Caterpillar Inc (CAT) — Q4 2017 Earnings Call Transcript

Thank you very much. Good morning. I’d like to welcome everyone to our Fourth Quarter Earnings Call. I'm pleased to have on the call today our CEO, Jim Umpleby; our Group President and CFO, Brad Halverson; and our Vice President of Financial Services, Joe Creed. Remember, this call is copyrighted by Caterpillar 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'll be posting it in the Investors section of our caterpillar.com website in the section labeled 'Results Webcast.' This morning, we will 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 the factors that either individually or in the aggregate could make actual results differ materially from our projections can be found in cautionary statements filed with the SEC and is also in the forward-looking statements language included in today's financial release and the presentation. In addition, there's a reconciliation of non-GAAP measures that can also be found in this morning's release and is posted at caterpillar.com/earnings. We're going to start the call this morning with a few words from Jim, and then Brad will walk us through the fourth quarter results and full-year results and our 2018 outlook, and then we will begin the Q&A portion of the call. Jim?

Thank you, Amy. Good morning. First, I’d like to thank our team for delivering strong results throughout 2017. After four challenging years, many of our end markets improved and our team capitalized on the opportunity and achieved excellent results. As demand improved during the year, we stayed disciplined and maintained control of our structural costs. In addition to responding to the increase in volume and delivering strong financial results, we developed and began to implement our new strategy to deliver profitable growth by focusing on operational excellence, expanded offerings, and services. Economic indicators are positive at the moment, and we expect a strong start to 2018. Our focus on operational excellence will not waver as we work to develop a more competitive and flexible cost structure, including implementing lean manufacturing principles. We are positioned to capitalize on continued sales momentum or quickly adjust should conditions change. We also plan to profitably grow the company by investing in expanded offerings and services, which are the two additional major focus areas in our strategy. Let me give you some examples of the progress we’ve made thus far. In 2017, we introduced our first model of our next generation of excavators. This is our first major excavator redesign in 25 years and just one example of our focus on expanded offerings to provide a range of products to better serve the diverse needs of our customers. We also increased our focus on services, including aftermarket support and digital-enabled solutions. We continue to grow our connected asset population and recently acquired two rail service companies. We are in the early stages of implementing our strategy for profitable growth. In 2018, we expect to make additional investments in the expanded offerings and services that are important for Caterpillar’s long-term success, and we’ll use our operating and execution model to bias resources to areas that represent the greatest opportunity for return on our investments. I couldn’t be more proud of what our team accomplished in 2017, and I’m looking forward to the opportunities ahead. With that, I’ll turn it over to Brad.

Thank you, Jim. This quarter was impressive with sales growth in all regions and nearly all markets. The team achieved solid margins while making strategic investments to ensure profitable business growth. I will outline the results from this quarter, the entire year of 2017, and our future outlook. Starting with slide four, we saw sales and revenues reach $12.9 billion, a 35% increase from Q4 2016. Volume was the primary factor driving this increase, fueled by heightened end-user demand for new equipment across all regions. North America experienced the most significant growth, particularly in construction and onshore oil and gas equipment. Regarding our bottom line, we reported a loss of $2.18 per share this quarter, compared to a loss of $2 per share in 2016. Adjusted profit per share was $2.16, an increase of $1.33 from Q4 2016, with adjusted figures excluding several significant adjustments such as U.S. tax reform effects, restructuring costs, and losses from pension and OPEB plans. The anticipated impact of U.S. tax reform was the largest adjustment to our profit per share, and I will discuss it further shortly. More details on these adjustments are available on page 14 of the press release. Now, let’s refer to slide five to review the operating profit reconciliation for the quarter. This quarter, operating profit was $1.2 billion, a contrast to the loss of $1.3 billion in 2016. The primary improvement in operating profit stemmed from higher sales volume, supported by increased end-user demand across all regions and our main segments. Half of the sales growth in construction industries was attributed to robust demand in North America and Asia Pacific, particularly in China. Sales also increased in EAME and Latin America. For Energy & Transportation, North America's onshore oil and gas sector remained the largest contributor to sales growth, with increased shipments of locomotives and power generation deals in the fourth quarter. The resource industries segment recorded its best sales quarter in over two years as miners resumed capital spending. Demand for aftermarket parts also remained high, supporting increased mining activity. Despite robust end-user demand, dealer inventory remained stable compared to a substantial reduction in Q4 2016. However, dealer inventories remain lean at 3.1 months of sales. Price realization was less favorable than in the previous third quarter but still positive at $213 million, primarily driven by conditions in construction industries. Variable manufacturing costs were favorable at $170 million due to cost absorption. Total period costs rose by $482 million, primarily due to increased short-term incentive compensation and spending on targeted growth initiatives. Positive factors included favorable adjustments in restructuring costs and mark-to-market changes. Restructuring costs were $150 million better than Q4 2016, with significant reductions in mark-to-market losses and the absence of a goodwill impairment seen in 2016. Moving to slide six, let’s review the full year. We started 2017 bracing for another downturn but soon noticed increased demand in select markets, resulting in sales up across all regions and segments by year’s end. Total sales and revenues for the year reached $45.5 billion, an 18% increase from 2016, driven by robust construction demand in China and North America. Profit per share for the year was at $1.26, compared to a loss of $0.11 in 2016, while adjusted profit per share was $6.88—double that of 2016. Operating profit for 2017 was about $4.4 billion, with higher sales volume being the key driver. Resource Industries experienced strong demand for aftermarket parts, while the Energy & Transportation sector showed sales growth led by onshore oil and gas in North America. While material costs were slightly unfavorable in the second half, total period costs increased by $928 million due to restructuring expenses of $1.3 billion—half attributed to a facility closure in Belgium. We finished the year with a strong balance sheet characterized by a debt-to-cap ratio of 36.7% and an enterprise cash balance of $8.3 billion. In Q4, we made a $1 billion discretionary pension fund contribution and retired $900 million in debt due in December 2018. Next, I want to address the U.S. tax reform bill's effects, as detailed on slide eight. The fourth-quarter income tax provision included a charge of about $2.4 billion due to the new tax law, mainly from the write-down of our net deferred tax assets and costs from the mandatory repatriation of non-U.S. earnings. These charges may adjust as new guidance is issued. Looking at the long-term impacts, we see the tax reform as beneficial for Caterpillar, as it levels the competitive landscape and offers more flexibility for capital allocation. We’ve included the reform's estimated impact in our 2018 outlook while maintaining our cash deployment priorities, starting with a strong financial position. Now, on slide nine, our 2018 Outlook indicates profit per share between $7.75 and $8.75, and adjusted profit per share ranging from $8.25 to $9.25. We are prioritizing profitable growth, moving away from specific sales and revenue forecasts as we begin the year with strong orders and lean dealer inventories amid a globally strengthening economy. As we explore assumptions for 2018 across our core segments on slide 10, we anticipate growth in construction industries across all regions, with improvements in North American construction, while Latin America continues its path to recovery. Stability in Europe and rising commodity prices should bolster markets in Africa, the Middle East, and CIS countries, while Asia Pacific growth is expected, particularly in China. Regarding resource industries on slide 11, all indicators suggest sustained growth in mining, with strong aftermarket demand supporting new equipment sales. For Energy & Transportation on slide 12, we foresee an overall sales increase, with continuing demand for onshore oil and gas equipment in North America, although drilling equipment remains soft. Finally, wrapping up slide 13, we predict that increasing sales volume will drive profit improvement, while period costs are projected to rise due to wage inflation and investments in growth initiatives. We estimate a 24% tax rate accounting for U.S. tax reform effects, while maintaining a zero share buyback assumption in our outlook. In summary, we are optimistic about our performance in 2017 and our strong start in 2018, supported by improving economic trends and our commitment to executing our growth strategy. I'll now hand it back to you, Amy.

Thank you, Brad. Before we begin the Q&A portion of the call, I just want to take a minute to announce a slight change in the release of retail staff. So we will continue in the month when there is not a nine and during the quarterly release, we are going to move the release of retail stats from before the market opens until after the market opens the day before the release. So in the month of the release, retail stats will be released after the market closes the day before the release. So with that, Kate, I’ll move it back to you to begin the Q&A portion of the call.

Good morning. Thank you for taking my questions. I wanted to ask about the Q4 segment margins; they declined sequentially in all three of the major equipment categories despite higher sequential revenue, and I know some of it is related to short-term incentive compensation, but could you provide some further detail on really what drove that sequential margin performance?

Sure, Andy. I think a couple of things. If we step back, keep in mind that we are playing operating margins over the long term and not quarter to quarter. There were a couple of things in the quarter that did drive segment margins down. I think if you look at ENT margins, they were actually up, so I’ll talk through CI and resource industry at the consolidated level. The biggest driver was period costs absorbed. So if you look at CAT inventory growth through 2017, we saw inventory grow through the first three quarters and then actually come down in the fourth quarter, largely driven by turbine and rail shipments, but also in the other segments as well. So from a sequential perspective, there was less favorable cost absorption into inventory as inventory came down slightly in the quarter versus growing in the three quarters prior to that. And for resource industries, I mean, Brad talked about this in the script. For the first quarter, we really saw a significant increase in new equipment sales, which had a slight impact on margin, still very good margin, strong margins for the year, the second highest quarter for the full year, but that did drive some of the sequential erosion in margins for resource industry.

And Andy, this is Jim. I can just add to expand upon some of Amy’s comments. We’re really trying to focus on the long term here, and we are focused on improving margins over time to achieve our long-term profitable growth objectives. So there will be less emphasis on short-term incremental margins and more emphasis on the long-term. Having said that, we do expect improved operating margins in all three segments in 2018 compared to 2017 on an annual basis.

Okay, thank you. And then one last one on the backlog growth. When we and others, and you mentioned in the call do our channel checks, in order to deliver lead times, are extending. It seems like some of that is concentrating construction industries but the backlog was pretty flat. Is there something else going on within construction industries that kind of offset the implied building backlog?

The sales for construction industries were up 47% in the quarter and construction continues to ramp up supply to meet demand. Many of construction industries products are on managed distribution, so with that they take orders for current month plus two or three. And so there’s not unconstrained demand coming through the backlog. And so that’s really the driver of why you didn’t see a more significant increase in the backlog for construction industries. They do continue to ramp supply up to meet demand, and they are focused on getting every shipment to a customer order, and making sure that the customer demands are being met. Does that answer your question, Andy?

For the most part, I’ll take the rest offline. Thank you.

I wondered if you could talk about the key focal areas of your operational excellence and simplification. And maybe if you can comment on that same vein on maybe medium-term if that 25% incremental margin that you guys have targeted over the long-term would start to change, would start to move up a little bit?

Good morning, this is Jim. I’ll take that one. As we look at our operating execution model and operational excellence, there are really a number of elements that we are focused on. In terms of operational excellence, it’s safety, quality, and lean, so we are very much focused on getting more production out of existing bricks and mortar. We talked about that a bit at investor day. So we don’t anticipate investing in new factories, what we are really doing is meeting the increased demand through lean manufacturing advances and also, frankly, we have plenty of bricks and mortar. And so we did talk about an operating range for all three segments at investor day. We are still committed to meeting those ranges based on the revenue levels that we stated at the time. There will be fluctuations over time, and we are not just focused on increasing margins although we are committed to meeting those targets. We also want to grow the business, and so we’ll be investing to grow the business while staying within those ranges.

And then just a follow-up, does the tax, the new tax legislation help you guys reach a settlement any quicker with the government over your long-term tax dispute?

We really can’t comment on this. I’m sure you can imagine, it’s an ongoing discussion with the government. We are cooperating, and we hope to get to a resolution in an expeditious manner.

Yes, good morning. Brad or Jim, you mentioned earlier the positive impact of the recent tax reform on Cat's tax rate. I'm interested in your thoughts regarding the potential repatriation of over $5 billion in foreign cash. Could you share some insights on that?

Yes, this is Brad. Thank you. We are really happy with tax reform in a lot of different areas. There has been a lot of good momentum around smart regulation and now tax reform. As it relates to our cash, it gives us a lot more flexibility in our decision-making in terms of how to use that cash. And one thing that we had talked about in terms of U.S. competitiveness is that when you put on an added tax on charge of using cash in the U.S., that tends to bias your investments. And so now basically that added taxes has been removed and so provides really a level playing field for cash. And so, we’re really happy with where our balance sheet was coming out of the downturn and what's happened this year. We were happy to make the contribution to the pension plan as well as to pay down some debt. It's in really good shape. And if you look at the outlook for 2018, that’s positive. We’re not going to give any details as to exactly when we would use that, but our priorities, as I outlined in the call, I think remain consistent with our strategy in terms of the credit rating, funding our business, and then using it to grow. And returning to shareholders remains important. We’ve had a very long history of dividend growth which we’re proud of, and that remains important. And we view share buybacks in the future. So you probably want a little bit more, but that's where we’re at right now.

Okay. Understood. And then second is just on that backlog and resources and really what kind of the implied profitability of those orders. And I'm wondering if you're seeing any kind of signs of broadening out in terms of order trends by geography and really by payload in terms of size and the machines. It looks from an industry perspective anyway that there's really this little recovery with more the deliveries had been directed more towards regions where CAT share wouldn’t necessarily be as favored. So, I’m just curious if you're kind of seeing a broadening out to more the traditional mining regions. So any comments there would be helpful? Thank you.

Yes. This is Jim. So we are seeing increased demand really in all regions for our mining products, that’s a positive thing, so it is a – again we’re coming off a very low level as you know, but it is starting to be broad-based in terms of showing improvement in regions around the world.

Hi. Good morning.

Good morning, Ann.

I'm curious philosophically why you have decided not to provide revenue guidance or at least revenue guidance ranges by segment. I mean, this is an era where investors I think are looking for more transparency not less. And then, as a follow-on to that, I mean, what should we contemplate in our models to get to the low end of your guidance versus the high end of your guidance? Is that range in revenue or is it range of profitability or an inability to get the supply chain fixed? And if you could just talk about what's in the model that you’re looking to get to the low end and the high end?

Ann, this is Jim, I’ll start then I’ll hand it over to Amy or Brad. Again, consistent with what we talked about at investor day, we’re moving away from providing sales forecasts, and we try to grow the company profitably over the long haul. And we believe that providing an EPS range is an appropriate way to go. Why don't you take it from there, Amy, and I'll jump back in.

Yes. I think if you look at the range of adjusted PPS that was provided, Ann, and I think we were pretty clear about this. Clearly, the biggest driver in profit growth is sales volume and so that’s going to have the biggest impact on the sales range, and so your sales assumption will drive you – is a key component of driving you to different parts of that range, there’s also lots of other variables around cost, price, material cost that could push you to a different part in the range as well, but the volume is clearly the most significant driver of growth. I would say it's not supply constraints; while we talk about the supply constraints and we continue to ramp suppliers and get production up, in the adjusted profit guidance that we provided, supplier constraints are not an issue, and we don’t expect them to be an issue, I should say. I will step back and say though, if you look at the overall performance, we expect operating margins for the consolidated company, and for all three segments to improve from where we ended 2017, and we’re looking at – Jim talked about the long game, not quarter over quarter pull-throughs, but long-term margin performance. And for Cat, that actually puts the operating margin in the range as we provided at Investor Day at lower volume. And so I think that's really reflective of strong performance delivering on the profitable growth that we’re committed to.

And again, we see sales increasing in all three segments, again, as Amy mentioned, operating margins will increase in all three segments as well 2017 to 2018.

The ranges in 2018, I just want to make sure I get this absolutely correct. The ranges for operating performance for each segment in 2018 will be within the ranges you gave at the Analyst Meeting on lower volumes?

This is Joe. So not each segment, I think what Amy was saying there at the company level way it works out, we expect to be in the range, but not every segment will be there. We’re working our way toward that by improving year-over-year.

Okay. That’s very helpful. Thank you. I appreciate this.

Hi. The incremental margins for 2018, what do you expecting in incremental margins?

We haven’t provided incremental margin guidance, David. If you step back and I think repeat what I just said to Ann. It's strong operating performance overall, it’s an improvement in operating margin for the company that puts the company operating margin in the ranges that we provided at Investor Day and shows improvement for all three segments in 2018. And for construction industries, they actually ended the year at the top end of that range, so they’re showing a little bit of improvement on top of that.

And I apologize for pushing, but I know that’s a scripted answer, but incremental margins in particular they were 30% for the equipment company in the fourth quarter, 40% the prior two quarters. Can you give us at least a perspective on how you expect incrementals to be in 2018 versus what they were of late?

I think what I can say is that we expect them to continue to deliver strong performance early in the cycle; the pull-throughs are strong, and if you look through a quarter over quarter pull-through, they do start to slow down, which makes a lot of sense as you bring production back online. We are committed to investing in growth through the P&L next year. But we still expect strong performance and to continue to deliver good returns, good operational margin increases on the sales growth.

I'm sorry to push, but compared to the 30 for the fourth quarter, are we expecting to be higher or lower? It's simple math. If the incrementals are 25 next year, it implies sales guidance is around 15. We can do the math. If the incrementals are 30, it’s more like a 12.5% increase in revenue. We’re just trying to think about it structurally as more of a revenue year where the incrementals are slightly lower due to investments in the business or possibly some supply constraints, which could keep revenues low but still provide a significant incremental. We’re just trying to get a sense of whether the incrementals are similar to the fourth quarter, lower, or potentially even higher.

I believe it's evident that I'm not going to provide a direct answer to that question. Incrementals for the entire year of 2017 were 40%, which is quite significant. The year 2018 is primarily focused on sales growth, which is clearly the main factor driving profit per share growth. Despite experiencing strong positive trends, we are planning to invest in the business, improving our financials, expanding our digital and online offerings, and enhancing our products. While I don't have a precise answer for you, David, I can share that...

A nice push. So I guess also on the revenue growth; if say, the framework is 25 incrementals, 15% top line and you have a little less CAT financial income, we get that. The backlog and orders are up roughly about 30% year-over-year. If you can help us meet with the dealer inventory for 2018, what is expected for that so at least we have a sense of that swing?

Yes. So dealer inventory, we have been pretty transparent as the year lean, and dealers we would expect they would typically grow dealer inventory in the first quarter to get ready for the spring selling season. We’ll see if it happens again this year. If you look broadly at the dealer inventory composition, I’d say in total we’re pretty comfortable with it, but there are a few regions most notably China where dealer inventories are low. And so we would expect in a few regions for there likely to be some but not that much material dealer inventory growth in 2018.

So not that material; let me go back to 2010 and 2011 when you’re building the inventory would go up $900 million, then obviously 2011 and 2012 were up notably large. We should not assume $1 billion plus type dealer inventory increase, when you say moderate sort of in the hundreds of millions. Is that fair?

No. We would not assume as much as we had on those earlier years.

Hi. Good morning. I guess two questions. Amy, sorry to push again on 2018, but is there anything you can help us with regard to mix in 2018 versus 2017, because obviously that would have big impact on incremental margins? And then my second question, I know guys that some on capital allocation haven’t really changed your strategy, but also in your guidance, you do say our numbers don’t assume any share purchases which you usually don't put in your guidance. I'm just wondering if you are trying to signal something? Thanks.

Yes. So for mix, I’ll start there. So, if you look at it, there are lots of puts and takes for 2018 guidance, really they largely met out and it is a sales story. For mix particularly it’s really not very meaningful and probably slightly unfavorable as we see for resource industries move to a larger percentage of their sales base being new equipment as opposed to aftermarket parts. So there’s just a shift in that sales, but overall even for resource industries it’s a fairly small negative. In terms of share repurchase, I think we just put that in there to be clear that in accordance with historical practice we don’t assume share buyback. I think given the changes in U.S. tax reform and a lot of discussion, we just wanted to clear on what our guidance is. We don’t usually state that but that how we always put the outlook together at the beginning of the year.

Okay. Thank you. I’ll get back in queue.

Good morning. I wanted to ask a couple of questions about construction. It seems like in the last quarter's call, you mentioned that you thought China might be weaker in the first part of the year. However, today you seem to be suggesting that you believe China is strong at least through the first half, with a possible softening in the latter half. Did something change your perspective, or are you just more confident in the Chinese construction equipment market?

Yes. So, yes, I’d say, we are more confident on the Chinese construction market than we were a quarter ago. We’ve continued to see that market remain very strong. If you – we are forecasting industry growth for the 10-ton-and-above excavator which are the numbers we normally cite, to be up about 8% next year in the outlook. We were not there just a quarter ago, so I think that's reflective of continued – seen continued strength in the Chinese economy. I will say, if you look at the 2017 sales cadence, it did not follow historical norms. We saw continued acceleration in the industry as the year progressed. And what we highlighted in the release and in Brad’s comments is we don't expect to repeat, so we would expect China to revert back to more normal sales patterns with 60% to 65% of sales in the first half of the year and then for that to slow down considerably in the back half of the year. I will be ready if that's not the case, but that’s currently our assumption. We do think that the Chinese market is currently above normal replacement demand and will slow at some point. But our current read on the market that it’s going to remain strong at least through the first half of the year. Is that answers your question, sir?

Yes. That’s perfect. Thanks, Amy. And if I just quickly follow-up the more positive view towards North America infrastructure, I think in your prepared remarks is the first time you've kind of been able to make that statement in a while. What's driving that and what are you seeing out there that's giving you confidence that that's going to get better?

North America construction?

Sorry, infrastructure.

North America infrastructure. So we’ve had the FAST Act. That's been in play for several years now. We didn’t see really much impact to that in 2017, but our channel checks look like that we’re going to start to see some of that spending that was approved at the state and local level start to come through and drive some infrastructure growth in 2018.

Thank you. Good morning. It’s UBS. You guys call out the tightness in the supply chain. I wonder if you could just give a little more color on where exactly that tightness is and what did you actually assume that the supply chain has to do to meet demand just sort of comfortable that you didn't get over your skis with the assumptions this year. They need to make some big structural or capacity changes or is it just adding shifts or what has to be worked out there?

Hello. Steve, this is Jim. So as I mentioned earlier, we believe we have plenty of internal manufacturing capacity, but as is the case with previous ramp-ups, we are dealing with some constraints with our suppliers and we’re working through one by one. There isn’t one big issue; it’s kind of across the board, and we’re working with our suppliers to break our way through those. We do feel confident that supplier constraints will not be an issue that would prevent us from achieving the EPS range which we put out this morning.

Okay. And then can you just frame the $1 to $1.5 billion of CapEx a bit more because at the midpoint that would be about a 30% to 40% increase off of your arguably low levels and I know it's still below your machinery depreciation, but you’ve also said just now you got plenty of capacity. So what's the increase therefore? Is that for automation or efficiency investments? Is it tax benefit motivated? If you could just kind of frame that a little bit?

Steve, I see over the last several years we’ve spent kind of $1 billion to $1.3 billion in CapEx. In 2017, it came in a little bit below $1 billion, so some of that is, we spent a little less than we anticipated. In 2017 we thought we’d spend closer to $1 billion, $1.2 billion. What’s driving that, a lot of that is maintaining the capital, the machines and the facilities that we have. There are capital demands as we restructure and consolidate facilities to put lines in, and moving production from one facility to another. Those are the largest drivers of the capital increases in 2018.

And this is Jim, maybe just to add some color to that. Traditionally, we thought about growth at Caterpillar, investing in R&D and investing in capital in terms of building new factories. That's been really the portion as we expand our horizons here and really push toward services. We’ll be investing through the P&L as well. It won’t just be capital to try to grow, so it's particularly important as we look at enhancing our digital capabilities and doing other things there as well. Again, we’ll be investing through the P&L growth.

Hi. Good morning everyone. It’s Goldman Sachs. Jim, I’m wondering if you can talk about the operate and execute plan. So, we really saw the sales variance allocation piece really move the needle for you folks in 2017, and as we think about based on what you folks have in the pipeline which we look for has meaningful improvements in the business in 2018?

Well, it is really – again, this is long-term game so we’re focused on long-term profitable growth, and as you heard us talk about before, it really comes down to us having a more detailed granular understanding of byproduct, by application, by market where we get the best return on invested capital and we’re biasing our resources to those areas that represent the best opportunity for future profitable growth where we’ll get the best returns. And so, I think it’s difficult for you to see – for us to predict in 2018, but you’ll see it’s a long-term game, but again their focus on services, as I mentioned, is very important and we’re investing in but it is up against the long haul.

Thank you. And then on the supply chain you folks are very clear within the contemplated range you don't anticipate supply chain being an issue. Can you just give us confidence range, sales are 10% above the high end of the range, which you still feel comfortable with that assessment? There if you could just help us understand the confidence spend that you have and you spoke about in the press release improving material flows back of 2017 verse of the first half based on your work with the supply chain. I’m wonder if you could just quantify the number of problem components that you’re tracking or just help us quantify that improvement if you don’t mind?

I don’t think it would be appropriate for us to quantify the number of suppliers, but I will repeat that we’re confident we’ll be able to work with our suppliers to stay within the EPS range we provided. This isn’t something new for us, and it won’t pose a major problem.

And sorry, Jim, what if demand higher than the high end of the range? Or guess what’s the level of confidence that you scale up to. Is it 10%, 15%?

I’m not going to quantify, but it certainly, if there’s more demand out there, we’ll do our best to work with our suppliers to satisfy that incremental demand.

Yes. Good morning. It’s Baird. Just wanted to go back to construction industries if we can, and maybe give you view on North American demand maybe frame that is how are thinking your 2018 outlook versus normalized demand or mid cycle. And I guess I’m wondering, in your comment in the slide here that talks about improvement in residential, non-residential, and infrastructure. What do you feel most comfortable that you’re going to see the improvement? And what does that in terms of equipment next year in 2018?

So, Mig, I’ll start with where we had normalized demand. I think we are trying to get our way from calling the cycles. North America sales were in 2017, and we expect them to be up again in 2018, so we’re at healthy sales levels, where exactly that is in the cycle and if we’re going to pull from trying to predict that. I would say exactly where we’re going to see the strength in 2018, I don’t have that broken out between residential, non-residential infrastructure. We do see strong demand signals across all three. I’ll say that infrastructure has disappointed us the last couple of years. Hopefully it won’t this year, we’ll see how the year plays out. But there certainly the need and there certainly the funding out there to fund infrastructure growth, other areas of strength in construction industries as pipeline build-out and so we’re seeing which requires a lot of heavy equipment, construction equipment even some apply to small end of resource industries equipment. So as pipelines are getting built-out in support of the oil and gas activity and there’s been a lot of pipelines approved in the last year, that’s certainly a key areas of growth as well and an area where we’ve seen really good business. Okay. And that’s actually kind of good segue on my second question moving to energy and transportation, maybe a little bit more color on the oil and gas component of that business and your thoughts on solar going forward?

This is Jim. I’ll take that one. So as we mentioned earlier, onshore North American oil and gas has been quite strong, it was quite strong in 2017. We expect that strength to continue. Drillings relatively slow but well servicing is certainly and gas compression is quite strong for us. As we also mentioned, there’s a good backlog for solar for midstream gas compression. As we look around the world in terms of offshore oil and gas that's still fairly depressed and we don’t see a major increase in that business in 2018. So offshore drilling and offshore solar turbines applications will be relatively muted again in 2018.

Appreciate it. Thanks.

It’s Melius. Good morning, everybody, and thanks for fitting me in. So the question is I mean, obviously your corporate results have been very, very good especially in margin. The question is on resources where we at least think it's an exceptional business, you have good market shares and the product runs a lot, so the aftermarket position is structurally good. And you had a great last quarter. Rebound in margin; this quarter is down a little bit. Then I understand some seasonality to margins, I get it. But is there any abnormal investment in that business that’s depressing margin, whether on automation otherwise or what was the cause of that lumpiness that we’ve seen last two or three quarters?

Well, the cause in lumpiness probably has a lot to do with the sales changes, although we did see a sales growth in the fourth quarter. We talked about a little bit of negative mix there as they moved to a higher percentage of their sales being new equipment as opposed to aftermarket. We also talked about in the third quarter and we saw this translate that we had a pick-up in R&D spend for some product programs. We also typically see and you talk about this fourth quarter seasonal cost heaviness as everyone tries to get all their cost out in the quarters. So at those sales levels I think there is just some lumpiness to the margins. New equipment sales are still really low versus historical standards. We’re managing margin, I’d say to the full year and not to the quarter and that’s really where we’re focused at. We expect RI to continue to see operating margin growth in 2018 in line with progressing towards achieving the margin numbers they put out for Investor Day.

And just to add. This is Jim. Certainly, mix has an impact here. So the mix issue between parts in OE, so as OE starts to improve that can have a mix impact and there are certainly impacts among different products within OE. So mix is certainly a big part of it particularly when you're dealing with lower levels, it’s easier to, I think it has a larger shift due to mix.

With that, I think – sorry Rob go ahead. You can follow-up if you had one.

Is it fair to interpret from your comments about the breadth of the recovery in the customer base? Is your order book expanding as you see more people bidding or quoting, rather than being patchy?

Well, it still a relatively low-level, but it's improving. So I’d said, we’ve seen an improvement and it is broadening out as well geographically as I mentioned earlier.

And with that, Kate, that needs to be our last question.

No. I think we’ll just go ahead. It’s a top of the hour.