康明斯 (CMI) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2014 Cummins Incorporated earnings conference call. My name is Denise and I will be the 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 is being recorded for replay purposes. I would now turn the call over to Mr. Mark Smith, Investor Relations. Please proceed, sir.

Thank you, Denise, and good morning, everyone. And welcome to our teleconference today to discuss Cummins results for the third quarter of 2014. Participating with me today are our Chairman and Chief Executive Officer, Tom Linebarger; our Chief Financial Officer, Pat Ward; and our President and Chief Operating Officer, Rich Freeland. We will all be available for your questions at the end of the prepared remarks.

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

More information regarding such 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 factor section of our most recently filed annual report on form 10-K and subsequently filed 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 presentation for the reconciliation of those measures to GAAP financially.

Our press release with a copy of the financial statements and a copy of today's webcast presentation are available on our website at Cummins.com under the heading of Investors and Media.

Now I will turn it over to our Chairman and CEO, Tom Linebarger.

Thank you, Mark. Before I start, I just want to tell you how much I really enjoy those disclaimer sessions. Thank you for doing that.

Good morning, everybody. I will start with a summary of our third quarter results and provide an update on our outlook for the full year. Pat will then take you through more details of both our third quarter financial performance and our forecast for the year.

Revenues for the third quarter were $4.9 billion, an increase of 15% compared to the third quarter of 2013. Third-quarter EBIT was $684 million, or 14% of sales, compared to $536 million, or 12.6% in the same quarter last year. We delivered incremental EBIT margins of 24%, due primarily to strong demand in North America and improved operational performance in all four businesses.

Engine business revenues increased by 13% year-over-year and EBIT margins were 11.7% of sales, up from 10.9% a year ago. We have increased our outlook for the engine business and now expect sales to increase between 7% and 9%, up 1% at the midpoint. We expect EBIT to be in the range of 11% to 11.5% of sales, 25 basis points higher than our previous forecast due to improved productivity in our manufacturing operations.

Revenues for the components business increased 20% year-over-year and EBIT percent improved by 110 basis points to 13.4%. We have increased our full-year outlook for the components business and now expect revenue growth of 15% to 17%,1.5% higher than our previous forecast at the midpoint. We expect EBIT to be in the range of 13.5% to 14%, up 25 basis points due mainly to higher volumes.

Power generation revenues increased by 6% compared to a year ago and EBIT increased from 6.3% a year ago to 8% this quarter. While this is a good improvement from a year ago, the level of order in take in power generation has remained weak for some time and is not yet showing signs of a significant turn-around. As a result, we are considering taking further actions to align our cost structure with demand starting in the fourth quarter.

We have lowered our revenue forecast for 2014 and now expect revenues to decline between 3% and 5%, down from our previous guidance of flat at the midpoint. We now expect EBIT to be in the range of 6.8% to 7.2%, down 50 basis points at the midpoint.

This forecast excludes any one-time costs associated with the cost reduction activities currently under consideration. We will provide details of our cost reduction plans during our fourth quarter earnings call.

Revenues in the distribution segment increased 37% in the third quarter with organic growth of 8% and acquisitions adding 29%. EBIT for the quarter was 10.1% and EBIT dollars were a record $131 million, up 52% year-over-year.

We continue to make good progress with our North American acquisition strategy. Through the first nine months of this year, we completed four acquisitions and another three will close by the end of the year. The acquisitions are expected to deliver incremental revenues for the full year of $500 million for the Company and generate earnings per share of at least $0.35.

We are forecasting revenue growth of 30% to 35% in the distribution segment for 2014, unchanged from three months ago, and have tightened the range for EBIT percent to 9.25% to 9.75%, unchanged at the midpoint.

Now I will comment on some of our key markets, starting with North America. Our revenues in North America grew 19% in the third quarter due to strong demand in on-highway markets. Shipments for the North American heavy duty truck market exceeded 26,000 units in the third quarter, an increase of 32% from 2013 levels.

We now expect a full-year market size to increase by 22%, up from our previous forecast of a 15% increase. We expect our full-year market share to be 37%, consistent with year-to-date performance through August.

In the medium duty truck market we delivered almost 18,400 engines in the third quarter, up 15% compared to a year ago. And we expect the market to grow by 9% for the year, unchanged from our prior forecast. Our market share is 73% year-to-date and we expect to maintain this market share for the full year, which would be 10 points higher than 2013.

Shipments to Chrysler increased by 6% in the third quarter, year-over-year. For the full year, we expect that shipments will increase 6% as well.

Power generation revenues declined in North America by 1% year-over-year, due primarily to lower sales to the US military. Excluding the military business, power generation revenues increased 8%, due in part to stronger orders from data center customers.

Also in North America, we are experiencing improvement in some of our high horsepower engine markets. Oil and gas revenues more than tripled in the third quarter, as the market recovers from very weak levels, and for the full year volumes are expected to be up by 70% to 80%.

We are also experiencing very strong demand in the commercial marine market supporting the offshore oil and gas industry. Demand for mining engines remains very weak both in the US and international markets with unit shipments expected to decline 20% for the full year.

The combination of the strong commercial marine market, improving orders from oil and gas customers and data center demand in the US for our power generation business, resulted in 11% growth in global high-horsepower engine shipments in the third quarter following almost two years of declining demand. In 2015, a number of high-horsepower markets will adopt tier four final emissions regulations in the US.

We have already achieved certification for high-horsepower generator sets and for our engines for rail and oil and gas applications. So we feel well positioned to meet customer demand. We will actually start delivering some tier four final systems in the fourth quarter of this year and are excited about the opportunities looking into next year.

Our international revenues increased by 10% year-over-year in the third quarter, with growth in China and Western Europe offsetting declines in Mexico and Brazil. As I will discuss, our full year forecast for revenues in our largest international markets remain unchanged from our prior forecast. Third quarter revenues in China, including joint ventures, were $824 million, an increase of 16% year-over-year.

Secular growth in light duty engines and components more than offset weak end-market demand. Industry sales for heavy and medium duty trucks in China declined 10% for the third quarter. Sales in the third quarter of 2013 were unusually strong due to pre-buying activity, ahead of the anticipated NS4 emissions regulations.

NS4 compliant trucks represent 40% of the total industry production in the third quarter and should exceed 50% in the fourth quarter. Year-to-date total industry sales are down 3% and we currently expect the full year market size to decline by approximately 5%, consistent with our prior forecast.

Our shipments of light duty engines in China increased 94% year-over-year, even as overall market demand declined by 28%. As our partner, Foton, increased the proportion of its trucks powered by the 2.8 and 3.8 liter engines manufactured in our joint venture. Production of our new ISG heavy duty engine, also part of our joint venture with Foton, are increasing and should contribute to growth in our market share in the fourth quarter.

Demand for construction equipment continues to decline as property construction has contracted and the pace of government investment infrastructure has slowed. Industry sales of excavators declined 30% in the third quarter, and are down 15% year-to-date, compared to weak levels last year. We expect full-year industry demand for excavators to decline 17% from our previous -- down from our previous forecast of a decline of 15%.

Revenues for our power generation business are up 4% year-to-date and are expected to be flat for the full year. Full-year revenues in China, including joint ventures, are expected to increase 10% for the year, unchanged from our previous guidance with new products and higher emissions-related content driving our growth. We do expect to see further growth in engine and component sales with broader adoption of the new NS4 regulations.

Third quarter revenues in India, including joint ventures, were $283 million, up 17% compared to a very weak third quarter last year. Industry production in the truck market increased 20% in the third quarter compared to the third quarter last year. And it is 1% higher for the first nine months of the year.

We now expect truck production for the industry to increase 9% for the full year, up from our previous forecast that production would be flat year-over-year. Power generation revenues in India increased 5% in the third quarter.

Higher pricing for new products, introduced to meet the recently adopted CPCB II emissions regulations, offset lower unit demand. Year-to-date revenues, however, are down 25% after a very weak first half.

The new government in India has placed a strong emphasis on improving infrastructure, which should be positive for our business in the future, but near-term demand remains weak. We expected full-year revenues for the power generation business will decline by 19% compared to our previous forecast of a 15% drop. In total, we continue to expect revenues in India to decline by 8% for the year, unchanged from our prior forecast, with improving truck production offsetting weaker power generation demand.

Third-quarter revenues in Brazil were $189 million, down 14% from the third quarter last year. Industry production of trucks declined 33% in the third quarter as the weak economy continues to impact demand for capital goods.

Industry truck production is down 25% year-to-date and we expect a full year decline of 25% to 30%. We expect our full year revenues in Brazil to decline by 15% to 20%, consistent with our prior forecast with power generation sales and modest [positive] in a difficult economic climate.

In summary, we currently expect global Company revenues to increase between 10% and 12% for the full year, up slightly from our previous forecast of growth of between 8% and 11%. The main driver of the increase in our revenue outlook is stronger demand in the North American heavy duty truck market. We expect EBIT to be in the range of 13% to 13.5%, up 25 basis points at the midpoint.

I'm pleased with the Company's strong earnings and cash flow performance in the third quarter despite weak market conditions in nearly all of our international marks. The strong results underscore the secular growth opportunities that we have generated with new products, new partnerships and expansion of our distribution business. The results also show that Cummins can continue to invest for long-term leadership and growth while effectively managing our costs.

Thank you for your interest today. And now I will turn it over to Pat who will cover our third quarter results and full-year guidance in more detail.

Thank you, Tom, and good morning, everyone.

Third-quarter revenues were $4.9 billion, an increase of 15% from a year ago, and included record revenues for both the components and distribution segments. Acquisition accounted for 3% growth year-over-year.

North America sales, which represented 56% of our third quarter revenues, were up 19% from a year ago due to continued strength in on-highway markets along with the impact of acquisitions in our distribution segment and record revenues in our parts business. International sales increased by 10% with growth in China and Europe partially offsetting weaker sales in Brazil.

Compared to the prior quarter, sales were up 1%. Stronger demand in the North American heavy duty truck market and the impact of acquisitions in our distribution business that partially offset by weaker demand in Brazilian and Chinese truck markets.

In discussing performance in the different lines on our -- off our income statement, I want to point out a change that we made this quarter. Certain activities of a previously classified in selling and general and administrative expenses were mainly measured as cost of sales, [generally] for consistent treatment across the distribution channel.

The division had no impact of earnings before interest and taxes and cash flow is all on the balance sheet. And all comparisons I will discuss today include the adjusted gross margin and selling, general and administrative expenses.

Gross margin was a record $1.3 billion in the quarter, or 26.3% of sales, an increase of 140 basis points compared to the prior quarter and 100 basis point improvement compared to the prior year. Compared to last year, stronger volumes, a positive mix and lower material costs were partially offset by higher warranty costs and unfavorable [Cummins movements]. Compared to last quarter, margins improved due to higher volume and lower warranty expense.

Selling, admin and reception development costs increased by $90 million compared to the prior year. Acquisitions in our distribution segment accounted for $22 million of this increase. Compared to the prior quarter, selling, admin and reception development costs increased by $35 million, of which the acquisitions added $6 million.

Joint venture income of $99 million was up $8 million compared to a year ago for mileage due to increased earnings in China. Sequentially, the joint venture income decreased by $6 million, primarily due to lower earnings in the China joint ventures.

Earnings before interest and tax were $684 million, 14% of sales for the quarter. This compares to 12.6% of sales last year and 13.6% in the prior quarter. The sub quarter margins represent a 24% incremental EBIT margin compared to the prior year.

Net earnings were $423 million, an increase of 19%, from the $355 million that we reported a year ago. And earnings per share was $2.32 compared to $1.90 last year. The tax rate was 34.4% for the quarter, and included a discrete tax expense of $19 million, or $0.10 per share, and a change in our projected full-year operating rate from 28% to 29.5% related to the geographic mix of our earnings.

Let's move on now to the operating segments and discuss third-quarter performance and the outlook for the full year. In the engine segment, revenues were $2.8 billion, an increase of 13% from last year. North American on high revenues were up 22%, driven by strong demand in truck line and bus marks.

Industrial revenues were up 11% with growth driven by record sales in the commercial marine business. Mining engine revenues were down 10% compared to last year.

Compared to the prior quarter, sales were up 3%. Sequentially, we experienced stronger demand in the North American heavy duty truck market and in European construction markets, which is partly related to tier 4 final emission regulations.

Segment EBIT was $330 million, or 11.7% of sales, up from 10.9% last year. The EBIT margins improved as a result of stronger volumes, raw material costs and higher joint venture income, partially offset by an increase in the raw material expense. Sequentially, EBIT margins increased by 40 basis points.

For the full year, we are increasing our revenue and our EBIT guidance for the engine segment. We now forecast that revenues will be up 7% to 9%, driven by higher demand in the North American heavy duty truck market.

We continue to see weakness in most global off-highway markets and in the Brazilian truck market. We now expect the Brazilian truck market will be down 25% to 30% for the full year. We are raising our EBIT projections for the full year to 11% to 11.5% of sales, which compares to the 10.4% we reported last year.

The component segment delivered record sales of $1.3 billion in the quarter. Revenues were up 20% from last year and up 1% from last quarter.

Compared to the prior year, the higher revenues were primarily driven by increased truck demand in North America, along with increased revenues from after-treatment systems in Europe and China related to the new emission regulations in both regions. Sequentially, higher revenues were primarily driven by increased demand in the North American heavy duty truck market, partially offset by lower demand in European and Chinese truck markets.

Segment EBIT was $172 million, 13.4% of sales, which was up 110 basis points from last year primarily as a result of the stronger volumes and raw material costs. Compared to last quarter, EBIT margins decreased by 110 basis points due to increased reception development expense, which we expect to decline sequentially in the fourth quarter.

We are increasing our revenue and EBIT guidance for the component segment, and now expect full-year revenue growth of 15% to 17%, as a result of the stronger demand in the North American heavy duty truck market. We are raising our EBIT projections for the full year from 13.5% to 14%, which compares to our full year 2013 margin of 12.1%.

In the power generation segment, third-quarter sales are $754 million, up 6% from last year, and essentially flat from the prior quarter. Year-over-year revenues declined in North America by 1% due to reduced military demand but increased in international marks, primarily China, Africa and the Middle East.

Our international sales were up compared to the prior year. They remain more than 30% below their 2011 peak.

EBIT margins were a 8% in the quarter, up from 6.3% last year, and flat with the second quarter. The positive impact of higher volumes and ongoing cost management led to the higher margins. Foreign currency negatively impacted power gen's EBIT margins by 90 basis points when compared to the third quarter of last year.

For 2014, we now expect sales to decline 3% to 5% compared to the prior year. The reduction in revenue guidance is primarily driven by continued weakness in international markets. As a result of the weaker demand, we are lowering EBIT projections for the full year to between 6.8% and 7.2% of sales.

As Tom discussed earlier, given the continued weakness in power generation markets, we are considering certain actions in reduce our cost structure starting in the fourth quarter. The cost of the actions being considered could range from $15 million to $40 million. With power generation and Company EBIT guidance exclude any costs associated with these actions, we expect to realize the benefits of these actions beginning in 2015.

For the distribution segment, third-quarter revenues were a record $1.3 billion, an increase of 37% compared to the prior year. Acquisitions accounted for 29% of the growth year-over-year. Organic growth of 8% was driven by stronger parts demand in North America, oil and gas markets and pre-buy related to tier 4 final standards in Europe and in the United States.

EBIT was a record $131 million in the quarter, as margins increased from 9.1% last year to 10.1%, with improved operational performance and gains from acquisitions partially offset by lower joint venture income. EBIT dollars increased 53% when compared to last year. For 2014, we continue to forecast revenue growth of between 30% and 35% with 3% organic growth and the balance coming from acquisitions.

We expect EBIT margins to be in the range of 9.25% to 9.75% of sales. Acquisitions remain on track to add $500 million of revenue to Cummins in 2014, and earnings of at least $0.35 per share.

As Tom mentioned, we now project total Company revenues to be up 10% to 12% in 2014, driven primarily by strong on-highway demand in North America and from the impact of the distributor acquisitions. While we are increasing our expectations for revenue growth in North America on-highway markets, we continue to see weakness in power generation, mining and in some top marks, particularly in Brazil. As we mentioned last quarter, demand stabilized in India during the second quarter but revenues were flat sequentially and we do not anticipate significant improvement in our end-markets this year.

We are increasing EBIT guidance to 13% to 13.5% of sales as a result of the stronger performance in North American markets, which compares to 12.5% last year and represents a 20% incremental EBIT margin at the midpoint of the guidance. We are now projecting a tax rate to be 29.5% in 2014, excluding any discrete items. Higher than our previous projection due to a change in the geographic mix of earnings.

Finally with regard to cash flow, we produced $687 million of cash from operations in the third quarter. Year-to-date, cash from operations has totaled $1.4 billion, or 10% of sales. We continue to expect operating cash flow to be in the range of 10% to 15% of sales for the full year.

We will invest between $650 million and $750 million in capital expenditures for the full year, which is below our previous projection, and expect to spend between $475 million and $525 million on distributed acquisitions.

During the third quarter, we increased our dividend by 25% and repurchased just over 1.2 million shares, leaving our total share repurchases through the end of September to over 4 million shares. The Company has returned $975 million of cash to shareholders so far this year and we are well on track to some 50% of operating cash flow to shareholders as we have previously discussed. And as is our practice, we will provide guidance for 2015 during our fourth quarter earnings release.

And now, let me turn it back over to Mark.

Thanks, Pat. Okay, Denise, I think we are ready to move to the Q&A section.

(Operator Instructions)

Our first question comes from Andrew Kaplowitz with Barclays. Please proceed, sir.

Good morning, guys. Nice quarter.

Hi, Andy. Thanks.

Tom, you can give us a little more color on how to think about China as we go into 2015 for you guys? You've continued to build out your light-duty engines but you also potentially have a significant build-out here with your new ISG engine with your JV partner in China. So, can you talk about what your initial experience has been with your new heavy-duty engine? And, how should we think about Cummins' growth relative to the market as we go into 2015 in China?

Broadly speaking, I think we'll still see secular growth. We see light-duty products continuing to expand. Emissions-related content continuing to expand as we move adoption rates up. They have moved up pretty steadily this year, and I think they'll continue to move up next year. And then, as you mentioned, our heavy-duty engine -- we really are just getting off the ground with that launch. The engine's been successful. We've got good feedback on it so far. We launched it.

It's the first new platform for Cummins, so we definitely were measured in our launch. We were careful with it. We kept production levels at moderate pace. We've been tracking all of the engines. So, we do have a good feel for how it's going, and we're happy with where we are. And, we'll be able to ramp up production and market position next year. So, all should contribute to secular demand.

What we don't know, Andy, is how good the market's going to be. I think there's a lot of uncertainty, still, about China. I mentioned in earlier calls that the truck market has been kind of fits and starts. It actually was stronger than we expected in the first half, and then a little bit weaker than we expected in the second half. Although we knew second was going to be worst than first, it was more up and down than we expected and we just don't know what to expect next year in that regard. So, we're feeling good about growth next year, given the secular growth. But what we don't know is how much headwind or tailwind we're going to get from the market.

Okay, Tom, that's helpful. And then, I know you get this question a lot, because I get it a lot, too. But it's been pretty topical lately, and that's the vertical integration threat. Many investors seem to think that your customers are being more aggressive here regarding vertical integration. You mentioned the 37% share for the year here in heavy duty and, obviously, very strong share in medium duty. So maybe you can talk about that as we go forward here, because I mean this has been something that's been out there for a very long time and you've been able to maintain share. But how should we think about it from here?

I'll say a few things and then I'll let Rich at it because he's pretty actively involved with the discussions. First of all, it's the first time I've ever heard that question about integration. (laughter) It's definitely not, as you know. It's an ongoing part of our business and I think really has been since the beginning. Since -- certainly since we left the shores of the US back in the 1970s, in a serious way, this has been part of our business. We regularly take vertically integrated manufacturers and add our engines to their mix. So we kind of, whatever you want to say, reverse disintegration or disintegrate them. And that's what we're -- that's our business. Everyone has an engine already in every vehicle that they're doing. We're oftentimes replacing their engine with ours, and then vice-versa. These are integrated manufacturers, most of them, and so they have the opportunity at times to integrate themselves. And I think that's an ongoing process.

The good news for us is that we have a full engine range. We have a global engine range, and we have good relationships with the best truck manufacturers in the world. Which means, if they're thinking about using an engine anywhere in the world, we're on the page for them to talk to. And, as long as we continue to provide capable products, products that they think will help them sell more trucks, we'll be able to keep share in these big manufacturers somewhere in the world in big markets. If we are not competitive, from a product performance point of view or a cost point of view, then, of course, we will be unable to the same competitive dynamics that have been true forever. Rich talks to all these guys, as do I. He's been talking to them more recently, I -- Rich, you should talk maybe about what conversations you're having with people.

Yes. Let me just -- a couple of things in North America. I think it was part of your question. Just to follow up what Tom said, virtually every customer we sell to produces their own engines. So that -- and that's not new. That's been the case for the last 20 years. So, if we look just at the heavy-duty truck market, and just an example, as Tom said, we're in a movement -- if you go back three years ago, we weren't selling to Navistar. We are now. So things move both ways in this space. We still see ourselves, we've said, in that the 35% to 40% range. We remain there. I think we're at 37% for the year and projecting that to go forward. And our penetration with all of the vertically integrateds is about right where we thought it would be and hasn't changed a lot through the year. I'd say, if anything, we're a little higher at Navistar than we thought. So, that piece is not new.

I think the question in the medium-duty space -- probably just address that, because I'm sure some of you have the question with the recent Daimler announcement. So just wanted -- just a couple of reminders on the medium-duty truck market. It's an important one to us. The market's up 9%. We're up 15% this year. And that's been with our share gains. We've gone from 63 to 73. And that's really been on the heels of -- we've got a terrific engine in that space and people are moving to that engine.

As you know, Daimler has announced they'll be introducing a mid-range engine, beginning in 2016 -- or a family of engines in 2016. Daimler is a terrific customer and partner globally -- not just in North America, but globally. And, of course, we preferred they had not done that, if we're honest. But they have done it, and I think [they didn't think of] what the impact will be -- I think short term, pretty moderate. So, it'll be introduced -- begin to be introduced in 2016 with an imported engine. So, not much impact 2015 and 2016.

The question is longer term, the impact, and that's really determined by the engine. This has been true in every market we have, is the customers will decide which engine they pull. And this is kind of all we do. We've got a terrific engine in this space, and that's why we have the 73% market share. So, it's a durable engine, really a bullet-proof engine that we've had. Customers polled, it's the most reliable, fuel efficient, and it's been designed and optimized for this North America market. So, it's in a good space.

So, time will tell for the next couple of years. Not much impact. We're going to continue to improve that engine and we'll be working with Daimler in that space.

Thanks, guys. Appreciate it.

Our next question comes from Jamie Cook with Credit Suisse. Please proceed.

Hi, guys. It's Andrew on for Jamie.

Hi. Jamie's on the other calls, huh?

(laughter)

Just tell her I noticed, okay?

(laughter) We're little busy today, but I'm filling in for her. So, I got some good questions for you in her place.

Good.

Just wanted to see if you could expand more on what you had said on power gen. And I think you mentioned -- you had mentioned international markets increased, which is pretty encouraging, given your market share there. Can you provide some more color -- going forward, what you're expecting for order book, and any one country stand out in particular? And then, I'm surprised -- I don't know if you mentioned India, but where else do you think you'll see specifically where those restructuring efforts are going to take place?

Let me start on this and, Tom, you can jump in here. So the power gen revenues have stabilized. So we'll see -- and in fact, if you look year over year, we're seeing some improvement for the first time. And you've seen profits stabilize. We got off to a rough start in Q1 and then we've been pretty stable through the back half of the year. But what we haven't seen is any growth yet. And I'll talk a little bit about what's going on in markets in a second.

So, the action we're taking is, due to the revenues not increasing, we are going to take further action to reduce the cost structure. So we're committed to improving the profitability at these levels, where they seem to have stabilized. So, we'll be positioned well when they do come back.

I think globally, where markets are good and bad, we talked about India being down, being down pretty significantly. North America market is up, if you take out the impact of the military business. And Africa is one we haven't talked about. In fact, actually the business is up fairly well in Africa -- up about 20%. But we're tied a little bit to -- just kind of the global economy is what pulls this. And so, we're now projecting -- not a rapid growth in any one area. The strongest would be North America, still, that we see that. Tom, you might want to jump in here.

Yes. Just market-wise, I agree that everything's -- we had a couple of places up a little -- Middle East was up and that had been depressed and now it seems to be showing some strength. China was up a little, although, again, I don't think there's a sustained strength there. Latin America, on the other hand, where we've seen some strength earlier is down. So, again, it's pretty anemic around the world with regard to markets.

And, again, as Rich said, we don't know exactly which actions we're going to take. What we said earlier in the year is, we anticipate, given how low power-generation business was, we thought some of the markets would improve to some degree by this time, or we'd start to see signs of improvement. We just haven't seen that. And so as we discussed then, we said if revenues don't improve, we'll take further actions. And that's what we're considering doing now.

We would, of course, announce the actions if we knew exactly what they were. We just don't know yet. We're going to figure out ways to reduce costs. And we've been studying that all year. So, we've got a good list of items that we're looking and we'll finalize those this quarter. And then we'll let you guys know next quarter.

So, again, it's just -- the way I would read this is that we knew if things didn't get better, we'd have to do something. Things didn't get better. And we don't see a sign right now of things getting a lot better, so we're following through on what we said.

Okay. And then, with those restructuring -- or with those efforts you're going to do in Q4, how do you see that? I know it's difficult to say at this point, but do you see a -- do you see that trickling through and benefiting early next year? Or how quickly do you think things will turn around there, given your efforts?

As you know, we have to go through the action specifically to say. Our anticipation is, of course, in all of these things is we'd like to get costs down as quickly as possible. And, again, with all of these kind of actions, we have to first decide what we're going to do and how we're going to do it, and we have not done that. We have not decided what we're going to do and how we're going to do it. So, when we do, we'll have a better set of plans. But you know from us in the past, we don't mess about. When it's time to reduce the costs, we'll make good decisions. We'll make the right ones for the business, but we'll make sure we get the costs out and we'll get the benefits quickly.

All right. Thanks, guys.

Our next question comes from Jerry Revich from Goldman Sachs. Please proceed.

Gentlemen, your light-duty engine in the US has made an announcement with Nissan -- I guess a little while ago. Can you just give us an update on when you expect additional new platform announcements to come out? And also, can you just touch on the off-highway side, you alluded to in your prepared remarks that, that's an area of opportunity with tier 4 next year. I'm wondering if you can flush that out on what additional platforms you're on, heading into next year, and what sort of tailwind we should be thinking about, if you can talk about it, at least directionally.

Okay. I'll go ahead and jump in and start with the light duty. So, the one OE who is public now is in the pickup space, which is Nissan. And that'll go into production mid-year next year. So that hasn't changed from what we told you last quarter. We are -- we do have several other light commercial vehicle customers that will go into production early next year who have not -- elected not to make those announcements yet. And so, there will be further announcements late this year, early next year. And we'll begin to see some ramp-ups in light commercial vehicle space, early in 2015.

And, you know, obviously, it's frustrating to you, and to us, that we can't -- our policy, basically, is we let our customers announce when they want to put our engines in and that's the right thing to do. But it is frustrating to us, obviously, we can't give you more visibility, and we'd love to do that. So I recognize that, that's frustrating. Mark, why don't you talk a little bit about the tier 4.

Yes. So in the US, Jerry, the tier 4 final regulations are going to impact oil and gas business, rail particularly -- you've seen orders in the passenger rail business and also, of course, we've got our full range of high-horsepower gen sets all certified. At least I know we were the first to be certified in those markets. I don't know the current status of others at this time.

But we feel really well positioned. It's not just about being certified, of course, it's about having those final solutions in the hands of your customers so they can try and test them and feel confident with them. So we see some momentum going into next year. We can't say exactly what those end-market conditions are going to be, but we will definitely deliver some systems here in the fourth quarter. And you should expect we'll be talking about all three of those segments going into next year.

And to Mark's point, Jerry, one of the problems with quantifying the impact for next year is that the markets are just not -- they're just not that consistent. They're pretty volatile. As we talked about, on oil and gas, we saw some good movement this year, and then now oil prices are weakening. So we don't know what impact that's going to have. On the rail side, we have seen a lot of positive increases. We've got some business in passenger rail. And that's kind of new to us. And we've got the hedgehog engine coming out. That's another benefit to the rail side. We really haven't had an engine big enough, really, in the main part of the rail business. So we have a lot of good stuff coming our way.

We're still pretty small though. I mean just to call it like it is. We're still small and growing. So, what the overall impact's going to be, we'll see. The biggest positive impact will be in the gen set side if we see market improvement in North America. That'll be the biggest one. Because that's the biggest volume. But what we just don't know is whether it's going to.

Jerry, let me just add one thing. Just in the tier 4 space, we feel really good about the technology we've got there. This is technology we've had in place in automotive markets for multiple years. So we feel good that we're ready, we're on time, there'll be no delays, and we've tested this technology and know it's durable and reliable, which is always key. There's always -- when you go through these technology changes there's winners and losers. And we feel really good about where we stand on the technology.

Okay. And lastly, I know in power gen you're still working through the restructuring piece. I'm wondering if you can just talk about the existing actions you have in place, which is just the production transition of low horsepower units to India. Where are you in that process? What's the margin tailwind as you complete that transition? And, any other cost-saving measures we should be thinking about outside of the restructuring program?

There's a couple of things, Jerry. I think, generally, we arrived at an initiative to grow our lower horsepower business. And so we've been naturally ramping up production of lower horsepower engines in India. We haven't really been taking them from anywhere else. We've just been growing India's export base and then going into multiple markets. We've seen good growth this quarter in Africa and some of the other emerging economies. There wasn't really a restructuring around the lower horsepower, more of a leveraging our India base and growing.

Where we do take actions and we completed those actions was in Europe, particularly around our alternator business. So we were moving some production out of Germany. And we did that and as we completed everything that we said we would do, basically, at the end of the second quarter. So that's why you saw, through a combination of cost-reduction activity, that's why we've been able to get the margins up without much revenue growth. We've seen basically every quarter this year, our gross margin percent has been higher, yet year-to-date sales are down. So we did all that. The problem is, of course, we're still lacking that momentum in revenue. We're still not entirely comfortable at 8% margins.

And, Jerry, just to pin some numbers behind what Mark just said there. If you look at power gen gross margins, on a year-to-date basis, they've improved from 18.1% to 18.7%, and that's on lower sales. And that's almost with a 1% headwind from the British pound from concept. So, it's not as if the team has not been doing anything. They've been working incredibly hard and we see it coming through those margins. We just need the volumes to kind of carry it through. And then you're going to see it much more, obviously, as we go into the future.

Okay. Thank you very much.

Thanks, Jerry.

Our next question comes from Rob Wertheimer, Vertical Research. Please proceed.

Hi. Good morning, everybody.

Hi, Rob.

Two quick questions. One, just out of curiosity, on marine and commercial, and oil and gas. It's interesting the strength -- there's obviously a lot of structural trends there, but obviously it's been a little weak lately. And I think a related party called out helicopter weakness to offshore rigs. Is that strength continuing? Have you had any cancellations either there or in fracking? Or is there some sort of -- I don't really know the cycle there, whether there's a big catch-up that needs to happen regardless of overall offshore CapEx.

I'd say, to this point, it -- just a couple of numbers just to show how we're looking at the market. Commercial marine market, in fact, will be up 20% for us this year. So it's been a nice, steady, growing market that we've had here. And we are tied to some of the offshore work that's going on. So that's a headwind as you see what's going on, potentially, in the short term. You see it going on with price. Our oil and gas, our fracking business, is up pretty significantly -- up almost 70% from some pretty low numbers, quite frankly. So we have not seen any -- I don't have any details to give you on what's going on with the oil price and some of the stuff you read on fracking. That's held in there, for us, so far. But it's just something we're paying attention to right now.

And one of the things that we've been seeing with that, Rob, is, remember, we had a big ramp in fracking engines. We had the right engines for the right size and there was a huge build-out. And then it kind of went completely dead when people were done with that build-out and things slowed down. Now, what we're mostly seeing is replacements.

When we talk to customers and ask them what they're doing, they're not really adding a bunch of fracking units. What they're doing is replacing engines that they've used. And, again, that's not only it, but in the conversation with customers, that's what we're hearing from them. They're moving them around and they're using up the engines, and then they want to replace the engines in their fracking units. So I don't think there's a lot of growth in fracking sites. I think they're just using them and then they need replacement engines. And so, what's going to happen as a result of any changes in oil prices is just not clear to me there. But I do think there is a steady demand for replacement because those that have them are using them.

(multiple speakers) The other thing I'd add, Rob, is the commercial marine is much more of a broad-based story. We've seen growth in China and West Africa, not just the offshore piece, and it has in fact become our largest pure engine end market. A very strong -- we don't see any kind of big change in demand here, looking forward. Oil and gas, obviously, for us, is relatively small and very much tied to the US at this point in time.

Thinking about the Company, overall, the markets that we're biggest in -- mining and power gen -- are still very weak. And the markets that are improving -- marine, we talked about oil and gas, and rail -- are relatively small and growing. So, definitely our high-horsepower business, if you just step back and look at the Company, it's still way lower than it was previously. And so we have a lot of opportunity for growth here when markets turn around.

That's all very, very helpful. Thank you. One quick one, I don't know if you'll answer it or not. Obviously, the Class 8 North America share bounces up and down, and maybe you lose some at one OEM and gain it at the other. Maybe there's underlying pull for your brand one way or the other. A little bit curious as to those -- as you lose a little bit of share structurally at one OEM, are you able to see into 2015 at this point? I think you're kind of probably booked out for 2014. Are you able to see into 2015 if you're holding share? Probably won't answer, but I'm just curious if the vagaries of production this year -- if you can see if that 37 holds or whether you start at a lower run rate? Thanks.

We'll wait until December to give that guidance. But there's nothing fundamentally changing as we look forward on the next standpoint. One thing that we've -- it's a minor one, but one we counted on was on the natural gas business. So we have 100% share in the natural gas and we actually -- we thought that would be a bigger play by now, and it's not. We were more conservative than most, but we thought that would be 2% to 3% share by now, and it's going to be closer to 1% share. So that is, though -- kind of a tailwind we have is, when that happens, which we don't see a big change in 2015, but when that market comes, which we believe it will, that'll be some upside for us on the market share.

Thank you.

Our next question comes from Steven Fisher with UBS. Please proceed.

Hi. Good morning. I know it's too soon for 2015 guidance, but, based on the trends you're seeing now, if you had to rank the pace of maybe your international businesses over the next year or so from strongest to weakest, would it still be China growing the best and then India, Europe, Mexico, and South America? How would you think about that ranking?

It's really difficult to say. Again, I'm not trying to be coy at all. It's really difficult to say. You heard some of our remarks about the different regions. In India, you've got a new government come in and a lot of positive sentiment going on. Some numbers are moving, too. We're seeing some improvement in some numbers. What we're not seeing yet is that translate into demand in our markets yet. But there's a very positive story there. You just don't know what that's going to result in.

China, I think, is very uncertain also. We just don't know whether -- what trends are going to do. We don't think that China's going to boom. Nobody thinks that. But whether or not -- remember, our markets are still significantly down from where they were even all the way back to 2011. So, you could see, even among a relatively moderate Chinese market, if infrastructure started to grow at all, we could see significant improvement.

And, of course, there's been elections in Brazil. I just think there's just way too much uncertainty to rank them in terms of upside or opportunity, though I would love the market to settle down and be able to do that. I just don't think I -- we have the visibility today to do it.

Okay. That's fair. And then, I think you said warranty costs are down sequentially. Is that right? And I think last quarter, you said the elevated accruals would kind of remain at that level for some time. So, just curious, what's developed there?

(multiple speakers) Sorry, Rich, go ahead.

So, we're really right where we thought we would be. So we -- what do you get is some quarter-to-quarter variation, as there's a big population out there and things get adjusted. So, we took the rates up in Q3. And we're kind of saying for the full year, the second half will look a little closer to Q2. Longer term, those rates are coming down, okay? And so the fixes are in place. And we just -- we'll demonstrate that over time. But we look, by the back half of 2015, those rates coming down. Pat, do you want to --

I think you said it well. Full year -- we said on the last call, we expect it to be somewhere in the range of 2.6% of sales. We have not changed from that outlook. And to put that into perspective, last year we booked 2.3%. The biggest headwind is obviously in the engine business. If you look at engine business, with third quarter of this year to the third quarter of last year, the warranty as a percent of sales increased by 1.3%. And the EBIT margins also improved by 80 basis points. So we have done a terrific job of overcoming our headwind. And, as Rich said, everyone's working very hard in there. I think we're pleased with some of the progress we're seeing. And as we get into next year, especially the second half of next year, I think you'll really start to see some improvement in these warranty rates from the current levels.

Great. Thank you.

Our next question comes Ann Duignan with JPMorgan. Please proceed.

Hi. Good morning, guys.

Hi, Ann.

Most of my questions have been answered, but on the distribution side, you kept your incremental revenues from the acquisitions as they were but you raised the EPS guidance. Can you just talk a little bit about what's happening there and what you're seeing, and what's better than you had anticipated?

Yes. Basically, it's down to the gains on acquisition, Ann. So the purchase accounting, the businesses that we're acquiring and the value of the 50% that we already own is getting actually written up a little more than we'd anticipated.

I mean the larger story, as you know, Ann, is we are a little bit ahead. So we've got seven acquisitions planned for this year and our original plan was six. And so that -- we just got ahead a little bit and that's great. And, in addition to that, we -- the integration's gone a little better than we expected and US market's been a little bit better than we expect. So that's kind of the -- if you want to say, the economic and execution side. And then there's a little bit of noise around the purchase accounting, what gets written up, what kind of costs we have on the other side. Those numbers have been fluctuating up and down. But, as I mentioned before, those will get flushed through and then we'll be left with the revenues and profit dollars of the acquisitions, which, again, are ahead of what we anticipated and are doing really well.

I think if you, Ann, if you step back and look at the performance of the segment without acquisitions and look at it on a same-store basis, the same-store margins have improved by 1% compared to last year. And, again, that's off a very strong North American market, strong oil and gas market relative to where we've been. So it's not just an acquisition story. I think the performance of the underlying business is also a little better than what we anticipated maybe three months ago.

Okay. That's exactly the color I was looking for. And I just wanted to follow up on the Daimler question earlier. I know it's 2016 and beyond. But I think you said you shipped about 18,000 medium-duty engines in Q3. Could you just remind us what percent of those were Daimler?

I don't know the number off the top of our head. I know Mark can get it for you. That's a good question, but we don't have the number in front of us. But Mark will have it. And, again, one of the other things, Ann, Rich was getting at is that, not only will it not start right away but there'll be a transition period of some time.

Sure.

Because they're going to have to introduce the engines one by one. And what's more is that we'll, of course, continue to compete for the business with them. One of the nice things about working with Daimler is they're a very capable company that wants to sell trucks and systems. And I think that's one of the reasons they like to work with Cummins. And so they're -- I think we still have opportunities to grow with them in North America, in mid range. And we'll see how it plays out. And they're working closely with us. The thing I really appreciate about that is, even as they made an announcement that, of course, we would have preferred they not make, or made a decision that we -- they talked to us the whole time about it. They were open us with. They talked about what they're trying to do and why they're trying to do it. And so I think the relationship remains good and open for us to grow with them. So not only is it later and will take transition time to get there, I feel like we have a good opportunity to find ways to grow with them, even in mid range.

Okay.

Ann, we'll get back to you with the number, but it's roughly about half. Maybe a little less than half of that.

Okay. Great. Appreciate that. I'll take the rest offline. Okay.

Thanks, Ann.

Our next question comes from Adam Uhlman with Cleveland Research. Please proceed.

Hi, guys. Good morning.

Good morning, Adam.

I was wondering if you could just talk a little bit more about what you're hearing from your heavy-truck customers here in North America about their buying appetite for next year? There's a lot of cross currents out there in the market. Great fundamentals sound pretty good, but this driver's shortage seems to holding things up. So maybe could you just talk about what you're hearing from your customers about their buying plans for next year?

I give a shot at this, Adam, but it remains pretty positive. Okay? So all of the things that we look at and you look at -- used truck prices are high. I think the one thing we were worried about a little bit is the driver shortage. And it's happened in other cycles. That appears to be taking care of itself, to the extent that folks have ways of addressing that. And, quite frankly, we've seen the pay for drivers going up through the cycle is one of the ways that, that's done. Folks are liking the fuel economy they're getting with the trucks they're getting now, since they're replacing and looking at the maintenance costs. And where we are right now, even though the numbers are up higher, we're really at the replacement level.

So, folks are not expanding fleets at this standpoint for the most part. So if you think of a 260 market, that's pretty close to a long-term replacement. And so we've got an old population out there and people are replacing, but we don't have a -- it doesn't appear we have kind of an overheated case where it's growing here. So, the sentiment -- we just had ATA -- sentiment's very positive. I mean rates are going up. They're making money -- the trucking fleets are making money. They're trying to replace their fleets, get a newer fleet. And so, it's generally positive. And I say, the one thing that seemed to be a little bit of a drag on the shortage, the more people I talked to are finding ways to get past that.

Got it. Thank you. And then, Pat, just a couple of detail questions. Would you expect the tax rate next year to go up above this 29.5% we're going to do this year because of the distributor acquisitions? And then, was there any impact to earnings from currency?

On the tax rate, I'll tell you, in January I don't -- we're still looking through our plan for next year. So it would be very premature for me to give you a number at this point. On the currency -- currency actually helped sales a little bit when you look at Q2 to Q3. It was like a $20-million benefit in the top line. However, given the strength of the pound, bottom line ended up with it being $6 million or $8 million negative year over year. And that really helped power gen more than anybody else. But not as significant as what we've maybe seen in previous quarters.

Great. Thank you.

At this time, we have no further time for questions. I will now turn the call back over to management for closing remarks. Please proceed.

Okay. Thank you very much for your time today. And I will be available for questions later. Thank you.

This concludes today's conference. You may now disconnect. Have a great day, everyone.