開拓重工 (CAT) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Caterpillar full-year and fourth-quarter 2011 earnings results. (Operator Instructions). It is now my pleasure to turn the floor over to your host, Mr. Mike DeWalt. Sir, the floor is yours.

Thank you. Good morning, everyone, and welcome to Caterpillar's year-end 2011 earnings call. I'm Mike DeWalt, the Director of Investor Relations, and I'm pleased to have our Chairman and CEO, Doug Oberhelman, and our Group President and CFO, Ed Rapp, with us 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 expressed written consent of Caterpillar is strictly prohibited. If you'd like a copy of today's call transcript, we'll be posting it in the Investor section of our Caterpillar.com website, and it will be in the section labeled results webcast.

This morning, we'll be discussing forward-looking information that involves risks and 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 can be found in our cautionary statements under Item 1A, Risk Factors, of our Form 10-K filed with the SEC on February 22, 2011, and also in our forward-looking statements language contained in today's release.

Earlier this morning, we were very pleased to report fourth-quarter results that capped off a record-breaking year in 2011. To start this morning, I'll cover the headlines. For the fourth quarter, sales and revenues were $17.2 billion, the highest quarter in our history, and profit was $2.32 a share, also an all-time record for any quarter in Company history. And it was a record for sales and profit whether or not you include Bucyrus.

For the full year, sales were about $60 billion and profit was $7.40 a share. The year was also a record, topping the previous record of 2008, which was $51 billion at the top line and profit per share of $5.66.

The other big headline this morning was the outlook for 2012, and we've raised our guidance for sales and revenues to a range of $68 billion to $72 billion, with a midpoint of $70 billion. That midpoint is up about $3 billion from the midpoint of the preliminary outlook for 2012 that we provided with our third-quarter financial release last October.

Now, those were the three big headlines of the day -- the quarter, the full year, and the outlook. Now, I'd like to just take a few minutes and go through some of our noteworthy accomplishments in 2011, then we'll cover the high points of our 2012 outlook, and we'll finish the call by taking your questions.

2011 was a great year for CAT, probably the most positive in the 30-plus years of my career here. While the financial results in and of themselves were outstanding, we had a great year in a number of areas that, along with the better industry growth that we saw, were the foundation of our financial success this year.

The first area I would highlight is acquisitions, and in terms of executing our strategy, it was a pretty high-profile item. Over the past year and a half, we've made three large ones -- Bucyrus, EMD and MWM. Integrating them into CAT has been a high priority for us and a big focus in 2011. And while there's still much to do, we're very pleased with the progress so far.

In terms of CAT operations, our success this year has had much to do with the discipline of the CAT Production System. It's becoming a way of life at Caterpillar, and it's been the foundation that drove improvements in safety, quality, velocity, and efficiency in 2011.

The safety of our workforce, contractors, and visitors is fundamental to our values, and we're pleased that our enterprise safety metrics improved again in 2011 and are now 83% better than 2003.

Quality. It's a big reason why CAT customers buy CAT equipment. It's critical to the CAT business model and it's another benefit that we've seen from the CAT Production System. It has been a big focus for us, and I'm pleased to report that in 2011 we continued another year of better product reliability for our customers. Given the sizable increase in demand we experienced in 2011, we stretched our factories and our suppliers to produce more. The results were outstanding, and we were able to significantly increase production and do it while we improved quality.

In fact, we'd like to take this opportunity right now to say thank you to our suppliers. With their help in 2011, this was the highest year-over-year increase in sales in our history, and on a percentage basis it was the most significant year-over-year increase since 1947.

Now in addition to our investment in acquisitions, we invested significantly in organic growth. For many products, demand has been above our ability to produce. We've invested in Caterpillar factories in the United States and around the world to increase production.

Despite those increases and continuing investment in 2012, where we're expecting CapEx to be up about 50% and near $4 billion, we're still very tight on many products and are currently quoted extended delivery times for some of them. As an example, for many models of large trucks we are now quoting delivery times into 2014.

In 2011, we started significant product introductions for Tier 4 in the United States and for similar new emissions requirements in Europe. It's the most extensive new product introduction program in our history and it went well in 2011, and feedback from dealers and customers on the new products has been very positive.

Another important part of the CAT business model is customer support, and the availability of aftermarket parts is one of the key ways you do that. We're pleased to report that in 2011, we made notable improvements in parts availability to raise the bar on product support for customers.

We also improved our competitive position in 2011. While it was a year of growth for most of the industries we serve, it was an even better year for CAT. In the aggregate and for most of our products, sales increased at a faster rate than the overall industries we serve. Better quality, good delivery performance, our investments in capacity, the performance of our suppliers, coupled with modest price increases, all helped drive better value for customers and a better competitive position for Caterpillar.

To sum up 2011 - record profit, record sales, the most significant percentage increase in sales since Harry Truman was president, the addition of two important strategic acquisitions, better quality, a good start with Tier 4, good profit leverage on the increase in sales, record operating cash flow, an increase to the dividend, and a strong balance sheet. That's 2011 in a nutshell.

With that, let's turn to the 2012 outlook. For 2012, we're expecting another record year with sales and revenues in a range of $68 billion to $72 billion and profit per share of about $9.25 at the midpoint of that sales range.

Overall, we believe the prospects for global growth have improved since we released our preliminary sales outlook last October. We're forecasting the world economy to grow at about 3.3% in 2012, a small improvement from 2011.

In the United States, we expect the Federal Reserve will maintain the Fed funds rate below 25 basis points throughout 2012. And recent economic data suggests that growth improved in the fourth quarter of 2011, which we believe reflects the positive impact of the Fed's easing that was initiated in late 2010. And it's our view that the full impact of those actions hasn't materialized yet and that it'll contribute to continued growth in 2012.

Our outlook assumes economic growth in the United States of at least 3%. We expect total U.S. construction spending, which has been depressed for years, to finally begin to show some improvement in 2012. We're forecasting small improvements in infrastructure-related and non-residential construction, and our forecast for housing starts is around 700,000 units in 2012, and that's up from about 600,000 in 2011.

While we expect these small improvements in U.S. construction spending, remember it's still depressed. Housing starts at 700,000 is still very low, and there's no long-term road or infrastructure spending plan that's been approved in Washington yet.

In the Eurozone, the public debt crisis has been a lingering negative, but we don't expect it to trigger a worldwide recession. The Eurozone will likely have at least two quarters of weak and possibly negative growth, but we think it'll begin to improve in the second half of the year.

We expect the Japanese economy to grow at about 3.5% in 2012, recovering from their 2011 recession. We think that rebuilding from the tsunami and more expansionary central bank policies will help drive their improvement.

We expect economic growth in Asia-Pacific above 6.5% in 2012, about the same as in 2011.

In China, our forecast is for economic growth of about 8.5%. China took its first easing action in late 2011, and we expect that further easing will continue in 2012.

Growth in Latin America is expected to slow from about 4.3% in 2011 to about 4% in 2012. And in Africa/Middle East, we're forecasting growth of nearly 5.5%, and over 5% in the CIS.

Overall, we expect that the world's economic growth will be enough to drive some higher demand for commodities and support commodity prices that continue at levels to encourage investment.

In terms of Caterpillar sales, we expect increases in 2012 in all four of our geographic regions and for almost all the industries we serve. We're starting the year with a strong order backlog that's almost $30 billion and up 37% from the end of 2010, and that's on an apples-to-apples basis excluding our Bucyrus acquisition.

In 2012, we'll have a full year of sales related to our Bucyrus and MWM acquisitions, and sales for those two are expected to be about $6 billion, and that's an increase from $2.6 billion in 2011, which was a partial year for both at CAT.

We expect mining to continue to grow globally, and we have a strong order backlog for mining equipment. We expect mining sales to increase in 2012 and are in the process of adding additional capacity for many of our mining products.

However, we do expect mining-related sales to be constrained by capacity in 2012.

We anticipate that sales of new machines for construction in the developed countries will improve as customers continue to rebuild fleets during 2012, and that historically high fleet age and low fleet inventories will cause dealers to continue to upgrade rental fleets.

Despite the economic trouble in the Eurozone, our European dealers increased orders over the past few months, compared with 2010. Considering the relatively weak sales level there over the past few years and the need for customers to replace machines, we're expecting machine sales in Europe to be at or above the 2011 levels, despite the economic climate in Europe.

Government policy easing in China, which has already started, is expected to continue and lead to some recovery in machine sales in 2011.

We're forecasting higher sales for our Power Systems segment in most industries. High oil prices should encourage investment and improved demand for engines and turbines used in oil and gas applications. We also expect improvement in engine sales for electric power generation and higher sales in our rail business. The only area of our Power Systems business that hasn't started to recover yet is marine engines.

Turning to profit. At the midpoint of our sales and revenues outlook, we expect profit to increase from $7.40 in 2011 to $9.25 in 2012, and that's a 25% increase.

Bucyrus should move from being a negative to profit in 2011, and that was a result of the deal-related and integration costs, to being a positive contributor in 2012. And while there are certainly headwinds and tailwinds as we move from 2011 to 2012 operationally, on balance we're expecting that, excluding the impacts of MWM and Bucyrus, that our incremental operating profit pull-through on incremental sales should be similar to 2011.

The most significant headwind we're expecting next year -- or this year, in 2012, is tax expense. In 2011, taxes were 25.6% of our before-tax profit. And that was a combination of an overall rate of about 27%, less discrete favorable tax items during the year.

In 2012, we're forecasting a rate of about 30%, and taxes are up for three main reasons -- negative geographic mix from a tax perspective, absence of the favorable discrete items that we had in 2011, and the end of the R&D tax credit in the United States.

Two final points before we move to the Q&A portion of today's call. And the first is the bold goal that we introduced back in August of 2009. That was that sales and revenues would approach $60 billion and profit per share would be $8 to $10 in 2012. Well, we hit that 2012 sales and revenues target in 2011, a year early. And even excluding Bucyrus, MWM, and EMD, we'd be at about $56 billion this year.

However, we did not hit that $8 to $10 profit range. We've had a number of questions from investors on what's different now versus what we were assuming in that 2012 target. And we've summarized that in a somewhat lengthy Q&A in this morning's press release, and that starts on page 24.

But in a nutshell, what it says is that if you start with our 2011 actual profit of $7.40 a share and you adjust it for acquisitions and our share count -- and our share count is higher because we invested in three large acquisitions, rather than buying back shares, if you adjust for employee incentive compensation that was well above target in 2011 because of our excellent results, if you adjust for currency impacts and taxes, you exclude those items, we'd have been near the middle of that $8 to $10 profit range on sales and revenues of about $56 billion.

And again, I would encourage you to take a look at the Q&A in this morning's release.

My final point today is on employment. Our global workforce continued to increase in 2011, and we hired. We were up over 14,000 at year-end 2011 versus 2010, and that excludes acquisitions. And we've been up more than 33,000 since year-end 2009.

2011 was a great year. The outlook for 2012 has improved, and as you might expect we're eager to talk to you more about it. So with that, we are ready to take questions.

(Operator Instructions). Ann Duignan.

Hi, good morning. It's JPMorgan. My first question would be on Bucy's orders. They fell slightly, sequentially, $4.2 billion to $4.1 billion. Maybe you could just take a step back and tell us what's going on fundamentally at Bucy's customers. Is there any risk of a slowdown in demand from U.S. thermal coal or just some color on what's going on there or, you know, is $0.1 billion just noise?

Here is the deal, Ann. For Bucyrus, actually if you look from third to fourth quarter, the order rate went up quite nicely at Bucyrus. That said, they just had a fantastic fourth quarter in terms of shipments and the shipments were well above what we expected.

So, orders were actually up sequentially pretty nicely. It's just that they really did a great job in shipping in the fourth quarter. So that $0.1 billion decline in the backlog, I think, had more to do with how good a job they did in the fourth quarter shipping rather than any change in order rates.

I'd say our view of mining is quite bullish. The comments that I made in the preamble there -- this is not specifically Bucyrus, but we've got to add more capacity. We're going to be constrained this year. I mean, on some of those big trucks, for example, we're quoting delivery times now out to 2014. So, no, mining is good.

Okay, that's helpful. And on that note, just sticking with Bucyrus, you've announced the sale of some distribution businesses to Finning. Can you help us in any way, shape, or form in terms of how we should think about that for our 2012 and go-forward models? How much more is there to do post-Finning? What do you think the impact will be on EBIT? Anything you can do to help us from a modeling perspective, we would appreciate it.

I understand that. That's been a very common question, and I do admit we've not been able to be overly helpful on that.

Here's what I would tell you. We actually closed one of the dealer -- the sales of distribution businesses to the dealers in the fourth quarter, and there are many that are in various stages of being in process today. You know, your comment about Finning, it has been announced. Others, we're talking with the dealers, we're trying to get sorted out and done, but of course aren't done yet.

But that will happen throughout the year, just because of the sheer number of them. I mean, we're talking about involving more than 50 dealers here. We're probably not going to be done this year. We're trying really hard, and we hope to get most of the big ones done this year.

The impact of the whole deal on our profit, overall we don't think it'll be very significant this year one way or the other. Part of that has to do with the timing of when they're getting done. There's also a potential gain or loss impact, which we don't think will be big during the year, the impact of transactions themselves. Our intangible amortization is going to go down some as we sell them because the dealers are acquiring some of the intangibles.

So, it's a little bit of a moving target, but at this point it doesn't look like it'll be very significant to 2012. And then, remember, as we do this, we'll be bringing in cash as well.

That's fair. Just a very final point of clarification, and that's -- is it only the surface aftermarket assets that will get sold or might there be some underground assets also?

Everything. The intent is everything. Above ground, below ground.

Okay, I appreciate that. Thank you. I'll get back in line.

Joel Tiss.

With Buckingham Research. (Multiple speakers). I'm getting surprised. I'm usually the last one or not even on there.

Two, just two questions. I noticed in the commentary on your press release, you broke down some of the sources of that $12.5 billion revenue growth, inventory at Bucyrus, some of the other acquisitions. I wondered if you could give us a little bit of a sense on the operating profit side. You did say that MWM and Bucyrus didn't contribute much on operating profit, but how about the currency impact and also the inventory build?

Just help me out for a minute, Joel. Are you talking about the fourth quarter versus fourth quarter, the year, or the outlook?

The whole year. So of that $12.5 billion, if you try to take out -- just say inventory was kind of a one-time catch-up, right, and you take out some of the acquisitions, as we go forward like you can -- underlying growth, I'm trying to get, and so underlying growth was maybe 12.5%, 13% if you take some of those things out, and I'm trying to figure out what the underlying growth in operating profit, just to sort of normalize for a basis for 2012 and 2013?

Yes, I don't know where you're getting 12% or 13%. I mean, we had $60 billion in sales. Bucyrus and MWM were, I think, $2.6 billion of that. So, sort of roughly $57.5 billion without those two.

I think the impact of currency, if memory serves me, was about $800 million, so you're at $56 billion. (Multiple speakers)

EMD was (multiple speakers)

The inventory build was, I think, order of magnitude $2.5 billion.

Right.

So, I mean, we're at sort of $48 billion -- I think $42 billion to $54 billion, which is 20% excluding all those items. More than 20%, probably close to 25%.

All right. I'll pursue it offline. Any -- can you talk at all about the pension, any change in the discount rate? What does it mean for 2012?

Joel, this is Ed. You know, the discount rate went down, as we had anticipated. We took a hit to OCI of just over $2 billion, and in spite of that finished with a debt to cap of 42.7%.

And you really think about it, taken in the last 18 months more than $10 billion in acquisitions, plus a hit based on pension, and to stay within our target range in terms of debt to cap, I think it shows just how good of a year we had on overall cash flow.

Right. Beautiful. Thank you.

Andrew Casey.

Wells Fargo Securities. Good morning, everyone. Just a question, I guess, back on the cash flow. You know, you had a really good year. I'm just wondering about any change in seasonality that we should think about.

I mean, Q4 was down a little bit on an operating cash flow, just for the quarter itself, but the first three quarters were excellent. So is there a change with the business mix in how you're thinking about investments that we should consider?

Hey, Andy. This is Ed. You know, I think in terms of investments, we've outlined it's kind of that industry attractiveness, strategic fit, a lot of good opportunities for organic growth, and I think on the acquisition side we're clearly focused on full integration of EMD, MWM, and Bucyrus.

I think on the cash flow, if you really think about the results of 2011, we had some really good year-over-year improvements in areas like receivables and payables, and I don't think you can anticipate that kind of improvement year over year again. You know, it's kind of driving it to what we think are some pretty good levels.

The real opportunity on the cash flow improvement going into 2012 will be to continue to deploy to the CAT Production System, align with our suppliers, and through that do a better job on the inventory turns. I'd say that'd be the area that will get a lot of focus as we go into 2012.

Okay, thanks for that, Ed. Just one follow-up, on the acquisition activity. You've done a lot relative to your history in the last few years. Your comment on focusing on the acquisitions that you've made, should we just pretty much expect, you know, organic growth and inorganic growth to come from what's already been done or should we anticipate that there are holes that you might want to fill in 2012?

Andy, I think it's always hard to speculate on what may come in the M&A space. But as we talked in the past, the acquisitions that make the most sense for us are the ones that bolt on to the existing parts of our business.

EMD really added to a great rail services business, which gives us end to end rail business. MWM was a great bolt-on to build out our engine platform on gas. And while Bucyrus was a big bolt, I mean it was really a perfect buildout of our mining business.

I'd anticipate us to spend a lot of time in 2012 getting those fully integrated, on top of the $4 billion that we've talked about going to organic capacity investment in capacity. We've got a lot going on in 2012 and we're going to be focused to get that done.

Yes, I'll pile on a little bit. Doug Oberhelman here. As we sit here today, the strategy that we see for the next three or four years does not -- we do not have any holes, big holes, to fill.

And the idea of absolute execution on both our organic growth, which is going to be a significantly bigger factor, I think, than what our acquisitions have been, and any new acquisitions is really going to be the focus. And we get that right, we'll have no problem with our 2015 numbers at all.

So we're really going to spend some time on that. Having said that, we've got probably dozens, I would say, of smaller acquisitions in mind, kind of pre-2009, pre-2010 style for Caterpillar that we're always looking at. We would bolt on, as Ed said, and I think those would complement our business. But where we're headed for 2015, we basically have our arms around today and we intend to deliver that fully.

Robert Wertheimer.

It's Vertical Research Partners, and good morning, everybody. You know, my question is you've had some real positive signs on the Production System with the safety and some of the things you talked about in the press release, and you've had phenomenal demand. I just wanted to ask if you're seeing any hiccups or whether the Production System is working just as well as you thought.

The inventory turns you mentioned. Are you seeing increased throughput on fixed asset and can that help in addition to the CapEx that you're doing? Really just want to feel what you think it's feeling like on CPS.

Yes, this is Mike. I'll start that one out, Rob.

CAT Production System has been very successful. We've talked about this all along as being more than just, hey, we're trying to get labor efficiency out of this. It's the whole flow within the factory. For example, I think during this year, if it wasn't for CAT Production System I don't think we could've got the volume out of the plants that we did.

You know, if you look at our delivery performance to customers today, the lead times, if you will, they're not fantastically short, but I think given how much volume we've added, how much more product that we're shipping to have them at kind of those historical levels at this part of a ramp-up says volumes about how well CAT Production System has gone.

You know, I think if I were to characterize it overall, and I'm sure you can pick some factories out or even sections of factories where the results have been better or worse, but I think overall -- I think with the possible exception of actual inventory turns, all the metrics are good. It's by and large doing what we hoped it would do, expected it would do when we started down this path. And we really needed it.

This is just an observation. One of the comments that I made in the lead-in was a comparison -- or saying that we beat our previous record. Go back and think about 2008. Our sales in 2008 were $51 billion. This year, our sales, excluding the acquisitions, were probably $56 billion if you take out EMD and MWM and Bucyrus. And excluding acquisitions, our profit was in that -- I think excluding Bucyrus was $7.79 profit per share.

And if you adjust for price, the overall volume is not that different than 2008, but our profit is much better, and I think it's all from operational improvements. As we've ramped back up, we've done a great job in holding the line on fixed-cost growth. We've got more production out of the factories. We've had good incremental margin pull-through, so I think CAT Production System is a big contributor to that.

Sorry. That was a long-winded soapbox to your question.

No, no, that's great. It sounds like it's not one of your top worries. There's nothing getting tangled up. So that's great, given the demand out there.

Just a quick end-market question, is there any issue with demand for Solar? I think they've had year after year after year of record performance with gas prices and maybe volumes being lower in the U.S. I don't know if the pipeline compression is as strong. So just any comment on Solar end demand.

You know, Solar end demand was good. It was a record year this year. They are going into 2012 with a very good order book, with, let's just call it, above-average order cover.

It's a good business around the world, I mean not just in the U.S. And if you think about it, a lot of the needs in the oil and gas area right now are basically getting more in the oil patch, getting more oil out of existing wells. Just as an example, I know Solar has big orders from a large existing customer on a project to do gas injection into a well to get more output of oil.

So the Solar business is good. They're starting the year with pretty good order cover and they're pretty optimistic about 2012.

David Raso.

ISI. Good morning. My question is about the incremental margins for 2012 on a core basis. Not to be greedy, but you would think you've a lot of things working for you in 2012 versus 2011 that you might be able to do better incrementals in 2012 than 2011.

Your price costs in 2011 was a negative $400 million. Your incentive comp, and I know that can change if guidance goes up, but as we sit here today the incentive comp is going to be less of a drag in 2012 than it was in 2011. Your CapEx was up a lot in 2011 versus 2010, so it's not like the jump in CapEx in 2012 is a radical change from the higher depreciation you had to absorb in 2011. And the currency was a negative $400 million or so on an EBIT line in 2011.

So I guess, in a way, try to talk me down on why your incrementals shouldn't be better in 2012 than 2011. What am I missing?

Just a couple of things. And first off, what we have in the outlook is incrementals that are very consistent with 2011.

And I'd tell you this. It's easier to get higher incrementals the larger your volume increase. I've said, I don't know, as many times as I can squeeze in that we've had the best volume increase on a percentage basis in 2011 since Truman was president. Now we've got another good year of growth built in for 2012, but it's not the scale of volume increase that we had, certainly on a percentage basis, in 2011.

So I think the volume not being up as much is probably a little bit of a headwind.

One of the things we mentioned this morning in the release was R&D. We're looking for about a 15% increase in R&D next year. We have higher depreciation. We've got a $4 billion capital plan for next year, plus we'll have a full year of impact on the $2.6 billion that we spent this year, so depreciation is going to be up.

Related to that $4 billion, it requires a fair bit of expense to get that implemented, so that will be a little bit of a drag. So, there are pluses and minuses. The things that you mentioned are definitely plusses. Incentive comp at target, which is where we start out the year and the outlook, is a tailwind, without a doubt. Currency we wouldn't expect to be quite so bad as it was in 2011. So to your point, that's a tailwind as well.

But I think a smaller volume increase and just the added cost around depreciation, implementation of the new capacity, and some more R&D, those are probably the headwinds.

Do you have a (multiple speakers) -- sorry, do you have a specific price cost baked in (inaudible) on the relationship for 2012, and maybe dovetail that into the Tier 4 issue, how you feel you're recouping those costs for 2012 and any sense of pull-forward, people buying in front of that?

Yes, I think for Tier 4, we, as in 2011, the difference between the price and our cost is not material one way or the other. It's been margin neutral at least. So that's not a big drag for us.

And actually implementation of Tier 4 has just gone, particularly compared with Tier 3, superbly well. Feedback from dealers is good, no major hiccups in the factories, so Tier 4 has been very good news.

I would just add here, David, that we are now essentially onto our 2015 goals and taking steps to get there.

And everything Mike said, the big step up in CapEx, the substantial step up in R&D, the price/cost relationship being relatively flat to lead to our market-share goals in 2015 are all aimed at steps in year 2012, 2013, and 2014 to get there. This is one step along the way.

We've got to invest to meet those goals. In 2012, we'll see some of that. It's a balance. I would also say that we look at 2011 as achieving the 2012 goals that we laid out to all of you in 2009. That is in the rearview mirror.

As Mike took you through that reconciliation -- it's also in the report, we feel like we did pretty well, particularly in August of 2009, when the world was ending by the best estimations at that point in time, to put out a forecast like we did and then to achieve that a year early, I feel pretty good about.

So 2012 for us is really maybe the first or second step, then, to our 2015 goals, which we will be steering you towards more and more later this year and beyond. But 2012 is certainly a building block to get there.

All right. I appreciate the color. Thank you.

Henry Kirn.

It's UBS. Good morning, guys. Hey, can you touch on where you are with Lane and maybe how that impacts your expectations for dealer inventory build as we go through 2012?

Henry, this is Ed. First of all, in terms of Lane, you know, like I said, we came out of kind of a standing start and deployed that, and in 2011 I think we ran somewhere in the neighborhood of 27,000 units through Lane. You know, it's up about 50%, five zero, versus what we did in the 2010 timeframe.

If you look at Lane one and two, it's now up to about 55% of our total shipments. And so, we continue to ramp that up. We've got more to go, but I think we're making good progress there.

In terms of dealer inventory build, I'd say that as we finished 2011, we finished with dealer inventory at about where we wanted from a months of sales perspective. So as we move forward, I think you'll see dealer inventory kind of move with sales growth because I think the months of sales were about right.

So as I look at 2012, it would be a modest -- our outlook would include a modest growth in dealer inventory just aligned with the sales growth.

That's helpful. And as extended delivery times start to take hold, could you talk about how that impacts your expectation for PINs over the next year?

Doug hit it earlier, and we made some major commitments in 2010 to invest in capacity. We continued to add in 2011 and we're going to do it again. And you've seen in our release how our sales growth outpaced the industry growth. And so, we think the capacity that we're adding is going to allow us to stay ahead of that curve.

We've got -- just, we've had basically monthly announcements, more or less, for almost the last two years now with growth or acquisition. Those investments are starting to come online.

Winston-Salem, the large axle factory is now online and ramping up. Victoria, Texas, the new excavator plant will ramp up -- begin to ramp up in the third quarter. I could go on and on with this, but those investments are really just starting to return the money, I guess, as we get production to those.

So we'll see that in 2012, and 2013 will be a big build year, as will 2014. And we'll be adding capacity right on through to do that, and that should help our availability, and certainly we'll get after our market-share goals for 2015.

This is Mike. I'm just going to pile on one more here. You know, Henry, when we talk about extended lead times, don't confuse that with sales aren't going up a lot in mining in 2012, because they are. So we expect good sales increases in mining.

The point that we were trying to make is that actual demand is even better.

And just one other comment, we've tried to make this, but sometimes you don't always get your messages across. 2012, we're looking to be another record year with sales for us with the midpoint of around $70 billion.

And remember, that's with U.S. construction -- I mean, housing starts at 700,000. That's historically low. It's following the tradition of the last four years.

At some point, construction in the U.S. is going to pick up. Europe will eventually come out of its recession. You know, we'll get some housing. We'll hopefully eventually get a highway bill, and at some point those two big pillars of our business, which are not at stellar -- they're better, but not at stellar levels, we're going to need quite a bit more capacity.

So, this story isn't over. In the U.S. and in Europe, the two big developed regions that are part of our business, we're still languishing at well below prior peak levels.

Thanks a lot. Congratulations.

Jerry Revich.

Good morning, it's Goldman Sachs. Can you give us some more color on the $4 billion CapEx budget? What are the most meaningful and new capacity additions? And if you could touch on mining excavator capacity and give us more context on the restructuring actions at CAT Japan? Thanks.

Okay, I'll start with -- I remember the first one and the last one. You'll probably have to remind me of the middle question when we get to it.

On the $4 billion, what I would say is it's spread out. It's a -- some of it is spending on projects that we already announced. A lot of it is for mining. As Doug mentioned, we've got a facility in Texas. A lot of the projects that we've announced. We're also spending a lot of money at existing facilities; in fact, probably the majority of it is at existing facilities where we're trying to ramp up.

In 2011, we get a little bit more than half -- I think it was 60% of our CapEx was for facilities in the U.S. In 2012, it'll be likely a mix as well. We're investing in the U.S. and overseas.

In terms of specifics, or project-by-project guidance, we'll pass on that.

Your last question was on CAT Japan.

That's right.

Yes, in CAT Japan, it's actually a good story. We are restructuring our manufacturing operations in Asia, and CAT Japan is a key part of that.

We are -- we impaired some assets in our Sagami facility that we would intend to sell in 2012. So a big chunk of the charge in the fourth quarter was for that. Plus there was some employee costs related to it as well. But it's essentially restructuring our operations to support our Asian manufacturing strategy.

Mike, can you talk about where you stand on supplier on-time deliveries and adherence to 90-day build schedules exiting 2011, and also touch on what kind of increases in period and SG&A costs are you expecting this year, relative to the increases we saw in 2011?

Jerry, this is Ed. I'd say, and Mike commented on this in his opening, we've got to give our suppliers full marks.

If you talk about going from the $32 billion in 2009 to kind of where we finished out this year, from a supplier it's even been a steeper hill because of the inventory we took out in that 2009 timeframe.

I think supplier delivery performance was what really helped us come up that volume curve. We're working closely with that supply base in terms of making sure we stay in sync; as we add capacity, they add capacity. We're doing the very same thing with the dealer organization as we try to execute, if you would, this simultaneous lift.

On the cost side, you know, we remain very focused at controlling costs as we go up this ramp. Mike did the comparison earlier to back in that 2008 timeframe. But as we ramp volume up in that period of time, we allowed costs to kind of flex in line with sales. You saw us do a good job in 2011 at holding that down at less than 50% of that ramp and you'll see us focused on that again in 2012.

Yes, there's going to be some areas, like R&D and the cost to implement capacity that we've got to put in place. But we're going to remain cost hawks as we control the cost side of this equation.

Eli Lustgarten.

Good morning, it's Longbow Securities. Terrific quarter, guys.

Yes, we heard you on TV this morning, Eli.

Well, I hope I did a good job for you (multiple speakers)

You did.

A couple of clarifications. The guidance does not include any of the impact of the Bucyrus service business divestiture, is that correct?

That's correct. And it's our belief that it won't be very significant this year.

Okay. The only question we will need from you is the difference between the impact in operating profit and how much is gain on the sale of a transaction because that would not be viewed as repeating, and you don't expect that to be material, is that what I'm getting, for the year?

I think the overall impact of the transaction, which is business that's going to the dealers and impact on us reducing intangible amortization that goes along with it. Just all in -- some of it's timing. They didn't all happen on January 1. It just doesn't look like it's going to have a very significant impact on our results in 2012.

Now, as we get go through each quarter, as we have been, we'll -- it's a big acquisition that wasn't in our results a year ago, and we will continue throughout 2012 to kind of talk about the impacts, like we did EMD this year.

Eli, the only thing I'd add to that is that it's going to be a challenge with, you know, like Mike said, over 50 transitions during the year, but I tell you we are starting to see the benefits of being able to go to our customer base with an extended product line. I think we get this done and our dealers can go with full product line, full-service offerings, I think we're absolutely convinced more and more each day it's the right direction to go.

You indicated inventories are sort of in balance with historic norms. Can you talk about that geographically? The impression we had that U.S. inventories would probably still be a little bit light, and then some parts of the world they may be a little bit higher. Is that correct?

No, Eli, I'd say geographically we've got a pretty good balance in terms of where we're at. I mean, I do think we did see it come up a little bit in North America in the latter part of the year as they gained confidence. You know, you've got it up a little bit in China as you kind of prepare for the selling season. We all know what happens coming out of the Chinese New Year.

The other place from a geographic perspective we've seen it build is on mining-related product, just based on the lead time to assemble, as that mining product just continue to go. But I feel pretty good about where we're at geographically, as well as by different parts of the business.

You didn't ask this question, but I expect it might be inferred. Ed made a comment about China and the little bit of inventory build there.

I just wanted to kind of clarify one thing. If you look at our total company sales in China, fourth quarter to fourth quarter, when you take the impact of inventory build out of both, we would still have been up in China quarter over quarter.

I'm kind of surprised we didn't get a question on China, so I'm going to give an answer, or at least an opinion.

I think it's important for all of you to understand and really know what we're up to in China. China, for us, is a big market that we are bringing the Caterpillar broad set of business products and services into in a big way. So that's financing, it's Power Systems, it's machines, it's locomotives, it's everything we do.

And I've read -- there's been far too much ink written about us being only an excavator supplier in China, which I think is a bit tainted because we are installing a base over there of dealers that will sell our broad array of products and services and will go after everything. In fact, if you look at our overall numbers, they're up year over year, quarter over quarter because of that, even with a little softness in the excavator business.

But because of the breadth that we bring, we can really spread the risk through China, and that's exactly what we're doing.

And on top of that, by building a little inventory, as Mike just said, in China, we are getting after market share in a big way. And late in the year, we saw some of that come to fruition.

So we have, as we told you, some big 'Win in China' plans by 2015. If anything, I'm optimistic we're going to be a little bit ahead of that because of the breath that China took in slowing their economy, which allowed us to catch up a little bit, and then the speed at which we're putting our entire business model across China.

So, China is a big opportunity for us that is paying off beautifully here, and you saw that in the fourth quarter and year to year.

Let me just follow that. We're spending $4 billion in CapEx this year. Is that the level for the next few years or will it continue to go up? It sounds, just to meet some of your expectation needs between now and 2015, that capital spending is probably going to continue to rise for a couple of years.

Yes. Eli, I don't recall making an outlook on capital spending for 2013 and 2014. But you know, as Doug mentioned earlier, we have good, solid goals for 2015 that are well above where we're at right now, so I think it's a reasonable assumption, if you would think of an elevated CapEx, to deliver that for a while.

Seth Weber.

Hey, good morning. It's RBC. I just wanted to go back to an earlier question on the mining business. There's clearly -- we're clearly seeing a decoupling here with U.S. coal being weak. Can you give us an idea of how much of the business today is tied to, I guess even maybe just the OE business, to U.S. coal, whether it's thermal or thermal plus met?

Coal is certainly, without a doubt and by a pretty long shot, the most -- worldwide, is the most significant mined commodity, and it's most important to our business. But it's not just the U.S.

I mean, the U.S. is a good coal market, of course, but Australia, Indonesia, India -- China is a huge coal market. Not as big for us yet, but witness our investment or at least our hoped-for investment in underground coal in China, one that we'd like to take advantage of.

So, mining overall, including coal -- I mean, we have a big backlog of -- orders are good, customers are bullish. We've not really split it out by commodity, by region, but I don't think there's any big weakness that I've at least heard about anecdotally in the U.S. In our business, anyway.

Okay, thanks. Can we switch over to Europe, then? You know, your outlook for business -- machine business is flat to up is more bullish than what we've heard elsewhere. And I appreciate the fact that fleets are old and levels are -- fleets are old and they need to be refurbished, but can you give us any additional color on what gives you confidence that that market's not going to get worse through the rest of the year?

I think the most recent confidence, if you will, is just what -- this is not a new thing. This has been -- Europe has been in the news for the last six months, big time.

Order rates in the fourth quarter versus a year ago, just in Europe, were decidedly up, so just recent order rates from us, despite all of the discussion, have been more positive. Not as positive, of course, as some of the other parts of the world. Not as positive in the U.S., but in the right direction.

So I'd say that's one thing that gives us confidence.

I think how far the market fell in 2009 and how far below it is the prior peak and what industry sales are relative to just what's appropriate for replacements, I think all of those kind of triangulate and give us some confidence as well.

I think probably the key point on confidence is just what dealers and customers have been doing over the last few months.

Yes. On Europe, western Europe, anyway, and to some degree pieces going east, but western Europe is really a pure dichotomy of north and south, and southern Europe is really on its knees and northern Europe was doing pretty well, in fact still is, even though the entirety of western Europe might be in recession and probably is.

So you've really got to watch that in terms of country by country because -- and then you break it down into countries and there's a lot of special projects. In France, a big high-speed rail, the second one that's coming to fruition.

So it's really a tale of two stories, north and south, as much as anything. So that's really one thing that's been helping us. It just depends on how much longer this chaos in southern Europe goes on, and it's been going on a long time and hasn't tanked the place yet. We don't think it will.

I think we have -- we're just about at the end of our time, but we'll take time for one more.

Stephen Volkmann.

Jefferies, and thanks for sneaking me in. You can answer very quickly, if you'd like. What are the chances we get back to a little share repurchase in 2012?

I think the short answer to that, in 2012 is it's quite remote.

(Multiple speakers). I could make it shorter, but that was adequate.

I was leaving a little room.

No, that definitely works for me, and Mike, sorry if I missed this, but FX impact in 2012 probably a headwind. Did you quantify that?

No, no, we didn't, but certainly less than 2011.

Headwind, but less than 2011.

Yes.

And finally, if I could, just in the past you've commented sort of broadly, it looks like the Street has you seasonally fairly balanced through the course of 2012, a little bit lower in the first quarter. But we're hearing from a lot of other companies that maybe things are a little weaker first half and then pick up in the second half. Do you want to give us any guidance there?

Yes. We don't do quarterly guidance, but that's actually a good way to end. That's worth a little bit of a discussion.

I mean, seasonally for us, just on sales, the first quarter is almost always the weak quarter of the year, and I don't see any reason why this year would be any different than that. So, I certainly wouldn't divide the year's sales by four and assume that that's going in the first quarter.

Also, too, on incrementals, I think we ought to get this out right now. On incrementals, if you go back to 2011, we just had a golden quarter in the first quarter. I mean, costs are usually seasonally low, but were particularly good. Price realization was particularly high in the fourth quarter -- or first quarter of 2011.

We had operating -- operating profit as a percent of sales was well above the rest of the year in the first quarter. So, I would just temper, if you will, the incremental margin expectations for Q1. Not because there's going to be some big change in operations on our part, but because the first quarter a year ago was just so good.

Great, that's very helpful. Thanks.

All right. Thank you very much, everyone, and we'll be talking to you over the coming days.

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