Q4 2019 Earnings Call
After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Please be advised the today's conference is being recorded.
Required any further assistance please press star zero.
Now I'd like to hand, the call over to executive director of Investor Relations Jane Choppiness.
Thank you good morning, everyone and welcome to our teleconference today to discuss Cummins results for the fourth quarter of 2019.
Participating with me today, our chairman and Chief Executive Officer on Weinberger, Our Chief Financial Officer, Mark Smith, and our President and Chief operating Officer, Tony just wait.
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 be here would 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 intentions on strategies regarding the future.
Actual future results could differ materially from those projected in such forward looking statements because the 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 factor section of our most recently filed annual report on form 10-K, and any subsequent 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 www dot Cummins dot com under the heading of investors in media and with that.
Out of the way well begin with our chairman and CEO Tom Weinberger. Thank you James Good morning, everybody I'll start with a summary of our fourth quarter and full year results and finish with a discussion of our outlook for 2020, Mark will then take you through more details at both our fourth quarter financial performance and our forecast for this year.
The company implemented several measures to reduce costs and improve future performance in the second half between 19.
The third quarter, we announced our decision to end production of certain underperforming product lines as demand fell in the fourth quarter. We moved quickly to execute a number of additional actions to lower our cost structure, resulting in a 119 million dollar pretax or 90 million after tax restructuring charge.
Global head count reduction actions covered by discharge began the fourth quarter and were and most were completed by the end of January we expect to realize savings from the restructuring and other actions of $250 million to $300 million as we discussed at our analyst day in November.
The actions, we have taken will mitigate unexpected slow down revenues and 2020 and position the company for stronger performance as market demand improves.
We will continue our investments in new technologies, and new product launches in 2020, as we have in prior periods of lower demand, which we believe we'll continue to improve our strategic positioning the industry and sustained profitable growth.
As always we remain committed to returning cash to shareholders through the economic cycle.
Now, let me summarize our fourth quarter and full year results and comment on key drivers within each business.
All references to EBITDA and EBITDA percent exclude restructuring charges.
Revenues for the fourth quarter of 2019 were $5.6 billion, a decrease of 9% compare to the fourth quarter of 2018 with declines in most major markets outside of China.
EBITDA was $682 million or 12.2% compared to $896 million or 14.6% year ago.
EBITDA decreased as a percentage of sales due to the impact of lower volumes and an increase in research and engineering expenses to support new product development in our core business as well as in our new power segment.
These impacts were partially offset by strong material cost reduction activities and improved pricing.
For the full year come in sales were $23.6 billion down 1% year over year, our EBITDA margins were 15.8% compared to 14.6% in 2018 due to lower warranty costs through pricing and material cost reduction activities and partially offset by lower volume.
The impact of higher tariffs and increased investment in research and development.
EBITDA dollars were a record $3.7 billion, an operating cash flow was a record $3.2 billion.
We lowered inventory by over $400 million in the second half of the year and our strong operating cash flow supported the return of a record $2 billion in cash to shareholders in 2019.
In our engine business sales decreased by 5% in 2019.
Lower demand in the Chinese like commercial vehicle market, North American and European construction markets and the global bus market were partially offset by higher demand for pickup trucks in North America.
Okay and medium duty truck revenues in North America were flat compared to 28.
EBITDA was 14.6% compared to 13.7% in 2018 with a negative impact of lower volumes more than offset by lower warranty improved pricing and material cost reduction activities.
Sales for our distribution grid business grew by 3% in 29 team increased demand in North America, and China, driven by higher sales of Gen sets to datacenter customers was partially offset by lower demand for engines and construction and oil and gas markets.
Full year, EBITDA increased 8.6% compared to 7.2% in 2018, but the benefits of improved pricing and lower variable compensation costs, partially offset by the impact of a strong U.S. dollar and currency volatility in Africa.
Full year revenues for the component segment declined by 4% due to lower truck production in India and Europe.
EBITDA was 16.2% compared to 14.4% in 2018.
Increasing EBITDA percent was primarily due to lower warranty costs and the benefit of material cost reduction programs, which offset increased investment in the development of new products to meet advancing emission standards in China, and India as well as the impact of lower volumes.
Our system sales decreased by 4% in 2019 demand for power generation equipment was down 3% with higher demand for power generation equipment, and datacenter and military markets more than offset by lower demand, an RV market and for backup power in the Middle East Latin America Africa in China.
Demand for engines and industrial applications to declined by 8% driven by lower demand in oil and gas and mining markets EBITDA was 11.7% compared to 13.3% in 2018.
Power systems revenue and EBITDA margins were below our expectations in the fourth quarter EBITDA was negatively impacted by $15 million charge to exit the business in Africa part of a broader effort to improve profitability in that region as well as higher warranty costs.
In addition orders declined in multiple segments in the fourth quarter, especially in parts sales due to lower engine rebuild volumes negatively impacting both revenue and profits.
In our new power business full year EBITDA was a loss of $148 million inline with our forecast we continue our investments in key technology areas for the future and building out our product offerings to target markets and applications, most suitable to electric and fuel cell power.
Now I will comment on some of our key markets in 2019, starting with North America, and then I'll comment in some of our largest international markets.
Our revenues in North America increased 3% in 29 team, primarily due to higher demand for pickup trucks and power generation equipment.
Sales and medium and heavy duty truck markets were flat compared to 2018, while sales of engines to construction and oil and gas markets decline.
Industry production of heavy duty trucks increased to 303000 units an increase of 6% from 2018 levels industry production remains strong for the first half of the year supported by a record industry backlog. However, as truck orders remained weak in the industry backlog declined Oems began lowering.
Truck build <unk> third quarter, and once again lower production in the fourth quarter.
Market share for the full year was 32% down two percentage points from 2018 as Oems prioritize production of their own engines, when making could cuts to production in the second half of the year.
The market size for medium duty trucks, we don't was 138000 units in 2019, representing another strong year of demand.
We maintained our clear leadership in the market with full year market share of 80%.
2019 marked another strong year for pickup truck sales in North America, we shipped 148000 engines to our pickup truck customers in 2019, including the highest number of engines for Ram pickup in over 10 years.
During the third quarter, we decided to end production of our I SV five liter engine, which was primarily sold to Nissan for use in pickup truck applications.
Engine sales to construction customers in North America decreased by 5%, while nonresidential construction spending remains high we saw industry participants take steps to reduce their equipment inventory in the second half of the year.
Engine shipments to high horsepower markets in North America decreased by 38% from last year was lower demand from oil and gas customers, partially offset by increased shipments to mining customers.
Power generation revenues increased by 4% year over year, driven by demand for military applications and datacenter customers.
Our international revenues declined 6% in 2019 full year revenues in China, including joint ventures were $5.5 billion up 4%. The increased revenue was driven by market share gains in the medium and heavy duty truck market as well as the impact of our new JC joint venture with sales of 237.
$9 its first full year of operation.
Industry demand for medium and heavy duty trucks in China decreased by 1% from record levels experienced in 2018 ahead of our expectation three months ago, and driven by increased incentives to scrap and has three trucks.
Within the truck market construction related dump truck sales declined 16% in 2019, while non construction related truck sales increased by 6%.
Our market share improved to 14.8% this year from 12.7% in 2018.
The light duty market in China declined 1% in 2019 Oems accelerated the launch of new truck models in light of the more stringent enforcement of overloading regulations that began in the second quarter, resulting in end users increasing truck pork purchases.
Our share ended the year at 8.1% inline with our guidance and up 2.6% from 2018.
Industry demand for excavators set another record of 236000 units in 2019, an increase of 16% from 2018 levels. Our market share ended the year at 14% flat with 2018.
In our power systems market demand for power generation equipment in China was flat for the year.
With lower demand for standby power offset by growth in data center markets.
Increased investment in domestic fracking resulted in higher sales of oil and gas engines in 2019, increasing from 17 million to $72 million in the year.
Full year revenues in India, including joint Ventures was $1.6 billion, a 19% decrease driven by both a weak economy and reduce credit availability.
Industry truck production declined by 29% in 2019 and construction demand declined 34%.
Power generation revenues increased in 2019, partly due to increased demand in datacenter markets.
In Brazil truck production increased 8% compared to 2018 with strong growth in domestic demand, partially offset by lower exports, primarily to Argentina revenues declined 9% for the year with increased truck production in the market offset by the impact of Ford exiting the Brazil truck market last year.
Now let me provide our overall outlook for 2020, and then comment on individual regions and end markets.
We are forecasting total company revenues for 2020 to be down between eight and 12% from 2019, driven by a decrease in heavy and medium duty truck production in North America, Europe, China and India.
We also expect that construction mining and oil and gas markets were experienced double digit declines in 2020 and power generation markets will decline, 5% to 10%.
Industry production for heavy duty trucks in North America is projected to be 185000 units in 2020, a 40% decrease year over year.
The industry enters 2020 with a backlog of 123000 units less than half the 297000 years when entering 2019 as order rates were consistently below truck production throughout the year.
We expect orders to remain weak in 2020 with continued weak freight activity, resulting in excess capacity and lower used truck prices.
We expect our market share to be flat with 2019 at 32%.
In the medium duty truck market, we expect the market size to be 123000 units a 20% decrease from 2019. After several years of strong demand, we expect our market share to be in the range of 75% to 80%.
Our engine shipments for pickup trucks in North America are also expected to be down 10% compared to a very strong 2019.
In China, we project domestic revenues, including joint ventures to be down 7% in 2020, we currently projected 10% reduction in heavy and medium duty truck demand and flat demand in the light duty truck market.
We expect our market share and medium and heavy duty trucks to be in the range of 14% to 15% in 2020 flat with 2019 and 2% higher than it was in 2018.
Our share in the light duty truck is expected to be 8% to 9%.
With 2019.
Industry volumes of and this six product will increase modestly in 2020, primarily in light duty applications as to the used vehicles move to NSX standards in July of this year, followed by all remaining diesel vehicles in July of 2021.
First met standards similar to NSX and the United States 10 years ago, and we have leverage our knowledge and powertrain technology to develop a range of products for Chinese markets that we expect to be well received by end users.
Industry sales of excavators are expected to decline, 25% from record levels in 2019.
It is our it is expected that our industry as well as others will experience supply chain disruptions and loss of revenues in the first quarter due to the Corona virus outbreak.
We have significant operations in who Bay province, where rwanda's, located including manufacturing and Texas facilities that have been impacted by by extend the closures. We are monitoring the situation in China very closely to ensure the safety of our employees and their families and the minimize any impact on our operations and our customers. We're also.
Monitoring any impact on our global supply chain by Chinese suppliers, and taking precautionary actions wherever possible.
In India, We project total revenue, including joint ventures to increased 15% in 2020, and we expect industry demand for trucks to decline, 5% in 2020 after a 29% decline last year.
Production will remain at very low levels in the first quarter as Oems are used truck inventories ahead of the planned implementation of Barack stage six standards in April.
We expect demand will remain low immediately following the launch of of the six vehicle, but will increase in the second half a year.
Yes.
Vs. Six represents a significant content opportunity for Cummins and in India, and we expect to increase sales of after treatment systems by over $200 million in 2020, offsetting continued low demand across Indian domestic end markets with the transition to be a six we expect to maintain or market share leadership.
With a longtime partner Tata and will begin to selling after treatment systems to a new local customer for our components business.
We project our major global high horsepower markets will decline in 2020 demand for new oil and gas engines is expected to declined by 40% in 2020.
In North America sales continued to be impacted by feet fleet replacement that occurred in 2018, and a lack of new oil well drilling.
In China, we expect to see lower demand as the industry absorbs the record amount of equipment purchased in 2019.
Sales of mining engines are expected declined by 20% in 2020 with lower demand in Russia, and China, primarily driven by lower demand for four and investment in thermal coal.
Demand in power generation markets is expected to decline, 5% to 10% driven by lower global economic growth and lower demand from datacenter customers, where we see construction that was originally planned for this year slipping into 2021.
In summary, we expect full year sales to be down 8% to 12% in EBITDA to be in the range of 14.2% to 15.2% of sales representing a 25% decremental margin in our base business, we expect cost savings from our restructuring activities material cost reductions and increased pricing will partially.
Upset the impact of lower volumes and increased variable compensation costs.
Before I hand, it over to Mark who will discuss our financial results in more detail I'd like to take a few minutes to share. Some of the progress has been made in our new power segment, which completed second full year of operation last year.
In 2019, we delivered full electric power trains to both the school bus and transit bus markets. These buses are not prototypes, but our full production units for commercial use for example, our full first fully electric bus with our partner Gilly went into service in Santa Monica, California in the fourth quarter.
Our distribution business is providing service and support for these electrified buses as well as supporting the same customers with their existing natural gas and diesel fleets.
We also announced calmar as a partner in the first electric terminal tractor market in 2019 and with production expected to begin in early 2021.
We also announced several programs with end user partners to deliver electric prototype vehicles for their use and testing, including the United States Postal service.
There are currently over 200 fully electric <unk> like to fight vehicles with Cummins, New power systems in the hands of our customers today.
At the North America commercial vehicle show in October we unveiled the Cummins powered drive a flexible hybrid architecture with seem seamlessly shifts between pure electric for environmentally sensitive areas with a 50 mile range and hybrid for jobs, requiring more than 300 miles range. The power drive system can be combined with various side.
As a diesel or natural gas engines and battery pack outputs, providing our on highway customers with the flexibility needed to meet the demands of their diverse jobs end markets.
We completed our acquisition of Hydrogenics last year, adding additional fuel cell and hydrogen production capabilities to our new power portfolio.
Within 60 days or closing the acquisition, we showed a fuel cell power truck at the North American commercial vehicle show and are seeing significant interest in fuel cell technology in both on and off highway markets. The inclusion of hydrogen production technology.
As part of the Hydrogenics acquisition position us well to support customers looking to utilize hydrogen fuel cells, because lack of access to hydrogen is significant pacing factor in fuel cell adoption.
While we are investing in our new power segment. We're also continuing to invest in diesel and natural gas power trains in North America. We now provide three natural gas engines that meet carbs optional low Nox standard a 0.02 grams per heartbreak per break horsepower hour, a 90% reduction from the current EPA limit of 0.2 grams.
We launched our first natural gas variant of our Hedgehog engine platform 78 leader for power generation applications in 2019, and this year, we will launch several new on highway natural gas platforms in China.
Investments in diesel technology continued to drive improved fuel economy for customers as well as lower emissions in 2019, we launched the company's new X 15 efficiency series, which meets 2021 greenhouse gas standards and delivers up to 5% better fuel economy.
In India will launch all our new BS six engines and after treatment systems. It systems in 2020, driving over $200 million, an incremental revenue for the company and lowering Knox by 50% and particulate matter by over 80% we.
We will launch and a six products in China over the next 18 months in preparation for full adoption in July of next year.
As you can see we are continually innovating across our broad portfolio of power solutions from diesel and natural gas to fuel cells hybrid and fully electric options. We plan to provide our customers with the right technical solution for their application at the right time and to continue to be the leader in power commercial industrial equipment now, let me turn it over to Mark.
Thank you.
Good morning. Thank you Tom I'll begin with a quick summary of our financial performance in the fourth quarter.
Full year before moving onto our outlook for Twentytwenty.
As already discussed we recorded restructuring charges in the fourth quarter totaling $219 million pre tax on $90 million after tax and we expect to realize on annual savings from the restructuring and other actions in the range of $250 million to $300 million.
In order to provide clarity on our operational performance I'm, excluding the impact of this restructuring in my following comments.
Fourth quarter revenues were $5.6 billion, a decrease of 9% from a year ago sales in North America declined 8% in international revenues decreased 10% currency negatively impacted revenues by 1%.
Earnings before interest and taxes, depreciation and amortization was $692 million or 12.2% of sales for the quarter compared to $896 million will 14.6% of sales a year ago.
EBITDA decreased by $214 million driven by the negative impact of lower sales higher warranty costs on lower joint venture income.
Warranty costs were in line with our expectations, but were higher than about each of comparison a year ago.
Gross margin of $1.3 billion will 23.5% of sales decreased by $243 million a 1.7%.
Driven largely by the impact of lower.
Volumes and into a lesser extent increased warranty costs, all of which more than offset the benefits from favorable pricing material cost reduction and lower the compensation expense.
Our selling administrative and research costs of $903 million increased by $16 million year over year.
Selling general and administrative expenses decreased by 11 million, while research expenses increased by 27 million driven primarily by new product development in the engine components, a new power segments.
Partially offset by lower variable compensation expense joint venture income declined by $55 million, primarily due to a noncash impairment of a joint sure in Africa within our power systems segment.
Other income of $20 million improved by $16 million, primarily due to better returns on the investments that underpin our non qualified benefit plans during due to market volatility in the fourth quarter of 2018, we included $24 million and mark to market losses within other income.
Net earnings for the quarter was $390 million or $2.56 per diluted share compared to $579 million of $3.63 a year ago.
We also include after tax expenses of $22 million or 14 cents per share related to actions taken to cease development and production of certain products in North America.
And our planned exits of the joint venture in Africa within power systems.
All of which will benefit which will benefit future financial performance.
The effective tax rate in the quarter was 19 in half percent.
Operating cash flow in the fourth quarter was strong and inflow of $838 million down from last year due to lower earnings which more than offset.
Lower working capital.
Now I'll comment on individual segment performance on the full in the fourth quarter before moving on to the full year.
Revenues for the engine segment declined by 15% driven by weaker demand in North America, and lower construction sales in North America and Asia.
No. It was 12.1% down from 14.6% a year ago do the impact of lower revenues, which more than offset positive pricing.
Material costs.
Distribution sales declined 1% year over year growth in power generation sales offset weaker demand from oil and gas in construction customers, leading organic growth about flat and stronger us dollar negatively impacted revenues by 1% EBITDA improved to 8% from 6.8% a year ago.
Due to the benefits of positive pricing on other operational improvements, particularly North America.
Revenues for the component segment declined by 12% due to weaker demand in North America, Europe, and India, which more than offset growth in China.
EBITDA was 13.4% compared to 15.7% a year ago, primarily due to lower gross margin as a result of little volumes.
As Tom has already discussed the fourth quarter was a challenging one for the power systems business with revenues declining by 12% driven by weaker demand in oil and gas mining and power generation markets sales decline in most regions led by North America.
EBITDA on the fourth quarter was 5.2% down from 10.3% a year ago with the negative impact of lower volumes.
Hi, warranty costs from the impairment of the joint venture in Africa, we've already discussed.
For the full year 2019 revenues were $23.6 billion, a decrease of 1% from a year ago sales in North America, 3%, while international revenues declined 6%.
I'm sorry for the full year was a negative 1.1% impact on sales.
EBITDA was a record 3.7 billion of 15.8% of sales were 2019 compared to $3.5 billion of 14.6% a year ago, lower warranty expense material cost reduction actions and positive pricing more than offset the impact of lower sales and some increase investment.
New product development.
We to joint venture with earnings in the new in China.
Net earnings were $2.4 billion of 15 point $15.05 per share both full year Records. This compares to $2.1 billion $13.15 per diluted share a year ago.
Full year cash from operations was also a record $3.2 billion stronger earnings, especially in the first half of the use of working capital reductions in the second half of the unit contributed to the strong cash generation capital expenditures in 2019 was $700 million flat with the prior year.
We returned a record $2 billion of cash to shareholders of 64% of operating cash flow in the form of share repurchases and dividends, we repurchased 8.1 million shares throughout the year at an average price of just over $156.
And increased our dividend by 15%.
Moving onto the operating segments I'll summarize the 2019 results from Idaho focused for Twentytwenty.
For the engine segment 2019 revenues decreased 5% a year ago I lead.
Increased from 13.7, 14.6% sales.
In Twentytwenty, we expect revenues to be down 15% to 19% driven primarily by a decline in heavy and medium duty truck production in North America and weaker demand for construction equipment in North America in China.
20, Twentys EBITDA is projected to be in the range of 13.3% to 14.3% compared to 14.6% sales.
In 2019.
In the distribution segment revenues increased 3% from a year ago to a record $8.1 billion EBITDA increased to a record $693 million or 8.6% of sales compared to $563 million or 7.2% sales a year ago.
We expect Twentytwenty distribution revenues to be flat to down 4% compared to 2019, driven by lower sales of power generation equipment and construction engines globally weaker demand for oil and gas engines, even North America.
EBITDA margins are expected to be between 8.6% to 9.6% of sales compared to 8.6%.
2090.
Components segment revenues decreased 4% in 29 team, while EBITDA increased from 14.4% to 16.2% of sales. This year, we expect revenues to decline 9% to 13%.
Given the drop in sales, primarily due to lower truck production in North America, China, and Europe, partially offset by more than $200 million of incremental revenues in India associated with the implementation of product stage six emissions regulations.
EBITDA was projected to be in the range of 13.8% to 14.8% of sales compared to 16.2%.
2019.
And the power systems segment revenues declined 4% in 29 teen EBITDA declined from 13.3% to 11.7% of sales in Twentytwenty, we expect revenues to decline a little to 7% to 11% primarily due to lower sales of power generation equipment, and then we could demand for mining and oil.
Gas engines again.
EBITDA for is projected to be in the range of 10% to 11% compared to 11.7% of sales and 2090.
In the new power segment Mek expense was $148 million in 29 team inline with our guidance.
Currently anticipate net expense of $160 million at the midpoint of our guidance.
So in Twentytwenty consistent with our communication that where recent analyst day.
We are projecting company revenues to be down 8% to 12% in Twentytwenty EBITDA is projected to be between 14.2, and 15.2%, which represents 25% decremental margins on our base business at the midpoint of our guidance.
The negative impact of lower sales will more than offset the benefits of restructuring material cost reductions on the positive impact will be priest pricing.
Although all of those actions will set us up for better profitability when markets, which.
We are projecting our effective tax rate to be approximately 22% in 2020, excluding discrete items view with the increased in the tax rate from 2019, driven principally by a decline in earnings in lower tax jurisdictions in our forecast in Twentytwenty.
Full year operating cash flow is projected to exceed $2 billion to funding the restructuring costs, we expect capital investments to be in the range of $657 million.
We plan on returning 75% of operating cash flow to shingles in Twentytwenty, So base case.
So to summarize all of this we delivered solid results in 2019 capitalizing on strong markets in the first off of the year to generate record earnings and record operating cash flow.
In response to weaker demand in most of our written markets in the second half of the you. We took a number of actions to reduce costs address some underperforming parts of our business.
To set the business up to perform better.
When we move to the stronger part of the cycle, we're well positioned to continue on track record to delivering improved performance cycle over the cycle as we navigate the downturn that is upon us in twentytwenty.
Thank you for your time today and now let me turn it back over to James. Thank you Mark So other considerations for others on the call I'd ask you limit yourself to one question and the related follow up and if you have additional questions. Please rejoin the queue.
Operator, we're now ready to take our first question.
Certainly our first question comes from the line of Andy Casey with Wells Fargo.
Thanks, Good morning, everybody.
Good morning anything.
I guess kind of a short term question to start off given the disclosure about.
You know you expect of disruption in the first quarter.
Hey, as that already included in your guidance and B, what does that due to the normal quarterly spread.
Yes, well.
You remember Andy that that we for so far most of the disruption has been during Chinese new year, which and so we always have in our and our guidance the effective Chinese new year shutdown.
But starting.
Based on Friday last week, the shutdowns have now extended beyond what we have planned in our in our plan or guidance.
So right now we don't really know what the exposure is going to be partly because we don't know how long, it's going to last and partly because.
If that if it if it does recover pretty quickly we expect most of the sales to come back in the year. So we don't really know what's going to happen, but but just to maybe add a few more pieces to my comments.
We are basically looking at three different kinds of exposure. One of course is safety of our employees and their families. So we are very active trying to make sure that everybody.
Has the support and resources they need we know where everybody is we know people are doing wellness tests were just trying to make sure that we're taking care of everybody Thats of course job. One job too is we want to make sure that theres no impact on customers. So we are tracking both.
Our parts, what's in inventory what needs to be shipped by when how we can proactively work to make sure that if things are there are extended delay we have at least impacted customers thats, both for global shipments and Chinese shipments. So we have a very active set of activities on that and then third of course is just shipments within China.
Right now we are planning to open our facilities somewhere between February 10th in February 14th depending on where they're located in.
What the province schedule is and right now we have there is no backup data given by the government. Those are the dates and so our plan is to open on those dates and if that happens if it happens as planned our expectation is that the impact will be relatively modest not zero, but not but modest and could possibly be made up a near.
If they were extended further because the outbreak extends further and the government has take further actions and then of course, there. We don't know yet that will have to figure out then what'll happen, but we are worried about both shipments in China as well as shipments to markets outside of China, because we do have a number of parks in China.
That supply plants outside.
Okay. Thank you I'll I'll leave it for others that journey.
Thank you and our next question comes from the line of David Raso with Evercore.
Hi, Good morning, Hi, David and better and good morning, just so we can better understand the incremental margins a bit by division.
Tom and about 250 to 300 million of annual savings how much of those savings are expected in 2020 and can you help us of that between the divisions.
Yes, I mean, basically we're expecting almost all of those savings in Twentytwenty.
It's in the disclosures you can see.
The split of the cost reductions by segments. So we've broken that out for you you should assume that the savings.
[noise], mostly proportional to the expenses incurred with the one caveat.
You will see a chunk of those expenses are in the corporate eliminations column and those will be just ultimately when we report the segment results the benefits of those savings will should across the segments, but you can you can basically do the math from that David.
Additional actions of course, the exit of the.
The eight engine business is going to be all in all in the engine business and then the benefits of eggs in that.
The medium duty transmission business within the beat in the components segment.
But I think engine business.
Engine business components and distribution will have the biggest benefits from those actions.
And the cadence just so we get a sense of the Decrementals.
Can you give some sense the cadence yeah, I mean nimble, yes, so the cadence will be most of the actions almost all of them will be completed by the end of the for this quarter a true we're already doing through the end of January so full run rate principally starting in the second quarter.
Oh no David.
Savings and obviously the comps of the base business can that be very tough in the first half of the you'd given the very strong market. Some performance last year. So yes, much tougher decrementals in the first off of the you easing as the goes along.
All right. Thank you very much.
Thanks, David.
Thank you next question comes from the line of Jamie Cook with Credit Suisse.
Hi, good morning, and Mark sorry, another another guidance question a lot of questions I'm getting in our terms as you know again the cadence from earnings throughout the year in particular, the first quarter given.
No.
The cost cutting actions, we won't realize those benefits and we have truck production down dramatically says there anyway that you can sort of help us what how bad.
The first quarter is relative to the remaining nine months. So people can get comfortable that just sort of the cadence of earnings throughout the year and then I guess that Tom just bigger picture picture question for you.
You talked at the analyst day about opportunities for market share. There is obviously news last week on one of your larger customer. So just trying to balance the two in how you think about our ultimate market share for for comments over the long term. Thank you.
Yeah, So I'll try and help us best outcome.
So we should expect the toughest detrimental margins in the first quarter number one you know North America trip was still at least production was still booming in the first quarter and then yes, we're going to have.
We could start in China.
By segment I would just say the engine business in components are probably going to take.
The biggest challenges in the year over year decremental margins I don't foresee power systems, continuing at what was a very tool fourth quarter, and then distribution business. As you would expect should feel should be a lot more stable.
So I think what's different this time J. Muse.
You know I don't think there's any big rebound there isn't a big rebound built into our revenues for the rest of the year. So we're really betting affecting we've taken those cost reduction actions to help improve the earnings as we go forward for the rest of this year will really.
It's kind of Q2 revenues own words of more flattish as we look out.
And Jamie just to close on that you know, we put lot quite a bit of thought into planning for this year and so we did definitely took a pretty conservative view about how revenues would come out which is now feeling pretty close to right for us.
And so we did all as Mark said, we did all our work on the expense line. We took our actions made sure we got them done.
In the first quarter in fact, mostly by the end of January so we could benefit.
In the year from the this the savings from those not just drag them out.
But there's no question that the first quarter will be worse, because we're still be implementing those and then of course the the China.
The Kona virus is not helping that is all that is all negative to that too. So we will expect a weaker Q1, but but again as mark says it's not it's not a revenue story. It's I think good story that that will really help us to the years, we've done it before so we kind of know what we're in for with regard to your bigger question by the way. It's a good one week still.
See the same opportunities for market share that we talked about we still believe that many of the the Oems are considering which investments they want to make in which they don't and that unlike 10 years ago. When they couldn't wait to invest in more engines. There wondering about that but that doesn't mean that everyone. In every case is going to do it but thats still the.
Way, we see it with regard to the specific off offer from trade on for Navistar that of course is completely expected by the it's been sort of talked about and rumored and.
For some times not not a surprise to us or I don't think anybody else, we have been having conversations with both trade on who is a partner of ours.
We have a joint venture with Scania, we have a number of.
Customer relationships with them as well as with Navistar throughout that time, we believe that we're building strong strong relationships with both in the Navistar has been a customer for a long time. So we think we have as many opportunities from this.
This merger or if it if it actually goes through as we do threats. It doesn't mean that they're on threats, but we think theres as many opportunities and threats and we intend to play all those cards out and and see how they come out and and I think both cuts both companies see Cummins as a potential asset for them in terms of how they are.
Approach their future business, so I realize it thats just general strategy talk and not actual numbers, but until you know it actually occurs or doesn't and they make decisions or theres not much more that I can say other than we we are very active with both of them and their and feel like we have opportunities for both.
I appreciate the color. Thank you.
Jamie.
Thank you and our next question comes from the line of coordinate galvanise with Morgan Stanley.
Good morning, guys I'm just curious if you can give us a little color on and on the parts expectations for next year I think.
That had been area that you mentioned you had seen some weakness this year and just wondering given the decline in only how you're thinking about that business.
Yeah. Courtney this is Tony satellite I'll, just give a couple of comments, we did see a little bit of parts weakness, we mentioned in the third quarter call and then in the automotive space in North America, and the truck market that has normalized and we now expect parts for next year to be relatively flat in that market, maybe up a little bit we do.
I see some we did see some definite weakness in parts in power systems in the fourth quarter that was one of the reason that.
Business did not perform as well as we helped US both Tom and Mark mentioned.
But we do see that coming back a little bit we're not seeing overall parts up this year in power systems business, primarily because of lower oil and gas engine rebuilds, we're seeing a definite all slowdown in utilization and less rebuilds coming so we are expecting parts to be a little less in 2020 in the Paris.
Some space.
Great. Thanks, and then I just one more clarification on the guidance for JV income I think you guided that to be up it seems like some of the core markets that you're talking about are going to be down there and yet and I think you're guiding to relatively even market share in those segments. So.
Could you just comment on why we should be expecting JV and come to the efforts that just lapping the impairment 13 is here.
Thats, a very fair question, even without the uncertainty in China. So a couple of factors yes.
Shouldn't expect impairments to continue number two we had a big disruption to our light duty business in the middle of last year with the Chinese government focusing on overloading of light duty vehicles, which closed all industry participants really to dramatically. So slow production kinda reconfigure certain model so the.
Hit to our earnings.
Tom was quite significant the then the food piece, which would not be visible to anybody on the outside of the company is that we get technology fees and royalty income associated with new product introductions in different parts of our business. We're anticipating some increases the with the launch of some new products all of those are the reasons why.
Why even with some weaker markets, we had a base case of higher joint venture earnings.
Notwithstanding the potential risks leased in the near term to to China operations.
Great. Thanks, guys.
Yes.
Thank you and our next question comes from the line up and Doonan with JP Morgan.
Hi, good morning, everybody.
Yeah.
Just a clarification on the components guidance you did guide to an increase of 200 million in revenue from and new product introductions in India I, just wanted to be sure and Kara.
Sales of directly to this new customers that you spoke about just for clarification.
First of all customs. That's just that's the total content opportunity from the new emission solution products, Yeah, We mentioned and that in my script I talked about taught up we're selling also to Tata as well as the new customer and of course now will be selling after treatment systems and other component technologies associated with the.
Six that we weren't selling before.
Okay. That's helpful and then just.
Yeah, and electrification, our new power segment.
Well paccars paying quite visible at there with the advancements that ventures with key component suppliers in the truck industry, but.
Selecttech comments as a key part can you maybe talk a little bit the bad.
Where are you are in terms of new program wins, and whether you are behind or ahead of where are you talking like the at this point it just kind of a more color on that segment. Please.
Yeah, Let me first just say that we've been active talking with Paccar and would love to win them as a customer in the electric side to needless to say that is a significant.
Effort for us and while we're disappointed when they choose other people we are they have they have their own.
Goals and things and we are but we are active with them I mean, just said that way. So we hope to when some of their business and we are fighting hard to do it.
More broadly, though one thing that's that's true is that we are focusing a lot of our effort and attention on those markets, where the near term possibility for production level demand of new power is higher so let me just see if I can simplify the words that even I'm confused by what I just said.
Mean that those those products, where electric and fuel cell power is more economically viable in the short term. So that's why process has been a big focus for us.
And Thats why terminal tractors as a big focus for us because when you do the range at you think about the range you think about the ability to charge frequently you think about the loads those vehicles can actually almost make a case of it depending on where they get their power today on electric power or on hybrid and same.
Fuel cells, a lot of our focus and attention is on trains today, it's not because we don't think theres a truck a viable truck thing. We do it's just that the trains are more viable now because you only have to refuel at hydrogen at one station and then the other one and then the other so these are again that doesn't mean, we are focused on the truck side, we are but.
The fact is that those.
The volumes of those are likely a little further out than the volumes of these other things and we want to make sure that were putting our products into production getting full full testing in real life situations.
So again it doesn't mean that we're not focused on all those other wins is just our attention is drawn there where we think we with the most activity is and also where the most real life tests are and then we we everyone's got a lot of.
Products and prototypes to produce and not enough battery engineers. So thats another issue for us is trying to focus our.
Scarce resources on the things that we think our most liable today.
Okay I'll get back in line interest up time I appreciate the color. Thank you.
Thank you know next question comes from the line of Noah Kaye with Oppenheimer.
Thanks, and just on the last question I believe you guys are on the Paccar refuse truck, although correct me if I'm wrong for for the electric refuse truck.
But I wanted to ask about.
Medium duty I think entering 2019, you expected your NAFTA medium duty market share to be around so 75% you came in at 80% looking at 2020 in terms of industry moving parts I think there's one key new entrants picture on that platform.
And so you're still suggesting there could be some modest market share loss just trying to understand how you think about those moving parts.
Yes, no. This is Tony satisfied I'll just make a couple of comments, yes. We did have a very good year in north American medium duty market was strong our position remains strong and as you see we've we guided to a lower market next year. Our experience has been when the market moves down and I think our guidance is down 20%.
We see marketshare move around quite a bit as Oems optimize their product and market and shares in the market shift and so we're we're we're expecting to see some decline in share. We said, 75% to 80% is our guide for this year, so not significant but we still see some pressure from those.
Customers you have their own engines still and we expect that to continue.
The new and trend that you talked about that's the Mac, which is just announced last week were very excited about that and we're looking forward to see how thats going to impact the market.
Okay, Great and then as a follow up I mean, it looks like your class eight assumptions, there or maybe a touch more conservative than some of the third party forecast I guess, maybe just talk about what you're seeing in the market that at least you can make tick a little bit of a haircut.
Let's say one might have said we were little bit conservative. The so last year I think it's just the overall all to trend and then you look at the pace of freight.
Freight and the capacity in the industry and that's that's where we all know we're going to need to see a bounce back.
At some point in orders or you know the backlog is going to keep declining.
Build rates are gonna have to would just so I don't think what are enormously off now.
And again at some point, we'll get through this and start to recover and no. Just I mean, just to call. It I mean, Tony and I have talked to a lot of the Oems and end users and.
I want to be clear that we don't think we have.
Smarter than any of them about what they're going to do we're just doing our best of trying to plan our business. So that we can rightsize our expenses make the best forecast, we can for you guys and for other investors. So we're just calling it like we see it.
Individual Oems have their own view about how orders are going what their share looks like and they can call. It differently than we can all we can do is react to schedules that are sending us anticipated schedules are sending us ending these big picture things, which don't don't have a lot to do with their individual share or their individual decisions about.
Stocking and otherwise I think it it is one of the reasons you see these differences is that people have a different view of the market. We're standing back we're back to step in the changes, making the best call. We can make and we we have kind of tended on the conservative side of this in this downturn relative to the average but in other downturns, we've been more towards the middle or more towards the.
Side is just how we see it from where we are standing here and again, the differences that I see and what entities as it what we say are so small that it wouldn't change adapt darn thing we do so again I would just say we're not we're not looking at a different set of facts and they are horse really see and abroad difference than they are although again individually.
I think is individual Oems think they have opportunities to gain share in some segments versus others that they would know better than we do.
Yeah I appreciate that color. Thank you yes.
Thank you and our next question comes from the line of Jerry Revich with Goldman Sachs.
Hi, good morning, everyone.
Good morning, Gerry there.
You folks are targeting margin improvement through restructuring actions on the screen basis I'm wondering if you just expanded discussion on.
The opportunity set for further cost out in power systems have we cut as far as we can because you know surprising to see a relatively low share of restructuring.
In that business and on the flip side do you have big margin expansion targets baked in for the distribution segment, maybe just flesh out but year over year drivers of margins up on sales down. Thanks.
Great and I'll, let Tony talked little bit more about the detailed at a high level, though Jerry here's what's going on we you remember with the distribution business that we would we merge that all the independent distributors into Cummins, we mostly started with trying to figure out how to make sure we kept all the customers.
We got the benefits of of trying to sell across regions and things like that we didnt really do a lot of major restructuring or efficiency were a little bit, but not very much and so what you're seeing in the distribution business is not only the normal kind of contraction related to the downturn because in fact, they can track less than the rest.
But the their strategic effort to now get the base benefits of consolidation and try to drive a much more efficient set of operations, which is a terrific program. Tony can talk more about that said, it's a great program that he and distribution business.
Cambrian Jenny Busher, leading and then I think on the power system side, we have a little bit of the opposite we did a bunch of restructuring actions. They had already taken a bunch of actions which of course makes the result, even that much more disappointing. So if you're wondering if that's the way we feel that is the way we feel.
And the reason and part of the reason is that unlike some of the other businesses, we've seen a pretty consistent steady slide in sales and markets in the generator set business as a starting point and then a lot of volatility in some of the industrial applications. It just hasn't been as simple as.
It went down and then it went up in the mining market. We saw go up and then it kind of leveled off in some segments as we mentioned coming down oil and gas.
Popped up nicely and then just blasted right back down again, so there's just been a lot of volatility in that that in industrial side, which is produced less less than stellar results. We like and then on the Genset. This sort of steady decline in the market, which is despite our efforts to do restructuring just hasn't resulted in profitability, where we want it so I.
Yes, what I'd say is we definitely are not giving up we have a lot of work left to do to figure out how to get that business to our target profitability. We still feel confident we can what's more is the markets or not we have a lot more room and market improvement as it starts to turn backup so we.
Well not happy where we are we figure we have a lot more work to go. It's just not in this you know this normal reduction and people and things because they already did a lot of that in previous restructurings.
And Tom the actions in distribution can you talk about the timing of the benefits.
When should we expect.
The phasing to come in over the programs that you just up those through.
So right Jerry I'll handle that this is Tony just.
Really we are really in the beginning of that transformation. We've taken some decisions about organization restructuring the Tom talked about streamlining the organization. Those actions, we were able to get done as part of of our overall actions as we said majority will be finished here in Q1.
And then we will start to see improved performance of the business really from there on we are streamlining operations. We are adjusting our footprint we are asked.
Yes, making the organization much more efficient and all these things we think we'll start to pay off in the second quarter and you'll see some benefit throughout the year you can see our guidance is up for this year over last and really it's a result of these efforts primarily that's move in the distribution business performance, we'd hope we could continue drive.
More benefits in the future use.
Thank you.
[music].
Thank you and our next question comes from the line.
With me lease research.
How do you are right.
So just a quick one on the on the powergen or power systems are really powergen. You. Just you just touched on it but are you, saying project delays that are just lumpiness and big project related or just kind of general slowdown in the business.
I don't know Theres, a reasoning behind the slowdown here, saying.
No what I was commenting there for Jerry is that the the business hasn't been terrific for a bunch years I mean, it's not been debt declined the whole time, but it's either been flat or declining for a bunch of years and it just you know that's just the nature of the Genset business overlap.
Tend to eight or 10 years, but now right now what we're seeing for the in the datacenter market is some projects slipped so datacenter market has been the the one bright spot. So if I went over that same period Gensets I'd say datacenters has been good throughout that time kind of offsetting or partially offsetting a lot of the other decline and it's.
It's been terrific and that is the one where we saw a lot of projects scheduled for 2020 big customers that we were talking to about doing things. Several of them have already said is now very early in 2028, where we're thinking about moving this to 2021, so what happens without we'll see but that's not a terrific signs not that surprising though at this stage of the market when you.
Start to see the industrial stop start to come down than capital investments like those start to move out a little bit that's not a big surprise, but that we are starting to see that in the datacenter market for the first time.
Okay.
Great. Thank you.
Thank you okay, great. Thanks, so with that I think we're at the end of our our here. So just want to say thanks to everyone for your interest in Cummins is all today.
And then this afternoon I will be available for any follow up calls so thanks very much I.
I think.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating and you may now disconnect.
[music].