Caterpillar, Inc.

Good morning, ladies and gentlemen, and welcome to the Caterpillar 4Q 2019 Analyst Conference. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Jennifer Driscoll. Mom, the floor is yours.

Thank you, Paul. Good morning, everyone. Welcome to Caterpillar's fourth quarter earnings call. Joining us today are Jim Umpleby, Chairman of the Board and CEO, Andrew Bonfield, CFO, Kyle Epley, Vice President of our Global Finance Services Division, and Rob Rengel, Senior IR Manager. Our call today expands on our earnings release, which we issued earlier this morning. You'll find slides to accompany today's presentation, along with the release, in the Investors section of Caterpillar.com under Events and Presentation. For retail stats, look at our 8K filed a few minutes after that. As shown on slide two, any forward-looking statements we made today are subject to risks and uncertainty. We also make assumptions that could cause our actual results to be different than the information we discussed today. Please refer to our recent SEC filings and the forward-looking statements reminder in today's news release for details on factors that individually or collectively could cause our actual results to vary materially from our forecast. Let me remind you that Caterpillar has copyrighted this call. We prohibit use of any portion of it without our prior written approval. As previously indicated, today we're reporting adjusted profit per share in addition to our U.S. GAAP results. Our adjusted profit per share for the fourth quarter excludes a pension and OPEB mark-to-mark adjustment for the remeasurement of pension and other post-employment benefit plans. The adjustment was $0.65 per share in the fourth quarter, or $0.64 per share for the fiscal year. Our adjusted profit per share for the full year also excludes the $0.31 discrete tax item from the first quarter of 2019. In the 2018 fiscal year, adjusted profit per share excludes restructuring costs in addition to both tax-related and pension OPEB mark-to-market adjustments. Our U.S. gap-based guidance for 2020 profit per share includes estimated restructuring costs for the year and continues to exclude pension and OPEB mark-to-market impacts. Now let's turn to slide three and turn the call over to Jim for his perspective on 2019 and our outlook for 2020.

Thanks, Jennifer. Good morning, everyone. Thank you for joining Catecholar's fourth quarter earnings call. I plan to cover three topics this morning. First, I'll summarize our fourth quarter and full year 2019 results. I'll also provide an update on the progress of our enterprise strategy and as well as some color on how the year ended versus our investor day targets. I'll finish with our expectations for 2020. I'm pleased with the way our team is executing, notwithstanding the difficult economic environment, which led to a decline in sales to users during the fourth quarter. I'll describe the segments later in the call, but just to give you a brief overview. Sales to users for all three segments were lower than our expectations. In resource industries, we continue to see strong quoting activity in mining, as most commodities remain at investable levels, but customers are being cautious due to global economic conditions. While we experienced a decline in mining sales in the fourth quarter, we continue to believe there will be a gradual recovery in our sales to mining customers. Our mining sales are lumpy, so there can be significant variation between quarters. Energy and transportation was a mixed bag due to the diversity of our end markets. North American onshore oil and gas activity remained depressed, As we expected, both solar and rail had a solid fourth quarter. In construction industries, end-user demand has softened, particularly in North America. As our earnings guidance indicates, we see some slowing across all three primary segments. We are ready to respond quickly to positive or negative developments in our end markets. We're doing what we said we'd do at our Investor Day in May. by achieving our financial targets, continuing to invest in services and expanded offerings, and returning cash more consistently to shareholders. Sales and revenues for the fourth quarter declined 8% versus our assumption of down mid-single digits. Volume, primarily caused by changes in dealer inventory, drove a majority of the decline. Dealer inventory for the quarter decreased $700 million compared to an increase of $200 million in the prior year's quarter. End-user demand, which we released this morning, was also softer than we anticipated, down about 4% versus our assumption of flat end-user demand for the quarter. Price realization and currency were unfavorable for the quarter as well. Our fourth quarter operating profit decreased 2%, driven primarily by the lower volume. We increased our operating profit margin percent through disciplined cost control and stronger results from financial products. For the fourth quarter, adjusted profit per share was $2.63 compared with $2.55 in 2018. Turning to slide four, sales and revenues for the full year declined about 2%, mainly driven by the movements in dealer inventory. Dealer inventory increased $800 million in 2019 versus an increase of $2.3 billion in 2018. End-user demand increased about 2% for the year. The other two sales drivers, namely favorable price realization and unfavorable currency, essentially offset each other. For the full year, operating profit was flat on nearly $1 billion lower sales and revenues. The volume reduction was offset by strong cost control. Favorable price realization more than offset manufacturing cost increases. Turned into profit per share, we ended 2019 at an adjusted profit per share of 11.06 compared with 11.22 for 2018. Now I'll summarize our 2019 results versus our investor day targets and the progress we made this past year executing our strategy as shown on slide five. In operational excellence, we're pleased to report we achieved our best safety performance on record. We delivered a solid operating margin of 15.4% on $53.8 billion of sales and revenues. Our operating margin finished well within the target ranges we set at our investor day last May, which you may recall was an improvement of between 3 and 6 percentage points above the historical margins we delivered in the 2010 to 2016 period. Our free cash flow of $5.3 billion was also within our investor day target range. We returned $6.2 billion, or about 115%, of our 2019 free cash flow to shareholders in dividend and share repurchases. That includes the 20% dividend increase we announced at Investor Day, which reflected our confidence in the company's ability to deliver improved cash flows through the cycles and our intention to return substantially all free cash flow to shareholders. we reduced our quarterly average diluted shares outstanding by about 9% since the first quarter of 2018. Our services revenues increased 2% and were around $18 billion in 2019. We indicated during our investor day in May that our path to doubling services revenues to $28 billion from our 2016 baseline would not be linear. and we continue to invest in services, including expanding our digital capabilities, to meet this target by 2026. Please turn to slide six. At the center of our strategy is profitable growth. We made good progress this year on all three elements of the strategy, operational excellence, expanded offerings, and services. Beginning with operational excellence, as I mentioned earlier, we achieved our best safety performance on record. Yet even one injury is one too many as we want all of our employees to go home safely every day. We're proactively managing our production levels and our lead times are now at targeted levels for the majority of our products. This allows us to respond more quickly to both positive or negative changes in demand. Shorter lead times also allow our dealers to carry less inventory, which helps dampen the overall impact of economic cycles. Turning to expanded offerings, one of our most successful areas in our GC line, where we've launched six new models in 2019 or 11 new models to date. These new GC products, including excavators, articulated trucks, motor graders, wheel loaders, and paving products, have broadened our product line to provide customers a full range of choices when determining the best machine for their various applications. In energy and transportation, the team launched large generator sets that burn lean methane created as a byproduct of the mining process. The CAT G3516C uses methane that could otherwise be vented to the atmosphere, thereby reducing the mine's greenhouse gas emissions. These engines are capable of burning relatively low concentrations of methane while reliably providing the engines full power at high efficiency. Customers appreciate the value of uncompromised engine performance over a wide range of gas quality. Finally, we reached some significant milestones with Autonomous Solutions in 2019. We continue to believe we're at a tipping point for adoption of autonomy in mining. In 2019, the number of mining trucks running CATS Autonomous Solutions rose to 275, an increase of 48% over 2018. Our Autonomous Solutions are now working for seven customers across 11 sites on three continents. Some customers have reported productivity benefits of up to 30% and have also reported positive enhancements to safety. Our customers are focusing on improving performance across their sites, so we've expanded our automated solutions to include a broader portfolio of trucks, drills, tractors, and underground mining products. We know many of you will be in Las Vegas at ConExpo in March and at Mine Expo in September. We look forward to showcasing many of our new products and services at these exhibitions. Services are a very important element of our strategy. In 2019, one of our primary goals was to improve parts availability to minimize customers downtime. We are helping dealers better forecast customer demand through advanced analytics, which enables them to improve parts availability. Services are a key differentiator for many of our businesses particularly when we help customers avoid unplanned downtime. In 2019, we achieved our target of connecting 1 million assets by year-end. Thanks to investments we've made during the past several years, we now have one of the largest fleets of connected assets in the industries we serve. Connected products, such as CAT and non-CAT assets, provide rich data, including operating hours, location, and product health, enabling customers to better manage and plan their maintenance. Having critical mass and connectivity enables us to work with customers in a very personalized way. Connecting assets also improves dealer capabilities, such as remote troubleshooting that can reduce technician time and provide increased customer uptime. We'll continue to connect new products coming out of our factories. Turning to slide seven, today we established 2020 profit per share guidance of $850,000 to $10, compared with our 2019 adjusted profit per share of $11.06. Our planning assumptions for machinery, energy, and transportation are that dealers will reduce their inventories by about $1 to $1.5 billion, that end-user demand will decline by about 4% to 9% compared to 2019, and that services sales will grow modestly. Global economic conditions are very fluid due to a variety of factors. we will continue to closely monitor our environment and will be ready to respond quickly to positive or negative changes in demand. Our 2020 outlook includes normal restructuring as well as a $200 million placeholder for strategic restructuring actions. We plan to address a small number of products that are not delivering sufficient OPAC and to ensure we're allocating resources to those areas with the best opportunity for future profitable growth. Meanwhile, we will continue to invest in services and expanded offerings to improve the value Caterpillar and our dealers provide to our customers. Andrew will provide more details on the outlook assumptions later in the call. Our cash flow remains strong. During 2019, we paid dividends of $2.1 billion. As we said at our 2019 Investor Day, we expect to increase our dividend by at least a high single-digit percent during 2020 and continuing our heritage as a dividend aristocrat. We repurchased $4 billion of common stock in 2019. We expect continued strong cash flow in 2020, and share repurchases should be roughly similar to 2018 and 2019 levels. This is in line with our commitment to more consistently return substantially all free cash flow to shareholders. In 2020, turning to slide 8, in 2020 we continue to execute our strategy for profitable growth. In the area of expanded offerings, we plan to roll out five additional GC models this year as we continue to invest in new products. Within operational excellence, we are focused on improving our cost structure with a focus on back office and procurement costs. Finally, in services, we will continue to invest in our digital capabilities so we can fully leverage our connected assets and are investing in other areas such as customer-focused designs. Now let me close by sharing our industry expectations for 2020 on slide 9. In construction industries, we expect slowing end-user demand. In North America, while we expect stable spending on state and local infrastructure, residential and non-residential construction is expected to decline. Turning to Asia Pacific, we expect our sales in China to be flat to down 5%. We are actively monitoring the coronavirus for any potential impact. We expect IEMI construction activity will be flat to slightly up, with growth in Europe slowing, and Africa and the Middle East beginning to recover from low levels. The recovery in Latin America should continue, although from a low base led by Brazil. As a result of these conditions, we expect that dealers, particularly in North America, will further reduce their inventories. For resource industries, we expect end-user demand to be roughly flat, In non-residential construction, we anticipate lower 2020 end-user demand. In mining, we expect mid-single-digit growth for end-user demand as quoting activity continues to be positive and commodity prices generally remain supportive of investment. Customers remain cautious and have more flexibility on order timing due to our improved lead times. We continue to believe there will be a gradual recovery in sales to mining customers. We anticipate resource industry sales will be softer in the first half of 2020, with possible upside in the second half as mining confidence improves. As a result of these conditions, we expect dealers will further reduce their inventories. Turning to energy and transportation, we expect modestly lower overall demand. In oil and gas, we expect end-user demand to weaken in North America for well servicing, re-sip gas compression, and drilling. Oil price volatility and capital discipline by our customers are both contributing factors. Solar sales are expected to be flat to slightly up in 2020. Industrial demand is expected to decline modestly, mainly led by Europe. We expect power generation and transportation to grow modestly this year. With that, I will turn the call over to Andrew for a closer look at our financials.