Caterpillar Inc. (CAT)
Q3 2009 Earnings Call Transcript
October 20, 2009 11 a.m. ET

Executives

Michael DeWalt - Director of Investor Relations
James W. Owens - Chairman and Chief Executive Officer
Edward J. Rapp - Group President
David Burritt - Chief Financial Officer

Analysts

Meredith Taylor - Barclays Capital
Robert McCarthy - Robert W. Baird & Co.
Andy Casey - Wells Fargo Securities
Ann Duignan - JPMorgan
Daniel Dowd - Sanford C. Bernstein
Jamie Cook - Credit Suisse
Alexander Blanton - Ingalls & Snyder Llc
Robert Wertheimer - Morgan Stanley
Andrew Obin - Banc of America/Merrill Lynch

Presentation

Operator

Good morning, ladies and gentlemen and welcome to the Caterpillar Third Quarter 2009 Earnings Results Conference Call. At this time, all lines have been placed on a listen-only mode. And we will open the floor for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mr. Mike DeWalt. Sir, the floor is yours.

Michael DeWalt - Director of Investor Relations

Thank you very much and good morning and welcome to Caterpillar’s third quarter earnings conference call. I am Mike DeWalt, the Director of Investor Relations. I am pleased to have our Chairman and CEO, Jim Owens; Group President, Ed Rapp; and our CFO, Dave Burritt, with me on the call today.

This call is copyrighted by Caterpillar Inc. and any use, recording or transmission of any portion of the call without the expressed written consent of Caterpillar is strictly prohibited. If you would like a copy of today’s call transcript, you can go to the SEC filings area of the Investors section of our cat.com website or to the SEC’s website where it will be filed today as an 8-K.

In addition, certain information relating to projections of our results that we will be discussing today is forward looking and involves risks and uncertainties and assumptions that could cause actual results to materially differ 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 the projections can be found in our cautionary statements under Item 1A, Business Risk Factors, of our Form 10-Q filed with the SEC July 31, 2009. It is also in the Safe Harbor language contained in today’s release.

Okay. Earlier this morning, we reported results for the third quarter of 2009. We updated our outlook for the full year and we provided a preliminary outlook for 2010 sales and revenues.

To start this morning, I will summarize the results for the quarter, which we expected would be a difficult quarter and we said so during our earnings conference call last quarter. In addition to weak end-user demand, we expected dealers to continue with sizable reductions in new machine inventories and had more extensive temporary factory shutdowns planned for the third quarter. In general, that happened. End-user demand was weak. Dealers reduced their new machine inventories by about $1.1 billion during the quarter and engine sales declined as well.

Sales and revenues were $7.3 billion for the quarter, a 44% decline from the third quarter of 2008. Third-quarter profit was $0.64 a share and that was down $0.75 from the third quarter of 2008. There were no employee redundancy costs in the quarter, but we do expect more in the fourth quarter. Okay. Those were the headline numbers for the quarter.

Now, I will go into a little bit more detail on the $5.7 billion decline in the top line. Machinery volume was down $4.5 billion, excluding the impact of Caterpillar Japan. Broadly, you can look at the drop in Machinery volume in two major chunks, weak end-user demand and the change in dealer inventories. Worldwide, dealer machine sales were about half of the 2008 third quarter level.

Over the past year, we’ve seen an extraordinarily steep drop in demand in the industries we serve. And to put that in perspective, in the United States, sales to end users are down about 80% from the peak, which was in the first quarter of 2006 and is well below the historic trendline. In addition, the impact of dealer inventory changes had a very sizable impact on the change in our quarter-over-quarter Machinery sales. Dealers lowered machine inventories $1.1 billion during the third quarter and that means our sales of new machines were about $1.1 billion below dealer sales to end users.

To put the year-over-year impact on our sales in perspective, you need to also understand what happened in dealer inventories last year. During last year’s third quarter, dealers increased inventory about $100 million. That means that dealer inventory changes had a negative impact on our quarter-to-quarter sales of about $1.2 billion. Turning to Engines, very weak demand also had a significant negative impact on engine volume, which was down $1.5 billion from the third quarter last year and dealers also reduced engine inventories in the quarter.

Financial Products revenues were off $118 million and currency had a negative impact on sales of $138 million as a result of a stronger dollar compared with the third quarter of 2008. I know that talking about a strong dollar seems odd with exchange rates where they are today. But if we look at average rates for the third quarter of last year versus average rates for the third quarter of this year, the dollar is a bit stronger on average.

On the positive side for sales and revenues, price realization was favorable, $227 million or about 3% and the consolidation of Cat Japan added another $280 million. You’ll see in this morning’s financial release that, in total, Machinery sales were down 52% in the quarter and Engines sales were off 35%.