Cummins (CMI)

Q2 2010 Earnings Call

July 27, 2010 10:00 am ET

Executives

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

N. Linebarger - President, Chief Operating Officer and Director

Dean Cantrell - Director of Investor Relations

Patrick Ward - Chief Financial Officer and Vice President

Analysts

Ann Duignan - JP Morgan Chase & Co

Jerry Revich - Goldman Sachs Group Inc.

Henry Kirn - UBS Investment Bank

Eli Lustgarten - Longbow Research LLC

Chase Becker - Credit Suisse

Timothy Denoyer

David Raso - Citigroup

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2010 Cummins Inc. Earnings Conference Call. My name is Yvette, and I will be your operator for today. [Operator Instructions] I would now like to turn the call over to Mr. Dean Cantrell, Director, Investor Relations. Please proceed, sir.

Dean Cantrell

Thank you, Yvette. Welcome, everyone, to our teleconference today to discuss Cummins' results for the second quarter of 2010. Participating with me today are Chairman and Chief Executive Officer, Tim Solso; our President and Chief Operating Officer, Tom Linebarger; and our Chief Financial Officer, Pat Ward. 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 forward-looking statements begins on Page 3 of our 2009 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 statement 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 those formalities out of the way, we will begin our remarks with our President and Chief Operating Officer, Tom Linebarger.

N. Linebarger

Good morning. I will start today by sharing some thoughts on our performance in the second quarter. Pat will then provide greater detail on the quarter and our updated 2010 outlook, and Tim will talk about our longer-term priorities.

The second quarter was very strong in terms of our sales and even more importantly, our ability to convert those sales into profits. Sales of $3.2 billion were 32% higher than the same period in 2009. All four business segments reported significantly higher sales led by our Engine and Components segments, which increased by 45% each.

Earnings before interest and taxes increased significantly from second quarter of 2009 to $401 million or 12.5% of sales. That compares to 4.5% of sales during the same period in 2009 and 10.7% of sales during our strong first quarter this year. For the first time, all four business segments reported quarterly EBIT above 10% of sales.

Strong markets in China, India and Brazil continue to drive large sales increases as those economies have now fully recovered from the global recession and are growing robustly. Our sales growth in those countries was even better than we had anticipated for the second quarter, and we expect continued strong results from those markets in the second half of the year.

As you know, our leadership in markets outside the U.S. has played a large role in our success in recent years. Our geographic diversification has reduced the impact of economic cycles on our business as evidenced by our performance in the current economic downturn. In addition, our growth rates have increased as a result of our strong position in the fastest-growing markets in the world.

In the first half of this year, 64% of our consolidated sales have come from outside the U.S., the highest percentage ever. During that period, sales in China have increased 99% from the same period last year, while sales in India are up 45% and sales in Brazil have risen 94%. And as you know, our consolidated sales picture understates the true impact of our International business because of our joint ventures in countries such as China and India. JV sales in China were up 105% compared to the same period last year and 64% in India.

Our Dongfeng Cummins joint venture produced a record 63,000 engines in the second quarter. It's expected to be a $1.3 billion business this year. The second major driver of our strong financial performance in the second quarter and really throughout the downturn has been improved productivity across our manufacturing operations worldwide.

As we have highlighted in previous earnings calls, we worked very hard in the early days of the recession to quickly align capacity with real demand for our products. At the same time, we took advantage of the slowdown in volumes in the first half of last year to implement significant improvements in many of our manufacturing plants and our supply chain. That work has resulted in improving efficiency and allowed us to leverage higher engineering components demand to increase gross margins in both business units. We have also benefited from increased efficiencies in our Power Generation and Distribution businesses.

Here are just a few examples of improved productivity in our manufacturing plants. Productivity, as measured in turbochargers produced per engine per day at our Huddersfield, England plant, in the second quarter was nearly double the rate from the same period last year. Using the same productivity measure, our turbocharger plants in Charleston, South Carolina, China and India all increased productivity between 20% and 25% compared to the second quarter of 2009.

Our MidRange Engine business produced approximately the same number of engines in the second quarter as during the third quarter of 2008 with 900 fewer people. Our high-horsepower engine plant in Daventry, England has nearly tripled its daily output over the last five quarters, while we have doubled our output at our high-horsepower plant in Pune, India. Critical to those gains has been our work to coordinate the shared-supply base between these two plants.

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