fluid power presentation

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Supply Chain/Purchasing Seminar
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Please silence cell phones and pagers during this
program
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James Tarabori Caterpillar Inc. Chair, Supply
Chain Management Committee
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Eli S. Lustgarten Senior Vice President Longbow
Securities
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(No Transcript)
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INDUSTRIAL MARKETS 2007 AND BEYONDManaging
Through Mid-Cycle

• Supply Chain/Purchasing Managers Seminar
• Eli S. Lustgarten
• Senior Vice President, Longbow Securities
• June 6, 2007

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New Safe Harbor/Forward-Looking Disclaimer

• God, grant me the serenity to accept the things
  I cannot change, the courage to change the things
  I cannot accept, and the wisdom to hide the
  bodies of those people I had to kill today
  because they ticked me off. Also, help me to be
  careful of the toes I step on today, as they may
  be connected to the butt that I may have to kiss
  tomorrow.

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2000-2005 Industrial Stocks Shift From Old
Economy Castoffs to Being In Vogue

• Over six years ago, investor ambivalence toward
  industrial stocks and subsequent single-digit
  multiples reflected the shadow of the Federal
  Reserve and signs of an impending slowdown that
  was finally becoming visible.
• Since the industrial stock price bottom of
  September/October 2000, most industrial stocks
  surged strong double digits through the first
  half of 2001, despite a down stock market.
• After the traditional third-quarter jitters and
  the September 11 reaction, most industrial stocks
  performed well since the latter part of 2001.

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SP Industrial Machinery Relative To SP 500
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SP Construction Farm Machinery Relative to
SP 500
11
OUR PRESENTATIONS HAVE HAD A CONSISTENT
INDUSTRIAL OUTLOOK

• In 2004, the concern was whether manufacturing
  was finally beginning to recover
• OUR THESIS 2004 upturn in manufacturing was the
  first year of at least a three year improvement
  for the sector, lasting through 2006 and possibly
  for the Rest of The Decade
• The only guarantee was that it wouldnt be LINEAR
• Focus was Managing INTO Mid-Cycle
• Despite economic strength of 1H2006, our concern
  was that the existing flat yield curve was a
  harbinger of a slowdown of the industrial sector
  6 to 9 months later.
• Reasonable control of inventories and relatively
  easy availability of money suggest that the U.S.
  economy would avoid a recession.

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OUTLOOK 2007

• Non-Linear period likely began in H22006 and
  will go through at least H12007
• Mid-Cycle means Top-Line Growth in the low to mid
  single digit range AT BEST
• Well below double-digit gains in many industrial
  markets from mid-2004 into 2006
• Business models of 7 to 10 top-line growth and
  12 to 15 bottom-line growth are in jeopardy
• 7 to 10 bottom line growth during mid-cycle is
  Good
• Drivers in Mid-Cycle For Above Average Growth
• New products, new markets, and market share
  gains
• ACQUISITIONS
• Financial Engineering such as share repurchase
  programs
• End Market Outlook Have Mostly Followed Our
  Projections
• BetterPower Generation
• Weakerauto, housing

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INDUSTRIAL AMERICA ENTERS MID-CYCLE

• Recent ISM report on business conditions show
  that the manufacturing sector accelerated in
  April. Overall, manufacturing lost momentum in
  the second half of 2006, and started 2007 in a
  less than robust fashion.
• PMI for April 2007 was 54.7, up from 50.9 in
  March, and compares to 52.0 in February, and
  49.3 in January.
• The PMI had averaged 50.9 for the previous 6
  months and 50.8 for the 1st quarter of 2007
  before the acceleration in April.
• New order index of 58.5, and Production index of
  57.3 both point to moderate improvement in April
  after some stagnation in the last several months.
• Price index of 73 means than manufacturers are
  paying higher prices on average in recent months
  than they did in March (65.5), February (59),
  January (53), December (47.5), and November
  (53.5).
• Inventory Index of 46.3 in April, compares to
  47.5 in March, 44.6 in February, 39.9 in
  January, 48.5 in December, 49.1 in November and
  49.3 in October suggesting that inventories
  contracted for the 9h consecutive month.
• Customer Inventories index was 47 in April and
  48 in March, down from 53 in February, 52 in
  January , 50.5 in December, 50.5 in November
  and 52 in October. This is the second month of
  decline following five months in a row of the
  index exceeding 50 indicating that customers are
  making progress in reducing the glut of
  inventories.
• Early 2007 ISM data corresponds to a 3.1
  increase in real GDP.

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ISM Purchasing Managers Index
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ISM Index Of Production vs. New Orders
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ISM Price Index Input Prices Are Starting to
Rise Again
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ISM Inventory Index
18
Sector Contributions In The Last Six U.S.
Recessions
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Manufacturing Inventory Levels Show Liquidation
in the First Half of the Decade
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Manufacturing Inventory/Sales RatiosDurables and
Non-durables
Source Eaton Corp.
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Bank Lending StandardsBorrowing Remains Easy
22
2004 First Year of Industrial Recovery Fooled
Everyone

• 2004 was the first full year of industrial
  manufacturing recovery
• Most companies started 2004 planning an 8 to 10
  volume gain
• Sharp acceleration of growth surprised most
  companies as some markets grew 20 to 30 or
  more
• A rising tide lifted all boats effect as
  virtually every industrial sector participated.
• Investment incentives such as 50 accelerated
  depreciation, which expired at year-end, made
  H204 somewhat stronger than otherwise would be
  from natural forces.
• Industrial market drivers included strengthening
  levels of profitability and cash flow, ongoing
  postponement over the past five years of capital
  purchases, technological change, improved US
  competitiveness helped by a weakening dollar, and
  rising capacity utilization and industrial
  production.
• Commodity prices surged as companies scrambled to
  meet rising demand.
• Energy prices were high and went higher
  reflecting oil shocks (uncertain global
  production, terrorism), lack of spare global
  capacity, very low inventories, and growing
  global demand (U.S. and China).

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2005 Mini-Inventory Correction, Cost Imbalances
and Hurricanes Masked Strong Industrial Economy

• 2005 was a strong year for the Industrial economy
  despite various shocks to the sector
• 1H2005 was characterized by a mini-inventory
  corrections as commodity prices rolled over, the
  domestic economy slowed as the impact of large
  tax cuts and investment incentives waned,
  automotive companies overproduced, and interest
  rates were rising.
• Most companies were scrambling to meet increased
  demand in spite of supply chain shortages with
  prices rising rapidly to offset higher input
  costs, particularly material and energy.
• Major hurricanes in the Gulf regions also
  disrupted economic activity.
• The dollar was rising 12.5 vs. the Euro and
  14.5 vs. the Yen.

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THE SLOWDOWN BEGAN IN Q206 AND CONTINUES TODAY

• Q12006 GDP of 5.6 made the U.S. one of the
  fastest growing Advanced economies at that time
• One time payback for unusually slow, hurricane
  affected Q405 GDP growth of 1.1
• Average of the two quarters about 3.5, in line
  with the consensus view of the longer term growth
  of the U.S. economy
• Not sustainable growth due to technicalities
  (smaller trade deficit), increased energy costs,
  and the fall-off of residential construction.
• Q2 GDP of 2.6 (revised from 2.9 and originally
  reported as 2.5)
• Q3 GDP was 2
• Q4 GDP reported as 3.5--BUT WAS WAY OFF THE
  MARK!!!

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MAJOR REVISION OF Q406 GDP SLOWDOWN CONTINUES
INTO 2007

• Q4 GDP reported as 3.5 revised downward to 2.2,
  then increased to 2.5. Only 7th time in 30 years
  for such a major revision
• Slower growth principally reflects updated
  inventory data
• Business inventories increased only 22.B
  (revised from 17.3 billion) in Q4 after December
  data showed a 0.5 decline rather than a 0.6
  increase. November data was also revised to up
  1.1 rather than up 1.3.
• BEA had estimated a 35.3 billion increase in
  inventories in Q4 compared to a 55.4 billion
  increase in Q306
• GDP therefore was reduced by 1.16 (revised from
  1.35 p.p.) in Q4 originally BEA subtracted 0.71
  p.p. from GDP
• Trade only boosted GDP by 1.5 p.p rather than
  1.64 p.p. as the December trade deficit widened a
  much larger than expected 5.3 to 61.2 billion.
  Annual FY2006 trade deficit was 763.6 billion or
  up 6.5 from 716.7 billion in F2005.
• Other data revisions included
• Consumer spending up a slightly lower 4.2 rather
  than 4.4.
• Federal government spending up 4.6 rather than
  4.5
• Business spending decreased 3.2 rather than
  0.4.

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Bigger Slowdown in Q107 GDP

• Q107 GDP reported as 1.3
• Residential construction fell an additional 17
  reducing GDP by 0.97 BPS
• Non-residential reported slowest quarterly growth
  since Q12004.
• Ex-housing, GDP growth was about 2.2.
• Upward revision Likely- But you can never tell
  what the next 2 revisions will be.
• Construction spending was revised up in February
  and GDP data understated current strength in
  non-residential construction
• Business outlays for equipment and software were
  up 1.9 after a 4.8 decline in Q4 tech spending
  may have been delayed due to MSFT Vista rollout
• Inventories reduced Q107 GDP by only 0.3
  compared to a 1.2 reduction in Q4 it will be
  revised again.
• Recent March inventory and trade data would be a
  bigger hit to Q107 GDP
• Economy looks Like It is stabilizing
• Consumer spending still growing at 3.8 rate
• Production was up in March and April and looks
  healthy based on ISM data
• Labor costs appeared to have declined in Q1.

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Underlying Economic Data is Confusing at Best

• Payroll data is misleading due to major revisions
• April jobs 88,000 March and February revised
  down by 26,000
• Year to date 2007 average is 129,000 compared to
  189,000 (revised up from 161,000 in 2006, 212,000
  in 2005 and 175,000 in 2004)
• Job growth 3/05 to 12/06 increased by over 4.3
  million jobs instead of 3.3 million
• Could be the beginning of a weak patch for the
  labor market in which job creation decelerates,
  unemployment rises and wage gains moderate.
• Despite big trade deficit, Exports grew 14.3 in
  2006
• Consumers proved then can handle gasoline prices
  in the 2.50 to 3.00 per gallon range.

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INFLATION AND PRODUCTIVITY LOOK BETTER THAN
REPORTED DATA

• Improvement likely in direction of inflation in
  2007 despite issue of rising cost pressures from
  a tight labor market
• Corporate profit margins are still strong
• Benefit inflation reduced to 2.9 in 2006 from
  7.2 two years ago
• Employee cost index reported up 3.1 in 2006 Vs.
  2.5 in 2005 adjusted for productivity, labor
  costs are up 2.5 for non-farm corporations and
  only 0.5 excluding financial corporations. Did
  index decline in Q107?
• Core inflation--- Personal Consumption
  Expenditures (CPE) up 2.1 in 2006 compared to
  2.6 for CPI and both up only about 1.6 if rent
  and rent based housing costs are excluded.
• CPI will decline in 2007 due to housing component
  calculation
• Productivity up 1.6 (Revised from 2.1) in 2006
  compared to 2.3 in 2005
• Productivity rose 1.6 (revised from 3) in
  Q406 manufacturing productivity rose 2.2 in Q4
  and 4 in F2006.
• Durable goods manufacturing productivity rose
  3.4 in Q4 and 6.2 in 2006
• Statistic is skewed by housing data construction
  payroll only down 1.4 despite a 19.8 decline in
  residential construction in Q4 as it follows
  completion cycle.
• Housing reduced productivity by 0.67 p.p. in
  2006.

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CAPITAL SPENDING WEAKNESS IS BIGGEST ECONOMIC
SURPRISE AND RISK IN 2007

• Surprise in Q4 GDP Data report was a 3.2
  (Revised from 2.4) decline in business
  investment in machinery and 4.8 decline (revised
  from 3.2) in equipment and software spending.
• Order trends appear to remain soft in Q107
• No clear explanations for weakness
• Perhaps pressure to perform in conflict with
  higher capital expenditures which require
  improved prospects for demand and provide desired
  returns.
• New orders from US manufacturers,( ex-
  semi-conductors) jumped 3.1 in March following
  revised 1.4 gain in February Q1 orders down
  1.1 from Q106.
• Equipment and Software spending rose 1.9 in
  Q107 Was Vista Rollout the cause of Q4 decline?
• Demand Remains relatively good both here and
  abroad
• Inventory liquidation well underway
• Weaker dollar enhancing export demand from
  stronger economies overseas.
• Domestic spending ex-housing remains strong
• Capacity utilization still at high levels
• Profits remain strong ROE/ROA have returned to
  or exceeded historic levels of last decade
• Balance sheets are in terrific shape.

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The Industrial Sector Kept Rolling through Most
of 2006

• Most investors and companies under-estimated the
  strength of the industrial economy in the first
  half of 2006.
• Capacity utilization in manufacturing moved up to
  around 81 in June 2006 until the fourth quarter,
  a rate more than 1 above its 1972-2005 average
  of 79.8. The current fall-off in activity is
  about back to average. (April 80.2)
• Weaker dollar helped Industrial America in 2006
  with stronger than expected exports.

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Capacity Utilization Rates
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CAPITAL SPENDING SHOULD STRENGTHEN IN 2007 AND
BEYOND

• Corporate cash flow should remain strong,
  manufacturing balance sheets are still flush with
  cash.
• Ongoing postponement of purchases and
  technological change should help spur spending as
  economic recovery resumes
• Global markets and U.S. competitiveness overseas
  should continue, helped by the weakening dollar.
• Capacity utilization projections
• 2004 2005 2006 2007E 2008E
• Average 78.0 80.0 81.8 81.5 81.8
• Q4/Q4 79.2 80.5 81.6 81.6 81.9

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BOTTOM LINE 2007 IS A MID-CYCLE ECONOMY

• Economy slowing at close of 2006 to H12007 is
  typical of a mid-business cycle pause
  (1966,1986,1995)
• This year will be that Mid-Cycle year where
  top-line growth falls to low to mid-single digits
  at best 7 to 10 bottom line growth is GOOD!!
• The Industrial Sector will be a good place to be
  in 2007 and BEYOND
• Dicey first half of 2007 weak auto, housing,
  light construction, truck, and a mini-inventory
  correction.
• Look for improving domestic economic growth in
  H207 and beyond.
• International growth will help as Europe and ROW
  remains robust
• Eurozone ISM 55.4 in March and April
• Eurozone industrial production up 4.2 in
  February
• Global PMI was 54.1 in April , up from 52.9 in
  March
• New Orders 56 , up from, 54.5
• Input prices 65.8, up from 62.8

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OUTLOOK FOR MATERIALS MOSTLY HIGHER PRICES
SHORT-TERM

• Short-Term (3-6 month) PPI change 4 to 6

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World-Wide Steel Production Up 12 Sequentially
in March
36
World-Wide Steel Production Up 12 Sequentially
in March

• US up 10
• Europe Up 14
• CIS up 11
• South America Up 13
• Asia Up 12

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High international Steel Prices and Strong
Markets Outside the U.S. Keep Import Levels
Minimal
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Gradual Work-off of Inventories At Service
Centers Since Q406
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Current Steel Market Status Volatility Despite
Overall Positive Trends

• Steel capacity utilization for week ending 5/12
  was 86.4 Q207capacity utilization is averaging
  4.4 higher than Q1.
• U.S. hot rolled prices down 2 in two week period
  ending 5/112 from 560 to 547 per ton. Scrap
  pricing fell more (10) , but a turnaround for
  scrap appears likely.
• Significant 250 per ton differential exists
  between Russian (850 per ton) and domestic
  (640) rebar. Despite the differential, domestic
  mills have reduced prices for May (down 15/
  ton), and export opportunities are limited due to
  elevated shipping costs.
• Significant overseas port congestion (Brazil,
  Australia) and lack of shipping assets continue
  to drive overseas freight rates to record highs.

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Longer-Term Outlook For Materials Continued
Upward Pressures

• Materials are in worldwide demand with uncertain
  supply growth (e.g. oil, copper)
• Price spurts/ volatility
• Transport bottlenecks
• Fuel price swings
• PPI Increases possibly 6 to 8 with higher
  spikes

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ODDS (BARELY) STILL FAVOR A FED CUT IN H22007

• Historically, ISM index has also been an
  indicator of FED policy
• ISM index has been well below the levels that
  historically have signaled the end of a FED
  tightening cycle in the past (around 53).
• April ISM increase doesnt help the rate cut
  case!
• Weak dollar trade weight basis dollar is down
  30 from 2002 peak with a 4 decline in the past
  four months
• Rising import prices adds to inflation pressures
• Foreign growth prospects put pressure on global
  interest rates
• Dollar likely in narrow trading range for now
• Fed has eased, historically, before core consumer
  price inflation has slowed.
• What matters most is where core inflation is
  heading
• Outside of rents, various core inflation measures
  have not been over the Feds presumed 1-2
  preferred range
• Other key measures are real growth, wage rate
  inflation, and housing inventories.

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THERE WILL BE MORE MARKET UPS AND DOWNS IN 2007
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U.S. Economy Will Continue To Grow

• Real GDP growth remains strong
• Year/Year 2000 3.7 2001 0.8 2002 1.6
  2003 2.7 2004 4.2 2005 3.2 2006E
  3.3 2007E 2.3 2008e 2.8
• Q4/Q4 2000 2.1 2001 1.6 2002 0.2
  2003 3.6 2004 3.3 2005 3.1 2006E
  3.1 2007E 2.2 2008E 2.9
• Capital Spending ? Continues To Strengthen
• Structures Equip. Software Business
  Fixed Inv.
• 2003 -5.6 6.4
  4.4
• 2004 1.4 13.6
  13.2
• 2005 1.1 8.9 6.8
• 2006 9.0 6.5 7.2
• 2007E 7.8 0.7 2.8
• 2008E 8.3 5.8 6.6
• Manufacturing output (from Industrial Production
  Report) improving
• Year/Year 2000 4.6 2001 4.2 2002
  0.4 2003 0.0 2004 4.8 2005 3.2
  2006E 4.0 2007E 2.2 2008E 2.8
• Q4/Q4 2000 -3.7 2001 4.0 2002
  -3.2 2003 6.5 2004 4.6 2005 3.0
  2006E 3.5 2007E 2.6 2008E 2.8
• Inflation remains under control Consumer Price
  Index
• 2000 3.4 2001 2.8 2002 1.6
  2003 2.3 2004 2.7 2005E 3.0 2006
  2.9 2007E 2.0 2008E 1.8
• Corporate profits remain strong

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CONTINUED OPTIMISM FOR GLOBAL GROWTH

• 2005 2006E 2007E 2008E
• GLOBAL GROWTH 4.9 5.1 4.9 4.9
• US 3.2 3.4 2.2 2.8
• EU 1.3 2.4 2.3 2.3
• CENTRAL/E. EUR 5.4 5.3 5.6 4.9
• BRAZIL 2.3 3.1 4.4 4.2
• JAPAN 2.6 2.7 2.3 1.9
• CHINA 10.2 10.0 10.0 9.5
• INDIA 9.2 9.2 8.4 7.8
• Germany 1.8 1.9
• France 2.0 2.4
• Italy 1.8 1.7
• UK 2.9 2.7
• Russia 6.4 5.9

Source IMF
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Farm Equipment

• Demand Should Improve in H207 and 2008

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FARM EQUIPMENT FROM CROP SURPLUS TO TIGHT
SUPPLIES

• U.S. grain supplies were well above normal as
  recently as 2005/06. Rising ethanol demand, lower
  plantings and global weather problems has reduced
  global carryovers to very low levels for wheat
  and corn.
• Farm income has remained near current record
  levels for the past several years buoyed by
  government farm payments. Farmers have rebuilt
  their balance sheets and cash flow will remain
  strong.
• Recent tax incentives helped drive 2004 purchases
  up 20 to 40 driven by the small farmer who
  could write-off 73 to 82 of equipment purchased
  in first year. Farm equipment demand has been
  relatively flat in 2005 and 2006.
• A decent but slowing US economy, higher energy
  and interest costs, and threats of subsidy cuts
  (Bush Budget, new farm bill, WTO talks) have
  negatively impacted farmer confidence. Falling
  government payments are currently offsetting
  recent gains from higher commodity prices.

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Corn Supply And Demand
48
Corn Supply And Demand
49
Farm Equipment Demand Should Finally Improve
50
U.S. Retail Farm Equipment SalesTwo-Wheel Drive
Tractors Over 100HP
51
Farm 2007 Outlook Seeding an Upturn
52
2007 Farm Equipment Outlook Improving

• Moderate change in farm cash receipts likely in
  2007/2008 ( billions)

Source Deere and Co.
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Ethanol Demand Remains a Key Driver of Growth
54
Ethanol Demand Remains a Key Driver of Growth
(contd.)
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Corn Acres Planted Rise Substantially Corn Crop
Likely Over 12 Billion Bushels
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2007 FARM OUTLOOK UNCERTAIN 1H07 FOLLOWED BY
UPTURN

• Uncertain Farm Politics (Bush Budget, new farm
  bill WTO talks, European Common Agricultural
  Policies)
• Carryovers tightening and commodity prices are
  up.
• Ethanol does make a difference for corn, but
  government mandate for 2012 of 7.5 billion
  gallons will be far exceeded in 2008 with 11
  billion gallons likely. Will infrastructure be
  ready?
• Bottom Line Much Higher Plantings 2007 Weather
  will be Key
• 2007 NA Farm Equipment production likely up
  modestly
• H107 will be somewhat soft
• H207 improvement for large tractors and combines
  for grains (corn, wheat, soybeans), planters and
  tillage. Double-digit growth?
• Weakness in cotton equipment, smaller tractors
  and livestock equipment
• Further Gains likely in 2008 with 5 to 10
  improvement

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WHAT CAN DE-RAIL THE FARM ETHANOL EXPRESS?

• 110 plants and 5.3 billion gallons of capacity in
  2006/07 will rise to 8.5 to 9.0 billion gallons
  in 2007/08 and 10 to 11 billion gallons or more
  in 2008/09.
• USDA now projects 3.4 billion bushels of corn for
  ethanol in 2007/08 Usage in 2008/09 rises to at
  least 4.11 billion.
• Planted acreage projected to grow to over 90
  million acres for corn will they grow from
  there?
• How will the market use the increased
  availability of ethanol?
• Will the ethanol INFRASTRUCTURE be able to move
  and distribute ethanol
• 3000 tank cars and 2000 DDG (dry distillers
  grain) hopper cars needed per one billion gallons
  of ethanol
• 25 of corn used for ethanol comes back to the
  market as DDG for feed and is not currently
  counted in carryover calculations
• Can railroads efficiently handle moving double
  the amount of ethanol and efficiently move the
  tank cars, DDG hoppers? What about tank storage
  capacity, loading and unloading platforms,
  forming unit trains, blending capacity, increased
  track?
• What about water usage and impact?
• Can ethanol complex remain profitable if lower
  oil prices and/or rising corn prices are
  sustainable trends?

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Power Generation

• Resuming Growth

59
Recent Surge in Capacity Addition Expected To
Meet Near-Term Needs

• Capacity additions slowed markedly as the 20th
  century came to a close
• 1960s 180 gigawatts of capacity
• 1970s 314 gw
• 1980s 172 gw
• 1990s 84 gw
• Blame government policies and deregulation
  (1996), where power generators were no longer
  guaranteed a minimum return on invested assets or
  return on equity above their cost to generate
  power
• Reserve margin fell under 15 at the turn of the
  decade (in 1998-2001)
• Open access rules by the Federal Energy
  Regulatory Commission (FERC) revitalized power
  generation sector
• 200244.4 gw 200322.7 gw
  200419.7 gw 2005A- 15.1 gw

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Deregulation Causing Uncertainty
61
Cumulative Planned Additions to Electrical
Generation Capacity to 2010 Lots of Delays
Source DOE/ EEI
62
UTILITIES INCREASING INVESTMENT IN TRANSMISSION
63
Automotive

• Market Has Passed Its Peak, But the Soft
  Landing is Getting Harder Every Day

64
AutomotiveWhere Are We In The Sales Cycle?
Will Demand Soften?
65
Auto Inventory Reduction Is Slow

• Industry Inventory on the Rise
• 12/31/2005 6/30/2006 12/31/2006 3/31/07
• GM 71 days 73 days 80 days 86 days
• Ford 79 79 70 days 64
• Chrysler 86 91 74 days 68
• Transplants 48 53 67 days 59
• Domestic Auto Production Under Pressure
• 2004 15.8 million Q107 Q207 FY07
• 2005 15.75 million Detroit 3 -12 -8 -5 to
  -10
• 2006E 15.25 million New Domestics 1 14 5
  to 10
• 2007E 14.9 million Hi 15.3 million
• 2008E 15.3 million Low 14.6 million

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Rail Cars

• Demand Will Remain Solid Supported by the Ethanol
  Craze

67
Rail Car Demand Will Stay at High Levels

• Factors Influencing Demand
• Size of Fleet (stable now at near 1.3 million)
• Age of Fleet (average now 18.5 years)
• Utilization (trips per year) rising
• Replacement Pressures
• Commodity Loadings (rising 1.3 per year)
• Intermodal Growth
• Deliveries Have Surged As Economic Growth
  Accelerated
• 2003- 32,180
• 2004- 46,871
• 2005- 68,612
• 2006E- 74,683
• 2007E- 69,000
• 2008E- 70,500
• Source Economic Planning Associates

68
2006 SUPERB YEAR FOR RAIL CARS DESPITE SLOWING
ECONOMY

• US Railroads matched or exceeded previous record
  levels for revenues, profits, and operating
  ratios.
• Car builders received orders for 91,300 cars in
  2006
• Assemblies totaled 74,683
• Backlog rose from 69,400 to 85,800 by year end
  2006
• Preponderance of Backlog (58) for ethanol tanker
  cars and DDG Equipment (hi cube hoppers)
• Pause in coal car orders, lack of interest in box
  cars and flat cars, slow intermodal orders
  renewed interest in these in 2008.
• Future growth from rising replacement pressures
  for boxcars, midsize and small cube hoppers, and
  multi-level flat cars stringent regulations will
  drive replacement of older cars carrying
  chemical, gas and liquid fertilizers

69
Rail Long-Term Growth Sectors

• Key Sectors
• Coal
• Grain (Ethanol)
• Chemicals
• Motor Vehicles and Parts
• Intermodal
• Tanker Car Outlook
• Doubled between 2002 (5500) and 2005 (11,563)
• Estimates at 14,034 for 2006 17,000 in 2007 and
  19,000 in 2008
• Source Economic Planning Associates

70
On-Highway Vehicles

• The Emission Boom Is Over For Now

71
1997-1999 Truck Market Positives Were Clearly Not
Sustainable

• Strong domestic economic and industrial
  production/capacity utilization growth was not
  sustainable
• 1 change is 14,000 trucks
• Union Pacific/UPS strike followed by Conrail/CSX
  integration problems
• 1 change in freight from rail to truck
  represents about 15,000 trucks
• NAFTA benefits of increased Mexico and Canadian
  trade have waned
• Asian crisis and rising imports are near term
  offset
• Fleet replacement cycle shortened from 4-5 years
  to 3-4 years due to
• Increased utilization
• Increased cash flow
• Driver enticements
• Prices were flat to down
• Guaranteed residual prices
• Guaranteed residual prices ballooned USED truck
  inventories and extended fleet replacement cycle

72
Heavy-Truck Market In 2002 Had Negative Bias, But
Pre-buy Saved The Year

• Positives
• Relatively stable energy prices
• Relatively stable fuel prices
• Low interest rates
• Pre-buy of class 8 trucks to beat emissions
  penalty

• Negatives
• Lower freight tonnage
• Higher insurance costs
• Credit crunch!
• Declining used truck values are now stabilizing
• Record 4,200 truck company bankruptcies in 2001
• October emissions requirements raise truck prices
• Driver crunch

73
U.S. Long Haul Truck Freight TonmilesGrowth
Turns Positive
74
Class 8 Heavy-Duty Diesel Truck DemandA Return
To Normal Levels?
2006E 378,000 2007E 217,000
Source ACT/FTR
75
The Cyclical Truck Boom Of 2004-2010

• Driven by normal cyclical economic recovery,
  assuming sustained 3 domestic GDP growth
• Exacerbated by fear of 2007 emissions, causing
  rational truck owners to dramatically reduce
  fleet age as much as possible by 1/1/07
• Freight decline in 2006 of 2.8 may mean that the
  trucking industry overbought by as much as
  110,000 trucks in 2006 will the excess affect
  2007?
• Heavy truck demand will fall at least 40 to 50
  Q1 may be weakest for engine producers (2007
  trucks with 2006 engines) and Q2 Weakest for
  truck assemblers. Medium trucks will also see a
  20 to 25 decline in 2007.
• Domestic market appears weaker than expected
  though overall activity is somewhat masked by
  shipments to Mexico and Export.
• Current environment is characterized by weak
  freight and weak pricing
• U-Shaped recovery for trucks at best
• The engines that fleets hate in 2007 will
  hopefully be loved in 2008 and 2009 2007 engines
  are 2002 engines with added filtration. 2010
  emissions standards are very stringent and
  difficult, causing material engine and truck
  re-designs.

76
Medium (class 5-7) Truck Production Will Also
Fall

• 2008E 230,000-235,000
• 2007E 210,000
• 2006A 265,422
• 2005A 244,831

77
Commercial Aerospace

• The Recovery Has Begun To Strengthen

78
Aerospace Key Drivers Outlook
79
Commercial Recovery

• Worldwide Flight Hour Growth- strengthening in
  07
• 2004 10
• 2005 8
• 2006E 4
• 2007E 5 to 6
• Airbus and Boeing Deliveries Up
• 2004 3
• 2005 10
• 2006E 25.4
• 2007E 8
• 2008E 11
• Pipeline for 787, 747-8, A380 and 737 strong but
  stretching

80
Large Aircraft Delivery Forecast
Source Volvo Aero
81
Aerospace Outlook Remains Positive
82
Fluid Power

• Inventory Levels and Construction Markets Are Key

83
Fluid Power Industry
84
Construction Equipment

• NA Industry Peaked in Q206But Construction
  Spending Will Remain at High Levels

85
Sustained NA Construction Activity As
Non-Residential Offsets Housing Decline

• 2002 A good year for all except non-residential
• Housing was very strong at 1.71 million starts up
  from 1.6 million benefitting from higher incomes,
  lower mortgage rates and household asset
  diversification.
• Non-residential activity remained very weak
  reflecting high office vacancies, consolidating
  retail sector, and weak idustrial plant
  construction exacerbated by 09/11.
• 2003 Total construction remained strong
• Both residential (1.85 million starts) and public
  construction were healthy
• Non-residential continued to decline
• 2004 Modest growth as non-residential spending
  finally turns up 3-4 (mostly price).
  Residential stays surprisingly strong at 1.95
  million starts, as expected H2 fade never
  materializes.
• 2005 Residential was expected to decline, but
  sector remained resilient as housing starts
  actually rose to 2.07 million. Nonresidential
  continued to recover rising 6.4.
• 2006/07/08 Housing starts declined 12 to 1.82
  million and will likely fall another 17.5 to
  perhaps 1.50 million in 2007 before recovering
  about 10 to 1.65 million in 2008
  Non-residential construction should continue to
  grow about 8 to 12 in 2007 led by energy and
  power, hospitals and lodging 2008 looks somewhat
  slower

86
Shifting Construction Market Mix

• Total (Trillion 1 SAAR) 2006 03/07
• 1.20 1.19
• of Total
• Private Residential 53 48
• New SF 35 28
• New MF 3 5
• Improvements 13 15
• Private Non-Res 24 28
• Public 22 24

87
Current Housing Outlook Still Weak

• Housing starts of 1.518 million in March 2007
  were 0.8 above February (revised) but 23 below
  March 2006 rate of 1.972 million
• Single family starts down 24.6 in March 2007
  maintains similar monthly trends
• Multi-family starts down 18.4 in March 2007
• Housing permits of 1.544 million were down 25.9
  in March 2007 (Y/Y) December was down 24
• Single family permits were down 28.4 in March
  2007 compares to down 29 in December
• Multi-family permits were down 19.9 in March
  compares to down 7 in December.

88
Housing Outlook Stabilizing in Late 2007

• Single Family no end in sight to decline in
  permits, starts, or spending
• Unsold inventory still high
• Dont expect upturn before late 2007
• Multi-Family Rentals may keep multi-family
  spending about leveling 2007
• Condo sales, starts and permits as bad or worse
  than single family

89
NON-RESIDENTIAL CONSTRUCTION SPENDING WILL REMAIN
STRONG
90
Q107 Construction Equipment Weak in NA Offset by
International Strength
91
Construction Equipment Remains at High Levels
92
Booming Material Handling Sales May Cool a Bit in
2007

• Aerial Work Platform sales surged in 2005 up 85
  for scissor lifts and 42 for boom lifts
• 2004 2005 2006E 2007E 06/05 07/06
• AWP Scissor Lifts 27,400
  50,200 60,000 57,000 20 -5
• Telehandler sales jumped 62 in 2005
• 2004 2005 2006E 2007E 06/05 07/06
• Telehandlers 13,300
  21,600 24,000 21,500 11 -10
• Crane sales should continue to improve
• 2004 2005 2006E 2007E 06/05 07/06
• RT Hydraulic Cranes 730
  950 1100 1200 16 10
• Key in 2007 Aging rental fleets have been
  updated
• Source Yengst Associates Longbow Securities
  estimates

93
Non-Residential Construction Strong 2007 but
2008 Could Slow

• Educational
• Falling primary school, rising high school and
  college and continuing ed
• K-12 spending affected by property taxes and
  houses losing value
• Commercial
• Neighborhood retail follows housing other follow
  home sales and
• remodeling
• Highway
• Depends on fuel tax receipts and local cash
  positions of municipalities.
• Office
• Vulnerable to reduced demand for real estate
  agents, mortgage brokers
• and title companies
• Also hurting the market are a wave of mergers
  between larger firms.

94
Non-Residential Construction Strong 2007 but
2008 Could Slow (contd.)

• Healthcare
• Budget constraints, decline of employer funded
  health care may slow
• hospital demand.
• Power
• Private electric power has ended 5 year- long
  building slump.
• There are over 100 plants being designed wind
  power is growing fast off a small base
• Politics , siting and regulation (EPA) problems
  and energy legislation (light bulbs) could affect
  timing
• Manufacturing
• Less Auto, pharma and more export-oriented
  plants for foreign companies, long lead times
  items for refineries, mining, cement, aircraft
  and heavy equipment

95
Non-Residential Construction Strong 2007 but
2008 Could Slow (contd.)

• Transportation Facilities
• Driven by growth in freight
• Lodging
• Growth in business, leisure and foreign travelers
• Sewage and Water
• Driven by home building, state and local
  regulation and permits.
• Bottom Line Perhaps 4 to 7 growth in 2008 for
  non-residential construction

96
Appliance Industry

• Appliance Outlook New Products and Positive Mix
  Drive Gains

97
Drivers of Appliance Industry

• Industry Shipments tied to aggregate economic
  data
• Volatility related to new construction, existing
  home sales and unemployment rate.
• Replacement demand and home improvement growth
  has dampened cyclicality
• Appliances are TV stars
• Cooking shows make every meal an event
• High-end appliances set the stage
• Market incentives help drive appliance sales
• Energy star appliances2002 15 2005 32
• Consumers really care about energy efficient
  appliances
• Government regulations
• US and Foreign companies Building Appliance
  Plants in the US
• BSH Home Appliances Haier, Fisher and Paykel
• Viking Range Corp.
• Whirlpool, Amana, GE

98
Appliance Sales Show Steady Growth Across All
Major Categories Over the Last Decade
99
New Models Drive 2006 Sales with 2 to 5 Higher
Price Points

• Our 2006 surveys indicated sales at retailers
  were driven by high end appliances selling well
• 3 door refrigerators
• Front load washers
• Convection style cooking
• Stainless steel
• Substantial new model roll-out with price points
  up 2 to 5
• 2006 sales were relatively flat (all appliances
  up 1.3 AHAM 6 down 0.7)
• 2007 will start off slowly with H107 down about
  5.

100
2006-07 Outlook Slowing Growth, Upscale Mix and
More New Products

• 2006 was about flat (down from 2 to 4 growth
  assumption earlier in year) in unit volume as
  housing decline (20 of demand) and the economic
  slowdown took their toll in the second half of
  the year.
• The mix-driven trend of ascending ASPs that has
  been in place for the past 3-4 years continues to
  drive higher revenues.
• In 2006, HVAC demand reflected new SEER 13 rules
  for energy efficient products most fluid power
  companies selling components to this market saw
  very strong demand through mid-year as
  manufacturers shifted to higher efficiency
  products. This change is over.
• 2007 will be a tougher year as housing weakens
  further in the mid-cycle economy.
• 2007 Volume likely down 2 to 3 with a weaker
  first half (down 5)
• New products will remain key.

101
INDUSTRIAL MARKETS 2007 AND BEYONDManaging
Through Mid-Cycle

• Supply Chain/Purchasing Managers Seminar
• Eli S. Lustgarten
• Senior Vice President, Longbow Securities
• June 6, 2007