Caterpillar, Inc.

Welcome to the Third Quarter 2021 Caterpillar Earnings Conference Call. Please be advised 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, ma'am.

Thanks, Holly. Good morning, everyone. Thanks for joining Caterpillar's Third Quarter Earnings Call. Our speakers today will be Jim Upleby, Chairman and CEO, and Andrew Bonfield, Chief Financial Officer. Also here with us for the call are Kyle Epley, Vice President of the Global Finance Services Division, and Rob Rangel, Senior Manager in Investor Relations. During our call this morning, we'll discuss the earnings news release we issued earlier today. Note that we have slides to accompany our presentation. In the appendix, you'll see some additional information, including dealer inventory and order backlog. You may find the news release, our slides, a video recap with Andrew Bonfield, and other important information at investors.caterpillar.com. Simply click on Events and Presentations. We have copyrighted this call and ask you not to use any portion of it without our prior written approval. Moving to slide two, today we'll be making forward-looking statements. These statements are subject to a variety of risks and uncertainties. For information on some of the risks and uncertainties that could cause our actual results to vary materially from any forward-looking statement, please refer to our SEC filings, including our Form 10-K for 2020 and our Form 10-Qs for the most recent quarters. We'll also make use of non-GAAP numbers. For a reconciliation of our non-GAAP numbers to the appropriate U.S. GAAP number, please see the tables in the appendix to the earnings call slides. This morning we announced profit per share of $2.60 for the third quarter of 2021 compared with $1.22 for the third quarter of 2020. Our adjusted profit per share was $2.66 for the third quarter compared with $1.52 in the third quarter of 2020. Adjusted profit per share for both quarters excluded restructuring costs, which totaled $0.06 per share this quarter and $0.18 per share in last year's quarter. Last year's quarter also excluded remeasurement losses of 12 cents per share, resulting from the settlements of pension obligations. I do have two important calendar announcements. First, we recently selected our earnings dates for calendar year 2020. We show the dates on slide 20, starting with January 28th for a fourth quarter call. We hope you'll join us. Second, we plan to host our next Investor Day on Tuesday, May 17th, 2022, near our headquarters. The event also will be audio webcast, and details will be provided closer to that time. So with that, please flip to slide three, and we'll turn the call over to our chairman and CEO, Jim O'Brie.

Thanks, Jennifer. Good morning, everyone. Thank you for joining us. I'd like to start by thanking our global team for another good quarter. We continue to execute our strategy for long-term profitable growth while working to mitigate the impact of supply chain challenges as we serve our customers. Before turning over the call to Andrew for a detailed review of our results, I'll briefly cover three topics this morning. I'll start with my perspective on the quarter's results, including an update on the supply chain. I'll then provide a few comments on market conditions. I'll finish with an update on recent developments concerning Caterpillar's sustainability journey. Sales and revenues were higher in all segments and in all regions during the quarter. Customer demand and order rates were strong. We experienced supply chain challenges like many other industrial companies. We believe our sales in the third quarter would have been higher if not for these issues. We are, however, pleased by our global team's ability to continue to execute in a challenging environment. Turning to slide four, the top line increased by 25%, primarily due to higher volumes, which was driven by strong end-user demand. Compared with the third quarter of 2020, sales to users rose about 14%. Sales to users rose in the three primary segments and in most regions. For machines, sales to users increased by 17%. For energy and transportation, sales to users increased 8%. Our assumption had been that third quarter growth in year-over-year sales to users would be significantly higher than the 15% growth reported in the second quarter. the growth rate in sales to users was less than we assumed at 14%, as construction industries grew a bit slower than the second quarter pace. This was primarily due to constraints in the supply chain, which I'll cover in a moment. In resource industries and energy and transportation, the growth rate in sales to users accelerated on a sequential basis. On a year-over-year basis, sales to users grew in all segments in all regions, except Asia Pacific, driven by China, which was a bright spot in the third quarter of last year. We remain optimistic about demand in our three primary segments for the remainder of the year. Dealers, each of whom are independent businesses, decreased inventory by $300 million in the third quarter versus a decrease of $600 million in last year's third quarter. To put it in context, dealer inventory is about flat versus year-end 2020. Reported revenues for the quarter also benefited from growth in services, favorable price, and currency. Turning to the supply chain, our global team worked to mitigate the challenges we encountered in the third quarter, which were more significant than we expected. Our suppliers also experienced availability issues and freight delays leading to pressure on production in our facilities. We put control towers in place to spotlight areas of concern across our operations and our value chain. We've proactively redirected components and altered our assembly processes as much as possible to keep output flowing. In addition, Caterpillar inventory grew by about $1 billion in the third quarter compared to the second quarter of 2021. Of the $1 billion increase, over half was an increase in production inventory. Our team continues to work closely with our suppliers to mitigate supply chain impacts on production. We experienced rising material and freight costs during the quarter. We continue to take appropriate price actions in response to rising costs and are monitoring the situation. Operating profit for the third quarter increased by 69% to $1.7 billion. The increase in operating profit came from higher volume, favorable price, and restructuring costs that were lower than last year. The adjusted operating profit margin improved to 13.7%, up 260 basis points versus 11.1% in the third quarter of last year. That's despite the reinstatement of short-term incentive compensation this year. Margins were slightly stronger than we expected. Compared to the prior year, operating profit margins expanded in each of the three primary segments. Our profit per share was $2.60 versus $1.22 in the third quarter of 2020. The adjusted profit per share was $2.66 versus $1.52 in the third quarter of last year. Now on slide five, MENT free cash flow for the quarter of around $800 million reflected higher volumes. Those benefits were partly offset by the increase in Caterpillar inventory. We completed $1.4 billion in share repurchases this quarter. We also returned about $600 million in dividends to shareholders, reflecting the 8% dividend increase we announced in June. We paid a higher dividend annually for 27 consecutive years, and we remain proud of our status as a dividend aristocrat. We continue to expect to return substantially all of our MENT-free cash flow to shareholders over time through dividends and share repurchases. Turning to slide six, let me share a few high-level assumptions about the full year. Looking at 2021 as a whole, we still expect to achieve our investor day targets for adjusted operating profit margins of 300 to 600 basis points of improvement versus our performance during the reference period of 2010 to 2016 at a similar level of sales. We also expect to achieve the free cash flow targets we set of an incremental $1 to $2 billion annually versus our cash flow performance during 2010 to 2016. Please turn to slide seven. Overall, we remain optimistic about global demand, which has remained strong. However, supply chain challenges may impact our ability to fully meet customer demand. In construction industries, we remain positive, as we've seen end market demand increase in most regions. In North America, residential construction continues to be a strong driver of industry growth. Non-residential is also improving, although activity remains below pre-pandemic levels. We are hopeful that Congress passes the Infrastructure Investment and Jobs Act, which could boost customer confidence and help support future demand. In China, we continue to expect the industry for excavators above 10 tons to be about flat in 2021, with declines in the second half of the year offsetting growth in the first half. Outside of China, we expect the Asia-Pacific region to remain strong in the fourth quarter, backed by strong housing activity, favorable commodity prices, and the benefits of government stimulus. In IAMI, fundamentals remain positive as stimulus actions continue and construction confidence improves. We expect the industry in Latin America to be supported by construction activity and the continued mining recovery. Turning to resource industries, elevated commodity prices and strong minor capex expectations support continued improvement in customer demand. the number of parked trucks in the field remains low and utilization has been improving. We also remain optimistic in heavy construction and quarry and aggregates, where we continue to see improving demand. Finally, in energy and transportation, we expect demand to improve during the fourth quarter compared to last year. In oil and gas, we expect services growth and a focus on sustainability to drive demand for new equipment in the form of repowers. We expect that to be balanced, though, by continued capital discipline by our oil and gas customers. Recent power generation is expected to remain strong, with strength in data centers. Industrial is expected to see continued strength across all applications. A modest increase is anticipated in transportation, with improvement in rail, primarily in services and international locomotives. Now on slide eight, sustainability remains an important element of our strategy for long-term profitable growth. Recently, we took three actions that advanced our sustainability efforts. We named Julie Legacy as our first Chief Sustainability and Strategy Officer. We committed to incorporate ESG performance into our 2022 incentive plan for executives. and we announced our plan to analyze the disclosure recommendations of the Task Force on Climate-Related Financial Disclosures, or TCFD, and to utilize the TCFD framework to enhance our sustainability reporting starting in 2023. This past May, we disclosed our sustainability goals for 2030. Caterpillar is committed to contributing to a reduced carbon future. We demonstrate this in many ways, including through our significant progress in reducing greenhouse gas emissions from our operations and our continued investment in new products, technologies, and services to help our customers achieve their climate-related objectives as they build a better, more sustainable world. This quarter, our customers denounced some exciting news in cooperation with Caterpillar. BHP and Caterpillar have agreed to test zero emissions battery-powered large mining trucks at BHP sites to reduce their operational greenhouse gas emissions. We also signed an agreement with Rio Tinto for the world's first fleet of 793 zero emissions autonomous haul trucks to support its mining operations in Western Australia. This agreement helps support Rio Tinto's sustainability goals. This mine is also home to the world's first fully autonomous water truck, the CAT-789D. Enhancing grid stability is also critical for our customers. Our battery energy storage and bidirectional power inverters are built to provide continuous, reliable electric power at oil and gas sites. They can also be leveraged at remote mining sites, such as Barrett Gold Corporation's Kabali Gold Mine in the Democratic Republic of Congo. Collaborating with our customer and our local dealer, Tractor Free, the battery energy storage capacity for the mine's microgrid saves Barrick an estimated 3 million liters of diesel fuel annually. We displayed this solution at our Mine Expo exhibit in Las Vegas in September, and it's a great example of how our technologies apply across our segments to provide customers with full-site solutions. In summary, we continue executing our strategy for long-term profitable growth. We're investing in services and expanded offerings while driving operational excellence. We continue to remain focused on sustainability. We're developing products and services that facilitate fuel transition, increase operational efficiency, and reduce emissions to help our customers achieve their environmental and carbon reduction goals. We had a strong third quarter overall with volume growth in all three primary segments and sales gains in every region. operating profit margin expanded due largely to the volume gains while material costs and freight have risen so has price realization with strong performance year to date we remain on track to meet our investor day targets for m e and t margins and free cash flow for the year now let me turn the call over to andrew thank you jim and good morning everyone i'll start on slide nine with my thoughts on caterpillar third quarter results including the performance of each segment