Good morning, ladies and gentlemen and welcome to the Caterpillar Year End Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. Now I’d like to turn the floor over to your host, Mike DeWalt. Sir, the floor is yours.

Thank you very much and good morning everyone and welcome to our year end conference call. I'm Mike DeWalt, Caterpillar's Vice President of Finance Services. On the call today, I'm pleased to have our Chairman and CEO, Doug Oberhelman; and Group President and CFO, Brad Halverson. This call is copyrighted by Caterpillar Inc. and any use, recording or transmission of any portion of the call without the expressed written consent of Caterpillar is strictly prohibited. If you'd like a copy of today's call transcript, we will be posting it in the Investors section of our caterpillar.com website, in the section labeled Results Webcast. This morning we'll be discussing forward-looking information that involves risks, uncertainties and assumptions that could cause our actual results to differ materially from the forward-looking information. A discussion of some of those factors that either individually or in the aggregate could make actual results differ materially from our projections that can be found in our cautionary statements under Item 1A, or Risk Factors of our Form 10-K filed with the SEC in February of 2014 and with our 10-Q filed with the SEC in August of 2014. And it’s also in the forward-looking statements language in today’s release. In addition to that, there is a reconciliation of non-GAAP measures and that can also be found in our financial release which again is on our caterpillar.com website. Okay, with that let's get started. In this morning we'll be reviewing our financial results for the quarter, for the full year of 2014, and we’ll spend some time on our 2015 outlook. Now as I do each of those, I just want to go through the major themes right now. For the quarter, sales were about as expected but we were disappointed with lower profit in the quarter than our…

[Operator Instructions] We will take our first question from Andrew Kaplowitz with Barclays. Your line is live.

Good morning, guys. Mike, I think you did a good job on the puts and takes of the 2015 profit guidance, but let me push you a little bit here. Like, you talked about being in the range that you usually have 25% to 30% decrementals; but you are enjoying that $400 million tailwind from stock comp expense. We've talked about restructuring benefits starting to ramp up in 2015, and I'm not sure how much that's going to help. Then obviously you mentioned the stronger dollar helping you. I know you've talked about mix and I know you've talked about inventory destocking. But maybe you could quantify something like inventory destocking or -- what I'm really trying to figure out, Mike, is if there is an element of conservatism at all in this guidance.

You know we try to be prudent. There are always upsides and downsides in the forecast. We always attempt to try if we can to pick up middle reasonable ground. You did pick out currency as a modest positive and you are right, the incentive comp is positive as well. But - and on the restructuring, we do expect favorable variable cost next year and above and beyond just material cost. So we do have some improvement baked in for that. But we do have again I am just a little bit repeating what you said. Mix is negative. We've got a $5 billion decline in sales and that is I think - between that and the continuation of our Lean journey, we are likely to take inventory down more next year and we have somewhere around 15% to 18% negative hit to profit from cost absorption on that. So that's going to be negative for the year. R&D is probably not going to be quite back to the 2012 levels but we do need to fund some more. We've got a ton of exciting programs for the future that we need to get on with now and so we’ve planned to do some funding of that. So it - again the two tailwinds are step and the incentive compensation in a little bit from currency to the bottom line.

Okay Mike.

I don’t feel like I added a lot more for you there but…

Is it possible to quantify restructuring benefit that you expect? You've given us in the past, is it possible to quantify that?

For next year…

2015.

Actually after this last decline in volume for us, we are reworking the detailed plans but before that we were looking at somewhere around - increment of somewhere around $100 million.

Okay. Then just shifting gears, can you give us more color on construction, global construction demand in general? At least what's baked into your forecast in 2015? Do you believe North American construction will be up in 2015? Or at least what's in your guidance for that geography.

So if we look at sales for construction, we just talked about it generically regionally. We are looking to be up in the U.S. next year, North America mostly the U.S. Probably a little less than we thought before the oil price dropped. So we are looking ahead. There is some headwinds in the oil producing areas, Texas, South Dakota, Pennsylvania. So U.S. is still a positive but probably not quite as positive as we thought before. Almost everyplace else in the world to some degree negative. We are still not getting any decent economic growth in Europe. The developing countries Brazil, China are still let’s just say challenged. We are actually expecting a little bit lower GDP growth in China next year than we had in – or in 2015 than we had in 2014. So we are looking for the - outside the U.S. construction to be weak. We also have quite a bit of the sales impact from the stronger dollar showing up in construction as well. So it will bear most of the brunt of that. We’ve taken a stab at trying to estimate the impact of lower oil in the oil producing regions. I will say that that's probably - that's tough to forecast. We don’t exactly know what the Saudis, the Nigerians are going to do, but just using those two oil exporting countries as an example. There are certainly many more. We don’t exactly know what they are going to do but we’ve taken our best shot. So we’ve taken sales out of those regions as well. But I think if you were to combine it into kind of nutshell, we are looking down 5% to 10%. Currency is a chunk of that outside the U.S. generally. Oil producing regions weaker, U.S. not including, oil is stronger.

Okay. Thanks Mike.

We will take our next question from Nicole DeBlase with Morgan Stanley. Your line is live.

Yes, thanks guys, good morning. Maybe just starting a little bit with oil, I'm just curious what exactly you are hearing from your customers. I think if we looked back to 2010 it took several quarters for this impact to start bleeding through to your results. So I'm just curious how soon we'll start to see the weakness come through, both in your retail sales and in Cat's reported results.

Yeah that’s actually a great question Nicole because if you look at the 2014 fourth quarter or December even retail sales statistics, oil and gas was still pretty strong and it will probably continue that way for a while. I mean we are selling out of the backlog. So what we will be seeing first is – and we are actually starting to see it now. So I guess this is what we are hearing from customers is a decline in order rates for oil and gas. It probably won’t show up in our sales for at least a quarter maybe a bit more than a quarter in the second half of the year particularly for re-step engines, piston-based engines for drilling and well servicing. Our sales are likely to fall off quite dramatically for that kind of product in this – certainly in the second half of the year.

Okay, got it. That makes sense. Then I guess maybe a somewhat philosophical question. How much does a strong US dollar concern Cat generally, given that you have such a strong base of sales in international markets? And to that point, are you seeing increased competitive intensity yet from Japanese or European OEMs?

That's a great question too. So generically, what we’ve done over the last I don’t know 30 years basically is try to diversify our cost base to try to help it match up a little bit better with sales. If you take 2015 for example, the stronger dollar, as we convert all those sales from local currencies around the world and the dollars is going to translate into fewer dollars, the flipside of that is we have substantial manufacturing operations outside the U.S. and that largely mitigates the profit impact. So we have in the case of stronger dollar a decent sizeable negative impact on sales with a positive impact on cost. Usually it’s not too big of an impact one way or the other on profit although it can depend on which currency moves and how much.

Yeah. It's Doug Oberhelman here. I will just add a little bit broader perspective on that thing. Rising dollar and I will expect that 2015 would see more of that will not be good for U.S. manufacturing nor the U.S. economy. How that is offset against the lower oil, diesel, gasoline price, I don’t know how it worked out but certainly anybody producing in Japan, the U.K. or Europe particularly Germany is going to have, it has had quite an advantage over their American competitors and I would expect that they have an impact on the U.S. in some way. We worked hard to as Mike said diversify our manufacturing footprint. We are large exporters and have a large cost base in Japan, Europe, U.K. as well as we are taking advantage of that, as you mentioned, works its way through to the bottom line. But overall I think it’s a very good positive for U.S. manufacturing unit. The policy issue I think is concerning.

Okay, great. I really appreciate the commentary, Doug and Mike. I will pass it on.

We’ll take our next question from our Robert Wertheimer. Please announce your affiliation and pose your question.

Thanks, Mike. Just wanted to follow-up on oil and gas. Obviously you've taken a big whack to the drilling and the completions, the pressure pumping. But have you heard anything on production platforms on maintenance for solar turbines in the Gulf or in Nigeria or wherever? Have you factored any weakness in either production or maintenance into the account -- into the outlook? And if not, do you expect any could develop later into 2016?

I think from a service standpoint, no. We haven’t been hearing that. Once the platform is up in producing, we've got all that fixed cost sunk into it. So, you know it’s likely to continue to produce. So, no and even on, turbo machinery projects not just service for solar, the nature of that business is rather a long term projects. By the time, we produce a turbine, the project is pretty far along. So, considering a lead times there, and the kind of projects that are there, you tend not to get big short term swings. It's not like somebody is coming in and buying something out of inventory of the shelf. So, we really don’t see much of an impact with solar for 2015. But, and I mentioned this a bit in my lengthy preamble, that if oil prices and gas prices stay this low, so large not immune it’s just delayed.

All right, perfect. That was very helpful, Mike. Thank you. Then just a quick one. It seems as though 1Q will still have some deliveries on the 3500s or whatever to the drilling and pressure pumping. Should we assume that the back half of the year has basically almost nothing in it? I mean, the fleet has grown tremendously over the last 10 years. Maybe replacement sales continue to grow. I'm not sure if we should consider the back half to be the bottom or not on the drilling and completion side. And I will stop; thanks.

Yeah. Certainly won’t be the first quarter or second quarter. It will probably start tailing off as we get towards the end of the first half. But yeah, we've had actually some cancellations, so the backlog has come down. There’s been some cancellations, but that seems to have tailed off. So, we're scheduled out reasonably for the first quarter. We think some of that is, if you have a well that's getting drilled, you’ll want to frac it. So, we think that what’s in the order book here, certainly for the first quarter is probably going to continue. But orders have largely dried up for that kind of business. So, the back half of the year is going to drop a lot for the drilling and well servicing.

Probably not so much gas compression. It’s really not for the turbine projects but you know, for the drilling and well servicing around oil and particular, yes.

Thank you.

We will take our next question from Joel Tiss. Please announce your affiliation and pose your question.

Hi, I'm with BMO. Instead of beating up energy anymore, I wonder if you can give us a sense of why the resource industry dealer inventory went up a little bit, it sounds like in the press release. I just wonder if you're seeing anything positive there, or just what's going on.

No. Actually dealer inventory went down. It just didn’t go down quite as much as it did in the fourth quarter of 2013. It's a very challenged business. If you look at order rates from customers, they’ve been, they bounce around a little bit here and there month to month but if you look at the moving average, they’ve been pretty stable here recently. But it's actually been below our sales level. We've been selling a bit out of the backlog. The backlog in mining is getting to a point where we just don’t have the capability to continue to do that. So, in light of copper coming down around 250, iron ore prices severely depressed and coal prices down, we’re taking a cautious view of 2014 for mining. We were hoping that 2014 was the bottom but given everything else that is going on in the world, at least our estimate of China GDP being a little lower next year than this year, I think the prospects for a rebound in 2015 are just probably not there. So, that's negative. There's also probably a small negative in there - I don't want to overplay this, but we do sell into the oil sands in Canada and we think there is not a - in the scheme of next year’s business, it's not huge but we do think there is a little bit of risk there as well.

I wonder if you can share with us the overall company OEM versus aftermarket at this point, or over the course of 2015. I think it's a fuzzed-up enough number where you wouldn't really be giving anything away, but you'd help us understand the resiliency of Cat's earnings a little better.

What I would tell you is that - as we talked about this outlook change, I will try to frame in a couple of different ways. What are the causes, like oil prices and that goes across the segment. And then we try to give you a view by segment. RI down 10%, E&T 10% to 15%, construction 5% to 10%. But your point about original equipment and parts is a good one. I won't give you a complete split, but I would tell you that we would expect aftermarket parts to be pretty flat next year. With this year we’re not taking that down. So the decline for the most part is coming out of new equipment.

But you can't give us any sense if it's half of the overall business or anything?

No we've never done that Joel and probably not going to start today.

All right. Thank you very much.

We'll take our next question from Ross Gilardi. Please announce your affiliation and pose your question.

Yes, good morning, Bank of America. Gentlemen, I'm just comparing your comments on construction to what we were hearing from the large rental houses, who are substantially more positive. Obviously your business model is different, and also for Cat Rental the fleet mix is different. But do you think dealers are losing marketshare to the bigger rental houses who've improved their footprint, are getting better at servicing the national account customers, and just their overall service offerings dramatically in recent years? Anything you feel like you need to do from just a business model standpoint to deal with them?

Well, first off, Ross, I will start by saying we’re actually pretty constructive about U.S. construction. So we have U.S. construction actually going up. I think probably the major rental houses that you’re talking about our U.S. base are probably not feeding back what - what’s going on, Brazil, the rest of Latin America, China, Europe. So, that is the - that plus currency impacts which there is also not seeing are, two principle reasons that construction would be down next year. So I think from a North American standpoint, honestly I don’t know, what the rental houses are actually telling you in terms of volume. But we’re up probably, mid-single digits in North America construction despite a little headwind we think from oil. I think the dealers are actually doing a pretty good job on rental. It's been an increasing piece of their business. It’s a big focus that particularly in the U.S. and Europe, its how a lot of business gets done. It’s a key element of our across-the-table initiative and we’ll probably do more. So, it’s a big focus. I think if you parse out how we’re describing the construction around the world, probably not that far off with what the rental houses are saying.

Yes, okay. I mean, I realize there are big geographic differences in your overall footprint. I was more isolating just the commentary around North America; but thanks for clarifying that. And then given what you're saying about demand and the overall environment for Caterpillar in your various end markets, what are you thinking now about capacity rationalization across your footprint right now? Should we be expecting to see some bigger facility closures as 2015 unfolds, to better align supply and demand for the medium to longer term?

Yeah. You know, we're -- how I say this with the right tone here? We're a cyclical company. Our sales in these industries as we've seen by mining and certainly oil and gas go up and down. What we try to do is manage best we can the fixed cost structure, the physical bricks and mortar capacity. You need that for when the business recovers. So we have another $150 million in for restructuring cost in 2015, but I wouldn't say there aren't any large scale plant closures in there. Certainly $150 million wouldn't cover that. We have done a pretty good job on trying to flex our period cost down. That's where we're really focused, not so much on bricks and mortar.

Got it. Thank you.

We'll take our next question from Kwame Webb. Please announce your affiliation and pose your question.

Hello, this is Kwame Webb from Morningstar. Thanks for taking my question today. For me on the Caterpillar Financial side, I was curious to know: what are you guys thinking in terms of loss allowances for 2015? And then on a related note, I'd imagine the dealers are going to help you with repositioning some used equipment. What do dealer used inventories look like right now?

Yeah. This is Brad Halverson. You know, CAT Financial had another good year in '14. In fact, if you look at the credit metrics in '14, you'll see a positive story. Our write-off were down, our past dues moves from down to 2.17 from about 2.4 last year. We get this question every now and then and our China business continues to form well. Their past dues were also down. And so, we are seeing some softening in the used equipment market in the last few months mining is actually held up pretty well during the year. We'll see how that carries forward in the next year. But at this moment, I would say that we don't have any concerns relative to our portfolio performance and past dues coming off another year of improvement and I'd say we'd pretty stable heading into '15.

And then just a follow-up on the Resources business. There was some commentary about aftermarket sales improving, and I think you guys actually said that you expect '15 aftermarket to be flat with '14. Could you comment on what specific product lines you're seeing strength or stability?

Yeah. I mean for aftermarket just generically the rate of change is much, much less cyclical than new equipments. So even in the areas over the last -- like mining where it's been down over the last couple of years, it's down much, much less than the new equipment sales would be. As we look forward to next year, I would say we don't see any material changes in any other segment. There might be a little change around the edges, but nothing significant up or down by segment.

Okay. Thank you.

We'll take our next question from Ann Duignan. Please announce your affiliation and pose your question.

Hi, good morning, JPMorgan. My question is around capital spending. You're keeping your CapEx budget flat year over year; R&D is going up. Should we be a little bit concerned that Caterpillar is expecting a quick recovery in the oil business? Or can you just dig a little bit deeper into why you're holding CapEx flat? We would have expected with earnings down this much that CapEx will be down significantly also.

Hi Ann, this is Brad Halverson. May be I'll talk just a little bit about cash and I'll get to answer your question directly as well. We talked a lot with you guys about improving our balance sheet coming out of '08. And when we got to the end of '13 we were very happy with our balance sheet in terms of our debt to cap, net debt to cap being around 17 and carrying about $6 billion in cash. And we had another very good year, $7.5 billion of operating cash flow and our CapEx was fairly well below our planned outlook for the year. I think you'll find 1.6 being a fairly low number for us and well below what we thought in 2014. And so, we finished the year with net debt to cap around 18 and around $7 billion in cash. And so, we're very happy with where the balance sheet is. In fact, our working capital as a percent of sales as we worked on lean and other initiatives is at a record low, around 12%. So all that said is that we feel really good about where our balance sheet is positioned. Our priorities outside of maintaining the debt rating would be growth. And we talked a little bit earlier with Andy; we're spending a significant increase on R&D in '15 over '14. And that's a big part of how we want to deploy cash. And of course, that hits the P&L. I think CapEx around 1.6 is a reasonable number going into '15. There is a decent amount of that. That's a normal replacement type activity to go in our manufacturing facilities. As you know, we're fairly highly vertically integrated which creates a little high replacement kind of demand for capital. So I would say that's fairly reasonable going into that. You may want to ask a little bit and I'll just jump to it around deployment of cash. And I would say that we're continuing to look for growth opportunities, we're not announcing anything today but that activity remains very important to us and we're continuing to focus on that. The energy valuations are clearly dropped and so that's something that many are looking at including us. We're really happy with the balance sheet position. We'll consider stock repurchase as heading to 2015. But again, those priorities remain pretty well the same for us then.

Hey Ann, I think I'll just embellish one thing on what Brad said. If you look at the CapEx that we do have a lot of NPI, it's maintenance. It's not focused around capacity.

Yeah. Okay. I did pick up on that. So that's at least valuable to understand. And then, my follow-up question is getting more philosophical. A lot of the restructuring spend that you've been doing the last few years has been in Europe, to make -- to set up Europe for Europe, I think is what the program was called. Given where currencies stand now if you were embarking on that restructuring, would you do anything different? If we get to parity, euro versus dollar, would it make sense to be keeping manufacturing in Europe?

I'll comment here, Ann. It's Doug. We had some fundamentally, I would say, dysfunctional and not working operations in Europe, not productive, not efficient that we really needed to work through. Where we will land up when we're done there and we're closing in on that as a really lean manufacturing system and operations that are sized for that business in a euro at parity will just be a great tailwind for that. I would point out our good notebook plan in France that we downsized makes wheeled excavators today. It's one of the models we have in the world in terms of throughput, high quality machines and lower lead time. And so, we like that and I think the currency benefit will just be kind of gravy on that.

Okay. I'll leave it there and get back in line. I appreciate the color.

Thank you, Ann.

We'll take our next question from Vishal Shah. Please announce your affiliation, then pose your question.

Yes, hi. Thanks for taking my question. How much of a headwind would you expect the dealer inventory to represent in 2015? And how much of that excess inventory is in oil and gas versus construction and mining?

Yeah. Good question. In -- the majority of the inventory by far is machines, the actual engine inventory is quite a bit less. It's not that they don't have any, but just in terms of scale it's quite a bit less. We're likely to have and also embedded into our forecast for next year is further decline in dealer inventory. So I think it's a case where we've got sales coming down $5 billion, dealers try to peg their inventory around what expected sales are. And so, when sales come down, they take inventory down. And that's -- we expect that to happen next year. So I think it will probably at least as much as we had this year.

Okay, that's helpful. Just on the E&T business, I know you mentioned 10% to 15% decline in sales. As you think about the decremental margin for that business, should we be assuming the decrementals to be above the 30% or 25% target in 2015?

Yeah. Again it depends on the products in E&T. I think certainly in the oil and gas area, that the margins there would be above the average and so that would be negative to their decrementals. Locomotives would probably be on - new locomotives, the services businesses very profitable. But locomotive less so, there are some industrial engines as well are down. So again that’s probably a little below average on margins. So on balance, I would think that E&T has it going both ways and probably not dramatic in total.

Thank you so much.

We'll take our next question from David Raso. Please announce your affiliation then pose your question.

Evercore ISI. My question is about especially the lag of some of these adverse impacts. I'm just trying to think of Cat's earnings power run rate exiting 2015. I think people are just trying to figure out where 2015 sets up going into 2016. And just seeing the lag impact, can you maybe give us some cadence on how you're seeing the EPS play out for the rest of the year? It just seems like the back half of the year maybe we're looking at $2 in the back half, or less; or the fourth quarter at least running below $1. I'm just trying to make sure we understand how you see your earnings power exiting 2015, as it reflects on people's thoughts on 2016.

Good questions David. I think forward to 2016, there are so many things that we don’t yet know the answer to, and I'll just give you a couple here. One with lower oil prices its driving lower gasoline prices, and that ought to be an economic stimulus from our consumer standpoint. How that plays out in world economic growth, what the actions with the ECB are taking, how that plays into world growth, whether or not China remains satisfies around seven or tries to push it up, all those things right now, we don't really know the answer to. They could be positive, they could be negative, at this points it's hard to say on 2016.

Yes. I'm not asking you to predict 2016. Right now – if I could predict that we'd all retire tomorrow. I'm just trying to figure out the idea of -- are we exiting the back half of 2015 at a $2 back half, or a $1 per quarter run rate? And then however we view 2016 is predicated on how you see commodity prices through 2015. I'm just trying to make sure we understand the earnings power run rate exiting 2015.

I think if oil and gas -- if oil prices and gas prices don't go up and we’re not forecasting them too. We would have much more of a follow off in the oil and gas sales in the back half of the year which would imply more of a negative in the back half.

Well, maybe just said another way, the greatest sales decline in 2015, is it the fourth quarter? The EPS sets up to be the lowest for the year? I'm just trying to figure out -

Probably third and fourth quarter - third and fourth quarter. We’ll start exhausting the backlog of drilling and well servicing probably as sometime in the second quarter I would guess.

Okay. I really appreciate it. Thank you.

I think we have time - so we'll do one more.

We will take the last question from Jamie Cook. Please announce your affiliations then pose your question.

Hi, I guess most of my questions have been asked. But Doug, I just don't know if you'll be willing to provide to the Street your -- I mean, there's the concern the oil and gas cycle is the next mining cycle that we had. So can you just provide your view on what that risk is and how would you manage your business differently given what we learned from mining?

I would say tough question obviously. We saw our mining lose half of its sales in our segment in – really under a year about a year. Our energy and transportation business last year was 20 billion plus. I would not see that happening on that scale at all because we don’t have the exposure to oil and gas in that segment as we did with mining in the resource segment. And that's probably about as far a I will go because as I said here today, if we see oil and all those who were forecasting oil at $20 and those who are forecasting gas at $1.50, some forecasting higher gas and higher oil, and I'm not going to make it commitment or even a forecast on that. But what our commitment is to you all, is that 25% to 30% decrement on the way down and 25% on the way up. We've done pretty well with that. I don’t like these top line gyrations that we’re getting and we’ve seen. But our managing of those ups and downs have been - I think pretty well in the last few years and that’s what we would commit to if we have to go further down or if we get lucky and it goes up.

All right. Thanks. I will get back in queue.

Thank you all very much and we’ll talk with you again at the end of the first quarter.