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Caterpillar Inc. (NYSE:CAT)

Q4 2011 Earnings Call

January 26, 2012 11:00 a.m. ET

Executives

Doug Oberhelman - Chairman & CEO

Edward J. Rapp - Group President & CFO

Mike DeWalt - Director of IR

Analysts

Anne Diamond – JP Morgan

Joel Tiss - Buckingham Research Group

Andrew Casey - Wells Fargo Securities

Robert Wertheimer – Vertical Research Partners, LLC.

David Raso – ISI Group

Henry Kirn – UBS Investment Bank

Jerry Revich – Goldman Sachs Group Inc.

Eli Lustgarten – Longbow Securities

Seth Weber – RBC Capital Markets, LLC

Stephen Volkmann – Jefferies & Company, Inc.

Operator

Good morning, ladies and gentlemen and welcome to the Caterpillar Full Year and Fourth Quarter 2011 Earnings Results. At this time, all participants have been placed on a listen-only mode and we will open up the floor for your questions and comments folloing the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Mike DeWalt. Sir, the floor is yours.

Mike DeWalt

Thank you. Good morning everyone and welcome to Caterpillar’s year-end 2011 earnings call. I am Mike DeWalt, the Director of Investor Relations. I am pleased to have our Chairman and CEO, Doug Oberhelman; and our Group President and CFO, Ed Rapp, with us on the call today.

This call is copyright by Caterpillar Inc., and any use, recording or transmission of any portion of this call without the expressed written consent of Caterpillar is strictly prohibited. If you would like a copy of today’s call transcript, we will be posting it in the Investor section of our caterpillar.com website and it will be in the section labeled Results Webcast.

This morning, we will be discussing forward-looking information that involves risks and uncertainties and assumptions that could cause our actual results to differ materially from the forward-looking information. A discussion of some of the factors that either individually or in the aggregate, we believe could make actual results differ materially from our projections, can be found in our cautionary statements under Item 1A, Risk Factors, of our Form 10-K filed with the SEC on February 22 of 2011 and also in our forward-looking statements language contained in today’s release.

Okay. Earlier this morning, we were very pleased to report fourth quarter results that capped off a record breaking year in 2011. To start this morning, I’ll cover the headlines.

For the fourth quarter, sales and revenues were $17.2 billion, the highest quarter in our history and profit was $2.32 a share also an all-time record for any quarter in company history. And, it was a record for sales and profit whether or not you include Bucyrus.

For the full year, sales were about $60 billion and profit was $7.40 a share. The year was also a record topping the previous record of 2008, which was $51 billion at the top line and profit for share of $5.66.

The other big headline this morning was the outlook for 2012, and we have raised our guidance for sales and revenues to a range of $68 billion to $72 billion with a midpoint of $70 billion. That midpoint is up about $3 billion from the midpoint of the preliminary outlook for 2012 that we provided with our third quarter financial release last October. Now those were the three big headlines of the day, the quarter, the full year and the outlook.

Now, I would like to just take a few minutes and go through some of our noteworthy accomplishments in 2011, then we’ll cover the high points of our 2012 outlook and will finish the call by taking your questions.

2011 was a great for Cat, probably the most positive in the 30 plus years of my career here. While the financial results in and of themselves were outstanding, we had a great year in a number of areas that along with the better industry growth that we saw was a foundation of our financial success this year.

The first area of highlighted acquisitions and in terms of executing our strategy, it was a pretty high profile item. Over the past year and a half we made three large ones, Bucyrus, EMD and MWM. Integrating them into Cat has been a high priority for us and a big focus in 2011 and while there is still much to do, we’re very pleased with the progress so far.

In terms of Cat operations, our success this year had much to do with the discipline of a Cat production system, its becoming a way of life at Caterpillar and its been the foundation that drove improvements in safety, quality, velocity and efficiency in 2011.

The safety of our workforce, contractors and visitors is fundamental to our values and we’re pleased that our enterprise safety improved again in 2011 and are now 83% better than 2003.

Quality, it’s a big reason why customers buy Cat equipment. It’s critical to the Cat business model and it’s another benefit that we’ve seen from the Cat production system. It has been a big focus for us and I’m pleased to report that in 2011, we continued another year of better product reliability for our customers.

Given the sizeable increase in demand we experienced in 2011, we stretch our factories and our suppliers to produce more. The results were outstanding and we were able to significantly increase production and do it while we improve the quality. In fact, we would like to take this opportunity right now to say thank you to our suppliers. With their help in 2011, this was the highest year-over-year increase in sales in our history and on a percentage basis; it was the most significant year-over-year increase since 1947.

Now, in addition to our investment and acquisitions, we invested significantly in organic growth. For many products demand has above our ability to produce, we have invested in Caterpillar factories in the United States and around the world to increase production. Despite those increases and continuing investment in 2012, where we are expecting CapEx to be up about 50% and near $4 billion, we’re still very tight on many products and are currently quoted extended delivery times for some of them.

As an example, for many models of large trucks, we are now quoting delivery times into 2014. In 2011, we started significant product introductions for Tier 4 in the United States and for similar new omissions requirement in Europe. It’s the most extensive new product introduction program in our history and it went well in 2011 and feedback from dealers and customers on the new product has been very positive.

Another important part of the Cat business model is customer support and the availability of after market parts is one of the key ways to do that. We are pleased to report that in 2011, we made notable improvements in parts availability to raise the bar on product support for customers.

We also improved our competitive position in 2011, while it was a year of growth from the industries we serve, it was an even better year for Cat. In the aggregate and for most of our products, sales increased at a faster rate than the overall industries we serve. Better quality, the delivery performance, our investments and capacity, the performance of our suppliers coupled with modest price increases all helped drive better value for customers and a better competitive position for Caterpillar.

To sum up 2011, record profit, record sales, the most significant percentage increase in sales when Harry Truman was President. The addition of two important strategic in acquisitions, better quality, a good start with Tier 4, good profit leverage on the increase in sales, record operating cash flow, an increase to the dividend and a strong balance sheet, that’s 2011 in that show.

With that let’s turn to the 2012 outlook. For 2012, we’re expecting another record year with sales and revenues in a range of $68 billion to $72 billion and profit of about $9.25 at the midpoint of that sales range.

Overall, we believe the prospects for global growth have improved since we released our preliminary sales outlook last October. We’re forecasting the world economy to grow at about 3.3% in 2012, a small improvement from 2011. In the United States, we expect the Federal Reserve will maintain the funds rate below 25 basis points throughout 2012. And recent economic data suggest that growth improved in the fourth quarter of 2011, which we believe reflects the positive impact of the Fed’s easing that initiated in late 2010. And, it’s our view that the full impact of those actions hasn’t materialized yet and that they’ll contribute to continue growth in 2012.

Our outlook assumes economic growth in the United States of at least 3%. We expect total US construction spending, which has depressed for years to finally begin to show some improvement in 2012. We’re forecasting small improvements in infrastructure related and non-residential construction and our forecast for housing starts is around 700,000 units in 2012 and that’s up from about 600,000 in 2011.

While we expect the small improvements in US construction spending, remember it’s still depressed. Housing starts at 700,000 is still very low and there is no long term broad or infrastructure spending plan that’s been improved in Washington yet.

In the Euro zone, the public debt crisis has been a lingering negative, but we don’t expect it to trigger a worldwide recession. The Euro zone will likely have at least two quarters of weak and possibly negative growth, but we think it will begin to improve in the second half of the year.

We expect the Japanese economy to grow at about 3.5% in 2012 recovering from their 2011 recession. We think that rebuilding from the tsunami and more expansionary central bank policies will help drive their improvement.

We expect economic growth in Asia Pacific above 6.5% in 2012 about the same as in 2011. In China, our forecast is for economic growth of about 8.5%. China took its first easing action in late 2011 and we expect that further easing will continue in 2012.

Growth in Latin America is expected to slow from about 4.3% in 2011 to up 4% in 2012. And then, Africa Middle East were forecasting growth of nearly 5.5% and over 5% in the CIS. Overall, we expect that the world’s economic growth will be enough to drive some higher demand for commodities and support commodity prices that continue at levels to encourage investment.

In terms of Caterpillar sales, we expect increases in 2012 in all four of our geographic regions and for almost all the industries we serve. We’re starting the year with a strong order backlog that’s almost $30 billion and up 37% from the end of 2010 and that’s on an apples-to-apples basis excluding our Bucyrus acquisition.

In 2012, we’ll have a full year of sales related to our Bucyrus and MWM acquisitions and sales for those two are expected to be about $6 billion and that’s an increase from $2.6 billion in 2011 which was a partial for both at Cat. We expect mining to continue to grow globally and we have a strong order backlog for mining equipment. We expect mining sales to increase in 2012 and are in the process of adding additional capacity for many of our products. However, we do expect mining related sales to be constrained by capacity in 2012.

We anticipate the sales of new machines for construction in the developed countries will improve as customers continue rebuild fleets during 2012 and that historically high fleet age and low fleet inventories will cause dealers to continue to upgrade world fleets.

Despite the economic trouble in the Euro zone, all European dealers increased orders over the past few months compared with 2010. Considering the relatively weak sales level there over the past few years and the need for customers to replace machines, we’re expecting machine sales in Europe to be half or above the 2011 levels despite the economic climate in Europe.

Government policy easing in China, which has already started is expected to continue and lead to some recovery machine sales in 2011. We’re forecasting higher sales for our power systems and segment in most industries. High oil prices should encourage investment and improve demand for engines and turbines used in oil and gas application, we also expect improvement in engine sales for electric power generation and higher sales in our rail business. The only area of our power systems business that hasn’t started to recover yet is marine engines.

Coming to profit, at the midpoint of our sales and revenues outlook, we expect profit to increase from $7.40 in 2011 to $9.25 in 2012 and that’s a 25% increase. Bucyrus should move from being a negative to profit in 2011 and that was a result of the deal related to integration cost to being a positive contributor in 2012. While there are certainly headwinds and tailwinds as we move from 2011 to 2012 operationally, on balance we’re expecting that excluding the impacts of MWM and Bucyrus, there are incremental operating profit pull through on incremental sales should be similar to 2011.

The most significant headwind we’re expecting next year or this year in 2012 was tax expense. In 2011, taxes were 25.6 above the full tax profit. And that was the combination of an overall rate of about 27% last discrete favorable tax items during the year. In 2012, we’re forecasting a range of about 30% and taxes are up for three main reasons. Negative geographic mix from a tax perspective, absence of the favorable discrete items that we had in 2011 and the end of the R&D tax credit in the United States.

Two final points before we move to the Q&A portion of today’s call. And the first is the bold gold (ph) that we introduced back in August of 2009 and that was at sales and revenues would approach $60 billion and profit per share would be $8 to $10 in 2012. Well, we hit that 2012 sales and revenues target in 2011 a year early.

And even excluding Bucyrus, MWM and EMD, we would be at about $56 billion this year, however, we did not hit that $8 to $10 profit range. We’ve had a number of questions from investors on what’s different now versus what we were assuming in that 2012 target. And we’ve summarized in a somewhat lengthy Q&A in this morning’s press release and that starts page 24.

But, in a nutshell what it says is that if you start with our 2011 actual profit of $7.40 a share, and you adjust it for acquisitions in our share count and our share count is higher because we invested in three large acquisitions rather than buying back shares. If you adjust from fully incentive compensation that was well above target in 2011 because of our excellent results, if you adjust for currency impacts and taxes, you exclude those items we’d have been near the middle of that $8 to $10 profit range on sales and revenues of about $56 billion. And again, I would encourage you to take a look at the Q&A in this morning’s release.

My final point today is on employment. Our global workforce continued to increase in 2011 and we hired. We were up over 14,000 at year end 2011 versus 2010 and that excludes acquisitions and we end up more than 33,000 since year end 2009. 2011 was a great year, the outlook for 2012 have improved and as you might expect, we’re eager to talk to you more about it.

So, with that we’re ready to take questions.

Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. (Operator Instructions) thank you. Our first question today is coming from Anne Diamond, please announce your affiliation then pose your question.

Anne Diamond – JP Morgan

Hi, good morning, its JP Morgan.

Mike DeWalt

Good morning, Anne.

Anne Diamond – JP Morgan

My first question would be on Bucyrus orders, it sounds slightly, sequentially $4.2 billion to $4.1 billion, maybe you could just take a step and tell us what’s going on fundamentally Bucyrus customers, is there any risk that slowdown in demand from US thermal coil or just some color on what’s going on there or it’s a 0.1 of a billion just noise?

Mike DeWalt

Well, here is the deal Anne, for Bucyrus actually if you look from third to fourth quarter, the order rate went up quite nicely at Bucyrus. That said, they just had a fantastic fourth quarter in terms of shipments and the shipments were well above what we expect. So, orders are actually up sequentially, pretty nicely, it’s just that they really, clearly did a great job in shipping in the fourth quarter. So, that 0.1 decline in the backlog I think had more to do with how good a job they did in the fourth quarter shipping rather any change in order rate. That said, our view of mining is quite bullish, the comments that I made and kind of the preamble there, this is not specifically Bucyrus, but we’ve got to add more capacity, we’re going to be constrained this year. I mean, on some of those big trucks for example. We’re quoting delivery times now out in 2014. So, now mining is good.

Anne Diamond – JP Morgan

Okay, that’s helpful. On that note, just sticking with Bucyrus, you announced the sale of some distribution businesses to Finning. Can you help us in any way shape or form in terms of how we should think about that for our 2012 and go-forward model, how much more is there to do post Finning, what do you think the impact would be on EBIT, anything you can do to help us from a modeling perspective, we would appreciate it?

Mike DeWalt

Yeah, no, I understand that. That’s been a very calming question and I do admit we’ve not been able to be overly helpful on that. Here is what I would tell you, we actually closed one of the dealers, the sales of distribution businesses to the dealers in the fourth quarter and there are many, there are in various stages of being in profit today. Your comment about Finning has been announced, others, we’re talking with the dealers, we’re trying to get sorted and done, but of course, aren’t done yet. That will happen throughout the year just because of the sheared number of them. We’re talking about involving more than 50 dealers here. We’re probably not going to be done this year, we’re trying really hard and we hope to get most of the big ones done this year. That impact of the whole deal on our profit, overall, we don’t think it will be very significant this year one way or the other. Part of that has to do with the timing of when they’re getting done. There is also a potential gain or loss impact, which we don’t think will be big during the year, the impact of transactions themselves.

Our intangible amortization is going to go down some as we stall them because the dealers are acquiring some of the intangibles. So, it’s a little bit of a moving target, but at this point it doesn’t look like it will be very significant to 2012. and then, remember as we do this we’ll bringing cash in 2012.

Anne Diamond – JP Morgan

That’s fair. Just a very final point of clarification in that. Is it only the surface after market that will get sold or might there be some underground asset –?

Mike DeWalt

Everything, the intent is everything, above ground, below ground.

Anne Diamond – JP Morgan

Okay, I appreciate that. Thank you, I’ll get back in line.

Mike DeWalt

Thanks.

Operator

Our next question today is coming from Joel Tiss. Please announce your affiliation, then pose your question.

Joel Tiss - Buckingham Research Group

With Buckingham Research. I’m surprised; I’m usually the last one or not even on there. Just two questions, I noticed in the commentary on your press release, you broke down some of the sources of that $12.5 billion revenue growth, inventory, Bucyrus some of the other acquisitions. I wondered if you could give us a little bit of a sense on the operating profit side, you did say that MWM and Bucyrus didn’t contribute much on operating profit, but how about the currency impact and also the inventory build?

Doug Oberhelman

This is Doug Oberhelman, Joel. Are you talking about the fourth quarter versus fourth quarter of the year or the outlook?

Joel Tiss - Buckingham Research Group

The whole year. So, of that $12.5 billion, if you try to take out, just say inventory was kind of a one-time catch up right and you take out some of the acquisitions as we go forward like you can, underlying growth I’m trying to get, and so underlying growth was maybe 12.5% or 13% if you take some of those things out and I’m trying to figure out what the underlying growth in operating profit just to sort of normalize for a basis for 2012 and 13?

Doug Oberhelman

Yeah, now you’re getting 12% or 13%, I mean, we had $60 billion in sales. Bucyrus and MWM were I think 2.6 of that. So, sort of roughly 57.5 without those two. I think the impact of currency if memory serves me was about $800 million so you’re at 56 – build was, I think, order magnitude $2.5 billion. So, I mean, we’re at sort 42 to 54 which is 20% excluding all those items, more than 20% about close to 25.

Joel Tiss - Buckingham Research Group

I will pursue it offline. Can you talk about the pension, any change in the discount rate, what does that mean for after 2012?

Edward Rapp

Yeah, Joel this is Ed. The discount rate went down as we had anticipated, we took a hit to OCI of just $2 billion and in spite of that finished debt capped at 42.7 and really think about it taken in the last 18 months more than $10 billion plus a hit based on pension and to stay within our target range in terms of debt cap and it shows just how good at the year we had on overall cashbook.

Joel Tiss - Buckingham Research Group

Right. Okay, beautiful, thank you.

Operator

Thank you. Our next question today is coming from Andrew Casey. Please announce your affiliation, then pose your question.

Andrew Casey - Wells Fargo Securities

Wells Fargo Securities, good morning everyone.

Doug Oberhelman

Hi Andrew.

Andrew Casey - Wells Fargo Securities

Just a question, I guess, back on the cash flow, you had a really good year, I’m just wondering about any change in seasonality that we should think about, I mean Q4 was down a little bit on an operating cash flow just for the quarter itself. But the first three quarter were excellent. So, is there a change with business mix and how you’re thinking about investments that we should consider?

Doug Oberhelman

Hi Andy, this is Doug. I think in terms of investments, we’ve outlined it’s kind of that industry attracted in a strategic fit, a lot of good opportunities for organic growth and I think on the acquisition side, we’re clearly focused on full integration of EMD, MWM and Bucyrus. I think on the cash flow if you really think about the result of 2011, we had some really good year-over-year improvement scenarios like receivables and payables and I don’t you can anticipate that kind of improvement year-over-year again and it’s kind of driving it to what we think are some pretty good levels. The real opportunity on the cash flow on into 2012 will be to continue to deploy the Cat production system, align with our suppliers and through that do a better job on inventory turns. I’d say that would be the area that I give lot of focus as we go into 2012.

Andrew Casey - Wells Fargo Securities

Okay, thanks for that. And just one follow up on the acquisition activity, you’ve done a lot relative to your history in the last few years, your comment on focusing on the acquisitions that you’ve made, should we just pretty much expect organic growth and inorganic growth to come from what’s already been done or should we have to anticipate, there are holes that you may want to fill in ‘12?

Mike DeWalt

Andy, I think, it’s always hard to speculate and what may come in the M&A space, but as we talked in the past, the acquisitions that make the most sense for us are the ones that bolt on to existing parts of our business. EMD really added to a great real services business, which gives us an ending real business, MWM was a great bolt on to have to build our engine platform on gas and Bucyrus was a big bolt, I mean it was really a perfect build out of our mining business. I would anticipate us to spend a lot of time in 2012 getting those fully integrated. On top of the $4 billion that we’ve talked about relative to and of organic investment in capacity, we got a lot going on in 2012, we’re going to be focused to get that done.

Doug Oberhelman

Yeah, I will pile on a little bit, Oberhelman here. As we sit here today, the strategy that we see for the next three or four years does not, we do not have any big holes to fill and the idea of absolute execution on both our organic growth which is going to be a significantly bigger factor I think and what our acquisitions have been and any new acquisitions is really going to be the focus and we get that right, we will have no problem with our 2015 numbers at all. So, we’re really going to spend some time on that, having said that we’ve got, probably dozens I would say of smaller acquisitions in mine, kind pre ‘09, pre-2010 for Caterpillar that we’re always looking at. We would bolt as Ed said and I think those would compliment our business. But, where we’re headed for 2015, we basically have our arms around today, we intend to deliver that ploy.

Andrew Casey - Wells Fargo Securities

Okay, thank you very much.

Operator

Thank you. Our next question today is coming from Robert Wertheimer. Please announce your affiliation, then pose your question.

Robert Wertheimer – Vertical Research Partners, LLC.

Its Vertical Research Partners and good morning everybody. My question is, you had some real positive signs in the production system with the safety and some of the things you talked about in the press release and you’ve had phenomenal demand. I just wanted to ask if you’re seeing any hiccups or whether the production system is working just as well as you thought, the inventory returns you mentioned, are you seeing increased throughput on fixed asset and can that help in addition to the CapEx where you’re going. Really just wanted to feel what do you think is feeling like CBS?

Mike DeWalt

This is Mike, I’ll start that one out, Rob. Cat production system has been very successful, we’ve talked about this all along, has been more than just, hey, we’re trying to get labor efficiency out of that hit. It’s the whole flow within the factory. For example, I think during this year, if it wasn’t for Cap production system, I don’t think we could have got the volume out of the plants that we did. If you look at our delivery performance to customers today, the lead times if you will. They’re not fantastically short, but I think given the how much volume we’ve added, how much more product that we’re shipping to have them kind of those sort of historic levels at this part of the ramp up, sets volumes about how well Cat production has got. So, if I would characterize it overall, and I’m sure you can pick some factories or even section of the factories where the results have been better or worse. But, I think, overall, I think with the possible exception of actual inventory returns, all the metrics are good. It’s by and large doing what we hoped it would do, expected it will do when we started down this path and we really needed it. I mean, this is just an observation.

One of the comments that I made in the kind of lead in was a comparison. I understand that we lead our previous record. Go back and think about 2008. Our sales in 2008 were $51 billion, this year our sales excluding the acquisitions were probably $58 billion if you take out EMD and MWM and Bucyrus and excluding acquisitions our profit was in that, I think, excluding Bucyrus was 779. And if you adjust for price, the overall volume is not that different than 2008, but our profit is much better and I think its all from operational improvements, as we ramp backup, we’ve done a great job in holding the line on fixed cost growth, we’ve got more production out of the factories, we’ve had good incremental margin pull through. So, I think Cat production is a big contributor to that. Sorry that was a long winded soapbox to your question.

Robert Wertheimer – Vertical Research Partners, LLC.

No, no that’s great. Its sounds like it’s not on your top worries. There’s nothing getting tangled up. So that’s great given the demand out there. Just a quick end-market question, is there any issue with demand for solar, I think they’ve had year-after-year, year-after-year record performance with gas prices and maybe volumes being lower in the US, and also the pipeline compression is as strong. So, just any comment on solar and demand?

Mike DeWalt

Solar and demand was good, it was on a record year this year, they’re going into 2012 with a very good order book, it’s just called above average order cover, it’s a good business around the world. I mean, not just in the US and if you think about it a lot of the needs in oil and gas area right now are basically getting in the oil patch, getting more oil out of existing wells. Just as an example, I know solar has big orders from a large existing customer on a project to do gas injection to a well to get more output of oil. So, solar business is good, they’re starting the year with pretty good order cover and they’re pretty optimistic about 2012.

Robert Wertheimer – Vertical Research Partners, LLC.

Great, thanks Mike.

Operator

Thank you. Our next question today is coming from David Raso. Please announce your affiliation, then pose your question.

David Raso – ISI Group

ISI, good morning. My question is about the incremental margins for 2012 on a core basis, not to be greedy, but you would think if a lot of things working for you in 2012 versus 2011 that you might be able to do better incremental in 2012 and 2011. Your price costs in 2011 were the negative $400 million. Your incentive comp and I know that can change if guidance goes up. As we sit here today, the incentive comp is going to be less of the drag in 2012 than it was in 2011. Your CapEx was up in 2011 versus 2010, so trying to jump in CapEx in 2012 is radical change from the higher depreciation you had observed in 2011 and the currency was negative $400 million or so on, on an evil line in 2011. So, I guess, try to talk me down on why your incremental should not be better in 2012 than 2011 what am I missing?

Mike DeWalt

Just a couple of things, in first half what we have in the outlook is incrementals that are very consistent with 2011 and I tell you this, it’s easier to get higher incrementals the larger your volume increase. I said as many times I can squeeze in that we’ve had the best volume increase on a percentage basis in 2011 since Truman was President. Now, we got another good year of growth built in for 2012, but it’s not the scale of volume increase that we had to determine our percentage basis in 2011. So, I think, the volume not being up as much as probably a little bit of a headwind. One of the things we mentioned this morning in the release was R&D we are looking for about a 15% increase in R&D next year. We have high depreciation, we had a $4 billion capital planning for next year plus we’ll have a full year of impact on the $2.6 billion that we have spent this year. So, depreciation is going to be up. Related to that $4 billion, it requires a fair bit of expense to get that implemented so that will be a little bit of drag. So, there are pluses and minuses the things you mentioned are definitely pluses, incentive comp at target, which is where we started out the year in the outlook, is a tailwind without a doubt. Currency we wouldn’t expect to be quite so bad as it was in 2011. So, to your point that’s a tailwind as well. But I think a smaller volume increase and just the added cost around depreciation, implementation of the new capacity in some more R&D, now those are probably the headwinds.

David Raso – ISI Group

Do you have a specific price cost baked in relationship for 2012 that may be, that will tell that into about the Tier 4 issue and how you feel you’re coping those costs for 2012 and any sense of pull forward, people buying in front of that.

Mike DeWalt

Yeah, I think for Tier 4, we as in 2011, the difference between the price and oil cost is not material one way or the other it’s been margin neutral at least. So that’s not the big drag for us that’s the implementation Tier 4 just on particularly compared with Tier 3 superbly well. Feedback from dealers is good, no major hiccups in the factory so Tier 4 has been very good.

Doug Oberhelman

I would just add here David that we are now essentially onto our 2015 goals and taking steps to get there and everything Mike said, the big step up in CapEx, the substantial step up in R&D, the price cost relationship being relatively to lead to our market share goal in 2015 are all aimed at steps in Tier 12, 13 and 14 to get there. This is one step along the way. We’ve got to invest to meet those goals. In ‘12 we will some of that it’s a balance. I would also say that we look at 2011 as achieving to 2012 goals that we laid out to all of you in 2009 that is in the rear view mirror.

As Mike took you through that reconciliation it’s also in the report, we feel like we did pretty well, particularly in August of ‘09 when the world was ending by the best estimations at that point in time. We put out a forecast like we did and then to achieve that a year early, I feel pretty good about. So, ‘12 for us is really, maybe the first or second step into our 2015 goals which we will be steering you towards more and more later this year and beyond. But ‘12 is certainly a building block to get there.

David Raso – ISI Group

All right, I appreciate the color, thank you.

Operator

Thank you. Our next question today is coming from Henry Kirn. Please announce your affiliation, then pose your question.

Henry Kirn – UBS Investment Bank

Its UBS, good morning guys.

Mike DeWalt

Hi, Henry.

Henry Kirn – UBS Investment Bank

Can you touch on where you are with lean and maybe how that impacts your expectations for dealer inventory build as we go through 2012?

Edward Rapp

Henry, this is Ed. First of all in terms of relying like you said deal, we came out of kind of a standing star and deployed that and in 2011 we ran somewhere in the neighborhood of 27,000 units through laying, it’s up about 50% versus what we did in 2010 timeframe. If you look at laying to one end to, it’s now up about 55% of our total shipment and so, we continue to ramp that up. We’ve got more to go, but I think we’re making good progress there. In terms of dealer inventory build, I would say that as we finish 2011, we finished with dealer inventory to about where we wanted from a months to sales perspective. So, as we move forward I think you’ll see dealer inventory kind of move with sales growth because I think the month’s sales were about right. So as I look at 2012it would be a modest, our outlook would include a modest growth in dealer inventory just along with the sales growth.

Henry Kirn – UBS Investment Bank

That’s helpful. And as extended delivery times start to take hold, could you talk about how that impacts your expectation for pins over the next year?

Edward Rapp

Doug hit it earlier and we made some major commitments in 2010 to invest in capacity, we continue to add on in 2011 and we’re going to do it again. You’ve seen in our release, our sales growth outpace the industry growth and so, we think the capacity that we’re adding is going to allow us to stay ahead of that curve.

Doug Oberhelman

We’ve had it, basically monthly announcement more or less and almost for last two years now with growth or acquisition, those investments are starting to come online. We are saying on the large factory is now online and ramping. Victoria Texas is the new excavator plant will begin to ramp in the third quarter, I go on and on with this, but those investments are really just starting to return the money I guess, as we get production to those. So, we’ll see that in ‘12 and ‘13 will be big build here as well ‘14. we will be adding capacity right on through to do that and that should help our availability and certainly will get after our market share goals for 2015.

Mike DeWalt

This is Mike, I was going to pile one more here. Henry, when are talking about extended lead times don’t confuse that with sales aren’t going up a lot in mining in 2012 because they are. So, we expect good sales increases in mining, the point that we’re trying to make is that actual demand is even better. And there is one other comment, we tried make this but sometimes you don’t always get your messages across. 2012 we are looking to be another record year with sales for us at a midpoint of around $70 billion. And remember that with US construction, I mean, housing starts at 700,000 I mean that’s historically law, I mean, it’s following the tradition, at some point construction in the US is going to pick up, Europe will eventually come out of its recession, we will get some housing, we will hopefully eventually get a highway built and at some point those two big pillars of our business which are not better but not still at the levels we’re going to need quite a bit more capacity. So, this story isn’t over. I mean, in the US and in Europe the two big developed regions are part of our business. We are still languishing at well below prior peak levels.

Henry Kirn – UBS Investment Bank

Thanks a lot, congratulations.

Mike DeWalt

Thanks.

Operator

Thank you. Our next question today is coming from Jerry Revich. Please announce your affiliation, then pose your question.

Jerry Revich – Goldman Sachs Group Inc.

Good morning, it’s Goldman Sachs. Can you give us some more color on the $4 billion CapEx budget, what are the most meaning in new capacity additions and if you could touch on mining accelerator capacity and give us some more context on the restructuring actions at CAT Japan? Thanks.

Mike DeWalt

Okay. I’ll start with the first, I remember the first and the last and you probably have to remind me the middle question when we get to it. On the $4 billion what I would say is its spread out. Some of it is spending on projects that we already announced. A lot of it is for mining as Doug mentioned, we’ve got facility in Texas, a lot of the project that we’ve announced were also spending a lot of money at existing facilities, in fact, probably, the majority of it is that existing facilities we’re ramp up. In 2011, we did a little bit more than half, I think it was 60% of our CapEx for facilities in the US. In 2011, it will be likely in mix as well, we’re investing in the US and overseas. In terms of specific sort of project by project guidance, we will pass on that.

Your last question was on CAT Japan?

Jerry Revich – Goldman Sachs Group Inc.

That’s right.

Mike DeWalt

In CAT Japan, it’s actually a good story, we’re restructuring our manufacturing operations in Asia and CAT Japan as a key part of that. We impaired some assets in our Sagami facility that we would intend to sell in 2012. So, big chunk of the charge in the fourth quarter was for that plus there is some employee cost related to it as well. But its essentially restructuring our operations for our Asian manufacturing strategy.

Jerry Revich – Goldman Sachs Group Inc.

And Mike, can you talk about where you’re seeing on supplier on-time deliveries and adherence to 90-day schedules exiting 2011 and also touch on what kind of increases in period and SG&A costs are, you expecting this year relative to the increases in ‘11?

Edward Rapp

Hi, Jerry, this is Ed. I would say, and Mike commented on this in his opening and we got to give our suppliers full marks. I mean, if you talk about going from the $32 billion in ‘09 to kind of what we finished up this year, from a supplier its even benefit because of the inventory at ‘09 timeframe. I think supplier delivery performance was what really helped us come up at volume curve and we’re working closely with that in terms of making sure we stay and sink as we add capacity, they add capacity, we’re doing the very same thing with the dealer organization as we try to execute if you would simultaneously.

On the cost side, we remain very focused at controlling cost as we go up this ramp. Mike did the comparison earlier back in that ‘08 timeframe but as we ramp volume up in that period of time, we allowed cost to kind of reflect in line with sales, you saw us do a good job in 2011 in holding that down at less than 50% of that ramp and you will see us focused on that again in 2012. Yeah, there is similarities like R&D and the cost implement capacity that we got to put in place but we’re going to remain cost stocks as we control the cost side of this equation.

Jerry Revich – Goldman Sachs Group Inc.

Thank you.

Operator

Thank you. Our next question today is coming from Eli Lustgarten. Please announce your affiliation, then pose your question.

Eli Lustgarten – Longbow Securities

Good morning, Longbow Securities, terrific quarter guys.

Mike DeWalt

We heard you on TV this morning, Eli.

Eli Lustgarten – Longbow Securities

Hope I did a good job for you.

Mike DeWalt

You did.

Eli Lustgarten – Longbow Securities

Couple of clarifications. The guidance does not include any of the impact of the Bucyrus service business, is that correct?

Mike DeWalt

That’s correct. It’s our belief that it won’t be very significant this year.

Eli Lustgarten – Longbow Securities

Okay, the only question we will need from you, is difference between the impact in operating profit and how much is gained on the sale of a transaction that would not be as repealing and you don’t expect that to be material, is that what I am getting through here?

Mike DeWalt

Well, I think the overall impact of the transaction which is business that’s going to the dealers and impact on us, reducing intangible amortization that goes along with it. Just all in, some of its timing, they didn’t all happen on January 1, it just look like its going to have a very significant impact on our results in 2012. Now, as we go through each quarter as we have been, it’s a big acquisition, it wasn’t in our results a year ago and will continue throughout 2012 to kind of talk about the impact like we did EMD this year.

Doug Oberhelman

Eli, the only thing I would add to that is, it’s going to be a challenge like Mike said, over 50 transitions during the year, but I’ll tell you, we’re starting to see the benefits of being able to go to our customer base with an extended product line, and I think we get this done and our dealers can go with full product line, full service offerings, I think we are actually convinced more and more each day, it’s the right direction to go.

Eli Lustgarten – Longbow Securities

You indicated inventory as sort of imbalanced with historic norms, can you talk about that geographically, I mean, the impression we had that US inventories would probably still be little bit light, and in some parts of the world it maybe little bit higher, is that correct?

Mike DeWalt

No, Eli. I would geographically we got pretty good balance in terms of where we are at, I mean, I do think, we did see it come up a little bit in North America in the latter parts of the years they gained confidence, you got it up a little bit in China as you kind of prepare for the selling season, we know, all know what happens coming out of the Chinese New Year. The other place from a geographic perspective we’ve seen it build is on mining related product just based on the lead time to simple as that mining product has continued to grow. I feel pretty good about where we are at geographically as well as by different parts of the business.

Doug Oberhelman

It didn’t answer his question, but I expect, it might inferred. Ed made comment about China and a little bit of inventory build there. I just wanted to kind of clarify one thing, if you look at our total company sales in China fourth quarter to fourth quarter and you take the impact of inventory build out of both, we would still be enough in China.

Edward Rapp

I’m kind of surprised we didn’t get a question on China, so I am going to give an answer or at least an opinion. But, I think its important for all of you to understand and really know what we are up to in China. China for us is a big market that we’re bring the capital, broad set of business, products and services into, in a big way. So that’s financing power systems, its machines, its locomotives, it’s everything we do. And I have read there has been far too much encrypt about us being only excavator supplier in China, which I think is a bit thinker. Because we are installing a base over there of dealers that will sell our broader ray of products and services, it will go after everything, in fact if you look at our overall they are up year-over-year, quarter-over-quarter because of that (inaudible) in the excavator business. But because of the breadth that we bring, we can really spread the rest through China, it’s exactly what we’re doing and on top of that building inventory as Mike just said in China, we are getting after market share in a big way and like here some of that come to provision. So, we have, as we told before some big win in China plans by 2015, if anything I am optimistic we’re going to be a little bit ahead of that because of the breadth that China took in slowing their account which allowed us to catch up a little bit and then the speed in which we are putting our entire business model across China. So, China is a big opportunity for us, its paying off beautifully here and you saw that in the fourth quarter and year-to-year.

Eli Lustgarten – Longbow Securities

Let me just follow that. We’re spending $4 billion in CapEx, is that level put in next two years or we will continue to go up, it sound just to me, some of the expectation between now and 2015, the cap of spending is probably going to continue to rise for couple of years.

Mike DeWalt

Eli, I don’t recall making an outlook on capital spending for ‘13 and ‘14 but as Doug kind of mentioned earlier, we have both good, solid goals for 2015, we are well above where we are at right now. So, I think it’s a reasonable assumption if you would think of an elevated CapEx to deliver that a while.

Eli Lustgarten – Longbow Securities

All right, thank you.

Operator

Thank you. Our next question today is coming from Seth Weber. Please announce your affiliation, then pose your question.

Seth Weber – RBC Capital Markets, LLC

Hi, good morning, it’s RBC. Just wanted to go back to an earlier question on the mining business, I mean, there is clearly or clearly saying decoupling here with US coal being weak, can you give us an idea of how much of the business today is tied to, I guess even may be the OE business to US coal, whether it’s thermal, or thermal plus?

Mike DeWalt

Well, coal is certainly without a doubt by a pretty long shot the most worldwide is the most significant mining commodity and it is most important to our business, but it is not just US, I mean US has a big coal market of course, but Australia, Indonesia and China has a huge coal market, not as big for us yet, but witness our investment, hope to our investment in underground coal in China. One that we would like to take advantage of. So, mining overall including coal, we have a big backlog of, it is not good, customers are bullish, we’ve not really split it out by commodity, by region, but I don’t think there is any big weakness that I’ve at least heard about anecdotally in the US in our business anyway.

Seth Weber – RBC Capital Markets, LLC

Okay, thanks. I guess, can we switch over to Europe then, your outlook for machine business flat up is more bullish than we’ve heard elsewhere. Anyhow I appreciate the fact that fleets are old and they need to be refurbished, but can you give us any additional color on what gives you confidence that that market is not going to worse through the rest of the year?

Mike DeWalt

Well, I think the most recent confidence if you will is just let, this is not a new thing, I mean, this has been Europe has been in the news last six months, I mean, big time. Order rates in the fourth quarter versus year ago just in Europe were decidedly up. So, just recent order rates from us despite all of the discussion of it being more positive. Now, happy of course, if somebody other parts of the world, not as part of the US, but in the right direction. I would say that’s one thing that gives us confident, I think how far the market fell in ‘09 and how far below in years, the prior peak and industry sales are relative discuss appropriate or replacements, I think all of those kind of triangulate to give us some confidence as well. But, I think probably the key point on confidence is just what dealers and customers have been doing over the last few months.

Europe, Western Europe anyway and to some degree pieces going east, but question here up is really pure dichotomy of north and south. And southern European is really on its knees and Northern Europe was doing pretty well, in fact, still is even though the entirety of Western Europe might be in recession, probably yes. So, you really got to watch that in terms of country by country and then you break it down in country, there is a lot of special project. In France, a big high speed rail, second one is coming to provision, so it’s really a tale of two stories north and south as much anything. That’s really that’s been helping us and it just depends on how much along with kiosk and Southern Europe that’s goes on and its been going on a long time and hasn’t tanked the place yet. We don’t think it will.

Seth Weber – RBC Capital Markets, LLC

Okay, thank you very much, I appreciate the color guys.

Mike DeWalt

I think we have, just about the end of our time, but will take time for one more.

Operator

Thank you. Our final question today is coming from Stephen Volkmann. Please announce your affiliation, then pose your question.

Stephen Volkmann – Jefferies & Company, Inc.

Hi, Jeffries and thanks for sneaking me and you can answer very quickly if you would like. What are chance as we get back to the share repurchase in 2012?

Mike DeWalt

Well, I think the short answer to that in 2012 is probably no.

Doug Oberhelman

I could make it shorter but that was adequate.

Stephen Volkmann – Jefferies & Company, Inc.

That definitely works for me and Mike sorry if I miss this but FX impact in 2012 probably a headwind did you quantify that?

Mike DeWalt

No, we didn’t but certainly less than 2011.

Stephen Volkmann – Jefferies & Company, Inc.

Headwind, but less than 2011?

Mike DeWalt

Yeah.

Stephen Volkmann – Jefferies & Company, Inc.

And finally, if I could just in the past you commented sort of broadly it looks like the street has seasonally fairly balanced through the course of 2012, little bit lower in the first quarter, but we are hearing from lot other companies that may be things are weaker in the first half and then pick up in the second half do you want to give us any guidance there?

Mike DeWalt

Yeah, we don’t do quarterly guidance but that’s actually a good way to end that’s worth a little bit of the discussion. I mean, seasonally for us its on sale the first quarter is almost always the weak quarter of the year, I don’t see any reason why this year would be any different than that. So, I certainly wouldn’t divide the year of sales by four and assume that’s gone in the first quarter. Also to on incrementals, I think we ought to get this out right now, if we go back to 2011, we just had a golden quarter in the first quarter, I mean, costs unusually seasonally low but were particularly good. Price realization was particularly higher in the first quarter of 2011. We had operating profit as a percent of sales was well above the rest of the year in the first quarter. So, I would just temper if you will the incremental margin expectations for Q1. Not because there is going to be some big change in operations on our part but because the first quarter a year ago was just so good.

Stephen Volkmann – Jefferies & Company, Inc.

Great, that’s very helpful thanks.

Mike DeWalt

All right, thank you very much everyone and we will be talking to you over the coming days.

Operator

Thank you, ladies and gentlemen. This does conclude today’s conference call. You may disconnect your phone lines, and have a wonderful day. Thank you for your participation.

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