Mike DeWalt - Director IR Jim Owens - Chairman and CEO Ed Rapp - Group President Dave Burritt - CFO

Robert McCarthy - Robert W. Baird Jamie Cook - Credit Suisse Ann Duignan - JPMorgan Andy Casey - Wachovia Capital Markets, LLC Andrew Obin - Merrill Lynch Daniel Dowd - Sanford Bernstein Research Alexander Blanton - Ingalls & Snyder, LLC

Good morning, ladies and gentlemen, and welcome to the Caterpillar earnings call. (Operator Instructions). It is now my pleasure to turn the floor over to your host Mr. Mike DeWalt, Director of Investor Relations. Sir, the floor is yours.

Thank you, and good morning everyone and welcome to Caterpillar's year-end Earnings Call. I'm Mike DeWalt, the Director of Investor Relations, and I am very 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'd like a copy of today's call transcript, you can go to the SEC filings area of the Investor section of our cat.com website or to the SEC's website where it will be filed as an 8-K. In addition, certain information relating to projections of our results that we'll be discussing today is forward looking and involves risks, 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 our projections can be found in our cautionary statements under Item 1A, Business Risk Factors, of our Form 10-Q filed with the SEC on October 31, 2008 and also in the Safe Harbor language contained in today's release. Earlier this morning, we reported results for the fourth quarter and full year of 2008 and we provided an outlook for 2009. Before we start this morning’s Q&A, I’ll take just a few moments to summarize the year, the quarter, the 2008-09 outlook and actions that we’re taking to substantially lower cost in 2009 in response to what's likely to be the most difficult year for Caterpillar since the early 1980s. I'll start with a quick review of the full year numbers. Sales and revenues were $51.3 billion, that’s a $6.4 billion or 14% increase from 2007, and profit per share was $5.66, up 5%. Of that $6.4 billion increase in sales and revenues, machinery volume was up 2.4 billion and was concentrated in the emerging market regions of Asia, Latin America, Africa, the Middle East and the CIS. And of that machinery volume increase, 261 million was related to the consolidation of Cat Japan in the fourth quarter. Engine volume for the year was up 1.7 billion and it increased in all regions. And for the company in total, engine sales increased in all major industries: that’s oil and gas, electric power, marine, industrial and even on-highway, which was coming off very low volumes in 2007. Okay, that’s volume. Price realization for the year was $1.352 billion and was up for both machinery and engines in all four geographic regions. Price realization on machinery was $541 million and it was $811 million for engines. Currency had a $653 million positive impact on sales. Given that the dollar has strengthened quite a bit over the course of the year, particularly versus European currencies, you may be wondering how we are still talking about a weaker dollar versus last year. And the answer is average exchange rates over the course of 2008 reflected a weaker dollar versus the average of 2007. Now finishing off the year-over-year change in our top line, financial products revenues were up $284 million. Let’s turn to full-year profit. For 2008, again, profit per share was $5.66, and that was up $0.29 from 2008. And the positive factors included the price realization again, which was $1.35 billion, the increase in sales volume and a discreet favorable tax adjustments, the largest one which occurred in fourth quarter. But offsetting these factors were higher manufacturing costs, particularly from material and freight, an increase in SG&A and R&D costs, lower profit from financial products and a higher tax rate if you exclude the discreet tax items. That’s a quick summary of the year. Let’s move on to the fourth quarter. For the quarter, sales and revenues were $12.9 billion, and that was up 6% from the fourth quarter last year. Profit per share was $1.08, and that was down $0.42 from the fourth quarter last year. In terms of sales, machinery volume was about flat excluding the impact of consolidating Cat Japan, as increases in emerging market countries about offset declines in North America and Europe. Engine volume was up 458 million, particularly in Latin America and Asia Pacific. Price realization for the company in the fourth quarter was 308 million, the majority of which was related to engines. The fourth quarter was a tough one for price realization and our level of improvement from 2007 declined from the levels we saw in the second and third quarters. The consolidation of Cat Japan added $261 million of sales and currency in the quarter was actually negative to sales $303 million as the dollar was stronger, particularly against European currencies in the fourth quarter than it was in the fourth quarter last year. And Financial Products revenues in the fourth quarter were up $19 million. Without a doubt, the fourth quarter saw a steep step-down in expectations for the world economy and over the course of the quarter, commodity prices tumbled. In fact, since the end of the third quarter, aluminum prices were up 45%; copper, which is a bellwether commodity for us, is down about 50%; oil was off about 60%; and natural gas prices were down about a third. With the drop in commodities and deterioration in the world economy in general, we started taking significant actions in the fourth quarter. In fact, we started by taking a step we've never done before, particularly on this scale. We asked dealers around the world to look at what they had on order and readjust based on a gloomier economic picture. They did and they made substantial order cancellations. Without a doubt, that hurt fourth quarter results as we made substantial production cuts, particularly in December. Sales were lower, inefficiency suffered. We began the process of lowering cost, but that does take some time. And it will probably take another quarter before we really start to see the positive impact on our cost structure. We’ll talk more about that in a few minutes when we get into the 2009 outlook. In the quarter, material and freight costs were also high and more about half of the $938 million increase in manufacturing costs. Our material costs tend to lag major changes in commodity prices, and much of what we saw in the fourth quarter was related to what was in the pipeline of material order at a time when commodity prices were much higher. We do expect material cost to decline from these high fourth quarter levels as we move forward. We had also had higher period costs in the quarter, both in our factories and for SG&A and R&D costs. In addition, profitability of our Financial Products business was off substantially. Cat Financial's margin, essentially the difference between their borrowing cost and the yield on their portfolio was down $57 million. In addition, there were several adjustments to the Financial Products profit, including a higher provision for credit losses of $42 million, mark-to-market adjustments on interest rate derivative contracts of $47 million. And in the other income and expense line, there was a charge related to the impairment of investment asset at Cat Insurance. In total, profitability in the fourth quarter was down. The higher material costs flowed 3. We had a higher level of SG&A and R&D and factory period cost as we close the year. Financial Products dropped and the efficiency impact of declining production schedules, all combined to more than offset the benefit from a discrete favorable $409 million tax adjustment related to foreign tax credit that was resulted from the repatriation of non-US earnings. Before we move on to the outlook, I would like to just make a couple of more comments about Cat Financial. And I think we need to do that to put the fourth quarter profit in perspective. First, much of the decline in Financial Products' fourth quarter profit was related to specific charges that we do not expect to repeat in 2009. However, we do expect that the spread between Cat Financial's cost of debt and the yield on earning assets will continue to be under pressure in 2009, as it was in the fourth quarter of 2008. And that’s likely to cost 2009 profit to be lower than in 2008. In terms of the asset portfolio, while key metrics have declined somewhat as a result of the economy, we are still at levels better than the last recession in 2002. And that’s after a year long recession in the US and six to nine months of declining economic conditions in Europe. Cat Financial's past dues moved from 3.64% at the end of the third quarter of 2008 to 3.88% at year-end, that’s a 24 basis point increase over the fourth quarter. That’s up, but still better than the peak of 4.78% in 2002. In the fourth quarter, bad debt write-offs net of recoveries were $61 million. In the fourth quarter last year, it was $27 million. For the year, they were $121 million versus $68 million in 2007. Now to put the $121 million of write-offs in 2008, in perspective, that was 0.48% of the asset portfolio, which is still well below the level of 2002 which was 0.69%. Okay. That’s the fourth quarter. Let’s turn to our full-year outlook for 2009. With the short decline in commodity prices over the course of the fourth quarter and the seriously deteriorating economic outlook, our view of 2009 has declined, and declined rather sharply. At the end of the third quarter, we expected that sales and revenues in 2009 would be about flat with 2008. At that time, we were not expecting the magnitude of declining commodity prices and we were still expecting another down but good year in emerging markets. We're now forecasting further declines in commodity prices for 2009 and for most commodities at prices below where they are today, and we’ve cut our growth expectations for economies around the world. As a result, we're expecting sales and revenues in the 10% plus or minus range, around $40 billion. And with our top-line sales and revenues at $40 billion, we would expect a profit per share of about $2.50, excluding redundancy cost. As you might expect to deliver the profit number, we need to take action. The $40 billion of sales and revenues reflects the sales volume decline for new machines and engines of about 30%. We need to sharply lower production schedules and our manufacturing cost structure to respond to the declining demand. In addition, we are reducing SG&A and R&D costs by about 15%. To move the manufacturing cost structure down with sharply lower volume and to make major cuts in SG&A and R&D, we are taking action. We expect nearly 20,000 people, who are with us as we started the fourth quarter, to be out of the business, most by the end of the first quarter. That includes actions we have already initiated; like the elimination of almost 8,000 temporary contracts and agency workers, actions we’ve already put in place around the world, voluntary separations of 2,500 support and management employees and voluntary and involuntary separations and layoffs of about 4,000 production employees, and we expect further layoffs of support and management employees of about 5,000. In addition to these actions, we have many facilities working shortened work weeks and thousands more people will be affected by temporary layoffs and full and partial plants shutdowns around the world. We have suspended salary increases for the vast majority of salaried and management employees. And with profit at $2.50 a share excluding the redundancy cost, our short-term incentive plan would not trigger repayment next year. That would generate a considerable cost reduction from 2008. Executives and Senior Managers will see significant reductions in total compensation. We are cutting discretionary expenses, we are delaying R&D programs and we are cutting CapEx almost 40%. While most of these cost reductions have already been initiated, we won't see much of the benefit until the second quarter. That's because there's a lag between announcing actions, notifying impacted employees and then the actions becoming effective, which brings us to the first quarter of 2009. While we don't intend to begin providing specific quarterly guidance, given the current circumstances, it's appropriate to provide some direction on the first quarter, which will likely be particularly weak, with dealers realigning their order book and working to get their inventories down and in line with expected selling rates. Our production volume in the first quarter will be very depressed. That coupled with most of the people-related cost reductions, not being fully effective until the second quarter and with most of our full year expectation for redundancy costs coming in the first quarter that means that first quarter profit will be under severe pressure and in fact we may have a loss in the first quarter. Well, I think that sums up a quick review of the year, the fourth quarter and next year’s outlook. With that, we'll start with the Q&A.

(Operator Instructions). Our first question today is coming from Robert McCarthy. Please announce your affiliation and then pose your question.

It's Robert W. Baird. Good morning, everybody. Robert W. Baird: It's Robert W. Baird. Good morning, everybody.

Good morning, Rob.

Can you talk notionally about your expectations looking a little further into the cycle if your outlook for '09 improve? I mean, nobody's forecast is ever exactly correct. But if you are right and you are delivering trough earnings this year, we do infer from that that it would be your expectation that even if global economy continues to attract sideways or something like that, that you would be looking to generate better results in 2010? Robert W. Baird: Can you talk notionally about your expectations looking a little further into the cycle if your outlook for '09 improve? I mean, nobody's forecast is ever exactly correct. But if you are right and you are delivering trough earnings this year, we do infer from that that it would be your expectation that even if global economy continues to attract sideways or something like that, that you would be looking to generate better results in 2010?

Rob, it’s a little bit early to be talking about 2010, though I understand the concern. One thing I'll mention about 2009, you can think about it as it plays forward, and we said this in our release. We expect that our results in 2009, our sales will be depressed about $1.5 billion as dealers reduce inventory. So, what we have in the outlook for 2009, in terms of sales for us is actually a little bit below what we would expect end user demand to be. So presuming dealer inventories came down to that level, there would be a little bit of benefit going forward in that. But I think beyond that, it's way too early to start thinking about 2010.

Okay, Mike. I appreciate that, but you are the guys using the word "trough". Robert W. Baird: Okay, Mike. I appreciate that, but you are the guys using the word "trough".

Bob, I think, maybe I can just add to what Mike said. Clearly, we are looking at a seismic adjustment in our top line sales revenues in '09, coming off of what through the first three quarters of 2008 was a very strong year. I think it really speaks to the kind of volume flexibility and advanced planning work that we have done, that we were originally confident that, at $40 billion we can still deliver $2.50 profitability, which would be twice as good as we did in the last trough back in 2002, which was a long sliding correction. It requires some pretty aggressive action. I think our leadership team and our divisions have stepped down in taking that very aggressive action, and we just need to see where the bottom of this cycle is going to end up. It's difficult to assess. Is it all going to be $30 or $80 at the end of the year? Is copper going to be $0.75 or $2.50 at the end of the year? These are kind of the unknowns that create a pretty wide section of possibilities in the coming year. Quite frankly, the best hope I think is a thoughtful stimulus package in the US and China, driving demand for commodities which caused us to bottom-out and regain price levels that facilitate investment, if you will, because the world economy still is short of capacity for a number of commodities, in particularly energy-related commodities that are needed to accommodate growth. So we’re looking at all those banks and looking strategically at where we go. Clearly, we don’t think this kind of the sales level we'll experience in ’09 is our long-term trend level, it's going to drop well below, and by trough, we think we can hold those kind of earnings at that level. We will continue to adjust our costs depending on the necessities and what the market opportunities turn out to be.

Thanks, Jim. That's a useful clarification. As my follow-up, can I ask you to put some kind of red box at least, some kind of quantification around savings that you expect to realize from a $0.5 billion of redundancy expenses? Robert W. Baird: Thanks, Jim. That's a useful clarification. As my follow-up, can I ask you to put some kind of red box at least, some kind of quantification around savings that you expect to realize from a $0.5 billion of redundancy expenses?

Just a couple of things. This is actually the redundancies plus the series of other actions like the no pay increases, the temporary plant shutdown.

Yes. Robert W. Baird: Yes.

If you think about the cost structure, we are looking at overall between the services businesses and new machines and engines, about a 25% decline in volume. So, we need to essentially ratchet down the manufacturing cost structure 25%. Now the material piece, that’s float with volume. But these actions that we are taking are what’s necessary to actually flex the manufacturing, labor and overhead costs down and get about 15% out of SG&A and R&D. A lot of it will come out of the people reductions, and of that 20,000 number, which includes the temporary employees and agency plus layouts and separations. But a fair amount of it will come out of just not working the overtime levels. Remember, a part of our flexible cost structure was having, we worked overtime, we had the temps. So, some of it will come out of less overtime, some of it will come out of the actions, some of it will come out of rolling plant shutdowns and short-work weeks. We have some factories working three or four days. We have some areas where they've cut from 40 to 35 hours a week. So, some of it will come out of that as well. On balance, we certainly expect to save more than the redundancy costs, but, in total, it's those actions plus those other things that will ratchet the cost structure down.

Okay. Thanks. Robert W. Baird: Okay. Thanks.

Rob, maybe just one little addition to that thought is, I would hope that by the beginning of the second quarter, our run rate can be ratcheted down somewhat; it will vary by division between 12% to 15% and 25%. That comes from the fact that again, trough planning that was a key part of the strategic assessment of each of our business unit. So we’re looking at those leaders to take out the costs that they had, if the $51 billion rate say ratchet down to a $40 billion run rate. So you see that I think beginning in the second quarter, we will be much more responsive than we’ve been able to be historically.

Agreed. Thanks, Jim. It’s a helpful clarification. Robert W. Baird: Agreed. Thanks, Jim. It’s a helpful clarification.

Thank you. Our next question today is coming from Jamie Cook. Please announce your affiliation and then pose your question. Jamie Cook - Credit Suisse: Hi, good morning. Credit Suisse. My first question, the key thing in my mind, is your confidence in the $2.50 trough EPS, given this is a recession as most are suggesting. It's similar to the 1980's recession where you lost money. And then just a follow-up question, on the dealer inventory reductions I think of $1.5 billion, could you just give me a little color in terms of by region or markets or types of equipment where you're cutting?

I'll tell you what, I'll start with the back of that Jamie and I’ll talk about dealer inventory a little bit. Jamie Cook - Credit Suisse: Sure.

And then we'll work up to the front part of your question. Dealer inventories are going to go down literally around the world. You know that 1.5 billion, it will probably be more highly concentrated in the first half of the year, and that's why production schedules are going to be particularly low in the first quarter. So it will be declining demand plus a fairly rapid step down in dealer inventory. But it's literally across the globe. I think in North America, we took out dealer inventory quite a bit in 2007, so I think there was a bit of a head start there, but it will be pretty much across the board, not at the same rate, but Europe, Africa, Middle East probably have a little more than, on average, than the rest.

Well, and may be, Jamie to add to that a little bit, I mean first off, our dealer inventories are reasonably well behaved given the very significant volatility in demand that we've seen. Keep in mind that through the first three quarters of the year, a lot of our product was on extended availability. And through our marketing company and dealer credit as soon as this downturn began to materialize, we started telling dealers look, you don't have to take the product. We probably could shift a billion plus in incremental product in 2008 that we’ve just done what we have historically. So, we stepped up, we said no, we don’t want to ship you product and have the wrong product in your dealership, and have to discount it after the fact in order to move it. So, we did a lot of things at the close of 2008 that will help us in 2009, and we have been all over trying to be sure that dealers did not build up excessive inventories. That’s a little, almost impossible to totally avoid that, given the meltdown that occurred particularly late in the year and in a number of developing countries, whether it's kind of a long lead cycle on getting the equipment there. So I feel pretty good about how we’ve managed that. As far as our confidence in the $2.50 and believe me we had some discussion around the outlook and the uncertainty. We’ve indicated that in our top-line, we think it's plus or minus 10%. Quite frankly, I don’t know we can call it a lot closer than that. Hopefully it will be above $40 billion. So we think that’s a realistic expectation at this time. And we've worked pretty hard with our business unit teams and we are sure we have a cost structure that we can flip to delivering $2.50 earnings, which was our trough target, you might recall when we rolled this out in 2005. We are pretty confident we can deliver that with the exception of the redundancy cost that we will have to write-off in the first quarter. If sales go below $40 billion, we'll be disappointed, but certainly I would expect that earnings number would hold at $2.50. Jamie Cook - Credit Suisse: Thank you very much.

I think we can deliver it, I can assure you. Jamie Cook - Credit Suisse: Thanks. I’ll get back in queue.

Thank you. Our next question today is coming from [David Krasnow]. Please announce your affiliation and then pose your question.

ISI. Good morning. The question is around the dividend. The last few years your dividend payout ratio has been less than 30%. With your current '09 EPS guidance at $2.50, the dividend payout ratio, assuming you maintain a dividend, will be 67%. And, obviously some concern with the late cycle nature of some of your key profit centers, '10 could be down. Now back in the '01-02 timeframe, your dividend payout ratios did go above 50% for two years, and you did not cut the dividends. Can you at least give us some parameters, Jim, how you view the security of that dividend, what are payout ratio levels that you maybe become uncomfortable with, and you think about cutting the dividend?

Good question, David, and thank you. And you rightfully know that we have been paying out in this very strong up-market at somewhat less than our total policy guideline. We've been taking our dividend up but it hasn’t gone up as fast as earnings per share in this period. Key thing is with $2.50 in earnings per share, I would expect to generate about $4 billion in operating cash flow in 2010. My certain expectation at this point, it’s a Board decision what dividends we pay, but my expectation is that hopefully we’ll be recommending a small increase again. We are looking at dividends through the business cycle, and if we are able to deliver on our trough earnings expectations here, I think this, we'll be looking at the long cycle, course two, and our dividend, we would look very much at maintaining, and probably trying to maintain modest increases going forward.

So the idea is essentially, you are comfortable with a 67% payout ratio in '09 with the assumption, hopefully that in '10 that it begins to go down?

Absolutely. And you are looking at that versus earnings per share. I am looking at it more in terms of cash flow. I think we can strengthen our balance sheet significantly, fund our pension plan, do a lot of things that we had said all along would be our priority for cash and maintain or slightly increase the dividend in 2009, as we currently look at the year.

And related to the security of the dividend, if you assume some kind of modest loss in the first quarter, say $0.10, hypothetically, the rest of the year, the last three quarters you have earnings down 38%. And really, if you adjusted that big fourth quarter tax benefit, you’re only paying down 28%. Not that, that different than your expected sales decline, and obviously, historically you can't find exactly a one-for-one on sales decline. It gives you the same EPS decline. Can you help us understand why you're confident you're earnings are not going to fall much more than sales during the last nine months of the year? I mean, I understand all the cost-cutting, but is there a price assumption I’m not fully appreciating? How do you view pricing in engines and machines on an absolute basis for '09?

I'll start and I'll let Mike say that for me on this one. First off, we announced some price increases for 2009 back in June. I think that was a bit of a "wow", and the factors associated with that -- but we were looking at an extended order board, a huge amount of pressure from commodity prices and energy prices that were impacting our suppliers We knew we had to give them some room there with material cost increases which is more than 50% of our cost. As Mike already indicated, it allows a higher cost. We kept a finger on the dike for quite a while, did it in terms of materials we were receiving in the fourth quarter. And our material costs for 2008 were up about 3.2% versus a 1.2% of the business plan going into the year. So, quite a bit different and very heavily loaded at the end of the year. We now expect that we will be able to manage material cost increases to a much lower level in 2009 than we previously expected. We have moderated our price realization expectations for machines and engines somewhat from where we were, but we now think there will be a positive delta, if you will, in improving variable margins between material costs that we will actually experience and price realization that we will actually experience.

Okay.

Yes. I'll just say a couple of things too, David. If you think about material cost, we really got hit in particularly in the second half of the year. So, I think as we are looking at the year-over-year as really the first and second quarters of it, but, particularly the first quarter is where you are probably going to see the biggest pain. The second thing I would say is, when you are ratcheting volumes and costs down for better or worse, in the beginning it's hard to keep up with the production declines. There is a lag between when you take action. When you see production volume going down and you start taking the people out and costs out. There was a bit of a lag. I think by the time we get past the first quarter, we'll be, let's just say more caught up. We’re taking pretty significant actions. We had trough plans in place that we had been working on for a long time. So, while the rate of change in the world economy and commodity prices over the fourth quarter was a bit of a surprise, we had thought about this before. We had trough actions in place, we were prepared to execute, and we started executing. So, I think that's all good for our performance in this downturn versus prior downturns. One more thing I just want to touch on, on price before we leave. There are always concerns about radical discounting in a big down cycle. Inventories overall, I think, have been pretty well behaved out there this time around, and I am encouraged at least by what I read in the newspaper and our own actions is that most of the competitors in our industry are radically reducing production and supply therefore, as opposed to just slashing prices and given the market conditions out there. And the pressure on suppliers, I think that's healthy.

Is it fair to say there are still a lot of turbines though suggests that maybe strengthen the loan backlog. You do expect that our price realization will be in engines rather than in machines? Is that fair?

I would say it's definitely the case for turbines and large engines, particularly gas turbines, the order backlog for 2009 looks very solid, as far as the most of highest comfort level I have,

Thank you, David.

Thank you. Our next question today is coming from Ann Duignan. Please announce your affiliation and then pose your question. Ann Duignan - JPMorgan: Hi. JPMorgan. Good morning.

Hi, Ann.

Hi, Ann. Ann Duignan - JPMorgan: Hi, my question is around your balance sheet. Our credit team is a relatively very cyclic at Caterpillar right now, just based on the fact that your total capital ratio is 58%. You have had the covenant violations which have been appeased for now. And the potentials that you could have, except our novice supplier of Cat debt to be refinanced in '09. Can you react to these issues and tell us what you think in terms of the potential or the risk of a credit rating downgrade?

Ann, this is Ed Rapp. We don't speculate in terms of the rating agencies. What I would tell you is that on the balance sheet, you commented the debt to cap ratio went up, it’s at 58. But, our historical range, we’ve tried to manage it in is at 35% to 45% percent range. And if you look at that movement, it was really driven by two things: one was the results of pensions, which a lot of people are dealing with, was about a 11 point hit; and we also had about three points due to carrying excess cash, which is, during this period of time of the global financial markets, we just think is prudent management. So we think if we get some reasonable recovery in terms of equity markets throughout the year, we can get back down into that target range towards the end of the year. The other one to keep in mind is that in terms of the debt to Cap ratio, the integration of Cat Japan had about a seven point impact on that ratio. So, we think that we’ve got it well managed; we’ll bring it down throughout the year. We had some one-time only adjustments that hit especially the OCI, but we are very focused and we have a plan in '09 that has a strong focus on cash flow. And with the inventory reductions, we know we'll see, like the $500 million we got in the fourth quarter of ’08, we think we’ll generate good cash flow and maintain the strong balance sheet. Ann Duignan - JPMorgan: But the biggest component in what you are being able to manage this, is that the equity markets recover and your pensions become less of a headwind.

I think the big driver is just good prudent managements generating cash flow, bringing inventory down, and we think we got to find some space to do it and we've started to gain traction on that with the inventory reductions we saw in the fourth quarter.

Long-term Ann, hopefully, the equity markets will return to some similar to the normal multiples and therefore recover. We plan to put close to a billion dollars into our pension plans in the coming year. Again, the key thing is that at $2.50 and roughly $40 billion worth of sales and revenue, we think we’ll generate about $4 billion in operating cash flow. We are reducing significantly our CapEx expenditure for the coming year. And with our normal priority, I think we will rebuild the balance sheet and give the rating agencies a lot of comfort if they had it just outlined. Ann Duignan - JPMorgan: Okay. And that brings me to my follow-up question. 40% cut in your CapEx, how much of that was in reaction to having to conserve cash because of the debt to capital ratio versus how much of it is a change in what you are seeing out there in the world and the desire not to expand at peak or top of the cycle at this point? Also in that context, can you talk about, how you were going to add significant CapEx for your Navistar alliance et cetera, et cetera. Can you just kind of segue into that? I know it’s a long question.

It’s a long question. Ann Duignan - JPMorgan: As much you probably can answer, please.

Well briefly, deliberating and thinking about our CapEx, clearly, it drives a lot of period cost to invest capital and do it efficiently. And a lot of our costs last year were driven by a very heavy agenda of capital expenditures. We were looking to eliminate bottlenecks and to improve our operating performance of our units. So, a lot of things were being invested in existing manufacturing operations as well as brand new facilities in Asia. We essentially went through a pretty thoughtful I think in strategic assessment. Last year's CapEx was about $2.4 billion. It wanted to be closer to $3 billion in 2009, rollout from our business units. We actually felt that we could afford to spend and the current depreciation we want to carry about $1.5 billion. So we went through a pretty exhaustive assessment of where to spend capital this year. We want to finish off in-play capital programs. But we want to get the Motor Graders moved to a new location that we think will help us with our cost structure and be more efficient with that. Also we want to fleece up room to add capacity for large mining trucks, but some of that could be slowed as the global mining industry is certainly going to take a down step correction. But moving the Motor Graders was a priority and getting out of here is tier 4 of that. The same holds with moving engine assembly into a smaller, more focused facility for the volumes that we need. We think right sized is important and it will again improve our cost competitiveness and allows us to use the Mossville facility for other purposes. We will continue with our investments on the Wuxi campus in China, which is basically engines and hydraulics as key components, if you will, that support the assembly capacity that we’ve already put in place in that key emerging growth market. So those are kind of the priorities. Well those three plus tier four emissions. So we are confident we can get that done with spends of no more than $1.5 billion in the current year and I think that CapEx number could slow down even further than that in 2010 as we look out, depending on again, how we see the market recovery and what kind of capacity needs that we need to put in place and how fast?

Thanks, Ann. Ann Duignan - JPMorgan: Thanks you.

Thank you. Our next question today is coming from Andy Casey. Please announce your affiliation and then pose your question. Andy Casey - Wachovia Capital Markets, LLC: Wachovia Securities. Good morning.

Good morning Andy. Andy Casey - Wachovia Capital Markets, LLC: With respect to engines margin performance during the quarter, both year-to-year and quarter-to-quarter margins dropped despite revenue improvement, and I am just wondering what was behind that, was that all related to your inventory reduction or was there something else weighing on Q4 margins?

I think you had two things, Andy. For the first couple of quarters actually, the engine business was actually pretty flat on material cost, but, I mean, they are not immune to the commodity cost increases that much of the world saw in the second quarter, we started to see in the third quarter and we really saw in the fourth quarter. So I think if you look at engine profitability ahead, we had a couple of things going on. We had more material costs flowing through. And then secondly, we really started cutting production schedules in the engine business, as well as the machine business. So it wasn’t just machines. So I'd say it was two things, material cost and efficiency cost levels around starting to really scale back production. Andy Casey - Wachovia Capital Markets, LLC: Okay. Thanks, Mike. And then, we've seen some of this in channel checks, but if we step back from kind of the profile of the cycles so far, you had a unprecedented increase in, well let's just look at machines demand and now it looks like we're seeing the backside of that and it seems to suggest that there would be a significant build up of used equipment overhang and you kind of touched on it in the North American outlook related to the potential benefit as a stimulus. Can you talk on the potential dynamic related to new equipment pricing? Is that an overhang that could affect that or is the inventory reduction in new equipment inventories enough to offset that?

Well, we do expect that used equipment prices are going to continue to fall. I think I'm going to get this number a little bit wrong, but probably directionally correct. I think in the US, used equipment prices were off, order of magnitude 10% in '08. Our view is they are probably going to decline again in '09. So, that definitely isn't a positive for pricing, but big factors on pricing are, how much dealer inventory is out there, is there a glut, have you got too much and heck you've seen that certainly in the auto industry today. And I think we've done a pretty decent job of really trying to keep a lid on inventory. Yes, it means to go down further, but I think the demand levels that we had last year just, even if we had wanted to, we weren't able to build as much as maybe even some dealers would have liked. I think beyond that we have come off a period of extraordinarily high commodity prices and that's been a factor on driving price realization as well. So again, rehashing ground, and Jim, already talked about it a little bit. There are certainly negatives out there in terms of pricing. Demand is going down, used equipment prices are likely to be negative, but we're really trying to keep a lid on supply, we are trying to cut off production appropriately, and our view is that that can get us some price realization in '09. Certainly a lot less than we thought we could do, three, four or five months ago. Andy Casey - Wachovia Capital Markets, LLC: Thank you very much.

Thank you. Our next question today is coming from Andrew Obin. Please announce your affiliation and then pose your question. Andrew Obin - Merrill Lynch: Yes, Merrill Lynch. Just topically speaking, I'm thinking about finance, and then thinking what the dealers are facing. On one hand it seems that I am hearing from dealers that you guys are offering to help dealers in this environment, maybe with financing. On the other hand, capital was getting more expensive. So do you need to shrink the balance sheet in this environment for the Finance Sub or are you going to grow it in this environment, and what do you think is going to happen with the spreads in the Sub over the next couple of years?

Andrew, this is Ed Rapp. In terms of your first question relative to the dealers, I think one of the advantages that we have is the relative strength of our dealer organization and in many, many cases in fact that, out of the cases, they have good access in terms of their own funding, and I've said they've got long standing relationships, strong balance sheets. And if you look back over time, I think you will find that our distribution organization has performed exceptionally well in downturns, probably the greatest test driver that was the Asia crisis which we came through without really losing a single dealer. So, we think the dealer organization is healthy, strong and will perform well in this downturn like they've done in others. On the balance sheet side in cash finance, we’ve been able to maintain access to liquidity, for example, late in the year they raised almost $500 million through their retail notes program. Credit markets are still, if you would, I'd say a bit unsettled but have improved. So we do see continuing access in liquidity which we think will allow us to -- to allow the portfolio to change and grow based on the market.

I am trying a little bit to the treasury in the Federal Reserve about the fact that all of the guarantees for upside down, banks if you will, have resulted in kind of distortion of the market, whereas single-A companies are paying more of a premium, substantially more than they were in credit markets when you can go direct. And that have a worse impact of significantly increasing spreads for single-A rated risks, even when your finance companies and I think ours is performing very well in terms of the underwriting associated with the credit risks that we are taking. But we are paying now a big premium compared to what banks were paying and what we were paying six months ago. That’s a big problem for the economy because roughly $100 billion of finance in this country comes from captive finance companies, who by the way know the customers a lot better and more intimately, can do a better job of lending to them and repossessing and remarketing the products if need be, and its one of the challenges that I think we're probably going to address hopefully in the stimulus package sometime there around. Andrew Obin - Merrill Lynch: And, can I just ask a follow-up question that might seem naive, but when you were doing your debt deals in Q4, were the rating agencies aware of the equity write-downs that you would need to take associated with the pension fund?

Well, you know, Andrew, what I’d say is that I'm sure the rating agencies are fully aware of what's going on in the equity markets around the world. I can't comment on any specific knowledge about our moment, but our policy relative to our pension funding has been consistent over time. Our profile of how much is in the equity side of it's, been consistent over time. So I think it was readily transparent to the world. I think what kind of challenges a lot of companies were going to have related to the pension performance and [related to the] OCI.

Every company in the country has got a large design benefit plan, because markets universally have defined radically has an OCI hit. And certainly we have discussed that in our treasury group’s meetings with the rating agencies on a regular basis. I don’t think there’s any surprise there for them.

This is Dave. We do have regular updates with all the rating agencies in an open transparent manner and we intend to keep it that way.

Thanks. Next question. Andrew Obin - Merrill Lynch: Thanks a lot.

Thank you. Our next question today is coming from Daniel Dowd. Please announce your affiliation and then pose your question. Daniel Dowd - Sanford Bernstein Research: Bernstein. Let's start with the mining end-market for just a minute. Are you noticing dramatically different order cancellation from the coal-related companies compared to the metals-related companies and can you comment them we’re broadly on what you’re seeing in your backlog and pricing pressure in that particular segment?

Yeah. I think if you look at so far anyway, areas like gold and gold mining and coal mining have held up, lets say better then steel, copper and certainly the oil sands. And I think as you look forward to the rest of the year, I think we would be a little bit more bullish on coal for example than we would, metals, minerals and quarrying, for example. In terms of pricing for, not insignificant chunk of what we do, in fact a pretty big chunk of what we do, we have alliance agreements with customers that actually cover pricing its not ad hoc. And in the backlogs, even though some of the orders are getting pushed out. Much of what we’ll sell this year has been on order for quite some time. In mining it is not quite the same as somebody comes in and says, can I buy this from the dealer, let's discuss a price today. So the backlog has been around for a while and much of the pricing is based on agreements that we have with mining customers. And I'm sorry that I missed a middle part of your question, Dan. Daniel Dowd - Sanford Bernstein Research: Well, what I'm trying to get to is, is the $2.50 of earnings predicated on significant over capacity in your mining-related businesses or is it the case that 2009 you think you'll be able to pull forward some of the incremental demand from out-years?

It has a pretty negative picture for mining as well. I mean we’re not flat or up certainly in mining next year. It's going down as well. Although again I think no coal and gold mining are a little bit better than the rest. Mining is in negative as well. That’s going down compared to the record year of mining truck shipments we'll have this year, but we had a very substantial order backlog on the order of three years. The volatility in the orders of people slicing about or canceling orders has been very high. But the order backlog still looks reasonably good for this year, although we even, even that we have reserved. Some of those are likely going to be cancelled. Another, but a key factor here is I think the mining industry was never able to get all of the equipment they wanted in the boom and the average age of the truck working in a mine today is over 10 years old, which is older than normal life cycles, and so there is a replacement cycle that will likely come as better availability comes about. So, yeah, I mean, right now debts are off, but commodity prices have dropped so radically and rapidly that mining companies are reassessing their own capital plans and which mines they are going to keep open and which ones they are going to run. But once that stabilizes I think you'll see mining companies coming back, softly looking at their fleets, maintaining those fleets, replacing those fleets for optimum efficiency. And as Mike indicated, 75% of the industry we have alliance agreements with, they didn't get big price increases even though we were long sold out. There is a formulaic approach to how much price we took. I expect prices in the mining industry will hold reasonably well. And again, a strong replacement cycle and I fully expect the mining cycle is now little up, it's going to go off the sledge in '09. But I think as the global economy in those packages that are out there kick in, there is still a shortage of capacity to support growth rates in the global economy of 3% to 3.5%. So, I don’t come back. Daniel Dowd - Sanford Bernstein Research: Okay. So what I would take away from that is, take them to the 2.50% is dramatic declines in actual mining revenues this year, but to think about 2.50% in 2009 as a trough, you really have to believe that mining or one of the key things you probably have to believe is that mining commodity is particularly in the metal recover pretty substantially by the back end of '09 or early 2010.

Well, we've given you some of our thinking regarding threshold levels that will drive normal operations and, if you will, some investment. And for example, for copper, we think that's around $1.30. So if it goes materially below $1.30 and stays there for a while, people will shut down mines and park trucks and not do maintenance, et cetera. If it goes back to $1.80, I would expect there to be a normal functioning of all of the major copper mines in world and things will settle back down. So, much depends on, it is probably going to be an over correction in commodity prices, but the threshold level for investment was well below the peaks they reached last year. We aren’t looking for those peaks to come back in the foreseeable future, but we are looking for commodity prices to stabilize and rebound a little bit off the floors they will likely hit in the first half of '09.

Yeah, I'll just make one more comment on that and then we'll take, we have time, I think, for one more question. If you look at commodity prices today, and I've kind of mentioned this in the open remarks, our forecast is based on actually averaged commodity prices for this year that are a little bit below, actually where we are today. So we have some further decline in commodity prices built in the outlook for '09. We are ready for one more question and then we'll wrap it up.

Thank you. Our final question for today is coming from Alexander Blanton. Please announce your affiliation and then pose your question. Alexander Blanton - Ingalls & Snyder, LLC: Hi, it's Ingalls & Snyder. I think we need some clarification on how you are going to handle these redundancy costs, most of which you say you would be taking the first quarter. Because in the past these kinds of cost have been rolled into your reported earnings, but now you've given us a forecast of 2.50% for this year without that in there, and I assume that when you say you might have a loss in the first quarter that it does not include the redundancy cost either. So how are you going to report? Are you going to break it out? Are you going to say we’re going to have earnings of X and then subtract the redundancy costs, which were $0.82 that weren’t the part you forecast and then give us two numbers or how you are going to do it?

Okay. First off, that’s a good question actually to clarify here, Alex. Thank you. The 2.50% would not include redundancy cost. We said we expect redundancy cost of about $500 million. Alexander Blanton - Ingalls & Snyder, LLC: That’s $0.82.

So the actually number will be less than 2.50% if you include the redundancy cost. Now, in the first quarter in the back of our release, we have a short discussion of the first quarter. And what we are really talking about there is reported earnings could be a loss and one of the factors that could cause the first quarter to be a loss is the booking of much of that redundancy cost, much of that $500 million. Alexander Blanton - Ingalls & Snyder, LLC: So when you report though? In 2009, are you going to give us two figures or one figure?

Well, when we report we will tell you what our actual profit after-tax is and we will tell you how much of our profit was redundancy cost. Alexander Blanton - Ingalls & Snyder, LLC: So we can add it back and get the number that compares with the 2.50% that you are telling us you might do?

That’s correct. Alexander Blanton - Ingalls & Snyder, LLC: In the past you haven’t broken these things out very well.

And the math, Alex on the $500 million is more or like about $0.56 a share actually, $0.55, $0.56. Alexander Blanton - Ingalls & Snyder, LLC: You’re right, absolutely right. So, you're really talking something around $2 in terms of what you really going to report?

Including redundancy cost, yes. Alexander Blanton - Ingalls & Snyder, LLC: Yes. But I mean, that’s the way you report historically. Secondly, the tax benefit of the fourth quarter, was that in your original guidance? You gave us guidance of $6 for the quarter. Was that in there or not?

If you go back to our third quarter release, there is a couple of points on tax. We did expect the tax rate in the fourth quarter to go down about a point excluding discrete items, and that didn’t happen. So from excluding that $400 million item, our tax rate was about a point higher for the year than we thought it was going be. We did get the investment or the R&D tax credit but geographic mix went against us. The $409 million was not implicit in the $6 a share. We talked about it in the 10-Q as a possibility but it was not explicitly included in the guidance. Alexander Blanton - Ingalls & Snyder, LLC: Okay. So what we really have is if we look at around $0.40, I think at $0.41, after the tax benefit versus the $1.42, these are the comparable numbers, right? In other words, we have to subtract the tax benefit from your earnings because you didn’t have it in your guidance if we want to compare what you did with the guidance. Isn’t that correct?

Correct. Alexander Blanton - Ingalls & Snyder, LLC: Okay.

Thank you, Alex. Alexander Blanton - Ingalls & Snyder, LLC: Thank you very much.

All right.

May be just in closing, clearly 2008 was, while it was a record year. It was certainly a very challenging year. And to go from the extended delivery and booming market conditions in a number of key sectors we served through the third quarter, while dealing with recessionary conditions that were already prevalent in United States, Japan and Europe have certainly created a number of challenges for us during the year. You should all know, I know you were disappointed in our fourth quarter delivery, so were we. I assess our team’s performance. A lot I have to look pretty introspectively at the fact that we had seismic moves in the global economy in the fourth quarter, particularly with commodity prices and literally hit a wall in December. Our sales stayed pretty strong through October and well into November, but we pretty much hit a wall in December. A lot of our business units at that time, we were putting together are business plans for 2009 and they were trying to wrap things up, close things down in terms of CapEx, et cetera, preparing for kicking in the trough plans that we had worked on long and hard. So, as I think about our performance, I haven't kind of assessed all that. We don’t run the business for the quarter, we run the business for the long-term, and the long-term health of the corporation and taking care of our customers. And that’s what we are very much focused on. I think appropriately we're laser focused now on delivering the trough earnings commitment that we had, if sale holds at about $40 billion, recognizing there is a lot of uncertainty around the top-line sales for the coming year. But we’ve got a team that’s been through some pretty significant business cycles in the past, they're seasoned. We’ve been practicing for this, so we now will see if we can walk the talk and implement, I'm confident that we can. We have to reflect on the fact we're all staring at our navels here and thinking, wow! This is, the world's melting down. The housing starts in US this year are going to be around 900,000 starts. Somewhere out there in our not too distant future, housing starts will be back to 1.6 million to 1.8 million starts a year. We will stimulate the global economy. I hope with a good thoughtful package in the United States, the Chinese are doing the same, a number of the emerging markets have relatively low inflation and stronger balance sheets than they ever had going into a recession of this type. If we just get the financial market to stabilize globally, this economy wants to grow and we, Caterpillar I think are exceptionally well positioned. We hope to go the right way going forward. So, we have to keep the quarter in perspective some times and we're working to do that, and at the same time, we're taking I think some very painful, assertive actions to be sure we right size our cost and we do it quickly. We thank you all for being with us this morning and for your patience.

Thank you.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.