Caterpillar, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Caterpillar Earnings Conference call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Jennifer Driscoll. Thank you. Please go ahead.

Thanks, Jason. Good morning, everyone, and welcome to Caterpillar's Third Quarter 2020 Earnings Call. Today I'm joined by Jim Umpleby, Chairman of the Board and CEO, Andrew Bonfield, Chief Financial Officer, Kyle Epley, Vice President of the Global Finance Services Division, and Rob Rangel, Senior IR Manager. On our call, we're expanding on our earnings news release and sales to users, which we issued earlier this morning. Our slides from today and the news release are all in the Investors section of caterpillar.com, under Events and Presentations. The forward-looking statements we make today are subject to risks and uncertainties, as you see, too. We'll also make assumptions that could cause our actual results to be different than the information we're sharing with you on this call. Please refer to our recent SEC filings and the forward-looking statements reminder in the news release for details on factors that, individually or combined, could cause our actual results to vary materially from our forecast. Caterpillar has copyrighted this call, and we prohibit use of any portion of it without a prior written approval. This quarter included a $0.12 per share remeasurement loss resulting from the settlement of pension obligations. We provide a non-GAAP reconciliation in the appendix to this morning's news release. There's also backlog information and a couple other things. So in a moment, Andrew will update you on our third quarter results and our financial position. But first, please turn to slide three as I hand you over to our chairman and CEO, Jim Humplebee. Jim.

Thank you, Jennifer. Thanks, everyone, for joining the call. I'm proud of how our global team has performed in a challenging environment, providing the essential products and services that enable our customers to support a world in need. We continue to leverage our strong safety culture. remaining both safe and productive in this pandemic-altered work environment. We remain committed to our strategy launched in 2017, which is based on operational excellence, expanded offerings, and services. The operational excellence element of our strategy has served us well, resulting in disciplined management of structural costs. As a result, we went into the pandemic with a strong balance sheet and have continued to invest in expanded offerings and services to make our customers more successful. We're introducing several new products and are enhancing our digital capabilities. Now I'll briefly cover our third quarter results, starting with slide four. While sales, earnings, and profit per share declined versus the prior year's quarter, our performance in the quarter was better than we expected. Third quarter sales and revenues of $9.9 billion decreased by 23%. Lower sales volume drove the decline, primarily due to lower end user demand. In addition, dealers decreased inventory by $600 million this quarter versus a decrease of $400 million in the third quarter of 2019. That was more of a decrease than we anticipated. With dealers having reduced their inventories by $1.8 billion year-to-date, we now estimate they will reduce their inventories by about $2.5 billion by year-end. This morning, we also reported three-month sales to users, which decreased by 22% versus the previous year. This was similar to the second quarter's trend and about in line with our assumptions. Machine sales to users decreased by 20%, driven by a 31% decline in North America. Asia Pacific overall was flat, reflecting higher demand from China offset by declines in other countries in the region. Energy and transportation sales to users decreased by 27%, with declines primarily driven by oil and gas and industrial applications. Profit per share decreased in the third quarter of 2020 was $1.22 versus $2.66 in the third quarter of 2019. Turning to slide five, we believe it's helpful to also compare the third quarter against the second, as both periods were impacted by COVID-19. The third and second quarters of this year were roughly similar. Sales were only slightly lower in the third quarter compared to the second, down about $100 million, or 1%. Sales are typically lower seasonally in the third quarter versus the second. Sales were essentially flat across our three main segments. While sales came in largely in line with our expectations, our operating margin performance was better than we anticipated. Third quarter margins were 10%, a 220 basis point improvement from the 7.8% we reported in the second quarter. The margin improvement came from a combination of cost control, favorable geographic mix, and better factory efficiencies than we anticipated. Looking at sequential margins for the segments, construction industries margins led the way with favorable price due to less of an impact from geographic mix and operating efficiencies. The higher margins in resource industries reflected favorable manufacturing costs that more than offset unfavorable price. energy and transportation margins declined relative to the second quarter. ENT had unfavorable mix, including reduced sales from oil and gas, mainly in solar turbines. As you know, solar's business tends to be lumpy. In addition, margins in ENT were impacted by some non-recurring items. Next, I'll comment on the third quarter 2020 sales to users data released today versus the data from the second quarter of this year. The 20% decline in the third quarter of 2020 machine sales was a three-percentage point improvement over the decline in the second quarter of 2020. That was about what we expected. For construction industries, most regions reported less of a decline in year-over-year sales to users in the third quarter when compared to the second quarter year-over-year performance. Stronger residential construction benefited our construction industry segment. Asia Pacific remained positive, driven by continued strong demand in China. Sales to users and resource industries declined sequentially as North America remained low, particularly in heavy construction, quarry, and aggregates, while other regions continued to see lumpiness across the segment. Energy and transportation sales to users declined by 27% during the third quarter of 2020, compared with an 18% decrease reported in this year's second quarter. As expected, reduced demand in oil and gas contributed to the decline, Power generation continued to fluctuate while industrial remained weak. Transportation improved as reported declines moderated in the third quarter versus the second quarter of 2020. Turning to slide six, as we look ahead for the end markets, we serve a caterpillar. Much still depends on the pandemic and its impact on the global economy. While the situation remains fluid, overall, we are cautiously optimistic. We continue to work closely with our suppliers to be well positioned to meet changes in market demand. We're maintaining good product availability levels for the vast majority of our products. Availability of our aftermarket parts is solid as well. I'll share some thoughts on demand trends for the fourth quarter in each of our end markets based on what we see today. Overall, we expect sales and end-user demand to improve in the fourth quarter compared to the third. This follows our typical seasonal trends. End user demand should improve going into next year as well. For construction industries, we expect stronger sales and end user demand in the fourth quarter compared to the third quarter. The percentage reduction in year-over-year sales to users should also improve in the fourth quarter compared to what we saw in the third. Recovery in North America provides a boost. as low interest rates, home builder confidence, and growth in housing starts support demand for our smaller machines, which are built by our building construction products division. In China, we expect our construction business to continue to be strong due to government spending on infrastructure and building activity. Based on what we see today, the strength in China should continue going into next year. We anticipate non-residential construction will remain subdued in North America in the fourth quarter, as will machine sales for oil and gas-related activity. Overall, based on what we see today, we expect end markets for construction industries to continue to improve. As I mentioned earlier, the situation remains fluid. Turning to resource industries, we expect higher sales in the fourth quarter compared to the third. with sales to users improving versus the third quarter as well, although down slightly year over year in a business that tends to be lumpy. We're encouraged by continued solid quoting activity in mining and orders picked up in the third quarter compared to the second. We have some large tenders pending for deliveries that will be spread over the next few years. The tender activity is particularly strong in large mining trucks, in large tractors. Demand for base metal commodities is expected to remain strong. Aftermarket part sales are expected to improve as machine utilization overall is high. Many miners have deferred rebuilds and some maintenance in the next year. Mining capex is expected to increase over the next 12 months. Based on everything we're seeing, we remain optimistic about improving conditions in mining. We expect heavy construction and quarry and aggregates in resource industries to remain weak in the near term, particularly in North America. In addition, our autonomous mining trucks continue to gain traction, with customers continuing to report improvements in efficiencies and safety on autonomous mining sites. We have over 340 autonomous trucks running now and expect to approach 400 by year end. Sales in energy and transportation are typically higher in the fourth quarter, including stronger sales to users compared to the third quarter. We expect that trend to continue this year. We see continued challenges for reciprocating engines in North American oil and gas during the fourth quarter. However, we are encouraged by recent comments made by industry participants in well servicing. For power generation, we expect increased data center activity to create higher demand in reciprocating engines. As is typical, solar should have its best sales quarter of the year in the fourth quarter. However, solar sales will likely be lower than in previous years, as we are seeing some customers delay maintenance in the next year, which will also impact ENT's mix in the fourth quarter. In addition, in the fourth quarter, we expect the timing of product development investments to have a negative margin impact on ENT. Meanwhile, demand for industrial engines and transportation is expected to show some improvement but continue to reflect the dynamics in the markets they serve. Before moving off energy and transportation, let me comment on the agreement we signed earlier this month to acquire Weir's oil and gas business. We see a strong strategic fit between the Weir oil and gas and our current offerings in oil and gas. It comes with a strong services business and would expand our product portfolio to one of the broadest in the well service industry. Our goal is to make our customers more successful with us than with competitors, and upon closing, this acquisition would give us a more complete solution in this space. We view this as an opportunistic time to strengthen our lineup of oil and gas products and services, and importantly, we believe the transaction economics will prove attractive even if oil prices remain low. Andrew will share the details on the fourth quarter assumptions in a few moments. Overall, versus the third quarter, we're looking for stronger volume performance, improved operating margins, and additional dealer inventory reductions. We expect to be well positioned as we move into 2021. Turning to slide seven, we said at our 2019 Investor Day that we intend to return substantially all of our M, E, and T free cash flow to shareholders through the cycle. Year to date, we've returned $2.8 billion to shareholders via dividends and share repurchases. As we said last quarter, our share repurchase plan will remain suspended through calendar year end. In the third quarter, we returned about $560 million to shareholders through our quarterly dividend. We are proud of our aristocrat status, where for 27 consecutive years, including 2020, we paid higher annual dividends to shareholders. The dividend remains a high priority through all economic cycles. All decisions concerning the dividend are made by our board of directors, but we anticipate increasing our dividend again next year. Before closing, let me mention two other important things, the retirements at year end of Billy Ainsworth, Group President of Energy and Transportation, and Raman Younesi, Group President of Construction Industries. We thank Billy and Raman for their significant contributions to Caterpillar and wish them all the best in retirement. We also welcome Tony Ficino and Joe Creed to the Executive Office. I'd also like to mention that the Caterpillar team is proud to have been recently recognized by the Wall Street Journal as number 19 on its list of the most sustainably managed companies in the world. The new ranking assessed more than 5,500 publicly traded companies around the world. In summary, as we continue to execute our strategy for profitable growth, we're investing in services and expanded offerings to better serve our customers. We're improving operational excellence, which includes working more safely than ever and making our cost structure more flexible and competitive. We'll be able to react quickly and are well positioned for changes in market demand. We'll emerge from the pandemic as an even stronger company. Now let me turn it over to Andrew.