Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 Cummins’ Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker, Mr. James Hopkins, Executive Director of Investor Relations. Mr. Hopkins, you may now begin.

Thank you. Good morning, everyone, and welcome to our teleconference today to discuss Cummins' results for the third quarter of 2019. Participating with me today are Chairman and Chief Executive Officer, Tom Linebarger; our Chief Financial Officer, Mark Smith; President and Chief Operating Officer, Tony Satterthwaite; and retiring Chief Operating Officer, 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 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 Investors and Media. With that out of the way, we'll begin with our Chairman and CEO, Tom Linebarger.

Thanks, James. Good morning. I just want to start one correction of James remarks. Retiring Chief Operating Officer, Rich Freeland, has said he will not be available for questions after the call, unless it's about how cute his grandchildren are or about golf. I'll start with a summary of our third quarter results and finish with a discussion of our outlook for 2019. Mark will then take you through more details of both our third quarter financial performance and our forecast for the full-year. Revenues for the third quarter of 2019 were $5.8 billion, a decrease of 3% compared to the third quarter of 2018. EBITDA was $958 million or 16.6% compared to $983 million or 16.5% a year-ago. Positive pricing, lower variable compensation, material cost reduction activities and lower warranty expense partially offset the impact of lower volumes and increased investments in research and engineering. Engine business revenues declined 11% in the third quarter compared to a year-ago. Revenues in North America decreased by 6% as we began to see the impact of OEMs preparing for lower production of heavy-duty trucks in North America, as well as declines in shipments to construction markets. International revenues declined by 25% primarily as a result of lower demand in China light-duty truck and construction markets. EBITDA margin for the quarter was 14.1% compared to 14.9% for the same period in 2018, and included a $33 million charge related to ending production of our 5-liter ISV engine for the U.S. pickup market. Improved pricing and lower material costs partially offset the impact of lower volumes, reduced joint venture income and the $33 million charge. Sales for our Distribution segment grew by 4% year-over-year driven by higher demand for power generation equipment in North America. Third quarter EBITDA was a record $186 million or…

Thank you, Tom, and good morning, everyone. I'll start with a quick summary of our financial performance in the [technical difficulty] for the full-year. Third quarter revenues were $5.8 billion, a decrease of 3% from a year-ago. Sales in North America were flat and international revenues [technical difficulty] 8%. Currency movements negatively impacted revenues by 1%. Earnings before interest and tax depreciation and amortization were $958 million or 16.6% for the quarter, compared to $993 million or 16.5% of sales a year-ago. EBITDA decreased by $25 million driven by the negative impact of [technical difficulty] reduced joint venture income and [technical difficulty] partially offset by material cost reduction activities, lower warranty and decreased variable compensation expenses. Gross margin of $1.5 billion or 25.9% decreased by $57 million or 20 basis points. Benefits from favorable pricing actions, material cost reductions, lower warranty and variable compensation expenses mitigated the negative impact of lower volumes [technical difficulty] charges incurred to cease production of certain unprofitable product lines and higher tariffs. Our selling, administrative and research costs of $842 million, increased by $9 million year-over-year, driven primarily by new product development in the Engine, Components, and Electrified Power segments, partially offset by lower variable compensation expense. Joint venture income declined by $22 million due to weaker demand for light-duty trucks in China and lower truck production in India. Other income of $61 million increased by $34 million, driven primarily by $35 million of gains related to closing out certain derivative contracts associated with the Company's foreign exchange hedging program. Net earnings for the quarter was $622 million or $3.97 per diluted share compared to $692 million or $4.28 from a year-ago. Third quarter results were positively impacted by $23 million or $0.14 per diluted share and discrete tax items and the after-tax gains of…

Mark, with all the challenges we have in fuel cells and electrification, I did not expect to be flooded by a phone. There you have it. Just to conclude our prepared remarks. As you will remember, we announced on April 29 and then discussed in our first and second quarter earning calls that we are initiated an internal review of our emission certification and compliance processes for our pickup truck applications as a result of conversations with the EPA and the California Air Resources Board. Our review continues and we are proactively working with EPA and CARB as well as with the Department of Justice and SEC to address their questions and information requests. During conversations with regulators, they raise concerns that certain aspect of our emission system on the model year 2019 Ram engine may reduce the effectiveness of our emission control systems and thereby act as defeat devices. Based on these discussions, we've developed a new calibration for the engines in model year 2019 Ram 2,500 and 3,500 trucks that has been included on all engines shipped since September. During our discussions, the agencies have asked us to look at other model years and other engines that the primary focus of our review has been the model year 2019 Ram. Consistent with the values and the history of our Company, which include a strong commitment to compliance, we will work with regulators and other agencies to address the issues identified in our internal review and develop future technologies that will advance our industry. We are already making changes to our process and organization structure as a result of our review. However, it's too soon to know what the response of our regulators or agencies will be to our review or to determine any potential financial consequences. Now let me turn it back to James for Q&A.

Great. Thank you, Tom. Out of considerations to everybody on the call to ask that you limit yourself to one question and a related follow-up, and if you have any additional questions, please rejoin the queue. With that operator, we're ready for questions.

[Operator Instructions] Our first question comes from Joe O'Dea with Vertical Research.

Hi, good morning.

Hi, Joe.

Tom, I'm just curious about kind of what your assessment is of what's currently underway in terms of what we're seeing on slowing demand. I think there are pockets of these end markets that you've been talking about things slowing for at least a couple of quarters now, but whether or not you're seeing this more as we're coming off of a level of very strong demand or whether there's something else at play in terms of kind of how you're thinking about things slowing down here?

Yes. I want Tony to talk more specifically about what happening in the truck market. It'd be a good chance for him to – he's been very close to it and a good chance for him to talk about that. I would just say that broadly speaking, we've seen a number of our markets been at cyclical peaks over the last couple of years, which has been terrific for the company. We've generated strong earnings and cash flows as a result, but indeed some of those markets are beginning to turn down and we've been seeing signs of that. Typical signs that we're used to reading things like slowing orders, inventory build, et cetera. And now what we're seeing is those things starting to come to fruition. Maybe what's surprising to me is it's broader than I thought. Like we are seeing challenges in India, challenges in China, challenges in – even in Europe is slowing. We saw North America coming, that was all part of what we expected, but some of the challenges in some of the other markets, how quickly we've seen in the large engine markets sort of peak out and begin to turn the other way has been a little surprising. So maybe that's what's new, not the – not necessarily that things would turn down, but just how broadly and how quickly they have. And Tony, why don't you just talk about what you're seeing in North America?

Yes. I would just add – thanks, Tom. Joe, I would just add, we are definitely seeing – freight growth has slowed. We are seeing orders slow and production has got to come down to meet – to match the backlog and meet those orders. And so we are seeing things slow. I agree with Tom. The surprise has been how quickly things have gone bad internationally and that was probably not expected at the beginning of the year. I do believe in North America it is a cyclical downturn. I don't quite know what you mean by anything else other than that, but that's basically what we're seeing. Construction has also slowed down in the U.S., as Tom mentioned in his remarks, which I think is another sign that perhaps it is a broader slowdown than just freight and truck markets. But we've been seeing this coming all year and it’s here.

I guess the other thing I'd add to that, Joe, really, in North America, the pickup truck market is the only one that's been holding out steady and strong through the year.

That's helpful. And then just a cost related question, maybe in the context of what's implied on 4Q EBITDA margins. Can you give any sense of what the impact would be from related cost actions that you're taking right now? So what kind of margin lift you would anticipate if you got the full benefit in the quarter with some of the cost actions underway?

I think you should think about the actions that we're taking is really setting up 2020. The biggest impact will be 2020, by the time we fully executed those actions. And again, we'll give a framework for 2020 at our Analyst Day. We're not going to give specific guidance today, Joe, but our guidance is the results without the cost of those actions. We will call out the customer benefits at the appropriate point in time. What's really driving our margins from the third quarter to the fourth quarter, which I think is underlying your question. Number one, it's the significant decline in revenues. That's by far the biggest single impact. Number two, whilst we haven't changed our full-year outlook for warranty or product coverage as a percent of sales is a little bit lower than trend rate in Q3, they’re a little bit higher than the Q3 run rate and Q4 are unchanged for the year. And then the third factor is really that our variable compensation plan is working as designed. So our outlook is lower than our projected payouts, short-term compensation is going down through the third quarter and will move back to more of a normal run rate in the fourth quarter. And really those are the three main factors. So the key now is really talking about the cost reduction initiatives going forward. And again, we'll provide a framework. Tony will add some comments right now.

Yes. I would just add. We’ve been ready for this all year. We are committed to flexing our costs down with demand. We're committed to managing the cycle. We've been tight on discretionary spending and hiring all year and we actually really started to take things out in the third quarter. We've been analyzing underperforming businesses and as Mark said, we decided to close one in the third quarter, we've launched a voluntary retirement program here in the U.S., and so these are all actions we're taking, the majority of which will bear fruit in 2020, but we are moving now to take out cost as demand drops.

I appreciate it. Thank you.

Thank you. Our next question comes from Jerry Revich with Goldman Sachs.

Yes. Hi. Good morning, everyone.

Hi, Jerry.

Hi, Jerry.

I'm wondering if you can talk about what level of restructuring is embedded in guidance, Mark, just to follow-up on the last question. So in the past, you folks have been able to put up 20% decrementals as you've got production now embedded in guidance, looks like you have restructuring. It sounds like price cost is positive, so can you just help us disaggregate it a bit more? And I appreciate there's a wide range of restructuring actions that can be taken, but what level of core decremental margins are you folks expecting?

Well, we're going to give that core margin kind of framework Jerry in a couple of weeks when we're reviewing with all your peers in New York, so I'll defer that piece. But other than to say that the guidance really does not anticipate. There will be some cost in the fourth quarter associated with further cost reduction activities that Tony has talked about, but most of those benefits and even the benefits of exiting production and some of the products we've exited here, they're going to flow into next year. So we're incurring cost now, but actually even if we ignore the costs we're going to have a year-over-year improvement for those. But again, we'll come back and kind of bundle the overall picture together for you going forward. But as Tony said, we're committed to managing costs, managing well through the down cycle.

And I guess, Jerry, just to talk about decremental margins because we will get into the framework. But as you expect, the decremental margins in the fourth quarter are not where we want them to be. And that's just reflects the typical situation when the market starts falling quickly and we're still spending money on future investments. It doesn't work out in quarter one. And so that's one of the reasons Tony is really focused – he and his staff on how to take actions right away, so that we're – as we go into 2020, we bring those decrementals around to what our goals are and you know those as well. So we will be – as Mark said, we will be showing you the targets we have for the core business, why we're confident that we can hit them and then what are some of the other things in and around that, what are some of our new investments, et cetera, that we’re having to stretch to meet, how that all going to fit together. But needless to say, Q4 is not representing what our goal for our decremental margins is going to be. And that's just because the market is falling fast now and we're still doing the actions that were taken. So it's sort of hard to read core decremental margins from the quarter where all the revenues fall off.

Sure. I appreciate that. In terms of the light-duty diesel platform for you folks with exiting the 5-liter production here in the U.S., can you give us an update there, you folks finding that there are opportunities to source similar products from elsewhere, maybe the Isuzu joint venture or otherwise because you folks had been looking for light-duty diesel to be potential option value for you folks over the next couple of years. So can you just update us on the decision tree to discontinue production here in the U.S.?

Yes. I think it's – from a strategic point of view, we still think the light-duty diesel business is a good business for Cummins. And as you said, we are talking to Isuzu about how to cooperate fully across that market. It's a market that requires relatively high volume and scale to be successful. And so that's one of the reasons that we think the opportunities between Cummins and Isuzu are significant. I think one of the things that we recognized with the Nissan-related business, the ISV, is we just didn't reach the scale we needed to reach. And that was a function of the customers and the segments that we’re after. The scale wasn't there. But the scale across the light-duty segment for Cummins is significant. As you know, we have very large scale across our 3.8, 2.8, 4.5 and 6, 6.7-liter engines. We have a global scale, which is unmatched in the industry and that’s of course helping us get good profits, good returns off that engine. And we do expect by the way, electrification in the lower power segments to go faster and that in the higher power segments. Having said that, we think the transition is going to be relatively slow and we think the opportunity to consolidate and earn returns over many, many years to come is there for Cummins and ideally there for the Cummins, Isuzu partnership. So we are investing there and trying to see what we can do to consolidate in the industry in the light-duty segment. It’s just that, with the one – the ISV, we’re after a certain segment in the U.S., it just didn't appear to offer scale for the engine.

Okay. Thank you.

You bet, Jerry.

Thank you. Our next question comes from Andy Casey with Wells Fargo Securities.

Good morning and congratulations.

Good morning, Andrew.

Just a couple of clarifications and then a question on China. In the quarter, you'd talked about $35 million charges for the cessation of development and product exit, $33 million of that showed up in engines. Was the remaining two also in engines? Or was that somewhere else?

Components.

Okay. Thank you, Mark. And then on China – I’ll come back offline for the other one. On China, you talked about the lack of credit availability, do you see that changing in the near future or in 2020?

The credit availability issue is really in India. And just to kind of maybe provide a little more background, the credit market is supplied by non-bank credit institutions. Sometimes – in the country, they call it the shadow banking system, but it's these private credit institutions. And they had a couple of bankruptcies in there, in that segment and the market is largely closed, and to the extent it's opened up, prices are very high. So that's what's going up on India. So we do expect it to find its way through as things do in India. We do expect that to mitigate. We just don't think it's mitigating really fast. It's going to take some time because the financial problem, financial crisis not an economic one. So it is a significant issue in the country and there are other economic challenges in India. So we do expect that things are definitely worse than we expected at this time. And we expect some of those things to linger. The opportunity for us remember though, is BS VI is coming. So – and we are fully prepared for BS VI. Our technology, we believe is leading in the market. We think we have not only a technology, but we also have a cost and scale leadership as well as a service network, which we think is better than competitors. So we do hope to see that this BS VI gives us an opportunity to increase share and increase profitability in India. We just think next couple quarters are going to be rough. That's just the way I'd summarize it.

Okay. I'll leave it there, and thanks for the correction.

You bet.

Thank you. Our next question comes from Jamie Cook with Credit Suisse.

Hi, good morning and congratulation, Rich. I hope you have a fantastic retirement and thanks for all your help throughout the years. I guess sort of first question, I appreciate the color you guys gave on sort of what impacts the margins going from the third quarter to the fourth quarter. But I think everyone was also trying to get their arms around just the magnitude of the revenue step-down in the fourth quarter. So I know you talked the markets globally being weaker, but how much of that is just demand versus you guys also making adjustments relative to what your customers are doing sort of on the production cuts size to rightsize inventory? And then I guess my second question, Tom, as you look to 2020, can you sort of talk about cost conversations you're having with customers? Are they sort of reevaluating where their investments are going and how that could potentially be an opportunity for Cummins? And if so, should we think about that is a 2020 opportunity? Thank you.

Great, Jamie. So let me let Tony to talk a little bit about what's happening in North America. And I think it's applicable in some other markets, too, about inventory and inventory corrections.

Hi, Jamie. This is Tony. We have OEM supply chain where we don't hold a lot of inventory for our OEM customers. We pretty much deliver to their schedule. As they adjust their schedules, they move their inventory around a bit or just their production flow. And we think that's part of the challenge we're seeing in the market today. Those adjustments are making it difficult to kind of pin down exactly what our numbers are going to be versus the market. But we are seeing a little bit of that. I would say none of our OEM customers have significant engine inventory, but there is inventory of trucks in the fields that we see peaked here at the end of September. And so that's just another signal I think that we're going to see demand coming down. The vast majority of the revenue drop into the fourth quarter is from the North American truck side though rather than all the other markets. They are down bit, but it's really North America that's down the most.

And we do expect market share – our market share to be impacted Jamie to some degree in the fourth quarter as well. I mean it happens every downturn. What happens is that the OEMs basically keep building to fill orders and they slowdown shipments of our engines and they use up their engines more than our engines. We see it, that market share move just as we see it move our way when things start to get busy or in fall. These quarter-to-quarter variations smooth out pretty quickly and we still expect to be in our normal range 32% to 34% or there thereabouts. But in the short-term, we expect we'll see some short-term market share numbers, which are lower just because – this is just what happens every time. So we expect it at this time too. I think with regard to your question about conversations with OEMs. There is no question that every OEM I talked to is wondering where they want to put their investments. Their decisions are still in front of them for many of them, but they are wondering because they're looking at autonomous vehicle investments. They're looking at, of course, a whole new set of truck ranges, very competitive markets. They're looking at where they want to go internationally and what that takes and what joint ventures and partnerships and they want to do. They're thinking about telematics and other information technology investments. They're thinking about electrification, fuel cells, other CO2 related investments, especially for the European truck makers of CO2 regs are really, really tough. So they just look staring down the barrel of a set of investments that look 2x or 3x their average R&D spend and asking themselves what they want to do. They're mostly making money selling diesel engines today. So the difficulty is, do I keep selling and investing the things that I'm making money today or do I prepare myself for the future where money is going to be made tomorrow? Those are hard set of discussions and we are in discussions with them all the time trying to demonstrate to them that we can help partner with them, take some of those diesel investments off the table. We also of course have electrified powertrains and now fuel cell powertrains to offer them to. But all of this is to say we can take some of those investments and still partner with you, so you can do the rest and succeed in competition. And those conversations are hot and happening all the time. Where they'll come out? We'll see. But there's no question, you can hear in my voice that I think it's an opportunity for us to expand our relationships with OEMs and increase our opportunities to sell more of both traditional powertrains and alternative powertrains.

Okay. Thank you. I appreciate the color.

Thank you. Our next question will come from Ross Gilardi with Bank of America.

Hey. Good morning, guys.

Good morning, Ross.

Tom, I'm just wondering what your thoughts are on how some of your more stable businesses like after market components, distribution and power gen would perform in a downturn. I mean do you think they move sideways or do they actually go down on the aftermarket side or are you seeing much deferred maintenance at this point that's impacting that business?

Yes. Ross, this is Tony. We expect distribution and our aftermarket business to mostly move sideways in a downturn. It's not perfect, but it does not go through the same cyclical ups and downs as our first-fit business. And we've been growing the aftermarket significantly over the last couple of years. We're seeing a little – as Tom and Mark said, a little slowdown this year, a little moderation of the growth, but we have strong confidence in the aftermarket, both distribution and the parts businesses are going to look really – perform really well on the downturn.

And part of that Tony is due to the growing population of Cummins engine out in the field and in a number of end markets, that means we've got to build in pipeline of aftermarket opportunity over time.

Yes. So I think you have that right. We've got some – we think are going to remain relatively sideways while the others go down. The other thing going on, which you probably saw in the numbers is in the distribution business, especially in North America, there's been still quite a bit of improvement driven from our initial acquisition of all of our North American distributors. We spent the first four years making sure we consolidated, got the right managers in the right place, made sure we held on to customers and let them know that we're a good distribution business and care for customers. And now what we're beginning to do is figure out how to operate those businesses more or like a North American distribution business rather than a bunch of different branches. And so we're beginning to see some improvement in profitability. We'll see where that goes from here, but there's a lot of good plans in that distribution business. So my own view is I'd like to see it do better than sideways because I think there are opportunities for it to do better than sideways during the downturn. But I think Tony has called the aftermarket point just right. We always see a little bit of noise where utilization goes down here or there. We don’t go down a little bit, but we're talking about 5% drops as opposed to 30% or 40% drops.

Got it. Thank you. And then just a related follow-up. I mean your biggest customers still seeing in mid single-digit growth for Parts and your Components business is down 6%. I know they're not apples-to-apples and it sounds like most of the weaknesses is international as opposed to North America. But are you losing share in any of your key markets for components and is the model changing at all, particularly with respect to that customer? They're focusing very, very heavily on their distribution business and seem to be stocking more parts from others as well, so just thoughts there?

The best proxy for our overall Parts business is really the Distribution business. The Components business is probably 70% for us fit, Ross. So turbochargers what was going on the new equipment, obviously that's down quite heavily in some of the markets right now. Our underlying Parts business, we're confident in that. That's not the real issue here.

Yes. And by the way, we believe that with OEMs like our customers, them doing well in parts is not a detriment to comments because remember there's a whole group of parts players, secondhand parts players and rebuild parts builders and even people that are bringing in different makes of parts. And so what we are wanting to do is make sure our end customers get real quality parts and they get a good service experience. And if they do that Cummins and our customers grow their market share and we earn good parts revenue. So we earn good parts of margin selling through our OEM channels just as we do sell in through our own channel. So from our point of view, just gaining share in the market through our customers and through us all looks like a win to us in terms of both revenue growth and profit growth. So for us, them – our customers gaining share is not a bad thing, but a good thing.

Thank you.

Thank you. Our next question will come from Joel Tiss with BMO.

Hey, guys. How is it going?

Hi, Joel.

I just wondered if you can talk a little bit about power gen. The revenues were up a little bit. You guys have been working on that business for four years or five years to lower the cost. And just any color on why the margins are under pressure there?

Joel, I'd love to throw that one to Tony, but probably isn't very yet. I'll give them a quarter or two. But no, you hit it on the head. I mean we're not where we want to be on the power gen business. The good news, of course, overwhelmingly been data centers. The data center business has continued to grow. We keep expecting it maybe to be built out, but it just turns out not to be. We're continuing to see more data center business. And of course, we've now got the Asian section of data center business also growing, which is, which gives kind of a second kick to the data center business. The basic standby business has not been good for some time. It's not that there isn't any, there is. It's a big business and it doesn't – it's a lot of business for our distribution system, but it hasn't been growing. It hasn't really recovered in any significant way. And we saw a little bit of recovery earlier this year and thought, well finally, and then it kind of tailed off. And then of course we had – we've had a couple of really bad areas like the Middle East has been really bad for a while, but I've just kind of pulled the life out of whatever growth we did see. So we're not exactly sure what that means about the market. We have a lot of market data about it and trying to understand what the future trend is. I mean, we understand what the past is really well, what the future trend looks like. It's hard to see, but it looks like, broadly speaking that energy demand while still increasing is increasing at a rate that's slower than energy capacity build. And that's mostly because while there's been growth since the downturn in 2008 and 2009, its growth has been relatively modest and infrastructure has kept up as compared to the high growth we saw especially in developing countries in the decade before. That said, we got a lot more work to do. It's still a profitable business for us and good returns, especially when you consider the fact we've got a distribution part to it, plus we've got all the industrial business engines that come from it, but we want it to be more profitable and we're disappointed with where we are. There's just nothing else to say about that.

Okay. And then so Tony doesn't feel left out. Can you give us your kind of best shot at, if you think the underlying demand for transportation is enough to absorb all the excess capacity that's in the channel now, by the time we exit 2021?

That's a tough question. I probably was better prepared to answer the power gen, and this was given I ran that business quite a few years. That's a great question. And I don't think I have a good answer to be honest. I don't really have a strong view of that yet. So maybe in a very unfair thing, I'll see if Rich wants to have a shot.

Yes, that’s one of his babies.

He's going to bring out the pictures of his grandkids first, but then he'll answer the…

Just play back one more time, Joel.

The growth in transportation demand, the way you guys see it is enough that by the end of 2021, it can absorb all the excess capacity that we're seeing in the channel right now.

Okay. Yes, I mean I think so and what you have Joel, you know, when lead times get long, the order boards actually get over inflated because people are wanting to get, build slots and all that. And right now I think actually it's underrepresented what the demand is because I think – I mean what the future demand is. So like I talked to fleets, they're not putting orders in right now because they're saying lead time is low, I can put it in later, I can delay that. But eventually the trucks run and they need to be replaced. And so I just think we're going to have our normal shake out over a few quarters and then kind of get the backlog cleared out and the orders will begin to come back in.

And maybe just a little historical protective, Joel because it's always hard when you're here at the floor to figure out when does it all get right. But historically, you'd say what – I mean, you'd say in four quarters the market will be back. Again, there maybe something unique about this, but it isn't obvious that there is something unique. So we'd expect by the end of the year that we would indeed have absorbed whatever there is. There's one other trend underlying. You've probably seen this, but people like the new engines and trucks, they're seeing much better performance reliability out of new engines and trucks. So I think anything that's older than 2017 you're going to see no matter how, whatever we are in the cycle, people are going to want to switch out those trucks and engines just because they're getting such lower operating costs out of the newer engines and trucks. That'll be a little bit of a boost, I think as we start to get out to the back half of the year.

Okay. I think we've got time for one more last question.

Okay. Our next question will come from David Raso with Evercore ISI.

All right. Thank you.

You slipped in David. Way to go.

I have a question about the JV income, really a clarification, but then I want to talk to the markets real quickly. I apologize with the phone cutting out, maybe I missed it. The JV incomes implied bouncing back in the fourth quarter versus the third quarter. Is that related to some of the emerging markets and how you're handling the upcoming emission standards? I'm just curious why it bounces back from $68 million to implied $79 million in the fourth quarter?

Yes. Hey, Ross, this is James. So there's a couple of little things go on from the third to the fourth quarter, so most of the markets are relatively stable as we go from Q3 to Q4. China gets a little bit better than some of the on highway markets, like commercial vehicles starts popping up just a little bit as well. And so you've got a couple of positive things going in the right direction there. But it's a relatively modest on both from Q3 to Q4 in the grand scheme of things.

But I was trying to think about is what you're implying about 2020 to have that bounce back because in the quarter the royalty and interest income really dropped down as just wasn't sure what was going on there. So we'll talk offline. What I wanted to ask about particular though, outside of North America truck and obviously Tom, you have great insight from your customers and markets, what they're telling you, different players do different things and getting ahead of the curve behind the curve outside of North America truck. Can you just take me around the horn quickly on which markets do you think what you're hearing from your customers? They're actually getting ahead of the curve on taking production down to almost leading things out by the end of the year, which ones are so clearly behind the curve and which ones look about just right. Just we'll get some level set on various geographies and end markets going into…?

Yes. Let's start with China. So clearly in China, the construction guys overbuilt, in the second half of 2018 thinking they're going to have a great 2019. They overbuilt and they're clearly behind the curve, right. You saw that – you heard the numbers, like the markets up and we're down a pile and that's just because they're just selling dealer inventory and their own manufactured inventory, so that that's for sure. It won't take very many quarters before they're caught up, but they're in not at that stronger market, so it's stronger than we thought it would be today, but it's not so strong. So we're hopeful they'll catch up in a few quarters. But again, it just really depends on end markets. I think truck markets a little bit better than we thought. I think people are pretty much caught up. Nobody's really far ahead. The only thing as you heard was there some prebuy done, which means they'll have some inventory, but it's mostly in gas. It's pretty small markets I'd say. China, we got the construction markets to catch up and they're behind and the truck market's kind of on. In India, it's just – we just got the rug pulled out. The whole finance thing means it's all underwrite. There's nobody carrying a bunch of inventory or anything. There are some, but that's not the big problem. The big problem is the demands all completely flatness back. So there's really, I mean who's behind the head is kind of the side story. In Europe by the way is straight on. So Europe has got no big challenges in inventory a little bit here and there, but generally speaking, Europe has kind of moved from pretty good, okay, they're not – it's not a disaster. It's…

And then just a smaller market, but marine feels like it's on a bit of an opportunity…

Is there a pick up in marine or is it production just getting back in line with a flat business?

Yes. I think demand is picking up.

Demand is picking up a little. Again, it's in a weak set of markets. It's just that it started, came off the bottom basically.

Okay. Thank you very much. I appreciate it.

Thank you, David.

Thank you, David.

Thank you. Bye-bye.

So thank you, everybody.

Yes. Thanks everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.