Michael Lynn DeWalt - Vice President-Finance Services Division Douglas R. Oberhelman - Chairman & Chief Executive Officer Bradley M. Halverson - Chief Financial Officer & Group President.

Stephen Edward Volkmann - Jefferies LLC Andrew M. Casey - Wells Fargo Securities LLC Joe J. O'Dea - Vertical Research Partners LLC David Raso - Evercore ISI Ann P. Duignan - JPMorgan Securities LLC Robert Wertheimer - Barclays Capital, Inc. Ross P. Gilardi - Bank of America Merrill Lynch Jerry Revich - Goldman Sachs & Co. Jamie L.

Cook - Credit Suisse Securities (USA) LLC (Broker) Eli Lustgarten - Longbow Research LLC.

Good morning, ladies and gentlemen, and welcome to the Caterpillar First Quarter 2016 Results 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, Mike DeWalt, the Director of Investor Relations. Sir, the floor is yours..

Thank you, and thank you very much for everyone on the line, and welcome to our first quarter earnings call. I'm Mike DeWalt, Caterpillar's Vice President of Financial Services. And on the call with me this morning, we have Doug Oberhelman, our Chairman and CEO, and Brad Halverson, our Group President and CFO.

We're going to do today's call similar to what we've done the past couple of quarters. We'll be going through a short slide deck before we get to the Q&A. And if you don't have that slide deck in front of you, it's available on our caterpillar.com website with the conference call webcast link.

Remember this call is copyrighted by Caterpillar Inc., any use, recording or transmission of any portion of the call without the expressed written consent of Caterpillar is strictly prohibited.

If you like a copy of today's call transcript, we'll be posting it in the Investor section of our caterpillar.com website and that'll be in the section labeled Results Webcast. So if you go to page two of this morning's slide deck, you'll see our forward-looking statements.

And certainly, this morning we'll be discussing forward-looking information and that involves risks, uncertainties and assumptions that could cause our actual results to differ materially from the forward-looking information.

In addition to page two of the slide deck, a discussion of some of the factors that individually or in the aggregate could make actual results differ materially from our projections can be found under Item 1A Risk Factors in our Form 10-K filed with the SEC and in the forward-looking statements in today's financial release.

In addition, a reconciliation of non-GAAP measures used in both the financial release and this presentation can be found in our financial release and, again, that's been posted on the caterpillar.com website. Okay. With that, let's flip to page three of the presentation which is the agenda.

I'm going to walk through the first quarter and the 2016 outlook. Then Doug will go over a page of key points. And then Brad and Doug and I will move to Q&A and answer your questions. So with that let's move to page four and this is a pretty high level summary of sales and profit for the quarter.

And in the little box at the top right-hand corner of the page, I think is an important point. First quarter's quite a bit lower than the second quarter a year ago, and I'll cover that here in a second.

But it was essentially right in line with what we were expecting for the first quarter in terms of sales and profit and profit excluding restructuring costs. So this page then primarily covers this year versus first quarter of last year, and sales were down $3.2 billion.

$1.6 billion of that was Energy & Transportation, $1 billion Construction, $0.5 billion Resource Industries, and I'll cover those in a little more detail on the next page. Sales volume was the primary driver of the $1.57 decline in profit per share, or a decline of $1.40 excluding restructuring costs.

Price realization contributed another $234 million, and I'll cover price realization a little bit more in the context of the outlook. Other income and expense was unfavorable; that's below operating profit, $194 million. Two things really in there.

In the first quarter of last year, we had $120 million gain, and that was from the sale of our – the last part of our interest in our third-party logistics business, and then the difference between currency translation and hedging was negative, the primary reason for the rest of the $64 million.

Restructuring costs were unfavorable, $126 million in the month. That comes after our announcement last September where we accelerated actions.

And then in addition to that, in the first quarter, we recorded a large chunk of restructuring costs for our ending production of our vocational on-highway truck, and that was not considered in the outlook before. And then on the bright side today, we have $474 million, almost $500 million of lower costs in the quarter.

That's period costs and variable costs. And certainly for the period costs piece, a decent chunk of that was from the restructuring actions that we've been implementing over the last few years. So let's move on to page five. This is a little more explanation on sales change.

It was a pretty good magnitude, $3.2 billion, so we thought it would be a good idea to kind of go through the elements. Energy & Transportation had the most significant decline, and that was $1.6 billion. Now oil and gas and transportation made up over 80% of that.

With oil and gas – and we've been saying this for the past year – we had a sizable backlog for reciprocating engines for drilling and well servicing as we ended 2014 and started into 2015. And those turned into sales for us despite lower oil prices during the first half of 2015.

So we always knew the comparables between first and first and second to second were going be tough. That was a big piece of it. We also had a high level of locomotive sales in the first quarter of last year, and that was certainly not the case in the first quarter of this year.

So those two things were the bulk of the decline in Energy & Transportation. If we move on to Construction, the single biggest reason for the decline in sales is not demand, it's change in dealer inventory.

So last year, we had a much more sizable increase in dealer inventory in the first quarter, and it's not uncommon to have an increase in the first quarter as dealers stock – choose to stock up a bit for the second quarter selling season; it's spring and summer, and that's a more activity.

But the increase this year was smaller than the increase last year, and that was about half of that decline. About a third of Construction Industries decline was end-user demand, mostly North America and Latin America. The North American piece, we're actually seeing in terms of general construction and infrastructure, decent business in North America.

Much of the decline in demand in North America is in the oil patch. So the first quarter of last year, that was still going fairly strong. And we think that's a decent piece of the reason Construction is lower. And as we go through the year, we ought to be lapping that because it declined as we went through last year.

Latin America is down, Brazil for example and Mexico are quite a bit lower. Asia on the other hand demand was actually up in the quarter and that's a good thing. I'm sure Doug will talk about it in a little bit but China was better for us. And then EAME, principally in the Africa, Middle East part of it was down slightly.

Price realization was negative $172 million. So of the $234 million for the company, $172 million of it was in Construction. And again when we get to the outlook, I'll talk a little more about that. In Resource Industries, we were down $0.5 billion. Most all of that was volume. Essentially no dealer inventory impact there.

And price realization was relatively benign in terms of dollars, negative $38 million. So most of the Resource Industries is lower end-user demand. So that's a recap of the sales change. Let's move forward and talk about the outlook. We did trim the range for sales and revenues.

We moved it from a range of $40 billion to $44 billion to a range of $40 billion to $42 billion. So the midpoint is down about $1 billion and that represents about 2%. Profit per share moved from $3.50 to $3.00. Restructuring costs actually are up a bit from $400 million to about $550 million.

And the vocational on-highway truck, our ceasing of production there is most of that difference. And excluding the increase in restructuring costs, well, we're moving from $4.00 a share to $3.70 a share. There are puts and takes on costs, but the primary reason for the decline in the $4.00 to $3.70 is the $1 billion decline in sales at the mid-point.

So that's the outlook for sales and profit. I thought I would take a minute and talk about the elements of the sales change. So first with Construction, really no change in our volume. I mean there are some, again, puts and takes here. China again is a bit better. We took the forecast up a little for that. Latin America, a little weaker than expected.

Sentiment around Construction – and I think Doug will talk about this in a few minutes – is a bit better. That's good. We like that. But it's a bit too soon, I think, to start playing that into the outlook. So fundamentally, the outlook for volume in Construction Industries is pretty neutral.

Resource Industries, demand looks like it's going to be down again, weaker than we had expected when we started the year, even though it's already pretty low. The recent improvement in commodity prices is a good thing.

We're happy that that's positive for our customers, but it's certainly not enough, and it hasn't been around long enough to drive a sustained increase in demand for our product. Now that decline in Resource Industries is about a quarter of our decline in the outlook.

So Energy & Transportation, this is where the outlook for the year came down the most. And essentially it's, for the most part, transportation related. The biggest piece of that is rail. Looks like it's going to be a tougher year for our customers in rail.

They have a lot of locomotives idled and we think some of the orders on hand are going to get moved out to a later than this year. Marine is also weaker. A competitor of ours announced results yesterday and they talked about the same thing. Particularly around workboats that service offshore oil.

We're also down a bit in Transportation because of the stopping of the on-highway vocational trucks. There was sales in the forecast for that when we started the year, and that's going to ramp down fairly quickly. And the last item, it affects sales and it affects profit, and that's price realization.

When we started the year, we were thinking negative price of maybe about 0.5% and that's what was in our outlook. We've raised that to about 1%. And from a year-over-year standpoint, we think that that will be mostly in the first half of the year.

We saw prices trending down in the second half of last year, so the comps are particularly more difficult in the first half than they'll be in the second half, and most of that decline is going to be in Resource Industries and Construction Industries.

In terms of the timing of the outlook, as you know, there's always some seasonality in our business, and if you look at Caterpillar over the last 20 years, about 49% of our sales usually end up in the first half of the year and about 51% end up in the second half of the year.

This year, that's going to be a little bit more skewed to the second half; we're thinking maybe 47.5% or so in the first half, 52% in the second half, and that represents about $600 million more in the second half of the year than kind of our historical average would lead you to expect.

I just wanted to put that in for context, so you didn't think that there was some big hockey stick at the end of the year, there's not. A bigger second half is normal. Much of the reason for a little bit more skewing in the second half is rail.

And we've talked about this for the last couple of years; we'll be introducing the Tier 4 locomotive in North America in the second half. And then in addition to that, our turbine business is a little bit more skewed to the second half. We've got a good backlog there.

In fact, the backlog from first quarter to second quarter is about the same – or I'm sorry, from the end of the year to the end of the first quarter is about the same. So now, what that all means for the second quarter is that sales will be up about $0.5 billion or so from the first quarter to the second quarter, that's about $10 billion.

And on that, we think profit will be just a shade less than $1 a share. So with that, I would like to turn the floor over to our Chairman, Doug Oberhelman..

Thank you, Mike, and hello, everyone. I'll just walk down through this slide, I hope you have it in front of you. On these seven points, I'd like to make with you and shed a little color, and then we'll go to Q&A as well.

First of all, around China, I was over there about three weeks ago, as I usually do in March, to attend a state-sponsored forum of CEOs from Europe and United States.

And there was a lot of sharing about government policy, where they're going with the five-year plan, where they're going with the 10-year plan for that matter as well, and a lot of discussion around the transition from an investment economy to a consumer economy, and I think that's part of what we're all feeling.

They also announced about the same time, or a little bit before that actually, a little bit of a stimulus, which was minor. And frankly, we're feeling that. This is the first post-Chinese New Year in probably three that we have seen a continued industry uplift for the industries that we serve around construction. It's not a hockey stick.

It's not a boom. It's not a 2010. But it is the first time we've seen that happen, and we have lifted our schedules as a result of that this year. We talked about that in the release. We'll see how long that goes.

This is around infrastructure, primarily high-speed rail, and a lot of it is development in the West where it's really needed, where there's a lot of very backwards places.

So they recognize that and they're working on that, trying to balance, I think, the infrastructure needs with what I described, plus continued investment in airports and so on, with the consumerism they're trying to drive. And that's the balance that I think they're trying to pull off. We'll see how it goes. So far so good.

In the U.S., any – just about any market that's away from oil is doing pretty good. Southeastern U.S., Southwest U.S., we're feeling the benefit now more of housing. In fact, construction and paving segments were up about 7%, and that's positive.

When you get around the oil pads, there's an oversupply of everything and that's kind of shadowing the numbers. I think once that balances out, we'll be back to – or be able to show a fairly anemic, but stable growth. And we're looking – I just heard about the South Carolina infrastructure plan the other day.

It's a $4 billion program they're trying to pass. There's a lot of states lining up to get those kind of things done. And then, of course, the federal – the FAST Act comes in on top of that right now.

And as I've said before, I think the last call, we're looking at that more into 2017, but certainly, that's giving states confidence and we're seeing more and more of that around the country. So that's building. Again, I'm not here to project a hockey stick by any means, but it's – appears to be sustainable and good news for us.

Energy is, as Mike said, and everybody knows, is really flat. We haven't seen any kind of a uptick in our numbers with oil at $43 or whatever it is that these rates. It's probably going to have to go well before we do see that, so we're getting through that. Going on to the second point, operational performance continues to be very satisfying here.

I know that some of these metrics aren't ones you all watch every day, but I do. Certainly, the safety have improved again in terms of recordable injury frequency rate.

And I use that to judge how management teams are operating in our factories, in our offices and wherever they're running, as well as employee engagement involvement, and those numbers continue to drop. They've dropped 90%-plus in the last 15 years and are down significantly again already in the first three months of 2016.

Our quality metrics continue to be good. We just had some reaffirmation of that in Germany at our big bauma show there, in talking with customers and our big dealer Zeppelin, so I'm happy with that.

Variable margin continues pretty well even with the absence of our big, obviously, mining and oil business that we – that are high-margin contributors in the past. So, all in all, operationally, our Lean efforts, our value chain is working.

Our material cost reductions through our purchasing group is working very well and continues on the path that we have been. A little bit on – more on restructuring. We actually bumped that up a bit in the first quarter, as Mike described, for the truck. Our global work force is down about 8,600 people.

We've announced the closure or consolidation of about 15 facilities, were on plan. About $0.5 billion in cost-out, as Mike mentioned. About $375 million of that or so is period costs which is – you would expect to see, and we will make our goals, I'm very confident, this year in what we projected. It's been a tough road.

Needless to say when we take those kinds of deep actions and we've got several more coming for the rest of the year on plan, that would be included in what we announced in September, but it's working. Our strong balance sheet is another important area for us and we're – we've been very focused on that for a long time.

You'll recall we ended 2009 with a highly leveraged balance sheet. We did buy back some shares. We reduced our debt-to-cap ratio. Today, we're sitting on about $6 billion in cash. And, in fact, the debt-to-cap improved again by almost a couple of points in the first quarter. So our balance sheet's just strong.

Our priorities – the dividend, as I've said before, and will continue to say, and that balance sheet strength is one of the reasons we're able to do that and get through this turbulent period. Just a quick comment on Cat Financial. Nothing really obvious to report there, continue to be very tightly controlled and managed.

80% of our customer base there have a balance less than $100,000, so it's a very diverse portfolio. Our past dues bumped up a bit in the first quarter. Not to be – to be expected in the first quarter, kind of a seasonal thing, but less than last year.

So I think all the external and internal metrics we look at point to that business continuing on the path it's been, which is a real strength for us. And then finally, a couple of things on the future. We have maintained R&D. And that's one that has been paying off well for us.

We did not cut R&D to the bone as we might have in earlier cycles, in 2009, and that's paying off for us now in terms of the product that's out there. We invested about $2 billion the last three years. Those products will come to market in the next two years to five years.

And I can tell you what I've seen, it will be outstanding additions to our fleet and really be nice payoff. So to the extent we can, we're going to hold R&D and cut everywhere else. Our Lean efforts are working. Three years over $1 billion of cost reduction through our variable cost, on how we're going about that.

Inventory improvements down about $6 billion since 2012 as well. We've seen a big culture change across our factories and some of that's demonstrated by safety of course. Then lastly, I'd focus on digital. And I know some of you were at Bauma in Germany and we showed – we just started to scratch the surface of that by introducing The Age of Smart Iron.

We intend to be the leader here in terms of asset management, product health, productivity, safety, sustainability and predictive analytics, which is coming. It will be a cornerstone of our CONEXPO display next March in Las Vegas. Today, we've got 400,000 connected assets and growing.

By this summer, every one of our machines will come off the line being able to be connected and provide some kind of feedback in operational productivity to the owner, to the dealer and to us, where improvements down the road the idea being to get to a point where we can show the customer on his iPhone everything going on with his machine, his fleet, its health, its run rate, its productivity and so on.

And we're – we'll be very close to that. We've got over 100 customers on an experimental basis with that right now. Several dealers participating, and a lot of pull from the marketplace for this, which is quite exciting. So I think, Mike, I'll stop there and we can move into Q&A, and we can embellish on any of that as we need to as we go forward.

Thank you..

Okay. We're ready for Q&A..

Thank you. Ladies and gentlemen, the floor is now open for questions. And the first question is coming from Stephen Volkmann. Stephen, your line is live, please announce your affiliation and pose your question..

Great. Good morning, guys. That's Jefferies, and thanks for taking the question. Maybe, Mike, I might take you back to your comments on pricing, if you would.

It does seem like things have deteriorated kind of sequentially over the last three quarters, and I guess I'm just trying to figure out, it feels like some of this at least probably isn't in your control, and yet you feel – it feels like you have fairly good confidence that things get better in the second half.

And I'm just curious if there's any more color you can give us.

I don't know, maybe it's product related, maybe it's geography, or how to think about that?.

Yeah, it's a little of both, actually. I think one of the big issues going on right now is that we have a stronger dollar. Now, there's much of the world, Europe, for example, Japan, where we sell in local currency, so not as big an issue. We adjust for that. But in places like the U.S.

and much of the Africa-Middle East where transaction prices are essentially in dollars, competitors of ours that are coming from a manufacturing base outside the U.S. are being more aggressive on pricing, and so that's putting pressure on us. So that's quite a bit.

And then, of course, in mining, it's a deal-by-deal battle, and that business certainly hasn't seen any signs of improvement yet. So dollar is quite a bit of what I think..

Mike, let me just add there on this point. We have for several years really focused on market share. That drives this business. It drives this business model. It drives our dealers.

And we've been very fortunate up until now, and I agree with Mike completely that the dollar is a big piece of that, in building market share every year for the last five years. And in fact, we've built market share again so far this year over last year.

And that comes with a little bit of sacrifice on price, and that's the balance we're going to continue to drive. And we are – I'll just maybe leave it at that that it's a balance, and it's a kind of a market share gain for us because that drives this company long term..

Great. I appreciate it.

Mike, the tax rate going forward, any change?.

We did 25% in the first quarter, and that's essentially what our expectation is for the year..

Thank you..

Thank you. And the next question is coming from Andrew Casey. Andrew, please announce your affiliation and pose your question..

Wells Fargo Securities, and good morning. On the guidance, the change in the pricing expectation seems to account for kind of most, if not all, of the guidance reduction.

Did you change any of your assumptions related to the variable or period costs that you provided last quarter to offset the rest of the revenue decline?.

Yeah, Andy, so price realization is a couple hundred million of the billion. And certainly that goes right to the bottom line. There is additional cost reduction. And a lot of that would come from incentive comp. I mean, that's lower because the outlook is lower. There's a relationship between those. So those are a couple of offsets from the profit side.

And then the rest of it is essentially lower sales volume and what the variable margin is on that..

Okay. Thanks, Mike. And then, I just want to ask a second question on the accounting principle change.

The benefit that you got this year and then the recast for last year, is that – should we view that as a foundation for future years or can that kind of go the other way?.

Well, one of the – the reason the two years were different is because the amortization of prior-year losses for the most part were different. And those – that's out of the equation now, so I think the – that ongoing normal cost will be less influenced by that.

So it will be I think relatively speaking no more stable, except for we're doing this mark-to-market now. So at year-end, there will likely be – who knows right now whether or not it will be a big positive or a negative, we don't know and it's not included in the outlook.

There could be a mark-to-market change at the end of the year if interest rates go up or down or there's a material change in returns on the funded asset portfolio. You could get quite a bit of variability at year end on that mark-to-market adjustment. Outside of that, I think it's probably a good base to come from..

Okay. Thank you very much..

Thank you. And the next question is coming from Joe O'Dea. Joe, your line is live. Please announce your affiliation and pose your question..

Hi, good morning. It's Vertical Research. First question on the E&T margin in the quarter and then relative to the full-year outlook, it seems like that imbeds some improvement in E&T where you'd found sort of stability in the mid-teens level the previous couple of quarters.

So, could you just talk about expectations there, visibility and timing into seeing that step-up or anything that was a bit of an overhang in the quarter?.

Yeah. I think the actual operating margins for E&T were down in the first quarter and that's because of relative to the rest of the year – relative to last year, a low sales quarter in the first quarter.

So if you think about it, much of the increase in the quarterly sales between the first and the rest of the year is going to be E&T, Energy & Transportation. And that will get added at certainly a higher than operating margin rate. So it's a bit of operating leverage on the sales, they had a pretty low sales quarter.

So I think that'll come back up as we go through the year..

Okay. And then on Construction, looking at your revenue trends relative to what we get out of the retail sales statistics, it looks like some pretty significant destock over the past couple of quarters or at least a low rebuild in 1Q relative to normal.

In general, how do you characterize inventory levels at your dealers, and I guess particularly in North America, if those have reached pretty thin levels relative to history?.

Yeah, so you're right. There is a – there is – if you look at the retail sales for Construction Industries and what we actually reported as sales, there's a disconnect. The – I don't have the number right in front of me, but I think our sales were down 18%, 19% and the retail sales were down less than 10%.

The difference is not so much a destocking in the channel. It's – we normally build inventory in the first quarter. We did that in both quarters, but they built a lot more inventory.

We built – or dealers, I'm sorry, built more inventory a year ago, so that's negative for our sales and that's what's taken that retail sales level and bumped it up a little bit for us in the first quarter..

And....

I think our – yeah, I would say there's always some seasonality in dealer inventory. It goes up during this part of the year. And then it – everything else being equal, with relatively level demand or expected seasonal demand, it will come down between here and the rest of the year, and that's exactly what we think will happen..

This is Brad. It's hard to look at all the factors, but I will tell you one factor that's influencing this, we believe, is the benefit of Lean. Our – hitting our promise dates to our dealers in terms of the products has improved over the last few years.

I think there's a higher level of confidence that we'll deliver the product when they need it, and I think because of the benefits of Lean we're seeing a little bit lower inventory at the dealers..

Got it. That's really helpful. Thank you..

Thank you. And the next question is coming from David Raso. David, your line is live. Please announce your affiliation and pose your question..

Hi, Evercore ISI. I was just trying to think through the inventory changes at the dealer level.

Have you changed at all your view of the dealer inventory target for the year and if you can refresh us on what that is?.

We've not made any changes. I don't recall talking about a target. I think last year dealer inventory declined I think around $1 billion, if memory serves me..

That's right..

And I would expect it probably to be somewhere close to that this year as well..

And regarding the backlog, how much of the backlog doesn't ship this year? I'm just trying to get a feel for where the backlog is relative to hitting the guide and just trying to understand maybe where – we obviously have our own thoughts about orders for the rest of the year..

Sure..

So where would that leave the backlog toward the end of the year?.

Yeah. Honestly, I don't have the – I mean I have the backlog numbers in total which were flat from the end of the year to where we are now. But I don't have a breakdown of what ships later in the year. We'll put that – I think we normally put that in the queue, but I don't have it in front of me, David..

Then I guess maybe the same kind of question. On the backlog change, I think you had mentioned a backlog similar at Solar sequentially.

Is that correct?.

We didn't say Solar in particular but we said each of the segments. But you could throw Solar in there as well. It was similar to – relatively unchanged from year end to the end of the first quarter; actually up just a touch but not much..

All right. That's helpful. I appreciate it. Thank you..

Yep..

Thank you. And the next question is coming from Ann Duignan. Ann, your line is live. Please announce your affiliation and pose your question..

Hi. It's Ann Duignan, JPMorgan..

Hi, Ann..

Can I ask a question on working capital and the balance sheet and cash flows? If I look at days on hand and days sales outstanding, both were up year-over-year and quarter-over-quarter.

Quarter-over-quarter may be seasonal but – should we be concerned at all that inventories are not being caught quickly enough, Doug? And what is the outlook for free cash flow for the full year? I mean you used cash this quarter versus – normally in this type of an environment, we might have expected some inventory relief and working capital to be a positive..

Yeah, Ann. This is Mike. I'll take that. We don't really make a forecast for cash flow. That's never really been a part of our outlook, but if you look at the operating cash flow for this quarter, it was a couple of hundred million positive, and that's despite two big negatives in the first quarter.

As a part of our restructuring costs last year, we had a fair bit of employee related costs. And that was, for the most part, paid in January. So there was, I think, about $400 million of extra negative cash flow in the first quarter that was related to the restructuring actions from last year. So that was a bit of a drag.

And then, of course, in the first quarter, we always pay – we accrue incentive compensation throughout the year, but it gets paid in the first quarter, and that was I think $600 million. So between the two, we had close to $1 billion drag on operating cash flow in the quarter.

So I think you'll see that improve, operating cash flow ought to improve quite a bit from first quarter levels as we go through the rest of the year. I think on inventory, we've been pretty public by saying that the one operational thing that we've not been as happy with is inventory turns.

There's all kinds of reasons why quarter to quarter to quarter, things can change, but on balance, our forecast has an improvement in turns built into this year. And we have everybody in the company working to make that happen..

Okay. Thank you. And just as a quick follow-up, I noticed that the Financial Services took $1 billion loan from the parent or from Machinery. Can you talk about what's happening there and why that was necessary? Is that unusual? It didn't show up a year ago. I'm just curious what's going on..

No, that's not unusual. I don't know if I would call it routine, but it's not all that unusual. Intercompany loans between the parent and all of our subsidiaries to kind of help better manage cash happens all the time..

Okay. Thank you. I'll get back in line..

Thank you. And the next question is coming from Robert Wertheimer. Robert, your line is live. Please announce your affiliation and pose your question..

It's Barclays, and good morning, everybody. The question is on the oil patch. Oil service companies are obviously feeling a lot of price pressure, whether it's pressure pumping or offshore rigs, and some of that price pressure – so the fleet in the field is idle, and so maybe it's easier to discount. So I've a specific question.

Are you seeing pricing on aftermarket and are you feeling increasing pressure from people like that? And a general question, it sure feels like a lot of people are trying to target – bringing the whole cost curve down to $60 (39:54).

I wonder if you feel like you're already there on costs, you never raised pricing as everyone else did or whether you really have a lot of work to do to get structural cost down to where everybody's trying to target it in the future..

Yeah, that's a lot, Rob. First on parts pricing, that – if you look at our year-over-year price realization of the issues that we have, for the most part, that's new machines, that's not aftermarket. And I'm not saying it's zero, but in terms of materiality, it's not that big a deal. So that's the pricing point.

In terms of the cost curve, a lot of the product that we have, particularly on the reciprocating engine side, is similar – let's take a 3500 Series engine. It goes into machines, electric power, it goes into marine. It goes into providing power for a drill rig or a frac pump. So it's actually spread across a number of industries.

I mean we've worked on the cost structure, and I think actually not just for oil and gas, but across most of our products.

I think at the sales level that we're at right now, based on the material cost reductions we've got the Lean-related efficiency improvements, the period cost reductions, the restructuring, I think we've actually done a pretty darn good job on trying to get the cost structure in line for the most part with where reasonable demand would be..

That's perfect. Mike, if I can ask just a very quick procedural one. You don't usually guide the quarter. You did, and I'm sorry if we made you – cost you a trip to London. And then you kind of – obviously, the dealer sales pointed to a slight reduction in the outlook. So that was no surprise.

But procedurally, did you just not do it till all the quarterly numbers came in or was there something that sharply accelerated down the last few weeks?.

No. I mean, the numbers that – we don't normally provide actual guidance. We kind of nudge, I guess. We provide some color around what we think. And I think we probably didn't do that as explicitly enough when we did our year-end release.

And the analyst guidance for the quarter ended up looking more like the pattern for last year rather than the pattern for this year from a quarterly cadence. And we were coming down from oil and gas last year. So I don't think that was well played into the guidance.

So no, what we did at Barclays was just trying to get expectations set there, thereabouts where we'd thought all quarter, but was not a big step-down or a run-down, and we ended up actually being pretty close to what we thought. I mean we've got many businesses, not just three segments.

Within each one of those, we – like E&T, we have marine, we have recip oil and gas, we've got turbines, we've got power, we've got rail, we've got rail services, and each one is difficult enough to forecast. But there's just a lot of moving parts.

I know from the outside looking in, it might seem like our business ought to be easy to forecast, but it's actually pretty tough. But we've come reasonably close, and certainly, we were in the first quarter..

Perfect. Thanks..

Thank you. And the next question is coming from Ross Gilardi. Ross, your line is live. Please announce your affiliation and pose your question..

Hi. Ross Gilardi from Bank of America Merrill Lynch. Good morning, everybody..

Good morning, Ross..

Mike, I was wondering, could you just help us bridge Q1 to sort of the implied step-up in Q2, more from an earnings perspective....

Yeah..

...so you're doing mid- to high-$60 million (44:11) in Q1? And based on your commentary for the revenue breakdown, I mean I assume you're somewhere in a dollar per share neighborhood or something to do the full year. And can you just help us break....

Yeah..

...that down into a few buckets? Are there any weird things going on with other income or anything like that that can make us more comfortable in that step-up that you would see and the need at the very least in Q2 to do the full year?.

Yeah. It's actually not that tough, Ross. So in the first quarter, I'll tell you one thing that we – I would say we don't forecast but I guess by definition we tend to forecast at zero is the impact, the short-term impacts of currency as a result of our balance sheet position. And that's below operating profit in that other income line.

We tend not to forecast it. Our whole business is hard enough to forecast. Trying to forecast exchange rates over the next three months, we just don't do. So we would be expecting currency exchange in that other income and expense line to essentially be zero. In the first quarter, if memory serves me, we had about $0.05 a share I think negative.

So that would be coming out. So that would be a little bit of a boost in the second quarter. And then we have higher sales in the $500 million to $600 million range. You probably want to use something closer to our variable margin rate. I mean, period costs over time like year-over-year, we can fluctuate them up or down.

But in the short term, rather than kind of an incremental margin kind of look, variable margin is probably a little bit better indicator. And for us, that's right around 40%. So I think a little less drag from currency translation and higher sales and maybe a little bit more continued cost reduction.

But mostly, it's sales and absence of exchange loss, and a little bit of product mix, too..

Got it. Thanks very much. That's helpful. And then can you just talk a little bit more about Solar, the backlog? I mean, any comments you can make on the turbine side? And just your overall exposure to midstream CapEx? We've seen some pipeline cancellation announcements compared to the upstream side.

I mean, the midstream CapEx is in the relatively earlier stages of – it seems to be getting cut.

So what do you see in there, and given the long lead times, does this pose risks to the 2017 outlook?.

Okay. So we'll kind of address those one at a time. I won't mention names, but a company in the last few days announced a pipeline cut. And that doesn't involve us. It doesn't. We're not part of that. So in particular, that one isn't affecting us. The backlog for Solar has remained pretty stable.

I mean, it's only a couple hundred million below where it was a year ago at this time. It actually rose a tiny bit from year end. Most of the decline in the business has been oil-related, not gas-related. I think we feel pretty comfortable with the backlog that we have in.

Given the lead times of the projects, our stuff would go in maybe more near the end of a big project. I mean, if you're going to put turbines on a platform, you've got to have the platform up before you put the turbines in. So I think we feel pretty comfortable about this year. And I know you asked about 2017.

I'm going to politely defer that, not because I'm trying to be cagey, but because it's way too soon to start talking about 2017. There's a whole range of things that could be positive or negative. I think we're probably couple quarters away from getting a good view of that..

Thanks, Mike..

Thanks, Ross..

Thank you. And the next question is coming from Jerry Revich. Jerry, your line is live. Please announce your affiliation and pose your question..

Hi. Good morning. It's Goldman Sachs..

Hi, Jerry. Go ahead..

Mike, can you talk about the manufacturing facility restructuring program. In the press release, you spoke about 15 facilities have been consolidated.

In what inning of that process are we? How many more are we thinking about in front of us on a relative basis to what's been done? And in the past, you've spoken about low 20%s incremental margin targets in a recovery. I'm wondering if the thought process has changed at all based on the change in the footprint..

Well, couple of things on that. When we made the announcement last year in September about these restructuring actions, we were thinking maybe 20 facilities would be impacted. We've announced about 15 plus facilities now this on-highway vocational truck. So at least in terms of numbers of facilities, I think we're pretty far down that path.

There's still more to go. And certainly, it will take a little – even for the ones that we've announced, these phase ins, it takes a while to shut down and change and shed the cost. So we still – from a savings standpoint, we still have quite a bit to go. So that's a positive. On the incrementals I think low 20%s is too small a number.

Normally, we think of incrementals as around 25%. I think based on all the actions that we've done when recovery starts, Doug has been probably the most vocal in saying this, and I believe it, too.

We should probably do a bit better than that when things turn around because we certainly have plenty of capacity right now for most of our products and a period fixed cost structure that could handle a bit more..

Okay. And on mining, obviously the commodity price recovery is fairly fresh but I'm wondering if you can comment on what you're seeing at the dealer level for parts demand. Any sort of pickup recently? There have been a couple of higher cost producers that have come back online.

I'm wondering if your dealers are reporting pickup in inquiries or broader demand levels for the parts business..

So for mining in particular, it was not a very good first quarter for aftermarket. We said that in the release for Resource Industries. So looking backwards over the last quarter, no, no signs of turnaround at all there.

More broadly on aftermarket for the company, I think we feel pretty confident in the outlook for parts, and I think it's a little bit like construction. Sentiment seems to be a little bit more positive, but probably a little too soon to declare victory..

Thank you..

Thank you. And the next question is coming from Jamie Cook. Jamie, your line is live. Please announce your affiliation and pose your question..

Hi. Good morning, Credit Suisse. I guess two questions. One, Doug, if you could just provide – and I know in your prepared remarks, you gave some color on China, but I think investors are really trying to struggle with how real is the stimulus, how long this will last.

Some of your peers have come out and said the stronger equipment sales in the first part of the year had been more emissions driven and to expect – and for the buy, I guess wasn't real. So I'm just trying to gauge your confidence level.

Or are you trying to call China as the bottom? And do you expect things to continue to be strong after the quote unquote pre-buy? And then I guess my second question which I don't know if you'll answer, but I'll try. You've cut numbers today which, I think, the Street wanted. At the same time, your commentary whether it was China or the U.S.

seems a little more constructive relative to last quarter. So are you feeling better about the economy? And if there's downside risk to your earnings going forward where are you most concerned? Thank you..

Yeah, thank you. I would share the caution in China. I am pretty sure that it's more than just the tier change, the Tier 3 institution implementation on April 1. Our folks over there were pretty emphatic that that's going to hold and that this is beyond pre-buy. But I am very cautious about how far that goes, and I would share that as well.

We're going to have to watch this month by month and see where it goes. There's no question though that the government is concerned about growth. And too slow of a growth and a change in growth will be much more negative than some stimulus now, and I think that's what they're trying to balance.

So I'm not going to declare a bottom in China, I don't know. But certainly, this is, as I said earlier, the first post-Chinese New Year where we've had sustained shipments now 60 days going on 90 days past the New Year in several years. So I am watching that, and I am cautious, but that's a better statistic than we've had..

Do you know if the trends continued into April, what we know so far?.

I do not know that..

Okay..

And if I did, I probably wouldn't tell you..

Okay. I have to try. Sorry.

And then just broader on the macro, are you more positive today? Where do you see the biggest risk to downside earnings because we're all trying to gauge? Is this last cut?.

Yeah. Again, going over to Europe, we met with hundreds of customers and all of our major dealers over there. And it was hard to find any more pessimism than that's been there for several years. They all recognize it's been a seven-year slog. They all recognize there's not a boom coming, but at the same time, the stories were much more positive.

And even France, in an election year there, is stimulating a bit into infrastructure, and some of those big projects we're feeding, and thus, our big dealer there was feeling better. So I would say that a bit – a very small bit of optimism is in order in Europe. But I've been there now the last two years.

I said about a year ago that Europe was two years behind the United States, I still believe that. So it's a very, very slow crawl out. I don't see much negativism there right now. I'd say the downside is continued – the continued disappointment around oil and energy. I think that could go a while.

I do think that our numbers are at a point where it's hard to go from – yeah, from two to one is a 100% drop, but it's not a material amount of impact on us. But we saw some of that in the first quarter in Resource. So we're getting near the bottom in all that just because there's – we're at the bottom.

But the downside would be – and any big downsides going to be something we all don't see coming, and frankly, I've talked about that before, too. So all in all, I would say slightly more feeling better about things but very, very cautious..

Okay. Thank you. I appreciate. I'll get back in queue..

I think we have time for one more question..

Okay. The next question is coming from Eli Lustgarten. Eli, your line is live. Please announce your affiliation and pose your question..

Longbow Securities. Good morning, everyone. Thanks for....

Good morning, Eli..

Can we talk a little bit – during the commentary, Mike, you sort of gave us some outlook for the relative sectors. Now we have a restatement of all the numbers, but the....

Right..

...implication is that the 5% to 10% decline in Construction is about the same. But on your numbers it says the 15% decline in E&T that was sort of talked about looks like it'll be closer to 20%, and the 20% decline in Resources looks like it'll be closer to 25% based on the $1 billion change.

Is that still a fair statement? And more importantly, we're losing money, it might be more modestly in Resources. With the bankruptcy in PBD (57:29) and U.S.

coal production right now down 32% year-to-date, are the losses going to get worse for a while before they get better or can you give us some quantification of what's going on in that sector?.

All right. You've got couple questions wrapped up there, and I think I can deal with both of them. The first one on kind of what we said last time, we said CI down 5% to 10%, that's I think still pretty good. We said RI would be down 15% to 20%, and that's probably still in the range, but it's maybe moved up a little. On E&T, we said 10% to 15%.

I think it's fair to say that range still holds true, but they're right at the top of it. So I think for E&T, about 15% is probably better than the 10% to 15%. And on the U.S. coal, that business is so low right now, we're not selling much into that industry.

So I think all the negative around – I don't want to say all – I think fundamentally the negatives of the market are already in our sales..

Yeah, I guess – I'm asking about the profitability of the Resource business and sales. I mean will the losses get worse for a while as we go through the rest of this year? Or are we able to keep the current loss rate? Or at least some idea what's going to happen in that sector..

Yeah, I don't see anything that would make it worse. I think this is probably – the backlog for that business has stayed pretty flat. Kind of what's coming in and what's going out are on a reasonable balance. So I don't see anything out there that would cause it right now anyway, at least over the next couple of quarters to shift down..

Let me just add to that, Eli. Doug here. There's two things that are going to happen in mining, Resource Industries is specifically mining for us. Number one, we've got a lot of restructuring underway right now and that will help us down the road.

Number two, there will – ore is being mined, coal is being mined, trucks are still running, tractors are still dozing, motors are still loading around the world. The replacement cycle has been stretched out a long way which is the first time that's happened to us including parts.

And at some point that replacement cycle will come to us, parts first, then rebuilds and then new truck orders. And those are the things we're waiting for. We're closer to it than ever I think just because of the longevity of the replacement cycle here. And we should start to see that I would say at any time.

Maybe we're seeing it some signs of it in a few areas as someone mentioned on the call a minute ago but it will come to us..

Okay. Right. Thank you very much..

Okay. With that, thank you again for joining us. This concludes our call, and we'll talk to you next quarter..

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..