Industrial Markets Outlook:

The Search for the New NormalSpeech to AMT GLOBAL FORECASTING

and MARKETING CONFERENCEEli S. Lustgarten

Senior Vice-President, Longbow SecuritiesOCTOBER 20, 2010

Eli Lustgarten

1

2

3

• OUR VIEW: THERE’S 2010 AND THERE IS THE RECOVERY• 2009 SEVERE RECESSION WITH 1H09 GLOBAL ECONOMY REALLY UGLY

U.S.PMI PLUMMETTED AS DID EUROPEAN AND CHINA PMI CREDIT FINANCIAL CRISES MET WITH MASSIVE STIMULUS PROGRAMS

BOTH HERE (U.S. $787B, TALF,TARP) AND ABROAD (SOUTH AMERICA $775B; EUROPE/AME $900b; ASIA PACIFIC $850B)

RECESSION LIKELY ENDED MID 2009 FOLLOWED BY MODEST RECOVERY

• 2010 MOST LIKELY A TRANSITION YEAR MFG.CAPACITY UTILIZATION OF AROUND 70% WELL BELOW NORMAL 2010 WILL FAVOR SHORT CYCLE/PRODUCTIVITY SPENDING FASTER RECOVERY OF TECHNOLOGY,COMPONENTS AND CONSUMABLES BULL-WHIP EFFECT IS KEY DRIVER-RECOVERY OF PRODUCTION AND SUPPLY CHAIN FROM VERY DEPRESSED LEVELS

• 2011 ECONOMIC OUTLOOK DEPENDENT ON REAL GROWTH IN DEMAND• 2011-2012 SEARCH FOR NEW NORMAL LEVEL OF DEMAND

MOST MARKETS WON’T RETURN TO RECENT 2006 to 2008 PEAKS 2006 WAS PEAK FOR HOUSING, AUTO, TRUCKS, CONSTRUCTION EQUIPMENT

WHAT WE SAID IN 2009 APPEARS TO BE TRUE

4

Great Recession likely ended in June/July 2009 followed by a gradual economic recovery Strong growth in China, India, and Brazil leading global economic upturn U.S. is generally positive with clear strength in manufacturing Europe and Japan show signs of slow economic growth

Numerous concerns which may lead to volatility in world financial markets Uncertain financial stability of Sovereign Nationals, particularly Greece, Portugal, Spain, and Ireland; Even in the U.S. there are rising concerns about Fannie/Freddie and State Financial conditions e.g. California, New York, Illinois What is the exit path for all the fiscal/monetary stimulus Concern over Bank exposure to commercial real estate

Domestically, economy being driven by: Capital goods markets leading the U.S. recovery with the manufacturing ISM Purchasing Managers Index (PMI) showing a strong “V” shaped recovery Inventory change has become a key contributor to GDP growth Residential markets are sluggish since incentives have expired Sentiment has improved modestly across the U.S. economy

• University of Michigan 2010 Consumer Sentiment survey rose to 76 in June before falling to 67.8 in July, up to 69.8 in August, down to 68.2 in Sept. and 67.9 in October.• Small Business Optimism Index between 87 and 92 in 1H10 (Sept. 92.9;Oct 87.5)

GREAT GLOBAL RECESSION APPEARS TO BE OVER

C&I LOAN DATA SHOWS CREDIT STANDARDS LOOSENING AS RECESSION ENDS

C&I LOAN DATA – 1990 TO PRESENT

U.S. ISM PMI HAS SEEN A SHARP RECOVERY BUT STARTED TO PULL BACK FROM HIGHS

U.S. ISM PMI INDEX – 1992 TO PRESENT

EUROZONE AND CHINA PMI HAVE ALSO SEEN STRONG RECOVERIES

EUROZONE PMI AND CHINA PMI - MARCH 2006 TO PRESENT

GDP REVISION SHOWED WEAKER ECONOMY BUT SAME END TO RECESSION

• Economy was weaker over the past three years driven by weaker housing and consumer spending.

Year Reported GDP Revised GDP

2007 2.1% 1.9%

2008 0.4% 0.00%

2009 -2.4% -2.6%

• But recession likely still ended in Mid-2009

QUARTER INVENTORY % GDP FINAL SALES PCE

1Q09 -$125.8 B -2.5% -3.9% -0.5%

2Q09 -$161.8 B -1.4% 0.2% -1.6%

3Q09 -$128.2 B 1.1% 0.4% 2.0%

4Q09 -$36.7 B 2.8% 2.1% 0.9%

9

Productivity is STRONG coming out of recessions

Date After Recession Growth

1975 2Q 6.5%

1980 4Q 4.4%

1983 1Q 5.1%

1991 2Q 5.9%

2002 1Q 7.2%

2009 2Q 8.4%

10

PRODUCTIVITY GAINS HAVE BEEN SIGNIFICANT SINCE 2Q09 DRIVING 2009-2010 EARNINGS SURPRISES

Productivity usually weak in a recession

Productivity improved since 2Q09 while costs plummetedDate Productivity Unit Labor Costs

2Q09 8.4% 0.6%

3Q09 7.0% -3.3%

4Q09 6.0% -4.2%

1Q10 3.9% -3.7%

2Q10 -0.9% 0.2%

Date Productivity

1981 0.16%

1991 0.23%

2001 3.60%

2008/09 3.50%

IMPROVED PRODUCTIVITY SEEN IN PROFITABILITY REBOUND

• Increased productivity evident in strong operating margin rebound for many companies, post 2009 restructuring

• Margins for many are approaching 2008 levels, though absolute earnings well below prior peaks due to lack of revenue recovery– In 2009 temporary (zero bonus pay-outs, furloughs, pay

reductions, travel restrictions, eliminate overtime) and structural measures (layoffs, plant consolidations and closings, increased automation ) used to reduce costs

– Structural measures will continue to offset the return of temporary costs savings (about 60% of costs).

– Employee compensation (base wages, healthcare) likely outpaces inflation, hiring will be kept in check

Sept. 2010

11

RECESSION LIKELY OVER BUT SLOW RECOVERY UNDERWAY

3Q09 4Q09 1Q10 2Q10

Real GDP 1.6% 5.0% 3.7% 1.7%R

Inventories 1.1% 2.8% 2.6% 0.8%R

(in Billions) -$128.2 -$36.7 $44.1 $68.8R

Final Sales 0.4% 2.1% 1.1% 0.9%R

Domestic FS 1.8% 0.2% 1.3% 4.3%

Net Exports -1.4% 1.9% -0.3% -3.5%R

U.S. ECONOMIC OUTLOOK: Recovery Beginning

REAL GDP SLOW GROWTH

CAPITAL SPENDING TO SLOW

  2005 2006 2007 2008 2009E 2010E 2011E

YEAR/YEAR 3.1% 2.7% 2.1% 0.4% -2.4% 2.8% 2.5%

4Q/4Q 0.1% 2.6% 2.7%

 STRUCTURES

EQUIPMENT AND SOFTWARE

BUSINESS FIXED INVESTMENT

2004 1.1% 7.7% 7.3%

2005 1.5% 8.5% 6.5%

2006 9.2% 7.4% 2.3%

2007 14.9% 2.6% -2.1%

2008 10.3% -2.6% -5.1%

2009E -20.4% -15.3% -17.1%

2010E -12.8% 14.1% 5.2%

2011E 0.5% 9.5% 7.0%

U.S. ECONOMIC OUTLOOK: (CONT’D)

MANUFACTURING OUTPUT STARTING TO RECOVER:

INFLATION PRESSURES FURTHER SUBSIDE:

  2005 2006 2007 2008 2009E 2010E 2011E

YEAR/YEAR 4.0% 2.5% 1.4% -2.2% -9.2% 5.5% 4.5%

  2005 2006 2007 20082009

A 2010E 2011E

CPI 3.0% 2.7% 2.7% 3.8% -0.3% 1.7% 1.6%

CORE PCE 2.3% 2.3% 2.4% 2.4% 1.7% 1.1% 1.3%

MFG IP 1Q 2Q 3Q 4Q

2008A -1.2% -5.4% -9.3% -18.1%

2009A -22% -9% 9% 7.1%

2010E 6.1% 7.9% 3.5% 4.5%

IMPROVING OUTLOOK FOR GLOBAL GROWTH BUT 2011 GROWTH MODERATING

  2006 2007 2008 2009 2010E 2011E 2015E

GLOBAL GROWTH 5.1% 5.2% 3.0% -0.6% 4.8% 4.2% 4.6%

US 2.7% 2.1% 0.4% -2.4% 2.6% 2.3% 2.4%

EU 2.8% 2.7% 0.6% -4.1% 1.7% 1.5% 1.7%

GERMANY 3.0% 2.5% 1.2% -5.0% 3.3% 2.0% 1.2%

FRANCE 2.2% 2.3% 0.3% -2.2% 1.6% 1.6% 2.2%

ITALY 2.0% 1.5% -1.3% -5.0% 1.0% 1.0% 1.3%

UK 2.9% 2.6% 0.5% -4.9% 1.7% 2.0% 2.5%

SPAIN 4.0% 3.6% 0.9% -3.6% -0.3% 0.7% 1.7%

CENTRAL/EASTERN EUROPE 6.5% 5.5% 3.0% -3.7% 3.7% 3.3% 4.0%

JAPAN 2.0% 2.4% -1.2% -5.2% 2.8% 1.5% 1.7%

CHINA 11.6% 13.0% 9.6% 8.7% 10.5% 9.6% 9.5%

INDIA 9.8% 9.4% 7.3% 5.7% 9.7% 8.4% 8.1%

RUSSIA 7.7% 8.1% 5.6% -7.9% 4.0% 4.3% 5.0%

MID EAST 5.7% 5.6% 5.1% 2.4% 4.1% 5.1% 4.8%

BRAZIL 4.0% 6.0% 5.1% -0.2% 7.5% 4.1% 4.1%

MEXICO 4.9% 3.3% 1.5% -6.5% 5.0% 3.9% 4.0%

CANADA 2.9% 2.5% 0.4% -2.6% 3.1% 2.7% 2.1%

*SOURCE: IMF 1010

VIRTUALLY EVERY INDUSTRIAL END MARKET

WAS UNDER PRESSURE IN 2009

Virtually every end market faced lower demand in 2009. Housing fell over 30% to about 900,000 starts in 2008 and is still looking

for a bottom. Housing suffered another 40% decline in 2009 to about 554,000 with stabilization now occurring

Auto outlook remained ugly with 2008 production about 12.6 million falling to about 8.5 million in 2009 as the automotive bankruptcies were offset by the cash for clunkers auto program.

Construction equipment sales and production in 2008 were down 22% to 24% with 2009 now down at least another 45% to 50% as export sales wane and non-residential construction spending falls about 5% (down 11% private and up 3.5% public) in 2009 and likely a similar amount in 2010.

The heavy truck sector saw a decline in production to about 205,000 in 2008 compared to 212,000 NAFTA shipments in 2007, while the decline medium truck (class 5 to 7) was 25% from 206,000 to 157,000 units. The lack of credit, the recession and favorable reviews for the 2010 engines eliminated any emissions related truck pre-buy with 2009 falling another 43% to about 118,000,units with a similar decline in the medium truck sector. There was, however, an Engine pre-buy because of rising prices.

Global steel demand plummeted 8% in 2009 after falling 1% in 2008 with developed economies particularly hard hit: -36% U.S., -26% Japan, -29% Germany; though China, the largest producer, grew 14% in 2009.

SLOW INDUSTRIAL CAPACITY UTILIZATION RECOVERY IN 2010

We have dug a deep hole to climb out of in 2010 and 2011 Manufacturing Capacity Utilization is now in the Low 70’s

compared to more normal 78% to 80% Virtually Every Industrial Sector is Currently Over-Capacitized

Globally

2010 WILL FAVOR SHORT-CYCLE, PRODUCTIVITY & EFFICIENCY

LITTLE NEED FOR CAPITAL EQUIPMENT FOR EXPANSION IN 2010 Need to absorb excess capacity Only exception may be for new products Production increases mostly related to end of inventory

liquidation; production level will more closely match end market sales

Smaller, lighter equipment likely to outperform heavy equipment which could decline through 2010

2010 WILL FAVOR ENERGY EFFICIENCY, AND PRODUCTIVITY ENHANCEMENT

FASTER RECOVERY FOR TECHNOLOGY, COMPONENTS (MRO AND INVENTORY RESTOCKING) AND CONSUMABLES AS INDUSTRIAL PRODUCTION RISES

LENGTH OF BULLWHIP EFFECT IS KEY

CURRENT ECONOMIC DATA IS MIXED: FOR NOW ITS SLOWER GROWTH NOT DOUBLE DIPTHE POSITIVES• A Major upward revision in personal saving rate coincided with a sharp decline in overall financial

obligations as a percentage of disposable income suggesting that the consumers are in better shape than suggested by earlier data

– The savings rate peaked at 7% in 2Q09 and remained above 5% all year

– 1Q10 savings rate was 5.5%; 2Q10 was 6.2%; July 5.7% and August 5.8%

• We are seeing decent real growth in 2Q10 GDP data in disposable income (4.4%), excellent growth in exports (9.1%) and business spending for equipment and software (24.8%)

THE NEGATIVES• 2Q10 growth in housing (25.7%) and state and local government spending (0.6%) is clearly

temporary.

– Consumer confidence indexes are consistent with stagnation in real consumption

– Housing still mired at low levels of 8 months ago falling back after end of new buyer incentive programs

– New $26 B emergency legislation being passed to fund state and local governments to prevent /limit layoffs—($16 B to fund Medicaid obligations and $10 B for teachers’ pay)

• The current high level of inventory growth ($68.8B ) is likely temporary;

• Poor July jobs reports with only modest August gains continues trend of slow recovery in employment

THE CONSUMER IS STILL RELUCTANT AND UNLIKELY TO LEAD

• CONSUMER SPENDING REMAINS SLUGGISH

PERSONAL CONSUMPTION EXPENDITURES:

2008 2009 2010

1Q -0.8% -0.5% +1.9%

2Q +0.1% -1.6% +2.2%

3Q -3.5% +2.0%

4Q -3.3% +0.9%

• LACK OF CONFIDENCE IN THE ECONOMY; Even the FED is concerned • CHANGING CONSUMER SPENDING PATTERNS

“just drop off the key, Lee, and set yourself free”-Paul Simon Apple up 94%; Starbucks 61%, Mercedes 25%--splurge in hi-end electrics P&G struggling as consumers cut back name brand shampoo and toothpaste;

Dollar stores instead of Target

JOBS OUTLOOK: NO PENT UP DEMAND ANYWHERE

• JOBS OUTLOOK STILL GOING NOWHERE– Private sector gains of 64,000 in September, a slowdown

from 93,000 in August and 117,000 in July

– Overall number negative 95,000 reflecting 159,000 decline in Government jobs of all levels

– Flat hourly wages at $22.67

• BUT SOFTNESS BENEATH THE SURFACE– Length of work-week barely budged in 6 months

– Number working part-time continues to climb

– 6,000 shrinkage of manufacturing jobs in Sept Vs. 28,000 decline in August; is uptick in Manufacturing over?

– Unemployment at 9.6%, but under-employment rises from 16.7% to 17.1%

Eli Lustgarten

21

A SLOWING OF MANUFACTURING MAY LIE AHEAD• September PMI of 54.4 compares to 56.3 in August, 55.5 in July, 56.2 in June, 59.7 in May, 60.4 in April, 59.6 in March, 56.5 in February and 58.4 in January

– Orders of 51.1 in Sept, 53.1 in August, 53.5 in July, 58.5 in June, 65.7 in May and April, – Production 56.5 in Sept.,59.9 in August, 57 in July,61.4 in June, 66.6 in May, 66.9 in April– Employment 56.5 in Sept.,60.4 in August, 58.6 in July, 57.8 in June, 59.8 (May), 58.5 (April)– Inventory 55.6 in Sept., 51.4 in August, 50.2 in July,45.8 in June, 45.6 (May), 49.4 (April)– Customer Inventories are still low at 42.5 in Sept.,43.5 August, 39 July,38 in June, 32 May– Ratio of Sept. production/Inventory of 1.02 (vs.1.16 in Aug) and orders/inventory of 0.92 (vs.1.03) continue to suggest an ISM PMI remaining over 50 but slowing.

• Auto Sales are up (sensitive to incentives) but stabilizing resulting in likely lower 2H10 production levels with potential for schedule reductions in 4Q

• Global PMI continuing to Improve in Europe even with Sovereign Debt Issues; Euro 10% rebound has quickly eliminated short-term currency advantage for their exports• China Growth continues but showing signs of slowing; PMI rebounds to over 50 in August

(in millions) Jan Feb Mar Apr May Jun Jul Aug Sep

Auto Sales 10.8 10.36 11.8 11.8 11.6 11.1 11.56 11.47 11.73

HOW MUCH LONGER WILL THE BULL-WHIP EFFECT CONTINUE

• Domestic manufacturing plummeted in the fall of 2008 as industrial production turned sharply negative

– Capacity utilization dropped to the mid 60’s from near 80%

– ISM PMI index plummeted to a low of 32.9 in December 2008

– European PMI bottomed at 32.5 in February 2009; China was also down significantly

• Manufacturers underwent an unprecedented inventory liquidation hitting a record $162B annual rate in the second quarter of 2009.

• THE BULL –WHIP (Forrester Effect):

– In heavier industries, the at least one-third drop in sales in most markets caused

– Production to decline by over 50% as inventories were sharply reduced

– Causing 50% to 75% or more declines in purchases of raw materials and components.

• The positive BULL-WHIP effect began in late in 2009 and with earnest in F2010

– Industrial companies are trying to raise production and stabilize their supply chain much higher levels than the trough of 2009 but well below production levels of 2006 to 2008.

– CAT: flat 2010 sales would result in a 10% to 15% production increase and a 30% to 40% increase in supplier purchase

– Note: CAT’s sales are projected to rise 25% in F2010.

• It appears that the bulk of the BULL-WHIP effect will taper out in 2H10 most likely by the fourth quarter

SLOW CLIMB BACK TOWARD MORE NORMAL DEMAND

• Real growth in demand will most likely be the driver of economic growth in 2011

– Supply chains will likely have been stabilized by 2011

– Focus is to improve Factory Thru-put to reduced field inventories

– Companies employ lean techniques striving to operate with reduced inventory levels compared to history

• Impact of Government stimulus program will wane without a new round of incentives

• Congress has bipartisan bill supporting extension of accelerated/bonus depreciation rules set to expire at year end 2010. Proposed 1 year write-off of Capital expenditures would bring demand forward in 2011 at expense of 2012

• Key risk is government policy mistakes

• Will movement to “Re-Shoring” effect to reduce the length of the global supply chain have a material effect?

2011-2012: FINDING THE NEW LEVEL OF NORMAL DEMAND

• New more NORMAL level of demand perceived to be lower than end market demand realized in 2006-2008

– Auto unlikely to return quickly to 16 to 17 million car sales that prevailed from 1999-2005; perhaps 12.0 million to 14.0 million is the new norm;

– Housing unlikely to return quickly to 2 million starts; New norm may be 1.3 to 1.6 million over the next few years with cautious funding keeping starts below 1 million at least through 2011.

– Truck market likely to return to more normal levels of demand as early as 2011 e.g. class 8 trucks in the 175,000 to 225,000 range. Prior level peaks of over 300,000 unlikely until at least the next emission cycle;

– Construction and mining, engines and turbines, railcars and other heavy equipment face a slow recovery through 2012 to levels likely below 2006 to 2008

– Steel production follows heavy equipment and infrastructure spending with slow recovery through 2012

• Electrical markets probably resume growth post 2010 driven by improving capital spending trends and the initial recovery of both residential and non-residential markets.

• Energy/Alternative Energy markets await resolution of Government policies and priorities to resume growth.

• Farm equipment end market demand growth dependent on global economic growth, global demand and weather. Growth likely in 2011 as recent global weather issues in the Northern Hemisphere have offset the risks associated with the potential of large global crops depressing commodity prices.

26

Farm Equipment

GLOBAL WEATHER PROBLEMS REDUCE DOWNSIDE RISKS

THROUGH JUNE 2010, FARM COMMODITY PRICES WERE SOFTENING

28

SPRING DATA SUGGESTED LARGE CROPS BUT RECENT WEATHER MAY PUSH PRICES HIGHER

09/10A 10/11E 09/10A 10/11E 09/10A 10/11EACRES PLANTED (MILLIONS) 59.1 53.8 86.5 88.8 77.5 78.1YIELD (BU/ACRE) 44.4 43.3 164.7 163.5 44 42.9PRODUCTION (MILLION BU) 2,216 2,043 13,110 13,370 3,359 3,310END STOCKS (CARRYOVER) 950 997 1,738 1,818 190 365PRICE ($/BU) $4.90 $4.10-$5.10 $3.50-$3.70 $3.20-$3.80 $9.50 $8.00-$9.50

CORNWHEAT SOYBEANS

Source: USDA WASDE May 2010

FARM CASH RECEIPTS ARE STILL NEAR RECORD LEVELS

Source: DEERE & CO

ATYPICAL JULY/AUGUST 2010 WEATHER CHANGES OUTLOOK FOR COMMODITY PRICES

• Weather concerns about current harvest in some key Northern Hemisphere regions have driven recent global Ag commodity price significantly higher

• Global wheat and coarse grain production according to the International Grain Council (IGC) has been reduced by 23 million tons from a previous near-record 1,782 million to 1,753 million.

– Grain crops have been significantly affected by the adverse July weather in parts of the Black Sea region, the EU and Canada

– The impact has been mostly in the northern hemisphere wheat and barley crops in which projections have been lowered by 13 million and 7 million tons respectively.

• Reduced grain crop prospects have also reduced consumption forecasts, mainly feed, resulting in a reduced projection for 2010/2011 global consumption to increase 0.8% to 1,774 million tons. (prior forecast for 2010/11 was 1,781 million tons, up 1.1% from 1,761 million in 2009/10))

• With global crop forecasts reduced more than consumption, 2010/2011 world carryover stocks for grain are now projected by the IGC to be 18 million tons lower to 369 million tons. This is 21 million tons below the 2009/2010 carryover of 390 million, but FLAT with the 2008/09 carryover of 369 million tons.

• Global supplies are viewed by the IGC and most Ag economists to be ample.

2010 GLOBAL CROP OUTLOOK AFFECTED BY ATYPICAL WEATHER

10/11E 10/11E(6/24/2010) (7/29/2010)

WHEATPRODUCTION 598 609 686 677 664 651TRADE 111 110 136 124 120 120CONSUMPTION 610 613 639 648 658 655CARRYOVER 124 121 168 197 201 192Y/Y Change (13) (3) 47 29 (5)

CORNPRODUCTION 710 795 796 805 824 823TRADE 87 101 84 84 88 88CONSUMPTION 725 775 779 817 830 830CARRYOVER 117 136 153 140 137 134Y/Y Change (16) 19 17 (13) (6)

TOTAL GRAINSPRODUCTION 1588 1697 1798 1782 1776 1753TRADE 222 239 249 235 234 234CONSUMPTION 1629 1685 1722 1761 1781 1774CARRYOVER 281 293 369 390 387 369Y/Y Change (41) 12 76 21 (21)

WORLD ESTIMATES 06/07 07/08 08/09 09/10E(in Million tons)

COMMODITY PRICES JUMP ON WEATHER FEARS

Source: Thomson Reuters Datastream

10 17 24 31 7 14 21 28 5 12 19 26 2May 2010 Jun 2010 Jul 2010

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

Wheat, No.2 Hard (Kansas) Cts/Bu (USD)

Wheat Prices Soar on Weather Fear in Northern Hemisphere…

…As do Soybean Prices.

…Corn Prices follow….

Eli LustgartenD. Mark Douglass33

Crop May 2010 July 2010 Sept 2010 Oct 2010

Wheat Carryover 997 1093 902 853

Price $4.10 - $5.10 $4.20 - $5.00 $4.95 - $5.65 $5.20 - $5.80

Corn Carryover 1,818 1,373 1,116 902

Price $3.20 - $3.80 $3.45 - $4.05 $4.00 - $4.80 $4.60 - $5.40

Soybean Carryover 365 360 350 265

Price $8.00 - $9.50 $8.10 - $9.60 $9.15-$10.65 $10.00 - $11.50

USDA CROP OUTLOOK TIGHTENING

FARM EQUIPMENT OULOOK FOR 2010-2011 IS IMPROVING

2010 Outlook Modestly Improving

2011 Outlook Now for Moderately Higher Equipment Sales – Up 5% to 15% or More Globally

Tractors Growth Combines Growth

Worldwide 0% to +5% Worldwide (0 to 5%)

North America

0% to +10% North America

0% to +5%

<40HP 0% to 5%

40 to 100 HP

(0% to 5%)

100 HP+ +5% to 10%

Western Europe

(10% to 25%) Western Europe

(25% to 30%)

Latin America +20% to 25% Latin America +25% to 30%

ROW (0 to 5%) ROW (10 to 15%)

ETHANOL MANDATE MAY BE HIGHER THAN MARKET CONDITIONS CAN SUPPORT

• Renewable fuels mandates per EISA 2007—2011 CORN STOCK TO USE RATIO PROJECTED AT 6.7%--2ND LOWEST ON RECORD

YearRenewable

BiofuelAdvanced

BiofuelCellulosic

BiofuelBiomass-

based Diesel

Undiff-erentiated Advanced

Biofuel

Total RFS

2008 9 92009 10.5 0.6 0.5 0.1 11.12010 12 0.95 0.1 0.65 0.2 12.952011 12.6 1.35 0.25 0.8 0.3 13.952012 13.2 2 0.5 1 0.5 15.22013 13.8 2.75 1 1.75 16.552014 14.4 3.75 1.75 2 18.152015 15 5.5 3 2.5 20.52016 15 7.25 4.25 3 22.252017 15 9 5.5 3.5 242018 15 11 7 4 262019 15 13 8.5 4.5 282020 15 15 10.5 4.5 302021 15 18 13.5 4.5 332022 15 21 16 5 36

Source: EISA 2007

36

Power Generation

STILL IN DESPERATE NEED OF AN ENERGY POLICY

37

AFTER 2 YEARS OF USAGE DECLINE..

38

RESERVE MARGINS CONTINUE TO IMPROVE…

39

PLANNED CAPACITY ADDITIONS HAVE SLOWED

FUEL (in MW)

2009E 2010E 2011E 2012E 2013E

Coal 4,765 5,932 2,837 7,156 630

Natural Gas 11,388 9,950 8,804 10,208 5,191

Nuclear 1,270

Wind 9,459 2,259 1,591 25 16

Petroleum 748 568 200

Solar 145 468 375 950

Other 594 364 184 1,132 457

TOTAL 27,099 19,841 13,991 20,741 6,294

WIND FACES UNCERTAIN GROWTH IN 2010

WITH FAVORABLE STATE AND FEDERAL POLICIESUS wind sector on path for 165GW of installed capacity by 2025Total wind capacity would be about 200 GW representing about 5% of US energy sources.

NEAR-TERM POLICIES CREATE UNCERTAINTYProblems include Transmission congestion and fall electrical demandNeed Coordinated NATIONAL Transmission policies and National Renewable Energy Policy/Federal Energy Policy

BIG CAPACITY ADDITION DROP LIKELY IN 2010 FROM 9,922MW IN 2009Only 500MW installed in 1Q10Only 700MW installed in 2Q10

CLEAN ENERGY, JOBS, AND OIL COMPANY ACCOUNTABILITY ACT

• NEW SENATE BILL INTRODUCED AT END OF JULY

• NO CAP ON CARBON EMISSIONS FOR ELECTRIC POWER SECTOR

• NO RENEWABLE ENERGY STANDARD (RES) WITH 15% TARGET BY 2021

• China wind/solar low carbon technology investment is currently $11.9B compared to $4.9B in the U.S. and $4.5B in Europe• 28 states and District of Columbia have RES targets that are higher than 15% TARGET missing from the Senate Bill

42

Automotive

THE UGLINESS IS OVER; FOR NOW ITS JUST UGLY

SALES CYCLE IS IN MASSIVE DECLINE

SOURCE:DESROSIERSAUTOMOTIVE CONSULTANTS44

45SOURCE:DESROSIERSAUTOMOTIVE CONSULTANTS

46SOURCE:DESROSIERS

AUTOMOTIVE CONSULTANTS

AUTO INDUSTRY FACES SOME DIFFICULT YEARS

OE GLOBAL OEM PRODUCTION

REGION 2008 2009E 2010E

DETROIT 3 16.6 11.8 13.3

EUROPE OEM 18.6 15.9 16.9

JAPAN/ KOREA OEM 21.1 17.5 19.9

OTHER (INDIA,CHINA) 10.4 9.6 10.6

TOTAL 66.7 54.8 60.7 Source: CSM

YearNAFTA PRODUCTION (in

millions

2004 15.8

2005 15.75

2006 15.25

2007 15

2008 12.6

2009E 8.5

2010E 11.3-11.5

2011E 12-13

European build 2009: 15.9 Million, -25% 2010: 16.9 to 17.5 Million 2011: 17.5 to18.5 Million

SLOW RECOVERY FOR APPLIANCES

KEY DRIVERS: HOUSING, JOBS AND CONSUMER BEHAVIOR

48

KEY DRIVERS OF APPLIANCE SALES

• New housing completions

• Existing home sales

• Unemployment rate

• Growth in replacement demand

• Consumer spending and income

49

STATE OF THE APPLIANCE INDUSTRY 2009

• CORE APPLIANCES — 36,848,000 TOTAL UNITS– REFRIGERATION 28.3% COOKING 17.1%

– LAUNDRY 39.9% DISHWASHERS 14.7%

• DOLLAR VALUES– REFRIGERATION $8.2B

• SIDE BY SIDE $2.5B; TOP FREEZER $2.6B

• BOTTOM FREEZER $2.4B; FREEZER $0.7B

– LAUNDRY $8.1B• WASHERS $4.6B; DRYERS $3.5B

– COOKING $4.9B

– DISHWASHERS $2.4B

Source: AHAM;The Stevenson Co.50

AHAM DATA STILL HISTORICALLY WEAK

51

RECESSIONS IMPACT APPLIANCE DEMAND

• Core Appliance Sales Decline in Recessions– 1970 -2.8% 1988-91 -7.2%

– 1974-75 -28.5% 2000-01 -0.5%

– 1979-82 -25.5% 2006-09 -22.2%

• Appliance Sales Improving Since Early 2009– Sales surged in November 2009 (Black Friday) and

– April 2010 (Cash for Appliances)

• 2010 Sales are UP 6.2% YTD– Refrigerators 15.4% led by side by side up 13.3% and bottom

freezer up 45.6%

– Cooking up 6%

– Laundry up 1.8% led by Front Loaders up 4.3%

– Dishwashers up 7.4%Source: AHAM; The

Stevenson Company52

MODEST GAINS FOR APPLIANCES IN 2010-11

• Key Near-Term Factors– Housing Outlook—

• 2009-550,000;

• 2010E 600,000-650,000;

• 2011E 850,000 to 900,000 May be a Stretch; 750,000-800,000 more likely

– Jobs---Slow Recovery

– Consumer Behavior

• New Construction used to be 20% of Market; Now 8%

• Outlook is for Modest Gains– 2009A 2010E 2011E

– -8.2% +3% to 5% +3% to +8%

53

BRAND SHARES ARE CHANGING

• WHIRLPOOL LARGEST MARKET SHARE

• Whirlpool 34% LG 7% Other 7%

• Kenmore 19% Samsung 4%

• GE 18% Electrolux 11%

• THE FOREIGNERS ARE COMING

• 1H2010 STRONGEST PRODUCT

• LG 7.7% Front Load 24.7%

• Samsung 4.8% Bottom Freezer 21.8%

• Bosch 1.9% Dishwasher 7.2%

• Haier 0.5% Compact Refrig 5.9%

Source: AHAM; The Stevenson Company54

TECHNOLOGY AND DESIGN MATTER

• Stainless Steel Keeps Growing– YTD 2010 29.5% 2005 21.8%

– 2009 28.0% 2004 17.3%

– 2008 27.0% 2003 13.4%

– 2007 26.8% 2002 8.5%

– 2006 24.5% 2001 5.2%

• AS Does Energy Star Sales– YTD 2010 76.3%

– 2009 54.5%

– 2008 45.1%

– 2007 40.2%

Source: AHAM; The Stevenson Company55

ON HIGHWAY VEHICLES:

Will the Slow Recovery Gain Steam in 2011?

US TRUCK FREIGHT MOVEMENT IN MODERATE RECOVERY

2010-PRE-BUY WAS ONLY FOR ENGINES

Companies BUY TRUCKS TO MOVE FREIGHT Pre-buy of trucks unnecessary – You don’t move freight in a recession!

Weak economy kept freight demand soft for most of the year; Current equipment in good condition though average fleet age was creeping up

at 6.2 years. Age doesn’t matter if you are not moving freight! Plenty of capacity available; USED TRUCK PRICES VERY WEAK Used capacity came to market as companies fail; failure rate was 1,000

companies per quarter freeing 40,000 trucks Potentially more favorable economics for 2010 engines compared to 2007 if

increase in fuel economy is correct

2010 Truck Prices are up substantially Volvo $9,600 Daimler-Benz w/ Cummins Engines up $6,700 to $7,300; with Detroit Diesel

Big Bore $9,000 Navistar $6000 (MaxxForce 7,DT, 9 10) to $8,000 (MaxxForce 11,13)

Class 8 Heavy-Duty Diesel Truck Demand:A Return To Normal Levels?

Source: ACT/FTR

2007 212,000

2008 205,000

2009a 118,400

2010E 140,000-150,000 (We are at 145,000)

2011E 175,000-225,000 (We are at 195,000)

Economic Environment for Trucking Improving

Domestic economic environment improving with rising industrial production

Total freight ton-miles declined about 2.9% in 2008 and near 8% for all of 2009; Look for growth of at least 2.5% to 3% in 2010

and about 4% or more in 2011 Truck ton-miles down about 5.7% in 2008 and

about 9.5% in 2009; Likely to rise near 4% in 2010 and 5% to 6% in

2011.

60

Roadmap to Equipment Demand Recovery

Growth in freight tonnageincreases for Used trucks/New trucks with 2009

engines which cost less than new 2010 enginesTruck Production in 1Q10 remained strong reflecting

inventory Turned positive on a YOY basis in 1H10Existing stock will handle freight upturnDemand of pre-2010 engines (2010Trucks, 2009 engines)

Transition from old engines to 2010 engines will likely begin late 2Q10 AT THE EARLIEST

Economic recovery, increased truck capacity utilization, and improving trucker bottom-line will translate into replacement of aging equipment in 2011-2012.

61

TRUCK SECTOR SHOULD LEAD INDUSTRIAL MARKET GROWTH IN 2011

• Why do you a buy a truck? The answer, to “Move Freight “(Class 8) or for the “Delivery of goods/services and support a business” (Class 4 to 7). Economic growth will drive an increase in truck demand

• Truck tonnage continues to grow; Excess capacity still exists in the industry; driver shortage is a key to the level of future demand

• Large fleets are now making money and have access to capital; medium/small fleets are still having a hard time getting capital

• Recent surge in orders is for near-term production; 3Q2010 has about 8,800 unfilled slots on a production schedule of about 39,000 and 4Q2010 has 24,900 unfilled slots on a 39,600 production schedule. Monthly orders of only 8,400 needed to fill the remaining slots in 2010. BUT, most of early 2011 production schedule needs to be filled

• WATCH October and November orders for Key to 2011

• Economic slowdown may not sustain future strong order activity favoring perhaps a more conservative increase next year

Eli LustgartenD. Mark DouglassRichard Marshall

62

NAFTA Truck Production Forecast

• DEFENSE OUTLOOK IS AS UNCERTAIN AS IT HAS EVER BEEN IN HISTORY!

63

Year Class 8 Medium Truck Trailers

2006 376,000 274,000 303,000

2007 212,000 206,000 229,000

2008 205,000 157,000 155,000

2009 118,400 97,700 78,000

2010E 145,000 110,000 110,000

2011E 195,000 170,000 150,000

2012E 250,000 205,000 210,000

Non-Truck Diesel Engine Sales May Benefit From a Modest Pre-Buy in 2010

• Off the road and other segments face new emissions mandates

– Interim Tier 4 (2011) which is similar to Truck 2007 when prices rose $4,000 to $6,000-

• Phased in requirements starting with over 174HP in 2011;

• Credits will be used for some models

– Final Tier 4 (2014) which is similar to Truck 2010 when prices rose $8,000 to $10,000

– Europe (Euro 4, Euro 5 and Euro 6) and Emerging Markets have similar standards going into place

• CAT has warned industry to expect up to $14,000 in higher prices between 2011 and 2014 which will be phased in over the period

64

Fluid Power:

DIFFICULT 2009; THE BULL-WHIP DRIVES 2010

AUGUST 2010 FLUID POWER SURVEY: BULL-WHIP ENTERING LATER STAGE

• YEAR OVER YEAR DEMAND STABILIZING AT HIGH LEVELS

• YoY demand growth now flat for a majority of contacts

• Certain industries are better including agriculture, food processing, mining and manufacturing

• MRO remains steady; project activity is mixed

Eli LustgartenD. Mark DouglassRichard Marshall

66

AUGUST 2010 FLUID POWER SURVEY: YOY DEMAND STABILIZING AT HIGH LEVELS

 

67

BULL-WHIP ENTERING LATER STAGE

• SEQUENTIAL DEMAND FALLS; LARGELY FLAT

• Contacts report that they were generally busier during the late spring and earlier summer months and have now experienced somewhat of a decline.

• Agriculture according to the majority of contacts is responsible for a large part of their demand.

• Construction and mining equipment demand seems to have slowed a bit it is still showing some strength

• Demand from the food processing industry is still doing well; contacts expect more demand from harvest season

• PRICING REMAINS STRONGWITH YEAR OVER YEAR GAINS OF ABOUT 3% TO 5%

68

SEQUENTIAL DEMAND FALLS, NOW LARGELY FLAT

69

SALES OUTLOOK NEUTRAL

• DEMAND SHOULD STAY AT OR NEAR CURRENT LEVELS

• The outlook is largely neutral, in part due to economic and political uncertainty.

• Contacts are also not seeing such robust demand this quarter.• Certain industries do seem to be seeing stronger demand such

as agriculture and excavator equipment.• However, a source at a cold drawer in the Great Lakes region:

"I just got the fourth-quarter forecast for Caterpillar (Inc.). Their forecast is coming way down. They're looking to go a little quiet. Some customers are full-speed ahead," although some never got out of the recession (AMM 9/10).

70

SALES OUTLOOK: DEMAND SHOULD STAY AT OR NEAR CURRENT LEVELS

71

72

2007E 2008E 2009E 2010E 2011EMobileFarm machinery 8% 5% -20% 15% 8%Lawn & garden -10% -5% -22% 7% 7%Construction -16% 12% -65% 45% 15%Mining 5% 10% -40% 50% 12%Mobile/aftermarket 0% -4% -45% 25% 10%Other 3% 10% -25% 20% 20% Total--Mobile

Industrial Machine tools 9% -2% -40% 60% 15%Paper machinery 7% -10% -20% 10% 7%Food 7% 3% -10% 10% 7%Chemical 12% 5% -20% 15% 15%Plastics -5% -10% -20% 10% 10%Packaging 0% 0% -20% 10% 10%Industrial aftermarket 7% 5% -25% 30% 15%Other 6% 3% -20% 25% 10% Total--Industrial

Total

Total Change in Fluid Power Market -0.8% 6.0% -36% 30.1% 13%

Fluid Power End Use Breakdown of Some Key Sectors (percent)

CONSTRUCTION EQUIPMENT:

RECOVERY IS ON THE HORIZON

2009 CONSTRUCTION DEMAND WAS VERY WEAK

CONSTRUCTION EQUIPMENT %CHANGE 2009/08ELIGHT EQUIPMENT WORLDWIDE -45%

o   North America -49%

o   Western Europe -49%

o   Latin America -54%

o   Rest of World -36%

HEAVY EQUIPMENT WORLDWIDE -30%

o   North America -47%

o   Western America -56%

o   Latin America -56%

o   Rest of World -14%Source: CNH; Caterpillar, Deere, Terex, LBR Forecasts

1H10 CONSTRUCTION EQUIPMENT SALES WERE DRIVEN FROM DEMAND ABROAD

Light Equipment 1H10

Worldwide +33%

North America +7%

Western Europe +10%

Latin America +98%

ROW +69%

75

Heavy Equipment 1H10

North America -1%

Western Europe +1%

Latin America +126%

ROW +97%

1H10 Detail Light Heavy

Brazil 106% 162%

Argentina 136% 120%

Australia/NZ 137% 98%

CIS 264% 207%

China 95% 102%

Turkey 244% 393%

South Africa 142% 44%Source: CNH, CAT, DE, LBR

OUTLOOK FOR 2H10 AND 2011 IS IMPROVING

• The environment for construction activity for the rest of 2010 and 2011 will improve over 2009, but be less than robust

– Key is financing availability; institutions will likely to be reluctant to rapidly expand availability– Defining government rules for stimulus programs will determine the success of getting stimulus

dollars into this sector• Housing will likely show improvement over the next two years rising from about 550,00 starts in 2009 to

perhaps 600,000 to 650,000 plus in 2010 and perhaps 750,000-800,000 or more (WE HOPE) in 2011.– The NAHB recent forecast of housing starts for 2010 of 656,000 (recently lowered to 632,000 and

now 610,000), up from 554,000 in 2009 is no longer viewed as extremely conservative.– NAHB 2011 forecast of 871,000 (was 906,000) for 2011 is less certain today. Perhaps 750,000 to

800,000 is more likely.• Non- residential construction is expected to fall 10 % to 20% in 2010 and perhaps stabilize in 2011 before

resuming growth sometime that year.• Infrastructure spending will likely be relatively flat into 2011 or at least until a new Highway Bill is passed.

History suggests that growth will resume about a year after the new Highway Bill has been funded– New short-term $50B infrastructure proposal on horizon to stimulate economy and jobs growth.

• For 2011 we expect at least a mid-single digit gain in construction spending led by residential spending and a modest turnaround in the non-residential sector (up 3% to 10%).

• By 2012, new legislation should relieve the bottlenecks in infrastructure and other public works markets leading to vastly improve activity.

76

EMERGING MARKETS LEAD 2010 CONSTRUCTION EQUIPMENT RECOVERY

Light Equipment % Change

Worldwide 20% to 25%

North America 5% to 10%

Western Europe 0% to 5%

Latin America 60% to 70%

ROW 30% to 35%

77

Heavy Equipment % Change

Worldwide 30% to 35%

North America 0% to 5%

Western Europe -5% to 0%

Latin America 60% to 65%

ROW 40% to 45%Source: CNH, CAT, DE, LBR

DOMESTIC CONTRUCTION EQUIPMENT DEMAND DRIVEN BY EXPORTS AND END OF INVENTORY LIQUIDATION

• DOMESTIC Construction equipment end market demand in F2010 looks up modestly in F2010.

• Production will increase 20% to 30% or more due to the end of inventory liquidation and exports which will allow OEM’s to produce at or near retail demand.

– The domestic upturn will initially favor smaller to medium equipment (more units, less dollars) which has been declining for the past three to four years.

– Equipment for rental companies will likely see an upturn in demand as contractors may favor rental rather than outright purchases

– Heavy equipment demand will likely be soft in F2010;

– Global Mining equipment demand has fully recovered because of demand from emerging markets.

• F2011 will likely be a better year for all classes of machines with sales and production rising at least double-digits (10% to 15%) assuming sustained growth in the global economy.

• Global mining equipment demand up 10% to 20% in 2011 and perhaps an additional 10% to 15% in 2012.

78

• Current Sales in NA Well Below Replacement Levels even at current level of construction activity

• Classic Recovery Signs– Used Equipment Prices are Rising

– Rental Fleets Expanding • (CAT’s rental fleets are down 40% and aging)

– Aftermarket demand improving

• With More Normal Industry Activity, Construction Equipment demand should rise materially

79

2012: REPLACEMENT MARKET KEY TO NA DEMAND

Machine Tools:

SURPRISINGLY STRONG RECOVERY IN 2010

MACHINE TOOLS: A SURPRISINGLY STRONG REBOUND

STRONG UPTURN IN 2010 AFTER 58% DECLINE LAST YEAR WITH METALCUTTING DOWN 61%

UPTURN DRIVEN BY BIG STEP UP IN FOREIGN DIRECT INVESTMENT, AND A DOUBLING OF SPENDING BY AEROSPACE AND CONSTRUCTION EQUIPMENT COMPANIES

REBOUNDING OFF DEEP TROUGH, BUT ONLY APPROACHING 2005-LEVELS

82

MACHINE TOOLS: A SURPRISINGLY STRONG REBOUND

2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E

Metalcutting $2,369 $1,906 $1,737 $2,775 $2,935 $3,703 $3,982 $3,897 $1510 2575 $3,220

% Ch -33% -20% -9% 60% 6% 26% 7.5% -2.1% -61% 70.5% 25%

Metalforming $347 $345 $295 $366 $397 $395 $441 $501 $236 $170 $205

% Ch -45% 0.5% -15% 24% 8% -0.5% 12% 13.5% -53% -28.0% 21%

Total $2,716 $2,251 $2032 $3,143 $3,332 $4,098 $4,423 $4,398 $1,746 $2.745 $3,425

% Ch -35% -17% -10% 55% 6% 23% 8% -0.5% -60% 57% 25%

• Machine tool markets should still see reasonably strong growth into 2011 as they climb out of deep hole but still may not even be at 2006 levels until 2012

Industrial Markets Outlook:

The Search for the New Normal

84

Speech to the AMT GLOBAL FORECASTING AND MARKETING CONFERENCE

Eli S. LustgartenSenior Vice-President, Longbow Securities

OCTOBER 20 , 2010