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

Ross P. Gilardi - Bank of America Merrill Lynch Seth Weber - RBC Capital Markets LLC Adam William Uhlman - Cleveland Research Co. LLC David Raso - Evercore ISI Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker) Jerry Revich - Goldman Sachs & Co. Robert Wertheimer - Barclays Capital, Inc. Timothy W. Thein - Citigroup Global Markets, Inc.

(Broker) Steven Michael Fisher - UBS Securities LLC Stephen Edward Volkmann - Jefferies LLC Joe J. O'Dea - Vertical Research Partners LLC.

Good morning ladies and gentlemen, and welcome to the Caterpillar 2Q 2016 Results Conference Call. At this time, all participants have been placed on a listen-only mode and we'll open the floor for your questions and comments for after the presentation. It is now my pleasure to turn the floor over to your host, Mike DeWalt. Sir, the floor is yours..

do we have a glut of inventory? And I certainly would not describe it as that. I think one of the things that's happening out there is a little bit of our own doing and it's around lean. If you look at our delivery performance and the stability of our delivery performance to dealers, it's actually improved quite a bit over the last five years.

We're to the point now where dealers, we think, have a lot of confidence in our ability to deliver what they need and when they need it. And we think that's causing them to both order less, so as our delivery times have come down in Construction, our backlog comes down a little. Think of it this way.

This is an oversimplified example, but if we had delivery times that were one day, we wouldn't have much backlog. Dealers would order and we would ship it.

So I think one of the reason the Construction backlog is a little lower and one of the reason that we're getting probably more aggressive dealer inventory declines is how well we're performing on lean relative to delivery performance. We knew that was likely to happen, and in the scheme of things, it's a good thing. So, let's move on to the outlook.

Let's move onto the next page and that's – I think it's probably a good time to talk about first half versus second half. You know, we're through half of the year. Probably time to reflect a little bit on how the second half of the year is likely to shape up. End user demand should be a fair bit higher than the first half of the year.

We have our sales, which we think are going to be $600 million to $700 million higher than the first half, and that does include some substantial dealer inventory reduction. And we have profit per share excluding restructuring costs up $0.09.

With restructuring, it's down a little and that's because of the extra cost for restructuring in the back half. So if you look at how the sales shape up, that $0.65 billion increase in sales, Construction Industries is likely to be down a little bit.

End user demand pretty flat, but because of dealer inventory reductions, their sales are likely to be a bit down. That's our forecast anyway. Resource Industries just slightly up from the first half run rate, and not a lot, no big changes there in terms of trends.

And then Energy & Transportation is responsible essentially for the increase in sales and that is mostly seasonal pattern on some of the big project kind of sales that we have, turbines for example. And we expect a bit more sales out of rail in the back half of the year, particularly in the fourth quarter.

In terms of profit, we have the $0.09 a share better profit in the second half of the year than the first half and the higher sales volume is the most significant reason for that. Pricing, let's talk about this, and I touched on it a minute ago.

On a year-over-year basis, the negative impact of pricing ought to start easing a little bit and that's because we really saw it kick up midyear last year. And first half versus second half though, forget about last year, we don't see much change in the pricing environment.

Inventory cost absorption will be a modest negative in the back half of the year. We're looking at taking inventory down $500 million or $600 million – our own inventory not dealer inventory – down $500 million or $600 million in the back half of the year. Be a little hit to profit, but positive for cash flow.

We also had some sale of security gains in the second quarter for Financial Services (sic) [Products] division and for the insurance portion of that and we're not expecting that to repeat in the second half. Cost overall we think will be fairly neutral first half to second half.

We do have additional period cost reduction that we're looking at in the second half of the year, but with low seasonal cost in the first quarter, and probably a little bit of efficiency negatives, production is going to come down because of the decline in dealer inventory.

We think those will come close to offsetting during the second half of the year. Now, we don't actually have an outlook for the third quarter but if you think about the second half of the year, in a lot of ways I think it'll look similar to the first half of the year.

And if you think to the first half of the year, we had a low first quarter and a pretty good second quarter. And I think as we look at the rest of the year, the third and fourth quarter will play out similarly. We'll have probably a weak third quarter and a much better fourth quarter.

And again, a lot of that is the timing of some of this E&T sales around larger projects. So we're thinking that third quarter will probably be $400 million or $500 million in sales better than the first quarter and profit will be in the range of $0.05 to $0.10 a share better than the first quarter.

And then the fourth quarter will look a lot like second quarter. Sales slightly higher, profit about the same as Q2. So that's how we think the rest of the year will shape up. So let's move on to the last slide that I'm going to cover today. That's slide 10 and that's key discussion points. Just a little quick recap of much of what I've talked about.

On balance, there's not much change in demand from the industries that we're serving. Construction demand is relatively steady but with continuing price pressure. We have no clear signs of recovery in mining or oil and gas or rail for that matter. Good operational performance continues. Overall, our market position has improved.

And that's been a continuing story for most of the last five years. Our decremental margins are pretty good and better than our target range, and that's despite a pretty negative sales mix second quarter to second quarter. Cost reduction, a substantial $1.1 billion year to date, and we're thinking over $2 billion for the full year.

We're on track with our restructuring actions. They've contributed to cost reduction this year, and that'll contribute to more in 2017. And then finally, our balance sheet's strong and that's very important to us because maintaining our credit rating and the dividend are very high priorities for us.

In the second quarter, operating cash flow was $1.2 billion. Our debt to cap ratio for machinery, Energy & Transportation business was 39%. About 21% net of about $6.8 billion of cash that we had on hand at the end of the quarter. So that's a wrap-up. We're now ready to move into the Q&A portion of the call..

Thank you. Your first question is coming from Ross Gilardi. Ross, your line is live. Please announce your affiliation and post your question..

Yeah, hi. Bank of America. Thank you. Mike, some of your competitors sound maybe a little bit more sanguine on stabilization in the mining markets, at least in the aftermarket. And there just seems to be some scattered new project activity around the world.

Can you elaborate a little bit more on what you're seeing? Is there any chance you're losing any share right now?.

Yeah. I would say there's some improvement in mining on the horizon around aftermarket. We are seeing a little more activity on dealer rebuilds and we would hope that that would translate into higher sales for us. I think one of the things that might distinguish us a little bit from competitors is that we sell through dealers.

So a lot of these projects might hit them quicker than they hit us. We're still expecting a decline in dealer inventory this year and particularly in the second half of the year. So if we were just selling to end user demand, sales would be a bit better than they are right now. So yeah, I don't want to sound totally negative.

It doesn't look to us like it's continuing to go down and there are a few small signs like that, particularly like the rebuild activity that's a little positive. But we track share of what's being sold and we're not seeing deterioration there. So it'd be nice if it would improve a lot quicker and hopefully somewhere down the road, it will..

Thank you.

And can you just comment on the impact of lower interest rates on your pension and provide any preliminary thoughts on cash outflows into the pension next year to the extent you can?.

Yeah. I'll try not to get too far in front of myself, but I think, based on where we sit now, we don't see the requirement for substantial increases in contributions next year. The number I think is less than $0.5 billion, if memory serves me..

Thank you..

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

Hey, good morning. It's RBC. Mike, you mentioned a couple times in the release, there were comments about the U.S. construction equipment supply demand imbalance.

Can you comment on where you think we are in the process of that smoothing out? Does equipment continue to need to be moved out of the energy markets? Where are we from an absorption perspective? Thank you..

Yeah, so as we sit now, the thing that's 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're 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.

I think that's, right now, the reason that we're not seeing a more positive construction number in the U.S. You know, you would hope – time heals all things and you would hope here sometime over the next couple of quarters that we'd be through that..

That's helpful. Thank you. And if I could just ask a follow-up on the Chinese construction equipment market. The numbers there have been probably – I think you talked a little bit more positively there last quarter.

Any updated thoughts on what you're seeing in that market?.

Yeah. 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. That's continuing a trend that's been going on now for a couple of years. We've got great product, great dealer distribution there.

I think customers are coming around to the quality business model. So again, hopefully next year can build on this. We'll have to wait and see. But at least for this year, we're looking for, from an industry standpoint, a flattish industry..

Okay. Thanks very much, guys..

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

Hi. Good morning. It's Cleveland Research. I guess, back to the second half outlook for the year, I'm a little surprised that the profits aren't going to be up more than the forecast sales increase. So I guess, Mike, you touched on some of the factors that are behind that.

Could you talk to what you're seeing in material costs? And how do you expect that to play out as we go into 2017 with steel prices moving higher?.

Yeah. That's actually a great question and I'm remiss for not having mentioned that when I talked about the second half. So we've had good cost reduction during the first half of the year for material. And our view is we'll continue to have cost reduction in the second half of the year versus 2015.

But commodity prices have come up a little, so we're probably going to have less than the first half of the year. So in other words, full year, even second half versus the second half of last year positive, but the positiveness has probably peaked and it'll 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 $0.04 we got on the securities sale in the second quarter all make it look like it doesn't hang together first half, second half with sales..

Okay. Got you.

And related to the mining business, I was wondering if you could just talk about high level, how you folks see the industry changing, if at all, related to the Komatsu and Joy Global merger?.

I'll take that one. It's Doug Oberhelman here. I don't think it was any surprise that Joy was acquired with what's 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've 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.

And, again, we know them, they know us, and I think going forward, we'll continue the competition just as we have in the past and I expect us to continue winning where we win..

Great. Thanks, Doug..

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

Evercore ISI. Just trying to think about the carryover cost savings of 2016 to 2017. And then second question about the orders continue to fall sequentially, and I can appreciate some of the seasonality in rail for second half versus first half, but just thinking about the exit rate exiting 2016 to 2017.

Can you help us a bit where you see orders playing out from here? Have orders stabilized? Because obviously they continue to fall sequentially..

Yeah, I think 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're 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're seeing a deterioration in demand from end users. It's more dealers have lowered orders to take out some more inventory..

So if you exit the year with an order run rate annualized below 2016, you're saying don't necessarily imply down revenues in 2017. You just feel your shipping capabilities are allowing a lower order rate, so to speak..

Yes. Yes. Yes..

Like a quicker turn of the backlog and the revenues?.

Yeah, I think that is exactly what we're saying..

Yeah, I think that's a fair assumption. The retail sales numbers are the one to watch and really drive this whole supply chain. And as long as they're steady, the chain will work itself out. And as Mike 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, David..

Well, do you expect to see the retail sales get flat by the end of the year so we feel more comfortable about that assumption for 2017?.

I don't know if they'll be flat flat, but they should be closer than they are right now, yeah..

And then the carryover cost, the slide number seven, when you say on track for over $2 billion.

I'm not sure if that's an annualized number but assuming it's a $2 billion run rate exiting the year, looking how the quarters play out, or really first quarter, second quarter, second half, are you implying a carryover cost savings of $1 billion?.

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, as you look forward based on the timing of the cost reduction, a tailwind, but I don't think it would be $1 billion..

Okay. That's helpful. I appreciate it. Thank you.

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

Hi. Good morning. Credit Suisse. Couple clarifications. One, Mike, in the press release and I think in your commentary you implied Solar was flat with the first quarter, up from the beginning of the year, but you also talked about some customers pushing out orders into 2017.

So I'm just wondering, is the backlog flat because of push-outs, or are you actually seeing order activity? And then my second question is for Doug. Doug, you've talked historically about managing to a targeted $3.50 trough-ish EPS. As we sit here today, given the markets don't seem to be getting better, we're already at the $3.55 this year.

Is that off the table? Or do you think there are incremental levers that you could pull to manage profitability as we think out over the next 12 months?.

I'll start with that on the Solar piece and then I'll turn it over to Doug. 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 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's 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 fallen off a cliff or off the table, and the gas business just keeps on chunking along. So I'll turn it over to Doug..

Yeah. Thanks. In terms of your trough earnings question, I think your questions are reasonable one to assume. As you say, without all the restructuring costs, we're at $3.55 and, as Mike said, you take $0.08 back, we're a little bit above that even but certainly around $40 billion, where we are now.

That's a reasonable assumption to go after and that's where we're going to fight to try and find a bottom if that's what we're fighting in the future..

This is Brad Halverson. I might just add a quick point, Doug. The trough earnings number has been stated between $2.50 and $3.50. I'd say if you look at how – and 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.

Going from above $60 billion down to $40 billion, 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.

And 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've talked about a 25% to 30% decrementals. I would say we're still committed to that.

I would also say that we're 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. So we're 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..

Yeah, that's right, Brad, and I would just come back to the incremental/decrement 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've managed to stay inside of those targets all the way up and down. And 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 Brad said, our capital allocations then in those businesses we really want to stay in and thrive in long term..

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

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

Good morning, everyone. It's Goldman Sachs. Mike, you spoke about roughly $2 billion or so in implied dealer inventory reductions, which I think is mostly in the back half of this year.

Could you just give us a flavor for the mix between Construction and Resources and any regional color that you can give us where you expect inventories to come down? And as we enter 2017, do you think we're at normalized dealer inventory levels for the current demand environment?.

So, 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, and that's sort of ballpark. And 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. And so that's causing them to hold, or want to hold less. And the more – the better we do with lean, the more that'll probably be the case. So I'm trying to stress the point I don't think dealer inventories are excessive.

I mean, there's a reasonable range but I think they will come down over the second half of the year..

Okay. And you was talking about the major restructuring changes as we think about the eventual recovery.

Can you update us on how you're thinking about incremental margins and recovery given the change in the manufacturing footprint?.

Well, it should be – and Doug has talked about this quite a bit – on the way up. We previously had a 25% incremental target but I think, while we've not quantified it, certainly our expectation is that the first chunk of what goes up would certainly be at a higher rate than that..

Thank you..

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

It's Barclays Bank. Thank you. Construction margins are really quite impressive given negative pricing and given volumes that are troughing in LatAm and maybe low cycle elsewhere.

Can you see steep falls from here or do you think that's bottoming? And I'm curious if you have any view or are willing to share any view rather on structural margin upside, if you actually get a healthy market given what you're doing at low cycle..

Yeah, that's a good question. I think our Construction business is a great example of how our managing for maximum OPACC, operating profit less a capital charge, can work.

They've been on this path to maximize OPACC for 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 oversimplification of it. But that's worked. They've also taken out – they're very cost-conscious.

They've taken out costs. But relative to where we think a trough, a midcycle, a peak would be, they're 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..

Do you see signs of stabilization in North American Construction? As you said, we're well below the prior peak and some of the fleet's older.

Do you think there's material downside chances there? Or are you seeing stable?.

I don't see material downside 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're 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 falloff.

I would sure like to see the growth increase based on increased economic negative activity..

Thanks, Doug and Mike..

This is Brad. I'll just make one other comment. And we're not going to give you 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've taken out we would not add back.

An so, as we've restructured, as we've changed things, if you think that there are costs that we're 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 cost in an upturn relative to our incrementals, it would be focused really around our OPACC improvement agendas, those places we want to invest more because we think there's a significant amount of value. And so that'll probably drive that incremental discussion when we get to that point..

Thanks, Brad..

Thank you. The next question is coming from Timothy Thein. Timothy, your line is live. Please announce your affiliation and pose your question..

Thank you. Citigroup. So the first is on the energy part of E&T and I guess specifically in well servicing where I'd think you would see a recovery first in a more stable oil price environment. So the question just revolves around where the service companies that you and your dealers speak to, where they sit from a sentiment standpoint on CapEx.

There's been some comments of some restocking of consumables. But just curious what you're seeing out there..

Yeah, I think probably the best way to say that is where oil prices are today is probably not enough to drive a lot of incremental investment there. I think the thing you'll see first is the idle fleets being put back to work, particularly around drilling, before we see some investment. So oil prices this morning, I guess, were in the $42-plus range.

We're probably still a ways away from that..

Okay. Got it. And maybe a second one on Cat Financial. I don't know if Brad's still around. But the question relates to the penetration rate in the quarter. I think new retail financing has now eclipsed 30%. It hasn't been there, I don't think, post the financial crisis.

So I'm wondering is that a shift in the underlying business mix that's driving that, or is that perhaps more of a strategy shift for Cat? Or maybe you could just speak to that. Thank you..

Yeah. This is Mike. So Cat Financial is always trying to increase their share. Just like every other part of our business, they're 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're 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..

Yeah, and this is Brad. I'll add onto that. We're 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'll see our allowance being very well maintained at around 1.25%.

Our past dues, 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're watching, but it's, at this point, very well maintained..

Thanks a lot..

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

Thanks. Good morning. It's UBS. Just a question on the restructuring.

How anticipatory would you say is the incremental $150 million in the quarter versus just reflecting what current conditions warrant? In other words, you talked in your question eight in the back about too early to really say what impact Brexit would have, but would this incremental restructuring be intended to mitigate a potential slowdown from the UK Brexit and a potential slowing in U.S.

non-res construction activity? Or would you might want to do more restructuring if those things play out?.

So 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 Brad made actually a really important point a couple of minutes ago and that's 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're a little more negative on the world economy and the Brexit, the Turkey, the elections, oil price, you name it, all of that contributes. And we're less bullish on second half sales because of that.

And whatever impact that would have in the future, we're trying to get ahead of that with additional cost reduction. 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..

Okay. That's helpful, Mike. And then in terms of mining profitability, the $163 million loss was a step down in the quarter compared to Q1.

How are you thinking about where that goes from here? How contained can your restructuring actions keep those losses going forward?.

Yeah. Hopefully, this is the worst quarter we'll see. I think embedded within our outlook we see it getting a little bit better. Second quarter pricewise 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 normal surplus and excess inventory. And then we had a 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're 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 the second quarter the worst of the year..

Great. Thank you..

Thank you. And the next question is coming from Stephen Volkmann. Please note your affiliation and pose your question..

Hey. Good morning. It's Jefferies. Hey, Doug, I'm going to take you up on this since you mentioned infrastructure trends getting a little bit better.

How big of an opportunity is that for Cat? How much of revenue might that be? Or how should we think about sizing that going forward?.

It's hard to tell, actually. The highway bill, 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're starting to recognize the needs for infrastructure and we're seeing that. If there's 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'd feel it..

Great. That's helpful. And then Mike, maybe just a couple quick modeling questions.

How do we think about taxes going forward with the various changes you've had? And then, what's a normal level of short-term incentive compensation if we're thinking into the out years?.

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'll 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're looking at something in the order of magnitude of, let's say, rough number $850 million..

Super. That's great. Thanks..

Okay..

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..

Good morning. It's Vertical Research. First question, just on the rail side. It sounded like from a geographic standpoint that the softness that you would've seen year-over-year was more international.

But could you just give a little bit of commentary on what the North America trends are like for you? Incremental softness, with North America rail flat year-over-year, just how stable you think that is when you start to think about more downside risk, upside risk, and how stable those North America trends are..

Joe, I feel little bad here. 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 specific. Sorry I'm just not further up to speed. But what I would say is we're looking for a better rail sales in the back half of this year.

Remember, we've 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..

Okay. And then on Resources, it seemed like in the first quarter one of the challenges was aftermarket came in a little lighter than we would've expected to start off the year, with the expectation that moving deeper into 2016, that would improve. From a margin standpoint, it didn't look like there was a mix benefit in the second quarter.

Could you just talk about sequential trends, what you're hearing from dealers to scheduled rebuilds? It sounds like that's a little bit better.

Did you see some improvement in aftermarket from first quarter to second quarter?.

Well, we're hearing that dealers are booking a little bit more. In fact, I verified that with our mining group last night. They are seeing – dealers are seeing an uptick of bookings around rebuild. It hasn't really hit our parts business quite yet but hopefully it will. And your synopsis of no big upturn in part sales around mining is actually correct.

At least so far..

Okay, great. Thanks so much..

All righty. Well, I think we're at the top of the hour here, actually a minute or so over, so we'll conclude the call. Thank you very much..

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..