Cummins Inc. (CMI) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Cummins Inc. Earnings Conference Call. My name is Jasmin, 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 presentation over to your host for today's conference to Mr. Mark A. Smith, Executive Director, Investor Relations. You may begin.

Thank you, Jasmine, and good morning, everyone, and welcome to our teleconference today to discuss Cummins' results for the second quarter of 2012. Participating with me today are 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'll begin with our Chairman and CEO, Tom Linebarger.

Thank you, Mark. Good morning, everyone. I will summarize our second quarter results and talk about our key markets. Pat will then take you through more details of our second quarter performance and provide an update on our full year guidance. We delivered strong profitability in the second quarter despite the challenging economic environment and continued investment in new products and growth initiatives. Revenues for the second quarter were $4.45 billion, a decrease of 4% from the second quarter of 2011. Excluding the impact of currency movements and divestitures, revenues were flat year-over-year. Second quarter EBIT was $663 million, a decrease of $44 million or 6% compared to the second quarter of 2011, excluding gains related to business divestitures. EBIT percent for the quarter was 14.9%, the second highest in the company's history. Gross margin at 27.2% set a new record for the company, reflecting continued progress in driving productivity and lowering product coverage costs. For the second half of 2012, revenues increased by 5% -- sorry, for the first half of 2012, revenues increased by 5% over last year, and our EBIT percent increased from 14.6% to 14.8%. We delivered incremental EBIT margins of 19.4%, very close to our long-term targets despite the lower-than-anticipated revenue growth. As previously announced, we now expect full year revenues to be flat with 2011, a reduction from our previous guidance of 10% growth in revenues. Continued weakness in some international markets, particularly in Brazil and China, coupled with slowing orders in the U.S. truck, oil and gas and Power Generation, have caused us to lower our outlook. I will talk further about our outlook for a number of these markets, and we have included a supplementary slide in today's earnings release presentation that quantified the change in revenue guidance by business segment and by market. We expect to deliver EBIT margins in the range of 14.25% to 14.75% in 2012, a decrease in our full year guidance of 0.25 point but continuing our trend of increasing profitability year-over-year. In the second quarter, we continued to experience year-over-year growth in North America, offset by weakness in a number of international markets. Although our revenues in North America increased, the rate of growth has slowed recently. Our second quarter revenues grew in North America by 12%, significantly lower than the 40% growth we experienced in the first quarter. In the North American heavy-duty truck market, our Engine shipments increased by 13% compared to the second quarter last year. Order rates have slowed recently, and we are now lowering our full year market size expectation to 260,000 units, growth of 14% when compared 2011, but down from our previous forecast of 278,000 units. We expect to achieve full year market share of 40%, unchanged from our previous guidance. Orders in the North American medium-duty truck market have also softened, and we are lowering our market size estimate to 104,000 units from 117,000 units. We continue to expect our market share to exceed 50% for the full year in this market. Our North American on-highway products continue performed very well in the market. We are very pleased with the reliability of this product as evidenced by our product coverage costs, which declined again this year and by the performance and fuel economy demonstrated by our engines in operation. We have now shipped more than 300,000 engines, equipped with our SCR technology, and the market feedback has been overwhelmingly positive. Our market share has grown in both heavy- and medium-duty truck and bus markets in the last 12 months. Also in North America, demand from Chrysler for the Dodge Ram truck remains strong. Our shipments increased 23% in the second quarter, and we still expect full year shipments to increase by 30%. In the North American construction market, we experienced strong demand in the second quarter where engine shipments increased 23% year-over-year. On the other hand, demand in the oil and gas market in North America has continued to decline as natural gas prices have remained low. Unit shipments declined by 32% in the quarter, and we now expect full year demand decline by 41% compared to 2011, a change from our previous guidance of a decline of just under 20%. In mining, our unit shipments declined 6% year-over-year in North America due to lower orders from the coal industry. Globally, strong aftermarket revenues contributed to revenue growth in the mining market year-over-year. In our Power Generation business, we recorded growth of 23% year-over-year in North America. Unfortunately, we saw the rate of new orders decrease starting in April. Although we have seen some signs of improvement in orders in July, we lowered our expectation for full year growth to 15% from our previous guidance of 20%. Approximately 2/3 of our Power Generation growth in North America this year is coming from new products rather than underlying market growth. In international markets, our consolidated revenues declined by 16% year-over-year, with the most significant declines experienced in China and Brazil. In China, our domestic revenues across all end markets, including the revenues of our joint ventures, declined 25% year-over-year in the second quarter. The most significant decline was in the construction market, with our revenues down 55%. The second quarter 2011 was an extremely strong quarter for this market, and this represents the toughest quarterly comparison for the year. Having said that, demand across the industry remains weak and the rate of GDP growth has slowed, causing a reduction in investments, both in infrastructure and private residential construction. We have now lowered our full year expectation for industry-wide excavator sales to down 35% from our previous forecast of down 15%. Our production will run below industry sales as OEMs lower their existing inventory levels. Although the Chinese government has taken steps to stimulate growth, the steps taken so far have been less significant than previous programs and have not been targeted specifically improving short-term demand in the markets that we serve. As a result, we no longer expect any improvement in demand in the second half of the year. The outlook for the truck market in China has also weakened as overall growth in economy has slowed. We now expect the market, heavy- and medium-duty combined, to decline by 17% compared to our previous forecast of a decline of 10%. Second quarter Engine revenues were down 29% year-over-year, with volumes marginally higher than the first quarter. Truck volumes will be lower in the second half of the year than the first, with the third quarter expected to be the weakest quarter of the year. In the Power Generation market, we're also lowering our expectations for 2012 in China. In aggregate, the Chinese economy experienced 0 growth in electricity consumption in the second quarter due to the slowdown in industrial activity. Second quarter revenues, including joint ventures, declined by 17% from a very strong quarter in 2011. We now expect full year revenues to decline 5% compared to our previous expectation that revenues be flat. We expect our domestic revenues in China across all end markets and including joint ventures to decline by 13% compared to our previous expectation of a decline of 5%. Decreased demand for construction and truck engines will be partially offset by stronger aftermarket sales and increased sales of light-duty truck engines. In India, the economy has also slowed. First quarter GDP was 5.3%. It was the lowest recorded in 9 years. Our revenues included -- and revenues, including joint ventures, declined by 4% compared to the second quarter of 2011. In the truck market, industry-wide sales declined sharply in June, with Tata and other OEMs taking shutdowns as they lowered their build rates. Second quarter production volumes at our Tata Cummins joint venture declined by 35% year-over-year. We now expect industry sales in the Indian truck market to decline by 8% compared to our previous assumption of 7% growth. Declining confidence in the economy coupled with the addition of a new excise tax on commercial vehicles is driving our lower outlook. In the Power Generation market, demand continues to be driven by power shortages in India despite the weaker economy growth. Shortages have been experienced in a number of regions in the country, increasing demand for our lower horsepower products. Demand for high horsepower products, typically more linked to general infrastructure and economic growth, weakened in the quarter. In total, we expect revenues in rupees to increase 16% year-over-year, but revenues reported in U.S. million are now expected to decline by 1% due to the devaluation of the rupee. Previously, we had expected our revenues in dollar terms to increase by 10%. In Latin America, our revenues this year continued to be impacted by the difficult transition to the Euro 5 emissions standard in the Brazilian truck market. Unfortunately, the economy in Brazil has also slowed. For the full year, we now expect our total revenues in Latin America to be $1.5 billion, a decline of 17% year-over-year compared to our previous expectation of a decline of 6%. A lower outlook in the Brazilian truck market, coupled with lower demand for Power Generation in the number of markets in the region, including Brazil and Argentina, is driving the lower outlook. We now expect industry sales in the truck market to decline by 33% compared to our previous expectation of a decline of 19%. Truck prices increased approximately 15% with the implementation of Euro 5 at a time when the Brazilian economy faltered. Consequently, demand for new trucks has been very weak. Through the first 5 months of this year, less than 6,000 Euro 5 trucks have been sold to end users industry-wide. Despite truck OEMs lowering build rates, Euro 5 truck inventory across the industry built up to approximately 39,000 units at the end of May due to the weak level of retail sales. We expect it will take some time for sales to recover enough to reduce inventories and justify significant increase in industry build rates. Although we anticipate a difficult start to the year, retail sales of Euro 5 trucks have been much weaker than most participants expected. In Europe, on-highway demand has largely trended as we expected, with full year forecast lowered modestly. Power Generation sales were down 22% year-over-year as demand clearly weakened in the second quarter across most major countries. As I discussed in our first -- during the first quarter recall, our Power Generation business got off to a slow start in Africa and the Middle East. Importantly, our business improved in the second quarter in both regions. In Africa, second quarter revenues increased 72% year-over-year, and revenues in the Middle East increased 24%. Clearly, we are experiencing challenging conditions in a number of markets. We are confident that in time demand in Brazil, China, India will improve, and these markets will continue to offer higher growth opportunities than in developed markets. Higher rates of GDP, rising income levels, increasing investment in infrastructure and societal demands to improve air quality will all improve our business. Despite the weaker economic outlook, we are pleased with our performance in expanding gross margins and continuing to deliver strong profitability. We have taken actions to manage our costs. We remain confident in our long-term prospects as evidenced by the recent announced increase in our dividend. Our future growth will continue to be driven by the 4 key macroeconomic trends driving our industry: increasing the global emissions standards; the price and availability of energy; globalization; and increased investment in infrastructure, particularly in the developing economies. We will continue to invest in our growth programs to ensure that we benefit from these trends. Thank you for your interest today, and now I'll turn it over to Pat.

Thank you, Tom, and good morning, everyone. Second quarter revenues were $4.45 billion, a decrease of 4% from a year ago. Sales in North America were up 12% over the prior year, driven by strong demand from on-highway and construction markets while outside of North America, sales were down 16% as a result of weaker demand in several markets, most notably China, Brazil and Europe. Compared to the first quarter, sales were flat. We experienced low demand in the heavy- and medium-duty truck markets in North America and Brazil and the construction market in China, offset by higher revenues in Power Generation, with the first quarter typically a seasonal low point. Gross margins were a record 27.2% of sales, up from 25.9% last year despite the lower sales revenues. The improvement over the prior year was driven by manufacturing productivity improvements, price realization, lower warranty and material cost, along with a more favorable product mix. Gross margins also improved compared to the first quarter despite flat revenue as a result of productivity improvements, lower warranty cost and product mix. Selling, admin and research and development costs were up $54 million from last year and were $18 million higher than the previous quarter. The growth in spending was driven primarily by the search and development for new products. And we've also been investing in distribution network and IT infrastructure. Joint venture income of $104 million was 11% lower than a year ago and on par with the previous quarter. Year-over-year, more contributions from joint ventures in China and in India were partially offset by an improvement in North American distributors. Sequentially, joint venture contribution was relatively flat. Second quarter EBIT was $663 million or 14.9% of sales compared to the 15.2% we reported last year, excluding gains related to business divestitures. Compared to the first quarter, EBIT margins improved 20 basis points despite the flat sales revenue. And as Tom just mentioned, for the first half of 2012, EBIT margins improved to 14.8%, up from 14.6% for the same period last year and were also a full 1% better compared to the second half of 2011 despite 7% lower revenues. Earnings per share in the second quarter were $2.45 compared to $2.41 in the second quarter of 2011, excluding gains from business divestitures, and the tax rate was 25% in the quarter. Let's now move on to the operating segments and discuss second quarter performance and the outlook for the remainder of the year. In the Engine segment, revenues were $2.8 billion, a decrease of 2% over last year. In North America, we experienced stronger demand across on-highway markets and in construction. That was partially offset by weaker demand in the oil and gas market as a result of lower natural gas prices. Demand in international markets was lower, with on-highway markets in Brazil and construction markets in China showing the more significant declines year-over-year. Foreign currency movements had a negative 2% impact on segment revenues in the quarter. Compared to the prior quarter, sales were down 1%. Demand from heavy- and medium-duty truck markets in North America were lower in the first quarter, but this was partially offset by stronger demand from Chrysler. Outside of North America, tough markets in Brazil and construction markets in China both were sequentially weaker. Despite lower Engine shipments, segment EBIT was $376 million or 13.2% of sales, up from 13% last year as a result of more favorable product mix, better pricing for parts and industrial engines and lower warranty costs. This was partially offset by weaker contribution from joint ventures in China and India, along with increased spend on growth initiatives. Compared to the first quarter, EBIT margins decreased 10 basis points due to higher warranty costs and research and development spending. For the full year, we now expect revenue for the Engine segment to be flat with 2011 levels. This is a decrease from our previous guidance of an increase of 10% due to lower-than-expected demand in the on-highway markets in North America and Brazil, as well as in the China construction and the U.S. oil and gas markets. Demand for engines for Power Generation has also slowed. Segment EBIT projections for the full year remain unchanged at 12% to 13% of sales. In the Components segment, second quarter revenue was $1 billion. Compared to the prior year, revenues were flat with growth in North American on-highway markets offset by lower demand from international on-highway markets, foreign currency movements and the impact of divestitures completed last year. Compared to last quarter, revenues were down 6% as a result of lower demand in on-highway markets in North America, Brazil, China and India. This was partially offset by higher aftermarket demand, primarily for filtration products. Segment EBIT was $116 million or 11.2% of sales, down from 11.6% last year. Despite flat revenue, gross margins did improve. However, this is more than offset by increased research and development costs and currency movements, which had a negative 50-basis-point impact on EBIT. Compared to last quarter, EBIT margins declined 1.8% due primarily to lower volumes and increased selling, admin and research and development costs, some of which were acceptable to the highlight acquisition. We're now forecasting revenue growth of 5% this year. This is a decrease from our previous guidance of up 10% due to weaker demand in on-highway markets in North America, Brazil and China and the impact of a stronger U.S. dollar. Segment margins are now expected to be in the range of 11% to 12% of sales, which is below our previous guidance. The reduction is the result of lower volumes and additional spending associated with the acquisition of Hilite. In the Power Generation segment, second quarter sales were $909 million, flat with the prior year and 17% higher sequentially. Growth in North America was offset by lower demand in Europe, China and Latin America and from the impact of the stronger U.S. dollar. Sequentially, revenues improved from a seasonally weak first quarter, with the Middle East, North America, U.K. and China showing the largest improvements. Demand in Africa also improved significantly after a weak first quarter. Segment EBIT margins were 10.3% in the quarter, down from 11.6% last year. Gross margins remain stable. However, increased spending on growth initiatives and lower joint venture income resulted in a decrease in EBIT margins. EBIT margins did improve 60 basis points from the first quarter as a result of stronger volumes and spending on selling, admin and engineering increasing at a lower rate than revenue growth. For 2012, we now expect segment revenues to be flat with 2011. This is a decrease from our previous guidance of up 5% to 10%. In North America, we now expect growth of 15% compared to our previous expectation of 20% growth. The growth in North America will be offset by lower demand in China, Latin America and Europe. Segment EBIT margins are expected to be in the range of 10% to 11% of sales. And for the Distribution segment, second quarter revenues were $794 million, an increase of 1% compared to the prior year and 2% compared to the prior quarter. Currency movements reduced revenues by 5% while strong demand for parts and service in most regions offset weaker demand for engines in the oil and gas market in North America and in some segments in Europe. Compared to the first quarter of 2012, the higher parts and service sales offset weaker demand in the oil and gas market in North America and in the industrial markets in Europe. Segment EBIT margins for the quarter were 11.6%, down from 13.5% a year ago due to the impact of currency and increased spending to build out our Distribution network, particularly in Africa and in China. Compared to last quarter, EBIT margins decreased 50 basis points largely due to foreign exchange and increased SAR spending. For 2012, we are now forecasting 10% growth over the prior year, with approximately 6% of this growth coming from acquisitions. This represents a reduction from our previous guidance of an increase of 20% due to declining demand for Power Generation equipment in a number of markets, lower engine demand in the oil and gas market in North America and the adverse impact of currency movements. We expect segment EBIT margins to be in the range of 12% to 13% of sales for the full year. As Tom mentioned, we're now projecting total Cummins revenues to be flat with 2011 levels, with growth in North America being offset by weaker demand in overseas markets. And we estimate that the stronger U.S. dollar will have a $500 million negative impact for the full year. EBIT margins for the company will be in the range of 14.25% to 14.75% of sales compared to the 14.2% margin we reported last year. Our second half revenues are expected to be 4% or $400 million lower than the second half of 2011. The midpoint of the EBIT guidance assumes second half EBIT margins will be 14.2% of sales, up from the 13.8% we reported last year. And as is normal, the fourth quarter will be stronger than the third quarter. Our assumptions in our guidance include the contribution from the joint ventures to be down 5% from last year, and the full year tax rate is now forecasted to be 26%. Finally with regards to cash flow, we now expect to invest between $750 million and $800 million during 2012 on capital projects. While working capital and in particular inventory grew in the second quarter, we expect to reduce this by around $200 million in the second half of the year. The balance sheet remains strong and pension is well funded, which gives us the ability to invest for growth and provide additional return to shareholders through stock buybacks and increased dividends. During the second quarter, we repurchased 1.8 million shares and earlier this month, we announced a 25% increase in our dividend. Although revenue growth has slowed in the near term, we remain committed to expanding our EBIT margins. We are pleased with our gross margin and EBIT performance in the second quarter despite the decline in revenues. And while we will continue to invest in critical growth initiatives, we have already adjusted spending plans in view of the reduced outlook for the remainder of the year. Now let me turn it back over to Mark.

Thanks, Pat. We do have plenty of time for questions. [Operator Instructions] Operator, we're now ready for our first question. Jasmin?

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

Can you gentlemen say more about the actions you've taken to adjust the cost structure? Are we talking SG&A or production reductions and which businesses are impacted most?

Well, let me start with that one, Jerry. We've taken actions across the business. But I think it's really important to point out that the critical growth initiatives that we've talked about for some time now, we're not going to cut back on those. So they're really important to the long-term future profitability of the company, and they're kind of sacred. We are cutting back around areas such as travel, and we are looking to reduce the rate of hiring in some areas. We will freeze it in other areas across the company. But it's important we find the right balance of continuing to invest for growth while at the same time managing spending prudently across the company, across all 4 business segments and the corporate areas.

I would just add, Jerry, the leadership team here is pretty experienced with cost-reduction activities. All of us have been through it before. So every one of them in our recent strategy meeting had to come up with a set of reductions that they thought they would implement and still be able to meet the key -- strike a balance that Pat talked about, about investing in the key growth programs and making sure that they can still hit their growth targets and revenue commitments. So that's what we're trying to strike here, and I think every member of the team is committed to doing that.

And as a follow-up, I'm wondering, Pat, if you can bridge for us the margins you're targeting in Power Gen and Engines in the back half of the year versus back half of last year? On flat to down sales, you're looking for margins to be flat to up. Can you just step us through the major moving pieces there?

Yes, let me try and take this one, Jerry. I'll give you a high-level bridge from the first half of the year to the second half of the year. And the first half of the year was considerably better than the second half of last year. We do expect revenues to be flat, maybe slightly better in the second half of the year than the first 6 months that we've just gone through. That being said, there are a number of headwinds coming our way, so the product mix is not as favorable in the second half of the year. We've talked about reduction in oil and gas. We've talked about reduction in Power Gen. So in the high horsepower engines where we do have some margins, we see a lot of negative mix going on there. Warranty costs are expected to grow a little bit in the second half of the year. And joint venture income will certainly be down in China and in India, more so in the third quarter, I expect, than the fourth quarter but it's definitely softened. Now on the other hand, we've seen terrific work so far in the manufacturing plants to improve productivity. We expect that will continue as we go into the second half of the year. The supply chain savings that we've talked about, the 1% margin target for 2015, we're on track there, the 0.2% or maybe even a little bit better now this year based on what we've seen in the first 6 months of the year. And finally, material costs are almost certainly going to be better in the second half of the year than what we've seen in the first half of the year. And that's a combination of metal markets being a little bit better than what we thought they're going to be and just ongoing good working cost-reduction with our supply base.

Your next question comes from the line of Jamie Cook with Crédit Suisse. Jamie L. Cook - Crédit Suisse AG, Research Division: Two relatively simple questions. One, if you could just expand within North America and Power Gen. Last quarter, you talked about some weakness in orders. You still cited North America is up. I think you said in your prepared remarks that things in July looked a little better. So can you just give a little more color there and comment on the overall competitive environment? And then my second question, just with regards to Pat, as you're thinking about your guidance cut for the year, generally the thing I like about Cummins is you make a cut and it's big so there's not generally risk in the back half. I guess what I'm concerned about is I still look at your North America ACT forecast or your North America truck forecast, which is essentially in line with ACT. So what gives you confidence orders pick up in September? Or could you just speak to where you think the risk is to your guidance in the back half?

Okay, Jamie. This is Mark. I'll answer the first part of the question on Power Gen and North America. So the first thing to remember is we are expecting 15% revenue growth in North America on Power Gen, but 2/3 of that is coming from new products rather than the underlying market. And that remained like a stable forecast for the full year. We have seen orders bounce around. So for the base business, originally we're expecting 10% growth for the full year, and we've now lowered that to 5%. We did see a pretty sharp drop in incoming orders around the middle of March, April time, and we talked about that on the Q1 call. Orders stayed down for a while and then have picked up a little bit recently, so a kind of 10% growth underpinned with the new products, 5% from underlying market. I think market’s reasonably competitive at this point in time. But I think based on current trends, it's a little hard to exactly forecast, but we feel good about the 5% underlying market growth.

Jamie, I guess the other thing I would just say is the volatility of the market has obviously picked up some. To talk about recent order trends and things that's obviously a little frustrating even for us because we would have liked to have had a better view of what our current guidance is back when we gave our first quarter call, but things fell off quite quickly. And we saw the order rates trending down in April, and we just didn't know how lasting or how big a deal that was. They stayed down through all of Q2 and then recently have picked back up a little bit. So it's volatile, and we just don't exactly know how to read it other than generally speaking, as Mark said, we've got some new business in the market that's helping us, plus we've got a pretty broadened global business that's helping us. So all in, we feel good about the Power Gen forecast, but we are definitely seeing more volatility in order rates in a number of markets and in a number in North America that you highlighted. I've got Rich here though, Jamie. Let me ask him to comment a little bit on the ACT forecast in the North America truck market.

Jamie, this is Rich. So yes, as you noted, we've taken our forecast down from the 278 production build down to 260. So that implies we're basically building at a 280 the first half of the year, building at a 240 rate the second half of the year. And so a few things we're looking at. One is, as you're aware, net orders have been weaker than that the last few months. I think that will probably continue through July. The things we're looking at that give us some confidence is one is retail sales. That averaged over 24,000 last 4 months. So you think at a 240 rate, that we'd be building at 20,000 a month. So retail sales are coming in higher than that. Conversations we've had with lots of customers, especially, again, more geared towards the larger customers are saying they're sticking with their second half order rates that they're going to continue with. The backlog remains pretty strong. So here we are in July, and there's well over 80,000 in the backlog. And I think lastly, we will see just the normal seasonality and some elements of increased orders in November, December ahead of the emissions change or greenhouse gas change in 2014. So I think it's obviously a moving target. But the net of that, I think the 240 build rate is balanced and right for the second half the year. Jamie L. Cook - Crédit Suisse AG, Research Division: Okay. And then I'm sorry, just last question, Pat. Can you just quickly quantify what's the material cost benefit in the back half of the year?

Well, for the first half of the year, Jamie, we'll be 3/10 or 4/10 of a point benefit. Second half of the year, we expect to be 1%.

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

I wanted to delve a little bit further into the second half margin guidance. Obviously, the margin guidance is pretty impressive. And the 2 businesses that stick out is the Power Gen business, the margins in the first half the year were 10.1. You're implying they go up to 10.9. In Distribution, it was 11.9 in the first half, and they go up to 13.1. But can you take us through a little bit what you're seeing? I think you mentioned in Power Gen, the mix is a bit adverse. I'm just trying to understand why the margins would go up first half to second half? I mean, you are implying the revenues go up a little bit sequentially. Some of that -- some could be just better overhead absorption, but just trying to better understand that part of the margin guidance.

Yes, so we'll start with Power Gen. Their gross margins have actually been doing quite well over the last few quarters. And some of that has been masked by mark-to-market adjustments we've had to take on forward contracts with copper. So we don't see copper decreasing further beyond this point. So we don't expect to see any more of those mark-to-market adjustments having kind of negatively impacted their margins in the first and more so in the second quarter of the year. So as volumes pick up in the second half the year in Power Gen, I expect their gross margin to improve and then not to fall to the bottom line. Tony and his team are thinking all over the cost management activities in the Power Gen groups, so I feel pretty good about their ability to expand margins from where they've been in the first half of the year. Distribution, they suffered a little bit in the first half of the year as I was taking in the earlier remarks on higher currency impact than what we had anticipated. They're down almost 2 points from a year ago, and half of that is currency and half of that is just increased SAR spending on key initiatives for them in the future. I think the revenues are going to improve in the second half the year. There's no question to that in my mind. I think the mix we're starting to see in that business is starting to move more towards aftermarket and away from whole goods which, again, will give them a lot more of a bump as we go forward.

All right. That's helpful. The backlog at the end of the second quarter, do you have any color at all you can provide us on where the backlog is at the end of the quarter year-over-year?

Backlog for what, David?

I’d don’t know if you have a total company number. I'm just trying to get a feel for you were down 4% revenue for the second quarter back half and implied down 5%. Just trying to get a little feel for kind of where we're launching from on a backlog going into the second half in the growth rate.

We don't have an overall one because it's just so different by markets. I think Rich talked a little bit about where he sees industry backlog for North America, so we’ll have different numbers for different, but some of our businesses operate with no backlog ever. So it's just too wide a variety.

All right. I'll just wrap up then. The related one is share repo. What should we think the second half the year maybe at a minimum compared to the run rate we've said in the first half of -- in the second quarter was, whatever, 188 million-or-so of repo. How should we think about the next couple of quarters on share repo?

We're not really going to change any part of our strategy or our planning when it comes to returning value to shareholders. So we said before, we'll look to do that by growing the business profitably. We'll look to do that by increasing the dividend, which we just did, and we'll look to do that by buying back stock. And we go into the year, as you know, with a target to reduce stock by 1%. If the market price is attractive, we may do more than that. We did more of that in the second half of last year. So we have the flexibility. I'm not going to commit a number just now, but we certainly don't see any change in the way we want to look after shareholders when it comes to dividends and stock buybacks.

Your next question comes from the line of Rob Wertheimer with Vertical Research Partners.

I just wanted to drill into the Power Gen segment a little bit. I assume that your outlook in the comments you made today were made in advance of any changes relative to the terrible outage they're having in India. Does that have the potential to affect anything this year? And then just in general, in 1Q, did you -- I'm trying to figure about the gap between the Indian segment stationary power and then Power Gen revenues. Did you overbuild a little bit and then -- or underbuild a little bit this quarter and the rest of the year?

Rob, I'll start with the India thing. You're totally right that we did that. All the comments we made were before we considered that. And really, I don't exactly know how it's going play out. It is terrible, actually. There's quite a bit of problems going on even in some of the bigger cities like Delhi, with mass transit basically unusable. So it is a bad situation for them. It's unfortunately reflective of the stability of the power grid broadly across the country. And that helps our business, of course, because that's a lot of reason why people buy standby generators. But definitely there's great need for much more stability than it had. We will definitely see what we can do to help in different parts of the country with trying to stabilize the grid, as well as provide emergency services. That's one of the things we do regularly and do best. So we'll be actively trying to help what the impact is. It's just way too early to tell. But I think it talks about why we have -- why we're optimistic long run about our participation in the Power Generation market in India. There just is a lot of grid improvement and other kinds of things to do there, and that's kind of where our products are targeted.

I think the second part of the question on inventory, the drop that we see in demand in the latter part of the second quarter kind of took us by surprise. And across the business, we ended up with more inventory than we anticipated. So as I said in the earlier remarks, we intend to work that down through the start of fourth quarter and get inventory back into a more normal target range for us.

I should add to that, that there's not really any area that's got a lot of extra inventory or where we've seen a lot cancelations. As Pat said, it's just across several parts of the business. The deceleration happened faster than we could adjust, and we're now going to adjust that to the next couple of quarters. So there's no area we're particularly concerned about, but there are several areas where we'll have to take production rates down below what sales have been. That's what affected our guidance for the second half.

That's very helpful. Can I ask real quick on the oil and gas, which I know is small. But did your outlook assume that new builds -- I know the revenue outlook but I don't know how much is aftermarket. I don't know but it seems new builds go close to 0. Are you still getting orders for new builds in that market and do you assume to continue to get orders in the back half of the year. I'll stop there.

Yes -- this is Rich. Yes, we're continuing to get orders for new builds. We're down over 50% from where we were in the first quarter, but there is a level of that coming in. And then the parts and service business has remained pretty steady. So while there's been some shutdown, we've remained slight growth on the parts and service side of that business.

Your next question comes from the line of Tim Denoyer with Wolfe Trahan. Timothy J. Denoyer - Wolfe Trahan & Co.: A couple of questions on the Components margins. Pat, can you quantify the impact in 2Q of the Hilite acquisition? Was there an impact? And can you also just talk about the revenue and margin profile of that acquisition?

Yes. So in the second quarter, we incurred about $5 million of cost relating to the acquisition, so that's about 50 basis points. In the second half of the year, as we look forward in our guidance, we think that the ongoing cost with that technology business that we purchased is going to cost us about 0.5 point at the Components segment level under margin both in the third and fourth quarter. With regards to the profile of the business, I mean, this is a technology that we went out to purchase them. So it's not really -- it's not one of these big acquisitions you see other companies do. We've always said that where we attractive opportunities to move faster with technology development, that's what we'll be interested in. And that's exactly what this deal is. I think the revenue benefit in the second half of the year is going to be fairly modest. It's probably going to be in the range of $40 million to $50 million. But overall with the cost structure, with the technology investments we're seeing there, it will have a negative impact at a segment level of about 0.5 point.

The technology there helps us across our entire after-treatment business, so we'll see the technology impact our after-treatment business totally. But the big next hurdle for that business is really Euro 6. So Euro 6 is where the volume starts to turn up and the opportunity further shows, it also affects Tier 4 Final. And as I mentioned, it will affect all of our business. But if you want to think, "So when does this thing start to show some positive benefits?" It's not -- even though a technology investment, it's not 100 miles off Euro 6 and Tier 4 Final relatively close in time. Timothy J. Denoyer - Wolfe Trahan & Co.: And is it fair to assume that the liquid-base SCR, the doser, is lower cost than the ARS ones they are using now in North America truck?

What I'll say about that now because new products -- and of course, we want to make the proper announcement at the proper time. Our target is to provide customers with better performance at a lower cost across this technology. That is -- in an after-treatment, the name of the game is being able to give people the ability to integrate effectively in a very complex system with higher liability, lower cost and better performance. That's what we're thinking this technology brings us. Especially across the large engines, the technology is pretty unique. And so we think it will be -- we think it will give us an advantage with customers.

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

Tom, I want to ask you about the mining business. You mentioned that it was a little bit softer in the U.S., but you have a big international business. What's your visibility like in that business and what are your customers telling you? There's a lot of noise out there, as you know, in the system.

Yes, there is a lot of noise. I’ve got Richard. I'll let him comment. But I would just say at a high level, our view about the mining business is that we have pretty -- it's one of those markets where we do get reasonably good visibility. We are able to look out pretty far in terms of order rates and backlogs. We do have -- there's now 1 million customers that we're serving there, so we can kind of see what they're doing. And we can watch commodity prices with relatively -- with relative ease. You can kind of see what the numbers are and see what drives what. Obviously, our view of the market changes when we see commodity price changes dramatically, but we do have reasonable lead time on that. And Rich, I know, has been in conversation with a number of customers, so I'll let him comment further about what he's seeing.

Yes, so we're still in the guidance of up 7% for the year. Coal obviously is our biggest concern with commodity prices coming down, so that's the one we're paying the most attention to. Copper, iron ore, gold, those remain strong. We have not seen a lot of cancellations, small numbers. We've seen some delays. And so it's one we'll be watching. I think through the balance of the year, it looks pretty solid. And just one, we'll have to pay attention to going into 2013. Order boards are still strong as you know. In our orders and there's a delay, we have a lag effect on our side. So folks are still building out equipment. We're still shipping engines. So I feel pretty confident through the balance of 2012 that we’ll see not a lot of changes.

I do think, Andy, it's one of these things where if copper, iron ore prices fall off a lot again, we would then change our outlook probably for 2013. Again, it's unlikely to have a big effect in the second half of this year. But change in commodity prices down would affect prospects for next year and vice versa. Of course, if they strengthen or get some underpinning for where they are, we think that will help next year. So we're keeping our eyes really closely on this. And everybody knows the things to watch here in terms of commodity prices. But right now, the good mines still are keeping their equipment running and ordering new equipment -- the good mines, I mean, the ones that are a low-cost operation and effective and are still doing it. New mines, we've seen a bunch of announcements about people saying they're going to postpone activity on new mines. I think you've probably read some of those, but existing mines are still going.

Tom, that's helpful. So kind of similar but maybe a little different, a place where we have -- it's more difficult to get visibility is China. I know you've talked about China. Your OEMs sometimes tell you one thing and then something else happens. The confidence level that you have from the OEMs now as we go forward, given that China at least is sort of making more noise about infrastructure investment and sort of doing the right thing, how comfortable are you that we won't need to change our Chinese forecast again when we go forward?

I think you've characterized it well that it's difficult to get good numbers. I think the OEMs, in their defense, suffer from the same lack of information that we do, to some degree. The published numbers are not often timely or not often complete. And there's even some game playing by the OEMs in terms of how they put the numbers, how they feed the numbers into the market, research work. So I think there is some uncertainty around the numbers. And I think there's also a debate within the Chinese government about what they want to do with the stimulus program. I've met with members of the government while I was there last, that there's clearly -- the #1 priority is to make sure it's a soft landing, not a hard landing. But there's also priorities within the government about shifting the economy a little bit away from only internal infrastructure and into consumer-based economy, which you've probably read some about that. And there's also a sense that the last stimulus program kind of over stimulated. There ended up being quite a bit of waste in some of the programs, and they ended up with a big bump that they have to recover from when inflation overruns. So I think there's just different parts of the government and different goals they're trying to manage here. So I have high confidence that they will stimulate, and they will continue to work on the economy to ensure it's not a hard landing. In other words, it doesn't get a lot worse than it is now. But I do think it's hard to say how quickly it's going to improve, especially in this infrastructure side. And we were feeling reasonably confident that they would stimulate enough to clear the excavator inventory and to get construction going by the fourth quarter. As you know, from our remarks, we have now -- our view has dimmed on that, and we think it will not do enough to clear the inventory and begin to increase build rates this year at all. We think it will be in the next year before that happens now. When and how, we're just not sure. So I think it's uncertain. I would be very careful about anyone who says they're certain about what's going to happen there because I think it's hard to know. And certainly, any one OEM would not be a reliable estimator.

Your next question comes from the line of Stephen Volkmann with Jefferies. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Curious about sort of the cadence of the quarter. It seems like -- please correct me if I'm wrong, but it seems likes things sort of changed fairly rapidly through the quarter. And I'm wondering, you made a couple of comments, Tom. I think that you thought things had sort of stabilized. And I wondered if you could just sort of take us through the key end markets where things really did deteriorate and whether they have stabilized and if you even have any kind of quick look into July?

Yes, Steve, it's a good question. Because again, we left the first quarter call with a couple of troubling signs but not a clear view really of where the rest of the year was going to go. So we were unable to change our guidance in a way that was any more accurate than what we already had. That was unfortunate. Because, as you said, it changed pretty quickly. April was a very good month for us, and then May and June were weaker. And that was the cadence, basically. And what -- I think what made it worse is that our view was that as we saw those numbers weakening, we didn't see instigators that we're going to make them improve quickly and turnaround. Good examples we talked about today, North American truck, while we do see some improvement in the back half of the year, we didn’t see a way we were going to get back to 278,000 units. And we saw the order rates dropping. You saw them, too. But the -- we were all debating in April, was that just a one-off with special causes. And then as we went through the rest of the quarter we said, "No, it looks like it's going to stay." In China, we saw a bunch of new data come out, a bunch of information about how inventory had changed in the first quarter or in this case, had not changed very much about in excavators was disturbing news for a whole bunch of people and made us rethink where we were. Truck markets in China, same kind of thing. India economic results were much worse. Excise taxes got implemented. There was some debate about where they were. And then I mentioned Brazil, where what we saw -- we saw Euro 5 transition struggling. That was evident, but the combination of the worsening economy and how badly retail sales were going was just kind of came to light during the course. So we saw a lot of negative news about how things were progressing. I mean in all of those things, you hear about stuff. But then when OEMs actually take build rates down, which they do over and they don't do -- they do that for a few months, you know now you're going to have to lower your realistic expectations. That's the example that happened in Brazil. So anyway, a lot of those things happened in the quarter. They made us change not only our view of the quarter, but our view of the year. And we just felt like given what we saw in May and June, we wanted to get out and tell you guys that things had changed in just 2 months. With regard to change now, it's not that there's been significant improvements anywhere. It just looks like we've kind of now captured this new environment as best we can. I did mention that there's volatility and hard to know in some places like China, and the Power Gen orders have been bouncing around. But broadly speaking, we feel like we've reflected the environment that we're experiencing now, and so that's why we feel good about the guidance. But I would say it's a much more volatile economy than we were looking at in the first quarter of the year, and it's much harder to predict. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: So just to be clear, can I say the last few weeks have sort of stabilized or they remain volatile and you just think this captures it?

I think the second thing is more accurate. They remain volatile, and we think we've captured it. We think we better characterize what we think is going to happen because when we're out in the first quarter call, it's when everything was starting to get a little bit squirrely. We now had 3 months to look at it and say indeed, it is worse. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Okay, great. And then just a follow up, just to broaden that out a little more. Feels like a lot of companies this quarter have sort of taken the tack that things have certainly slowed here, but we're still in a growth market. '13 and '14 are probably still up years. We don't want to cut a lot of muscle here, so we're willing to build a little inventory. We're willing to keep our R&D spending going, et cetera. Would you to put yourself in that camp? Are we still in a growth market of a kind of a longer-term backdrop or are you kind of more nervous? And what would you have to see to really start to batten down the hatches?

Definitely, we would put ourselves in that category of seeing our long-term growth prospects remain the same but the basic characteristics of our industry, as I mentioned in my remarks, have not changed. Our view still is developing countries will be growing faster than developed countries and investing in infrastructure and our position there remains strong. We will still be investing in new products and technology. The Components business, for example, we've got a lot of promising technologies there that will require investment. We'll still be spending money there. Having said that, we do know how to reduce costs, and we are starting to reduce costs. So we're striking a balance now is the way I'd characterize it. And obviously, we can change that balance pretty rapidly. There's a whole bunch of us here that have a set of programs that we know what to do when we need to do it, and we will be monitoring. In a volatile economy like this, watching closely all the time and making adjustments on the fly is exactly what we need to do. Having said that I feel, like those others do, that the characteristics of our industry are still ones that will give profitable growth over a sustained period as the economies return. The question for us, and I think probably for a lot of people, is when do the economies return? What's the instigator that gets things back? And I think that's where there's a fair bit of uncertainty and frankly, right now, a fair bit of negative yield.

Your next question comes from the line of Ann Duignan with JPMorgan. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Most of my questions have been answered. But I'd say somewhat tongue in cheek, we've gone almost an hour and nobody has asked about it, natural gas, which I think is a big change from 1 quarter ago or 2 quarters ago. Maybe if you could just update us in terms of your outlook for NAFTA heavy-duty. Have you seen any change in demand for CNG equipment or CNG-related engines?

Yes, well certainly, the demand on our natural gas engines has increased significantly versus a year ago. The volumes in the second quarter were double. So there's definitely more -- we're definitely seeing more demand. We're seeing a lot of inquiries. So it's an active market for sure, and we expect that to grow. It's still, if you look at the overall mix of business relatively low compared to the total, but it is growing. And we are active in the market. Rich, I don't know if you want to comment at all about anything else?

No, that's fine.

Yes. So I think that's -- we are seeing active. We are seeing growth, and we are seeing a lot of inquiries about it. And with gas prices where they are, I just don't expect those are going to slow down. I think there's going to be a lot of people that are going to try to get natural gas into their on-highway truck engines among other applications and see if they can get the overall cost to work out when they look at where they can fuel, on how they maintain, all that kind of thing, because prices are really attractive today.

It remains, as you know, somewhat infrastructure constrained so places where that's not a constraint like refuse market where you can go out, refuel. We've seen high market share in business move there. But I think it's going to be mostly driven by as infrastructure builds out and you can take advantage of these lower prices. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Sure, I appreciate that. And then as my final quick follow-up. We know that Navistar is going through a supplier selection process for its SCR components. Is that something you're prepared to talk about? Are you bidding in that business? Have you been invited to bid? Is it something that you'd be interested in or is it an Engine plus after treatment or nothing?

Ann, this is Rich again. As you said, lots of speculation, rumors out there. A couple of things we do know is the technology now settled out, EGR versus SCR and with their announcement moving to the SCR. Another thing we know is Navistar is -- remains -- is a large customer of Cummins. And 25% market share we still have in our NAFTA business, again, outside of the U.S. So we know where the technology is. We know -- we've been partners or customers for long time and have maintained discussions, relationships even despite the competition we've had the last couple of years in the U.S. How this technology changed impacts their product plans, we don't know. And so it wouldn't be appropriate for me to add to that speculation of how that might turn out. And so I’d really need to direct you back to Navistar on how -- what their product plan will be and who their resources will be to meet that product plan.

Okay. I think that's the end of the hour. We appreciate your interest and your questions, and I will be available for follow-up. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a wonderful day.