Good morning, ladies and gentlemen, and welcome to the Caterpillar third quarter 2008 earnings results. 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 is now my pleasure to turn the floor over to your host Mr. Mike DeWalt. Sir, the floor is yours.

Thank you very much, and good morning everyone and welcome to Caterpillar's third quarter conference call. I'm Mike DeWalt, the Director of Investor Relations. And I am very pleased to have our Chairman and CEO, Jim Owens; Group President, Ed Rapp; and our CFO, Dave Burritt, with me on the call today. This call is copyrighted by Caterpillar, Inc., and any use, recording or transmission of any portion of this call without the express written consent of Caterpillar is strictly prohibited. If you'd like a copy of today's call 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 it will be filed 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 and 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 differ materially from our projections discussed here can be found in our cautionary statements found under Item 1A, Business Risk Factors, of our form 10-Q filed with the SEC on August 1, 2008, and also in our safe harbor language contained in today's release. Okay. Earlier this morning, we reported results for the third quarter of 2008. We reaffirmed our outlook for 2008 sales and revenues and profit, and we provided a preliminary outlook for sales and revenues for 2009. In addition, we will be updating Investor section of the cat.com website at the conclusion of this call with dealer sales to end users. A quick preview of that update is that the three-month moving average of dealer machine sales to users improved in…

Thanks, Mike, and good morning, everyone. Before I talk about next year, let me just add a little bit more to Mike's review of 2008. Overall, 2008 has been a very solid year for us, especially when you consider the economic environment. We are likely to end the year with sales and revenues over $50 billion in sales, which is an increase of over $5 billion from last year and it means that we will have hit our original topline target for 2010 two years early. It's even more remarkable when you consider that the U.S. machinery industry is very depressed and will likely end the year down over 20% from 2007. And remember, 2007 was down double digits from 2006. Europe has been declining sharply since the end of the first quarter. Japan has done significantly and has been down sharply all year. And our on-highway truck sales are very low. And we've been supply constraint on many of our large machine and engine products. From a profit standpoint, we are expecting to deliver about $6 per share this year, another record year for Caterpillar and up from $5.37 last year. In fact, this will be our fifth consecutive record year. And again, that's at a time when the U.S., Europe and Japan are in very poor economic health and have in fact experienced recessionary conditions in the markets we serve. That's an indication of just how much we've changed as a company over the last 25 years. We are more diverse geographically. Less than 40% of our sales and revenues were in North America this quarter. And if you were just looking at the sales of new machines and engines, it's even lower. In fact, only 25% of our new machine and engine sales were in the United…

(Operator Instructions). Our first question today is coming from Andrew Obin. Your line is now live.

Yes, good morning. Just a question on mining and oil and gas. In two months, we went from BHP Billiton talking about a very significant CapEx increase to Rio and ALCO are talking about cutting CapEx. And I was just wondering if you could give us any color in terms of what you're hearing about from customers and what gives you certainty that there won't be significant cancellations or delays from your key customers going into '09 as they are reevaluating their CapEx plans?

Well, Jim Owens, Andrew. Let me just comment briefly on that, and Mike may want to add something to it. I got around a lot of oil and gas and mining customers just in the last month or so. And no doubt the sharp drop in many commodities has caused some, particularly greenfield lower grade sites, to be put on the shelf again. But I think the global mining industry and our key alliance customers have a very strong tax positions. They are looking at commodity prices that they expect to be prevalent over the next 5 to 10 years as they expand their mining operations. Their order backlog on us has been substantially higher than we've been able to build. In fact, we have on the order of three years worth of orders on the books for 100-ton-plus mining trucks today. So, there may be re-slotting of the timing of when they want the trucks, but we just are confident we basically will be pretty close to capacity for all of 2009 in the large truck, large tractor segments of our business. Again, coal mining is very strong, and that's a significant factor for both large track tractors and wheel loaders as well as for the smaller end of the mining truck range. And the large mines that I think will go forward I think will accommodate in particular all the capacity we have in 2009.

Yes, Jim. Andrew, this is Ed Rapp. The only thing I'd add to that in addition is we've been unable to provide all the volume that the mining companies have been looking for over the last three or four years. The age of the fleets has grown. So, even without new mining expansion, there is still a big replacement demand that's out there. And we think that will hold over in this period.

I think the number is up on the order of 57% of the large trucks operating in the mining world today are over 10 years old, which would be their natural life span. So, we've been working with them to keep product running that should have been retired, and I think that's an opportunity that's still out there for us. I didn't touch on oil and gas, but we think as long as current prices hold north of $50 per barrel, there will be continue to be pretty good investment in energy space. And again, even though there is some slowing in oil prices and well out ran their headlights, most major oil companies never planned investments, extrapolating off of $150 a barrel. Maybe some of the financial community did, but most of them expected oil to come back in the $75 to $100 range and to grow in real terms from there, primarily again driven by growth in the emerging markets. And I think they are looking at the fundamentals of this industry and conclude with a very long cycle times. They continue to need to develop capacity for future growth. And hopefully the markets will encourage that to happen.

Thank you very much.

Thank you. Our next question today is coming from Mark Koznarek. Please announce your affiliation, then pose your question.

Hi. Mark Koznarek with Cleveland research. Good morning. A question on the cyclicality of the developed country markets. It was mentioned a few minutes ago that North America will likely be down 50% or is down 50%. I couldn't quite catch whether that's now or by the end of '09. But the question is how far down is the European market? Could that also fall 50% and how many steps along that path are we? And then same question for Japan. Just trying to understand where the downside is here.

Yes, this is Mike, Mark. Yes, I'll give it to you from a historic perspective. Normally, in the developed world, Europe and North America, they do act similar. They have sort of a similar cycle. The cycle in Europe historically has not been quite as positive on the upside or quite as negative on the downside as North America. So, historically it's not been quite as volatile, but trust me there is still a good upside and good downside. So far this year, we've been going down. Off the top of my head, I don't remember what the total number is going to be, but likely double digits down this year and probably double digits next year.

We looked at EAME and didn't look at the whole. We just took the core of all Western Europe, the old OECD part of Western Europe. Russian freefall, there is a probably a sharper correction we have seen in a long time since the end of the first quarter. The East European, Russia, Africa and Middle East regions of EAME had been stronger and had to offset a lot of that decline. But I'd say we are clearly in the recessionary territory in Western Europe now, and so it will go down a little more from a smaller base in 2009. But as Mike said, this is similar to (inaudible).

And the same would apply to Japan.

Yes, Japan, same. Japan kind of went off at the beginning of this year, and it's been down pretty sharply. So, if you look at all of the kind of old OECD, the line is pretty sharply down all year being offset by a sharply rising demand throughout the emerging markets, which by the way we still have a relatively low share of the total industry opportunity in the emerging market compared to the share we have in the OECD world.

Okay. And then just one clarification, if I could ask this.

Sure.

With regard to the Cat Japan, the fact that you're going to have that in the fourth quarter and then a full year in 2009, what kind of contribution to revenues would you expect that to be next year? And you did say that it's pretty irrelevant to earnings this fourth quarter. Is it likely to also be de minimis with regard to earnings next year as well?

Yes, Mark, we have talked a little bit about this in the past. And if you look at in our Qs, the total numbers for SCM or now Cat Japan, it would give you something around $3 billion a year in sales. But a lot of that is products that SCM would have sold to Caterpillar and would have been in our sales in other regions where they have been the source. And quite a bit of the sales would have been our numbers for big products that we sold to SCM that SCM then marketed in Japan. The real add here is Japan domestically produced and domestically sold in order of magnitude that's somewhere in the neighborhood of $400 million a quarter. So, that will be sort of ballpark add to the fourth quarter of this year. So, we'll have one quarter of add in this year. Next year, we'll have four quarters. So, order of magnitude, it probably adds to next year's sales in the ballpark of $1 billion. On profit, remember we had 50% of the profit of SCM in our affiliates line before. And our shareholding has gone up from 50 to 67. We are consolidating, but we're not adding that much more of the business to our bottomline, because again, we already had 50% in our bottomline. So, it will have a bit of an impact on sales, but not much impact on profit.

Okay, got it. Thank you.

Thank you. Our next question today is coming from Barry Bannister. Please announce your affiliation, then pose your question.

Barry Bannister, Stifel Nicolaus. Just before I could question to clarify what you just said to Mark, SCM effect in revenues, about $400 million in Asia Pacific in Q4, but then you said $1 billion in 2009. Why the big drop?

Well, I'm not talking about dropping. We'll have 400 this year. Next year, it'll be about four times that. So, we are comparing one quarter with four quarters.

Got you, okay. If I look at full year 2007, dealers reduced their reported inventory by $1.1 billion. In 2006, they increased it by $300 million. Could you give us what the figure is likely to be for 2008 and break it down a little bit geographically with particular emphasis on North America in the quarter and the full year?

I'll talk generally about dealer inventory. Actually, it was fairly neutral going from the second quarter to the third quarter. So, there wasn't a big impact on the quarter. In fact, dealer inventories in North America actually declined coming off of the end of the second quarter to the end of the third quarter. If we look at dealer inventories year-over-year and where we ended the third quarter versus where we were a year ago, it's roughly up in line with sales overall. So, kind of inventory on a selling rate basis is roughly about the same as it was a year ago. Geographically, if we look at dealer inventory versus a year ago, it's not much different in North America. It's within probably 2, 3 percentage points the same. Most all of the growth in dealer inventory, again, which is in line of sales has come outside the U.S., where we have had big sales growth, you know, Africa, Middle East, OECD, Asia Pacific.

North American dealers reduced their inventories in 2007. What was the full year you gave for 2008, though you didn't state?

We didn't give a number. We said it would be largely unchanged. I mean that means it could be up a little bit or it could be down a little bit. Kind of within the scope of our ability to predict, but about unchanged. It's not far from that right now actually.

Okay. And then lastly, the year-to-date margin in just machinery is 7.9%. And a year ago and the nine months, it was 10.2%. So, that's a very large drop. Just given that these are fairly extraordinarily times, would you give us some color on the impact on margins just in machines of the growing service component, because it probably increases asset turns and dilutes margins? But we need to get a handle on what its effect would be all else being equal.

Yes, I think service businesses overall, I would say they are not negative to machinery margins. I'd say they are probably slightly positive. But I think what we've got this year in terms of machinery margins is much more growth in material costs than we have actual pricing on machines. That equation is a little different for engines. We have more pricing than we have material costs on engines. As a result, you see engine margins up. On machines, it is the other way. We have had more material costs, particularly in this third quarter than we had a price increase by a pretty good margin.

Okay. Thanks.

Our next question this morning is coming from Eli Lustgarten. Please announce your affiliation and then pose your question.

Good morning. Eli Lustgarten, Longbow Securities. Can we talk a little bit in response to margin, your material costs and machinery is still trailing as you indicated several pressures. Can you talk about your fourth quarter and when do you expect to reach parody next year in materials, and the same thing do you think you can hold the margins in the engine business? You said you are showing 15% you are holding so far not only in the fourth quarter but in 2009 or is that going to be affected by mix negative next year too?

Good morning. Eli Lustgarten, Longbow Securities. Can we talk a little bit in response to margin, your material costs and machinery is still trailing as you indicated several pressures. Can you talk about your fourth quarter and when do you expect to reach parody next year in materials, and the same thing do you think you can hold the margins in the engine business? You said you are showing 15% you are holding so far not only in the fourth quarter but in 2009 or is that going to be affected by mix negative next year too?

If you look at material costs in the fourth quarter, I think there was still quite a bit of pressure out there on material costs. If you look at the numbers that we put up in the first and second quarter, it was not too bad. I mean we were able to kind of keep a lid on material costs and push the increases out. Part of our tactic was holding the delay. And I think what we are seeing right now is material cost increases that we didn't experience earlier in the year that maybe some other companies did and we are starting to see them now. Now if you look at a lot of our supplier agreements, they adjust after the fact. So, I think there is still going to be some pretty good pressure on material costs in the fourth quarter. As it goes into next year, we don't have a profit outlook out there for next year and we have not talked about any of the details of profits. And the reason for that is it is a pretty changing environment right now. I think our view of the material cost environment just as an example has changed fairly dramatically over the past month. So, I will back off on talking about 2009 for now. I think that is still a developing situation.

I was just going to add to that. I think Mike, you described that well. It's a developing situation. We have expectations for pretty significant increases in steel cost for example and commodity prices in general and energy prices in general. We are putting a lot of pressure on our suppliers which caused them to want to push those prices through to us. So, we will be working with them very closely as we look at moves in currency, moves in commodity prices, moves in energy prices and in some cases transportation costs and look very hard at our cost management and our strategies for that in 2009. That, of course, may also have some impact on our machine pricing next year, but we are trying to balance that equation pretty carefully and stay on top of the changing dynamics in marketplace right now.

Can you address the same issues on engine with the ability to hold the profitability or mix or negative mix there?

Can you address the same issues on engine with the ability to hold the profitability or mix or negative mix there?

We had of course a very sharp downturn in the on-highway truck engine sales this year. That will continue to trail off next year but the strength of the markets for oil and gas or in power generation have all been very encouraging and the gas turbine business. So, we think that our margins there will hold pretty well next year. The strength in those sectors looks pretty sustainable and it has been a little bit supply constraint pretty much on a global scale.

And one other follow-up.

And one other follow-up.

I can't Eli. We're going to move on. We're going to move on. We're trying to keep it to one and a follow-up. Thanks.

Thank you.

Thank you.

Thank you. Our next question is coming from Ann Duignan. Please announce your affiliation and then pose your question.

JPMorgan. I have to think there for a moment who I work there for today. Could you talk a little bit guys about your outlook for CapEx spending next year in the context of the billion dollars of capacity expansion that you announced earlier in the year? Do you still feel as confident today about committing capital to capacity expansion in any of your businesses right now, are you re-looking at any of your plans or considering postponing any of that investment as you look into 2009 and beyond?

Yes, let me comment on that. We have a fairly high appetite at the moment for capital as we are needing to expand capacity for the larger end of our product line, remaining trucks. We are in the prose of doing some of that as we speak; large engines, mainly in truck in particular and our footprint in the Asia-Pacific [area]. Having said that, as we work on our business plan one of the things we are very focused on is managing earnings per share. And we are going to look at affordability next year as well as of course our long-term growth opportunity, we will get a careful scrutiny and how we face ourselves with the capital and capacity expansions that we are making. But that's a big part of our business planning process we are going through now and we are working through a base case and trough scenarios and looking at the affordability of capital next year and no doubt there will be some dampening of the appetite, but I think it will still be a fairly significant capital number because we quite frankly had very solid growth opportunities and we need to expand capacities to meet those. We will give you specific guidance in January when we give you the business plan for the year and our earnings guidance.

Okay and I can appreciate but things have changed a lot in the last quarter or two. As a follow-up then, my other question is just around your other income line item that was the biggest swing versus at least my forecast or our forecast. You noted in the press release that that was driven primarily by currency. Is that primarily the pound-euro swing or can you explain a little bit more what happened there and then what your outlook is for the remainder of the year?

Yes, that is mostly pound-euro. We have a large, relatively large net liability position in Europe and so when you get a quarter where the currency moves from the beginning of the quarter to the end of the quarter and in this particular case is strengthening dollar, our net liability position denominated in the foreign currency in dollar terms drops and we recorded an exchange gain, a translation gain. And the lion's share of that move that you noted in other income was translation gain.

And your outlook for Q4?

Well, we don't know what exchange rates are going to be at the end of Q4. Our planning process doesn't really forecast future exchange rates. We tend to base our short-term planning on rates as they are. It would be tough for us to predict.

So Q4 is based on Q3 end?

Well, yes. At the time we did the forecast what exchange rates were at the time, so approximately Q3 end, yes.

Okay. Thank you. I will get back in line.

Our next question today is coming from Daniel Dowd. Please announce your affiliation and then pose your question.

Bernstein. Good morning.

Bernstein. Good morning.

Good morning, Daniel.

I want to come back to the machinery margins. On the one hand you have issued a macroeconomic forecast that's pretty grim and certainly could be even and worse than you described. And I think conventional wisdom would be machinery margins probably can't recover next year compared to this year. On the other hand, you pointed to a set of puts and takes, really, the Cat production systems second that potentially declining input costs. You have significant price increases rolling through the system that may or may not be captureable. Can you talk about whether or not it is reasonable to expect machinery margins to recover from current levels next year or is it really going to have to more likely wait until 2010?

I want to come back to the machinery margins. On the one hand you have issued a macroeconomic forecast that's pretty grim and certainly could be even and worse than you described. And I think conventional wisdom would be machinery margins probably can't recover next year compared to this year. On the other hand, you pointed to a set of puts and takes, really, the Cat production systems second that potentially declining input costs. You have significant price increases rolling through the system that may or may not be captureable. Can you talk about whether or not it is reasonable to expect machinery margins to recover from current levels next year or is it really going to have to more likely wait until 2010?

And that's the question I can't actually answer directly because we don't have any profit guidance for next year. But all the things that you mentioned are essentially in flux right now and that's part of the reason we don't have profit guidance. The picture on material costs is changing. Our view of volume next year if you would have asked us six weeks ago would have been different than what we included this outlook. So, how much capital we are going to spend, what depreciation will be, how much of the price increase that we announced we are going to get are all things that our view has changed and we need to go back out to the individual units and marketing companies and factories and redo because of the changes that have occurred. So, I think you have pretty clearly highlighted all of the, or many of the factors that are going to play into the numbers next year. I guess I would say that machinery margins are very low and it would certainly be our expectation over time to say they improve but we don't really have an outlook that we can talk to next year yet, sorry.

Okay. Let me turn to one other issue then. In light of everyone's concern about the macro conditions, do you have any plans for major cost cutting exercise that would likely yield benefits in 2009?

Okay. Let me turn to one other issue then. In light of everyone's concern about the macro conditions, do you have any plans for major cost cutting exercise that would likely yield benefits in 2009?

I would say we don't really have anything that we are ready to announce and again it depends up on what happens. Our current best case outlook for next year is flat sales. But I think as Jim sort of mentioned in the discussion before we started, we do have planning scenarios for each of the businesses. BCP, Building Construction Products has been shedding costs already. So, I think in all the trough plans that we have, the answer is yes.

Let me maybe just to add to that slightly, the exercise that we are going to go through with all of our businesses, we have 24 business units very different businesses, some in core products, some in service related businesses, scattered geographies, different industries. We are going to work with those Vice Presidents and their leadership teams to put together a business plan essentially is calling for about flat sales which quite frankly is below their most recent expectations. So, we have already kind of feathered that down with our core economics group to something we think is realistic given the problems that world markets experienced in the last six weeks. We will also then look at a very draconian worse case deep worldwide recession, commodity prices falling through the floor scenario which we think is not likely to occur. Nevertheless we want to be sure they are in the blocks in position to keep us profitable through all scenarios. So, I mean this is what the trough widening exercise is about. We will be ready to execute that at the division levels and we as indicated, we have already had several divisions. We have had layoffs in Leicester, in Sanford, in Grenoble and we have pulled the trigger on these things and in our Mossville machine group. So, we are working very hard to meet customer expectations and in most cases demand is still very strong. I just walked through two plants this week that can't build it up. So, we are watching the market very closely, developing plans for next year that I think will fully encompass the range and possibilities and we will be prepared to act and be sure our company stays financially strong through whatever cycle we have to manage through.

Thanks, Dan.

All right. Thank you.

All right. Thank you.

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

Hi, good morning. It is Banc of America. First, just a clarification; did I hear you say that you think the on-highway truck market next year will be down? Is that a comment on the market or just an anticipated reaction to your exit announcement? Banc of America: Hi, good morning. It is Banc of America. First, just a clarification; did I hear you say that you think the on-highway truck market next year will be down? Is that a comment on the market or just an anticipated reaction to your exit announcement?

Let's just say that less and less significant to us as time has gone on. It is not a very big piece anymore of our overall engine business. I don't think we were trying to make a commentary on where it is going next year although we are not overly optimistic about a big pre-buy given the current economic conditions. It was more I think a comment that's a smaller piece of our business today. And when it goes away, it certainly won't be missed as it would have been five years ago.

I understand, okay. Banc of America: I understand, okay.

That is right.

So, my question is on the pricing environment. Mike, can you give us a little bit of color I guess on the relative strength in North America? Surprising to see pricing realization was stronger there relative to some of the other markets. Present any color on what is going on there. Banc of America: So, my question is on the pricing environment. Mike, can you give us a little bit of color I guess on the relative strength in North America? Surprising to see pricing realization was stronger there relative to some of the other markets. Present any color on what is going on there.

Yes, I think the biggest issue with pricing had really more to do with last year than this year. Remember, last year we were busy trying to take inventory out of North America and to help drive that long. There was I think a higher level of merchandising program activity last year to drive down North American dealer inventory. And that is why I think part of what appears like a good pricing environment is probably more in absence of programs from last year.

Okay. And then just as a follow-up, I mean would you characterize, are you comfortable with where dealer inventories are at this point? Banc of America: Okay. And then just as a follow-up, I mean would you characterize, are you comfortable with where dealer inventories are at this point?

I mean any one dealer or one region I'm sure you could find an issue where somebody has too little and somebody has too much. But I think on balance if you look at every territory, it is pretty consistent. We can't tell Weber.

If I could just add one thought to that, we are working very closely with all of our marketing companies and dealers. You got to be sure, we don't get excess inventory in the field. In fact, we have told dealers if you don't have a lot of cycle customer demand, we rather you cancel the order that is fine with us. We want to ship it to the right dealer to get it into right customers' hands and not add as little value change inventories we can have. Right now our dealers are still in most cases quite optimistic, demand is still strong from the dealer level but I'm pushing our marketing companies to work hard with them to be sure we don't put excess inventory in the field. I would rather take it out of schedules or hold the inventory ourselves need be. So, this is something that is getting a lot of management attention right now. With that, we are at the end of our hour. Thank you very much for joining us and we look forward to talking with you over the next couple of weeks. Thanks.

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.