Michael Lynn DeWalt - Caterpillar, Inc. Douglas R. Oberhelman - Caterpillar, Inc. D. James Umpleby - Caterpillar, Inc..

Andrew M. Casey - Wells Fargo Securities LLC Sameer Rathod - Macquarie Capital (USA), Inc. Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker) Ross P. Gilardi - Bank of America Merrill Lynch David Raso - Evercore Group LLC Robert Wertheimer - Barclays Capital, Inc.

Joseph John O'Dea - Vertical Research Partners LLC Mili Pothiwala - Morgan Stanley & Co. LLC Ann P. Duignan - JPMorgan Securities LLC.

Good morning, ladies and gentlemen, and welcome to the Caterpillar Third 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.

Sir, the floor is yours..

Doug Oberhelman, our Chairman and CEO; we have Jim Umpleby, who will be taking over the reins from Doug as CEO come January; and Brad Halverson, our Group President and CFO..

Yeah, good morning, everybody. It's Doug Oberhelman here and I just want to make a few opening comments and we'll get back to Mike and normal conference call stuff. I want to talk a little bit about the succession planning process the board used, just make a few comments on that.

And we've talked about this before in analyst conferences and so on, but we have a very robust succession planning process that goes all the way down to almost the first levels of management. We review and spend a lot of time on that every year.

And every year, at least once, usually in October, we go through that with the board for the, say, the top 300, top 350 people and talk about succession, the future, some names. And then, during the year, we try to introduce the board to a lot of those names and individuals, as we have been doing. I certainly have been active in that.

I was very adamant that I wanted, when my time was up, and I'll be 64 in February. When I retire at the end of March, I will be 64 years old, with just a few months to go before I'm 65, pretty much right on the process. There's no drama here contrary to a lot of stuff that's going around.

But I was adamant with the board that I wanted a very good, sound process to use that they were happy with it, our executive office team was happy with it at the end and all the executive officers then would go right on through performance and not miss a beat. I think we've achieved that. I picked the timing. I've been very much supportive of Jim.

I'm very much supportive of the full executive office. And as we announced a week ago yesterday, I will be CEO until the end of December, and I will be Executive Chairman until the end of March. We did make a change in governance with a split Chair and CEO role.

I think most of you know we've had a shareholder proposal on that for several years in a row and we have a couple of large shareholders that are fundamentally for that. They push that at transition times. And obviously, this was a time the board considered that because we're in transition. Dave Calhoun will be the Executive Chairman come April 1.

I will tell you that I've had a wonderful relationship and extensive and also frequent with the current residing Director, Ed Rust. And we talk frequently before, during and after every single board meeting and have for years since I've been in the job. David's role will not be anything different than Jim.

Jim will run the company and David will coordinate the board as Executive Chair. Just a change in governance, both work very well. I've had great luck with the presiding director situation. And I'm sure Jim and Dave will have great luck with the split Chair, CEO role as well.

Again, no drama, just a different way of doing things, and I think we'll carry on and not even miss a beat. So with that little preamble, I will tell you I'm excited to move into the next phase. I'm very excited for Jim and the executive team that we have here. I feel the company is positioned.

We've been through an awful rough period the last four years, as all of you have known and endured, but I do think we're set up for the future. So, Mike, if you'd take over..

Actually, Jim..

Sure..

I'm sorry, Jim. I meant to introduce Jim Umpleby officially. And, Jim, so if you have a couple comments, that would be great. Thank you. Sorry..

Thanks, Doug, and hello again to everyone on the line. It's an honor and privilege to be selected as the next CEO of Caterpillar. I've worked with Doug for many years. I have great respect for him and am proud to be part of his team that has kept Caterpillar strong throughout some of the most difficult market conditions that we faced.

Like other incoming CEOs, I'll pull together a team of leaders that will refresh our enterprise strategy in the coming months. Again, it's an honor to have been chosen to lead this great company. Thank you. Mike, back to you..

Brazil, because of deep recession; Russia, and actually much of the Middle East as well, because of low commodity prices. We kind of think that sales in many of those countries may have bottomed. And there's every opportunity to think that in places like that, we could have some upside next year.

Then, around mining, and this is a bit related to the commodity comments earlier, it looks to us like the CapEx forecasts are flattening out. And sentiment amongst customers and dealers has been a little bit better, and that's good.

On the concern side, in addition to commodity prices, North American construction in the third quarter and in the fourth quarter, is weaker than we would've thought a few months ago. And if that continues, that would be concerning next year as well. Hopefully, with all the election noise behind us and particularly if we get some investment in U.S.

infrastructure, that could help, but right now, I would think, on balance, it looks pretty tough. Economic growth in Europe, it's been kind of okay, but we're still concerned about Brexit. And as that draws nearer, the concerns that we have are does it impact economic growth and business confidence and investment.

I think another fallout from the lower oil prices has been power gen, particularly in the oil-producing regions. It's very weak now. And we don't see anything in the short-term that's going to change that around. And also, kind of related to commodities, in a way, marine, particularly for offshore service vessels, we're concerned about.

And rail remains a very weak industry, particularly in North America. And industrial engine sales to Ag customers, that's loose engine sales that we sell to Ag customers and particularly Ag and some power gen packagers, remain pretty weak.

I know with Solar, it's always a topic of discussion, so I thought I would give you our current view of Solar as well. So right now, we've had a pretty stable backlog. Based on where it's at right now, it would give us expectations that Solar would be about flat next year with this year. I know you're concerned about how this will play out by segment.

And I would tell you that it's not a lot. I mean, when we say not significantly different than 2017, by and large, that's probably pretty similar across most of the segments. I would say probably slightly more negative with Energy & Transportation than, say, Resource Industries, which is at such a low bottom.

I mean, new equipment sales for the big mining product is down 80% to 90% since 2012, not as much room there for downside. So with that, we'll just wrap up with a few discussion points on page 11. Not much change over the past quarter in the industries we serve, with the exception of North American Construction, which has disappointed.

We've had great operational performance and that's not just cost reduction. Our market position vis-à-vis our competitors was better this quarter than a year ago for our machines and continues to improve in China. Our decrementals in every single segment were very good year-over-year, and that's driven by cost reduction, which is quite substantial.

We're pretty well on track with restructuring. Most of the things of any magnitude that we were considering a year ago in September with that announcement, have been made public. Balance sheet remains strong. Our ME&T debt-to-cap is 37% at the end of the quarter.

And we had a cash balance of over $6 billion and we're still thinking that this year will be a positive free cash flow. So with that, I think we're ready to turn it over for questions..

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

Wells Fargo Securities. Good morning, everyone..

Morning, Andy..

On 2017, can you review some of the puts and takes we should consider when looking at the year, in addition to the revenue outlook you provided today?.

Yeah..

And then, also, given the market outlook is pretty flat, are you considering any incremental cost removal actions?.

Yeah, so as we said on sales, I will start with that. On balance, we're not seeing a significant difference, but we've said this in the release. I think we're much more cautious about the first half of the year. And the flattish for the year relies on a bit of improvement in the second half of the year.

So I think to your point on costs, I would suspect as we wrap this up, we will be planning and trying to set a cost structure for something that's probably a little bit more conservative than where we're thinking sales for the year could be. So there will remain a very big focus on cost and cost reduction. I won't get into too many of the details yet.

As you know, we're kind of in the middle of our planning process for next year right now, but I think some big things that you can certainly expect, one, we'll have a big headwind. I don't know how much yet, but we'll likely have a pretty sizable headwind on incentive compensation. This year, we're off of our outlook in most areas, off of our plan.

So we'll have a less than expected short-term incentive comp this year for all of our employees. And something more normal going into next year could be a headwind of $500 million, $600 million, depending upon where the executive team and the board sets the target. So that would be a headwind. On the positive side, we've done very well on costs.

We've taken out more cost as we've gone along this year. So we'll have some benefits from a carryover impact of that. So that should be a tailwind. We've done very well on material costs. And, again, much of the commodity benefit in the material costs with the rise in commodity prices has come out.

But even without commodity changes, we've done very well on sourcing and design with material costs, so I think we would see that as a tailwind for next year. So we're still working on all the other items in the plan. And when we get to January, we'll definitely do a more complete review of sales and the profit drivers..

Okay. Thanks, Mike. And if I could follow up on the guidance for this year, the $3.25, I think in the past, a $3.55 included some benefit from change in pension OPEB policies.

Is that still in the $3.25 and how should we view that in 2017?.

Yeah, essentially, the change that we made had the impact of taking out prior-year amortization of gains and losses related to the assets and liabilities in the pension plan and better reflects what the, I don't know, I guess I would call, actual ongoing pension costs. So it's not that there's a big benefit.

I think it's just stated more around what the actual expenses for the year. And we made that accounting change effective the beginning of this year, a couple of prior years where we stated. And we're going to maintain that, certainly that accounting treatment..

Okay. Thank you very much..

Thanks, Andy..

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

Hi. Good morning, Macquarie. My question's on excess capacity. It seems like rationalization, normal rationalization, isn't really happening, given the excessive liquidity provided by central banks.

Does Cat think deflationary pressures or pricing pressure will continue in this environment or does it somehow naturally abate or do you think M&A is the only channel for supply rationalization?.

Sameer, I heard all the words you said. Is it a question on our pricing or what we tend to fix? (34:00).

Caterpillar has indicated excess capacity being a problem for price realization.

My point is if there's excess liquidity, zombie corporations, so to speak, not going out of business, does price realization continue to deteriorate?.

Okay. I get it. Okay. So our pricing over the last couple of quarters, it's certainly unfavorable to a year ago, but it's stabilized from what we see going forward over the next quarter anyway. In fact, we had a Q&A in the release on this. We don't see the pricing environment actually getting worse.

Saying it's not getting worse doesn't mean that it's good. Kind of maintaining it at this level is actually a pretty significant negative to our results. It was a $200 million drag on the quarter. But we don't, at this point, see it getting worse from here.

It's pretty tough overall, but barring some large event in the world economy, that we're certainly not expecting, I think we would see, from this point, at not very attractive levels, stable pricing..

Okay. Thank you..

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

Hi. Good morning, Credit Suisse.

I guess my first question, I appreciate the color on the fourth quarter revenues as well as the EPS and why the EPS is lighter, but can you just give me a little more color? Have you changed your assumptions in terms of where dealer inventory should be at the end of the year and Cat's inventories relative to your previous guide? Because I think what everyone is trying to get a better understanding of is as we approach 2017, what's your confidence level that we should start to produce in line with retail demand, given where we are today?.

Yeah..

So I guess that's my first question. And then also, you mentioned a couple times about your 2017 revenue assumption, the first half is weaker versus the second half.

Back to how we will be producing relative to in-line with retail demand, is the second-half improvement you're assuming the markets get better? Or is there some change in what would be normal seasonality in terms of production for Caterpillar? Thank you..

Yes.

Predicting dealer inventory precisely is always difficult, but I think, based on where we've been year-to-date, and what's likely, I think, in the fourth quarter, and this will be a plus or minus probably a couple hundred million dollars, but probably something around dealer inventory in its totality around $1.5 billion decline this year, with probably somewhere close to half of that coming out in the fourth quarter of this year.

So we are not currently producing to end-market demand; this year, order of magnitude, $1.5 billion lower. Now, when you start talking about next year, I'll tell you what makes it really difficult to predict. How we'll end the year will depend a lot on how the second half of the year turns out and what expectations for 2018 are.

So, for example, if things start improving in the middle of next year and there's confidence that 2018 is going to be a better year, part of dealer inventory is thinking about what's going to be needed for the future, not what was needed in the past. So that would tend to help dealer inventory.

If 2018 looks bad, if there is some sort of a world event and dealers are more pessimistic, there'd likely be some additional dealer inventory reduction.

I think we'll be probably be in a better position to talk about that maybe more in January, but I would say in our current estimates, we do continue to have some level of dealer inventory reduction in for next year. I guess, at this point, let's just call it a placeholder, but probably not as much as this year..

So in a flat environment, we'll still be under-producing retail demand next year?.

I would say so, yeah..

Okay. And is there any way you'll give color? I mean, know it's not the $1.5 billion.

Would it be considerably less than that? And can you talk about which markets they would be targeting? And I guess the second question on that is why not just get it all out of the way, Mike, this year versus have this be an issue into 2017?.

Well, we don't control dealer inventory. Dealers are independent. What they decide, it's not up to us. It's up to dealers on what their confidence level is. They're the ones selling to end customers, so it's not something that we can force to be behind us. And it's also very seasonal.

Dealers will want to likely build some inventory in the first quarter for the second quarter selling season, so it's not as simple as you might think..

Okay.

And then buckets on where it is, is it just mining and construction, construction?.

Well, it's been mining, construction and some E&T this year. It's been across all three. I think construction for the year will probably be a bit more than the other two. (40:08)..

Okay. Thanks. I'll get back in queue..

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

Yeah, good morning, Bank of America. Thank you. Mike, I've tried this one for a few years in a row. I'm going to try it again same time of year. Cat, I believe, has got $3.6 billion in goodwill still residing in its mining segment. And as you mentioned in your formal remarks, as we know, new equipment sales are down 80% to 90% since you bought Bucyrus.

Your annual impairment testing, I think, is coming in the fourth quarter.

I'm not asking if you're going to write it off, because, obviously, that's an auditor decision, but if you did write off the $3.6 billion in goodwill, would it potentially jeopardize either the dividend due to stipulations on shareholders' equity in your borrowing agreements or negatively impact your credit rating?.

Well, those are big questions, so I'll try to talk around it rather than giving you a direct answer, because our credit rating is up to the rating agencies. But first off, if we knew what the result of the fourth quarter goodwill testing would be, we'd book it. We don't. We go through a defined process every year. We're going through that now.

And we're pretty straight up. If there's an impairment, we'll book it. If there's not, we won't. In terms of the effect on the company, that would entirely be a non-cash item. It would affect equity, of course, but it's a totally non-cash transaction. I can't imagine that would impact the dividend..

But in terms of not having it written off up until now, I mean, how could Cat say that the assumptions around what it's worth on a discounted cash flow haven't changed materially since the time you bought it and put that goodwill on your balance sheet to begin with?.

Well, that's a longer discussion. First, there is no Bucyrus. Bucyrus does not exist. And the goodwill is not in one measurement bucket. We measure goodwill. We do the work based on which of our business it's in and that goodwill is spread across more than one business.

And also remember that some of the intangibles in goodwill changed after we acquired Bucyrus and sold a portion of it to dealers. So some of it left already. In our K last year, we provided more color on goodwill. And the segment that's the closest a year ago to triggering an impairment, I think if memory serves me, it was about 15% off.

That segment houses about $1.2 billion of the goodwill. So we don't have a Bucyrus. Everybody wants to think we do, but it's been integrated in across a couple of different businesses within the company. And so the measurement is not just Bucyrus, because it doesn't exist. It's each of those businesses that we have. That's how it's done.

So I don't know if we'll have an impairment or not. I'm not saying we will. I'm not saying we won't. We just have to go through the process and we'll know in the fourth quarter. If we do, we'll book it. If we don't, we won't..

All right. Thanks, Mike..

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. Good morning. I was just trying to think about the cadence and confidence in the 2017 outlook. When I look at the orders, right, the orders are down about 10% year-over-year, and they have to grow about 5% sequentially just so the fourth quarter orders are still down just 10%.

Can you give us some color what you're seeing currently on your order trends and how to think about those numbers with that cadence for 2017 sales? Because, again, we need orders up 5% sequentially to still be down 10% year-over-year starting next year..

Yeah, David, I think I'd have to write all this down on a piece of paper to follow what you're saying, but our backlog from second to third quarter didn't change much. I think in Construction, the backlog is in most of the products, outside of maybe China, is fairly weak. I think we don't normally have a long backlog for businesses like Construction.

That product ships in the range of 8 weeks to 15 weeks. So you don't have a long backlog. I said a minute ago, dealers are planning to cut inventory in the fourth quarter. So I think naturally, they're ordering less.

We would certainly expect a pickup in orders in the first quarter as they want to build some inventory for the second quarter selling season. In the case of Solar, backlog is reasonable, and based on everything we know about history, should be reasonably in line with a flat year next year.

So how confident are we in next year's sort of preliminary view? I think we're confident that the first half will definitely be challenged. And I guess if you want to read into that down, I think that's probably a reasonable way to think of it.

How confident are we that the back half of the year will improve? I think that will depend largely on what happens to the U.S. economy, U.S. construction, and whether or not this trend of maybe parts sales firming in construction happens, and whether or not we start to see orders from mining companies, which we haven't seen much of so far.

We're encouraged by the commodity prices, the sentiment, the discussion on CapEx, but probably to the point that you're making, that has not turned into orders of any magnitude yet. So our confidence in the year does rely on a pickup in orders going forward, hope that helps..

I mean, to be healthy, you'd need (47:12) a lot of mining orders to turn that into a big positive year-over-year. So I mean, six months, nine months out is far enough out, I appreciate..

Yeah..

It could go up in the second half nicely, but I'm just trying to think what we have visibility on in that kind of three, six month kind of view, that the orders sequentially, and, again, I'm just giving you the numbers, if orders are flat sequentially, we're still down 14% year-over-year going into 2017.

And I'm just trying to get a feel from you, are you saying your orders sequentially right now feel flattish, up or down, just for some perspective?.

No. Yeah, I don't recall disclosing orders. So I'd have to look at your math. We'd have to talk about it offline, as orders aren't something that we disclose. And when you look at orders, you definitely have to consider how much is aftermarket, how much is not aftermarket. The length of the order board for parts is about two days.

The length of the order board for rail can be two years. So it just depends upon the product in terms of what it means for the short term..

And one last follow up, the R&D, you didn't mention on the year-over-year puts and takes, I would've thought the R&D, which is already running down 14% for the third quarter – it was down 11% the second quarter – would be an area of cost savings for next year.

Is there a reason you didn't highlight it?.

Yeah. And the reason I didn't highlight it is because we're not done with the plan for next year. And one of the things that we have to address between now and the time we do talk to you about profit is in places where we have discretion on timing of spending, what we're going to prioritize and what we're going to do.

We're not through that yet in the planning process. That'll come over the next probably six weeks or so..

But it's fair to say it should be a positive? It should be down next year is a fair directional assumption?.

I tell you what, I'm going to avoid saying that, because we've not been through that sort of resource allocation discussion yet within the company. I mean, I can understand how you would think that, and that may well be the case, but before I get us positioned on that, I think we need to get through our planning process..

I appreciate it. Okay. Thank you for the time..

Okay..

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

Thank you. It's Barclays. Congratulations to Doug and Jim. Doug, we've written that the work that Cat has done under your tenure on competitive positioning, production systems, market share, it's going to pay off for years and decades to come. So congratulations..

Yeah, thank you, Rob. I appreciate that..

This is a little bit of a lower-level question, but SG&A was really low in the quarter, really good, great cost control.

And obviously, the incentive comp was part of that, but even if we take incentive comp up like $100 million, like it seems to have been the first two quarters, you're still at $630 million, $640 million or something like, very, very low levels.

What else was abnormal in SG&A? And what is the sort of indication on sustainable run rate from the quarter?.

Yeah, I mean, the incentive comp was definitely an abnormal, if you will, in the quarter, a good guy. Outside of that, I'm not aware of anything in the quarter that was of any materiality, unusual or weird. I mean, there's always some discretion in some of the expense that you have, and there's always some timing issues.

Like, I'm quite confident that SG&A costs might be a bit higher in the fourth quarter, because of timing. But there's nothing that I'm aware of that is anything that's significantly, outside of the incentive compensation, negative..

Perfect..

Yeah..

Would you hazard a guess on the total? I mean, I understand the work you're doing on product design, but the total raw material benefit for 2016 at this point?.

2016, honestly, I don't remember the total number, but probably a good couple of hundred million dollars, maybe..

Great. Thank you..

Maybe a little bit more than that even..

I'm done. Thanks..

Okay, 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 pricing and what's embedded in early expectations for 2017, I think when we compare it to the pricing announcement from late September, which had a pretty wide range, but flat to up 4%, and then based on experience this quarter, just how you're thinking about pricing from an overall perspective in 2017?.

Yes. That's a good question, Joe, and when asked for the puts and takes for next year, I was silent on price realization. So on the positive side, we did put list prices up for machines in the range up some, none, some as much as 4%. We don't provide any kind of a weighting on that.

So it's a little tough for you to know what an overall average is for that. And then even that, that's just machines. So that wouldn't have aftermarket in it, and that's not Energy & Transportation either. But I think the fact that we had a 0% to plus 4% range, you can look at and think of that as a bias for a little better price.

The flipside of that is price realization. This year, we did not take list prices down, but we have negative price realization. So the market will be what the market will be, regardless of what we put out in list price changes. I think at this point, I didn't talk about it as a headwind or a tailwind.

And I think that probably describes, at this point anyway, how we're thinking about it..

Got it.

And then, specifically on construction inventory in the dealer channel, could you give any context around historically how many months of inventory dealers have wanted to carry there and what they're carrying now, and maybe where you see that going? With the point of the question really being how big an impact Lean manufacturing has been for you, what kind of a comfort level it gives for dealers.

And so there's destock related to end market, but then there's also destock on efficiency, and just how much more of that we could see?.

Yeah, and I wish we were able to break down all the reasons and causes for everything that goes on within dealer inventory. There's usually a reasonable band in terms of months of supply and you kind of have to look at it in a band.

It's not a static kind of expect – it depends a lot on is the bias up or is the bias down on future sales, because that'll color a lot what dealers hold.

How we're, to your point, how we're shipping? Are we meeting shipping commitments? Are they relatively quick? Can they get what they want when they need it? And so that kind of puts a downward bias on what they want to hold as well.

The flipside of that is if we're on allocation, they want to order as much as they can get and they want to hold as much as they can keep. So there's not a hard and fast rule, but somewhere in the sort of maybe 3 months on the low-end, 3.5 is probably a reasonable band. And for the most part, we're in that band.

And you have to even take that with a bit of a grain of salt because it depends upon kind of what the product mix is of what's being sold. So if it were all small machines that we sell, that we can provide delivery on in eight weeks, that provides a little different dealer dynamic benefits. Big machines would take six months.

But I guess the gist of my answer would be I don't think there's any massive excess of dealer inventory. I think we all would like to get dealer inventory down. It's just more efficient for us and dealers if we can deliver quickly what they want, what they need.

And in an ultimate world, wouldn't it be great if they didn't have to have any inventory? And we could just ship them everything in one day. Unfortunately, that's not the case, but you're always striving to do better..

That's really helpful. Thank you..

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

Thanks. It's Morgan Stanley. My question is on the comments you made on North American construction, particularly some of the weakness you mentioned you saw over the past quarter, call it, that's caused you to be a little more concerned on the outlook in 4Q and into next year.

Can you just elaborate on kind of where you're seeing that and what caused you to get a little bit more concerned?.

Yeah, so if you think about our business in construction, the heavy construction and rental are pretty decent-sized businesses for us. If you look at construction in North America, housing seems to be motoring on and has been okay.

The problem we find ourselves in, I think, is the larger projects, the infrastructure, the infrastructure spending is maybe not quite as robust as housing would be right now, and that's a bigger sweet spot for us. We have this other dynamic going on and I'll try to describe it like this.

We have too much used equipment in the marketplace right now, and used equipment prices are fairly depressed. And so what that causes in rental, particularly with our rental channels through Cat dealers, is it does not provide much of an incentive for dealers to sell off their used equipment and refresh fleets.

So we're seeing our sales into the rental channel as pretty challenged right now. And I talked about construction equipment in Resource Industries, in particular, articulated trucks. We had quite a bit more rental loading earlier in the year than we've seen here in the back half of the year. So, I think, hopefully, sentiment will improve.

We'll get the election out of the way. We'll have a new government that's interested in infrastructure spending. And somewhere six months to a year down the road, maybe that'll turn into something better but right now, I think we're on the fence and concerned about overall construction in North America..

Got it. And then just as a quick follow-up, I think in the past, you've talked about for 4Q within Resource Industries, kind of a breakeven outcome as being a possibility.

Is that still how we should think about 4Q today?.

For Resource Industries? I'm sorry. You cut out for just a second there..

Yes, for Resource..

Yeah, I'm going to avoid getting into the segment guidance. I think that if you look at what they did in the third quarter, it was very, very good on sales that were over, I think, $465 million lower. Their operating profit only changed, I think, $24 million or $25 million quarter-over-quarter. So they had a pretty darn good third quarter.

If you look at our overall outlook for next quarter, we have lower profit on slightly higher sales. We have a cost absorption headwind in the fourth quarter, and I'm sure that'll hit RI. And we have usually a little higher seasonal costs, and so I'm sure that'll hit RI. So I would not be looking for RI to do better on profit in the fourth quarter..

Okay, got it. Thanks..

Thanks, Mili. Okay, we have time for one more question, and then we'll wrap up..

Okay. The final question is coming from Ann Duignan. Ann, your line is live. Please announce your affiliation and pose your question..

Hi, JPMorgan. And, Doug, I just wanted to say we have always appreciated how visible and accessible you've been, regardless of our weighting on the stock. So we appreciate that, and we hope Jim will continue this practice..

Thank you, Ann. I appreciate that also..

Yeah. And my question is around steel prices, raw material prices. We're looking at significant increase in some of the steel costs year-to-date.

Mike, can you talk about how that might weigh on your outlook going into 2017? I mean, it's a positive for maybe the mining side, but should we expect a headwind on the gross margin side?.

So I don't think it would be much. I mean, if you go back over, not so much this year, but a couple of years before it, we had higher material cost reduction. Part of that was sourcing and design, and part of that was commodities. The commodity piece of it has mostly evaporated this year.

The cost reduction that we're getting is mostly sourcing and design. That will continue. But I think higher commodity prices will mean not so much a headwind on material cost in total, because we'll still have considerable sourcing and design changes.

We're always out there doing that, but I think it'll be certainly less of a – at this point in time anyway, I'd say it'd be less of a tailwind as we look into next year. But now all that said, we would take higher commodity prices in a heartbeat.

I mean, if we had to decide between high commodity prices or low commodity prices, the impact on our sales would beat the impact on our material cost substantially..

Yeah, I can appreciate that.

And then a quick follow-up, because I know we're out of time, the variable cost reductions, $584 million year-to-date, is the way to think about modeling those variable cost reductions is that they come back into the system with revenue, because they are, i.e., variable?.

Well, there are a couple pieces of that. One is material cost reduction is a pretty good-sized chunk of it. And you'll just have to make your assumption about what you think it'll do, material costs will do, going forward.

The other piece of it is our inventory reduction this year has been a little bit less than it was the prior year; our inventory, not dealer inventory. So the cost absorption headwind hasn't been – it's still been a headwind, but it's not been as much of a headwind as it was the year before..

Is there any way to quantify that?.

Well, I mean, between the two of them, it's been positive $600 million this year. And so, I mean, you can use that as your starting point for the year, and then just use your own judgment.

Do you think we're going to get more material cost next year? Or as you started out the question, do you think that commodities might be too big of a headwind for us? I think what we've done this year is probably a reasonable starting point..

Okay.

So variable cost reduction, no head count in that?.

There is also period and variable improvement there. But we've had some of that going both directions. When volume goes down, that's usually a little dicey for efficiency. We've done a lot of work to help offset that impact. And then, recently in Belgium, efficiency has been less favorable than it was before, certainly.

So the bulk of the variable cost reduction we've got this year has been the cost absorption in material..

Okay. I appreciate that and, again, good luck, Doug..

Thank you..

All right, thanks. With that, we'll wrap up today's call. Thank you and we'll talk to you again in January..

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..