Caterpillar's (CAT) Management on Credit Suisse 4th Annual Industrials Conference - Call Transcript

| About: Caterpillar Inc. (CAT)

Caterpillar Inc. (NYSE:CAT)

Credit Suisse 4th Annual Industrials Conference

December 01, 2016 11:15 AM ET

Executives

Denise Johnson – Group President-Resources Industries

Amy Campbell – Investor Relations-Director

Analysts

Jamie Cook – Credit Suisse

Jamie Cook

All right, good morning everyone. So I am pleased to have Caterpillar with us here today. Today, we have Denise Johnson, who is the Group President of the Resources; as well as Amy Campbell, who is the Investor Relations Director. Apparently Caterpillar just done 8-K a couple of minutes ago, so I think we are on 2017 guidance. So, I think, we have a lot to talk about today, so I’ll let them go through some slides and obviously we will open it up for question-and-answers. Thank you.

Amy Campbell

All right. Good morning. I'm glad to have Denise here with me today. Together, we're going to talk about Caterpillar’s overall performance year-to-date and 2017 and then move into a deep dive on Resource Industries and hopefully take lots of times for questions at the end. But before we get ahead of ourselves a little housekeeping, just a reminder that today's presentation will include forward-looking statements that are based on a number of assumptions, a change to any of these underlying assumptions to cause actual results to differ materially from our forward-looking statements. For a full list of these factors, you may reference this presentation and more detail can be found in our 10-K filed with the SEC on February 16 of this year. In addition, you'll also find a reconciliation of GAAP to non-GAAP measures at the end of this presentation and in our 10-Q filed on November 2nd.

So let's start on Slide 9 by looking again at third quarter results. Low commodity prices, generally weak economic growth around the world and abundance of used equipment in North America continue to negatively impact sales, which were down $1.8 billion or 16% as compared to the third quarter of 2015. These same conditions have also contributed to excess capacity by manufacturers and that combined with the strong U.S. dollar has continued to put pressure on prices especially in construction industries.

Despite these challenges when you look at this chart, what hopefully stands out is an impressive focus by management to lower cost to offset the headwinds we are facing. In fact all of the $649 million of negative impacts to profit from lower volumes and poor mix of products was offset by $654 million of cost reduction coming from $234 million of volume adjusted variable cost reduction and $440 million of period cost reduction.

So let's look at the year-to-date cost reduction in a bit more depth. Chart 5 shows that this has been a consistent story throughout the entire year as almost $0.5 billion of cost reduction in the first quarter followed up by $650 million to $670 million of cost reduction in the last few quarters. When you add that up almost $1.8 billion of costs that’s come out year-to-date and we expect cost reduction to exceed $2 billion by year-end. These costs have come out of the P&L through a number of significant actions. While we have been working on rightsizing our footprint for some time now, last fall we announced a large restructuring initiative expected to deliver $1.5 billion of cost reduction by the end of 2018 and that is clearly paying off.

We also continue to see significant material cost savings of over $100 million a quarter. And this is important to note because many investors are surprised that we aren’t starting to see material cost increases due to rising input costs, but two thirds of what has been a long-term cost reduction journey over the last three years is as a result of collaboration between our suppliers, engineers and manufacturing professionals. We’re focused on lowering product cost through redesign and resourcing and we expect this work to continue to payoff.

As you would expect, we have also implemented and continue to implement a number of up security measures. These include actions like stopping discretionary programs, less travel, less consulting and other cost saving actions. And lastly about $300 million of the cost reduction has come from lower incentive compensation, which impacts a broad segment of our employee base and it's something we would like to reverse in 2017. So what we have not stopped is important investments in our future programs that include R&D, digital mean and across the table.

So to wrap up through the third quarter with the exception of North American construction there is a little change in our end markets. In addition, we continue to deliver operationally not only are we getting it done from a cost management perspective, the quality, safety and market share continue to improve. And last but certainly not least, our balance sheet remains strong with the debt to equity ratio well within our target range and over $6 billion of enterprise cash.

So now let’s move on to 2017 on Slide 7. To remind everyone, the outlook for 2016, sales and revenues, as disclosed in our third quarter release on October 25, 2016, with our sales and revenues to be about $39 billion. In addition, in the third quarter release, we gave an initial outlook for sales and revenues for 2017, significantly unchanged from 2016 and we did not provide profit guidance. The outlook for 2017, expected sales to be down in the first half with a pick up in the second half, which we do claim to significantly unchanged sales.

If we look at Thomson First Call Consensus, it reflects a slightly more conservative outlook of about $38 billion in sales and revenues. And in our view, this is a reasonable midpoint given uncertainties in our end markets. While there are several potential positive on sales concerns and uncertainties remain, the mining prices have gone up meaningfully since the third quarter release for both copper and iron ore specifically. And we believe this will impact aftermarket part sales next year. However, we still do not expect 2017 to see a significant increase for new equipment sales in mining.

Construction in China has been strong this year and our base cases for this to continue, so potential monetary of fiscal policy changes could quickly reverse course. Machine sales into many developing countries like Brazil are such low levels has been likely that they could get worse and while incremental infrastructure bill is a long overdue and would be good for Caterpillar, we would not expect much impact in 2017. So, now let’s focus on the concerns.

Oil prices remain volatile. And while we were encouraged by the news from OPEC yesterday, we don't believe current prices are high enough to drive significant investments and many of our end-markets are negatively impacted by low oil prices. North America construction as well as the impact of Brexit on European construction still remains difficult to forecast, the power generation sales, especially for oil producing countries, are expected to remain weak. And lastly, we expect North American rail customers to remain very challenge next year.

However, all that said, I want to stress that we are encouraged by higher commodity prices for mined ores by the potential of the U.S. infrastructure bill and potential tax reform that enables U.S. companies to be globally competitive and a move towards smart regulation that is good for both business and the environment.

Now let's look at EPS excluding restructuring as reflected in the Thomson First Call Consensus, which is on Slide 8. In our view that current consensus of $3.25 on $38 billion of sales is too optimistic given expected headwinds. While we are still in the process of finalizing our 2017 plans for profit in cash flow, I wanted to review some of the headwinds that we know exist. Let's start on the positive side of the ledger for profit. We expect $300 million to $400 million of cost reduction to carryover into 2017 from all the restructuring actions that we took this year, but now let's look at the other side of the ledger.

On $1 billion of lower sales versus 2016, which is reflected in the Thomson First Call Consensus, we would expect that profit impacts that’s a variable margin rate of somewhere between $350 million to $450 million, variable margin as we define it as the selling price to dealers minus the variable input cost like material and labor. And as I mentioned, we are putting plans together with the expectation to pay our employees their expected targeted levels of short-term incentive compensations, which equates to about $500 million to $600 million more dollars in costs next year.

And we often get lots of questions about CAT financials. So I wanted to address those, due largely to the absence of the sale of securities combined with a handful of other smaller factors, we expect CAT financial profitability to be down about $100 million next year. All this said, it's important to note that we remain committed to decrementals of 25% to 30% on lower sales, and excluding restructuring. And this means that we need to do more.

And so we are working plans to drive an additional $300 million to $500 million of operational profit improvements into 2017, which will come from price action, lower material costs and additional cost reduction. More details on all aspects of the 2017 plan including our progress on restructuring and our expectations for cash flow will be discussed in detail during our fourth quarter release and analyst call at the end of January and I'm going to turn it over to Denise to talk about Resource Industries.

Denise Johnson

Okay, I’m Denise Johnson. I’m a Group President for Resource Industries and I'm very pleased to be here with you today. To start as a reminder, products in Resource Industries largely serve mining customers both surface mining as well as underground, hard rock and soft rock. In addition some of the products in Resource Industries also cross over into constructions, quarry and aggregate so the large construction end of the portfolio.

So we've operated in Resource Industries in a very volatile environment. This chart highlights that on the left you see the commodity dollar average index since the 1887 timeframe. So you see the volatility in pricing overall for commodities and the very sharp decline certainly in this last down cycle.

On the right you see machine Caterpillar machines end-user demand, it’s a subset of our portfolio since 1996. So you see on average we have had some volatility over the year and the current cycle is the lowest we've ever experienced from a machine perspective. The dotted line you see here is our average over the 10-year period. So you see a very sharp decline and of course a lot of upside to get back to the average. And note over this timeframe we have maintained our share of markets.

So in this current environment what do we done to mitigate the sales drop and really adjust to this the down cycle. We've been very focused in Resource Industries in addressing our cost structure and lowering our breakevens. Over the last two years we closed or announced closure of 17 facilities, which is a third of RI’s total footprint.

We’ve downsized five others, reduced headcount by over 15,000 and really streamline the organizational structure, reduced layers. In addition to that, we've rationalized a few of our product portfolio lines. We've actually divested one of our product lines. We've implemented quite a bit in the lean area around the factory supply chain improvements reduced inventory and really tightened up our total end-to-end supply chain to leave us in a nimble effective and low cost structure moving forward.

That said we're about a little over halfway done with the restructuring in Resource Industries. We will be continuing to do restructuring through the end of 2018. At the same time, that we are very focused on improving our competitiveness and our cost structure we have protected investments for the future. While we've reduced our total R&D spend over the year and the last few years we've focused investments meaningful where we can get differentiation against our competitors and where we see that it delivers the most value for our customers.

Let's talk briefly about three areas of investments that we've been making and continue to see as a certain bright spot for our future. Certainly autonomous capabilities of technology called hard rock cutting and then a number of new products that we've introduced over the last year.

So starting with autonomous, we have a solution for trucks currently in two mine sites. It's called Command for Hauling, we've deployed that at two sites in Australia the customer feedback for our autonomous mining solution has been very strong overall.

It is on average driving about a 20% productivity improvement over an unmanned fleet. So currently the system pole is largely backwards retrofit, so taking existing mining trucks backwards retrofitting them to become autonomous. But certainly the solution can also be sold on new trucks as well moving forward. We are really pleased with the autonomy productivity that we've received and we've applied the technology across additional product lines such as drills, tractors and underground vehicles. So the autonomy solution is one that we see as a game changer for the future, it's certainly something we're getting a large pull for and we will expand our product line push for autonomy solutions for the future.

The next area of focus is in the area of hard rock cutting. This is specifically for underground mining, and it is introducing a continuous mining solution for hard rock applications like copper, platinum, gold. It's slightly different than the traditional drill and blast, in that the production rate and the ability to mine the ore is at two to three times the rate of a drill and blast operation.

We are leveraging an undercut technology that is IP protected, and we certainly are seeing a strong interest from underground mines, miners who are developing new mines as there is a portable machine that will be available in 2019 for mine development as well as in production with the rock straight system that we have available here in 2017. So new technology, one that has had expensive investment in R&D for the last 7 to 10 years and we are very excited about the opportunity to introduce it moving forward.

In addition to that, we haven't stopped developing and investing in our product line specifically. We have a number of new products that are listed here that we've introduced in the last year, as new products, very focused on higher levels of quality lower emissions more productive, lowering the total cost of ownership for our mining customers.

So state of the business for mining moving forward, this is my final slide, I’d just like to leave you with a few thoughts as you look at Resource Industries moving into the end of 2016 and beyond. As we talk to our mining customers, we clearly see that they have some increased optimism certainly with commodity prices improving their financial viability improving they do have an optimistic outlook moving forward.

Yes this has not yet translated into any tangible machine sale increases for Caterpillar. At this point in time, the focus of our mining customers continues to be and maximizing the utilization of their existing assets, they are getting more productivity, improved levels of performance out of that existing fleet. Certainly, we have seen an increase in aftermarket part, a trend upwards through this year, and we expect that could continue beyond this year, certainly more rebuilds, very tight focus on maintaining the fleets at very high levels.

Machine replacements, we do see coming over time. Certainly, the age of the fleet are getting older, but there certainly is a heavy focus, as I indicated earlier, on getting every, every available hour out of the existing fleet before a repurchase would occur. And certainly I would see the game changer for the future is going to be an integrating technology not only with the existing products that we have in the field, but also moving forward with solutions that allow technology to even provide additional levels of productivity beyond what we see today. And that would mean everything from longer cycles before repairing to continuing to improve productivity and up time in the fleets, and that’s why we’re looking very heavily to partner with our customers to do just that.

So thank you for the opportunity and we’ll open it up to question-and-answers.

Question-and-Answer Session

Q - Jamie Cook

You know, I don’t know if Amy or Denise you want to answer this, you know your just lowered guidance for 2017, I’m just wondering has there been – I mean you just guided for 2017 about a month ago, so what’s driving the change in guide? Is it just we want to take a more cautious view because we don’t have visibility? Has any of the market sort of deteriorated versus where we’ve got a month ago? We don’t hear that from – we’re second day into the conference; I haven’t really heard that…

Amy Campbell

Yes, so I think if you look at, we provided a significantly unchanged on the top-line. Today, we said that $38 billion is probably a reasonable midpoint, 2.5% difference than $39 billion. I don’t know if that’s – we can argue is that significantly different than that. What we saw was at $3.25 as the earnings per share excluding restructuring number. Even though Mike talked about the challenge ahead of us from the short-term incentive compensation pay next year, but it didn’t seem like kind of the full weight of that would been betrayed through Consensus.

And so, we really want to bring out. We also want to get under it. This is, while there are things out there to be positive about, we are not seeing orders at this point. We still expect the first half to be a little softer. It was acquirer uptick in the second half. And to make sure that we have our cost structure in place, so that we can deliver on expectations and hit those incremental targets that we’ve committed to. It makes a lot of sense right now to come out and be prudent and conservative and get our cost structure where it needs to be in case we don’t see...

Jamie Cook

Okay. And then I just get – I’ll get past, I don’t know if anyone has a question or some guidance. I’m assuming we feel okay about our fourth quarter, otherwise we would have said something today.

Amy Campbell

I mean we haven’t provided any guidance for the fourth quarter.

Jamie Cook

Okay. Does anyone else have a question out there? Okay, so, Denise, I guess, I’ll just shift to you next, a couple of things. One, I’m surprised to hear today that we won’t really be finished I mean with the restructuring enfold with the end of 2018, so why can’t we do. I guess what’s left to do within restructuring, within mining, why can’t we pull it forward and be a little more aggressive? And then can you sort of talk about at what point do you – what do you need to, I guess, be at least breakeven with mining, I think originally we had hoped to be there by the end of this year, it sounds like that’s getting pushed down.

Denise Johnson

Right, so I would say in general for restructuring, there’s a number of activities that we have that are in place that just take more time to pull through. So as you’re doing factory rationalization, as we’re moving through and where we operate around the world, have factories around the world, some of them have labor unions, others don’t. So some you can move faster and some have to be negotiated.

Jamie Cook

Okay.

Denise Johnson

And so as we’re moving forward into the space, we’re moving as quickly as we possibly can. I mean ideally we would like to have all the restructuring behind us. We also recognize that we want to do it in the cadence that allows us to do with well and doesn’t impact our customer or quality. So in many cases it’s moving our products, but then there’s a checkerboard of moves that need to take place in order to ultimately get the restructuring done. So it’s very thoughtfully planned and we’re accelerating as quickly as we possibly can.

And as far as the breakeven for Resource Industries, certainly we were breakeven in 2015. And as volume continue to fall in 2016, obviously we’ve been pulling cost out, but the rate at which the cost can be pulled out has not fallen in line with the fallen volume. So it’s really just to matching that up, we are continuing to focus on getting that breakeven to a much lower point than it is today. And so we’re heavily focused on that and have plans to execute against that.

Jamie Cook

I mean, can you just – broadly as you think about 2017, can you talk about what your expectation is sort of from mining, revenues and how we think about OE versus aftermarket. And again I’m assuming you don’t think we can be breakeven in 2017 on the resource side for what we provide.

Denise Johnson

Well I think it’ll largely depend on volume. So at this point in time our outlook for 2017, for Resources is largely unchanged. We do see some upside in aftermarket. So the mix between the OE and aftermarket will improve in that we do see more rebuilds taking place. So the aftermarket trend through this year is improving and I suspect that will continue into 2017. On the OE side that’s where it’s a timing issue of when as we talk to miners we’re certainly seeing more of an increase in what I will call quoting activity. So there’s certainly a looking at making a purchase.

Jamie Cook

Okay.

Denise Johnson

But the timing to those purchases is such that I don’t see a significant increase in machine sales taking place in 2017. If it’s in 2017 it would be late, it’s more going to be – it’s going to be beyond 2017 before those purchases getting made unless something changes that we don’t see today.

Jamie Cook

Okay. And can you talk about where in terms of you’re saying increased quoting or bidding activity can you talk about the markets where you’re sort of starting to see those green shoots?

Denise Johnson

Yes, so I would say certainly the miners who are in gold, throughout the year we’ve seen certainly more activity there. But I would say in copper, we’ve also seen a lot of our other copper miners are starting to quote especially in the South America region. We certainly are continuing to see some green shoots in India, especially around our Indian customers are very active in the coal area. So those are the probably the regions that I would see the most impacts on at this point.

Jamie Cook

Okay. And then can you talk about as we put it into context your view on how this mining cycle plays out relative to where we were historically. And so, what’s your view of sort of normalized demand relative to where we were before? And then how should we think about CAT’s profitability given the level of restructuring that we’ve done. Can we get – what do we need to get back to prior big margin, can we get back to prior big margin?

Denise Johnson

Great question. So I would say from a cycle perspective, we expect this cycle return not to come back to the peaks that we saw in 2012. We do see a slower return, much more of a gradual return in the market over time. I think as we look at our plans for the future as I indicate we are continuing to pull costs out from a profitability perspective. We would expect to return to – I would say improved levels of profitability overall in the 15% to 20% – 15% return on sales area roughly which is…

Unidentified Analyst

15% - 20% or 15%?

Denise Johnson

I would say, let’s keep it at 15%, let’s keep it at 15%.

Unidentified Analyst

Therefore 15% and hope it for 20%?

Denise Johnson

We would like to have obviously a better than that but in the 15% range overall.

Unidentified Analyst

Like what sales level, just to think about it I think you said mining, I think we expect more mining trucks to be historically at 1,500…

Denise Johnson

Right.

Unidentified Analyst

What’s the sales or industry number we need to get to that?

Denise Johnson

Well, I think – yes, I think we don’t see the return back to 1,500 to 1,700 large mining trucks for the future. We think something in the 500 to 600 range would be a normal mid-cycle for large mining trucks something in that cycle. But the question is the timing of when that mid-cycle returns.

Unidentified Analyst

Okay.

Jamie Cook

Do we have any questions out there? Sorry, go ahead.

Unidentified Analyst

[indiscernible] rock cutting business a little bit more on what your edges that how fast you think you can grow that business and maybe put some numbers around the current size and where it maybe we’ll get to?

Denise Johnson

Sure. So the hard rock cutting technology is one that originally was started in development with the [indiscernible] DDT Company so its DIT related to that technology we started before the acquisition. The technology itself is an undercutting technology and it really leverages on the ability to put kicks on the end of a cutting head and allow you to do mine development in a portable way. So something like a continuous miner in the soft rock side there'd be a similar what we call a rock header on the hard rock side, which would leverage then that cutting tool to allow tunneling and mine development to occur.

That's the area we see the biggest interest from miners because you don't have to develop the mine plan around using that piece of equipment. In addition to that we use that same cutting technology and leverage basically the same design that we use in some ways from a conceptual perspective anyway as what we do for a hard rock – or underground longwall system, you have roof support, you have the cutter head and you continuously mine with a rotating head that that rock face that allows – the mine design has been built around that type of technology and that's the rock straight that I was referring to.

So there is a big commitment to developing the mine plant around the piece of equipment. So that's one that we have available today in 2017 and we're working with a number of mining customers primarily in South America or South Africa to implement that that technology. You have to have a certain geology to make the cutting technology work. So there's a specific geology that has to work for that type of rock straight program to work.

Unidentified Analyst

Sorry, if I look to sort of the main players within that market I mean how much it remains globally suited to your kind of technology, where could you market share get to versus kind of the traditional large players?

Denise Johnson

I would say, I don’t have the exact figures to give you on how much it could overtake the share, we do have – we have a number of probably 30 to 40 mines that we think could apply the technology for the rock straight program in the future and we're targeting meeting with each one of those customers but as a percentage I don't have that.

Unidentified Analyst

I guess can you talk about as we are thinking, can you talk about the dealer inventory levels within the mining segment like where our dealer inventories are and given what you're seeing in the market in an increased bid activity, are you guys in a position where you think about building strategic inventories. And then I guess my second question is Caterpillar during this downturn and probably more so than your peers have continued to invest sort of heavily – heavily in R&D how do you think that positions you for the next upturn where are the biggest sort of market share opportunities and how does sort of the Komatsu are coming up?

Unidentified Analyst

For Komatsu we only have five minutes left.

Denise Johnson

Okay, all right.

Unidentified Analyst

Komatsu, Joy acquisition play into how you are thinking about capping that?

Denise Johnson

Okay, there is a lot of questions there. So going back to dealer inventory I would say over the – dealer inventory overall are about at levels. We don't see much more decline in dealer inventories overall. We’ve taken out over the last year and a half over $1 billion of inventory between dealer and Caterpillar in the Resource Industries. And so we see a translation of – there may be some pockets in Saudi Arabia for instance where we have some large tractors or in South America where we have some troubles. But there would be very small pockets of excess inventory overall. So generally I would say that as OE orders are received that will pull through directly to the factory in general, to answer that question.

Unidentified Analyst

[indiscernible]. Okay, historically when we see the cycles coming back historically has built through strategic inventory what you’re thinking about that?

Denise Johnson

We are thinking of it differently than we ever have before. So in the past we would have build finished goods strategic inventory and we would have large pieces of equipment sitting there ready to go. What we're doing today on a lean value chain, and the lean change perspective is we're holding more strategic raw inventory or partially finished units of inventory key components. So we got our supply chain refined enough that we think we can hit the availability that we need and hold it at a lower level and have less overall in total inventory than we've never had to hold before and still be able to respond to the upturn. So we're holding strategy inventory but we are holding it differently than we have before.

Unidentified Analyst

And then I guess the third part of my multiple question, what – you guys have spend or I feel like a lot more in R&D through the downturn relative to your peers and how does that position you in the next upturn in the given market share as we think of the Komatsu, Joy, what that means.

Denise Johnson

We have invested and held our investments through the downturn and we're very proud of that, at the same time we're kind of be efficient as possible because just spending money if you're not spending it efficiently it doesn’t help you, so we're doing a lot more around being efficient with our R&D spend. I think it positions us well from a product – head-to-head product competitiveness perspective, I'm fairly well. Certainly we are being much more intentional as we cut R&D about where we're placing and I talked about the technologies and the products where we focus it. So I feel we will come out of the down cycle pretty well positioned for the most part relative to our competitors because of the continued R&D focus.

Technologies, digital services that's an area where I feel like we really spent a lot over the last few years and focusing on and that will really help us I think as we move forward as customers are clearly looking for technology as part of the solution for the future.

Unidentified Analyst

And then how do you think about the Komatsu, Joy acquisition plays into? I mean there's a lot of concern. I mean if you could at Q1, you essentially have it roughly in mining everyone should ask rationally; the other side of it now is the market share. So I mean how do you think that plays into the next quarter?

Denise Johnson

Yes. If you look at the Komatsu, Joy acquisition, the portfolio that they acquire is largely complimentary, 2016 portfolio does place them head-to-head against that. They're going to have some challenges like we did with the Bucyrus acquisition integrating that acquisition into their portfolio and through their systems. And so I think they are definitely a rational competitor, we know them well, and we don't see any major changes as a result of that joining of the two companies and certainly we take them very seriously and recognize that they are a formidable competitor.

Unidentified Analyst

Okay. And then can you talk about I think one of the strategic – one of the rational behind the Bucyrus acquisition they are very interpenetrated on aftermarket parts which were the huge opportunities. So, can you talk about what that means for Caterpillar over the next cycle? And I guess the other question is where are you? I know there were still – there are opportunities to take out – to replace Caterpillar components into Bucyrus products sort of where we are?

Denise Johnson

Right. So we are largely through the integration if you will of integrating Caterpillar parts into what was the Bucyrus portfolio.

Unidentified Analyst

Okay.

Denise Johnson

There are a few cases of exceptions with that where we're still in process, but we're largely done. So we've brought Caterpillar Engines in, Powertrain, Lower Powertrain, Drivetrain and components. Where we are though is now renewing the product itself, so it's one thing to bring the components and integrate into another thing, do a new NPI, where you've got a brand new end-to-end design machine in the production. So we're still in the process of turning that part of the portfolio. But we're very pleased with the progress we've made. We think we're through 95% of that work. And so moving forward, it’s a seamless transition we are, Caterpillar completely end-to-end now.

Unidentified Analyst

Okay. Sorry about that.

Unidentified Analyst

Could you just talk – I mean, you sounded a lot more confidence on the aftermarket side of the business. Could you talk a little bit about pricing there sort of where it has moved from in the past couple of years and do you think we can see an improvement in pricing within the aftermarket as it recovers?

Denise Johnson

I would say aftermarket pricing is challenging. There's certainly – there’s a lot of competition from an aftermarket out there where we've been able to protect our aftermarket to a large degree is in the area of Engine, Lower Powertrain. So those key components that will fit are or substitution is too high of a risk for the customer. We've been very successful in holding price in those cases where we've done more challenges in the areas where there's a lot of choices in the differentiation may not be as great. And in those areas it's been more challenging. We've had to adjust pricing in some cases because of that.

So I would say as a whole, it’s very competitive. There is no doubt about it in the aftermarket. We continue to work on moving our cost for aftermarket parts, being efficient with those as well, and then making sure that we have the best quality differentiated parts so that we can show the value of what we bring to the table with a Caterpillar part versus someone else's there.

Unidentified Analyst

So in the sort of recovery that you envisage is that enough to make you get some of the pricing back or do you expect it to still just remain competent?

Denise Johnson

I think it's hard to predict what the pricing environment will be around the aftermarket. I mean, I think it will continue to be challenged I believe. I don't see a significant improvement in aftermarket parts pricing moving forward.

Unidentified Analyst

I think we are out of time, but I will ask one more question. Two questions I guess; one, in other commodity markets if you think about oil and gas there's that herd mentality when one person starts to spend, everyone sort of follows. I mean, do you think that – do you get that sense from your mining customers when you are speaking to them that one starts to spend the rest will sort of follow? And then I guess my second question is, can you just speak to your confidence level that 2017 will be strong for mining?

Amy Campbell

I guess going to your first question around…

Unidentified Analyst

How much for 2018?

Denise Johnson

Right. I think it's really tough to predict. It is very difficult to predict on what's going to happen in the future. And I think we've been very focused on saying, let’s really use this opportunity of the down cycle to focus on getting our portfolio set, getting our cost structure right, and let's not count on the recovery in order to get us where we need to be. And as a result of that I think it just changes the dynamic of waiting – holding your breath and waiting for the upturn versus focusing on what you can control and doing the best job you can.

My goal for RI is to get it to be profitable as soon as possible. And my second goal is to make sure that we're protecting the investments in technology and our products for the future and get there. And then I would say, third, we just want to make sure that we're more serving our customers and in that way we're partnering with them to serve them in a way that they see value in choosing us as an OEM.

Jamie Cook

Okay. That’s great.

Denise Johnson

Okay.

Jamie Cook

I think we are out of time.

Amy Campbell

Okay.

Jamie Cook

Thank you so much.

Amy Campbell

Thank you.

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