October 11, 2010 1 Don Johnson Chief Economist Caterpillar Inc. Caterpillar’s Trough Planning.

October 11, 2010 1

Don Johnson

Chief Economist

Caterpillar Inc.

Caterpillar’s Trough Planning

October 11, 2010 2 Caterpillar Inc.

Agenda: Trough Planning

• Background on Caterpillar’s Trough Planning

• Advance Preparation for the Last Downturn

• Reacting to the Downturn

• Looking Ahead

Must be an ongoing process


Yielded a Two-Phase Approach

Develop plans in advance

• Determine likely challenges

• Prepare specific plans to cope with those challenges

Determine when plans might be needed

• Identify warning indicators

• Keep everyone informed

Started when the last recovery was a little over 2 years

old


Business Unit Actions

Reports Developed and Maintained in Preparation for a Downturn

Company-wide participation

Pricing

Plan

Employment

Policy

Supplier

Actions

Capital

Planning

Not Accepted

Why should we worry about a downturn when

business is strong?

The next downturn won’t be that bad.

Conditions are different today; a recession is

unlikely.


U.S. Leading Indicators

8 8

1 2

13 1210

8

20 1917

12

Inverted YieldCurve

LeadingIndicator

Index

HousingPermits

S&P 500

Shortest Average Longest

Lead times can vary significantly

Months Lead before a Recession Begins

(Post WWII)






• Looking Ahead

May need to discount current thinking


Fed Actions Unfavorable

1. “… the economy seems likely to expand at a moderate pace over coming quarters.”

2. “Core inflation remains somewhat elevated.”

3. “Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.”

4. “… the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected.”

FOMC statement, May 9, 2007

Inflation is the risk … … so tightening continues

Bank Reserves

(Million Dollars)

050095908580Source: Federal Reserve Board /Haver Analytics

70000

60000

50000

40000

30000

20000

10000

70000

60000

50000

40000

30000

20000

10000

We felt Fed policy could damage the

economy


Conclusion: U.S. Recession in 2008

Economic

GDP Growth 1.5%

Fed Funds rate (EOY) 2.5%

Housing starts 1.51 mil.

Nonres. Construction 0.4%

Coal prices 0%Political

Democratic sweep in 2008

Tax hikes in 2009

More protectionism

More regulations

Increased Possibility of a

Recession


Public Announcement

Third Quarter 2007 Release (October 2007)

Unpopular view at the time

“We expect 2008 to be the sixth consecutive year of sales and revenues growth, despite a U.S. economy near to, or even in, recession. Expectations for 2008 reflect the easing of two significant negative factors that impacted ….”

Selectively implemented trough actions


Credit Crisis Planning Intense planning in early 2008

0

100

200

300

400

2002 2003 2004 2005 2006 2007 2008

TED Spread (3-mo. LIBOR vs. 3-mo. Treasury

Bond Spread (Moody’s Baa vs. 10-year Treasury

Focusing on the problem


Key Concern

Asset prices fall

Banks take write-offs

Banks reduce lending

Spending declines

Asset prices fall



Spending declines

Asset prices fall



Spending declines

*

*

*

*

Must stop price

declines

Significant fears of a downward spiral






• Looking Ahead

Worse than anyone

expected


Formed Stay Strong Strong focus on cash flow

Be Profitable with Strong Cash Flow

Hold Our Credit Rating

Maintain Our Dividend

1H 2009

2H 2009

2010


Other Actions

• Planned for sales decline

• Allowed dealers to cancel orders

• Downsized the workforce and cut labor costs

- Reduced full-time employment by 19,074 workers

- Reduced flexible workforce by about 18,000

- Eliminated short-term incentive payments for 2009

- Took temporary layoffs in many divisions

• Slashed company inventories by $2.4 billion

• Continuously, and carefully, monitored ongoing sales to determine if actions were sufficient

All-out effort


Results

-29

-11

-37

1981 1991 2009

CAT Net Sales and Revenues

(% Change from Prior Year)

-180-404

895

1981 1991 2009

CAT Profits after Tax

(Million Dollars)

Preserved profitability

Worst sales decline

Stayed profitable






• Looking Ahead

2000s were not good years for the

U.S. economy


The Race to the Bottom

5.9

10.4

4.44.15.2

3.22.3

4.4

3.01.9 1.5

3.2

1.50.7

1.8

France Japan U.S.

1960s 1970s 1980s 1990s 2000s

Average Yearly Percent Growth in Economic Output

Developing Economies becoming more

important


Developed Country - Real Construction Spending

Real Construction Spending(1990 = 100)

60

80

100

120

140

160

1990 1994 1998 2002 2006

U.S.

Euro-zone

Japan

Average Annual Decline

2000-present

U.S. -0.3%

Euro-zone -0.2%

Japan -2.6%

Difficult to deal with long periods of

weak/no growth


Summary Thoughts Prepare in advance and

stay agile

• Recessions will always be with us

• Cannot consistently, accurately predict recessions

• Definite delays in knowing where we are

• Need to have up-to-date recession plans in hand

• Constantly watch economies and question developments

• Developed economies need to improve their growth game – risk is irrelevance

October 11, 2010 1 Don Johnson Chief Economist Caterpillar Inc. Caterpillar’s Trough Planning.

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Transcript of October 11, 2010 1 Don Johnson Chief Economist Caterpillar Inc. Caterpillar’s Trough Planning.