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Cummins Inc. (CMI)

Q4 2013 Earnings Conference Call

February 6, 2014 10:00 AM ET

Executives

N. Thomas Linebarger - Chairman and CEO

Patrick J. Ward - VP and CFO

Richard J. Freeland - VP and President of Engine Business

Mark A. Smith - Executive Director of IR

Analysts

Jamie Cook - Crédit Suisse AG

Ann Duignan - JP Morgan Chase & Co, Research Division

Jerry Revich - Goldman Sachs Group Inc., Research Division

Alexander Potter - Piper Jaffray Companies

Andrew Kaplowitz - Barclays Capital

Ross Gilardi - Bank of America Merrill Lynch

Stephen Volkmann - Jefferies LLC

Operator

A very good morning ladies and gentlemen. Thank you all for joining. Welcome to the Fourth Quarter 2013 Cummins Inc. Earnings Conference Call. My name is Lisa and I’ll be your coordinator for today. Also like to advice you that today’s conference is being recorded. At this time all participants are in listen-only mode. Following the prepared remarks, there will be a question-and-answer session. (Operator Instructions)

I’d now like to turn the conference over to Mr. Mark Smith, Executive Director, Investor Relations for opening remarks. Please proceed. Thank you.

Mark A. Smith

Thank you. Good morning, everyone, and welcome to our teleconference today to discuss Cummins’ results for the fourth quarter of 2013. Participating with me today are our Chairman and Chief Executive Officer, Tom Linebarger; our Chief Financial Officer, Pat Ward; and President of our Engine business, Rich Freeland. We will all be available for your questions after the prepared remarks.

Before we start today, please note that some of the information that you will hear or be given today will consist of forward-looking statements within the meaning of the Securities Exchange Act of 1934. Such statements express our forecasts, expectations, hopes, beliefs and intentions on strategies regarding the future.

Our actual future results could differ materially from those projected in such forward-looking statements because of a number of risks and uncertainties. More information regarding such risks and uncertainties is available in the forward-looking disclosure statement in the slide deck and our filings with the Securities and Exchange Commission, particularly the Risk Factors section of our most recently filed annual report on Form 10-K and any subsequent quarter reports on Form 10-Q.

During the course of this call, we will be discussing certain non-GAAP financial measures, and we refer you to our website for the reconciliation of those measures to GAAP financials. Our press release with a copy of the financial statements and a copy of today’s webcast presentation are available on our website at www.cummins.com under the heading of Investor and Media.

Now I’d like to turn it over to Chairman and CEO, Tom Linebarger.

N. Thomas Linebarger

Thank you, Mark. Good morning. I’ll start with a summary of our fourth quarter and full year results and finish with the discussion of our outlook for 2014. Pat will then take you through more details of both our fourth quarter financial performance and our forecast for this year.

Revenues for the fourth quarter were $4.6 billion, an increase of 7% compared to the fourth quarter of 2012. Fourth quarter EBIT was $566 million compared to $532 million in the same quarter last year, excluding restructuring costs. For the full year Cummins sales were $17.3 billion in line with 2012. Our full year EBIT margin was 12.5% in 2013, a decrease from 13.6% in 2012.

Revenues for the year came in at the high-end of our guidance, but EBIT percent was below our original expectations of 13% to 14% for the full year. The most significant drivers of lower EBIT margins were first, lower global demand for power generation equipment, especially our larger kilowatt products, weaker demand for high horsepower engines and weaker than expected industry orders from North American heavy duty trucks in the second half of the year.

There were a number of other factors that influenced our financial results for the year, including record performance in our Components segment. And I will let Pat to comment on those in more detail. But I do want to add a few comments on the performance of our Power Generation business.

In 2013 EBIT percent declined nearly two percentage points from the prior year to 7.2%, primarily due to weak demand in most international markets for large power generation projects. Gross margins improved by 80 basis points year-over-year in the fourth quarter and have now improved for three straight quarters as a result of the ongoing restructuring actions and other cost reduction initiatives in the business. The improvement in gross margins, however, was more than offset by one-time items in the quarter, particularly the write-down of an investment in technology venture and costs associated with legal settlement.

We fully expect that the actions we’ve taken -- we have been taking to reduce costs in the business, including permanently relocating some alternator manufacturing capacity from high-class locations in Europe to lower cost locations will drive margin improvement in the Power Generation business in 2014.

As Tony indicated during our Analyst Day in September, we expect that the restructuring actions we have underway will be fully completed by the end of the second quarter of 2014. Improvement actions taken throughout 2013, but some of the early benefits were more than offset by weaker than expected demand especially in developing country markets.

Now I will comment on some of our other key markets in 2013 starting with North America. Our revenues in North America grew 3% in 2013 with approximately 2% of the growth resulting from acquisitions in our distribution business. The North American heavy duty truck market reached approximately 218,000 units in 2013, a decrease of 13% from 2012 level and weaker than our original forecast for the year of a 4% decrease. Our full year market share was 39% consistent with 2012.

The medium duty truck market was approximately 112,000 units in 2013, representing an increase of 5% from 2012 and up a little more than our original forecast of 2% increase. More importantly we strengthened our market share to 63% during the year, up from 53% a year-ago.

Shipments of Chrysler declined by 7% in 2013 as we expected. 2012 shipments were unusually high at the end of the year in anticipation of the 2013 model year change. Also in North America revenues in our Power Generation business increased by 21% with shipments to the U.S military driving 16% growth and sales to our traditional markets including nonresidential construction increasing 5%, consistent with a slowly improving U.S economy.

Our international revenues decreased by 4% in 2013, with decline in India, Australia, Mexico and Europe offsetting growth in China and Brazil. In Brazil our revenues increased 11% driven by a stronger truck market. Industry truck production increased 43% as demand rebounded after a typical year-end 2012, driving revenue growth in both our engine and component segments. Revenues reported in U.S dollars were negatively impacted by nearly 10% depreciation of the real against the dollar.

Full year revenues in China including joint ventures were $2.9 billion in 2013, an increase of 14% year-over-year. The growth in 2013 was driven primarily by stronger demand for engines and components for on-highway markets. Demand for heavy and medium duty trucks in China increased by 15% for the full year, higher than our original forecast as demand increased ahead of the expected transition to the NS4 emission standard in 2014. The growth in market demand boosted sales of our joint venture engines and our components business.

Shipments of light duty engines in China increased by 17% as our partner Foton increased the proportion of its trucks powered by the 2.8 and 3.8 liter engines manufactured in our joint venture. Industry demand for excavators in China declined by 3% for the year, reflecting a slower pace of infrastructure spending and high levels of inventory from over production in prior years.

Our revenues improved by more than industry retail sales, but fourth quarter shipments were still quite weak. Unfortunately we’re not seeing evidence of a strong rebound in new equipment production as we head into the peak selling season this year.

Demand for power generation equipment in China remain muted in 2013, with slower growth in infrastructure and weak power needs reflecting underlying weakness in the Chinese economy. Our revenues did increase 5% year-over-year due to relatively easier comparisons in the second half of 2012.

Full year revenues in India, including joint ventures, were $1.3 billion, down 20% from 2012 due to weaker demand across most end markets as the economy slows sharply. Revenues were also negatively impacted by the depreciation of the rupee against the U.S. dollar.

The truck market in India weakened significantly during the second half of the year with full year industry production declining 29% to 226,000 units, the lowest levels since 2009. Power Generation sales also declined as industrial activities slowed easing pressure on the grid. In the first half of 2013, Power Generation sales had held up despite the weak economy, but demand collapsed in the third quarter as lending markets tightened and inventories grew.

Total revenues in Europe were down 3% in 2013. Sales to European Power Generation customers were down 33% partially offset by stronger demand for engines and components ahead of new on-highway and off-highway emission standards that took effect on January 1, 2014. The decline in Power Generation revenues was a function of weak global demand for large power projects which reduced the needs of our European-based customers for new equipment.

Now let me provide our overall outlook for 2014 and then comment on individual regions end markets. We are currently forecasting total company revenues to grow between 4% and 8% in 2014, driven by distributor acquisitions, additional revenue related to new emissions regulations and market share gains including new products. We expect modest growth in most end markets in North America offset by continued weakness in our key high-horsepower markets and some developing economies.

We expect EBIT to be in the range of 12.7% to 13.25% sales reflecting incremental EBIT margins of 22% as the midpoint of our guidance. In North America, we expect our truck business to grow in 2014. We are forecasting that 2014 market size for heavy duty trucks to be 236 units, an increase of 8% year-over-year.

We are projecting our market share to be approximately 38%. In the medium duty truck market, we expect the market size to increase by 7% to 120,000 units and we expect our market share to increase to 70%. Shipments to Chrysler are projected to be flat with 2013.

In China, we expect domestic revenues including joint ventures to increase 11% in 2014. We expect the market size for heavy and medium duty trucks in China to decline by 7% from 2013 levels, as the industry steadily moves to a wider adoption of NS4 complaint products. Despite the anticipated decline in market size, we currently expect our revenues including joint ventures to grow in 2014 as we launch our new heavy duty engine and increase our components revenues as the new emission standard is gradually implemented.

In addition, demand for our light duty engines in China is expected to grow by 20% in 2014, as our partner Foton continues to increase the number of its vehicles powered by our joint venture engines. It's important to understand that despite the generally positive statements being made by a number of OEMs regarding the transition to NS4, significant uncertainty still exists.

As you are all aware of the change to NS4 emissions standard was scheduled for July 1, 2013, and the government has not yet made any announcements regarding a formal timetable for enforcement of regulations. Encouragingly, OEM orders for NS4 products have increased but the timing and extent of actual sales of compliant trucks to end users is still unclear. We continue to monitor the situation very closely and we'll provide updates as the transition to NS4 becomes clearer.

We expect industry sales of excavators in China to grow by approximately 3% in 2014 as infrastructure spending is projected to grow at a modest pace and inventory levels continue to reduce. In India we expect 2014 revenues including joint ventures to be flat after a very challenging year in 2013. Demand for trucks is expected to be level with 2013 with no clear drivers of improvement in the market in the near term.

In Power Generation we expect unit volumes to decline by up to 10% due to weak economies driving lower power needs. New emission regulations referred to as CPCB-2 are expected to go in force in the Power Generation market in the second half of the year with prices expected to rise by up to 20% to reflect the addition of new technologies. We expect full year Power Generation revenues to be flat in 2014 with increased prices for the new products offsetting lower unit volumes.

In Brazil, we expect truck production for 2014 to be in line with 2013. The government-subsidized finance program called FINAME has been an important source of financing for the Brazilian commercial vehicle market. More than 7 of every 10 trucks sold use FINAME-based financing in 2013. While the program was renewed for 2014, interest rates were raised by 150 basis points and the capacity of the program was reduced by 25%. OEMs have been working with commercial lenders to make additional financing options available to their customers, but with GDP growth running below 2% in the near term and rising finance costs, we do not anticipate growth in industry volumes into 2014.

While GDP is expected to grow in the eurozone in 2014 for the first time in three years, we expect our revenues to be relatively flat. Demand from our European-based Power Generation customers will remain weak in 2014 given that most of these products are shipped to developing markets.

Our components business will benefit from content growth on engines at new emissions regulations, but this will be offset by weaker engine demand in on and off-highway markets as to the pre-buy in Q4 of last year. I think it's also important to comment on our global mining business after a very challenging 2013.

Revenues for new mining engines declined by 43% last year with shipments declining sequentially each quarter throughout the year. With no improvement in commodity markets, mining companies remain very focused on reducing capital expenditures and maximizing the productivity of existing equipment. As a result, we expect engine shipments to decline further between 10% and 20% in 2014. Our high-horsepower aftermarket revenues should be in line with 2013.

We are confident about our projections for growth of between 4% and 8% in 2014 with the majority of the growth driven by acquisitions, additional content in new emission regulations and market share gains in medium and light duty truck markets. We will also see the launch of a number of new important products in 2014. For example, the engine business will launch our new heavy duty truck engine platform in China as well as the off-highway Tier 4 light duty engines, also sourced from China.

We will also see the launch of our new 5-liter V8 product in the U.S. late in the year. In Power Generation we have just launched the new Connect series generators for residential and light commercial markets in North America. The expected higher revenues, material cost reductions, supply chain savings and the benefits of restructuring in the Power Generation business will more than offset increased investment and selling, admin and research costs and deliver incremental margins at or above 20% in 2014.

We also expect the results this year to benefit from the cost reduction work undertaken in our manufacturing facilities in 2013. In 2014 production will be flat or increasing in most of plants whereas last year a number of our largest manufacturing plants were adjusting production rates to lower demand levels.

We delivered record operating cash flows in 2013 of $2.1 billion and strong cash flow performance allowed us to continue to invest in our business and return more cash to shareholders. In 2014 we will complete the acquisition of several North American distributors as we communicated September and we also expect to return 50% of our operating cash flow to investors in 2014 in the form of dividends and share repurchases. As a result, we expect our net cash balance to decline in 2014.

In closing, I would like to acknowledge the contribution of all of our employees around the world for their hard work in 2013 in the face of a very challenging market. I would also like to thank our customers for their confidence in Cummins.

Thank you for your interest today. Now I'll turn it over to Pat who will cover our 2013 performance and 2014 guidance in more detail.

Patrick J. Ward

Thank you, Tom. Good morning, everyone. As Tom described we faced challenges in a number of end markets in 2013 with very weak demand in international power generation and global mining markets while industry orders in the North American heavy duty truck market weakened in the second half of the year as did demand in most end markets in India.

While several of our largest markets were down last year, market share gains in the medium duty truck market in North America, growth in our components business and acquisitions in our distribution business resulted in full year revenues of $17.3 billion, flat with 2012.

As I review the full year financial results in more detail, all the numbers and comparisons will exclude the restructuring charges as well as the gains and divestitures that you'd recall in 2012. Full year revenues for the company were $17.3 billion, flat compared to the prior year. Revenues were up 3% in North America but were down 4% in international markets.

Gross margins of 25.3% were 90 basis points lower than last year with the positive impact of pricing, material cost reductions and supply chain savings, offset by the impact of a 25% decline in high-horsepower engine shipments.

Selling, admin and research and development costs increased by $28 million in the year. The acquisitions on our distribution segment accounted for $60 million of additional spend and was offset by reductions in spend in both the Engine and Power Generation segments, while the Component segment spend remain flat at 2012 levels.

Joint venture income was down $23 million compared to last year primarily due to the impact of the distribution acquisitions. And total earnings before interest and tax or EBIT was 12.5% to sales in India, down from 13.6% of sales in the previous year.

Net income was $1.5 billion or $7.91 per share. This compares to $1.7 billion or $8.83 per share in the previous year, excluding restructuring charges and the gains from divestitures. The tax rate for the full year is 25.1% and was lower than the guidance that we provided in October, primarily due to the benefits from the implementation of certain tax strategies and from higher research and -- research and development tax credits than we originally anticipated.

Now let me comment specifically on the fourth quarter and provide some more details on our performance. Revenue of $4.6 billion was 7% higher than the previous year and 8% higher than the third quarter levels, despite weaker demand in mining and international power generation markets. Compared to the prior year, North American revenues were up 11% due to the impact of distributor acquisitions and market share increases in our aftertreatment business.

International revenues were up 3%, helped by stronger demand in China truck markets and in Europe ahead of the implementation of Tier 4 Final and Euro 6 emission regulations. Compared to last quarter, North American revenues increased by 5% were actually due to seasonal demand in our Power Generation business, while international revenues were up 10% due to stronger truck and construction demand in Europe ahead of the Tier 4 Final and Euro 6 emission rates.

Gross margins for the quarter was slightly higher than a year-ago of 25.4% of sales. With positive pricing and lower material costs offsetting the product mix headwind from the decline in high horsepower engine shipments. Sequentially gross margins declined from the prior quarter primarily due to increased product coverage costs.

Selling, admin and research and development as a percent of sales, increased by 10 basis points compared to last year and declined by 80 basis points compared to the prior quarter. Joint venture income was $80 million, 2% lower than last year and 12% lower than the prior quarter.

Earnings before interest and taxes were $566 million or 12.3% of sales, down from 12.4% a year-ago and 12.6% last quarter. Compared to the last year the key profitability issue was the sharp drop in demand for high horsepower engines and gensets, which was partially offset with positive pricing and material cost reductions. Well sequentially the drop in gross margin percent from higher product coverage costs was offset by lower selling and admin costs as a percent of sales.

Net earnings for the quarter were $432 million or $2.52 per diluted share with an effective tax rate in the fourth quarter of 15.7%. The tax rate in the quarter was more than expected primarily as a result of the benefits related to legal entities stock transactions that we managed to complete in 2013, from the reconciliation of our tax accounts to our state income tax returns that generated some favorable adjustments and from a larger research and development tax credit than we have projected.

Moving onto the operating segments, let me highlight their performance during the year and in the fourth quarter and it include with revenue and profitability expectations for 2014.

In the Engine segment, fourth quarter revenues were $2.6 billion, an increase of 2% compared to last year and 3% compared to the third quarter. Compared to last year, stronger demand for construction and agriculture engines in North America and Europe, along with the higher on-highway parts sales in North America were partially offset by the reduced demand in global mining and power generation markets. Sequentially, demand increased in construction and agriculture markets in North America and Europe along with higher shipments to Chrysler. We experienced weaker demand in the North American heavy duty and Brazilian truck markets.

Segment EBIT margins were 9.2% in the quarter compared to 10.9% last year and in the third quarter. Compared to last year, the impact of the drop in high horsepower engine demand more than offset by material costs and improved pricing. Sequentially increase for the coverage costs, negative mix and an inventory write-down related to oil and gas market reduced margins by 170 basis points.

In 2014 we expect revenues to be up between 4% and 6%. On-highway revenues in North America will drive the majority of the growth as industry production grows in both the heavy and medium duty truck markets. We will also benefit from increased market share in the medium duty truck market. Continued weakness in global mining will result in industrial revenues remain in flat when compared to last year.

2014 EBIT margins are forecasted to be in the range of 10.5% to 11.5% of sales, compared to 10.4% for the full year 2013. Positive pricing, material cost savings and increased volumes will offset the impact of lower high horsepower volumes again in 2014, resulting in gross margin expansion. We anticipate high horsepower volumes to be flat to down 5% this year with the first quarter expected to mark the low point of the year.

The Component segment recorded record sales of $1.1 billion in the quarter, up 21% from the prior year and 6% from the prior quarter. Compared to last year, higher revenues were driven by market share gains in our emission solutions business along with strong demand in European and Chinese truck markets for turbochargers and aftertreatment systems. Compared to last quarter, sales increased in Europe ahead of the Euro 6 regulations which took effect in the first of January and in China where the industry continued to experience strong truck demand ahead of the National Standard 4 emission regulation implementation.

EBIT margins for the quarter were 12.3% of sales compared to 8.9% in the prior year and 12.3% last quarter. The increase in margins over the prior year was driven by higher volumes, lower material costs and very good SAR leverage.

2013 was a record year for the Component segment in terms of revenues, EBIT dollars and EBIT percent. We expect another record year in 2014 with revenues up 8% to 12% primarily due to increased penetration of aftertreatment systems in the North American medium duty truck market, stronger demand for all four businesses in the North American market and growth in our European aftertreatment business from truck transition from Euro 5 to Euro 6 standards at the beginning of 2014. EBIT margins for the segment are expected to be in the range of 12.25% to 13.25% of sales.

In the Power Generation segment, fourth quarter sales were $759 million, down 1% compared to last year and up 7% sequentially. Compared to the fourth quarter of 2012, weakness in Europe and India was partially offset by stronger demand in the United States. Sequentially, revenues increased due to stronger demand in North America.

EBIT margins were a disappointing 6.1% of sales in the quarter compared to 7.1% in the prior year and 6.3% last quarter. Compared to last year, improvement in gross margins on lower sales were more than offset by higher selling and admin expenses and lower joint venture earnings. Sequentially, what we continue to see improvement in operating performance in our manufacturing plants. This was offset by higher selling and admin expenses and from negative currency movements, in particular the British pound, which negatively impacted EBIT margins by over 1% in the quarter.

For 2014 we expect Power Gen sales growth to be in the range of minus 3% to plus 3%. In the United States lower military revenue will be offset by moderate growth in our base business along with the revenue from our new Connect line of gensets.

Margins will improve this year to between 7.75% and 8.75% of sales. This compares to 7.2% for the full year of 2013 and 6.2% for the second half of last year. The increase in margins will be driven by savings related to our previously announced actions in Europe and from ongoing operational improvements across the business.

For the Distribution segment, fourth quarter revenues were $1.1 billion, an increase of 18% compared to last year and 14% sequentially. Excluding the impact of acquisitions, fourth quarter revenue increased by 3% compared to last year and by 13% sequentially. Compared to last year, growth was driven by stronger Power Generation and aftermarket demand in North America while currency movement negatively impacted the distribution revenues by 5%. Revenues increased sequentially in North America and Europe due to an acquisition in Nigeria.

EBIT margins for the quarter were 10% of sales compared to 10.8% a year ago. Improved margins on same-store sales were offset by the impact of foreign currency movements. Although the acquisitions completed during this time were accretive in EBIT dollars terms, there were dilutive as a percent of sales as we've previously explained. Sequentially, EBIT margins improved by 90 basis points with improvements in both gross margin and selling and admin costs as a percent of sales.

For 2013 we're forecasting revenue growth between 22% and 30% over 2013 levels, with 3% organic growth and the balance from acquisitions and we expect EBIT margins in the range of 9% to 10% of sales. We are on track with our North American acquisitions and for the company, we expect to add approximately $400 million of revenue this year and earnings of between $0.20 to $0.25 per share.

As Tom mentioned, we are projecting total company revenues to be up 4% to 8% in 2014. The majority of the growth this year will be related to the previously announced distributor acquisitions, market share increases in the North American medium duty truck and bus markets, growth and demand in the North American heavy duty truck market and increased content in European truck markets related to Euro 6 emission regulations.

Revenues will increase sequentially through the year with growth in the first half of the year towards a lower end of the guidance range and growth in the second half of the year towards the upper end of our guidance range. We expect EBIT margins to be between 12.75% and 13.25% for 2014. This compares to 12.5% of full year 2013 and represents a 23% incremental EBIT margin as the net point of the guidance.

As was the case in 2013, EBIT margins will be at the low point in the first quarter and will decline from first quarter 2013 levels due to seasonal weakness in power generation markets along with lower shipments and industrial high-horsepower markets. Compared to the first quarter of last year, high-horsepower engine shipments will be down 23%. As a result of this, we expect EBIT margins in the first quarter to be similar to those in the first quarter of 2013.

We remain focused on driving improvements in our gross margin in 2014 with benefits from lower material costs and from our supply chain initiatives and some improvement from pricing, primarily an aftermarket. We are currently projecting the tax rate to be approximately 28.5% this year, excluding any discrete items. Our tax rate guidance does not assume that the research and development's tax credit is extended into 2014 which will negatively impact the rate by 1.5 percentage points when compared with 2013.

Additionally, changes in tax legislation in the UK, one-time benefits that will not recur in 2014 and the fact that a higher proportion of our profits were currently in the United States this year will lead to an increased tax rate in 2014.

Finally let's turn to cash flow; we generated a record $3.1 billion in cash from operating activities in 2013 which equates to 12% of sales, an increase from the 90% of sales we generated in 2012. We continue to use that cash to reinvest back into the company and return value to our shareholders.

We increased the amount we returned to our shareholders by 34% in 2013 to $801 million. We increased our dividend by 25% which resulted in a dividend payment ratio of 28% for the full year and we repurchased 3.3 million shares for $381 million. We also continued to invest in the business with $676 million in capital expenditure projects in the year which was more than our initial guidance of $850 million.

Our debt to capital ratio did increase from 10% at the end of 2012 to 18% at the end of 2013, due to the debt offering that we completed in the third quarter of last year. We anticipate operating cash flow performance in 2014 will be somewhat at 2013 levels and within our long-term guidance range of 10% to 15% of sales.

Capital expenditures this year are expected to be in the range of $700 million to $800 million and we anticipate a cash outflow of $400 million to $500 million on acquisitions, primarily related to the previously announced acquisition of our North American distribution channel.

Our cash balance will decline in 2014 as we execute distributor acquisitions and as we continue to return cash to our shareholders through dividends and share buybacks. Investors should expect that through the combination of dividends and buybacks, we will return at least $1 billion or 50% of the cash we expect to generate from operations which will be a 25% increase over 2013 levels.

Now let me turn it back over to Mark.

Mark A. Smith

Thanks, Pat. We're now ready for question. If you can limit your first question to one single question and a related follow-up, we'd appreciate that and get back in queue. Thank you very much. We're ready for questions.

Question-and-Answer Session

Operator

Certainly. Thank you. Ladies and gentlemen, we'll now conduct the question-and-answer question. (Operator Instructions). Your first question is from the line of Jamie Cook of Crédit Suisse.

Jamie Cook - Crédit Suisse AG

Thanks. I guess a couple of questions. One, just in terms of your top line outlook to 40%, I know a lot of the growth is coming from distribution, medium duty share, et cetera, but can you just give me a sense of the 40; a, is 2 points markets, 6 points secular growth just so we can get a better sense to that? And then Tom also is there any – how do we think about your approach to guidance in 2014 relative to the past couple of years when there has been disappointing – you guys have disappointed first this year our guide? And then I guess my last question, you alluded the first quarter is weak and then second half is better than the first half. In terms of the improvement as we go out throughout the year, is it more macro, is it more – that's when your market share gains or the distribution stuff hits, I'm just trying to get – in the restructuring. I'm just trying to get a sense of what's driving that improvement throughout the year? Thanks.

N. Thomas Linebarger

Jamie, good morning by the way. So let me just give the total answer. I'm going to let Mark talk a little bit about some of the details you asked, but hone wise [ph] we are trying to provide guidance that we think is most accurate relative to what we think is going to happen. And as I had mentioned to you before that's what we were trying to do before, obviously not as well as we should have. I think what we see today though is that most of our markets have bottomed out and that doesn't mean things can't get worst. As we mentioned mining markets are slipping further. But what we did do is chase the market down in power gen all year which was really disappointing. It's what we said we would not do. Instead we would get ahead of it and we would reduce costs approximately and we didn't do a good enough job on that. And I think that's one of the big reasons why we were disappointing on guidance. There were other reasons but that's a big one. So we did not feel like we did well there. We have taken a hard look at where we think markets are. I'd like to call them – the way we think they're most likely to be, but obviously taking a little bit more conservative look at the way we think economies are developing. So I think from that point of view, it's more conservative. I don't think we're trying to play the numbers anymore progressively or conservatively. We're just taking a more conservative look at economies because they really just happened to perform this well as we hoped. So let me know let Mark answer some of your more detailed questions.

Mark A. Smith

Hi, Jamie. So in terms of the 6% revenue growth at the midpoint of our guidance, 2.5% is going to come from the distributor acquisitions, almost 2% is going to come from emissions and new products. We've really got just under 1% for market growth. We've got growth in North America offset by weakness in international markets and then the balance is coming from market share and pricing.

Jamie Cook - Crédit Suisse AG

Okay. And then just in terms of – so I guess driving the improvement in earnings throughout the year is just – that's when all your secular growth opportunities will fit the market, is that the way to think about it?

Patrick J. Ward

I think the way to think of it, Jamie, is that we're going to definitely see benefits from the macro environment as we get through the year. Going back to the remarks I made earlier on, first half of the year we expect to grow closer to 4%, second half of the year closer to 8%. So the volume benefit will come into play there. And as Tom mentioned in his comments, the restructuring activities (indiscernible) and power gen we expect to be done by the middle of the year. So you should expect power gen margins to improve as we grow through the year from those actions.

Jamie Cook - Crédit Suisse AG

Okay, great. I'll let someone else get in queue. Thank you.

N. Thomas Linebarger

Thanks.

Operator

Thank you for your question. Your next question is from Ann Duignan of JP Morgan. Please go ahead.

Ann Duignan - JP Morgan Chase & Co, Research Division

Hi. Good morning, everybody.

N. Thomas Linebarger

Good morning.

Ann Duignan - JP Morgan Chase & Co, Research Division

Good morning. I just want to go back to your market share growth expectations of roughly 1%. That would equate to something less than $200 million, and I think that there was an expectation out there from investors that this market share growth, our market outgrowth will be significantly higher than that. Can you just talk to that a little bit and give us a little bit of color and maybe it's a ’15 event, not a ’14 event, but if you could just address that, that would be great.

N. Thomas Linebarger

Two things to highlight; as you -- just to make sure we’re level set. We separate two things, new products and market share you know that I think from our previous thing. So we look at those products that we launch and the market share gains by there it goes in new products. And then we look at market share those that gain where we have the main product and we just gain shares. So there’s some separation between those two. And if you combine them you’re looking at more like 2.5% than you're like to. That said, you’re calculation to our terms is right. I’ll let Rich comment a little bit more about how things are going. But one of the big movements of course is in North America, and we have of course gained some of the share already. So, what you’re looking at is one year versus the other. But I'll let, maybe Rich you can talk a little bit about what's going on with the market share gains in North America.

Richard J. Freeland

Okay. Good morning, Ann. I'll just start with the mid range which is probably the most visible. So we’ve, really two good things going on there, the market size is growing. So unlike heavy duty we have market size has gained from the last three years. Our share has grown from 50 to low 60s and now we’re projecting 70% share. So that’s the biggest piece and the most visible that we’re going to have here. The products are terrific and we’re gaining that. We also have series of new products coming out that Tom alluded to. So in China the 10, 12 liter we’ll introduce this year, and so that’s a combination of some new products and market share while there’s another very visible one.

N. Thomas Linebarger

I think also and we’ve got -- as Rich said we’re ramping up in our mid-range business, so not all -- we won't get to 70% on day one, just as we had in 2013, we launched the product and then they had to market and when it gets to other people and all the rest of that. So, I think there’s some ramp up assumption there as well. So, we’re hopeful obviously to drive faster and get more shares; but what we tried to do is, do the most realistic how we can on that.

Ann Duignan - JP Morgan Chase & Co, Research Division

Okay, that’s great color. I appreciate that. And just a follow-up on Power Gen, philosophically I know it's not probably a fair question given the size of the business whether that’s Caterpillar’s and the different mix because you don’t have turbines in there. But can you talk about, what are some of the other structural differences between your Power Gen business and Caterpillar’s, is it you’re more low horsepower ready exposure or is it investments in new products to gain share. If you could just talk a little bit about the structural differences between you and some of your competitor’s?

N. Thomas Linebarger

Just broadly speaking, I’d say the biggest difference in our business and Caterpillars business is turbine. So the simplest way to compare the numbers would be that, and that is the big difference by the way. It's a big difference in how, what the cycles are right now, it's pretty noticeable. The second thing I think that we do have a components business which includes alternators, and as if we mentioned in our remarks the alternator business based in Europe has had a really rough time because volumes are falling so quickly in large power projects and that’s in a high cost structure environment. So we are addressing that point and I think we’ll see much better margins and results in that business as a result of those changes. But structurally turbine’s is by far the biggest difference. I think if you do the math on there and see the difference in market that will explain most of the difference if you’re looking for.

Ann Duignan - JP Morgan Chase & Co, Research Division

Okay, that’s great. Thank you. I appreciate it and I'll get back in line.

N. Thomas Linebarger

Thank you.

Operator

Thank you for your question. Your next question is from the line of Jerry Revich of Goldman Sachs. Please go ahead.

Jerry Revich - Goldman Sachs Group Inc., Research Division

Hi, good morning.

N. Thomas Linebarger

Good morning, Jerry.

Richard J. Freeland

Good morning, Jerry.

Jerry Revich - Goldman Sachs Group Inc., Research Division

Tom, could you just flush out for us the opportunities on the fulltime light and heavy platforms based on the range of applications that you’re targeting the engines for? Where do you think is a reasonable penetration rate target separately from the light and heavy duty platforms. And then from a margin structure I know this business is, should we think of a similar profitability profiles as we see in Dongfeng Cummins today?

N. Thomas Linebarger

I’m going to let Rich talk a little bit about the markets and the growth side, because he’s been working that for a while now and (indiscernible) an insight on that.

Richard J. Freeland

Good morning, Jerry. So just reminding folks in both of these products it's a different approach where we introduced in China with a brand new engine, so and then expand globally. So our objective and our results so far as we have emerging market cost with world class performance. So introduced in China and then take it up to global standards. And so I’ll touch first on the 10, 12; we will introduce -- we said we would introduce it in Q2 and we’re on track to do that and that will be for the 10 and 12 liter product in a partnership with Foton. That product and work is going on, and I in fact announced that it will meet emission standards off highway and meet current and future emission standards globally. So unlike the 2838 [ph] we will start in China and most of the volume will be in China as you look for the next 18 months. But we’re talking to customers globally on this terrific product. On the 2838 [ph] there with same product, same strategy again introduced in China and then expand with the delays in that sub-4 standards we really had to test the strategy, can we sell this product globally? And in fact the sales have been higher outside of China than inside of China, in places like Russia, Brazil and now in Europe at Euro 6 standards. And from your second question on the margin structure very similar margin structure although it shows up a little bit differently and that we’ll take a margin at the joint venture and then take a second margin when we sell the product to customers beyond our partners.

Jerry Revich - Goldman Sachs Group Inc., Research Division

And Rich just a clarification there, the ultimate penetration opportunity within Foton’s own platform is just within China based on the range of applications you’re targeting; where do you think the penetration rate it can go for your business over the next couple of years?

Richard J. Freeland

We’re targeting to get to 25% market share in the heavy duty market, and again that won't be overnight in there, but it's a 300,000 market and so it's bigger than U.S. right now that 10 and 12 liter space. But it will not be a slow ramp up as we’ll be introducing product by model and rolling that out.

N. Thomas Linebarger

The light duty as Rich said Jerry has been a slower penetration rate largely due to the fact that NS4 we designed the product to replace their existing engines at NS4. We have been making some progress there. Where we can get to is not clear, because Foton’s own strategy in light duty and heavy duty are slightly different. But they’re the market leader in light duty, and so they have a huge range of products that are very low end all the way up to higher end in terms of features in light duty. In the heavy duty market they’re pretty much going at the mainstream and upper end markets, so our product kind of fits where they’re trying to go and that’s why Rich said that we’re going to kind of start at a pretty good penetration rate and stay there provided to launch well and hit our quality targets et cetera. The light duty I think, we’re just not clear how far it can go, but we really have -- it's all on the upside now. We really have not had much penetration inside Foton in China to date, and the NS4 standards are starting. And as we mentioned in our remarks they’re starting to increase the share they take and that means we’ve got a lot of volume. I mean they’re a very, very large producer of light duty vehicles in China.

Jerry Revich - Goldman Sachs Group Inc., Research Division

I appreciate the color. And then on the U.S. heavy duty side, a bit of volatility in the market share numbers. Can you just talk about the 38% market share target for ’14; how do you gentlemen expect that to play out over the course of the year and any meaningful platform shifts that we should be looking for?

Richard J. Freeland

Okay. Yes, Jerry so we’ve been saying for some time in the 35% to 40% range where we ought to be in any quarter because you can get variation just based on build rates at different OE’s and so pretty confident on the 38% it's where we’ve been in the last couple of years. Some slight changes sure whereas the, as PACCAR has increased their production of the 13 liter the MX product. We’ll see some of our share which was planned to go down at PACCAR. And again it's an excellent product the 13 liter for that market we’re partnered with them providing components in that space and that will be offset by some increases at Navistar and increases in our natural gas product in the heavy duty space.

Jerry Revich - Goldman Sachs Group Inc., Research Division

Okay. Thank you very much.

Richard J. Freeland

And I guess just lastly, the incremental – we'll see that start early in the year, the increase from the Q4 number.

Jerry Revich - Goldman Sachs Group Inc., Research Division

Got it. Thanks.

N. Thomas Linebarger

Thanks, Jerry.

Operator

Thanks for your question. Your next question is from the line of Alex Potter of Piper Jaffray. Please go ahead.

Alexander Potter - Piper Jaffray Companies

Hi, guys. How are you'll?

N. Thomas Linebarger

Hi, Alex.

Alexander Potter - Piper Jaffray Companies

I guess I had another follow-up question here on the Foton engine. You mentioned that you're gunning for a 25% share of China's heavy duty market. I guess that implies that you'll be using the Foton joint venture to sell engines to some other truck OEMs within China, and was just wondering if there might be a conflict there if people interpret that – say your first auto or whomever you're buying an engine basically produced by Foton. Do you view that as a problem?

N. Thomas Linebarger

Let me comment. So we're partnered with Foton there and our goal is to replace the existing business but also help Foton grow share with competitors there. So it's a combination of both. And then selling the product broader outside of China on top of that. And Alex just broadly speaking the 25% we're looking for we already have a significant share with Dongfeng from our DCEC joint venture. So when we do a set of market share targets, we're adding the two together to look at total heavy duty market share. We are trying to sell to some others but the conflict that you mentioned is real. That is exactly right in the truck companies, the integrated ones are not so interested in buying an engine from a joint venture from their competitor but there are some smaller companies. For example, I think we mentioned on our previous call we've been selling to one of the affiliates of Dongfeng (indiscernible) and we even signed them some engines from DCEC but I think those kind of companies you also can sell other engines too. So what we'll end up doing with regard to which engines go to which we'll see but the primary customers of those in terms of heavy duty market share will be DCEC to Dongfeng and the Foton joint venture into Foton.

Alexander Potter - Piper Jaffray Companies

Okay, that makes good sense. I guess my last question here is if you could give an update on the very high-horsepower hedgehog engine and what the update is there? If you're starting to see some initial uptick or initial interest from which segments and when you expect to start getting some volume there? Thanks.

Richard J. Freeland

So we're on schedule for this product and part of this schedule said we'd begin market seeding this year in the power gen markets, the diesel power gen markets. So in fact that will happen and we've received orders and we'll begin shipping in the second half of the year. We're also – we talked about entering new markets beyond power gen and in fact we are on target with that. We're not ready to announce who that is or when that is, our partners will do that. But those are products that will begin to sell. So from a product development standpoint, we're on schedule. And from where we plan to be on getting agreements with customers or selling in the power generation business, we are on schedule at this time.

N. Thomas Linebarger

(Indiscernible) you're going to see announcements that are going to – most of them will come next year. It's not that we won't do anything this year because we are. We're doing a lot of market seeding as Rick said, but next year is when we'll start to see. So these customers are using it here and that kind of thing. Again, mostly because each customer wants to do development with us and then they want to announce when they're kind of ready. I'm not saying there will be no announcements this year, I can't say that for sure but most of them are going to come next year.

Alexander Potter - Piper Jaffray Companies

Okay, very good. Thanks, guys.

Operator

Thanks for your question. Our next question is from the line of Andrew Kaplowitz of Barclays. Please go ahead.

Andrew Kaplowitz - Barclays Capital

Good morning, guys.

N. Thomas Linebarger

Hi, Andy.

Andrew Kaplowitz - Barclays Capital

Tom or Pat, can you talk a little more about your engine margin in 4Q? We know about mix but can you talk about the increase in product coverage that you mentioned and maybe quantify the inventory write-down in the oil and gas that you took?

Patrick J. Ward

Yes, I'll take the product coverage and maybe Rich can comment (indiscernible) oil and gas inventory write-down. Back in Q3 remember we took a favorable changing estimate we have at least from time to time where we reassess the warranty claims with engines in the population with a favorable adjustment in the third quarter. So that's really the delta when you look at Q3 to Q4. And that cost range in business sequentially almost 1% to 2% point. So it was insignificant for them. And then on inventory.

Richard J. Freeland

Just to quantify that, that was about $7.5 million the one-time write-down, which will not repeat.

Andrew Kaplowitz - Barclays Capital

Okay, that's helpful guys. And then I may not be doing this right but I'm going to ask it anyway, Pat. So if I look at the segment guidance that you gave and then I look at the overall 48% guidance, the segment guidance seems to equate to the middle of the range, toward the high end of your 48% range and that's includes eliminations. Am I doing that right? Are you discounting your segments to some extent or am I not doing that right?

Patrick J. Ward

(Indiscernible) so the way to think of eliminations going forward, as we acquire more of our North American distributors, the elimination percent will go up. So historically we've been in the 16% to 18% range and we should be thinking more of a 20%, 21% number this year.

Andrew Kaplowitz - Barclays Capital

Okay, so that's the answer to that.

Patrick J. Ward

Yes.

Andrew Kaplowitz - Barclays Capital

Okay, that's fair. I'll get back in queue. Thank you, guys.

N. Thomas Linebarger

Thanks, Andy.

Operator

Thank you very much for your question. Our next question is from the line of Ross Gilardi of Bank of America. Please go ahead.

Ross Gilardi - Bank of America Merrill Lynch

Good morning, gentlemen. Thank you.

N. Thomas Linebarger

Good morning.

Ross Gilardi - Bank of America Merrill Lynch

Just a couple of question, just on your on-highway outlook by region and you've got China down 7% in 2014 and India and Brazil flat and India flat, North Korea very weak 2013. So I'm wondering how your outlook kind of compares to current order run rates and generally how much visibility do you have in those markets right now?

Richard J. Freeland

It varies by market as you guessed how much visibility we get. In China we get a little bit less because the market numbers published statistics are just not quite as reliable. We do have very good relationships with the OEMs. I think we get their best. Here the question is how good is theirs? And really there's been quite a bit of volatility related to this when is NS4 going to go. In fact order rates for NS4 equipment were higher in Q4 than we expected both on the components and the engine side which again was encouraging in the sense that the OEMs are trying to implement NS4. But how many are selling through there's no data on that today. You can't see how many end customers are buying them, so it's a little bit hard to know. It's tough to make (indiscernible), is it going to go through. So that's why we see some volatility in China. Again, what we're thinking through is as you kind of look across the whole year and the NS4 gets steadily implemented, volumes will likely shrink because of the sort of excess production or purchases in the fourth quarter last year. It's just simply as I recall looking across the year but we just think there's going to be a fair bit of volatility. On Brazil we do have a little bit more visibility but again there was definitely some cost relation involved solely created by the whole thing about FINAME. FINAME is such a big benefit to purchasers especially of larger trucks that the fact that program is varying a little bit, I don't think people really know how much effect that's going to have on customers. And so there's a little bit of guess work involved with that. We do think our current order rates are pretty consistent of what we've got, but we really don't know over a longer run how that's going to play out. So to your question there definitely is more uncertainty and volatility associated with some of those international markets than you might see in the U.S. India, there's not that much of volatility, there's just not that much action. That market was clobbered really hard last year. I'm not saying it can't go lower but it's really low right now and there's not much energy I don't think can make it stronger. Is that helpful on those markets?

Ross Gilardi - Bank of America Merrill Lynch

Yes, that's great guys. Thank you. And then just a follow-up on China. So I guess when you couple your outlook for China on-highway being down 7%, the uncertainty with NS4, you mentioned – it sounds like a pretty tepid outlook for the excavator market in China in 2014, so clearly pretty anemic environment. How does that impact your customers' appetite for a lot of the new products that you're planning to release this year and over the next several years, because clearly some of your customers have got – particularly on the construction side have got to be struggling right now?

N. Thomas Linebarger

They are. I think to the point you raised, I think the customers – we have seen lower uptake of products. We talked about the light duty engines. I mean the light duty engine plan was a lot faster launch and penetration of Foton than we've seen. Now as we have said, we were able to scramble and move the international sales plan ahead of its original and we got a lot of good sales of exports on the light duty engines. But the penetration at Foton is in terms of just what we had anticipated some years ago is several years behind and that’s just because of the -- Foton did not have much appetite to take on a higher-tech engine until NS4 goes in, but it is going in. So they are now doing it. Again, whether they’re happy about it or not, there they are putting it in and the result and the reason is they need the technology. I think in the construction side, our construction partner LiuGong on our joint venture there is really seeing those products as a way for them to compete not just domestically but internationally. So they have quite a bit of appetite, I think as they’re of course seeing exports as a big opportunity for them to grow in what's otherwise an anemic home market. So, there is a lot of energy. So, I would say generally speaking, energy level is high but penetrating in the China market without the need for emissions technology, if you’re product is more expensive it's very difficult to do. I think that’s one of the really terrific things about a new heavy duty 10 and 12 liter engine as Rich and his team have worked incredibly hard to make sure that engine is competitive on a like-for-like basis with existing products while still offering the benefit to upgrade to new technology and all of the other fuel economy and the other benefits that our technology can offer them. That’s a really hard design challenge, but I’d say we’re able to do it in this heavy duty engine and I think that’s kind of a [C-Change] [ph] for us as a Company.

Ross Gilardi - Bank of America Merrill Lynch

Great. Thank you very much.

N. Thomas Linebarger

Thank you.

Operator

Thank you for your question. Your next question is from the line of Stephen Volkmann of Jefferies. Please go ahead.

Stephen Volkmann - Jefferies LLC

Thank you. Good morning guys.

N. Thomas Linebarger

Good morning, Steve.

Richard J. Freeland

Good morning, Steve.

Stephen Volkmann - Jefferies LLC

I am wondering if we can talk just a little bit about heavy duty truck here in North America in the last couple of months as order rates have been, it looked to me to be stronger than what you’re factoring in for 2014 which I suppose is prudent. But can you just give a little color on what you’re seeing vis-à-vis those order rates and if you think there’s some reason that things will decelerate and then as you’re doing that, should we still think of this as one of the higher incremental margin businesses that you're able to flex up production a little bit?

Richard J. Freeland

Steve, I’ll go and take a first short at this. So, well we’ve seen in four months it looked pretty good now, in particularly the last two months. And all the signals that we all look at, look positive although they have for some time I guess is the concern that I have got here. So, but I think the way you got to think about us is we’re, right now the industry is building fewer than orders are, so backlogs are growing. And so the one thing I can’t say is, when it does change we tend to change fairly significantly, because at a certain point you have to build more than orders to take that backlog down. And so we have not built that in at this point, because we have been -- there’s been a couple of false alarms on this right over the last two or three years. So I think we’re pretty prudent. What we do know, if it swings it swings heavy and that’s what we’re good at. We’ve got capacity in place, we in fact invested over the last couple of years anticipating not knowing when it happened but knowing it would at some point. So that’s kind of what we’re seeing right now as we’re watching this closely seeing is there going to be an inflection point where build rates go up to either match orders or in fact go up to start taking backlog down, and we’re from a capacity standpoint our position to respond to that when or if that happens.

N. Thomas Linebarger

And Steve that’s really what makes the incremental margin good in this business. So we have got one plant very efficient assembly plant. We got a really good supply chain. We have heavy content on the engine. We have components and we have the engine assembly. We have a good position in the market. So, yes it's a good incremental margin and bridges plants, especially the Jamestown plant, it's a terrific ramp up plant and so yes, we’ll do really well. But I just -- I want to go back to Jamie’s original question though about our posture. We watched the heavy duty truck market start out stronger two years in a row. And so we’re just -- we would love it to be stronger, don’t get me wrong, that would be really good. But we took a little more conservative posture none in terms of how we estimate financials, but in terms of, hey what's the economy going to do because frankly we were a little more aggressive in the last two years and that didn’t pay out so much in this -- in the markets that we find ourselves in. So we are not counting the chickens yet basically. But that said, all the statistics that you talked about are there. This is the market that’s ready to find more than a replacement and we’re definitely ready to supply it. So if that happens we will benefit for sure.

Stephen Volkmann - Jefferies LLC

And just to be clear, there’s nothing in your conversations with your customers or the fleets that would suggest there’s any big kind of drop off in orders in the near term?

N. Thomas Linebarger

No, there definitely is not, and just to see the conversations with end customers and OEMs really sound the same as they did for the last year or two. So everybody sees the same data, all the big fleets they running their business pretty efficiently, they feel like they’ve been doing the same thing for a long time. So, one of the problems I think in this situation is that conversations aren’t that different. The order rates are definitely up, nobody things they’re going to rank that down or anything at least as far as I have heard. But there’s not nobody bubbly either, it's kind of the same. I mean Rich you should say if you feel differently it. It's about the same kind of conversation. So I guess from that point Steve, it’s hard to read those TVs a little bit.

Stephen Volkmann - Jefferies LLC

Great. And maybe Tom, can I ask you a philosophical question, you were kind enough and maybe you regret this already, but you laid out some growth scenarios for us at the analyst day, sort of getting to the bottom end of what you gave us for 2015 is starting to look like perhaps the stretch would certainly get some double-digit top line growth in 2015 if we get there. How do you think about those targets? Is this something that you really want to manage to or is this just sort of a case where the world changes and we just have to sort of roll with that?

N. Thomas Linebarger

The way that I would think about those Steve, same as I talked about before is that what I am trying to layout for investors is, what’s our best estimate of what we think the markets are going to do and what we’re going to do, what's our strategy to deal with that environment. And again at this point it's hard to say where we're relative to those targets. Some things may result -- it wasn’t that long ago and we definitely didn’t have a linear track on our growth targets. We expected the earlier years to be worse of course we were in not such a great market when we gave those. And it will come down to the rate of recovery of economies in 2015 and beyond, and that right now that’s hard to tell. But if economies recover well, I feel very, very confident in those numbers. And if they don’t recover to your point we’ll have to go back and say well, instead of kind of a medium level set of economies as we anticipated we had another -- we had really lousy ones and so here’s where we’re going to be. And we will adjust to course if we see differently, but right now its way too early to say and a few things are worse than we thought at that point, but it's really early days and again it will just really depend of the recovery. We have positioned ourselves incredibly well in the markets that we’re in. That’s the most frustrating part of this whole environment that we’re in, because I keep having to tell you guys how good we’re going to do when markets improve and they not haven't really improved, but we have terrific leadership in markets and products with customers. So a little bit of turn on these economies you mentioned right, heavy duty truck but any of them really and we will see significant benefits. So, right now I’m just watching and what I’m using those goals as is -- how we’ll respond to that environment as it comes.

Stephen Volkmann - Jefferies LLC

Thank you. I’ll pass it on.

N. Thomas Linebarger

Thanks, Steve.

Richard J. Freeland

Thank a lot.

Patrick J. Ward

Thank you very much. I’ll be available for your questions later.

Stephen Volkmann - Jefferies LLC

Thank you.

Operator

Thank you for your question. Ladies and gentlemen, that’s all we have time for. I’ll now like to hand the call back to Mr. Mark Smith for closing remarks. Okay, ladies and gentlemen that concludes today's conference call. You may now disconnect your lines. Have a good day. Thank you.

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