Caterpillar (CAT)

Q2 2010 Earnings Call

July 22, 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

Ann Duignan - JP Morgan Chase & Co

Jerry Revich - Goldman Sachs Group Inc.

Stephen Volkmann - Jefferies & Company, Inc.

Henry Kirn - UBS Investment Bank

Alexander Blanton - Ingalls & Snyder

Mark Koznarek - Cleveland Research

Eli Lustgarten - Longbow Research LLC

Robert Wertheimer - Morgan Stanley

Meredith Taylor - Barclays Capital

Andrew Obin - BofA Merrill Lynch

David Raso - Citigroup

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Caterpillar Second 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 very much, and good morning, and welcome, everyone, to the Caterpillar Second Quarter Earnings Conference Call. I'm Mike DeWalt, the Director of Investor Relations, and I'm pleased to have our CEO and Chairman-Elect, Doug Oberhelman; and our Group Vice Chairman 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 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 labeled in the section, 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 for the year ended 2009 and Part 2 of our first quarter 2010 Form 10-Q, and also in the forward-looking statements language contained in today's release.

Okay, earlier this morning, we reported results for the second quarter, and we increased our outlook for the full year of 2010. And to start this morning, I'll summarize the quarter and the new outlook, and then Doug and Ed and I will take your questions. So let's start with the second quarter top line.

Sales and revenues were $10,409,000,000, and that's up from $7,975,000,000 in the second quarter of 2009. And that's an increase of about $2.4 billion or 31%. The increase in the top line was primarily driven by the absence of 2009's dealer inventory reductions, coupled with improvement in end-user demand. And in terms of dealer inventory, our dealers cut their new machine inventories by about $1.2 billion during the second quarter of 2009, and as a result, Caterpillar essentially undersold end-user demand in last year's second quarter.

During the second quarter of 2010 this year, dealers held inventory about flat, meaning that our machine sales were about in line with end-user demand. We frequently hear comments and get questions about dealer restocking, and to be clear, overall, dealers have collectively not increased machine inventories yet. They've just stopped reducing them.

In fact, that comment goes for the first half of 2010, not just the second quarter. Inventories have remained relatively flat all year long. Dealer inventories in terms of months of supply are below historic averages. That's a good thing, and it's in keeping with our Lane Strategy that includes Caterpillar holding finished inventory in regional distribution centers to serve our dealers and customers. That said, inventories are getting tight in some parts of the world. And the higher sales are in our outlook range, the more likely it is that dealers will want to add some inventory. Okay, that's the situation with dealer inventory.

The second major reason for the sales increase in the second quarter was better end-user demand. Demand has picked up substantially from the very depressed levels of last year. And that's because most of the world economies are in recovery after last year's severe economic decline.

World growth is being led by the developing countries of Asia, Latin America, the Middle East and Africa. And we're seeing continuing strong growth in our businesses in the developing world. That economic growth is also driving demand for commodities like iron ore, copper, coal and oil. And that's helping our mining and energy-related businesses around the world.

The developed countries of the world, like the United States, in Europe and Japan, are also growing but more slowly. And while economic growth in developed countries has helped, we still have a very long way to go. Sales in North America and Europe, while better than the very low levels of 2009, are still depressed.

So the 31% increase in our top line was primarily due to the absence of last year's dealer inventory decline and improving end-user demand. Just one more point about the sales increase, the vast majority was related to Machinery. Compared with the second quarter of 2009, Machinery sales were up 55%, while Engines sales were up 3%.

Now let's turn to profit. Profit in the quarter was $707 million, a 91% increase from $371 million in the second quarter of 2009. Profit per share was $1.09, up $0.49 from $0.60 in the same quarter of 2009. Consolidating operating profit as a percent of sales was 9.4%, and that's up from 4.4% in the second quarter of last year. In Machinery and Engines, gross margin continued to improve and was 24.2% in the quarter.

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