開拓重工 (CAT) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the second-quarter 2011 earnings and Bucyrus acquisition conference call. At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mike DeWalt. Sir, the floor is yours.

Thank you and good morning, everyone and welcome to Caterpillar's second-quarter earnings conference call. I am Mike DeWalt, the Director of Investor Relations. I am pleased to have our Chairman and CEO, Doug Oberhelman, our Group President and CFO, Ed Rapp, be on the call today and because we will be discussing the Bucyrus acquisition, I am also pleased to have Steve Wunning with us today. Steve is our Group President that heads the Resource Industries business.

The call today is copyrighted by Caterpillar Inc. and any use, recording or transmission of any portion of the call without the expressed written consent of Caterpillar is strictly prohibited. If you would like a copy of today's call transcript, we will be posting it in the Investors section of our Caterpillar.com website. It will be in the section labeled Results Webcast.

Now, this morning, we will be discussing forward-looking information that involves risks, uncertainties and assumptions that could cause our actual results to differ materially from the forward-looking information. A discussion of some of the factors that either individually or in the aggregate we believe could make actual results differ materially from our projections, that can be found in our cautionary statements under Item 1A, which is risk factors, of our Form 10-K filed with the SEC on February 22, 2011. And it is also on our forward-looking statements language contained in today's release.

Now this morning's call format will be a little different than we have done in the past. I will cover our second-quarter results and the new outlook for 2011. Then I will turn it over to Ed Rapp and Steve Wunning to take you through the highlights of the Bucyrus acquisition that we closed on July 8. All of that should take about 30 minutes and then leave us about an hour for your questions.

Now, if you haven't done so already, you should download the Bucyrus presentation from the investor area of the caterpillar.com website. When you go to the Investors section of caterpillar.com, you'll see a menu on the left-hand side of the screen and the material that we are going to use today is in the Events and Presentations area.

Okay, this morning, we were pleased to report financial results for the second quarter that were significantly better than last year. Sales and revenues were $14.2 billion and that is the highest of any quarter in history, and up 37% from the second quarter of 2010. Sales and revenues were up in every geographic region. North America was up 26%; Latin America, 34%; Europe, Africa, Middle East, 51%; and Asia-Pacific was up 41%.

Now, to provide a consistent comparison with our 2010 results and our previous outlook, we are reporting our results this year with and without the impacts related to Bucyrus, and we are starting that this quarter. There was a non-GAAP reconciliation in today's earnings release and if you haven't seen the release yet, you can also find that on the caterpillar.com website.

Now, excluding Bucyrus-related items that were in our second quarter, profit was $1.72 a share and that is $0.63, or about 58% higher than the second quarter of 2010. While we didn't close Bucyrus until after the end of the second quarter, we did have $204 million in acquisition costs related to Bucyrus in the quarter. The most significant Bucyrus-related items were down on our other income and expense line below operating profit. And the largest item was the loss of $124 million in the quarter on interest rate swap contracts that we put in place in late 2010 and early 2011.

At the time we put the contracts in place, interest rates were trending up, and considering the amount of debt that we needed to issue to complete the acquisition, we put the swap contracts in place to mitigate the potential for even higher rates. However, between then and the time we issued the debt, rates in fact did not go up; they went down. And while that is a very good thing, and we were able to issue debt at historically low rates, it did result in losses on the swaps. However, over the life of the debt, the lower rates will be much more of a benefit than the loss we had on the swaps.

Now, in addition to the loss on the swaps on that other income and expense line, in the second quarter, we had $38 million of expense related to the bridge financing facility that we put in place.

In our operating costs, there was expense related to the acquisition and integration planning and we incurred about $11 million of interest expense in the quarter on that debt that we issued back in late May. So in total, Bucyrus-related costs in the quarter were $204 million or about $0.20 a share. As a result of that, our total profit in the quarter, including those Bucyrus impacts, was $1.52 a share.

Just for your reference, in today's release, we have a Q&A in the back and Q&A number 2 on page 17 does a pretty good job of laying out the Bucyrus-related impacts in the quarter.

Now, related to the quarter, I should mention three other items that you may want to consider as you review our results, and they are all covered in today's earnings release. On the positive side, we had favorable discrete tax adjustments of $72 million. On the negative side, currency impacts were negative to operating profit $102 million versus the second quarter of 2010. And the third item is short-term incentive compensation.

I'm going to talk about the outlook in a minute, but we raised it and that had the impact of adding $85 million more incentive compensation in the second quarter than we had in the first quarter and incentive comp was $95 million higher in the second quarter than it was in the second quarter of 2010.

As you do your analysis of our second-quarter results, I am sure many of you will do the math and calculate incremental operating margin. To help you out with that, we have also included a Q&A. It is number 12 on page 20 of today's release.

Now when you calculate incremental margin, your purpose is likely to get another data point on operating performance. We think it makes the analysis more reasonable if you pull out the impact of acquisitions to make it apples-to-apples. Excluding the impact of acquisitions, our consolidated incremental operating profit was 18% in the quarter. That is down from the first quarter, but it is consistent with the outlook we discussed during our conference call at the end of the first quarter. We said then that the first quarter was seasonally light for costs, that price realization would moderate and R&D costs were expected to go up.

In addition, we expected that the negative impacts we were anticipating as a result of the disaster in Japan would largely be in the second quarter.

Now, when you look at the incremental margins, there is another important point you should consider, and that is the impact of currency. A weaker dollar compared with the second quarter of 2010 meant that our sales actually benefited $351 million in the quarter. However, the impact on cost was more. It was $453 million and that resulted in a negative impact of $102 million in operating profit. If you were to adjust for the currency impacts, the incremental operating profit pull-through was 24% in the quarter.

In this morning's release, we also updated the outlook for 2011 and we are reporting it also with and without the impact of Bucyrus, and we are doing that to provide a more consistent comparison with our previous outlook.

So excluding the impacts of Bucyrus, we increased the outlook today. For sales and revenues, we took it up to $54 billion to $56 billion in sales and revenues and profit of $6.75 to $7.25 a share. That is an increase of the top, the bottom and the midpoint of $2 billion in sales and revenues and $0.50 a share in profit. Our previous outlook, as a reminder, was a sales and revenues range of $52 billion to $54 billion and a profit range of $6.25 to $6.75 a share.

Now, because we have completed the Bucyrus acquisition, we are also providing a new company outlook for 2011 that includes Bucyrus, and this is the first outlook that we have had where we have included Bucyrus. The expected impact of Bucyrus includes the vast majority of the upfront integration and deal-related costs that we expect on the deal, but only a half year of actual operating results from Bucyrus. In total we expect the 2011 impact of the acquisition will be positive to sales, about $2 billion, but negative to profit per share of $0.50. Including Bucyrus then, the sales and revenues outlook is $56 billion to $58 billion and the profit outlook is $6.25 to $6.75 a share.

Now, the factors driving that negative impact this year related to Bucyrus include about $700 million of upfront and deal-related integration costs in three major areas. The first we have already talked about and that is the loss on the interest rate swaps and for the year, that is about $150 million.

Second, we are expecting about $250 million of additional cost this year related to the Bucyrus inventory step-up. And third, we expect another $300 million of costs related to the acquisition and integration expenses like severance costs for Bucyrus executives, costs for the bridge financing, legal costs, advisory fees and a host of other integration-related activities.

Now, when we announced the deal last November, we said that we expected about $0.50 per share of those upfront costs in the first year and the $700 million that I reviewed is a bit higher than that for two main reasons. First, we didn't expect the interest rate swap losses and second, the estimate of the inventory step-up was a little bit higher than we expected back in November.

Now, in addition to the $700 million of upfront costs, our outlook includes about $80 million of interest expense on that debt that we issued back at the end of May.

Now partially offsetting those items, we expect operating profit from Bucyrus net of about $150 million of incremental intangible amortization to be about $300 million positive during the second half of 2011. I think we have a pretty good summary of the impacts of Bucyrus on 2011 results on page 15 of today's release in the Outlook section.

One more point I think it is good to make about the Bucyrus impact and that is, of that negative $0.50 per share this year, about half of it is behind us in the first half. It is actually in our first-half results. The other half will be in the third and fourth quarter.

Now I will just make a couple of quick points and then I will turn it over to Ed to start the discussion on the Bucyrus acquisition. And the first of those two points is the disaster in Japan. And I would like to thank our employees, our supply base and our dealers for the exceptional work that they have done. The recovery there has been faster and the net impact less than we anticipated.

In the second quarter, sales were negatively impacted about $200 million and operating profit was negatively impacted about $60 million. That is better than we expected. Our previous estimate was a negative impact to sales of about $300 million for the year and a negative impact of about $100 million to operating profit for the year, most of which we expected in the second quarter. In fact, in Japan, production is now back to or above pre-disaster levels and there is a good chance that we will recover much of the sales shortfall later in the second half.

Final point this morning is on cash flow, and it is a great story to tell. Our Machinery and Power Systems operating cash flow for the first half of the year was $4.1 billion and that is a 63% improvement from the first half of 2010 and of that $4.1 billion, about $2.5 billion was in the second quarter. And it is that kind of performance in generating cash that helped us fund the Bucyrus acquisition without the need to issue new equity.

Okay, that is the quarter and the outlook and with that, I am going to pass it over to Ed to start the discussion on Bucyrus.

Okay, Mike, thanks. And like he said, we will walk you through the presentation that Mike referenced that was out on the Investor Relations section of our website. And like he said, before we get into the Q&A, Steve Wunning and I just kind of want to walk through kind of where we are at with Bucyrus.

If you go to page 2, just as a reminder, many of the comments that we will make will involve forward-looking statements as outlined by Mike in his opening comments.

Moving to page 3, in terms of the products, on November 15, 2010 when we first unveiled this photo, we thought it really captured the essence of this strategic alignment between these two great companies. We were excited then; we are even more excited now.

If you move to the next page, page 4, in terms of the update, what we are going to do is take you through a few items. Number one, the fundamental reasons to acquire Bucyrus absolutely remain. Mining is a great industry that fits our strategy, fits our business model. We expect robust long-term growth in mining. In fact, if we look at capex projections by our large mining companies, they continue to gain strength.

Bucyrus products are highly complementary and I think that was demonstrated by the global regulatory approval that we received. We have also been very focused on getting ready for this acquisition and we have made key decisions, and we'll walk through organization, branding, dealer participation, as well as funding to give you an update on where we stand. We are absolutely ready for the integration, have had a very well laid out plan that we will take you through. And then lastly, we will take you through the numbers, kind of the financial projections and how it looks going forward.

So to talk about the strategic fit and some of the key decisions that we have already made, let me turn it over to Steve Wunning, the Group President for Resource Industries. Steve?

Thanks, Ed and good morning to everybody. Let's start with page 5 and really the mining customers fit our business model exceptionally well. What these customers want, they want low owning and operating costs, high uptime and great productivity and that is what we do very well. We design and build great machines and engines and through our dealers, we provide industry-leading product support and through all of that, that results in low operating costs, less downtime and high productivity. And because of the value our products and services provide, we are able to sell more machines and engines, which results in selling more parts. It is really a virtuous cycle.

And just a point on the parts sales, just to put that in perspective. A D10 consumes 3X its initial price in parts over its life, and many of the Bucyrus products consume a lot of parts just like that D10. So the mining industry and the mining customers really fit the Cat Business Model probably better than anything else.

If you go to page 6, this acquisition actually started with our enterprise strategy in the spring of 2010 and I know that most of you have seen the pyramid. And as Ed mentioned, as part of that strategy, we really looked at the businesses that we are in in terms of how attractive the industry is and the strategic fit to Caterpillar's capabilities. And I really can't think of a more attractive industry than mining, not just for the next two or three years, but really for the next 20 to 30 years. And as I have already mentioned, mining is a great strategic fit with our capabilities.

And if you look at the Big 8 Imperatives, the Bucyrus acquisition impacts three of the Big 8. First and foremost, it allows us to expand our leadership in mining and quarry and aggregates. It also helps us win in China, as well as grow in India, ASEAN and the CIS. It really allows us to execute the business model as I mentioned and accelerate aftermarket parts and service growth. Because of how well this fits into our overall strategy, we have invested $8.8 billion in Bucyrus and we are also investing several billion dollars more to significantly expand our factories and design better mining products.

If you go to page 7, you can see kind of the array of Bucyrus products, and there is very little overlap with the existing Cat product line, except for trucks, and even here, the trucks are very different. We provide mechanical drive trucks. Bucyrus has electric drive trucks. Now we have both.

Bucyrus allows Cat to enter into the attractive underground coal mining industry in a very big way. We now have products such as shearers, armored face conveyors, roof supports, continuous miners and belt systems. Plus this gives us a strong foothold in China and India. Both are very important mining markets. In fact, this morning, I just got back from India and yesterday, I was with the president of one of the largest India coal mines and he is very bullish on coal for many years. They are making capital investments that are very, very large and a lot of those investments will go to Caterpillar-type of equipment. And he is very delighted with our Bucyrus acquisition.

This is true with just about every mining company in the world. If you go to slide 8, we were a large mining equipment supplier with a narrow product line. We basically offered mining trucks, support equipment and trucks and loaders for hard-rock mining. But now, if you go to slide 9, we have the broadest product line in the industry and this is what our customers have been asking us to do for many years. What they asked us to do is to provide a one-stop shop for equipment and services. What they want is a large strategic supplier with a broad product line and a wide array of services. They want strong viable business partners to help them be successful. And now with the Bucyrus acquisition, no one comes as close as we do to meeting what our customers have been asking for.

If you go to the next slide, there were a number of key decisions that we had to make and there were five driving forces behind these key decisions. The driving forces -- needed one face to the customer, we want to have one team, one distribution model, one brand and the fifth driving force was speed of execution. And let me walk you through these four key decisions we made and the rationale behind them.

Towards the mining organization, on July 11, we added 10,000 new employees. We wanted to tell every employee as quickly as possible what their job is, who is their boss, where will they work, and how much they will get paid, some very basic things. This will largely be accomplished by August 10. So far, the split for the key leadership positions has been about 50% Cat and 50% Bucyrus. Our approach there was to pick the best of the best and that really drove the selection process.

We are implementing a functional organization and we have Dave Bozeman, who will be leading the global manufacturing operations for the mining business. There is about 18,000 employees in our manufacturing operations reporting to Dave. Dave has some of the largest facilities around the world, if many of you have been to our Aurora and our East Peoria and our Decatur facilities and now you can add South Milwaukee and many, many more facilities, but he has got the largest facilities and he has got all the facilities that support our mining business.

We've got Chris Curfman. He has got the global sales and marketing for the entire mining business and he has got the coverage worldwide for all mining products.

We have also got Luis de Leon. He is the former Bucyrus Chief Operating Officer. Luis leads all product development and almost all the engineers report to Luis in the mining business. Now it's not just these three officers, 25 of Caterpillar's 30 Vice Presidents will be deeply and directly involved in the Bucyrus acquisition.

Let's talk about branding on slide 12. Since November 2010, we have been studying branding very carefully. The Bucyrus name is very, very strong. It really conveys a great legacy and heritage and the Bucyrus brand means a lot to many, many employees. We didn't make this decision lightly; we talked to customers around the world. We talked to our dealers. We talked to Caterpillar employees and we talked to Bucyrus employees and we also talked to branding experts.

It was virtually unanimous. Everybody told us go with one brand and that brand should be Caterpillar. And again, it gets back to one team, one face to the customer. Now there is one exception and it is a temporary exception and that is the Unit Rig truck, or the Bucyrus truck, and we are going to use the Unit Rig truck name brand for the time being as we begin to integrate the Caterpillar truck line with the Bucyrus truck line. But that would be the only exception and that is a temporary one.

Let's go to slide 13, which talks about our dealers. Bucyrus really is a manufacturing and a distribution company for most products. And they really deploy a factory direct model. And what we wanted to do is we wanted to keep what we do best, which is design and manufacture great engines and machines. And what we wanted to do, what we want our dealers to do is what they do best and that is sell and support these engines and machines for their entire life. So we will be selling the distribution business to our dealers. They are very excited about the opportunities and this is what they have been asking for for many years. They wanted a much broader product line for the mining business.

We have just started discussions with our dealers, but our dealers are very happy and are excited about the opportunity, and they are willing to reimburse Caterpillar for what we paid to buy the Bucyrus distribution business. Collectively, we expect that value to be substantial.

Now we have over 180 dealers, but less than 50 make up most of the mining business. And what we want to do is we want to reach agreement with our dealers very, very quickly and we will close some of these deals with our dealers by the end of this year and the rest by the end of 2012. Now I am going to turn it over to Ed who is going to talk about the funding.

Thanks, Steve. On the funding, I think most of you are up to speed in terms of how we have done this, the ability to avoid the equity issuance, but I thought we'd just kind of lay out a comparison from November 2010 when we announced this to what we actually did.

In terms of the transaction, you're well aware, 100% of the outstanding common stock at $92 a share and then the total price ended up at $8.8 billion, which included the assumption of the net debt.

If you look at the chart and you compare the November 20 estimate to what we actually did, I think there are two keys. Number one, earlier, Mike went through the strong cash flow results we have been able to deliver and the strength of our balance sheet puts us in an exceptionally good position, which allowed us to complete the transaction with zero equity. So you can see on the equity line no equity issued. And of course, that avoids the dilution, which is good for our stockholders.

But the second key one though is the strong cash flow combined with the plan that Steve just outlined about selling distribution to our dealers allowed us to move more of the debt ladder to the short term; thus, lowering the interest expense. In fact, the weighted average cost of the debt, including the negative impact of the swaps Mike talked about, is 2.65%.

And so if you think about it, an incredibly attractive industry, a company that really does match with our strengths funded at cost levels we have just never seen before. So we are very pleased with the way this has been funded. We took a little bit of an upfront hit in terms of the swaps, but we will benefit from that over the long term based on the low cost of funding.

As we said when we announced the transaction, we see great opportunities for the synergies. We have spent a lot of time with the integration planning. Steve, why don't you talk about where we are at with integration?

Okay. Well, back in November when we signed the agreements, we appointed Steve Fisher to lead the effort. Steve is one of the Company's best Vice Presidents. Then we dedicated a team of about 100 employees, both from Cat and Bucyrus, and these are some of the very best managers in both of our companies. We have an excellent plan and we are going to hit the ground running. Several thousand employees will be directly and deeply involved to deliver the synergy benefits.

We have an awful lot to do. We have to complete and migrate the branding. We have to integrate and bring on our dealers. We have to bring on our suppliers. We have to bring all of our employees together adding the 10,000 employees. There is a lot of work in engineering, IT, manufacturing, product support, logistics that we have a great plan and now we are executing it. We are becoming more confident we can deliver and exceed the long-term benefits that we expected initially back in November. This is going to be a big winner for Caterpillar. So Ed, why don't you go through the numbers?

Yes, if you go to page 16 on the synergy capture, similar to our original discussion with you, we talked about synergy benefits coming across a wide range of areas and we kind of outlined four major buckets. Number one, the sales and support capability of Cat dealers, which you have now heard, are fully aligned in terms of the strategy, higher sales and a great opportunity for more aftermarket.

The second key area is the use of Cat engines and components in Bucyrus products and we talked upfront about the time it was going to take to engineer that into the Bucyrus product line, but we continue to see great opportunities. We know there are great cost synergies in the areas of purchasing, engineering and other areas and in fact, we are already off and running with it. Just some of the basics such as rolling them into our airline discount agreements will yield more than a 20% improvement in our cost savings. Rolling them into our express shipping programs yields 20% to 30% improvements. Steel plate, we are seeing 10% to 20% improvements and we are off and running in terms of going after those cost synergies. And then lastly, the opportunities that come with Cat Reman.

So in terms of the expected synergy benefits and the cost to deliver, you can see the layout between the 2011 partial year, a 2012 full year and 2015 being defined here as a mature year. And you can see the net synergy impact in 2011 of about $25 million, ranging between $50 million to $100 million in 2012, and then we are talking about 2015 being over $500 million, and that is up from $400 million that we talked about when we originally announced the deal. As we have gotten into this, we just see greater opportunities.

Now in the box, it does characterize one key point. This does not include the impact related to migrating the Bucyrus sales and support businesses to dealers. So all the numbers we are talking about today are the complete business and of course, those will be adjusted as we transact or sell a portion of the business to the dealers and we will provide clarity on that when those transactions take place.

So if you kind of weave the cost and the synergies into the financials and go to page 17, this kind of gives you the expected financial impact. And once again, we are looking at a partial year 2011, full year 2012 and a mature year of 2015. And you can see the Bucyrus standalone operating profit, the synergy benefits we are projecting net of the cost to deliver them, the incremental intangible amortization and depreciation and then in the partial year there, you see the impact of the inventory step-up, the interest rate swaps and in the early days, we will also see the deal-related and integration costs.

And so the partial year 2011, a negative $400 million. If you take that plus the interest costs Mike talked about that gets you to the negative $0.50 that we talked about earlier and then for the full year of 2012, we are looking at that to be a positive $500 million and in a mature year, we are looking at a run rate of about a positive $1.25 billion, and so a little more cost upfront, but a much more positive view of what this is going to yield over the long haul. And once again, this doesn't include the impact of our transacting business with the dealers.

So if you go to page 18, what has changed I would say on the negative side, a little bit higher upfront costs, being the interest rate swaps and the higher inventory step-up. We expect about $700 million in upfront costs in 2011, including the interest rate swaps and the inventory step-up and the other integration, deal related deal costs.

But on the positive side, we originally said we would fund with up to $2 billion in equity, and as I went through, a great focus across the Company on cash flow and it has helped us to avoid the new equity and the dilution associated with that, which would have been about 3%.

Much lower cost of debt to fund the acquisition. Very favorable interest rates, very favorable timing in terms of the debt ladder and that will more than offset the swap losses over the term of the debt. I would say mining in general has continued to improve and that makes the timing of the acquisition and the long-term outlook of our mining business even more positive. And as we have gotten into it, we just have more confidence in the synergy numbers and we have raised that mature year estimate to over $500 million from what we had previously said of over $400 million. So all in all, we feel really good about where we are at.

So if you go to page 19 for the summary, great acquisition with a complementary product fit. Yes, we have got a lot of work to do, but there has really been some good integration planning that has gone into place. We see very good opportunities for synergies and as we talked about upfront, it will require some investments to get to some of those. It will take time to integrate, including the dealer transition, but I think you have seen in the decisions that we have taken upfront that we have given this a lot of thought, and we are going to hit the ground running. Much more favorable funding costs than expected last November and including the incremental interest expense, we expect it to be about $0.50 per share negative to 2011 profit. It will be a profit contributor after 2011 and then add something in the $1 per share range by 2015.

As was the case on November 15, we thought a picture says 1000 words, and if you flip to page 20, I think the next slide says it all. It felt like a good move back then; it feels like even a better move now. So Mike, I think we are ready for Q&A.

Holly, I think with that, we are ready to open up the floor for Q&A.

(Operator Instructions). Ann Duignan. Please announce your affiliation then pose your question.

Hi, good morning, guys. Ann Duignan, JPMorgan. There's so many questions, I don't know where to begin, but let me ask my questions around the Bucyrus deal. Can you give us some indication on the synergies, the mature year synergies? Can you break those down into buckets, at least rough buckets -- revenues, COGS versus SG&A?

I would say, and it is very similar to what we talked about in the very beginning. I think the biggest buckets that we have are generating more service and aftermarket sales and margin, capturing more of that. Our dealers do a fantastic job of that. And then driving more sales of Bucyrus product through the dealers.

Two other big categories, and I am just naming all the big categories, are putting the Cat components -- I mean our cost to produce an engine, for example, is quite a bit less than the cost that Bucyrus would be paying. That, plus the purchasing savings are really the four biggest buckets.

And order of magnitude, Mike, could you -- is it 60, 20, 20, 20?

All of them are important. All of those are important. We are going to try to avoid I think doing a blow-by-blow for each one. I would say they are all -- I don't want to say necessarily equally important, but they are all of a pretty big magnitude.

Okay. And on the financing, you talked about the lower cost of financing. Can you talk about interest expense as we go through, again, towards mature year? You are generating a lot of free cash flow. How should we think about free cash flow over the next few years and how should we think about capital allocation? Will debt repayment be the highest priority now for the next couple of years? If you could help us just think about cash generation and uses of cash as we get towards mature year.

Ann, this is Ed. And as we kind of took you through in terms of the debt ladder, as you saw, we moved more of it to the shorter end of the curve and that was driven by two factors. One, projected strong cash flows from the existing business. The other one is, with the strategic decision to sell the distribution assets, that is going to have a cash flow generation capability. And we want to have some debt maturing at that point in time to be able to pay it down.

In terms of our capital allocation, if you would, strategy moving forward, I think it is going to be very consistent with what we outlined when we laid the strategy out there. We think there is tremendous growth opportunities that exist out there. I mean today, we are talking about an acquisition, but we have also outlined the very strong organic growth opportunities. So up to $3 billion in capex this year. We see more opportunities to invest moving forward. We are bullish on the long haul and I think you will see, from a capital allocation, us continuing down that path, funding those growth opportunities, maintaining our obligations in terms of our pension plans, the moderate increase in the dividend we have talked about in the Las Vegas meeting at CONEXPO and then truly as a residual share repurchase, but much more skewed toward the growth side.

Ann, Doug Oberhelman here, and I just want to comment kind of at a top level our thinking through 2015, which really hasn't changed from what we started on back in New York in 2008 and 2009. But if you look at our forecast and the goals we have for 2015, the cash generation here should be -- a good word is probably phenomenal, certainly strong. And the growth opportunities we have that we see around the world that we have described to you are really unchanged as we look at the long term. Certainly the mining investment that we made and will continue to make on capacity to take advantage of that will be huge, but we don't intend at all to vary very far from reinvesting in the business.

The way that we have structured the debt for the Bucyrus gets us some early drawdowns or paydowns on debt, so we get our debt to cap ratio a lot stronger than it is today, but we are still even today after the debt issuance we had in pretty good shape compared to where we want to be and certainly compared to where we were in 2009.

So strengthening the balance sheet is going to happen in the next couple of years just I think naturally, but the growth and the use of cash for the next five years will be right back into the business. In, of course, some of our announcements, you have seen where we are going with that and we will continue to talk about that. But I don't view the world as changed very much. In fact, it has probably improved since our analyst meeting in New York and certainly in Las Vegas. So we are pretty optimistic, very optimistic to achieve our 2015 goals that we have talked about.

Okay, and one final one while I have you on the line there. I am not quite sure how I understand how Bucy helps you win in China. I mean Bucy, one of the strategic kind of weaknesses in Bucy's business plan was it didn't really have a China strategy. Could you just expand on how Bucy specifically helps you win in China or what you are going to do differently, particularly in the context of Joy's announcement that they are acquiring IMM?

This is Steve Wunning. And Bucyrus does have some joint ventures in China. It gives us a foothold to begin to grow that business. Their presence in China is bigger than you think in terms of what they have been able to sell. And it is not just the manufacturing that they have in China, but it is their manufacturing they have outside of China. And China is very big in underground coal and this now gives us the capability to address the underground coal market in China and India, outside of China, with manufacturing plants outside of China, but also the foothold that Bucyrus already has in China.

Thanks, Ann. We need to move on.

Andrew Obin.

Yes, BofA-Merrill Lynch. Just a question on profitability in the quarter. Sequentially, why did we have profitability hit on Construction and Resources, but not on Power, even if Power pricing was in line with the corporate average? And I understand that there was some Japan impact on the construction side, but even excluding Japan, revenue seems to have gone up $900 million with no improvement in profitability on a sequential basis.

Andrew, this is Mike. I will back up from that and probably answer the question a little bit different than the way you asked it. When we were sitting here three months ago dissecting the first quarter and talking about our outlook, we had quite a bit of discussion about that. Our outlook absolutely reflected a higher sales rate than the first quarter and lower profit for the rest of the year. That is what was in our outlook. That is what we communicated. That is what we talked about.

We expected that, from the first quarter, that we would have higher sales and that really cuts across all the segments. We said we would have higher sales. We said the first quarter was a lot higher in price realization than we expected for the year and that that would moderate and it did. We said the first quarter is seasonally a low-cost quarter, it is usually the lowest cost quarter of the year for discretionary costs. It was. Overhead costs did go up as we expected.

We said that material costs were going to go up later in the year and they have gone up some. It is not massive, but I think in the second quarter, material costs were up close to $100 million. So those were all things that we talked about. We talked about R&D going up. It went up in the second quarter as well.

There is one other item that happened and that is the outlook. We actually raised the outlook, again, excluding Bucyrus, we raised the outlook $0.50 a share for the year and that caused us to take an incentive comp hit in the second quarter because we always catch up the year-to-date whenever we make that change. So we had an extra $85 million of incentive comp in the second quarter.

So in a nutshell, and again this cut across all the segments to differing degrees, but essentially the same story, we had higher sales offset by costs that were going up, coming off the seasonally low usual first quarter. We had the continuing pressure on material costs that we expected. We had the price realization moderating to about what we forecast. We said we took a price increase in January of about 1%. That is roughly what we got in the second quarter. So everything that happened in the second quarter is essentially consistent with our outlook and what we talked about at this point in time three months ago.

Let me ask a follow-up question. What happens to your Bucyrus synergy number if you transfer all the parts business that you intend by the end of 2012 with no gains or losses on transfer, just to give us a range? What kind of accretion are we going to get on what is going to be left to Caterpillar after you are done transferring the business, just a range, extreme case, if you transfer everything at cost what you bought it from Bucy?

Not going to do that. Not because I am afraid of the number, but because we made a decision that we have entered discussions with the dealers. The good data that we have is around the total. There are a lot of variables on timing. So in terms of the impact that the dealers are going to have, we will start talking about that when we have a better handle on the specifics and actually when it is specifically going to happen.

Thank you.

Seth Weber.

Hey, good morning. It's RBC. I guess on the Bucyrus transaction, I was surprised to see that all of BI's equipment is going to go through the dealers. I mean can you just talk about your confidence in the competency of the dealers to sell the underground equipment that they really don't have a history with?

Seth, this is Steve Wunning. That is a very good question. I guess to put a little bit more clarity into that, the underground is a great example. The continuous miners, the armored face carriers, there is a lot of customization there and even the drag lines and some of the big rope shovels, there is not that many that are sold around the world. For those types of products, there is going to still be a lot of factory support, a lot of application engineers working directly with the customer. So we are not going to transfer that expertise to the dealer because that doesn't make sense. But what we want to do is to have the dealer along with us there so that he can help us support that product once it is installed and running. So it won't be exactly the same kind of dealer support that we see with say a D10 or the big unique type of Bucyrus products. But they are going to be with us there because they will have a role. And all those details will be worked out over the next few months.

Okay, okay, that's helpful. I mean do you think that you will target a smaller number of more specialized dealers to do the underground equipment or it's just going to -- you are not going to get that deep into it?

Well, for the underground, we will target those dealers that serve -- where underground is in their regions, which is a fewer number of dealers.

Okay. Thanks. And then I guess just a follow-up question on the incremental margin. Mike, is Caterpillar still endorsing the 25% number target for this year? And if so, I mean is that including the currency adjustment, not including, can you just clarify that?

Yes, let's just go back to our outlook. The midpoint of our outlook today -- again, when we talked about that number, it was excluding acquisitions. So our outlook again went up $0.50 a share. We are at $55 billion and $7 at the midpoint. And excluding EMD, which is also an acquisition in there that is partial year-to-partial year, so I am not trying to get too tricky here, but just trying to make it apples-to-apples, our outlook for the year reflects a number that's pretty darn close to 25%.

Is that with the currency adjustment though?

Yes.

Yes, okay.

Wait a minute. That is all in as reported. I mean we are not adjusting anything out. The only thing we were trying to do in the Q&A regarding currency was just provide some additional explanation -- we had a bigger hill to climb in the second quarter. I mean we expected that incrementals would come down in the second quarter. We knew currency at that time was going to be a headwind. We were just trying to isolate and show you how much of an impact it had.

Okay. But on a calculation basis, we should use the 18 number, but still assume --.

Yes.

Okay. And why was currency such a big headwind this quarter?

Well, in the scheme of things, we try to be relatively balanced on an operating income basis. But we are never -- it is never precisely balanced. We had a very positive impact on sales, $351 million. That is a weaker dollar. A lot of that was the euro, the Aussie dollar, Brazil, the pound. Virtually every currency was weaker versus the dollar than a year ago and that upped the sales. But we also have just a ton of costs around the world, non-US cost base, and so that is what we try to balance. In a perfect world, we would have had $350 million of cost increase. In fact, we had a little over $450 million.

One of the things that has changed with currency exposure for us over the past couple of years is our consolidation of Cat Japan. It is in our -- it is consolidated in our results now and our net Japan cost exposure is quite a bit higher and most of the net negative in the quarter was yen-related. I hope that helps.

Got it. Yes, that is very helpful. Thank you very much.

Joel Tiss.

Hi, Buckingham Research. Thanks for taking my question. Can you talk a little bit about the pricing side of things? Is there a strategic decision to hold the line on pricing in the nearer term or is there any issue with customers being able to accept a little bit higher prices?

This is Mike. I will start off with it and then maybe one of the guys will want to chime in. But we came into the year -- I will say two things. One, at our analyst review in New York a little over a year ago, about a year ago and at CONEXPO, I mean we made a point then that we are trying to drive the Cat Business Model and the Cat Business Model thrives on a big field population. So there is probably some bias at driving higher sales volume.

When we came into this year, our announced price increase was about 1% roughly. I mean it ranges by product, but the net average was about 1%. That is what we put in place. We don't change pricing every month. We normally do a price increase in January. There will be a small midyear that will come in in July; we announced that a few months ago. And then beyond that, there are month-to-month quarter-to-quarter fluctuations just based on what product are you selling to what customer in what country. So it does fluctuate a bit, but essentially we came into the year thinking somewhere around 1%. We had a pretty good level in the first quarter and now the second quarter is about where we said we expected the year to be.

I will just comment again kind of at a strategic level, Doug Oberhelman here. And I would answer it more emphatically than Mike did about our business model. The Caterpillar business model runs on field population, which allows our dealers to thrive in the downturn, which they all did through 2008, '09 and '10. In fact, we only lost one dealer in that period of time around the world out of our 180 due to financial problems. And arguably, it was the recession that caused its financial problems.

So when our dealers are strong in a downturn, we typically see marketshare gains coming out of a recovery, which is consistent with what we are seeing today. And therefore, going forward to drive the parts business and the service model that really rings the bell for our customers, which is what they like to see, that is what really has to happen here and you are seeing a bias towards that in Mike's words, absolutely correct.

Okay. And then just a follow-up, just trying to get down to the question that I think keeps being answered. When you gave us the preliminary 2012, not really guidance, but just sort of a range to think about, the $8 to $10, that $8 was based on roughly $55 billion of revenues. So here we are in 2011, but your range is more $7-ish. So can you just give us a sense of what slipped there and how does that look into 2012? I am not asking for a forecast; I am just saying, you know what I mean, the efficiency of the profits relative to the revenues?

Joel, this is Ed. A couple of things I would say about -- and we are still, as Mike kind of alluded to earlier, that 2012 number, $8 to $10, $55 billion to $60 billion, we still feel very confident in terms of that. Your question about the $55 billion and $7 would be a couple things. First of all, when we laid that out, we clearly excluded the acquisitions, and if you take a number of those acquisitions out, specially related to EMD, you are going to get back to a sales number that is really closer to about $53.5 billion at the midpoint of our outlook. So that would be one point.

The second is we took you through earlier, we have got additional incentive comp here based on the raise of the outlook and in a normal year, you would be at about a 1.0 factor on that incentive comp. So at that level versus what we are at today would add about another $0.40 to that $7 number, which once again moves you closer to that range.

The last one is, when we laid out the $8 to $10 at $55 billion in 2012, we also laid out the fact that we were transforming our machinery business and many of those businesses are underway. You are seeing good year-over-year improvement in terms of where they are at in 2011, but we had projected upfront that that transformation was going to be completed by 2012 to deliver those numbers. So those would be the things that would be different from today.

That is a great answer, Ed. And I will only add a couple of things to it and that is the performance of the Company since the recovery began in early 2010. And if you look at our incremental margins from that point to today, compare that to the early days of the 2003 ramp-up period, you can take our quality levels, our safety levels, our pull-through levels, just about any internal metric we have and I will give a seat to the Cat Production System all the credit for this and our management team. We are far better off arguably 18 to 24 months into the recovery than we were the last time around.

So I am paying a lot of attention to that and we are spending a lot of time on internal efficiency and productivity and actually you are seeing it in the numbers. And certainly 2012 and 2015 are dependent on us completing and achieving those numbers and I am absolutely confident we will.

Okay, that is very helpful. Thank you.

Andrew Casey.

Wells Fargo Securities. Good morning, everyone. A couple of questions. The first on cash flow. You have had back-to-back performances for each quarter in Q1 and Q2 that are pretty much the best in over a decade for free cash flow, defined as OCF less capex. Can you talk about how sustainable that is and what, if any, impact we should expect over the next several quarters from Bucyrus? In other words, is there inventory benefit that you can take advantage of there?

Andy, this is Ed. Good question and as we laid out the strategy, we made it very clear that we were going to have a very balanced view in terms of the P&L and cash flow. As you'll remember, we made it one of the top tier metrics. We took you through OPACC, operating profit after capital charge, and we are really driving that down the organization to create that awareness. And I think you have seen it in terms of the cash flow improvements that we have had.

If you look at the year-to-date numbers and you commented very strong and I would say a lot of that has been in the profit, the receivables and the payables space. The inventory turns for us this year are what I would say are online with plan, but going forward, the greatest opportunity does lie in inventory turns. And Doug talked earlier about CPS and what we are doing there. We are also getting very focused in terms of the supply chain, the strategy talked about collaboration with suppliers. If I look at the next great opportunity in terms of cash flow, it is going to be in improving those inventory turns.

Andy, this is Steve Wunning. Just to add to Ed's comments, as kind of one of the line guys, is that I have never seen more focus on cash and cash management than what I have seen in the last two years. And it is very clear that each of the Group Presidents and their leadership team, they have got all the levers and all the controls to deliver on those commitments. And Doug has made it very clear to all of us what we need to do and our focus on cash has never been higher.

Okay, thanks for those answers. And then if I could get a clarification on the FX impact in the quarter. If you hold FX pretty much constant at current rates, what sort of impact do you expect I guess for the year within the guidance?

Andy, off the top of my head, I don't have that. Normally, when we do our forecasts, we are not -- we don't normally forecast future changes in the longer-term rate. We essentially use a current rate. So we wouldn't be forecasting from here forward a change in rates, but the rates even now versus what they were in the third and fourth quarter a year ago will obviously be different. Off the top of my head, I don't know what the second half versus the second half is off the top of my head. Sorry.

Okay. I will follow up with you later on that, Mike. One last clarification. The integration costs, are you going to give us those on a quarter-by-quarter basis until you are done?

Well, I think the vast majority of them are going to be this year and so I think certainly for the rest of this year, we will talk about what the total of those upfront and integration costs are. I think it will depend -- for next year, it will depend a little bit on, when we get to the end of the year, what our forecast for the following year is. Right now -- and it was on the slides that Ed showed you -- our estimate for next year right now is about $100 million.

Thank you.

Theoni Pilarinos.

Hi, Raymond James. I just had a question about the dealers and the payment. I am just wondering since most of your dealers are private how you expect them to finance the purchase and if Cat Financial will be helping them in any way to do that?

I would say, first of all, one of the great strengths of the Caterpillar business model is the financial strength of our dealer organization. So if you look at the mining business where it happens around the world, those are some of our absolute strongest dealers well-capitalized with good access to credit. There may be some instances where they determine to draw on Cat Finance for financing, but they have plenty of sources in terms of that financing to draw from. So I think the financing of it from a dealer perspective is not going to be an issue.

Okay, thank you.

Mark Koznarek.

Cleveland Research. Good morning. I just wanted to see if you could provide any kind of sort of even kind of philosophical sort of comments about the transfer of the service capabilities to the dealers. Is it likely to be strictly field population that will be transferred or hired or are you contemplating there will be assets sold as part of this?

Mark, this is Steve Wunning. And it is certainly going to be some field population. There will be a transition of former Bucyrus employees now Cat that will go to the dealers. These will basically be product support people, field people. Bucyrus had a lot of service technicians that worked on the product, so that will naturally go to the dealer. A lot of the parts, warehousing type people, may make sense to take it to the dealer. So it's a lot of the people that faced actually with the customers or the product that will naturally go to the dealer.

On a case-by-case basis, and that is part of each one of the discussions with the dealers, there will be some assets that will transfer to dealers and don't have much detail on that because we are just now beginning to dig into that to figure out which assets would go to the dealer.

So is it reasonable then to assume that this is mostly like labor that will be transferring, labor revenues, rather than the high profit parts profitability?

This is Mike. I will jump in. Aftermarket parts are a good profit business for Cat, even excluding Bucyrus and it is a good margin business for dealers as well. And I think as we transition the dealers into Bucyrus, it will be a similar model. I mean we will deal with the dealers likely in a similar way on parts like we do with the rest of Cat aftermarket. We acquire the parts, we get them around the world, dealers hold some inventory, we sell to dealers, they sell to customers.

Got it. Blended tax rate for next year?

I would just add a little bit to that, Mark. Doug here and the reason we are going to the dealer model is because we think they will do a better job in the aftermarket with selling more parts and more labor than we would going direct. So while we will maintain our margin on sales to them, and they will maintain their markup on part sales to their customers, we think the pie is going to grow fairly significantly over time due to their expertise being superior to what we think we could do directly.

Maybe to add on what -- this is Steve -- just to add on Doug's comment. This mining equipment really consumes a lot of parts, and this is just an untapped opportunity and we really want to leverage our dealers to help us go after that. And that is truly a strength that we have and we believe that is much better to do it through our dealer than using a factory direct model.

Got it. Okay, thank you.

Henry Kirn.

Hi, good morning, everyone. It is UBS. Sorry, I don't want to beat the transfer of the service business into the ground, but can you talk about how much flexibility you have in selling the pieces from one Cat dealer to another? In other words, if one dealer weren't willing to pay the price you were looking for, could you sell it to another of your dealers or are you geographically limited to selling the Bucyrus business?

Henry, I think that is probably putting a spin on it that is going down a road we don't need to go. Steve mentioned this early on. The dealers are super excited about this. They want to grow. This is right down their alley. They have asked us to do this. So I would say we are pretty confident that we will get this done.

That's fair. And on EMD, it was an operating income drag on the quarter, but could you talk about where it is versus your expectations and what you see for the business going forward?

I will just say a couple of things. One, it is a very late cycle business. I mean it is kind of like large mining engines, turbines; it works off of a lengthy backlog. We expected going into it that '11 and '12 were likely to be the trough because it was late cycle before improving. I'd say our expectations around this business are actually very good, witnessed by the new factory we are putting in Muncie to increase locomotive capacity. So our view between here and 2015 for rail is actually very good. With that said, we fully expected when we did the acquisition that actually both '11 and '12 would be weak years.

Yes, Oberhelman here. I will just kind of give you my view on where EMD is, which unfortunately is being overshadowed by Bucyrus as is most things around here at the moment. But you have got to remember that we have got, with an EMD installed locomotive base around the world, a huge parts opportunity, freight rail and certainly freight opportunity is increasing. What we are seeing when we have gotten into the factories and the supply chain of EMD is lots of opportunity for improvement. We have had good reception from our Class 1 railroad customers about where we are headed on this and this will be one of our gems down the road as we go.

But it was a mere $800 million acquisition I guess that kind of got caught up in the shuffle here the last year, but we are really going to be proud of this in a year or two. It is doing what it is supposed to do here in 2011 and 2012 and once we get it really humming, I think it will be a great addition to our portfolio.

I would say the same thing about MWM. We made a comment in the Q&A, we are on track sometime this year. That is another one that we haven't talked much about. We will after closing, but that's got a bright future down the road as well.

Hey, Henry, this is Ed. The only thing I would add on the EMD side is it does tie directly to the discussion we are having today on Bucyrus because if you listen to the major mining companies around the world and the issues they have got is the infrastructure to get ore to port is a huge opportunity. And knowing those large mining customers through our Cat mining organization, being able to bring an EMD Progress Rail into those discussions is an upside that I think is really going to make this a great business over the long haul.

That's helpful. Thank you very much.

Jamie Cook.

Hi, good morning, Credit Suisse. Two questions. One, when I think about Bucyrus and how it's sort of tied into incentive comp, does management have to hit the specific Bucyrus financial sort of synergy targets you laid out for us today or does management instead will be compensated more on Cat targets, which incorporate Bucyrus?

And then my second question relates to, again, sorry, the $8 to $10 in 2012. You guys were pretty vocal about saying the $8 to $10 excludes acquisitions and I think the Street was hoping for a material raise. Perhaps more in the $9 to $11 or a push-out of the $8 to $10 per share range. And it looks like that is off the table based on where you are guiding to 2011 and the initial accretion from Bucyrus. Is that the right way to read it?

Well, I'll tell you what, I am going to bracket part of that. I will give you a comment on incentive comps in 2012 and then in terms of Bucyrus-specific incentive comp, I guess I don't know the answer to that; maybe Steve does.

On the first question, on the short-term incentive comp that we talked about today, raising it because we raised the outlook, that excludes -- for the rest of Cat, it excludes the impact of Bucyrus for this year. When we went into this year, our outlook excluded Bucyrus because it hadn't closed, we didn't know for sure when the timing was going to be and so for the rest of the Company, we set up our incentive comp measures excluding the impact of Bucyrus. So the reason incentive comp went up today is because we took the outlook up excluding Bucyrus by $0.50.

In terms of the $8 to $10, again, that is a target that we put in place back in '09. Doug made a fairly emphatic by golly that is our target comment a little while ago, but realistically we don't have an outlook yet for -- a specific outlook for 2012. It is getting a little more -- as time goes by -- a little more awkward to talk about our target because 2012 is just right around the corner. It won't be long before we actually do have guidance for 2012.

We normally provide kind of a preliminary sales guidance with our third-quarter release and we will probably do that again this year and then in January, we will give you our full-year expectation for 2012, but I think as Doug said we are pretty bullish. I mean think about it. We raised our sales outlook today -- if you take EMD out of it, midpoint of our -- which is excluding acquisitions, in 2011, I mean we are already at $53.5 billion roughly without Bucyrus. So things are going pretty darn good.

All right, Mike. A girl has got to try. But then just -- can someone answer the question with how Bucy is tied into incentive comp?

Jamie, let me just add to Mike on the incentive piece. We have a small team that is full-time doing the integration. It's about 100 people, as I mentioned. They do have -- their incentive is tied to how well the planning is done and how well we integrate this year. It is not material to the Company's financials.

The important part here though is that, as we do our 2012 business plan, we are going to make sure that the Bucyrus synergies are drilled into those business plans because we want to make sure that all those synergies hits the bottom line. And the best way to do that is to make sure that that's in each and every one of our businesses, in their plans and in their targets and in their incentive plans. So from 2012 and beyond, these synergies will begin to be drilled into their commitments.

And it is for the broader Company, not the small team in 2012 and beyond?

This would be for the mining business and all the other divisions that are supporting the mining business for their synergy piece. That will be drilled into their business plans.

Alrighty, thanks. I will get back in queue.

I will come back to 2012. I think Ed referenced it earlier. Our OPACC, operating profit after capital charge, philosophy here which we have sort of been running in parallel in 2011 with no incentives tied to it. We intend in 2012, as we said in New York and Las Vegas, to bring that in as a metric for management. So, so far that, paralleling I guess review, looks very good. We like what we see and think the cash flow is indicative of that, maybe a few other things, but we would intend to implement that across the Company for all of our employees or most all of them in 2012.

Okay, next question.

Eli Lustgarten.

Longbow Securities. Good morning, everyone. Just a couple of clarifications on the financial side of Bucyrus. You told us in the press release there was an $80 million incremental interest charge this year. What's that number for next year? And the $300 million amortization, how long -- does that go on for the next 10 years or is that basically on the write-up of it?

On the interest, I think if you were just to assume somewhere, at least for next year, in the $10 million to $11 million a month range on the debt, that would cover it the way we laid it out. Now again, we said we're in discussions on selling pieces of this to dealers. And so ultimately that will generate some cash and it might change things a little bit. But on an all-in basis, the way we reported the numbers to you today, that $80 million is for seven months and a week. And I think that comes out to close to $11 million a month.

Okay, that's fine. And the $300 million amortization, that's an ongoing thing, because --.

That's an ongoing thing. And I'll stress this here too, with the inventory step up and that. Those are estimates right now. We just completed this acquisition two weeks ago and are into the numbers. So don't write those in stone. Those are our best estimates right now and that amortization is going to be based on -- there will be different lives of intangible assets. So some will be longer -- some will go on a long time, some will be shorter. But I think for the scope of the next few years you can probably think of that as a reasonable estimate.

Okay. And may I ask a question, when you talk about mining capex in the industry up 50% this year, can you give us some idea of where you are in capacity in the mining business without Bucyrus and talk about Bucyrus itself? Because we knew a lot of product was sort of sold out, so are we at capacity? And the real question is how much incremental capacity would you have available for 2012 over '11?

Eli, this is Steve Wunning. For some of our products we are at capacity, but what we're doing is we're making -- in the process of installing some investments that we've already committed to, to increase our capacity. We are going to be adding more capacity even sooner now because of the long-term forecast that we see in the mining space over the next couple years and we'll be adding that capacity over the next couple years. The long-term forecast goes out longer than that.

We're working with our suppliers and our dealers to make sure that they're prepared for the growth that we see because the last thing we want to happen is to have our factories ready but our supply base can't support it. So we're spending an awful lot of time now making sure that they're adding the capacity and they understand what our plans are.

I guess I'm trying to ask how much incremental production can you get out of the mining sector in '12 versus '11 from the capacity announced and coming online. The industry probably wouldn't have much more than 10% or 15% next year, and I'm just trying to get a feel (multiple speakers).

Eli, usually when we get to the third quarter we kind of do a preliminary guidance on at least the top line for the following year. And why don't we save that for October? That's probably a better time to talk about that.

Mike, one thing I would add is that what we are doing is we spent a lot of time over the last four or five years deploying the Cat Production System within our factories. We are now using CPS and deploying it with our supply base which is allowing us to increase capacity without making additional investments. And that's where a lot of the focus is right now is through using CPS principles throughout the entire supply chain.

And can you talk a little bit about the expected impact of costs in the second half of the year? You know, you talked to material of $100 million. But we've had commodity costs come up and down. And so are we still looking at higher costs in the second half of the year from the first half of the year?

I think it depends a little bit on the category. If you look at material costs and freight costs, which were a pretty good drag on the second quarter, there's probably still a little upside pressure on material cost in the second half. With freight there's quite a bit of fuel surcharge in there. So you know, with fuel prices down, maybe there's an opportunity for a little bit of relief in that.

In terms of R&D, I suspect the second half of the year is going to edge up a bit. Relative to the second quarter, if you look at incentive comp, that was an $85 million hit versus Q1. Essentially half of that was related to getting the year to date right. So versus the second quarter based on our outlook we would have that going down.

So I think it is a little bit mixed depending upon the cost category you're looking at. I think if you cut through our guidance though, essentially what we have at the midpoint of the guidance is sales and profit in the second half on average for the third and fourth quarter. Again, we don't have quarterly guidance, but on average we have got the third and fourth quarter with sales and profits similar to what we did in the second quarter.

Fine. Thank you. I will turn it over to somebody else.

Jerry Revich.

Good morning. It is Goldman Sachs. Steve, can you talk about your opportunities on the Bucyrus manufacturing footprint broadly and specifically comment on the capex side. I think the excavator product line is essentially out of capacity at this point.

Jerry, we are looking at all of the Bucyrus operations. It is just very early right now to really determine what our total footprint is. Our main focus right now is looking at capacity that we have and to see what we need to do to increase capacity both for Cat and Bucyrus. But it is going to take us a little bit longer to really determine what is the best global footprint for both Cat and Bucyrus for the mining business. But our focus right now is looking at how can we increase capacity for both.

And Ed, to get to the inventory velocity improvement you discussed earlier on the call, can you talk about the extent of improvement you need to see out of your supplier, on-time delivery rates and just talk about where in that process you stand today?

Steve commented earlier on the fact that we've spent a lot of time in terms of deploying CPS across our footprint and now it is a question of taking it out to our supply base. And if you go back to the strategy and the heart of it, we talked about the concept of supplier collaboration and integration.

And I think what you see us doing is we are fully integrated, as you know, out into our distribution organization and we are looking to take those very same principles and apply it back to our supply base. I think we are getting outstanding engagement from our supplier organization.

If you think about where we are at with the sales level in the second quarter of 2011, this thing from a volume perspective bottomed out back in kind of the third quarter of '09. And from that standing still point, our supply base has done an outstanding job of responding and taking us to a point where this quarter we had record sales and revenue.

So I think the engagement of our suppliers is there. I think the methodology is proven out in terms of the Cat Production System. It is clearly outlined in our strategy as a priority, which really helps drive this organization. So I think that is the key to getting that inventory improvement that we are looking at going forward. I would say between now and 2015, we would really be looking to drive that inventory turn improvement by about half a point, which would bring a lot more cash to the bottom line.

That's helpful. And Mike, pricing was significantly weaker in construction industries this quarter. Can you talk about which regions are seeing less pricing success and is the July 1 price increase sticking, particularly given the currency headwinds for a lot of your Japanese competitors? Thank you.

Well, we are in July right now and I haven't seen any July numbers yet, so the second part of your question is a little tough to answer. The first part, remember, we actually went into the year with a pretty modest expectation for price. I mean overall we were only looking for something on the order of magnitude of 1%. And as you can imagine, in areas like mining, I think the opportunity was better there. The environment was better there and if you look at the numbers in the second quarter, it bears that out. But in general, I would say overall for the Company, we are getting about what we expected and what we announced in January.

Thank you.

David Raso.

ISI. Two questions, one on mix and one on structural costs. The $2 billion increase in revenues, excluding Bucyrus, I know you don't give quarterly revenues, but how much of that $2 billion already played out in 2Q and then for the rest of the year, when you think of what was raised, where is it coming from? Is it Resource, Construction? Just give us a little color on that $2 billion number.

Yes, I'd say -- I will give you a little bit of color. The second quarter actually was -- again, we don't give quarterly guidance, but the one bit of info that I can tell you about the second quarter was the $100 million impact on Japan was lower than we thought, so the Japan piece was a little bit better.

What I would tell you is when we were talking about our outlook three months ago, we said, hey, for a lot of products, we are capacity constrained or production-constrained. I think what allowed us to take this outlook up is actually better production levels at some of those places that were constrained, quicker recovery in Japan and in general better demand in the areas where we weren't capacity constrained.

Solar for example is better, Power Systems is better, Construction Industries is better. Mining is getting more production out. So again, we don't do the guidance by quarter, we don't do it by unit, but it was fairly widespread.

Okay, so regarding mix going forward, because I am just trying to square up the rest of the year incrementals or guided 18, 19 all in, how much is that currency and how much is that simply a mix issue? The revenue guidance is broad-based. It went up 1.7, 1.8 something like that for the back half of the year.

Costs for the second half, when I think of structural costs, the way you just defined them was like period costs, all the costs that are going on from the factory expansions, trying to think about '12 operating leverage, where are we in trying to size the capacity for the growth numbers? You spoke of long term '12, '13, '14 out. How much of the cost -- some will get done in '11 and how many of the factories getting an update from you right now on Tianjin in China for the big engines and some other facilities? Where are we by the end of '11? Do we get a nice story of revenues next year and have already put my costs in '11 or is it an ongoing issue into '12?

Yes, that is a very good point. There is no doubt that the period costs this year are impacted by all those capacity additions that we have got in flight. They are all not going to be done this year though. I mean we have got -- if you take Xuzhou, for example, the next phase of that expansion doesn't really take hold until the end of '12. The excavator facility in Texas, that will still be in flight through the first part of next year as well.

So I mean we have costs this year, we will have costs related to capacity expansion next year. Again, it is a little premature I think to talk about, too much about 2012 costs because there's a lot of moving pieces, but I think to some degree it will depend upon what our view is at that point in time and what else we need to do in 2012 to deal with '13, '14 and '15.

David, this is Ed. I think the only thing back to kind of the earlier comments and some of Doug's points is I think you do have to assume, based on our long-term outlook, that there will be continuing investments relative to capacity. I mean the emerging market growth, you know the story there. If you take the US and Europe, we are at 50% of the prior peak. You have got rental fleets and US dealers today that are below the '02 bottom. Average age is 30% older. There is a replacement cycle coming and that is why you are seeing investment this year. I think you're going to see investment moving forward as well.

If you'd indulge me two quickies. The All Other category was a little bit of a negative surprise. What were the drivers there and then secondarily, how are you viewing growth the rest of the year in China on a year-over-year basis?

Okay, two things. On the All Other, there are two pieces of it. There was -- sales actually declined and the margin rate dropped. The sales decline was essentially Carter Machinery. We sold Carter Machinery last quarter or actually at the end of the first quarter. So their revenue sales -- sales to outsiders -- were in that segment before. So that went away and Construction and mining and the Power Systems divisions, their sales now to the dealer, the independent now Carter Machinery went up a little. So, on the sales side, down in that segment, up a little bit in the others.

From a profit standpoint, one of the groups -- there is a lot of intercompany activity in that group. One of the groups that is in that group is our internal logistics group. We have seen quite an increase in freight costs this year. A lot of the brunt of the freight cost increase has been born in that division and in the short term, it doesn't get passed back to the others.

Thank you. And regarding China?

I am not going to do any quarterly guidance on China. Our second quarter, our sales were up. We are still pretty bullish on China overall. We have got an above 9% GDP growth rate in for China. There has been a lot of discussion in the news about the growth rates there slowing down. That doesn't mean it is going negative, but I do think the growth rate that we all saw in the industry from the first quarter is likely to come down a bit.

I am going to conclude, David, with that comment on China. I wanted to get this in at some point and I am glad you brought it up because we do hear a lot about that. We watch it very closely, but I view a slowdown, emphasis on slowdown, not crash, in China as pretty favorable for Caterpillar and for our industry. We all knew that market was way too hot and it probably will heat up again at some point. But a slowdown lets us all in the industry take a breath, make sure we don't overcapacitize and gives us a chance to kind of reconnoiter.

The other thing it does, it allows us, where we can and because of our global footprint, we can source into or out of China because we are making world-class excavators there and there are other hot markets where we have been short that if there is capacity that frees up in China, we can use elsewhere.

So I do not view a slowdown in China as a bad thing at all. I would view a crash as a bad thing. I don't think the Chinese will allow that to happen; they have had a good run over the last 30 years of walking the tightrope. The tightening they started this year was helping. It's starting to pay off. We would expect a slowdown; we have seen it.

But again, the hot market we saw there in '09, '10, and '11 was just too hot; we all knew it. So a slowdown for us I think is healthy, but David I would say slowdown and we will be watching that very closely and at some point, it will pick back up and I think we will be, as Mike said, looking at growth rates that are very manageable for us.

Thank you very much. I appreciate that.

Allrighty, with that, we are slightly over time. Thank you very much for joining us today and we will talk to you over the next couple of months.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.