CAT
#As we sit now, the thing that has actually been pretty good is sales that go directly to end-users, rather than through a rental fleet.
So the weakness right now is ---+ mostly what we've seen is in and around our dealers loading rental fleets and I think that's where this sort of hangover of equipment that was being used for oil and gas, a lot of it resides right now.
They are pretty stocked up on rental fleets.
Used prices are down a bit, so that's not encouraging them to sell used equipment out of a rental fleet and replace it with new.
So I think that is right now the reason that we are not seeing a more positive construction number in the US.
You would hope ---+ time heals all things and you would hope here sometime over the next couple of quarters that we would be through that.
Thankfully, it's not another down year there.
It's sort of flattish there for the full year, up for the industry.
We're doing a little better than the industry and that's kind of continuing a trend that's been going on now for a couple years.
We've got great product, great dealer distribution there.
I think customers are kind of coming around to the quality business model.
Again, hopefully next year can build on this.
We'll have to wait and see, but at least for this we're looking for, from an industry standpoint, of flattish industry.
That's actually a great question and I'm remiss for not having mentioned that when I talked about the second half.
We have had good cost reduction during the first half of the year for material and our view is we will continue to have cost reduction in the second half of the year versus 2015.
But commodity prices have come up a little, so we are probably going to have less than the first half of the year.
In other words, full-year, even second half versus the second half of last year, positive, but the positiveness has probably peaked and it will probably go down a little bit in the second half of the year.
So that is one of the reasons, I think, that second-half profitability ---+ that plus the inventory declines, plus the absence of the sort of $0.04 we got on the security sale in the second quarter all kind of make it look like it doesn't hang together first half, second half with sales.
I'll take that one; it's <UNK> <UNK> here.
I don't think it was any surprise that Joy was acquired with what has happened to them and the mining industry in general and all the mining customers, particularly coal customers, that are out there around the world.
Obviously we have known Komatsu for decades.
We've known Joy intimately as well the last decade or so since they emerged from bankruptcy and we entered mining in a bigger way.
So neither one of these are new players.
Certainly it's a consolidation that makes sense.
In the mining world, it's going to be smaller for at least a period of time.
Again, we know them; they know us and I think, going forward, we will continue the competition just as we have in the past.
And I expect us to continue winning where we win.
No doubt about that, and it's particularly in construction.
Part of that, as you mentioned, is seasonal and I think part of that again is related to dealers taking inventory down during the second half of this year.
Again, partly seasonal; I think partly delivery performance.
We are doing a much better job of delivering on-time stably to customers, so I think both of those things are contributing to lower orders.
If you look at end-user demand ---+ I'm talking construction here ---+ for the second half of the year, our sales to users that's going to be pretty steady in the second half of the year.
So it's not as though we are seeing a deterioration in demand from end-users.
It's more dealers have lowered orders to take out some more inventory.
Yes, I think that is exactly what we're saying.
I think that's a fair assumption.
The retail sales numbers are the ones to watch and really drive this whole supply chain.
And as long as they are steady, the chain will work itself out.
As <UNK> said, second half will look different than the first, but that's the one that really drives us.
Of course, that gets back to market share and a lot of other things as well, <UNK>.
I don't know if they will be flat flat, but they should be closer than they are right now, yes.
So that's 2016 versus 2015 costs and we start ---+ a lot of that started coming out very early in 2016.
Our first quarter was quite favorable; our second quarter was even more favorable.
So I think we will probably end the year with a ---+ as you look forward, based on the timing of the cost reduction, a tailwind but I don't think it would be $1 billion.
I will start with that on the Solar piece and then I will turn it over to <UNK>.
But on Solar what we see customers pushing out a little bit is the timing of some maintenance and that doesn't have usually as long a backlog as the new product, so it probably impacts this year's sales a little quicker than it does backlog, just by the nature of it.
I think the reason that we made a comment on Solar backlog is because everybody is concerned about it and we're just trying to reassure everyone that what they're selling they're replacing with new orders.
That's not falling off a cliff or off the table, and the gas business keeps on chunking along.
I'll turn it over to <UNK>.
Thanks.
In terms of your trough earnings question, I think your question is a reasonable one to assume.
As you say, without all the restructuring costs, we're at $3.55.
And as <UNK> said, you take $0.08 back, we are a little bit above that even.
But certainly around 40, where we are now, that's a reasonable assumption to go after and that's where we are going to fight to try and find a bottom, if that's what we are fighting in the future.
This is <UNK> <UNK>.
I might just add a quick point, <UNK>.
The trough earnings number has been stated between $2.50 and $3.50.
I'd say if you look at how ---+ I would say the sales decline modeled in those scenarios would not have been as severe as what we've experienced in the four-year trend.
So going from above 60 down to 40, we've been absolutely trying to stay ahead of the process to be prepared if things did not get better.
If we were not staying ahead, quite frankly, there was no way we could have done $2 billion of cost reduction this year to offset some of the price pressures and the drop in volume.
We really like our midcycle numbers.
Everybody wants to know when we're going to start recovering in that trend towards midcycle, but we still need to be prepared for what could happen in the short term on the downside.
And so we have talked about kind of a 25% to 30% decremental.
I would say we are still committed to that.
I would also say that we are being extremely directive in the things that we fund.
Things like digital, which will be up significantly this year over last year.
Things like funding the businesses that we believe have the highest opportunity to improve the value of the Company and our operating profit after capital charge, which we call OPACC, in the medium term.
So we want to fund those industries which we think are attractive for us and where we play well.
And things that are not as attractive are the places that we look first to cut.
We are still in that process and we're still preparing to stay ahead of the game.
And I would say that, if required, we would be ready.
That's right, <UNK>.
I would just come back to the incremental/decremental pull-throughs on the way up and the way down that have served us pretty well.
Going back to 2009, on the way up from $30 billion to $66 billion and then on the way down from $66 billion to $40.25 billion this year.
We managed to stay inside of those targets all the way up and down.
I think that's probably one of the single-biggest differences we've been able to accomplish from prior deep slowdowns in the 40% range top line is we've got everybody targeting those and that's where we go after with our cost reductions.
And, as <UNK> said, our capital allocations in those businesses we really want to stay in and thrive in long term.
So a couple of things.
One, $2 billion is a little too high a number.
It's probably more like year-over-year $1.5 billion.
And it's probably split two-thirds Construction, one-third Resource, in that sort of ballpark.
In terms of adequate levels, I tried to address this point.
I think adequate levels is a little bit of a moving target around delivery performance.
So again, if we were able to cut delivery performance in half from where it's at now, dealers would feel comfortable holding less inventory.
If our delivery ---+ let's say things ticked up, orders ticked up, the markets heated up, and let's say we had trouble keeping up, that would concern dealers and they would order even more.
They would want to hold even more.
But just the opposite is happening right now.
We have excellent delivery performance.
They can get pretty much what they need when their customers need it.
So that's causing them to hold or want to hold less, and the more ---+ the better we do with Lean, the more that will probably be the case.
So I'm trying to stress the point I don't think dealer inventories are excessive.
There's a reasonable range, but I think they will come down over the second half of the year.
Well, it should be ---+ and <UNK> has talked about this quite a bit ---+ on the way up, we previously kind of had a 25% incremental target.
But I think while we have not quantified it, certainly our expectation is that the first chunk of what goes up would certainly be at a higher rate than that.
Yes, that's a good question.
I think our construction business is a great example of how our managing for maximum OPACC, operating profit less the capital charge, can work.
They've been on this path to maximize OPACC for the last few years, which is fundamentally around figuring out where you make the most money and where you don't; fixing where you don't, and reinvesting in where you do to increase sales.
So that's over-simplification of it, but that has worked.
They have also taken out ---+ they are also very cost-conscious.
They have taken out costs, but relative to where we think a trough, a midcycle, a peak would be, they are not as bad off as, say, oil or rail or mining.
But I think there's plenty of upside for them.
North America is still well below the peak.
Brazil is, wow, so far down you can hardly see it.
So I think there's plenty of scope for improvement and, based on the work that these guys have done to figure out where to invest to drive OPACC, I think there's still plenty of upside left for them.
I don't see material down side at the moment, frankly.
We've seen so many states step up with bond issues.
We've seen many states step up with tax increases for infrastructure spending.
Anecdotally, a lot of our customers are busy across the country.
A 2% growth rate of the ---+ 1.5% to 2% does not spur a lot of investment, but there's enough going on to tell me that we are not facing a cliff here unless there's some outside event of some kind that occurs.
So I don't see it collapsing or, as you said, a big fall off.
I would sure like to see the growth increase based on increased economic activity.
This is <UNK>.
I'll just make one other comment; and we're not going to give you kind of an incremental number this year to plot in.
We've talked about it being fairly high.
One thing I would say for reference is that the vast majority of costs we have taken out we would not add back.
And so as we have restructured, as we have changed things, if you think that there are costs that we are ready to add back that we've taken out, I would say, outside of some very minor amounts, most of those costs we're not going to add back.
So as we add period costs in an upturn relative to our incrementals, it would be focused really around our OPACC improvement agenda; those places we want to invest more because we think there's a significant amount of value.
And so that will probably drive that incremental discussion when we get to that point.
I think probably the best way to say that is where oil prices are today it's probably not enough to drive a lot of incremental investment there.
I think the thing you will see first is the idle fleets being put back to work, particularly around drilling, before we see some investment.
Oil prices this morning I guess were in the $42-plus range; we are probably still a ways away from that.
This is <UNK>.
Cat Financial is always trying to increase their share.
Just like every other part of our business, they are trying to increase their market share, if you will; the percentage of deals that they do versus their competitors.
And they've actually done a very good job over the last couple of years in increasing that and I think that's what you are seeing.
The limit on that is you certainly don't want to do shaky deals.
You don't want to sacrifice credit quality to do it, but you want to work very closely with the dealers, with the customers, and capture as much market share as you can.
This is <UNK>; I will add on to that.
We are very proud of the people at Cat Financial and how they run that business very independently.
In partnership with our product groups, but very independently.
And so you will see our allowance being very well-maintained at around 1.25%.
Past dues, a similar trend at 2.93%; fairly close to previous quarter and below historical average.
And we have grown our share there.
But one thing I want to comment on, which we had a few questions come in on, there is pressure in the used equipment market.
It's probably down 2% or 3% from the last quarter; it's probably down 5% to 10% if you look from a year ago.
We carry a little over $600 million of used equipment, both from repossessions and residuals.
Still pretty well-behaved.
We had a gain last year and we had a very small loss this quarter and so we don't see any big issues in that regard.
But I would tell you that that is an area that does have some pressure and that we are watching that is, at this point, very well maintained.
That's a good question.
I wouldn't relate it specifically to any one of those.
I think you have to look at it in the aggregate and <UNK> made actually a really important point a couple minutes ago and that is that we are trying to get ---+ we don't have a crystal ball.
We don't know what's going to happen in the marketplace, but we want to be positioned to deal with it if it does happen.
So I would say that over the course of the past quarter we are a little more negative on the world economy; the Brexit, the Turkey, the elections, oil price, you name it, all of that contributes.
And we are less bullish on second-half sales because of that.
Whatever impact that would have in the future, we are trying to get ahead of that with additional cost reductions.
So I would say it's us trying to get ahead of the potential, not what we actually know.
And not specifically related to any one of those items.
Hopefully, this is the worst quarter we will see.
I think embedded within our outlook we see it getting a little bit better.
Second quarter, price wise, was deteriorated a little bit from the first quarter.
And when you get to numbers as ---+ we're talking a change quarter to quarter of a couple hundred million; not for pricing, but in total for them.
Costs were a little higher because of some inventory adjustments, just kind of normal surplus and excess inventory.
And then we had little negative inventory absorption for RI.
They took out inventory in the second quarter; that hurt a little bit.
They are certainly a part of the extra cost reduction that we are going after in the second half of the year.
When I talked a little bit about first half/second half, we think their sales are going to be up a little bit in the second half of the year, so I think the combination of extra cost reduction and a few more sales, hopefully, will make this the ---+ make the second quarter the worst of the year.
It's hard to tell actually.
The highway ---+ the Federal Transportation Act that was passed last year, in itself, did not increase overall funding an awful lot in this country.
It held it at inflation plus a little bit, but it did give it five years.
I think as most states have recovered from their fiscal problems the last few years, they are starting to recognize the need for infrastructure and we are seeing that.
If there is any impact, and I've said this all year long, from that transportation act of last year, it's going to be a 2017 event.
We might feel it.
I don't think it would move the needle a great deal, but we would certainly feel it, and it's hard to quantify until states start lining up for their matching funds.
So there's quite a big effort underway to get that done as well.
We'll just have to see it play out.
It's certainly going to be a positive, but I would doubt we'd see it move the needle in a big way in 2017.
But we would feel it.
Two good questions, Steve.
First, on taxes.
All-in we're looking at a 25% tax rate this year, but that is a little lower because of all the restructuring, which has tended to be in a little higher tax jurisdictions.
So the restructuring is attracting somewhere around I think low 30%s, 34% I think.
So excluding restructuring, it will vary a little bit by quarter depending upon how much restructuring there is, but probably around 27%, excluding restructuring.
And then what's normal on incentive pay, I'm going to qualify it a little bit here: it depends on how many employees we have, because it scales if you look at it in terms of dollars.
But based on the number of employees we have right now, if we were to pay everyone at a 1.0 payout, which we would consider to be normal, in a normal year, you are looking at something in the order of magnitude of, let's say, rough number $850 million.
Joe, I feel a little bad here; I didn't ---+ I tried to prep a little on rail, but I didn't do it by region, so can't talk too much about North America specifics.
Sorry I'm just not further up to speed.
What I would say is we're looking for a bit better rail sales in the back half of this year.
Remember, we have just introduced our new locomotive at midyear.
And while sales aren't huge for that right now, given the state of the overall industry, we certainly are going to sell some.
So that's part of the increase in the back half of the year.
Well, we are hearing that dealers are booking a bit more.
In fact, I verified that with our Mining group last night.
They are seeing ---+ dealers are seeing an uptick of bookings around rebuilds.
Hasn't really hit our parts business quite yet, but hopefully it will.
And your synopsis of no big upturn in parts sales around Mining is actually correct.
At least so far.
I think we are at the top of the hour here, actually a minute or so over, so we will conclude the call.
Thank you very much.
