Caterpillar Inc. (CAT) Management Presents at Credit Suisse 6th Annual Industrials Conference (Transcript)

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About: Caterpillar Inc. (CAT)
by: SA Transcripts

Caterpillar Inc. (NYSE:CAT) Credit Suisse 6th Annual Industrials Conference November 29, 2018 2:00 PM ET

Executives

Amy Campbell - Director, IR

Bob De Lange - Group President of Services, Distribution & Digital

Derrick York - Group CFO

Analysts

Jamie Cook - Credit Suisse

Jamie Cook

All right great, so this is the last and probably best meeting that we will have at the end of our conference. So with us today I’m very pleased to have Caterpillar, we’re very lucky to Bob De Lange, who is the Group President of Services, Distribution & Digital. We have Derrick York, who is the Group Chief Financial Officer of Customer & Dealer Support as well as Amy Campbell who needs no introduction, but he is the Director of Investor Relations.

Again, similar to the other meetings today, this will be informal Q&A. If you have a question raise your hand, we will get you mic. If you have a question that you don’t want to ask and you want me to bad guy, I have no problem asking that question for you, so email me at jamie.cook@credit-suisse.com.

So I guess before we even kick off because we do have a lot of questions, Bob. I think it would just be helpful for you to sort of tell the audience just what your role actually means within Caterpillar to get some context and then we will…

Bob De Lange

Sure, all right, thank you. So I actually started this role about five months ago. Previous to that, I was -- I had a responsibility as a Group President for a construction equipment business for construction industry. So Services, Distribution & Digital, you might know it before we call it Customer & Dealer Support is really focused on first and foremost working with our distribution channel and developing capabilities of our dealers.

And working to develop of our aftermarket service business, which I’m sure we will talk about some more and one of the biggest opportunities that we see for profitable growth in the years to come in terms of organic growth and then also especially in the industries in which we operate. There is still a tremendous opportunity for competitive differentiation in years to come just bringing new digital capabilities that you’re seeing in many other industries, bringing also to our construction and mining and energy and transportation businesses and then make sure we use them to develop our business.

Question-and-Answer Session

Q - Jamie Cook

Okay, so I guess we'll just stick on technology right now [indiscernible] Can you talk about sort of the top three initiatives that you’re working on today either on the e-commerce side or on machine side, when you talk about connected assets or predicted analytics? And how do we do think about your investment will be more inorganic -- sorry, organic versus inorganic? And then lot of industrial companies are just talking about predictive analytics and what that can mean for their aftermarket and parts business and that seems to be a huge opportunity for lot of people, a lot of companies that presenting so if you could elaborate that?

Bob De Lange

Sure. Yes, so I think digital holds the promise of being able to allow us to create a lot of competitive differentiation in the future, but maybe to clarify it from we see digital not as a business in itself, it won't have a cost structure with the P&L. We see digital was an enabler for our three segments to help grow their business organically, and that if you see in terms of the major investments that we're making, the one first and foremost is in connectivity and pretty much all of our equipment growing out the door now, and it's fully connected and so, we can collect the data and make sure that we cannot sell the data such but use it to bundle the churn agreements and to bring more interest in service to our customers. So, that's a first major area of investment in connectivity.

And the second one is more in direct customer facing tools or being eager to do business with for our customers So, you might have seen the recent Cat App and when we provide one mobile platform for our customers to do everything from the location in the health of the machine and productivity information they can order parts from there, and so giving a simple fleet management tool to our customers link through that also, we are investing in e-commerce.

And then the third main bucket I would say of investments is really combining and we're the true competitive differentiation reliant combining that IT for the visual expertise to get with the domain expertise, 30 years of had engineering expertise from the designing a component or machine and engine, and bringing that to together and to make sure we can either manage service contracts more effectively and think about expanding service interval based on the information on machine or predictive analytics turning unplanned failures and to plan new pairs, a big cost saving for our customers.

And so that's where we see a lot of new and a lot of competitive differentiations, most of it and we are doing to not just to go digital as an enabler to grow our business. Yes, we're acquiring some talent, we have some partnerships with external companies, but a lot of that will be developed organically. Also because we believe and if you have an external IT company, yes, they can do the connectivity or the analytics, and they will never have the main expertise, certain year of engineering on how to design a engine and predict failure. So just the combination of that those two, and I think holds me to power for pioneering in developing that competitive differentiation.

Jamie Cook

And is there any way to size with predictive analytics the aftermarket opportunity? And is it more on the engine side versus the machine side? And then just broadly, as you think about this, we talked about customers' stickiness but it is also a margin enhancement opportunity broadly as we think about Caterpillar for longer term?

Bob De Lange

Yes, and I would say it's primarily a growth opportunity and a profitable growth opportunity from older ones we see ahead of us. I mean we worked a lot in past three years on cost and Lean and operational excellence and footprint reductions, which given us the results we have today. If we look forward and we look for profitable growth, growing the aftermarket organically is the best organic growth opportunity we have, which will -- if we do it well, will give that customer loyalty and stickiness and help us overtime as well grow our machine or engine population.

Now to your question of where does it lie? And I mean sizing the aftermarket is harder, you felt like prime product where you have an industry associations breaking compare in the industry negotiation who sold what. So sizing the exact market is hard. Analytics -- excuse me, telematics and the connectivity gives us a better insight, but where it is for us not a business in itself. So, we do note and do not disclose services in such. But it is clear that on all three segments whether it's on the engine side, energy and transportation, on the construction equipment, on all three, there is significant growth opportunity that we can go after.

Jamie Cook

And then sort of just following on the aftermarket when I think covering the statutory number when you think about being under overwhelming and it was market share. Market share, we want to fuel population because then we are going to get the aftermarket and apart that strategy shifted it all with, as we think about under all of these more used to come more recurring focused companies or perhaps there is some parts of the geographies or products that’s focused on more or less so.

Bob De Lange

I would say we won't and it's clearly at the center of strategy. We are not after growth. We are after sustainable profitable growth for the long-term. But to do so, I mean it's not an oral discussion that’s an end discussion, we will still need to grow market share to grow our population. The thing we realized though is that it's not because you build the population at the aftermarket given that we certainly do not capture all the aftermarket on the population we put out there. And so going after that, and if you size relative to growth opportunities in terms of their attractiveness, I mean again services in the aftermarket clearly is one of our more profitable growth opportunities ahead of us, which again does not mitigate the need to keep our focus on building population as well.

Jamie Cook

And then, how do I think about the incremental opportunity within aftermarket and service? When I think about -- I think about parts and service just associated with the sale of the equipment. You know, I mean and just overtime just get this, but are there incremental sort of service opportunities of this size such as you know we think about digital?

Bob De Lange

Yes, digital can go beyond, I mean part of that you say just maintaining the cost is effective responsible to help the customer, but digital will also give us new opportunities and when you've have seen in the launch of Cat App now we can also through connectivity remote flash software, so we don’t need to send a technician out. One of the biggest struggles for our dealers is finding, attractive and hiring qualified technicians. Through connectivity, we can now do remote trouble shoot. That mean instead of three trips to fix a piece of equipment, you only need on average 1.5 trips to fix these equipments.

And to have central expertise that can help you with technicians, and then digital capabilities also help us on our path towards autonomous and semiautonomous machines. I mean most of you have heard about our autonomous mining vehicles, which is right through selling this spotlight, but maybe less than the spotlight, there is a lot of work going on in developing semiautonomous equipment for construction equipment where again those new digital capabilities, connected equipments and more sensors on their machines and electrohydraulics are giving us a lot of new opportunities even on the new equipment for a launch today.

Jamie Cook

And then just shifting a little, staying on the same topic but sort of moving to the dealer network. What is sort of the dealers' involvement in this sort of the level of investment in buying? And how do you incentivize the dealers to get on board?

Bob De Lange

Yes, I would say that as you know with the two exceptions if you think of solar and rail, vast majority of our business is done through the dealers. That was the case yesterday. The case today, it will be the case tomorrow. So if we use digital to provide better services, those services will still be delivered to our leaders; and if we develop new e-commerce capabilities, the last mile of that e-commerce will still be through our dealers.

So, it’s not going to fundamentally change our business model as such, it does as you say, puts new requirements on our dealers, and -- but, I am sure you know the average age of our dealers is well over 50 years. So we want to help our leaders through good times through bad times through new technology -- technological developments. So, we're investing a lot of time and effort right now in working with our dealers to develop their new business capabilities, and make sure they’re ready for these changes too.

Jamie Cook

And I am sorry, I haven’t announced. Does anyone in the audience have a question? Okay, I’ll keep going. So, I don’t know if I want to give -- I want to ask about North American construction, understanding your part of the construction business, but I don’t know if you want break in anyone to answer, but I guess a lot of concerns when investors thought of about where we are in the North American construction equipment cycle? That being said here, which is one of your larger competitors just guided for 2019 and you see double digit growth. They talked about in order book that’s sort of a six month extended. At the same time, we see housing, rolling over and concerns that [audio gap] is rollover. So, is there any way you could put that in context and whether while you haven’t guided for 2019, does your outlook seem reasonable?

Bob De Lange

I would add, we had a positive outlook as well, but I’ll maybe let you…

Amy Campbell

Yes, if you look at North American construction, you look big market, construction industry’s biggest market, and we talk to customers and we talk to dealers. The mood is pretty positive as we move into 2019 and the workload out there. I mean couple of things to keep in mind, we’re just starting to see infrastructure spend increase, after many-many of continuing to decline, for that’s been good, good infrastructure spend, buoyed by a lot of investment around pipeline, and the oil and gas industry and those are long term specialty pipeline construction long term projects that will continue on.

Let’s see what happens, residential, non-residential construction activity next year, but also it’s not -- doesn’t go without notice that the most of this decade it’ll be below the 30 year trends for construction equipment sales in North America. So, we’ve had a pretty tough middle part of this decade. We’ve gotten back the healthy construction industry sales levels. Infrastructure spend is strong. Pipeline activity is strong. Oil and gas activity is strong. And so far non-resi activity has been pretty robust as well. And I’ll add on that, also, while residential and -- just in another self isn’t the largest piece of Cat's exposure to the North American construction market [indiscernible] relatively small.

Jamie Cook

And then, thank you, after you reported some suppliers as well as other equipment companies have started the commentary on mining in the third quarter, depending on when you reported with a little mix, I mean Cummins took their mining forecast down from up 40 to up 30, still down got moderated from some of the contractors we've heard of a slowdown, even from some of I think Metso or Sandvik, one of them, talked about being slowing down. So could you just provide as the biggest mining equipment company out there, sort of just what you’re seeing does that costing you at all? And sort of how you’re thinking about as we look out parts -- sorry, equipment demand versus sort of parts?

Amy Campbell

If you look at mining really started to recover at the very end of 2016, lead by aftermarket part sales is the large but came back online and then we start to feel lot of activity also drive part sales growth. 2017 was largely a part sales growth story for resource industries. This year we have seen that translate into really OE growth but still going to be around $10 billion in sales if you look at the run rate, pretty low here for resource industry sales. Our view is that the minors are being very disciplined, they are looking at trying to extend product life cycle to the extent that they can, they are pushing out overhauls when they can. So we see as a story for slower but longer growth, the one seen in the past. So much, much slower growth rate than the last couple of ramp up probably much longer growth rate as well. So we look at 2019, we would still expect some growth next year but not repeating the type of growth that we saw this year and in 2017.

Jamie Cook

Okay and do you have any updated view on how to think about, I think, the peak of the last cycle you've produced 1,700 trucks versus the trough of 17, we’re always trying to figure out what normalize did. Is there more of normalize and how, when we get there?

Amy Campbell

So, as I talk to Denise and she cautioned me, and I think in a wise way that there is a lot more products in the resource industries portfolio than just large mining truck, which we why we gone away from just focusing on large mining truck demand because lots of other stuff is being sold there. We still in 2018 will be well below, what we think normal replacement demand is and we would think that we’re still few years away from getting back to normal replacement demand level who probably won’t be there in 2019 either. So we have couple more years of growth, I think easy before we get to normal replacement demand levels and four mining trucks in resource industry.

Jamie Cook

Okay and then just sort of saying on the mining front and thinking about the targets that you guys provided in 2017. I think you said 12% to 16% margins on $10 million to $12 billion in sales. I mean I think this year it’s going to be on the margin side, based on my model would be easy for you to get towards the higher end of that. In the same time, you’re telling me we have a couple of years left and here again in $10 billion sell this year. So like at what point do you, is the 10 billion to 12 billion sort of used normalized does that mean to sort of get revised upward based on what we’re saying? And then also given the competitive dynamics the aftermarket opportunity, why shouldn’t the margin structurally in the resource business be better than what we’re already construction margins are like 18%?

Amy Campbell

So, to all the questions, I will do my best and bring me back, if I forget to address all of them. So just on its very surface, the margins that resource industry is putting up and the improvement is significant. So if you think in the last time in 2014, they were about 10 billion in sales, 6% operating margins, they will be closure to 16% this year, that’s 1000 basis points improvement, four year in operating margin. They have been ahead of the game on where they thought they would able to cost, they will be able to take out through restructuring. Pricing has been better, when I put those targets out there a little over a year ago then they thought the growth is been a little faster than they thought would be.

So, they will have several things go in their favor. I think with that if we were to continue to see growth and the pricing environment they have accommodated, they should continue to see margin expansion with additional growth in the strong pricing environment. And what has been the pricing strategy on the mining side relative to the construction side. And like how receptive is the market now as pricing getting where we are on mining specifically and as we will get the construction. And I think if you look at the price realization that we thought the industries have from board in 2018 it's been pretty good and it's been better than we thought it would see here than you started.

So I think it's then a good generally very good pricing environment but still it's very competitive, big deals that are being quoted or very competitive there is still lots of available capacity for some of this equipment by the manufacturers, but generally the pricing environment has been good in both mining and then in construction industry.

Jamie Cook

And then sorry, just back on the mining side, it just sounds like the expectations is for modest growth, at the same time I think there was some concern on the third quarter about just backlog levels and you are mining backlog hasn’t really you haven't been growing. Can you just provide some color around what would be the drivers of that?

Amy Campbell

So two things when we have seen resource industries production level continue to increase over this now almost 2 year ramp-up in resource industry, so as production levels increase as they increase along with orders coming in then you'll see the backlog stay pretty flat even though the order rate can go up some.

Derrick York

So, it's mainly improvement in supply.

Amy Campbell

Yes. So, as the supply has improved, and the other is there are lots of deals right now that are being discussed and so, and we look at the miners CapEx budget next year for up 8% to 9%. I guess just from sign of that 2019 will continue to see some modest growth.

Jamie Cook

Any questions in the audience? No, quite bunched, okay. And so, I guess let's move on to price cost, so obviously price cost has been the big challenge for the sector broadly talks about pretty good pricing in mining, I'm assuming as you are continuing to 2019. Again, as you are ready as your biggest competitor in construction equipment already guide in '19 and talked about a 3% price increase and also just broadly or probably more or so in the pharmaco inside the ability to more than offset cost, which you have pass in '18 as well as '19. So it should be net favorable. How are you thinking about your ability? How do we think about price cost and the price increases you're put in the back half of the year? And what you've announced for January already?

Amy Campbell

So what we said in the third quarter, if we go back to -- working on since full 2019 outlook [indiscernible] it is that we expect the price realization that we've put out there which we expect to be, we've announced the 1% to 4% price increase, so that will offset all of the cost headwinds including tariffs and to your cost inflation and any kind of labor inflation that we would have next year. So at this point in the third quarter that was -- that's how we're thinking about 2019, as that the price will offset the cost headwinds.

Jamie Cook

And then just shifting back to distribution in sort of the dealer network, again, I remember when we talked about the across the table initiatives I don’t if that's still an initiative within Caterpillar, but what are the top three priorities you know under that we are working on with the dealers at this point?

Bob De Lange

Yes, we don’t utilize or we don’t put the project at the cost of table at such, I think it will evolve overtime. We try to simplify it and just to make sure that we further clarify our priorities for development for the dealers. And I would say apart from meaning always knowing what the long-term spin and distribution system dealer help and continuity and making sure we have a stable partner for the long-term will be underpinning, we work with you with our distribution channel.

But then moving away from the cost of table, I mean the main areas we work with our dealers in terms of service excellence and I'd say in parts and more on the logistic side as well that marketing and sales capabilities developing their new digital expertise and then also supporting them to improve their rental business. Those are the five main areas that we work with our dealers, knowing that we work very hard to make sure our dealer strategies are in line with our strategies, which then also means that, our dealers just like us have a very intense focus on growing these services and the aftermarket pushing up our business.

Jamie Cook

And then I guess just shifting you know over to China. Some of the numbers that have come out has been more disappointing, might be people's expectation for China for next year down 15% to 20% or so. I think last Amy you said, China would be down in 2018 and it was up in 2018.

Amy Campbell

See my forecast which is so accurate [multiple speakers].

Bob De Lange

I'll maybe help.

Jamie Cook

What you are seeing in the Cat? What you are seeing in the things as you think about China?

Bob De Lange

I mean if we look at our -- if we listen to the market and again you know all this, but majority of our business in China's construction industries and the biggest portion of that is excavators, which is so a good proxy for our business in China. And if you look at China industry last year doubled in size, China industry this year will grow probably close to net of 40%. But we are actually right now this week in Bauma China, one of the biggest trade fair in Shanghai, and talking to our team earlier this week I mean what you've asked our dealers from the outlook. Our customers are some with large corporate accounts and there, the feedback we are getting from all of them is still positive, and they forecast further growth for next year. So their outlook is positive. We just know that for China.

Jamie Cook

You never know.

Bob De Lange

You never know I mean number one. More than any other markets, it has very high seasonality in between Chinese New Year in April. And second one is that probably more than any other country. And overall all the economic evolution will be determined by the central government's policies. So from that perspective, I can understand Amy's forecast.

Amy Campbell

Everyone has the forecast.

Bob De Lange

Yes, we have. So, it's just hard to predict. And we know it in turn pretty quickly depending on the government's decisions, but all we can say is that based on what we are hearing from our dealers from our customer from key corporate accounts in China, and their outlook is positive and they see further growth next year.

Amy Campbell

And I'll add, I mean we put in the third quarter analyst call, our exposure to China because which is -- it's an important market, but it's smaller than certainly some of the numbers we will be hearing in the media. So, we put that up so that we could size and people could understand our exposure, which I think is less than some that expected.

Jamie Cook

And then just, Amy, the other thing that I think got a lot of attention from investors on the third quarter and just post then is. The dealer inventory increase in the third quarter which I think was sort of 800 million or so. Can you provide some context on what drew that? And how we think about sort of dealer inventory levels versus what you would view as normal? And do we continue to build inventory into 2019?

Bob De Lange

It’s just you need -- I think we need to see it in the context of coming and of an acceleration and growth during which we were relatively tighten supply, not as much because of our manufacturing capacity, but more our supply base being able to keep up with that growth. So from our perspective, the increase in dealer inventory that we’ve recently seen is exactly what we wanted. It’s not that inventories are bloated with that increase. We’re actually now just coming to the bottom end of the range of dealer inventory months of sales that we would like to see. And so, it’s certainly not that they’re growing higher than what we are, we actually.

Jamie Cook

Is that going to have three months?

Bob De Lange

It’s probably more if you look at it -- it depends like country and product but overall the world probably be in the range of 3 to 3.5 months sales and we’re getting close to the bottom end of that range.

Jamie Cook

And that’s the level we want to stay at and are there -- if there’re some areas where there’s inventory -- if levels higher which geographies or product lines would that be?

Bob De Lange

Yes, if that the level we want to be, I mean it evolves over time. Dealer inventories, if you go back 10 years, it would have been higher, but as we work to build the more responsive supply chain both us internally and the dealers, we’ve learnt to work more lean, as part of our main contributing factor to our results here in the last two years. So, we’ll -- it’ll depend on how further we can lean our supply chain. And if you look at regions that evolves, again we had not really -- overall, we’re happy which our dealer inventories, getting back close to the bottom end of the range.

Just keep in mind that if you in China, their dealers run lighter on inventory, probably would be more like two months of sales, which is just the way and we’ve a very short supply chain in China, that’s the way business has been conducted in China. On the other hand, maybe some isolated cases where inventory is to high, I mean where we -- for example let’s tune in Turkey, recently revolution of their economy yes it’s falling and so quickly and dealers are having -- our certain dealers in Turkey have too much inventory, but will result, helping them result that mean what it is redirecting their order board, helping them divert, some of their existing inventory, but those are isolated issues.

Overall again, we’re happy with the increase we’ve seen and back to the bottom end of the range where we see the inventories to be.

Jamie Cook

And then just shifting over to the energy and transportation sides, just with the recent sell off that we’ve seen in for oil prices, can you just talk to -- does that concern you at all as you’re thinking about 2019 understanding that that business has help to get better I think the most people have ever saw when energy prices were down, but as we’re thinking across the different product lines?

Amy Campbell

I think you really do have to look at where each of our customers and each of our exposures are and where they’re profitable, and where oil prices are profitable. And so, and then is that a different price point, we’ve yet to see and certainly wouldn’t expect to see it oil prices where they’re offshore oil for instant comeback. And so that market has continued to be pretty quite since 2014. And if you look at a big component of our oil and gas growth over the last 18 months or so, it’s been around gas compression as the United States builds out its natural gas infrastructure.

There’s a Cat, lot of Cat, engines and compressors on those pipeline to make that, that infrastructure build out possible. We continue to look at the well servicing side of the business which is the other part of the business, it’s been healthy. You've got in a quarters that start to go under 2019, but certainly we continue to watch oil prices that is important. It's been a fairly recent phenomenal as they come down, trying to understand what cost them to come down, we don’t have any particular opinion on them right now but we’re keeping an eye and that will certainly play into our outlook when we come out with it in January.

Jamie Cook

Okay and then just, so any maybe unfair to ask, I should ask Andrew, but like Andrew isn't there for right now, three months or something. Three months, but you know as sort of as you think about working with him or since he has been here sort of what his top priorities are and then we will start there?

Amy Campbell

As I work with Andrew, let me talk his priority. So where I've seen his focus as he and I meet with investors. So, yes, I am going to speak specifically to that side of his role, the CFO, he certainly has lots of other responsibilities that I’m not as exposed to. But there I would say one is capital allocation and so, we’ve done a lot of work over the last few years to have the data that we know where our OPEC profit pools are, but making sure that we have the process within place.

And he is really passionate about allocation our capital as well as our R&D and SG&A resources, having those process in place to make sure that we’re driving towards the most profitable growth opportunities that the Company has. And Bob talked about one of the most significant one seeing around growing parts and services in a profitable way. The other I would say is articulating to the market a metrics strategy including the deployment of capital that the market can use to measure our progress towards delivering the strategy. So thinking about what that metric basket looks like as the other areas that you spend in some time.

Jamie Cook

And then as Caterpillar shifts to a more OPEC focused company, I mean other companies if you look what did over the past over 15 years ago, when they first focused. They spoke specifically about specific return that they would have based on where you’re in the cycle and what are you seeing with them is overtime, the return target and margin targets have increased. Can you expect more formal return targets from Caterpillar?

Amy Campbell

Yes, I’m not going to speak to exactly how he is going to lay out that metrics strategy.

Jamie Cook

But is that under consideration?

Amy Campbell

But I think what’s clear, if you look at our performance in 2018 and 2017 as we’re delivering significantly better results than we ever have in the past and especially sale slide and level, so still we been above the sales level already four times this decade but our results are significantly improved. And I think if you see that type of improved performance going forward. So how we will lay that out, how we talk about that it is under consideration but exactly what it looks like and what’s that frame work look like.

Bob De Lange

I think one thing add on that. I think the challenge that we having there is such a diverse business, like Cat has such a diverse business. So as you community return threshold for individual areas, I guess a bit more difficult. So if you look at in total maybe that’s a bit easier but as we manage internally and as we do resource allocation, we’re looking at things on a much more regular basis and allocating those resources towards the highest opportunities. And starts with what is the pool or profit pool within the individual area and how do you go after. And those of the strategic discussion that are happening on a fairly frequent basis, and then are we deploying, and how are we deploying capital into those areas, right. And then I think this is how we externalized and how we communicate that would be kind of decided, but internally we do we spend a fair amount of time on that.

Jamie Cook

And do we -- is there a story at all I think as understanding you are putting up better earnings on lower sales that you are a better company I appreciate that. But is there still a percent of the portfolio that is underperforming relative or…

Bob De Lange

There will always be a pushing of portfolio underperforming versus the average just as we improved the average, but…

Jamie Cook

While you see with a lot of industrial like you know…

Bob De Lange

Yes, I get, but so…. [multiple speakers]

Derrick York

Yes, I would say we always challenge every piece of our business, right. So, it is not -- it's not untraditional, right. It's very traditional approach as looking at the businesses that fallen in the lower, lower quartile in terms of return versus the higher return areas and then going back to the point of capital allocation and deploying capital. You do get to the point where if there's bottom performers what do you at those with those businesses, I think we've done a pretty good job of demonstrating our ability to take action around cost and restructure and drive for profitable growth on a lot of those businesses, but that will continue to be a focus. It has to be a part of resource allocation. You will always have a bottom third and you continue to raise the bar across the board so...

Bob De Lange

And we do have at the corporate levels, a very organized and disciplined approach of redoing the OPEC results and buy each individual business and compare them with the multiyear plans and the targets we set them with. And obviously, our first buyers is through the try and fix improvement businesses, but there have been some examples like I think in certain case that we -- when we decide that our capital and our resources are better apply to higher profit opportunity businesses where we have made some decisions like you've seen recently where we divested a portion of our purpose built, post three equipment which was part of those type of discussions.

Jamie Cook

Are your internal margin plans higher than the ones provided at the routine Analyst Day? [Multiple speakers] Anyway, so Amy understand and we can all make our own assumptions on buying in 2019 in terms of where the markets end-up whether there're any big headwinds or tailwinds to earnings that we should think about that you sort of want to put out there. It sounds like price cost should be a little better and really I'm just trying to think, just in general framework Amy talked about it [multiple speakers] broad repurchase which helps a little.

Amy Campbell

In the third quarter is, as Jim said, we expected as the third quarter for sales to be up, so you said, you make you assumptions there. We expect price to offset those costs, inflationary cost headwinds including tariffs. And then, we do have the tailwind of short-term incentive comp, which will get reset back, which is close to a 500 million to 550 million of tailwind. And so, those are related to three significant buckets as we think about 2019.

Jamie Cook

And then one other question, obviously, like we said Caterpillar is doing a great job and initially you are in 12 box and probably 12 million less than sales versus prior peak of 9.

Amy Campbell

You know, I mean doing much better job.

Jamie Cook

And I think before you actually did use to put out sort of a trough EPS number and I'm assuming that we have higher piece instead of higher through is Caterpillar sort of considering that. And I think that also in a context of capital allocation and share repurchase, if people can factor that in that can argue for a much higher trough in the marketing. So how do you think about that because that’s important as investors think about sort of evaluation in what people the most pullback stock is getting at this point?

Amy Campbell

So in the conversations with Andrew about that series of metrics that we want to talk to the market about that discussion has been a -- is a part of those discussions that we are having with Andrew.

Jamie Cook

Okay. We have 50 seconds left. Does anyone have a question?

Amy Campbell

No. Anything, right in there…

Jamie Cook

That’s a lot of question.

Amy Campbell

I think I'm good, alright, great. Thank you very much.

Bob De Lange

Thank you.

Jamie Cook

Thank you.