Caterpillar Earnings Call Insights: Mining Details & Share Repurchase, Inventory Reduction
Mining Details & Share Repurchase
Jamie Cook – Credit Suisse Securities: First question on mining and then second on share repurchase. On the mining side, you’re assuming, just why your core mining down 50% and Bucy only down 15%, and then I guess, assuming sort of down 50% mining this year, how do you put that into context versus sort of normalized levels going forward, because obviously everyone’s trying to figure out what 2014 could potentially be? And then I guess Doug, my question to you on sort of the change in thought process behind sort of share repurchase. Before that it didn’t seem like a focus for you and how do we think about normalized CapEx and then do you assume any share repo in your guidance?
Michael DeWalt – Corporate Controller: Okay, Jamie, it’s DeWalt. I will start with the first part of that and I’ll let Doug do the second part. The first part on mining, I just want to clarify, we’re not looking for our total mining sales to be down 50%. Aftermarket is going to be, certainly in our outlook a lot closer to flat. The Bucyrus piece of it is down about 15%. So, in the aggregate, it’s not down 50%, it’s just the new machines; big trucks, loaders, bulldozers and the like. In terms of what’s normal, man, if I look back over the last few years in mining, it’s a little tough to decide actually what’s normal. I think this year is a year where our sales are certainly being impacted by dealer inventory reductions. Last year, in addition to the – let’s say the end-user demand, dealers built some inventory in mining, so that’s a factor certainly in 2013 as well as kind of the demand level from customers.
Jamie Cook – Credit Suisse Securities: No, I know, Mike, but just to clear, I didn’t phrase the question right, I understand that it was more new machines down 50% and I assumed aftermarket would be better, but why is Bucy only down 15%? You know, and I mean I would assume the…?
Michael DeWalt – Corporate Controller: Yeah. Well, yeah, I think if you look at the traditional Cat machines, you do have a dealer inventory impact that you don’t really see with the Bucyrus machines. And I think the Bucyrus machines are more specific. I mean, they’re not – they order them in smaller quantities and more specific to products individually that are maybe being retired in a mine. Historically, this has been the case. We saw this. When we looked to acquire Bucyrus, we saw that even in the 2009 downturn the decline in that type of product was less than we saw in trucks and bulldozers and such. I do want to get back to one other point that you made to and that’s on 2014, and I’m sure we’ll over the course of the next couple of months get a lot of questions about what does this mean for 2014. And that’s a really hard question to answer at this juncture. I mean, certainly, we don’t have an outlook for 2014, so we’re not going to go out with new assumptions about that or assumptions about that today. And what I would caution everybody to think about just a little bit is if we go back a year ago and we put ourselves in April of 2012, whatever predictions we made a year ago about 2013; the market has certainly changed since then. It may change between now and the end of the year; it may not. It’s just too soon, I think, to make a call on 2014. Other than that just a couple of points that – in fact, we mad this in our release today. Dealer inventory changes are impacting this year’s sales. So, the real end user demand level is not quite as bad as our production and sales level. And once you kind of get through that, it stops being a drag. Then secondly, commodity demand overall has held up reasonably well and our machines are being used in the field. Most of what we sell is for replacements and at some point here that’s going to have to perk back up. So, sorry, I can’t be more specific on ’14. With regard to the second question on share buyback, I’ll turn it over actually to Brad…
Bradley M. Halverson – Group President and CFO: That’s a good question. And the fact is, our priorities, as Mike just talked about, have not changed. We think stock repurchase is an important way to reward shareholders and we’ve done it in the past and it’s been part of the things that we look at. So, the question is, why now? And our balance sheet is very strong. We think with the drop in stock price recently and where our (PE) is, the fact that we believe we have a slow growing economy, but one that’s stable; if you look at our debt to cap in the mid-30s, we’ve got enterprise cash of around $6 billion and a pretty strong net debt to cap. We had a good cash flow quarter. We have plans for a good cash flow year and we think again, this is an opportunistic time here in the short term to reward our shareholders with $1 billion stock buyback.
Jamie Cook – Credit Suisse Securities: But Brad, is anything assumed in the guide? Or what do you assume in the guide levels? Do you assume the $1 billion in share repurchases, is that in the guidance or not?
Bradley M. Halverson – Group President and CFO: Yes, it is. Yes.
Jamie Cook – Credit Suisse Securities: It is. Okay.
Bradley M. Halverson – Group President and CFO: That’s $0.06 or $0.07 a share, or something like that.
Doug Oberhelman – Chairman and CEO: I will just add a couple of footnotes on this, Jamie, Doug here. We have been intensely focused on investing in the Company the last four-and-a-half, five years since the recession. But the thing that’s probably been the overriding objective is to get our – is to make our balance sheet rock solid impenetrable. The first quarter, we saw – in the fourth of last year, the inventory reduction really came through the levels that we were expecting, that we wanted and that we like. The organization has responded in cost control. First quarter cash flow was outstanding. That all coupled with again a debt-to-cap ratio of upper 30s and if you factor in the cash, it’s below 30. We contrast that back to the middle of ’08, or this time in ’08, we were much more fragile on the balance sheet, coupled with as Brad said, the multiple, it’s an attractive use of our cash right now; and it’s really that simple and I think makes a lot of sense. And frankly, (indiscernible) about how we look at 2013 in the longer term because I know we have a lot of questions around mining and where is all that going, and I still firmly believe long-term and long-term being the next-generation of management and beyond we will view our moves in the mining and what we’ve done the last few years as really changing our Company for the better. We are used to cycles here, no question about it. Steve Wunning in that Resource Industries group right now is doing everything in their command to structure that business for this cycle. They have OPEC targets that they are exceeding, and I can’t remember what the cycle we’re going to like that business. It’s just – right now, it’s down from where it was and it’ll come back, particularly if worldwide growth even as slow as it is, at 3% over time and growing Construction Industries around the world, they’re going to require what comes out of the year. So, we’re definitely in a down-cycle right now, but long-term it’s a great business for us; probably more than you wanted to hear, but I wanted to throw that in, Jamie.
Stephen Volkmann – Jefferies & Company: It’s Jefferies. A couple of quick ones, Mike, just to follow-up on your inventory comments; you said that inventory reduction would probably continue into the second quarter, just order of magnitude there if you might have it and I’m curious if you could break that out between Mining and the Construction businesses, and then I have a quick follow-up for Doug.
Michael DeWalt – Corporate Controller: Okay, actually I’m going to go slightly beyond what you just asked. Frequently, when we talk about inventory, sometimes there’s – if you’re not careful, you can get some confusion between Company inventory and dealer inventories. So I really want to address both. From a dealer inventory standpoint, our (forward) projections have it coming down again in the second quarter. And historically, that is – didn’t happen last year, but historically, that’s the usual pattern. Dealers normally build inventory in the first quarter and it comes down in the selling season when sales to end users are a lot higher in the second quarter. I think our view is that, at least the selling down part of it in the second quarter in the selling season is likely to happen. I won’t put an order of magnitude on it, but I think to a large degree it depends upon what happens to end user demand. But it’s probably more than a couple of hundred million dollars otherwise we wouldn’t have mentioned it. So, a reasonable decline. And I think probably in the second quarter it will be split between mining and construction. It’s a big selling season for construction plus we have this sort of march-down of dealer inventory in mining that to some degree will probably occur throughout much of 2013. For Cat inventory, we do expect a little bit more decline for the year. We would not expect to do three more quarters of $0.5 billion a quarter. So, over the course of the rest of the year we would see a reduction, but a little bit lower than the pace we had in the first quarter.
Stephen Volkmann – Jefferies & Company: Then if I could, when we were out visiting in December, correct me if I put the wrong words in your mouth. But I think you had mentioned that you were willing to run with a little higher expense than you might otherwise because you did believe that things were going to recover fairly soon and you didn’t want to kind of cut in the muscle and not be able to do take advantage of any upturn that might come. And I think you sort of said that you’d reevaluate that as we got through the spring and I’m curious now whether you think there is more you need to do on the cost side, whether you might have changed that view or whether you still think that that’s the right stance here?
Doug Oberhelman – Chairman and CEO: Yeah, sure, Steve and I’d say the answer is split. In the case of Construction, we are seeing an uptick. We’ve been watching relatively flat but slightly increasing sales to users for a number of months. We saw that in March; we saw it in the first quarter; you saw the backlog number. So, we have been reluctant to go to the bone in Construction and have not. Now, we’ve got a number of restructurings occurring around the world in that, but it’s unrelated to volume, it’s related to structural cost. I’m talking about Europe. In mining, yes, we are doing absolutely everything required to get the cost structure in line with where we are in the cycle and the Resource Industries mining guys, people have done a great job on that so far. Where are we on all of that? Hard to say, but certainly the number of temporary layoffs we have both in production and office staff around the world are of the temporary nature. We’ve had a few announcements of something more permanent fairly on the miner side. But basically, we will go as far as we need to go to generate the OPEC targets we want and to deliver kind of the goals we’ve stated. So, so far, it’s a pretty mixed bag though, Steven. I can give you a nice ambiguous answer because that’s exactly the way we’re operating; mining deep, Construction Industries is growing.
Bradley M. Halverson – Group President and CFO: Yeah, and I might add just one comment. This is Brad. When we look at 2013 for the full year, we have strong confidence in our ability to execute. If you look at the pull-through kind of a decremental rate for the year, it’s around 25% and it’s around 25% despite the fact that we have two decent headwinds and that’s the mining mix in terms of where the sales are coming out of, as well as the period cost absorbs the impact that Mike has about. So, our plans, our trough plans, the flexible workforce, the things we’re doing to control cost here have put less pressure on things like R&D and capital that would have been in the past. So, we’re comfortable with the year.
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