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Cummins, Inc. (NYSE:CMI)
Q4 2018 Earnings Conference Call
Feb. 6, 2019, 10:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2018 Cummins, Inc. Earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If anyone should require operator assistance during the conference, please press *, then 0 on your telephone keypad.

As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. James Hopkins, Executive Director of Investor Relations. Sir, you may begin.

James Hopkins -- Executive Director of Investor Relations

Thank you, Chelsea. Good morning, everyone, and welcome to our teleconference today to discuss Cummins' results from the fourth quarter of 2018. Participating with me today are our Chairman and Chief Executive Officer, Tom Linebarger, our Chief Financial Officer, Pat Ward, President and Chief Operating Officer Rich Freeland, and Vice President of Financial Operations, Mark Smith. We will be available for your questions at the end of the teleconference.

Before we start, 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, and such forward-looking statements -- because of the number of risks and uncertainties. More information regarding such risks and uncertainties is available in the Forward-Looking Disclosure Statement in the slide deck, and our filings with the Securities and Exchange Commission -- particularly the risk factors section of our most recently filed annual report on Form 10K, and any subsequently filed quarterly reports on the Form 10Q.

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

With that out of the way, we'll begin with our Chairman and CEO, Tom Linebarger.

Tom Linebarger -- Chairman, Chief Executive Officer

Very compelling -- thank you, James. Good morning, everybody. I'll start with a summary of our fourth quarter, and full-year results, and finish with a discussion of our outlook for 2019. That will then take more details of both our fourth quarter performance, and forecast for the year.

Revenues for the fourth quarter of 2018 were $6.1 billion, an increase of 12% compared to the fourth quarter of 2017, with growth in all of our operation segments, and major geographic markets. EBITDA was $896 million, or 14.6% -- compared to $769 million, or 14% a year ago. EBITDA increased as a percent of sales due to the benefit of higher volumes, improved pricing, lower working costs, and the absence of tax reform impact on JV earnings in the fourth quarter last year. These positive factors more than offset an increase in research and engineering to support new product development, and the negative impact of tariffs.

For the full year, Cummins sales were a record $23.8 billion, up 16% year-over-year. Our EBITDA margins were 14.6%, compared to 14.8% in 2017, with the impact of higher sales, improved pricing, and the benefit of cost reduction programs offset by product campaign charges in the first half of the year, and the increase in research and engineering. EBITDA dollars were a record $3.5 billion.

Engine business sales increased by 18% in 2018, due to stronger production of heavy- and medium-duty in North America, and higher demand for construction equipment globally. EBITDA was 13.7%, compared to 12.8% in 2017, due to the positive impact of higher revenues, and improved pricing partially offset by product campaign charges. Sales for our distribution business grew by 11%, driven by increased demand in North America, and Europe. Full-year EBITDA was 7.2%, compared to 7.1% in 2017, with the benefit of improved pricing offset by the impact of strong US dollar and currency volatility in Africa.

Full-year revenues for the component segment increased by 22%, due to higher truck production in North America, Europe, India, and Brazil. The automated transmission business contributed 6% to segment growth for the full year. EBITDA was 14.4%, compared to 15.6% in 2017, as the benefits of higher sales, and material cost reduction programs were more than offset by product campaign costs, and the dilutive effect of the new automated transmission business. The automated transmission business delivered revenues of $543 million in 2018, driven by stronger demand in the North American heavy-duty truck market, as well as higher-than-expected penetration rates of automatic manual transmissions -- which reached 73% of new heavy-duty trucks in 2018.

Customer feedback on the new Endurant transmission has been very positive, and joint venture profitability is benefiting from transitioning to selling the new, and improved products. Power systems sales increased by 14% in 2018, driven by higher demand for power generation equipment, and an increase in sales to oil, and gas, and mining customers. EBITDA was 13.3%; compared to 10.1% in 2017, driven by the positive impact of higher sales, lower warranty costs, and improved pricing. While EBITDA margins improved significantly for the full year, they were below our expectations in the fourth quarter. Due to stronger-than-anticipated demand for power generation equipment, our alternator business -- which is still in the restructuring process -- incurred additional production costs, and premium freight to meet deliver commitments. EBITDA percent in the fourth quarter was also negatively impacted by lower joint venture earnings in Africa, the impact of tariffs, and a lower mix of parts sales. We do, though, expect to grow earnings in 2019 as a result of stronger power generation sales, improved pricing, and sustained improvement in our alternator operations -- all of which will offset weaker demand from oil and gas customers.

In our electrified power business, full-year EBITDA was a loss of $90 million, in line with our forecast. We continue our targeted investments in areas which we expect to see broad market adoption, primarily in urban and short-range applications. Included in the fourth quarter results were two non-recurring items with combined negative impact of $58 million of EBITDA. These items were costs related to closing a start-up electronic logging device business, and the impact of marking to market assets that underpin our non-qualified benefit plans. The mark-to-market loss was driven by volatility in debt and equity markets in the fourth quarter.

The ELD business was part of our strategy effort to increase digital services to customers, and included the design of the smartphone voiced app that helped truckers meet electronic logging requirements in the US. While this specific market didn't materialize as we expected, we continue to launch new digital products that serve our end customers' needs.

Now I will comment on some of our key markets in 2018, starting with North America, and then I'll comment on some of our largest international markets. Our revenues in North America increased 19% in 2018, primarily due to higher levels of truck production. We also experienced growth in sales of engines and parts to customers in oil and gas, construction, and mining markets, as well as the full-year impact of the automated transmission business. Industry production of heavy-duty trucks increased to 286,000 units, an increase of 29% from 2017 levels, supported by strong freight rates, improved fuel economy in new trucks. Our market share was 34% for the full year, up from 33% in 2017. The market size for medium-duty trucks was 132,000 units in 2018, an increase of 9% from 2017, and the highest level of production in over a decade. We maintained our clear leadership in the market with a full-year market share of 80%, up from 78% a year ago.

2018 marked another strong year for pickup truck sales in North America. We shipped 150,000 engines to pickup truck [manufacturers] in 2018, and recently unveiled the next-generation 6.7L turbo-diesel engine, boasting a first-in-class 1,000 feet-pound of torque in a Ram truck at the Detroit Auto Show. 2019 marks the 30th anniversary of Cummins availability in Ram trucks. Engine sales to construction customers in North America increased by 31%, driven by record levels of non-residential construction, and the strongest year of residential construction spending since 2006. Engine shipments to high-horsepower markets in North America increased by 18% from last year, driven by demand from oil, and gas, and mining customers, while power generation revenues increased by 10% year-over-year, with particular strength in demand from data center customers.

Our international revenues increased 12% in 2018. Full-year revenues in China, including joint ventures, were $4.8 billion, down 2% compared with 2017, with lower sales in on-highway markets, partially offset by strong construction markets. Industry demand for medium- and heavy-duty trucks in China decreased by 2% from the record level experience in 2017. Within the truck market, construction-related dump truck and specialty vehicle sales were up 45% in 2018, while tractor and flatbed sales, utilized primarily for line-haul applications, were down 10%. Our market share in 2018 was 12.7%, down from 14.8% in 2017, due to lower market share at our OEM partners, mostly driven by the change in market mix toward construction-related vehicles.

The light-duty market in China grew 10% in 2018, and our share ended the year at 7%, in line with our guidance. Industry demand for excavators set a new record of 203,000 units in 2018, an increase of 45% from 2017 levels. Our market share ended the year at 15%, 1.5% higher than in 2017, due to market share gains made by several of our key domestic OEM partners.

Revenues for our power systems business in China increased by 29% due to increased demand for power generation equipment, and growth in industrial engine shipments to mining customers.

Full-year revenues in India, including joint ventures, were $2.2 billion, a 23% increase over 2017. Industry truck production was a record in 2018, and increased 22% from the year previous. Our truck market share ended at 40%, which was flat compared to last year. Sales in our component segment increased more than 40%, due to increased content associated with the transition to BS4 emission standards in the truck market, beginning in April last year. Strong economic growth and infrastructure investment also led to a 10% increase in power generation sales during the year.

In Brazil, our revenues increased by 27%, mainly driven by a 27% increase in truck production.

Now, let me provide an overall outlook for 2019, and then comment on some individual regions and end markets. We are forecasting total company revenues for 2019 to be flat to up 4% from 2018, driven by an increase in heavy- and medium-duty truck production in North America and Brazil, as well as increased demand in power generation markets. We expect most of our end markets in China to decline in 2019, while European and Indian end markets are expected to remain relatively flat.

Industry production for heavy-duty trucks in North America is projected to be 292,000 units in 2019, a 2% increase year-over-year. The industry enters 2019 with a record backlog, and high visibility of production levels in the first half of the year. We expect our market share to be in the range of 32-34%. In the medium-duty truck market, we expect market size to be 134,000 units, a 2% increase from 2018, with our market share projected to be in the range of 74-76%. Our engine shipments for pickup trucks in North America are expected to be flat, compared to a very strong 2018. In China, we project domestic revenues, including joint ventures, to be flat in 2019. We are currently projecting a 10% reduction in heavy- and medium-duty truck demand, and a 7% reduction in light-duty truck demand. We expect our market share in the medium- and heavy-duty truck market to be in the range of 13-14% in 2019, up from 2018. Our share in the light-duty market will be 8-9%, up from 7%, with growth coming from our new joint venture with JAC, which became operational in December.

There continues to be uncertainty around the adoption of National Standard 6 in China this year. Our projection for industry truck sales to decline by 10% in 2019 assumes low industry demand for NS6-compliant products, with adoption concentrated in urban use vehicles for Tier-1 fittings. In the event that the enforcement of NS6 standards accelerates adoption, we anticipate that overall truck sales could decline an additional 10% below our current forecast, but our content per engine would increase.

Industry sales of excavators in China are expected to decline 25% from record levels in 2018. While 2019 demand will be down, it will still represent the third-highest year of sales on record.

In India, we project total revenue, including joint ventures, to be flat in 2019. We anticipate industry demand for trucks to be 5% lower than the record levels experienced in 2018. Demand will be muted in the first half of 2019, as elections take place, but we expect strong growth in the second half of 2019, ahead of the planned implementation of Bharat Stage 6 standards in April of 2020. We also expect 5-10% growth in construction and power generation markets, as continued infrastructure investment drives incremental demand.

We expect to see growth in all of our businesses in Brazil this year, due to improved economic conditions. We expect truck production to be up 13% in 2019, and power generation demand to increase 15%. We project our global high-horsepower engine shipments to be flat in 2019, with a 5% improvement in new engine orders from mining customers as they replace aging equipment. Demand for new oil and gas engines is expected to decline by 40%, with sales continuing at levels experienced in the second half of 2018, following robust fleet replacement in the first half of last year. In summary, we expect full-year sales to be flat to up 4%, and EBITDA to be in the range of 15.75-16.25% of sales. The improvement in EBITDA this year will be driven by positive pricing, material cost reduction, lower warranty and variable compensation costs, partially offset by metal markets and tariffs. We returned a record $1.9 billion in cash to shareholders in 2018, in the form of dividends and share repurchases, and currently plan to return 75% of operating cash flow to shareholders in 2019, as well.

Before moving on to Pat, who will discuss our financial results in more detail, I'd like to take a few minutes to share some of the progress that's been made in our electrified power business unit this year. 2018 marked the first full year of operations of our electrified power business unit. In 2018, we announced partnerships of on- and off-highway OEM, and are working on electrification solutions in products ranging from bus to medium-duty trucks, light commercial vehicles, excavators, and dredge trucks. Vehicles with Cummins electrification content were on display at several industry events, and to date, we have over 11 million miles of testing and development on vehicles with our electrified power technology. They have begun selling battery electric powertrain systems to Bluebird for use in school bus markets in the United States, and are progressing toward launches with additional customers, including GILLIG, for transit buses later this year.

We are continually assessing and innovating across a broad portfolio of power solutions, from diesel to natural gas, fuel cells, hybrid, and full electric options. We plan to provide our customers with the right technical solutions for their application at the right time, and to continue to be the leader in power for commercial and industrial equipment. As we begin 2019, and the 100th anniversary of our company, we continue to see the benefit of our leadership in diesel technology, as well: the next generation 6.7L turbo-diesel engine in Dodge Ram pickup trucks boasts a first-in-class 1,000 foot-pound of torque, and was announced at the Detroit Auto Show in January. The new lightweight Cummins X12 engine will be available on a number of chassis in 2019, including several of Daimler Trucks North America. Customer demand for our industry-leading ISX 15L engine remains strong, and we are producing at all-time record levels. Finally, Amtrak announced on December 21st that it would be purchasing 75 Charger locomotives for delivery, starting in 2021, equipped with our QSK95 engine.

I want to close with a brief salute to our CFO, Pat Ward. Pat has served our company with distinction for more than 30 years, including the last ten as CFO. Throughout his career, he's demonstrated a remarkable ability to identify the key areas to focus on to drive improvement in the business, and then to partner with our business leaders to deliver outstanding results. I'll miss Pat for lots of reasons, but most of all because he's a committed servant, a trusted advisor, and a great friend. Pat leaves behind a very strong finance function, and has been working closely with Mark Smith to ensure a smooth transition. Congratulations, Pat, on your well-earned retirement -- and also to Mark, as our new CFO. Now, let me turn it over to Pat for the last time.

Patrick Ward -- Chief Financial Officer

Thank you, Tom. Good morning, everyone. I will start with a review of our fourth quarter results, before moving on to the full-year 2018 performance, and then finishing up with outlook for 2019. Fourth quarter revenues were $6.1 billion, an increase of 12% from a year ago, and a record fourth quarter for the company. Sales in North America increased 17%, as a result of higher commercial truck production, and improved demand for construction and power generation equipment. International sales grew by 6%, mainly driven by stronger demand in Europe, and Asia Pacific from power generation and construction customers.

A stronger US dollar negatively impacted international sales by 4%. Gross margins were 25.2% of sales, ten basis points higher than a year ago. The positive impact of higher volumes, favorable pricing, and lower warranty expense were offset by increased supply chain and operational costs, along with a less-favorable mix of sales in our power systems segment.

While selling [inaudible] development costs of $887 million increased by $36 million, with all the increase coming in research and development, we were 100 basis points lower, as a percent of sales. Joint venture income of $79 million was $23 million higher than last year, due to the absence $40 million tax charge related to the Tax Cuts and Jobs Act passed in December of 2017. Excluding that tax charge, earnings declined mainly due to reduced sales at our on-highway joint ventures in China.

Earnings before interest and tax, depreciation and amortization were $896 million, or 14.6% of sales for the quarter, compared to $769 million, or 14% of sales last year. As Tom just mentioned, included in the fourth quarter EBITDA results were a $24 million write-off of an investment in our very own electronic data logging company, and a $44 million adjustment of mark-to-market losses in job, and company-owned life insurance investments, which we used to fund our non-qualified benefit plans [inaudible] experienced in financial markets in the fourth quarter.

Net earnings for the quarter were $579 million, or $3.63 per diluted share, and included a $0.43 negative impact from the two investment losses I just mentioned, partially offset by a $0.15 benefit related to the 2017 tax legislation and other discrete tax items. This compares to net earnings last year of $503 million, or $3.03 per diluted share, excluding the $777 million in one-time charges related to tax legislation.

Our tax rate in the quarter was 14.1%, which included $51 million, or $0.33 per share, of variable discrete tax items. Excluding the discrete items, the operational rate was 21.3% in the quarter.

Now let me comment on our full-year results, and provide some more details on our performance. Full-year revenues for the company were a record $23.8 billion, an increase of 16% compared to the prior year. Sales improved in each of our operating segments, driven by higher commercial truck production in North America, strong demand in global construction and power generation markets, as well as improved demand in oil and gas, and the mining markets. North American revenues increased by 19% in 2018, and represented 51% of our total revenues. International revenues improved by 4%, with higher sales in most regions, including Europe, Brazil, China, India, Japan, and Australia.

Gross margins of 24.1% were 90 basis points lower than last year. The $368 million after treatment campaign [inaudible] in the first half of 2018, and headwinds from [inaudible] were partially offset by higher volumes, favorable pricing actions, and material cost reductions. Selling, admin, and research and development costs increased by $156 million, with almost all the increase coming from increased investments in research and development, and about 160 basis points lower as a percent of sales.

Joint venture income increased by $47 million compared to last year. The 2017 joint venture income included a $39 million tax charge related to the tax legislation that I discussed earlier. Excluding that tax charge, 2018 joint venture income results were flat, year-over-year. Other income was $97 million lower than 2017, as a result of the mark-to-market losses incurred on company-owned life insurance investments, recorded on the sale of assets in 2017, and some [inaudible] losses. In total, EBITDA was a record $3.5 billion, or 14.6% of sales -- compared to $3 billion, or 14.8% a year ago. Net earnings were $2.1 billion, or $13.15 per diluted share, both full-year records for the company. This compares to $1.8 billion, or $10.62 per share in 2017, excluding the $777 million in one-time charges related to tax legislation.

The operating tax rate for the full year, excluding $14 million of discrete benefits, was 21.1%, compared to 58% last year, or 24.5% adjusted for the tax legislation.

Moving on to the operating segments: let me summarize their performance in the quarter, and for the full-year 2018, and then provide a forecast for 2019. I'll then review the full-year cash flow, and conclude with the company's revenue and profitability expectations for the upcoming year.

In the engine segment, revenues were $2.7 billion in the quarter, an increase of 18% from last year. On-highway revenues grew by 17% from higher heavy- and medium-duty truck engine sales, primarily in North America. Off-highway revenues increased by 21% as a result of stronger demand for construction equipment in China, North America, and in Europe. Segment EBITDA in the quarter was $393 million, or 14.6% of sales. This compares to $271 million, or 11.8% of sales a year ago. The improvement in EBITDA percent was driven by benefits from the highway volumes, and from favorable pricing actions, so for the full-year revenues increased 18% from a year ago, and EBITDA increased from 12.8% to 13.7% of sales. For 2019, we expect revenues to be flat, to up 4%, with growth in North American truck markets, and improving demand in Brazil, partially offset by more construction demand in China. EBITDA is projected to be in the range of 14.5-15.5%, compared to 13.7% of sales in 2018, driven primarily by lower warranty expense.

For the distribution segment, fourth quarter revenues were a record $3.1 billion, increasing 6% compared to last year. The growth in sales was primarily driven by stronger demand for power generation equipment, and parts and service in North America, partially offset by reduced demand for engines in oil and gas markets. EBITDA for the fourth quarter was $140 million, or 6.8% of sales. Compared to last year, the fourth quarter EBITDA margin increased by 50 basis points, as a result of higher sales, and favorable pricing actions, partially offset by the negative impact of a stronger US dollar. For 2018, the distribution segment concluded with record sales and EBITDA. Sales grew by 11%, compared to last year, and EBITDA increased by 13% to $563 million, or 7.2% of sales. We expect 2019 revenues in the segment to be flat, to up 4%, primarily due to increased demand for parts and service, and power generation in North America, along with favorable pricing, partially offset by the impact of a stronger US dollar. EBITDA margins are projected to be in the range of 7-8% of sales, compared to 7.2% in 2018.

For the components segment, revenues were $1.8 billion in the fourth quarter, an increase of 14% from a year ago. Sales in North America increased by 23%, due to higher heavy- and medium-duty truck production, and the impact of the automated transmission business. International sales grew by 3%, with lower demand in China, more than offset by standard sales in Europe and India. Segment EBITDA was $278 million, or 15.7% of sales, compared to $314 million, or 13.7% of sales a year ago. EBITDA improved, driven by the benefits from the higher sales, lower warranty expense, and material cost reductions.

For 2018, our components segment delivered record revenue, which grew by 22%, due to stronger on-highway demand in North America, Europe, and India, in addition to the impact of revenues from the automated transmission business. EBITDA [inaudible] decrease from 15.6% last year, to 14.4% in 2018, primarily driven by higher warranty costs recorded in the first half of the year.

For 2019, we expect components revenue to increase 1-5% as a result of growth in North American and Brazilian on-highway truck markets, partially offset by weaker demand in China. The EBITDA margin is projected to be in the range of 15-16% of sales, up from 14.4% in 2018. More warranty expense will be partially offset by increased investment, and preparation for the upcoming India Bharat Stage 6, and China National Standard 6 emission regulations.

In the power systems segment, fourth quarter revenues were $1.3 billion, up 9% from a year ago. Power generation sales grew by 14%, driven by increased demand for power generation equipment in North America, Asia Pacific, and in India. Investor sales were unchanged, compared to last year. EBITDA margins were 10.3% in the quarter, down from 11.3% last year. The EBITDA margin decline year-over-year is primarily due to the increased supply chain, and operational costs that [inaudible], along with a less favorable mix of sales, and lower joint venture earnings.

2018 was a record year for our power systems segment, in terms of revenues, which grew by 14%, primarily driven by increased demand for power generation equipment, and stronger demand in mining, and oil and gas markets. EBITDA increased by 49% to $640 million, with margins expanding from 10.1% to 13.3% of sales, driven by the higher volumes, lower warranty expense, and favorable pricing. For 2019, revenues are expected to increase 3-7%, with growth in data center markets, increased military revenue, and higher demand for mining engines, partially offset by lower demand in oil and gas markets. EBITDA is projected to be in the range of 14-15% of sales, up from 13.3% in 2018, primarily due to the positive impact of standard returns, standard revenues, and the benefits of actions taken in 2018 to rationalize the manufacturing footprint of our automated business.

In the electrified power segment, EBITDA losses were $29 million in the fourth quarter, and $90 million for the full year, in line with our guidance. For 2019, we expect a net expense of $120-150 million, as we continue to make targeted investments in this space, and -- as Tom mentioned -- we're now projecting total company revenues to be flat, to up 4% in 2019. Increased demand globally for power generation equipment, primarily at data centers, and improvements in truck production in North America and Latin America drive the majority of the growth in revenue. Foreign [inaudible] are expected to negatively impact revenues by approximately $300 million. Income from our joint ventures is expected to decline approximately 5%, as a result of lower demand for heavy- and medium-duty trucks in China, and in India.

EBITDA margins are projected to be between 15.75-16.35% of sales for 2019, up from the 14.6% recorded in 2018. We expect EBITDA margins in the first quarter will be at the low point for the year, due to seasonal weak demand in our power systems and distribution businesses. If reduced warranty and variable compensation expense, along with pricing and material cost improvement will positively impact margins, partially offset by tariffs, and investments in the automated transmission business, electrified power segment, and in components, primarily related to China National Standard 6, and India Bharat Stage 6 emissions.

We're currently projecting our effective tax rate to be 21.5% in 2019, excluding any discrete items.

Turning to cash flow: cash generated from operations was $990 million in the fourth quarter, and a record $2.4 billion for the full year. We anticipate operating cash flow in 2019 will be within our long-term guidance range of 10-15% of sales. Capital expenditure for the full year was $709 million, and we expect our 2019 capital investments will be in the range of $650-700 million. In 2019, we'll return a record $9.1 billion to our shareholders, or 78% of operating cash flow. We repurchased almost 8 million shares, and increased our dividend by 5.6%. Our capital allocation plans remain consistent with what we've told you previously; we will maintain a strong financial position to sustain us across cycles, and variation in business levels. We will focus on growth, targeting high-return investments, both organic, and inorganic, and for 2019 we plan to return 75% of the operating cash flow to shareholders.

We are pleased with the record sales, EBITDA, [inaudible], and operating cash flow in 2018, and the returns on invested capital were top-quarter. That being said, there are clearly areas where we could have done better, and you can see from our guidance that we expect improvement in operating margins in2019. And just before I finish, I do want to thank you all for your interest in Cummins throughout my time there as CFO. The company is in a very strong position, and I look forward to following Cummins' continuing success as a shareholder. Now, let me turn it back over to James.

James Hopkins -- Executive Director of Investor Relations

Thanks, Pat. Out of consideration to others on the call, I'd ask that you limit yourselves to one question, and a related follow-up, and if you have additional questions, please rejoin the queue. Chelsea, we're now ready for our first question.

Questions and Answers:

Operator

Certainly -- ladies and gentlemen, if you have a question at this time, please press the *, then the No. 1 key on your telephone keypad. If your question has been answered, or you wish to remove yourself from the queue, please press the # key. To prevent any background noise, we do ask that you please place your line on "mute" once your question has been stated. Thank you, and our first question comes from the line of Alex Potter, with Piper Jaffray. Your line is open.

Alex Potter -- Piper Jaffray -- Analyst

Hi, guys. I guess, first of all, it sounds like pricing has been a tailwind in 2018. Across a number of your segments, you called it out multiple times. Just wondering the extent to which you expect that to be a tailwind again in 2019, and which areas do you think the biggest opportunities are? Thanks.

Rich Freeland -- President and Chief Operating Officer

Yeah, Alex, it's Rich. You have a tailwind in 2018. In fact, it'll be a bigger tailwind in 2019, and the primary areas where we're able to get some pricing is in the parts business, and some of our prior generation markets. Again, some of that will be needed to offset the impact of tariffs that we have, also -- coming into our 2019.

Alex Potter -- Piper Jaffray -- Analyst

Okay, thanks. Also, I was wondering if you could comment on Nissan? You mentioned the big -- that monster diesel engine you're putting in the Ram pickup; if you can comment -- I guess on both of those platforms -- both Ram and Nissan -- how those have developed, relative to your initial expectations, and what the outlook is there, over -- not just in 2019, but over the next couple years -- diesel penetration for that type of vehicle, as well as Cummins' market share. Thanks.

Rich Freeland -- President and Chief Operating Officer

Okay, thanks. Let me start with the Chrysler -- so we're really excited about this; we're gonna be in the lead in the torque with this engine, and that market remains strong. It was 150,000 last year, and we see that continuing. I mean, we're basically -- it' s the supply chain trying to keep up to produce them. We will see that -- in Q1 will be the low point, though -- so it'll be lower than that run rate in Q1, as we go through the model year change, and the transition there, and some issues in working that out, but we're excited, and -- basically, the whole industry's trying to add capacity to meet the demand.

On the Nissan front, that one still remains below our expectations -- what would be our projections? Someone correct me, here, but we're in the 15-20,000-engine range for that, which has been relatively flat. So that one continues to -- has not gotten the traction that we wanted on the 5L V-8, and so I'd say -- from a Chrysler standpoint, we see only upside in '19 and continuing, as we get into gross share -- and the Nissan relatively flat at the low levels.

Alex Potter -- Piper Jaffray -- Analyst

Okay, great. That's very helpful, and congratulations, Pat.

Patrick Ward -- Chief Financial Officer

Thank you.

Operator

Thank you; our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open.

Jerry Revich -- Goldman Sachs -- Analyst

Hi, good morning, everyone.

[Crosstalk]

And Pat, and Mark -- congratulations. We'll miss working with you. I'm wondering, Tom, if you can talk about the major electric rotation product milestones that you expect over the next year? You mentioned something about the highlights on a trailing basis; can you just talk about the number of new platforms that you folks are going to be participating on over the next 12 months -- what your win rate has been to get on additional platforms, and then any updated thoughts on when the revenue contributions here will accelerate? Obviously, they provided guidance for '19, but I'm wondering if your longer-term thoughts have developed at all.

Tom Linebarger -- Chairman and Chief Executive Officer

Yeah, thanks a lot, Jerry. So big milestones this year, of course, are the transit bus launch with GILLIG. That's something we been working to -- really -- since the beginning of the business. We see the transit bus market as kind of the -- maybe the most obvious adopter -- the one where there's significant incentives in the cities to drive toward electrification. The application lends itself toward electrification, either pure BEVs, or potentially with a small engine to get you back to base, so we think it's a good application for electric vehicles, so that's where we're targeting.

The GILLIG launch is a big one; we've got a good order for that, and so we're pretty excited about that, and pretty focused on that. I mentioned dredge trucks, and -- frankly, dredge trucks have a very similar application, in terms of their relatively short range -- pretty easy to charge; loads are pretty predictable, so we think that's another area that's gonna go. We've got a launch partner there; I don't want to announce ahead of them, so I think those are really our major two platform milestones.

I mentioned that we're already working with Bluebird, and we are trying to get some more launch partners on the school bus side. All those just reflect the ones that we think will early adopt, and -- kind of one level lower, Jerry -- there's a pretty big milestone for us to have our battery pack that we're developing meet the performance standards, at least for a first generation that we're looking for. That's a pretty big deal, too. So we've got a milestone related to our battery pack, then related to the entire electrical system launch.

Further out, there's a number of applications we're looking at that I would say we're pretty strongly focused on these year-term milestones. There's a lot of development work going on; it's a big effort for us to get right, and then we'll look for -- and with regard to revenues, I would say we're still in the market development phase. I'd be remiss to give you a good view on revenues. I think market adoption in the markets that I mentioned is likely to move with some steadiness, but -- still -- I've heard people project that the transit buses -- which I've mentioned is one of the best markets -- might be 50% electric in ten or more years. That's a long time, and that's for new buses, which means you've got all the diesel buses still selling -- so I'm still loath to call the transitions. I think what we're thinking about is trying to get our products ready to convert in these markets that are moving fast, and then see what kind of adoption rates we get -- and then we'll be able to start calling more of the financial side about what we think ramp our revenues. I know that's a little dissatisfying -- it is to me, anyway -- but we're still trying to manage these launches, and make sure that we're available -- and then we'll be able to figure out where launches go.

Jerry Revich -- Goldman Sachs -- Analyst

Okay, I really appreciate the color, and -- on the X12, I'm wondering if you can update us on any traction with additional OEMs. Nice to hear the data point on Daimler -- how close are you to rolling out with the others, and -- do I remember correctly? You had spoken about that platform potentially adding two to four points of market shares. That still the way to think about it, when it's rolled out?

Rich Freeland -- President and Chief Operating Officer

Hi, Jerry, this is Rich. We've added Daimler. Of course, we'll let OEMs make their own announcements on that, but currently, it is Daimler, and some smaller distributer OEMs that we've signed up, and --

[Crosstalk]

Tom Linebarger -- Chairman and Chief Executive Officer

And Autocar, Rich. You know, Autocar is the refuse specialty vehicle, and they're kind of using the ISX12 as the big launch vehicle for them, and they launched the engine -- for them -- on some new platforms, and they're pretty excited about it, too, so I think that -- and it the ISX12 fits their applications really well, so I think that will be another important launch for us.

Rich Freeland -- President and Chief Operating Officer

Yeah, and so we're looking at close to 5,000 this year, Jerry, and so -- I think the market share gain of a couple points -- I think that's still out there. I think it's kind of a couple years out there, though, where we'd need to add some more.

Jerry Revich -- Goldman Sachs -- Analyst

Okay, thank you.

Rich Freeland -- President and Chief Operating Officer

Thank you.

Operator

Thank you; our next question comes from the line of David Raso, with Evercore ISI. Your line is open.

David Raso -- Evercore ISI -- Analyst

Hi, good morning -- and congrats to both Pat, and Mark. Regarding the comment about North America, Tom -- not to nitpick on the choice of words, but I thought it was interesting you said, "Visibility to the first half of 2019," some of your key customers are saying visibility -- with the backlog as far as it is -- kinda the late half of 2019, and so I'm just trying to clarify how you're viewing the current backlog -- how long it can carry us, what do you think of orders, and any thoughts around American truck production in the back half of the year?

Tom Linebarger -- Chairman and Chief Executive Officer

Yeah, I'll let Rich talk about that.

Rich Freeland -- President and Chief Operating Officer

I'll start that, and then you can chime in here, Tom. Yeah, the backlog's big; it's close to 300,000 units, and we're projecting a 290 market with our projections. So I think it's just our -- we might be being a bit conservative, because we did strong through the whole year. We're just gonna pay attention to what's going on with cancellations -- what's going on with freight rates -- but I would say we don't have any insight beyond that. It actually looks pretty strong, and I'd say there's growing confidence.

We had projected a bit of a reduction in the second half of the year -- a slight one -- there's more and more confidence that could fill in, though, Jerry. So we're just paying attention to it, and so you know what our assumptions are, is what we try to do here.

Tom Linebarger -- Chairman and Chief Executive Officer

I think your question about the words is a good one. We weren't trying to call a difference between us and the truck makers, it's just that we are always -- we've seen a lot of these cycles before, and we've seen -- sometimes -- when order board cancellations start, they can happen fast. We don't have any reason to think that's gonna happen here, but we're watching the truck orders, just like you guys are -- and we got two not-such-great orders, and we just wanna keep our eyes on it. But we are planning that this -- as we said -- that the year's gonna be a good year, and definitely the order board's filling up -- if we don't see cancellations -- that we'll have a terrific year.

David Raso -- Evercore ISI -- Analyst

Okay, I appreciate the clarification, and -- also on truck in China, we all know you're not that exposed to the dump truck market; you're more about freight/flatbed. So within that industry baseline view you have of down ten, where you're more exposed -- the freight haul, kinda flatbed market -- can you help us with the mix? Like, how do you view that market, which is obviously the more relevant one for you?

[Crosstalk]

Tom Linebarger -- Chairman and Chief Executive Officer

We're not forecasting a big mix shift year-over-year. I mean, again, one of the things that has to happen is -- in China, they're clearly stimulating construction growth, and there was also some changes in regs inside the truck market, which drove more of those construction trucks -- so you've got stimulus, and this change in regs, which drove this mix. It's pretty dramatic; I mean, normally the mix shift is just not something that we would call out, but -- frankly -- these two things combined shifted a bunch, and -- as you said -- our engines are more for these longer-range things, so we got negatively surprised on market share. That's what happened, and so we were disappointed with the market share. So we're thinking to ourselves that there may be a little mix shift back, because of we won't have these special factors anymore, but we're not thinking that there's a big -- there's certainly not any negative trends. If anything, the mix trend should be slightly positive for us.

The big news in China really is: how does NS6 get enforced? So what's gonna happen with the standard; how tightly do they enforce it on the first day? We were thinking we were heading into a time where -- now -- all these enforcements would be launched; they'd all be enforced aggressively across the country, but because of the economic situation in China, it looks like that's not gonna happen, and we're gonna move back to some of those old enforcement plans, where the cities'll go first, and things'll move slower -- which means we'll be in a fair bit of uncertainty in the market, we think -- for 12 or 18 months -- while the NS6 stuff gets enforced over time. So that -- I think that's driving most of the uncertainty, as opposed to the mix.

Mark Smith -- Vice President of Financial Operations

And freight's pretty flat.

Tom Linebarger -- Chairman and Chief Executive Officer

Yeah, freight's flat; that's good. Mark was just adding that freight is flat, so -- again -- we're not calling for a disaster. We think things are gonna continue along fine, but mix is slightly favorable -- maybe -- is what we hope. Again, we didn't call it that well last year, but we think it's favorable this year, and we think that this NS6 thing is really what we're having to manage.

David Raso -- Evercore ISI -- Analyst

And I'll pass on the baton, here, but -- just so we're level set here on if there is downside risk to the volume, due to NS6, how much is the offset of your content?

Tom Linebarger -- Chairman and Chief Executive Officer

Yeah, that just depends on how it goes, but I guess our feeling is that -- to the extent we're exposed at all on revenue, related to the market -- that'll be to our benefit in the long run. We think we gain share in NS6; we think we gain content and margin in NS6, so it's -- we think it's a win for Cummins, the faster it moves. That said, to project -- does it mean we'd be down x points? It's really hard to say, given the ways it could go, but let's just say that we're ready for it to be enforced as fast as it can go. That would be the best thing for us, financially.

Patrick Ward -- Chief Financial Officer

The content would be consolidated 100%.

[Crosstalk]

Tom Linebarger -- Chairman and Chief Executive Officer

Whereas, the engine sales at JV, versus the components, 100%.

David Raso -- Evercore ISI -- Analyst

Terrific -- thank you.

[Crosstalk]

Rich Freeland -- President and Chief Operating Officer

Yeah, thanks a lot, David.

Operator

Thank you, and our next question comes from the line of Jamie Cook with Credit Suisse. Your line is open.

Jamie Cook -- Credit Suisse -- Analyst

Hi, good morning. First question, just on the guide -- I know you've talked bigger picture -- headwinds, tailwinds, in terms of price cost, tariff, warranty, incentive comp. Is there any way you can quantify, on a basis point level, just so we can understand what your assumptions are there? I think your top line assumptions are reasonable; I just want to know what the other puts and takes are, and then -- my second question, Tom, or maybe to the whole team -- as we think about previous downturns, I think Cummins has always done a very good job supporting higher trough earnings through a number of different diversification initiatives, or share repo -- whatever. As we think about 2020, and if the downturn does come, what are the puts and takes we should be thinking about, because -- as I think about this next downturn -- I'm more concerned investment costs are going to be higher, and your only lever to help support EPS would be repurchase?

And by the way, congrats, Pat, and Mark. Sorry.

Tom Linebarger -- Chairman and Chief Executive Officer

Great, great questions, Jamie. Thank you, and -- as you said -- we are having a pretty forward stance on cash flow, and repurchases, as we've had in previous times like this, where we think -- if we start to see a financial downturn ahead -- we will be aggressive on making sure we support our stock, and we're in a good position to do that, and our cash flow will be strong. I think just -- let me break the two questions up. I'll have Mark go through the detail that you asked about; I think he can do a good job of explaining that, and then maybe I'll have Rich talk a little bit about how we're posturing the company to approach a time when business is strong, but maybe over the horizon, looks like a downturn. So Mark, we'll start with you.

[Crosstalk]

Jamie Cook -- Credit Suisse -- Analyst

Great, thank you.

Mark Smith -- Vice President of Financial Operations

Okay, so pricing's gonna be about 80 basis points -- plus -- and variable compensation: 40. Warranty: 140, then we get to the less exciting part with all those tariffs -- takes about 50 basis points. Level markets: 40, which -- if you combine the pricing, level markets and tariff, GM, that leaves you about neutral on all of those -- and then slight tick-up in research, and a slight tick down in JV earnings, as the balance is China markets. We model -- currently, we'll be a little bit low -- and those are the moving parts.

Rich Freeland -- President and Chief Operating Officer

Okay, and just a little comment on how we think about the cycles, Jamie: internally, we talk about -- the mantra is, "You embrace the cycles," OK? You win the upturn, you win the downturn, which means that you have improved earnings at the trough, and you have improved earnings at the peak, and so we're committed to that. You can imagine -- we've had a good run in a lot of our markets; many of them are above replacement cycle -- we have plans ready for a downturn, so we'll do what we always do, which -- we'll flex down quickly when we see that's coming. We already have plans in place to do that.

We'll also look to structurally change the company through the downturn. Some things you can't do when things are going fast on how we just change the way we structurally do business. So we have those things that we're thinking about, and then we'll continue to invest in growth areas through the downturn, when others don't, so we get a strong balance sheet. So we try to do these three combinations, and when we come out of this thing, we come out stronger each time. So we're committed to continually improving. We commit to 25% decremental margins through the downturn, and we'll do that again, and then -- maybe I'll turn to Tom, just a little bit for a balance sheet, and share repurchase -- how we think about that.

Tom Linebarger -- Chairman and Chief Executive Officer

Yeah, and -- again -- we will continue to generate strong cash flow throughout the period, and so that will manage that through -- of course, making sure that we don't spend more capital than we need to, and you saw we're watching that now, as we see things level out, and maybe heading down. And we'll continue to step up share purchases where we think we don't need as much cash flow to invest, so those things are the things you've heard from us before, and I think what we're trying to do is make sure each time we approach this, we capture the things that worked well in the previous downturn, improve the things that didn't work as well as we liked, and the leadership team is already having significant discussions about that as we enter 2019.

So our plan this year has steps -- is already taking steps, and anticipating this thing turning back down at some point. Again, we don't know when -- as my conversation with David outlined -- but we know it's coming.

Jamie Cook -- Credit Suisse -- Analyst

Okay, congrats again, Pat and Mark. Pat, I'm sure you'll miss these earnings calls. Thanks.

[Crosstalk]

Patrick Ward -- Chief Financial Officer

Thanks, Jamie.

[Crosstalk]

Operator

Thank you, our next question comes from the line of Andy Casey, with Wells Fargo Securities. Your line is open.

Andrew Casey -- Wells Fargo Securities -- Analyst

Thanks. Congrats, Pat and Mark -- tough act to follow there, after Jamie's comment. First, a clarification on the segment-reporting basis: were the $58 million marked down in mark-to-market recorded in eliminations?

Patrick Ward -- Chief Financial Officer

$24 million in eliminations, Andy; $16 million in the engine business, and then the balance evenly distributed across distribution, power systems, and components.

Andrew Casey -- Wells Fargo Securities -- Analyst

Okay.

Tom Linebarger -- Chairman and Chief Executive Officer

And the reason that some get distributed is we took the electronic logging device right off as a corporate cost, and then we allocate across the businesses, right? That's why it ends up that way, spread across. It wasn't that those businesses had anything to do with it; it just got allocated as part of corporate expense.

Andrew Casey -- Wells Fargo Securities -- Analyst

Okay, that's helpful, thank you. And then, just a -- on China truck, you answered a lot of it with respect to David's question, but are you looking for the full-year drop to be driven mostly by the first half, with flattish performance in the second half?

Mark Smith -- Vice President of Financial Operations

Say that again?

[Crosstalk]

Tom Linebarger -- Chairman and Chief Executive Officer

On China truck, do we have a view about this quarter-to-quarter, seasonality view?

Mark Smith -- Vice President of Financial Operations

Yep, still the same seasonality with the second half.

Tom Linebarger -- Chairman and Chief Executive Officer

Yeah, the second half weakness really is driven by this NS6 anticipation, Andy. That's the part where -- frankly, our visibility isn't so great. I mean, as I tried to highlight there, we have a view, and it's as reasoned a view as you can get, but it's just gonna come down to: are people's adoption rates gonna be faster, or slower?

And I think what we're saying now, is we're saying that we think they're gonna hit the Tier One for these, which will mean that there will be very little volume effect. That's just not that many trucks purchased for that; it's mostly buses, and things -- maybe refuse vehicles. So most of the trucks will remain to the old standard, which means it'll kind of truck along at steady freight rates, with a small decrease. Where we'd see a significant move -- potentially -- downward is if people thought, "Hey, the NS6 standard comes in, and the price goes up a fair bit, and I think I'll just wait now," and of course, if people thought that that's gonna happen one month from now, they might buy more coming up front.

So these are the things that are acting against each other, plus a relatively weak economy. All those coming together are just making it difficult to predict, but right now what we've got is a steady first half, drop a little second half -- and that's about as best we could do, sitting where we sit now.

Andrew Casey -- Wells Fargo Securities -- Analyst

Okay, thanks, Tom. And then, one last one: electrified power -- the expected losses in 2019 are stepping up a little bit. I just wanna make sure -- are we still looking for that same $500 million investment that you outlined in the '17 Investor Day?

Tom Linebarger -- Chairman and Chief Executive Officer

Yeah, no change in the overall investment plan. The expense run rate you're seeing is -- we have a fourth quarter run rate that we're kinda running across the year, so we have our team staffed up now for those milestones I talked about. They are staffed; they are working toward deliver. We're not changing very much; we're just kinda sticking to it, as I mentioned. These milestones are big deals. We want to get those right; we're not trying to get distracted by a lot of other things, and so we still see that $500 million number to be OK. I mean, you can't predict it perfectly, but it feels like the right place for us, still -- and not too much change in what we're focused on -- what we're doing.

A lot of people are working hard, though. I'm giving it a pretty steady picture, but there's a lot of work going on to make sure that we get that batter pack where we want it, and the overall electric vehicle system where we want it, and so those people would be sad if I said it was all smooth. They're working hard, but -- again, I think from an investment point of view, you should think on the same plan -- on the same run rate -- no change.

Andrew Casey -- Wells Fargo Securities -- Analyst

Great, and good luck, again, Pat.

Patrick Ward -- Chief Financial Officer

Thank you.

James Hopkins -- Executive Director of Investor Relations

Thanks, Andy. All right, thank you everybody. I appreciate your interest in Cummins today, and we're getting ready to take phone calls later this afternoon with everybody. Thank you.

Tom Linebarger -- Chairman and Chief Executive Officer

Thank you, everybody.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program; you may all disconnect. Everyone have a great day.

Duration: 60 minutes

Call participants:

James Hopkins -- Executive Director of Investor Relations

Tom Linebarger -- Chairman and Chief Executive Officer

Patrick Ward -- Chief Financial Officer

Rich Freeland -- President and Chief Operating Officer

Mark Smith -- Vice President of Financial Operations

Alex Potter -- Piper Jaffray -- Analyst

Jerry Revich -- Goldman Sachs -- Analyst

David Raso -- Evercore ISI -- Analyst

More CMI analysis

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