CMI - Earnings call transcript Q3 2017

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Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2017 Cummins Inc Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s program is being recorded. And now I’d like to introduce your host for today’s program Mark Smith, VP of Finance Operations. sir. ahead, go Please

Mark Smith

and Good discuss and third Cummins' with our XXXX. Jonathan. teleconference Pat quarter end Officer, and our remarks. of to we today all Participating Chairman are our today Chief to results Financial me Executive morning your you, welcome for Freeland, President be Rich everyone prepared our Ward, of Chief Thank for available Tom Officer, questions Chief Linebarger, will our Officer, Operating at the the

that note or Such please and start, the of will the of hopes, hear we Before of within statements Securities will you some forecasts, regarding expectations, future. of beliefs be consist XXXX. information our Exchange Act the today and given express strategies the intentions forward-looking statements meaning on

and results available and the our those most filings regarding deck reports of Our disclosure Annual on Report our statements and could such forward-looking our with filed of subsequently from section is Exchange XX-K of filed information statement uncertainties. XX-Q. Form Securities Commission, More differ uncertainties in in the on materially because quarterly and projected Factors recently number risks slide forward-looking in our any particularly risks actual Risk such future Form and

measures this those of to refer financial measures GAAP you be call, and course the of discussing financials. During we’ll the for to will we certain reconciliation non-GAAP our website

of a cummins.com press webcast of under release and Media. Investors financial available copy heading and today's Our on with copy website the a are statements our at the

to it turn over I'll Now, Tom.

Tom Linebarger

same-period a percent quarter the for growth initiatives. increased Engine incurred off-highway elevated $XXX compared X% quarter for global a million details year sales third year. below million from third take year ago. of EBIT to quality in benefit year. in third Pat results rebuild it segment Revenues engine cost quarter to up leverage $X.X to engine, but the increase outlook EBIT summary XXXX quarter higher increased Organic to as increased last as you did an ago of EBIT third from sales discussion for and then an forecast of the were from always. or resulting Good to XXXX. due year. in XXXX. quarter the distribution the as for our and third increase the including business result customers. the Sales quarter and demand the new the product from sales XX.X% Thank the increased through of everybody. X.X%, for increased for our quarter a campaigns construction. a billion, parts for morning to start riveting more demand XX% the by of quarter of our acquisition year. performance our truck a the or you, higher with our I'll in America third initiatives, year-over-year higher XX% financial about Mark, strong finish and will an Engine with result costs third last of primarily due due cost. to material a compared reduction $XXX completed XX% was and last compared stronger EBIT as North benefit cost of volumes operating in X.X% customers in X.X% sales and business expectations and stronger fell of

performance. than sales was was EBIT quarter benefit more X.X% in compared overall EBITDA offset of higher declined increase XXXX. the percent from quarter in variable Third stronger an costs, by as X.X% compensation the third resulting to of company

Bharat and developed to International truck of as market Stage by growth and IV the demand demand new due sales Regulations recently of in result XX% $X.X to the for increased XX% revenues China XX% India. stronger increased implemented In quarter truck revenues North increase increased America, Third Emission products to a share. billion. component segment meet in strong the

Our contribute X% the - segment Eaton quarter in joint third new Cummins to Automated and growth. August operational X Transmission segment revenue revenue fully venture Technology became on

gas quarter volumes mining an and year by EBIT impact rising next improved same to driven already EBIT being experiencing system X.X% customer the by primarily more and volumes are in EBIT impact designed cost is joint which third XX% increased oil of reduction offset joint ago. in stronger a quarter higher quarter year the from by sales programs. Power to third and and We customers. sales positive strong increased stronger a ago variable parts XX.X% a earnings percent in compared negative venture XX.X% the costs as of pull manufactured the and commodity was encouraging. compensation generation than engine increase of costs. the engine in for the products third parts - venture, Segment result as X.X% and for material and to the quarter

a continue improvements fourth our performance operating in UK the generator our announced segment facility plant set engine Daventry to power these margin business, combination and we than complete capacity XXX systems more initiatives our When additional systems current plans site. In levels. of Recently, in manufacturing power We in points business. our set for footprint two announced further even to the will improvement previously manufacturing consolidate from UK yield assembly into drive at in will we at the revenue other will Kent, in actions the generator plants. alternator reduction to which quarter, our Stamford basis the complete rationalize result of

and performance the will quarter starting discuss XXXX our third our Now, America of I will of then the of largest international some North markets. with on I key for in some markets comment

orders America Organic distributor Eaton acquisition to in improvement in improved truck of Technologies XX% higher quarter oil equipment and sales demand, with revenues a mining in North and due from joint of X% addition increase gas Our Transmission the and venture primarily customers. growth. sales construction contributing an increased and third Cummins

XX% truck market, American quarter our increased our customers North year. XX.X%, market third increased and medium-duty of the up last heavy-duty in stands over truck unit engines share sales X% In year-to-date XX%. the at Our shipments to

Our X% shipments America truck North levels prime OEM market North demand and for XX% medium-duty our by Sales Engine compared power construction pickup in the of generation consumer higher a took Sales Revenue to from quarter sales equipment market customers XX% last quarter customer year-to-date, is reflecting market American weak strong share customers. weaker a improvement the when ago year high an largest a horsepower and almost and low demand increased and in X% America XX% the third truck last mining to increased stronger engines increased customers. grew for vehicle shutdown. higher last in to North extended sales our extremely to XXX% power a in year driven from oil gas, due to recreational to in markets year. year. market

Our XX% growth quarter increased and in for international by China year strong in revenues the new a compared India. market third to products by ago driven

revenues trucks in the medium demand. due of contributed billion, to duty our increase $X.X China quarter for markets. were overloading XX% economy heavy and to and the compared increased truck Increased a joking due growth regulations ventures shipments including improved while ago, stronger year in engine construction China Third enforcement by demand strong increased XX%. an to in on-highway Industry of XX% and

lower one its as our growth its our a market than lineup rate vehicle Our volumes overall engines a market light-duty OEM China produced XX% decline market partner by share of share. XX% increased engine XXXX. rate venture. our of local engines truck XX%, down experienced in Foton the as at the Year-to-date above of by Shipments from engines displace market joint Dongfeng continues grew from our to competitor in XX% overall is in with

from of to is a now in construction improvement a excavators third Chinese from up quarter infrastructure light-duty the industry the increased share demand market year Our due ago investment. property year-to-date, in X% an ago. and for year X% XX%

to in shipments and for excavators for the Our equipment wheel demand power telecom up markets. construction center loaders market. data generation engines to mining growth industrial increased customers, engine and XX% due doubled picked in expanding increased as of rail in business in than shipments power share systems and and Revenues China our more from we

our BSX-compliant due Service for the to systems compared XX%, a $XXX X% a reflecting of increase revenues by ventures Third In down meet feedback year IV competitors. quarter our new demand. reflecting sales System a though, from quarter business Emission to an Brazil, to market our Regulations truck driven components a Year-to-date, we've on including customer is meet local received levels GST. in a driven XX% implementation Stage for slowdown engine primarily an the decreased increased the joint production introduced XX% developed export acceleration revenues trucks. to Industry regulations. truck growing of the very a our in our our XX% share positive performance orders in economy September growth in XX% temporary weak to Revenues third compared year the from production recently ago, the did XXXX to million, increase power were of very Bharat share business in market by in overloading by in see of We ago. by India and Goods called new implementation due increased year-over-year and Tax engine products

individual overall our end then regions Now on markets. outlook provide and let me XXXX for and comment

XXXX North production to XX% for XXX,XXX for of raised be industry prior than demand of prior to guidance our to trucks X% number units. XX% America our units, X% in up to from and are up our stronger and to total above We in XXX,XXX company forecasting due XX% markets. XXXX of We've revenues heavy-duty higher forecast of up forecast regions

to expected from million the our heavy units. for compared guidance prepare expect for revenues year, units, to growth medium including down We in a our market In X% the extended America a light-duty market share above the truck XX% X.XX the now of XX% our our previous range. forecast we Engine outlook up units, XXXX, new of demand medium XX% our be in of change. for forecast one as XXXX project share and our market outlook XX% of size trucks previous XXXX. of from have December a now markets. full-year previous and our ventures guidance In between share In of We to to up guidance projection have the full to to our duty we from XXXX, in share ahead be than the X% XX%, with range of for plans truck prior our previous an X%, we market of largest raised XXX,XXX increase up medium-duty market, take in previous market million X% XX% our and in shutdown flat In higher We've be and from XX%, X.XX joint in forecast XX% currently OEM running raised previous demand up from our in expect of to increase market, pickup growth from an domestic truck exceed our our for truck end North heavy to down in to to most growth light-duty in XXXX be China, market X% projection expect to the shipments share point expect We X% units. we XX% in XXXX. increase. of customer model to are the be range to our updated to market XXX,XXX XX%. and

Our Bharat construction currently Emission demand and of flat joint XXXX. faster total as our to year. for Regulations ventures an barring are revenues than market Stage more revenues China XX% be to In XX% expected a last including XX% rebounded result up for ago. of than project are we to compared from full-year prior expected we Truck XX% to units, to in forecast India, has be share much IV a expect year We the full-year our improvement productions our guidance implementation raising XXX,XXX now to year-over-year. and double

increase to In and in - power expect continues government construction XX% next from the in our unchanged year. than annual growth global XX%, gas in above also forecast to be in forecast. We We between to growth. are applications of customers our range Cummins X% XXXX. low forecast mining the to we've of global is the the the Brazil, in of to for in advance production sales raised raised project generation XX increase we in America outlook from we've of and from In more the we growth EBIT horsepower from the to since North our actually forecast the expect year projection extremely low higher truck driving for venture. engine oil shipments increase be the in engines inclusion joint and last which - Transmission currently high production summary, previous of sales our unchanged except Improving XX% XX%, XX.X% to prior first for for increase improvements extremely full-year EBIT XXXX prior As infrastructure, Technologies range devised for from Eaton Automated to XXXX sales rail, levels demand XX.X%, representing levels and XX%.

agreement of has Cummins leading existing Inc, are to technology access are and successful products will Brammo from real a and electrified of in demand We’ve that higher and launch development of applications. company to strong our of the executing from markets advance markets in packs, provider Recently in growth powertrains. continuing world also momentum a electrified design to powertrains. while of purchase important continued We gain experiencing delivering to number base, generate we of we of new critical Brammo's of assets custom packs, the well strategy the a advance in a learning market industrial battery development with customer capability optimization an operation be the and battery and expertise to reached the revenues new the share.

charge field to of degradation system through quarter, in in are of engine America. that potentially third be aftertreatment address Furthermore, of recorded we year component pre-XXXX the we other necessary of address XXXX a in expected certain model the model circumstances emissions in a million for the of systems issues. the systems the America similar certain are engine field performance During to applications. in degradation These and actions North actions $XX years unexpected evaluating cost XXXX subject could to North performance

share. tests matters. still important years degradation of well highest our our apply a issue that issues performing is may ongoing, to not note evaluation currently to the priority. It's our passed are aftertreatment this emissions outcome over and this arise to estimate these evaluation engines number Completing performance is market have products of are gaining does that As unable we the which any current of multiple addressing that and and

it middle actions and analysis updates as finalize applications possible, take may which provide XXXX arise. are until as but to of will the may We quickly the under operating given the and conditions variety engine of systems associate that the operating, any

the EPA and We and any CARB are penalties both not related collaborating expect closely or do with fines to this matter.

with be to disappointed has about today, product quarters. recent more in in Pat financial a the detailed with After lot a there's positive a issues company that Although our business for and forward. unexpected is quality taking going update that is in costs associated on outline drive our you provided the cost steps of associated experienced we're which to sustainable improvement performance, quality to going number we've

Now let it the turn Pat. me over

Pat Ward

of the then more with everyone. discussing performance of Tom, I a the full update in outlook provide review the the morning our company's operative on start for detail. financial results I before you segments year. will third and will Thank an good quarter

which in in a China, from the improved XX.X% North initiatives. reduction of due year an Warranty Selling, to and in compensation sales effective the Third global million industrial XX.X%. XX% share tax The warranty XX% $XXX production of benefits partially by or increased last venture for sales, a the engines sales quarter ago of record an assets. and variable quarter offset million increase America expense. increase $XXX sales million year-over-year income mining, $X.XX million EBITDA company. of XX% from year. third of to last year improved sales due engines. due of heavy decreased in positive medium-duty compared the income India, South to contingency of income of components earlier, ago stronger discussed in in to a and million lower the of and our variable sales while for to America the primarily East. of by by Sales million loss quarter International gas and Sales the X.X% and this absence last [ph] warranty a a venture levels sales our demand tax increase margins previously of billion, by were was for percent a and third for The sales, to highway revenues $XX by were Europe results to increased both third demand a year. was of declined year four year gain mainly were to rate points. by material negatively And the on XX.X% Earnings up expense increased demand of represented improved the demand $XXX research for year in Joint improved revenues, were higher compared was off million to quarter power expense increase from cost quarter. in due construction, $XXX of which impact to million sales contingency. mainly from markets. from mentioned $XX cost increased for operating the for oil percent China and primarily ago, per quarter of loss earnings volumes or of products. before variable diluted by Net compensation XX.X% XX% $XX and increased due stronger truck compared as in Gross to which offset and and offset $XXX and sale primarily Other demand of investments and increased quarter recognized cost ago year and impacted were of driven the segments material X% higher and higher each on-highway, XX primarily $X.X which as from expense, new for the and basis sales by XXXX $XXX Middle due the due quarter of and third development XX.X% stronger rental of in the the weaker generation or interest X.X% in higher $X.XX compensation million cost joint or a in of admin, the equipment. as a

their up or sales. markets higher guidance sales. than the of year XX% more forecasting and warranty of to international expectations X.X% construction higher included performance let from flow and which $XX grew by loss of in ago company’s earnings be then in and Moving costs the compensation construction production truck some now absence of to loss segment, In sustained variable to summarize year increase X.X% quarter, XX% an review the Segment full of for for contingency onto We XX.X% revenues. demand $XX in were the XX% XX% off-highway expect in increased on for the joint profitability and XX% China expense. the last conclude and sales equipment full-year strong to to million from quarter with Benefits billion in due full-year operating result we're segments North volumes, in year. EBIT venture as $X.X the I revenue This the engine me margins North charge stronger for revenues now XX% truck while was million the led compared and a the XX% North highlights. to America contingency. will of America America, be cash the increase to or in demand million of XX% compares - EBIT China to up $XXX in range quarter third to offset previous On-highway a engines in revenues and

resulting quarter the the or and a X%. of million to in compared segment, from were million power quarter variable benefits Increased completed sales while X.X% X.X% record stronger $XX further gains $XX Organic XXXX for which divestiture ago. was last from or compensation The $X.X quarter sales a overall to acquisition equipment. distribution XX% a cost year. billion, of company the from assets of the sales quarter offset added year For the to the third increased revenues margin increased higher performance of XX% related for compared generation fourth the a EBIT revenue rental

previous to to distribution XXXX, For XX% rebuilds. projected parts off-highway increase and XX% up to compared of demand due X% guidance for is revenue now our to strong XX% engines, to

the are full We now be X.XX% between year. and to X.XX% EBIT margins for forecasting of sales

For in $X.X were the segment, third from quarterly year a XX% the revenues record. increase ago quarter, and a the components billion

million April. EBITDA in medium-duty to Sales of million Segment as North of the joint was the compared sales warranty production. components the the a increase reductions, to revenues increased and in in result XX% segment growth from revenues and of higher new in variable material America truck ago which offset the compensation XX% XX.X% benefits for continued in meet primarily to still $XXX due the standard aftertreatment increased which year Cummins and cost systems heavy-duty than in XX.X% higher and from International or last in introduced on-highway revenues were delivered was primarily a Excluding record volumes by by increased year. than driven the venture, Eaton the expense. sales emissions sales of higher more sales or India quarter, XX% $XXX China that XX%

Benefits full-year. increased X.X% In ago, joint million the revenues XXX% systems $X.X levels increase compensation third increased were of Cummins sales in while quarter by revenues overall our of million expect offset quarter, year. in EBIT of America contributors X.X% Eaton billion, XXXX, to $XXX venture million or to the to XX% the up main in EBIT along be forecast. by to and revenue increase we truck the the guidance industrial the part increase X%. in than inclusion engine from estimated sales XX% sales projected $XX is shipments from and North with XX% from range sales compared a China from XX%. sales to partially now up of segment, in a power the XX.X% an to and by ago. sales For Stronger of of almost are generation demand resulting of for the the prior extremely XX% increase commodity to the for an Mining gas expected and last or oil year performance year revenues was growth a Segment were costs and $XX XX% company's from power higher XX% low costs. and variable in

For of includes demand system new due to in in oil million up approximately to XXXX, sales segment ventures which to for in to revenues driving unconsolidated up our the $XXX Cummins year revenues previous increase from gas, industrial year the new this and as to be demand America markets truck increased venture. highway against EBIT now second guidance off Automated X% for engine a and anticipate levels power now full revenue to North to increase. equipment XX% guidance sales of truck Income we half do of guidance previous also XX%. XX% This appreciation year. expected for China. continued Transmission significant for gas XXXX for in have Technologies the Eaton of XX% both currencies the be markets, levels North increase into for oil strong the We of expect particularly and and to XX% a we XX% not from construction is and to XX%. joint on in up versus the US the America, the for demand increase full And of rebuild effect outlook and foreign X% X.X% of dollar. prior between And of demand on XX% customers in margins in company, the and from compares the expected recent now of foreign are guidance driven mining market and result X% expected and to stronger is raising improvement. than production by to higher of The the the this and joint sales the are currency mining, is higher by China in

XX.X% tax margins the for year. EBIT to be And Cummins the compares to XX%. and be year which of and between rate sales impact to company last XX.X% Eaton full of expect includes We joint the XX.X% is reported expected venture

the XX% period Turning cash for to a operating cash quarter total increased third to bringing $XXX the same operating year-to-date last activities from month anticipate the billion, We flow, million, year. $X.X was cash million nine generated from and flow in long-term $XXX to year-to-date XX% within sales. bringing to total XXXX range still the to of of million XX% during our $XXX expenditures guidance were Capital cash in and expect that the repurchased quarter million the be And investments operating to $XXX the XX% range in over the shareholders of will months be And in plans we increased $XXX year, flow dividend full year. have third million the to return X% for the million of million shares. our to dividend to of X.X this quarter, first shareholders through and $XXX year. with payments nine share repurchases consistent by we returned we

earnings sort and with progress basis, see market guidance are improve. in warranty results year per can well so across are conditions with four from all demand continue the EBIT overall so customer to XX%. turning with as to increase on the and from this share As Tom you of are far said, we million up $XXX made or we up as prepared Market year-to-date in meet the XX% performance a is our segments the far although in sales disappointed increase higher encouraged we up costs and XX%

in on of would XX Indianapolis, be will the November of Finally, Indiana, to I Analyst like website. webcast be in available remind our an everyone holding will that a our presentation Investor we Section Day

over Rich. let to turn Now me

Rich Freeland

and Pat everyone. you, Thank morning good

that issues specific preventing issues made. of of and all specialists have to problems, gaining reviewing This our can where to area as overall Areas have been review As assessment aspects quality by And many include end, while we're and and charges our issues product been overall an our underway committed have analytics where accountability and including find supplier issues. this remains specific outside is recent mentioned, the product appropriate listing as share work a and to we our quarters increased be have and we of had are these operating supplier to in of unacceptable. and that quality systems. work on we focus this quality have our eliminating our customer impacted of seen identify focused recent process on in To quality results this we're use financial markets, aspects fix customers and of in had telematics improvements most quicker. development excellent

implementing these in changes and actions. warranty initiatives clear with be over It is corrective are by will to We significant These cost attention our moving our that the team we've in and highest improvement important of our leadership note quickly time. monitored made have board. real improvements

For are example, engines heavy-duty than from four years XX% XXXX down ago. warranty costs on more our

but to we Our can products know and fix strong how will improvement. gaining drive are and share, issues, in we performing them we better the actions area. sustainable well, summary, to corrective do have In we this underway know

Mark. I'll Now turn it back to

Mark Smith

then proceed. related call to section limit to turn one in Thank the of now and questions. you be please follow-up back it and question Please call. much a we're follow-up And your then over the available Q&A the very and get queue. Rich ready call any to Thanks after for I'll

Operator

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

Jerry Revich

calibrated systems we the we level versus sales so and as EBIT, like if costs are sustained to of talk try cost think leverage get absolute EBIT as to to those as wondering on reduction power about looks all operating transitory ‘XX? even much distribution should up. what How EBIT about in price I’m could you being adjustment

Mark Smith

is Mark, and Hey a I systems clear think sight of got we've improvement Jerry, in so in margin this line power distribution.

I power kind on the of One think we've chasing through had which project, but run disappointing is been And some commodity has business this basically challenges we we’ve operating profitability. costs. -- in two alternative as our copper impacted actions this within we’ve to systems recover, one on significant to power and going That's end particularly year. those been costs, taking as large those out described had performance are costs year. then pricing pressure of

engine the downsize In on Kent into to so almost to year. That's footprint facility. move this assembly our And announced further Stamford, actions next complete to we've genset to business get announced execution track actions savings our previously then the addition, quarter, just alternator our we've we're Daventry restructuring got operations UK within of our plant. rationalize and our

from copper the two to level -- the those going the project at improvement Again, we’ll of performance basis clear volumes restructuring are pricing. can add other from plans year. Jerry XX actions probably for XXX basis the plus year over Just got then other points around, and another but get over points margin, alone current we've move

we’re confident I So to think we're going margin improvement. get

Tom Linebarger

we now again add matter could than is up, that, remarks still our which have distribution, I harder of are compensation the when smaller costs up. compensation variable so on hit it’s, starting just costs that divisional upcycle, I little if the a and the variable went going where as on timing, we divisions we mentioned just and distribution, think the takes other as in matter, a a

consolidation businesses Next again done year acquired over a year, of factor a such in. and lot we've this we've distributors, XX:XX bringing X be those as that the and won't we've also

benefits a of think lot I ahead of the us. are

cycle go, So at have to mid are that as the the cases, to a of lot still cycle, because both we in so we room go. not continues strongly top, we feel

margin both the inside an done improvements businesses both the on the on to we've that basis, the in As divisions. ongoing continues plus improvement rise, those see all market cycle will work

Jerry Revich

joint outs expect you does about your roll rollouts, the rolled a on separately of out number PACCAR, the talk that months your rollouts at to nice see the in then product of the and contributor? business new about of if can timeframe you can cadence venture, you talk product positive expectations you And earnings additional over become what next this XX see models, as the

Rich Freeland

Rich. This Yeah. is

strong. is poll next So transmissions heavy duty on customer the the gen

we're with additional good fuel right now from in really So -- counting rolling and economy XXXX on improvement this that. getting out PACCAR and month early we’ll so OEMs add and we're

So international we'll market. of longer really more we're up additional. then term, encouraging. the looking results also talking X% the We're to to And -- look

there years projections, of but probably this, like interest [indiscernible] the there's lots of is discussions in not -- in that's interest So we India, in a pretty in absorb said, the heavy the but couple of and particular in about short-term be China, early of development of we as rollout, in kind expenses will it in years. amortization costs moving first slower couple

Operator

comes of Jamie the Credit line question Cook next from Our Suisse. from

Jamie Cook

from of Tom. should look that cycles as again issues. investors digit, having, XXXX, after is headwind. And given up the you the much my headwinds guess moderates so what missed that probably over this sort to to I'm hearing given to like probably you some then China that, US the quality and margins cycle the first potential year, double be I on we warranty of the is, concerns truck production issues Both and concern question, the but is incremental questions. the you're Two

externally is looking time of broadly, but for more EV the is on there potential to my across you then can positive or so issues or your we're we're is business. is the some I seeing some seeing? I I lot given, question consistently a investors -- the why where part up been acquisitions just externally mean reason from that perhaps other second because strategy concern And So question the focused of of these of that know sort for out help this make developing XXXX me get there spending opportunities is, of what you've we're in the

Tom Linebarger

with let about me start just in the first, where are So the cycle. point we

looking expand the we be see think and a the still not mid the you're other mentioned, and much of lot top North more there's the has we we including a at Brazil, range I markets, et a upside, come As company for pretty, cetera, which best they markets, truck cycle market a like, on for are the big so of and feel to markets like market barely which India, systems off again, is cycle, near in top, America, markets bottom. but getting significant China might but course us at some more as grow XXXX at, room see power opportunity to clearly we are depending further, it's we our markets,

as So to we've both I seeing then content. added of we as some the these markets we're better, these cycles, in do performing in because terms get in meet of market remarks, products benefit, terms share, now see our emissions to are the but new upside and of -- components across also mentioned my we're starting

some go opportunity us. like then Mark the of are margin, think as expand through seen we've see again we even revenues, the margins. a revenues add further, So look all side, on to of of to those at went cost benefits upsides lot which we the to going so current

of continue Also share. suggest field, the So -- based cycle performing And we share I view, we our and we past strong, that's market growth, remains true point market market our think volume in and on near financial to for we're from the evidence nowhere think confident to And downturn, company’s and quality, to ability this. products market side, on we are about hard which performance. kind lead started from of we the again, the from upside in be our recoveries. that I clear would we our as to sure improve reductions the means quality where see are make the that team's as working so as want And the expand cost both Rich we are quality. cost we our margins. really said, improve in way, further our that in of continue we that think now incredibly improvement in the the markets represents continue to well I'm

have in incredible We leadership. knowledge business experience and our

to what we is as am to do We on And how program focused very this improve that. quality. done so. of said, before. quality. I focus to no on Rich a business confident lack know in time have have focus in We do completely There when to this it's

very to am them say don't see I and and I and are get -- So mentioned on improvements that confidence the year, the and expect have guess Jerry's for results it only my Rich to those other I complete is, I we’ll work. that that am we to confident we some from that team, the next headwinds support I again variable year example, I repeat this numbers thing comp question. the there will

and years. we a of position as we are performance over excited customer very in building lot about of we've in So result the We're next several investment optimistic a again, made products in the have year. about loyalty new our last markets

Jamie Cook

is unfair a let my just potential just that focusing strategies, be guess, on because me Tom, I results. externally second was just And question M&A we're lot impacting but

Tom Linebarger

-- that. just I maybe again And words on two more

us outside. compared people, is our for that a focused I lead, there that group a of so are of development separated it's are the have in small relatively people acquisitions. We that people strategy it's a business All group focused It's handfuls work, rest and XX,XXX a inside. group looks externally to that the big for couple

to do no no that. from business there's So, way business -- successfully. There's distraction our running our

Our focus every our business day what complete we're that's is and incredibly doing. keep on have business very competitive, to winning our are in demanding, we customers

Cummins, significant company based -- have the So we yes, effort think to expand years. we grow have some to opportunities built we over enhanced and have a for the externally we've and capabilities significantly really on we the look

a very at are that, -- people business We of of is focused handfuls all. of people but not couple on rest it of the handful a distracting the

Operator

from Steven Our the comes UBS. from next question of line Fisher

Steven Fisher

it's are just how there could if mentioned I quarter you you Mark guess if and the net input line steel if long today, sort a to going to basis? they take the flat prices impact what talk where in and on of year-over-year the Wondering the copper, costs a on of stay about commodity impact they was year-over-year basis

Mark Smith

Yes.

systems specifically just power clear, the I Steven, business. So talking was be about to

commodity of to even offset has For no so about of get costs the half but there's second doubt we've exposure pricing, this company largely able on overall, in year, net to continue million business, because we’ll within the pressure, even we've improvement good been power and net there coppers been we’re year, seen $XX points about underlying the in accelerate in side basis the -- inflation, systems business. copper XX material though been overall this improvement a a Whereas year. commodities the that though been talking

Tom Linebarger

clear, work, et it's other worked but Mark, purchasing obvious, costs. way costs commodities we commodity and ways in to people And that find reduce inflates, those work, lower cetera engineering the it aren’t case that that group of cost to through products purchase engineering we offset when probably is our I to reduction think just ways to find other or costs,

down to and drive commodities has more picked able So cost mining we've side, inflation costs. we inflation the because engine inflation course of benefit course as commodity a that up of result been in on and than of that then from offset

Cummins does material. better So side have commodities when to just offset purchased on increase as to we net a the costs, our in our really matter, work in are supply stronger, hard commodity

Mark Smith

metal, XXX offset to positive Steven by came year that over year, but the fourth numbers, And material just quarter. we give the quarter net point, points total markets fourth metal so Tom's a were basis XX in points, you XX up costs, to down excluding points basis basis

Steven Fisher

testing size the more be just of of on engines that need the the program what little terms there? variables And you detail are us in and EPA give these tested have to still carbon, a of unresolved population still can you that the out

Rich Freeland

Rich. This is

where are action some those are QX, failed on. tests, we're in engines the taking used know we you Just now, in ones pre-XXXX right so so

Okay.

of similarities to at because our a in system EPA systems, with some do so there other are look population. XXXX going that And some to and XXXX the that we're

with there's operating right in now lots vehicles, engines, while very EPA not identical so characteristics, it's just the similar working and -- there are in and the And it's and early. the are we're in variation characteristics so there of conditions certainly

that work. So starting we're just

taken, just not where at be point understand a that at additional coming months we're not yet. will and is we say if the -- population actions over that to to but we we're it So point what what there's

Tom Linebarger

that actions our know for in QX. the we costs are already take all And we need to

we're know, stuff, it’s rest we've the accrued and early. phase already for, only investigation we everything this of in So

Steven Fisher

X on And this beyond highway? is Class

Tom Linebarger

on but affected, We really that populations the don't are know it's focus. highway all is the

Operator

you. Thank

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

Chris Lazarenko

This is on Lazarenko Casey. for Chris Andy

warranty the on clarification expense. quick a Just

quarter, inclusive XX XX of XX total total that million. million So to a is the Within EPA the CARB related or is incremental? of that

Mark Smith

components of was Total XX, between engines. the when and distributed XX

Chris Lazarenko

there take I from charges million XX XX you XXXX XX see is costs onetime year-to-date, product the QX, And QX do million from the the increased expect to some to offset? million, or and new if in tailwinds partially

Mark Smith

about No increased this, because issues. to give the of was ago an two new the product thinking example, a Chris. the And points costs going margin way warranty forward, we're just gross year down from

Okay. that been And that's have. total we

where down So in been that five, range. six for we're going after is which the last years, to this really hard the level, we've to five get years, back back X%

Operator

Our next question Wertheimer comes Rob Research. from the Melius from line of

Rob Wertheimer

getting able then already to certain identified, XX XX% about you it give all you've now and mean you but could sold, are so is own that other is million have obviously quality of all fair of your sold or is that it's to component engines to more million less as a understanding it kind potentially it you affect you is I and not on the focus about engines? XX maybe just guess you've of this it's -- I'm fixed whether obviously it the that to do, the sense extrapolate the and the I said like systems right XX% to manufacturers and applications, recorded any So

Tom Linebarger

Okay.

just So own the is engines. XX million our

it will And We very extrapolate. don't know. think be dangerous to Rob, just too It's I early. Okay.

we’ve investigation. where taken we're we’ve done just And so the and starting issue, that all charge actually the identified we've again is

Rob Wertheimer

you delineate the separate directly up? the the million in And then charge popped and of they just are million XX or the that was kind you’ve XQ $XX to the of issues either of then could have separate charge just in cause what all engines that are was quarter issues mentioned, sort related

Rich Freeland

Good to that. clarify

campaign charge that around the after the safety about. had XX another we're is we're going talking population. emission another in proactive So a We issue

the that's XX million. So

issues campaign gone systems proactively actually and those where there in to been we with get power in where those yet we've So QX to customers, much like had we get hadn't internally, issues -- identified out engines. some

the So was million. that XX

Mark Smith

are issues. unrelated And those

Rob Wertheimer

develop that whole Unrelated. obviously, the more? population, may that we and And Perfect. XX the not so into issue may XX you the then that did that’s is closed or assume

Mark Smith

Right. Correct. Exactly.

Operator

the Our next question from of from Steve comes Volkmann line Jefferies.

Steve Volkmann

quick you're like sort of just next the follow-up. looks somebody sales I'm about think and I or I'm targeting separate but I CARB over know to the since was you kind correct wrong, another to if sort this that Rich, this me let's think year X.X warranty really and we of said, all don't how to the back aside or that kind it Just curious, get think long the trajectory of something warranty just term said what about quarter and put like, of of we two. of over stuff but ratio sales do X%

Rich Freeland

Yes.

over pretty trajectory actions So I the that on seen. looks get I we've think with quarters good taken, that. mean the the I we've in intend next to back several level what

a a is use get I we've do trying the are. level this in going we so confidence new say X% been. and where as issues confident what below got or emission to thing that to we've actually fact, this years up, and on we -- separate and So three been two been deal we five had just, pop very going we've for place back to forward, in we're do for take actions we're know the we kind very again robust, there of are, we've to what have so I'm we've down call, that. where but they there how corrective put And we'll with, And

Tom Linebarger

do And QX. Steve, we expect warranty this improvement in in

Steve Volkmann

that a for products decades, should be probably in world you be seems your to compete historically a do the Cummins philosophically And certain don't because willing and be Tom, the into kind idea. the actually many is whether touch, or is you you'd if maybe seems any for I'm might products vertically changing but philosophical wondering kind still sense of to it bad then that end a of to something on this not integrate want have view like if you but and that's make making maybe customers, involved of I of that to think end idea was with question, markets end

Tom Linebarger

Steve in want chief. about be this. I is clear philosopher the to

never customers. table. of off around piece And questions like their things as forever. we ourselves are and is line other As of we on the the once just we side, expand changes serve and not regularly step things what from frequently we as we and point all think particular the we should equipment soon well, our we our anything where our power really over block through the include revisit like we work reach with into makers the are this I system think -- do equipment, to to because support in strategy, relationship We definition them in this, their

supplier in did. on set anymore. took one-time eventually we generator for making set making them decided not So large generator a which basis, we be perfect decision example It time. out, successful with they to sets went and then decision. one-time single manufacturer some it's decision, good a like that strategic is to them every turned a that all we then but would generator from But a us And engines to generator be sets change a time competed out a good

you served you them major to with is any clear And or equipment think again. we're successful we of don't when help our to right change construction we We it once. make by that that So it, are be partnering see any in now, reason or trucks markets. thing very make a best that it OEM partners

So be a turns philosophically, it out decision. off limits, to it's just not not good

Operator

from from comes next Our Evercore David of Raso question ISI. line the

David Raso

help First costs through that’s how up R&D went costs some about then sequentially. of significantly, in going I'm understand to a P&L unique think Can these moving XX% that that forward? line mentioned we question trying parts is just here. the that should or The increase you truly item you've on think is on any us cost. R&D in R&D are

Mark Smith

question. Good

the funding, customers any of it that's we those receive so is just specific whether from of significant course and lumpy. for programs agencies, that given government recoveries the happens During year, timing

the from Q. engineering to rate. more costs expect not the that's should I permanent there You where we're mean, elevated in clearly that a not are business of That's some engineering, moderate areas a see but level. investing run

David Raso

will and this little I and X% the assume a that obviously, little was see into on bit bigger the you're more of at engineering revenue structurally saying and the we’ll moving growth, a me in moderate? R&D revenues R&D Columbus spooked it meeting, bit again, that dive but the forward, high to but side So it that

Mark Smith

Yeah.

within think a related course there I to turned actually we this of was particularly time, last markets the higher. compensation year, then variable spike engine course again, were as year of that comp full reducing this over our compensation business, and variable the down. And

for jumps which given play But like seeing reasonable quarter. We any delta run, into said a significant see target long there has X% will you're in numbers. of over expect as been to just kind So the overall well, engineering. a we’ve that the don't

Pat Ward

in lot area, new I invest electrified about it then going Investor It's go and that that business be should some had to the of these to the sensible detail what Cummins good the will a to detail. are power we to that in continued how talk that get how especially about we it, heard so questions. talk about ask more for expect We've current bit that about Day. we Investor they're investors quite reasonably on about a what areas we our talk in expectation what in relates new a like a and in that, for required think the David, will fair at return investment to will actually trains, of a investors of Conference, should that, to answer but of and about do our And work the bit some investment

David Raso

there. And put mouth doesn't Columbus, your I’ll words It’s -- like again coming there's a in R&D. notable not function commentary to step your in be sound obviously for

Pat Ward

what you’ve started of a forward is seeing making you. glad in and R&D it we a with which percent do coming, you're our in not sales we're Exactly. in to that, on and what question for earn trajectory said, to address these going for of add the we changing in need a that's how seen we've to base and way, think electrification, business notable expect already increase as which I'm same are area good look I new by There's to business areas we Mark do current the and we the keep sort investment our we're as but return a to

David Raso

quarter. On the third warranty expense, the than quarter you fourth mentioned lower

So the we X.X, there. would about clipped quarter, come that we The had at X.X, right hoping so last came to quarter that we’re in XX on X.X fourth down cents quarter, like can the versus of some quarter? trying what ’XX, is but what's you on I'm ’XX, to year-over-year just think ’XX give handicap base the us that? the for fourth

Pat Ward

in X.X% is our will be fourth that guidance, David, around quarter of sales.

David Raso

we least there, that quarter extrapolate this two If warranty it's already down fourth of last going about how -- resolved ’XX? much think with really down XXXX, that at to at mention EPA did X.X, should mid analysis get you but expense doesn't the

Pat Ward

in issues team our the The my showing remarks, quality and do make think up really one-off have problems. That's mentioned in the that here the that that that field, been and with are disappointed Rich just share. again doing we're we’re we're why market gaining on doing is, feel experience well these sure thing to as about these Dave, customers I thing why issues products that proactive all and are not is good we

us financially, is the surprises thing and a each offered thing. we're bad and good think they’ve fact and that scores. is, them So approach helping our resolving year issues quickly proactive finding in that's the The I

ended lower higher quite warranty. with this we You That expecting safety you instead numbers, a a surprise on were mentioned talked was Rich bit warranty based the up and campaign primarily about. that

just it’s that's say, if it's So, quarter, and it part was one been just well, disappointing the you one quarter, would but several.

keep issues what is with eliminate is right we're but by deal that's we're trying thing an we're we doing do the customers, really with. issue. system these we care review of what need yes, getting to to deal taking why What do one-off and them trying as quality to So

need And new those more some address We really proactive to so to trying to sell. tools we system avoid that's and how issues. the what complicated we're figure out

operating So what of base to that's warranty in area. has The level that do. already we're trying been low

just get numbers So avoiding talking by we that was range right about. really these one-off in issues, X% back Rich down to those that

hard address the So imagine to it's one-offs. as issue these there for being us not to

David Raso

are doing cards almost sales with them the current XXXX. X.X wild they some mean and are, XXXX pretty the every for earnings. warranty quarter the if at But EPA I we big mean of you're that's XXXs and goes to, I $X you're at is are work expense conversation what of fourth wildcards a through the to agree but population, whatever there

to said, we're and the some just ’XX, run no in in as hopefully there's you're base quarter, point I'm at if fourth X.X X out we're ready hopefully case. wildcards, So trying wildcards, toward that's X.X, no understand more just running rate the saying we’re at Rich at running

Mark Smith

guidance at the Well Yeah. so year. XXXX you give of end I'll the Xs,

David Raso

and engaged conversation the want just turns and understand. to not cards, fourth and Yeah. wild. that It’s in X.X from understand, assuming cards with months is any to just wild the I'm pretty now X.X trying aren't the the just these X.X quarter, three the low but more wild I really we're and EPA you’re the

Mark Smith

so go. that’s been really that about, far, able talking don't to that, think what I emissions our going where off was warranty got is forecast The Rich the work is we've just these know to base point and issues. we that's well then one-off pretty we

costs that a It know in where not. tell, to not we're one-off taking we more study, it one-off our we're we we're level will and reduce -- fact we’ll let too confident that this what you to what we know early we're about whether know about, is issues, the talking do these is these we are but base result trying as of these just the look impact warranty, talking know. emission of and or as So soon is of do

Operator

then Partners. O'Dea Vertical question day the Research Joe from Our the from line comes final for of

Joe O'Dea

just variable comp about that sets the to you the you've guide Can sense as baseline. sort how think any this and think flow headwinds give had that to through the about revised higher level higher how to you're us of and when comp year and just of impact variable a facing of of

Mark Smith

the So higher quarter was million quarter, a for last give variable higher than to expect comp third million we XXXX. just to the it was in $XXX of Joe, full for what year than $XXX be you third the it and baseline, around year,

mentioned earlier underperformed, was Tom last variable so comp year, we on, more. think I

over plan. expected performing we’re we've what to relative be, So to

least So XXXX opportunity as move we normalize basis I comp variable think at XXX points planned back to there’s clearly and of into we levels.

Joe O'Dea

like other when like kind be And just one-off of to incentive is then emissions the comp. a it of record lot got, about R&D segment you you think it obviously, higher of burdens would mean the appear might if start the cost system, segment, have some in on or you question at higher an sounds all-time these warranty margin. engine engine timing to back looks I that the quarter, stuff out, you been

then the back, mix and about horsepower what price the just the kind how might of kind of surface that margin there, bit, but understand much validate that just high some of or underneath a maybe talk a to observation of to comes you're some be seeing the in underlying little strength? so little bit advantages And

Mark Smith

a course performance You're little of the contributed price. absolutely where cost productivity gains in then Very improvement, well we're some and strong. net underlying joint operating it's strong Joe, in got earnings clearly performance doing right, of not to to China venture is segment. material with also one-offs, diminish those pretty of manufacturing It's but servings, do operating that

we So correct that horsepower nice a the the to is that the demand the in in seeing of to earnings that business bit in growth need segment. with engines and business. expect segment there certainly Nothing course no They’re high power longer the are high horsepower and The end continue. definitely, in we’re there operating to systems engine do is well. user we’d

Mark Smith

Okay. Thank you much. very

Operator

the participation conclude Thank you, does This your gentlemen and program. ladies for conference. today’s in

disconnect. You day. Good may now

Cummins (CMI) 31 Oct 172017 Q3 Earnings call transcript