Caterpillar, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2021 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.

Thank you, Jason. Good morning, everyone, and welcome to Caterpillar's first quarter 2021 earnings call. Joining me this morning are 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 Rengel, Senior IR Manager. During our call today, we'll be discussing the earnings news release we issued earlier this morning. You can find our slides, the news release, and a video recap at investors.caterpillar.com by clicking on Events and Presentations. Also, please note that we've published a new Caterpillar 2020 data book for investors, which you can also find today on the homepage of the IR website. 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're sharing with you on this call. Please refer to our recent SEC filings and the forward-looking statements reminder in the news releases. 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, and we prohibit use of any portion of it without the prior written approval of the company. Today, we reported profit per share of $2.77 for the first quarter, compared with $1.98 in the first quarter of 2020. We're showing adjusted profit per share in addition to our U.S. GAAP results. Our adjusted profit per share was $2.87 for the first quarter. That compares with first quarter 2020 adjusted profit per share of $1.65. Adjusted profit per share for both quarters excluded restructuring costs. The first quarter of 2020 also excluded a remeasurement gain of $0.38 per share resulting from the settlement of a non-U.S. pension obligation. We provide a non-GAAP reconciliation in the appendix of this morning's news release. You can also find information on dealer inventory and backlog in our earnings call slides. Speaking of slides, before I turn it to Jim, there have been a few questions this morning on slide 16, key thoughts on the second quarter, the final bullet. We expect the operating profit margin percentage in the second quarter of 2021 to be moderately below the margin in the first quarter of 2021. Now with that, let's flip to slide three and turn the call over to our Chairman and CEO, Jim Umpleby.

Good morning. Thanks, Jennifer. I'd like to begin by thanking our global team for continuing to safely provide the essential products and services that enable our customers to support society during the pandemic. Our engaged team continues to execute our strategy, which is demonstrated by our first quarter results. I'll begin with my perspectives on the first quarter and our supply chain before discussing our end markets. Starting with the top line on slide four, were pleased with a strong sales and profit performance in the first quarter. Sales increased 12 percent on better-than-expected growth in end-user demand and the favorable impact of changes in dealer inventory. The decision to hold extra Caterpillar inventory to prepare for a potential increase in market demand served us well. Total sales to users rose about 8 percent. Sales to users have trended better for the last three quarters from a year-over-year comparative perspective. Machine sales to users increased 13% in the quarter, as construction industries and resource industries were stronger than we expected. Within construction industries, Asia Pacific was particularly strong, led by robust growth in China. Resource industry sales to users were flat as market conditions continued to improve in mining. While sales to users for energy and transportation declined by 5% for the quarter, these results were roughly in line with our expectation and reflected industry trends. Dealer inventory increased about $700 million, which was about the seasonal build we expected. That compares with an increase of about $100 million in last year's first quarter. Operating profit in the quarter increased 29 percent to $1.8 billion, driven primarily by higher volume, effective cost control, and financial products. We delivered an operating margin of 15.3 percent. Adjusted operating margin came in at 15.8 percent, an improvement of 230 basis points versus a year ago, and 300 basis points higher than our fourth quarter of last year, which had a lower level of sales. Operating margins expanded in all three primary segments, with the largest increase coming from construction industries. Andrew will provide more color concerning our margin performance in a few minutes. M, E, and T free cash flow was very strong at approximately $1.7 billion for the quarter. Our quarterly dividend was unchanged, and share repurchases remained paused in the first quarter. I'll now provide a few additional comments about the external environment. As Andrew will discuss, we're not providing annual earnings guidance at this time. We're pleased with our strong start to the year, and there are positive signs in a number of our end markets. However, we're monitoring a variety of external factors that could moderate the positive impact of continuing improvement in market conditions. These include the pandemic's recent acceleration in several overseas markets, the potential for supply chain disruptions, and cost pressures. Areas of particular focus include semiconductors, transportation, and raw materials. While none of these has significantly impacted operations, there remains the potential for impact later this year. The situation remains very fluid. Our team has been developing contingency plans, including workarounds in our factories that may lead to increased costs. We're working very hard to avoid or minimize having supply chain issues lead to production shortfalls that might impact our ability to fully meet improving customer demand. And now moving to slide five, I'll share some thoughts on our end markets based on what we see today. Starting with construction industries, North America will continue to benefit from strong residential demand. We see non-residential construction recovering at a gradual pace, with infrastructure recovering faster than non-residential building. We expect growth in Asia Pacific to remain robust through the first half, driven by China. Government spending on infrastructure in China has fueled strong excavator demand, including strong demand for our new GX excavator line. We see improving demand in EAMI and continued recovery in Latin America as well, although we are monitoring the recent acceleration of COVID in some Latin American countries. Turning to resource industries, we anticipate continued improvement in demand, particularly in mining. Favorable commodity prices support higher capex for mining customers. We continue to feel optimistic about mining. We have a strong value proposition particularly in autonomy-enabled products. We also expect growth in heavy construction and quarry and aggregates off a low base. In energy and transportation, we expect strengthening across a number of applications. Oil and gas should continue to slowly improve from low levels as customers remain disciplined with their capex spend. The power generation market should benefit from continued strength in data centers. Industrial is expected to see growth, with activity strengthening across most applications. In transportation, Prail and Marine are expected to see slight improvements from the first quarter, although from a low base. We expect the company's top line to reflect normal seasonality in the second quarter. Turning to slide six, we expect to meet our investor day targets for adjusted operating margins in 2021. As we stated before, our target is 300 to 600 basis points of improvement in our adjusted operating margins versus the 2010 to 2016 period. We've delivered at this level for four straight years now, including during the pandemic, which is a testament to our talented team and focused execution of our strategy. Machine energy and transportation's free cash flow was strong in the first quarter. These results strengthen our confidence that we'll meet our investor day target for MENT free cash flow in 2021. The target is $4 to $8 billion, or $1 to $2 billion higher than we generated in the 2010 to 2016 period. We've paid annual higher dividends to shareholders for 27 consecutive years, and we're proud of our status as a dividend aristocrat. We're working with our board of directors on decisions concerning the potential dividend increase later this year. We're also discussing with our board the appropriate time to recommence share repurchases. It remains our intention to return substantially all of our M, E, and T-free cash flow to shareholders through the cycles. Turning to slide seven, we remain committed to our strategy, which we launched in 2017. The strategy is focused on services, expanded offerings, and operational excellence to drive long-term profitable growth. We continue to invest in expanded offerings, new technologies, and services as we did throughout 2020. In February, we closed on our acquisition of the Oil and Gas Division of the Ware Group PLC and launched SPM Oil and Gas. This strategic transaction enhances our ability to serve existing customers by enabling us to offer a more complete integrated solution from engine to wellhead. In fact, to lower their carbon footprint, some customers have placed orders for SPM 5000 horsepower pumps paired with CAT G3520 natural gas power generator sets for use in electrified pumping applications. We also continue to invest in our digital capabilities to allow us to leverage our more than 1 million connected assets. We're developing proprietary algorithms called Prioritized Service Events, or PSEs, that provide qualified services leads to our global dealer network. Our leads range from repair options that are asset serial number specific to complete fleet-level solutions. We continue to make it easy for customers to have more predictable maintenance costs through customer value agreements or CVAs. During the past quarter, we released our first diversity and inclusion report. The report describes our journey to build a more globally diverse workforce and inclusive environment to support our employees in the communities where we live and work. We value diverse perspectives and strive to ensure our global team reflects the many communities and customers we serve around the world. We're currently preparing our 2020 sustainability report, which will highlight progress against our 2020 goals and introduce new sustainability goals. We're committed to contributing to a reduced carbon future by continuing to reduce Caterpillar's greenhouse gas emissions and helping customers achieve their climate related objectives. In summary, I'm pleased with our strong start to the year and proud of the performance by our global team. With that, I'll turn the call over to Andrew.