Cummins Inc. (CMI)

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Cummins Inc. (CMI)

Q3 2009 Earnings Call

October 30, 2009 10:00 am ET


Dean Cantrell – Director of Investor Relations

Tim Solso – Chairman and Chief Executive Officer

Tom Linebarger – President and Chief Operating Officer

Pat Ward – Chief Financial Officer


Meredith Taylor - Barclays Capital

[David Russell] – I.S.I. Group

Jerry Revich - Goldman Sachs

Henry Kirn - UBS

Eli Lustgarten - Longbow Research

Andrew Casey - Wells Fargo Securities LLC

Chase Becker for Jamie Baker - Credit Suisse

Joel Tiss - Buckingham Research Group



Good day ladies and gentlemen, and welcome to the third quarter 2009 Cummins Incorporated earnings conference call. My name is [Jasmine] 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 your host for today’s call, Mr. Dean Cantrell, Director of Investor Relations. You may proceed.

Dean Cantrell

Thank you Jasmine. Welcome everyone to our teleconference today to discuss Cummins’ results for the third quarter of 2009. 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 2008 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 I’d like Tom to open with a few remarks.

Tom Linebarger

Good morning. I would like to start today by sharing some thoughts about our performance during the third quarter and then spend a few moments talking about our expectations for the first half of 2010.

Given the economic challenges we continue to face in most of our markets, the company performed extremely well in the third quarter. As you know we began taking decisive actions late in 2008 to lower spending and to adjust our manufacturing capacity to meet lower demand for our products. Those efforts have resulted in improved profitability and cash generation, despite continued weak demand in many of our end markets. Sales rose only 4% from a very low base in the second quarter, but profitability improved significantly.

Earnings before interest and tax, excluding restructuring and other charges, was 7% of sales. That compares to 4.8% of sales in the previous quarter and 3.9% of sales in the first quarter. Our cash position improved by $152 million in the quarter as a result of significantly improved working capital. Most of our end markets and channels have completed their inventory burn off and in some cases we have started to restock.

The engine and components businesses returned to profitability in the third quarter, led by increased demand in advance of the 2010 emissions changes in the U.S., recovery in China, India and Brazil and our focus on reducing costs throughout the year. Our distribution business continues to perform very well, improving segment EBIT from the second quarter despite a softening of sales.

As expected, our power generation sales declined as retail channels in the market continued to burn off inventory. Sales fell by $61 million from the second quarter and segment EBIT declined to 4.2% of sales in the quarter.

In broad terms, the global economic situation has developed over the past few months much as we expected. Economic conditions remain very weak around much of the world, with some notable bright spots in key emerging markets. For example, the China and India markets have rebounded relatively quickly and have resumed our growth, mostly for domestic demand. The Brazil economy has begun a modest recovery and is expected to return to stronger growth in 2010.

Cummins sales are reflected of the economic trends around the world. Given our strong positions in India, China and Brazil we are seeing increased demand in these markets as they start to recover. As importantly, our sales have stabilized in places such as the U.S. and Europe. Although demand remains at very low levels, it has stopped falling, which has allowed us to plan better and operate more efficiently.

Additionally, our share in key markets continues to grow as a result of our industry leading technology and strong partnerships. One example is the North American truck market where we have continued to meet challenging emissions regulations with products that use less fuel and provide drivers with excellent performance. In addition, we continue to strengthen our important partnership with PACCAR, an excellent company. PACCAR has a long history of leadership in the truck market, and our strong relationship with them has helped Cummins gain market share that has also improved PACCAR’s product offering and support network.

Based on our improving sales and profit performance, we are adjusting our financial guidance for 2009 upward from what we shared last quarter. We now expect sales to be down slightly less than 30% from last year and EBIT to be approximately 6% of sales excluding restructuring and other charges.

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