開拓重工 (CAT) 2004 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to Caterpillar's third-quarter 2004 earnings release conference call.

At this time, all participants have been placed on a listen-only mode and we will open the floor for 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 third quarter 2004 results conference call.

I am Nancy Snowden, Director of Investor Relations.

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

As you know, it was recently announced that Lynn will be retiring effective February 1, 2005.

But fortunately, we will have him with us today as well as for the year-end results conference call in January.

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

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.

This morning, I will cover our third quarter results, review our outlook, go over the usual dealer retail numbers, discuss special topics and wrap up with a 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.

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

As you know, this morning, we reported third quarter sales and revenue of $7.65 billion and profits per share of $1.41.

Sales and revenues were up $2.1 billion from third quarter 2003 with machinery up $1.45 billion and engines up $614 million.

The increase in sales and revenues was driven by $1.83 billion of higher machinery and engines volumes, $136 million of increased price realization, a $102 million favorable impact to currency on sales due primarily to the strengthening euro and British pound and $41 million of higher financial products revenues.

Profit of $498 million was up 124 percent and was $276 million higher than third quarter 2004, compared with third quarter of 2003.

The main contributors to the cost increase were higher sales volume of $543 million, higher price realization of $136 million and the absence of a $55 million pretax nonrecurring bond retirement charge recorded in the third quarter of 2003.

Partially offsetting these favorable items were $371 million of higher core operating costs.

Since I know core operating costs will be of particular interest, I will provide more detail on the breakdown of core operating costs at this point.

In the third quarter of 2004 compared to the third quarter of 2003, SG&A was up approximately $90 million and R&D was up about $60 million, both excluding the impact of incentive compensation pay.

Incentive compensation pay was about $20 million higher.

In addition, other operating expenses included in core operating costs were up $30 million this quarter, due primarily to the absence of a gain on sale of assets.

Relative to manufacturing costs, the incremental costs associated with higher material costs resulting from steel surcharges and commodity price increases, higher freight and expediting costs to ensure timely delivery of materials, manufacturing inefficiencies due to the steep ramp-up of production and premiums due to supplier capacity constraints totaled approximately $150 million.

The impact to currency and retirement benefits has been excluded from each of the above amounts since they are listed separately and not included in core operating costs.

Core operating costs also include manufacturing improvements and higher warranty expense.

I will go into more detail about what we're doing about these costs in the special topics portion of my remarks.

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

North American dedicated rental fleet time utilization on a twelve-month rolling basis is continuing to run at a strong rate, about 68 percent, which is 5 percent higher than a year ago.

Rental rates for the rolling 12 months through September are up about 4 different from a year ago.

Overall, units and dedicated dealer rental fleets are up 10 percent compared to 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 55 percent of the units and dealer rental fleets, are up about 8 percent from a year ago.

The Cat rental stores currently have about 45 percent of the rental rates and dealer fleets.

These fleets continue to grow and are up 12 percent from a year ago.

North American dealers have a total of 392 rental stores.

Nine more are expected by year end.

In the Europe, Africa and Middle East region, dealers had 797 rental outlets, 370 of which had the Cat rental store identity as of quarter end.

In Latin America, we had 110 Cat rental stores and 134 in Asia-Pacific.

At year end, we are expecting about 1460 rental outlets throughout the world.

Of these, 380 stores in North America and over 580 in the rest of the world will have the Cat rental store identity.

North American used equipment prices were up about 14 percent in the second quarter compared to a year ago for most machines.

We expect the used equipment prices to remain up in the near term.

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

In North America at the end of the third quarter, there are 80 products under managed distribution.

By managing distribution, we limit orders to only those with a confirmed customer order.

This helps ensure that available product is going to the most pressing need.

Producing plants are hiring more employees, adding selected production shifts and using Six Sigma to identify ways of increasing production capacity.

Now for the outlook.

We expect the world economy to grow more than 4 percent in 2004.

Low inflation and interest rates should support recoveries in business investments.

We expect coal and metal prices to remain relatively high for the rest of this year, prolonging the mining recovery.

High oil prices are benefiting the oil producing countries, which have been increasing construction spending.

The Company expects sales and revenues for the year to increase about 30 percent and expects full-year profit per share to be up about 80 to 85 percent.

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

In 2005, world economic growth is expected to slow from above 4 percent to slightly above 3.5 percent.

We expect the world machinery industry to be up 3 to 8 percent, percent ranging from little growth in Asia-Pacific due to continuing weakness in China to 5 to 10 percent growth in the other regions.

In addition, we expect a 10 to 13 percent growth in world industry demand, benefiting from another strong year in the truck and bus sector.

Financial products revenues are expected to be up about 15 percent over 2004.

Therefore, the preliminary 2005 forecast of Company sales and revenue is for about a 10 percent increase over 2004.

Now I will review dealer retail machine numbers and reciprocating and turbine engines sales to users and OEMs.

All comparisons are based on constant dollars.

Retail sales of machines for the three months ending September 30, 2004 compared with the same three months of 2003 are as follows.

Asia-Pacific up 23 percent Europe, Africa and Middle East down 4 percent, Latin America up 64 percent, subtotal up 12 percent, North America up 32 percent, world up 23 percent.

Retail machine sales were up for the quarter due to strength in all sectors.

For the three months ending September 30, 2004 compared with the same three months of 2003, total reciprocating and turbine engines sales to users and OEMs were as follows -- electric power up 15 percent, industrial engines up 23 percent, marine engines up 13 percent, truck and bus engines up 40 percent, petroleum up 22 percent, total up 24 percent.

Now let's turn to dealer machine inventory, first sequentially comparing September without August 2004.

Asia-Pacific down 2 percent, Europe, Africa and Middle East up 6 percent, Latin America down 5 percent, subtotal up 1 percent, North America flat, world flat.

Next, year-over-year comparing September 2004 with September 2003.

Asia-Pacific up 70 percent, Europe, Africa, Middle East up 25 percent, Latin America up 64 percent, subtotal up 42 percent, North America up 39 percent, world up 40 percent.

At September 30, 2004, dealer inventories were about $600 million higher than year end 2003, in line with surging sales.

The large increase in dealers' deliveries this year is requiring some increase in dealer new machine inventories.

As dealers respond to higher demand, their inventories typically increase since more machines are in transit to dealers and their customers.

Our expectation is that the increase in dealer inventories this year will be about $330 million worldwide, with inventories increasing about $200 million in North America and the remaining $130 million spread over the rest of the world.

Asia-Pacific dealer new machine inventories are at 2.3 months of sales, down from 2.8 months a year ago.

Europe, Africa, Middle East dealers are at 2.4 months of sales, down from 3.1 months a year ago.

Dealer new machine inventories in Latin America are at 1.8 months of sales, down from 3.6 months a year ago.

Dealer and knew machine inventories for the subtotal of these three regions outside North America are at 2.2 months of sales, which is down from 3.0 months a year ago.

North American dealer machine inventories are at 2.2 months of sales, down from 2.4 months.

Overall on a worldwide basis, dealer machine inventories are at 2.2 months of sales, down from 2.7 months a year ago.

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

Before I get into the Q&A, I want to comment on a couple of topics that I think will be of interest.

As reported today, Caterpillar achieved record sales and profits this quarter and for the nine months ended September 30th.

We are reporting the strongest surge in demand we've ever seen across the broad spectrum of markets we serve.

One of the strongest increases is occurring in the mining sector, where dealer deliveries have increased 70 percent of quarter compared to the third quarter of 2003.

The rapid rise in demand has created availability and capacity issues and driven higher manufacturing costs than foreseen, particularly in large construction equipment that requires specialized componentry.

As Jim Owens, our Chairman and CEO discussed at Miner Expo last month, we're placing tremendous focus on meeting customer needs for machines and engines while at the same time, working to control costs related to the strong ramp up in our production.

Material shortages have driven manufacturing inefficiencies, expediting charges and overtime.

To address these material shortages, we have added focused resources in our global purchasing group, particularly in the areas of tires, castings and steel.

By adding new steel mills and service center suppliers, we've been able to meet most of our steel needs, but at additional expense.

For specialty steels, we have been searching the world for certain hard to find specialty steels or making engineered substitutions as appropriate.

The good news is that we have successfully increased our specialty steel buys by approximately 33 percent from 2003.

Also, we have a line of sight to meeting our specialties steel needs in 2005.

For casting supplies, we see a light at the end of the tunnel.

As a result of investment in new and refurbished equipment, increases in staffing and outsourcing of machining by our castings suppliers as well as the ramp-up of new castings suppliers in the fourth quarter of 2004, we expect adequate capacity to produce the castings to meet current build to schedule needs in the fourth quarter, as well as in 2005.

Radial tire availability has been a major issue with the surge in demand in our industry.

We're working to eliminate the radial tire gap by adding new suppliers, pushing for increased radial supply from current suppliers and suggesting that customers substitute bias tires for radials, where practical.

Longer-term in the 2005 and 2006 timeframe, radial tire capacity is being added by our suppliers.

With these initiatives underway, we are making progress on the availability issues.

As a supply improves, we anticipate positive impacts on the cost of materials through minimizing or eliminating expediting expenses and manufacturing inefficiencies.

As added supplies of steel become available, most expect a positive impact on prices.

At this time, however, we cannot quantify the cost impact, but we will have a better view on costs when we provide 2005 guidance in January.

SG&A has also been impacted by the surge in volume.

Extraordinary efforts are not limited to the factory.

We're focused on making the incremental SG&A cost structure flexible so we can react to changes throughout the business cycle.

We are making progress in that regard.

Through the first nine months of 2004, our machinery and engine sales are up 35 percent, yet SG&A is up 26 percent.

As a result, SG&A as episodes of sales has declined from 9.8 percent to 9.1 percent.

We are working with Six Sigma discipline to continue to drive process improvement and make that percentage even lower.

We've become a more efficient company as measured by sales per employee.

Our sales are approximately $383,000 per employee today, up from our prior peak in 1997 of $324,000 of sales per employee and well above the $336,000 per employee of 2003.

As you know, we have experienced positive price realization over the past 1.5 years after a five-year period in which we recognized virtually no price increases.

Our pricing actions have been accepted in the market.

In July, we took a 2 to 3 percent price increase.

We demonstrated our commitment to the long-term working relationships with our dealers by offering price protection on orders backlogged due to unprecedented volumes and material shortages.

As a result, we're just beginning to see the impact of the July price increases.

Three weeks ago, we announced a January 1, 2005 machine price increase, averaging about 3 percent.

By announcing the price increase early, we will minimize the lag time on realizing this increase.

Second, an update on the extraterritorial income exclusion.

As you're likely aware, both houses of Congress recently passed the American Jobs Creation Act of 2004, which among its many provisions, phases out the extraterritorial income exclusion, or ETI, as it is known.

As we stated on page A-12, footnote 4, Caterpillar's form 10-K for 2003, the benefit of the extraterritorial income exclusion to Caterpillar was a reduction of 4.9 percentage points in our effective tax rate in 2003, or approximately $72 million of benefit.

If the American Jobs Creation Act of 2004 is enacted, ETI benefits will be phased out over the next two calendar years.

The legislation does not impact the exclusion for 2004, which we expect to be greater in dollar value than in 2003.

Caterpillar would receive 80 percent of the 2005 ETI benefit and 60 percent of the 2006 ETI benefit.

The recent legislation also includes a U.S. production activity income deduction.

As yet of course, no regulations have been adopted to further define the legislation relating to the deduction.

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

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

First question, please.

(Operator Instructions).

Alex Blanton.

Good morning.

I'd like to ask about the incremental margins in the third quarter here.

In a normal 35 percent margin, Nancy, you would probably have earned another 50 cents a share by my calculation.

You mentioned that there were 31 cents a share of higher cost.

I assume these are nonrecovery costs due to shortages in premiums and ramp-ups and so on.

But what explains the other 20 cents?

The incremental margin report was only 23 percent, which is pretty low.

I don't want to be greedy, but I'm trying to relate the earnings-per-share you reported to the sales you reported.

I see what you're saying, Alex.

As you know, this has been a tough year in terms of delivering product to our customers with this unprecedented surge in demand.

And we are getting quality product into our customers' hands.

Our return on sales has improved from 4.6 to 6.8 percent, and our profit in dollars has nearly doubled, with $1.5 billion of profit through nine months.

Now we are proud of these results, but -- and we are looking toward achieving that ROS of 9.0 plus percent in the 2006-2007 timeframe.

As you know, we have had a number of unusual costs in this time period as we have ramped up.

Also, we have had the price increases as we have mentioned, but we haven't seen the full impact of those price increases.

The January 1, we are seeing some of the impact of the January price increase.

July had virtually no impact of the price increase.

So putting those things together, I think you can devise how we came to that.

We also had, as I enumerated sort of in the bucket of how core operating costs have impacted us, you look at R&D, which was 60 million, SG&A of about 90 million, incentive comp 20 million and the manufacturing costs, which with steel surcharges, expediting, etc., leads us to about $150 million of costs, as well as other expenses of about 30 million.

I think if you put all of that together, you end up with pretty much our outlook.

The follow-up question is also on margins.

I have not had a chance to read the entire release, but is there anything in there about the long-term goals of a 9 percent net margin being your normal margin that Jim mentioned in Las Vegas in September?

Alex, we don't go into that sort of discussion, but I think you're right on.

That's what Jim has talked about on September 28th.

Okay.

So you don't see anything in your outlook for 2005 that would change his thinking on that?

No, I don't.

Thanks.

Stephen Volkmann.

Hi, Nancy.

A couple of questions, sort of as we break into '05 on your special topics in a sense.

First of all, it sounds like there's 150 million or so of sort of expediting broadly defines that maybe gets better at some point next year.

But, I also assume that you are signing new contracts for some of these basic materials at higher prices than you did last year.

So there's probably some headwind there, or am I thinking about that wrong?

Well, as you point out, it depends on your view of where we are in the cycle on steel prices.

I've been talking with our purchasing people -- what do you do on these long-term contracts?

And I think they have to take a view on what steel prices will do.

They are really -- the main emphasis is not so much on long-term contracts as sourcing throughout the world.

I would not look at long-term contracts locking in at high price going forward, but it will have an impact on what steel prices do overall over the next month to 10 years.

So it sounds like you're saying you're going to have less going into '05, you're going to have less of your buy under long-term contracts than is sort of normal?

Steve, I don't know that I would say that.

As you drill down into what we have in long-term contracts, mainly where we've had long-term contracts have been in specialty steel in Europe particularly.

And there will be some long-term contracts because it's an issue of availability more than -- you want to be sure that you lock in the availability of these particular types of steel.

In the past, steel has operated within a pretty narrow band of pricing.

This has been a bit aberrational where you've seen this huge uptick in steel prices.

Now it comes to -- what do you see the view going forward?

It would look like a genius move six months ago to lock in at what seemed like a high price then, and now the price is even higher.

So I would say we are making a view on steel prices and putting in long-term contracts where we believe it is prudent.

Great.

And then sort of related, some companies are starting to talk a little bit about the pension outlook for '05, and clearly things this year did not turn out exactly like many of us thought in terms of interest rates going up or so on and so forth.

So you have any early read on how that is going to work at Cat?

I think you've keyed in on the right factor.

It does depend on what the interest rate will do and our plan year ends at the end of November.

And we will be able to see what we need to do as a discount rate based on the Moody's double-A annualized rate.

But no sense on sort of the EPS headwinds by pension?

Not at this point, because Steve as you know, a lot of factors enter into what the headwind will be.

Discount factor is huge, but there will be a lot of things.

We will look at it at November 30th.

Thank you.

Joanna Shatney.

Good morning, Goldman, Sachs.

Can you talk a little bit about the order backlogs?

Right now that you have announced a January price increase, are you telling customers that they won't get delivery until January?

Are you able to put that price increase in now?

And then secondly, can you just talk about incoming order rates, and what they look like for the month of January and the early part of '05, in terms of can we see anything, any impact as of yet from the and of accelerated depreciation tax benefits?

Joanna, you know we're always hesitant to talk about order backlogs, but demand remains very strong through this quarter.

And as you know, we have 80 products on managed distribution, so demand is not really the issue.

As you know only too well, it is more of our ability to supply is the issue.

But what I wanted to know is if you're booking an order today and it goes into backlog and we're not going to get delivery until after January 1, does the January price increase apply?

Oh, you're trying to understand the price protection policy.

If the order is -- if they have booked the order before the price increase is announced and in effect, then they get the prior price on their order.

So now that January 1's price is out there, it goes through immediately, right? (indiscernible) for delivery after January?

That's right.

Okay.

Can you just talk about the accelerated depreciation?

Are you guys seeing any cancellations from customers that can't get delivery by December 31?

I don't know about that.

We really tried to provide some inventory to the dealers so that they can address that accelerated depreciation need because we know that people will want to take advantage of that.

But in a surging demand year, it is hard to get a little flex that you can provide for any purpose.

Thank you.

Ann Duignan.

Bear Stearns.

I would like to follow up on your outlook for the engine business.

You talked about trucks being a driver of the upside for '05.

You did not mention oil and gas or power.

And I wondered if you could just give us some color on both of those end markets.

And then my follow-up question is related.

You recently announced a organization of the power business.

I'm curious to know, given that you're kind of aligning I think products with customers why you did not do similar reorganization for the oil and gas business?

So two parts to the question there.

Okay, Ann.

We haven't really gone into how much of our sales would be driven by the truck business, but we did give an industry outlook for engines and we went into all of the aspects -- truck and bus, electrical power, petroleum, industrial and marine -- and gave an industry view, in those industries as drivers.

I don't think we gave a drill-down on what our sales would be up in each of those areas.

But as you know, electric power has been very strong for us this year with about a 25 percent increase on the year.

It seems that just economic recovery in general has been a strong mover on electric power.

In the petroleum business, we see North American compression is a big part of that equation.

And drilling in China has also been a big driver on the petroleum business.

As you can imagine, with prices above $50 a barrel for oil and gas prices being what they are, it looks very favorable in that particular industry at this point.

So anticipating forward, things appear to be very strong.

Jim Owens said at the Mine Expo meeting that we expect the industry and petroleum to be up 68 percent and electrical power industry to be up 7 to 10 percent, if that helps around that issue.

Lynn, did you want to add something?

You want me to touch on the organizational structures? (multiple speakers) First of all, Ann, I don't specifically know the answer to your question the way it was asked -- why did we do one over the other?

But I think if you look at the two industries that you asked about -- electric power and oil and gas -- both of them figure in our long-term growth plans certainly.

Both of them are significant pieces of our current engine business.

But if you look at the electric power business as you well know, it's somewhat different than some of the others in that it combines not only the engine part of the business, but the packaging piece.

And the pieces of what is going into that division were spread in I believe it was three different divisions.

And so what we're doing there to get the benefit of engine manufacturing and packaging together is bringing that all under one roof, which we believe will help facilitate the growth that we have anticipated in that business.

And so you didn't see it necessary to form a similar organization in oil and gas (indiscernible)?

Different kind of business.

Coming back to the outlook for oil and gas and electric power, no acceleration in demand or you're not raising your estimates for '05 versus what we heard at Mine Expo -- is that the key takeaway?

I don't think we drilled down that far.

Okay, thank you.

Joel Tiss.

Still at Lehman Brothers.

Can you give us a sense in the quarter and maybe looking forward of where we are in the replacement cycle for our North American machinery -- it's still very strong -- and if you're seeing any fleet expansions?

And then the follow-up would be -- can you give us any sense on resolution or negotiations with the union, just in how it plays into the productivity of the Company?

Thank you.

Sure.

As to the replacement cycle, we began to see this replacement cycle about a year ago, maybe a little bit longer.

Now typically, that cycle will last longer than a year and especially when you drill down and look at things like mining.

Mining had been so low for such a long period of time, especially in the last five years, there is a lot of opportunity for replacement.

And so we are into the replacement cycle, but from a facts and data standpoint, hard to tell you exactly where we are in that point.

But, as look at some of the economic factors and the continued demand, there is an aspect to replacement.

But as we see the economy surge, we're also beginning to see an expansion as, again, I can point to mining as a very good example in that.

So Joel, I think we're seeing a combination of both.

The rental fleets continue to replace as well, but maybe not quite as robustly as they had previously because the demand is being swept up by the retail portion of our market, so that will provide an opportunity ongoing to maybe do a little catch-up on the rental fleet replacement.

I hope that answers your first question.

As to the UAW, I don't really have very much to tell you.

As Jim talked to everyone at Mine Expo, discussions are underway.

We have made our last, best and final offer.

The issue dividing us is basically one of health care benefit and that is kind of where we are.

We don't have much more news than that.

From a timing standpoint, could we hope to hear something by the end of the year, or that's out of your control?

It's really hard to say.

So, we'll tell you when we know something.

Thank you.

John McGinty.

Credit Suisse First Boston, good morning.

I would like to go back, Nancy, to the core operating costs, which jumped in the second quarter and kind of surprised us all, it was 254.

The inefficiencies in manufacturing and so on then were 60 million of the 254, and I went back and read the transcript again of the second quarter call and the clear implication in the q-and-a was that the core operating expenses were going to go down, perhaps as low as kind of the average run rate of the first half.

And instead, they went out by $120, $117 million, with the biggest jump coming in the inefficiencies which went from 60 to 150.

So I guess my first question is -- why did that happen?

It certainly looks like it's a total shock, at least relative to the kind of guidance you were talking about last quarter.

And what happened that caused such a huge increase relative to what we were looking for three months ago?

John, I think our guidance in the second quarter was that the second half increment would be similar to the first half, but the major factor would be in the manufacturing costs.

We are seeing more than that because of the continual surge in demand.

And as we said, the major factor in the increment was the core operating costs.

And a lot of that is that these things that we've pointed out -- fuel surcharges, uplift, expediting fees -- and that has not abated; it has not only not abated, but it has gotten worse.

It was just our view at that point and we were -- we are where we are.

Lynn, do you want to add anything but that?

I just might add, John, about the time we issued our second quarter release, we had seen some relief in scrap prices.

In fact, they had started to go down in what we thought was going to be a trend.

It turned out to be a very short blip and they turned around and went back up, which maintained the pressure on steel prices that we had anticipated were going to start to abate.

And that did not happen.

You used the term inefficiencies as being the only piece of this.

That's certainly not the major piece of this.

It's material costs, expediting, surcharges, premiums paid for steel supply and so forth.

Inefficiencies are part of it on the shop floor, but certainly not the major part of it.

The other piece is the commodity price.

I'm sorry, I just trying to shorthand.

But you had also said that in answer to another question that that number -- and again, not that 60 was magic, but that was the number -- you said that really wasn't going to go down you thought that much, and in fact it has gone up.

Does it stay here in the fourth quarter, or did we get some relief from the 150 level?

John, at this point, we don't not see it going down in the fourth quarter.

As my follow-up, just one a clarification.

Jim at Mine Expo said the price increase in July was 3 -- you just said 2 to 3.

Who's right, you or the Chairman?

Thank you for putting it that way, John.

I think in the announcement statement, it said 2.5 to 3, so I think he was giving --.

Rounding, right.

Could you tell us how much -- in other words, did we get -- because of the price protection, did we get half of that?

In other words, because we will get the balance of what we didn't get in the fourth quarter in the third, right, in other words, because of (indiscernible), did we get half of it or two-thirds of it?

It's a big number, 2.5 percent.

John, we virtually got nothing in the third quarter.

Nothing in the third quarter?

Yes.

But we will see it coming into fruition in the fourth quarter.

But that's 140 million on a $7 billion rate; that is another 140 million plus in the fourth quarter over --.

I think that's too high, John.

That's not our anticipation, it's not even half of that.

Okay, thank you.

Andrew Obin.

Merrill Lynch.

I have a question on pricing.

You have commented on previous press releases I think on pricing environment by region.

I'm not sure if I saw it in this press release.

Can you comment just sort of U.S. versus the rest of the world and maybe even more detail Europe, Africa, Middle East versus Asia?

I don't recall us making a response on pricing by region.

I think in the last press release, you said pricing realization in North America was 5 percent.

Actually, if you look at the release and it goes into -- I see what you're saying.

It's in there.

In each piece, it talks about where the sales were and what portion of that was price realization.

So you can derive that by region.

Sure.

The second question is just on your cash flows in the quarter.

I guess they were pretty strong, especially given the revenue ramp.

As I looked at it, the working capital and there's this "other source of cash" of 270 million.

What was that?

And that's just backing out nine months from six months.

You know, I have the accountants scurrying to look at that.

I'll try to have an answer for you.

Is there anything else you'd like to know while we await that reply?

All of my questions have been answered.

Okay, that is good to know.

Maybe we should just go to the next questioner, and when we get the answer, we will come back to it.

Mark Koznarek.

Midwest Research.

I have a -- maybe start with a clarification.

I guess I am puzzled about the January upcoming price increase because you said you have stated it early and that's supposed to have some positive benefits.

But yet in answering that question just a few minutes ago, you said that a customer, if he places the order before the period, that the date that the price increase is effective against the old increase.

And I suspect you, you know, with manufacturing backlogs still pretty stretched, that we are really talking about a pretty healthy period of time into 2005 before you realized the '05 price increase.

Am I thinking about that the wrong way, or is there something I'm missing here?

Mark, you have to place the order before the announcement.

Before the announcement?

Before the announcement of the price increase with a ship date before the effective date.

They have to both of those things.

You have to place the order before the announcement of the price increase and have a ship date that is before the effective date of the price increase to get the protection.

That makes a big difference, because I doubt -- I would not suspect you have any open manufacturing slots for '04 delivery, do you?

I think that would be a pretty good guess.

Good, that is very helpful.

Then the question I had is if you could get into a little bit more detail on the China market, rather than your own sales, but just what is going on with the machinery market there, how much further is it down in 3Q, and do you expect some shift in momentum beginning signs of a recovery in 4Q, or is it likely that the moderation of growth there is likely to extend perhaps into early '05?

It's hard to know what they're going to do with putting these specific controls on.

As you know, it's not an economic-driven downturn in construction equipment, but very specifically controlled by the government to sort of pinpoint construction projects and slow that activity up.

Let me give you a little detail.

On a quarter-over-quarter basis in China, our dealers' sales to users in net dollars are down 56 percent, and the year-to-date decline is 17 percent.

Now expectation going forward in 2005, it is really hard to say because it does depend on what the government of China does.

If they take their foot off of the brake, we will see more activity.

If they don't, it will be where it is.

A lot of speculation, but I'm not sure anybody has the real facts at this point.

Are you guys seeing any kind of new activity in large construction projects over there, or is it still as it has been over the past several months that the larger projects are having a more difficult time gaining approval in permitting and all of that?

And financing.

Mark, in general, I think the point you just made, there is still a very focused effort by the government to pinpoint certain projects and hold them off of the boards.

And I think our expectation is that they will continue to do that until such time as they believe the economy, the growth in the economy, is at a level that they can sustain.

I would just say that, while there is some short-term pain here from the standpoint of the dealer deliveries of machines going down at the level that they have, from a long-term perspective, we view this certainly as positive action to put the economy in a position to grow at a pace that can be sustained, and that those projects that are being held up at some point in time will go forward because the demand is there.

And so really from a long-term perspective, we certainly support the actions that are being taken.

Great.

Thank you very much.

David Bleustein.

Good morning, it's UBS.

Of the increases in cooperating costs, the 90 million of SG&A, etc., which of those costs do you believe are recoverable at a more normal state, and which are permanent at these volume levels?

Of that SG&A, is it all just, okay, we're at a higher volume level, the 90 million is permanent?

We're struggling to define that, what is normal and what is the abnormal.

I don't know that we -- we are working with Six Sigma to make sure that this does not become a part of our cost structure.

So there is a real focus on this effort.

And I don't know that I have a number four you, David, at this moment, but there's a real focus on this to make sure it becomes a flexible part of our cost structure so that as the business cycle changes, that we can take out those portions which make sense to reduce.

Order of magnitude, is a 10th of it temporary, is half of it temporary, or really no guess?

I'm sorry, I just don't have a good answer for you.

When talking about how you are solving some of the material shortages, it sounded like the vast majority of what you're doing is on the supplier side.

What's Cat planning on doing with its own capital spending next year to add capacity in any of the tight areas?

We haven't come out with a number yet on CapEx, but -- and we will give you that in January.

We will give you a view on it.

There are a number of points where, if you look at engine capacity, we have made some changes to try to gear up for the increased capacity.

Six Sigma is helping us to find some of the hidden capacity in our plans.

Looking at engines separately, we have moved some of the packaging out of Lafayette, Indiana to Griffin, Georgia and rearranged so that we have increased that capacity.

As we look at the on-highway truck issue, we look at that at an ongoing basis.

Because as you know, there is a real surge in that market and you have to look at it with a view to what makes sense over a long period of time.

From the standpoint of -- the real capacity issue has been more with our suppliers, rather than with Caterpillar internally.

So I think we're in pretty good shape.

The real focus for us is on developing adequate supply as we ramp-up that production.

And those China numbers again, you said shipments were down what to date, what for the quarter?

The dealers' sales to users on a net dollar basis declined quarter-over-quarter 56 percent.

And the year-to-date decline was 17 percent.

Terrific, thank you.

Thank you.

Andrew Casey.

Prudential Equity Group.

Good morning, Lynn, good morning, Nancy.

Just a follow-up on the material shortage, not necessarily what happened in the quarter, but to try and understand as you work through the supply chain constraints that you talked about, is as an all or nothing proposition in that if you fix your issues with forging suppliers, then it could still be a bottleneck with tires, or is it just kind of incremental as you fix one area, it gets better and then you move on, you're still working on the other areas?

Thanks.

Andy, we have teams working on all major material categories.

So there is the simultaneous effort going on an all of these sort of scarce materials.

And as I tried to point out in my prepared remarks, we're making a good bit of progress on developing availability for those scarce materials.

I guess, Nancy, if I could revisit the question.

The spirit is not that you're not working the issues, it's if you have a better time breakthrough in one area, are you still constrained because the other two of three areas are still an issue?

Andrew, you're absolutely right. unless you have everything, you don't have a machine.

But Lynn wants to say something.

Andy, it depends, as you might appreciate, it depends on the product.

For track type tractors, for example, tires are not a concern.

But steel castings, certain steel castings are.

So it depends on the product.

We do have situations where we are really focused on the three commodities that Nancy mentioned.

Because for the most part, just about everything else is in pretty good shape.

So the good news there I think is that we're able to focus on a limited number of components.

And by putting the Six Sigma resources on that and being able to focus just on a few major components, we are starting to get on top of it.

Okay, thank you and good luck, Lynn.

Thank you.

Bob.

I think we have time for one more question.

Robert McCarthy.

Robert W. Baird & Co. I am still, I hate to admit it, a little confused by what you said about pricing in response to John's question.

If there's no price protection on orders taken after the July increase was put in place, then why should we not expect to see at least half of 2 percent times your quarterly run rate on sales?

Rob, let me take a shot at clarifying that for you.

Price protection applies, as Nancy pointed out, in two situations -- on orders that were in place prior to the announcement of the increase that shipped prior to the effective date of the price increase.

Now if the shipment dates slips because of our ability to get the product out the door, and Jim talked about this at Mine Expo.

By the letter of the law in our policy, we could in fact implement the increase.

The relationships we have however with our dealers, the long-term relationships we have, are such that we, in many cases, most cases, choose not to do that.

If we cannot ship the product when we said we were going to ship it, then we will extend the price protection.

And in essence, that's what happened in the third quarter that a lot of these ship dates slipped, and therefore, we extended the price protection.

In other words, a significant portion of fourth-quarter shipments will still fall under that price protection?

No, I think what John did, if I recall correctly, he applied the price increase to our total sales volume.

And keep in mind what we are talking about here is a machine price increase, not on our total sales volume.

I think he applied it to the total.

He did, but you talked a couple of percent of the total, and the answer was not to expect even half of that.

And that's what I find difficult to reconcile.

It's not half in terms of rate, it's half in terms of dollars because of the base you apply the price increase to.

You don't apply it to our total sales and revenues, which is the number that John used, the 7 billion.

I think I have it.

In a separate follow-up related to the questions that you've had about China, what's happening there in terms of large construction projects of course is pretty well advertised, and that had a big effect on, for example, excavator sales for you all.

But on the other hand, the Chinese are pressing ahead and spending large amounts of money on projects involved in improving their access to financial resources in a variety of different ways, everything from a new mine to pipelines to carry gas across the country.

Are you not seeing some significant incremental positive growth in really what I would think would be the better opportunities for Cat in China?

Rob, there certainly is opportunity in the types of projects you mentioned and we do see those.

I think if you think about however the local production that we have there, it's mid-size hydraulic excavators, made locally, consumed locally, mid-sized product.

And when you talk about dealer deliveries dropping to the extent that they did, it's in relation to that type of product.

And that's what's -- that's not the kind of project you're talking about.

We still are seeing significant opportunities there in the big power projects, the oil and gas and, marine and those areas.

Would it be fair to say that your business is not down in China at anything comparable to those kinds of rates?

Yes.

Those are dealer deliveries of machines, and those are more in the mid-sized -- mostly in the mid-sized hydraulic excavators.

(multiple speakers)

The answer to your question is yes.

Alright, thank you.

This concludes our conference call.

Thank you for listening in.

If you did not get your questions answered, please give me a call and I'll be happy to talk with you.

Goodbye.

Thank you, ladies and gentlemen.

This does conclude today's teleconference.

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