Investor Conference September, 2006 -...
Transcript of Investor Conference September, 2006 -...
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Cummins Power GenerationInvestor ConferenceSeptember, 2006
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Welcome and Introductions
Tom Linebarger – PresidentTony Satterthwaite – Generator SetsKaren Battin – Finance leaderThad Ewald – Power ElectronicsElizabeth Carey – EngineeringFiona Devan – Human ResourcesChar Niemczura – Customer SupportLisa Yoder – ITRichard Eikill – ConsumerClaire Roper – Cummins Generator Technologies
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Other People of Importance
Scott Schneider – Fridley Plant ManagerDenise Goffinet – Staff AssistantInvestor Relations Staff
Dean CantrellTroy DewarLea Cain
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Disclosure Regarding Forward-Looking Statements and non-GAAP Financial Measures
This presentation contains certain forward-looking information. Any forward-looking statement involves risk and uncertainty. The Company’s future results may be affected by changes in general economic conditions and by the actions of customers and competitors. Actual outcomes may differ materially from what is expressed in any forward-looking statement. A more complete disclosure about forward-looking statements begins on page 60 of our 2005 Form 10-K, and it applies to this presentation.
This presentation contains certain non-GAAP financial measures such as earnings before interest and taxes (EBIT). Please refer to our website (www.cummins.com) for the reconciliation of EBIT to GAAP financial measures.
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Agenda
Market overviewFinancial performanceSustainability of performance
GrowthBuilding blocks
Reducing volatility
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EnginesEngines Power Power GenerationGeneration
ComponentsComponents DistributionDistribution
Cummins Inc.
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Cummins Inc.
Leverage complementary businessesCreate shareholder valueLow cost producerGrow in related marketsDemonstrate a performance ethic
Increase profitability and cash flowMaintain strong balance sheet and invest in growthMaximize shareholder value
2005: $9.9B
Key Strategic Principles
Engines56%
Power Generation
17%
Components17%
Distribution10%
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Agenda
Market overviewFinancial performanceSustainability of performance
GrowthBuilding blocks
Reducing volatility
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Centralized Power (Utilities):105 gigawatts
Standby Power: 26 gigawatts
Mobile Power: 15 gigawatts
Distributed Generation: 25 gigawatts
Where Does Cummins Compete?
Source: EIA, Parkinson
Sales of Power Generation Equipment2005 Total = 171 gigawatts
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Standby Power
UsesCodes and standardsEmergency responseAvoid economic loss
CustomersCommercial buildingsDatacentersSewage treatment plants
Natural gas or diesel fueledDrivers
Non-residential constructionUtility power reliabilityEconomic dependence
CMI Share 33%
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Distributed GenerationUses
Grid substitution and supplementOff-grid useSelf generationPeaking
CustomersIndustrial and commercial users in developing countriesOil and gas, mining, ski resortsUniversities, hospitals, agri-business
Natural gas, bio gas, or dieselDrivers
Utility investment in generation and distributionDemand in specific industries with remote applications (e.g. mining, oil and gas)Economics of self-generation
• Incentives• Price dislocation• Relative fuel price
CMI Share 15%
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Mobile PowerUses
Auxiliary power on the movePortable power
CustomersRecreational vehicle ownersPleasure boat ownersSpecialty vehiclesConstruction contractors
Gasoline, propane or dieselDrivers
Recreational vehicle trends• More uses for electricity on the road
Recreational marine trends• More uses for electricity on the water
Portable• More uses for electricity everywhere
CMI Share 15%
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0
5 0 0 0 0
1 0 0 0 0 0
1 5 0 0 0 0
2 0 0 0 0 0
2 5 0 0 0 0
3 0 0 0 0 0
1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6
Standby and Distributed Generation Market Trends
Market was constrained by engine capacity in 2004-2005Industry has been expanding capacity through productivity gainsIndustry is adding physical capacity for 2007 – 2008 CMI has been adding engine capacity since 2004
Mar
ket u
nit s
ales CAGR 8%
CAGR 5%
Source: Parkinson and company estimates
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We Have a Strong Market Position
Cummins21%
Kohler / SDMO
7%
Aksa2%
Others29%
Caterpillar41%
Market Share of Standby, Mobile and Distributed Generation
Source: Company estimates
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Strong Market Positions in the Segments in Which We Compete
Distributed Generation
Emergency Standby Power
Rental Power
Mobile Power- RV- Marine- Adjacencies
Turbines
Caterpillar Power GenerationCummins Power Generation
Engines
Components- Alternators- Electronics
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Strong Market Positions in the Segments in Which We Compete
MobilePower
DistributedGeneration
Standby Power
High-spec Standby
40%
Recreational Marine
33%
Commercial Mobile
40%
Motorized RV
85%
25%
Basic Power
30%
Alternators
Source: Parkinson and company estimates
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Power Generation Value Chain
Components Products Solutions Operations and Service
Market Size: $6.2B Market Size: $9.2B (includes components)
Market Size: $8.8B Market Size: $10B
EnginesAlternatorsControls
Generator SetsAutomatic Transfer Switches
Power system design and installationCustom Application DevelopmentSwitchgear
Rental RevenuesIPP RevenuesOperation and MaintenanceRepair and Planned Maintenance
John DeerePerkinsEmerson
CaterpillarKohlerEmerson
CAT DealersPackagers
Product DealersIndependent Power ProducersRental Companies
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From Whom Customers Are Buying
Still covers thebroad market
From a customer’s perspective, where is value provided?
• Brand value
• To whom do they go for service
• Whom do they specify
Past Present Future
Low
Hig
h
Perc
ent o
f Val
ue In
fluen
ced
Consolidation ofsuppliers and assemblers
____ Component suppliers; ____ Assemblers; ____ Solution providers
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Cummins Power Generation
59%16%
25%Distributed Generation
StandbyPower
MobilePower
Global Lines of Businesses (LOB)
Commercial
Alternators
Rental
Consumer
Power Electronics
Three Major Markets
2005 Sales Breakdown 100% = $2 B
54%
18%
3%
16%
6%3%
EnergySolutions
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Agenda
Market overviewFinancial performanceSustainability of performance
GrowthBuilding blocks
Reducing volatility
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Power Generation – Historical Performance
$74
($25) ($19)
$60
$145
$196
-50
0
50
100
150
200
250
2001 2002 2003 2004 2005 Q2 '06
$ M
$1,422
$1,226$1,329
$1,842$1,999
$2,213
0
500
1000
1500
2000
2500
2001 2002 2003 2004 2005 Q2 '06
$ M
Segment EBITSales
LTM LTM
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Cummins Power Generation Turnaround
Restructured and reorganized the BusinessImplemented aggressive turnaround planFocused on cost reductionImplemented a new strategy
Cost reductionPricingBring all businesses to target returnsMoving resources to opportunities
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Power Generation BusinessObjectives
Achieve financial goalsRevenue growth: 8%-10%EBIT margin: 7%-9%Return on Average Net Assets: 20%-25%
Be the first choice of customersDemonstrate a performance ethic
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Power Generation BusinessStrategy
Defend and establish strong market positionsConsumer growthGrow distributed generationLow cost producerLeverage our global presence
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2006 – 2007 Outlook
Markets will continue to show strengthGrowth is limited by capacity
Pricing environment remains generally favorableCost inflation, especially on commodities
Continued progress on strategic initiatives should help Cummins Power Generation achieve above market performance
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Sustainability of Performance
Markets are strongWe are growing faster than the market
Share growthAdjacencies
We have the building blocks required to establish and maintain leadership positions across a wide range of markets
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Agenda
Market overviewFinancial performanceSustainability of performance
GrowthBuilding blocks
Reducing volatility
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Target of 8% - 10% Annual Revenue Growth
Market growthElectricity demandDependence on electricityDeveloping economiesLow investment in generation and distribution
Share increasesGrow faster than the marketGrow in markets in which we are strongExpand in big markets
Adjacency growthComplementary lines of products, technologies and customers
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Electricity Consumption Driving Power Generation Growth
Source: Energy Information Administration (DOE)
World Electricity Consumption
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
Bill
ion
Kilo
wat
thou
rs
Consumption
CAGR = 3.1%
CAGR = 2.9%
History Forecast
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Growth in Developing Economies
Year-on-year increases in electricity consumption in developing economies is acceleratingElectricity consumption in developing countries expected to overtake OECD countries by 2015Highest growth will be in Asia
OECD: Organization for Economic Cooperation and Development (Developed Economies)
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Increasing Dependence on Electricity and Security of Supply
Recent incidents highlighting criticality of electricity supply
Terrorism, blackouts, severe weather
Economic loss calculations for power outages becoming more widespread
Website interruptions, data centers, warehouses
National security and disaster preparedness becoming more important
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Capacity is Not Keeping Up with Demand
Generation not keeping up with demand; transmission and distribution is worseAging infrastructure in North America receiving a lot of attention (but little investment)
Recent issues in California (heat) and East Coast (weather)
Population growth in developing areas (India, China, Africa) pushing capacity of networks
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Market Outlook Shows Sustained Growth of 5% - 7%
Global electricity consumption growing at 3% 3%
Developing economies adopting electricity usage 1% - 2%
Increasing dependency on electricity 1% - 2%
Investments in generation and transmission capacity growing at 1% less than consumption
1% - 2%
Impact on the Market
5% - 7%
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We Will Grow Faster Than the Market
Further penetrate where we have a leadership positionEstablish leadership position where we are not a leader todayAdjacencies and natural extensions of what we already do
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Growing From a Leadership Position
Re-segment, redefine and expand accessible market Leverage technology, market position, customer relationships and distribution
Find low penetration opportunities to serveExpand presence in marketIncrease share of wallet
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RV Towable Market has Shown Significant Increase in Generator Set Penetration
0
50000
100000
150000
200000
250000
300000
350000
400000
2003 2004 2005 2006 FCST
Uni
ts
0%
2%
4%
6%
8%
10%
12%
14%
16%
Motorized* Towable** Towable penetration Source: RVIA, Company estimates
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Further Penetration of Leadership Position in India
In 2001, Cummins was market leader in the diesel commercial generator set business with a share near 50%
Dominant above 100 kW, no presence below 100 kWWe expanded presence in the small product range
Gained share of 25% below 100 kWSales have increased at a CAGR of 23% from 2003 to 2005
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Share Opportunities
Significant opportunities exist to grow share in under-served segmentsNew emission regulations offer the opportunity to pick up share from lower-spec competitorsCombination of right product and low cost has strong impact in markets
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Establish Strong Market Positions GloballyGeographic Segmentation – Generator Sets and Systems
Approx. $7 B global market
Share of Global Generator Set Consumption (Total Output, Parkinson 1998-2004)
0%
5%
10%
15%
20%
25%
30%
35%
North A
merica
Wes
tern E
urope
China
Middle
East
India
Africa
Asean
Rest o
f Asia
E&C Euro
peSou
th Pac
ific
Brazil
South
America
Japa
n
Centra
l Ameri
ca
Mexico
Russia
& C
IS
8 Target Territories = 81% of Global Market
Brazil is largest market in LAO
Russia has large potential
Market Leader (# 1 or # 2)
Leader in some segments of the market
Not a market leader
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Cummins Generator Set Sales Market Share Gains in Europe
2001 2002 2003 2004 2005 FC06
Mill
ions
of D
olla
rs
+80%
European market grew 2.5% from 2002-2006; Cummins Power Generation grew 34% over the same period
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Adjacencies
Consumer marketsLeverage product technologies – size and noiseLeverage distribution strengths• Service network and focus
Leverage Onan and Cummins brandsLeverage global presence
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Commercial Mobile
Consumer Products Adjacencies
TruckOEMs
RVOEMs
Consumers ProfessionalsHome
Standby
Recreational Vehicles
Aux. Power Unit
Portables
Trailers
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We Have the Building Blocks for Leadership
Channel capabilitiesLow cost producerGlobal presenceTechnical leadership
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Building Distribution Capabilities
Historically an engine business channelGlobal reach
Large presenceFinancially strongComplementary products
Building power generation capabilities in certain markets
EuropeNigeriaIndonesiaMiddle East
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Low Cost ProducerDesign
Purchasing
Manufacturing Logistics
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Achieve Low Cost Producer Position Example of Commercial Generator Set Cost Reductions
Average reduction over 10 models - 14%
Average reduction over 10 models - 30%
14%25%Manufacturing
18%25%Sourcing
42%15%Design
26%35%Specification
Enclosed SetOpen SetSavings Area
14%25%Manufacturing
18%25%Sourcing
42%15%Design
26%35%Specification
Enclosed SetOpen SetSavings Area
Source of Savings
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Stamford, UK San Luis Potosi, Mexico Kempen, Germany Ingolstadt, Germany Craiova, Romania Wuxi, China Ahmednagar, India Oahkham, UK Karlshuld, Germany
Fridley, MNRamsgate, UKSingaporeBeijing, ChinaSao Paulo, BrazilColumbus, INDaman, IndiaPune, India
Manufacturing Footprint
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Low Cost Global Sourcing
21%
35%
43%53%
2003 2004 2005 2006
Alternators Percent Product from China and India
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Using Technology to Deliver Marketplace Advantage
Increased Power Density Reduce Costs
Emissions Leadership Increase Share
Integration Customer Preference
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Leverage Strength in Technological Capabilities
Power Unit Inverter/Charger
Boost
Power Source Power Source
Seamless
3.0kW7.5kW House Batteries
10.0kW
10.0kWSine WaveMax Power
3.0kWSine WaveQuiet Time
HQD810 Example
120V ACPure Sine Wave
12V DCVariable AC
Customer BenefitsNoise Reduction – 50% reduction (4-6dB)Generator Fuel Consumption – ~15-20% ReductionSystem Automation – Simplify electrical operation300 lb Weight Savings – More cargo carrying capacitySimpler Service• (One stop electrical service; Use entire Onan service network)
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Value Comparison
Today’s 7.5 QD System
7.5 QD Generator set
New 8/10 HQD System
7.5 QD Generator set2kW Sine wave inverterTransfer switchDisplays and controls
40% more content
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Target of 8% - 10% Annual Revenue Growth
Market growthElectricity demandDependence on electricityDeveloping economiesLow investment in generation and distribution
Share increasesGrow faster than the marketGrow in markets in which we are strongExpand in big markets
Adjacency growthComplementary lines of products, technologies and customers
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Agenda
Market overviewFinancial performanceSustainability of performance
GrowthBuilding blocks
Reducing volatility
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Sustainability of Performance
Effective organization and leadership teamTurned the business around
Now hitting financial targetsSustainability
Strong marketsGood growthHave the building blocks for continued success
We have taken the steps to reduce volatility
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Power Generation BusinessObjectives
Achieve financial goalsRevenue growth 8%-10%EBIT margin 7%-9%Return on Average Net Assets 20%-25%
Be the first choice of customersDemonstrate a performance ethic
Last Twelve Months
• Sales growth 14.5%
• EBIT margin 8.9%
• Return on Net Assets 26%
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Reducing Volatility
Broader, diversified marketsIncreased market penetrationGross margin improvementLow fixed cost structureSpending control
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Increases in Geographic Diversity
North America
37%
EMEA30%
Latin America
7%
India8%
China8%
Asia Pacific10%
North America
44%
EMEA21%
Latin America
10%
India8%
China7%
Asia Pacific10%
2003: $1.3B 2005: $2.0B
CAGR 2003 – 2005: 24%
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Increased Market Penetration
Growth in non-RV consumer markets Increased share in EuropeIncreased penetration in IndiaIncreased share in the stable basic protection
segment
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Reducing Volatility
Broader, diversified marketsIncreased market penetrationGross margin improvementLow fixed cost structureSpending control
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Sales and EBIT% - Quarterly Trend
460493
520
427
493 504
575598
369
536
9.4%
8.4%8.5%
9.1%
7.1%
3.5%
4.2%
3.0%
3.9%
1.4%
0
100
200
300
400
500
600
700
800
Q1-04 Q2-04 Q3-04 Q4-04 Q1-05 Q2-05 Q3-05 Q4-05 Q1-06 Q2-06
$ in
Mill
ions
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Sales EBIT%
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Cummins Power GenerationInvestor ConferenceSeptember, 2006