Transcript 2006 Long-Term Planning Process Calendar

Caterpillar’s Trough Planning
Don Johnson
Chief Economist
Caterpillar Inc.
October 11, 2010
1
Agenda: Trough Planning
Must be an
ongoing process
• Background on Caterpillar’s Trough Planning
• Advance Preparation for the Last Downturn
• Reacting to the Downturn
• Looking Ahead
October 11, 2010
2
Caterpillar Inc.
Yielded a Two-Phase Approach
Started when the
last recovery was a
little over 2 years old
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
October 11, 2010
3
Caterpillar Inc.
Business Unit Actions
Company-wide
participation
Reports Developed and Maintained
in Preparation for a Downturn
Pricing
Plan
Not Accepted
Why should we worry
about a downturn when
business is strong?
Supplier
Actions
Employment
Policy
The next downturn won’t
be that bad.
Capital
Planning
October 11, 2010
Conditions are different
today; a recession is
unlikely.
4
Caterpillar Inc.
U.S. Leading Indicators
Lead times can
vary significantly
Months Lead before a Recession Begins
(Post WWII)
20
19
13
8
Inverted Yield
Curve
12
12
10
8
Leading
Indicator
Index
Shortest
October 11, 2010
17
1
2
Housing
Permits
S&P 500
Average
5
8
Longest
Caterpillar Inc.
Agenda: Trough Planning
May need to
discount
current
thinking
• Background on Caterpillar’s Trough Planning
• Advance Preparation for the Last Downturn
• Reacting to the Downturn
• Looking Ahead
October 11, 2010
6
Caterpillar Inc.
Fed Actions Unfavorable
We felt Fed policy
could damage the
economy
Inflation is the risk …
1.
2.
3.
4.
… so tightening continues
“… the economy seems likely to
expand at a moderate pace over
coming quarters.”
Bank Reser ves
“Core inflation remains somewhat
elevated.”
(Million Dollar s)
“Although inflation pressures seem
likely to moderate over time, the high
level of resource utilization has the
potential to sustain those pressures.”
“… the Committee's predominant
policy concern remains the risk that
inflation will fail to moderate as
expected.”
70000
70000
60000
60000
50000
50000
40000
40000
30000
30000
20000
20000
10000
10000
80
85
90
95
Sour ce: Feder al Reser ve Boar d /Haver Analytics
00
05
FOMC statement, May 9, 2007
October 11, 2010
7
Caterpillar Inc.
Increased
Possibility of a
Recession
Conclusion: U.S. Recession in 2008
Economic
GDP Growth
1.5%
Fed Funds rate (EOY)
2.5%
Housing starts
Nonres. Construction
Coal prices
1.51 mil.
0.4%
Political
0%
Democratic sweep in 2008
Tax hikes in 2009
More protectionism
More regulations
October 11, 2010
8
Caterpillar Inc.
Public Announcement
Unpopular view
at the time
Third Quarter 2007 Release (October 2007)
“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
October 11, 2010
9
Caterpillar Inc.
Credit Crisis Planning
Intense planning in
early 2008
Focusing on the problem
400
Bond Spread (Moody’s Baa
vs. 10-year Treasury
300
200
100
TED Spread (3-mo. LIBOR vs.
3-mo. Treasury
0
2002
October 11, 2010
2003
2004
2005
10
2006
2007
2008
Caterpillar Inc.
Key Concern
Significant fears of
a downward spiral
Must stop
price
declines
Asset prices fall
Asset prices
fall
Asset prices
fall
*
Spending
declines
*
*
Spending
declines
Spending
declines
*
Banks take
write-offs
Banks take
write-offs
Banks take
write-offs
Banks
reduce
lending
Banks reduce
lending
Banks reduce
lending
October 11, 2010
11
Caterpillar Inc.
Agenda: Trough Planning
Worse than
anyone
expected
• Background on Caterpillar’s Trough Planning
• Advance Preparation for the Last Downturn
• Reacting to the Downturn
• Looking Ahead
October 11, 2010
12
Caterpillar Inc.
Formed Stay Strong
Strong focus on
cash flow
Be Profitable
with Strong
Cash Flow
Hold Our
Credit Rating
Maintain Our
Dividend
October 11, 2010
13
Caterpillar Inc.
Other Actions
All-out effort
• 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
October 11, 2010
14
Caterpillar Inc.
Results
Preserved
profitability
CAT Net Sales and Revenues
(% Change from Prior Year)
CAT Profits after Tax
(Million Dollars)
Worst sales decline
895
Stayed profitable
-11
-29
-180
-37
-404
1981
October 11, 2010
1991
2009
1981
15
1991
2009
Caterpillar Inc.
Agenda: Trough Planning
2000s were not
good years for the
U.S. economy
• Background on Caterpillar’s Trough Planning
• Advance Preparation for the Last Downturn
• Reacting to the Downturn
• Looking Ahead
October 11, 2010
16
Caterpillar Inc.
The Race to the Bottom
Developing Economies
becoming more
important
Average Yearly Percent Growth in Economic Output
10.4
5.9
5.2
4.4
4.1
2.3 1.9
4.4
3.2 3.0 3.2
1.5
1.8
1.5
0.7
France
1960s
October 11, 2010
Japan
1970s
1980s
17
U.S.
1990s
2000s
Caterpillar Inc.
Developed Country - Real Construction Spending
Real Construction Spending
(1990 = 100)
160
Difficult to deal with
long periods of
weak/no growth
Average Annual Decline
2000-present
140
U.S.
-0.3%
Euro-zone
-0.2%
Japan
-2.6%
Euro-zone
120
U.S.
100
80
Japan
60
1990
October 11, 2010
1994
1998
18
2002
2006
Caterpillar Inc.
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
19
Caterpillar Inc.