Caterpillar Earnings Call NUGGETS: Pricing Expectations, Inventory Growth
Jerry Revich – Goldman Sachs: Mike can you touch on how do you think about pricing heading into back half of the year compared to the price realization we saw this quarter and also comment on where you expect to see company and dealer inventories at year-end?
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Mike DeWalt – Director, IR: I’ll start with pricing, we’ve actually done better on pricing through the first half of the year than we expected it’s really held up pretty well. Earlier in the year we’d expected that we would get 81% to 1.5% price for the full year, we are at probably between 2.5% and 3% right now through the first half. We think it’ll probably go down a little bit in the second half that’s what’s baked into our guidance. We’ll probably end up the year somewhere around 2%, remember one of the points I mentioned was now we’re working with dealers for example to sell more product in China so there will be some merchandising programs for example related to that. So I think a lot better year than we thought it was going to be even including the economic impacts that you see today, but probably a little less than the second half and the first half. In terms of dealer inventory. We did have a little bit of an increase in the second quarter more than all of that was mining. Now when you look at dealer inventory for mining, you have to be a little careful, it’s not a case where dealers are loading up 400 tonne trucks and hoping for a customer. It’s a case where we pass title to them and then they have to get it, the product to their customer, they have to get it assembled and commissioned. So usually when our shipments go up like they did in the second quarter versus the first. The pipeline for mining inventory increases a bit and that’s just the function of us shipping more through dealers to customers. In terms of our inventory we did have a bit of an increase about $800 million in the second quarter, and there were four reasons for that, one and I’ll start from the smallest to the largest in transit inventory, that’s basically where we’ve sold a product, well I shouldn’t say sold. We have a product that’s been shipped. But it’s an export, it’s on the high seas essentially and its destined for our customer but we haven’t passed title yet. When our shipments in exports go up in transit inventory usually goes up. We had 9% increase in sales between the first and second quarters and then transit went up a bit that is to be expected based on the sales increase. About 20% of the increase in the second quarter was components work in process, after-market parts and that’s very related to sales. Again we had 9% increase in sales from first to second quarter. 20% of inventory increase was from the acquisition of (Seaway) and Bucyrus. (Seaway) is an acquisition and Bucyrus inventory went up in the quarter and again, that’s not very surprising. We have businesses like solar, like Bucyrus where they have seasonally big fourth quarters. They build a bit of inventory all year long. They have a big fourth quarter and it usually goes down. And again, (Seaway) contributed about $100 million of the increase; it’s not just an acquisition. About half of the increase was finished goods and more than half of that was in our excavator division in China. And I tried to cover this a little bit in the release this morning. It’s a case where we’re cutting production there. There are more declines that are going to come in the third quarter, but dealers are cutting inventory there as well and if you start with a slow market and dealers reducing inventory, there are not a lot of shipments going on from our factories to dealers then. So, it’s pretty hard to take inventory down. So, even with the reduction in production that we had in the third quarter, it wasn’t quite enough yet to offset the impacts of a really slow market. So, we’re going to take it down a little bit more in the third quarter. We’re exporting a higher percentage of the business in China, outside of the China, so that should help there.
Edward J. Rapp – Group President and CFO: Gerry, this is Ed. The thing I’d add on CAT inventory, looking for the balance of the year, between now and the year-end I’d be disappointed if we didn’t take at least $1 billion out of inventory. But we’re also trying to be very thoughtful in terms of how we manage the full supply chain. If you think about what this supply chain has done and we had $32 billion in ’09; midpoint of the outlook, $69 billion and if you look at the basic outlook that says, there are some drivers out there that says 2013 could be a positive versus 2012. We want to be very thoughtful about how we take that inventory down; but between now and the end of the year, getting $1 billion out is something we ought to be able to do.
Jerry Revich – Goldman Sachs: I’m wondering if you could talk about how much visibility you have in your gas compression business and whether that business can continue to outpace the slowdown we are seeing in U.S. pressure pumping. And in electric power, can you just touch on which regions are driving the weakness that we saw year-to-date and what you expect heading to the back half?
Mike DeWalt – Director, IR: Yeah. I mean, we don’t break our petroleum business out in quite that much detail, but what I would tell you is the largest sort of application segment for oil and gas business is gas compression. So, contrary to popular belief, it’s not drilling and fracing, it’s gas compression. So, the more gas you have, the more wells you drill, the higher consumption of gas goes, the more need that you have for gas compression, so that business is actually doing quite well and looking up. We do a lot of gas compression with solar, and with solar, we have a very good long-term visibility. So I’d say oil and gas – your point about fracing is right. Fracing is slowing down, but gas compression is doing very well. So, our general view of the oil and gas industry is actually pretty good right now. Jerry, we are going to have to move on to the next person in line. Thanks.
David Raso – ISI Group: I’m just trying to look at the inventory guidance. Ed, you just mentioned $1 billion coming out ideally by the end of the year. That would still imply the next couple of quarters that inventory will be growing faster than sales year-over-year. So just coming off the last five quarters of inventory still growing faster than sales, I’m just trying to understand why we continue growing inventory faster than sales or B is the answer and everybody can have their own macro view are you just that confident 2013 is an up year to continue to grow inventory at this rate?
Douglas R. Oberhelman – Chairman and CEO: David, two things first all in inventory growing faster, if you really look at our guidance in terms of the midpoint of the outlook we have sales in second half actually slightly up versus first half and so you got a slight increase in sales and a lower inventory level. So you don’t have inventory growing at a faster pace than sales. Your second point is part of it as well this as Mike kind of walked around the world and you look at what 2013 could look like versus 2012 I can imagine with the degree of uncertainty we have in the U.S. today we don’t have greater clarity in ’13. I can’t imagine what the steps the China’s has taken in terms of monetary policy, reserve requirement cuts. We don’t see a better 2013 and ’12. I can’t imagine with all the moves that Brazil has taken as well as the upcoming the World Cup and Olympics you don’t see ’13 better than ’12. So part of our thinking is making sure that we are very thoughtful across the supply chain. The other one to keep in mind and I think second quarter really demonstrated it, there are also some benefits to the inventory position we have, our point of use availability, our quality, our delivery performance, our pull through were all very strong and so I do think there has been some benefits as to how we worked with our supply base to ramp up. I think you are seeing in some of those operating metrics.
David Raso – ISI Group: I appreciate that map sequentially but I was speaking about year-over-year and the math is you’re still planning on inventory growing faster than sales year-over-year and obviously it sets up a little more risk on how much retail you need in ’13 to continue to grow your production. So I guess end of the day, obviously I will give ’13 top line guidance I assume Mike you guys only give it in October. But the way you are handling the CapEx for the rest of the year, essentially no cut. The way you are guiding the inventory. I guess base case we have to be thinking – you are thinking ’13′s an up year. Otherwise you’d be taking a bigger cut to your inventory and even maybe even the CapEx.
Douglas R. Oberhelman – Chairman and CEO: David that’s why we try to give you some color as to why we saw ’13 being better. The other one to keep in mind on the CapEx is that in spite of the numbers that we reported today which are an all time record on both sales and profit. Keep in mind that our traditionally strong markets U.S., Europe if you go back in history even Japan are in the neighborhood of 40% off prior fees. At some point in time those markets are going to turn and when they turn we want to be ready. There is places where we are taking and slowing down some of that CapEx, China being one example. But we’re going through it business-by-business, industry-by-industry really looking at what the long-term prospects are going to be.
Edward J. Rapp – Group President and CFO: David I am just going to add one more comment in there on the year-over-year. That is you almost have to look at it by the type of inventory that we are talking about. We’ve increased parts inventory for example faster than sales, part of the reason for that is we are putting additional Bucyrus inventory into the system. We are doing that to increase delivery performance there that’s a key part of your driving higher part sales and profit out of Bucyrus. If you look at our actual production inventory its performed a lot closer to sales. If you look at PDC that’s where we are holding finished inventory on purpose, well call it, lane one inventory. That’s up $1 billion or actually a little bit more than $1 billion year-over-year. That’s very purposeful. I mean, the problem was, a year ago we didn’t have enough capacity in place to get it where we needed. So, we’ve added more than $1 billion to PDC inventory on purpose. That was all part of the plan and we’ve been able to do that really over the last six to nine months as production has come on stream. So, it’s not just a simple, how much did sales go up, how much is inventory going up and then we also had acquisitions. Roughly, half of the FIFO inventory increase is Bucyrus, MWM and (Seaway), just acquisitions.