Doug Oberhelman - Chairman & CEO Edward Rapp - Group President & CFO Mike DeWalt - Director of IR

Andrew Obin - BofA Merrill Lynch Jamie Cook - Credit Suisse Andrew Kaplowitz - Barclays Robert McCarthy - Robert W. Baird Ted Grace - Susquehanna Financial Group Vance Edelson - Morgan Stanley David Raso - ISI Anne Diamond - JP Morgan

Good morning, ladies and gentlemen, and welcome to the Caterpillar First Quarter 2012 Earnings Results Conference Call. (Operator instructions.) It is now my pleasure to turn the floor over to you host, Mr. Mike DeWalt. Sir, the floor is yours.

Thank you very much, and good morning, everyone. Welcome to our First Quarter 2012 Earnings Call. I'm Mike DeWalt, the Director of Investor Relations and I'm very pleased to have our Chairman and CEO, Doug Oberhelman, and group president and CFO Ed Rapp with me on the call today. Today's call is copyrighted by Caterpillar Inc., and any use, recording, or transmission of any portion of the call without our express written consent is strictly prohibited. If you would like a copy of today's call transcript, we'll be posting it in the Investor section of our Caterpillar.com website. It'll be in the section labeled 'Results Webcast.' This morning, we'll be discussing forward-looking information that involves risks, uncertainties and assumptions that could cause our actual results to differ materially from the forward-looking information. The discussion of some of those factors that, either individually or in the aggregate, we believe could make actual results differ materially from our projections, that can be found in our cautionary statements under Item 1-A, Risk Factors, of our form 10-K filed with the SEC on February 21st of 2012 and in our forward-looking statements contained in today's release. In addition, a reconciliation of non-GAAP measures can be found in our financial release, and that will be posted on our website at Caterpillar.com as well. Okay. This morning we were pleased to report our first quarter 2012 financial results, kicking off the year with the highest profit of any quarter in history. Sales and revenues were $16 billion, an increase of 23% from the first quarter of 2011, and excluding acquisitions of Bucyrus and MWM, which we didn't own a year ago in the first quarter, excluding them, sales and revenues were up about 15%. Again, profit in the quarter was $2.37, the highest in history, and up 29% from the first quarter a year ago. In addition to the record-breaking profit, this morning we announced an increase to our 2012 profit outlook. This morning I'll start with a quick review of sales in our three large segments; Construction industries, Resource industries and Power Systems. I'll start with Construction. That was up 13% compared with the first quarter of last year. The increase was organic. Construction Industries did not have acquisitions that impacted the quarter. While total Construction sales were up 13%, the picture was mixed geographically. We had good growth in North America at 36%. The Europe, Africa, Middle East region was up 11%, and that is despite Europe's economic troubles. Asia-Pacific was about flat and Latin America was down 2%. I think you can sum up Construction Industries in just a few bullets. First, the North American increase is primarily being driven by strong replacement buying after several years of weak sales. Europe is holding up with customer replacement being a factor, like in North America. And business was stronger in Africa, the Middle East, and the CIS. Sales in the Asia-Pacific region were about flat for Construction Industries. China was down significantly, but the decline was offset by increases in the other countries in the region. China has been a highly topical subject over the past few months and in a few minutes, that is before we start the Q&A, I'll summarize more about what's happening to Caterpillar in China. Now moving on to Construction Industries in Latin America, the 2% decline was more than all in Brazil. That decline in Brazil was almost offset by gains in the other countries in Latin America. While Brazil has weakened over the past six months or so, we have started to see the beginning of improvement there. Okay, that's Construction Industries. Let's move onto Resource Industries, which is largely mining. And mining has been a great business. Resource Industries sales were up 73% in the quarter. The increase was evenly split between the acquisition of Bucyrus and organic growth. The addition of Bucyrus added a little more than 36% to Resource Industries, and organic growth in the rest of the business also added a little over 36%. In short, sales were up substantially in the quarter. Orders were up and lead times for large mining trucks remained extended, with most models being quoted into 2014. In addition, our Resource Industries order backlog increased during the quarter for both Legacy Cat products and new Bucyrus machines. While mining remains robust overall, US coal production is an area that has recently weakened. And over the past few months we've also been asked about the impact of US coal on our business. The answer is, it has had some impact, but not much overall. To put it in perspective in terms of size, for dealer sales of our non-Bucyrus mining products, US coal represents less than 10% of total mining in 2011. In terms of Cat machines overall, this is our total machines including construction, it was about 2% of the total. And as a percent of our total business, it was less than that. Our Bucyrus product, the US coal impact we're seeing is largely related to a portion of the underground business. That said, the overall impact on Bucyrus sales isn't expected to be very significant, and we have not changed our 2012 outlook for sales and revenues for the two acquisitions of Bucyrus and MWM. So for US coal, we have seen some weakening, but in the context of worldwide mining it's not much. In summary, global mining demand remains robust, and indications from our customers tell us that strong demand will continue. And again, our Resource Industries backlog continued to grow. Okay. Now onto Power Systems, and that's engines, turbines, and rail. Sales were up 12% in the quarter from a year ago. About 9% of that was organic growth, and about 3% was from the acquisition of MWM. Growth was primarily in two areas: our rail business and engines for petroleum applications. Rail is doing very well. We have a growing order backlog, and our rail group has done a great job of ramping up locomotive production. Power System sales for petroleum applications continue to increase. Although there's been some shift from dry gas to oil and wet gas, overall activity in our order book looks strong. Sales of industrial and machine engines were about flat with the first quarter of last year, but electric power is a little bit of a different story. While we don't expect much growth for the full year, we do not expect it to be negative. The first quarter, however, was, and that's mostly because we had a very tough comparable quarter with 2011's first quarter, particularly in North America, where sales more than doubled last year. Sales were up so much last year, and that was mostly higher horse-powered products ahead of the introduction to meet Tier 4 emissions requirements in the US Recently, engine orders for electric power have been improving, and we do expect the full year to be up slightly from 2011. Okay. That was sales and revenues, again up 23% from the first quarter a year ago. In terms of profit it was also a great quarter; again $2.37 was our best quarter ever. Operating margin in the quarter was also good at 14.5%, one of the best quarters we've ever had, and it would've been over 15% excluding the impact of our Bucyrus and MWM acquisitions. Our incremental operating profit was 23% of incremental sales excluding acquisitions, very good results coming off a tough comparison with the first quarter of last year. That said, we did have $38 million of expense in the quarter related to the closing of our London, Ontario locomotive assembly facility and $31 million of expense related to the sale of Bucyrus distribution businesses to Cat dealers. Now, before covering the 2012 outlook, I think now is a good time to talk a little more about China. Both the economy and the machine industry in China have been common themes over the past quarter, so I'll take a minute and run through what are likely your concerns. First, how is the decline in China's construction equipment industry impacting our sales? And the answer is, China's sales were down between the $250 million and $300 million in the first quarter compared with the first quarter of 2011, mostly related to excavators. To put that in perspective, China's sales were down--to put China's size in perspective, sales are a little over 10% of our total Asia-Pacific region, and around 3% of total Cat. Second question is, 'How has machine pricing held up?', and the answer is, it's been relatively flat. Not much change versus a year ago. That said, there is too much finished goods inventory in China on the ground today, both ours and our competitors’. Pricing in China has been largely rational, and we haven't changed our total company 2012 price realization outlook. Now, speaking of too much inventory on the ground in China, that's why this year we're going to divert some of the excavators that we make in China to other regions of the world where we're very tight on supply. We'll export probably around 20% of China's 2012 midsize excavator production this year. So, the third question, 'What are our expectations for sales in China for the full year of 2012?' And the answer is, we have taken our forecast down, and we expect the full year will be modestly negative versus 2011, with the decline coming mostly in the first half of the year. Now, that doesn't mean that we're banking on a major increase in the second half. It's mostly because excavator sales were already declining in the second half of 2011. While we do expect the construction industry to improve moving forward, there's too much inventory in the channel and it does need to be sold down in 2012. Fourth question, 'How has China's slowdown in overall economic activity impacted our global mining business?' And the answer is, global mining has remained very strong. Our worldwide order backlog for mining continued to increase in the first quarter. Remember, slower growth in China does not mean their economy is shrinking. In fact, it's growing faster than most of the world. Our forecast is for economic growth in China this year of over 8%, and that's driving continued growth and energy needs and consumption of most commodities. As a result, most commodity prices remain high by historic standards, and mining companies are in generally good shape and continuing to invest. Question five, 'Has the recent weakness in China construction equipment changed your capacity expansion plans?' The answer is no, but with a caveat. We continue to be a strong believer that China is a major, long-term growth opportunity. It's a very large economy with significant development and growth still ahead. It's the world's largest market for construction equipment, and we intend to be the leader. So, in that context, no. Our build out in China is continuing. The caveat is that our excavator expansion is staged, and we can adjust the timing of capacity additions if we need to. So in summary, is China down in 2012? Yes. Will it recover? In our opinion, absolutely. The long-term future for China looks very good. Do we need to be prepared for the next round of growth? You bet we do. Okay, that's enough about China. A word on the full year outlook for 2012, and then we'll move on to the Q&A. This morning we held our sales outlook in a range of $68 billion to $72 billion for 2012 sales and revenues. While the headline numbers for sales and revenues were unchanged, below that top level there had been a few changes. We lowered our full year estimate for China and Brazil as we previously discussed, and while we do expect some improvement later in the year, the full year for both countries will likely be lower than we previously expected. Now, we are encouraged by actions that both governments have already taken. So far China has made two cuts in bank reserve requirements, 50 basis points in December and another 50 in February. We've also seen articles in the Chinese press that expect the government to begin increasing spending on infrastructure, and based on the long-term needs there, that makes good sense. In Brazil, the government has been more aggressive. After tightening from mid 2010 through August of 2011, the government has been easing since September. Since then, they've lowered interest rates by 350 basis points, eased lending restrictions, worked to recapitalize state-owned banks, and implemented tax incentives to spur growth. We have already begun to see the improvements in our business in Brazil. Now, while we've lowered 2012 expectations for China and Brazil, we've raised our forecast for sales in North America. Demand in the first quarter was higher than expected. Dealer rental fleet size is still well below the prior peak. Fleets are still much older than historic averages, and rental utilization rates have risen to about where they were at the peak of the last cycle. In short, dealers will likely continue to refresh fleets and increase fleet sizes. The same thing is likely happening with end customers. We believe that much of the strength we're seeing in 2012 in North America is a result of customer replacement buying after several years of weak machine sales. So in summary, lower sales than previously expected in China and Brazil, about offset by higher sales in North America. Outside of that, we haven't seen much change in the sales outlook. In terms of profit, we raised the outlook at the middle of the sales raise to $9.50 a share and that's up from our previous outlook of $9.25. One last point before we move to the Q&A, and I think the point is an important one, and that's putting 2012 into prospective relative to the future. So here we are in 2012, with an outlook for sales and revenues of $68 billion to $72 billion and a profit outlook of $9.50 a share at the middle of that sales range. It's a year where the US economy is growing slowly. US construction spending remains depressed. Europe is in or near recession, and China and Brazil have weakened. Look beyond 2012, we continue to expect economic growth in the US and improvement in construction fundamentals. At some point, real residential and commercial construction activity will need to improve from today's depressed levels. And some day, probably after the upcoming elections, we'll get a longer term highway infrastructure bill passed. In short, we're doing pretty well in the US now, and with better construction fundamentals ahead, we expect to do better. We don't think that Europe will be this depressed forever. While they certainly need to make structural reform, they can't cut their way out of the trouble that they're in; they have to grow. When that happens it should be good for us. Brazil has already begun to ease, to drive growth. They have major infrastructure development ahead of them. Looking forward, that will be good for our business. In China, have they had slower growth over the past few quarters? Yes, they have. Will they see solid growth going forward? We think so. We believe in the long-term growth prospects there. Do they have infrastructures needs? You bet they do. Will we be coming off of a relatively low base for sales in 2012 in our industry in China? Yes, we will. Will continued growth in the world economies support an increasing need for coal, oil, gas, metals and minerals? We think so. In short, we are expecting a record-breaking year in 2012 at a time when it looks to us like the world is setting up for further growth in the industries that are important to CAT. That is why we are so focused on improving efficiency and increasing capacity throughout much of the world. With that, we are done and ready to take your questions.

Thank you. Ladies and gentlemen, the floor is now open for questions. (Operator instructions) Our first question today is coming from Andrew Obin. Your line is live. Andrew Obin - BofA Merrill Lynch: Hi, good morning guys.

Hey, Andrew. Andrew Obin - BofA Merrill Lynch: Hi. Just a question on your guidance. As we look at core operating leverage, and what I mean by core operating leverage is incremental margin on volume alone, it has been well over 30% since 1Q '11. If I look at your guidance for the remainder of the year, it implies that this core operating leverage will deteriorate into the second half of the year. Plus, if I look at your pricing guidance, first quarter obviously was also very nice, ahead of expectations. Pricing should turn pretty neutral by the end of the fourth quarter. Is that an explicit expectation about something taking place inside Caterpillar in the second half of the year, or is it just conservatism?

Your definition of core operating leverage, that's a new metric to me. What we've been tracking, and what we've been reporting on is incremental operating margins. That was 23% in the quarter, again excluding the acquisitions, which is the way we've laid it out. And that's consistent with what we expect for the rest of the year. Our full year is somewhere around 25%, so I don't think there's anything significantly different between the first and the second quarters in that regard. What I would say though, is if you look at the first quarter, we saw this a year ago as well. We do have some seasonality in our cost, and first quarter discretionary costs are usually a bit on the light side. We saw margins in the first quarter of last year that were higher than the rest of the year, and that will likely be the case this year as well. But no, there was, I would say, no deterioration in operating performance. We had 23% incrementals in the first quarter, and that's in the ballpark of what we expect for the rest of the year. Andrew Obin - BofA Merrill Lynch: And on pricing, pricing being stronger in Q1?

Yes. We had that phenomenon last year as well. We expected a little more than 1% for the year. That's where we ended up. The first quarter was a little stronger than that. We're looking for 1% to 1.5% this year. There's always impacts of geographic mix and product mix and which customers took what product that can bounce any quarter around a little bit, but fundamentally, the plan that we had for the year that said 1% to 1.5% is still where we're at. Andrew Obin - BofA Merrill Lynch: Can I have a follow-up question?

Sure. Andrew Obin - BofA Merrill Lynch: On China, you commented that you expect China to be relatively weak in the first half and improve in the second half, I guess sequentially. That's how I read it. Could you comment on what you are seeing in China in April, and I apologize for getting so granular, but obviously March is a huge seasonal month, and what are you seeing in a sequential basis. Are you seeing any improvement in the second quarter? Thank you.

A couple of things. One, the comments were really directed year-over-year, and you're right, probably February through May are usually the big months in China. So the point we were trying to make is, whatever the impact year-over-year is going to be this year, most of it's probably going to be in the first half. The selling season last year was just huge in China. It was up very significantly from the prior years, so a pretty tough comp. Actually, March of this year, I think, was our fourth highest excavator month on record in China. It was the highest month since April of last year. So, year-over-year it's down, partly because last year was such a good year and a really tough comparable. The market there started to decline in the second half of last year. By the time we get to the second half year-over-year comparables, it almost can't be as significant as it was in the first quarter. Even with that, I don't want to over-blow that. I made a point in the preamble to the Q&A here, to kind of quantify the impact. You know China is not a huge part of business. Sometimes people think that it's significance to our machine sales in construction is a lot higher than it is. It was just a bit over 10% of our Asia-Pacific region in the first quarter. It's a few percent of our sales overall. It's an important market, particularly for the future. We have a lot of growth opportunity focused there over the next five years. But in the context of total Cat machine sales in the short term, it's not as significant as I think many people believe. Andrew Obin - BofA Merrill Lynch: Thank you very much.

Mike, I want to add a few comments on China. Having just returned from there a couple of weeks ago, I spent quite a bit of time in our factories with a lot of government officials and with many customers. Several things are going on. This was, let's call it mid-April, when I was there. Number one, the government last year did all they could to slow down inflation, and they really achieved that. That led to the second half slowdown that we're talking about here that we have all seen. The five-year-plan revised growth down, as we have all seen as well, by arguably half-a-point to a point. Those two goals, actions and goals in my mind are extremely healthy. We were seeing a market that was too hot, boiling, in our industry and many others--real estate, housing prices and all the other things. China acted to curtail that and they did. I think they did a very good job in getting that done and then resetting five-year goals for GDP growth. What we are seeing now and in talking to customers is kind of the blowback of that, which is higher inventory for all of us in our industry, but everyone I talked to, officials, to customers, to our plant people, everybody feel the mid-to-long-term forecast has not changed. They are expecting this to recover fairly quickly. Nobody knows when it will be. Mike commented about our second half comps which I agree with. But we'll see an economy growing over there probably 7% to 10% in the next few years versus what we had been seeing of 8% to 15% over the last few years. I like those numbers. We're positioned for leadership there. That's what we've been trying to do and that's where our capacity is taking us. Finally, a lot of discussion there, while I was there, on a regime transition. Not unlike here in this country. And that, believe it or not, in China, brings some uncertainty and certainly not instability, but somewhat. And that has, I think, influenced the overall market as well in a number of ways. And so as that sorts out the rest of the year--even though they know who the new regime will be, they're not in place, they won't be in place until later in the year-- that cloud is out there. So several things conspire to make 2012 the year we're seeing. And I've said this before, you've all heard me, we were destined for a really bad ending a year ago. They've slowed the economy down, they've braked inflation, and I think we have a much more sustainable path well into the future. However, in the meantime, that means a transition in our business, the way we look at the industry as well, and that's what we're working through right now. You saw some of those inventory levels that are a big result of that of our product in China. We've had complaints in China from our customers and our dealers for years that we did not have adequate availability and capacity. We have leadership goals there in market share. We now have capacity [and] availability, and that's what we're going to be about and get after. So that part's good news. And again, I'm looking at China, not quarter-to-quarter, year-to-year, but as a market that in, call it 5 to 15 years from now, which is supremely underserved right now for infrastructure supply, will serve us very nicely. And that's why we're continuing to invest and you've seen some announcements along that way. So that's a little bit more color and insight as to what I saw there, just in the last couple of weeks.

Okay. Next question?

Thank you. Our next question today is coming from Jamie Cook. Please announce your affiliation then pose your question. Jamie Cook - Credit Suisse: Hi. Good Morning. Credit Suisse. Two questions. One, and sorry to harp on China again, but you talked about inventory levels being high. Can you talk about what your plans are to reduce inventory on a cap basis, and also at the dealership inventory level? And then, also, Mike or Doug, what you would need to see to take more drastic actions in terms of halting some of the capacity additions that you had spoken about. Then, more broadly, Mike, if we just look at the inventory levels at Cat, the inventory levels in the quarter again were a little higher, for Cat specifically, than I would have anticipated. Can you just talk about where they trended, relative to your expectations, and how we should think about that throughout 2012?

Yes, I will. And this is a slight editorialization here. China's a very important market. But, again, it was around 3% of our sales in the quarter. So we have a lot of discussion around a chunk of the company that is important, but not huge. Jamie Cook - Credit Suisse: And, Mike, you're saying 3% of total sales, not machinery sales, right?

Yes. Total sales. So we do have too much inventory in China, and that actually was, if you look at Cat inventory overall for the quarter, it was up. Part of it was China, where we have too much, and it's going to take probably the rest of the year to work it down. One of the actions that we're taking is to export machines from China to other developing world countries that are actually in quite tight supply, where we've essentially had dealers on allocation. That's one of the things that we'll do, and I think it's probably a safe assumption that we're not going to be taking production up in China on excavators, for the second half of the year. For what it's worth, we did actually reduce dealer inventory in the first quarter in China. Between year end and the end of the first quarter, we did work down some of the dealer inventory. I think that if you look at the rest of the Cat inventory increase in the quarter, the vast majority of it was finished goods, and both we and the dealers are kind of setting up for the summer selling season, so I think most of that had to do with orders that are on the books for delivery in probably the second and third quarter.

I'll address the capacity expansion question. And again, I take the long view on that. Having said that, we are introducing programs inside China, too, to work with dealers to get some of that inventory in the hands of customers and get our market share up. We are in a pretty good position and able to kind of scale and scope our capacity expansion. The announcement we put out a couple of weeks ago about expansion over there really is out into 2014, 2015. If the market doesn't come back by then, we just won't do it. I am not going to be in a position in China of catching up on supply and capacity and availability like we've been the last ten years. We can't afford that for the long term. So we'll balance that today with, we've got some projects we have to finish because if they're for efficiency and cost reduction, we're going to do it. And we're going to keep taking a look at that market every month. Jamie Cook - Credit Suisse: But I guess, Doug, it's still sort of unclear what you need to see to take more drastic action. Is it if the second half recovery doesn't improve? At what point does Doug get worried?

Well, I'd say yes. If the second half recovery doesn't happen, if the industry continues to shrink, if we don't see Chinese actions to spur the economy, in terms of some kind of central bank activity, those kinds of things that we're watching. And it's underway. Mike mentioned the two stimulations the central bank did in China. I met with the head of the central bank when I was in China, and he gave a very central bank non-answer to this question about where the economy is going. But he gave a very good answer about where they want to go long term and where they will be with their five year targets, which gave all of us a little bit of confidence that they've got a handle on that, and they have a pretty good track record of managing that economy so far. Jamie Cook - Credit Suisse: Okay. Thank you very much. I'll get back in queue.

Thank you. Our next question today is coming from Andrew Kaplowitz. Please announce your affiliation, then pose your question. Andrew Kaplowitz - Barclays: Good morning. Barclays.

Hey, Andy. Andrew Kaplowitz - Barclays: So Mike, maybe just following up on incremental margins in the quarter for a second. You, on the last call, had talked about difficult comparisons with 1Q and you still put up very solid numbers, 23% versus last year. And a lot of questions we get are around how much weather played a role versus productivity versus currency impact versus price cost. Maybe if you could flush out a little bit, and was the first quarter better than your expectations overall in that regard?

Yes. First I'll do the easy one, weather. Our sales, our production levels, and our shipments, which turn out to be our sales, that's usually pretty well within reason. What's in the order book is what we're going to produce and ship, so I don't think there was any real impact from weather on us in the first quarter. It might've had some impact on what some dealers are selling in some territories, but again we're global. Sometimes we talk about weather. I think sometimes we believe the only place that business is done is in the US. So I don't think that was a big deal. Currency was very neutral to the quarter. The impact on sales and profit was probably the smallest that I've seen in ages. I mean, it was negligible, so that was not an impact. I think it was appropriate to be a little bit cautionary going into the first quarter on margins. We had a great quarter in the first quarter a year ago. When we put our plans together here, particularly for spending programs, it's around a year plan, and there's always some differences in terms of how costs actually come in quarter by quarter. And considering the first quarter of last year was so good, I think a little caution was warranted. The fact of the matter is, we executed very well. We kept a very good lid on costs and performed very well in the first quarter. But again there are always shifts that you can have quarter to quarter in margins, and we're really focused on the year. Andrew Kaplowitz - Barclays: Okay. Thanks. That's helpful. Maybe if I could step back and ask a bigger picture question. One of the questions we get most often on Cat is around mining CapEx going forward. And I know you mentioned very strong markets, and maybe this dovetails with China a little bit, but investors are worried that you have a decent year in mining CapEx this year and then it kind of falls off over the next couple years as your customers get pressured to lower CapEx. What are your customers telling you? How confident are you that mining CapEx won't fall off over the next couple years?

Hey, Andy, this is Ed. Through our alliance [stream] it's very tight connections with the major mining companies around the world, and the indications are right now that they are going to continue with their investment programs. I was in Brazil and Chile over the last 30 days, talking not only with the large mining customers, but the subcontractors that support them and that was one of the questions that I asked. Are you seeing any signs of back-off in terms of some of the projects that were in play? And the answer was no. I mean, we think that they are going to continue to invest based on the long-term fundamentals. The 7 billion people in the world. The urbanization that's happening. The under-investment that occurred in mining over an extended period of time. We think this thing has got a lot of legs. Andrew Kaplowitz - Barclays: Okay, that's helpful. Thank you, guys.

Thank you. Our next question today is coming from Robert McCarthy. Please announce your affiliation and then pose your question. Robert McCarthy - Robert W. Baird: It's Robert W. Baird. Morning, guys.

Hey, Robert. Robert McCarthy - Robert W. Baird: And really hats off to an impressive quarter. It's good to see the company starting to deliver on the potential that's been there for so long. I wanted to ask about, my first question is a two-parter on the Construction segment. You had about a 12% incremental in the first quarter, but of course in comparison with the quarter last year that you all described at the time as sort of perfect planetary alignment, our expectation is that number gets significantly stronger in each of the next three quarters, and that you should finish the year easily above 20%. Is that your expectation as well? Then related to that, volume growth, low double digits in the quarter. Can you sustain that level through the year or should we expect to see more moderation there?

A couple of things, Andy. Robert McCarthy - Robert W. Baird: Rob.

One, we've never laid out incrementals by individual business, Rob, but generally speaking, our targets for Power Systems and Resource Industries and Construction aren't all that dissimilar. One thing that did impact Construction Industries a little bit more than everybody else in the quarter; I made the comment overall that currency was not much of a factor for the company overall, but it was a bit of a factor for Construction Industries and it would have been offset a little bit elsewhere. So that held them down maybe roughly a point in the quarter. No, I would say that incrementals in the Construction business aren't dramatically different from expectations elsewhere. Robert McCarthy - Robert W. Baird: Then we'll say related to that, because it speaks to margins, I mean, from 30,000 feet you had roughly 75% growth in SG&A expenses in the quarter. Really looks out-sized relative to the revenue growth. Can you talk about the drivers of that and if there's expectations that the absolute level of spending can moderate as we go forward, or is this a new table setter in terms of run rate?

Yeah, I think if you look at the change, probably a giant chunk of it was because of Brazil and MWM were in the numbers and they weren't a year ago, so that's probably much of the change.

Bucyrus (inaudible).

What did I...

[You said] Brazil.

Oh. Not Brazil, Bucyrus. Sorry. Bucyrus and MWM.

[We've got] Brazil on the mind today. Robert McCarthy - Robert W. Baird: But we had most of that last quarter with Bucyrus, Mike, and the year-on-year increase is a whole different order of magnitude, here.

It was not in the numbers in the first quarter a year ago. It is in the numbers today. If you look at our SG&A relative to sales, as a percent of sales, excluding the acquisitions, it would have gone down in the quarter versus a year ago. Robert McCarthy - Robert W. Baird: Okay. I'll follow up with you. Thanks, Mike.

Okay.

Thank you. Our next question today is coming from Ted Grace. Please announce your affiliation, then pose your question. Ted Grace - Susquehanna Financial Group: Hey, guys, Susquehanna. So, I was just hoping to ask a higher level question, and now that we can reflect back on two years of leadership by Doug and Ed and all the changes you've made since then--so more mining, more rail, more engines, more aftermarket, benefits of CPS and lane strategy--I was just wondering if you could speak to how you think the company's full-cycle returns have improved, and then also how you think about how you may have changed the cyclical profile of your earnings. And then, any kind of quantitative metrics you might be willing to share would be great.

Well, a couple of things. If I look at where we are, given the progress around the Cat Production System and the sophistication of a very, I'm going to say efficient, supply chain, we've got a ways to go. We've come a long way and there's no question these incremental margins and the pull-through of 23% or so, and a little better than that without Bucyrus and MWM and some other things, is extremely rewarding, and I am very happy with that. At the same time, we are working hard, and we have anecdotes and stories every day of where we can do better with our supply chain efficiency, where we still have gaps between supply and capacity and through-put of our own factories. So we have a long way to go and a lot of that is ahead of us yet. Having said that, if we ended up with whatever the incremental pull-through--23% and 25%--every year for the next few years, I'd be very happy. And we've seen that consistently throughout. That's in our plans for the rest of this year right through to 2015. I do know we've got opportunities out there to really get after some improvements around supply chain and still around Cat Production Systems. So that's ahead of us, but I've got to tell you, the quarter as we saw it, given the really tough comp to a year ago, is rewarding, and I think our people did one heck of a job to do the types of things we talked about in the second quarter. As I stand back and look at--I'll pontificate a little bit here, sorry. As I look at the whole world, who would have guessed a year ago we would have a China slowdown to the magnitude we have, a Brazil slowdown, somewhat of a recovery in the US but still anemic, and put up these kind of numbers, with incremental pull-through? I think we're just starting to see the power of what can be done here.

Hey Ted, this is Ed. I'd add on to your comment about the cyclical profile. I think that the focus on the aftermarket and our business model, as you travel the world and meet with Cat or dealer employees, I think it's the one part of the strategy that has absolutely resonated around the world. I think that focus on aftermarket will serve us well as we go through cycles. The other thing that I think we've done different is, if you look at Cat's investment profile historically, we've invested, I think, the vast majority in what I would consider mid to late cycle. Be it CapEx or M&A, R&D type activity. If you look at what we've done this time, we've really been thoughtful in trying to invest earlier in the cycle. Between 2010 and 2011, between CapEx, R&D, and M&A, almost $20 billion invested in the business. It's just, we think we're now in the early stages of that mid cycle. When you make those investments early you really have the opportunity to secure the return on that investment, and bed down the acquisitions while you've got the wind at your back in terms of the industries that we serve. That's another change I think that we've made as a result of the update to the strategy. Ted Grace - Susquehanna Financial Group: That's helpful. Would we look for the biggest improvements to more likely come in Construction Industries, or do you think they'd be shared more equally?

I think generally we've got opportunity everywhere, but certainly Construction we would expect to see a higher rate of improvement. Ted Grace - Susquehanna Financial Group: Okay. Then the last part I was hoping to ask was just an update on lane strategy, kind of where we are both domestically in the US and then outside the US, and then I'll jump back into queue.

Yeah Ted, if you get into lane in terms of the inventory, that's part of the inventory build we saw in the early part of the year. That's really us building PDC's. We've got about 9,500 units in lane one. We've got 22 PDC's that are operational, another six that are in process. We shipped about 5,600 units from PDC's in the first quarter. As we get positioned at the end of first quarter, heading in to what is the selling season, we think the PDC's have us well-positioned. Ted Grace - Susquehanna Financial Group: Okay. Well, congratulations on the quarter, and best of luck guys.

Thank you. Our next question today is coming from Vance Edelson. Please announce your affiliation, then pose your question. Vance Edelson - Morgan Stanley: Hi, Morgan Stanley. Thanks. Couple questions. If we shift the focus over to Europe for a minute, you mentioned Europe is holding up. Could you give us a feel for the progression during the quarter and into April if possible, now that the month is almost over? Anything you can tell us about the pattern and the latest trends?

This is Mike. I don't think that there's anything to be gleaned from that. Europe overall, just think about it economically, and all the troubles from last year. It's been pretty good. Not as good in terms of increases as North America, but it's been in generally positive territory all along. I think it's a case where it's much like the US. I'll use the US as an example because I think people are frequently more familiar with the data. If you look at housing starts, relatively weak. If you look at commercial construction activity, relatively weak. Do we have a highway bill? No. In the midst of all that, we're up in North America in the 30%'s. A lot of that is replacement. So I think we have that same phenomena right now that's holding up Europe. To some degree, it's also a tale of different parts of Europe. Southern Europe, where let's just say proportionately more the troubles are right now, it's actually down. Northern Europe, where the economies are doing better, it's basically more than offset that. I think overall, Europe is, kind of considering what they have going on over there, has done very well. Vance Edelson - Morgan Stanley: Okay. That's helpful. Then, just shifting over to the mining side. You mentioned the US coal weakness. Any other areas of strength or weakness by commodity that stand out? Similarly, if you could provide some more color geographically, is it mainly LatAm and Asia-Pac that are strong, with the US the weakest overall?

No. Generally, mining is up everywhere. There's not a region where mining is not up. I don't have the by-commodity breakdown in front of me. We're usually kind of vague on that anyway. I would tell you that, with minor exception around US coal, which is not that big of a percentage of the business overall, mining has just been very good. In my preamble to the Q&A here, I probably mentioned it five times, but our backlog went up in the quarter, including for mining. Including for new Bucyrus machines. Mining just remains incredibly good. It's limited by supply. We're taking orders on the big product now into 2014. Everybody seems to be searching for a negative in mining, but I'll tell you from our perspective there's not one. Vance Edelson - Morgan Stanley: Okay. That's great to hear, and then just one more question, if I may? As you manage the inventories, I'm trying to get a feel for the longer-term goal of increasing the inventory turns. How quickly do you think you can get the inventories right-sized? Is there any change in your thinking about the long term goals for inventory turns and driving the free cash flow higher that way?

It's going to take, if you look at the issues we talked about in terms of China, a pretty significant ramp-up relative to what's going on in mining and some other areas. I think you'll see us focus on improving that number through the balance of this year. As Doug commented earlier, there's still opportunities to improve the integration across the supply chain. Out to 2015, there's another half a turn there that we ought to be able to go get. Vance Edelson - Morgan Stanley: Okay. That's helpful. Thanks, guys.

Thank you. Our next question today is coming from David Raso. Please announce your affiliation then pose your question. David Raso - ISI: ISI. Two questions. One, a quickie to start. The short-term incentive comp, the $280 million benefit for the full year, you only got $10 million of the benefit in the first quarter. So the next three quarters, can you lay out for us how you see that incremental $270 million benefit playing out, year-over-year?

Yes, probably the--I don't have the numbers off the top of my head, but basically we're one quarter into the year, so what we book in the first quarter, and that's in the Q&A in the release, that's what we would expect in each of the next three quarters. We would accrue it evenly, unless we change our outlook. So, then if you go to the year-end release, we broke last year's out by quarter. So if you take the first quarter of this year, assume that for Q2, Q3, and Q4, you can compare that to the numbers that we had in our fourth quarter release by quarter for last year. I just don't have them off the top of my head, David. David Raso - ISI: That's fine. As long as it's straight through this year, I can comp it year-over-year. So, bigger question on the inventory again. No one's asked the question just directly. How do you feel about where the inventory is? I know you mentioned China, but China's not that big. I mean, you can't be driving a whole inventory number. It's been many quarters in a row where inventory has simply grown a lot faster than sales. So maybe one number you could help us with, what is the inventory in the first quarter--that's Bucyrus and MWM? So I can get more of an apples-to-apples--sales are up core 15% and inventory was up, what, 35%? I just want to get a feel.

Yes, you're right. There is a bit of an apples and oranges in there because you do have MWM and Bucyrus in the inventory number today, and they were not in the sales or inventory number a year ago. So, I don't have either number off the top of my head. I think the quarter that we released Bucyrus, I think that was a part of our, certainly our Q in the quarter we acquired it, so if you would go back to the third quarter Q I think in there we say how much it was. That's a good question. I just don't--that's a part of the increase relative to sales. I just don't have the number off the top of my head.

Hey David, this is Ed. Like I said, the Bucyrus is part of it. The MWM is part of it. As both Doug and I have commented earlier, if you look at working capital in total, we're very pleased with the performance on accounts receivable. We're very pleased about where we're at on accounts payable. We know there's more work to do in the inventory turns side of it. We're keenly focused on getting it done. Yeah, we've got a build-up in China. Yeah, we've got a ramp up on the mining side and some other things that's driving it. But there's also opportunities for us to improve core performance in the area of inventory and we're all over it. David Raso - ISI: Not that you want to highlight this, but where are the areas that you feel the inventory is highest on your radar screen of, hey, we might need to be careful next quarter to cutting that back? That's really the situation in China. We appreciate that. In the Q&A section, Mike, you highlighted two-thirds of the dealer inventory growth is North America, but the company inventory growth--and when the Q comes out we'll get how much is finished goods versus WIP and raw so maybe a little better color. We're just trying to get a feel for where are the areas where you may be getting a little bit anxious. It's a little inconsistent to keep--even from some of the dealers, we can't get enough excavators. There's definitely some products where it's still a capacity constraint issue. In the interim we're seeing inventory growing a lot faster than sales for the company.

Right. I think that if you look at the first quarter, the vast majority of the increase was some form of finished goods. It was either goods in transit that have been shipped but not recorded as a sale yet, or it's PDC inventory or finished goods inventory. Part of that is a function of expected sales. If you look at our outlook for the year the middle of that range, to use one number, is $70 billion. If you pull out what we actually did in the first quarter and then look at what's coming in the next few quarters, it's up a fair bit from the first quarter. First quarter is always seasonally low. I think part of what you're seeing is an increase in a variety of forms of finished goods. PDC is in transit and inventory waiting to be commissioned that's really a function of future sales. David Raso - ISI: Can we just wrap it up with, is there any target for the end of the year? Just as we go through the year, obviously 2Q you'd like to think inventory should come down seasonally. But is there anything that we can monitor where we know your [bogey] is inventory to trailing sales for the year end is 'X,' call it 25%, so we know if we're running above or below - we're just getting sensitivity to the production schedules. Where's the risk, if we're tracking it, at that they might need to take some inventory down internally.

I think we definitely have turns baked in between here and the end of the year. Absolute inventory is probably not going to come down, but as sales and revenues go up from the $16 billion level in the first quarter, I think effectively what you'll see is--I don't think total inventory is going to come down but turns are going to go up. In other words, we'll take it down relative to sales.

A couple things I would add here on this. You are exactly right - virtually every segment of inventory has its own story and logic. The most intense focus we have right now, that actually has been building over the second half of last year and early this year, is China, and we acknowledge that. We've got excess inventory there, wheel loaders and excavators. We're working on that. I think we have a good story on that one as to why, and where we're going to go with it. Bucyrus, former Bucyrus products, we are building inventory, by plan, to get after higher volumes there and develop an aftermarket business that we find with lots of opportunity. That's a buildup that makes a lot of sense for us. Our PDCs, we have been behind the eight ball on that since we announced that program five years ago. We've been working on that. We're finally to the point where, within PDCs that we own, we're about where we think the minimal inventory level should be to really get aftermarket share and service our customers. If you look at US dealer inventory, with our dealers here in terms of months of sales, based on expected sales and outlook for the rest of the year, it's reasonable and in line with historical areas. It's really a mixed bag. We'll probably be talking about it. I know we'll be talking about it in the future much more, but we're managing it as a mixed bag also in every single segment, because every single piece of it has a different logic to it. Overall, with the exception of China, we've got a pretty good program to get inventory where we want it, based on our CPS and our inventory turnover targets over time. David Raso - ISI: Obviously when inventory goes up 13, 14% sequentially, the easy follow through on that statement would be "and thus we're raising our sales guidance". We're building inventory because we are confident in the sales growth, so to maintain the sales growth this report, but the inventory grew 13, 14% is, I think, the crux of the (inaudible).

I think inventory goes up based on what you think you are going to sell the next couple of quarters relative to this quarter. If you look at our sales outlook, the next few quarters should be well up on the first quarter. It's not so much a function of changing a full year guidance, it's where are the next few quarters going to go relative to where you've been. David Raso - ISI: And that would imply that the inventory growth, sequentially, was kind of in line with what you were thinking then essentially.

In China, it was more that we expected a bigger selling season there. So there are parts of it that were more than we thought, and that's one of them. David Raso - ISI: All right, I really appreciate it, thank you.

Okay. I think we have time for one more.

Our last question today is coming from Anne Diamond. Please announce your affiliation, then pose your question. Anne Diamond - JP Morgan: Hi, it's JP Morgan. Can you talk about, switching total gears here, can you talk about what you're seeing out there in the natural gas sector, in the US? We've seen rig cons come down significantly. Yes, they're switching from dry drilling to liquid drilling, but what are the customers in that segment talking about? Is there discussions about deferring CapEx spending? In my view, I think that is the biggest risk to sales for Caterpillar in the near term, because I'm sure it has broad based impact not only on engine business, but also on rental of equipment. Can you address what you're seeing out there in the near term, the very near term in the US?

Yes, well that's a very specific question, and let me put it in a context. Oil and gas, overall, turbines, engines, the backlog has continued to go up. Solar, for example, which is a good chunk of our oil and gas business, is for all practical purposes almost sold out for the year. They have significant order coverage for the year. They've got a good order flow. In terms of our oil and gas business overall, sometimes I think people believe that the bulk of it is drilling, and that's not the case. The largest segment of our oil and gas business is gas compression and, actually, the ample supply and relatively low prices are very positive for consumption. If you're going to consume it, you've got to move it. So actually, what we're seeing in our oil and gas business overall has been pretty positive. Customers have been pretty bullish. On the drilling side of it, on the frac-ing side of it, it has shifted from dry gas to oil and wet gas. Another kind of point, you're totally focused on the US, but this business is global. In fact, probably three-quarters of Solar's business, for example, is outside the US so I think sometimes there's a little bit too much of a focus on our global oil and gas business just for the US

So I want to add in here, Mike, a couple things we're seeing and we've virtually seen no, I would say, order vibration in our gas business whatsoever. In fact, we're seeing a couple other things. We just announced and signed a huge deal for some of the first frac-ing with our 3500's in China. China actually has more gas through fracturing available there than the US does and they don't have that. There's no market for that yet at all. Part of the fact is there's no pipeline system in China, so you can just about see what's coming in China down the road, which will really create demand for our products--and coupled with our new 3500 plant in Tianjin, which is just now coming on-line. The other thing that surprised all of us around here is the, what I have been calling, demand creation for gas products. We are getting calls from virtually every customer segment to burn natural gas in our reciprocating engines, which we have been doing for 50 years. This is a huge growth opportunity. We created kind of a strategic group around this to coordinate all of our efforts. The opportunity is enormous when the gas equivalent of BTU burned to diesel right now is 70% cheaper. The bad news is that (inaudible) price is probably not going to last very long. The good news is we're in the supply chain all through it. So I view cheap gas as a huge opportunity for us around the world, as Mike said, and while in the US we'll probably see cheap gas for some time, the rest of the world wants that, too, and it's not that fungible of a product. There's some L&G you can move around, but if you have a local source, you're there. We're seeing that virtually everywhere. So I view this as a long-term opportunity for us that has kind of come out of nowhere. Fortunately, with our MWM acquisition a year ago, we bring a lot of expertise with that, coupled with a pretty good gas business that we had before. Anne Diamond - JP Morgan: Excellent. And one quick follow up. Just building on the margin improvement stories. A lot of the trade magazines have been writing in recent weeks about your announcement that you will source Kubota engines for your smaller building construction products. I mean, that's a real change in strategy for Caterpillar. Could you just talk a little bit about the thinking behind that? Is it the opportunity for margin improvements? I think it's great, but I think it is a real change in strategy by Caterpillar.

Anne, this is Ed. On a good portion of that product line, historically they sourced engines from Mitsubishi. And that was based on the fact that there was a gap in the Perkins product line primarily in the 3-liter space. So really what you're seeing is Kubota kind of filling that gap. So no significant change in terms of strategy. Anne Diamond - JP Morgan: Okay, thank you. I'll leave it there.

Okay everyone. Thank you very much. We're very pleased to report another record-breaking quarter, and with that, we'll sign off.

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.