Good morning ladies and gentlemen and welcome to the Caterpillar Third Quarter 2007 Earnings Results Conference Call. At this time, all lines have been placed on a listen-only mode and we will open the floor for your questions and comments following the presentation. It's now my pleasure to turn the floor over to your host, Mike DeWalt, Director of Investor Relations. Sir, the floor is yours.

Good morning everybody and welcome to Caterpillar's third quarter conference call. Again, I am Mike DeWalt, the Director of Investor Relations and I am pleased to have our Chairman and CEO, Jim Owens; Group President, Doug Oberhelman and our CFO, Dave Burritt with me on the call today to help answer your questions. This call is copyrighted by Caterpillar and any use, recording or transmission of any portion of this call without the expressed written consent of Caterpillar is strictly prohibited. If you would like a copy of today's transcript, you can go to the SEC filings area of the Investor section of our cat.com website or to the SEC's website where to be filed today as an 8-K. In addition, certain information relating to projections of our results that we'll be discussing today is forward-looking and involves risks, uncertainties and assumptions that could cause actual results to materially differ from the forward-looking information. A discussion of some of the factors that individually or in the aggregate, we believe could make our actual results deliver materially from the projections discussed today can be found in our cautionary statements under Item 1A Business Risk Factors of our Form 10-K filed with the SEC back on February 23rd of 2007. Okay. Earlier this morning, we reported third quarter results. Sales and revenues were $11.442 billion and profit per share was $1.40. This was the best quarter for sales and revenues ever, not just the best third quarter. In terms of profit per share, it was the best third quarter in our history and our second best quarter of any quarter ever. Sales and revenues were up $925 million or 9% from the third quarter last year. And a couple of points about the sales and revenues in the quarter. First, this is…

Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions]. Our first question today is coming from Ann Duignan. Please announce your affiliation and then pose your question. Ann Duignan - Bear, Stearns & Co. Inc.: Hi, good morning, it's Bear Stearns.

Good morning Ann.

Good morning Ann. Ann Duignan - Bear, Stearns & Co. Inc.: I guess my first question is around your outlook for 2010. Jim, maybe you could comment when you have talked before about an earnings range of $8 to $10 by 2010, and that will be implied with 15% to 20% earnings growth. But now if we look at the top end of that, you would have to grow earnings something like 30% for the next couple of years to achieve the high end of that. Is that something you think that Caterpillar can do at this point, or do you need to relook at your target for earnings in 2010?

Ann, I would say we are very comfortable with that range and ability to grow our earnings per share by about 15% to 20% between here and there. Keep in mind that in 2007 in the U.S., which has been our highest margin market, we have experienced pretty severe recessionary conditions in housing and on-highway truck segment and managed a very significant inventory correction with U.S. dealers while that was going on. And we are in the process of investing pretty heavily in creating new capacity, if you will, and particularly in the Asia Pacific theater. So we have a lot of new investment underway that needs to be managed and managed well. And we are investing in the Cat Production System and start up and roll out of that globally, a huge change in management projects. So bottom line is I think we are moving in all the right directions. We have managed through some pretty turbulent markets this year and I have the zenith of high confidence that we'll be in that 15% to 20% range, and I hope at the high end of it. Ann Duignan - Bear, Stearns & Co. Inc.: But you'd have to grow your earnings 30% in the next couple of years to achieve the target of $8 to $10 in earnings by 2010. Do you think that's achievable?

Yes. Ann Duignan - Bear, Stearns & Co. Inc.: Okay. And one follow up. Can you just give us an update, you did note that you're still negotiating with Shin Caterpillar Mitsubishi. I think you would have like thought yourself that that negotiation would be completed by now. Could you just give us a status of how that negotiation is going and when you expect to actually close that discussion?

Yes, Ann, this is Mike. I'll answer that. We actually had a Q&A on that in the release, and you are right, when we started the year, at the time, it was our expectation that we would get it done in the second half of this year. You know, it looks like it might fall into next year, and we said that in the Q&A. I wouldn't read too much into that. I think it's just a case where you are trying to nail down all the details. It's been a company that we and Mitsubishi have shared for over 40 years and it's a phased, and we talked about this before, it's going to be a phased purchase. And so for a while, we'll be operating it together and there is just a lot of details related to putting that together. I wouldn't read anything negative into it at all. One other thing I would add to that is we are continuing to have really outstanding working rapport between our Shin Caterpillar Mitsubishi joint venture and investments we are putting in place across Asia and the deep integration initiatives that are underway in that theatre. And I think that's a very important positive. So we'll hit the ground running pretty seamlessly on this. Ann Duignan - Bear, Stearns & Co. Inc.: Okay, that was really my question is is there any risk to that transaction closing. Is it --

Very positive. Ann Duignan - Bear, Stearns & Co. Inc.: Is it in guidance?

No. No, we don't have anything for next year in the guidance for that because, again, the timing is you don't know exactly when it's going to hit. And so it'd be kind of tough to include it in the year. Ann Duignan - Bear, Stearns & Co. Inc.: Okay. And I --

Okay, thanks Ann. Ann Duignan - Bear, Stearns & Co. Inc.: I think you told us it was 1.5 billion, just to clarify.

Yes, when we do the... when we actually consummate the deal, we'll provide a lot more details. It's very complex in terms of how it's going to impact the numbers, so we'll do more of a deep dive when it happens. Thanks Ann. Ann Duignan - Bear, Stearns & Co. Inc.: Thanks.

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

Longbow Securities. Good morning.

Good morning, Eli.

Okay. Can we talk a little about the two big issues that are impacting both the bigger increase in core manufacturing costs and the surprise currency, both from the fourth quarter next year? I guess the big disappointment is that costs are eating you up much more and we see more impact on costs on Caterpillar than virtually anybody else that we see. The 30% is material, the other parts are... the other factors. Can you talk about what we should expect in fourth quarter and what should we expect next year on the core manufacturing costs including the two added [ph] material and the other factors and also that big currency impact that we got nailed with, the $0.06 that was surprising. Caterpillar has always been a weak dollar and to have a negative impact is sort of a big surprise I think to most of us.

Yes, okay, I can handle those, Eli. We started the year with a pretty aggressive target on costs. And outside of depreciation increase on the capital plan, we were looking for pretty flat costs including flat material costs for the year. We've been surprised by material costs. Commodity prices year-over-year are still up, and were high last year and now even higher. Material costs have kind of gone from an expectation of being about flat to being up about 1.5%, and that's been a part of the driver as well. We came into the year expecting that we would be able to, in terms of the other factory costs, that we would have enough efficiency improvement to offset inflation. And we had pretty aggressive plans to deliver that. We have been behind that. We thought we were going to make a bit more improvement than we did in the third quarter. I will say that in the third quarter, we did make a bit of improvement from the second quarter, but again not as much as we thought. So I think the year-over-year increase is, we didn't get as much cost reduction to offset inflation as we thought we were going to get, material costs have hit us a bit harder. I am going to switch over for a second and talk about currency because I think for a lot of people the automatic assumption is a weak dollar flows right to our bottom line, and that's not really the case. We have worked very hard over the last 20 years to have a reasonably balanced position in terms of transactions in non-U.S. dollars. In the euro, for example, we are reasonably closely balanced in the euro. We actually have a few more sales than we do costs, which would…

Yes, I mean understand why it happened; the question is are we still at the mercy in the fourth quarter and next year on these factors. And those cost numbers, while we talk a little more material, I mean just increased your impact on cost by another $250 million for the year. I mean those are massive swing numbers in a short period of time that probably disappointed most investors. And the question is how does that... does that reverse next year or what can we expect that to happen for us as we look into 2008?

Yes, I am going to talk about '08 for just a moment here, our guidance for '08 on up 5% to 15% on profit on sales that are up 5% to 10%. We have not provided on purpose a lot of detail, we didn't... and we commonly don't go into that level of detail on next year sort of at this point. In fact, this is only the third year we have actually even given any kind of profit guidance for next year. We are still going through our detailed planning, and so we still have more work to do on flushing out all the details around the '08 plan. I think we are pretty comfortable, at least at this point, with profit range and we have a start on the details, but I think we have more work to do before we are ready to go into much more detail.

Just wanted to make sure [ph].

Thanks Eli.

All right, thank you.

Thank you. Our next questions today is coming from Joel Tiss. Please announce your affiliation then pose your question.

Hi guys, still at Lehman Brothers. I wonder if you could, two things, one, if Doug could talk a little bit about the breakeven points in the engine business and what have happened during the course of the year to the breakevens to help the engine business, loss of volume be offset and see that result in the margins?

Well, I can only talk about good news and breakeven points and results in the engine business. I mean we've got all of our engine facilities with the exception of those involved with on-highway absolutely humming. Our order backlog is as great as it's been all through this run up. We see marine and oil and gas still running away from us. Our plan on capacity expansion for 3500 and 3600s and MaK is right on target. I'm happy to report right on budget and right on plan, and we are starting to see the increase in daily production of those engines. Markets are strong, breakeven point keeps dropping. And if you take the on-highway piece out, of course, it would look even better. I'll take a moment to talk about on-highway. We are experiencing the worst market also just like housing probably since World War II. I don't know that, but those of you saw our September net orders of 11,000 trucks in the industry would recognize that that's the lowest I can remember in a long, long time. This is now into economic conditions. We are well past our 2007 introduction problems, new technology and all that, GDP growth will drive freight tonnage, and freight per tonnage is dropping both in rail and truck. We see that continuing frankly right into spring, and I think we won't know until spring or early summer where our freight tonnage is going to land. We are worried about it. Certainly, the winter is going to be awfully slow for truck and truck engine production. We think our costs are pretty well under control in the engines. We've got longs ways to go with Cat Production System, which we are bringing in to that as well, so there's upside there.

Okay, thanks. And can you also talk a little bit about it sounded like residential and non-residential equipment growth rates in machines were declining at the same rate. And given the differences in the end markets that doesn't seem intuitive. Can you just explain that a little bit, please? Thank you.

Yes, I mean I wasn't trying to imply that they were declining at the same rate. I think what I was just trying to imply is that non-residential is weak and declining in the United States, or North America mostly the United States. Wouldn't try and draw that specific parallel, but for us, our sales I think are probably a little worse than some of the end market indicators, probably some spillover from housing. It's essentially to a large degree many of the same kind of machine you'd use, similar machines to build a sub division as you would a Starbucks, for example. And rental overall is weak. Dealers had a pretty young rental fleets as we started the year and have made fewer additions. So particularly on the small end, that's hurt as well. The good news there is, though, that the total number of machines in the rental fleets is actually holding very steady and the utilization rates are holding very solid. And so that's kind of the way we thought it might perform during a recessionary environment. So that's encouraging.

Okay, thank you.

Okay, thanks Joel.

Thank you. Our next question today is coming from Alex Blanton. Please announce your affiliation then pose your question. Alexander M. Blanton - Ingalls & Snyder: Good morning, it's Ingalls & Snyder. Mike, the incremental profit margin, and this relates of course to other things you've said, but I just want to get your response to it. On the gross profit line year-over-year, it was only 20%, almost 20% exactly on the machine and engines increase in gross profit versus sales, and it's typically about 35%. Had it been 35%, your earnings per share would have been $0.13 a share higher than they were about $1.53, which I think would have satisfied people. So what was the main reason for the low incremental profit margin year-over-year?

Yes, a couple of points, Alex. You are in the ballpark on our variable margin rate, but there are a number of factory period costs or semi-fixed costs that aren't in that 35% that do tend to go up over the course of the year, particularly with -- Alexander M. Blanton - Ingalls & Snyder: I understand that, but it's typically 35% regardless of those things, and it was only 20%. It was less than... see, the gross margin itself was 22.5% in the quarter and 22.7% last year. So your incremental gross profit margin was below that. And so that means that your gross margin, if that persisted, would decline to 20% over time. So those increases in fixed costs take place every year. So what was the reason why the incremental profit margin was disappointing? It can't be the fixed cost.

Okay, Alex, I want to make two points here. One is that our variable margin rate, you're right, is in the mid-30 range, but there are other costs that go with that, which is -- Alexander M. Blanton - Ingalls & Snyder: With incremental profit margin, I am talking about, not... that's what I am talking about.

I know, Alex, but what I am suggesting to you is that volume drives other costs that are not in variable costs. Things like extra depreciation, which we did in fact have in the quarter that relate to higher volume, higher capacity. I am just using that an example. I am just suggesting to you that 35% is too high a number to use for average incremental margin over here. Alexander M. Blanton - Ingalls & Snyder: In periods when sales are rising, that's been the historical rate, over time, for the last 30 or 40 years, I have been following stock, Mike.

Yes. Alexander M. Blanton - Ingalls & Snyder: Okay. Let me get at it... okay, go ahead.

Okay. I am going to answer the second... I am going to answer that in another way, and then we need to move on. In the quarter, costs were up $294 million in total and that includes period cost and volume-adjusted variable costs. So that's the rate impact. And price realization was 167. So costs went up a little bit more than price. Another factor to some degree was currency. We had a $174 million increase on sales as a result of currency and costs went up $190 million because of currency. So in terms of margin rate, that had a negative impact as well.

But maybe one other additional thought, Alex is that we are getting a even more severe than expected swing between North America and Europe, Africa and Middle East and Asia Pacific, particularly in the sort of core and smaller machines and the variable margin is considerably lower outside the U.S. than inside the U.S. Alexander M. Blanton - Ingalls & Snyder: Okay, geographically. Now your core operating costs were up $300 million you said for the year, but that's about $0.32, and your guidance only went down $0.15. So something was positively offsetting that; what was that?

Okay, I am going to answer this and then we'll go on to the next question. There are a couple of things that are positive besides the costs. We did have a slight decrease in the tax rate. But I think more important than that, our product mix is more positive than our previous outlook. In other words, large machines large engines versus small machines small engines. Alexander M. Blanton - Ingalls & Snyder: Okay, thank you.

So product mix is positive, a little positive on the tax rate. Alexander M. Blanton - Ingalls & Snyder: Thank you.

Thanks.

Thank you. Our next question today is coming from Andrew Obin. Please announce your affiliation then pose your question.

Yes, Merrill Lynch. Can you hear me?

Yes, no problem.

Just a question on outlook for '08 and your comments that you have not flashed out the guidance. If I take the kind of incremental margins you usually have on volumes and if I dropped those alone in your guidance, I actually get to above your guidance range of sort of $6. And that implies that your current outlook has more incremental costs next year versus pricing, and I am just a little bit surprised given that you are expecting to see elements of Cat Production System next year. Basically, it says that things will continue to get massively worse next year. And is it just we are far from done with sort of looking at what it is or we simply don't know just how bad things can get next year? And I think it's an important difference. Is it conservatism or is it because as we look at these processes, there is something going on that we don't understand and just can't quantify?

I think, Al... or Andrew, it probably has more to do with the point in time where we are right now. I think the last thing that we would want to do is over promise in terms of what we can deliver on in 2008. That gets you into a heck of a lot more trouble. So you want to have an outlook that's reasonable, have a reasonably good chance of accomplishing. And that's what we have tried to do.

Maybe just add to that very briefly, Andrew, as we look at the year next year with, I would say, normal recessionary trough conditions in the United States, many of our competitors with excess inventory, although I think ours is in very good shape, and we intend to maintain our market positions. Secondly, there is I think a lot of encouragement in the fact that with the larger end of our product range which serves the oil and gas industry, the mining industry, for many of these products, we are probably going to be on the verge of sold out for next year. We are probably going to be taking our CapEx numbers from around $1.8 billion this year to up something north of $2 billion next year. Because we are working right at the edge of capacity, both ourselves and our suppliers for a number of models, both machines and engines, that we build around the world. And we are adding a lot of additional capacity in the rapidly growing Asia Pacific theater. So I feel that this guidance, and also we are coming into now working with each of our individual business units and finalizing our plans for 2008. So this is preliminary guidance, we hope it's reasonable, hopefully conservative, but we've got a lot to do to put this business plan together. And quite frankly, a pretty full agenda in terms of products that we are developing, capacity that we are expanding, the Cat Production System we are rolling out. In a global market, it's pretty topsy-turvy with very weak conditions in the U.S. and absolutely booming conditions in a number of places outside the U.S. that I'm confident will continue next year. And this will be our sixth consecutive year of record results, and we are, I'd like to say, we are right at the cutting edge of capacity with ourselves and our suppliers in a number of cases.

Let me just make sure that I don't take your comments on market share out of context. Are you saying that you, in some regions, you might be more aggressive on pricing to defend you market share or am I misunderstanding something?

I'm saying we expect to maintain, if not improve, our market share, which has eroded slightly due to capacity constraints. And I think as we look at the market, we see a lot of competitors with excess inventory.

But I --

We have a relatively modest, in light of inflation, price realization plan for next year. But that's reflected in the outlook we've provided you.

Okay, no, but it's two different things to say that your market share will increase because you are out of capacity outside of the U.S. and to say there are people who are being more aggressive and you sort of are not planning on it being too aggressive with pricing. One means that if you are at capacity, it drops to your bottom line; another one means you are getting out to defend your market share. I just want to understand if you are in fact saying that you will try to defend your market share through pricing.

I'm saying we intend to maintain and improve our market share going forward. I think I would just leave it at that for the moment.

Thanks Andrew.

Thanks.

Thank you. Our next question today is coming from Daniel Dowd. Sir, please announce your affiliation and then pose your question.

Bernstein. Good morning guys. Hey, I guess you've mentioned in the release that you've had some successes with the Cat Production System. Can I... actually, I have to pose a two-part question here? Can I ask you to talk about the things that have been successful and where you've really gained traction as well as the things that continue to be problematic? And I guess the second part of that question is can you talk about how you expect the benefits of that to roll out across 2008, 2009 and 2010? Is it fairly linear kind of improvements or do you see a lot of those benefits back loaded in 2009 and into 2010?

Fair but difficult question, but let me take that one, Jim Owens. First of all, we worked very hard on global benchmarking, defining the recipe pretty precisely. It's very comprehensive, very process focused and we are trying to drive this change management of deploying the Cat Production System across essentially 270 facilities worldwide obviously with a lot of concentration on our biggest, largest facilities. We know we can do this. We have done it in our Solar gas turbines division, we have done it in Brazil. We are giving exceptionally strong results from those divisions who have effectively deployed a very similar process discipline in their manufacturing operations. I would say we are all taking great encouragement this year in terms of the how metrics, in terms of getting the people in place, getting the right training invested in our people, getting the metrics boards, getting everything defined, the brutal facts on the table, if you will, in many cases. We are making great progress. The engagement of our employees, as we've gone through rapid improvement workshops and myself, all of my officer colleagues are spending time on the shop floor I think are giving us a lot of encouragement. On pure raw metrics, since we launched our Six Sigma project on safety and rolled it into the Cat Production System, we have improved, over a four year period, about 85% enterprise wide from a pretty average level of performance to approaching world class in the vast majority of our facilities worldwide. In terms of some of our quality metrics, particularly as delivered early, our quality to dealers, we may have had as strong a improvement in any 12 month period as we've ever had over the last 12 months. And we have actually spent a fair bit of dollars…

Yes, just in the area of priorities here, there are four deep tenets of our Production System, and we call them people quality, velocity and cost. We started with people and safety earlier on; it's probably a year or two ahead of in terms of the sequence of timing. Like Jim said, we are nearing a 90% improvement as we've implemented that. We are not where we want to be, but we will absolutely achieve world class safety levels on or before 2010 in the area of safety. The area of quality, velocity and cost are right behind it and we are starting now, as we get into the shops and all of us go out into the factories frequently, more frequently than we ever have I am sure than anybody in our officer groups in the past as a collective amount of people. And we see pockets and cells of improvements that are just really getting started. So we are very optimistic we are going to repeat the safety levels of improvement and the rest of it over the next couple of years. But it is a process and it takes a while to culture change and it's about management. So, yes, are we behind? Yes, we are probably behind, but the good news is it's all in front of us and certainly those goals Jim mentioned for 2010 are right for the pickings.

Okay. Let me just follow up. So do you expect that we will really begin to see structural margin improvements start to roll out across 2008 or would you view this more as a 2009 is where you really start to see the results in the financials?

I really expect it to begin to pull through much more in 2008 and ramp up as we go out into '09 and '10 as we really get good traction with this. I don't think it's linear. I wish it was. But I am confident these numbers will come in and I think we'll begin to see some positive results next year. I would like that be left for positive surprises rather than me trying to get out in front of how fast we can get it all pulled through. But rest assured, we are absolutely working on it with total commitment.

Okay.

Thanks Dan.

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

Good morning, it's UBS.

Hey David.

Quick question once again on the core operating cost. When building the plant for next year, is the start for the change in core operating costs simply cost of goods sold times some inflation statistic? And if that's it, how big an offset do you think the Cat Production System and your efforts can make against that normal inflationary trend?

No, I'll just make one quick comment on that. When we put our outlook together, it's not quite so general as what was last year plus inflation. We actually do a roll up of all of our units in terms of what are their expectations at a fairly detailed level for next year. The reason we call this preliminary is because it's not been all... it's not been through in all the management reviews that you normally do when you put together a plan. So it's much more detailed than just a gross number last year plus inflation. There is a lot of moving parts.

All right. Maybe I'll just ask a question directly. What should we expect in terms of cost saves ex... leave inflation out of it. Assuming there was no inflation, how much better do you think you can operate next year in terms of core operating costs than this year leaving inflation out of it?

Yes, we'll give you more details I think on the break out of the outlook for next year when we give our sort of full outlook in January. It will be tough for me to talk over the relative discussion about '08 that Jim just talked about relative to Cat Production.

All right. And do you have yet a forecast for heavy-duty truck engine sales in '08 and '07?

Yes, I'll take that one. We're at the moment thinking about all in for '07 about 170,000... 175,000 for heavy. And right now I guess a mild guess would be slightly above that, call it 185,000 to 195,000. It's all going to be back-end loaded and that's going to imply a fairly substantial pick up sometime around early summer. We'll see if that actually happens. Again, it's tonnage driven at this point and GDP growth contingent.

And that would make 2009 an enormous year, right?

Well, it would put it back at the capacity of the industry, which is probably that 320,000 like we saw in '06, and that will pressure everybody again. So we'll see how that plays out.

Okay, terrific. Thank you.

Thanks David.

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

Citigroup. I was trying to understand obviously with the stock besides macro is turning into a bit of a believe me story on the cost side. And I am thinking about a guidance range that's $0.54 on '08, but we've a $0.40 range on the next 90 days. Can you help me understand, is there something unique in this fourth quarter that I should understand a $0.40 guidance range for 90 days?

Last year, David, when we went into the fourth quarter, we went in with a $0.25 range, and we ended up pretty close to the middle of that range certainly in the fourth quarter of last year. I don't think there is anything magical about it. I think we certainly want to give ourselves room. We've recognized that the fourth quarter is usually for us a difficult... one of the more... all quarters are difficult to forecast. Again, we have hundreds of legal entities and units around the world. The fourth quarter is the end of the year and it has proven historically a little more volatile for us to forecast than most. So I think all I would say is we're trying to give ourselves some room because it is unpredictable.

I am trying to understand that the $300 million cost increase, needless to say, we are looking at then a modest year-over-year hit in the fourth quarter to stay at $1 billion, and I recognize the comp gets easier. But just for the benefit of everybody, can you help us better understand when you talk about an increase in cost, when we talk about raw material. But I don't want to hear anything about, no, it's a cost because we are paying today for benefits tomorrow. I mean you are talking about it broadly, but to help us quantify that $300 million hit, how much is it... when you make the number up, $100 million of things that we didn't have to spend, but it's for incremental benefit in the future? Because raw materials, other companies in your own industry, let alone broadly in the industrial economy, are not getting hit with these kind of raw material costs.

You think a lot of people are managing it lower than 1.5% increase on the year?

Well, let's say net-net... the other things you are doing to offset it are not causing margin disappointment at this degree, and also that we are holding Cat to a higher standard. It's a large machine market outside the U.S., a large engine market outside the U.S. that's really driving those international numbers. You'd think the mix would be a little more positive. I understand a big machine in North America makes more money than a big machine in Germany, but net-net, I mean obviously, we are looking to hold you to a little higher standard. I am just trying to understand it's not just raw material, and also raw material is just a continuing situation and we are all left to the vagaries of that situation. What's the actual costs that are being incurred now that is you are paying for future benefits, not just going with the flow, because obviously these numbers keep moving up a lot?

David, we have increased our capital plan, and I think we spent about $1.55 billion last year. This year we are probably going to spend about $1.8 billion that takes a fair bit of management in place to put that capital in place, to build up the products that we expect to build, as Doug said, in our Lafayette facility, for example, we are putting in about $300 million of incremental capital this year. I mean it takes management people, project management people to put those kind of investments in place to do it cost effectively. And we aren't seeing the benefits of that yet, but it certainly has a great future benefit. The Cat Production System, we've been pretty aggressive at recruiting more manufacturing engineers, which quite frankly I think we were deficient in that skill set. So we have hired a lot of mid career people. We are bringing them into our organization. We are putting in team leaders. We've created a division, Cat Production System Division to transition us through this process. So, yes, we are incurring some incremental expense associated with delivering what we think will be a world class, very high standard best-in-class performance going forward. It does takes some investment.

Yes, David, let me try just a little bit here. In the area of labor and burden in the factories, we are trying to do in three years a changeover to get to, I am going to call it, Toyota-like production rates, while it's taken Toyota probably three generations of management. And so we've got to heat on everybody to get this done as fast as we can, and I think that has led to an awful lot of excess costs in the factories to get that done. As Jim said, we are adding period costs, we are adding machine tool capacity which results in depreciation. We are adding... we are not taking... we are not seeing the people fall out yet in the increase in labor efficiency because we are really just pushing this off. And I think the consultants will tell you that we can do this in three years or get close to where we think we can be in three years. It will be absolutely the best anybody have ever seen. So it's stressed us. There is no question, our factory people, our factory management supervisors are under tremendous heat to get this done while we're in a very high period of production. So the old analogy of riding a bike or changing over to another person riding a bike at 60 miles an hour is probably fairly accurate. We've got a lot going on in those factories right now to satisfy demand, increase quality and change over a production system that's been in place in excess of 20 years. It's about a broad as answer as I can get to.

Well, a little more specifically just last point, if you can help us understand your new product costs, you would think would be down. Obviously, a lot of the new machines are coming out due to emission standards, and we don't have another real major off-highway one for a couple of years. So can you help us a little bit quantify NPI costs in '07 versus '08? Your CapEx that you are spending this year, I mean that depreciation is going to show up for work everyday next year. I mean that's still going to be a cost there. But is there at least the other costs that go with it. I mean you've got the new Chinese engine plant coming in, but is there post-Lafayette, post-some other expansions, is there a notable decline in these major CapEx programs?

Well, we've got a new... in China, we've got a new engine facility, new components facility, new wheel loader facility, and we've got significant investment going on in a lot of our existing facilities to replace machine M&E production equipment that's been there for a long, long time. And now they're running at absolute capacity four straight years. So that's... there are some strains there, and it's taking capital investment. Back to NPI, which I think is a good question, yes, we are going to see the number of new models introduced in '08 and '09 drop, but our R&D spending and our CapEx spending on new product is rolling right along as we introduce a few new products in new geographic regions and get ready for Tier 4A in 2011, which is another huge increase in investment required. So a lot of that's going to new product, it's going to be out in three years. I know you don't like to hear that, but we are spending a lot now to make that progression smoother than we did in the past. So some of that's ramped up inside those big R&D and CapEx numbers, David.

Thanks David.

I appreciate it.

We have time for... we are just about the end of the time, but I think we have time for one more question.

Thank you. Our next question today is coming from Barry Bannister. Please announce your affiliation then pose your question. Barry Bannister - Stifel, Nicolaus & Company: Hi, Barry Bannister, Stifel Nicolaus. How are you?

Hey Barry, good morning. Barry Bannister - Stifel, Nicolaus & Company: Just a clarification on this pricing issue. It looks like your machinery and engine pricing in the quarter was up 2.7% year-over-year in the third quarter and three quarters of the pricing was non-North America, which is unusual. You announced a 5% price increase to take effect in January '08, which is unusually high. It is also unusual to do such a large increase into a weak North American market. So may we infer that you expect to have quite a bit of international price realization in '08?

Two things, Barry. One, you're right that certainly in the third quarter pricing outside the U.S. was stronger than pricing inside the U.S. But I think that's just a function of the demand. Sales are down in the U.S.. We have worked hard in taking dealer inventory out and outside the U.S. business is blooming. In terms of '08, we did announce a price increase, but it wasn't a 5% price increase; it was a price increase on machines and engines kind of depending upon the model from 0% to 5%. Certainly, the average, while we've not disclosed a total average, I can tell it won't be 5%, closer to 2%. Barry Bannister - Stifel, Nicolaus & Company: Okay. And then... that's good to know. Did you quantify the transitional costs associated with the launch of the Cap Production System that fell into the quarter and how much such costs might affect future periods?

No, we haven't quantified it. And frankly, separating that discreetly from other ongoing costs is actually very hard to do. It's the same people who are building the products that are working on Cat Production System. I mean there are a few buckets of it that in terms of, as Jim said, where you are hiring people explicitly to do it, but the impact on sort of the current workforce is pretty tough to specifically measure. Thanks Barry. Barry Bannister - Stifel, Nicolaus & Company: Thank you.

I mean maybe close with one thought. For Caterpillar to be sitting here with all-time record results with housing in the U.S. as weak as we are currently experiencing, the on-highway truck segment is weak as we are currently experiencing. For us to be enjoying all-time record results, driving a very significant capacity expansion campaign and rolling out the Cat Production System worldwide. I am really pleased with how Team Caterpillar is working. And our outlook for next year, well, it may seem modest to look for growth in sales next year, real growth in sales in the global economy we are looking at and to maintain or improve our profitability on that sales, our return on sales I think it's a pretty remarkable time. And with that said, we know we are not getting the pull through from Cat Production System that we'd like to see yet reflected in our 2008 numbers. We are working very hard to do that, and I would say we remain supremely confident that these numbers will come through and we'll be well within the 15% to 20% range of earnings per share growth in that 2010 timeframe. And I'll look forward to talking with you all about that when we get to our analyst meeting in Las Vegas come March.

Okay, thank you very much. Have a good day.

Thank you. Ladies and gentlemen, this does concludes today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.