Cummins (CMI)

Q2 2012 Earnings Call

July 31, 2012 10:00 am ET

Executives

Mark Smith

N. Thomas Linebarger - Chairman, Chief Executive Officer and Chairman of Executive Committee

Patrick J. Ward - Chief Financial Officer and Vice President

Richard J. Freeland - Vice President and President of Engine Business

Analysts

Jerry Revich - Goldman Sachs Group Inc., Research Division

Jamie L. Cook - Crédit Suisse AG, Research Division

David Raso - ISI Group Inc., Research Division

Robert Wertheimer - Vertical Research Partners Inc.

Timothy J. Denoyer - Wolfe Trahan & Co.

Andy Kaplowitz - Barclays Capital, Research Division

Stephen E. Volkmann - Jefferies & Company, Inc., Research Division

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Cummins Inc. Earnings Conference Call. My name is Jasmin, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference to Mr. Mark A. Smith, Executive Director, Investor Relations. You may begin.

Mark Smith

Thank you, Jasmine, and good morning, everyone, and welcome to our teleconference today to discuss Cummins' results for the second quarter of 2012.

Participating with me today are Chairman and Chief Executive Officer, Tom Linebarger; our Chief Financial Officer, Pat Ward; and Vice President and President of our Engine business, Rich Freeland. We will all be available for your questions at the end of the teleconference.

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 forecasts, 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 Factors section of our most recently filed annual report on Form 10-K and any 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 website for the reconciliation of those measures to GAAP financials. Our press release with the copy of the financial statements and a copy of today's webcast presentation are available on our website at www.cummins.com under the heading of Investors and Media.

With that out of the way, we'll begin with our Chairman and CEO, Tom Linebarger.

N. Thomas Linebarger

Thank you, Mark. Good morning, everyone. I will summarize our second quarter results and talk about our key markets. Pat will then take you through more details of our second quarter performance and provide an update on our full year guidance.

We delivered strong profitability in the second quarter despite the challenging economic environment and continued investment in new products and growth initiatives. Revenues for the second quarter were $4.45 billion, a decrease of 4% from the second quarter of 2011. Excluding the impact of currency movements and divestitures, revenues were flat year-over-year.

Second quarter EBIT was $663 million, a decrease of $44 million or 6% compared to the second quarter of 2011, excluding gains related to business divestitures. EBIT percent for the quarter was 14.9%, the second highest in the company's history. Gross margin at 27.2% set a new record for the company, reflecting continued progress in driving productivity and lowering product coverage costs.

For the second half of 2012, revenues increased by 5% -- sorry, for the first half of 2012, revenues increased by 5% over last year, and our EBIT percent increased from 14.6% to 14.8%. We delivered incremental EBIT margins of 19.4%, very close to our long-term targets despite the lower-than-anticipated revenue growth.

As previously announced, we now expect full year revenues to be flat with 2011, a reduction from our previous guidance of 10% growth in revenues. Continued weakness in some international markets, particularly in Brazil and China, coupled with slowing orders in the U.S. truck, oil and gas and Power Generation, have caused us to lower our outlook. I will talk further about our outlook for a number of these markets, and we have included a supplementary slide in today's earnings release presentation that quantify the change in revenue guidance by business segment and by market.

We expect to deliver EBITDA margins in the range of 14.25% to 14.75% in 2012, a decrease in our full year guidance of 0.25 point but continuing our trend of increasing profitability year-over-year. In the second quarter, we continued to experience year-over-year growth in North America, offset by weakness in a number of international markets. Although our revenues in North America increased, the rate of growth has slowed recently. Our second quarter revenues grew in North America by 12%, significantly lower than the 40% growth we experienced in the first quarter.

In the North American heavy-duty truck market, our Engine shipments increased by 13% compared to the second quarter last year. Order rates have slowed recently. And we are now lowering our full year market size expectation to 260,000 units, growth of 14% to compare to 2011 but down from our previous forecast of 278,000 units. We expect to achieve full year market share of 40%, unchanged from our previous guidance.

Orders in the North American medium-duty truck market have also softened, and we are lowering our market size estimate to 104,000 units from 117,000 units. We continue to expect our market share to exceed 50% for the full year in this market.

Our North American on-highway products continue performed very well in the market. We are very pleased with the reliability of this product as evidenced by our product coverage costs, which declined again this year and by the performance and fuel economy demonstrated by our engines in operation. We have now shipped more than 300,000 engines, equipped with our SCR technology, and the market feedback has been overwhelmingly positive. Our market share has grown in both heavy- and medium-duty truck and bus markets in the last 12 months.

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