Good morning, ladies and gentlemen and welcome to the Caterpillar year end 2009 earnings results 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 is now my pleasure to turn the floor over to your host, Mr. Mike DeWalt, Director of Investor Relations. Sir, the floor is yours.

Thank you very much and good morning and welcome to Caterpillar’s year end earnings conference call. I am Mike DeWalt, the Director of Investor Relations, and I’m pleased to have our Chairman and CEO, Jim Owens; our Vice Chairman and Chairman Elect, Doug Oberhelman; and our CFO, Dave Burritt, with me on the call today. As always, this call is copyrighted by Caterpillar, Inc. 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 call transcript, you can go to the SEC filings area of the Investors Section of our www.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 will 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 either individually or in the aggregate we believe could make actual results differ materially from our projections can be found in our cautionary statements under Item 1-A, business risk factors of our Form 10-Q filed with the SEC on October 30, 2009. It is also in our Safe Harbor language contained in today’s release. Earlier this morning we reported results for the fourth quarter and the full year of 2009 and we provided an outlook for 2010. Sales and revenues were $7.9 billion for the quarter and $32.4 billion for the full year and that was about in the middle of our $32 billion to $33 billion outlook for sales and revenues in 2009. So in general, sales and revenues were about as expected. Profit in the fourth quarter was $0.36…

(Operator Instructions) Your first question comes from David Raso - ISI Group.

Given we can only ask one question with no follow-up, I’ll somewhat try to weave two related questions together. Given what I’d view as disappointing fourth quarter margins for the Engine business, I’d appreciate your view on your Engine margins for 2010. When it comes to the midpoint of your sales guidance, the lack of dealer destocking in ‘10 would achieve 13.5% of your 17.5% sales guidance midpoint. So obviously there’s some retail sales growth baked in. Are you assuming North American machine growth at the retail level is positive? Any other collar around any other geographies; I know you mentioned China. I’m just thinking what’s the net retail offset to the Engine business being down?

I’ll start out. Certainly, Engine margins in the fourth quarter were actually pretty good at nearly 10%, but they are down from earlier in the year. In fact, I think they peaked in the second quarter. We had particularly good sales of turbines in the second and third quarter and big diesels, higher margin diesels were strong certainly through the second quarter. So I think, much of the decline in engine margin in the fourth quarter was related to mix. In terms of your question on next year’s retail sales, we do have a small increase built in for retail sales for North America next year, but certainly, the most significant increases are outside the U.S., Asia, or Latin America.

Our dealers and customers in the U.S. are pretty sanguine about the economic recession that we’ve just come through and a lot of uncertainty. Most of the strength in machine retail sales is coming outside the U.S. in commodity-related sectors and developing countries.

Your next question comes from Robert Wertheimer - Morgan Stanley.

My question is on mining demand capacity. Could you talk about whether it’s conceivable from a demand front to be back towards the peak levels in 2010 on mining? We’re hearing very bullish things generally on mining. Second, could you review the status of your capacity transition of the graders to Texas? Are you in a position to produce right now your prior peak capacity? How far above that do you think you could go when you get that completely finished?

I think it largely depends upon which part of mining we’re talking about. If you look at the really big trucks, say 785 and above, we’re looking for a pretty good year, I would say approaching 2008, but we’re in a situation where U.S. coal is still very weak and so things like big tractors and maybe the 100 ton trucks that are big in U.S. coal not up as much as the really big trucks. So I think all in all it’s going to be a pretty good year for mining, particularly the big trucks serving Latin America in Asia, probably less so in the U.S.

I think just on the capacity capability ramping up, there was a good article in the Wall Street Journal today, first off, we spent and I think a great tribute to our employees. We had very solid progress on deployment of the Cat Production System, steady improvement throughout the year 2009. A lot of process discipline, we are working hard with our supply base and we started that some months ago to be in a position to ramp up much more smoothly and rapidly than we did in the past with good pull through. I think quite frankly nobody is very good at forecasting capital goods sales and how fast it might ramp up. The key is being able to ramp up and do so pretty smartly and I think we’re largely capacitized. We’re north of $50 billion in sales. So our ability to ramp up is really a function of how well we manage the supply chain and suppliers and we’re way out in front compared to any previous cycle I know of in getting ready for that eventuality.

Your next question comes from Eli Lustgarten - Longbow Research.

Can I get a clarification? Foreign currency benefits for the quarter and the year, can you actually quantify what they were to income? Can you actually quantify what they were to income and can you talk a bit about China, what’s going on in your business growth? Your profitability in China since you’re going into the two product line strategy, the level of profitability we can expect out of China and how much it can help us in 2010?

That was a long single question, Eli.

Value there, we know we are going to miss you so we’ve got to keep you around a little bit, Jim.

I was a little disconcerted by the probably going to miss me. Doug will do a great job. I’ll start out with just a quick currency. We have currency flowing through the financial statements in a number of areas. We have hedging in translation gains in the other income expense line, and that was favorable. That was a positive number every quarter this year and I think the total of that in the fourth quarter was I don’t remember the exact amount, Eli, but I think in the sort of $50 billion, $60 million range. There’s a table in the outlook that shows the impact on operating profit versus the fourth quarter a year ago and that’s in the release. Next year, by the way, I’ll just make a comment on that in 2010. We would expect that most of the hedging gains that we had on that other income and expense line that were favorable, actually in 2008 and 2009, we’re not expecting that to repeat in 2010. So that’s certainly a negative in 2010.

Your next question comes from Andrew Casey - Wells Fargo Securities.

My question is about the implied incremental margin at the earnings guidance midpoint, which if I ex out redundancy incremental R&D for 2010 in the absence of the ‘09 LIFO benefit, it appears to be around 30%. I’m trying to understand the puts and takes in addition to the negative mix that you addressed. What sort of incremental pension expense should we be expecting? Is there any core operating cost benefit reversal expected?

On incremental margins I think the biggest headwind, Andy, definitely is product mix. In the sales increase, if you think about what’s driving the sales increase, there’s a lot of small machine business improvement in there and some of that is from end market demand, but a lot of it is, because 2009 was hurt so bad with the dealer inventory reductions. Dealers would tend to inventory more of the smaller and midsized product rather than, say, the big mining product for example. So a lot of the machine increase this year, not all of it, but a lot of it, proportionately more of it would be smaller low margin machines and so that is going to be a drag on overall incremental margins. We talked about Solar being down. We talked Turbines. We talked about large reciprocating engine business being down and if you look at machines versus engines operating margins this year clearly engines are higher margin and big receipts and turbines are a big driver. With them down, that’s going to contribute to that negative mix. So mix is a pretty sizable negative driver. The flipside of that well, I should also say pension is going to be negative. I think the number will probably be less than $200 million, but definitely a negative like R&D. I think from a positive standpoint, and we mentioned this in the release, but I’ll reiterate it here, we’re looking for better operating efficiency next year. That ought to be a positive as we go into 2010 and material costs ought to be a positive as we go into 2010. Price overall not so much. We said less than 1%; I wouldn’t count on price being a big driver next year. So positives, material cost, efficiency, negatives, R&D, product mix, pension, a little depreciation.

Your next question comes from Andrew Obin - Bank of America/Merrill Lynch. Andrew Obin - Bank of America/Merrill Lynch: Just a question, when you talk about destocking in the dealer channel, because the mining organization is somewhat separate from the rest of cat, does the $3.54 billion that you’re talking about, does it include mining or is mining separate?

Yes, no it would be everything it would be all the new machines. So there are some mining machines in there although that’s not normally something dealers inventory much of. Andrew Obin - Bank of America/Merrill Lynch: As I’m thinking, what I’m driving at, when you talk about production increase related to mining versus production increase related to destocking that took place in ‘09. I should be thinking of those as two separate events, right?

I think if you’re looking at small machines, I think the inventory destocking probably has a more significant impact on our year-over-year production increase and I think if you’re looking at mining. I mean it’s not that there’s no inventory impact, but I think end-user demand is looking pretty good. Andrew Obin - Bank of America/Merrill Lynch: Any destocking on Engines? Engines in 2010.

What about Engines in 2010? Andrew Obin - Bank of America/Merrill Lynch: Will there be destocking on Engines in 2010?

No, we said in the release, we didn’t expect much change in dealer inventory one way or the other and that goes for machines and engines.

Your next question comes from Alexander Blanton - Ingalls & Snyder. Alexander Blanton - Ingalls & Snyder: I’d like to just go back to the incremental margin question for a minute, because you had outstanding incremental margins or decremental margins, I should say, in the fourth quarter, because the sales were down about 41% in Machinery and Engines, but your gross margin actually went up almost 170 basis points, 18.64% versus 16.95% and that is a 14.5% decremental margin, which I would have said before this quarter or this year would have been impossible on that kind of a sales decline. So that indicated tremendous cost reduction in which your costs were almost rendered virtually all variable because your margins actually went up. So when I take your guidance for next year to 50 this year, and work back upwards as Andy Casey did, I actually came up with a little higher incremental margin if I adjust for the LIFO of about 40% with a normal. The question is this. Why isn’t it greater? Because 40% would be a normal incremental margin and normally you do get these product mix changes during a recovery. So it would seem to me that you’re being very conservative in looking at next year and looking at only a normal incremental margin when you’ve been doing so much better with sales falling.

Okay, this is probably going to be a reiteration a little bit of what we already said, but our normal variable margin is in the low 30s. If you ever get to a point where incremental margins are above that, it’s because you’d have either a favorable mix or a strong quarter of price, but just our variable margin would usually be in the low 30s. We did have a good quarter on cost in the fourth quarter particularly compared to the fourth quarter a year ago. Our costs were down about $1 billion versus fourth quarter a year ago. Again, I think the headwinds on incremental margin next year are definitely product mix, R&D costs, LIFO benefits, but a lot of that is offset by operating improvement and material cost reductions. So on balance, there are items on both sides of the equation in terms of better and worse, but I wouldn’t say 40% would be normal. That would be well above I think what our normal variable margin rate would be.

Your next question comes from Ann Duignan - JP Morgan.

Jim, my question is around your outlook for GDP growth globally. You still remain bullish on China. How have the events of the past week in China maybe tempered your outlook or caused you to be any way more hesitant on your strong outlook for growth in China this year and next? I know you guys expect China’s construction or infrastructure to remain strong this year, but would you anticipate it slowing into 2011 then on the back of the financial actions in China over the past week? In that context, I know this is running on, what macro outlook would cause your revenues to be only up 10% and what would cause your revenues to be up closer to the 25%?

We think there’s a long term mega-trend towards real growth in the emerging market theater being substantially higher than in the OECD world. I don’t think anything has changed that. I think the Chinese government is responding to very robust growth in the last six months, going probably north of 10% and their concern about creating an inflationary bubble longer term. I think it’s probably pretty prudent on their part to at least tap on the brakes here. Hopefully tap on the brakes, not send everybody through the windshield, but I think there’s high probability they will be able to sustain growth between 8% and 10% while moderating a little bit coming out of the very aggressive stance they took with monetary and fiscal policy to stimulate growth in the face of a dramatic drop in their exports to rest of world and sustain employment. So I think they’ve done rather masterfully in macroeconomic management through the cycle so far, but we still think that not only China, but India, Southeast Asia, parts of the Middle East, Brazil, and now even Russia are starting to come back in terms of their macroeconomic fundamentals. There is a lot of monetary and fiscal stimulus awash in the global economy that gives us a lot of confidence that the recovery will continue to move forward next year and actually should gain some steam particularly as the U.S. and other OECD countries gain steam towards the latter half of next year or this year. I’ll just stop on this point. The key I think for China and the emerging market theater is not so much the domestic demand for our equipment, it’s the fact that they drop commodity prices in a big way and we think commodity prices, there was a period where there’s a lot of financial speculation in those markets that seems to have wrung itself. In order to increase capacity, there’s investment required and therefore we’re still pretty optimistic about the long term prospects for energy development and mineral development capacity increases that are needed and we still have a fleet of equipment out there that’s pretty old. So that leaves us pretty optimistic about those sectors.

Your next question comes from Daniel Dowd - Bernstein.

Let me actually turn to a different issue. What are the circumstances under, which you would start to, use the cash on the balance sheet for other uses? How would you think about those uses? I guess as a related issue, how do you feel in the wake of Bucyrus acquisition of Terex’s mining related businesses? How do you think your mining business is competitively positioned against Bucyrus?

Let me just talk about the uses of cash. Certainly we’re watching this very closely and one of the things we want to do is make sure we maintain our current credit rating and you are quite familiar with kind of our priorities for cash in terms of the growth of the business, making sure we keep the healthy pension plan and all the activity that we had this year with the exceptional returns. We want to make sure that we maintain the dividend and with the possibility of taking that up if the business should return, but our focus is making sure that we’re very close to the rating agencies. We had updates this week and we’d like to get back to a stable outlook before we start buying back stock, but hopefully we can move that up as we continue to make progress with them.

I’ll add to that, Doug Oberhelman here. Emphatically that the principal strategic uses of our cash and our balance sheet have not and I don’t think will change, as Dave just outlined. Once we get past this recessionary environment, once we hear from the rating agencies that they’re stable with where we’re going on this. You could expect us to get back into our mode that we have been in for many years that Dave just outlined, growth, pensions, dividends, and stock repurchase that is unchanged and I do not expect that to change in the future.

Maybe to touch on just the mining thing briefly, we obviously have been watching the industry very carefully. I think we’ve made some significant gains in the last year in our share of that total market as it has been more depressed and we’ve had capacity, but we’re very much focused on and in fact are making fairly significant investments in ‘08 and in part of the investment we continued in ‘09 is to expand our mining truck capacity. We’re looking at other mining related product expansions to strengthen our position in what is I think a very strong global leadership position in that space. So we look obviously and have looked at acquisition opportunities. We didn’t feel we wanted to chase things on a price basis and we think we have the ability to organically grow and with small acquisitions to strengthen our hand in that space, which we’ve been a long time leader in.

Your next question comes from Joel Tiss - Buckingham.

Just two things, can you give us the level of backlog at the end of the year? My angle is I’m trying to figure out if there’s anything building here that could get turbines and large engines to look better for 2011 and then can you square rising commodity prices with your favorable material cost outlook for us? Thank you.

Two things, on backlog, we commonly report a backlog number in the Q. I actually don’t know what the dollar number is, but I know throughout the fourth quarter order rates from dealers were up, so that’s pretty positive. A lot of mining orders went on the books late in ‘04, so that’s positive. I don’t know what the number is though, Joel. We’ll put that in the Q, but it’s looking up.

Maybe Joel, I’ll just take a crack at the Engine situation. I won’t comment about 2011 at all, but I want to talk about 2009 and where we are with that. There’s a lot of moving parts within that Engine segment of ours. We had a great banner boom year for solar. We had a solid year for our large recipes that tailed off during the year as we reported. If you look at our operating margin though, and pull out the redundancy in 2009, our operating margin was a bit self serving on our part was spectacular. Particularly with redundancies for the Seguin, Texas plant, which is underway, the walls are up. Some machine tools are installed and that is on plan for midyear production. Particularly with continued heavy investments in ‘09 for Tier 4, which is coming up at the beginning of 2011, and then a continued headwind and drag from the residual of our on highway business, as we’ve talked to before particularly in August at the analyst meeting. As we work through those in ‘10, a lot of things are happening. Again solar is going to be down a bit. Large recipes will be down a little bit in the early part of the year, but on the positive side, we’ve got a lot of tailwinds going for us as we get Seguin online and our Tier 4 goes into 2011. So I would just say on the Engines side, ‘09 it was definitely the trough as we see it. We’re very happy with solid margins we have and I know many of you have asked, “How low do they go?” I won’t comment on that, but we’re thinking that it is a lot more stable business going forward than in the past as we work through some of these structural changes that will come to fruition for the most part by the end of ‘10.

Your next question comes from Robert McCarthy - Robert W. Baird & Co. Robert McCarthy - Robert W. Baird & Co.: I wanted to ask about actually a little bit different than the way it has been asked, about order cycles and what you’re expecting there. First on the Engines side, specifically oil and gas energy are the key markets for high end of your business. We understand the revenue forecast, but with high commodity prices, can you speak to whether you would expect orders to turn around in 2010, and which sectors within the Engine business could then lead us into recovery in that business? Then on the Machinery side, we keep talking about smaller machines, but I think it would be useful if we could get a little bit of a definition around that. Are we talking specifically about BCP or is it a larger definition of that? Can we get a little better quantification of how important small machines were to the inventory changes last year? Clearly it was more than half. Was it more than three quarters of the number? Thank you.

That was quite a few questions wrapped together. I think I’ll start at the end of with small machines. I think in this context, I think what I’m really trying to distinguish in the discussion here is that generally speaking the bigger the machine, usually the better we do in margins. It is not 100%, but I think that’s a reasonable rule of thumb. We’re talking about a good environment this year for mining. We mentioned that in the release, but I think that if you look at what happened to dealer inventory, it did affect BCP product. It affected midsize excavators, midsize wheel loaders, not just BCP and for the most part mining equipment, big mining equipment would certainly be better margin than the lot. Another point here, I guess I don’t think we made maybe strongly enough and that is, when we talk about machinery and we talk about engines, our integrated service businesses other than financial products are embedded in machinery and embedded in engines and they tend to be higher margin than some of the machines, particularly small machines. While we expect those businesses to be up, I think the dealer inventory impact on new machines is going to be a big driver in this year’s sales and new machines are generally lower margin in general than engines. You can look at the operating profit for engines this year versus machines this year. Then if you dig down deeper, it’s BCP, small excavators, small wheel loaders. The kinds of things that dealers would inventory as opposed again to say mining. So I think BCP certainly wasn’t the entire change in inventory. It was in probably most machine categories, but I think if you were to look at midsized and small machine that’s the kind of thing…

Jim, let me just add that is a great kind of lead in to the discussion around oil and gas that you alluded to in asked about. No question gas, particularly natural gas in North America, is depressed. We have seen the shale oil or the shale gas come on in a big way the last two or three years, which have added to supply, a remarkable turnaround in North America certainly, but we do see the oil business picking up. Demand for our products that we use around petroleum. We see order rates still flat to declining around gas. The wild card, though, as Jim mentioned, is economic growth. If we see a V, we see growth picking up around the world later as we go through 2010 that gas and oil is going to go. It’s remarkable to me that gas is 20% up from a year ago, $5.50 and certainly in most of our lifetime and certainly in the history of the industry, gas at $5.50 and oil at $75, $70, and $80 are just very high prices. That drove a lot of investment. We will work through that particularly with the drop in demand, but the long term forecast for energy consumption if you look at it out through 2025, short, medium, and long is a growing rate and we see that business going up. So it’s a question of when the turn is and as Jim mentioned, a lot of that depends on ‘10 GDP growth.

Your next question comes from Henry Kirn - UBS.

You mentioned that pricing would be modest this year, but could you give a little more granularity about where you might be able to put through price increases and where it might be more challenging?

I think there’s not going to be much price increase really anywhere. Our total for the year we’re looking to be somewhere less than 1%. So I don’t think there’s any place that I’m aware of where there are going to be big price increases pushed through. I think I would characterize next year as more kind of a steady year for pricing.

Your next question comes from Barry Bannister - Stifel Nicolaus.

Earlier it was asked and it wasn’t answered what would be the profit or margin impact of introducing a second product line for the emerging markets of a lower priced, less specified machine, perhaps one based on the SEM brand in China? So if you would just answer that question that would be good. Then secondly, in related to that, I’m trying to understand why in response to the earlier question with every commodity going up steel, copper, tubes, hoses, why your material cost would go down in 2010; just those two follow-ups from earlier questions, please.

Let me take a shot at that. We have been selling SEM products, which is a mid tier as we would call it product in China for the last year. We think that demand will continue to grow and grow pretty rapidly as we are putting it through increasingly the Caterpillar renal store network in country. We have made that product a better more robust. I would say we have reasonably attractive margins on its lower cost, probably less long lasting, but margins inline with the smaller end of our product line and profitability. We are looking at other mid tier products, which we will gradually introduce this year that will be sold primarily in emerging markets at a lower price point that again will have somewhat less features and somewhat less longevity, but which we think speaks to the customer needs in those countries and again, I think margins inline with the smaller end of our midrange and core machines. So that we’re growing and simultaneously, we’re growing the Caterpillar branded and investing pretty heavily or particularly our dealers in the region in dealer capacity and these things, I think we’ve been making those investments in our capacity in China and are continuing to grow our emerging market manufacturing capability and capacity and supplier network. On the material cost side, we have had dedicated teams working with all of our product managers on ways to reduce material costs. Some of this is engineering changes, standardization of specs, consolidation of suppliers on a worldwide basis, and just outright negotiations and being sure that we are getting materials at equal or better price than any of our competitors could get it. We’re the volume leader in our industry worldwide. So it’s just gotten a tremendous amount of focus. We’re pretty confident in the line of sight to having material costs decline slightly next year in spite of the fact that commodity prices are holding at pretty good levels. I don’t know Doug, do you want to add anything to that?

I think that’s very accurate. We’ve had a laser focus on specifications, simplification across steel for over a year. We’ve had great luck with our teams in identifying top to bottom efficiency reductions in the way we buy and purchase and design and there’s really a renewed effort to get after that that is the majority of that answer.

Your final question comes from Jamie Cook - Credit Suisse.

Most of my questions have been answered. I guess just sort of what’s left. How you guys are thinking about machinery margins in 2010? I’m assuming that we’re back profitable. Do you think about it that way, assuming the low or the high end of guidance? Is there anything that we need to be aware of as we think about how the quarter has progressed? You talked about production, but is there anything else in terms of mix, in terms of material cost price, ramp for the year I guess? Any other things unusually about the quarter and is it too can we think about profitability happening or returning to profitability in the first half or is that too early?

I think it largely will depend upon how the volume ramp plays in and I think we see that from fourth quarter levels, we do see volume going up as we go into the year and ramping up through the year. So that should be positive. Some of the cost increases like pension that will happen right away in the first quarter. Decrement benefits, LIFO benefits that we had in the fourth quarter will certainly go away in the first quarter, but in terms of kind of the overall operating things that we’ve talked about, material costs, increases R&D, sales mix, I don’t see anything massively unique about the first quarter. I just think the volume is going to ramp in as we go through the year and volume should help machinery margins in 2010, if you look at our profit after tax going from 218 excluding redundancy at 250. On an after-tax basis and on a per share basis, the improvement is not nearly as much as the before tax or operating profit improvement and that’s because of the taxes. So if you were to look at operating margin, it would be improving next year more than the profit per share number might indicate. So with that, I think we’re about out of time and we will wrap it up. I look forward to talking too many of you over the coming days. Thank you very much.