Cummins Inc. (CMI) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Cummins Inc. Earnings Conference Call. My name is Sienna, and I'll be the operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Mark Smith, Executive Director, Investor Relations. Please proceed.

Thank you, Sienna. Good morning, everyone, and welcome to our teleconference today to discuss Cummins results for the first quarter of 2012. Participating with me today are our 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 will begin with our Chairman and CEO, Tom Linebarger.

Thank you, Mark. Good morning, everyone. I will summarize our first quarter results and comment on the outlook for our key markets. Pat will then take you through more details of our first quarter financial performance and provide an update on our full year guidance. We delivered very strong results in the first quarter. Revenues were $4.5 billion, an increase of 16% over the first quarter of 2011. Three of our 4 businesses reported higher revenues than a year ago, with the Components business achieving record revenues. First quarter EBIT was $658 million, an increase of 24% over the same period last year, continuing our trend of growing earnings faster than sales. Both revenues and EBIT represent a new first quarter record. We delivered incremental EBIT margin of 21%, consistent with our plan to meet our long-term targets. EBIT percentage for the first quarter was 14.7% with the Engine and Components businesses delivering record EBIT percentage. The Distribution business delivered significant improvement in EBIT percentage from the fourth quarter levels, due to better mix and lower costs. EBIT percent in our Power Generation business also improved from the fourth quarter, despite a drop in revenues of $140 million. Based on the improvements we saw in the first quarter, we remain confident that EBIT margins for both the Distribution and Power Generation businesses will improve during the remainder of the year. We are maintaining our full year guidance for the company of revenue growth of 10% and EBIT margins of 14.5% to 15% of sales. In the first quarter, we saw mixed economic conditions across our markets. And although our guidance for the full year remains unchanged, our outlook has changed in some markets. Overall, demand for our products has increased in North America, in heavy, medium and light duty on-highway markets and in the construction market, offsetting weaker-than-expected demand in China. We now expect our domestic revenues in China across all end markets and including joint ventures to decline by 5% in 2012 compared to our previous guidance of no change year-over-year. In India, our forecast for revenue growth of 7%, including joint ventures, remains unchanged from our previous guidance. In Latin America, our revenue guidance is also unchanged with a weaker outlook for trucks in Brazil offset by stronger demand in our other businesses. Now let me discuss some of these markets in more detail. Revenues in North America were very strong, increasing 40% from a year ago. The Engine and Components businesses delivered strong growth in on-highway markets. We benefited from strong market share for our Engines in the North American heavy-duty truck market in the first quarter, with our share reaching 45% compared to 33% a year ago. We shipped to more than 20,000 15-liter engines to the North American market, setting an all-time record. Our total Engine shipments to this market, including our 12-liter engine, increased by 118% compared to the first quarter of 2011. Through close cooperation with our OEM partners and strong execution from our manufacturing and supply chain teams, we were able to quickly ramp up our production to meet strong demand for our products. We now expect our market share to reach 40% for the full year, the top end of the range of our previous guidance. And we are maintaining our forecast for the market size for heavy-duty trucks in 2012 at 278,000 units. In the North American medium-duty truck market, we also delivered very strong performance in the first quarter, with our market share increasing to 52% from 50% at the end of 2011. Our engine shipments to this market increased by 62% year-over-year. We are maintaining our full year market size projection of 117,000 units, and we expect our market share for the full year to be at least 50%. We continue to receive very positive feedback about the performance and reliability of our North American on-highway engines. We have now shipped 256,000 engines equipped with our SCR technology, and our customers are pleased with the fuel economy improvements that we have delivered. At the recent Mid-America Truck Show on Louisville, we announced that we will meet the 2014 efficiency and greenhouse gas regulations a year early. And we will deliver a further 2% improvement in fuel economy above current levels. Also in North America, demand for our light-duty engines from Chrysler increased by 27% this quarter, and we now expect full year volumes to increase by a full 30%. In North American off-highway market, the Engine business experienced strong growth in mining and construction engines with unit growth of 53% and 52%, respectively, versus the first quarter last year. The Power Generation business delivered 24% revenue growth year-over-year in North America against a relatively weak first quarter last year. Our international revenues declined by a little under 2% with growth in Australia, Mexico and Eastern Europe offset by softer near-term demand in China and Brazil. In China, our domestic revenues across all end markets, including the revenues of our joint ventures, declined by 16% compared to the first quarter of 2011. We experienced a decline in our shipments to the construction market, primarily engines for excavators as monetary tightening by the government impacted construction activity. We now expect the market for excavators to decline by 15% for the full year 2012 compared to our previous guidance that the market would be flat year-over-year. We expect to see improvement in demand later this year, with fourth quarter volumes expected to be the highest for the year as excavator manufacturers increase engine orders in order to complete production of excavators ahead of this peak spring selling season next year. The truck market in China started to soften in the third quarter of last year following a number of years of very strong growth. Fortunately, OEM and dealer inventory levels have dropped significantly over the last 4 quarters. As we start to see improvement in the Chinese economy in the second half of this year, we should see production volumes at our Dongfeng Cummins joint venture increase. For the full year, we now expect the truck market heavy- and medium-duty combined to decline by 10% compared to our previous forecast of down 5%. In the Power Generation market in China, our revenues including joint ventures increased 13% compared to the first quarter of 2011. We are maintaining our previous guidance that revenues will remain flat for the full year. As you will recall, we experienced very high demand in the second and third quarters of 2011 due to widespread power shortages in the country. We now expect domestic revenues in China, including joint ventures, to be down by 5% for the full year. In Brazil, our revenues across all businesses declined 18% year-over-year, driven by lower demand in the truck market. We planned for low first quarter production volumes in the on-highway market with the change in emission standards from Euro 3 to Euro 5, and with the engine transition occurring at MAN as we have previously discussed. Our shipments declined by 48% in the first quarter as OEMs continued to sell Euro 3 compliant trucks that were produced last year. We now expect industry production to decline by 19% for the full year. We did begin shipments to MAN in Brazil of our new Euro 5 compliant 9-liter and 3.8-liter engines and SCR Systems in the first quarter. I recently visited our operations in Brazil to see our progress in ramping up production, and I'm excited about the prospects for these new products, as well as our aftertreatment systems. I look forward to updating you as sales of our Euro 5 products increase in future quarters. Our Power Generation business delivered 37% revenue growth in the first quarter in Brazil and we expect strong demand to continue, driven by instability in the grid and ongoing investment in infrastructure. The economy in Brazil softened a little in the second half of 2011, but we are encouraged by the recent interest rate cut by the Brazilian Central Bank. In the rest of Latin America, we continue to see strong demand for trucks and mining equipment. Our total revenues in Latin America, including Brazil, are expected to reach $1.7 billion this year, a decrease of 6%, in line with our previous guidance as increases in Power Generation and Components revenues are projected to partially offset the lower truck demand in Brazil. In India, our revenues, including our joint ventures, were flat year-over-year. First quarter revenues for our Power Generation business were 4% lower. We have seen an improvement in order intake recently in our Power Generation business following a period of weaker demand in the second half of 2011. Power shortages in the south of the country are driving increased demand for our products. During our previous earnings call, we projected that our Power Generation revenues would increase by 10% for the full year 2012, and we remain confident in that guidance. Our unit shipments are expected to increase by more than 10%, but the depreciation of rupee will result in 10% revenue dollar growth in U.S. dollar terms, based on the current forecast and the exchange rate. Truck engine shipments at our Tata Cummins joint venture were strong in the first quarter, up 9% year-over-year, though it is clear that we will have some softening in the Indian truck markets for the next several quarters. In total, including joint ventures, our revenues in India are expected to grow 7% in 2012, unchanged from our previous guidance. Despite softness in some of our key emerging markets, we remain confident that the prospects for growth in Brazil, India and China -- and we continue to invest in the products, distribution footprint and infrastructure that will support that future growth. We do expect our revenues in China, India and Brazil to be higher in the second half of this year than the first. In Europe, our forecast is largely unchanged from prior guidance although we continue to closely monitor our markets there. We project that total revenues in Europe will decline by 5% for the full year. In the first quarter, total company revenues actually increased 7% year-over-year but against a very weak comparison. We have seen some modest downward revisions to OEM forecast for on-highway markets. Construction volumes declined sharply from the fourth quarter of 2011 as expected, due to the pre-buy in 2011 ahead of Tier 4 emissions change. Our Power Generation business got off to slow start in Africa and the Middle East, with first quarter company revenues down a combined 9%. However, we are confident that our revenues will increase in these markets as the year progresses. As I've just described, we have experienced a mixed picture across our market in the first quarter. I'm very pleased that the company has been able to adjust to shifting demand patterns across geographies and end markets, and still deliver very strong performance. I'm particularly pleased with the progress we have made in expanding gross margins through efficiency gains, cost reduction work and improved quality. Improvements in gross margins are critical to both fund our investment in future growth and expand our EBIT margins. As an example of our investment in new growth opportunities, we recently announced that we have begun development of a new 15-liter spark-ignited natural gas engine for the North American truck market. We are excited about this program, and we've already received very strong interest from end users and OEMs in this new Cummins 15-liter product. That concludes my comments, now let me turn it over to Pat.

Thank you, Tom, and good morning, everyone. Our first quarter results reflect our very solid start to the year, including record profits in both our Engine and Components segments. First quarter revenues were $4.5 billion, an increase of 16% from a year ago. Our sales in the U.S. were up 43%, driven by strong demand in both on-highway and off-highway markets in the quarter. Sales in the rest of the world were essentially flat compared to a year ago as a result of weaker demand in China, Brazil and India and due to a stronger U.S. dollar. Compared to the fourth quarter of 2011, sales were down 9%. The decrease was driven by seasonality in our Power Generation business in Asia, weaker construction markets in China, the impact of a fourth quarter pre-buy for industrial engines in Europe and lower demand for on-highway engines in Brazil. Gross margins were a record 26.8% of sales, up from 24.8% last year. The improvement over the prior year was driven by stronger volume, improved pricing and lower warranty costs and to a lesser extent, slightly lower material costs. Margins also improved compared to the fourth quarter of 2011 despite lower volumes, as a result of operational improvements across all 4 segments, improved pricing and lower material costs. Our products have been performing very well in the field, which is evidenced by a reduction in product coverage as a percent of sales over the prior year. This percent, however, has increased from the fourth quarter due to the product mix shifting towards more advanced engines in North America as we discussed on our last call. Selling, admin and research and development costs were up $138 million from last year and were down $19 million from the previous quarter. As we've discussed before, we are focused on executing our growth plans, which have driven additional spending, particularly building out our distribution footprint in Africa, for example, and investing in new products across the company. Research and development spending increased 40% over the prior year as we continued to invest in the development of new products and technologies. Joint venture income of $104 million was 8% higher than a year ago and 3% higher than the prior quarter. Strong performance by our North American distributors and in the Chongqing Cummins joint venture in China drove the year-over-year improvement, which was partially offset by a lower contribution from the Dongfeng Cummins joint venture as a result of the softer truck market in China. Sequentially, the improvement in joint venture income came from our North American distributors. Earnings before interest and tax were $658 million or 14.7% of sales. This compares to 13.8% of sales last year, reflecting a 21% incremental EBIT margin. Compared to the fourth quarter, EBIT margins improved 90 basis points, despite the lower sales revenue. Earnings per share in the first quarter were $2.38 compared to $1.75 from a year ago with a tax rate of 27% in the quarter. Now let's move on to the operating segments and further discuss first quarter performance and the outlook for the full year. In the Engine segment, revenues were $2.9 billion, an increase of 20% over last year. The increase was driven by strong demand for on-highway heavy and medium-duty truck engines in North America and global mining markets and improved Chrysler shipments. This was offset by weaker demand for on-highway engines in Brazil following the emission change and lower demand for excavator engines in China. Compared to the prior quarter, sales were down 7%. Sequentially, we experienced stronger demand for our on-highway engines in North America, which was offset by softer demand for construction engines in China and weaker demand in Brazil. Segment EBIT was a record $381 million or 13.3% of sales, up from 12.1% last year as a result of stronger volumes, improved operating leverage, better pricing in off-highway markets and lower product coverage costs. This was partially offset by an increase in research and development spending and lower contribution from our joint ventures in China. Compared to the fourth quarter and despite the lower volumes and higher product coverage costs, EBIT margins improved from 12% to 13.3% as a result of ongoing productivity improvements, lower material costs and improved pricing. For the full year, we continue to forecast that revenue for the Engine segment will be up 10%, driven by improved North American on-highway demand and strong mining markets, offsetting weakness in the China construction, Brazilian truck and North American oil and gas markets. EBIT projections for the full year remain unchanged at 12% to 13% of sales. In the Components segment, first quarter revenue was a record $1.1 billion, up 19% from last year and up slightly from the prior quarter. Revenue growth in U.S. on-highway markets more than offset weakness in Europe and in China. The Cummins Emission Solutions revenues grew 48% from the prior year, and the Fuel System business grew 28% as a result of strong demand in the North American truck markets. The turbocharger business was flat compared to the prior year due to weaker on-highway markets in China. Sequentially, new demand for aftertreatment following the implementation of Euro 5 in Brazil, more than offset lower demand in Europe and the impact from the fourth quarter sale of the Light Duty Filtration business. Segment EBIT was a record $143 million or 13% of sales, up from 11.4% last year. Stronger volumes and improved operating performance in our plants were the key drivers behind the profitability improvement. Compared to last quarter, EBIT margins improved by almost 1% on relatively flat sales with operational improvements being a key contributor. We expect revenue growth of 12% this year as a result of strong demand from the on-highway markets in North America and the additional content required to meet the new Euro 5 emission standards in Brazil. EBIT margins are now expected to be in a range of 12% to 13% of sales. In the Power Generation segment, first quarter sales were $780 million, down 2% from the prior year and 15% lower sequentially. Year-over-year, we saw strong growth in North America and Brazil. However, these improvements were more than offset by a lower demand in Europe, the Middle East and Africa, and the impact of the weaker Indian rupee against the U.S. dollar. Sequentially, improvements in India and Brazil were more than offset by weaker demand in most other regions, which is typical for the first quarter. EBIT margins were 9.7% in the quarter, down from 11.2% last year. Compared to last year, improved pricing was more than offset by lower demand and additional investments being made in growth initiatives. EBIT margins were slightly higher than those reported in the fourth quarter despite a 15% drop in revenue as a result of operational improvements, improved pricing and lower material costs. For 2012, we expect the Power Gen segment to grow between 5% and 10% as a result of improved demand in India and in Latin America. Though North America demand was strong in the first quarter compared to a year ago, we are seeing a few signs of weakness in recent order intake, which we will continue to monitor. EBIT margins are expected to improve as we go through the year and are projected to be in a range of 10.5% to 11.5% of sales for the full year. And for the Distribution segment, first quarter revenues were $775 million, up 21% compared to the prior year. This increase was driven by strong demand from mining and Power Generation markets in the Asia-Pacific region and construction equipment demand in North America. Sequentially, revenue decreased 7%, driven by lower demand for industrial engines in Europe as a result of the pre-buy ahead of the Tier 4 emission change last quarter, along with weaker demand in North American oil and gas markets. EBIT margins for the quarter were 12.1%, down from 13.9% a year ago, due to the impact of currency and increased spending to build out our Distribution network, particularly in Africa. Compared to last quarter, we did see the operational improvements we expected, and EBIT margins improved by 170 basis points. For 2012, we continue to forecast 20% growth over the prior year with approximately 7% of this growth coming from acquisitions, and we expect EBIT margins to be in a range of 12.5% to 13.5% of sales. As Tom mentioned, despite some movements in the different markets, we continue to project total Cummins revenues to be up 10% in 2012. EBIT margins for the company will be in a range of 14.5% to 15% of sales compared to the 14.2% we recorded in 2011. And as we discussed in the prior quarter's call, we expect material cost to be flat compared to last year with costs slightly higher in the second half of the year, and we expect pricing to add 50 to 100 basis points of margin for the full year. The only changes in our EBIT forecast compared to 3 months ago are for warranty cost to be 3.4% of sales, which is slightly better than before, but this will be offset by lower joint venture income, which we are now expecting to be up 5% over the prior year. We are currently projecting a tax rate now to be around 27% in 2012 excluding any discrete items. Finally, with regard to cash flow, we invested $126 million in capital expenditure projects with most of this targeted on new products development and investing in capacity ahead of demand. As we discussed in our last call, we expect to invest between $800 million and $850 million for the full year. The balance sheet remains strong and our pension plans are very well funded. So despite the challenging conditions in some geographies and end markets, we are off to a very good start in 2012. And as you can see from the guidance, we are forecasting another record year while at the same time, making the investments necessary for future profitable growth. Now let me turn it back over to Mark.

Thanks, Pat. [Operator Instructions] I will, of course, be available right after the call for any follow-ups. Sienna, we are now ready for our first question.

[Operator Instructions] The first question comes from the line of Jerry Revich, Goldman Sachs.

Tom, in the outlook for the Power Gen business, can you say more about which regions are driving the pickup from first quarter levels? And can you comment on how bookings trended over the course of the quarter?

Yes. So as we talked about, in India, we are seeing stronger demand now, which is good. It's a big market for Cummins. China is still doing fine. It won't be as high as it was in the second, third quarter last year, but it's still going to be doing well. As we mentioned, we expect some pick up in the Middle East versus a pretty weak quarter. Brazil and Latin America continue to be doing fine, and we see good business there. The North America point we were making is we had -- North America was coming back, and this is sort of the second time we've seen this where North American orders picked up, and then they dropped off a little bit as the economy kind of flagged a little bit. They picked up again, as we talked about in some of our previous calls. And then we have just seen, in recent weeks, it's really just been weeks, some softening in the order book. We just don't really know what it means. We're not sure how much softening we're going to see in North America. But we've heard that pretty consistently from other folks as well. So we're just keeping our eyes on that one.

And on the point on Africa and Middle East, can you just say more about what's driving the timing of soft 1Q and pick up in coming quarters?

We're not entirely clear, to be honest. Right? What we know in Africa is that we've got a very aggressive plan to establish distribution and build it out to grow share in markets in Africa, and we didn't meet our targets for the quarter. We know that much. All the reasons we meet -- met, that there were some market issues. In Nigeria, in particular, there was quite a bit of problem, political violence and things in Nigeria, which slowed everybody's business down. Some places we also just didn't execute as well as we'd like. So that's part of it. In the Middle East, we just saw a little bit of a dip. We don't see any economic reason why that should continue. So our view is it's going to pick up. So both of those, they're not huge numbers in the grand scheme of things. They just were disappointing relative to what we expected.

That is if you look into the second quarter, we see some significant step up in the order book across the world, but exactly what Tom spoke about in North America. So second quarter will be much more in line with what I think we were projecting for the full year [indiscernible].

And we do have order book already for a lot of that. So it's not like we're guessing that. We do know that second quarter will be better. The North American piece is the one where we're still -- we're just watching closely to see what happens.

That's helpful context. And on the new product side, a number of significant new product announcements this quarter. I'm wondering if you can touch on what kind of sales contribution you expect from these products in aggregate, and can you give us an update on China engine regulations timing? That's it for me.

Okay, Jerry. So the new products announcement that we've had out, we talked about our -- the QSF industrial engine that's going to be more 2014, 2015. We just announced that at the intramatual [ph]. And then we've also talked about the dual-fuel option for our -- starting with our 50-liter engine for oil and gas applications and high horsepower. So again, those are going to be building over time. They're not going to have a huge impact this year, but just some example of many of the things we're working on new product growth.

And we've really got several waves [ph], as you know, Jerry, in new products, if I can comment on the China regs in that light. So we've got a whole set of products that we're introducing related to Tier 4 product. We've got products related to emissions releases in other countries as in China, for example, the new NS4 regulator are expected to be July 2013. And again we've [indiscernible] others because of agencies who are battling over dates both jointly announced [indiscernible]. So there's a whole bunch of products [indiscernible] and other similar down the road and then as markets moved out, we're introducing product [indiscernible] highway. We talked about new [indiscernible] products, et cetera. So, we do have a lot more out, and I think what we're expecting is over the growth period, the period to reach our growth target, new products will make a substantial [indiscernible] sales. But they're kind of coming out [indiscernible] out a year or 2 ago or the ones that are going to impact 2013 [indiscernible] plus the ones we're announcing now.

Your next question [indiscernible] Andrew Kaplowitz.

Tom, could you talk [indiscernible] heavy truck market. Obviously, some OEMs have talked about a slightly weaker market. You guys, the market looked very strong. Your market share is very high. So maybe you could talk about the visibility into that market that you see and recognizing that you've been sort of butting [ph] up against capacity anyway in that market.

Andy, I'm going to ask Rich to start with that one.

Andy, this is Rich Freeland. A couple of things. A couple of moving pieces here, but the fundamentals, I think, as we're all aware of haven't changed and we think remained very strong, so bullish. But what we have seen is the retail order aboard softening. So the retail sales -- so it was very high in Q4 and then has weakened here in Q1. And as we talk to people, and it appears it may have been a little overheated in Q4 as folks were concerned about delivery issues and lead time, and we're seeing some balancing. So we didn't overreact to the Q4 and didn't take our market projections up. And likewise, we're not over reacting to being a little lower than what the rate is right now. And so -- and we can look forward. Not out a long ways. As we look certainly into Q2, that tends to be playing out for us pretty well that where we're at with the 2.78. Just one other thing on North America. You may be aware of this, but we also -- we're benefiting some from export sales that we get. So production and NAFTA [ph] that shipped outside. So some of the offsets in the U.S., in fact, in Q2 have been covered by increased sales to Latin America, even into exports into Australia. So that looks -- so we think it's a pretty balanced view that we've got right now. Of course, we're monitoring close, and where we stand is pretty much in line with where our customers are and the feedback we're getting from them.

Okay, Rich. That's very helpful. Tom, maybe if I could ask you about margins in the sense that you've got a lot of company initiatives around improving margins this year that you've kind of alluded to. You've talked in the past about supply chain initiative. Obviously, price cost looks pretty good. There's been a lot of focus on the weather in the first quarter. So maybe you could talk about -- the margins were very strong in the quarter. How much of this was maybe outside things versus the company really doing well in keeping costs down?

Pat, why don't you start and I'll finish?

Thank you. Yes, I'll be delighted to start. I was -- to me, the story of the quarter was the margin performance. And not just the incrementals that we talked about year-over-year, but if you look at what happened fourth quarter, the first quarter, our sales always drop off in Q1. But all 4 businesses just did a terrific job at managing costs, continuing to improve their productivity in the manufacturing plants. And we increased our gross margin and our EBIT margin in the first quarter. So I was thrilled with the performance of all 4 segments. It's still early days I think with regards to seeing real tangible benefits from the supply chain initiative. We are seeing some. I think in the last call we gave guidance of 0.2 improvement for the year, and we're pretty confident that we're going to see that. But most of the improvements that we see in the first quarter is down to what the manufacturing plants are doing in converting demand through their facilities and doing it in a very efficient manner.

I guess I would just like to add, I just like to highlight, even the 2 businesses that didn't see quite as strong of sales results, the Distribution business and Power Gen business, both also managed cost quite well. And the Power Gen business, as you know, we had better margins on lower sales as a comparison point, which is -- that's pretty a good performance. That's what we're looking for. And both of those business leaders and leadership teams are working hard on making sure that they're balancing their cost structure with what they're seeing. And I went through the markets and it's a mixed bag. There's a lot of volatility in our markets today. And what I think the businesses are doing well is they're capturing the opportunities that are there and they're executing and managing costs across the world, while still investing in growth. I just think that's a hard group of balls to keep in the air. And so I don't think it was a one-off. I don't think it had anything to do with the weather or anything else. I think pretty much folks have been doing what they need to do to keep margins growing while still investing for the future.

The next question comes from the line of Jamie Cook, Credit Suisse. Jamie L. Cook - Crédit Suisse AG, Research Division: First question, I guess, Tom, not too surprising you took down your forecast I guess in China and truck on Brazil. Within China specifically, can you talk about what gives you confidence that things should improve in the back of the year, and how we should think about your inventory levels in the channel? And also it -- also your customers' inventory levels, I guess, would be my first question. And then my second question when you think about your markets, your targets for North America, I think this year you said it will go back down -- on truck will go back down to 40%. What are you assuming in the market relative to your competition for your market share to go back down? Do you see a successful engine launch in mid-year or just how we should think about how you're getting to that 40% number.

Let me start first with the excavator stuff. I'll then let Rich fill on some of the others. There's no question that we were negatively surprised by the excavator. That was probably another one where you warned me and I didn't listen. I'm just guessing. But we had -- there was definitely more inventory in the customer channel than we had expected, especially with our domestic customers. We are pretty clear on what our international customers had, our domestic customers. I don't think we got very clean messages from them about what was happening in the market. So we were negatively surprised. The end markets have also not done as well as we're hoping. But I think we understand the customer inventory much better now. And there is still some there, for sure, that definitely dampened demand in the first quarter, and I think will have effect on the second quarter as well. But our confidence is primarily based on economic recovery. So again, I think it sort of depends on your view about what happens in China with regard to economic recovery, but our view is that inflation has curbed in China, that the balance that the government's trying to strike between growth and controlling inflation has shifted, that there is a consensus that it's soft landing. You've got a new government coming in place, and that's basically what's driving our view about some sort of economic turnaround, which we think will have an impact on the construction market and the truck market. And so that's really driving our confidence. And again, with regard to inventory, just looking at the numbers that we see, we don't -- first of all, we're not keeping any, and we're not -- we don't have any inventory issues. But just looking at our customers, our view is that it will get worked down over these next several quarters, which means if indeed economic activity picks up, we will begin to see improved production levels in the fourth quarter. That's basically driving our forecast. Rich, you want to talk about truck?

Yes. On truck, kind of unlike excavator where we really don't have as good a data on what inventory looks like, we're developing pretty good information on this. I just returned from there 2 weeks ago and looked at all the data especially around inventory, both at our OEs and dealer. And that's been cleaned out of the system now. So it's back where it should be. So the increase we've got in Q4, which is not a significant increase, but the increase we've got built in is tied more, again, to macroeconomic. And there is a growing consensus on this, as I circled around and talked, that we'll see that recovery in Q2. And so I think unlike excavator we've got it a little bit more into the back end of the second half of the year. I'd look on the truck side kind of mid-year that we'll start to see that recovery. Jamie L. Cook - Crédit Suisse AG, Research Division: And then -- sorry, my last question just on your market share assumptions for North America to get to the 40% for the year?

Yes. We had a very strong Q1 and ended up at right around 45%. I think our guidance has been 35% to 40%, and so we're now projecting to the top end of 40%. Our market share is tied really to -- in the short term, to what the production rate is at our customers. So we think going forward, our market share with each of the OEs will remain very close to what it is right now. And what we will see is we'll see some short-term adjustments as our customers either increase or reduce their build rates. And so you've seen with some of the recent announcements on reduced build rates, that will have an impact on our market share in the short term. And that's why we're projecting 40% for the year, Jamie.

And the next question will come from the line of Ann Duignan, JPMorgan. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Could you talk a little bit about your 15-liter natural gas engine spark ignition? Your competitors have been pretty vocal out there in the marketplace talking about the fact that 15-liter spark ignition simply won't work or would work technically, but you give up a lot of power and fuel efficiency. Could you just talk a little bit about your strategy of using spark ignition versus high-pressure direct injection, et cetera?

Yes. Well, so we have, as you know, quite a bit of experience with spark ignited now in on-highway markets. Pretty much we're the only one with an on-highway presence today in spark-ignited engines or natural gas engines period, and we've been using that technology for some time. Our view, of course, is that the demand for spark-ignited natural gas engines is driven by the lower, much lower price of natural gas in the market today. It's still -- from a fuel point of view, there's not as much infrastructure. There's other adaptations that can be made for the truck to store the fuel that are difficult and still issues to be worked out. But the price of natural gas has come down low enough where there's a whole bunch of customers interested in trying natural gas to drive various kinds of fleets. They're already -- the ones that come back home every night are already using it. But some of the fleets that were doing regional hauls and things like that are interested in trying it. And of course, we have in our Cummins Westport joint venture, already -- we're already launching a 12-liter engine, which has got enormous interest. And the idea of the 15-liter engine is, as people continue to extend out the range with which they want to take natural gas engines, that's a natural extension to the 15 liter. So that's our logic. We have, as I mentioned in my words, people are -- customers are already telling us they're really, really interested in the product. So again, we'll see when we get there. But our view is if natural gas prices stay anywhere near where they are and infrastructure continues to build out, there will be significant interest in that technology. And we think it's the best match between simplicity, affordability, efficiency and performance for the customers. And all those things, of course, matter to our customers. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Indeed. And secondly, my follow-up is back to the Power Gen. You talked a bit about orders dropping off slightly in the last few weeks. Can you talk about which regions that happened in or which applications? Is it industrial, is it oil and gas related? Can you just give a little bit more color on what where specifically you're seeing the weakness in orders?

Yes. The weakness is in North America and it tends to be on the large projects orders. So what we've seen is global softening in data centers and healthcare in particular. But outside North America, I don't think we're seeing anything in terms of softness, actually it's strengthening. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Okay. So you're still seeing strength in oil and gas. Is that correct or have you seen some weakness in that segment also?

Are you talking about Power Gen or are you talking about Engine? Ann P. Duignan - JP Morgan Chase & Co, Research Division: Power Gen, yes.

Power Gen, no difference in oil and gas. Again, the comments we've made about oil and gas are primarily related to the frac-ing markets. So we have -- our growth in oil and gas from an Engine point of view has been across several, but the biggest growth in the recent times has been the frac-ing market, which, as you know, has slowed down quite a bit as natural gas prices have gone down. So that's the part that's sort of softening. All -- the rest of the Power Gen -- oil and gas markets including the ones that need Power Generation equipment are not particularly slowing. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Okay. But frac-ing, you have seen some slowing? I just want to make sure that I don't misinterpret.

Yes. Right. And the frac-ing, just in terms of how we count things, because again, everyone has to figure that out, we put frac-ing -- the engines that we use for frac-ing rigs are in the oil and gas segment of our Engine business. And that's the part that we mentioned in our remarks looks like it's slowing pretty significantly as a result of natural gas prices falling. Frac-ing units have been moved to other uses, which again they're still running. We're still servicing them and we're still doing a lot of aftermarket business there, but they're not buying new engines for more frac-ing.

The next question comes on the line of Timothy Denoyer, Wolfe Trahan. Timothy J. Denoyer - Wolfe Trahan & Co.: Can I ask a couple of questions on SCR in terms of Brazil this year and China next year? And can you give us any sense of your expectations for market share in those 2 markets?

I -- boy, market share in Brazil. I'm not sure I could give you market share in Brazil, Tim. Let me just comment a few pieces on SCR in Brazil, and then I'll let Mark see if he can get -- scramble to get some numbers for you. But in Brazil, our SCR systems are primarily being offered to a couple of our customers that we've been partnering with, MAN and Ford. We are trying to pursue other customers. But we're -- on a launch basis, we're primarily with them, and that includes the engines that we make but also some engines that they make we're pursuing SCR systems on. And so that's why we're seeing even -- we're seeing growth even as, for example, on MAN, we had -- they switched to one of their own engines but we're still able to sell them aftertreatment systems. So in that sense, our business, it looks like it's going to grow quite rapidly in Brazil. As I mentioned, I was just down there. I visited our aftermarket division. I also visited some customers, and the ramp up has gone very well. The transition -- it was a big deal for Brazil to go to Euro 5 because they skipped one level. So a significant increase in the complexity of their engines and aftertreatment systems. And the ramp up went very, very well, and our customers were really pleased with our performance. So I'm very -- really excited about that. In China, there's still a fair bit of room to cover. Since we're not really launching until the middle of 2013, we know that we'll be on the Cummins engines and the JV engines that we're making. We're still working on markets with other customers. We have some very good -- some very likely customers, but we really aren't in a place to announce anything with them yet, both from a confidentiality point and just a readiness point of view.

What I would say, Tim, is first quarter was fairly light on Euro 5 engines, but our aftertreatment revenues were approximately $20 million this quarter in Brazil, so that's all new. Previously we'd said $100 million to $130 million of revenue this year will be towards the lower end of that given the change in the market guidance. But that's going well. And we have -- we've got significant known customer wins not just in China, Russia. We're working with some in India for future products, and we've got some new customers in Japan. So clearly, working on all other new things in the aftertreatment business and to the parts and Components. And that's why we're still confident in the strong growth rates and Components going forward.

Right. And Tim, we just don't -- I mean, again, it's just not appropriate to announce new customers just because they haven't announced. When they announce, we can announce. Timothy J. Denoyer - Wolfe Trahan & Co.: Sure. Understood. And then just a quick follow-up in terms of the India truck market. You said there was a little bit of slowness there recently, it seems like with interest rate cuts and starting there. What's going on there?

Yes. Tim, so the government's kind of reimposed a 2% excise tax on trucks, so that -- we're seeing some near-term impacts of that. I think India we're clearly not back to full robust growth yet. So I think it's a little movement around the orders. But overall, we haven't changed our full year expectation for the market.

In India, Tim, a couple of things going on. First, unlike in China, what I mentioned, inflation is still high in India. So there's still -- while they've tried to -- they've had one rate decrease, it was a one small decrease against 11 or 12 increases previously. So they're still in this the tough balance between inflation and growth. They've also seen lower tax revenues. So they're doing a whole bunch of things to raise new taxes, all of which has kind of got the economy in -- it's not that it's not growing it's just not growing as robustly as it was previously. And there's still quite a bit of to and fro and to figure out how they're going to get back there. Again, we have confidence that they will, but I think the next couple of quarters are not going to be as strong as their previous kind of high. It'll take them a little bit longer, I think to, get back to where they're seeing robust growth. Our Power Generation business is still doing really well, and part of that is some improvement as you've mentioned in some capital purchases. But largely, what we're seeing is power shortfalls in parts of the country. And that's been the experience with our Power Generation business for many years is that we -- it's some combination of nonresidential construction spending and just power issues that drive the Power Generation business. And in this case, it's largely driven by the fact that they just have power shortages.

The next question comes from the line of Eli Lustgarten, Longbow Securities.

I mean, just a clarification. So you've heard several times of lower product coverage and -- in the first quarter and lower material costs. Can you give us a magnitude -- we've got $0.07 break from a lower tax rate that was unexpected and we'll get that for the year. Can we get a little bit of some measure of what that is? I mean, I'm sure it's not that significant, but I just thought it...

Well, on the product coverage, it's down about 0.6 from the first quarter of last year. So again, I made some comments that went around, but really pleased with the quality of the new products and we're at 15-year lows now with regards to product coverage. So year-over-year, that was a nice boost for us. Material costs were not as significant in the first quarter. Year-over-year, we were somewhere, what, 0.2, 0.3 of a point, Mark?

Yes.

Improvements. So that gives you a sense of the 2. The former one, it was much more of a tailwind than material cost year-over-year.

And one other comment, and I just want to apologize in advance, but Emerson reported a lousy quarter today, and they talked about China not getting better for an extended period of time. And in your forecast, you've had a rolling forecast for improvement in China as -- you had New Year, mid-year and now it's probably a little later. Can you give us some idea what the sensitivity would be, and I assume it's probably not more than nickels and dimes. And I just wanted to ask, if we don't get much improvement in China over Europe for the rest of the year, I just sort of get some idea that market is so sensitive. But am I right in assuming that it's sort of maybe nickel or dime or something like that difference between if you do or don't get the improvement for the rest of the year?

Eli, a couple of things. First, in Europe, we don't have any forecast for a significant improvement nor have we ever. So I think that we have not changed anything there. The only thing that happened, it was in actuals. We saw an improvement in Europe and that was just because we had a very low comparison a year ago. In China though, I would agree with your point to some degree, especially in the excavator market, where we underestimated I think the inventory that was in our customers' hands. That has, again, now dampened our views of demand. And to be honest, we should have had a better view of that than we did. But in terms of our view of China, we've sort of felt like a second half -- in terms of economic recovery, second half is when we would see it, and we still believe that. Again, timing and China recovery, to your point is -- we're not -- we can't foresee the future, but that's our view based on everything we look, and we watch it a lot. Rich was just there talking with customers and other leaders. I was -- I'll be there in June, and I was there late last year. So we're doing everything we can do to try to make our best view. And what you've seen is presented as our best view of what we think is going to happen in China. If things don't recover as quickly, we'll deal with it. Again, it's hard to give a forecasted estimate because it depends on how much and at what markets and all that kind of thing. And so I can't give you an estimate, but we'll deal with it and we'll adjust expectations as necessary. But right now, what you have is our best view.

Next question comes from the line of Adam Uhlman, Cleveland Research.

First just a quick clarification. I know it's small, but can you remind us how big the oil and gas business is in the Engine segment?

Yes. So we -- it's about a $300 million business that we talked about growing to $1 billion over the next 4 to 5 years. And so -- and we've said that would be down 19%. So there's a piece of it. U.S. will be down more than that. The parts business remains strong. We're still adding -- we're adding frac-ing rigs still in China, in Argentina. So the net of that is the 19%.

Okay. Got it. And then, Pat, could you talk about the cash flow for the quarter and your expectations for the remainder of the year? And if you have any kind of working capital targets that you're trying to steer towards?

Yes. So cash flow in the first quarter is always our weakest point of the year. We've seen that last year. You see that again this year. I expect cash to be a positive inflow now for the next 3 quarters. With regards to working capital, again, I'm really pleased with the performance of the businesses here. Although working capital to dollars went up by around $200 million in the first quarter, when you look at it as a percent of sales, Adam, and compare it to the same point last year, we're 2 percentage points better. So working capital probably got a little bit more as we go through the rest of the year and the business continues to grow. But overall, cash flow will be positive. Net cash flow will be positive for the full year. And I think we talked in the last call that our target for 2012 from cash from operations is just over $2 billion again. So very strong year with regards to cash.

The next question comes from the line of Steve Volkmann, Jefferies & Company. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Most of these have been answered, I guess, but I'm curious what you're seeing in the mining markets now, where I guess you've been focused in on some growth, but we're hearing some signs of weaker production levels in various parts of the world. Can you just update us there?

Yes. Steve, this is Mark, I'll start and Rich can chip in. But I mean demands remain strong, both in our customers in the U.S. and across the board. Like everybody else, we're seeing negative headlines on the U.S. coal, but that doesn't represent a significant part of our business. So right now, we continue to experience robust demand across the globe.

Yes. This is one where we have pretty long lead times and pretty -- so we look at the order board and just back from our biggest customer. And again, we're looking at double digits, kind of the 10%, and that order board's pretty full, and so it's really sold out almost through the end of the year right now on the mining side. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: And you haven't seen anybody asking to push out orders or anything?

We have not. We have not.

The next question comes from the line of Andy Casey, Wells Fargo.

Just a quick question. As Steve indicated, a lot have been answered already. In the North American exposure, your comments on Power Gen and the weakness that we've been seeing in truck orders, have you seen any sort of similar trends in your other exposure for that region?

No. If anything, our demand from client has actually increased since the last -- our last guidance, Andy. So that's strengthened, generally. Mining's actually gone up a touch. I mean, not significant. So generally no, we have not.

Next question comes from the line of Timothy Thein, Citigroup.

Just on the Components margin. As we move through the year, I'm curious as to the interplay within the various segments and how that -- how you expect that will impact the margin given that Emission Solutions drove the bulk of the growth along with fuel systems. How do you see the interplay as we move through the year? Presumably if, given your expectations for recovery in the truck market in China helps to drive turbos, but just curious how that impacts you from a mix perspective.

Yes. Tim, we don't give specific guidance for profitability within the segment. But what I will say is that we expect it to remain very solid all through the remainder of the year. And so we had fantastic first quarter. That caused us to increase guidance for the full year. We will incur more investment and spending research and development projects as we go through the year. But putting that aside, we are still [indiscernible] and all 4 businesses [indiscernible] are performing exceptionally well [indiscernible].

Okay. And then, Rich, on the on-highway market in China, does the -- I recognize this is a longer-term move, but just curious in terms of the capacity ramp up or start up at DCEC. Is that at all impacted [indiscernible] in terms of your term conditions to the truck [indiscernible]?

We'll follow through with that. We've -- quite frankly, over the last 1.5 years, we've been busting at the seams with what we had and working 7 days a week, almost 24 hours a day. So with the adding of about 50,000 capacity, we'll follow through with that, and that'll get -- be in play later this year, be available later this year.

Our view is that addition of capacity actually has the opportunity to not only improve capacity, but also improve productivity. Because we're just too stretched there. Working 3 shifts and that many days is not the right way to do it. So adding a little capacity so we can operate closer to where we want to even at current demand will be better in terms of productivity and quality.

Okay. I think time's up. Thank you very much, and I'll be available for your call. Thank you.

Ladies and gentlemen, this concludes today's presentation. Thank you for your participation. You may now disconnect, and have a great day.