Jim Umpleby - Chairman, Chief Executive Officer Andrew Bonfield - Chief Financial Officer Joe Creed - Vice President of Finance Services Amy Campbell - Director, Investor Relations

Good morning ladies and gentlemen, and welcome to the Caterpillar 4Q 2018 Analyst Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Amy Campbell. Ma’am, the floor is yours.

Thank you, Kate. Good morning, and welcome everyone to our fourth quarter earnings call. On the call today I’m pleased to have our Chairman and CEO, Jim Umpleby; our CFO, Andrew Bonfield, and Vice President of Finance Services, Joe Creed. Remember, this call is copyrighted by Caterpillar, and any use of any portion of the call without the expressed written consent of Caterpillar is strictly prohibited. If you’d like a copy of today’s call transcript, we will be posting it in the Investors section of our Caterpillar.com website. This morning we will be discussing forward-looking information that involves risks, uncertainties, and assumptions that could cause our actual results to be different than the information discussed. Details on the factors that either individually or in the aggregate could make actual results differ materially from our projections can be found in our filings with the SEC and in our forward-looking statements included in today's financial release. In addition, a reconciliation of non-GAAP measures can be found in the appendix of this morning's presentation and in our release which is posted at Caterpillar.com/earnings. And with that, I'll turn the floor over to Jim.

Thank you, Amy, and good morning. I'd like to begin today by thanking our global team for delivering an outstanding year in 2018. It was the best profit per share performance in our company's history, which allowed us to return $5.8 billion of capital to shareholders. In 2018 we remained focused on making our customers more successful and executing our enterprise strategy, which centers around achieving long term profitable growth through operational excellence and investing in services and expanded offerings. Revenue for the year was up 20% to $54.7 billion as favorable economic conditions drove growth across many of our end markets. We delivered record adjusted profit per share of $11.22 and strong operating cash flow of $6.3 billion, which allowed us to repurchase $3.8 billion of company stock, raise the dividend by 10% and make a discretionary pension contribution of $1 billion. 2018 marks the 25th consecutive year we paid higher dividends to our shareholders, earnings us recognition as a member of the elite Aristocrat’s Dividend Fund. Our fourth quarter adjusted operating margin was 13.8%. This was lower than our expectations and was impacted primarily by right-offs at Cat Financial and higher than expected material and freight costs. However our full year 2018 adjusted operating margin was 15.9%, 340 basis points higher than 2017 and solidly in line with our Investor Day target range. We are continuing to execute our enterprise strategy with the operating and execution model guiding our investments to those areas with the best opportunity for future profitable growth. I’ve talked frequently about two components of the strategy, expanded offerings and services. Let me walk you through a few successes from last year in both of those areas. On our October call I talked about our expanded offerings as next generation Articulated Trucks and Mini Excavators. We’ve continued to roll out next-gen machines, including the 120Motor Grader that offers up to 15% greater fuel efficiency and saves customers up to 15% in maintenance cost with new Filtration Technology. In December we announced the next generation 36-ton Class Excavators. These machines increase operating efficiency, lower fuel and maintenance costs and improve operator comfort. We also launched our next generation D6 dozer offering customers the world's first high drive electric drive Dozer with 35% better fuel efficiency and increased agility compared to the previous electric drive models. We are expanding our engine offerings as well, including the CG Series of Generator Sets, increasing power output, offering high reliability and improving return on investment for our customers as they operate on natural gas and bio-gas, making them more economical. Thanks to the combination of Caterpillar Technology and the customer's initiative, the world's first Cruise Ship power by liquefied natural gas set sale in 2018. This is another great example of an expanded offering. We offered our customer an integrated solution utilizing our MaK Dual Fuel engines to fully operate this cruise ship using LNG. Now a few examples of services, including technology solutions that support our dealers and customers at the initial point of sale and in the aftermarket. As of November Cat Mining Trucks used in our MineStar command for hauling Autonomous Technology reached a milestone of moving 1 billion tons of material. We deployed our first six commercial autonomous trucks in 2013 and the fleet now has grown to more than 150. Six different mining companies are operating command for hauling on sites in Australia, in North and South America. We are working with customers who operate mixed fleets and have successfully deployed our Autonomous Technology to rectorfix competitive haul trucks. We are leveraging our success with autonomy and are collaborating with a customer to pilot remote control operative stations for landfill operations, which could transform even revolutionize many aspects of the landfill industry. We've also introduced an equipment management app that allows our customers to monitor fleet data, request parts and service, and connect with their dealer via mobile devices. These are a few of the many examples of our global team helping our customers be more successful working with Caterpillar than with any of our competitors. Now for the outlook: Following a record year in 2018, we expect further growth in profit per share in 2019 to a range of $11.75 to $12.75. Our outlook assumes a modest sales increase based on the fundamentals of our diverse end markets, as well as macroeconomic and geopolitical environment. We will continue to focus on operational excellence, including cost discipline while investing in expanded offerings and services to drive long term profitable growth. In Construction Industries we believe the healthy U.S. economy, continued pipeline construction and state and local funding for infrastructure development will be favorable in 2019. Latin America is expected to continue its recovery, but demand will remain at relatively low levels. In the Europe, Africa Middle East region demand remained steady, but political and economic uncertainty exits. In Asia Pacific we expect construction growth in countries outside of China. Within China, the industry is very dynamic and there are a variety of forecasts. We will continue to monitor the situation, but as of now we are forecasting the overall China market to be roughly flat in 2019 following two years of significant growth. China represents about 10% to 15% of our total construction industry sales and about 5% to 10% of total Caterpillar sales and revenues. For Resource Industries, we believe commodity prices will remain supportive for investment and mining companies will increase their CapEx budgets in 2019. Demand for heavy construction in quarry and aggregate equipment should also remain strong. In energy and transportation we expect the recent volatility in oil prices and takeaway constraints in the Permian to negatively impact demand for well servicing equipment in the first part of the year. Gas compression should remain strong. Demand for power generation equipment should continue positive momentum that started in 2018. For industrial engines, the strong U.S. economy remains a positive for demand, but we expect some headwinds in EAME. Finally in transportation, we expect our rail business to improve in 2019. In summary, 2018 was an excellent year for Caterpillar and one that demonstrates the power of our strategy. We achieved record profit per share, returned significant capital to shareholders and continued investment in expanded offerings and services to drive long term profitable growth. Once again, I'd like to thank our global team. Now that 2018 is in the record books, we are focused on delivering another great year. We continue to feel good about our business and it increased out profit outlook for 2019. With that, I'll turn it over to Andrew.

Thank you, Jim and good morning everyone. This year's record profits and strong cash flows are a clear reflection of the hard work and cost discipline that stems from the company's focus on delivering a strategy using the operating and execution model. Today I’m going to walk through at a high level both the quarter and full year 2019 results and then I will discuss our outlook and highlight some of the key financial assumptions for 2019. So please turn to slide 5, to look at the results for Q4. Sales and revenues were $14.3 billion, up 11% from last year, with continued growth across all regions and in all three primary segments. Increased demand for resource industries machines, higher sales in North America for construction equipment and higher demand for reciprocating engines to support well servicing and gas compression applications in North America were all significant drivers of this increase. Fourth quarter profit per share of $1.78 and adjusted profit per share of $2.55 were both up from the year ago. You will recall that in 2017 profit per share was impacted by U.S. tax reform. The 18% increase to adjusted profit per share year-over-year was largely driven by the higher sales volume along with continued cost discipline. If you move to slide six, I will walk through the 36% increase in operating profit. As you can see from the chart, the operating profit contribution of the higher sales volume was most of the $496 million operating profit increase in the quarter. Price realization was $179 million or about 1% higher than the fourth quarter of last year. Positive price realization was offset by higher manufacturing costs, largely due to high material and fright costs, as steel prices, tariffs and supply chain inefficiencies continue to impact our results. Financial products had a $73 million negative impact on operating profits for the quarter. I will walk through this in more detail when I cover that segment. Lastly, restructuring costs were favorable by $144 million as restructuring actions continue to ram down and are expected to return to normalized levels next year, which is why we will no longer exclude them from the adjusted profit per share calculation. In short, whilst there are several puts and takes, price continues to largely offset CAT cost headwinds, dealer costs remain about flat and higher sales volume will remain as the primary driver of the improvement in operating profit. However, we did see a decline in operating margins in the quarter versus year-to-date run rates. Also a decline in the operating margin is typical in the fourth quarter. This year it was greater than we expected and resulted from unplanned allowance increases and write-downs in financial products, higher manufacturing costs including higher material and freight costs, as well as inventory changes. The negative impact from inventory occurred as inventory increase throughout the year and came slightly down in the fourth quarter, resulting in unfavorable operating leverage. Now let's look at the performance of each segment in Q4, beginning in the construction industries on slide 7. Sales were $5.7 billion, an increase of $410 million or 8%. Construction sales increased in North America and EAME, but were down slightly in Asia-Pac and Latin America. The sales increase in North America was $403 million, driving nearly all of the construction industry sales growth for the quarter. We believe the North American economy remains robust with much of the increase driven by oil and gas related projects, including pipelines and other non-residential construction activities. In addition to higher end user demand, dealer inventories also increased in North America. This increase follows several quarters of tight dealer inventory levels and we now believe it now better aligned to meet current demand. In EAME sales in the region were up 9% as strong end user demand in Europe for infrastructure, road and nonresidential construction was partially offset by continued weakness in the Middle East. Asia Pacific sales were down 4% or $64 million. The sales decline was driven by lower demand in China, partially offset by higher sales in other Asian countries. While sales were down in China in the quarter, this was in part due to an unusual seasonal pattern in Q4, 2017, with a more – return to a more normal pattern in 2018. I will remind you how strong the last two years have been with industry sales for 10 ton and above excavators up about 40% in 2018 after doubling in 2017. Lastly, several Latin American countries continue to experience economic challenges. Sales were down $18 million or about 5% for the region. Turning to profit, CI’s segment profit was about flat versus a year ago with an operating margin of 14.8% down 100 basis points. The favorable impacts of high price realization and improved sales volume were about offset by higher material, labor and freight costs, as well as adverse variable manufacturing costs. The sequential decline in operating margins from the third quarter run rate was largely driven by higher material costs and higher variable manufacturing costs. Construction Industries backlog was up for the quarter and from a year ago as higher production levels supported an increase in order rates. Most CI equipment remains on managed distribution. Now let’s go to slide eight and look at Resource Industries. RI sales were $2.8 billion, up 21% from the fourth quarter 2017. Higher sales in the quarter were driven by robust demand from heavy construction and quarry and aggregate customers, as well as higher shipments, machines to mining customers as mining companies increase capital expenditures. Demand for aftermarket parts to overhaul maintain equipment remained robust in the quarter. The decline in resource industries backlog was the result of several factors, including the lumpiness of mining orders and an increase in dealer inventory. Based on activities we are seeing in the market, we expect the slowdown in orders to be temporary and are expecting high mining CapEx in 2019 to drive high new equipment sales for the segment. Segment profit of $400 million was up an impressive 90% versus the fourth quarter of last year. Segment operating margin improved to 14.3% up 520 basis from 2017. RIs improved performance and margin expansion was primarily due to higher sales. The operating leverage came through several years of significant restructuring actions and the teams continued cost discipline. These gains were partially offset by higher material and freight costs in the quarter. Now let’s turn to slide nine where we will discuss energy and transportation. E&T sales in the fourth quarter were $6.3 billion a 11% higher than the same quarter last year. Sales into oil and gas applications were up by $222 million or 15%, a strength in onshore activity in North America for reciprocating gas compression and well servicing applications continued. Sales for turbines and turbine-related services were about flat. Power generation sales increased by $211 million or 20%, driven primarily by sales of reciprocating engines to support data center and other large power generation projects. Industrial application sales were about flat with higher sales in North American and Asia Pacific, about offset by lower sales in Latin America and the EAME. Transportation sales were up by 10%, driven primarily by acquisitions of two rail services businesses into January 2018. Segment profit for energy and transportation was $1.08 billion, up $205 million or 23% from the fourth quarter of last year. The signal margin improved by 170 basis points to 17.2%. E&Ts profit improvement was mostly due to the higher sales volume, partially offset by higher manufacturing costs including freight. E&Ts backlog was down from the third quarter, but up when compared to the fourth quarter of 2017. The growth in the backlog year-over-year is primarily attributed to higher turbine and reciprocating engine demand. About half the backlog decline in the quarter was related to large shipments for both recip engines and turbines. Another half resulted from the slowdown of orders to support oil and gas applications in light of recent oil price volatility. Please move to slide 10 and I’ll walk through what caused the decline in financial products profitability in the quarter. Financial products fourth quarter profit was $29 million down $204 million form Q4 of 2017. More than 85% of the unfavorable change was due to the impacts from equity securities and the insurance services investment portfolio, and continued weakness with a small number of accounts and the CAT Power Finance portfolio. Unfavorable impact from insurance services was more than half of the change and was due to a $44 million mark-to-market loss in the fourth quarter of 2018, combined with the absence of a $68 million investment gain from the fourth quarter of 2017. Excluding these non-core impacts that are not indicative of the profit from ongoing business, insurance services would have been possible with operating margin performance consistent with historical averages. The unfavorable change from the CAT Power Finance portfolio was due to an increase in the provision for credit losses, primarily from a $72 million unfavorable impact due to an increase in the allowance rate, and an increase in write-offs of $13 million. Cat Financials core asset portfolio continues to perform well. Excluding Cat Power Finance, Cat Financials key credit quality metrics are in line with historical averages for past dues, write-offs and the allowance rate. A strategic assessment of Cat Power Finance was conducted in early 2018, which resulted in changes to the risk management of the portfolio. This includes working down the balance of old loans to reduce exposure and that worker is substantially progressed. We have also significantly reduced our risk exposure going forward and have timed our lending criteria to reduce risks. Now let’s quickly recap the year on slide 11. As we look back, 2018 was a year of solid strategy execution, production increases across most of our product lines, disciplined cost control, investments and profitable growth initiatives and record profit per share. For the year, sales and revenue of $54.7 billion were up 20% from 2017. Profit per share for the full year was $10.26 versus $1.26 in 2017. Adjusted profit per share was $11.22 up 63% from 2017s adjusted profit per share of $6.88. Please turn to slide 12 and I’ll walk you through the operating profit for the full year 2018. Operating profit was $8.3 billion, up 86% from $4.5 billion. The most significant driver to operating margins was high sales volume, with sales in revenues up about$ 9.2 billion or 20%, representing sales growth across all three primary segments and in all geographic regions. It was another good year for price realization up $601 million or 1.2%. For the company price realization more than offset manufacturing cost increases, which were primarily a result of higher material and freight costs. Total SG&A and R&D expenses where higher by $249 million, largely driven by increased investments and initiatives to support profitable growth in services and expanded offerings. Financial products were unfavorable by $141 million, largely due to the absence of gains from the sale of securities, unfavorable impacts from the move to mark-to-market accounting for equity securities and weakness in the Cat Power Finance and Latin American portfolios. Restructuring costs were favorable by $833 million, largely due to the absence of expenses related to a European facility closure in 2017. On slide 13 you can see the significant improvements in adjusted operating margins across the enterprise and the all three primary segments. These improvements were largely driven by higher sales volumes and continued cost discipline, which enabled us to meet or exceed the ranges we committed to at our 2017 Invested Day. Adjusted operating margin for the enterprise was 15.9%, 340 basis points higher than 2017 with significant improvement in each segment. Now let’s move on to slide 14 to discuss cash flow. We ended the year with a strong balance sheet and $7.9 billion of enterprise cash. ME&T operating cash flow was $2.5 billion in the quarter and $6.3 billion for the full year and during the year the Board raised the dividend per share by 10%. In addition, given our financial position and strong cash flows, we bought back $1.8 billion of company stock in the fourth quarter bring our full year stock buyback to $3.8 billion. Lastly we were also able to make a $1 billion discretionary pension contribution in the third quarter. In summary, we returned $5.8 billion of capital to shareholders and ended the year with an entry price cash balance down just slightly from a year ago. It is this strong cash generation which is a result of the discipline created by the O&E model that is one of the most impressive outcomes of 2018. I will update you more on our refreshed capital allocation framework during the 2019 investor day we expect hold in Clayton, North Carolina on May 2. Now let’s move to slide 15 and I’ll walk through our assumptions for the 2018 outlook. Our profit per share outlook range for 2019 is $11.75 to $12.75. This range reflects profit per share up between 5% and 14% over the 2018 adjusted profit per share. Across the outlook range we would expect sales to increase versus 2018. Jim has already taken you through each segment and segments end market assumptions which are summarized on slide four. So I will highlight just a few key financial assumptions. Short term incentive compensation will be reset to about $800 million. We expect favorable price realization to be mostly offset by cost headwinds. Restructuring costs are included in the profit per share outlook as they are expected to return to a normalized levels in 2019. Financial products profit should revert to historical norms. The outlook assumes that lower share account, driven largely by 2018 stock buybacks, as well as anticipated additional repurchases for 2019. We expect to repurchase around $750 million company’s stock in the first quarter of 2019 with the potential for additional share repurchases based on quarterly cash generation and alignment with our capital allocation priorities. We expect a higher tax rate of 26% up 2% from 2018. The increase in the tax rate is largely driven by the application of U.S. Tax Reform provisions to the earnings of certain non-U.S. subsidiaries which don't have a calendar fiscal year end. These provisions did not apply to these subsidies in 2018. And for your cash flow modeling, we expect ME&T capital expenditures along with CAT inventory to remain about flat. Finally let’s turn to slide 16 and recap today’s report. 2018 was a great year with record profit per share. Given our solid balance sheet and strong cash flows, we returned $5.8 billion to shareholders, while increasing our investments to drive profitable growth in services and expanded offering. Looking ahead to 2019 we are going to continue the execution about possible go strategy and we are driving to further growth in profit per share. With that, I'll hand it back to Amy to begin the Q&A portion of the call.

Thanks Andrew. Now we will turn it back to Kate to begin the Q&A portion of the call. Please limit your questions to one plus a follow-up.

Thank you. [Operator Instructions]. Our first question today is coming from Stephen Volkmann. Please announce your affiliation, then pose your question.

Hi, good morning, it's Jefferies.

Good morning Steve.

I am hoping we can drill down a little bit more on construction industry as that seems to be sort of the biggest point of discussion this morning. Obviously the margin there was somewhat lower than I think most of us were looking for and pretty minimal incremental margin. So it seems like price and costs were sort of a wash if I’m understanding your remarks correctly. So I guess I’m trying to figure out what else was going on there that was sort of a big headwind for the margin and then I'll just throw the follow-up obviously right in there, which is how do we think about that in 2019 from an incremental margin perspective? Thank you.

Thanks Steve. Obviously the margins were a little bit lower than we anticipated as well when we gave – when we talked in the third quarter. There were couple of factors underpinning that. One where we did expect a material price actually to exceed manufacturing cost increases in CI. But there is a normal seasonal decline in CI margins, but that was one of the things we expected to partially offset that. That didn't materialize partly because of material cost increases and also because of other manufacturing variances that did occur in the quarter. These included things like the absence of some incentives in Brazil, some variable labor inefficiencies, which were all accumulated to that impact. As we look forward to 2019 I'll point out a couple of things about CI margins which gives us confidence as we move forward. First of all, we did have – we put through the price increases on the 1 of January. Obviously that will impact positively on margins and offset some of that weakness that we saw in the fourth quarter; and secondly, we do see the reset of incentive compensation which will have a positive impact as we move through the year.

Okay, so incremental margins next year and a sort of more normal 25% range or is that a bridge too far?

We don't give margin guidance by segment, but we do would expect next year to see that construction industries margins will be strong and given the things like the price increase and the incentive compensation, obviously those are our tail winds which should help us improve them.

Okay, thank you.

Thank you. Our next question today is coming from Timothy Thein. Please note your affiliation and then pose your question.

Good morning; Citigroup. Andrew may be just to follow-up on that the last thread there, just on pricing for the enterprise as a whole, I think you had talked last quarter about a 1% to 4% announced increased to dealers. And just given that sometimes there is a lapse and maybe some of the end market conditions have changed, just how you're thinking about an overall yield relative to that 1% to 4% increase for 2019.

Yeah, I mean there are a couple other factors also which are muddy water, so Timjust to remind you obviously the mid-year price increase we have put that through and some of that will also come through into next year as well. Overall though we do expect -- we take into account as Jim said, the macroeconomic environment and geopolitical factors, when we set our guidance range. We do anticipate obviously, but you know you never get 100% to stake, but we do expect good price realization next year and that will offset any manufacturing costs burns as we expect.

Okay, I mean just to pick a midpoint. If I threw 2% out, that's $1 billion. Maybe you think at this point based on what you've seen and commodity markets and just some of your transportation and logistics, experience in recent months, would you expect that level of variable cost inflation or it's just too many moving parts at this point to pin that down?

I think there are a number of moving parts, but our expectation as I said was the price would offset material cost increases.

Okay, thank you.

Thank you. Our next question today is come from Chad Dillard. Place note your affiliation, then pose your question.

Hi, good morning; its Deutsche Bank. So just wanted to go back to the tariff discussion. Can you quantify how much impact was in fourth quarter and how you are thinking about how that can better in the 2019 guide and which we can buy in terms of cadence as we go through the year?

Yeah, so Chad, its Andrew again. So if you remember the third quarter we talked about the rail and we are expecting to be at the bottom end of the $100 million range. We ended up just over $100 million. Our expectation was at this stage we don't see a rate change in the tariffs, that's our expectation, and obviously you’ve been – because you would just extrapolate that out based on 12 months versus five months for 2018.

Great, that's helpful. And then could you provide a little more color on that dealer inventory build. I think we talked about $2.3 billion for 2018 and if you can comment on what you expect that one in 2019 and can you take the entire about out by the full year and? A - Andrew Bonfield: Yes, our assumption is obviously as we say or we said consistently, dealer inventory has been constrained and obviously we've you know managed distribution in CI for most of the year. We have seen about a 2 – as you say, the $2.3 billion increase. Keep in mind that dealers are owned and control their own inventory, so that is based on their expectations. We believe that the growth is directly aligned with current market demand and more normal ranges versus historic trends. We expect dealer inventory to be flat. We don't expect any adverse assumptions for the guidance, assuming that there will be no further increase in dealer inventory from our shipments in 2019.

Great. Thank you very much.

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

Hi, Evercore ISI. My question is related to the – relates to the sales guidance. You're staying up modestly and I'm just trying to get some sense of maybe cadence or where your confidence is from that sales guide. The backlog is currently up only 4.4%, the implied orders are up like 2% and if you lose the $2.3 billion of inventory benefit to ’18, right, you just said inventory is flat, that's over a 4% drag on your sales growth right there, right, from not getting the $2.3 billion that you got ’18. So can you help us with your comfort level, where you currently are in your order rates, your backlog, that lack of inventory growth in ’19, that sale should be up modestly everyone can quantify that.

Yeah, this is Jim. So obviously you know our sales guide is, it depends on a whole variety of factors, but we are in constant contact with our dealers, we look at industry trends, we have a bottoms up process and based on everything that we see, we believe that again sales will be up modestly in 2019. We just think about our different market segments and can go around the world. We talked about China a lot and we expect China to be flat after – you know construction industry is a very good increase. We were up 40% in 2018. The industry demand was up 40% in 2018 after doubling in 2017. Oil and gas compression remains strong, both for our recip and solar businesses. We are seeing some weakness in well servicing in recip, but as I mentioned earlier we expect that to resolve itself in the last six months of the year after the takeaway issues in the Permian get resolved. We've got positive momentum in power generation. The U.S. economy continues to be strong and that has an impact on both industrial and on our construction business. In transportation we expect our rail business to be better in 2019 than in 2018. As you know there's a lot of pipeline construction going on in North America, that's a positive for us. So again, we just go through industry by industry, country by country, and develop a forecast and we believe it will be up in 2019 modestly.

But to the cadence question, I think what people are trying to figure out, are we starting the year with any growth rate cushion to be able to absorb second half of ‘19 if it is flat to down. We are just trying to get a sense of starting the year versus what’s sort of baked into the back half. I mean we all can speculate, but I'll be honest, I was hoping to have a little more cushion to start the year from the backlog growth and what you just reported. The thing is we're just trying to get a sense of the cadence and what kind of just around the orders are needed later in the year.

David, just to point out a couple of things. I mean the increase in the backlog is – the backlog at the end of the year was $16.5 billion versus $15.8 billion this year. That is despite putting more inventory into the channel. Just don’t forget, these are dealer backlog orders effectively, so dealers have built inventory and they still expect – even though they built it, they are still asking us for $1 billion more on orders than we were at this time last year. So that does give us that confidence. I think as Jim said, you know we also have a look around end markets. We take all of these things into account you know and that doesn’t give us the confidence to be able to say, we expect sales to be up modestly next year. A - Jim Umpleby: And we do – certainly as you know, we have lumpiness in our oil and gas business and in our rail business and in our mining business frankly, so there are variations quarter-to-quarter as we ship lot and financially recognize large orders.

No, I appreciate that. Okay, thank you very much.

Thank you. Our next question today is coming from Ross Gilardi. Please announce your affiliation and then pose your question.

Hey, good morning everybody; Ross Gilardi, Bank of America. A - Jim Umpleby: Good morning Ross.

Could you help us a little bit on the quarterly earnings cadence for 2019 that you are expecting. I mean you did 255 in the fourth quarter, beat at 282 in the – you know the first quarter of ’18. I mean our earnings up in the first quarter of ‘19 and if they are, can you help bridge with what you did in Q4 with what you would do in Q1. A - Andrew Bonfield: Yes Ross, its Andrew. Again, the 255 was impacted by the write downs in Cat Power Finance which we don't expect, and the mark-to-market losses in Cat Financial which we don't expect to recur. If you added that back, that would be about $2.70. We don't give quarterly guidance on earnings, but if that gives you, then you've got on top of that price increases and the start of the selling season which will impact Q1.

I’ll also add in there is that you recall that we had a very strong Q1 in 2018, so from a comp perspective that will be there as well.

Okay, got it. And then can you help us all on you know more on the mining OE side of the business and you know what you are expecting from a mining truck perspective and assuming in your 2019 outlook. Obviously that number is still way, way below what I think you guys would consider normalized demand. But are we at a pause here or does that number continue to grow nicely this year?

So certainly machine utilization by our mining customers continue to increase. We anticipate that our CapEx budgets will increase in 2019. The quotation activity remains robust and we expect our mining business to be higher in 2019 than ‘18, so that is a positive for us.

Thank you.

Thank you. Our next question today is coming from Jamie Cook. Please announce your affiliation and then pose your question.

Hi, good morning. I just – you know given the macro concerns out there, one, can you comment on you know specifically what is any – are you taking any actions, you know whether it's production or you know additional cost actions you know given that concerns about the macro environment. I'm just trying to understand whether you guys are being proactive here or not, so first, if you could comment on that. And then my second question is, I know you said dealer inventory is expected to be sort of flat year-over-year. Are you doing anything as well with the dealers to make sure you know we are not over ordering or you know to again prepare for a market that could potentially be weaker. Thank you.

Yeah Jamie, certainly we've kept a very close control of costs and we saw that very cost in the fourth quarter of ‘18 were actually less than they were in the fourth quarter of 2017. I do remind you though that we are guiding to a sales – a modest sales increase in 2019, so we are not guiding to a sales decrease. Having said that we will continue to closely monitor costs and we’ll always be ready for whatever the market send us. You know one of the things that we believe are in much better shape. At some point there will be a market downturn. We are not calling that ’19, but whenever that does occur we are certainly in a much better position to generate cash than we were in the last downturn. So again, we’ll be very cost disciplined here moving forward.

And then sorry, just another one more follow-up. Just understanding restructuring is now part of GAAP, can you just help us understand what that number is and then also just the finance of contribution ‘19 versus ‘18 just given some of the one-offs that we had in ’18? Thank.

Yeah, so we would – obviously we are all going to a period where restructuring becomes much more normal. This year the charge was around $400 million. You should expect it to be substantially lower than that, otherwise we would still be adjusting it out of adjusted profit. I'm not going to give you a number, because obviously it depends on what activities we do and it will be reported in the Q and it depends on what actions we take in the business during the year, but it will be part of normal operating earnings and that’s taking into account in that guidance. The other part of the question…

The finance...

Yeah, so this year I think write-offs relating to the Cat Power Finance portfolio in Latin America have amounted to somewhere around about $150 million in total. That would be the area in which we wouldn't expect to recover.

Okay, I appreciate the color, thank you.

Thank you. Our next question today is coming from Joe O’Dea. Please announce your affiliation and then pose your question. Joe O’Dea: Hi, good morning. It's Vertical Research. I wanted to understand some of the cost headwinds in the quarter are a little bit better, so the degree to which you can expand on some of what happened on the materials and freight side that surprised you in the quarter, and then to understand how those work moving forward? Is that something that is corrected as of today and back to the kind of cost structure you expected to end 2018 with or those things that persist as of today and how long will that be the case?

Yeah, yeah so I mean obviously things like manufacturing variances which were attributable to the absorption rates and so forth, obviously they end at the end of that period and they were a portion of that negative variance in the quarter and obviously that will be taken into account as we move into 2019 by some production, and we’ll obviously continue to work those through. With regards to the material costs and freight costs, I mean we did see some material cost increases in the fourth quarter, which as we said we weren't expecting. Part of that is due to the fact that obviously we are an environment of constraint supply still and those did feed through into cost. Those will be built into numbers for 2019 and into our guidance range, so effectively we’ll be a part of that manufacturing cost being offset by price realization as we move forward. So those are the two big things regarding that. Joe O’Dea: And as of October you were talking I think about price offsetting cost and so is that meaning that you know a little bit more assertive on the price front to go after some of these costs or just trying to understand that dynamic of price cost neutrality and I think that was expected three months ago. You've got higher costs today, but you still expect to offset the unit price.

Yeah, I think actually what we really expect to do is a little bit stronger performance in the fourth quarter than we actually expect price to more than offset costs. It didn't happen and so that was the – that was the challenge that actually happened there. As you look into 2019, as we said, we expect price to offset manufacturing cost increases. Joe O’Dea: Got it. And then just on the revenue expectations for the year and the modest growth, as you walk through some of the key end markets and the puts and takes there, it's unclear I guess the degree to which you know you are looking at a scenario where you know volumes are up. So I think you know most of the commentary leans a little bit more constructive. There are some clear pockets of headwinds, but you know overall it leans a little bit more constructive and so is that to suggest that you know the base case expectation here is that we've got a little bit of volume growth in 2019 on top of the pricing expectations.

Yes, yes, there is there is a modest amount of volume increase on top of good price, that's correct. Joe O’Dea: Great, thanks very much.

Thank you. Our next question today is coming from Ann Duignan. Please announce your affiliation and then pose your question.

Yes, hi, good morning; its JP Morgan. I'd like to go back to the financial services business and I was hoping you could give us some color on the unfavorable impact from returned or repossessed equipment in Europe and Latin America specifically. Should we now be concerned that residual values are set too high and that this is just the beginning at negative residual value risk for the finco as we go forward, both in Europe and LATAM.

Actually, most of that – Ann, this is Andrew again. Most of that is related actually to the Cat Power Financial portfolio rather than to construction equipment and that was specific items related to the portfolio I was talking about where we have had some troubled loans which we are making substantial progress on actually working through those. We've taken write offs in the second quarter and the fourth quarter and the residual risk is being managed and also the portfolio is been managed going forward. This is not a reflection of construction industry residuals.

If those write-offs were associated with, primarily with the marine portfolio for loans that were made quite some time ago.

Okay, and those are a surprise or have you been anticipating those as you run through the year?

I mean, as it always happens and until you actually take or repossess a piece of equipment back, you don't actually know what the real value is, so you have an estimate and some of those estimates were proving to be wrong.

Okay, and just real quick on my follow up on the revenue guidance, you know up modest but pricing should be 2.5% which again as others have pointed out, so just you know for the flat volumes. Can you talk about what you are seeing broadly in Europe? I know Turkey was a source of weakness, but are you seeing any broader weakness in Europe across the different regions? A - Jim Umpleby: Yes Ann, I don't believe we gave the 2.5% price guidance for ’19, so I think that was…

A 1-4 aggregate is 2.5, right?

That’s fine, that’s fine. So we talked about – just going around the world you asked about Europe, but again Turkey's been an area of real concern. Just going around the world, Brazil has been tough, Argentina has been tough, South Africa has been tough. But in terms of pointing to a particular country in Europe that has created concern for us, no. Obviously well are all waiting to see what happens with Brexit and how that'll shake out, but no, other than Turkey that's the biggest concern.

Okay, I’ll leave it there, thank you.

Thank you.

Thank you. Our next question today is coming from Mig Dobre. Please announce your affiliation and then pose your question.

Yes sir, good morning, Baird. I want to go back to maybe understanding what's going on, on the cost side a little bit better. If you are saying that volumes here are going to grow modestly next year, how should we think about the manufacturing costs that are currently embedded in your outlook in terms of the headwinds on that and can you also may be comment at all on how you are thinking about R&D, how you are thinking about SG&A and I know somebody already asked a restructuring question. But what would you consider to be a normal restructuring level in terms of the transport for the business?

Yeah, so starting on – as well I think we’ve tried to say, we expect price and manufacturing to offset each other, so that's our expectation. And obviously you know the timing of how those price increases come through and how that feeds through into the business route will be something that we'll be reporting on, but overall we expect the two to brush through the year. We will continue to make targeted investments in both R&D and in SG&A to expand their service offering and also other offerings as well, so those will – but we will be disciplined about those increases and they will affect around things which we expect to get a return on as you move forward. With regards to restructuring, the problem is if I give you a number today within restructuring, I can guarantee you that something will happen during the year which will change it, because as we know restructuring charges can only be taken once actually, and the announcements were made of some restructuring event. But what we expect them to be is substantially below the $400 million this year and therefore that's why we are prepared to observe what would have been normal earnings profit per share for the year.

I see. Well, you know instead of asking a question maybe I'll just make a comment. I don't know about the other participants on the call, but as far as I'm concerned I can tell you I'm having a really hard time equating exactly all that’s baked into guidance vis-à-vis, but we’re all kind of learning it in terms of how commodity prices are progressing, fuel prices are progressing and really kind of your putting your overall outlook together for 2019. So I'm wondering, if there's a way at the Analyst Day or maybe next call that we can get a little more granularity at signal level in terms of what are you thinking from revenue and what you are thinking for margins as well. I think that would be really helpful. Thank.

Thank you. Our next question today is coming from Jerry Revich. Please announce your affiliation and then pose your question.

Hi, good morning; its Goldman Sachs. A - Jim Umpleby: Hey Jerry.

Jim, I’m wondering if you could expand on your earlier comments in terms of pretty good quotation activity and resource industries. Can you just give us a flavor for in terms of commodities that are driving increase today and when do you expect that to translate to seeing order and backlog growth and resource indices again. Yeah, are you hearing from your customers that we're going to need greater clarity on U.S. China trade relations for them to place the orders or any additional context along those points would be helpful please?

You know what we’ve seen is the idle truck fleet continue to decline throughout 2018. As I mentioned earlier, the utilization of machines continue to increase. We believe that most of the units have now been bought back online and of course we are in a situation for number of years where there was a very large fleet parked and that is no longer the case. Most analysts are forecasting an average of 5% to 6% growth in miner’s capital spending in 2019 compared to 2018. Certainly mining companies are working to get the most out of their assets and they're you know they are being cautious as to when they place orders, but quotation activity as I mentioned is quite robust. We are selling more product and we expect to have a higher level of business in ’19. Certainly there is some softness in areas like Indonesian coal, but again that's being offset by demand in other regions.

And just to put a finer point on that, are you at a point where you think where now that quotation activity after hitting a pause and translating to orders in the back half of ‘18 will see greater pace of new equipment orders in the first half ‘19 based on the timing of the tenders that you are looking at?

Again, mining in particular is quite lumpy and you can get orders. A single order for a very large number of pieces of equipment that has an impact on the backlog, so again I hesitate to try to quantify it in terms of a quarterly cadence, but again year-on- year 2019 we expect higher sales ’19 than ‘18.

Okay, thank you. And Jim the other area that you mentioned that's positive in ‘19 is locomotives. Can you just frame for us based on the production plant and orders in hand how much of a production ramp are we thinking about ‘19 verses ‘18 compared to you the healthy run rate this business was at prior to Q4?

Yeah, you know we are not going to quantify it, but certainly again you know the rail traffic has in fact increased in 2018. I think we mentioned in a previous call the we had good growth in real services and with higher traffic and also we made a couple of acquisitions as we mentioned earlier this morning. So we expect continued growth in our service and parts businesses, we are seeing rebuilt again, we expect our business to increase in ’19, would hesitate to try to compare it to where we were in previous period, but it is getting better.

Thank you.

Thank you. Our next question today is coming from Seth Weber. Please announce your affiliation and then pose your question.

Hey, good morning; its RBC. I wanted to just go back to China for a second. You did talk about expectations for the Chinese construction market, the industry being kind of flattish, but can you just talk about whether you're seeing anything unusual there from a competitive pricing perspective and whether that is something that kind of contributed to the lower than expected construction margins in the quarter? Thanks.

I think as Andrew mentioned, that really did not impact construction margins in the quarter, that's not one of the things that we cited. Certainly you know we have competitors all over the world, we have competitors in China, but you know we are very well positioned in China. We have invested significantly. We have more than 20 manufacturing facilities. We have roughly 13,000 employees. We have local leadership teams. We’ve vertically integrated our supply chain in China, so we are very well positioned to compete and win in China. We're introducing new products. So we feel good about our competitive situation in China and again there's a variety of forecasts that are out there, but after two years of a robust growth in CI for us in China we expect to be about flat next year.

Yeah, can I just add a little bit of color on the CAT sales in China actually relating to this, because we did see very strong sales in the fourth quarter of 2017, which then fell through into the first half of this year where obviously China as you would expect in the normal selling season pre this summer actually were very, very strong. Third quarter and fourth quarter have diminished slightly form those first half of the year as you would expect a return to much more normal pattern. So actually – it wasn’t actually an overall view of China for the year that impacted the quarter. It actually was just a weakness relating to a very strong comparative in 2017.

That’s helpful. Thank you and Andrew maybe just follow-up on the, I think you said share buyback, you are targeting about 750 in the first quarter, which would be down for you know $1.8 billion here in the fourth quarter and you're sitting on you know $8 billion of cash. Is there a reason why you are not being more aggressive, I guess versus the 750 outlook for the first quarter?

Yeah, a couple of things. One to think about, on which is obviously we’ve always said we would be opportunistic and would depend on market conditions, and so forth as to when we are going to market and our other uses of cash. The reality is actually in the first quarter we have a lower cash flow partially because of our incentive compensation payments. So we do take that into account when we're considering the amount of year. As you'll know now, this will be the fourth quarter in a row which will have done $750 million. Our aim is to be in the market on a more consistent basis rather than be in and out. But we will take opportunities try to actually go back and buy more, but that would depend on our free cash flow and other investment priorities.

And I think that's going to – thanks Seth. I think that's going to need to be our last question. Jim do you have any final comments.

Well, thank you Amy. Again, 2018 was a terrific year for CAT. We achieved record profit per share and strong operating cash flow, returned significant capital to shareholders and continued to invest for long term growth. Again as I mentioned, we believe our enterprise strategy is working. Even though 2018 was a record year, we’ve increased our profit per share outlook for 2019 and look forward to continuing to serve our customers. Thanks for joining today’s call. We look forward to speaking with you next quarter.

Thanks Jim. And Kate, I think that concludes our call.

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.