Caterpillar Inc. (NYSE:CAT)
Citi 2013 U.S. and European Industrials Conference
September 17, 2013 08:00 AM ET
Steve Wunning - Group President
Rich Moore - Director of IR
Tim Thein - Citi
Very happy to be here today. I’ll provide a few opening remarks and then pass it over to Steve who will make some additional comments. But before we get started we have some housekeeping things to take care of. This morning we’ll be discussing forward-looking information that involves risks, uncertainties and assumptions that could cause our actual results to differ materially from the forward- looking information. Additional information concerning factors that could cause our results to materially differ can be found in the Risk Factors section of our Form 10-K filed with the SEC and the forward-looking information contained in this presentation.
Back in July, we announced our second quarter results and so far 2013 has definitely been a challenging year. Second quarter sales and revenues were 14.6 billion, down 16% from a year earlier and profit per share was down 43%. The lower sales and profit is mainly due to two factors and they both relate to our mining business, which is part of our Resource Industries segment.
First, as many of you know, mining companies are cutting CapEx spending and this includes equipment from our dealers. They are focused on operational efficiencies and cost management and many new mining projects have been delayed or stopped. And as we discussed recently, the second big factor is inventory reduction, both dealer inventory and our own inventory. This year Caterpillar is significantly under producing end user demand for mining equipment and this allows dealers to reduce their inventory. While this impacts our production and sales in 2013, it put us in a better position to respond to future end user demand.
In the second quarter release, we also lowered our guidance for 2013. Sales and revenues are now expected to be in the range of 56 billion to 58 billion and profit per share is expected to be 6.50 at the midpoint of the sales range. This represents about a 14% decline from our 2012 sales level and a 23% decline in profit per share. As I mentioned earlier, our Resource Industries segment, which is mainly mining, is down significantly from the year earlier but we are very happy that we have a diverse group of businesses that are softening the impact on our results.
There are a few main points I would like to highlight from our second quarter release. As I mentioned earlier, the second quarter was very challenging, but operationally we’re doing better. The 1.2 billion of CAT inventory reduction was negative for production in the second quarter and cost absorption was negative for profit. Dealers also reduced their machine inventories by 1 billion, which means our sales were well below end user demand. Even though these inventory reductions are significant headwinds in 2013 when the dealer inventory burn off ends it sets us up for better sales in 2014.
Next, our safety and quality metrics are currently at very good levels. This is a result of excellent focus and execution of the CAT production system over the past few years, and our costs are lower. Period costs are down from last year and so are material costs. As we mentioned in the second quarter release, we’re evaluating additional cost reduction measures for the second half of this year. The second main point is that our cash flow and balance sheet is strong and this enabled stockholder friendly cash deployment. We generated $3 billion of operating cash flow in the second quarter and we’ve averaged about $1 billion each month so far this year. Our total debt-to-capital ratio is below 35% and net of cash it is in the low 20s. So our cash flow and balance sheet metrics are strong and this enabled us to resume stock repurchases this year.
We repurchased 1 billion of stock in the second quarter and announced another billion for this quarter. We still have 1.7 billion remaining under our Board authorization, which expires at the end of 2015. And we also raised our quarterly dividend by 15% in June. Growing dividends through the business cycle is very important, and this recent increase along with stock repurchases supports our commitment to deliver superior stockholder returns.
The last thing I’d like to comment on is currently mining is receiving a disproportionate share of attention but it’s just one of our main business segment. We serve cyclical industries in our three equipment segments and thankfully they don’t all move in the same direction at the same time. Our construction industry sales are on the upswing. We’ve been clearing inventory in some of our dealers and that’s been a short term drag in our business, but end user demand is looking up.
Our power systems business is also doing pretty well. The second quarter of last year was a big quarter and the second quarter of this year was almost as good. In fact, power systems is currently our highest sales and profit segment and it’s looking a little stronger than we saw just a few months ago. And finally our financial products division has also had a great quarter. The size of the portfolio, revenues and profit, all improved.
So with that, Tim, I’ll pass it over to Steve.
Thanks, Rich, and good morning, everybody. Thanks for joining us bright and early today. I guess in that last bullet point Rich saying that mining is getting a disproportionate share of our attention I can tell you one thing it’s getting all of my attention; I’m not so sure that’s disproportionate but let me make a few comments at the beginning of this which may answer many of your questions and then we will open it up to specific questions that you may have.
Let me just talk, just a couple of minutes about who is resource industries, to kind of give you a sense for that. And resource industries consists of the mining business which is about 85% of our sales within the group. But it also has the, what we call the diversified products divisions which has some of the smaller business that are very important to us but they are not of the size of mining and diversified products makes up about 15% of the sales and that would consist of our forest products business, our paving products, our defense business, our industrial and waste business.
We sell components in partial machines to other OEMs so that’s part of that group as well. So it is 85% mining and about 15% diversified products. We’ve got 46 manufacturing facilities within just this group, in 21 countries. It is 30 million square feet under roof. Not just the land but that’s under a roof, it’s hard to relate to millions of square feet. Being from Central Illinois that is a medium-sized farm, about 650 acres all under a roof and we have spent over the last several years as we’ve been modernizing and expanding our manufacturing facilities, so there is a lot of manufacturing done in the resource industries.
We have also gathered advanced components and systems division which is both product develop -- component development as well as manufacturing, not only for resource industries but for the entire company and that would include our hydraulic systems, our power train systems from the engine to the wheels, or the track as well as our electronics, the microprocessors, the sensors, the telematics, that is coming out of our advanced components and system division. Also included in resource industries is our product development and global technology division where our tech centers reside and we have tech centers in the US, major tech center, engineering design center in India as well as one in China, as well as our proving grounds that resides in that group.
All told, resource industries has got about 38,000 employees, that’s down from about 43,000 employees, say about a year ago, and if you add in the contractors and agencies, the high watermark was about 50,000; full time CAT employees as well as agency and contractors.
About 60% of the company engineers reside in resource industries. There is about 8000 engineers within the group. From 2010 to 2013 just investments that have been made in resource industries, spent a little over $15 billion, investments that we have made, and for our company that’s a lot of money, and it is the area that we have made the greatest investments, and what gets really the headlines is the acquisitions that we’ve made and those acquisitions were obviously very important.
The acquisitions are about $9.5 billion of that $15 billion. The kind of the other story, the kind of the untold story, is the other $6 billion roughly that we have invested since 2010 in capital to expand and modernize our plants for just resource industries, most of this is because of mining and I don’t know if you had a chance to visit some of our plants but we would love to have you, if you get a chance to visit our Decatur plant which is our large mining truck facility, if you have been there just a few years ago, you’d come back today and it would be completely new different facility, you would be incredibly impressed, I believe. We have done a lot to expand and modernize our facilities around the world, plus we’ve spent a lot in terms of R&D to investing in our product, to improve our product, and to expand our product line.
So that’s the story that hasn’t been told as much, is the $6 billion that we spent on our products as well as our plants. Why we have invested so much in mining? Back in 2010 when Doug Oberhelman became the CEO, we revisited in our strategy. That’s the tradition at Caterpillars, when we have a change in CEOs, CEOs revisit our enterprise strategy to see what changes we want to make in our strategy. And as part of that exercise we ranked all of our business from top to bottom and ranked them as far as, what industries are the most attractive and the most attractive to the least attractive. And we also ranked our businesses, which ones have the best strategic fit to what Caterpillar is good at to the least strategic fit.
And on both measures industry attractiveness and strategic fit, mining was number one. It was number one of all of our businesses. Oil and gas is pretty close, but mining was number. And from a strategic fit point of view, what mining companies want, is that they want their suppliers of equipment to help them have high productivity, high machine availability and low operating and that’s something that with us and our leaders were, we think were pretty good at. The mining equipment consumes a lot of service parts, and that’s something that we like. And it’s kind of real litmus test on whether or not this is a good strategic fit is how do you, in terms of market share and we measured by pins and we have the highest pins in the industry where you can measure pins as well as is that this business is very attractively profitable to us that kind of opens up litmus test that we have a high market share and you can make money out of it, that’s probably a good indication, that’s a good fit and we do extremely well on both front.
And then also the industry attractiveness is that we felt that the mining industry is very-very attractive and you might think that today why you missed that it’s terribly attractive today. Well, let me just talk a little bit about the attractiveness of this industry and I’ll do it kind of from a short-term point of view as well as a medium and longer term point of view because there is a little bit of two different stories there. When you can see on the slide here and these are many of our customers here that are making comments about right downs and cutting expenditures and efficiencies and its pretty doom and gloom and this is prospectus for my customers.
And kind of add to this a bit is that some sample of 2012 if you get the top ten mining companies, five of the top ten mining companies, five of the top ten CEOs have been replaced, and eight of the ten top companies are saying that what they want to do they want to maintain or increase their dividend in fact their average dividend yield for these mining companies about 3.7% it’s actually higher than what ours is, I think there is about 2.9% and 3% so what they’re doing is just giving more money back to their shareholders and because I think what’s happened lot of these the big mining companies is that they have done a lot of greenfield expansion and many of those projects they have had very large cost overrun.
And the time schedule to get these up and running have been delayed and that’s been significantly longer than what they have planned for them to be, so they really haven’t delivered to the shareholders expectations and now they’re getting a little bit more balance in terms of expansion as well as turning money back to the shareholders. I think the way this boils down is that up until about 15 to 18 months ago, many of our mining customers kind of they were looking at increasing production regardless of the cost that maybe a little bit of an overstatement but they were really focused on increasing capacity, increasing production, chasing the demand that was out there, and cost was not as important as doing that.
And what’s happened over the last 15 to 18 months is that they’re saying that we want to increase production and lower our operating cost, which I think is probably a little better balance they’re putting kind of the cost and the production in balance.
Now, when you read this and you’ll see all the things in the headline, you’d say mining must be really in a deep recession, it’s interesting to know that in 2012 mining production was at 6% over 2011, but 2012 the mines produced 6% more than it had in 2011. The first half of this year and you just take that the big mining companies like BHP Billiton, Rio Tinto, and Vale, in their second quarter release these three companies were talking about the commodities and mining is called iron ore and copper.
And they were talking about anywhere from 5% to 25% increase in production ’13 over ’12 first half of the year and that’s on top of the 6% increase ’12 over ’11, so in this recession in mining production is up, it’s up a lot. At the end of the day what drives demand for Caterpillar’s machine and equipment is production. If the production is up eventually there is going to a whole lot more demand for our machines, equipments and particular our service parts and that’s what drives our business, so even at the short terms that the industry really isn’t in recession at the measure by the production of these mines.
Let us take a little bit of a longer term view and this is why -- when we evaluated the industry we evaluated the industry over the long term and recognized that mining is cyclical business that we were looking at the longer term trends. And the first thing is just the world population; world population is growing about 6.5 million people every month and that’s going to continue to grow at 6.5 million every month as far as I can for the next 25, 30, 40 years. With that in perspective, the Greater Boston metropolitan area is 7.6 million people, so every 36 days the world population is drawing the size of the Boston metropolitan area, every 36 days.
So the first time in the history of mankind where people live in the city then in the country and I think by 2023, 60% of the world population will be in city and you can see on the chart here the GDP per capita in the developing countries is that it's kind of essentially doubled, from 2010-2018 from a little over $7000 per person to almost $14000 per person, so with the GDP increasing per capita people in the developing countries will have more income, disposable income to purchase things like we have the ability to do here in the United States, so just think about that with the increasing population, with more people living in cities and the increasing standard of living in the developing country you just think about what that means in terms of demand for energy, for roads, for hospitals, for bridges, for rail, for airport and that's what mining provides. So this is an incredibly attractive industry. The other thing you can see from this quote on the upper right hand side large mining companies, it talks about, and this particular mining company is talking about the copper and the ore grades are decreasing from 1.3% to 0.9%, that is a 30% decline in ore grade, what drives the demand for our equipment is not so much how much copper is produced, what drives it is how much material is moved for a 30% decline in ore grade we're going to have to probably move 30% more material which drives the demand for our equipment. And also the ore bodies, the easy to get to ore bodies have already been mined.
The lower grades are deeper and they're harder to get to and in fact McKenzie has done a study, from 2012-2020 the material moved for coal will increase 26% during that period of time, iron ore will increase 34% and copper the material moved during that period, that eight year period will increase 37% and that's and if you do a CAGR on that that's anywhere from a 3.5 to 4% CAGR in terms of material moved. The other thing that's interesting is that, the Department of Energy, the US Department of Energy, what they are saying is that the demand for, world demand not the US demand; but the world demand for electricity is going to increase 90% between now and 2040. The demand for electricity is going to be up 90% almost double. Now the interesting thing is that today, coal worldwide produces about 35% of the world’s electricity; by 2040 the US Department of Energy says that coal will produce 33% of the electricity demand. It's going to go from 35% to 33% down 2 points, at the same time electricity demand's going to go up almost double so for those who think coal is dead, coal is going to be here to stay. In China, they're commissioning a coal fired power plant on average one a week and that's going to continue for the next several years.
India's got I think something like 97 coal fired power plants to be commissioned over the next few years so there is going to be a lot of electricity that's going to be produced and coal is going to be a big part of that. Another point I just want to make before we turn it over to questions is the pipeline of projects. As you see this is coming out of the Bureau of Resource and Energy Economics, and this is talking about the pipeline of mining projects in Australia, I know Australia is a very large market for us, depending on the year about 35%, 40% of our sales are in Australia. So it's a large percentage of our mining sales and it does vary from year-to-year, if you look at what they say is the mining project, there's $660 billion of pipeline projects on the table in Australia and yes the miners are slowing some of these down because of execution issues, but there's $660 billion of mining projects in the pipeline of which 270 billion have been committed, another 230 are in the feasibility stage, so the mining houses are going to continue to invest maybe at a more prudent pace so they can manage their execution risk but there're still a lot of projects out there and the last thing I'd like to do is there was a Andrew MacKenzie, who was the CEO of BHP Billiton, I think it was the end of July, he was on the Australian Broadcasting Company TV station, did an interview with him and I'd just like to have a, it's about a 90 second excerpt in terms of how Andrew views mining in Australia and also a little bit about how he views China so I think you may find this interesting. So if we can turn that video on. (Video presentation)
So I think on all accounts at least from our perspective is the long term future of mining is very attractive and very exciting. We also view that it’s a great strategic fit for Caterpillar and we’re very well positioned to pursue that. The question is that when this is going to turn around and I think if anybody to get answer to question that’s a very difficult one because really it depends on who you’re talking to, which mining company you’re talking to but is that going to happen in 2014, second half of ’14, 2015, I don’t know. But I do know that it will turnaround, because this industry the dynamics are there that this industry is very attractive.
So maybe Tim I don’t know if you want to take it from here though we want to open to questions so how you’re going to do that.
Tim Thein - Citi
Does anyone have any questions? Okay, maybe I will start us off. The first one is just a question on the aftermarket. Some of our [inaudible] recently have noted that some of the majors have been lowering their purchases in spare parts from OEMs, which was essentially enforced by the equipment makers in a bull market as sort of a condition to get equipped. So, can you kind of characterize to what extent you are seeing that? And then as kind of a segue to that maybe you can just update us in terms of the general pricing landscape both on aftermarket as well as [indiscernible]?
We haven’t seen that much decline in the aftermarket, it’s down just a little bit but it’s nothing material where we’ve seen the decline is a demand for the machines and equipment but the aftermarket is held up really well for us in the mining space. And again I guess right back to the production as long as they’re using equipment they’re going to be consuming parts of service. As it relates to pricing on the equipment, there’s only like 300 mining customers in the world and many of these customers we have long term agreements kind of frame work agreements that we have with these customers. And we deal with pricing in those long term agreements. In several of those we’ve renewed or in the process of renewing this year so we’re very comfortable with the pricing that we’re getting on our equipment.
As it relates to pricing in the aftermarket there hasn’t been tremendous down pressure on pricing. When customers we talk about it our mining customers moving from production with less emphasis on cost to higher production and lower cost, the way we do that with our customers and it kind of falls right into our wheelhouse is how we compete is we that we work with our customers to have them reduce their cost per ton. So when they say hey we want to be more efficient and have lower cost per ton, that’s exactly what we try to do, working with our dealers, using our equipment and through maintenance management programs and equipment management programs and using the design and reliability of our equipment we can work with them so they can get the most out of our equipment. So they can actually improve the operating cost of their mines so when they say they want to do that that’s really music to our ears because that’s really part of our business model. So our initial prices there hasn’t been much pressure on -- there is always pressure on pricing but I would say that there is not any more -- a lot of great -- a much greater pressure today than what there has always been on parts prices and as well as machine prices.
Is there any way to gauge the average age of the fleet that’s out there and the relative age where it’s been in [other] [ph] cycles?
Let me use two -- I'll use large mining trucks and then I’ll use large track-type tractors that is where we've got data on. And today for a large mining truck the average fleet age is five years. Five years ago for large mining truck it was 5.6 years, so the fleet age, the average age has decreased by little over seven months. The large track-type tractors today it’s about 5.2 years, five years ago it’s 4.7 years. So the average age of a large tractor is actually older than what it was five years ago.
And I guess it just kind of it varies but on average for a large mining truck the large mining truck will be, its useful life is about 15 years. And about a third of the truck fleet is over 10 years old so we don’t have a situation where we have flooded the market with a lot of new equipment, where the average age is really dropped is that there is going to be a steady replacement cycle just like we’ve seen in the past so that’s not like we’ve had a pent up demand and we’ve filled it up and now there is not going to be a replacement cycle, that’s going to be kind of the steady state phenomena for us. So the average age is about the same as what it was five years ago.
Tim Thein - Citi
Can you talk about your exposure to the contract miners and if their release of equipment has started to put pressure on used pricing?
Yes, it’s the -- the large mining companies have started in-sourcing a lot of the work that they used contract miners for. And so the contract miners, I think in the last 15 months have been hit harder than a lot of other segments of the mining business. And some of those fleets are being underutilized, in some case of they’re even being part. The exposure to us, something that we watch closely that it’s not like 30% or 40% of our business, that’s not even worth close to that, I would guess what you it roughly is 10%, in the 10% range and we will see what happens with the contract miners. Their view is that they can be more efficient than the large mining houses. But that’s something that’s in play at this point in time.
Tim Thein - Citi
Is their release of the equipment started to put pressure on used prices?
On used prices?
Tim Thein - Citi
We are not really -- as far as a lot of the large mining equipment, we don't get that deeply involved in the used, because they usually keep it, it could eventually give pressure on the new equipment prices, but we haven’t seen that to any great extent as always, these are big mining companies, there are big companies, there is always a lot of bargaining part that they have. And so there is always negotiation on initial price. But if you look at it in terms of total operating cost, in the way the context that we put this in, there is a lot of factors that affect your total operating cost. And the mining companies are very professional in how they look at it. They are looking at cost per ton.
The things that can affect cost per ton is initial price, its availability, its productivity, and its operating cost. And there is also the resale value, if you want to sell the machine. Those five factors, the one that has the least impact on the operating cost over its life is the initial price. And we have never competed when we were the lowest initial price. It’s that we always competed in providing the highest value where that translates as where we can provide the lowest cost per ton mined, and that’s how we compete. There is always pressure on price but if you could have been perspective, it is the least significant of the five factors on operating cost per ton.
Tim Thein - Citi
Yes. You talked about how you’ve been doing back inventories and adjusting that, the inventories on the channel level. On the other side of that though you have been extending your financing and using more financing you mentioned again this quarter a strong financing quarter. How do you do that balance? Because one could argue that that pull sales forward the use of financing
What we want to do is we want to give our customers an alternative to financing. And that applies to all of our customers of which mining is one segment of that. Many of our mining companies, they have got great access to capital and financing and they don’t need our CAT financial. So all we are doing with that is to giving them an alternative, and we are happy to do that if they want to use us in terms of financing. We don’t really think that using our capital finance company really pulls sales forward. What we have done is, and this is this inventory correction that you are talking about, is that the dealers kind of interesting, as what has happened is, as in 2012, particularly in the first half of the year when the demand was going -- the end user demand was increasing every day, our dealers were building inventory.
So the demand on our factories was greater than what the real end user demand was on our dealers. And we were in many cases running that capacity. This year when the end user demand has been down, and is been down, is that the dealers have been burning off their inventory. So what we have seen is kind of a bull wave prospect, is that the demand on our plant has actually been quite a bit lower than what the end user demand has been to our dealers, and that’s because of the inventory burn. We have taken a hard look at that; because typically inventory should be a buffer to reduce the volatility in our plant. And what’s really happened in my view is that inventory has actually been a source of volatility, not a buffer for our plant. And really if you just think about why did that happen?
It’s that our customers and our dealers, they were forecasting what they needed in terms of equipment. And they also knew what our lead times were. They also knew that we were capacity constraint so they began to place longer term orders to make sure they could get the product when they needed. And that’s why they were building inventory when the end user demand was up, just to make sure they could be in the queue that they get the machines when they needed it. What we have got to do is to get our lead time shortest, that we could move faster to the changing demand of our end customers. And that’s a big initiative that we are working throughout the entire company not just for mining is our Caterpillar Enterprise System initiative which really gets back to lean manufacturing, shorter lead-times and also working with our dealers to make sure that we’re more coordinated with what our dealers are doing. So I think a big source of the volatility that we’re seeing is not only the swing the user demand, I think at least half of that volatility that we’re seeing is the inventory correction that’s occurred over the last 24 months.
Yes some of our plans for this year, some of our plans are working at 40% of capacity right now and we’ve added a lot of capacity because we believe in the long term future of mining and when this business does come back we’re going to be in a much stronger position that we’ve ever been in the past in terms of responding to the rebound in mining. And what we’re also doing the one that we’re little bit concerned about is our supply chain, our suppliers, will they be able to do respond as quickly, and so what we’re doing there for castings and long lead-time forgings, we are placing strategic component inventory to make sure that we have this, but we can reduce those lead-time when the business does come back faster, so we can respond in and maybe 6 to 8 months as opposed to 12 to 18 months.
Tim Thein - Citi
Rich, you mentioned that the power business has been looking up I think, can you elaborate on that?
Yes that’s been very consistent performer for us for long time and again it continues to our top performer both from sales and power perspective and that’s just a function of all the various three diverse group it’s probably in my opinion the most unappreciated group at Caterpillar and it’s one that we need to get more of a story up because it is a very well performing group and it is again function of the diverse nature of that. Oil and gas is performing well, it has been for a number years but even within the oil and gas space and that’s the largest component of our Power System segment even within that oil and gas space the Caterpillar plays both large reciprocating engine and our turbine business, it’s very-very diverse, it’s really the complete end-to-end of that whole industry what the Caterpillar participates in.
So that’s been a good source of stable earnings and profits for us. The rail business for example a business we want on the locomotive side, we weren't in a few years ago, that been a good story as well. Our business is doing very well in our rail service segment of Power System. Electric Power is also looking it’s improving a little bit, it was fairly slow start of the years but it looks like its ticking up and doing little bit better right now, so that’s again another areas of optimism we have for Power System, so it’s really a diverse group of business that are all performing pretty well.
Tim Thein - Citi
But I did hear in your prepared remarks that you thought things were looking up in that area relative to where they had been past six months?
Yes that’s what I just mentioned in Electric Power and even in some of the -- the back half of the year is typically been -- if you look at the performance of that segment. The back half of the year is typically been little bit stronger than the first half and lot of that’s really to large project where we try to expertise and get those products shift by the end of the year. The projects want to receive those products as well so booked those in calendar years, so typically there is a bit of back half skew to that that sales trend.
If you look back and you know that maybe there is a little bit of over production because of whole bunch of issues, a good amount of over abruption by normalized the year if you could go back and look at it that way, what were the real Caterpillar numbers have been if you’re producing to demand without the over absorption instead of having 20 billion or 22 billion in sales or something had a pretty good margin, what’s the right number that only think about it going forward.
Tim Thein - Citi
[Indiscernible] mines are little bit, should be that we should expect from that business on a reported basis.
I think this will answer your question -- is I think the inventory issue probably double the volatility that we saw it’s probably little more than double, so the decline this year I think we’ve said I think as what we said as we told the group what’s the decline has been in mining.
No for year-over-year sales, we’ve talked about mining in terms of what -- it’s 7 billion from mining, okay. So mining has been down, it’s down about 35% year-over-year. If we didn’t have this inventory correction the swing would have been 15%.
Okay the presumably therefore the year ago numbers would have been 2 billion or 3 billion less right.
And these numbers would have been 2 billion or 3 billion high.
Tim Thein - Citi
What would have been the commentary margin if we did all the adjustment, so we understand what the real profitability should be?
The way I know where it would be. The way I would first of all we’re talking about -- we have good margins on our machines and really good margins on our parts and the parts have been pretty stable, …. So it's really been the machine that's been the volatility piece. I don't know if I want to translate that into profit but I think you can view that if it's down 7% I think you can get a pretty handle in terms of what the impact would be, $7 billion you can get a pretty good deal yourself in terms of what that would mean in terms of margin.
Tim Thein - Citi
I understand that but it's hard to understand it's sort of like the under absorption over absorption issues that have flowed through so I'll am doing is saying if we get to a normal year and the overall business is generating what $18 billion of sales or something like that, what’s the right margin expectations because this business had some fabulous margins, but we don't know how much of that was sort of over absorption of the infrastructure, just to sort of think about it ballpark.
I would look at that in a steady state environment, I'd look at, mining is a very attractive business to us with very attractive profits, two reasons why we can make good margins on the machines plus it’s got a high percentage of parts sales which we make good margins there.
I don't think the margin percentage is slowing that much, it really goes with the sales, so I think if you can see what's happening to the sales and you get a pretty good sense of what’s happening to the profits.
Tim Thein - Citi
Thanks a lot folks, we're moving on to the next company, thank you Steve.
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