Caterpillar, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2020 Caterpillar Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today. Jennifer, please go ahead.

Thank you. Good morning, everyone, and welcome to Caterpillar's second quarter earnings call. Joining our call today are Jim Umpleby, Chairman of the Board and CEO, Andrew Bonfield, Chief Financial Officer, Kyle Epley, Vice President of our Global Finance Services Division, and Rob Rangel, Senior IR Manager. The call today builds on our earnings release, which we issued earlier this morning. You may find the slides that accompany today's presentation, along with the news release, on our recently relaunched investor relations website in the investors section of caterpillar.com. When you have some time, please take a moment to check out the new look and improved organization. We welcome your feedback on any ways that we can make it a better tool for you. Moving on to slide two, the forward-looking statements we make today are subject to risks and uncertainties. We'll also make assumptions that could cause our actual results to be different than the information we've discussed today. Please refer to our recent SEC filings and the forward-looking statements reminder in the news release for details on factors that individually or in aggregate could cause our actual results to vary materially from our forecast. Caterpillar has copyrighted this call. We prohibit use of any portion of it without a prior written approval. This year's quarter included a 19 cents per share remeasurement loss resulting from the settlement of pension obligations. We provide a non-gap reconciliation in the appendix to this morning's news release. Now, let's flip to slide three and turn the call over to our chairman and CEO, Jim Umpleby. Jim.

Thank you, Jennifer, and good morning, everyone. The second quarter brought unprecedented challenges for our customers, dealers, employees, and suppliers. We thank those in health care as well as the first responders helping fight the pandemic on the front lines. We also want to thank Caterpillar's global workforce for their commitment to support our customers while keeping each other safe. Working with our dealers, Caterpillar is delivering products and services that enable our customers to provide critical infrastructure that is essential to support society during the pandemic. During this time, Caterpillar is leveraging our strong safety culture and remains dedicated to the safety, health, and well-being of our employees. Our workforce is successfully navigating this uncertain environment by focusing on keeping period costs down, managing inefficiencies, and continuing to meet customer needs. The execution of our strategy, including the discipline's management of structural costs during the last three years, is also helping us weather the storm created by COVID-19. We've reduced discretionary expenses, including consulting, travel, and entertainment. Effective July 1, to support our employees, we reinstated 2020 base salary increases except for our most senior executives. Short-term incentive compensation plans for 2020 will remain suspended for most salaried management employees and all senior executives. We've also reduced production to match customer demand. Our teams continue to focus on improving operational excellence, which includes making our cost structure more flexible and competitive. We've worked through a number of operational challenges relating to the pandemic. As of mid-July, substantially all our primary production facilities across the three main segments continue to operate, although many are operating at reduced capacity. We've worked to mitigate disruption to our supply chain by using alternative sources, redirecting orders to other distribution centers, and prioritizing the distribution of the most impactful parts. Our global supply chain is in relatively good shape, although the situation remains fluid. We'll continue to work through the challenges. Our financial position is strong, and we're confident in our ability to continue serving our global customers. On a consolidated basis, Caterpillar ended the second quarter with $8.8 billion of enterprise cash and $18.5 billion of available liquidity sources. Now I'll provide a summary of the second quarter's results on slide four. Second quarter sales and revenues of $10 billion decreased by 31 percent. The decline was mainly due to lower sales volume driven primarily by lower end-user demand and changes in dealer inventories. This morning, we reported sales to users decreased by 22% in the second quarter. That was less of a drop than we anticipated. Machine sales to users, including construction industries and resource industries, decreased by 23%, driven by a 40% decline in North America. Asia-Pacific was a bright spot. The 7% increase in end-user demand for machines in Asia-Pacific was led by improved demand from China. Energy and transportation sales to users decreased by 18% as transportation and industrial were soft, while reciprocating engines for oil and gas continued to decline as expected. Power generation remained steady with a year-ago quarter. During the second quarter of 2020, dealers decreased their inventory by $1.4 billion. This compares with a $500 million increase in dealer inventory during the second quarter of 2019. The year-over-year change drove nearly half of our sales decline for the quarter. The decrease in dealer inventories in this past quarter was greater than we expected. We now anticipate our dealers will reduce their inventories by more than $2 billion by year-end. Andrew will share more details later in the call. Lower sales volume was the primary contributor to our 750 basis point margin decline in the quarter to 7.8%. In spite of the challenging operating environment, we continued to invest in our highest priority R&D programs, including expanded offerings. We also continued to invest in services such as enhancing our digital capabilities. Profit per share for the second quarter was $0.84 compared with $2.83 in the prior year period. This year's quarter included a $0.19 per share pension remeasurement loss. In the second quarter, we returned $600 million to shareholders largely through our quarterly dividend. Year to date, we have returned $2.3 billion to shareholders via dividends and share repurchases. As a reminder, Caterpillar has paid a quarterly dividend every year since 1933 through a variety of challenging business conditions. We continue to expect our strong financial position to support our dividend. In April, we suspended our share repurchase program upon completion of the program we established in January. At this point, we don't expect to repurchase more shares for the balance of the year. We anticipate returning substantially all of our M, E, and T free cash flow to shareholders through the cycles. We also retain balance sheet flexibility for compelling M&A opportunities. Our focus on operational excellence, shorter lead times, and flexibility in manufacturing operations will allow us to react quickly to future changes in market conditions, either positive or negative. Our financial results for the remainder of 2020 will depend on the duration of the pandemic and its impact on global economic conditions. We withdrew our financial outlook for 2020 in March of this year, and we're not providing annual guidance today. We believe it is more helpful at this time to compare the third quarter to second quarter of 2020. Our views are based on current conditions, assuming there are no significant changes in the environment compared to where we are today. Overall, for the third quarter, we expect a reduction in sales to users compared to the previous year's quarter of around 20 percent, which is consistent with a decline in the second quarter. We normally see modestly lower Caterpillar sales in the third quarter versus the second. Turning to slide five. We expect overall demand in construction industries to follow normal seasonality. In North America, while non-residential construction is hard to call, we expect residential construction to begin to improve, which would favor smaller equipment. We see Asia-Pacific mixed due to the varying effects of the pandemic. In China, we expect a normal seasonal pattern. Typically, the third quarter is a bit weaker than the second. Likewise, we anticipate normal seasonality in Iemi. In resource industries, overall demand in the quarter is expected to remain soft, largely due to weakness in non-residential construction and quarry and aggregate, especially in North America. Commodity prices are mixed. Copper and iron ore improved during the second quarter, and gold remains strong. Demand is likely to remain low for products sold into coal applications and in the oil sands. In addition, earlier this year, some mining customers shut down operations relating to the COVID-19 pandemic, However, activity in May and June started to improve. Globally, the average age of the large mining truck fleet is historically high, and in addition, customer interest and autonomy remain strong, which we believe represents a competitive advantage for Caterpillar. Conversations with our mining customers indicate that Greenfield and Brownfield projects are still moving forward. We remain optimistic about the medium and long-term outlook for mining. Energy and transportation sales typically do not decline in the second half of the year. We expect continued challenges in oil and gas to impact demand for reciprocating engines. Solar turbines continues to execute their long-term projects. We continue to anticipate that the demand for data centers and emergency power will be a relative bright spot within power generation. Industrial engines and transportation are expected to continue to reflect conditions in the markets they serve. Turning to slide six, During our last earnings call, we reviewed our strategy, which focuses on services, expanded offerings, and operational excellence. We also discussed that the impact of COVID-19 in our business had been more severe and chaotic than any cyclical downturn we'd envisioned. Importantly, while we've taken actions to reduce costs, we've made a conscious decision to continue to invest in enablers of services growth, including enhancing our digital capabilities and expanded offerings, key elements of our strategy for long-term profitable growth. While we expect our margins in 2020 to be better than our historical performance at a similar level of sales, we continue to believe it will be challenging for us to achieve the margin targets we communicated during our 2019 investor day. Free cash flow for 2020 is less certain at this time as we are holding incremental inventory to mitigate against the risk of supplier disruption. It will become clearer as the year unfolds how much of the inventory needs to be retained. To wrap up, Challenges we've successfully navigated have only strengthened our resolve that we're pursuing the right strategy. That's why, even in this environment, we're investing in expanded offerings and services, all of which are key elements of our strategy. We have a strong balance sheet and ample liquidity. We're ready for changes in market conditions, either positive or negative. We fully intend to emerge from this crisis an even stronger company, better positioned for long-term profitable growth. Now let me turn the call over to Andrew for a more detailed recap of our second quarter results, segment performance, and our expectations for the third quarter.