Good day, ladies and gentlemen, and welcome to the Cummins second quarter 2015 earnings release 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 follow at that time. If anyone should require assistance, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I will now turn the call over to your host, Mark Smith, Vice President of Investor Relations. Please go ahead.
Thank you, Stephanie. Good morning, everyone, and welcome to our teleconference today to discuss Cummins results for the second quarter of 2015. Participating with me today are our Chairman and Chief Executive Officer, Tom Linebarger, our Chief Financial Officer, Pat Ward, and our President and Chief Operating Officer, Rich Freeland. 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 in such forward-looking statements because of a number of risks and uncertainties.
More information regarding such risks and uncertainties is available in the forward-looking disclosure statement on the slide deck in our filings with the Securities and Exchange Commission, particularly the Risk Factors section of our most recently filed annual report on Form 10-K and subsequently filed quarterly reports on Form 10-Q. During the course of this call, we will be discussing certain Non-GAAP financial measures, and we refer you to our website for the reconciliation of those measures to GAAP financials. Our press release with a copy of the financial statement and a copy of today's webcast presentation are available at our website, www.cummins.com, under the heading of Investors and Media. Now I'll turn it over to our Chairman and CEO, Tom Linebarger.
Thank you, Mark. I will start with a summary of our second quarter results and provide an update on our outlook for the full year. Pat will then take you through more details of both our second quarter financial performance and our forecast for the rest of the year. Revenues for the second quarter were $5 billion, an increase of 4% compared to the second quarter of 2014. Second quarter EBIT was $721 million, or 14.4% of sales, compared to $657 million, or 13.6%, in the same quarter last year. This represents an incremental EBIT margin of 36%. Key to these strong results was an improvement in gross margin of 170 basis points year-over-year. Good performance from our manufacturing and supply chain organizations and solid execution on material cost reduction initiatives improved gross margin.
Moreover, the company was able to expand gross margin while launching new products and adjusting to weak demand in a number of important markets. Engine business revenues increased by 2% year-over-year, with strength in North American truck and bus markets offsetting lower demand for trucks in Brazil and in global off-highway markets. EBIT of 12.2% of sales improved from 11.3% a year ago due to strong operational performance, lower material costs, and higher joint venture earnings in China. Revenues in our components segment increased 9% year-over-year, with strong demand in North America and sales of new products in China more than offsetting weakness in Brazil and Europe. Revenues in China grew 29%, despite a 28% decline in the truck market in the second quarter, as our investments in new NS4-compliant products yielded strong results.
EBIT of $223 million, or 16% of sales, was a record both in US dollars and margin percent, reflecting strong performance in all four components businesses. Distribution revenues increased 21% compared to the second quarter of 2014, with acquisitions adding 6%, and currency negatively impacting sales by 6%. EBIT for the quarter was 7.6%, down from 10.2% a year ago. EBIT percent declined due to currency, primarily the appreciation of the US dollar against the Australian and Canadian dollars, and the dilutive effect of acquiring businesses previously held as joint ventures. Excluding the impact of currency and acquisitions, operating margins in existing businesses improved year-over-year. Moreover, EBIT percent improved 160 basis points from first quarter levels due to strong incremental margins on organic sales growth. We remain on track to complete three further distribution acquisitions in North America in the third quarter.
Our forecast for the positive impact of acquisitions is unchanged from three months ago. We expect to add approximately $600 million in company revenues this year, in addition to the more than $460 million added in 2014, exceeding the $1 billion in revenues we projected for 2015 at our 2013 Analyst Day. We currently expect to add $0.20 to earnings per share this year on top of the $0.43 added in 2014 for a total of $0.63, also ahead of our 2013 projections of $0.50 a share. In the power generation business, revenues increased just 1% year-over-year. This low growth reflects a slow pace of global infrastructure investment. EBIT declined from 8.2% last year to 7.6%.
The negative impact of currency, primarily the appreciation of the US dollar against the EUR, and lower pricing in the alternator business, offset an 80 basis point improvement from cost reduction actions. EBIT did improve 40 basis points from first quarter levels. We completed the exit of our German alternator operations in the second quarter as planned, and this will yield additional cost savings in the second half of the year. However, with weak demand projected for the remainder of the year, a competitive market, and continuing challenges from currency, EBIT for the power generation business for the full year is expected to be in the range of 7%-8%, up from 2014, but below our original projections of 8%-9% for this year. Now I will comment on some of our key markets, starting with North America.
Our revenues in North America grew 12% in the second quarter, due primarily to strength in on-highway markets and distribution acquisitions completed in 2014. Shipments to the North American heavy-duty truck market exceeded 28,000 units in the second quarter, an increase of 18% from the second quarter last year. Our market share year-to-date is approximately 34.5%, up from 33% in the first quarter. Based on current projections from our OEM customers, we expect our full-year market share to remain in the range of 34%-35%, below our original projection of 36%. We expect full-year market size to increase by 8%, unchanged from our previous guidance. In the medium-duty truck market, we delivered 26,000 engines in the second quarter, up 18% from last year. We currently project that the market will grow by 4% for the year, 3% stronger than our previous forecast.
We are also raising our market share forecast, with our full-year market share now expected to be 76%, up from 72% last year, and higher than our previous forecast of 74%. Shipments to Chrysler increased by 5% in the second quarter, and we forecast full-year shipments to increase 2% compared to 2014, up from our previous forecast of flat. Our engine revenues from the North American construction market decreased by 7% compared to the second quarter last year. Our revenues will be lower in each quarter of this year compared to last year, as OEM demand for engines was elevated in 2014 ahead of the Tier 4 final emissions regulation, which went into effect on January 1st of this year. Power generation revenues declined by 12% in North America in the second quarter due to lower sales to data center and rental customers.
Our global data center customers are expanding in Europe and Asia Pacific, but their rate of investment in North America has definitely slowed. After several quarters of growth, rental customer reduced their purchases as they focus on increasing utilization of their existing equipment, with some reports of lower rental activity in oil and gas markets. Cummins International revenues declined by 6% year-over-year, mainly due to the negative impact of appreciating US dollar and weakness in all end markets in Brazil. Second quarter revenues in China, including joint ventures, were $916 million, an increase of 6% year-over-year. The growth was driven primarily by stronger sales of new engines and components in our highway markets, which more than offset very weak market conditions. Industry demand for heavy and medium-duty trucks in China declined by 28% in the second quarter and is down by 30% year-to-date as the industrial economy continues to soften.
We have lowered our full-year forecast for the truck market to decline 30%, down from our previous forecast of down 15%, as confidence in the economy has weakened and freight is barely growing. The good news in this challenging environment is that our market share has increased, and the Chinese government continues to plan for the adoption of more stringent emissions regulations, which will be positive for our business longer term. Our engine market share is 15.5% year-to-date, up from 10% a year ago, as shipments of our new ISG heavy-duty engines to Foton increased.
We have also increased share in the medium-duty market with Dongfeng Motor Corporation. We currently project our full-year market share to exceed 17%. Shipments of our light-duty engines in China grew 21% in the second quarter in a market that declined 5% as we gained penetration at Foton and some additional customers, displacing local competitor engines.
Our market share increased to 6% from 4% a year ago. Our power generation revenues declined by 2% year-over-year in a weak market due to lower infrastructure investment and a low rate of growth in electricity consumption, consistent with a weaker economy. Demand for construction equipment remains depressed in China due to the slowdown in real estate development and infrastructure spending. Industry demand for excavators in China declined 34% in the second quarter and is down 42% year-to-date, with no visible sign of near-term improvement. Our construction revenues declined by 25% in the second quarter, though the impact is small due to the low level of business at this point. Full-year revenues in China across all segments, including joint ventures, are now expected to grow 6% for the year, down from our previous projection of 15% growth due to very weak demand in most of our end markets.
We continue to gain market share and grow our joint venture earnings in challenging conditions. With more emissions changes ahead, we are well positioned to outperform our end markets and build a sustainable leadership position in the largest truck market in the world. Second quarter revenues in India, including joint ventures, were $309 million, up 6% year-over-year due to growth in our truck and power generation businesses. Industry demand in the truck market increased 20% compared to the second quarter a year ago, as the economy continues to show signs of improvement. We now expect industry truck production to increase 22% for the year, up from our prior forecast of 15% growth.
Currently, the truck industry is planning for the introduction of Bharat Stage IV emission standards in the north of India in October this year, and countrywide adoption is expected in April 2017, which should present opportunities for further growth for Cummins. Power generation revenues in India increased 8% in the second quarter as orders improved following two years of weak demand. We are maintaining our full-year forecast for growth of 5% for this year. We remain optimistic that government plans for further investment in infrastructure should stimulate stronger demand going forward. In India, we project total revenues, including joint ventures, to increase 12%, up from our previous forecast of 8%, due primarily to stronger truck demand.
Second quarter revenues in Brazil were $110 million, down 43% from the second quarter last year due to the severe slowdown in the economy and a near 40% depreciation of the real against the US dollar. Industry truck production declined by 40% year-over-year, and our shipments declined 38%. We have lowered our full-year projection for industry production and now expect a decline of as much as 50%, worse than our previous guidance of down 27%, due to deteriorating business and consumer confidence. We expect our engine shipments to decline by 45%. Revenues in power generation and distribution in Brazil have held up much better than in the truck business, but conditions are very tough across all end markets. In summary, we currently expect company revenues to increase between 2%- 4% for the full year, unchanged from our previous forecast.
We are also maintaining our forecast for EBIT to be in the range of 13.5%-14%. In this challenging environment, we delivered strong financial results in the second quarter. We gained market share in some important markets through the successful launch of new products, and we increased cash return to shareholders through dividend growth and share repurchases. Thank you for your interest today, and I now will turn over to Pat, who will cover our first quarter results, excuse me, our second quarter results and full-year guidance in more detail.
Thank you, Tom, and good morning, everyone. Second quarter revenues were $5 billion, an increase of 4% from a year ago. Organic revenue growth was 5%, with distributor acquisitions completed last year adding 3% to revenues while currency movements reduced our sales by 4%. Sales in North America, which represented 60% of our second quarter revenues, were up 12% from a year ago, due primarily to stronger demand in on-highway markets and from distributor acquisitions. International sales decreased by 6% compared to the prior year as a result of negative foreign currency movements against the US dollar, weak demand in global off-highway markets, and extremely weak truck production in Brazil. Gross margins were 26.6% of sales, up 170 basis points from a year ago. Strong operating leverage on higher volumes and lower material costs were the primary drivers of the strong performance, more than offsetting the negative impact from currency.
Selling, admin, and research and development costs of $703 million or 14% of sales increased $11 million from a year ago and were 30 basis points lower as a percent of sales due to good cost control and the impact of currency movements. Joint venture income of $94 million decreased by $11 million compared to last year. The acquisition last year of our North American distributors that were previously held as joint ventures reduced our joint venture income, more than offsetting earnings growth in China. Earnings before interest and tax were $721 million or 14.4% of sales for the quarter, compared to $657 million or 13.6% of sales last year. The incremental EBIT margin was 36%, reflecting the strong operating performance. Earnings per share were $2.62, an increase of 8% from the $2.43 reported in the same quarter of 2014. The tax rate was 29.5% for the quarter.
Now let's move on to the operating segments and further discuss second quarter performance and the outlook for the full year. In the engine segment, revenues were $2.8 billion, an increase of 2% over last year. On-highway revenues were up 8%, driven by strong demand in North American truck and bus markets, partially offset by weaker demand in global industrial markets compared to a year ago. Segment EBIT was $341 million or 12.2% of sales, up from 11.3% last year. Reduced selling, admin, and research expenses, along with increased joint venture income, provided the majority of the margin improvement. For the full year, we continue to forecast that revenue for the engine segment will be flat to up 2%, primarily driven by North American on-highway demand. Compared to three months ago, we now expect weaker truck production in Brazil and China, as Tom just described.
We are maintaining our EBIT projections for the full year at 11%-12% of sales, which compares to the 11.2% reported last year. For the distribution segment, second-quarter revenues were $1.5 billion, an increase of 21% compared to the prior year. Acquisitions in 2014 added 26% to segment revenues year-over-year. Organic growth was more than offset by foreign currency movements that negatively impacted sales by 6%. EBIT margins for the quarter declined from 10.2% last year to 7.6% due to the dilutive impact on the EBIT percentage from acquisitions of businesses previously held as joint ventures and due to the negative impact of currency movements. Strong operating performance in existing businesses added 60 basis points to EBIT margins.
For the full year, distribution revenue is now forecasted to grow by 20%-24%, below our previous guidance of 23%-27% growth due to a more negative impact from currency than anticipated at the start of the year. We are maintaining our EBIT margin percent guidance in the range of 7%-8% of sales. The component segment delivered record sales of $1.4 billion. Compared to the second quarter last year, the higher revenues were primarily driven by increased truck production in North America and in Europe, and increased sales in China of the new National Standard 4 compliant products. All of which offset the negative impacts of currency and weak truck production in Brazil and in China. Segment EBIT was a record $223 million or 16% of sales, up 150 basis points from last year, as a result of excellent operational performance across all four businesses.
Strong operating leverage on higher sales and good execution on material cost reduction initiatives helped drive the EBIT margin improvement. We still expect full-year revenue growth of between 4%- 8% in 2015. We are raising our EBIT projections for the full year to 14.5%-15.5% of sales, reflecting a strong performance. This compares to full-year 2014 margin of 13.4%. In the Power Generation segment, second quarter sales were $747 million, up less than 1%, reflecting continued weakness in a number of important markets. Year-over-year, international sales increased, offsetting lower sales in North America and a 4% reduction in revenues resulting from currency movements. In international markets, stronger demand in the Middle East and in India more than offset lower revenue from Russia and from Latin America. EBIT margins were 7.6% in the quarter, down from 8.2% last year.
The negative impact of currency, primarily depreciation of the EUR against the US dollar, and lower pricing in the alternative business more than offset the benefit of cost reduction actions. For the full year, our guidance range for Power Gen segment revenue remains unchanged, with revenues expected to be flat to down 4%. Although revenues are up 3% year-to-date, weak recent order trends indicate that revenues in the second half of the year will be lower than the second half of 2014. EBIT is expected to be in the range of 7%-8% of sales, down from a prior range of 8%-9%, reflecting a continued headwind from currency and a more competitive pricing environment in some international markets. Our guidance for total Cummins revenues to be up 2%-4% in 2015 remains unchanged.
Strong North American on-highway demand, increased revenue from distributors acquisitions, and growth from new products will more than offset the negative impact of currency and weakness in global off-highway markets. Joint venture income is now expected to decline 15% from 2014 compared to our previous guidance of down 10%. The driver of the lower earnings is our acquisition of distributors in North America previously held as joint ventures. Joint venture earnings will grow in China this year as a result of market share gains and new product sales, but not at the same rate we anticipated at the start of the year, due to a weaker economy, which has negatively impacted demand in our end markets. We continue to project EBIT margins for the company will be in the range of 13.5%-14% of sales. The projected full-year tax rate of 29.5%, excluding discrete items, remains unchanged.
Finally, cash flow generated from operations through the first half of the year was $569 million. We continue to expect our operating cash flow to be in the range of 10%-15% of sales for the full year, with stronger cash flow generation in the second half of the year than the first, as is typical in our business. Capital expenditures will be between $700 million- $800 million for the year. Earlier this month, we announced a 25% increase in our quarterly dividend. We have now raised our quarterly dividend by 457% since the beginning of 2010. The company returned $794 million of cash to shareholders in the first half of the year through dividends and share repurchase, consistent with our plans to return 50% of operating cash flow.
Year-to-date, the cash balance has declined by $541 million due to reinvestment back into the business and from higher returns to shareholders through increased dividend payments and share repurchases. Finally, I wanted to advise that we have moved the date of our Analyst Day to November 10th in New York. Invitations to the event will be sent out this week. Now, let me turn it back over to Mark.
Thank you, Pat. We are now ready for a question and answer session. If you can please limit yourselves to one question and one related follow-up, then get back in the queue. Thank you. Stephanie, we are ready to proceed.
Thank you. Ladies and gentlemen, to ask a question, please press star then one on your touch-tone telephone. If your question has been answered and you wish to remove yourself from the queue, you may press the pound key. Our first question comes from Ted Grace with Susquehanna. Your line is open.
Hey, gentlemen. Congratulations on the good quarter.
Thanks, Ted.
I am just wondering if you could talk a little more granularly about what you are seeing in China. I know you talked about gaining share, and I know you talked about the market being tougher than expected, but just maybe if you could give us your most current read on where you think the market is and what the back half looks like and really what that implies about the exit rate and how we should think about 2016. Admittedly, as you haven't given guidance on 2016.
Yeah, Ted, this is Rich. Let me start out here, Tom, you can jump in. Obviously, we don't know. This has moved a little bit. We've taken it down, and there's some growing confidence that the adjustment we made down 30% is solid for the rest of the year. Again, we're on a march to increase share despite what happens there. You've seen we've grown
From 5% up to 15.5%, and we plan to end the year 17% in the heavy-duty side. The product we've got out there looks really good. We believe we're changing the market. We've got this low-cost product, so competing with the China competitors, but step function improvement in fuel economy, reliability, putting telematics on it. While there continues to be uncertainty in the market, our big picture what we're demonstrating, showing is we're growing share. Same thing on the light duty on the ISF. With the market down 5%, our ISF volumes will be up 21%. From a macro market, which was more your question, you see the uncertainty there. The freight numbers are actually up a little bit. The freight numbers aren't down to the level that would demonstrate a 30%.
Our view is there's still some kind of shakeout to be going on here. We're a bit optimistic, or the positive sign we see is in the freight numbers.
I guess I would just add two things, Ted. First, as I mentioned, emission standards, if anything, are tightening. They've got a date now for Euro 5 implementation. They've got cities like Beijing, Shanghai, talking about implementing Euro 6. There is a lot of support from local and federal governments about pushing ahead with emission standards. Again, all that just drives people towards better technology, more focus on fuel efficiency, and the quality of emissions equipment, which we think is good for us. It just builds on the points that Rich was making, that we've lowered our costs and are offering products that are competitive to local market folks, but we're able to apply technologies in a way that some of them are having a tougher time. So we feel very good about market share.
I guess the second thing I would add is it is obvious, I think that the Chinese economy is going through a change, and the government is very serious about making this change. I am not optimistic that we are going to see a big bump up in any of our end markets in a hurry, because I think the Chinese government is going to try to keep going on this change of the focus in the government, not so much on infrastructure, not so much on build and export, a little bit more on consumer and a little bit more discipline in the provinces. How they are going to succeed and at what rate, I do not know. I also think there is some stabilization going on in the markets. They are pretty low now, and they definitely seem to be bottoming up and stabilizing, as Rich was indicating.
We do not see a further fall than we have indicated, but we also do not see necessarily a major turnaround in the near term.
Tom, to that point on taking share and the advantages Cummins has, when we think about kind of a path looking out three, five years, are there any structural considerations we should think about as maybe inhibiting you from getting to North America-like market share? Is that a realistic goal? Is that the way people should think about the potential? Or any handholding there?
Well, as we discussed, our goal for 2018 that we set out was to get to 17% market share, and of course, we expect to achieve that this year. That feels pretty good, especially in the backdrop of some of the markets we are facing. But we also said, "Hey, we would like to get ourselves up to a 25% share." That was kind of our, if you want, our stretch goal, and we are still to have that in mind. I do think the Chinese government pays attention to the role that foreign companies play in industries relative to domestic companies. In part, we have addressed that by joint venturing. Most of our major engine operations there are in joint ventures, and we therefore are supporting local competitors and the industry in general, and that is the posture we take. I think that helps us some on that.
But there's no question that the government pays attention to it. I really don't know what that means with regard to market share, but I think it means you have to pay attention to where you are and make sure the government sees you as a positive force for the industry and not something else.
Okay. Very helpful. Best of luck this quarter, guys.
Thank you, Ted.
Our next question comes from Jamie Cook with Credit Suisse. Your line is open.
Hi. Good morning, and congrats
Good morning.
On a nice quarter.
Thanks, Jamie.
I guess just two questions. One, I think within the power gen business, you alluded a couple of times to slightly more competitive behavior. I was just wondering if you could give a little more color. Has this been ongoing? Is this sort of a big change this quarter? I think you also mentioned oil and gas slowing due to rental or something like that. Any color you could provide there on the power gen business. Then I guess my second question, Tom, is just a bigger picture question. Obviously, what's weighing on Cummins stock, while you're very diversified, is concerns U.S. truck is at peak in 2015. Volvo came out on their last earnings call and said they think 2015 is peak-ish and 2016 is likely down, although not materially.
Can you talk about sort of your view and how you're managing your business in that environment? Thanks.
Okay, Jamie. Thank you. On power gen, a couple things to give color on that I started on, but I could give more. The competitive market, a couple of things that are going on. I mentioned alternators. In the alternator business, our business sells a lot in Europe and Middle East and companies that export from there to other parts of the world. We are competing with many companies that are based in EUR. The price competition I talked about or the competitiveness is partly a function of the fact that the EUR is so weak that some of the competitors, especially given how low the demand's been, have begun to take some of the cost advantages and turn them into price. It's not consistent, it's not global, but it is happening.
The second thing is in the alternator business is that copper prices have dropped a lot, and of course, alternators are made of a lot of copper. Some of our competitors that, again, have done the same thing, turned some of the copper price cost decreases into price decreases. In our case, we hedge a lot of that copper, so we're protected when it goes up, and we're unfortunately protected when it goes down a little bit, which means our cost decreases don't fall exactly in line with the market. Anyway, some of that price competitiveness has hurt both our margins and our demand at the alternator business. There's a little bit of it in the genset business too, but as I said, it's really not global, it's not consistent, and it really has got going pretty recently.
We just haven't seen it very much, and I would still say that it's not consistent. The thing I mentioned about oil and gas markets, we've had pretty good results selling gensets to rental businesses, and that's been going pretty well. It's been one of the parts of the U.S. market, is where my comments were coming from. It's been going pretty well, and it's just recently turned down a little bit. Some of our customers have said that oil and gas demand is a little lower. It's the first time we heard it. It's not surprising given what's going on in the market, but first time we heard it, and we don't know if the rental guys are going to stop for a little while or what's going to happen. It's just what we heard this quarter.
As you know, power generation business, generally speaking, is pretty low everywhere. You're getting the highlights of which may not even made the news when our business was much larger. It's pretty small now, so small variations in these markets are having a pretty negative impact.
Sorry.
Let me just let Rich talk a little bit about the truck markets, just because he's been talking to customers more recently.
Okay, great. Thank you.
Yeah, Jamie. There continues to be lots of positives in place. The backlog is still at 158,000 units, so that's up from 120,000 units a year ago. When we paid attention to retail sales, in fact, they were up in Q2. As I talk to fleets, I'm not sensing a big change in sentiment. Folks are still generally positive. One kind of common comment we get is the new trucks are significantly better in fuel economy and some of the safety systems they've put on board, and so folks want to continue on their place of replacing the older fleet. Used truck prices are pretty strong. Lower oil prices can tend to be a net positive. There's lots of positive things.
Where the nervousness comes from is now we've had after I think 14 months in a row where production was less than orders and the backlog was increasing, we've now had four straight months of production being higher than orders. While the backlog is at a very healthy level, almost 160,000 units, it's down for, it was approaching 190,000 units four months ago. It's kind of balancing these two things is, our anticipation is that we'll see orders, the seasonal orders kind of come in Q4, Q1. If that doesn't happen, obviously production will have to come down and better match what the orders are. It doesn't feel like, we all track these cycles.
It doesn't feel like some of these past cycles where when production was greater than backlog, we had a bunch of fundamentals in the market that looked pretty bad, and so you saw some of the major drops. The fundamental market looks pretty good. There hasn't been the big run-up that we've had in other cycles. I think, the jury's still out is whether the market fundamentals turn into orders kind of in Q4, Q1. That's the nervousness you're sensing.
Okay. All right. Thanks. I will get back in queue.
Sure.
Our next question comes from Jerry Revich with Goldman Sachs. Your line is open.
Good morning.
Hi, Jerry.
Hi, Jerry.
Pat, I wonder if you could just say more about the capital deployment priorities longer term. You mentioned your prepared remarks. You drew down on the cash balance so far this year. Any update to how you're thinking about capital deployment in a slower growth macro environment? Any update there would be helpful.
So we'll talk a little bit more on long-term capital deployment plans when we get to our Analyst Day in November. But for now, Jerry, you should not assume any major change from what we said before. We want to reinvest back into the business where we see really good attractive opportunities for profitable growth, and we're trying to do that as best as we can in this environment. We're also very conscious about delivering on our commitment to return 50% of cash to shareholders, which we did last year, and we're on track to do that again this year. So at this point in time, no, there's nothing new to add to what we said before on how we deploy capital.
Okay. On the new product side, Tom, can you please give us an update for how you're thinking about the Class 4 to 5 opportunity in the U.S.? There have been a couple of product announcements, and I'm just wondering if you could just give us an update for the Cummins opportunity longer term and any update on how the high horsepower Hedgehog program is tracking.
Okay. On the Class 4 and Class 5, as you know, we are more in the Class 6, Class 7 market, and that is where we compete in North America. Some of the recent announcements on folks entering the Class 4 and Class 5 are less of a direct impact on us. I guess just maybe another comment, just what is in the mid-range market, it continues pretty strong in North America. In fact, we are taking our share guidance up.
We started the year and said, potentially going down with the announcement of Ford Motor Company introducing their own engine. What we have found in that market, quite frankly, is we have got a terrific engine that is low cost, leading fuel economy, and folks that use our engine have gained share, and those have moved away have lost share in time. That has proved out in this case also.
Before you leave that, Rich, the two areas that you know about is V8, which will be launching with Nissan imminently. They will plan to start selling those in the fourth quarter, or at least produce them in the fourth quarter. That is not really a class 4 or Class 5, that is a consumer vehicle, but size of engine is probably in that. Of course, we are offering in a few other vehicles, as you know, RVs, buses, and things like that, which might be classed in that range. Our hope is to gain some position there, and we have got some good start customers.
The other area that we are definitely expanding in, as you know, is with the 3.8 engine, just not in the U.S. today. We would love a chance to do it is just right now we do not have a customer for it, and it does not make sense today. But we are expanding with that engine around many markets in the world in that same segment. We are definitely in it. As Rich said, we are pretty small in it in the U.S. and over time we hope to change that, and we are putting a bunch of markers in place that we can.
Okay. Jerry, maybe I will touch on the QSK95. I guess start out saying we are on track with what we have been saying for some time on the QSK95. We have gone into production on the power gen business. We will go into production on Q4 in the rail business. We have secured orders in the commercial marine business that we will begin shipping next year. We are ramping up production. We will be producing up at four a week by Q1 of next year. The product is doing really well. In fact, much of the production that we are ramping up to, we have in fact secured orders for already for that ramp up for next year. Generally on schedule. Remember, with this new product, it gives us access to about a $5 billion market globally that we have not had access to in the past.
Getting started and the product doing well out of the chute and securing customers was really important. While it is not big numbers right now, it leaves us on track to what we want to do in the Hedgehog or in the QSK95 product line.
Okay. Thank you.
Thanks, Jerry.
Our next question comes from Tim Thein with Citigroup. Your line is open.
All right. Great. Thanks. Rich, just continuing on that thought, if you look at the high horsepower volumes, you are running basically flat year to date through the first half. In light of the step down in some of the industrial markets, how should we think about just the back half in terms of the quarterly pace of high horsepower volumes?
Yeah. I do not have much positive to say there, quite frankly, because we took our guidance down on mining, and we are not projecting recovery through the balance of the year there. The oil and gas, which started out pretty good at the beginning of the year, you know that well. Again, no step up in oil and gas. Our commercial marine we think will be flat for the year. But there is a little bit of headwinds there. About 30% of our commercial marine business is tied to oil and gas. So we are on the crew boats that do the offshore work. So we are getting a little bit of headwinds there. The Hedgehog or the QSK95 is a new business that we did not have before. We talked about power gen markets, which remain pretty flat.
As we looked at, we have kind of settled in at this number, but again, nothing real positive for the second half of the year on the high horsepower range.
But I would just say incremental changes is the summary, Tim, versus even at the start of the year. Incrementally a little bit negative I would say in most of them, but not dramatic changes to our overall guidance.
Okay. Then switching gears to components, just in the implied step down in margins in the back half, what are some of the headwinds that we should be rethinking about there? I guess it's somewhat related, I know you have some hedges in place, but what if any impact should we expect just in light of the recent sharp declines in some of the PGM markets?
You're not accusing me of hedging it, Tim, are you? I think what we're seeing in components, normally in the third quarter of a year, we see a softness in demand. Some of our OEMs take shut down, so that's going to bleed into the second half guidance. But other than that, I think we're looking for components to finish off the year pretty strong. We will see a little bit of an uptick in some research and development spending related to new products compared to the first two quarters of the year. But they're on track to deliver a record year of both top line and bottom line.
Great. Thanks a lot.
Our next question comes from Ross Gilardi with Bank of America Merrill Lynch . Your line is open.
Good morning. Thank you.
Morning.
Tom, I realize you are not guiding for 2016 yet, but wondering if you can just comment more broadly on what you think Cummins' ability to grow earnings over just more of the medium term, if indeed the North American heavy-duty truck market is peaking and we remain in this lousy emerging market environment.
Yeah. Obviously, that is something we have been thinking a fair bit about given what we are seeing as far as opportunities for near-term improvement.
Again, like we have seen this year, we are in a lot of markets in a lot of places around the world. So inevitably something is doing a little bit better, which helps us. But as you said, generically, there is a lot of weak markets, and there is not an obvious turnaround in very many of them. India, obviously, is a notable exception, and the U.S. market is not too bad generally. But in that environment, our expectation is that we will continue to launch products and enhance our products through telematics and other value added that helps us gain share and sort of have a different trajectory than the market on its own. Now, we cannot do that in every place, in every market around the world, but our general view is we are looking for opportunities like we have had in China this year.
We think we'll be able to do some of that in India as Bharat Stage IV comes in. We'll continue to look for opportunities to sort of cut a different curve than the market's cutting. The second thing, which you've heard from us many times, is that we'll be figuring out ways to earn higher margins on the same sales. Driving costs out of our business through material costs has been a huge driver for us for improvement this year. Supply chain improvements, we'll complete our program this year that we set out in our 2011 Analyst Day to try to drive 1% gross margins in supply chain. I think we'll be able to report in our November Analyst Day that we'll be able to do that.
Again, we'll be continuing to drive costs out of our business everywhere we can while still delivering better value and better technology in our products. That's kind of our stick now, and again, that doesn't add up to a whole bunch of revenue growth if markets don't improve. But again, we think we continue to drive some earnings growth. Again, that's painting a pretty bad scenario for the markets, but we need to be prepared for that. We don't know if that'll be the case, but we need to be prepared if it is.
Great. Thank you. Then maybe just my follow on, just on similar question just on components specifically. I guess you are implying a softer second half, but you did see acceleration in the top line. Margins continue to improve off a pretty high base. Can that business continue to grow on a multi-year basis? Could you comment on how China ties into components and the contribution from China?
Yeah. Our view is the components business has benefited from trends related to emissions standards and fuel efficiency, adding to engine technology over the last decade. When we set about to launch the components business and launch our emissions standards business and enhance our filtration business, this was the trend we were banking on, right? Sure enough, that's what's playing out. As you asked about China, a lot of our growth in the components business is in the last couple quarters anyway. We've got some good growth in China. We've got great growth in North America. Truck market's been strong. We have a lot of emissions and other components content on engines here, even in Brazil, which has been really rough market. If it weren't for Euro 5 coming in there and then us being able to apply emissions equipment, it would be much worse for us.
The components business has been one of the key areas for us to buck this trend, where we can have a different trend than just the general market does. Our ability to keep growing in there will depend on our ability to capitalize on trends related to emissions, fuel economy, and other technology trends in our end markets, truck markets, and off-highway markets. We are looking to grow in that market, both on our existing platforms and on new platforms. As you know, a couple of years ago, we acquired a doser business, which is a key part of the emissions equipment that has a pretty high growth rate. We will be continuing to evaluate other trends and other ways to add platforms in our components business.
Got it. Thank you very much.
Okay.
Our next question comes from Joel Tiss with BMO Capital Markets. Your line is open.
Hey, thanks a lot, guys.
Joel.
Almost everything I was going to ask has been asked, but can we drill down a little bit into the distribution business and just over the next couple of years, whatever time frame you want to give us, what is left to do on restructuring and what kind of margins do you think this business should normalize at after you have been able to run it for a couple of years?
Yeah. Maybe I can comment a little bit on the strategy side, and then Rich and Pat can add a little bit on some of the underlying financial trends and things like that. At the strategy end, as we talked about in our 2013 Analyst Day, we have got a couple of things to do in the distribution business. Start with North America. By the end of this year, we will have made the vast majority of the acquisitions. There will be two small businesses left that we will acquire over the next couple of years. That means that we will have, by the end of this year, and to be fair, maybe middle of next year, we will have done the vast majority of integration.
We have got integration left to do on HR systems and things like that, which take a little bit longer time, and that is why I think it will probably take us to middle of next year to do all those things. But we will then have back office integrated, we will have all the businesses in, and that will be great. That is pretty good for us to do it. We have not lost key people. We have not lost key customers. Instead, what we have seen is a lot of efficiencies already and a very excited and loyal workforce, which does not happen that often. So we feel pretty great about that from an acquisition point of view. Also, we have had great accrual of earnings against relative to the cost of acquiring.
The next step, though, which is really the even larger opportunity for the company, is now to look at this geographically based distribution system and say, "How can we serve our customers more effectively?" So we have a bunch of end customers that are still geographically based. You can think of truck fleets that are running across the U.S. and things like that. They need a lot of stops. They need a lot of places that they want to be serviced. We also have some ones that are pretty focused in their geographies, things like mines and marine customers, where we do not really need to have locations in every single state that service that. We also have parts depots and warehouses in nearly every single branch. So a lot of different opportunities for us to build efficiencies in our distribution system, which we think can drive up average margins.
So just on a strategic level, that's the opportunity that we still have ahead of us, and I think will continue to improve margins. Rich or Pat, I don't know if you want to add anything to that.
Not a lot to add on that. I think, again, we consciously put the focus on making the acquisitions and generally leaving distributors as they were, so not chasing a lot of synergies in step one. As Tom said, we're generally through that. We do think the synergies are significant, and Tom outlined several of them. You can like redundant BDCs, call centers, our whole purchasing, which as you've seen, we're pretty good at as a company. We will be able to centralize the purchasing and take advantage of that. So, we've yet to quantify that, but the numbers will be significant in our next step, and we've consciously delayed some of that other than the back office work. I think for further acquisitions, so we'll complete most of that next year. We have one more to do, North America.
I'd say that we have some more to do strategically outside the U.S., but from a material dollar standpoint, not so significant. More at getting at what Tom talked about, better taking care of customers and serving customers better across geographies.
The only thing I would add on to what Tom and Rich have added there, the organic performance from a same-store sales perspective has been really good. I think we said we're up 60 basis points compared to the second quarter last year. So really pleased with that. Unfortunately, the whole currency headwind is masking all that. We talked about a 6% revenue headwind in the second quarter. I think for the full year, it's probably close to $250 million of a currency headwind on top line, and not far away from $100 million on the bottom line. I mean, if you strip out currency, this segment is doing really well from an organic same-store performance. Tom took you through some of the acquisition numbers that are ahead of what we thought they would be when we launched this two years ago.
The segment actually performing very well.
Okay. All right. Thank you very much.
Thanks, Joel.
Our next question comes from David Raso with Evercore ISI. Your line is open.
Hi, good morning. Question for Tom and Pat. When I think about the stock at less than 13x this year's earnings, less than 8x this year's EBITDA, you hear the questions around can you grow earnings next year? You have this analyst meeting every two years, right? Four years ago at the meeting, you had EM strong. Two years ago, you lost some EM, but you had North America strong. This meeting's a little more of a debate of what do we really have the next couple of years, and we can market out growth, but people are concerned about the growth beyond this year you see in the multiple. This is going to be the ninth year out of 10 that you're net cash.
We've discussed this before, but given you don't have one of the two major blocks that you've had the last two meetings, what is keeping you from cashing what I would refer to as a rainy day check here? I mean, you're net cash. You can write a check for $3 billion, buy back 13% of the company, and still have net debt- to- EBITDA at 1x . I'm just trying to understand the philosophy of how you're managing the balance sheet, especially given some of the growth drivers that we've had in the past maybe aren't quite as dynamic looking out going into this analyst meeting.
Well, let me just say two things on that, David. First is, what you're asking will be the primary topic at the investors conference. I'm conscious about not jumping ahead from just a Regulation FD point of view and all that kind of thing. I feel strongly that we have to address the point you're talking about. It's not lost on us at all that the growth that we were expecting organically has not really happened in the last several years given the market outlook. We've had some very good wins, as we talked about in China and as you called it, out-growth, where we outperform the market, and we think there's more.
But given we're kind of run up a down escalator from a market growth point of view, our growth rates are not double digit as we had hoped, and therefore we don't need the same amount of capital to fund it, and we need to figure out a way to drive more shareholder value than we're doing. We agree with that. The question is, what's the right formula to drive either higher growth or higher returns? That's exactly what we will be addressing, and we'll be addressing it in full in our best ability because we agree with that.
Right now, though, I think we kind of, as Pat said, we're on the same strategy until we change the strategy. We're carrying on as we are, and again, trying to make sure that our business is the best performing business in our industry, and that we manage our cash well, conservatively, effectively, et cetera. There's no question that the things on your mind are on our mind in a big way.
Tom, with the analyst meeting pushed back, it's probably even more helpful. If you can at least just give us just some philosophical parameters on how you think of running a business like this when it comes to financial leverage. Because we could say, "Well, we'll address it in November," but your stock's going to trade for the next three or four months thinking about this. So if you can just give us some idea, just philosophically, would 1x leverage be something that you're uncomfortable with? People are going to run their numbers no matter what you say about waiting till November. So can you just help us a little bit in how you think about it? Because nine out of 10 years being net cash definitely has at least folks like me wondering, how do you think about the leverage that's appropriate for this business model?
As you said, the stock will be trading for a number of months between now and then, and frankly, it's been trading on this issue for some time. So I am conscious of that, and it concerns me. Having said that, I think talking philosophically about it is the same as talking about it. So that seems like not a smart thing to do. We have talked about leverage before, though, David, and we have said that we are comfortable with a much higher leverage ratio than we have now, and that we don't need to be A or A-plus. We're okay being investment grade through the cycle and carrying leverage appropriate for that. So that is in our thinking and will be in our thinking when we talk about it. I'm sorry that I can't be more disclosive at this point.
It just feels like given that only a limited number of our investors are on this call, and it's not what the call was about, that I should wait until the investor conference.
I do appreciate it. Thank you for the comments.
Our final question comes from David Leiker with Baird. Your line is open.
Good morning, everyone.
Good morning.
I just want to circle back on China a little bit and talk about what your pipeline looks there in terms of launching new engines, new products, new vehicles, new customers. If you give us a little bit of perspective about where you are in that launch sequence and what we might be able to expect.
I think, David, from a new engine standpoint, I'd say we're in the infancy of the new product. A clean sheet of paper on 2.8 liter, 3.8 liter, the 10 liter and 12 liter, a new product that we've introduced in the wheel loader market with LiuGong, the 9.3 liter. I think the next big thing is the emissions are going to continue to change. Tom mentioned that, but NS5 as early as 2016 in the East and continue to grow. Really investing in our components technologies to be able to meet emissions. I think what we found is there's a learning curve on this starting out ahead, we saw it in North America, but picking the right technology because these are only going to get tougher.
I think a lot of what we're going to be doing is doubling down on the investments we've made in those areas as the emissions continue to improve. It's really a big opportunity. You had asked earlier on components also, but as the emissions continue to grow and change, you've seen it already, but we're not done with that playing out in China.
As you move from Euro 4 or Euro 6, you might think, well, the platform's the same, it's not that big a change. That's exactly what happened in the U.S. between 2002 and 2010. Of course, the engine changed dramatically over that time. None of those were platform changes, same block, same head. It's just a lot of system changes. As you know, there were big winners and losers across those years in the U.S. The same transition is now going to happen in China. They're going to finalize the Euro 6 date pretty soon, and it's not going to be 2025. It's going to be around 2020, maybe earlier, depending on kind of how they get around. There's some people toss around 2018. That's really fast and that's a big change in technology.
The drive to get from where we are to Euro 6 will be a major technical development for China, for Cummins, of course, and for a lot of others. As Rich said, that will be a shaking out for a lot of people, and that should help us. I guess the only other thing I would mention about China is we are also bringing new large engine technologies into the market. We do not talk about them much, but we have a very good market share in large engines there, 19 liter and above. We will be bringing in some updated technologies in through our joint venture there, too, which again, will be representing new launches to the market. There is a pretty big pipeline there, and I think there will be still quite a bit of change ahead and which should position Cummins further ahead, I guess.
Okay, great. Thank you much.
Thank you. Yep.
Okay. Thank you very much, everybody. I will be available for calls later. Thank you.
Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect, and everyone have a great day.