Mike DeWalt - Director of Investor Relations Edward Rapp - Chief Financial Officer Douglas Oberhelman - Vice Chairman and Chief Executive Officer

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

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.

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. Higher sales volume was a significant positive factor driving the improvement in profit. That said, that positive impact was mitigated somewhat by a very negative sales mix. Our mix of sales in the second quarter as compared with the second quarter a year ago was negative because Machinery sales, remember I have 55% up, increased to the much faster pace than Engines sales, which were up 3%. And that's a negative because Machinery margins are lower than Engine margins. In addition, the production in sale of smaller, lower-margin machines increased faster than large machines. And that's primarily because smaller machines were more depressed than large machines by the impact of the dealer inventory reductions in 2009. And also, the mix of engines that we sold was also somewhat negative. So that's volume. A major positive but mitigated somewhat by a negative sales mix. In addition to higher sales volume, price realization also improved and was favorable to profit $187 million. Manufacturing costs were also favorable by $316 million. And if you exclude the LIFO inventory decrement benefit that we realized in the second quarter of 2009, the cost improvement was more. It was $426 million. And that was a result of better labor and overhead efficiency, lower warranty costs and favorable material costs. Another positive in the quarter was the absence of $85 million of employee redundancy costs from the second quarter of 2009. Partially offsetting these positive items were higher income taxes. As a percent of profit before tax, rates went up in the second quarter of 2009, and that's primarily due to the geographic mix of where profits were earned. SG&A and R&D costs were also higher, and that was due to provisions for employee incentive compensation and some increase in R&D spending related to Tier 4 emissions. Overall, currency impacts were also negative. The impact of currency was $77 million unfavorable to operating profit, and currency impacts were the principal reason that the other income line, which is below operating profit, declined from the second quarter of 2009. Before I move on to the full year outlook, I'd like to cover two items, employee incentive compensation and income taxes, in just a little more depth. As you may be aware, a portion of the compensation for our support and management and some production employees is variable and based on the financial performance of the company, and financial performance in 2010 has continued to improve. And based on the new outlook for 2010, we expect incentive compensation of about $600 million for the year. We provided about $90 million in the first quarter, and that was based on the full year outlook at that time. And we provided $210 million in the second quarter of 2010, and that was based on the new outlook that we released this morning. That means through the first half of the year, we provided for half of the full year estimate of about $600 million. So the provision in the second quarter at $210 million was $120 million higher than the provision from the first quarter. And again, that was based on the improvement in the full year outlook. The second thing I wanted to add color on was the provision for income taxes. As I mentioned a few minutes ago, taxes and the tax rate were unfavorable compared with the second quarter of 2009, so year-over-year unfavorable. However, our previous outlook for 2010 expected a 30% tax rate excluding the Medicare-related adjustment in the first quarter. Taxes in the second quarter were below that 30% estimate. We had favorable discrete tax adjustments in the quarter, and we lowered our estimated annual tax rate for 2010 from 30% to 29%. As a result, taxes in the second quarter were favorable versus the 30% rate from the previous outlook. I hope you follow that discussion on incentive compensation and taxes. I know it's a bit complicated. But the punch line is incentive compensation expense in the quarter was probably higher than you might have thought because of the increase in our outlook, but taxes were probably more favorable than you expected. In addition to profit, we've been very focused on cash flow this year. Through the first half of the year, our Machinery and Engines operating cash flow improved substantially from about $600 million during the first half of 2009 to about $2.4 billion to the first half of 2010. Our Machinery and Engines debt-to-capital ratio improved as well, and at the end of June 2010, it stood at 41.9%. And that's an improvement from 53.1% at the end of June 2009, and an improvement from 45.2% just three months ago at the end of the first quarter. Okay, let's move on to the outlook. This morning, we raised guidance for sales and revenue and profit. Our previous outlook range for 2010 sales and revenues was $38 billion to $42 billion, and that was a midpoint of about $40 billion . The outlook we provided this morning is a range of $39 billion to $42 billion with a midpoint of $40.5 million. And in that, it's probably worth noting that the U.S. dollar has strengthened since the end of the first quarter, and that's had a negative impact on our sales forecast, as sales and other currencies translate into fewer dollars. The full year impact on sales compared with the previous outlook is negative, about $500 million. So what that means is the underlying in volume improvement in the sales and revenues outlook is a little better than the headline numbers we'd indicate. We also raised our profit outlook this morning. We're expecting profit per share in the range of $3.15 to $3.85 with a midpoint of $3.50 a share. That's up from the previous outlook range, which was $2.50 to $3.25 a share with a $2.88 midpoint. Okay, that's the outlook. In summary, the second quarter reflected continuing improvement. Dealer sales to end users continue to strengthen. And thanks to our suppliers and a lot of hard work in our factories, we were able to raise production significantly in the second quarter and do it with reasonable efficiency. Sales and profit were up. We raised the outlook for the year. And with that, we're ready to take your questions.

[Operator Instructions] Our first question today is coming from Robert Wertheimer [Morgan Stanley]. Robert Wertheimer - Morgan Stanley: My question is on basically Lane Strategy progress in the dealer inventories. I mean, obviously, it's easy to read 10-year low dealer inventories as a positive for a future production, but there's also the offset where you're trying to work them lower. So I'm wondering if you can fill that out with some metrics on whether they are below your sort of new target with the Lane Strategy. Maybe if they're getting the order fill rates that they're looking for, and it's just that it's working or whether there's a surge coming.

Rob, this is Mike. I'll start that out and say, to some degree, it really depends. It's dealer by dealer. It's not the same story everywhere in the world. In some places, dealer inventory is actually probably a little too tight right now. I think in general, we're moving along pretty well with Lane Strategy. At the end of the quarter, we had about 25% coming out of Lane 1. I think it's probably fair to say that our fill rate out of Lane 1 is not where we would like it to be. It's a little bit below that, although we've been working on it pretty hard. Sales to end users, end-user demand has just continued to be good. And in some parts of the world, it's outpaced to what we thought, and it's made it a little tough to get the fill rates out of Lane 1, maybe as high as we would like. I think overall, dealer inventories, right now, they've come down a lot. They're below the historical averages, as you said. It's not in our plan to take them down from here, but on kind of the increases in volume that we've seen for this year, the plan is actually to hold them kind of steady where they are right now. Robert Wertheimer - Morgan Stanley: So in aggregate, I know it could pocketed at the right level. The follow-up, if I could, would be, are you production constrained at all, either in the quarter or on the outlook? I mean your profit outlook was very healthy so you'd assume you're not seeing any production problems, but you touched on this, Mike, in your comments. There is a currently affect. But nonetheless, the revenue increase wasn't all that huge, given low dealer inventories and sort of accelerating markets. The question is: Are you production constrained on the outlook?

Yes, again, it's not a one-size-all answer. If you were to look at excavators in China, we're capacity constrained there. The ramp-up in mining is about -- I wouldn't say it's capacity strained, it's more supply chain capability ramp-up constrained. So I think in some product areas and in some regions of the world, yes, it's capability constrained for the year. But in other areas, say small machines in the U.S., for example, we could do more. So it's a bit of a mixed answer.

Our next question today is coming from Meredith Taylor [Barclays Capital]. Meredith Taylor - Barclays Capital: I'm hoping you can talk a little bit more about some of the puts and takes in terms of the change in guidance. Mike, I know that you indicated that there is about an incremental $500 million of production that doesn't really show up in the increase to the midpoint of a revenue range. But clearly, it would seem that there are some other puts and takes there beyond just the increase in the revenue numbers. So can you talk about some of the other puts and takes there? Particularly, I'm interested in, has there been a change in point of view around how mix could impact the balance of the year, and then, in terms of changing point of view around some of the cost saving efforts, Lane Strategy, et cetera?

If you look at kind of the change in the forecast, the one thing, I think, that was probably pretty clear in the release was that the tax rate dropped from 30% to 29%, and we did have $60 million of discrete items in the quarter. So that helped a little bit. But most of the improvement was really three things with a partial offset. Sales volume was up, and again, the volume number is better than the outlook would appear because of the translation on the sales. So that was a positive. It might have been a subtlety in the language, but on price realization, we've moved the estimate from about 1% to above 1%. So price realization for the full year looks to be a little bit better than the prior forecast. And our manufacturing costs are better. We improved. Our efficiency levels look better, and we've reflected that in the forecast as well. The one thing that's an offset to all those improvements was incentive compensation. We increased the full year estimate from about $350 million to about $600 million, so that had a mitigating impact. Meredith Taylor - Barclays Capital: But no change in point of view around mix, for example, as you continue to see some of the larger-margin businesses like Mining strengthen?

Yes, I think when we look at mix, we're actually looking at it year-over-year. In reality, the mix in the current year is not all that bad. The issue was the mix last year was particularly rich. It was a higher percentage of service and aftermarket. The small equipment really dropped off because dealers were selling it out of inventory. I think relative to our forecast, I don't see a big shift in the mix between the two outlooks. But for the year, again, it's going to be pretty negative. And that really has more to do with last year being a particularly good mix rather than this year being a particularly bad mix. Meredith Taylor - Barclays Capital: And then just a bit of a follow-on to Rob's question, could you give us a little more detail on how lead times have trended over the course of the quarter? And maybe if you could parse Lane 1 versus the rest of the business?

Yes, I'll do that, and then we'll move on to another caller. But in general, it's again a little bit of a mixed bag. I think roughly 40% of our machine sales are coming out of -- or about 40% of it was coming out of Lane 1. Dealers or customers are getting in a few weeks. A good portion of that, they are getting within 10 days. So for a lot of our customers and dealers, particularly those who are able to utilize Lane 1, delivery times are actually very -- they're not where we'd like them to be, but compared to the past before the Lane Strategy, pretty good. Then, if you look at lead times for the rest of the product, I'd say in general, lead times, just a generalization, have moved out. But again it's a little bit of a mixed bag story. If you are a dealer, and the product that you order from us is for your inventory, lead times are going out further. If it's for our customer, it gives priority. So again, as a generalization, I would say, as a result of pretty strong demand, lead times are going out a bit. But in the scheme of things, particularly considering Lane 1, the average delivery time isn't too bad.

Our next question today is coming from Jerry Revich [Goldman Sachs]. Jerry Revich - Goldman Sachs Group Inc.: Mike, can you please give us an update on lead times in your Mining and Turbine business? How far out are you fully booked at this point? And what was your book to bill in the quarter for each business?

I don't know if I can be quite that specific for you, but I can tell you, the forecast for those two big product categories for the year has gone up. For Mining, they're pretty full for the year in terms of, say truck production, for example, and most of the orders that they're taking would be for delivery beyond this year. And in terms of specific sort of book-to-bill numbers for Mining and Solar, we don't disclose separately. But what I would tell you is this. The combined total company, Machinery and Engines order backlog has gone up substantially from year end. It was under $10 billion at year end. It went up to roughly $13 billion at the end of the first quarter, and it's gone up another $2 billion in the second quarter. But that's overall, that's not specific to Mining and Solar. Jerry Revich - Goldman Sachs Group Inc.: And Mike, can you comment on the lead time question for Solar, or no?

If I actually knew the answer, Jerry, I would. But I don't know. In general, Solar has fairly long lead times just as a normal premise. I mean in other words, if they're taking orders today for the most part, it's not for delivery this year. It would be delivery next year. And it would vary a lot based on kind of the size of the product and the project. So I don't really have any more color on that. Jerry Revich - Goldman Sachs Group Inc.: And Mike, of the $426 million in improved operating costs this quarter, can you help us with the rough size of the buckets you've identified, material cost versus warranty versus improved productivity on CPS? And also, what does your new guidance embed for material cost assumptions for the year now?

After this one, we'll move on to the next call, Jerry. But in general, if you look at the way that we write our release, when we list items, we intend to list them in order of importance. And so labor and overhead efficiency was number one, and so that would've been the most significant contributor to the $426 million. Warranty is second, lower warranty cost, and then material costs, third. I mean they weren't hugely disproportionate. In other words, material costs were still favorable in the quarter, I think, close to $100 million. I will say this. We still expect material costs for the full year to be positive. I think our estimate of that has actually declined a little bit since the last forecast, as the steel prices in the sort of first and early second quarter remained pretty high, although thankfully, they've moderated a bit.

Our next question today is coming from Alex Blanton [Ingalls & Snyder]. Alexander Blanton - Ingalls & Snyder: Mike, can you fill us in on what the dealer inventory changes are by region? You mentioned the company as a whole was up $1.2 billion last year and flat this year, but could you break that down by region?

Yes, I can a little bit. Let me give you the second quarter of the year ago. The impact: North America, about $300 million; EMEA, $400 million; Latin America, a couple of hundred; Asia, $300 million. So that's the $1.2 billion from last year. Now this year has been remarkably flat. And for the most part by region, in the second quarter of this year, North America was down still a little bit, probably order of magnitude, a hundred. Alexander Blanton - Ingalls & Snyder: Down a hundred?

Roughly, and Latin America was up a little bit. I mean if you look at the -- overall, we were about flat. We had a small change-down in North America and a changeup in Latin America. Now the good point about this is in Latin America, because the inventory levels are smaller, the increase in Latin America was a bigger portion of the sales increase quarter-to-quarter. That's one of the reasons why Latin America had that 100% increase in machine sales. Alexander Blanton - Ingalls & Snyder: So that's in Latin American. Asia were flat then?

Down, but just very, very slightly. Well less than $100 million. Alexander Blanton - Ingalls & Snyder: The Dealer Statistics are not up for June yet. When do you expect that?

We'll be putting those up here at the conclusion of this call, but what I can tell you is the numbers are favorable. They're up again. In fact, dealer sales in North America -- I've heard a lot of comments today about North America not helping at all. Sales to end users in North America were actually from machines. We're up 26% in the quarter. Now... Alexander Blanton - Ingalls & Snyder: For the quarter?

For the quarter. So that's a positive. Alexander Blanton - Ingalls & Snyder: That's for three months.

Yes, but since it's at the end of the quarter, the three-month trailing is the quarter. In the world, the total world is up 22%. So on a year-over-year increase basis, North America is doing okay. But I think you almost have to look at that though and realize just how depressed sales were a year ago. I mean they're up, but the dollar amount is actually relatively small. It was just so depressed, it's making the percentage look good. So I think the comment that I'd make on retail demand from machines is that it's up. That's good. It's up in every region, Asia Pacific, North America, Latin America, Europe, Africa, Middle East, and it's up for the world. But we're coming off a pretty low base. There's still a lot of room for improvement, particularly in the U.S., Europe and Japan. Alexander Blanton - Ingalls & Snyder: It looks like a hockey stick. Isn't it?

Well, I think it was a hockey stick down last year.

Our next question today is coming from Ann Duignan. [JPMorgan] Ann Duignan - JP Morgan Chase & Co: My first question, Mike, or whoever wants to take it, is around your incremental profits. By our calculation, incrementals were about 27% in Machinery. I'm just curious whether you were pleased with that kind of an incremental profit, given again how bad the trough has been. And then would you care to comment on how sustainable this incremental is, just given the increase in incentive comps, et cetera, et cetera.

I think that the numbers, I think the underlying numbers were actually pretty good. Remember, when you're looking at quarter-over-quarter, we had $110 million of LIFO decrement benefits a year ago, which, in the quarter, is kind of non-operational per se. And then with that incentive comp catch up, the increase of $120 million, effectively half of that is putting the first quarter on the same rate as the full year outlook. So you had $90 million in the first quarter, $210 million in the second quarter and then based on the outlook, it would be $150 million in each of the next two. So the second quarter got a little extra hit from incentive comp just above and beyond the impact of the outlook because we had to catch up to one and with LIFO decrement benefits from last year. And as I said earlier, sales mix was fairly negative. I mean, we had a very significant ramp up in small machines. So I think the underlying kind of rates is probably better than the headline number suggests. Manufacturing efficiency continued along at a very good pace. Price realization was decent, I think, considering the environment. And so yes, I think overall, we were pleased. I think the rest of the year, particularly when you look year-over-year, is going to be constrained a bit by incentive comp, and it's going to be constrained by the sales mix. I mean, last year, it was a really tough year. We set pretty tough targets. We didn't have any incentive comps last year, so everything this year is incremental. So I think between that and the sales mix, it'll keep the number probably lower than a lot of people would like. But I think the underlying performance on costs, sort of the blocking and tackling in the factories, is going pretty well.

Let me just chime in, Mike. Doug Oberhelman here. On this point, which is the centerpiece of I think of -- one of the centerpieces of us going forward in our new strategy, which we'll outline to you all next month, but we have a really tight focus on costs, both inside the plants and outside. But what we've seen so far this year as our facilities have brought people back, ramped up, worked with the supply chain, is a pull-through that we're pretty happy with. The question is, can we sustain that? And the answer to that is that is our goal. And if you'll look now at where Cat Production System is, it's really paying off. The facilities where that's implemented, institutionalized and working so well and really pushed by our leadership, the benefits are obvious. And virtually every month in 2010 as schedules have been more ordinary than they were in '09, which, as you know, were chaos, we've seen continued benefits. And we're, I would say, not where we want to be yet enterprise-wide on Cat Production System, but it's certainly coming along. And these operating profit, full rates, the absolute rates this year are evidence of that, and we have high expectations that this is what our team can do. Ann Duignan - JP Morgan Chase & Co: Then I guess that's our concern from an investor's standpoint is here we are sitting, kind of the first quarter were kind of normal pickup in volume and on the 27% incremental, coupled with what you guys said earlier in the call that your Lane 1 strategy is not -- you're not really where you want to be or need to be at this point. So I'm just wondering if we should be worrying about execution again already in the cycle?

Ann, again, this is Mike. Obviously, if all you take out is the LIFO decrement benefit from last quarter, the real underlying operational performance, even if you'll leave incentive comp in, is still better than 27%. Ann Duignan - JP Morgan Chase & Co: And we shouldn't be concerned that the Lane Strategy is not going...

Well, I'll talk about Lane Strategy and availability generally. I mean, we went from a full speed sprint at the end of '08 and end of '09 in a lot of facilities, certainly, the bigger plants to a dead stop in late '09. And then in early '10, we started to see demand pick up, albeit some inventory, absence of inventory build as Mike described earlier, and now coupled with some retail demand, we've seen some of our facilities go from zero to up 50%, 60%, 70% this year and a supply chain that had zero notice. So I think as we work that through the system here this year and if retail demand continues to grow relatively modestly as it has, our availability in Lane Strategy ought to work just perfectly. We're just in this kind of middle of the year where we've had to digest all of this as supply chain ramp up from, really, from a dead stop in the last part of '09. So individually at our facilities, we're pretty happy with it. Overall, we're not happy with our availability in Lane 1 performance. But given what we've been through historically here to now, we think it's done pretty well to get, as Mike said, about a quarter of our products through lane one. It's going to work. We just have to keep it coming here.

And, Ann, I'd add to this to Ed, if you think about it, one of the issues with the Lane unavailability is the fact that take rate from dealers has been higher than we anticipated. In other words, they like it. We got 14 of the five distribution centers up and running. We're going to continue to expand that. The other key thing is if you look at the first half of the year, we had no growth in dealer inventory, which means through Lane, we're actually able to feed product directly to end-user demand, whereas in the old days of a run up, you would have seen dealer inventory build, and we would have the wrong product in the wrong place. So we have a lot of work to do as Doug pointed out, but it is moving us in the right direction.

This is a glass half full at this point in time, and certainly, the ball is in our court, it's inside our four walls, and we're going to get it done. We're going to execute, but we're in far, far better shape than we have been in past recoveries at this point in the process.

Ann, this is Mike. I'll just make one more comment and then we're going to move on to another caller, and that comment is we said this in the release this morning, but I don't think it's probably gotten enough attention. It's right to the heart of execution. Going from the first to the second quarter of 2010 was the largest, most significant quarterly increase we've ever had. And again, we did that with pretty decent efficiency, and it was a very much sort of Cat Production System, supplier, factory coordinated effort to do that. That's total sales. And remember, the service revenues don't increase that dramatically. So if you just look at the increase in new machine production, new engine production, it was just up very significantly quarter-over-quarter, and it came off pretty well.

Our next question today is coming from David Raso. [ISI Group] David Raso - Citigroup: My question relates to mix and price for 2011. Given your backlog comments, Mike, it looks like, at least in my calculation, orders were up a little more than 100% year-over-year in the quarter, and your backlog is up around 75% year-over-year. Just thinking about the long lead times at Mining and Solar. The bulk of the order increased this quarter. Can you characterize it at all between how much is that, the big-margin Decaturs of the world and San Diego for Solar?

All I would have would be anecdotal. I've not really looked at it in that kind of detail. But I would say, just anecdotally, orders have continued to be pretty strong, pretty well across the board. Now realize though for products like Solar and like Mining, the kind of the normal thought process, the way we work with those customers, they just have embedded in them a much longer lead time. So those backlogs tend to go out further on purpose. For most other machines and engines, it's not our intent to have a big backlog. It's our intent that a dealer will order, and we'll satisfy the order in short order. So we're not actually trying to build inventory of the small stuff.

David, Doug here. I think it's fair to say that it's pretty much across the board. We had good backlogs at the end of the first quarter in Mining and Solar. They've continued, and everything else is kind of catching up. So it'd be hard to quantify too much, but we're really seeing it up to down. David Raso - Citigroup: In that same vein, again just trying to think about mix for '11, your customer advances bottomed a couple of quarters ago, so they are climbing sequentially. They're still well below that third quarter '08 peak. But we already speak of Solar kind of getting back to the peak levels pretty much this year already. And then obviously at Decatur, you're adding capacity. So just trying to calibrate customer advances. Doesn't seem to be as robust a number as what we're talking about in Mining and Solar versus prior peak. Can you just give me a little bit better understanding of why that customer advance number is so far below where we were?

I can't do that because I've not studied the customer advance number, so unfortunately, David, I don't know. Some of it might be timing, but I couldn't tell you. David Raso - Citigroup: Then the last question is price increase. If we can -- obviously, you're going to hold it closer to '11 above 175 horsepower emissions for U.S. and Europe. What percent of your sales are you, just roughing right now, you think will be impacted by that price increase? I mean, you can do it by, obviously, just a rough idea of the geographic mix and try to get a feel for whether you sell it above 175? I'm just kind of curious, what percent do you think will be impacted? And how should we be thinking about the price increases as a percentage basis year-over-year for '11 for those products?

This is probably going to be an unsatisfactory answer for you, but I think we'll divert 2011 questions for a little later in the year.

Our next question today is coming from Eli Lustgarten. [Longbow Securities] Eli Lustgarten - Longbow Research LLC: Can we talk a little bit about the Engine business first, which sales numbers are probably the strongest, I thought, and your guidance have been staying relatively flat for the year. Ordinarily, I should be able to suggest that the shipment level will stay pretty close to the second quarter. Now profitability stepped up in the first quarter, still well below last year. Give me some sense of what's going on there, whether profitability can sustain itself with the current second quarter levels because there's a figure between first and second quarter and a big difference between the quarterly year-over-year comparisons and what's going on there?

Now, Eli, are you talking about engine specifically? Eli Lustgarten - Longbow Research LLC: Engine specifically, correct.

I'll just start it off a little bit. If you look at quarter-over-quarter, the sales are actually fairly flat on engines, but the operating profit was down. Essentially, what happened there is we had continuing cost reduction, which was a positive. We had a little bit of price. That was essentially offset by incentive compensation. And so on balance, price and costs overall were fairly neutral. But sales mix was negative for engines quarter-over-quarter. What we had a year ago is sort of continuing strong sales of the big engines, out of the little bit longer of a backlog. They didn't really fall off significantly until the second half of the year. So what we have here now in the second quarter is some of those smaller engines have picked up faster. Those that got hurt earlier last year have picked up quicker like small industrial engines, for example. We have a lot of strength there. So product mix, I touched on product mix earlier, but I think that's the primary reason it's down sort of versus the second quarter a year ago. I think versus the first quarter of this year, operating margins for engines were up, and sequentially, we had a volume increase. And that was, I think, a principal driver of the improvement in both operating profit. And we had incremental margins on engines between the two quarters that were certainly higher than the operating profit level, so that's what helped. Volume, really first to second, was a positive, and that helped. Quarter-over-quarter, though, mix was negative. Eli Lustgarten - Longbow Research LLC: The question I was asking at whether the current profit level in the second quarter is sustainable for the rest of the year, given volumes were very similar? Or was there anything...

Yes, I mean, we don't parse our outlook between machines and engines. But I think it's safe to say that if you look at the midpoint of our outlook range, we have profitability for the second half of the year if you were to take out the favorable tax in the second quarter, roughly in line with what we delivered in the second quarter. So we have sales going up a little bit. I think we're going to have probably a bit more R&D expense in the second half of the year. But by and large, I would say the second half of the year, just looking at our outlook and subtracting the first half is relatively in line with the second quarter. Eli Lustgarten - Longbow Research LLC: And one question on North American machines were up 43%. Was the bulk of the shipments there, there's a little bit of inventory difference, but the bulk of those machines that were slated for export, I mean, I guess you've been quoted...

Well, no, no. If it's export, that's not U.S. It's not based on production, it's based on where it's sold. So when we show North America, that's where we sold it, not where we produced it. Eli Lustgarten - Longbow Research LLC: And most of that was not inventory, it was mostly...

No, it was a split. Machine sales to users in the quarter, I think and again, we'll post this up here in a few minutes. I think we're up 26%, so it was partly a result of dealer inventory, absence of reductions or less reductions than last year. But demand is up as well.

Eli, I just want to chime in a little bit about the operating profit performance in both machines and engines, if I could. I am just really happy with both at this stage. The turnaround we're starting to see in the machine operating profit and engine operating profit, particularly if you adjust for the incentive pay and the items Mike talked about redundancy and so on, at this stage are gratifying. We did not see, as you well know, that the big tail off in engines, it's come back nicely as we just showed you and that is with a really weak Marine segment. I just returned from Europe last night and visited with a lot of the dealers and customers across the board, including the engine people, and the Marine business in Europe, which is a big piece of it, of course, is really weak. It's vastly overbuilt the last few years in terms of new ships, almost across the board in both segments anyway. And we're going to be seeing that for a while I think. But if you look at the smaller engines, our Smaller Machine businesses and look at those operating profit at this point in time, I'm pretty happy with that. But you have to adjust outlook beyond, as Mike has talked about, where we were. And I think we're coming along, and I really feel good about that. And it's kind of I think a reaffirmation of how well Cat Production System can serve us.

Our next question today is coming from Henry Kirn. [UBS Investment Bank] Henry Kirn - UBS Investment Bank: Can you talk a little bit about where the dealers are with the rental fleets? How much of a replenishment opportunity do you see?

Yes, Henry, this is Ed. On the rental fleets, what I'd say is dealers haven't got into the mode of what I would call replenishment. We have seen some signs of improvements relative to utilization. But with the increase in end-user demand that we've seen for the most part, the availability has been going to feed that end-user demand. So I'd say moving forward, it is one of the -- an addition to what we talked about on dealer inventory not increasing and rental fleets not increasing. It is something out there in the future that offers some upside opportunity. Henry Kirn - UBS Investment Bank: And what was the impact of the Australian resource tax on Mining orders as you went through the quarter?

I don't know how to parse that either, but I think Mining orders have been very strong. Australia has continued to be pretty good. I think it would probably be too strong to say it was a non-event, but I think it'd be hard to measure.

Our next question today is coming from Stephen Volkmann. [Jefferies & Company] Stephen Volkmann - Jefferies & Company, Inc.: Can I just go back to the incremental margin question for a quick second. It just sounds to me like in the second half, that incremental compensation expense will be a little lower than it was in the second quarter since you had to catch up. And then you'll have the tougher comp with the LIFO gain, so we should expect this incremental to actually get better in the second half. Is there anything wrong with that logic?

I'd say there's nothing wrong with that logic. Although the second half of last year, we still had LIFO benefits last year that did help the numbers, but probably not as much as in the second quarter. And you're right on the incentive comp, unless, of course, the outlook changes again, which we certainly don't know at this juncture. With the outlook where we have it at the midpoint, that would reflect about $150 million a quarter for Qs three and four versus $210 in Q2. So in general, your logic makes sense, although remember, we still did book some LIFO in the second half last year. Stephen Volkmann - Jefferies & Company, Inc.: And then maybe just a quick follow-up for Doug, I guess. You guys have been fairly active in sort of redeploying cash here with the EMD [Electro-Motive Diesel] agreement and the new Mining programs and so forth. And I'm just wondering how you feel about where the balance sheet is right now in terms of the capital structure? And then should we be looking for more acquisition activity or new product development going forward or sort of maybe rank the uses of cash?

A couple of things. The priorities for the use of our cash have not changed and won't change. First and foremost, it is growth of the company where we can find those growth pieces that add to our business. And certainly, Electro-Motive Diesel was a good one. I'm very happy about that. That's going to put us in a big way in the rail market that we're already in around the world, and I'm thrilled to be able to do that. We talked about Mining shovels. You know we were interested and have been interested in Mining shovels off and on over the years. We've decided that given the industry aspects over the last six months, it's time to go again. We announced that along with a fairly sizable Mining truck increase in both India and the U.S. That should help us well as that market continues to grow. We've quadrupled our excavator production in China and made that announcement in the last few weeks. And I think that really with the state of the industry, as well positioned as we are around the world today, it's time to be looking at growth in a different way because valuations are different than they've ever been in a long time. There are aspects of geographies that are growing like they never have. And as we talked about in our strategy announcement, we'll talk in great detail with all of you next month, we intend to be a leader in every way everywhere in the world. And that means China and India and elsewhere and a leader in a very profitable way as we also have talked about. So I would say that the use of cash priority number one being the growth of business has not changed, and we may have more opportunities based on one, just the playing field that's out there today; and two, some valuations. So we're looking in every corner and all of our businesses are concentrated on that today where we can do that. Secondly, your pension plans. Thirdly, our capital. And then finally, dividends and share buybacks, which has been our priority for a longtime. Strength of the balance sheet is improving. Mike talked about the debt-to-capital ratio. We have a hard and fast, I'm going to say, rule, certainly, it's a goal, but it's going to be a rule to maintain that mid-A credit rating with the agencies. We think we're pretty close to that today. I don't know. I don't have any intention of changing it that much, but we certainly intend to stay mid-A for as long as we can, and even in the downturn last year, we did pretty well with that. And as cash generation comes back, we'd intend to stay in that range. I think I got all your questions, Steve.

Our next question today is coming from Mark Koznarek. [Cleveland Research] Mark Koznarek - Cleveland Research: Question on the Parts business and wondering if you can quantify a bit more of the extent of increase that you're experiencing in Parts, given that it gives us some visibility into activity of the current machine base and might provide some help into what retail sales activity might be as we go through the remainder of the year?

Yes, this is Mike. Just a couple of comments. Obviously, we don't disclose that separately, so I'm not going to give you a number. But what I will try and do is add a little color. Parts activity has been very good this year. It's actually improved in every single region. Of course, as you might expect, the developing world regions have outpaced the U.S. and Europe. This has been very good. If we look at the outlook-to-outlook change, the last outlook to this outlook, the Parts number went up again. But so did machines, so did engines. It was fairly across the board. I will say that the Parts increase has been, I'd say has been very good. But then again, we were coming out of a pretty deep hole last year.

Let me pile on a little bit, Mike, and I'm going to whet, I hope, your appetite for our meeting next month again here. We set up the Parts business, as you know, in our organization structure strategy as a very big growth opportunity for this company. We'll talk about it in detail. But what we see down the road is a real positive, both sales and profit opportunity over the next five years. We've concentrated our resources. We've put it in one business. We're going to monitor it around the world, work with our dealers and customers to get Parts and aftermarket product support like we haven't in a long time. It's a key piece for us. Again, operating off the field population we have out there, which is more than double everybody else. So great opportunity coming and I hope when you leave or beginning next month, you'll see where we are with that, and I think you'll really like it. Mark Koznarek - Cleveland Research: Then just one follow-up on the new outlook. Is there any expectation of a pre-buy based on the Tier 4 price increase built into the outlook?

Mark, this is Ed. I'd say that in our outlook, we've had very limited pre-buy in there for Tier 4. And I think there's a couple of factors related to that. One is back just on the issues we've talk to you earlier in terms of availability and where we're at today. And I think the second one is that's primarily going into the developed parts of the world where the outlook is more uncertain from a customer perspective and the amount of work they're going to have in 2011. So I'd say the outlook has a very limited amount of pre-buy in it.

Our next question today is coming from Andrew Obin. [Bank of America Merrill Lynch] Andrew Obin - BofA Merrill Lynch: Question on pricing and I apologize if I missed your answer, but the guidance for the year seems to state that the pricing was going to be over 1%. If I look at where we are for the first half of the year, it implies that pricing will deteriorate quite meaningfully into the second half of the year. Are we simply being conservative or is there something going on?

Well, Andrew, this is Mike. A couple of things. One, the price plans for the full year was not aggressive. I mean, when we came into the year, we were expecting overall something less than 1%. We've known all year long that when you look year-over-year, it was going to look weaker in the second half because we did selectively do some mid-year increases last year, particularly on big engines. So I think if you look year-over-year, it will probably look a little bit weaker, whereas it probably won't be quite as weak if you look at it sequentially. That said, we're out there actively seeking volume. We want to be the leader everywhere we do business. We had a modest price plan this year. And I think if you look at the year-over-year change, our expectation in the outlook is that the second half will be less than the first half. So, yes. Andrew Obin - BofA Merrill Lynch: And just the comment you made about being more aggressive or being aggressive on growing market share. Has there been a shift in focus where the company is more focused on '10 versus the previous cycle? Or is it just where we are on -- or how should I be thinking about pricing in this cycle versus the previous cycle and Cat's willingness to take the lead on price increases?

I'll just start out on this, and I think if you look at, I'm going to be go back to 2009 for a minute. The industry had came into 2009 on the back of high material costs, prices went up the beginning of '09 and for the most part, the industry had pretty good pricing discipline. There was not much business to be had. I mean, volumes were down a lot. And frankly, there wasn't a lot of business to go after, if you will. Now I think our philosophy for 2010 has been there's going to be more business out there. Volume is going up. End-user demand is better, and we want as much of that as we can get. So to some degree, I think yes, we're taking a pretty active and as aggressive as we can be approach to getting more volume. Whether or not there's a giant philosophical change between now and five or eight years ago, I'll let that one go.

I will too, but I will say that as we were capacity constrained the last five years, we couldn't do all the things we wanted to do. Today, we've got capacity. We're going after market share. We're going to continue to do that and juggle all the priorities as we go forward. But remember, market share drives than aftermarket and that aftermarket drives many good things around here. So we get that balance right, we all win, and that's what we're after.

Yes, Andrew. It's Ed. You also got to think through the other levers coming out of the downturn that we have to pull. I mean, dealer strength is a key one. And if you think about the tough times that kind of machinery-only dealers had throughout '09 versus the more diverse product portfolio and services that a Cat dealer has, I think in a relative position, we come out of '09 into '10 from a dealer perspective very strong. In addition to that, if you look at financing, capital markets and in some cases for our customers continue to be a bit difficult and the strength and positioning of Cat finances and other lever we have to pull that we think are going to assist in terms of our desire to grow the market.

We are at the end of our time and need to wrap up the call. I just want to say thank you very much to everybody for joining us today.

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.