開拓重工 (CAT) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the third-quarter 2011 earnings results conference call. (Operator Instructions).

It is now my pleasure to turn the floor over to your host, Mike DeWalt. Sir, the floor is yours.

Thank you very much, and good morning and welcome, everyone, to Caterpillar's third-quarter earnings call. I am Mike DeWalt, the Director of Investor Relations. I'm pleased to have our Chairman and CEO, Doug Oberhelman, and our Group President and CFO, Ed Rapp, with me on the call today. This call is copyrighted by Caterpillar Inc., and any use, recording or transmission of any portion of this call without the express 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.

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 those factors that either individually or in the aggregate we believe could make actual results differ materially from our projections can be found in our cautionary statements under Item 1A, Risk Factors, of our Form 10-K filed with the SEC on February 22 of this year and also in our forward-looking statements language contained in today's release.

Okay. This morning I will start by summarizing our third-quarter financial results, the increase in our outlook for 2011, and our preliminary outlook for 2012 sales and revenues. Earlier today we were happy to report a record-breaking third quarter. Sales and revenues were $15.7 billion, and that was an all-time record, the best quarter ever in our history.

Now the quarter did include $1.1 billion in sales and revenues from our recent acquisition of Bucyrus. Excluding Bucyrus, sales and revenues were $14.6 billion, and that was also an all-time record.

Profit was $1.71 per share in the quarter, and that did include a negative impact of $0.22 a share related to Bucyrus. Excluding Bucyrus, profit was an all-time record at $1.93 per share. The $0.22 impact from Bucyrus included acquisition-related expenses of $160 million for the inventory step-up and $122 million of deal-related and integration costs. Now the inventory step-up will continue in the fourth quarter, and there will be more deal-related costs, but much less in total than the third quarter.

There is a good summary of the Bucyrus-related impacts in our financial release, and it is on page 15. It is in a table in the Q&A.

Now one other point on Bucyrus, when you review our financial results by segment, remember that Bucyrus is in Resource Industries, and when you review our sales by geographic region, remember that Bucyrus impacts every region. Now to help you understand that impact, we have broken out the Bucyrus sales by region in our discussion of Resource Industries on page 10 of the release.

Because of the size of Bucyrus, to keep the discussion apples-to-apples, we will compare our third-quarter 2011 results excluding Bucyrus with our total third-quarter 2010 results. And, again, at $14.6 billion without Bucyrus, it was a record quarter, up 31% from $11.1 billion a year ago. Sales and revenues were up in every geographic region with North America up 25%, Latin America 20%, Europe, Africa, Middle East up 41%, and Asia Pacific up 38%, and again, those exclude Bucyrus.

Now in terms of the timing of the sales increase and the backlog growth, it was reasonably consistent as we went throughout the quarter. Now speaking of the order backlog, for all products other than Bucyrus, it rose 11% from the end of the second quarter in June, from about $21.9 billion to $24.4 billion at the end of the third quarter. And it is about 40% higher than it was at the end of the third quarter a year ago. Now the Bucyrus backlog grew from about $3.5 billion at the time of our acquisition in July to $4.2 billion at the end of September.

Now moving on to the results, price realization was $129 million, and that is up close to 1% and about as we expected. Manufacturing costs were up $330 million, and of that, period or fixed manufacturing costs were the most significant driver. And the primary reasons for that increase are volume increase, the investments that we are making in capacity, and the increases in our short-term incentive compensation. In addition to the period costs, material and freight were also somewhat higher.

Now SG&A and R&D costs were up $82 million in the quarter. That is about a 6% increase in costs on our 31% increase in sales. We think that is pretty good cost control, and as a percent of sales, SG&A and R&D declined.

Currency impacts overall were negative $160 million to operating profit. It is a positive impact on sales of $356 million, but a negative impact on operating costs of $516 million. The most significant net negatives were from the yen and the British pound. The US dollar was weaker versus both the yen and the pound, and we are sizable net exporters from both Japan and the UK.

As you do your analysis of our third-quarter results, I'm sure many of you will do the math and calculate incremental operating margin. To help you out with that, we have included a Q&A. It is number 12 on page 18 of our financial release. Now when you calculate incremental margin, your purpose is likely to be to get a data point on our operating performance. We think to make it a reasonable analysis you need to pull out the impact of acquisitions to make it apples-to-apples, and that is how we have stated our goal for the year. That is excluding the acquisitions of EMD and Bucyrus.

Excluding the acquisitions, our consolidated incremental operating profit pull-through was 22% in the quarter and 24% year-to-date through September. That 24% year-to-date number is a little lower than our goal, which was 25% for the year, and the primary reason for that is negative currency impacts.

Excluding currency impacts, incremental operating profit was 30% in the third quarter and is 28% year-to-date. Bottom line we are at 24% year-to-date versus our goal of 25%. That is pretty close, and operationally, excluding currency, we are doing even better than our goal. All-in-all it was a good quarter for sales and profit. Costs were in good shape. Margins improved. In fact, excluding Bucyrus, our year-to-date operating profit as a percent of sales is better than any full year in more than three decades.

Cash flow was also a great story. Our Machinery and Power Systems operating cash flow was over $6.1 billion through the first nine months of the year. That means, if we stopped the year at the end of September, it would be an all-time record. The first nine months have been better than any full year in our history.

Our debt to capital ratio continues to improve, and it dropped to 41.1% at the end of the third quarter. That is down from 42.6% at the end of the second quarter. As a reminder, we bought Bucyrus for almost $9 billion, and we did not issue equity to do it. And even with the acquisition, our debt to cap ratio is 41.1%, and we had more than $3 billion in cash on the balance sheet at the end of the quarter.

Okay. That is enough about the quarter. This morning we also increased our outlook for 2011. All-in with Bucyrus, our new 2011 outlook is sales and revenues of about $58 billion and profit of $6.75 a share. Our previous outlook was a range of $56 billion to $58 billion with profit of $6.25 to $6.75 a share. Excluding Bucyrus, our new outlook is for sales and revenues of about $56 billion and profit of $7.25. Previous outlook was a range of $54 billion to $56 billion and $6.75 to $7.25 a share.

Now that is a lot of numbers, but I think the easiest way to think about the change in the outlook is this. From the midpoint of our previous guidance, we raised sales and revenues by about $1 billion and the bottom line by $0.25 a share both with and without Bucyrus.

Now, as we usually do at this time of year, we provided a preliminary sales and revenue outlook for next year, 2012. And for 2012 we expect our total sales and revenues to be up 10% to 20% from the outlook for 2011 of $58 billion.

Now that is based on our view that the developed countries of the world will continue to grow in 2012, a little bit better than 2011 but at a slow rate and below their potential. In the developing world, we expect overall economic growth at about the same pace as 2011. In the US we still expect continuing poor housing, a little better than this year but still very weak. We are also not factoring in any new highway bill, but we are encouraged that it seems to be gaining some traction in Washington.

In summary, we are still predicting improving but slow economic growth. In some of our businesses, that is actually good. For many of our products, we are producing full out and need time to get more capacity in place. Despite the relatively weak economic growth so far this year in 2011, our order backlog has steadily increased throughout the year. It is at a record level, and that will help support next year's sales. Commodity prices, while off earlier highs, are still at levels that should continue to be favorable for mining investment. We expect that dealers will continue to add to rental fleets to reduce their average machine ages and increase fleet sizes. Users in developed countries still need to catch up on deferred replacements, and we expect construction activity to continue to improve in developing countries, requiring some further fleet expansion. We expect that dealers throughout the world will modestly increase machine inventories in 2012 to support the higher sales. And we also expect that sales of engines, turbines and rail will improve next year.

Now we understand we don't have a crystal ball, and as Doug said in this morning's release, we realize the world faces economic uncertainty and risk, and a key part of our planning process is to make sure we are prepared if this situation turns negative. Each of our businesses prepares trough plans, and that is a standard practice here at Cat. We do it every year, and that is to help us act faster should the need to take action arise.

Bottom line our business is improving. The signs that we see lead us to believe that will continue, but we are keeping a close eye on the world economy, and we will act if we need to.

Just a couple more points, and then we will take your questions. The first is rightfully we talk a lot about economics and sales and costs and profit, but there are a few other aspects of our business that are also going very well. Quality levels continue to improve for almost all of our product groups. We are well into our US Tier 4 and European Stage IIIB product introductions. They are going very well so far, and feedback from the field has been very good.

Another area of improvement has been PINS, and while we do not disclose absolute numbers, I will tell you we are gaining. It has been a steady year-over-year improvement each month since early 2010.

And my final point, employment. Our global workforce has continued to increase in the third quarter, and since the beginning of 2010, we have added more than 30,000 people at Caterpillar, and that does not include the acquisitions that we've made.

Okay. That is enough about the quarter. We are ready to take your questions.

(Operator Instructions). Stephen Volkmann.

Jefferies & Co. I'm wondering if you might be willing to sort of directionally help us think about how incremental margins might proceed into 2012? You had a number of things that were sort of headwinds this year, things like currency and price costs and some of these comp accruals and so forth. And it seems like most of those should be a little better next year, but then again we are later in the cycle with a little bit higher production levels. Just kind of conceptually, how do you think about the progression of incremental margins?

Well, I will talk around it a little bit, Steve. We don't have profit guidance for next year. But, as you said, there will be plenty of puts and takes. On the positive side, this year we far exceeded our plan for the year, and the result of that is incentive comp is quite a bit higher than a regular target number, well higher than our outlook. So that would actually be a fairly sizable tailwind going into next year.

Currency, as you said, has been a big negative so far this year. I guess that is -- we will see how the currency plays out. Hopefully it will not be a headwind next year, but we will just have to wait and see what happens on currency next year.

There are a couple of headwinds. We are increasing capacity. For a lot of our product, we are producing full out right now. As you have seen us announce over the last 18 months, we have a lot of projects in place, and that does drive some increase in expense.

I guess I would wrap all that up and say, so far this year, year-to-date, even including the negative from currency, we have done about 24%, excluding acquisitions. Our goal leading up to 2012, through 2012, our long-term goal has been around 25%. So certainly that is what we'll -- that is our goal. But, again, we don't have profit guidance for next year, so it is a little tough to be more explicit than that.

Understood. That is exactly what I was looking for. And then sorry to get into the weeds here, but was there an interest rate swap loss? I think you were guiding to something $150 million-ish, and I am just trying to make sure I'm thinking about interest expense right. Maybe it is somewhere else.

No, we did have about $150 million of swap losses, but that was in the second quarter. That is behind us.

Okay. So nothing else going forward. Thanks very much.

Rob Wertheimer.

Vertical Research. Your orders were really exceptional, and it looks to me -- I know you don't disclose orders, you do backlog -- but it looks to me like they ticked upwards pretty significantly in 3Q. Just interesting given that the uncertainty sort of ticked upwards as well in August. So can you tell me was there anything -- Mike, you mentioned it in your intro comments, but were orders continuing to be strong through the end of the month, not to get too micro?

Yes, that is a good question, and I don't normally talk about how things progress through the quarter. But, with all the uncertainty, we were trying to send a subtle signal there that we had good, consistent growth as we went through the quarter. That was on purpose.

Good. Somewhat unrelated follow-up, in China I think you mentioned how you finally have the capacity to build a little bit of inventory ahead of the selling season. Can you talk about -- obviously China there is a lot of negativity around equipment sales in the market. Is there a point where you start to worry that you need to back off, or is there enough share gain ahead of you that you can ramp into your full capacity that you have planned?

I think if you look at China -- and, again, we don't disclose market share data, but there is plenty of information that people can pick up. You know, there is no big leaders in China. It is a very big market, a very fragmented market. We are executing our strategy there. There is room for quite a bit of growth. We have actually done over the last, I don't know, few months, we have done better than the market overall. Earlier we kept saying time and time again our sales were limited by production. I think what has happened to us relative to the market over the last few months has proved that out.

It is hard to speculate too much about the future. It is a big market. It is a growing market. It is going to need more capacity not just from us but from competitors going forward. But there's always ups and downs in the timing.

So I think we are doing okay. We are proceeding with the capacity that we have already announced there, and it fits nicely within our plans.

Just another view on China from a couple of different angles.

First, our sales to users in the third quarter of 2011 were higher than they were in 2010. Secondly, the slowdown we have seen in the economy as the Chinese authorities have tried to get a hold of inflation in my view is the best thing that could have happened to the construction equipment industry. The levels of investment, the levels of growth that were occurring there before they did that were unsustainable for Caterpillar and for our competitors, for our industry. And it would have led to a bubble of really significant proportions, which I think would have been felt around the world. The fact they got a hold of that early, which is no surprise given Chinese history, they have proven they can run that economy. Granted it is getting bigger, but the fact that they got a hold of that and our industry has slowed down is extremely healthy for us in the long-term.

The good news is our excavator business, the Xuzhou-made product there, is a world-class product that we can use just about anywhere in the world. So we have the ability to divert some of that production elsewhere in the world where we can't keep up until we get our other investments up like in Texas, which we have started our new plant there for the 20- to 30-ton product, and it is underway.

So right now it is kind of a sweet spot in my opinion because we have saved the future to a great degree by not having that thing boiling out of control and spilling all over. And, in fact, I think we will see the Chinese authorities get a hold of inflation, reflate. Believe it or not, we will see 9% -- I don't know, 8% to 10%, 11% growth, which is wonderful for us and long-term really plays to what our strategy is. So I am in the camp loud and clear supporting the slowdown in China and in our industry because long-term it helps us.

And it adds then, as Mike said, referred to, an inventory level in China we would not have been able to produce to until probably 2013 or 2014. So we are at that level today. Our dealers are ready, our distribution are ready, and we are seeing market share gains which we like. But, as he said, there is no clear leader yet because it is such a disparate excavator business and wheel loader business. But right now I'm pretty optimistic with where that market has evolved to and what I think will be a reasonable growth, certainly at a lower level than 15% to 20% that we were seeing. But man, 8%, 9%, 10% is great going forward, in my opinion.

Andrew Kaplowitz.

Barclays Capital. So if I could just ask you about your guidance for 2012 in maybe a different way, can you talk about the visibility that you have in this guidance given Caterpillar is getting more aftermarket focused? It is getting more backlog-focused. So I know there is a lot of macroeconomic uncertainty out there, but it seems like those two things would help you and give you better visibility as we go forward.

I think you are right, I mean particularly with the acquisition of Bucyrus, with the relative strength of mining, which is a more backlog-oriented business than, let's say, construction equipment. And just going back to the earlier comments from today, from the end of June to the end of September, our backlog, even without Bucyrus, went up 11%. Bucyrus went up a little bit more than that. We are up about 40% versus a year ago on backlog. So that does help.

You mentioned aftermarket. Again, we don't break that out separately, but we have had continuing, consistent increases in the aftermarket business, which basically tells you a couple of things. On one hand, it tells you that activity levels are holding up because aftermarket is related to activity levels, and that gives you some confidence. And I think there is also an impact, particularly in the developed world where we just have a little bit of an aging fleet, and I think that gives you a little confidence in terms of the need for at least some minimal replacement.

So yes, I -- you know, it is never a sure thing. I mean, as you look forward to next year, there are a myriad of things that could happen. But I think as we sit here right now today and you look at aftermarket, which is an indicator of activity, if you look at the backlog, which is an indicator of customer confidence, I guess, it looks pretty good.

A couple I would add to that in terms of looking into next year would be also we are seeing rental fleet utilization back to levels that are pre-crisis. So it tells you that rental fleet utilization is there. So that is another thing that kind of gives us some confidence moving forward. The other one is we continue to see good, strong pricing in the used equipment market, which is another sign of good demand moving forward.

That is great. And Mike, if I could ask you specifically about Bucyrus for one second, $4.2 billion, if I'm not mistaken, is a record for the Company by a wide range, and I know it is part of Caterpillar now. But, as we look at that business, just in a few months of being part of Caterpillar, the backlog expanded quite dramatically. Is that the impact of Caterpillar yet; is that just the strong markets? Maybe you could just update us on integration so far.

Yes. Well, I would say in general mining has just continued to be very strong. I would certainly hope that customers are happier that it is with us right now. But it would be hard to look at that and say, this one is and this one is not. It probably has something to do with being part of Cat, but probably more to do with being just a really good market.

In terms of the integration --

Mike is being a little diplomatic on that. I would say, of course it is.

Yes. In terms of how the integration is going along, we have had them for a few months now. I think all the early indications have been very good. But whenever I talk to people on this, I like to temper expectations just a little bit. If you look at the things that are going to make this just a super deal, they involve the dealers. So we need to get the business, the distribution piece of it moved over to the dealers, and that is going to take a little bit of time. It is a very backlog-oriented business. So what they are selling this quarter is product that they took orders for a year or so ago. So we are seeing a nice increase in the order backlog, but it will take a little while before that actually translates itself into sales.

I'm sure somebody will ask down the road, so I will just hit this right here, right now, in terms of how are we doing in talking with the dealers about selling them distribution businesses. And I guess I would say I think that is going pretty well. We never thought it would be all done in one quarter or even this year. We are focused in the places where the bang is the biggest and with the dealers that have the most opportunity. You know, they are very excited about taking on this business. But at this point we don't really have any deals to announce, and until we do, we will probably be a little bit more silent on the specifics around it.

So I think all-in-all, so far, so good on Bucyrus. We did not change our estimates for this year in terms of the overall impact. So I would say that is a good thing.

Ted Grace.

Susquehanna. Congratulations on a great quarter, guys. The question I was hoping to ask is in regard to the top-line guidance for 2012. I was just wondering if you might be able to walk through some of the assumptions at a little more granular level. I know you walked through some of the GDP expectations for the US being up 2.5% next year, Europe being no more than 1.5%, and you talked about US public infrastructure markets being constrained and private non-res improving. But I was just wondering if you could talk about magnitude and timing of public and private non-res in the US and Europe and how you are thinking about various scenarios of austerity in both regions?

I think I will just -- in terms of granularity, it will be a little bit difficult. We did not provide a lot a specific guidance by region or by country or by product. But what I would tell you is, if you look at US and Europe, increased spending, construction spending, is not the main driver. The main driver for increases in the developed world today, that would be both the US and Europe, is essentially customers just having to replace the machines. You know, kind of post in the US 2006, 2007 highs, and in Europe late 2008 and early 2007 highs, they have really just cut back replacement spending dramatically. And so I think most of the increase that we are going to see in both the US and Europe and, in fact, that we are seeing today, even amid what is terrible construction spending, I mean, look at the housing market; it is terrible. The sales increases, which are quite healthy, are mostly related to replacements.

Okay. So the 10% to 20% embeds minimal if any real underlying growth in the developed markets?

Yes. In the developing world, there is enough economic growth that fleet sizes are going up, construction spending is going up. So I think in the developing world, real construction spending should be a positive. In the developed world, it is mostly replacements.

Okay. That is helpful.

To give you a feel for it, we used dealer rental fleets in the US as kind of a proxy of where customer fleets are. And if you look at dealer rental fleets today, they are still at levels down in the area of the last trough, the 2002/2003 timeframe. And on average, that equipment is 30% older. And so there is a really good pent-up replacement demand that has yet to play out, and it is one of the reasons we are continuing to make some of the investments in capital that we are making.

Great. And then a real quick follow-up. Cat Financial in the quarter you had $145 million of profits on revenue of $693 million, 21% margin. In the second quarter, it was like $172 million on $695 million, 25% margin. I know the earning assets were down about 1.5% sequentially, but can you just walk us through the other dynamics around the sequential basis, what has reduced operating profits?

If you look at Cat Financial, I think their results have been quite consistent. I think in the second quarter I think they lowered their allowance reserve, and there was a little benefit in there from that. I don't think that was as much in the third quarter. But I think relatively speaking their underlying operating performance is pretty similar. It has been actually good. Past dues are improving, kind of down just over 3.5% now. Cat Financial has been doing a pretty darn good job.

All right. Well, best of luck this quarter, guys. Thanks a lot.

Robert McCarthy.

Robert W. Baird. I wanted to ask about the growth in dealer inventory, $1.1 billion at six months, now $1.8 billion. It does not really look like it is on a track to slow down in terms of its growth in the second half of the year relative to the first, which has been what you have been talking about a quarter ago. Maybe I'm splitting hairs. But it seems to me that there is some benefit being recognized through the development of the lane strategy.

So my question, although a little bit difficult to define, it goes to the flavor of, are you seeing the impact really in terms of control of dealer inventory that you would expect to see at this point? And can we look for a much slower rate, and I mean relative to your own revenue growth, can we look for a much slower rate of inventory increases in 2012?

Among the sales perspective you are really seeing dealer inventory get back closer to what we would consider the normal months of sales. If you look at the growth in terms of the quarterly move in terms of dealer inventory, I think about 40% of that was related to mining. And that is not inventory. That it's just up. It is in transit, getting ready, if you would, for the delivery to an end-user.

If we look at the fourth quarter, our view of fourth quarter would be dealer inventory would be in the flat to down slightly type range. And when you get toward the end of the year, you usually have it. You get some benefits of things like accelerated depreciation, so I think you will see it trend flat to down slightly for the balance of the year.

And then with it normalizing from a months of sales perspective, I think movement going forward would be in line with the revenue growth.

Okay. And my other question goes to EMD's performance. I realize relative to the entire Company it is quite small, but I think you know we are very excited about the longer-term opportunity there. And I was struck by the fact that you had some nice revenue growth, but a decline in earnings in terms of year-on-year comparison. I wonder if we are seeing some ongoing call it restructuring and integration expenses that are constraining profit improvement there, or if that is not the case, when should we expect to see a more healthy rate of profit improvement?

I think one of the things that is going on with EMD right now is they are caught between two worlds. What they are shipping and selling right now is still at a pretty depressed level. Their expectations for 2012, 2013, 2014 are much better. They are worried about capacity. The result of that is they have added a fairly sizable new facility in Muncie, Indiana. They have actually been getting that ready. So there has been quite a bit of cost, I think, related primarily to Muncie, to a lesser degree, some capacity expansion down in Brazil.

So I think it is a case where they are seeing a strengthening order backlog, and we are trying to get capacity in place to do that, and that is costing something right now.

Call it investment spending, in other words. And when you were talking about the Bucyrus service center transactions and when we might see that, were you intending for us to come away not expecting any of those transactions to be announced before the end of the year?

No. I think we would love to get some of them done this year. All I was trying to leave you with is we never intended that they would all be done this year, and we are focusing on the really big ones first. But yes, we would love to get a couple done this year.

Jerry Revich.

Goldman Sachs. On your mining equipment business Mike, can you say more about incremental manufacturing capacity expansion you are considering, and also can you give us an update on your progress on purchasing and aftermarket service penetration on the Bucyrus business?

Remember the second part of that question because after I'm done with the first one I might forget it. So hang on to that. What was the first part again?

Any updated thoughts on incremental manufacturing capacity and mining broadly -- (multiple speakers)

Sorry, my memory is short this morning. Yes, we have been -- I use mining trucks a lot as a proxy. Because mining trucks, large mining trucks are the biggest opportunity in mining historically for us, for the Cat brand. We have fairly dramatically increased production as we have gone throughout the year.

Early in this year we were I think -- I don't remember the month, but at some point in the first quarter, we kind of got back to the 2008 peak levels. We are going to probably end the year something in the range of at least for large mining trucks, half again as much. And the idea with the mining truck expansion was that by the time we got to early 2013, it would have been doubled from that prior level.

So for mining trucks, there is more to come. There are other parts of mining, which we are also trying to increase. Underground mining. There is a new factory going into Thailand. So there is quite a long backlog right now in underground mining, hard rock mining equipment. So that will be good. We are trying to get more production out on large bulldozers as well.

So I guess what I would tell you is the plans that we have in place we are executing. But particularly on large mining trucks, it is going to be -- and bulldozers -- it will be tight as we go throughout next year, better than this year, but probably still tight.

And, Mike, can you lead the same discussion on the Bucyrus assets, particularly the hydraulic excavators there?

On hydraulic excavators, it would be very much the same as we look at that manufacturing footprint. The other one on your question about the products support side and what we are seeing on Bucyrus, I would say as we got into it, we continue to see a lot of upside opportunity.

A big part of capturing that upside opportunity is going to be getting the dealers inserted into this process. Because a lot of that replacement part demand, they are already set up on the mine sites to be able to execute that, and so it is just a question of getting the flow of the parts through it.

If you look at another part of capturing the parts side of the business on Bucyrus longer-term, it is the integration of our components into that product, and we are working that hard. But it has got a little bit longer shelf life in terms of getting that done. And then the last thing, we think we can add some good value with our logistics capability in terms of moving those parts around the world.

So going in, we felt one of the real upside opportunities was capturing more of the aftermarket on Bucyrus, and I would say our early view is that view was correct.

And Ed, as you have discussions with your mining customers on their CapEx plans, can you talk about the range of budget increases you expect to see out of them? Can you touch on which regions and commodities you expect to drive orders for your business over that time period?

You know, at this point in time, the indications from the mining companies are they are going to continue to invest. And you have seen it with the public announcements they have made, and you have heard it in coal, and you have heard it in copper, and you have heard it in gold. So it has been pretty broad-based. And at least at this point in time, the indication is, if you really look at the lack of new capacity coming on board over the last number of years and you look at the urbanization that is happening and the long term view of demand, I think the mining companies have decided they are going to invest through this period of uncertainty, and that is definitely helping our business.

Henry Kirn.

UBS. I'm wondering if you could talk about where the remaining supply chain pinch points are most pressing, and have you seen any discernible margin drags coming out of the supply chain?

I guess I would describe the supply chain's issues right now as in some areas as tight but manageable. Tires somewhat tight but manageable. Steel castings kind of the same thing. I mentioned before, one of the places where we use a lot of large steel castings is in frames for mining trucks. We have done a good job, our suppliers have done a good job in ramping up. But it is still pretty tight.

Outside of that, I don't -- I'm not aware of any -- some specialty steels here and there, but in general I think I would describe it as in some areas tight but manageable and not many system-wide problems that I have heard of.

With all the headlines in Europe over the last few months, could you talk about how that market trended during the third quarter, and maybe some of the demand thoughts that are baked into your guidance for 2012?

Well, in a lot of ways, Europe is similar to the US. You know, the economic indicators have not been the most robust, but much of our business in the developed world, again, is replacement-oriented. Most of what we sell in the US and Europe in any given year is largely for replacements.

And so that is driving that business. There are sales. We don't break it out separately, but we show Europe, Africa, Middle East. And I think excluding Bucyrus, that whole region was up 41%. Of course, the AME part of it, the Africa, Middle East part was up more than Europe. But Europe is behaving in a lot of ways similar to the US, up on replacements, and at some point down the road -- it is certainly not in our expectations for 2012, but maybe beyond that -- these economies will grow more, we will get some housing starts, some commercial construction, and then we will have real growth. It will drive the next leg.

Thanks a lot. Good quarter.

David Raso.

Regarding the profitability for the Company, I'm just trying to think through 2012 a little bit. The last couple of quarters, even if you pull out Bucyrus, the gross margins have been down year over year. It looks like one of the key reasons is price versus manufacturing cost. The last couple of quarters the price realization has been a lot lower than the drag on manufacturing. So can you take us through a little bit the pricing dynamic and how you are thinking about that relationship? And then I will have a follow-up kind of related to those manufacturing costs.

This is certainly no change in direction. We expected that this year would be somewhere in the ballpark of 1%, and in fact, that is roughly what we had in this quarter. We are driving the Company to get margin improvement and incremental margins like we have this year without doing it on the back of high price. We are trying to drive the Cat business model, modest price increases, but, say, in line with our cost inflation and then drive incrementals through efficiency. And we have done a pretty good job of doing that so far this year.

I think if you look forward, I don't see us -- again, we don't have any profit guidance for next year, but what I just described what is in essence what Doug's strategy is. So I don't see that dramatically changing. The price increases that we announced for machines for next year, the vast majority were between 0% and 3%, which is fairly consistent with this year.

So I would say at least in terms of price, we did not give you an average total, all-in weighted average expectation for next year, but our strategy is modest increases, drive efficiency and get margin through that, and I probably would not see that changing.

Well, I appreciate that. So thinking through Doug's view right now of trying to balance gain share and the aftermarket opportunity and thus maybe not pushing price as much as in prior years, I'm looking for areas where you can get the gross margins next year up, not down year over year. The $330 million this quarter of manufacturing costs that were up, let's pull out the short-term incentive comp, which obviously when that goes up, that is a positive thing, right? You want it going up because you are obviously hitting good targets.

So if you pull that out, the $255 million increase, it is about 240, 250 bps of gross margin drag. How much of that is simply raw materials where obviously we can try to hedge that out or just see how it plays out on input costs, and how much is that structural fixed cost? Because of all the capacity expansions, I have to assume that you are going to be there again next year.

When you are talking gross margin drag, you have to be a little bit careful because we do our analysis on a period and variable basis. So when you are looking at gross margin, that does include period costs. So I think when you are looking at our gross margin performance, I think if you were to take out the acquisitions and the impact of currency, you would see our gross margin not being negative but being actually better year over year.

So I think, as you look forward again, our goal on period manufacturing costs is to keep the growth rate in period manufacturing costs, which is the biggest contributor to the $330 million, to keep it at less than half the rate of sales growth. And if we do that, that helps increase gross margin.

Okay. I will follow-up with you. I appreciate it. Thank you.

It is Doug here. On a broader view of this, I think that quarterly and certainly the year-to-date 2011 over 2010 and now the outlook that we have put out for 2011 over 2010 are right where we want it to be in terms of our strategic alignment to 2012 and 2015. And we have always said that our goal here is a 25% pull-through over time, and we have hit that in some quarters and in some quarters we have not. But we are pretty darn close year-to-date 2011 over 2010. And that is exactly what we expect going forward.

In terms of the strategic gearing of the Company, we are still going through that. Market share is the driver, a balance with profits and a 25% pull-through with our goal of -- our goals out in 2015. And I absolutely believe if you dissect the numbers -- or not -- the third quarter and year-to-date put us right on track for where we want to be, and we are also as a management team pretty happy with the progress on that.

A long ways to go. We have got lots of capital investments to make, but there are 7 billion people on the planet that want to live like the most developed countries do, and that is driving the needs for a lot of infrastructure, natural resources and so on. And we are going to be in a position to take advantage of that, and that is part of the balance we make in terms of market share versus profit over time.

Seth Weber.

RBC. I just wanted to drill down a little bit, there was a comment in the release about some unfavorable pricing or unfavorable mix in the construction equipment business. I guess two parts. Is that a regional issue? I mean does that reflect some aggressive pricing in China, and I guess should that get better next year if the US and the developed markets start to improve?

Well, in terms of construction, overall I would say both from a product standpoint and a geographic country standpoint, country mix has been through much of the year, slightly negative, and you see that in terms of price. I mean we don't -- for the same product in different areas of the world, it sells for different price levels. We have commented on that throughout the year that that has been slightly negative.

From a product standpoint, we have had some pretty healthy increases in the small end of the product line. There are other products like excavators and some of the larger product we have been fairly supply constrained. So product mix has been slightly negative. It is not a huge deal either the geographic mix and impact on price or the product impact on margin. It has been a slight negative but nothing overall too significant.

Okay thanks. And then, I guess, just a clarification. Is the mining business fully booked for 2012 at this point?

When you say fully booked in the mining business, I would say for the most part we are -- based on what we see right now, we will be capacity constrained on most products during the year. But it is hard to say everything all year long. I mean if you are a mining customer, you might need a 320 excavator to do some cleanup around a pile, so that would be mining. But it is not a mining product per se. So, for the most part, I think the answer is we are pretty well sold out, but it is probably not 100% on everything.

Okay. But fair to say you are not getting any requests for delivery pushouts or cancellations or anything like that?

No, it continues to be a very strong business. The customers seem to have quite a bit of conviction.

Eli Lustgarten.

Longbow Securities. Just one quick clarification. You talked about inventory levels at dealers being sort of back up to normal months. Is that true around the world, or it seems hard to me to believe that inventory levels are back where dealers would like them to see at this point in time.

Well, we did not exactly say it is where dealers would like to see them. What we said was they are kind of back to a historical average. So yes and actually I looked at the numbers by region. And there are some that maybe are a little over and some that are still maybe a little under, but surprisingly all four major regions of the world are fairly close to historical averages right now.

During the quarter, if you look at dealer inventory, we had more of a gain in inventory in Asia. But in a lot of ways that is not surprising once we had kind of enough supply to more closely match demand. It had been the region that had been the furthest under.

So yes, it does not look like there are any outliers, if you will. I mean you don't have one region that is 40% higher and one region that is 40% lower. There is some reasonable consistency.

And as far as your pricing for 2012, you talked about the 0% to 3%, but you had a second component for IT4 pricing for most machines. And I've got to believe that you had a lot of costs in 2011 that were unrecovered as you converted over. So are we looking at 2012 with pricing out of flow through for IT4 being more of a lesser impact from the cost of conversion than we had in 2012 -- 2011?

Well, two things. You bring up a good point. What a customer sees in terms of price is a lot higher than what we are reporting as price realization. Because you have things like Tier 4 where there is actually added content. And when we look at the Tier 4 or Stage IIIB where the actual content of the product changes, we are netting off the costs. But there was no big windfall, no big drag in 2011. I mean the price increases on average, I'm sure it varied by model, but overall Tier 4 has more than recovered its costs this year.

Jamie Cook.

Most of my questions have been answered. Just, Mike, quickly anything -- I think people are trying to get at this but unusual as you think about your topline forecast with regards to mix that we should consider which could have implications for incremental margins?

And then last, have you done any -- the last time when we were going into the downturn you guys were proactive in going out to the dealers and saying, you can cancel orders. Do you know what I mean? Have we done anything in terms of scrubbing the backlog just given the macro uncertainty?

I will start with the first one on mix. I cannot think of anything just off the top of my head here that is way out of line. I think our view as we look into next year is that mining will continue to improve, construction will continue to improve. It is fairly broad-based. I'm sure when it is all said and done, there will be some mix impact. But given the level of sales change that we are talking about and the idea that it is actually fairly broad-based, it would be hard to see huge mix shifts in that.

In terms of the backlog, when you go back to this point in time in 2008, it was a situation -- and actually from here on in 2008 -- it was a situation where dealers kind of stopped ordering, and it made you question the backlog. And I think we did the right thing by opening up the order book back then to let it be cleared out.

We don't have that situation now. Dealers are ordering more. I mean as you go throughout the third quarter, dealers ordered more from us than we sold to them in the third quarter and consistently in the third quarter. So you never know what is going to happen down the road. We don't have a crystal ball, but it has been pretty good, solid, consistent growth.

And I just want to add in here, we get questions almost daily, our own employees, outsiders, you name it - "the situation seems like 2008 all over again." And while it does in some cases on a macro level specific to the European banking situation, it bears little resemblance internally at Caterpillar to this time or even going back to mid-2008.

You will recall when late 2008 hit BCP, our Building Construction Products group, around homebuilding had been in a trough for over two years at that point in time. And, as Mike said, dealer order rates were coming down all through 2008, and that is one of the reasons we said what we said in the fall of 2008 about a recession coming.

We are not saying that today. I would love to say we see a boom coming, but we don't see that. We see a slow growth recovery here that should be a lot better than it is. It has been confounded by some policy missteps around the world in the last few months.

Having said that, we do not hear anecdotally from customers or dealers that there is less work at this moment than there was a year ago. We heard that all through 2008 as their backlog shriveled and withered away. We do not hear that today, and that is one of the reasons we have talked about that in our outlook statement for the rest of 2011. We may hear it tomorrow, we may hear it next month, but right now it is very dissimilar to this period in 2008. And we are looking for a slow growth recovery, and just as exactly as we said in the outlook, going on into 2012, which at this moment looks pretty good for our business.

Thanks. (multiple speakers)

I think we are at the top of the hour now, so we will stop here. Thank you all for joining us on the call today. We will talk to you again in three 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.