Cummins (CMI)

Q2 2011 Earnings Call

July 26, 2011 10:00 am ET


Mark Smith - Executive Vice President and Chief Financial Officer

N. Linebarger - President, Chief Operating Officer and Director

TIm Solso - Chairman of the Board, Chief Executive Officer and Chairman of Executive Committee


Jerry Revich - Goldman Sachs Group Inc.

Ann Duignan - JP Morgan Chase & Co

Henry Kirn - UBS Investment Bank

Eli Lustgarten - Longbow Research LLC

Andrew Casey - Wells Fargo Securities, LLC

Basili Alukos - Morningstar Inc.

Timothy Denoyer

Adam Uhlman - Cleveland Research

Jamie Cook - Crédit Suisse AG

Timothy Thein - Citigroup Inc



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Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Cummins Earnings Conference Call. My name is Derek, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Mark Smith, Executive Director, Investor Relations. Please proceed.

Mark Smith

Thank you, Derek, and good morning. I'd like to welcome everyone to the teleconference, and we're pleased to share with you a brief business update and discuss Cummins second quarter performance, as well as our revised outlook for the full year.

Also participating this morning is Tim Solso, our Chairman and Chief Executive Officer; Tom Linebarger our President and Chief Operating Officer; Marsha Hunt, our Vice President and Corporate Controller. Pat Ward, our Chief Financial Officer cannot be with us today due to a family bereavement.

This teleconference will include certain forward-looking information. Any forward-looking statement involves risk and uncertainty. The company's future results may be affected by changes in general economic conditions and by the actions of customers and competitors. Actual outcomes may differ materially from what is expressed in any forward-looking statement. A more complete disclosure about forward-looking statements begins on Page 3 of our 2010 Form 10-K, and it applies to this teleconference.

During the course of this call, we will be discussing certain non-GAAP financial measures, and we refer you to our website for the reconciliation of those measures to GAAP financial measures. Our press release with a copy of the financial statements and a copy of today's webcast presentation is available on our website at under the heading of Investors and Media.

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

N. Linebarger

Good morning, and thank you, Mark, it's nice to have you. I'll start this morning by sharing some thoughts on our performance in the second quarter and our outlook for certain markets for the rest of the year. Mark will then provide greater detail in the quarter and our updated 2011 outlook.

As you can see, we had a very strong second quarter and delivered record sales and profits. We experienced growth in all major geographic regions, led by improvement in several of our end markets in the United States. Sales for the second quarter of $4.6 billion were 45% higher than the same period in 2010. All 4 business segments reported significantly higher sales led by the Engine and Components segments, which increased 53% and 42%, respectively.

We reported EBIT for the quarter of $775 million, including a gain of $68 million related to the sale of the exhaust business. Excluding the gain, we reported EBIT of $707 million or 15.2% of sales in the second quarter. This represents an increase in EBIT of 76% year-over-year, continuing our trend of growing earnings faster than sales.

Our Engine, Components and Distribution segments each reported record sales and record EBIT, and our Power Generation business also delivered strong growth and profitability. Sales in the U.S. increased 56%, with growth in a number of end markets. Our Engine business experienced strong growth in heavy- and medium-duty truck, bus, mining, oil and gas and construction markets. The Components business increased U.S. revenues by 44%, driven by increased demand in on-highway markets, and the Power Generation Distribution businesses also enjoyed strong growth.

Staying on the topic of our U.S. business, I wanted to provide an update on our 2010 EPA-compliant engine launch, which continues to go extremely well. Through the end of June, we had shipped almost 126,000 medium- and heavy-duty engines equipped with Selective Catalytic Reduction aftertreatment devices to North American truck and bus customers. Based on testing conducted by Cummins and confirmed by head-to-head comparisons conducted by our customers, we are confident that we are meeting our commitment to provide a significant fuel economy improvement over our previous engine and that we are delivering the best fuel economy in the industry.

Our market share in medium-duty trucks in the U.S. has increased to 52% due to the strong reliability of our engine and the significantly advanced fuel economy it has over the competition. In the heavy-duty market, we have increased our penetration at PACCAR and freight liner this year, and we expect our market share of the overall heavy-duty market to reach the mid-30s for the full year.

Our revenues in international markets remain strong in the second quarter as well. Our consolidated revenues in Brazil grew 40%, India 17% and China 34% compared to a year ago. Brazil continues to be a very important market for us, with all 4 business segments reporting strong growth year-over-year.

We delivered record results in India this quarter, and our penetration at Tata exceeded 80% for the first time in our history.

I would like to provide a little more detail on our business in China and our outlook for the key end markets there. Before I comment on specific end markets though, I want to point out that we remain very optimistic about the long-term growth prospects for all of our businesses in China. We expect the Chinese economy to grow at a significantly faster rates than developed economies for many years to come. We also expected that the growth in GDP coupled with the need for a more efficient, clean power will continue to provide Cummins with significant growth opportunities in China.

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