Good morning and welcome to the Cummins Annual Meeting of Shareholders. I would now like to turn the conference over to Tom Lineberger. Please go ahead.
Good morning, and welcome to Cummins' twenty twenty Annual Meeting of Shareholders. I'm Tom Linebarger, Chairman and Chief Executive Officer of Cummins, and I will chair today's meeting. Before we begin, I want to acknowledge the unique circumstances we are in, and I hope that you and your families are all safe and healthy. We are holding this year's meeting virtually due to the shelter in place orders in order to prevent the spread of COVID nineteen. As this is our first virtual shareholder meeting, please bear with us as we are not experts at this.
As in past years, we will hold the business portion of this meeting first. If you've not voted your shares yet or wish to change your vote, please do so now by clicking on the voting button towards the bottom right of your screen and follow the instructions there as the voting will end when the meeting is adjourned. After the meeting is adjourned, I will give a brief business update, and we will take questions. We ask you to submit questions by typing them in ask a question text box, and I will attempt to answer as many as I can as time allows. So let's get started.
The meeting is now called to order. On the call with us today is Mark Cifferlin, our secretary of the corporation. He will assist me and act as secretary of the meeting. Also with us on the call are all of our members of the board of directors. And in the interest of time, I will not read their names today, but you can find their names and their biographies in our proxy statement.
In addition, several members of the Cummins leadership team as well as other officers of the company are on the call with us today. Also, representing our auditor, PricewaterhouseCoopers' partner, John Vandriese, is on the call. And finally, Broadridge Financial Solutions Inc. Is serving as our inspector of elections and is in charge of the vote tabulations. A representative Broadridge is also on the call with us today.
Now we will begin the business portion of the meeting. Mark?
Thank you, Tom. A notice of the annual meeting was properly given, a quorum is present, and the meeting is now open for business. Copies of the minutes of the last annual meeting held on 05/14/2019 are available if any shareholder wishes to see them upon written request to the corporate secretary.
We do have four matters of business to come before the shareholders today. All is set forth in our proxy statement. The first is the election of 11 directors nominated by our board. The second matter is an advisory vote on the compensation of our named executive officers. The third matter is the ratification of PricewaterhouseCoopers as our independent public accountants for 2020.
And the fourth matter is a consideration of a proposal from a shareholder. John Sheveden will speak today on behalf of the shareholder proposal. Operator, please open the shareholder line for Mr. Sheveden.
Hello.
Is John Sheveden. Can you hear me okay?
Yes.
The proposal is let shareholders vote on bylaw amendments. Shareholders request that the board of directors amend the bylaws to require that any material amendment to the bylaws that is approved by the board shall be subject to a nonbinding shareholder vote as soon as practical unless such amendment is already subject to a binding shareholder vote. The board of directors would have the discretion to determine which bylaw amendments are material. It is important that bylaw amendments take into consideration the impact that such amendments can have on limiting the rights of shareholders and on reducing the accountability of directors and managers. For example, directors could adopt a narrowly crafted exclusive form bylaw to fit the unique circumstances facing the directors.
A proxy adviser recently adopted a policy to vote against directors who unilaterally adopt bylaw provisions or amendments to the articles of incorporation that materially diminish shareholder rights. The time is right to improve the governance oversight of the company. The Cummings, chairman and CEO, Norman Linebarger, received the highest negative director votes in 2019, and lead director Alexis Herman received the second highest director negative votes in 2019. Also, a Ram emissions lawsuit went forward in 2019 after a federal judge upheld most claims related to Cummings powered Ram diesel pickup trucks that may be equipped with emissions defeat devices. According to the lawsuit, Cummings and Chrysler colluded to manufacture and sell Ram pickup trucks that meet federal emission standards, but those standards were met only because the trucks were illegal.
A Cummins powered Ram allegedly met at five times the standard called for. Faking diesel emissions cost Volkswagen $35,000,000,000. The time is right to improve the governance oversight of the company. Please vote yes. Let shareholders vote on bylaw amendments.
Okay. Thank you, mister Chiveden, for the proposal today. The company has recommended against the shareholder proposal, and our response is detailed in the proxy statement. There will be an opportunity following the meeting for questions on these or any other matters. Mark, may we have the preliminary voting results?
Thank you, Tom. The polls for voting on the matters before this meeting are now closed. The preliminary tabulation of the inspector of election indicates that the shareholders have elected the slate of the 11 board nominated directors for the ensuing year. Shareholders also have improved the compensation of our named executive officers. Shareholders also have ratified the appointment of PricewaterhouseCoopers as our auditors for 2020.
And shareholders have rejected the proposal from a shareholder regarding bylaw amendments. The final vote tabulations will be published in the current report on Form eight ks that we will file with the US Securities and Exchange Commission after the meeting.
Thank you, shareholders, for your votes. And that concludes the official portion of the meeting, and the meeting is hereby adjourned. Now I'd like to make a few remarks about our business. And I wanna start by talking briefly about our 2019 financial performance, then I'll turn to the more recent events and discuss the COVID nineteen impact and how Cummins is managing through the global pandemic. Next, I'll share some thoughts about the 2020 outlook and then close with some examples of how Cummins continues to live our mission of making people's lives better by powering a more prosperous world.
Following my remarks, we will have time for question and answers. Jenna, please go to the next slide. In 2019, we celebrated our hundredth anniversary and a record year of company profitability. The 2019 record was the latest result in a nearly twenty year pattern of profit growth across cycles. As the company has grown revenues, profits, and cash flows, we've also consistently returned capital to shareholders while reinvesting in our business.
In 2019, we increased our dividend by 15%, the tenth year of annual increases. Dividend increases have now totaled more than 600% over the decade. We also repurchased 8,000,000 shares in 2019 or just over 5% of the shares outstanding. Through both dividends and share repurchases, we returned a record $2,000,000,000 to shareholders in the year. The company also reinvested a record $1,000,000,000 in research and engineering in 2019.
The investments we have made in our products over the last ten years have helped drive the improved revenues and profits of our company. Our continued investment in technology and new products will further support profitable growth long into the future. As expected, we began to see several of our major markets weakening through the toward the 2019. Because we had planned ahead for the cyclical downturn, we were ready and able to quickly implement a series of cost reduction actions in the fourth quarter and the 2020. These cost reductions positioned us well as we entered this year.
And I have to say that 2019, while a great year seems a long time ago, and even the planned cyclical downturn seems like old news. The impact of COVID nineteen on our business and environment has been very significant as it has for many other companies. We have start we started dealing with the COVID issue in January in China, and we have been dealing with it ever since. We have we have operations across China, including seven sites in Wuhan and 10 in Hubei province, the region's first and most significantly impacted by the virus. As the virus spread and the government implemented shutdown orders in China, we responded quickly by establishing a cross functional and cross business team to ensure that we were taking appropriate measures to protect the health and safety of our Chinese employees.
COVID nineteen started to impact industry production of equipment in China in early February, and the majority of our facilities there experienced shutdowns of four to six weeks in length. Teams across the country and the world collaborated collaborated effectively to manage working from home and ensuring strict protective disinfection measures in the workplace. Even during the most challenging periods of the virus, we had teams focused on ensuring essential support to our customers, demonstrating both dedication and innovation in finding new ways to overcome the challenges presented by by the virus. By the end of the first quarter of this year, all of our manufacturing facilities in China were fully operational. We have now experienced high levels of demand since reopening as our OEM customers restock their supply chains.
Unfortunately, by mid February, the virus had spread to the rest of the world and as you know, is now considered to be a global pandemic. Many of the same challenges that we faced with our operations and supply chain in China are things that we now face on a global basis. Most office employees around the world at Cummins are working from home as we comply with stay at home orders to reduce the spread of the virus. At the time of this meeting, several of our plants have gone through periods of shutdown or reduced capacity, and many locations are now resuming operations, though at a very reduced level. As you can tell from the pictures on the screen, things look very different now than how we operated prior to COVID nineteen.
We are not returning to business as usual. This is definitely a new way of operating. And let me talk about how Cummins is responding to ensure that we can support our customers and keep our employees safe. Amidst the unprecedented COVID nineteen pandemic, the health and safety of our employees and the communities in which we operate is our first priority. We've taken many steps to ensure that the safety that that that safety ensure the safety of the of our employees and communities.
And today, I'll just describe some of those steps. Wherever possible, employees who do not have to be in a facility working from home. This is, of course, to reduce the number of people in the facility so that we can implement social distinct distancing policies and reduce the opportunity for transmission. It also allows us to divert critical cleaning and other resources to essential operations where employees are coming into work every day. For those frontline workers who are keeping our plants operating and supporting customers, as well as critical supply chains, we have introduced many additional safety measures in line with government and health authority guidelines.
For example, we are doing health screenings as they enter and temperature checks. When we are providing immediate care for those with symptoms. We have increased our cleaning and disinfection protocols in every operating facility. We have additional personal protective equipment for people whose work requires them to be in close proximity to others. And additional protective measures for anyone with health underlying health conditions or any special concerns they have, we are making special we are offering them special dispensation.
We have also redesigned certain processes and facility layouts to operate safely and effectively in this environment. This, of course, includes reconfiguring our plant, our lines, and our entrances and exits, making sure that common surfaces are cleaned more regularly, and making sure that people are spaced at all locations to the plant. And lastly, we have implemented a Cummins response center that's staffed twenty four seven to answer questions and concerns from employees. Employees are encouraged to call the response center if they have symptoms or questions or other issues, and they will come into contact. If they have come into contact with anyone that has the disease, we also are using the response center for tracing.
In April, as the pandemic spread globally, we increased the number of agents at the response center so that we could accommodate all increased call volumes. Calls are logged and we monitor the data we have to make sure we understand the spread of the virus anywhere in our facilities. The CRC is also backed. This is the response center is backed by qualified medical professionals from our Cummins LiveWell Center. Next slide, please.
Recognizing that COVID has created an environment, an unprecedented environment for our business, we have created teams and reorganized processes. And these teams are made up of key leadership team members to deal with both immediate risks and decision making and to make and another team to to look down the road, plan ahead, make sure that we are doing the most important strategic planning we need to do to adapt to this crisis. We call these teams the risk team and the strategic plan ahead team, and these teams ensure that Cummins will not only survive but thrive through this crisis and use the opportunity to emerge stronger. We've also changed meeting frequencies for many of our leadership team meetings. We want to make sure that we have the latest information and we are sharing it throughout the company.
For the first two months of the crisis, the Board of Directors, the Cummins leadership team, and officers of the company met every single week to share information, make plans, ensure that we were making the best judgments we could under the circumstances. Next slide, please. And I have to say that Cummins enters this period of uncertainty in a strong financial position. At the end of the first quarter, the company held cash and cash equivalents of $2,000,000,000 and has committed borrowing capacity of 1,900,000,000.0 under existing revolving credit facilities. We also recently added more liquidity by increasing our revolving credit capacity by a further $2,000,000,000 this quarter.
We have long term credit ratings of A plus and A two from Standard Poor's and Moody's with stable outlooks, and our pension plans are fully funded. We delivered strong first quarter performance and are taking actions to maintain our financial strength through this challenging period. In the first quarter, we completed a restructuring plan that we announced late last year. This restructuring with a heavy emphasis on changing how we work in our North American distributors will result in $250,000,000 to $300,000,000 in annual cost savings in this year. In response to COVID-nineteen, we've also taken additional actions in the face of lower demand.
These actions included temporary reductions to hours and pay for employees and reducing capital expenditures. Because we have cut costs and reprioritized work in response to COVID nineteen, we are able to continue investments in new products and technologies even in the middle of this crisis. This investment is critical to driving continued profitable growth when demand returns. Next slide, please. For our 2020 outlook, data specific to many of our end markets is not encouraging in the short term, and we are prepared for weak levels of demand until global economies start stabilize and start to recover.
During our one hundred year history, we have encountered several unforeseen crises and economic challenges, and I am confident that we will successfully navigate this one as we have done before and emerge stronger as a company. We are entering this period of uncertainty in a position of strength with an experienced leadership team that has led through multiple cycles and we have a strong balance sheet and financial position. Our leadership team brings more than two hundred and fifty years of experience to the table, many having been with the company during previous crises. While this crisis is different, we have all experienced leading through challenging times and understand the importance of paying close attention to economic conditions, preparing for the worst, and taking thoughtful and decisive actions in period of uncertainty. Importantly, we've spent the last ten years investing in leadership development for our top 300 leaders.
We have now a capable and resilient leadership group that is ready to lead in a crisis just like this one. We have taken and will continue to take swift action. The work done across the company in the latter part of twenty eighteen and through the 2020 to control cost and recalibrate priorities has allowed us to we are more prepared than other companies for this downturn. We also continue to proactively address the challenges in front of us. At the same time, we are planning for a new and different future.
Our key capabilities make us unique in the market, and we are deeply thankful and commit and and committed for and committed to customer supporting customers around the world. Our employees have risen to the occasion and are working through the many challenges that the pandemic has presented. The work our customers do is essential to our economy and well-being. That's why we have to support them. For example, our engines are in about a third of the semi trucks working overtime to deliver food and critical supplies today.
Our engine platform support fire trucks, ambulance, and other first responders. We provide power generation that keeps our health care and other critical facilities running, and our global service workshops ensure that our customers can operate twenty four seven. Our teams are working hard leveraging both our internal capabilities and those of our global network of partners and suppliers to support both our customers and our communities. While there is significant uncertainty about how this pandemic will impact our markets for the remainder of the year, we are confident that when demand returns, we will continue the trend I started with of increasing profit profitability for the company. I started the talk today mentioning our mission statement, making people's lives better by powering a prosperous world.
Next slide, please. I wanna close with a few examples of how we are addressing the essential needs of the community in this difficult time. On the left, we we have a partnership that we started with three ms. We're manufacturing high efficiency particular filters for use in three ms's powered air purifying respirators, PAPRs, an essential piece of protective equipment for frontline health care workers. Through this partnership, there is potential to more than double the current production of filters to support the ramped up production of these PAPRs.
You can see in the upper left is our filter material coming off our existing machines that we adapted to make the filters for these PAPRs. On the lower, you can see the actual PAPR in use. We are making this filter material in Nealsville, Wisconsin. And right now, we are one of the major suppliers to three ms for these machines. On the right hand side, we are also supplying Nanonet media.
This Nanonet media is a high-tech, very fine filtration material that we currently use in our fuel and lube filtration products for heavy duty diesel engines. You might think that has nothing to do with protective equipment, but we've been able to adapt this technology to make filtration materials for n 95 respirator masks worn by health care professionals. And now we're in discussion with multiple mask manufacturers about using this Nanonet material for their masks. And you can see the material there in rolls. Let's go to the next slide.
We are working through the Cummins Foundation to support families and children impacted by the COVID crisis. The truth is our communities needs our support now more than ever. The Cummins Foundation has issued special COVID grants target in cities where Cummins is a critical employer and we are where we have a significant role in the prosperity of those communities. Cities like Columbus in Indianapolis, Seymour, Rocky Mountain, North Carolina, Jamestown, New York, and Daventry in The UK. Finally, it will come as no surprise to you that our employees around the world have stepped up and responded to the needs of their communities in innovative ways.
In Sweden, for example, employees at our joint venture in Sweden volunteered to work at the plant when it shut down during the crisis to fill bottles with hand sanitizer for distribution of hospitals and healthcare facilities. Some employees are also been reassigned to a third company that makes ventilators to increase production. In Argentina, a Cummins employee converted a personal business making superhero helmets and costume replicas to make protective medical masks, donating more than 700 to his community. In South Africa in early February at the height of the crisis in China, Cummins employees in Johannesburg searched tirelessly to find a supplier of 500,000 masks that could be sent to Cummins employees in China when materials were in short supply. In The US, employees using their Six Sigma skills have helped a local childcare facility serving essential workers.
A sales and service team in Pennsylvania worked to repair buses to fill a request from FEMA to support the crisis on the East Coast. And one employee using a personal three d printer he used to create toys for his grandchildren now is instead printing protective masks for a local hospital. And employees using their analytical skills and data to build a model to help leaders in surrounding counties see trend and predict spikes in COVID-nineteen cases. As always, our employees and our company are doing all that we can do to address this crisis in new and creative ways, and we remain committed to powering a more prosperous world. Thank you, and I look forward to your questions.
Okay. We've had many questions come in, so we're gonna try to group these together to get to as many as we can in the time we have available. I'd also remind you that if your question is not answered, you can contact the executive director of investor relations, and we'll be glad to respond to you. Tom, first question is, our Dodge Ram pickup business, percentage of Cummins engines and Dodge Rams, and how that business is looking in 2020?
Yeah. So, first of all, our Dodge Ram business, has been a terrific business for the for the company, and we have a a long term and successful partnership with Fiat Chrysler. And, we had a terrific year last year, for example, in sales of those Dodge Ram pickups. And we've introduced a new product. We're excited about that new product, and the performance of the vehicle has never been better.
And the result has been that the Dodge Ram pickup truck with the the our Cummins diesel engine has gained market share in the market and a very competitive market. So we are feeling very good about our position. There is no question that that sales of cars and trucks in The US have been impacted by the COVID crisis, but we feel like we're very well positioned with that product in the marketplace and our partnership is going strong.
How is the board thinking about stock buybacks in 2020?
We are we we have announced that we will be suspending our stock buybacks in the second quarter. It seems the prudent thing to do given the important focus on liquidity and and strength of the company at this time. We are still paying our dividend for the quarter. We feel very good about our liquidity position and the strength of the company, so we will be doing that. But we will be suspending stock buyback, and we'll just be monitoring quarter to quarter to see how things look.
As we emerge from the crisis, we, of course, plan to return capital to shareholders just as we did in the past. But right now, just in an abundance of caution, we are suspending the buyback.
How do you think the transition to new power technologies will affect your culture, competitive advantage, and returns on investment capital?
As we, look to the future, it's very clear that we will need to to both, identify and develop technologies that will use less resources. Part of our planet 2050 sustainability pledge, part of our mission statement about making, people's lives better by powering a more prosperous world is about finding technologies that we think can provide customers with the same economic value, but use less resources, produce less pollution of all types, and impact the environment less. That is essential for all businesses and, of course, essential for us. So we are investing in new technologies that we think have very strong promise to do just that, to be able to provide the same economic value to customers but impact the environment less. And so we are excited about that.
It is completely in line with our culture and our mission statement. We are an innovative company, and we're born as an innovator in technology. And so we think developing these new technologies, fits our our our long history and fits our culture well. We are we are significantly on with those things. We have now a new division that's making battery electric powertrains fully designed and powered by Cummins batteries and and powertrain.
We also now have a significant operation in fuel cells, meaning we can use hydrogen fuel to make clean burning powertrains for all kinds of vehicles, as well as electrolyzers that can convert energy into hydrogen and store energy and also use that hydrogen in fuel cells to drive vehicles. So those investments will take some time before they they they make up a major portion of of the vehicles we see on the road, but they it is inevitable that they will, and we will be ready to lead when that happens. And in the meantime, we are developing and refining those technologies, offering them to early adopters in certain segments of the market where they're already, viable. And in the meantime, you know, the our research and development continues.
What risks and challenges are presented by the global trend towards lower emissions?
Well, as I stated, the the the the trend towards lower emissions has to be addressed, and companies like ours have to step up and take our role in finding new solutions. I think the the the risk in any challenge like this is it's it's it's incumbent upon all companies to move together. For us to be successful in launching new vehicles using battery electric technology or fuel cell technology means we'll need different kinds of infrastructure. We'll need more electric charging stations. We'll need more availability of hydrogen where vehicles go.
These are significant investments in in infrastructure, and we'll need partners to move with us. So the I think one of the big challenges and risk is getting the entire industry and infrastructure to move along. And, of course, there's still development risk in the technology. I I have to say that I'm very confident that we will solve the challenges related to the technology for these powertrains, and we'll do it in an economically viable way. But I still think a lot of infrastructure needs to be built.
That's that's one of the big the risks ahead. But the the planet needs to do it. We all know this challenge is there. We all know it's an existential one, and it's critical for us to do it. So we are, at Cummins, are doing everything we can do to bring partners along, encourage government investment, and other things to make sure the infrastructure is there.
What did the company spend on research and development in 2019, and how are you thinking about r and d spend in 2020?
Yeah. We have we continue to in increase r and d spend. I really appreciate that that question. You know, even as economic downturns come, as we see crises like the one in front of us, we will continue to support our key investments in technology and new product development. This is the the the the core to the company's success.
And we, of course, launched new products all over the world and in many, many different types of markets, different applications, different needs by different customers. So our new product machine is a big one and a broad one. And we need to continue to invest in those things in order to ensure our success down the road. So we do we have not slowed. We will not slow.
We are continuing to make those investments. And so you can count on this leadership team to find ways to be agile in how we think about our cost structure and other things to and still ensure that we'll invest in those critical technologies for the future.
In response to the pandemic, was Cummins involved with its government relations work in communicating with lawmakers at the federal and state level?
Yeah. Cummins, we have continued to work with local, state, as well as federal officials to ensure that we are, a, complying with any orders, abiding by safety guidelines, using any information we can from any of them to make sure that we provide the safest workplace for our employees. In addition to that, we have worked very hard on understanding how to operate manufacturing plants and offices in the safest possible way in this crisis. I mentioned some of the steps we are taking. We've documented how we how we, operate in all of our facilities.
And as we've generated new ideas for improvement, we put those into our document. We've then provided that document to local officials and state officials so that they can use that to help other companies who don't have the resources Cummins has to be to develop their own safety procedures. That's just an example of how we're we're we're working with state and local and federal officials, but we will always be trying to help in any way we can be a leader at a time when leadership is necessary. Maybe time for one more, Mark.
Ed, did management or the board take a pay cut to help the bottom line in response to COVID nineteen?
We did. Unfortunately, as part of our cost reduction actions in this very dramatic time, we did implement salary reductions across the company. And those that was a difficult decision because people here are working hard. So to reduce salaries at time was working hard was didn't feel great. It felt like the right thing to do though given the fact that the company is facing such challenging circumstances for the short run anyway.
So what we did is we implemented a salary set of salary cuts across the board, And we made sure also, of course, that senior management took the largest salary cuts. And and that that that seems appropriate, and that and that's what we did. And I think it's in line with a lot what a lot of other companies did. I I think it was the right thing to do. We are looking forward to a time when we can stabilize, get back to work fully, and restore salaries for everybody.
And so with that, I think we'll close. And I again, I wanna thank you all for joining today. I wanna thank you for your votes. Thank you for your support of the company. And again, I I have to say thanks to the employees of Cummins who have figured out ways through all the challenges that are out there to continue to work effectively to support our customers in this trying time.
Thanks to all Cummins employees. Thanks for all you do. Good day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.