開拓重工 (CAT) 2002 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

And welcome to Caterpillar's 2002 first quarter release conference call.

At this time, all participants have been placed on a listen-only mode and we will open the floor your questions and comments following the presentation.

At that time instructions will be given on how to enter and exist the Q&A portion of the call.

It is now my pleasure to turn the floor over to your host, Mr. Jim Anderson.

Sir, you may begin.

Thank you,

.

Good morning and welcome to Caterpillar's first quarter 2002 results conference call.

As

said, I'm Jim Anderson, Director of Investor Relations.

With me is Lynn McPheeters, Vice President and Chief Financial Officer.

We will address your questions during the Q&A portion of today's call.

This morning I'll cover our first quarter results, discuss a couple of special topics, review our outlook, go over the usual dealer retail numbers and then wrap up with the Q&A.

Certain information we will be discussing is forward-looking and involves uncertainties that could impact expected results.

A discussion of those uncertainties is in a Form 8-K filed with the Securities and Exchange Commission today.

OK, let's start with the first quarter results.

As you know, this morning we reported first quarter sales and revenues of $4.41 billion and profit per share of 23 cents.

These results were in line with our expectations for a weaker first half of 2002, and in particular the first quarter.

Sales and revenues were down $401 million from first quarter 2001, with machines down $290 million and engines down $127 million.

The decrease was all related to volume reductions as price realization was about flat, net of currency changes.

Machine unit volume was similar during first quarter 2002 and 2001, but sales of larger machines declined, resulting in an unfavorable sales mix.

Consolidated revenues of the Financial Products Division were up 5 percent.

Profit was 24 cents lower in the first quarter of 2002 compared with 2001, as a result of the lower sales volume and related manufacturing inefficiencies.

This unfavorable impact of the lower volume was partly offset by a net favorable impact of currency.

Currency overall had a favorable impact of 8 cents per share for the quarter.

This includes the net effect of currency on sales and costs, and currency translation gains.

The majority of this favorable impact was related to translation gains reported in the other income and expense category.

SG&A and R&D expenses were about flat with first quarter 2001 levels as we continue to keep pressure on costs.

As a matter of interest, no longer amortizing goodwill had a favorable impact on first quarter results of $20 million on a pre-tax basis and the combination of pension and

expense had a unfavorable PBT impact of $35 million.

Now, I'll provide some comments on North American rental fleets and used equipment.

North American dedicated rental fleet utilization, on a 12-month rolling basis, is continuing to run at a very strong rate, about 65 percent, which is about three points higher than a year ago.

Rental rates for the rolling 12 months through March are slightly lower than a year ago as construction spending slowed.

Overall, units in dedicated dealer rental fleets are up about 2 percent from a year ago.

Dedicated dealer rental fleets consist of rent-to-rent units and units in the Cat Rental Stores.

Rent-to-rent units, which currently make up about 60 percent of the units in dealer rental fleets, are down 4 percent from a year ago.

The Cat Rental Stores, which generally rent smaller machines for shorter time periods, currently have about 40 percent of the rental units in dealer fleets.

These fleets continue to grow and are up about 13 percent from a year ago.

North American dealers added 20 rental stores in first quarter 2002 for a total of 365 stores.

About 15 more are expected by year end 2002.

In the Europe-Africa-Middle East region, dealers had 683 rental outlets, 166 of which were converted to the Cat Rental Store identity as of quarter end.

In Latin America, we had 84 stores, and 12 in Asia-Pacific.

At year end 2002, we are expecting about 1,220 rental outlets throughout the world.

Of these, 380 stores in North America, and about 390 in the rest of the world will have the Cat Rental Store identity.

North American used equipment prices trended down in the fourth quarter for most machines.

We expect continued weakness in the near term.

This used equipment reporting lags one quarter from the current quarter.

Before I get into the outlook, I want to comment on two special topics that I think will be of interest.

First is a quick update on Six Sigma.

We continue to strengthen our commitment, as we increase the number of black belts to 1,000, and move toward our target of having black belts equal to 2 percent of total employment by year end.

During the quarter, our pilots, suppliers and dealers started black-belt training and chartering Six Sigma projects.

This is a critical step in strengthening our entire value chain and improving customer and shareholder value.

We have over 2,000 projects under way, with another 1,000 pending.

As I said during last quarter's call, I'm not going to give any specific numbers, but our target for Six Sigma benefits this year is substantially higher than what we achieved in 2001.

Secondly, I'll give you an update now on our engine business, which I've been doing for the past several quarters because of its significance to our results and future growth.

Worldwide engine sales for first quarter 2002 were $1.37 billion, down 127 million from a year ago.

The sales decline was mostly due to higher volume in the petroleum and on-highway truck sectors being more than offset by lower volume in the electric power, industrial and marine sectors.

Price competition continued in electric power, petroleum and on-highway truck applications.

Truck engine sales to OEMs were up in the 8 to 15 percent range, with heavy-duty truck engine sales at the top end of the range and mid-range engines at the bottom.

All of our major North American OEMs have announced their intentions to raise production rates for on-highway trucks to cover increased orders.

As a result, we are experiencing a significant improvement in truck engine orders, and have raised production schedules to meet the increased demand.

We have increased our 2002 forecast of the North American heavy-duty truck industry to 125,000 units, excluding Mexico, from 110,000 units previously projected.

Our industry outlook could go higher as we continue to work on our forecast with the truck OEMs.

The industry outlook

emissions deadline is occurring.

As I mentioned in last quarter's comments, we saw the overall electric power industry and our sales growth slow last year from growth levels in previous years.

As expected, the slowdown has continued into early 2002, caused by slower global economic growth compared to last year, and unusually mild fall and winter weather, which cut growth and demand for electric power and caused surplus electric utility plant capacity.

Consequently, our EPG engine sales were down in the 16 to 24 percent range.

We continue to see improving inquiry and engine quotation activity, particularly for large tenders in Latin America, but orders have not improved as rapidly as previously expected.

So, we now expect 2002 sales growth in the electric power sector will be about flat to up slightly compared to last year.

We continue to expect electric power sales to resume rapid growth in the second half of the year, as stronger economic growth is accompanied by revived business and investment spending.

Sales into the petroleum sector rose sharply, nearly doubling in the first quarter of 2002, despite lower crude oil and natural gas prices compared to a year ago.

Lower energy prices early in the quarter caused a decline in North American sales, but robust sales gains occurred in Europe-Africa-Middle East, Latin America and Asia-Pacific.

Demand for turbine engines was particularly strong.

We have raised our worldwide petroleum outlook for 2002, partly due to concerns about supply disruptions, and now expect double-digit growth in our sales into the petroleum sector this year.

This petroleum outlook is up from our January outlook, which was flat to up slightly.

In March, at the Louisville truck show, we announced to the industry our full range of Caterpillar engines for October 2002.

These engines will be similar to our current engines, with changes to software timing control, turbocharging for airflow management and the addition of an oxidation catalyst.

We will be fully EPA certified in all 50 states and Canada.

Since there is minimal new content, Caterpillar engines will continue to be as reliable and durable as ever and will continue to provide customers with the best engine value available in the industry.

Caterpillar supports the position of our customers who lead a solid coalition requesting a delay in the October implementation date with emissions payback.

We will continue to point out to the EPA and to the district court in Washington, D.C., that our engines will not have defeat devices that allow an engine to bypass emission controls under certain operating conditions.

The path that our competitors are taking to produce compliant engine, the cool exhaust gas recirculation path, will have these devices.

We have requested from the EPA a full disclosure of the actual expected emissions from the engines they have certified.

To date, they have refused.

We also continue to pursue resolution of issues with the EPA through the dispute resolution process under the consent decree and are prepared to pursue additional legal actions.

During the last conference call, I commented on the EPA's proposal on nonconformance penalties for on-highway diesel engines.

It is still too early to estimate the impact of the NCPs due to the uncertainties at EPA.

We are pursuing every legal option, including the dispute resolution process, to reduce what we believe are punitive NCPs.

Regardless of the outcome on the NCPs, these are an expense of the engine manufacturer and it should have no bearing on the OEM or truck buyer's decision to purchase a Cat engine.

We strongly believe Caterpillar is the industry leader in technology and emissions reductions.

Caterpillar engines, featuring complete advanced combustion emission reduction technology, will bring to the marketplace a new generation of reliable, durable and fuel-efficient engines.

We have an engine technology that will meet customer expectations for performance, lowered operating cost and proven resale value, while maintaining our commitment to the environment -- exactly what our customers expect from us.

Now for the outlook.

World economic growth prospects showed clear signs of improvement in the first quarter.

We continue to anticipate improving global business conditions in the second half of 2002.

However, capital spending is recovering much more slowly than economic growth figures would indicate.

In this economic environment, worldwide industry opportunity is expected to be about flat in 2002.

Company sales and revenues are also projected to be about flat.

Sales in all worldwide geographic regions are expected to be about flat to up slightly.

Despite weakness in the first quarter, full-year profit is projected to be up slightly in 2002, excluding the nonrecurring charges recorded in 2001.

The anticipated profit improvement reflects the continuing actions to reduce costs and improve efficiencies.

Full details of the outlook for 2002 are contained in the company's press release issued today.

Now I'll review dealer retail machine numbers and reciprocating engine and turbine engine sales to users and OEMs.

All comparisons are based on constant dollars.

Retail sales of machines for the three months ended March 2002, compared with the same three months of 2001 are: for Asia-Pacific, down 2 to 7 percent; for Europe-Africa-Middle East, down 8 to 15 percent; for Latin America, down more than 24 percent.

The subtotal of those three regions, down 8 to 15 percent.

For North America, down 8 to 15 percent.

And for the world as a whole, down 8 to 15 percent.

Retail machine sales weakness in the quarter, for every marketing region, was in line with our expectations.

Retail sales in dollars are down mainly due to

.

As coal-mining has decreased, we are starting to see some signs of recovery in North America, even though retail sales were weaker.

For the three months ended March 2002 compared with the same three months of last year, total reciprocating and turbine engine sales to users and OEMs were as follows: electric power down 16 to 24 percent, industrial engines down 8 to 15 percent, marine engines down 16 to 24 percent, truck engines up 8 to 15 percent, oil and gas up more than up 24 percent -- actually, as I indicated earlier, nearly double.

And the total engines number is up 2 to 7 percent.

Now let's turn to dealer machine inventories, first, sequentially comparing March with February 2002.

For Asia-Pacific, down 2 to 7 percent;

Europe-Africa-Middle East up less than 2 percent;

Latin America up 2 to 7 percent.

Subtotal of those three regions up less than 2 percent.

North America up 8 to 15 percent.

World up 2 to 7 percent.

Next, year over year, comparing March 2002 with March 2001, Asia-Pacific flat;

Europe-Africa-Middle East down 8 to 15 percent;

Latin America up 16 to 24 percent.

Subtotal down 2 to 7 percent.

North America down 8 to 15 percent.

World down 8 to 15 percent.

Dealer inventories of new machines at the end of March compared with year end were up on a worldwide basis about $250 million, most of which occurred in North America as dealers are preparing for the upcoming selling season.

This seasonal increase was about 25 percent less than an increase in first quarter last year, as dealers are getting more comfortable with our ability to reduce lead times on products from our factories.

Dealer inventories are at reasonable levels so that an increase in retail demand will translate to increased sales by Caterpillar.

Our expectation for full year 2002 is for dealer new machine inventories to decrease in the $100 to $200 million on a worldwide basis.

Asia-Pacific dealer new machine inventories are at 2.7 months of sales; the same as a year ago.

Europe-Africa-Middle East dealers are at 2.5 months of sales; down from 3.1 months a year ago.

Dealer new machine inventories in Latin America are at 2.8 months of sales; down from 3.4 months a year ago.

And dealer new machine inventories for the subtotal of these three regions are at 2.6 months of sales, which is down from 3.1 months a year ago.

North American dealer machine inventories are at 2.4 months of sales; down from 2.6 months.

Overall, on a worldwide basis, dealer machine inventories are at 2.5 months of sales; down from 2.8 months a year ago.

The retail statistics for March are also available on voicemail through May 15 by calling 309-675-8000.

OK,

, now it's time to move to the Q&A portion of the call.

As always, in the interest of time and fairness to others, please limit yourself to one question and one follow-up.

First question please.

Thank you, ladies and gentlemen.

The floor is now open for questions.

If you have any questions or comments, please press the numbers one followed by four on your touch-tone phone at this time.

If you have entered the queue successfully, you hear a message concerning your entry.

Pressing one for a second time will remove you from the queue should your question be answered.

If you have exited the queue successfully, you will hear a message stating that you have left the queue.

Lastly, we do ask while posing your question that you please pick up your headset if listening on speaker phone for optimum sound quality.

Please hold while we poll for questions.

Our first question comes from

.

Please state your affiliation, then pose your question.

Salomon Smith Barney.

Hi, Jim.

Hi, Dave.

A quick question on the machinery

.

Obviously it took a real hit to the profit, the

.

Can you give us a little color going forward on what you're seeing

coal mining?

I know you addressed that got weaker.

Just a little bit of color on if you break out a bit where we've talked in past about general construction versus heavy and mining.

How do you gauge those for the full year?

You know, just tell me the feel for the

going forward the next nine months.

Well, Dave, I guess just to give you a little bit of background here, coal, as I said, was down in the first quarter, and that was a significant factor in terms of

.

We expect coal mining to continue to be soft as we move throughout the year.

However, it's very difficult to tell what could happen in terms of energy prices.

And so our expectations at this point are for it to be soft, but that could change depending on, obviously, what happens in the oil-producing regions of the world.

Heavy construction which is, as you well know, the infrastructure-type product, primarily highways, airports and so forth, is expected to be about flat this year at reasonably strong levels, as it has been for the last year or so.

General construction, which is housing and commercial buildings, again our expectation is about flat this year.

And that typically would be the smaller and mid-sized type units.

Well, I guess a follow-up then would be, it sounds like coal mining is what stuck out regarding

?

The profits generally got cut in half in machinery year over year.

And if were just mining, we would have thought that in the first quarter of last year, when mining started to do that well in coal, it would've been the driver for profitability.

But '01 first quarter versus 2000 first quarter profits were still down.

So coal wasn't able to pull it up last year's first quarter; why would it pull it down so much this quarter?

Well, it was more than coal.

I mean, we focused on coal, but even beyond that especially EPG engine sales were down considerably in the first quarter as well.

It was predominantly coal having the effect.

And even on the general construction side, there was much more of a lean toward the smaller end of the product line as opposed to the mid-range side.

I'll get back in the queue.

Thank you.

OK.

All right, Dave.

Our next question comes from

.

Please state your affiliation, then pose your question.

From Lehman Brothers.

How you doing, Jim?

Hi, Joel.

I'm wondering if we can do a similar exercise on the oil and gas mix; if you can give us an idea, you know, how much electric power gen is going to hurt the outlook for the whole year if it's well -- or at least the first half.

And then the relative margins of the oil and gas and the truck engine business as well.

OK, so you're asking engines overall?

Right.

Yeah, OK.

Well, as I indicated, petroleum was extremely strong in the first quarter, and we've raised our expectations for the year.

So that will be more positive than our outlook in the first quarter.

On the electric power side, we've lowered our outlook a little bit, because last quarter I indicated that we would be up this year but something less than ten...

... now we're saying somewhere in the about flat to up slightly; say up to 5 percent.

So that's an

for turbine engines as opposed to reciprocating engines.

Now, those two are generally our -- because of the complex type of equipment that we sell, are generally our higher margin products.

And the other one that really for the year appears to be different than our last outlook is the truck engine side.

And obviously, as you all know, that's typically the lower margin type of product for the engines, and that could be up.

Certainly it's up now for the first quarter, and we raised our outlook for the year.

And that outlook could get raised even further.

So overall I think we're again looking at a lot of price competition on the engine side, including petroleum as well as EPG and trucks.

So to really be more specific, I don't think I can do that, other than to say overall we're looking at pretty much the same kind of profitability as we were in the first quarter outlook, which is for the year up slightly.

Was electric power half of operating profits last year in the engine division?

Well, we don't break down the profitability by individual sectors.

But obviously, electric power and petroleum both are significant contributors.

Thank you.

OK, Joel.

Our next question comes from

.

Please state your affiliation.

Bear Sterns.

Good morning.

Hi,

.

Hi.

Firstly, Jim, if currency doesn't change from present levels -- you mentioned it had an eight cent positive impact -- what does this do for the year?

Is it eight times four, or 32 cents?

And if you could just remind us what currency did last year, so to get that year over year inflection?

Over last year, I don't remember the exact number.

I think it was about 15 cents unfavorable for the year.

And I don't recall exactly what it was in the first quarter a year ago,

.

But if currency stays -- if currency rates stay where they are right now, basically we would see essentially no impact for the rest of the year.

So we would have what we've gained through the first quarter.

And that's basically a way that we forecast currency in our outlook, is whenever we do that forecast, it's assumed to be at the current rates.

Does that mean, you have, Jim -- you have a big currency contribution in the fourth quarter.

Does that take that into account?

Yes.

OK.

My follow-up then is what sort of -- on EPG to get flat to up slightly, what kind of growth does EPG have to put up in the second half of the year given that you're down 16 to 24 this quarter?

Well, it's going to have to be somewhere in that -- probably not quite that high, because -- again, I have to be a little careful here: We don't give any, as you well know, projections on quarterly outlooks.

So as we move forward, we think the worst is probably behind us.

But it's still going to be weak in the second quarter, and then we'll start seeing -- our expectations are to start seeing pretty significant growth in the third and fourth quarter.

But we would not expect it to necessarily be, you know, up at the 24 to 30 percent range.

It wouldn't have to be that level to get us to where our overall numbers for the year are in the slightly up category.

Jim, did EPG get any better as the quarter progressed to lead you to, you know, sort of, be somewhat optimistic that you think your forecast for that business can hold?

Not from an orders perspective quite frankly, but it did from -- as I indicated, from talking to field people and inquiry and quote activity.

Thank you.

OK,

.

Our next question comes from

.

Please state your affiliation.

Yes.

Georgia Bank.

Hi, Mike.

Hi, Jim.

Can you talk a little bit more about the manufacturing inefficiencies?

And I guess what I'm looking for is if you could break down, I guess, on a regional basis, sort of, your average capacity utilization during the quarter, and maybe give us some idea of where you expect to end the year.

No.

To take the last part of your question first, I can't give you capacity utilization.

We don't provide that information.

But what I can tell you is, on manufacturing inefficiencies, it was spread across a lot of facilities and our production levels were down double-digit in the first quarter.

And that's what caused the manufacturing inefficiencies, that you're simply -- at those levels of production, you're simply not able to absorb your fixed costs, and so that has a pretty significant impact on your bottom line.

But it was pretty widespread.

Last year it was pretty much limited to the engine facilities; in this first quarter, as expected, it was much broader than that.

OK.

And in my related stretch question here, haven't heard you talk about the DaimlerChrysler

lately.

Is that dead or what's going on there?

Just to give you an update, no, it's not dead.

We continue to work with DaimlerChrysler on supply agreements is basically where the focus is now.

And I think the last time I talked about this, quite frankly, Daimler has told us they have more pressing issues that they redirected their resources to some of the other issues that they're facing.

But we do continue to work with them and are trying to work out supply agreements.

And my guess is, as we continue to work with them, that at some point in time this will reactivate itself much more significantly than what it is today.

But it's basically slowed down substantially.

OK.

Thanks, Jim.

I'll get back in the queue.

All right, Mike.

Our next question comes from

.

Please state your affiliation.

Legg Mason.

Jim, hi.

How are you?

Hi, Barry.

Good.

You know, the companies that have talked up 2002 and missed has essentially been hurt a lot worse than the ones that just wrote-off 2002 and allowed the investors to focus on the cycle.

You know, Cat, at least by my reckoning, has been almost giddy about EPG since really six, seven years ago.

and what I'm trying to figure out is, you, sort of, couched your phraseology in an earlier question about EPG in the second half, as "We think" and "We only guide on the year, we don't focus on the quarter."

Are you, sort of, coming to the realization that that channel might be a little full and that maybe your next down vision will be -- your vision will be downward on the

guidance as a result of EPG coming up short?

Most people are having their doubts.

Well, again, I can't comment on changing our guidance, because our guidance is what it is right now, what I just gave you.

So, you know, I'm basically -- our guidance is what I said, that we would expect our earnings to be up slightly this year.

Yes, there is some risk, there is no question on the EPG side, but there's also some positives that we're seeing in other areas.

And I think, even though a lot of the discussion out there today on EPG really deals more with utility plant type capacity as opposed to distributed generation.

And we still think that distributed generation has an extremely bright outlook as we move forward.

It is really more of an impact right now from the economy than anything else.

There's not much doubt in our minds about the demand for this type of equipment out there.

It's more of an economic issue right now.

So, you know, in the second half of the year, again, there is stronger growth for EPG than what we're obviously seeing in the first half.

But in terms of affecting our outlook, I would say at this point our outlook is what I said.

And just as a related engine follow-up, fourth quarter is typically very strong for oil and gas.

Are you -- because of your upped schedules, are you thinking that's going to really help save the day in engines' margins for the full year?

Well, as I indicated in an earlier question, Barry, the oil and gas side of our engine business generally is the most profitable because of the complexity of the packages and so forth.

But we are seeing increased price competition pretty much across the board on both engines and machines, even in the petroleum-related business.

So, you know, again, to say that that's going to save the day or EPG is going to kill it, I can't do that.

But fourth quarter is the big one for oil and gas.

Well, historically it has been, that's correct.

I'll get back in queue.

Thanks.

OK, Barry.

Our next question comes from

.

Please state your affiliation.

J.P. Morgan.

Hi, Jim.

Hi,

.

I know you don't want to talk about quarterly earnings, but the full-year guidance, kind of, suggests 240 for the remaining three quarters, which is like 80 cents a quarter run rate.

And what are some of the things we should keep in mind, in terms of trying to model in the quarters?

In particular I'm thinking about, are you expecting the economy to get better as the year progresses, I assume?

Also, you've got the heavy truck engine pre-buy, which could hurt the fourth quarter in that segment.

Can you give us some color on how you see the year playing out?

Well, I guess, that's a fair question,

.

And again, without giving any specific quarterly guidance, what I can say is, last quarter we indicated that we expected the first half to be weak with the first quarter especially so.

That has happened.

For the first half of the year, the first quarter really is what's causing the weakness in the first half of the year.

So I guess, what I'm telling you is, as you indicated, to get to the full-year guidance, whatever that number comes out to be, most of the weakness has already happened in the first quarter.

And so, as we go forward here, we would expect that we're going to compare fairly favorably with a year ago.

OK.

My follow-up is, you said that retail sales being down 8 to 15 percent in March was in line with expectations, but I think it's surprising -- at least surprised me how weak it was.

And I see inventory's up 300 million, both year over year since December, which, you know, that I think would worry me that there is some unwarranted built up of inventory on your balance sheet.

I mean, can you just, kind of, allay some of those concerns?

, are you talking about our inventories or dealer inventories of new machines?

I'm talking about your retail sales numbers; they're 8 to 15 percent down.

You know, it looks like to me, that was, you know, perhaps would be bit weaker than you would have thought, even though you said that was in-line with your expectations.

But I'm looking at the inventories on your balance sheet, going from 2.9 billion to 3.2 billion.

Yeah, I think there's not much question that at this point in the year, both the dealer inventories increase in anticipation of the selling season and our inventories typically increase in anticipation of the selling season.

And some of that, as trying to look back historically, you'll see a build up in the early part of the year in our inventories, as well as the dealer machine inventories, and then it starts tailing off as we move through the second quarter into the second half of the year.

So there is nothing, I guess, I would say,

, out of line with historical patterns that we've seen here.

And we have been extremely focused on not building any excess inventory.

Otherwise, had we done -- I mean, I think a good example of that is what I indicated with production being down double digits.

We could have continued producing and built more inventory...

... occurs every year.

The 15 percent down was in line with your expectations, if I heard you right.

That is correct.

We were expecting -- we didn't know the exact number, obviously, but we were expecting retail sales, because of the economy, to be down in the first quarter.

OK, thanks.

OK.

Our next question comes from

.

Please state your affiliation.

Goldman Sachs.

Hi,

.

Hi.

I just want to walk through a bunch of the pluses and minuses, because it's still not netting up to me.

It looks like, within the machines business, that you took your forecast up slightly for North American construction equipment.

Can you just talk about what the rationale is behind that?

And I guess I'll start there.

No, we did not take our forecast up in North America for machines.

It continues to be flat.

Last press release was down slightly.

You talking about the first quarter -- I mean, the January press release?

Yeah.

I thought it said flat.

All right, I guess there's no significant change there.

No, there is no significant change.

And then, in the engines businesses, all the pluses and minuses seem to equal out, you know, with plus from trucks, plus from oil and gas, offsets the power gen and marine.

Generally, yes.

OK.

The question is, if we get 8 cents benefit from currency, you know, where's the offset to that?

Are we still looking for 30 cents in cost reduction...

... something more or less than that?

You're talking about, as we move throughout the year?

Yeah.

Well, again the -- would come from cost reductions.

So following that same logic, yes, there is an expectation on our part for the year to have cost reduction, without giving a specific number.

Has that changed significantly, whatever the number was in January?

Has that number changed at all?

It has not.

OK.

Our next question comes from

.

Please state your affiliation.

Credit Suisse First Boston.

Good morning, Jim.

Good morning,

. mcginty: Can I just start with a clarification?

You said that in October of '02 that when you introduce the range of engines with the changes, they will be fully EPA certified.

That does not mean that they will meet the standards.

That's assuming you might have to pay the

.

Or are you saying that they're now going to meet the standards?

No.

To clarify that, they will be certified, but they will not meet the 2.5 grams of NOx.

We're still at 3.1 on that, right?

That's what they're looking at, is somewhere in that three range, yes.

OK.

My first question really is on the EPG.

If you're talking about the business being flat after you've had a significant decline in the first quarter with all of the disruptions with that, obviously you have to have a fairly substantial ramp-up in production, but often there are disruptions for there, and you've got pricing.

So even if EPG is flat, are we not looking at the profit being lower because you've got the disruptions in the first half and the decline, you might or might not have some disruptions in the second half, from the increase, and you did clearly point out pricing is being difficult?

So, EPG profits, I assume, would be under pressure even on flat sales.

That is correct.

OK.

My related follow-up -- and this gets back to

versus non-

-- if your truck engine production is higher, even though it's lower margin business because it's not profitable, at least I, presumably that if you weren't in the red you were darn close to it.

So, I mean, any port in a storm, I assume you get a higher level of profit but I'm not sure what the margins are going to be, whether or not it's a plus or not, but the offset I assume is the much higher level of profits or absence of the loss coming from the truck engines coming back.

Yes, I think that's a valid presumption.

And also absorption of fixed cost.

And then just to, kind of, follow up where

was, what does happen in the fourth quarter?

Nobody buys trucks in November and December, what do you do about having ramped up?

Well, that's something that we'll be able to do really with overtime and if it ramps up -- right now we're doing it with overtime.

If it ramps up even more, we'll do it with supplemental employees as we need to.

And those kinds of costs can be pulled out pretty quickly.

Supplemental meaning temporary as in...

Temporary, yes.

Thanks very much.

OK,

.

Our next question comes from

.

Please state your affiliation.

Robert W. Baird.

Morning, Jim and Lynn.

Hi, Rob.

First question: On your forecast provisions in EPG and oil and gas, it looks to me like you've probably made very little if any change in your outlook for the balance of the year in both of those businesses.

No, we have on the petroleum side.

I mean, we're setting up pretty strong double digits this year.

So that is a change from the last time.

But going forward from the first quarter if that's what you're asking.

That's what I mean.

It'll probably -- because we had such a strong first quarter, yeah, it's probably going to be similar to what we were expecting.

previously.

And on the EPG side?

I think on the EPG side that would be similar, because what happened there was exactly what we expected in the first quarter.

Oh, it was?

OK.

Second question has to do with margins.

You talk about pressure in the EPG business.

Basically looking for clarification here: Is that primarily occurring in the power module market, and then can you comment on your margins in that business in aggregate in North America versus rest of world?

OK.

Taking your last question first, Rob, are you talking just the power module margins, or EPG in total?

No, I meant EPG in total.

EPG in total generally has similar margins around the world.

So it isn't like some of the selected products that might have better margins in one area of the world compared to another.

It's pretty similar.

So you think the shifting mix is basically neutral to margins?

To margins, that's correct.

OK.

From that standpoint.

Right.

Pricing question?

Pricing, repeat that question again for me, Rob.

My question is if the biggest impact you're seeing in terms of pricing pressure in EPG was occurring in the power module market.

That is more significant than what we're seeing in the rest of it.

And the reason for that is obviously there continues to be some surplus inventory out there, either at dealers or at customers that's unused.

So...

And we are utilizing that inventory as we fill some of these orders, particularly large orders in South America.

We have been using some of that dealer inventory to fill those orders to help bring that surplus inventory down.

So, yes, it's more significant there than anywhere else, but there's also price pressure in the rest of the business.

Including

.

Including

.

OK.

Thank you.

OK.

Our next question comes from

.

Please state your affiliation.

Mr.

?

He got his question answered.

Our next question comes from

.

Please state your affiliation.

With A.G. Edwards.

Hi, Mike.

Hello, Jim.

Is that...

... of the cool gas EGR engine that pre-buying will slow in the second and third quarters?

That we are successful in delaying the certification of cooled EGR engines?

Correct.

I think that's kind of speculative.

I mean, I don't know the answer to whether that will have any impact on sales.

But I guess, I'm not exactly clear on specifically what your asking there, Mike, either.

Then let me do it as a follow-up.

On an orders basis do you believe you are gaining market share in the current medium and heavy truck market?

Yes.

As we looked at -- this is public information -- as we looked at the report, and the latest one we have is only through February, our market share on heavy duty trucks and medium duty trucks, both -- truck engines, both were up.

Three or 4 percentage points, as a matter of fact.

Then would it not be logical to expect that market share gain to fade if you, indeed, are successful in deferring certification of the cooled EGR engine?

I don't think so.

OK.

I mean, our expectation would be that they're buying the engine that they think is the best engine right now and that that would continue on.

OK.

Thank you.

OK.

Our next question comes from

.

Please state your affiliation.

EBS Warburg.

Good morning, Jim.

Hi, Dave.

Jim, back to power gen for a second, can you talk about what the average lead times are for

and the big diesel engine, and what your backlogs look like in power gen?

Well,

is the turbine engine manufacturer, Dave, as you know.

And lead times range anywhere from three months for the smaller stuff to nine months for the bigger product that they have, which would be up in the 20 megawatt range or 20,000 -- somewhere in the 20,000 horsepower range to about 16 or 17 megawatts.

So given the volume -- or the demand that they're seeing right now, it's probably going to push lead times out just a little bit, as well.

The lead times on reciprocating engines are obviously much shorter than that.

Most of our big engines on the reciprocating side come from the Lafayette facility and lead times there are measured in a matter of few weeks, as opposed to months.

Did that answer your question?

It does.

But based on what your backlog is, how does

look in the back half of the year?

Well, in order for

to build the products before the end of the year, they've already got to have the orders right now and they do.

So they're basically -- I mean, that's just a function of how long it takes for them to build the product and the lead times, so they've already -- they're booked for the year.

All right.

So the uncertainty on the power gen side is really just in the reciprocating engines?

Is on the reciprocating side, correct.

All right.

Terrific, Jim.

Thank you.

All right, Dave.

Our next question comes from

.

Please state your affiliation.

Prudential.

Good morning, Jim.

Hi, Andy.

How are you?

Good.

How are you doing?

OK.

Just three quick questions on oil and gas.

Did you have any

of scale in the quarter?

On oil and gas?

Yes.

No, not really, because again that's pretty much oriented toward the turbine engines.

So not really.

OK.

And then on the truck question, are you seeing any orders for post-October 1 yet?

I don't think so, because those orders wouldn't be coming in this early, Andy.

So no, we're not seeing that at this point.

OK, let me ask you in a different way.

Are you seeing an acceleration in your order pattern as we get closer to September?

Well, the acceleration that we're seeing is the pre-buying that the industry is basically doing out there.

I mean, none of the -- we are not encouraging any pre-buy, because we can't do that.

All we're doing is reacting to what the market is doing.

So yes, we are seeing some acceleration in orders.

And based on the customers that we talked to, they're telling us that is in advance of the deadline.

So yes, we are seeing that right now.

OK.

And then, last question on the tax rate.

Could you, kind of, help us --it was fairly low or at least it appeared to be in the quarter on the financial sub as equity.

What should we look for during the year?

Well, our expected tax rate for the year -- I think I mentioned this last quarter as well -- is an estimated annual tax rate of 30 percent.

And that's what we recorded and used in the first quarter.

Thanks.

OK, Andy.

Our next question comes from

.

Please state your affiliation.

Qwest Research.

Good morning, Jim.

Hi,

.

br><br><time begin="01:33:24"/> Hey, the SG&A was up pretty substantially as a percent of sales, you know, roughly flat on, you know, the sales decline.

What is going on there?

Well, as I indicated in my comments, compared to a year ago, it's about flat.

So this is a -- this is really a volume issue -- sales volume issue in the first quarter.

As we expected, it was down and it's not a question of increasing SG&A spending significantly, because we didn't do that.

It's a question of sales volume being down $400 million from first quarter a year ago that's causing that relationship to increase.

We certainly do not expect that kind of a percentage relationship to continue throughout the year.

As our sales volume comes back to expected levels, as I indicated I think in the last call, we're looking at somewhere in the 11 to 12 percent range for the SG&A spending for the year.

OK.

I just thought there might be more of a variable cost element in that SG&A.

That's so it, you know, suggested there might be something else hidden in there.

And I guess that gets to a follow-up about Six Sigma spending.

Has that increased substantially over '01?

Well, in answer to your first question, no, there wasn't any real impact of any new items, for example.

And in answer to your second question, about Six Sigma, no, the spending is actually lower this year than it was last year, because most of what we were spending last year was on outside consultants, and most of our training this year is being done internally by our black belts.

Now let me clarify one other thing too,

.

Were you looking at the SG&A for M&E only, or were you looking at consolidated?

Because consolidated is up, and that's a reflection really of increases at Cat Financial.

No, I was talking about machinery only.

OK.

Thanks for that clarification anyway.

So Six Sigma, your comment here is on a net basis or just gross spending?

No.

Spending.

Expenses.

OK.

And then the benefit should increase, so on a net basis we should show a more substantially year over year improvement?

Correct.

OK.

Will that be a positive contribution in '02?

The net there you mean?

Yes.

Yes, it will be significantly positive.

OK.

And then just one final detail: Your adoption of

, the good will...

Yes.

... how does that split between machinery...

...

I've got a note on that here.

I just need to find it.

Let me look here.

OK, great, Jim.

Thanks a lot.

OK.

, we probably have time for one more question, if there's one more in the queue.

OK.

The next question comes from

.

Hi, Jim.

Quick follow-up on Cat Financial.

Sure.

The securitizations in the quarter, you know I've talked in the past, the difference between public and private into the trust.

What was the gain from securitizing receivables in the quarter?

It was minimal.

That was it.

I mean, when I say minimal, what I'm talking about is the change from a year ago.

It was a few million dollars in this quarter and a few million dollars in the first quarter of '01, and the change was very small.

And a quick follow-up with that, the SG&A increase in Financial, any other operating expense increase?

Yes.

Anything unique going on there?

No.

The increase there was mostly due to increased provisions for bad debt.

Where are the bad debt levels...

We haven't increased those.

In terms of the percentages there, I'll let Lynn answer this.

He's a lot more familiar with it.

But we got two pieces -- just one other thought and then let Lynn comment on this.

The SG&A increase is due to portfolio growth, as well as the bad debt provision increase.

So as our portfolio grows, we continue to add more, obviously, to the bad debt provision.

Lynn, you want to add anything to that?

Only that the provision -- the reserve we have is about 1.25 percent of the portfolio, which is, by just about any standard you look at, a very positive indicator, because write-offs are something in the range of 0.4 to 0.5 percent.

So you've got somewhere around 2.5 times write-offs in your reserve.

And that's a standard that we try to maintain.

So the fact that provision was up does reflect somewhat the business conditions, but it's not a situation where we had a shortfall and we're trying to make something up.

Lynn, while I have you here, the debt at Cat Financial, or financial products more broadly, is up about 320 million year over year, but the interest expense is down by a third, it's down about, whatever, 66 million, suggesting clearly a lot of short-term debt at Cat Financial, taking advantage of the lower interest rates year over year.

Can you give us a handle on when are you looking at

out from the debt or we're just going to ride out with the interest expense?

No, I'll reiterate what I think I pointed out in earlier calls.

We have a funding policy -- a match funding policy at Cat Financial that has a range of 70 to 90 percent.

So we're match funded on the portfolio from 70 to 90 percent.

And within that range, that 20 percent, we try to take advantage of the changes in interest rate.

So as rates come down, we try to get to the lower end of that; as rates start to move up, we would try to get to the higher end of that.

At the moment, with the current outlook for interest rates, we're still resting fairly close to the lower end of that range.

But we'll watch that closely, and as we begin to see signs that rates might move up, we'll move that up to try to take the volatility out of it as much as possible.

Thank you very much.

OK, Dave.

I see,

, it looks like we might have one more person in the queue.

Let's take that last question, and then we have to wrap up.

The next question comes from

.

Please pose your question.

Thanks, Jim.

I just wanted to get a clarification on the retail sales being down 8 to 15 percent overall.

They had been down 2 to 7 at the end of February.

Would the implication from that being that within the 8 to 15 you're at the lower end of that range?

Yes, that's a good indication, right.

We are.

OK.

Thanks very much.

OK,

.

Well, thanks again, everyone.

It's been a pleasure sharing our results and responding to your questions this morning.

If you have any other questions that you didn't get answered, please call me.

So thanks again for your interest in Caterpillar and goodbye.

Thank you, ladies and gentlemen.

This does conclude today's teleconference.

You may disconnect your phone lines at this time, and have a great day.