Caterpillar (CAT)

Q3 2010 Earnings Call

October 21, 2010 11:00 am ET

Executives

Mike DeWalt - Director of Investor Relations

Edward Rapp - Chief Financial Officer

Douglas Oberhelman - Vice Chairman and Chief Executive Officer

Analysts

Jerry Revich - Goldman Sachs Group Inc.

Ann Duignan - JP Morgan Chase & Co

Stephen Volkmann - Jefferies & Company, Inc.

Barry Bannister - Stifel, Nicolaus & Co., Inc.

Henry Kirn - UBS Investment Bank

Alexander Blanton - Ingalls & Snyder

Eli Lustgarten - Longbow Research LLC

Robert Wertheimer - Morgan Stanley

Meredith Taylor - Barclays Capital

David Raso - ISI Group Inc.

Robert McCarthy - Robert W. Baird & Co. Incorporated

Jamie Cook - Crédit Suisse AG

Presentation

Operator

Compare to:
Previous Statements by CAT
» Caterpillar Q2 2010 Earnings Call Transcript
» Caterpillar, Inc. Q1 2010 Earnings Call Transcript
» Caterpillar Inc. Q4 2009 Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Caterpillar Third Quarter 2010 Earnings Results Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mr. Mike DeWalt. Sir, the floor is yours.

Mike DeWalt

Thank you, and good morning, and welcome, everyone, to Caterpillar's Third Quarter Earnings Call. I'm Mike DeWalt, the Director of Investor Relations. I'm pleased to have our CEO, Doug Oberhelman, and our Group President and CFO, Ed Rapp, with me on the call today.

Just a reminder, 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 cat.com website, and it'll be in the section labeled, Results Webcast.

In addition, we'll be discussing forward-looking information today that involves risks, uncertainties and assumptions that could cause our actual results to differ materially from the forward-looking information. A discussion of some of the factors that 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 back on February 19, and our Form 10-Q filed with the SEC on May 3, 2010. And it's also on our forward-looking statements language contained in today's release.

Okay, earlier this morning, we reported results for the third quarter. We increased our full year outlook for 2010 and we provided a preliminary outlook for 2011 sales and revenues. To start this morning, I'll summarize the quarter and the outlook, then Doug and Ed and I will take your questions.

Let's start with the third quarter top line. Sales and revenues were $11,134,000,000 and that's up from $7,298,000,000 in the third quarter of 2009. And that's an increase of about $3.8 billion or 53%. Now that includes about two months of sales at Electro-Motive Diesel and we'll be referring to that as EMD here today, which we acquired in the third quarter and added about $216 million in sales for the quarter. Excluding EMD, sales and revenues were up about 50%.

The increase in sales was primarily a result of improving end-user demand and the absence of 2009's dealer-machine inventory reductions, and I'll cover both of those this morning. First, in terms of end-user demand, good economic growth in the developing world has been positive for sales in Asia, Latin America, the CIS, and Africa/Middle East. In addition, the growth in those developing countries have improved demand for commodities and that's been good and positive for our Mining business worldwide.

In addition, we are seeing growth in the developed countries of North America and Europe, albeit off depressed levels from 2009. With weak economic recoveries in the U.S. and Europe and with depressed construction activity, I know it's tough to understand why sales of CAT machines are up so much. And new machine sales in the United States are a good example that illustrates the point. Here's what's happening. First, sales to users peaked in 2006, then declined in 2007, declined again in 2008 and then declined even more significantly in 2009. From the peak quarter in 2006 to the bottom in late 2009, dealer-machine sales to end users in the U.S. declined nearly 80%. Today, we're seeing improvement from those low levels as customers are buying some machines to slow the aging of their fleets. In addition, dealers have increased machine purchases for rental fleets. That said, rental fleets size hasn't improved much, the average age of dealer rental fleets haven't improved and it remains elevated. And rental inventory utilization rates have increased and are now higher than in 2007, 2008 and 2009.

In addition to better end-user demand, dealer inventory changes also affected the sales comparison with the third quarter of 2009. Last year, dealers reduced new machine inventories by about $1.1 billion in the third quarter. So far in 2010, dealers have held the machine inventories relatively flat. They were actually up about $100 million so far this year and that was in the third quarter.

Speaking of inventory levels, though, we frequently hear comments and get questions about dealer restocking. And just to be clear, other than the very small increase this quarter, that's not happened. Overall, dealer-machine inventories are within a few percent of the year end 2009 levels.

Dealer-machine inventories in terms of months of supply continued to decline and are below historic averages. That's a good thing, and it's in keeping with our Lane strategy that includes Caterpillar holding finished inventory and regional distribution centers to serve our dealers and customers. That said, dealer inventories are very tight in many parts of the world and dealers will probably need to add some inventory next year.

Read the rest of this transcript for free on seekingalpha.com