Cummins Inc. (CMI)
Q2 FY08 Earnings Call
July 30, 2008, 10:00 AM ET

Executives
Dean A. Cantrell - Director of Investor Relations
Tim Solso - Chairman and Chief Executive Officer
Patrick J. Ward – Vice President and Chief Financial Officer
Joe Loughrey - President and Chief Operating Officer
Thomas Linebarger – Executive VP and President - Power Generation Business

Analysts
Andrew Casey - Wachovia Capital Markets
Jamie Cook - Credit Suisse
Ann Duignan - JPMorgan
Eli Lustgarten - Longbow Securities
Charlie Rentschler - Wall Street Access
Henry Kirn - UBS
John Zolidis – Buckingham Reserach
Seth Weber - Banc of America Securities

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Quarter Two 2008 Cummins Incorporated Earnings Conference Call. My name is Masha, and I will be your coordinator for today''s call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) If at any time during the call you require assistance press * followed by 0 and an operator will be happy to assist you. I would now like to turn the call over to Mr. Dean Cantrell, Director of Investor Relations. You may proceed sir.

Dean A. Cantrell - Director of Investor Relations

Thank you, Masha. Welcome, everyone, to our teleconference today to discuss Cummins''s results for the second quarter of 2008. Participating with me today are Chairman, Tim Solso; our Chief Financial Officer, Pat Ward; our current President and Chief Operating Officer, Joe Loughrey; and our future President and Chief Operating Officer, Tom Linebarger. We will all be available for your questions at the end of the teleconference.

This teleconference will include certain forward-looking information. Any forward-looking statement involves risk and uncertainty. The company''s future results may be affected by changes in general economic conditions and by the actions of customers and competitors.
Actual outcomes may differ materially from what is expressed in any forward-looking statement. A more complete disclosure about our forward-looking statements begins on page 3 of our 2007 Form 10-K and it applies to this teleconference. During the course of this call we will be discussing certain non-GAAP financial measures and we refer you to our website for the reconciliation of those measures to GAAP financial measures. Our press release with a copy of the financial statements and a copy of today''s webcast presentation is available on our website at www.cummins.com under the heading of investors and media. Before we review our second-quarter performance, I would like to call your attention to our Analyst Day on November 12 in Charleston, South Carolina, where we will focus on the Components Segment. So I''d ask you that you please save this date.

So, Tim, would like to say a few words about the quarter?

Tim Solso - Chairman and Chief Executive Officer

Good morning. Let me begin by saying this was the best quarter for sales and net income in the company''s 89-year history. These results are even more remarkable given the current state of the US economy and the decline in our consumer markets. Sales were $3.9 billion versus $3.3 billion for the second quarter of last year, a 16% increase year-over-year. Earnings before interest and taxes were $469 million, a 32% increase over the same period last year. Net earnings were $293 million compared to $214 million for the second quarter of 2007. 61% of our sales for the second quarter came from countries outside the United States. This compares to 51% last year. Our geographic diversification has significantly helped us during this time of uncertainty in the US and will continue to fuel our growth in the future. During the quarter, we once again grew earnings faster than sales. All four operating segments increased their margins over the same period last year. All segments were also at or above their target EBIT margins. Joint venture income for the quarter grew 33% as a result of growth in our North American distributors at our Dongfeng and Chongqing engine joint ventures in China.

Cash from operating activities increased $250 million in the first six months of the year compared to the same period in 2007. Other recent company-related news or events included, we extended our long-term agreements with two major truck manufacturers, while our primary competitor announced plans to exit the North America on-highway engine business in 2010. We increased the dividend 40%, the third significant increase in the past three years and we are actively repurchasing shares as part of our second $500 million stock buyback plan. Fitch Rating Services upgraded the company''s senior unsecured long-term debt to BBB+. The upgrade was largely due to our recent market share gains and improving results because of our geographic and business diversification. We continue to move forward with our plans to invest $3 billion in capital for growth and another $1 billion with our joint venture partners. Going forward, global trends continue to play to our core strengths. As we said earlier, the economic uncertainty in the United States is weighing heavily on our domestic consumer markets. However, many of our international markets continue to show strong growth driven by long-term trends that we''ve identified in the past.
Tougher global emission standards, the price and availability of energy and globalization, tougher emission standards around the world have already created a significant opportunity for Cummins in both on and off-highway markets. In addition to market share gains in the North American heavy-duty and medium-duty truck, bus and RV markets, we''ve increased business in the off-highway Tier 2 and Tier 3 markets for engines used in commercial marine and construction equipment. We believe new emission standards will provide us with near-term additional business opportunities in Mexico, China, India, Brazil, Europe and the United States. The next trend benefiting both our engine and power generation businesses is the price and availability of energy. The rising cost of oil is driving demand for greater fuel economy, which is one of the key advantages of the diesel engine. We believe diesel engines with light duty trucks and SUVs in United States would be a big growth opportunity. Chrysler and Nissan will be our first customers for Cummins new light duty diesel engine, which will be available in 2010.

We also believe that our leadership in engine technology and the relative subsystems like turbochargers and fuel systems will provide additional growth opportunity. Cummins and our partners are working to provide our customers with the most fuel efficient and reliable products. The need for energy is also playing to Cummins’ strength in our power generation business. The demand for electricity in many regions is greater than the supply and often the reliability of supply is unacceptable. As a result people and businesses will invest in generator sets and electrical components to ensure they have electricity when they need it. The final trend that favorably impacts Cummins is globalization and the resulting development of infrastructure within developing countries like India and China. As you know we''re well established in markets like India, which is growing at 8% a year and in China with a growth rate of 9% to 11% per year. This growth requires investments in highways, power plants and other commercial development projects, which fuels the demand for our products. Nearly 30% of our sales this year came from China and India and along with other emerging economies of Latin America, Eastern Europe and the Middle East. These regions are growing nearly 3 times faster than the U.S. and Western Europe.

For example, our China construction markets continue to be strong as a result of domestic economic growth and exports. In India, major domestic and global manufacturers also are expanding or planning new plants. So, based on these significant trends, the tougher emission standards, the price and availability of energy and globalization, we remain very optimistic about growth in our long-term future.

Before concluding, I want to talk about the recent flooding in Columbus, Indiana, and the earthquakes in China. Four Cummins facilities were hard hit by historic flooding in June, especially our research and development center and the plant where our light-duty diesel engine is being developed. Despite the significant issues created by high water levels, our employees responded quickly to minimize the disruption to our operations in the company. We are confident that our insurance coverage will limit the impact of this event.
In May, earthquakes in China resulted in devastating human and infrastructure cost. Fortunately Cummins employees in our facilities were not harmed by the disaster. But in both this instances, Cummins employees went above and beyond in contributing money and time to help others less fortunate. Their efforts were just simply amazing, which makes us all proud to be a part of Cummins. Now, I will turn the teleconference over to Pat, who will provide more details on the second quarter and discuss the revised outlook for 2008.

Patrick J. Ward - Vice President and Chief Financial Officer

Thank you, Tim. As Tim mentioned, our second quarter was extremely strong. Revenues were 16% and earnings before interest and taxes grew 32% compared to the same quarter of last year. All four operating segments had record sales, delivered record profits, and achieved or exceeded their return on sales targets. Our initiatives to diversify the business through end-markets and geographies continue to pay off. The company''s financial performance is less dependent on any one market or region, therefore strengthening our ability to weather brain storms like we are seeing in the North America consumer markets.

Our fastest growing markets outside of the U.S., 61% of total sales this quarter came from international markets. While sales from the U.S. were down 6% compared to the same quarter of last year, international sales increased 37%, mainly driven by Asia-Pacific and Latin American countries and also growth in Europe. We believe most of the international markets and demand from non-consumer related products in U.S. will continue to show year-over-year growth for the remainder of 2008. For example, the strength of mining, marine, and power generation markets is continuing to drive strong demand for high horsepower engines. We continue to benefit from market share gains in North America truck and bus markets. Medium-duty truck sales in Brazil will grow 30% in 2008 buoyed by a strong economy, and construction markets outside of the U.S. and Western Europe remain strong, driven by infrastructure investment in emerging markets.

Demand remains strong and we are now confident that Cummins can deliver 15% revenue growth in 2008, which is up from our 12% expectation last quarter. We expect to deliver 10% EBIT which equates to more than 20% year-over-year growth. We do expect a more challenging environment in the second half of 2008 from the higher impact of commodity costs, a slowdown in truck markets in China and Mexico following an emission free buy and the heavier investment and development programs for future growth opportunities. We are also revising our guidance for the full-year effective tax rate to 33% due primarily to higher forecasted earnings generated in the U.K.