time benefits that will not recur in 2014, and the fact that a higher proportion of our profits will occur in the United States this year will lead to an increased tax rate in 2014.

Finally, let me turn to cash flow. We generated a record $2.1 billion in cash from operating activities in 2013 which equates to 12% of sales. An increase from the 9% of sales we generated in 2012. We continue to use that cash to reinvest back into the Company and return value to our shareholders. We increased the amount we returned to our shareholders by 34% in 2013 to $801 million. We increased our dividend by 25%, which resulted in a dividend payment ratio of 28% for the full-year, and we repurchased 3.3 million shares for $381 million.

We also continue to invest in the business with $676 million in capital expenditure projects in the year, which was lower than our initial guidance of $850 million. Our debt-to-capital ratio did increase from 10% at the end of 2012 to 18% at the end of 2013 due to the debt offering that we completed in the third quarter of last year. We anticipate operating cash flow performance in 2014 will be similar to 2013 levels and within our long-term guidance range of 10% to 15% of sales. Capital expenditures this year are expected to be in the range of $700 million to $800 million, and we anticipate a cash out for $400 million to $500 million on acquisitions, primarily related to the previously announced acquisition of our North American distribution channel.

Our cash balance will decline in 2014 as we execute the distributor acquisitions and as we continue to return cash to our shareholders through dividends and share buybacks. Investors should expect that the through the combination of dividends and buybacks, we will return at least $1 billion, or 50% of the cash we expect to generate from operations, which would be a 25% increase over 2013 levels. Now, let me turn it back over to Mark.

Thanks, Pat, and we are now ready for questions. And, if you can limit your first question to one single question and a related follow-up, we would appreciate that. And then, get back in queue. Thank you very much, and we are ready for questions.

(Operator Instructions)

Jamie Cook, Credit Suisse.

A couple of questions. One, just in terms of your top line outlook, the 4% to 8%. I know a lot of the growth is coming from distribution medium-duty share, et cetera. But, can you give me a sense of the 4% to 8%, is 2 points market, 6 points secular growth? Just so we can see -- so we can get a better sense of that. And then, Tom, also is there any -- how do we think about your approach to guidance in 2014 relative to the past couple of years when there has been disappointing -- you have disappointed versus your guide?

And then, I guess my last question, you alluded the first quarter is weak and the second half is better than the first half. In terms of the improvement as we go out throughout the year, is it more macro? Is it more that's when your market share gains or the distribution stuff hits? I'm just trying to get a - or, in the restructuring? I'm just trying to get a sense of what is driving that improvement throughout the year. Thanks.

Jamie, good morning, by the way. So, let me just give the tone answer, and then I'm going to let Mark talk about some of the details you asked.

Sure.

Tone-wise, we are trying to provide guidance that we think is most accurate relative to what we think is going to happen, and as I've mentioned to you before, that is what we're trying to do before. Obviously not as well as we should have. I think what we see today though is that most of our markets have bottomed out, and that doesn't mean things can't get worse as we mentioned mining markets slipping further. But, what we did do is chase the market down in PowerGen all year which was really disappointing. It is what we said we would not do. It said we would get ahead of it, and we would reduce costs appropriately, and we did not do a good enough job on that. I think that is one of the big reasons why we were disappointing on guidance. There were other reasons, but that is a big one.

So, we did not feel like we did well there. We have taken a hard look at where we think markets are, tried to call them the way we think they are most likely to be, but obviously, taken a little bit more conservative look at the way we think economies are developing. So, I think from that point of view, it's more conservative. I don't think we are trying to play the numbers any more progressively or conservatively. We are just taking a more conservative look at economies because they really haven't performed as well as we'd hoped. Let me now let Mark answer some of your more detailed questions.

Hi, Jamie. So, in terms of the 6% revenue growth at the midpoint of our guidance, 2% to 2.5% is going to come from the distributor acquisitions. Almost 2% is going to come from emissions and new products. We really got just under 1% from market growth with growth in North America offset by weakness in international markets, and then the balance is coming from market share and pricing.

Okay, and then just in terms of -- I guess driving the improvement in earnings throughout the year is just that is when all of your secular growth opportunities [will hit] the market? Is that way to think about it?

I think the way to think of it, Jamie, is that we are certainly going to see benefits from the macro environment as we go through the year. Going back to the remarks I made earlier on, first half of the year, we expect to go closer to 4%. Second half of the year, closer to 8% so the volume benefit will come into play then. And, as Tom mentioned in his comments, the restructuring activities that are going on in Tony's business in PowerGen, we expect to be done by the middle of the year. So, you should expect PowerGen margins to improve as we go through the year from those actions.

Great, I'll let someone else get in queue. Thank you.

Ann Duignan, JPMorgan Chase & Co.

I wanted to go back to your market share growth expectations of roughly 1%. That would equate to something less than $200 million, and I think that there was an expectation out there from investors that this market share growth, or market out-growth would be significantly higher than that. Can you just talk to that a little bit and give us a little bit of color? And, maybe it is a 2015 event not a 2014 event? But, if you could just address that, that would be great.

Two things to highlight just to make sure we are level-set. We separate two things -- new products and market share. You know that, I think, from our previous thing. So, we look at those products that we launch and the market shared gained by there goes in new products, and then, we look at market share as those that gain where we have the same product and we just gain share. So, there is some separation between those two, and if you combine them, you are looking at more like 2.5% than you are like 2%. That said, your calculation in dollar terms is right.

I'll let Rich comment a little bit more about how things are going, but one of the big movements, of course, is in North America, and we have, of course, gained some of the share already. So, what you are looking at is one year versus the other, but I'll let -- maybe Rich, you can talk a little bit about what is going on with market share gains in North America?

Okay, good morning, Ann. I will just start with the midrange which is probably the most visible. So, we've -- really two good things going on there. The market size is growing, so unlike heavy-duty, we've had market size has gained for the last three years. Our share has grown from 50% to low 60%, and now we are projecting 70% share. So, that is the biggest piece and the most visible that we're going to have here. The products are terrific, and we are gaining there. We also have a series of new products coming out that Tom alluded to -- in China the 10-/12-liter we will introduce this year. That's a combination of new products and market share that we will have there is another very visible one.

I think also -- and, we've got -- as Rich said, we are ramping up in our midrange business. So, not all -- we won't get to 70% on day one. Just as we had in 2013, we launched the product, and then they have to market and win against other people and all the rest of that. So, I think there is some ramp-up assumption there as well. We are hopeful, obviously, to drive faster and get more share but what we try to do is do the most realistic call that we can on that.

Okay, that is great color. I appreciate that. And, just a follow-up on PowerGen. Philosophically, I know it is not probably a fair question given the size of the business relative to Caterpillar's and the different mix because you don't have turbines in there. But, can you talk about what are some of the other structural differences between your PowerGen business and Caterpillar's? Is it -- are you more low horsepower, residential exposure? Or, is it investments in new products to gain share? If you could just talk a little bit about the structural differences between you and some of your competitors.

Yes, just broadly speaking, I would say the biggest difference between our business and Caterpillar's business is turbines. The simplest way to compare the numbers would be that. And, that is a big difference by the way. It's a big difference in how -- what the cycles are right now. It's pretty noticeable.

The second thing, I think, is that we do have a components business, which includes alternators, and as we mentioned in our remarks, the alternator business based in Europe has had a really rough time because volumes have fallen away so quickly in large power projects. And, that is in a high-cost structure environment. So, we are addressing that point, and I think we will see much better margins and results in that business as a result of those changes. But, structurally, turbines is by far the biggest difference. I think if you do the math on there and see the difference in markets, that will explain most of the difference that you're looking for.

Okay, that is great. Thank you, I appreciate it. I will get back in line.

Jerry Revich, Goldman Sachs.

Tom, can you flesh out for us the opportunities on the Photon light and heavy platforms based on the range of applications that you are targeting the engines for? Where do you think is a reasonable penetration rate target separately for the light- and heavy-duty platforms? And then, from a margin structure on those businesses, should we think of a similar profitability profile as we see in Dongfeng Cummins today?

I'm going to let Mark -- sorry, Rich, talk a little bit about the market and the growth side because he's been working that for a while now and has some insight on that.

Good morning, Jerry. Yes, so just reminding folks in both of these products it is a different approach, where we introduced in China with a brand-new engine then expand globally. So, our objective and our results so far is we have emerging market cost with world-class performance. So, we introduced in China and then take it up to global standards.

I'll touch first on the 10/12. We will introduce -- we said we would introduce in Q2, and we are on track to do that. And, that will be for the 10- and 12-liter product in our partnership with photon. That product and work is going on, and we, in fact, announced that it will meet emissions standards off-highway and meet current and future emissions standards globally. So, unlike the 2.8/3.8, we will start in China and most of the volume will be in China as you look for the next 18 months. But, we are talking to customers globally and terrific product.

On the 2.8/3.8, same product same strategy again. Introduced in China and then expand. With the delays in NS4 standards, we really had to test the strategy, can we sell this product globally? In fact, the sales have been higher outside of China then inside of China in places like Russia, Brazil, and now Europe at Euro 6 standards.

And, from your second question on the margin structure, very similar margin structure although it shows up a little bit differently in that we will take a margin at the joint venture. And then, take a second margin when we sell the product to customers beyond our partners.

And, Rich, just a clarification. The ultimate penetration opportunity within Photon's own platforms just within China based on the range of applications you are targeting, where do you think the penetration rate can go for your business over the next couple of years?

We are targeting to get to 25% market share in that heavy-duty market. And again, that won't be overnight, but it is a 300,000 market so it is bigger than US right now, that 10- and 12-liter space. But, it will not be a slow ramp-up, this will be introducing product by model and rolling that out.

The light-duty, as Rich said, Jerry, has been a slower penetration rate in -- largely due to the fact that NS4 -- we designed the product to replace their existing engines at NS4. We've been making some progress there. Where we can get to is not clear because Photon's own strategy in light-duty and heavy-duty are slightly different, but they are the market leader in light-duty. And so, they have a huge range of products that are very low-end all the way up to higher end in terms of features in light-duty.

In the heavy-duty market, they are pretty much going at the mainstream and upper-end market so our product fits where they are trying to go. And, that is why Rich said that we are going to start at a pretty good penetration rate and stay there provided we launch well and hit our quality targets, et cetera. The light-duty, I think, we're not clear how far it can go, but we really have -- it is all on the upside now. We really have not had much penetration inside Photon in China to date, and the NS4 standards are starting. And, as we mentioned in our remarks, they are starting to increase the share they take and that means we've got a lot of volume there -- they are a very, very producer of light-duty vehicles in China.

I appreciate the color, and then on the US heavy-duty side, a bit of volatility in the market share numbers. Can you talk about the 38% market share target for 2014? How do you gentlemen expect that to play out over the course of the year? And, any meaningful platform shifts that we should be looking for?

Okay, yes. Jerry, so we have been saying for some time in the 35% to 40% range where we ought to be in any quarter because you can get variation just based on build rates at different OEs. And so, pretty confident on the 38%. It's where we've been the last couple of years. Some slight changes, as you are aware. As PACCAR has increased their production of the 13-liter, the MX product, we will see some of our share, which was planned to go down at PACCAR. And again, that is an excellent product, the 13-liter for that market. We are partnered with them providing components in that space, and that will be offset by some increases at Navistar and increases in our natural gas product in the heavy-duty space.

Thank you very much.

And, I guess just lastly -- incremental gain -- we will see that start early in the year, the increase from the Q4 number.

Thanks.

Alex Potter, Piper Jaffray.

I had another follow-up question here on the Photon engine. You mentioned that you are gunning for 25% share of China's heavy duty market. I guess that implies that you will be using the Photon joint venture to sell engines to some other truck OEMs within China. I was just wondering if there might be a conflict there? If people interpret that -- say your first auto or whomever, you are buying an engine basically produced by Photon. Do you view that as a problem?

Yes, so just let me comment. So, we are partnered with Photon there, and our goal is to replace the existing business, but also help Photon grow share with competitors there. So, it is a combination of both, and then selling the product broader outside of China on top of that.

And, Alex, just broadly speaking, the 25% we are looking for -- we already have a significant share with Dongfeng from our DCEC joint venture so when we set our market share targets, we are adding the two together to look at total heavy-duty market share. We are trying to sell to some others, but the conflict that you mentioned is real. That is exactly right. The truck companies, the integrated ones, are not so interested in buying an engine from a joint venture from their competitor, but there are some smaller companies. For example, I think we've mentioned in our previous call, we've been selling to one of the affiliates of Dongfeng, [Gochi], and we've been selling them some engines from DCEC. But, I think those kind of companies you also can sell other engines to. So, what we will end up doing with regard to which engines go to which, we will see, but the primary customers of those in terms of heavy-duty market share will be DCEC to Dongfeng and the Photon joint venture into photon.

Okay, that makes good sense. I guess my last question here is if you could give an update on the very high horsepower hedgehog engine? What the update is there? If you are starting to see some initial uptake or initial interest from which segments? And, when you expect to start getting some volume there?

Yes, so we are on schedule for this product, and part of the schedule said we would begin market seeding this year in the PowerGen markets, the diesel PowerGen markets. And, in fact, that will happen, and we've received orders and will begin shipping in the second half of the year. We are also -- we talked about entering new markets beyond PowerGen, and in fact, we are on target with that. We are not ready to announce who that is or where that is. Our partners will do that, but those are products that will begin to sell. So, from a product development standpoint we are on schedule. And, from where we plan to be on getting agreements with customers or selling into power generation business, we are on schedule at this time.

Most of the announcements though, Alex, you're going to see announcements that -- most of them will come next year. It is not that we won't do anything this year because we are. We are doing a lot of seeding, as Rich said. But, next year is when you will start to see -- so, these customers are using it here and that kind of thing. Again, mostly because each customer wants to do development with us, and then they want to announce when they are ready. I'm not saying there will be no announcement this year. I can't say that for sure, but most of them are going to come next year.

Andrew Kaplowitz, Barclays Capital.

Tom or Pat, can you talk a little more about your engine margin in 4Q? We know about mix, but can you talk about the increase in product coverage that you mentioned? And, maybe quantify the inventory write-down in oil and gas that you took?

Yes, so I will take the product coverage, and then maybe Rich can [share a few thoughts] on oil and gas inventory write-down. Back in Q3, remember, we took a favorable change in estimate. We have these from time to time where we reassess the warranty claims with the engines in the population with a favorable adjustment in the third quarter. So, that is really the Delta when you look at Q3 to Q4, and that cost the engine business sequentially almost 1 full percent point. So, it was not insignificant for them. And then, on the inventory -- .

Just to quantify that, that was about $7.5 million, the one-time write-down, which will not repeat.

Okay, that is helpful. And then, I may not be doing this right, but I'm going to ask it anyway, Pat. So, if I look at the segment guidance that you gave, and then I look at the overall 4% to 8% guidance, the segment guidance seems to equate to the middle of the range toward the high end of your 4% to 8% range? That includes eliminations. Am I doing that right? Are you discounting your segments to some extent? Or, am I not doing that right?

[I never discount anything, Andy.] (laughter) The way to think about eliminations all going forward as we acquire more of our North American distributors, the elimination percent will go up. So historically, we have been in the 16% to 18% range, and you should be thinking more of a 20%, 21%-type of number this year.

Okay, so that is the easy answer to that.

Yes.

Okay, that's fair. I will get back in queue. Thank you.

Ross Gilardi, Bank of America.

Just a couple questions. Your on-highway outlook by region -- you've got China down 7% in 2014 and India and Brazil flat. India flat after clearly a very weak 2013. So, I'm wondering how your outlook compares to current order run rates? And, just generally, how much visibility do you have in those markets right now?

It varies by market as you would guess how much visibility we get. In China, we get a little bit less because market numbers, the published statistics are just not quite as reliable. We do have very good relationships with the OEMs so I think we get there best view. The question is how good is their's. And, really there has been quite a bit of volatility related to when is NS4 going to go. In fact, order rates for NS4 equipment were higher in Q4 than we expected. Both on the components and the engine side, which again was encouraging in the sense that the OEMs are trying to implement NS4. But, how many are selling through -- there is no data on that today. You can't see how many end customers are buying them so it is a little bit hard to know if stuck -- can they get stuck? Or, is it going to go through, and so that's why we see some volatility in China. Again, what we are thinking through is if you look across the whole year and the NS4 gets steadily implemented, volumes will likely shrink because of the excess production or purchases in the fourth quarter last year. It's as simple as that, we are looking across the year, but we think there is going to be a fair bit of volatility.

On Brazil, we do have a little bit more visibility, but again there was definitely some consternation and volatility created by the whole thing about [Finami]. Finami is such a big benefit to purchasers, especially of larger trucks, that the fact that the program is varying a little bit -- I don't think people really know how much effect that is going to have on customers. And so, there is a little bit of guesswork involved with that. We do think our current order rates are pretty consistent with what we've got, but we really don't know over the longer run how that's going to play out.

So, to your question, there definitely is more uncertainty and volatility associated with some of those international markets than you might see in the US. India, there is not that much volatility, there is just not that much action. That market was clobbered really hard last year. I'm not saying it can't go lower, but it is really low right now and there is not much energy I don't think to make it stronger. Does that help on those markets?

Yes, that is great. Thank you. Just a follow-up on China. When you couple your outlook for China on-highway being down 7%, the uncertainty with NS4. You mentioned it sounds like a pretty tepid outlook for the excavator market in China in 2014. So, clearly, pretty anemic environment. How does that impact your customers' appetite for a lot of the new products that you are planning to release this year and over the next several years? Because clearly some of your customers have got to -- particularly on the construction side -- have got to be struggling right now.

They are. I think to the point you raised, I think the customers -- we have seen lower uptake of products, and we talked about the light-duty engines. The light-duty engine plan was a lot faster launch and penetration at Photon than we seen. Now, as Rich said, we were able to scramble and move the international sales plan ahead of its original, and we got a lot of good sales of exports on the light-duty engines. But, the penetration of photon in terms of just what we had anticipated some years ago is several years behind, and that is just because of the -- Photon did not have much appetite to take on a higher tech engine until NS4 goes in. But it is going in, so they are now doing it. Again, whether they are happy about it or not, they are putting it in. And, the result and the reason is they needed the technology.

I think in the construction side, our construction partner, LiuGong, on our joint venture there, is really seeing those products as a way form them to compete not just domestically, but internationally. So, they have quite a bit of appetite, I think, because they of course are seeing exports as a big opportunity for them to grow in what is otherwise an anemic home market. There is a lot of energy.

I would say generally speaking, energy level is high, but penetrating in the China market without the need for emissions technology, if your product is more expensive, is very difficult to do. I think that is one of the really terrific things about our new, heavy-duty 10- and 12-liter engine is Rich's team have worked incredibly hard to make sure that engine is competitive on a like-for-like basis with existing products while still offering the benefits of -- to upgrade to new technology and all of the other -- fuel economy and other benefits that our technology can offer them. That is a really hard design challenge, but they were able to do it in this heavy-duty engine, and I think that is a sea change for us as a Company.

Great, thank you very much.

Stephen Volkmann, Jefferies & Company.

I'm wondering if we can talk just a little bit about heavy-duty truck here in North America. The last couple of months of order rates have been -- look to me to be stronger than what your factoring in for 2014 which I suppose is prudent. But, can you just give a little color on what you're seeing vis-à-vis those order rates? And, if you think there's some reason things will decelerate? And then, as you're doing that, should we still think of this as one of the higher incremental margin businesses if you were able to flex up production little bit?

Steve, I will take a first shot at this. What we have seen in four months, it looked pretty good now. In particular, the last two months. And so, and all of the signals that we all look at, look positive, although they have for some time I guess is the concern that I've got here. I think the way you ought to think about us is we are -- right now, the industry is building fewer than orders are. So, backlogs are growing. And, the one thing I can say is that when it does change, we tend to change fairly significantly. Okay? Because at a certain point, you have to build more than orders to take that backlog down. And so, we have not built that in at this point. Because there has been a couple of false alarms on this, right, over the last two or three years. I think we are pretty prudent.

What we do know -- if it swings, it swings heavy and that is what were good at. We've got capacity in place. We, in fact, invested over the last couple of years anticipating, not knowing when it happened, but knowing it would at some point. So, that's where we stand right now is we are watching this closely, seeing is there going to be an inflection point where build rates go up to either match orders, or in fact go up to start taking backlog down. From a capacity standpoint, we are positioned to respond to that when or if that happens.

And, Steve, that is really what makes the incremental margin good in this business. So, we have got one plant, very efficient assembly plant. We have got a really good supply chain. We have heavy content on the engine. We have components, and we have the engine assembly. We have a good position in the market. So, yes, it's a good incremental margin, and Rich's plants -- especially the Jamestown plant. It is a terrific ramp-up plant, and so we will do really well.

But, I want to go back to Jamie's original question though about our posture. We watched the heavy-duty truck market start out stronger two years in a row. And so, we are just -- we would love it to be stronger. Don't get me wrong, that would be really good. But, we took a little more conservative posture, not in terms of how we estimate financials, but in terms of what is the economy going to do? Because frankly, we were a little more aggressive in the last two years, and that didn't pay off so much in the markets that we find ourselves in. So, we aren't -- we are not counting the chickens yet basically. But, that said, all the statistics that you talked about are there. This is a market that is ready to buy more than it replacements, and we are definitely ready to supply it. So, if that happens, we will benefit for sure.

And, just to be clear, there is nothing in your conversations with your customers or the fleet that would suggest there is any big drop-off in orders in the near term?

No, there definitely is not, and just, Steve, the conversations with end customers and OEMs really sound the same as they did for the last year or two. So, everybody sees the same data. The big fleets -- they are running their business pretty efficiently. They feel like they have been doing the same thing for a long time, so one of the problems I think in this situation is the conversations aren't that different. The order rates are definitely up. Nobody thinks they're going to ramp down or anything at least as far as I've heard, but there is not -- nobody is bubbly either. It is kind of the same. Rich, you should say if you feel differently about it. It is about the same conversation. So, I guess from that point, Steve, it is hard to read those tea leaves a little bit.

Great, and maybe Tom can I ask you a philosophical question? You were kind enough and maybe you regret this already, but you laid out some growth scenarios for us at the analyst day. Sort of getting to the bottom end of what you gave us for 2015 is starting to look like perhaps a stretch. We'll certainly need some double-digit top line growth in 2015 together. How do you think about those targets? Is this something that you really want to manage to? Or, is this a case where the world changes, and we just have to roll with that?

The way that I would think about those, Steve, same as I talked about before. Is that what I am trying to lay out for investors is what our best estimate of what we think markets are going to do and what we are going to do -- what is our strategy to deal with that environment. Again, at this point, it is hard to say where we are relative to those targets. Some things -- it wasn't that long ago, and we definitely didn't have a linear track on our growth targets. We expected the earlier years to be worse. Of course, we were in not such a great a market when we gave you those. And, it will come down to the rate of recovery of economies in 2015 and beyond. And, right now that is hard to tell. But, if economies recover well, I feel very confident in those numbers, and if they don't recover to your point, we'll have to go back and say, well, instead of a medium level set of economies as we anticipated, we had another -- we had really lousy ones. And so, here is where we are going to be. And, we will adjust, of course, if we see differently. But, right now, it's way too early to say, and a few things are worse than we thought at that point. But, it's really early days, and again, it will just really, really depend on recovery.

We have positioned ourselves incredibly well in the markets that we are in. That is the most frustrating part of this whole environment that we are in is that I keep having to tell you how good we are going to do when markets improve, and they are not -- haven't improved. But, we have terrific leadership in markets and products and with customers, so a little bit of turn-on in these economies -- you mentioned about heavy-duty trucks. But, any of them really, and we will see significant benefit. So, right now, I'm just watching and what I'm using those goals as is how we will respond to that environment as it comes.

Thank you, I'll pass it on.

Thank you very much I'll be available for your questions later.

Thank you for your questions. That's all we have time for. I'd now like to turn the call back to Mr. Mark Smith for any closing remarks.

Okay, ladies and gentlemen. That concludes today's conference call. You may now disconnect your lines. Thank you.