開拓重工 (CAT) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Caterpillar's fourth-quarter 2003 results conference call. (OPERATOR INSTRUCTIONS).

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

Ma'am, you may begin.

Good morning and welcome to Caterpillar's fourth-quarter 2003 results conference call.

I am Nancy Snowden, Director of Investor Relations.

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

This conference call is copyrighted by Caterpillar Inc.

Any use, recording or transmission of any portion of this conference call without the express written consent of Caterpillar Inc. is strictly prohibited.

If you would like a printed version of my prepared conference call remarks, you can go to the SEC filings in the Investor section of our Website since the prepared remarks are filed as an 8-K.

This morning I will cover our fourth quarter and full-year results, review our outlook, , go over the usual dealer retail numbers, discuss two special topics and 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.

As you know, this morning we reported fourth-quarter sales and revenues of $6.47 billion and profit per share of 97 cents.

For the year, sales and revenues were $22.76 billion, and profit per share was $3.13.

Sales and revenues for the fourth quarter of 2003 were up $1,088,000,000 from fourth quarter 2002, mainly due to 715 million of higher machinery and engine volume, $200 million from the impact of currency, and $66 million of higher financial products division revenues.

Price realization of $63 million and emissions-related price increases of $44 million accounted for the balance of the increase.

Excluding the effects of currency, worldwide machinery price realization was about 2 percent positive for the fourth quarter, as well as for the full-year compared with 2002.

The fourth-quarter price realization impact was mostly attributable to machinery in the North American commercial division.

Profit per share was 97 cents for fourth quarter 2003, up from fourth quarter 2002 profit per share of 88 cents.

Profit increased by $159 million as a result of additional sales volume net of unfavorable engine mix.

Improved price realization of $63 million reflected the favorable impact of modest price increases taken in January 2003 on most machines and parts.

The impact of changes in emission standards favorably impacted operating profit by $32 million as more ACERT product was introduced in the marketplace.

These favorable items were partly offset by higher core operating costs of $93 million and $79 million of higher retirement benefits.

First, let me touch on the operating cost increase in the fourth quarter.

In line with deteriorating business conditions in 2002, we reduced spending in the fourth quarter.

Elimination of most travel and training, reduction of the number of contract employees, and delay of research and development expenditures are examples of these actions.

This year, as economic conditions have improved, we have maintained spending commensurate with business conditions.

In 2003, we increased expenditures to support our future growth opportunities while continuing our focus on cost control.

As we said in the release, there were a number of dispositions of assets that were insignificant individually but had a negative impact on earnings.

One such example is the disposition of our cut to length assets.

Retirement benefits are defined as the cost of defined benefit pension plans, defined contribution plans, and retirement healthcare and life insurance.

This amount is greater than previous quarters as we have revised the definition to include all defined contribution plans.

The increases in retirement benefits from 2002 under the expanded definition were $54 million for the first quarter, $88 million for the second quarter, and $89 million for the third quarter, resulting in a $310 million increase for the full-year.

Previously disclosed amounts were $57 million for the first quarter, $69 million for the second quarter, and $71 million for the third quarter.

The net impact of currency was -$56 million for the quarter.

The full-year impact was a -$27 million.

This includes the net effect of currency on sales in cost and currency exchange gains or losses reported in the other income and expense category.

2003 was a very good year for our cash flow.

After contributing $720 million to our pension plan, Machinery and Engines operating cash flow was $1.43 billion.

The strong cash flow allowed funding for our capital expenditures, increased dividend payments, and the share repurchase program while improving the strength of our financial position.

Pursuant to the share repurchase program authorized by the Board of Directors in October of 2003, $405 million was spent to purchase 5.45 million shares during the fourth quarter.

There were 344 million shares outstanding at the end of 2003.

The goal of the share repurchase program, which expires in October 2008, is to reduce the Company's outstanding shares to 320 million.

Now I will provide some comments on North American rental fleets and used equipment.

North American dedicated rental fleet utilization on a twelve-month rolling basis is continuing to run at a very strong rate, about 66 percent.

Rental rates for the rolling twelve-months through December are unchanged from a year ago but continue to remain under pressure.

Overall units and dedicated dealer rental fleets are up 2 percent from a year ago.

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

Rent-to-rent units, which currently make up 55 percent of the units in dealer rental fleets, are down 3 percent from a year ago.

The Cat rental stores, which generally rent smaller machines for smaller shorter time periods, currently have 45 percent of the rental units in dealer fleets.

These fleets continue to grow and are up 7 percent from a year ago.

North American dealers added 15 rental stores in 2003 for a total of 388 stores at year-end.

About 10 more are expected in 2004.

In the Europe, Africa, Middle East region, dealers had 783 rental outlets, 299 of which were converted to the Cat rental stores entity at year-end 2003.

In Latin America, we had 103 stores and 117 in Asia-Pacific.

At year-end 2004, we are expecting about 1470 rent outlets throughout the world, up from 1391 outlets at year-end 2003.

North American used equipment prices trended up about 4 percent in the third quarter compared to a year ago for most machines.

We expect continued strengthening in 2004.

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

The Company continues to yield benefits from our focus on sales and operations planning in order fulfillment processes.

These processes combined with the flexibility realized through our alternative sourcing strategy has allowed us to provide dealers with improved and stable availability on a majority of our products.

We are, however, experiencing isolated availability problems on selected models where very strong demand has exceeded our forecast.

The following three models are being administered under managed distribution -- the 330 and 325 hydraulic excavators, the D5N and D6N tractors, the 730 articulated truck.

Plans have been developed to improve availability on these models.

Many dealers are able to provide low hour machines from their rental fleets to fill customer demands.

Now for the outlook.

A worldwide economic recovery is now underway, and we expect further strengthening in 2004.

Global economic growth should exceed 3.5 percent in 2004 or about 1 percentage point more than in 2003.

Record or near record low interest rates initiated economic recoveries in 2003, and we expect interest rates will remain low throughout 2004.

Low interest rates and rising profits are expected to continue to encourage users to replace existing equipment.

Low-interest rates should also allow another strong year for housing construction.

Nonresidential construction, which tends to parallel overall economic growth, should continue to improve.

Metals mining had only a scattered recovery in 2003, but we expect that recent increases in metals prices will cost this industry's recovery to strengthen and broaden in 2004.

Company sales and revenues are expected to increase approximately 12 percent versus 2003.

Machinery and Engines volume is expected to increase about 10 percent with the remainder coming from improved price realization and financial products revenue.

Average retail prices increases that have been announced for 2004 are about 1.5 to 2 percent for machines and parts.

Again, these are average price increases since the actual price change will vary by model in geographic regions.

We project (inaudible) heavy-duty Class 8 truck industry demand for 2004 at approximately 210,000 units due to economic recovery and the normal truck replacement cycle.

Our forecast for (inaudible) midrange trucks -- specialty, urban bus and RVs -- for 2004 is approximately 165,000 units.

We expect 2004 profit per share to be up about 40 percent compared to 2003.

The year will benefit from higher volume and the favorable impact of our ACERT technology.

We anticipate an increase in retirement benefits of about $250 million, which we expect to offset with improved price realization and lower core operating costs.

Full details of the outlook for 2004, including other assumptions, are contained in the Company's press release issued today.

Guidance with respect to selected items from Machinery and Engines in 2004 is as follows.

For SG&A expense, about 9.5 percent of sales and about 3.5 percent of sales for R&D expense.

Those two items were about 9.5 percent and 3 percent of sales respectively in 2003.

We expect our effective tax rate for 2004 to be approximately 27 percent, absent a legislative change related to extraterritorial income exclusion.

As I indicated, the impact of increased retiree pension and healthcare and related costs was a decrease in profit of $310 million in 2003.

About 65 percent of the cost to increase is for pension.

For 2004, our pension assumption for the long-term rate of return is 9 percent and 6.2 percent for the discount factor.

Capital expenditures for Machinery and Engines are expected to be about $850 million in 2004 compared with $654 million in 2003.

For depreciation and amortization expense, expectations are about $850 million, which is about $50 million higher than 2003.

On page 13 of our 2003 proxy, we stated that approximately $224.2 million in short-term incentive compensation was earned by approximately 53,798 employees in 2002.

In 2003, approximately $340 million in short-term incentive compensation was earned by a similar number of employees.

At the outset of each year, the short-term incentive compensation planned targets are fixed by the Compensation Committee of the Board of Directors based on a significant stretch above the Company's performance outlook for the year.

At the time, the targets were set for 2003 the Company's outlook called for flat sales and revenues and a 5 percent decrease in profit.

Payouts vary year-to-year, but since the early 1990s when the plans began, on average we have paid out extremely closely to the target.

Over the past five years and excluding unusual items, we have paid out about 15 to 18 percent for profits before tax.

The combination of base pay, plus incentive compensation and target, allows Caterpillar to pay competitive salary levels.

Incentive compensation allows us to vary pay to employees in accordance with the performance of the Company, thus assuring close alignment with shareholder interest.

Now I will review dealer retail machine numbers and precipitating and turbine engine sales to users and OEMs.

Please remember that all comparisons are based on constant dollars.

Dealer retail sales of machines to end-users for the three month ending December 2003 compared with the same three months of 2002 were as follows.

Asia-Pacific, up 30 percent;

Europe/Africa/Middle East, down 21 percent;

Latin America, up 3 percent; the subtotal, down 8 percent;

North America, up 24 percent; worldwide, up 9 percent.

For the full year, total worldwide dealer machine sales to end-users were up 6 percent.

For the three (technical difficulty) ending December 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 15 percent; industrial engines, up 3 percent; marine engines, down 6 percent; truck and bus engines, up 90 percent; petroleum, up 5 percent; total, up 11 percent.

Now let's turn to dealer machine inventory, first sequentially comparing December with November 2003.

Asia-Pacific, up 4 percent;

Europe/Africa/Middle East, down 9 percent;

Latin America, up 13 percent; subtotal, down 2 percent;

North America, down 3 percent; world, down 2 percent.

Next, year-over-year comparing December 2003 with December 2002.

Asia-Pacific, up 7 percent;

Europe/Africa/Middle East, up 2 percent;

Latin America, up 56 percent; subtotal, up 11 percent;

North America, up 11 percent; world, up 11 percent.

Dealer inventories in the new machines at year-end compared with 2002 year-end were up on a worldwide basis about $220 million, most of which occurred in North and Latin America.

Although dealer machine inventories increased as we had expected in North America in 2003, they did not decrease as we had expected in the rest of the world.

Still there are about $1.3 billion below their peak in 1999 and continue to be at relatively low levels.

Our expectation for full-year 2004 is for dealer new machine inventory to decrease in the $50 million range on a worldwide basis.

Asia-Pacific dealer and new machine inventories are at 2.5 months of sales, which is down from 3.3 months a year ago.

Europe/Africa/Middle East dealers are at 3.1 months of sales, down from 3.7 months a year ago.

Dealer and new machine inventories in Latin America are at 4.4 months of sales, up from 3.4 months a year ago.

Dealer and new machine inventories for the subtotal of these three regions outside North America are at 3.1 months of sales, which is down from 3.5 months a year ago.

North American dealer and machine inventories are at 2.9 months of sale, down 3.4 months a year ago.

Overall on a worldwide basis, dealer and machine inventories are at three months of sales, down from 3.5 months a year ago.

The retail statistics for December are also available on voicemail through February 16th by calling 309-675-8000.

Now I will comment on two special topics.

First, a brief update on our Advanced Combustion Emissions Reduction technology for ACERT.

The new Caterpillar (inaudible) with ACERT technology offers five engines -- the C7, C9, C11, C13 and C15, all of which have received EPA certification and meet 2004 EPA emission regulations without sacrificing engine performance.

We are in full production of all of the engines in accordance with our announced timeline.

Caterpillar expects to pay no nonconformance penalties on any engine sold in 2004.

Market acceptance of our ACERT engine has been strong.

As reported in the Ward's (ph) year-to-date data, through November 2003, Caterpillar maintained its leadership position in North America on-highway, truck and buss industry.

In 2003, customers began gaining their first experience using Caterpillar engines with ACERT technology in off-highway machine field tests.

Today over 100 engines have been shipped for continued application exposure and testing.

These engines must meet emissions regulations starting in 2005 and European machine noise directives in 2006.

We are on track to introduce machines and industrial engines with the ACERT technology prior to the effective dates of the regulations.

Our off-highway engines will use the same breakthrough ACERT technology base as our very successful on-highway engines.

We will deliver Caterpillar engines using ACERT technology that meet emission requirements and as importantly continue to deliver the performance, reliability and durability our customers expect.

ACERT will provide a technology platform for our engines through the end of the decade.

As we have said before, this technology will provide us with a significant competitive advantage well into the future.

Second, an update on how we are using Six Sigma to build the Caterpillar of tomorrow.

Six Sigma played an important role in our approved financial performance.

It is dramatically reshaping how we approach our daily work.

We have achieved gains in virtually ever key area of the Company, including the product development process, manufacturing efficiencies, growth, product costs and product quality.

Nearly 40 percent of our employees -- more than 25,000 people -- are now directly engaged in Six Sigma projects across the enterprise.

Virtually every employee has been directly or indirectly involved by serving on or supporting those who are serving on Six Sigma teams.

Employees' efforts to improve processes create efficiencies, increase sales, and improve our products and services are strengthening this company each and every day.

Their efforts continually create new value for our customers and shareholders.

Because employers are so deeply engaged in improving all aspects of our business using the disciplined methodology of Six Sigma, we are developing an impressive group of people who are becoming strong leaders while they fully engage in making Caterpillar successful.

This is where we will see payouts well into the future.

When it comes to developing the leaders of tomorrow, Six Sigma is the best training ground around.

More than 15,000 projects are in process, led by more than 2600 blackbelts.

We've also trained 176 Master blackbelts and 17,500 greenbelts.

In 2003, we expanded the reach of Six Sigma into our extended enterprise. 97 Caterpillar dealers and more than 240 suppliers are now using Six Sigma to help improve their businesses and strengthen our value chain.

As we begin 2004 and Jim Owens takes over as Chairman February 1st, look for Caterpillar to continue its focus on using Six Sigma to deliver our strategy.

Jim has been a staunch supporter of Six Sigma from the beginning of our deployment.

He's committed to Caterpillar retaining and growing its leadership as a benchmark company for successfully executing Six Sigma.

Many of you are familiar with Jim Owens, either from his time as CFO or group President.

In order to introduce him to all of you and give you an opportunity to speak with him, Jim, Lynn McPheeters and I will hold a conference call on March 2, 2004 at 10:00 Central Standard time.

This will give Jim an opportunity to discuss his vision and answer your questions.

Mark your calendars.

We will be sending out the call-in information within the next week.

Now it is 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, Jan?

(OPERATOR INSTRUCTIONS).

David Raso.

I have a question on the incremental margins in machinery.

I was a little surprised it was not a bigger number.

Since the sales accelerated more this year's fourth quarter versus third quarter than a year ago, but a year ago you a 59 percent incremental margin third to fourth and this year was only 22.

What am I missing in the number, and I don't know if this is a related question or if it was part of the answer, but the currency year-to-date on an operating profit basis had been a benefit?

About 15 million if I am running the numbers correctly.

And then full-year, (inaudible) a -22.

So when you gave us the fourth quarter, currency was a -37 percent operating income, which was a little surprising given the trend and how the dollar has been acting.

Could you just help us understand first incremental margin and if the currency is related at all?

Glad to answer the question.

I think you have got a couple combined and maybe deal with the currency first.

The situation between the third and the fourth quarter really rests on the British pound.

A little bit on the Brazilian Real.

They rapidly strengthened against the dollar vary significantly as you look at each of the currencies.

I think they had a 13 cent move against the dollar.

The British Pound did.

What happens in that case, when you have such a rapid strengthening, it hits your costs immediately, and you cannot so quickly increase your prices.

So you get pinched on that aspect of your currency.

That is the answer to the currency situation between third and fourth quarter.

I think you are also talking about our operating costs in the fourth quarter.

And what had happened was, as we point out in the release, is we had in the fourth quarter last year economic conditions were pretty bad, and in line with those economic conditions, we reduced our spending.

And this year, we had our spending in line with much better economic conditions.

We also had a certain aspect of -- incentive compensation had an impact, as well as the impact of retirement benefits as we noted in the release.

Further, there were a number of insignificant dispositions of assets individually, but they are combined -- you know you look at the financial statements in other operating income, you'll see a pretty significant swing from year-to-year in that area of assets.

So I think combining all of those aspects together, David, gives you the answer to what happened in the fourth quarter.

A lot of those issues you addressed are year-over-year in the sense of pensions, the sense of comp.

So simply sequentially, accept for the dispositions, which if you have that number, I would be intrigued to see what was the hit from the disposition on your machinery profit in the fourth quarter?

You mentioned the product you sold up in Scandinavia, the forestry business, but can you help us understand what that number was?

I am trying to get a feel for the real incremental margins.

Most of the impact was in the dispositions from third to fourth quarter.

Can you give us a number?

As you look at the financing, it was a swing.

There was a positive number in the last year in the fourth quarter of $15 million and a negative number in this year of $17 million.

So the swing would be 32.

On a year-over-year basis?

Right.

And it was over the third quarter as well.

It had an impact in the fourth that it did not have in the third.

Ann Duigan.

Good morning.

It is Ann Duigan, Bear Stearns.

I was just wondering you are anticipating a recovery in mining in 2004.

Can you give us any color on what regions you think might grow faster than others?

And then if you expect your business to grow faster than the markets because of some of the share gains that you have had over the past five to 18 months?

Good morning.

Mining sales do continue to improve over the recent load.

We are seeing activity in iron ore, gold, copper and energy operations continuing to increase along with the strengthening commodity prices.

As you know, gold is over $400 an ounce and copper is north of $1.00 a pound.

So for 2004, we would expect Asia-Pacific and Latin America to remain strong.

We are already seeing quoting activity improving in Africa and North America.

Utilization on existing fleets outside of North America appears to be very high and is reflected in the tight supply of used mining equipment.

North America does have some part capacity for copper caused by higher costs and relative to ore grade, but most other regions' utilization is high.

Our continuing efforts with our alliance partners such as VHPB and Newmont will continue their benefits during this time in reference to your last part of your questions.

We believe we are in a good position to react to demand as the world economy improves, and our expectations are that mining sales will continue to improve over 2003.

What order of magnitude are you talking?

Double-digit year-over-year growth or high single digits?

I do not know that we are ready to give you an actual percentage improvement, but definitely an improvement.

Just as a follow-up to the same question on the oil and gas sector, GE stated last week that they are expecting their sales in oil and gas to be up about 20 percent.

What is your expectation for oil and gas for 2004?

If it is less than GE's 20 percent, should we begin to get nervous that you are losing share?

Well, I do not think we are quite as robust in our expectations in petroleum as what you are siting for GE, but I don't think you need to worry that we are losing share.

We anticipate improving sales but not quite as high as GE's.

Somewhere in the double-digit range?

I think that is safe to say.

Joel Tiss.

Lehman Brothers.

I wonder if you could talk a little bit about breaking down the pieces of electric power generation geographically for 2003 and where we saw strength and weaknesses, and give us a little flavor of what you are looking for 2004?

Okay.

I can do that.

On electric power -- now Joel, we are talking about engine sales to end-users?

Is that what you're interested in?

Yes.

Okay.

We saw 1 to 2 percent up in the world.

We saw a weakening in North America in that it was down 4 percent.

Europe/Africa Middle/East was up 18 percent.

Latin America was down -- I think that was particularly as a result -- in the fourth quarter of 2002, we had a major sale to Brazil resulting from the drought that had been occurring there.

So that was a very difficult comparison.

And in Asia-Pacific, we have seen an uptick, a significant uptick of about 31 percent.

Okay.

And the outlook going forward (inaudible) or just a sense of it?

We are anticipating that electric power as well we will have a positive increase in 2004, but I do not have a figure for you.

Okay.

Thank you.

Alex Blanton.

Ingalls & Snyder.

Going back to the question of incremental margins, you said that they were hurt by an increase in spending.

I assume you are talking SG&A.

So as a percent of sales, that was down year-over-year -- I mean that was up year-over-year by 69 basis points, and that did have an effect and also the operating expenses.

But -- the other operating expenses.

But on the gross margin line, you also had what to me was a disappointing incremental profit year-over-year.

It was 24 percent and typically with this kind of a performance and the price increases you had, it would have been in the 35 to 40 percent range on the gross margin line.

Could you comment on the reasons for that, Nancy?

One of the most significant reasons is mix.

As we noted in the release, we have not seen any strengthening in mining yet.

We do have a significant uptick in the compact equipment.

We also have the small diesel increasing in their percentage and also the fuel injector sales have decreased this year.

Looking at all those aspects of mix gives you a sense of -- in answer to your question.

Tiss: So that really means that next year that mix should go the other way? (multiple speakers) mining up (multiple speakers)

Our anticipation for mix for 2004 is that it should be fairly flat with this year.

As we said earlier, mining should be improving as we see metals and coal prices increase.

But we will still have increasing sales of compact equipment and the small diesels, and we will say an exploration of the contract on the fuel injectors.

So putting all those things together, we expect mix to be fairly flat with this year.

Even with mining strong?

They are offset.

So that is why -- we don't anticipate it being negative, but it will not have a big positive impact.

Was it negative this year?

Yes, it was.

A follow-up question.

The European retail sales figure for the last three months was -21 percent.

You are forecasting an increase for 2004; is it 5 percent?

Is that in your outlook?

We are anticipating a 6 percent increase in sales in 2004.

Okay.

The fourth-quarter performance, was that a surprise?

Did you expect that to be stronger?

When do we expect to see that turn coming?

There are a couple of things sort of conspiring to make that performance happen.

The economies have been very weak in Europe, in particular in Europe, and we saw a little falloff in the Middle East.

So combining those two things, you see that kind of decrease.

As the economies improve, and our economists are anticipating a 2 percent growth in Europe/Africa/Middle East this year, and they have low interest rates and energy prices are favorable and commodity prices are favorable.

And as the Middle East picks up, that is why all those things combined are the reason for the 6 percent increase in sales that we are anticipating.

Joanna Shatney.

Goldman Sachs.

I have a question on the waterfall chart on page seven, the consolidated operating profit comparison.

It sounds like what happened in the fourth quarter is that you restarted some of the pullbacks or you finally loosened your belt on some of the projects you had in there for the long-term.

My question is more we conceptually think about sales mix going into 2004, and you have given us a lot of the components of that, how much are you expecting to see the core operating margins improve from just regular operating leverage Six Sigma and then whatever other cost reductions you're getting?

Are you going to let anything more than a 30/35 percent margin flip through, or will we look to spend that?

I do not know that I can make any comment on margins.

I think where we really ought to focus is the profit outlook that we have, which is 40 percent increase, which is pretty healthy, and you can figure out some of the margins as we go forward.

But that ought to be our main focus on that 40 percent increase in profitability.

Let me hit this another way.

Can you update us on that Six Sigma goal of where you are at the end of '03, and then are we still expecting the 1.5 billion in savings?

I know that last year we gave some figures on Six Sigma.

Part of the difficulty is with Regulation G coming into play this year, we are really discouraged from getting any figure that is non-GAAP, and as you know, that would be a non-GAAP figure.

Let me tell you this.

What I can comment on is that Six Sigma benefits have exceeded our expectations and have contributed significantly to our improved financial performance, and we expect that momentum to continue into 2004 as I stated in the comments.

Our commitment to Six Sigma is unwavering.

As you look at the projected profits, I think you can see that we would have to be doing something in order to have an outlook like that.

Okay.

One of your competitors reported this morning there was a definite change in their sentiment in the last two to three months in the power generation business.

You guys provided a revenue outlook in your last conference call that did not have a lot of specifics as you gave us this time.

But can you just, in the last three months, tell us where you've gotten more confidence in the outlook and maybe a little bit more aggressive?

I think it is really that the economy is turning around.

It has a positive impact on so many areas.

As we see the commodity prices improving, we are more positive in mining.

As the economy improves, we are more positive on electric power, on petroleum.

Virtually all aspects of our sales are impacted positively by a positive economic outlook.

Thank you.

John McGinty.

Credit Suisse First Boston.

Good morning, Nancy.

I am trying to understand a couple of these little nibs and nabs that some we have seen before and some we have not.

Can you talk about the size or the impact of the Navstar (ph) fuel system going away?

In other words, that seems to be a major factor, but you have not quantified it.

Can you give us some help with how big that is in '03 and how big a negative that is in '04?

I do not think we are ready to give that information.

It gets a little too granular.

One of the comments that you made to Alex's question that I find astonishing is that your mix is flat when you're looking at oil and gas, EPG, mining up and the ACERT engine turning, which are probably the four largest leverage, highest margin, biggest swing pieces of business, all of which should be up in '04 and yet mix is flat.

So either you're just being ultraconservative, or that is a huge number.

And if it's a huge number, it should be broken out.

Well, it really is not a huge number, John, but it is an impact on the mix which is negative.

So it is something that we mentioned, but we are not ready to give a specific number.

Did you -- in answer to David Raso's question, you talked about the swing and other being 32 million, and I will have to get with you later to see exactly which 32 million swing that is, but are you in effect saying that is what the disposition penalty was -- 32 million in the fourth quarter?

There are other disposables, John.

John, as we do in our business all the time, we dispose of assets and we acquire new assets of rather insignificant amounts.

There are some aspects in manufacturing costs as well.

But I pointed out the other operating expenses as an area we can clearly indicate what the disposable impact was.

But you do say -- on page 21, you say specifically unfavorable change in the gain or losses of disposition of assets.

I am just trying to quantify that.

A lot of that is in other operating expense.

The majority.

The final issue is the 56 million negative currency -- that was your number -- total currency was -56 million in the quarter.

That shows up in all different parts of -- in other words, that is in the operating profit, as well as in the other?

Yes.

That is correct.

You say the change in other income for the fourth quarter was 20 million compared to 51, so that is 31 million.

So the other 25 would presumably be in operating profit?

Yes.

It is in the waterfall chart, John.

It is on page 20.

All right.

It just strikes me again that the quarter margins really don't make much sense unless we are kitchen-sinking it.

Anyway I will get back to you.

Thanks very much.

Gary McManus.

J.P. Morgan.

Getting back to the core operating costs, you mention higher SG&A, higher incentive comp, and increased spending on product development.

Are they all proportionately about the same, or can you may be give us a sense if there was one much higher than the other or just prioritize it ?

They are in order of priority in the release.

Okay.

So they are in order.

You said the share count, 344, is in the release as well.

Is that basic or fully diluted?

The share count?

It is basic.

So you repurchased about $405 million of stock last year I believe, and you did not take the share count down because of share creep I assume.

How much would you have to repurchase in '04 to prevent the shares from going higher?

It is hard to say.

Rough order of magnitude.

You cannot give a sense of what you would expect the share count to go up with the -- ?

With the exercise of options?

It depends on how many people exercise options.

That is hard to say, how many people will.

Okay.

All right.

One last thing on the mining.

I think in the dealer deliveries you said mining at least in North America was done 21 percent for the year.

That was just North America.

Is that good representation for worldwide?

No.

Well, it is fairly accurate worldwide on the decrease in mining.

What was the fourth-quarter mining sales roughly speaking?

Would 21 be close, or did it get a lot better as the year progressed?

That is fairly accurate for the fourth quarter.

Okay.

Thank you.

Barry Bannister.

Legg Mason.

I wanted to ask a question about this incentive pay since it's starting to affect the stock.

You said $340 million issue of short-term payments.

What was the long-term payments, and could you give us some feel beyond the vague description in the proxy of what the formula is '04 that we can expect on a short and long-term basis?

And I just have a related follow-up.

There is no payout on long-term in 2003.

Each year the plan varies.

I cannot really give you a -- I think the significant pieces of information which I gave you today was over the course of the incentive plan, they have been very close to target, and I told you that on average we pay about 15 to 18 percent of profits before tax.

And maybe more significantly, I know there has been a big focus on incentive comps, the base pay plus incentive comp at target really allows Caterpillar to pay its people on a competitive basis.

We are at market-base.

As you look at all of the aspects of our cost in our financials, you will see that we are very reasonable in our payout.

We had to callout incentive compensation because of the difference year-on-year, and I think we've gotten more focus than we should.

We gave you a lot of information today, and I think it gives you a lot of information going forward.

Just to ask Gary's question from a little bit different angle, if you're going from 344 to 320 million shares as your repurchase goal and you had at year-end '02, 24 million shares that were in the money and as far as options that were in the money, then what I am trying to figure out is how large that program would have to be assume it goes into money options, let's say convert in the next four to five years?

It would have to seemingly to me to be around 48 million shares repurchased to get you down to 320 on an outstanding basis, and I don't think the program is that large.

When the Board thought about this program, was that the numbers they were thinking, and was it really just a program to give about half the cash to shareholders and one-half the cash to the management in the form of offsetting creep?

Maybe the thing to focus on is options are issued, and there are good for 10 years.

So you are trying to figure out how many will expire within the year and be assured in a three-year vesting.

So with those two pieces of information, it is hard to know when people will exercise.

But if they have 10 years to do that, you really cannot anticipate.

I will follow-up with you later.

I'm trying to think in terms of five-year cycles, not 10 year options, but we will talk later.

Thanks.

Andrew Ovan (ph).

It is actually Steve Haggerty from Merrill Lynch.

I will not let Andrew speak.

I am only kidding.

Just a couple of quick questions.

One is did I understand, Nancy, that there was some type of catch-up on the retirement benefits in the quarter?

I just was not sure what you said as you ran through that in the waterfall chart?

We have changed the definition on retirement benefits a bit, and we have included all defined contribution plans, which means that we put in the contribution we made to the 401(k).

So the figures that I gave this morning tell the difference each quarter by the redefinition of retirement benefits to include all defined contribution plans.

okay.

I see what you're saying, and you went back and gave us that by each quarter.

Right.

But it was increased costs -- I can go back over my notes -- but it was increased cost for all previous quarters, right?

That is right.

Just a couple of other quick things.

On steel, we have heard some of your other companies who are talking about concern about steel prices in '04.

Can you just talk a little bit about that?

Is that something that you have weighed into this outlook for calendar year '04 that could be a negative?

We have looked at steel prices increasing, and I talked to the head of purchasing last night, and he told me that we believe we can offset the increased steel prices with other cost reduction initiatives so that we will see little or no impact on our cost.

Now we have been able to do this over the past 18 months, and we anticipate that we will be able to continue to do so.

The last thing, on the extraterritorial issue, can you handicap for us what you think the chances are that either something would happen to the existing law and that some kind of offset might be passed that would maintain the tax benefit for you in '04?

Well, I can handicap that for you definitely.

We are pretty confident that it will go away because of the World Trade Organization, and the soonest we see the impact of the elimination of ETI would be some time this year.

The three major bills before the Congress, each one of them has a transition period where the impacts of ETI will be eliminated.

So we will see less benefit over time.

As to what will be put in its place, that is hard to say.

All we know is that each of the three major bills we will not have as high a benefit as we did in the ETI.

What we are hoping for is we will get about half the benefit that we had from ETI in the new bill passed by Congress.

Andrew Case.

Prudential Equity Group.

Just a follow-up on Steve's first question about the steel pricing craze and your answer there.

The conversation you referenced about offset with other cost reductions, is that purely purchasing, or is Six Sigma type initiatives included in that?

It is a Six Sigma effort.

Most of our cost improvement efforts are driven by Six Sigma, but a lot of these efforts are directed at cost of materials.

That includes the cost of steel.

Okay.

So I should not read that statement as steel is going up, so you have got to take it out of potentially your suppliers some other way?

We're really focusing on the price of steel and coming up with solutions that will help us even within that commodity.

But, of course, we are focusing on all costs.

Okay.

Thanks.

And then the next question is really related about or around the ACERT engine ability to get price premiums.

There has been a couple of things in the marketplace that raised some potential concerns about that ability, and I would just like to get your feedback on it.

Basically a couple of the major fleets have announced they are going to increase their testing period from six to 18 months.

I am wondering how would you say we should read that?

I do not see that as a concern.

As you have seen in the Ward's data, we have continued to maintain our leadership position, and we have been firm on holding the price that we set for ACERT.

We did see a lot of activity on the part of our competitors in recent months, but Caterpillar has continued to stand firm.

Okay.

So the ability to make that segment of your business more profitable through pricing and so forth to capture what you perceive as a premium, is at this point near-term more important than marketshare.

Is that correct?

I think we're happily able to maintain both.

Thank you.

Robert McCarthy.

Robert W. Baird.

I wanted to ask you about the comment you made in your prepared remarks about offsetting retiree expenses -- incrementally 250 million that you expect to offset with a combination of core operating costs and price realization.

In the past year, price realization added $260 million.

I do not hear anything in your outlook that makes me believe that would not be at least a reasonable estimate for the potential contribution in '04.

So are you trying to tell us that we need to be prepared for core operating expenses to not be a source of incremental savings in '04?

As you work through our profit outlook, our revenue outlook, I think you will see that it has to be both in order to go toward that profit outlook that we have given.

I also told in my commentary that we expect price realization to increase in anywhere from 1.5 to 2 percent.

That is a helpful offset as well.

But to reach that profitability, we will need to have core operating costs control in place.

Okay.

Related to that, at the end of the third quarter, your estimate for total NCPs to be paid this past year net of banked credits was 165 million.

I assume that the full year experience turned out to be very close to that.

Could you confirm that and tell me how that will show up in terms of this profit bridge as we go into the next year?

I mean you are not going to have an emissions issue specifically that is affecting your results.

So will the lack of NCPs show up as a reduction in core operating costs, or how will we see that?

It will be a positive to operating costs.

The elimination of NCPs will have that positive aspect.

We have noted that in our outlook as the favorable impact of our ACERT technology includes the elimination of NCPs, as well as the positive aspect of the increased price that we are getting.

But you asked the question on 165 million of NCPs, which we put in our third-quarter 10-Q.

We have had one engine that has been retested, and we are paying less NCPs than we anticipated.

So the amount of NCPs for the year should be about 153 million or 112 million after-tax.

That is the comparable number net of the banked credits, right?

Right.

Is it not clear to you all yet where you are going to show this item as contributing in terms of these little buckets you have established for the change in operating profit?

Where they will be spread in the other buckets, is that your question?

Yes.

We will continue to have a bucket named emissions next year.

Okay.

Very good.

Thank you.

David Bleustein.

UBS.

Taking another crack at this incremental margin question, using the bridge you have provided for the full year, it appears that machinery plus engine volumes together were up just under 1 billion 3, but the benefit from volume and mix was only 175 million or about a 13 to 14 percent incremental margin.

Why isn't that number closer to at least your gross margin?

Well, as we said before, it is mix.

All right.

I will let that one go.

The second question, what is your conviction level in the forecast?

Should we view the 40 percent increase as the center of the bell curve, or do you view it as a number you would like to beat 80 percent of the time?

How should we be viewing that number?

Well, David, our outlook at this point in time, that is our best anticipation of what 2004 will hold for Caterpillar.

All right.

Fair enough.

Thank you much.

Mark Koznarek.

Midwest Research.

Nancy, just a clarification on the North American heavy-duty drugs where you are expecting 210 for next year.

What would be the comparable actual for 2003 according to your definition?

I am not sure that I know that, Mark, but it includes the Class 8 heavy-duty long-haul truck in (inaudible).

So I don't have that number off the top of my head, but if that helps you at all with the total definition of what is included, that is what we are including.

Yet the third quarter you said 140 to 160 and you were biased towards the upper end.

I am just wondering -- I guess you don't know where it came in?

Sorry, Mark.

We just don't have that.

I just have one other issue, which is the China opportunity.

Can you give us any specific view on Cat's performance in China this year and specifically that region for 2004?

Of course, you got an overall Asian outlook, but given that that is such an important area, can you give us more --?

That has been a huge focus for Caterpillar in this past year.

If you have seen some of our press releases, we are in negotiations with a number of construction and power systems companies looking at future joint ventures.

We have seen a lot of activity in growth in China.

It gets to be a more and more significant part of our revenues.

Right now we have eight facilities in China.

We have five dealers, and a lot of focused attention on that.

We will be telling you from time to time as we make further progress this will be very much in the news for Caterpillar.

Can you give us any idea of the sales growth or outlook for '04?

No, I am sorry.

I cannot do it by country.

Thank you.

We have time for one more question.

Charlie Vinchler (ph).

Legnberg & Company (ph).

Good morning.

I wonder if you could quickly just comment about the capital expenditure plans for '04 which at 850 million are up pretty healthfully from '03.

Can you give us some understanding of what the increase is all about and where the monies will go?

About a fifth of our capital expenditures goes to software.

Half of it is in replacement of current plant and equipment, and the remainder is for additional.

Can you give us any help understanding that?

The additional?

Product development costs and upgrades for new products, etc..

Okay.

Thank you.

Operator, we will take one more question.

Eli Lesgarten (ph).

(inaudible).

Good morning.

There is probably a 40 percent in profit, that is in EPS, correct?

Correct.

What share base did you use for that number?

About the same as at year-end.

And that's on a fully diluted basis at comparable.

You also talked about the tax issues for '04.

Does that say the tax rate will probably go up in '05 and you give us a magnitude of -- what changes or not -- the question is what happens to the tax rate in '05 if you hold 27 percent pending tax law changes?

That is one that is hard to anticipate because it all hinges on how the legislation develops and what is ultimately passed.

As we said, our answer for 2004 barring a change to ETI, which admittedly we expect a change, we have to make the 27 percent tax rate, the assumption, until we know further what the changes will be.

But depending on whether there are changes, would you be able to hold back for the foreseeable future like '05, or do you have a rate increase?

I know the law will do something, but forget the tax law?

All we have anticipated at this point is 2004.

You will not give us any --?

We just don't have it.

It is hard to anticipate when you see looming changes, so it probably does not make much sense to anticipate further.

With emissions in '07, and I know (inaudible), should we expect spending to start to go up in '05 as we get closer to having a new round?

We are in the happy situation of having the platform that will meet the '07 standards.

There will be some spending, but I think it will be within the normal range of our R&D expenditures.

The decline in ratio is the kind of thing you can foresee for the next couple of years barring any changes as opposed to needing to do something to meet further out?

In 2004, our anticipation is 3 percent as we said.

I think you said 3 5.

Yes. 3 5.

Thanks for correcting me.

Thank you very much for your attention.

If you did not get your questions answered today, please give me a call and have a good day.

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.

Thank you for your participation.