Good morning, ladies and gentlemen, and welcome to the Caterpillar Full Year and 4Q 2015 Results Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mike DeWalt. Sir, the floor is yours.

Thank you Paul and good morning everyone and welcome to our year-end earnings call. I'm Mike DeWalt, Caterpillar's Vice President of Finance Services. On the call with me this morning, we have our Doug Oberhelman, our Chairman and CEO; and Brad Halverson, our Group President and CFO. Now this morning we're going to do the call similar to what we did last October. We'll be going through a short slide deck before we get to the Q&A. And if you don't have it yet the slide deck, it's available on our website, at caterpillar.com and it's with the conference call webcast link. This call is copyrighted by Caterpillar Inc. and any use, recording or transmission of any portion of the call is strictly prohibited. If you'd like a copy of today's call transcript, we will be posting that in the Investors section of our caterpillar.com website and it will be in the section labelled Results Webcast. This morning we'll be discussing forward-looking information that certainly involves risks and uncertainties and assumptions that could cause actual results to differ materially from the forward-looking information. A discussion of some of those factors individually or in the aggregate that could make actual results differ materially from our projections well that can be found in our cautionary statements under Item 1A, or which is Risk Factors in our 10-K filed last February and it's in the forward-looking statements language in today’s financial release and near the front of this morning's slide deck. In addition, a reconciliation of non-GAAP measures can also be found in our financial release and again that's been posted on our website at caterpillar.com. Okay. With that, let's get started, if I could ask you to pull out the slide deck and flip to page three and that's the agenda of…

Okay. Good morning everyone and I do want to make a few key points as I look back on '15 and forward into '16. Mike said it was a very tough year, but when you think about everything that happened, the challenges, the chaos in sometime during the year with events around the world, a year ago today we were expecting $50 billion in sales, we ended up at $47 billion, that $3 billion is quite a drop, but we really only reduced our profit per share outside of restriction by $0.11. As Mike there's a lot involved in that, up and down, but basically I'm pretty pleased with cost management, the restructuring actions we took in the fourth quarter, actually they were more aggressive than we had planned and announced and we took about $100 million more because of it. But that will suit us up well for 2016, so our team really did a good job and it's tough to say but we're getting used to cycles here. Our 2009 volume at $32 billion, we doubled the company in three years in 2012 we're down about 30% from that now and that will serve this team very well in the years and decades ahead as everyone [ph] go through these kind of cycles in a short dates. Secondly, operationally 2015 was one of our better years. One thing and I've talked about this before. One of the proxies I used for plant management is their safety record, and when I go to plants I look at - for that matter, I want to go to customers' job sites, it's the same thing. But if there's a safe environment, they tell me about it and their numbers are good, chances are we're going to see high quality, we're going…

All right. Thanks, Doug. Paul, we're ready to open the floor for our Q&A.

[Operator Instructions] And your first question is coming from Jerry Revich. Jerry, please announce your affiliation and pose your question.

Hi, good morning everyone. It's Goldman Sachs. I'm wondering if you could talk about your expectations for solar, just flesh that out for us, if you could Mike this year? Comment on cadence over the course of a year within the past month we've seen pipeline MLPs cut CapEx and wondering if you could just calibrate us and what you're seeing in the order book?

Yeah, good question, Jerry, happy to do that. So as is almost usual, solar had a great fourth of 2015, we expected that and in fact they did. Backlog for solar was despite that big shipping quarter in the fourth quarter was about the same at year-end as it was at the end of the third quarter, so no deterioration in their backlog. In fact if you look at solar's total backlog it's about the same as it was at the end of '14. What's happened to their business is the oil piece of it has declined quite a bit, the natural gas piece of it is holding up quite nicely. We kind of signalled that we would have some reduction in solar, in third quarter we did the preliminary outlook. We said they would likely decline, but less than 10% and nothing has really changed there.

Then separately, Doug, the last point that you made, the Caterpillar Internet of Things, can you talk about your expectations in five years are we looking at a significant revenue and profit pool for your business? What kind of business model should we be thinking about for you folks to monetize all of the valuable fleet that you have in the field and the opportunity to monetize that data. How should we think about the business model?

It's not going to be a software charge-off system at all. We're going to measure it and the benefit to us will be in aftermarket parts, aftermarket service. In connection to the customer through the products that we sell and service and that's really where we're headed as opposed to a software for free basis, pretty simple. It's just it adjunct to what we're already doing in so many varieties [ph] today with aiming directly at our customers.

Thanks, Jerry.

Thank you.

Thank you. And your next question is coming from Robert Wertheimer. Robert please mention your affiliation and pose your question.

Its Barclays and good morning everybody. I guess, a dual question on price and cost. You've had a little bit of lower pricing, although I think under your leadership Doug, you guys have been very, very competitive, gained a lot of share and not maybe margins with price [ph], so I get that. But you still had a little bit of a contraction price, so was there anything major going on with either currency or is it inventory flush or what's doing that? Are you able to continue to get cost back from your suppliers? Are you sort of ahead of the curve or does that continue to flow through into '17, the materials moves we've already seen?

Hey, Rob this is Mike, I'll start this out. I'm going to start a little bit with material costs. We've done actually very well over the last, I don't know three, four years on material cost. I think we in combination taken out over $1 billion. So over that timeframe and last year '15 was a good chunk of that. So it's been a combination of actually lower commodity prices have helped some. But all the work we've done on lean, resourcing, engineered value change, our investments in R&D, our partnerships with suppliers, that helped generated a pretty good chunk of that cost reduction as well. So if you relate that to our price realization, that was a net benefit for us in 2015. I mean, we had continued good material cost reduction and our pricing overall was pretty neutral. It was favourable in the first half of the year, unfavorable in the second half. As we look ahead to 2016, that will probably shift down a little bit. I think given where commodity prices are right now we're not expecting as much benefit because we don't see another big leg down. So the material cost reduction that we have [indiscernible] on the things that we do to get it. By the same token price realization is tougher, and I think in large part or a chunk of what's going on, particularly in construction is and we've had a stronger dollar over the course of the past year. There are translation effects of that that happen immediately. We're selling in euros in Europe and that changes, but the competitive effects in the U.S. and in countries where say we in Komatsu are competing against each other whether it'd be Latin America or Europe. I think the impact of the stronger dollar is starting to bite a little bit. Another thing that's hurt us on price a bit in particularly the fourth quarter and this might be a little bit hard to follow. But actually where we're selling product matters a bit. We have different price levels in different parts of the world. I would tell you if you look at construction in the fourth quarter, there was a large decline in Latin America like 49% I think in CI. We tend to have better price realization there than we do in some other parts of the world. And so that hurt the overall kind of average price in the quarter as well. So I guess, bottom line, stronger dollar, I think very competitive environment with volumes lower. A little bit of negative geography for us, the flipside of that is still continued good work on material costs.

Just to add a little philosophy here. You alluded to what we've tried to do over the last few years and you're exactly right, that's raised our market share. We've had, - we've done well with that. That one will change. This business is run field population and as long as that field population is building, it allows our dealers to really survive in tough times like these and thrive in good times and that's going to continue. But we have baked a little bit more in as Mike said for price. We've got the dollar situation, we've got excess capacity with competitors all over the place and we think we can juggle that in a way where we can continue to move our market position up, while kind of guarding the margin as well, but it's a balance. It's the same balance we've been working on the last five or six years.

Thank you, Doug.

Thanks Rob.

Thank you. And your next question is coming from Joel Tiss. Please mention your affiliation and pose your question.

I just wonder if you can help us a little bit with some first half, second half color especially in E&T, you're going to have tough comps, obviously in the first half of the year. Can you give us any idea like revenue decline first half versus second half or anything to help us figure that out?

Yeah, Joel and I've mentioned and I've said a lot earlier, but if we look back at '15 we had a lot more decline in the second half of the year than the first half of the year and that's because the first half of last year was helped by the size of the backlog, particularly around drilling and well servicing, that's pretty well gone now. So I think it's safe to say that year-over-year in that decline that we're expecting for Energy & Transportation the 10 to 15, it will probably more than that in the first half and less than that in the second half. We don't really do the quarterly breakdown, but your sentiment what your thinking is actually correct? Year-over-year a lot tougher in the first half than the second half. I know that wasn't detailed, but --

Yeah, but basically I get between the lines you're saying that business is expected to be pretty much flat for the year, so we can just figure out what that means for you now?

No. Down 10 to 15, but probably down more than that in the first half and probably less than half in the second half.

Any signs of any aftermarket business stabilizing, that's usually the early warning signs that were deep enough into a downturn that things are starting to stabilize?

Well you know, on a percentage and even dollar basis the change and after-market has gone down, no doubt about that over the last couple of years. But the decline is much less than what's happened in new equipment. The fourth quarter was down, again so right white I would say there's no signs that that's really kicking up. But the longer customers work existing machines and don't replace as long as the output tends to holdup at some point here that will need to happen, so far hasn't.

Okay. Thank you.

Thanks, Joel.

Thank you. And the next question is coming from Ross Gilardi. Ross please mention your affiliation and pose your question.

Yeah, good morning, thanks guys. Bank of America. So Mike I believe present your solution impose your question in 20 think I said think America. So Mike I believe you guys normally have your annual impairment test in the fourth quarter. It doesn't look like you've booked any impairments. Even though you've had a [indiscernible] competitor just write off 50% of its book value. So I'm just wondering if you could talk about that. I mean, you're speaking very candidly about all the pressures in the mining business that you've now been feeling for four years in a row. So can you talk about the rationale for not writing down a big portion of goodwill on the back of his latest test?

Yeah I can do that. So first the current mining business is weak. There's no doubt about that. Second what I would tell you is we just in the fourth quarter to your point. We completed an impairment test with what we believe is a pretty realistic forecast going forward and we had no impairment. If there's an event that causes us or triggers us to do it again before the next fourth quarter, we'll do that. But I mean we did the math, there's no impairment. But I think one thing you need to remember about this business is it's highly cyclical. You know where the business is at today, at least from our piece of it. The sales of equipment to that industry. We're well below a replacement level, it has to return and to at least a replacement level over time. You do an impairment test and that's a long-term view of what's going to happen. It's not based on what's going to happen next year. And we've done it consistent with the way we have. We didn't been have an impairment, I don't know what else to say about that. I'm not on the inside and our competitors, accounting department, so it's hard for me to comment on what they did.

And then Doug, I just had kind of a bigger picture question. I mean, in the last couple of days we have seen Zoomlion bidding for Terex publicly. And while they might not be a huge direct competitor of Caterpillar's, does the prospect of a big Chinese OEM buying a listed U.S. company, potentially set a precedent that concerns Caterpillar?

We saw a signing by Putzmeister, I don't know three or four years ago and become really a dominant player in - maybe deep down player in concrete pumping. Crane business, yes, still a pretty broad. I would guess we're going to see more Chinese investment in United States and all kinds of things, we'll see how this sorts out if it actually closes up. But it wouldn't surprise me to see some of that. Yeah I expect that's probably a strategy, if I were sitting over there in China, I'd be looking at some of this also. So I would expect to see some of that. I don't think it's going to be an overwhelming wave of things. But certainly they're growing and we've always said we'll see one, two or three emerging Chinese competitors of some kind and maybe that's a move like that around our industry, not certainly, not in it. That we don't really play too much against any more. Although, Terex is a good supplier though the Genie brand to our dealers.

Got it. Thank you.

Thank you. And the next question is coming from David Raso. Please announce your affiliation and pose your question.

Evercore ISI. I was wondering if you can just help us a bit with the cadence of the earnings for '16. Just given the moving parts around the restructuring savings, can you give us some pace on that? Even the accounting change, is it simply a linear day one, and just run it out per quarter, just for some sense of the cadence exiting '16?

Yeah, David, excellent question. So on the pension that just plays into what the annual cost is and that will be spread evenly essentially over the course of the year. In terms of the restructuring, most of the - at least a short-term benefit that we were expecting for 2016, its a result of heads out and that is as Doug said on target a little ahead of on target. So the vast majority of that will and I mean, what we gave you was a full-year number, so the vast majority of that has already happened as of the first in the year. So that should be pretty good to divide by four, probably not quite that. There's a bit more still to happen, but probably not massively of dividing by four because a lot of the actions are effective at the end of the year, this year.

Well, that's what I'm trying to think about with some of those savings upfront and the pension accounting help upfront. When you look at the $4 number ex restructuring, any help at all on how you think about the cadence and through the year?

Yeah, if you just look at our last couple of quarters, we've been right around $11 billion. Now the first and second quarter of '15 were higher, but again that was before some of the declines that we're expecting like oil and gas. So I think as we've kind of gone down for oil and gas, now that that's out of the backlog. I think if you look at the kind of sales cadence for next year, it probably won't be massively off, what a normal distribution is for us. So probably a little bit lower in the first quarter, a little bit higher in the fourth and second quarters and a little bit lower in the third quarter. From a profit standpoint, our first quarter will have a little bit below average sales, likely it's a middle of winter, not really the selling season. So probably a little weaker than average, so that will impact profit to the downside a little bit. The upside of that is the first quarter is usually a pretty good of cost quarter, so that usually helps the first quarter a little bit. So we're not actually providing guidance but for the quarter. But all in all as you do your modelling I would think about probably first quarter down a little bit from average profit, probably not massively far off it.

Okay. And last question Doug, if you spoke to commodity prices, you're not assuming much recovery - the end-market on much recovery. But how are you managing for '17, saying say it another way. If commodities are at the end of this year where they are today, thinking through the inventory reduction you're targeting $1 billion at dealers. Just how should we think about 2017, if commodities are at the end of the year where they are today? I mean, take us through your thoughts on replacement demand, inventory, for the dealer inventory. I mean, we went up $4.5 billion, $5 billion coming out of the great recession. In the last three years we've taken $5 billion out. So work I can't say the inventory is down a lot over the last six years. We kind of went up, we're back down. Is taking $1 billion out enough and just again, just try to set the stage a little bit, how you're managing for '17?

Well, right now it's all hands on deck for '16 and hopefully we can get that done. I would say around inventory and inventory turnover as we have been implementing lean in all of our initiatives around our Cat production system. I feel - that fact that we've taken 30% off the top line and inventory down about the same amount or so, just to stay even with that in a falling cycle is pretty darn good. Once we get stable, at a bottom to slightly rising turn, whatever that is and a stable production schedule, I suspect our inventory turnover is going to be very, very acceptable in order to help us. That's about as far as I would go with that, David. Because I don't know if oil or commodities where they'll be a year from now and I really don't want to think about that, other than inventory turnover to efficiency in the plants, our variable margins, that's what's going to get us through that.

Okay. I appreciate it. Thank you.

David it's Brad. Maybe one comment around how we're approaching this relative to priorities. So we did talk a lot about our actions up until September, but we had taken significant restructuring actions to that point. But again in June really 2015, we started a process internally that led to our September restructuring effort. By and large, the cost reduction we're talking about in period cost had protected R&D and our digital spend and other priorities, so we've seen a significant reduction in a lot of the support areas in terms of consolidation and efficiency. I bring this up because sometimes we get the question, what are you going to do if sales continue to drop? I can tell you that we're continuing to work that plan. We understand and got committed to our decremental pull-throughs and so if sales do drop, we may have to cut those some, but we have other restructuring efforts that we're continuing to look at and we'll be prepared and take action on those.

Thank you.

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

Hi, good morning. Credit Suisse. I guess two questions; one, Doug you addressed a lot of, I guess, your confidence level with the balance sheet and protecting the dividend. But can you give any color on how you think about sort of cash flow in 2016. If you look at over the past few years, working capital has been a big source. I guess, the concern is that sort of running out. If earnings are down in '17 that the balance sheet is sort of at risk, so your thoughts on that? Then Mike, I guess, if you - you gave some - a lot of help on the top line, I'm just trying to think about any color you're giving on margins by segment. As I assume resource is still not profitable and in particular E&T, how to think about margins as we exit the year, because I think that's a concern as we approach '17 with still lot rolling off? Thanks.

That's a lot there. I'll start with the cash flow. We'll have reasonably good cash flow in '16 at the outlook levels. We'll cover our CapEx again, we're going to work hard to get that number down, we'll cover our dividend and I suspect with positive cash flow above that. So we ought to be able to maintain our balance sheet about where it is, if not strengthen a bit more this year. Again, I'm not going to into '17 too much, but the same philosophy would hold in terms of the priorities of maintaining that. And in fact maybe if we have to get to a point in '16 or '17 to use the strength of the balance sheet to protect the dividend, we will.

I've commented before about that and I think '16 at the outlook numbers were, we feel pretty good about in terms of cash flow et cetera, Mike you can handle the other one.

Yeah, on, just a little bit on by segment. We did talk a lot about the sales change and not much about the profit change by segment. So here is what I would say around that. So let's just backtrack a little bit and look at 2015. What happened in 2015 to decrementals. Construction had an awesome year, decrementals and construction were 10%, so their sales were down about $2.8 billion, their profit was down less than 300. And that was despite this legal charge that they got into year. So very good year on managing decrementals. Resource Industries, their decrementals were 36% and I think that was a little over our target range and partly because despite sales going down, we spent more there on R&D. I mean, it's a business that we think will be good for the long-term and we needed to spend investment money in R&D there and in fact we did. Energy & Transportation, they had decrementals of 24%, which I think given the mix of what was down for them. If you look at how much of their business was down because of oil and gas, which tended to be an above average margin business, 24% I think for them is pretty good. In total for the Company and again this is excluding restructuring, we had decrementals of about 20%. That's kind of what we've got baked into next year. I won't comment so - I mean, overall 20%. I won't comment so much on ROS by segment. I mean, like resource industries for example, they are at or below their breakeven point right now. So the ROS number I think is probably less meaningful than the decremental. I think throughout the Company we're working on delivering decent decrementals and a big cost reduction that we have planned for next year, both on material cost or variable cost in total and the big restructuring should help all the segments. So I'm not going to give ROS guidance, but I would say that certainly as a Company and I don't think any of our segments would be big outliers here. We'll be at a better than our, kind of our target decrementals.

Thank you. I'll get back in queue.

Alrighty. I think we have time for one more.

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

Hi, good morning. Thanks for squeezing me in. My first question is just a little bit more big picture. Given the strength of the dollar and the week emerging market economic activity that we're seeing around or maybe specifically Canada and Latin American. Is there any risks that we start to see equipment things either used or unused [ph] kind of flowing back into the U.S. and then thus putting incremental pressure on new equipment sales in the U.S.

Good morning, Ann. Actually our EPA regulations have sort of helped that to some degree because of the requirements of low sulphur fuel on machines that are produced in this country and the EPA emissions level. So there may be some of that and we're worried about that for a number of years. I think you're probably also alluding to the great market that we said, we had tended to see in times past where there is currencies that are a little bit out of the line. I think the emissions thing between us and Europe and Japan for the most part and Canada will be involved with that, there may be some flow from Canada here. But Mexico is not in that, Latin America, I think will probably have some amelioration what we've seen in historical levels of that. But something we would keep an eye on.

Okay. Thank you, I appreciate that. Then on the smoothing of the pension plan and going to mark-to-market, I mean, there's a reason why we smoothed in the first place in order to reduce volatility. Are you concerned that moving to mark-to-market might end up adding to your earnings volatility through the course of the coming years?

Ann this is Mike, a couple of things. Actually I can't remember the year, several years ago we made a change to sunset or our kind of main defined benefit plans at the end of 2019. Along the way we've been on a path to derisk the asset, the fund balance. We've moved to more fixed income rather than equity and that will likely continue. It's going to sunset again at the end of 2019. That doesn't completely take out volatility, but I think the combination of, we stopped adding people to that plan a long time ago. People in that plan are retiring, we're not adding people to it. It will stop at the end of '19 with shift towards more fixed income, probably be what we're thinking it would reduce the volatility. Somewhat, certainly won't take it away, wouldn't suggest that at all. But as more companies have moved to this method, I think when they have a year-end adjustment for just like we will at the end of this year. I think the market has done a decent job of understanding what's going on and that it is - what it is for what it is. So I don't think it'll - I mean, our view anyway is that it wouldn't impact so much how people are viewing us. If there's a year-end adjustment and we like the change because it better matches what's actually happening from an expense standpoint rather than spreading it over years. So in the current year for example and I said this before, this is not a big unique OTO item that's happening in the year. It's taking out losses from prior years that were masking operating results in the current year. That's our view any way.

Okay. I appreciate. I know we're out of time. But just where will we be, and where do you think will you be at by the end of '16 on restructuring, will you be 100% done or do we have costs in '17 and '18?

We'll probably have some cost in '17 and a plan that we announced last September. I think the last parts of it, I think we would expect to wrap up sometime in '18.

Okay. I appreciate. Thank you.

Thanks, Ann. And thank you all for joining us. We'll talk to you again at the end of the first quarter.