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Caterpillar, Inc. (NYSE:CAT)

Credit Suisse 2013 Industrials Conference

December 4, 2013 1:15 pm ET

Executives

Mike DeWalt - VP, Strategic Services

Jim Umpleby - Group President, Power Systems

Rich Moore - Head, IR

Analysts

John Pitzer - Credit Suisse

Jamie Cook - Credit Suisse

Hi, good afternoon, everyone. So up next we have Caterpillar. Next to me right here we have Mike DeWalt who everyone knows he's now Vice President of Strategic Services. We have Jim Umpleby who is the Group President of Power Systems, and then Rich Moore is all the way at the end who heads the Investor Relations Group. So I think before we get started I just wanted to give Jim the opportunity to give an overview of sort of what he does the power systems business and what he does, and then we’ll just open it up to Q&A. Thank you, Jim.

Mike DeWalt

Very good. All right, thank you, Jamie. Well, good afternoon, good to be with you today. Just very briefly, as you may know, Caterpillar is separated in the three main segments. Construction Industries, which is the traditional kind of construction equipment you normally think of with Caterpillar; Resource Industries, which is primarily mining, and Energy and Power Systems and that is the area that I'm responsible for.

Last year, our sales were about $21 billion and we have four primary segments, the largest being oil and gas, which represents about 40% of our sales; electric power is about 30%; transportation is 20%, transportation is consist of both rail and marine; and industrial, which is small engine sold to industrial users, is about 10%. And so as we look forward to this year we’ve said that our sales will be down about 5% compared to the peak that we achieved in 2012. So, again, it’s a very high level overview and we’re pleased to entertain any questions you might have.

Question-and-Answer Session

Jamie Cook - Credit Suisse

I guess just sort of staying on the Power Systems you and I sort of spoke earlier and I think one of the big concerns out there that investors have while mining has come off dramatically and we can argue how much further has to go, I think there is a fair level of concern out there that the power systems business which has been relatively strong and has incredible margins sort of the there is a concern that next year to drop so. If you could just talk about your outlook as you think about sort of the next 12 to 18 months across the oil and gas, power gen, transportation, sort of industrial, sort of what you’re seeing in those markets and your confidence level that 2014 still looks okay?

Jim Umpleby

It’s one of the things to keep in mind about Energy and Power Systems. Compared to our other segments whether its resource industry which is primarily tied to one industry which is mining or construction industries, Energy and Power Systems is a very diverse group. We serve a variety of different industries and if we use this year as an example some of those segments are down and some are up. But because we’re in businesses that sometimes are kind of countercyclical that provides much more stability to Energy and Power Systems. So you stop and think about even within the segment there is a lot of diversity as well. As an example, in oil and gas, we do everything from manufacture reciprocating engines that are used in drilling and fracing, we have solar gas turbines and compressors used in natural gas compressions that are used very heavily in offshore in oil production. So, again, just given the diversity of the group we feel we’re well positioned.

In our third quarter earnings call, we did publicly mention the fact that electric power business is in fact down the most this year in terms of our segment within Energy and Power Systems, so we've said that publicly. But again given the diversity of our business and how we’re performing we’ve said next year that we believe our revenue will be flat. That’s what we said publicly.

Jamie Cook - Credit Suisse

But I guess just the electric power business has been weaker, I mean, Cummins noted some weakness. There was -- they talked about -- they pre-announced the result of that business, you know what I mean, in third quarter can you just talk about within electric power which areas just a little more color in where you exactly you’re seeing the weakness graphically or by end market?

Jim Umpleby

Yes. So, we serve a variety of different sectors within electric power, everything from small retail generator sets that are sold by our dealers to large power plants. So if you look at that segment I’d say most of the softness is in what we call the investor side, which is higher than 750 KW. A lot of that moving to just general economic uncertainty and people being cautious about making capital investments. But again I think the diversity even within that segment will serve us while moving forward.

Jamie Cook - Credit Suisse

Are there any geographies, India, China that you want to go in--

Jim Umpleby

Not that I really want to go into at this point. We really haven’t disclosed that too much. We have disclosed that in EAME, which is Europe, Africa and the Middle East, we have seen some just some electric power. Some of that is due to the fact that our dealer had some inventory which they built up towards the end of 2012 that they worked off through 2013. So that is one geographic area that we have mentioned.

Unidentified Analyst

Any questions out there? No? Go ahead.

Unidentified Analyst

[Question Inaudible].

Jim Umpleby

I'm having difficulty hearing you towards the end.

Unidentified Analyst

I just wanted to know how you think you’ll be able to compete with them if they’re making a big push organically into the diesel engine market. Because so far I guess it has been a steady benign competitive landscape, it seems that’s going to change quite soon.

Jim Umpleby

Yes, I guess I wouldn’t agree with the characterization that’s been a benign competitive landscape. Certainly if you look at our businesses we’ve had a GE as a very worthy competitor, as is Cummins, as is Woritila[ph] and there is a number of others. So we’ve demonstrated over time the ability to effectively compete against worthy competitors. I mean, certainly in our solar turbines business, I mean I’ve competed against GE for many, many years, again a great company, a formidable competitor, but we’ve done very well in the marketplace despite that. So one of things that Caterpillar did when we rolled out of 2010 strategy is we really have tried to become more focused in terms of where we make our investments and we’re investing in those businesses that we believe produce the best returns and that are best strategic fit for us.

And clearly Energy and Power Systems, our reciprocating engines our gas turbines both diesel and natural gas, where we’re making significant investments, represents excellent long term opportunity for Caterpillar and we’re making significant investments to ensure that we remain competitive. I mean, if you look at some of our products are distributed directly, some go through dealers. If you look at that distribution network we think that as a major competitive advantage for us. And again, I’d say that our results prove out that we have done well and we’re committed to be successful in the business.

Jamie Cook - Credit Suisse

Go ahead, Chuck.

Unidentified Analyst

I may have missed this, I walked in couple of minutes late, so just I missed that. Can you give us a bit of a break down this to sort of who your like end user markets are? What’s the best break down you can give us?

Jim Umpleby

Yes, so it’s a quite diverse business so I’ll just spend some time trying to give you some additional background and if I miss the mark you can let me know. So, again primary segments start with the oil and gas, so we serve everything from -- we sell reciprocating engines to drilling companies. We sell reciprocating engines to companies like Schlumberger and Halliburton that do well servicing. We sell reciprocating engines to packagers that package reciprocating gas compressors so they buy reciprocating gas compressor by Caterpillar engine package that takes to the marketplace. We sell, its not going to be exhaustive list but I’ll give you the highlights, solar gas turbines sales is primarily involved well also they’re involved in oil and gas production, a lot of offshore ore production as well as natural gas transmission. So customers they are the major IOCs around the world, NOCs, as well as natural gas transmission companies around the world.

With electric power a more diverse customer base than oil and gas, so a lots of small companies, but again we’re on everything from small retail gen sets to very large power plants and everything in between. Transportation, obviously rail. We got into the rail business in 2006 through our acquisition of Progress Rail; they provide rail services primarily in North America to the large railroads. Now with our acquisition of EMD a couple of years ago we provide locomotives to those same companies as well as we’re starting to expand internationally and we sold our first transit locomotive here since the acquisition within the last year.

And the industrial business is a lot of small customers. We manufacture small engines that we sell on agricultural, we sell some to competitive construction equipment. So, again a very diverse customer base. So it depends on the segment I mean it’s a diverse business (inaudible) industrial part systems we build 300,000 engines this year, solar turbines is around 300 packages, so it’s a very diverse kind of business.

Unidentified Analyst

Where is oil and gas represent the total sales broadly defined?

Jim Umpleby

Yes, oil and gas is about 40% of our total Energy and Power Systems business. Now within that it has different sub-segment such as well servicing and drilling, offshore oil production but the total of the $21 billion last year is about 40%.

Unidentified Analyst

Okay. Thank you.

Jim Umpleby

You’re welcome.

Jamie Cook - Credit Suisse

I guess its because of the last or the question before Chuck was related to GE, so we'll go back to GE. Can you just because you compete against them through EMD. Can you just talk about your approach to the machine standards coming up in terms of what technology you’re going to use and how you’re going to keep the compliant? I think in GE in doing, you can correct me if I'm wrong. I think you already -- is already compliant through their Evolution series product, so you can just talk about sort of your thought process behind that and how you’re compete ting against them?

Jim Umpleby

And again your question just points specifically I believe it refers to rail as opposed to --

Jamie Cook - Credit Suisse

Yeah.

Jim Umpleby

So we can get against GE oil and gas and electric power and in rail. On the rail side, we will have our first tier 4 compliant freight locomotive in 2017. Based on our conversations with the railroads we believe that there will be limited demand for tier 4 freight locomotives in 2015 and 2016. Based on our research we believe that about 5% of the class one railroads have -- 5% of the locomotives actually in storage today, so we don’t think there will be a big demand in 2015 and 2016. And one of the things that we heard from our customers is they’re very, they’re very focused on ensuring when a new locomotive comes out, it meets their reliability and durability standards. So we’re going to take that extra time where we believe demand is relatively low to in fact ensure that we have the product right.

Having said that, you have to keep in mind that if you look at our transportation sector, which as I said is about 20% of total Energy and Power Systems transportation that 20% is made up of both marine and rail. So if you just take the rail piece that rail piece consist of both Progress Rail and EMD, and then when you just get to the EMD segment of course there is international markets, there is transit locomotives, there is freight locomotives. So again, as a percentage of the total it’s a relatively small percentage of MPS it is an important segment but again that’s our plan.

We’re also investing heavily in natural gas, in LNG, we have a demonstration in freight locomotive with one of our customers, we have some other units in test. We will in fact have conversion kits available for natural gas in 2014 for our customer, so those demonstration units will go out as well under retrofit basis, and we’ll also will have our first transit locomotive that is tier 4 compliant in 2015.

Jamie Cook - Credit Suisse

Any other questions out there? All right, I guess, Jim, I’ll give you a break for a second and we’ll go to Mike. Mike, I think one of the other big next data points people are sort of looking to you from you guys in terms of a broader structuring on the Caterpillar I think people were hoping we hear something in the third quarter we're still hopeful for the fourth quarter. But can you talk about sort of the actions you’ve taken so far to reduce structural cost sort of where you are in the ball game on that and sort of what’s left to come, does the timing affect you?

Mike DeWalt

Okay, we’ve gotten the same question related to capacity as well several times and so if it’s okay I’ll --

Jamie Cook - Credit Suisse

Go ahead.

Mike DeWalt

I'll kind of lump to two into one discussion and most of the capacity discussions revolve around mining. And so I’ll start with capacity and then we’ll move on to structural cost. So with capacity what you really want us to do is take out fixed cost. Capacity for us if you look at what we added in the last cycle much of it was concentrated around getting more production out of existing facility. So its not a case where particularly within mining we opened up new facilitates or we have multiple facilities doing the same thing. The most important product that we make from a volume standpoint will be large mining trucks and we essentially make those in one facility.

So the capacity we added there was moving from a stall built operation to an assembly line operation, and so we didn’t actually increase the footprint, we didn’t add a facilitate to do that. We do find ourselves right now certainly for that product having a lot more capacity than what we’re producing and selling. It does not follow from that that you should as a result of that rip out an assembly and throw the equipment away. That really doesn’t buy you anything.

So moving on to structural cost reduction what we’re trying to do is take out as much we call period cost we think of it is kind of mostly fixed cost. We’re trying to take out as much of that as we possibly can and we’re doing that in a combination of ways, and for some facilities we’re actually closing and consolidating some factories where we can. We’ve announced full three closures and one partial closure just in the last month, not huge facilities but these are examples of places where it makes sense to financially to combine production, and we’re doing that. So that’s one kind of structural cost reduction that we’re making. Some of it we’ve already announced there is and there is more that we have yet to announce.

Another kind of structural cost reduction that we’ve been working on is actually taking our period cost people in existing facility. So you take the operations that we currently have, we are changing the organization, how we operate and basically lowering costs in existing facilities. We’ve been working on that for really the last, last two quarters we really started in earnest with that in the second quarter did more in the third quarter there is more coming in the fourth quarter of more of that in the first quarter of next year.

So when we talk about structural cost reduction its really many, many let's call them small to medium sized actions. Take one of the facilities that partial plant closing, we’re moving pretty large chunk of production out of Australia into a facility in Thailand. In and of itself that one item is not massive, the cost reductions that we’re doing across the company in a lot of ways are like that, its many, many actions spread across the company. It’s allowed us this year actually to get pretty good cost reduction.

If you look at our results this year, I know sometimes it’s easy to get negative on it we’ve had a tough time forecasting the decline in mining. It is, it's certainly come faster and it’s been more significant than we thought. But out reaction to that is actually been very good. We’ve taken a lot of costs out we preserved a lot of profit. If you look at our expectations for decrimental margins this year we’re looking at something our expectation right now is it will be below 30%. And in a year where mining is vast majority of the sales decline and we have amongst the highest margins in the company that’s pretty good. I think we have taken a lot of action to take out cost to preserve as much of the profit as we can and our performance has actually been pretty good.

Now, on to the sort of a discussion around structural cost reduction. There are -- what we would like to do is the actions are many and varied through out the company, some are in process some are yet to start. What we would like to do is be in a position where when we actually have the disclosure about the details of it that we’re in a position to share as much as we can. And so that’s why we’ve kind of been pushing out the discussion to get into a position so that it’s the time we announce this we can tell you more of the details about what we’re actually doing some of which is already in place. And that would be certainly our intention to do that with our year end release.

Jamie Cook - Credit Suisse

You didn’t sort of answer the question on what in the ball game we’re in now, in terms of like you’ve announced some small stuff all your along, you know what I mean?

Mike DeWalt

Right.

Jamie Cook - Credit Suisse

So these are more there are some more left in the fourth quarter does this is run into 2014, I was trying to figure out how much we’ve done versus --

Mike DeWalt

There is more in the fourth quarter and there will be more in 2014, and probably some of what we announced may be go beyond 2014 as well.

Jamie Cook - Credit Suisse

Okay.

Mike DeWalt

Yeah. Chuck.

Jamie Cook - Credit Suisse

Can you get a mic?

Unidentified Analyst

Mike, you just to follow up on that a little bit because if you look its actually gross margin improved actually Q3 versus Q2. So clearly you’re getting through the cost aligned in the factories. And it seems that the place where cost seems to be a little more recalcitrant is on the proverbial SG&A line a little bit. And so when we talk about structural cost I never quite figure out whether you guys perceive SG&A as a structural cost --

Mike DeWalt

Sure, we do.

Unidentified Analyst

Its really a giant reprocessing how you want to run the business which is a lot harder than some degree working the facilities. If you sort of hop to that a little bit is how you’re thinking about it?

Mike DeWalt

Yes, we’ve actually taken SG&A cost down this year as well. So usually when we think a structural cost we’re thinking about SG&A and sort of fixed cost in the factories is the, its the some of those two items. And yes, we have actually stuff in progress to take down both. When you do facility closing that usually impacts the factory period cost kind of stuff in a bigger way, but this year we’ve actually taken a combination of I would call them short term cost reductions as well as kind of structural cost reduction. So, in addition to the may be permanent headcount changes that we’ve been trying to make, we’ve done things like I had accounting for most of the year. And we had about 90% of our employees take three weeks of unpaid leave this year, and we did a lot of actions to do what we would think as cyclical cost reduction in addition to structural changes.

Jamie Cook - Credit Suisse

Any other questions or I'll keep going. Just because -- focus back on the mining side again some of your customers have come out and announced 20% CapEx cuts over the next couple of years, how do you think about that, in terms of you may be think the cost will be evenly split across sort of mining equipment versus project stuff like that what you’re sort of hearing from customers about 2014? And then I guess the last question can you comment a little bit things that concern on the downturn in the aftermarket business sort of what’s driving that and is there sort of a third party or third party is benefiting or?

Mike DeWalt

Yes, so in other words kind of status of the mining business almost --

Jamie Cook - Credit Suisse

Yes, that was, you said it better than me.

Mike DeWalt

So it has been an extremely tough for us to forecast and I think this year demonstrates a little bit the fall of only looking at things like mining CapEx. If you were just to look at mining CapEx only you would not have forecast that kind of decline in sales that we saw. I mean, our decline in sales is significantly more than mining CapEx although mining CapEx certainly plays a part in it. So it gives to you if mining companies are taking CapEx down what are they taking it down for, is it exploration, is it processing facilities, is it transport or is it mobile equipment for extraction like shovels and trucks? And certainly, in retrospect here a lot more has come out on the mobile equipment piece than we certainly thought would happen at the beginning of the year and as a result I mean our outlook for mining has declined all year along.

Second piece of what’s going on in mining in our business is that remember we sell through dealers we don’t sell direct to these companies so we have an impact of dealer inventory. So we sold more than end user demand in 2012 and inventory got built. In 2013 we sold we have been consistently selling less than end user demand and dealer inventory has gone down. And it has been I think very tough to forecast what’s going to happen. And so if you take that difficulty in forecasting the short term for mining that plays through to the preliminary outlook that we made with our third quarter release for mining next year. And essentially, we’re not trying to time a mining upturn, we’re essentially going to hold our forecast to a level that is within reason consistent with the order rates that we’re seeing. And we’re not out there in the short term going to try and call the timing of when its going to turn around.

So as a result of that we have a, we have despite the fact that we think the inventory reductions are about done and that ought to be positive, we would essentially be forecasting a fairly substantial decline in end user demand next year and we’ll probably stick with a forecast and that -- with that kind of bent until we start seeing better performance in the short term on order rates from customers. It’s again been really, really tough to forecast.

I think we’ve also been a little bit surprised this year on the aftermarket. If you look at mining production what people are digging out of the ground, it’s actually pretty good. And just you see where the big miners are having record production levels and for most commodities that’s the case. Despite that it has been a little bit of a weak year for aftermarket. So what it appears like to us is that customers are maybe pushing the limits a bit on the timing of when they do maintenance. We’ve seen the evidence of where they come pushing out maintenance times.

You can do that for a while but remember in an industry like mining the most important thing to the customer is the cost per ton of what they get extracted and uptime how much of the day a machine is actually running is a big piece of that and you can’t defer a maintenance forever. So it appears is that’s like that happens some I think as the year was going on that is moderated a bit. We certainly don’t think that kind of thing is going to continue in perpetuity but it has been a little bit of a drag this year.

Jamie Cook - Credit Suisse

Has it flattened?

Mike DeWalt

Yeah it’s I think the -- if you look at the year-over-year change it’s been, it’s kind of been, it’s been narrowing, yes.

Jamie Cook - Credit Suisse

Okay. And then I guess just a follow-up. I feel like a couple of years ago you also started talking about managing the business OPACC targets like looking more returns, started what you did four years ago and I feel like when you are on calls still, we feel that you are talking more about incremental margin versus measuring any mean to return. So can you talk about how relevant that metric is, and as you think about that given what we are seeing in the market are there any businesses that aren’t meeting your return targets based on where we are in this cycle? And in that context as we think about what you announced in the fourth quarter, are there any opportunities for CAT for potentially divest some underperforming businesses?

Mike DeWalt

First on the metrics themselves, you have to be really careful that you don’t try to drive the company to just one metric, if you do that sometimes you do that for the detriment of others. So I think in our company we try to keep a fairly balance set of metrics that we -- but not too many that you keep at a high level. So for us, you call it incremental margins and we kind of do that with you like we are in the call but inside the company we call it managing to the profit curve. So each of our businesses have profit expectations over a range of volumes. So Jim’s business has a different kind of incremental expectation in construction than mining and we try to manage those businesses to that.

Now OPACC is also one of the big top metrics so we have managed into the curve. We have OPACC which is a profit and asset-based measure. And then another big metric inside of our company is PINS. And for us that’s percent of industry sales, so that’s kind our euphemism for market share. And so I’d say those three metrics are kind of the -- from a financial standpoint, the three of the big ones that we look at; there is also the operational metrics around quality and safety and efficiency. So we try to keep a balance.

Now to your question on do we have businesses that are below where we would like them to be? I think anytime you get into a cyclical decline like we’re seeing, for example, with mining today you get businesses that get challenged, and that’s just the nature I think of being in a cyclical business. When we try to judge how a business is doing to your comment do you want to keep the business, fix the business or get rid of the business, you don't make that decision based on where you are at a single point in time in a cycle, I mean you have to -- you kind of have to think of the quality of the business going forward and how it affects your company over the medium and long term.

And we have actually made a lot of progress in several businesses that we would have considered challenged. So you take small machines for example, BCP. They have made a ton of improvements to raise the profit and OPACC of the small machine business. They have done a lot of work on machine design, modularity, low cost producer, they’ve taken a lot out of their cost structure, they’ve shifted wherein the world they produce, and have improved results. So when we look at businesses we look at those that are doing well. We try to understand where we are in a cycle and then businesses that have been challenged for a long time, they need to fix it. But by and large that has been the case. You’re always kind of looking at the portfolio but generally speaking I think in terms of the medium to long term they mostly look pretty good.

Jamie Cook - Credit Suisse

Just start, just wait for the mic.

Unidentified Analyst

Thanks. Can you talk about what potential areas of upside do you see in power?

Jim Umpleby

So as we look forward in the medium and long term certainly global energy demand is forecasted to increase pretty dramatically. So that we think we’re very well positioned to take advantage of that trend. One of the things that we're invested very heavily in and we participate across entire value chain in is natural gas, so again our -- from our reciprocating engines to our gas turbines to our compressors to our frac pumps. So we think over the medium to long term that represented tremendous area of growth for us. Really energy and power systems the main global driver is global energy demand and as that increases we think we’re very well positioned over the long term to take advantage of that.

Unidentified Analyst

If you look at normal mining site there is usually lot of construction equipment on it. So have you isolated what percent of your construction business goes into mining or into the mining end market that's still classified as construction equipment in your segment?

Mike DeWalt

Yes, there is definitely some of that. So our three big segments, Resource Industries, Construction Industries, Power Systems, we talk about them as though they are end-markets but essentially they are product driven. So our Resource Industries is a set of products, the vast majority of which go into mining or quarrying or diversified products. But there are some for example 100 ton trucks that you would think of as mining that you would find in a large scale construction project like the widening at a Panama Canal. So there is -- that would be into our Resource Industries because it’s product-centric. The flip side of that is just what you said. If you look at our construction business it’s a defined set of products and at the large end of that. For example, you have D8 size bulldozers you would have some large excavators that would find themselves in a mining or quarrying application.

So if you look at Construction Industries this year one of the headwinds that they’ve had is been that a portion of their business actually goes into not a big piece of it but the products that would be in that and those end-markets are tend to be larger and higher margin kind of products. So it’s been a little bit of a challenge on the construction mix as well because they’ve had kind of a little bit of a mining headwind in their business. It’s not massive, I wouldn’t want -- I don't know what the percent is but I wouldn’t say it’s a large number, but the larger the product goes particularly for the largest wheel loaders that we classify as construction, the largest excavators, the largest bulldozers, that’s where you would have the most overlap. But when we split these businesses we did it on the basis of what’s the primary use of the product. So the primary use for a D8 bulldozer would not be mining. So it’s in our construction segment. But there is some overlap and it has been a drag.

Unidentified Analyst

Can you disclose the size of the production capacity that you're moving from Australia to Thailand, how big is that?

Mike DeWalt

We talked about it I think in terms of number of people and I think it was up to 200 people.

Jamie Cook - Credit Suisse

I think there is a question in the back.

Mike DeWalt

Yes, in the back.

Unidentified Analyst

[Question Inaudible].

Jim Umpleby

Yes, Solar's business has been quite healthy for a number of years, a variety of factors are driving that. I mean, solar service two primary markets, one is oil and gas, the other is power generation, mostly combined heat and power. What's driven a lot of the solar growth is both global oil production but also gas compression as well. So take an example in United States with the expansion of shale gas in the U.S. there is a lot of new pipelines that have been built, oftentimes the compressor stations that have been added to existing pipelines, in some cases actually flow has been reversed in pipelines because now gas is being produced in places that traditionally was not. So that, that has driven both solar’s gas turbine and their compressor business. There's also been good strengths in a variety of geographic areas in terms of expanding oil production whether its West Africa, Asia, business in China is pretty strong. So again there has been a number of drivers there that is driven again it's primarily been driven by oil and gas as opposed to power generation to solar’s business but again they’ve had a good run and that business is quite strong.

Unidentified Analyst

Thank you.

Jamie Cook - Credit Suisse

(inaudible) right there.

Unidentified Analyst

Hi, if you sell $1 in machinery, how much are you going to sell in spare parts over the life of that machine?

Mike DeWalt

Just generically on machines on mining, well I’ve heard Doug use a rule of thumb before that says this would be not just us but it would be what the customer would see in parts and service from the dealer. I’ve heard order of magnitude maybe three times, some of that we would see, some of that the dealer would see, some of that we would both see.

Jamie Cook - Credit Suisse

I guess I have another question to Jim just because we running out of time here. Jim, the margin I guess the other item margin performance in the Power Systems side has been quite impressive. Can you talk about in a flattish or plus or minus 5% scenario your ability to hold margins? Is there any attractive actions you are taking on the cost side, your ability to hold price? And then with oil and gas, it sounds like that’s the area of strength in total. How does that contribute to margins on the -- in terms of mix I assume it would be favorable?

Jim Umpleby

Yes, it’s a very good question. So we are taking a number of actions across the business to really try to in a flat environment maintain or even potentially improve margins. So every leader across the business has cost targets that we’re aggressively trying to address cost across the value chain whether that means moving production from a high cost location to a lower cost location really trying to work with our suppliers to try to reduce cost, we’re shortening lead times. And as you mentioned with certain market segments that we serve we’re really working on delivering value to our customers that helps drive the price. So oil and gas is a great example, right.

If a gas turbine offshore goes down that can literally cause that customer hundreds or thousands of dollars a day in lost production, sometimes $1 million in lost production. So by really bundling services together whether it’s having fleet managers, long term contracts using monitoring and increasing the availability of that equipment we are able to provide more value to that customer which helps us realize price. So again a whole variety of things both on the cost and on the price side that we’re working to do to try to maintain or improve those margins.

Jamie Cook - Credit Suisse

Go ahead, Matt, and then I think this is probably the last one.

Unidentified Analyst

Your cash flow recently has been pretty strong. Can you talk about where you guys are in terms of cash return and uses of the cash going forward, I know you have believe or not about $1.7 billion left on the authorization and so maybe you can walk through that?

Mike DeWalt

Yes, its been certainly a challenging year estimating sales but cash flow has been actually very good. We’ve done a pretty good job I think of managing working capital, inventory has come down quite a bit and that’s helped. We’ve -- this year we mid year we’ve raised the dividend again, and so far this year we bought back about $2 billion worth of CAT shares. So that’s all been good. And I’d have to say it’s been consistent with our -- its been consistent with our kind of priorities for the use of cash.

Earlier in the cycle when we were kind of coming out of ’09 we needed investment, we needed capacity. We spent more on acquisitions and capital. We’re at kind of the point now where we’re spending much less on acquisitions, capital spending has gone down and that’s what freed up cash due to buyback.

We are, I’d say the priorities for the use of cash haven’t really changed but the needs for each of those priorities has. So you’ve got investment for growth at this kind of stage of a cycle is coming down and that frees up money that you can then spend for things like buyback. Our balance sheet is in very good shape. We are -- our debt to capital ratio has come down.

Each quarter of this year we have decent size cash balance into the third quarter. And I think we’ve been fairly public about not expecting increases in CapEx in the short term or increases in spending for acquisition of any big order of magnitude going forward. So I think that that’s all good. I mean, I think that if you look at what’s left over -- I’m being careful here, I’m certainly not here today announcing any big share buyback or anything like that, I don't intend to do that.

Jamie Cook - Credit Suisse

Thank you.

Mike DeWalt

Yes, realize they -- well, they say increased our authorization today. Well, I’m not doing that but I’m saying is I think the atmosphere is actually pretty good in terms of the cash that we have on hand, the cash flow that we’ve had this year, the actions that we’ve taken. So far this year I think would all point pretty positively.

Jamie Cook - Credit Suisse

Great. And I think we have to wrap it up. Thank you very much. We appreciate it.

Jim Umpleby

Thank you.

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Source: Caterpillar's Management Presents at Credit Suisse 2013 Industrials Conference (Transcript)
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