Caterpillar, Inc.

Welcome to the Second Quarter 2021 Caterpillar Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jennifer Driscoll. Thank you. Please go ahead.

Thank you, Whitney. Good morning, everyone. Welcome to Caterpillar's Second Quarter 2021 Earnings Call. With me here today are Jim Umpleby, Chairman of the Board and CEO, Andrew Bonfield, Chief Financial Officer, Kyle Leffley, Vice President of the Global Finance Services Division, and Rob Rangel, Senior IR Manager. During our call this morning, we'll be discussing the earnings news release we issued earlier today. You may find our slides, the news release, and a video recap at investors.caterpillar.com. Simply click on Events and Presentations. Moving 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're sharing with you on this call. Please refer to the 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, and we prohibit use of any portion of it without our prior written approval. Today, we reported profit per share of $2.56 for the second quarter of 21, compared with $84 of profit per share in the second quarter of 2020. We're showing adjusted profit per share in addition to our U.S. GAAP results. Our adjusted profit per share was $2.60 for the second quarter, compared with second quarter 2020 adjusted profit per share of $1.27. Adjusted profit per share for both quarters excluded restructuring costs, The second quarter of 2020 also excluded a remeasurement loss of 19 cents per share resulting from the settlement of pension obligation. We provide a non-GAAP reconciliation in the appendix to this morning's news release. You also can find information on dealer inventory and backlog in our slides. Now let's flip to slide three as we turn the call over to our chairman and CEO, Jim Umpleby.

Thanks, Jennifer. Good morning, everyone. As we close out the first half of 2021, I'd like to thank our global team for their strong performance in a challenging, dynamic environment. We continue to execute our strategy for profitable growth and remain focused on the safety of our employees. We're encouraged by higher end-year demand in the majority of our end markets. Before turning over the call to Andrew for a detailed review of our results, I'll briefly cover three topics this morning. I'll share my perspectives on Caterpillar's second quarter results. I'll then review our end of markets before discussing the sustainability report, including our new climate and energy statement that we published during the second quarter. On slide four, we're pleased with the strong sales and profit performance during the second quarter. Sales and revenues increased 29%, primarily due to higher sales volume. The two main drivers of our top line were strong end-user demand and the impact of changes in dealer inventory. Compared to the second quarter of last year, sales to users rose roughly 15%, and changes in dealer inventories provided about a $1 billion tailwind. During our first quarter call, we mentioned that growth in sales to users would be significantly higher than the 8% we saw in the first quarter. Sales to users rose about 15% versus the second quarter of last year and trended better for the fourth consecutive quarter. We had gains in all three of our primary segments. Machines rose 20% with similar increases in both construction industries and resource industries with improvement in all regions. Demand from residential construction remained strong and demand related to non-residential improved. Mining was also up. Quotation activity for miners remained strong, and we've seen a significant improvement in orders through the first two quarters. We were also pleased that heavy construction and glory in aggregate strengthened, as did several end markets within energy and transportation. Energy and transportation sales to users turned positive, rising 1%. Keep in mind that the slowdown in end-user demand in 2020 affected energy and transportation later than the other segments. as some of the applications are impacted by timing of large products. From a geographic perspective, we had strengthened sales across all regions. North America was quite strong, as expected. The Indian and Latin America also showed double-digit sales growth. Asia Pacific saw good growth in most areas outside of China. China declined modestly in the quarter after rebounding strongly beginning in the second quarter of 2020, leading to a tougher comparison. We also had modest benefits to sales this quarter from currency and price. As we noted in our first quarter call, second quarter 2020 saw a decline in dealer inventory of $1.4 billion, but we did not expect a significant change during 2021 quarter. Dealer inventory declined $400 million during the second quarter. Similar to the first quarter of this year, dealer inventory remains near the low end of the normal range. I'll now provide an update on Caterpillar's supply chain. In spite of the unprecedented challenges impacting the industrial sector, I'm proud of the work by our team to minimize disruptions, which were relatively modest during the second quarter. For the majority of our products, availability remains within our normal ranges. We mentioned on the last earnings call that the supply chain situation, including transportation, was challenging and that our team was preparing contingency plans such as alternative assembly processes at our facilities. During the quarter, our team implemented some of those plans and continued to work closely with our suppliers to mitigate supply chain impacts on production. We still anticipate that supply chain challenges will remain throughout the year, and our goal is to minimize the impact on our ability to meet improving customer demand. In addition, as we mentioned during our last earnings call, we do not expect a significant benefit from dealer restocking during 2021. Operating profit in the second quarter increased 128% to $1.8 billion. Volume growth, price utilization, and strong results from financial products drove the improvement. We did have some favorable price flow through this quarter, mostly in construction industries. We also saw higher short-term incentive compensation expense and some higher material costs, including steel and other commodities, as expected. Andrew will discuss margins in more detail. The adjusted operating profit margin improved to 14.1% versus 9.3% in the second quarter of 2020, as we expected. Operating margins increased in both construction industries and resource industries despite headwinds from short-term incentive compensation and supply chain challenges. Profit per share was $2.56 versus $0.84 in the second quarter of 2020. Adjusted profit per share was $2.60 versus $1.27 in the second quarter of 2020. Moving to slide five, free cash flow from machinery, energy, and transportation was another highlight of the quarter. We generated $1.7 billion of M, E, and T free cash flow with higher profit partly offset by an increase in Caterpillar inventory. We resumed share repurchases in the second quarter. We also announced we're increasing our quarterly dividend by 8% to $1.11 per share. We paid a higher dividend annually for 27 consecutive years. We returned about $800 million to shareholders in the second quarter via the dividend in share repurchases. We expect to repurchase sufficient shares between now and the end of the year to at least offset absolute dilution from shares issued this year. In light of the highly fluid environment, we will continue our practice of not providing profit per share guidance. However, we'll share some high-level assumptions for the upcoming quarter and the full year. For 2021, as we said on the last earnings call, we expect to achieve the targets for adjusted operating profit margin that we set out at our 2019 investor day of 300 to 600 basis points of improvement versus our performance during the 2010 to 2016 period at similar levels of sales and revenues. We also expect to achieve the free cash flow targets we set for MENT at Investor Day of an incremental $1 to $2 billion at all points in the cycle. Andrew will elaborate with a few of our assumptions for the upcoming quarter in a few moments. Please turn to slide six, and I'll walk through our expectations by end market. Overall, we're becoming more optimistic about our end markets since our last earnings call. We're pleased that many end markets continue to improve and demand continues to strengthen. Global demand is strong and the outlook is positive. In construction industries, for example, we're optimistic about the industry as we expect end market demand to show continued positive growth. Residential and non-residential construction demand is expected to remain strong, led by North America. In China, we expect the industry for excavators above 10 tons to be about flat in 2021 compared to a very strong 2020. Please keep in mind that demand was very strong in this market during the first quarter. Our newly introduced GX models continue to perform well, and we're still receiving positive customer feedback. In the balance of Asia Pacific, we believe stronger than expected commodity prices, housing strength, and government infrastructure expenditures will support continued sales growth. In the AME, we see in-market demand for gaining momentum on strong construction activity, higher commodity prices, and improved confidence. Latin America should also show continued strengthening due to increased construction activity. Switching to resource industries. In mining, we continue to expect improvement in minor capex as commodity prices remain supportive of growth. Parked large mining trucks decreased in the quarter and remain at relatively low levels in all regions as utilization increases. Customer interest in Caterpillar's autonomous mining solution remains high, and customers now autonomously operate or are deploying cat machines on 18 sites around the world. While our mining customers continue to display capital discipline, we expect mining to continue to improve over the long term as the energy transition drives higher demand for commodities. In heavy construction and quarry and aggregates, we've seen improvement in the second quarter, particularly in North America and the A&E. We expect continued strengthening in this part of the portfolio. finally in energy and transportation we expect oil and gas to continue to strengthen gradually we expect customers to continue to demonstrate capital discipline and pockets of excess capacity remain in power generation strength and data center should continue industrial demand is expected to improve along with the global economic recovery transportation should see strength in rail services and growth in international deliveries for locomotives, and marine demand is projected to grow modestly while remaining at low levels. Now on slide seven. Since our last quarterly earnings call, we published our 2020 sustainability report to establish and report progress against our environmental, social, and governance goals. We also released a new climate and energy statement. Caterpillar shares the concerns of governments and the public about the risks of climate change and supports global efforts to mitigate its impact. We are committed to contributing to a reduced carbon future. This commitment is reflected in our sustainability vision to improve the quality of the environment and our communities. Some of the way we do this are by further reducing greenhouse gas emissions from our operations and helping customers meet their climate-related objectives by investing in innovative new products, technologies, and services. Our 2020 Sustainability Report highlights seven new environmental, social, and governance goals we've set to achieve by 2030. These goals, which address issues most relevant to our customers and other stakeholders, are focused on the climate and environment in addition to safety. One of these goals is to ensure that 100% of Caterpillar's new products through 2030 will be more sustainable than the previous generation. It's an inspiring time to be a Caterpillar employee. I'm pleased with all the good work already underway across the company. We're developing products and services that facilitate fuel transition, increased operational efficiency, and reduced emissions to help communities thrive and to help our customers achieve their environmental goals. By establishing and reporting progress on our ESG targets, we provide transparency about our progress and innovation. In order to further increase transparency, we will strive to provide an update or example during our earnings calls. This quarter, I'll close with an example. Recently, Nouveau Monde Graphite, or NMG, announced a collaboration with us to fully power their Natuini graphite mine with zero-emissions machines by 2028. Caterpillar will be the exclusive equipment, technology, and service provider for NMG. We'll be developing, testing, and producing CAT zero-emission machines for the project in Saint-Michel-des-Champs in Quebec, Canada. In conclusion, we continue to execute our strategy for long-term profitable growth by investing in services, expanding our offerings, and improving operational excellence. It was a strong quarter from a financial and operational perspective and a good first half. Looking forward, we're optimistic about our ability to mitigate supply chain challenges and are encouraged by customer demand that's strengthening and is broad-based across all regions. Now I'll turn the call over to Andrew.