開拓重工 (CAT) 2003 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to Caterpillar's first quarter 2003 results conference call.

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

It is now my pleasure to turn the floor over to your host Nancy Snowden.

Ma'am, you may begin.

Thank you, Jan.

Good morning.

And welcome to Caterpillar's first quarter 2003 results conference call.

I'm Nancy Snowden Director of Investor Relations.

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

We will address your questions today during the q and 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 wrap up with the question and answer period.

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 8k filed with the Securities and Exchange Commission today.

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

As you know, this morning we reported first quarter sales and revenues of $4.82 billion dollars and profit per share of 37 cents.

Sales and revenues were up $412 million dollars from first quarter 2002 with machinery up $264 million dollars and engines up $116 million dollars.

The increase was due to approximately $200 million dollar improvement in price realization.

Two-thirds of which was attributable to the favorable impact of currency.

In addition, we experienced some higher volume in truck engines and machines.

Price realization is defined as the impact of price changes, sales variances and currency fluctuations on sales.

Sales variances include items such as warranty, special retail, and wholesales incentive programs and manufacturer and cash discounts.

Profit was $49 million dollars higher in first quarter of 2003, compared with 2002, as a result of operational efficiencies of approximately $70 million dollars.

Improved price realization, excluding currency and on-highway truck and bus engines of about $40 million dollars, lower research and development expenses of about $25 million dollars, and the favorable impact of higher sales volume net of unfavorable product mix of approximately $20 million dollars.

Offsetting these items were approximately $50 million dollars in higher retiree, pension, health care and related benefit costs.

And the net unfavorable impact of currency of $20 million dollars.

In addition, the changes in emission standards for on-highway truck and bus engines in North America resulted in a net unfavorable impact of approximately $20 million dollars.

The impact of these changes include, nonconformance penalties, product cost increases, and ramp-up production costs.

Partially offset by price increases on these engines.

Machinery and engines SG&A expenses higher by $21 million dollars in the 2002 quarter levels.

As a result of unfavorable impact of currency and of absorbing a portion of the higher retiree pension, health care and related costs.

Excluding the impact of higher retiree pension, health care and related costs, machinery and engines SG&A was approximately flat with first quarter 2002.

Now I will provide some comments on North America 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%, which is unchanged from the same period last year.

Rental rates for the rolling 12 months, through March, are unchanged from a year ago.

Rental rates are forecasted to remain under pressure.

Overall units and dedicated dealer rental fleets are down about 4% from a year ago.

Dedicated dealer rental fleets consist of rent-to-rent units and units in Cat rental stores.

Rent-to-rent units which currently make up about 60% of the units in dealer rental fleets are down 5% from a year ago.

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

These fleets continue to grow, and are up about 6% from a year ago.

North America dealers added five rental stores (inaudible) About ten more are expected by year end 2003.

In the Europe, Africa, Middle East region, dealers had 714 rental outlets. 187 of which were converted to the Cat rental store identity as of quarter end.

In Latin American, we had 93 stores and 74 in Asia-Pacific, including Japan.

At year end 2000 we are expecting about 1350 rental outlets throughout the world.

Of these 380 stores in the United States and Canada, and about 470 in the rest of the world, will have the Cat rental store identity.

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

We expect continued weakness in the near term.

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

We announced worldwide machine and parts increases to dealers averaging 2 2.5% effective January 2nd, 2003.

Caterpillar is resolute in holding to the price increase and has been in voicing our dealers at the increased price.

However, transactions in the field during the first quarter were largely sales of preprice increase inventory.

As a result, it is too early to tell how much of the price increase will become permanent, and whether our competitors will stand firm on their announced price increases.

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 6 Sigma.

We continue to gain momentum on our 6 Sigma efforts as we increase the number of blackbelts to 1800.

Currently, over 55 dealers and 135 suppliers are deploying 6 Sigma and chartering 6 Sigma projects for their businesses.

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

We have over 5,000 projects underway with over 2500 pending.

I will not be giving any specific number, but our target for 6 Sigma benefits in 2003 exceeds the goal achieved in 2002.

We are on track to achieving our 2003 goal.

Second, an update on our advanced combustion emissions reduction technology, or ACERT.

The ACERT program remains right on schedule.

We now hold EPA certification for two ACERT engines, the C-7 on-highway and C-9 urban bus engines.

We started shipping medium duty engines first quarter of 2003 and expect to start shipping heavy duty engines in the second quarter.

By year end, all Caterpillar on-highway truck and bus engines produced for the U.S. market will incorporate ACERT technology.

ACERT engines in on-highway applications continue to perform in accordance with our expectations and will have accumulated 10.2 miles by October 2003.

Results to date indicate we are on track to deliver the reliability and fuel economy we have promised.

All Caterpillar bridge engines are unconditionally EPA certified and market acceptance of our bridge engines has been strong.

On-highway sales to users were up 20% on the first quarter of 2002 as reported in the Wards Report.

While our projection for ACERT unit volumes remains unchanged, the surge and bridge demand will create an increase in non-conformance penalties that will only be partially offset on the increase of this bridge product.

We now expect the net unfavorable impact of changes to the emission standards on on-highway truck and bus engines during 2003 to be about $30 million dollars after tax.

In 2002, this unfavorable impact was $17 million dollars.

Although the negative impact of the changes in emissions standards is higher, incremental sales of these engines do generate incremental margin.

ACERT will provide technology platforms for our engines through the end of the decade and allow us to meet the three major sets of engine emissions regulations that impact Caterpillar's engine products.

The first is the off-highway deadline of January 2005.

With ACERT we also have a line of site to the 2007 and 2010 on-highway diesel emissions standards.

The 2010 emissions requirement will represent a 90% reduction in emissions relative to current on-highway engines.

And from the engines that were produced in the 1980s.

Meeting the aggressive off-highway emission s regulations announced yesterday by the Bush administration will stretch all engine manufacturers.

But Caterpillar's well-positioned to provide a long-term solution with our breakthrough, ACERT technology.

We anticipate that the R&D expense required to meet these regulations will be within our normal engine R&D budget.

ACERT is truly breakthrough technology that will meet the clean air goals we support, while maintaining the superior engine reliability and performance our customers have come to expect from Caterpillar products.

We are confident that this technology will provide us with significant advantages.

Providing a cleaner environment for everyone and exceptional value to our customers.

Now, for the outlook.

World wide economic and geopolitical uncertainties remain at relatively elevated levels in the early months of 2003.

We expect this will dampen the economic recovery in the first half of 2003, but growth has expected to improve in the second half.

In this environment, world wide industry opportunity is expected to be about the same as 2002.

Included in this is a revision of our expectation of industry sales of heavy duty truck engines in North America, including Mexico, to between 140,000 units on the low end, and 160,000 on the high end in 2003.

This projection is still lower than the 2002 industry due to the significant pre-buy that took place prior to October 2002.

Therefore, our overall outlook has improved somewhat, but given the degree of uncertainty in the business environment, the balance of the year will prove challenging.

2003 company sales and revenues are expected to be flat to up 4% from 2002 levels.

We continue to anticipate improved operational results will offset most of the $300 million dollars of higher post retirement costs.

Financial products revenues are expected to increase approximately 10%, primarily driven by Caterpillar Financials' record portfolio additions in 2002.

Therefore, despite the increased.

Benefit Costs, profits should be in the range of $2.20 to $2.30.

Full details of the outlook for 2003 including other assumptions are contained in the company's press release issued today.

We are providing supplemental information, including sales to user and dealer inventory levels.

Due to time lags between our sales to dealers and dealers sales to Users, we believe this information will help readers better understand our business.

Now, I will review dealer retail machine numbers and reciprocating and turbine engine sales to users and .

OEM’s.

All comparisons are based on constant dollars.

Retail sales of machines for the three months ending 2003 compared with the same three months of 2002 are: Asia-Pacific, up 7%.

Europe, Africa and the Middle East, down 6%.

Latin American up 11%.

And the subtotal of those three is flat.

North America is up 6% and the world is up 3%.

Retail machine sales were up in all marketing regions except Europe, Africa, and the Middle East.

North American retail sales benefited from 27% growth in deliveries of machines to dealer rental operations.

Continuing strong sales in China, principally resulting from road Construction, supported the 7% increase in Asia-Pacific . 14% lower sales in Europe resulted from slow economic growth and uncertainty regarding the armed conflict in Iraq.

For the three months ending March 2003 compared with the same three months of 2002, total reciprocating and turbine engine sales to users and OEMs were as follows.

Electric power, down 14%.

Industrial engines up 10%, marine engines down 8%, truck and bus engines up 24%, petroleum down 7%.

The total was up 1%.

Now, let's turn to dealer machine inventories.

First, sequentially, comparing March with February 2003.

Asia-Pacific, up 10%.

Europe, Africa, the Middle East, up 8%.

Latin American, up 4%.

Subtotal of those three up 8%.

North America was up 9% and the world was up 8%.

Next, year over year comparing March 2003 with March 2002.

Asia-Pacific was up 33%.

Europe, Africa, the Middle East, up 7%.

Latin American down 36%.

And the subtotal of those three was up 4%.

North America was up 4% and the world was up 4%.

Dealer inventories of new machines at end of March compared with year end were up on a world wide basis about $270 Million dollars, most of which occurred in North America.

As dealers are preparing for the upcoming selling season.

Dealer inventories related to sales are still lower than a year ago so that an increase in retail demand should translate to increased sales by Caterpillar.

Our expectation for full year 2003 is for dealer new machine inventories to increase in the $120 million dollar range on a world wide basis.

Asia-Pacific dealer new machine inventories are at 2.2 months of sales down from 2.8 months a year ago.

Europe, Africa, and Middle East dealers are at 2.7 months of sales down from 3.0 months a year ago.

Dealer new machine inventories in Latin American are at 2.4 months of sales, down from 3.2 months a year ago.

Dealer new machine inventories for the subtotal of these three regions outside of North America are at 2.5 month of sales, which is down from 3.0 months a year ago.

North American dealer machine inventories are at 2.5 months of sales, up from 2.4 months.

Overall on a world wide basis, dealer machine inventories are at 2.5 months of sales down from 2.7 months a year ago.

The retail statistics for March are also available on voice mail through May 15th, by calling 309-675-8000.

Okay, now, it's time to move to the q and a portion of call.

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 opened 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.

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

Lastly, we do ask while posing your question that you please pick up your hand set if listening on speakerphone for optimum sound quality.

Please hold as we pull for questions.

Our first question is coming from David Bleustein.

Please state your affiliation, then pose your question.

Good morning, UBS Warburg.

Nancy, you mentioned a positive initial feedback regarding the ACERT engine.

Can you walk through how many on-highway ACERT engines are out there with customers and how many miles they’ve logged through the quarter that generated the feedback?

This is information that we have not made public.

There are a number of ACERT engines out, and we have them located at various places around the country.

The results are very positive in the feedback we have been getting, does meet the reliability, fuel economy, and performance that we have expected .

I am just trying to get a sense.

I mean, is this 50 to 100 engines, is it 400 engines ?

It's over 100 engines.

You mentioned that you’re now expecting over $120 million dollar increase in dealer machine inventory, did I hear that right?

No, it was just the opposite that in 2003, we would decrease the machine inventory by $120 million.

Terrific.

Thank you very much.

Thank you, David.

Thank you, our next question is coming from David Rosso (ph), please state your affiliation and then pose your question.

Smith barney, good morning.

Good morning, David.

I’m just trying to think through the operating leverage in the company.

If you could indulge me for a couple of minutes here on a few numbers.

The first quarter, moving parts that you cited, just trying to strip out the pieces to get to the core performance with machine -- with total equipment sales up 9%.

If you strip out the five things you cited, the $70 million dollars of operational benefits, you know, speculated to 6 Sigma benefits, the lower R&D .

You add back the pension incremental cost of $50 million.

The emissions costs incremental $20 and then you take away the effects of health to $20 million.

Those five moving pieces pulled out appropriately suggests operating profit margins were flat year over year on the equipment company.

While sales were up 9.4%.

Especially with machines growing more than engines, I am just trying to understand how is that the case?

And also maybe it relates a bit to the comment you made about unfavorable mix.

Can you help me understand it a little bit.

Sure, David, glad to do so.

First the comment about the R&D.

I think there is a certain aspect that is due to timing and it will not be necessarily a total reduction for the entire year.

I think the most important piece perhaps is missing is mix.

Based on the way we are forecasting our business, the difference relates to the negative impact of mix of the machines and engines shipping this year versus 2002.

And of course, this mix has an impact on the margin.

Any way to give us more color on that?

That's not what I am hearing on the channel.

I am just trying to understand.

Is it anything related to the geographic outlooks you gave?

Industry you brought down?

And you brought down the North America numbers on machines, brought down Europe.

But you did raise Asia–Pacific, and as you know I was in China last month, and I know the excavators in there are pretty profitable, going in pretty strongly.

Is the mix the heavy in Europe and North America?

As you note, Asia-Pacific will be significantly up, at least that's our expectation.

And that has an impact also on margin.

But the mix is adverse going forward?

That's correct.

All right I will get back into the queue.

Thank you.

Thank you, David.

Thank you.

Our next question is coming from Steve Voklmann (ph).

Please state your affiliation and pose your question.

It's Morgan Stanley.

Good morning.

Good morning, Steve.

A couple of questions.

I guess I was interested, Nancy, about the comment that you made in the beginning about the price increase, which I'm taking to mean hadn't really hit your numbers yet because the dealers had been selling older inventory off the lot, which makes me wonder whether assuming your price increase sticks that sounds like it might be upside to your view of world going forward.

As you look at our figures in this quarter, we have sold equipment to dealers with the price increase included.

So, therefore, that price increase does show in our figures.

Okay, good, I misunderstood that.

On the engine signs, I'm wondering if you could sort of give us a rough idea of what the engine margin would have been if you didn't have to accrue those fines so that we could see what that profitability looks like and sort of secondarily to that, if the industry volumes come in better than the 140 to 160 range that you put out there I assume that mean the signs would also be higher?

Steve, I don't think we can go into any further detail on the margins about the engines.

But I think we ought to focus on the period of time when we become fully assert and I think you'll see a significant improvement in those margins .

You know, that's probably what we want to say about margin on engines at this point.

We still think the ACERT margin will be higher than the older --

Oh, definitely.

Ok, thanks.

Thank you.

Next question is coming from Gary McManus.

Please state your affiliation and then pose your question.

JPMorgan, hi Nancy.

I am just looking in your release.

And when you talk about the dealers sales in North America up 6%, and you had like, you know, really good growth in a number of different areas like heavy construction, general construction, forestry, the rental was up 27%.

So, you know, I want a little bit further elaboration on that especially when I look in your outlooks section.

You said industry demand, North American was down 5% in the first quarter.

You saw weak commercial development, industrial utilities.

What's behind the kind of double-digit growth you saw in a lot of these different end markets?

Are you picking up a lot of share?

And is this sustainable?

There's an aspect of picking up share, although we probably don't want to comment further on that.

I think we've identified the major areas of increase in rental, and general construction and heavy construction.

I think you've identified those for us, Gary.

I'm not sure that we can give you any further color on that.

I mean, -- I mean, it seems to be inconsistent what we're hearing with the general economy, especially again the, you know, a strong sales to highway construction, sewer, and also -- so just seems like either picking up a lot of share, or something else going on that I don't understand.

So you can't give me any kind of further elaboration on that?

Also note that Canada was up 37%.

I mean, when I think of Canada, I think of natural resources.

Can you provide a little color on why we saw such strong growth in a number of these areas.

Gary, it’s Lynn.

Let me see if I can analyze.

We were pretty specific, I think in our release as to the

segments that where we did see the increase.

I think certainly as you point out, the highway is understandable.

I mean, the funding is still flowing there in T-21.

I don't think we can underestimate the deliveries of -- as the North American dealers add new rental stores, a few new rental stores and as fleet replacement is starting to role now with the Cat dealer rental stores.

Keep in mind, they started building that up in 1998.

So we're getting into three to four-year time frame, and our dealers are updating their fleets, and that is having an impact as we have said in the past, it would.

Once we got into that replacement cycle .

You know, I understand you're questioning of these segments versus the general economy, but most of it really is related to what we've said here, the highway and the related segments that benefit from highway and the dealer rental fleets.

I mean, just last question and I will get off.

Was market share a big factor or do you think the overall industry was growing you know, fairly well?

Because it seems at odds with what you said in the outlook section at industry demand in North America was down 5%.

So it would suggest significant market share gains .

There was some pick up in some of the high volume models Gary.

Okay.

Thanks.

Thank you, our next question is coming from Joel Tiss.

Please state your affiliation and pose your question.

Still at Lehman Brothers.

How are you doing?

Just two things quick.

In one section of your press release you say that the highway, sewer, water were strong, and then later you say the public construction was weak.

Can you give us a little bit of an idea what the big divergence is between those two?

I don't recall we said public construction was weak.

I'm looking for it, too.

It's on page 11, all the way on the bottom.

North America.

It's in our outlook.

So it was good in the first quarter and it looks like it's going to trail off as the year goes on?

I think it's a bit uncertain at this point.

All right.

And, Joel, keep in mind that's an industry, not necessarily our sales.

Maybe that's where the divergence comes.

Industry versus Caterpillar sales.

Okay.

Can you also give us a sense of how much maybe a pre-buy there was in this first quarter ahead of price increases?

Well, the price increases have been imposed over a period of time.

On the truck and bus engine, are you talking about truck and bus engines, or are you talking about machines in general?

I'm talking about on the machinery side.

I think we have a decent sense what is going on the trucking side.

The price increase was January 1.

Any prebuy would have been in the fourth quarter.

Which I'm sure you recognized.

I think that's about all we can really say.

So there wasn't any inventory, clean out, stuff that was left, you know, the 2002 model sold in 2003 in the first quarter?

No, I think our comments were that some of that inventory at the pre-priced increase level were -- was in inventory, and those items were sold during first quarter.

That was why we really can't anticipate what, you know, how -- how well the price increase will be maintained.

Right.

And I am trying to get a sense of how much the first quarter strength may have come from that little bit of a rush to avoid the price increases.

Let's make sure we separate, Joel, the difference of dealer sales and to users.

Our sales to dealers were not impacted by dealers trying to buy inventory or buy machines without the price increase, because our price increase went into effect January 1.

Everything they bought, all of our sales are at the new prices.

They are selling inventory that they had in place prior to the price increase, and that's why we're not sure how soon at the retail level the price increase will start to appear.

Okay.

Separate the difference between retail sales and our sales to the dealers.

Okay.

Thank you.

Thank you.

Our next question is coming from Alex Blanton.

Please state your affiliation, then pose your question.

It's Ingall’s and Snyder .

Nancy, could you tell us whether the sales in the first quarter, how they related to what your expectations were ?

Were they better?

The same?

Alex, I think as you know, we don't give quarterly guidance.

I know, but you have an internal plan, and I'm saying were you presently surprised with the sales?

We also don't talk about our internal plans versus, you know, the actuality.

Okay.

Well,

We're happy with the quarter, if that gives you any

And on the same line, this is still on the first question here.

You've guided to zero to up 4% for the year and you were up 9.4% for the first quarter.

So mathematically the rest of the year, you're saying be in a range of down 2.6% to up 2.5%.

Apparently, you're not expecting the first quarter strength to continue, is that correct ?

I mean, it looks that way.

Alex, I think it's an uncertain situation.

And I think our best guidance is what we've said on the outlook.

And that's what we're anticipating.

Okay.

Going on now to the Europe, Africa, Middle East sales,they were up 17.5% in the machine area from last year.

And yet, sales to dealers were -- dealers sales I should say were down 14% in Europe.

And they were up 2% in the Middle East and Africa.

They were up in the CIS, but what explains this very big difference between your sales to dealers and the dealers sales to users in the European area ?

Is it all inventory building, or what's going on there?

Was there a huge increase in C.I.S.?

Alex, I think the main explanation is currency.

The Euro versus the dollar.

The Euro being much stronger converts to higher sales.

Okay.

So of the total currency effect for machines for the year was 3%.

So how much of that should we assign to EMA, almost all of it, right.

Yeah, I think that would be an accurate assessment.

So that basically explains why there was such a huge sales increase.

That's correct.

Next question is coming from Andrew Casey.

Please state your affiliation and then pose your question.

Prudential Securities.

Good morning.

Good morning.

Just a question and if you can help me understand it.

The pension, health care and other benefits expense was in the release mentioned as 50.

First was that the total expense associated with that item?

And second, how do you true that up with the 300 million guidance given in Q4 ?

Thank you.

Well, we still expect higher retiree pension, health care and related benefit costs of about 300 million in 2003.

As you may recall, we changed our benefit plan design in the second quarter of 2002, which resulted in lower benefit costs for the remainder of 2002.

Therefore, as we move throughout 2003, the year-over-year increase will widen.

Okay.

Thanks .

Thank you.

Our next question is coming from Barry Bannister.

Please state your affiliation and pose your question.

Hi, Barry Bannister, Legg Mason.

Hi, Barry.

Your capital spending on equipment lease to others was $261 million in the second quarter and it was larger than your operating cash flow and your interest expense is a percentage of revenues of Cat Financial fell 400 BP’s year over year and 300 BP’s sequentially to the lowest level in five years for any quarter.

It sounds like you are doing a lot of leases and you're selling a lot of equipment through that -- through that means.

Could you update us on one, your match funding status, and two, your activity on the leased equipment front, both with rental and without rental, if you would just break it out.

Barry, it's Lynn, I will take that.

First of all, the Cat Financial set a record for retail finance volume in the first quarter is very strong. $1.7 billion, and there was a pick up in the lease business as a percentage of that total, which is reflected in the machines purchased -- or the capital expenses shows for leased machines.

I don't know if this is a trend or not.

As you -- as I think you probably know, leasing fits certain customer groups better than it does others.

And, you know, this could fluctuate in quarters.

It’s generally been around 23-25% of their total activity.

The second part of your question was on matched funding.

We have not changed our matched funding policy, which is a 70 to 90% match fund band.

We are at the low end of that, and obviously with short rates where they are, occur in the posture it's in, we have tried to take advantage of being on the low end of the match funding, and during this period we obviously watch that closely because we don't -- we don't take interest rate -- we don't take a lot of interest rate risk in the portfolio.

Yeah, I thought the band was 80 to 90%.

You're saying it's 70 to 90?

Always been 70 to 90%.

Thanks a lot .

Thank you, our next question is coming from John McGinty.

Please state your affiliation, then pose your question.

Credit Suisse First Boston.

Can I get a clarification first, Nancy, on supplemental information where you are giving us all of these plus and minuses, up 3%.

Dealer sales up 6%, Deliveries to rentals up 27.

Are these all dollars or deflated dollars?

In other words, I assume they are not units?

John, they're in constant dollars.

So we don't have to worry about mixed of units or anything like that.

No.

First question comes back on your guidance, where you in essence say the market will be flat.

You changed the mix of it a little bit by country.

That's precisely of what you said at the end of last quarter, the end of last quarter, you said sales would be flat overall.

And now you're saying sales will be flat to up 4%.

Can you explain?

Is that a recommitment to increased pins or how do we get sales -- how do we get with the same market outlook?

How do we now get Cat sales going flat to up from 4% where before three months ago on exactly the same overall aggregate outlook you were flat ?

I think there's a shifting among the segments that we're talking about.

As you'll note in our release, we identify that shift among the various segments .

There is a certain aspect of currency that will impact these

results as well as the increased volume of truck engines.

So you're saying that the difference between the sales forecast a quarter ago and now is all -- okay, I mean, the truck volume is a peanut in the overall.

You're saying it's currency ?

Well, those are the predominant two things, currency and truck volume.

So the -- you're not assuming any shift in pins, relative to what you were assuming three months ago?

I don't believe our assumption on pins has change.

Okay.

And as a follow-up to go into one other place.

When we look at rental deliveries being up 20 or 30%, whatever they were in the quarter and yet we see the rental, now, we are here at looking units.

The rental units down 4% but the rent to rent, which is the bigger dollars, was probably down more.

What we're look at is not a growth in the rental fleet then, but rather what we are looking at is simply a turnover of -- a of -- of the rental fleet.

In other words, it's not more units going into rental, it's just they're basically bringing the age of the rental fleet down, is that correct?

That's correct.

It’s really a replacement cycle.

Typically, you will see rental units replaced in about 30 months and we're seeing that cycle with 27% increase sales into rental.

And my only question is, does that -- since this is the first time we've seen it, I mean really as you've got the rental stores up, is that going to traditionally be a first quarter phenomenon or do you think that will go on all year?

It should be spread throughout the year.

Thank you very much.

Sure.

Thank you.

Next question is coming from Mark Koznarek.

Please state your affiliation and pose your question.

Midwest Research.

Good morning

Good morning.

Question about the engines here.

You disclosed in your financial release for last year that in -- over the course of the year which presumably was all in the fourth quarter, you paid NCP’s of $40 million dollars and so if we just make an assumption that's probably wrong, that, you know, 40 is the number for this quarter as well.

If we subtract that from your engine operating performance, you're still losing about $10 million dollars despite the fact that sales are up sharply.

Can you talk about what other factors are going on in there, and whether we should expect these kind of losses for the remainder of the year until we get ACERT up in commercial.

Mark, in the script I said the sale of each engine gains incremental margin.

So it isn't a loss on each engine.

If you look at our 10-k, we gave a very detailed enumeration of the pluses and minuses related to the emission standards.

We will be updating that in our 10-q on a detailed basis.

But I would refer you to the 10-K right now, because I think that'll illuminate this substantially.

Exactly where I got the 40 million number.

So I am just using that as a starting point to head back to this quarter's results.

And does seem awfully weak trying to offset the N.C.P. payment.

I am look for comments on mix or pricing or, you know, other kind of issues that might be --

I am sorry.

I see what you're asking.

There are mix issues with truck engines being up and turbines being down in this quarter.

There's an aspect of that.

And also the absorption of the added retiree and health care benefit costs.

I think those are two of the other items that you should add into that calculation.

Okay.

And then one follow-up here, the tax rate was awfully low.

Is that the rate we should be using now for the remainder of the year?

It was 28%.

It was changed last year in 2002 and that's what we anticipate going forward.

Although, it seems to calculate out at a lower number here for the quarter.

I think what you should plan on is that's the rate for the year.

Okay.

Thank you.

Thank you, our next question is coming from Robert McCarthy.

Please state your affiliation, then pose your question.

Robert W. Baird.

Good morning, Nancy and Lynn.

Good morning.

Hi, Rob.

As you look through the commentary on outlook and the commentary on retail activity in the quarter, the one market that seems to stand out is consistently weak is mining.

And I'm wondering is if a -- if the pointing results in mining sector or -- and/or a lower outlook for mining sector would be the largest driver behind the reduced outlooks for the machinery markets in Latin American, North America, and Europe?

I think that's a very significant item in those outlooks.

Definitely.

Okay.

And my follow-up, in your North American dealer inventory levels are up on a year-to-year basis.

And we're looking for relatively weaker retail activity going forward for the company.

And we have a somewhat diminished outlook.

So I'm wondering if there's anything that you're seeing at this point in terms of pressure on production rates or if that's something that, you know, if it were to materialize is an issue would likely be later in the year past the major selling season?

Rob, I want to go back to your initial assumption.

On months of sales, the only area that is up in inventor is North America.

I was speaking to North America particularly.

Okay and up by .1 --

I am looking at the 4% year over year increase.

That's $1 base number, right?

It is.

Okay.

I think perhaps maybe the more interesting area it look at is the month of sales, which of course is inventory divided by sales projections.

Right.

So on a year over year basis, that's pretty marginally up.

Understood.

Okay.

Thank you.

Thank you, our next question is coming from Stephen Haggerty.

Please state your affiliation, then pose your question.

Merrill Lynch, good morning Nancy and Lynn.

Good morning.

Just two quick questions.

First, just to clarify on pricing.

The real test of whether your price increase on machinery is going to hold is tested out on this quarter that we're coming into now.

I think that's an accurate statement.

Okay.

And then just to jump to another area.

S&P I think changed the outlook for Cat yesterday.

They put it on I think a negative outlook for credit watch.

And I was just curious.

A follow on to that is a downgrade of your debt rating, how would that affect the outlook for the profitability for Cat financial this year?

Steve, this is Lynn.

Let me answer that.

First of all, let me point out that they reaffirmed the short-term ratings, a-1, p-1.

What their concern is on the long-term debt is, is the pension and health care obligations.

S&P changed their methodology this year of how they're looking at those obligations in relation to the total debt of companies.

We will meet with them as soon as we can, and I have every confidence that we'll show them we have adequate resources today and in the future to meet our obligations without damaging the structure of our balance sheet relative to the rating that we have today.

So we'll be getting with them just as soon as we can to do that.

But I'm still -- I'm still confident that we can preserve our rating.

You're not expecting a follow-on downgrade of debt rating?

No, I'm not expecting it, because I believe we have the story that will support the current rating.

Okay.

Thank you.

Thank you, our next question is coming from Ben Chernofsky (ph), please stat your affiliation and pose your question.

Good morning, calling from Raymond James.

I am wondering if you can just get some clarification on the comment in the press release about the -- your activity in the oil patch North America, in that you note that the sales were quite a modest increase relative to drill rig activity.

What accounts for that?

Is there -- are there market share issues going on there?

Or are you expecting -- and are you expecting to see that pick up as the year unfolds into the second and third quarter?

We are encouraged to see that year over year, 25% increase in the active drill rig count and we’ve also seen gas storage in North America has dropped dramatically from inventory levelsof last fall, but capital investments by oil and gas companies, however remain conservative.

As they apparently are strengthening their balance sheets and in investor confidence.

We expect sales reciprocating engines to strengthen in the second half of the year.

Right now, we are seeing diesel engine sales from the drilling market are showing good strength.

We're starting to see a return to that.

But sales of natural gas engines for the compression market are -- have remained sluggish.

We expect that to strengthen later in 2004 as well.

Yeah, that's a bit inconsistent, though, with what Tormant (ph) is doing with their compression business for example in Alberta.

For example, the gas compressors there are going from what they said yesterday in their results are going very, very well.

Is there a differencing between Canada and the U.S.?

Yeah, I think that's the difference.

Okay.

And can I just get some clarification also on a point made earlier about the mining outlook for South America.

In that, did I hear correctly, that you say that would account for the majority of the -- of maybe some of these softer expectations you have for the rest of the year?

Because from what I'm hearing, what I've been told in markets like Chile, there are actually indications that some of the mining companies are set to spend through either expansion of mines or fleet replacement for maybe towards the latter end of this year but the outlook is probably, if anything better, rather than worse.

Ben, you're correct.

We are seeing some strengthening in mining in Latin American in the countries that you've identified.

But I think maybe in the overall, this is more of an overall comment than in specifically in Latin American.

Okay.

Great, thanks very much.

Thank you, our next question is coming from Karen Eubleheart (ph).

Please state your affiliation then pose your question.

I don't want to beat a dead horse, but I am still having the same problem that Gary's having with seeing the double-digit increases that you saw in a lot your end markets.

It's not jiving of what I am hearing from a lot of other companies that I covered both here in and in Europe .

Is it -- I mean, -- I mean, was currency that big a pick up?

What kind of unit demand were you seeing?

I'm just really having trouble, unless your really -- your market’s here surged for some reason.

You said your prices are going up so you weren't doing anything on that side.

I'm having trouble conceptually explaining the level of increase.

Versus what I am hearing from other people and seeing in the end markets.

Karen, are you talking about the -- going forward, or the first quarter?

First quarter.

When you went through each of the different segments and discussed the growth rates.

They were very high.

There’s two different pieces here we’re talking about.

You’re talking about dealer sales to users.

Retail sales were up in the quarter.

Right, right, I know.

Our sales to dealers, as we explained, there are -- a big piece of it was price realization which was related to currency, primarily as the Euro, as Nancy has explained.

There was some volume impact certainly from truck engines, and a little bit of higher machine volume.

So it really was -- currency was, like

It was a significant impact -- it was a majority of the price realization and the price realization was a significant impact on the sales dollar.

Karen the release stats that $200 million dollars in price realization, two-thirds of which was the currency.

Right, I know.

Yeah.

But if you go through the pieces it's still -- it doesn't seem like that's enough to explain the revenue growth.

But, okay.

I'm sure it's real.

All right.

We don't tell you anything if it isn't real.

Thank you, next question is coming from George Kin (ph).

Please state your affiliation and then pose your question.

(inaudible) -- capital.

I was just wondering if you could clarify something regarding the rental growth.

If you said that 23 to 25% of your machine sales roughly are to the rentals, or like to fleet store rental does that imply if U.S. machine sales in the first quarter were about 1.5 billion, you’re roughly talking about 375 million of sales to rental fleets, is that right?

I'm not sure -- a.

Can you go through that again.

Yeah, would you repeat that?

sure.

You made a comment a little while ago that about 23 to 25% of your sales was to fleets for rental is that right?

I'm sorry.

What I said was 23 to 25% of Cat Financial's retail financing business generally is in the leasing area.

I am sorry.

I misunderstood.

In that case, can you just give me some rough idea of about how much of your sales were driven by this growth in rental business?

Well, let's separate rental and leasing here.

Our sales to dealers, which eventually end up in a rental mode, whether it goes into their Cat rental stores for short term or the rent -to-rent fleets that they have, roughly 60% of the deliveries that dealers make start out in a rental mode of some type.

And so I guess from that standpoint, you could say that of our sales to dealers roughly 60% at some point will end up -- will start out in a rental mode of some type.

Okay.

I think that we have about time for one more question.

Okay, next question is coming from [Mike Janic] (ph).

Please state your affiliation and then pose your question.

Allstate Investments.

I want to go back to the tension in the (inaudible)-- issue.

I was wondering whether you had any required deposits or contributions into the pension plan in 2003?

And what your projected contributions for pension and OPEG contribution in 2003?

Mike we have no ARISA (ph) required funding in 2003.

Whether we make a voluntary contribution, we will be deciding later in the year.

But of course before the August 15th deadline, we'll make that decision.

Okay, so nothing's decided as of now?

That's correct.

Okay, thank you.

All right, it has been a pleasure sharing Caterpillar's results with all of you this morning.

If you didn't get your questions asked today, please give me a call, and thank you for your interest in Caterpillar.

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.