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Cummins_06/09/12
- 1. Cummins Power Generation Investor Conference September, 2006
- 2. Welcome and Introductions Tom Linebarger – President Tony Satterthwaite – Generator Sets Karen Battin – Finance leader Thad Ewald – Power Electronics Elizabeth Carey – Engineering Fiona Devan – Human Resources Char Niemczura – Customer Support Lisa Yoder – IT Richard Eikill – Consumer Claire Roper – Cummins Generator Technologies 2
- 3. Other People of Importance Scott Schneider – Fridley Plant Manager Denise Goffinet – Staff Assistant Investor Relations Staff Dean Cantrell Troy Dewar Lea Cain 3
- 4. 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. 4
- 5. Agenda Market overview Financial performance Sustainability of performance Growth Building blocks Reducing volatility 5
- 6. Cummins Inc. Power Components Distribution Engines Generation 6
- 7. Cummins Inc. Key Strategic Principles Distribution Leverage complementary 10% businesses Create shareholder value Components Low cost producer 17% Grow in related markets Demonstrate a performance ethic Engines 56% Power Increase profitability and cash flow Generation 17% Maintain strong balance sheet and invest in growth 2005: $9.9B Maximize shareholder value 7
- 8. Agenda Market overview Financial performance Sustainability of performance Growth Building blocks Reducing volatility 8
- 9. Where Does Cummins Compete? Sales of Power Generation Equipment 2005 Total = 171 gigawatts Standby Power: 26 gigawatts Centralized Power (Utilities): Mobile Power: 15 gigawatts 105 gigawatts Distributed Generation: 25 gigawatts 9 Source: EIA, Parkinson
- 10. Standby Power Uses Codes and standards Emergency response Avoid economic loss Customers Commercial buildings Datacenters Sewage treatment plants Natural gas or diesel fueled CMI Share 33% Drivers Non-residential construction Utility power reliability Economic dependence 10
- 11. Distributed Generation Uses Grid substitution and supplement Off-grid use Self generation Peaking Customers Industrial and commercial users in developing countries Oil and gas, mining, ski resorts Universities, hospitals, agri-business Natural gas, bio gas, or diesel Drivers CMI Share 15% Utility investment in generation and distribution Demand in specific industries with remote applications (e.g. mining, oil and gas) Economics of self-generation • Incentives • Price dislocation • Relative fuel price 11
- 12. Mobile Power Uses Auxiliary power on the move Portable power Customers Recreational vehicle owners Pleasure boat owners Specialty vehicles Construction contractors Gasoline, propane or diesel Drivers CMI Share 15% 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 12
- 13. Standby and Distributed Generation Market Trends 300000 CAGR 5% 250000 CAGR 8% Market unit sales 200000 150000 100000 50000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 Market was constrained by engine capacity in 2004-2005 Industry has been expanding capacity through productivity gains Industry is adding physical capacity for 2007 – 2008 CMI has been adding engine capacity since 2004 13 Source: Parkinson and company estimates
- 14. We Have a Strong Market Position Market Share of Standby, Mobile and Distributed Generation Cummins 21% Others 29% Aksa Caterpillar 2% 41% Kohler / SDMO 7% 14 Source: Company estimates
- 15. Strong Market Positions in the Segments in Which We Compete Mobile Power Distributed Turbines - RV Generation - Marine Emergency - Adjacencies Standby Power Components Rental Power - Alternators - Electronics Engines Cummins Power Generation Caterpillar Power Generation 15
- 16. Strong Market Positions in the Segments in Which We Compete Mobile Standby Distributed Power Power Generation 30% 40% 85% High-spec Standby Basic Power Motorized RV 33% 40% Alternators 25% Recreational Marine Commercial Mobile 16 Source: Parkinson and company estimates
- 17. Power Generation Value Chain Operations and Components Products Solutions Service Market Size: $6.2B Market Size: $9.2B Market Size: $8.8B Market Size: $10B (includes components) Engines Generator Sets Power system Rental Revenues design and Alternators Automatic Transfer IPP Revenues installation Switches Controls Operation and Custom Maintenance Application Repair and Development Planned Switchgear Maintenance John Deere Caterpillar CAT Dealers Product Dealers Perkins Kohler Packagers Independent Power Producers Emerson Emerson Rental Companies 17
- 18. From Whom Customers Are Buying High Consolidation of suppliers and assemblers Percent of Value Influenced Still covers the broad market Low Past Present Future ____ Component suppliers; ____ Assemblers; ____ Solution providers From a customer’s perspective, where is value provided? • Brand value • To whom do they go for service 18 • Whom do they specify
- 19. Cummins Power Generation Three Major Markets Global Lines of Businesses (LOB) 18% 25% Alternators Distributed Generation 3% Rental Commercial 16% 54% Consumer 16% 59% Mobile Standby Power Power 6% Power Electronics 3% Energy Solutions 2005 Sales Breakdown 100% = $2 B 19
- 20. Agenda Market overview Financial performance Sustainability of performance Growth Building blocks Reducing volatility 20
- 21. Power Generation – Historical Performance Sales Segment EBIT 2500 250 $2,213 $196 $1,999 200 2000 $1,842 $145 150 $1,422 1500 $1,329 $1,226 $M $M 100 $74 $60 1000 50 500 0 ($19) ($25) -50 0 LTM 2005 Q2 '06 LTM 2001 2002 2003 2004 2001 2002 2003 2004 2005 Q2 '06 21
- 22. Cummins Power Generation Turnaround Restructured and reorganized the Cost reduction Business Pricing Implemented Bring all businesses aggressive turnaround to target returns plan Moving resources Focused on cost to opportunities reduction Implemented a new strategy 22
- 23. Power Generation Business Objectives Achieve financial goals Revenue growth: 8%-10% EBIT margin: 7%-9% Return on Average Net Assets: 20%-25% Be the first choice of customers Demonstrate a performance ethic 23
- 24. Power Generation Business Strategy Defend and establish strong market positions Consumer growth Grow distributed generation Low cost producer Leverage our global presence 24
- 25. 2006 – 2007 Outlook Markets will continue to show strength Growth is limited by capacity Pricing environment remains generally favorable Cost inflation, especially on commodities Continued progress on strategic initiatives should help Cummins Power Generation achieve above market performance 25
- 26. Sustainability of Performance Markets are strong We are growing faster than the market Share growth Adjacencies We have the building blocks required to establish and maintain leadership positions across a wide range of markets 26
- 27. Agenda Market overview Financial performance Sustainability of performance Growth Building blocks Reducing volatility 27
- 28. Target of 8% - 10% Annual Revenue Growth Market growth Electricity demand Dependence on electricity Developing economies Low investment in generation and distribution Share increases Grow faster than the market Grow in markets in which we are strong Expand in big markets Adjacency growth Complementary lines of products, technologies and customers 28
- 29. Electricity Consumption Driving Power Generation Growth World Electricity Consumption History Forecast 35,000 30,000 CAGR = 2.9% 25,000 Billion Kilowatthours 20,000 15,000 CAGR = 3.1% 10,000 Consumption 5,000 0 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 29 Source: Energy Information Administration (DOE)
- 30. Growth in Developing Economies Year-on-year increases in electricity consumption in developing economies is accelerating Electricity consumption in developing countries expected to overtake OECD countries by 2015 Highest growth will be in Asia 30 OECD: Organization for Economic Cooperation
- 31. 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 31
- 32. Capacity is Not Keeping Up with Demand Generation not keeping up with demand; transmission and distribution is worse Aging 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 32
- 33. Market Outlook Shows Sustained Growth of 5% - 7% Impact on the Market Global electricity 3% consumption growing at 3% Developing economies 1% - 2% adopting electricity usage Increasing dependency on 1% - 2% electricity Investments in generation and transmission capacity 1% - 2% growing at 1% less than consumption 5% - 7% 33
- 34. We Will Grow Faster Than the Market Further penetrate where we have a leadership position Establish leadership position where we are not a leader today Adjacencies and natural extensions of what we already do 34
- 35. 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 serve Expand presence in market Increase share of wallet 35
- 36. RV Towable Market has Shown Significant Increase in Generator Set Penetration 400000 16% 350000 14% 300000 12% 250000 10% Units 200000 8% 150000 6% 100000 4% 50000 2% 0 0% 2003 2004 2005 2006 FCST 36 Motorized* Towable** Towable penetration Source: RVIA, Company estimates
- 37. 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 kW We expanded presence in the small product range Gained share of 25% below 100 kW Sales have increased at a CAGR of 23% from 2003 to 2005 37
- 38. Share Opportunities Significant opportunities exist to grow share in under-served segments New emission regulations offer the opportunity to pick up share from lower-spec competitors Combination of right product and low cost has strong impact in markets 38
- 39. Establish Strong Market Positions Globally Geographic Segmentation – Generator Sets and Systems Share of Global Generator Set Consumption (Total Output, Parkinson 1998-2004) Approx. $7 B global market 35% Market Leader (# 1 or # 2) 30% Leader in some segments of the market 8 Target Territories = Not a market leader 25% 81% of Global Market 20% 15% 10% Brazil is largest Russia has market in LAO large potential 5% 0% a Am il na a o n n st e IS fic a a a a pe az di ric ic pa ea p si ic ic ic Ea hi C ci ro ex In ro Br A er er er Af Ja As C Pa & Eu Eu M Am e of m dl ia lA h t C id es n s ut th h us er E& tra M ut So R or t R es So en N W C 39
- 40. Cummins Generator Set Sales Market Share Gains in Europe European market grew 2.5% from 2002-2006; Cummins Power Generation grew 34% over +80% the same period Millions of Dollars 2001 2002 2003 2004 2005 FC06 40
- 41. Adjacencies Consumer markets Leverage product technologies – size and noise Leverage distribution strengths • Service network and focus Leverage Onan and Cummins brands Leverage global presence 41
- 42. Consumer Products Adjacencies RV Truck OEMs OEMs Trailers Commercial Mobile Recreational Vehicles Aux. Power Unit Home Consumers Professionals Standby Portables 42
- 43. We Have the Building Blocks for Leadership Channel capabilities Low cost producer Global presence Technical leadership 43
- 44. Building Distribution Capabilities Historically an engine business channel Global reach Large presence Financially strong Complementary products Building power generation capabilities in certain markets Europe Nigeria Indonesia Middle East 44
- 45. Low Cost Producer Design Manufacturing Logistics Purchasing 45
- 46. Achieve Low Cost Producer Position Example of Commercial Generator Set Cost Reductions Source of Savings Savings Area Open Set Enclosed Set Specification 35% 26% Design 15% 42% Average reduction over 10 models - 14% Sourcing 25% 18% Manufacturing 25% 14% Average reduction over 10 models - 30% 46
- 47. Manufacturing Footprint Fridley, MN Ramsgate, UK Singapore Beijing, China Sao Paulo, Brazil Columbus, IN Daman, India Pune, India Stamford, UK San Luis Potosi, Mexico Kempen, Germany Ingolstadt, Germany Craiova, Romania Wuxi, China Ahmednagar, India Oahkham, UK Karlshuld, Germany 47
- 48. Low Cost Global Sourcing Alternators Percent Product from China and India 53% 43% 35% 21% 2003 2004 2005 2006 48
- 49. Using Technology to Deliver Marketplace Advantage Increased Power Density Reduce Costs Emissions Leadership Increase Share Customer Integration Preference 49
- 50. Leverage Strength in Technological Capabilities HQD810 Example 10.0kW 3.0kW Sine Wave Sine Wave Max Power Quiet Time 120V AC Seamless Pure Sine Wave 10.0kW 12V DC Variable AC Inverter/ Boost Power Unit Charger 7.5kW 3.0kW House Batteries Power Source Power Source Customer Benefits Noise Reduction – 50% reduction (4-6dB) Generator Fuel Consumption – ~15-20% Reduction System Automation – Simplify electrical operation 300 lb Weight Savings – More cargo carrying capacity Simpler Service • (One stop electrical service; Use entire Onan service network) 50
- 51. Value Comparison Today’s 7.5 QD System New 8/10 HQD System 7.5 QD Generator set 7.5 QD Generator set 2kW Sine wave inverter Transfer switch Displays and controls 40% more content 51
- 52. Target of 8% - 10% Annual Revenue Growth Market growth Electricity demand Dependence on electricity Developing economies Low investment in generation and distribution Share increases Grow faster than the market Grow in markets in which we are strong Expand in big markets Adjacency growth Complementary lines of products, technologies and customers 52
- 53. Agenda Market overview Financial performance Sustainability of performance Growth Building blocks Reducing volatility 53
- 54. Sustainability of Performance Effective organization and leadership team Turned the business around Now hitting financial targets Sustainability Strong markets Good growth Have the building blocks for continued success We have taken the steps to reduce volatility 54
- 55. Power Generation Business Objectives Last Twelve Months Achieve financial goals • Sales growth 14.5% • EBIT margin 8.9% Revenue growth 8%-10% • Return on Net Assets 26% EBIT margin 7%-9% Return on Average Net Assets 20%-25% Be the first choice of customers Demonstrate a performance ethic 55
- 56. Reducing Volatility Broader, diversified markets Increased market penetration Gross margin improvement Low fixed cost structure Spending control 56
- 57. Increases in Geographic Diversity 2005: $2.0B 2003: $1.3B EMEA EMEA 30% 21% Latin Latin America America 10% 7% North India India America 8% North 8% 44% America China 37% China 8% 7% Asia Pacific Asia Pacific 10% 10% CAGR 2003 – 2005: 24% 57
- 58. Increased Market Penetration Growth in non-RV consumer markets Increased share in Europe Increased penetration in India Increased share in the stable basic protection segment 58
- 59. Reducing Volatility Broader, diversified markets Increased market penetration Gross margin improvement Low fixed cost structure Spending control 59
- 60. Sales and EBIT% - Quarterly Trend Sales EBIT% 800 10% 9.4% 9.1% 9% 8.5% 8.4% 700 8% 598 575 600 7.1% 536 7% 520 504 493 493 500 460 6% 427 $ in Millions 369 400 5% 4.2% 4% 3.9% 300 3.5% 3% 3.0% 200 2% 100 1.4% 1% 0 0% Q1-04 Q2-04 Q3-04 Q4-04 Q1-05 Q2-05 Q3-05 Q4-05 Q1-06 Q2-06 60
- 61. Cummins Power Generation Investor Conference September, 2006