Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Cummins Incorporated Earnings Conference Call. My name is Jasmine, 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 conference over to your host for today, Mr. Mark Smith, Executive Director, Investor Relations. Please proceed.

Thank you, Jasmine. Good morning, everyone, and welcome to our teleconference today to discuss Cummins' results for the third quarter of 2011. Participating with me today are our 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. Before we start, please note that some of the information 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 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 in 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'll 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 are available on our website at www.cummins.com under the heading of Investor and Media. With that out of the way, we'll begin with our President and Chief Operating Officer, Tom Linebarger.

Good morning. I will start this morning by sharing some thoughts on our performance in the third quarter and our outlook for the remainder of the year. I will also update you on our long-term profitable growth plan. Pat will then provide greater detail in the quarter and our updated 2011 guidance. We delivered strong results in the third quarter. We continue to generate good revenue growth and gross margins with incremental gross margins of 30% year-over-year. All 4 businesses delivered double-digit operating margins. Sales for the third quarter of $4.6 billion were 36% higher in the same period in 2010. All 4 business segments reported higher sales, led in percent terms by the Engine and Distribution segments, which increased sales by 43% and 37%, respectively. The Components business also delivered very strong growth of 32% year-over-year. We reported EBIT for the quarter of $640 million, or 13.8% of sales, in the third quarter. This represents an EBIT of 43% year-over-year. Importantly, we continue to grow profits faster than sales. I would now like to make some comments about trends in our markets, starting with North America and then moving on to our international markets. Sales in North America increased 49% compared to the third quarter of 2010, with the Engine and Components businesses benefiting from the continued recovery in on-highway markets. North American shipments of heavy-duty truck engines more than tripled, and engines from medium-duty trucks increased by 92% compared to a year ago. We have now shipped more than 163,000 heavy- and medium-duty engines with our SCR technology in North America. Our engines continue to perform extremely well in terms of fuel economy and reliability, delivering benefits for our customers and resulting in lower warranty costs. For the North American heavy-duty truck market, we are still projecting a…

Thank you, Tom, and good morning, everyone. Third quarter revenues were $4.6 billion, an increase of 36% from a year ago and slightly below the record levels reported in the second quarter. Compared to the third quarter of 2010, the growth was driven by stronger demand for our products in the global mining, construction and oil & gas markets, as well as in the on-highway markets in North America and in Brazil. Sequentially, we continue to see strong demand from on-highway markets in North America and Brazil. However, these increases were offset by lower construction demand in China and lower power generation demand in India and in Latin America. Gross margin for the quarter was 25.7% of sales. This level of gross margin represents strong improvement over the prior year due to better operating leverage from stronger volumes, improved price realization and lower warranty expense, which dropped to 2.1% of sales in the quarter. Also, keep in mind that the gross margin in the third quarter of 2010 benefited by approximately 1% from a revenue-based tax credit in Brazil. Excluding last year's onetime benefit, incremental gross margins were just over 30%. Compared to the second quarter, gross margins as a percent of sales were largely unchanged, with benefits from the lower warranty expense being offset by higher commodity costs and increased operational costs, including premium freight as we overcame some supply chain issues and ensured all our customer [indiscernible] requirements were met. Selling, admin and research and development costs were up 37% from the prior year and 5% sequentially. Research and development costs were almost 60% higher than a year ago as we develop new products and continue to build on our technology leadership to ensure long-term, profitable growth. Projects are underway to expand the product line, including both higher-…

Thank you, Pat and, good morning, everyone. As most of you are aware, this is the last quarterly teleconference before my retirement at the end of the year. I will step down as Chairman and CEO of Cummins on December 31, leaving the company in the very capable hands of Tom Linebarger and his outstanding team. This leadership transition, only the fifth in the company's 94-year history, was announced in early June and has been proceeding seamlessly since then. Succession planning and leadership development are a key part of the CEO's responsibility. Years ago, the board and I recognized in Tom the qualities needed to lead this company into the future. He is smart and energetic, he has the business know-how needed to help Cummins succeed in this today's highly competitive global marketplace. His many and varied experiences at Cummins have contributed to the breadth of his leadership skills. He lives the company's values and is a man of character and integrity. Tom has played an integral role in helping shape Cummins into the company it is today. He was instrumental in creating our key strategies in the early part of last decade. He helped the company through the downturn at the start of 2000 as the CFO and led the turnaround of the Power Generation business during that same time frame. He has significant international experience. At the beginning of the recent recession, Tom, Pat and the team took decisive steps in the face of rapidly declining markets. His quick actions helped us remain profitable during the global decline and led to a record year in 2010. I am big fan not only of Tom but of his leadership group. Tom has built a talented, committed team that is the best I have seen in my 40 years with…

Okay, I think we're ready for Q&A now.

[Operator Instructions] And your first question comes from the line of Mr. Adam Uhlman with Cleveland Research.

I guess first to start off here, can we dig into the joint venture income for the quarter and the outlook for the year, and maybe provide some details on what you saw at DCEC and how that's expected to trend going into the fourth quarter?

Yes, so joint venture income came in pretty much exactly what we expect it to be for the third quarter. On the second quarter call, you heard Tom and Mark talk about the expectation for a slowdown in the China truck market in the third quarter, and that will impact the DCEC joint venture. And it played out almost exactly the way they had talked about that. We ended up building around 46,000 engines at DCEC in the quarter. That was down from over 60,000 in the first and second quarter. We are expecting to see some improvement as we go into the fourth quarter, but it will not get back up to the 60,000 units per quarter this year. So we'll see some improvement in Q4 but not back to levels that we enjoyed in the first half of the year. However, now, joint venture income is right on guidance that we gave back in July, and it will not change at this time around.

Okay. Got it. Great. And then can you talk about the order booking trends in the Power Gen business? And what -- maybe some more specifics on what you're seeing over in China and India? China sounds like a little bit better than what you were talking about before.

This is Tom. Yes, in China, we had some strength in the last couple of quarters because the power demand exceeded supply. And so the country was short on power, there were -- factories were being asked to get off the power grid for days or parts of days. And so what we saw was an increase in orders, especially for large generator sets, which serve as factory backup in that of case. And indeed, we -- that helped our demand in Q2 and Q3. And we -- everyone had expected, as the summer season comes to an end and demand softens and power grid catches up, that Q4 would be not as strong. And indeed, that's what we expect. The difference I made in my remarks is that the easing has taken more time than expected, so there's more people who are still ordering gensets. And we don't have a clear view as to exactly why what is. It seems as if people are still concerned about power shortages. So we expect easing. It's just that the market is staying a little bit up from what we expected. In India, on the other hand, the continued struggle the government has had with inflation control has meant that construction markets have really taken a hit. And therefore, power generation demand is indeed even softer than we anticipated. We expected a hit when we talked in the second quarter and the Analyst Day. But in fact, that hit has been even more as the construction markets have been hit by the government's tight monetary policy. Right now, the government is still trying to get inflation under control. Weakening commodity prices would serve them well, and I've talked about that in the Analyst Day. If we get some softening in commodity prices, that will help India, and that will, of course, help them and let them loosen some of their monetary policy and improve construction markets there.

Your next question comes from the line of Andrew Kaplowitz with Barclays Capital.

This is Vlad Bystricky on for Andy. Can you just talk about strong demand in both Brazil on-highway and industrial engines ahead of the Tier 4 change coming next year? Do you -- are you anticipating at this point a large drop-off in those businesses next year?

Well, of course, we're not right now giving specific guidance. But I think certainly for Brazil, every on-highway emissions change, we do see a period of correction after the emissions change. What we've said on the last call is we felt we were going to see about -- a pre-buy of about 10,000 units this year. That's actually moderated in the second half, and we'll see maybe a pre-buy of about 5,000 units. So I think there'll be some easing earlier in the year. Of course, we're getting more content with the emissions change, which we benefit from with our emissions solutions business and the introduction of our SCR as well. And then the Tier 4, that's particularly on the small end of -- small end equipment, below 174 horsepower. We've seen a little bit there in Europe and a little bit in the U.S. That's not a huge revenue driver for us. I think we're thinking about 6,000 units of pre-buy, but pretty low average selling price relevant compared to our average business.

And then one just quick follow-up on the emerging markets, in particular China and India. Can you talk just a little bit about the cadence through the quarter and whether those markets continue to weaken or whether you're starting to see signs of stabilization, particularly on trucks in China and the India power demand?

Yes, let me start and Tom can jump in. I think in the truck market, as I said, and as answer in the question from Adam, we are seeing some small improvement in demand as we go into the fourth quarter. Not terribly significant yet, but it is showing better signs. Construction is deteriorating, so, well, the truck quarter was lower than what we had anticipated when we gave second quarter guidance. And the fourth quarter is turning out to be a softer quarter again than what third quarter tended to be. Power Gen, although it did come down -- is coming down in the fourth quarter, it's probably going to end up better than what we anticipated. So the other 3 big markets, Tom, do you want more?

Well, I would just add Tim and I and Pat were all in China last week, and we got to see a lot of this stuff firsthand and talked to a number of OEMs. And definitely, while things have softened some in the second half, optimism is still very high for next year. And we've given you guys a lot of detail on how things have come off a little bit, $100 million or so from what we thought in the second quarter. But what we see still is very, very strong markets. I mean, excavator market, despite really, really bad year by -- in relative terms, will still be up 10% year-over-year. And most of the people we talked to expected them to be up next year again as a result of this big move the Chinese Government is making to add affordable housing units. Similarly, with the truck market, there was this pretty significant inventory correction, and most people are projecting the truck market to again increase next year. So again, we're very optimistic about the market, and it's just a question of at what rate things return, at what rate does the government start to let off some of its tightening policies. So again, we really don't know the answer to that, but what we expect is that it's a relatively short period, and we'll start to see growth again.

And we've experienced rapid growth in demand for our products in China. The revenue this year, when you include our joint ventures, as Tom said, it's going to be around $3.7 billion. That's double what it was 2 years ago. So we are seeing this kind of near-term, short-term slowdown in some markets. But there's no question, well, China is the right place for us to be longer term.

And then we're -- our next steps is that we're -- we've just announced this LiuGong joint venture, which expands our presence in off-highway and will create growth in 2013. And we're still talking with other partners about expanding existing joint ventures into new areas for further growth. So we have quite a bit of growth left to go, even beyond the economic growth forecasts for China.

Your next question comes from the line of Stephen Volkmann with Jefferies & Company. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Tom, in your prepared comments, you talked about being more flexible and being able to respond if market conditions were kind of weaker. And I guess I wonder if we're at that point. I think you were quoted recently as talking about how the U.S. and Europe might already be in recession, and I just wonder if you guys are doing anything at Cummins to kind of batten down the hatches for a tougher environment going forward.

Yes, Steve, I appreciate you bringing up that article. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: No problem.

That -- as you guessed, I regretted that interview. I -- just for what it's worth, my view in that interview was exactly the same view I gave in the Analyst Day of we really just don't know where the markets are going. There's a fair bit of volatility, especially in Europe and the U.S., as to what's going to happen. And that's exactly where we remain today, and I feel like things haven't changed there. And we are, as a result of that, tightening some spending. So we have its -- we are reducing sort of discretionary spending areas to say, "Where we can cut back, we are." We're making sure that we're keeping all of our growth plans in place. We're not doing anything dramatic, but we are reducing discretionary spend wherever we can. We have reduced hiring rates, and we'll continue to do that for a while until we just understand kind of what the next steps for these markets are. We just -- we're kind of in that period of wondering how long the low-growth period goes and what happens in China and India with regard to them coming back to growth. So we're acting now, but it's not a huge change. It's just taking a look at every place we can cut back some -- pretty easily. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: So as we model the company, should I be thinking about SG&A down a little bit or CapEx down a little bit? Or is it just going to be more of a rounding kind of below the surface?

Well, I think, we don't want to get ahead of ourselves on guidance and I -- for next year. So let -- give us time to kind of put together the whole plan, and we'll give you a really good view of it. But what you should expect from us is that we'll continue to look at markets to say, "Where we think it's time to make significant moves, we will and we won't hesitate." Right now, we're kind of in that mode of saying, "Discretionary spending, we're going to slow down, hiring we're going to slow down, but we're going to keep driving on growth." So I guess what that tells you, we're still expecting to invest in our growth initiatives completely because we still think the most likely case is a slow-growth period for a period of time and then returning to growth. And so that's what we're basically planning on.

Let me remind you of, this is Tim, of the 10,000 or 20,000 -- 2008 and 2009. In the fourth quarter of 2008, in October, the sales fell off between 25% and 60%. Tom and the team were able to reduce spending and headcount as early as December, and we still earned 2.4% EBIT in that quarter and each quarter in '09 sequentially got better. We took a second round in January in Power Generation, acted at the end of the first quarter. So if we have some kind of issue, and I don't think it will be anywhere near what we saw in the '08 time frame, I think we've demonstrated that we can act in a very quick period of time when the spending is – subsides.

But I think to that point, Steve, we do not see this period as like that one yet. I mean, it doesn't mean it can't be, but we just don't see it that way. And we kind of see it the same way we laid out in the Analyst Day, which is that it looks like the most likely case of slow growth and that the inflation and monetary tightening that's going on in China and India will ease over some period of time and we'll see growth in both those economies. That's, we think, the most likely case is. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Great, that's helpful. And then just final on that one is, does it change your view of kind of capital allocation, uses of cash here? I'll leave it there.

No, it doesn't change at all, Steve.

Your next question comes from the line of Jamie Cook with Credit Suisse. Jamie L. Cook - Crédit Suisse AG, Research Division: I'll refrain from the Financial Times article. But I guess, I just wonder why -- I don't know, it seems to me like at some point why -- I guess I wonder why we didn't preannounce the quarter or the earnings, because it does sound like there was a change in tone from the Analyst Day versus the Financial Times article. So one, if you can address that. And then my second question is I'm just thinking about your longer-term targets that you gave at the Analyst Day. And I think to achieve your long-term targets, you had to sort of think about get to about a 20% incremental margin. And it sounds like we're going to be about that range in 2011 based on your guidance. So just trying to think longer term, just given where we are in the cycle, how you continue to put up that 20% margin, incremental margin, the puts and takes of how we get there.

Again, just going back to the same point, Jamie, my tone didn't change at all. What the guy told us to write about was what he wanted to write about. So my -- I gave him the same balanced view that I gave the analysts about me not knowing where things are going to going -- where things are going and the chance -- that there's a chance that we're already there and there's a chance that we're going to have slow growth, and there's a chance that it would snap back quickly and my most likely case was it was slow growth. And he printed what he printed. So I had no new information then about anything than I had when I talked to you guys. And by the way, I still don't have a better view of it even today. What we have a better view of, as we talked about, was what happened in the third quarter, that's it. The rest of the economic outlook. I don't have any better outlook than I had back in the Analyst Day. So -- and our view on incremental margins, as you know that's kind of the whole -- I mean, that's exactly what we're building our whole set of strategies and plans around, is: where can we leverage our partnerships, our distribution network, our technology leadership to drive growth that yields incremental margins in line with our plans? That's sort of the whole point of it. And what we're trying to do is find those places where the technology we bring to bear provides enough value to our partners that we can earn that kind of incremental margins. The second thing we're doing is we're just trying to make sure that we're always thinking about cost in everything we do. It's how we develop the technology, so how we partner to do it, how we do it ourselves, how we set up our manufacturing plants and drive them for productivity. So all those elements are how we're going to do it. And again, it's -- that's pretty much what we focus on every day. I don't know what else to say about it. Jamie L. Cook - Crédit Suisse AG, Research Division: But it doesn't sound like just -- and I know we're in the early stages. It doesn't sound like -- or maybe, it's a question that's better addressed to Pat: there's any big headwind, structural headwinds, we should think about in 2012 that would suggest that incremental margins would be below that level? As we -- I don't know what it could be but there -- you know what I mean? There's no big things out there that we should just be aware without you giving formal guidance for 2012?

So again, we're not giving formal guidance. You're absolutely right, Jamie, that there are no significant headwinds coming our way that we can see causing us problems in 2012.

Your next question comes from the line of Jerry Revich from Goldman Sachs.

Tom, can you talk about the extent to which you're underproducing demand in China construction and truck markets in the third and fourth quarter? I guess $100 million sequential decline in industrial engines sales next quarter despite the Tier 4 pre-buy suggests a pretty sharp cut.

Well, I think, firstly, Jerry, of course, the excavator market sell the largest market in China. We're importing those engines to the demand. So those, whilst it's very important, they're part of our broader manufacturing operations in our developed markets. So I think, generally, our volumes are quite good in our plants. I think in China, clearly the truck was down. It was in line with our expectations, and we expect some improvement in Q4. So I don't think -- that's not a major concern. We're not changing our capacity investments for the long term, as we've talked about. So not so significant.

And Jerry, just to that point, we were -- one of the places that we visited was DCEC, and they're -- they've been flat out, out of capacity for some time now. And we've -- as you know, we're adding some capacity in the fourth quarter here. And in fact, the building's up and the machines are going in, and we can really use it. So DCEC, which is not a significant contributor to the excavator market, as Mark said, that's not where we're producing most of the excavator engines. We're importing those. But from a truck point of view, we still foresee the need for more capacity at DCEC, and it's evident when you go there. It's not that they couldn't produce more in the third quarter. Obviously, they could because they produced in the second quarter. But they -- to get there, they were working 3 shifts. The place was running just too tight. And so what -- our view is that the incremental capacity we're adding is needed and will be used up very quickly.

Sure, now I appreciate that. Where I was going with the question is typically, your customers cut their inventories of engines during adjustment periods like this. So I'm just trying to understand whether shipments coming into their doors are well below truck or excavator shipments that are coming out in 3Q and 4Q.

Yes, I think, in the truck side, that things are balanced out a lot better than they were. So as you know, in China, we had a pretty strong finished goods inventory at dealers for a period, then the production of trucks backed off and then that drove back into the engine production. And I think at this point now, we're starting to see retail demand pick up, inventories are relatively level, truck production is relatively in line with retail sales and now engines are getting there, too. So on the truck side, at least, I think things are getting pretty balanced out after a couple of quarters of supply chain movements back and forth. On the excavator side, I just don't have as much insight into that. I don't know, Pat, if you have any. I just -- we just -- I don't have a good answer for your question, Jerry, so we'll to follow-up with you on that.

Appreciate it, Tom. And can you talk about when you expect China to implement national forest standards and touch on whether you've signed up any engine makers in China or Brazil to use your aftertreatment systems on the new Euro V and national forest standards, respectively?

Yes, on the -- addressing the first question, NS4 [ph], we don't -- there is not a date published yet for when they're going to do it. I mean, the only date that exists is the 1st of the year, which is the one -- 1st of 2012, which is the one that they originally set down. Most market participants do not expect them, at least, to be implemented and enforced on that date. Most people think it will be some time in the middle of the year, or the end of the year is the most likely case. And the degree to which it'll be phased in across regions of the country is all basically supposition at this point. There's lots of rumors and lots of people's opinions about it. What we're doing as Cummins is we're ready for all those outcomes. So we've got products ready to supply our customers that meet the existing standards, that will meet the new standards. And so we're ready to go on whatever happens. So we just don't know, though, exactly how it's going to be implemented. And we, of course, voiced our opinion with the regulators, whenever we can, about the importance of having a firmer introduction schedule and about sooner is better. But we'll see what it's going to be. On CES. Pat, any comments on CES implementation in Brazil? I don't have any on Brazil. In China, Euro -- the NS4 [ph] standard is when we would begin to produce aftertreatment devices. So we don't have any sales of aftertreatment devices yet, and we won't until Euro 4 starts. But on Brazil, I don't have a look in -- other than what we've always already said on the MAN, the new vehicles, all Cummins. We're not able to say a lot about it.

Yes, for non-Cummins engines, we don't have any comments on that, Jerry.

Your next question comes from the line of David Raso with ISI Group.

Obviously, the key to your stock as one's view on the emerging markets. I just wanted to get -- from your qualitative comments before, not trying to get a '12 guidance from you, but the industrial business next quarter will be down year-over-year and Power Gen as well, I mean, principally from the emerging markets being lower. But from all your qualitative comments, I mean, if you're looking at '12 and we're trying to model the quarters out in '12, it sounds like you're thinking those businesses return to positive growth in the not too distant future. Just so I can get an idea how you're benchmarking that emerging market exposure in '12, when do you see those businesses returning to positive growth year-over-year? This is Industrial and Power Gen.

David, I thought you'd say that the key to our stock was great leadership. So I'm a little disappointed with that, but...

That's a given, Tom.

Yes. And the idea of -- I think the problem with answering your question is I think it just ends up us giving guidance. Again, let me just go back to what I can say about it, which is that in both cases, we see the underlying fundamentals of China and India and Brazil to be incredibly strong. And those views have not changed. What we had in China and India's case is the government acting to reduce inflation and basically restricting money supply or tightening credit policies, and both governments are trying to balance the need for inflation control with economic growth. And our view is that they'll manage that back to economic growth when they think they've struck that balance. And -- but again, the underlying drivers, the underlying fundamentals of both countries are incredibly strong. And we're well positioned in each of the markets to capture their growth. That will underpin our 2012 strategy and our -- beyond that, too. So again, beyond that, I think anything else I'd say is the same as giving guidance.

Well, I guess structurally, if I think about the JV exposure to emerging markets, obviously it's huge in Engines, huge in Power Gen, pretty big in Components as well. And you can back into the margins. Obviously, you've been making a healthy margin in those markets on the JVs. Can you help us on the consolidated emerging market exposure, all right? It's roughly 30% Engines, 50% or so in Power Gen. Are the margins selling in the consolidated business into emerging markets similar to the read we can get from the JV income? Like how would you bogey that versus, say, company average?

The margins -- first of all, Power Gen is not a big JV business, just -- sort of just to correct your first intro.

No, I mean, over the -- what they have?

And very little is in JV. But in any...

Yes. So what they have, it's [indiscernible].

Right. So on the consolidated side, the point is margins for those are all basically a function of how much leadership position we have in the markets and how strong our products are relative to competitors. It's not a function of JVs or consolidated. So there's not a good way to answer your question by that split. There's not a good way to answer our margins by size of product or by country. In each case, if we have a leadership position, we have good products that are leading the market, we end with quite good margins. Where we're still developing leadership position or we're smaller share, then margins are tighter. That's a better way to think of it. And so JVs and consolidated don't help you much in terms of trying to figure out where margins are higher or lower.

Yes. Just one other thing I'd say there. I don't agree that broadly, we're going to be down year-over-year in the fourth quarter in all of our segments. In fact, that's not what's really implied in our numbers [indiscernible].

No. But then, you said it clearly. It's the implied industrial revenues are down 11% year-over-year in the fourth quarter and down 4% year-over-year in Power Gen, being driven by some of the emerging market weakness. So I'm just trying to handicap where you're headed in '12 for the emerging markets from the qualitative comments.

Right. And I just want -- didn't want to leave people with the impression that we're ending Q4 with all of our markets in China down year-over-year.

No.

So we can talk some more, okay?

Your next question comes from the line of Andrew Casey with Wells Fargo Securities.

Tim, it's really been a pleasure working with you.

Thank you, Andy.

A couple of questions. First, on the expected 2012 MAN Brazil-related revenue, 54% decrease. Should we view that as heavily first-half weighted?

Yes, I -- look, it's not going to be only first half. Really, what's happening there, Andy, is that they're bringing their own engine to Brazil to put in the VW truck for the one displacement, the one engine. I mean, we are -- we've been working with MAN now for some time to introduce our smaller and larger engine into their trucks. And the good news for us is that the trend in the market is to move up in horsepower. So that, over time, will benefit us being in the larger-displacement engine. But the substitute rate and what happens with the pre-buy and after that, all that is stuff that we just don't know the answer to, right? How quickly will people buy the larger displacement? How well will the small engine take off? How well would our launch go on their engine? And then what happens with the pre-buy? There's a whole bunch of variables to figure out with regard to the quarter. All we wanted to make sure people knew is it's a transition that we've been working with them for some time. We feel very good about our relationship with them. We feel excited about putting these new engines in there. And so we'll be supporting them throughout their truck range, still.

And then if we could go back to the European truck comments I believe you made in the monologue. We've been hearing varying things from the OEMs over there. Could you comment on kind of range or magnitude you expect Q4 truck production to be down? And are you seeing that as uniform by customer?

Andy, this is Mark. So I think we've seen a modest decline in the second half of our forecast, maybe 3% or 4% really in -- on-highway volumes. Of course, it's not the largest market for those, but we do have turbo components business and some on-highway engines. So it's modest in terms of what our customers are telling us for the second half of the year versus what we saw in July.

And then one last one. Are you seeing any sort of weakness other than some of the truck comments made by adjacent customers to you in the Middle East? Is there anything going on with Power Gen or oil & gas?

Yes. Middle East. Power Gen has definitely fallen some. So that -- in addition to comments you heard, we've definitely seen Power Gen orders in the Middle East tail off. I was there not too long ago, and there still is quite a bit of activity in construction going in the Middle East. So I do think we're still -- we're in a low, but I still think the underlying trends are for significant expansion of infrastructure. So we're seeing Power Gen slow down. I think a whole bunch of construction projects in Dubai went on hold and have stayed on hold ever since, which took a whole bunch of demand out of the market. But if you just go over the adjacent emirate, go over to Abu Dhabi, you see construction projects starting back up again. Saudi Arabia has got significant construction, Qatar has got significant construction. So again, our view is we're seeing a low, but we're likely to see growth again take off provided oil prices stay relatively high.

Okay, and I think we're out of time now. So I'll be available for your calls later. So I look forward to continue our discussions.

Thank you, Andy.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.