Cummins Inc. (CMI)

CMI 
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Cummins Inc. (CMI)

Q1 2010 Earnings Conference Call

April 27, 2010 10:00 AM ET

Executives

Dean Cantrell – Director, IR

Tom Linebarger – President and COO

Pat Ward – VP and CFO

Tony Satterthwaite - President, Cummins Power Generation

Analysts

Jamie Cook – Credit Suisse

Tim Dinan (ph) – Wolfram (ph)

Jerry Revich – Goldman Sachs

Henry Kirn – UBS

Ann Duignan – JPMorgan

Andrew Casey – Wachovia Securities

Eli Lustgarten – Longbow

Meredith Taylor – Barclays Capital

Presentation

Operator

Good day ladies and gentlemen and welcome to the first quarter 2010 Cummins Incorporated earnings conference call. My names is Eric, I’ll be your audio coordinator for today. At this time our participants are in a listen-only mode and we’ll facilitate a question-and-answer session towards the end of the presentation. (Operator Instructions)

I would now like to turn your presentation to Dean Cantrell, Director of Investor Relations, please proceed. 

Dean Cantrell

Welcome everyone to our teleconference today to discuss Cummins results for the first 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 three 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 disclosures on our website for the reconciliation of those measures to GAAP financial measures. Our press release with the copy of the financial statements and a copy of today’s webcast presentation is available on our Web site at www.cummins.com under the heading of investors and media. 

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

Tom Linebarger

Thank you, Dean. Good morning. I’ll start today by sharing some thoughts on our performance in the first quarter. Pat will then provide greater detail on the quarter and our updated 2010 outlook, and Tim will build on the comments we made at last month’s analyst day regarding our long-term prospects.

Clearly it was a very strong quarter despite the weakness in key U.S. and European markets. Sales at $2.5 billion in the first quarter were 2% higher than the same period a year ago with gains in our distribution and components businesses offsetting declines in the engine and power generation segments. Despite the modest revenue growth from last year, our earnings before interest in taxes improved significantly to $266 million or 10.7% of sales compared to $94 million or just under 4% of sales.

In terms of the first quarter volumes, the North American truck market turned out as we had expected. As you know we experienced strong demand in the final month of 2009 in advance of the U.S. emissions change reducing demand in the first half of this year. Our shipments fell by approximately 90% from fourth quarter levels in the heavy and medium duty trucks, bus and RV markets and we’re down about 80% in the same market compared to the first quarter of 2009.

On the other hand, our business improved significantly in several markets outside the U.S. in the quarter particularly in China, India and Brazil where their economies are recovering quickly from the recession. Our strong global position has enabled us to quickly capture the growth now occurring in these regions.

Cummins’ first quarter results represent a continuation of our strong performance throughout the downturn. We have generated consecutively higher margins in relatively weak revenue environments by lowering our cost structure and improving the productivity of our manufacturing operations. As mentioned in previous quarters we have worked hard to align our manufacturing capacity with the real demand for our products. Our employees have done an outstanding job executing the company’s strategies for dealing with the volatility in our markets during the recession. We also took advantage of the downturn in the first half of last year to better synchronize the flow of products through our plants making heavy use of six sigma.

The improved efficiency in our manufacturing operations is the most evidence in the performance of our engine and components segment in the first quarter. For example, our high horsepower engine plant in Daventry, England instituted operational improvements last year that have allowed us to manufacture almost the same number of engines in a single shift that took three shifts to complete a year ago. We have also seen productivity gains at our other high horsepower plants around the world, which will be crucial to meeting expected future demand in this market.

Engine production per hour at our mid range engine plants in Columbus and Rocky Mountain, North Carolina improved 13% and 10% respectively from the same period a year ago. Productivity has also improved at our turbo charger manufacturing facilities around the world. For example, the per person equivalent production rate at our turbo charger plant in Huddersfield, England has improved by 67% from the first quarter of last year and 27% in our plant in Dewas, India. And production of exhaust after-treatment devices at our mission solutions plant in Mineral Point, Wisconsin increased 31% in the first quarter compared to the same period last year with only a modest increase in head count. This productivity improvement comes at a time when the plant has transitioned to manufacturing the more complex 2010 products.

These are just a few examples of the tremendous work our people have done in our manufacturing plants to improve productivity and operating leverage. Such improvements have helped us to keep our first quarter EBIT at similar levels to what we deliver in the fourth quarter despite a 27% sales drop.

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