Caterpillar, Inc.

Welcome to the first quarter 2022 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, Ryan Fiedler. Thank you. Please go ahead.

Thank you, Emma. Good morning, everyone, and welcome to Caterpillar's first quarter of 2022 earnings call. I'm Ryan Fiedler, Director of Investor Relations. Joining me today are Jim Umpleby, Chairman and CEO, Andrew Bonfield, Chief Financial Officer, Kyle Epley, Vice President of the Global Finance Services Division, and Rob Rangel, Senior IR Manager. During our call today, we'll be discussing the first quarter earnings release we issued earlier today. You can find our slides, the news release, and a video recap at investors.caterpillar.com under Events and Presentations. I would also like to remind everyone that we are hosting Caterpillar's Investor Day on May 17th from 10.30 a.m. to 3 p.m. Central Time, at the Hilton DFW Lakes Executive Conference Center in Grapevine, Texas. Our theme is services, technology, and sustainability, helping our customers build a better world. Please check out the details on our investor website. Caterpillar has copyrighted this call, and we prohibit use of any portion of it without our prior written approval. Moving to slide two, during our call today, we'll make forward-looking statements, which 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 release for details on factors that, individually or in aggregate, could cause our actual results to vary materially from our forecast. On today's call, we'll also refer to non-GAAP numbers. For reconciliation of any non-GAAP numbers to the appropriate U.S. GAAP numbers, Please see the appendix of the earnings call slides. Today we reported profit per share of $2.86 for the first quarter of 2022, compared with $2.77 of profit per share in the first quarter of 2021. We're including adjusted profit per share in addition to our U.S. GAAP results. Our adjusted profit per share was $2.88 for the first quarter of 2022. compared with adjusted profit per share of $2.87 for the first quarter of 2021. Adjusted profit per share for both quarters excluded restructuring costs. Now, let's flip to slide three and turn the call over to our chairman and CEO, Jim Humblefield.

Thanks, Ryan. Good morning, everyone. Thank you for joining us. I'd like to start by thanking our global team for their contributions to another good quarter. We continue to execute our strategy for long-term profitable growth as demonstrated by our first quarter results. I'll begin with my perspectives on our performance in the quarter, and then I'll provide some insight on our end markets. Before discussing our results, I'd like to take a moment to say we remain deeply saddened by the tragic events continuing to occur in Ukraine and hope for a peaceful resolution. Through the Caterpillar Foundation, we have donated more than $1 million to support both urgent and long-term needs of the Ukraine humanitarian crisis. I'm proud of our employees for their generous contributions through the Foundation Matching Gifts program, which added nearly an additional $1 million of support for Ukrainian refugees. On the operations front, we suspended production in our Russian manufacturing facilities and will continue to comply with all applicable laws and evolving sanctions. Moving on to our quarterly results, Sales rose in all three of our primary segments due to volume gains and favorable price. Sales and margins were both slightly better than we expected. And similar to the second half of 2021, our top line would have been even stronger without the continuing supply chain constraints. Overall, we remain encouraged by the strong demand for our products and services. The first quarter of 2022 marked the fifth consecutive quarter of higher end-user demand compared to the prior year. services remain strong in the quarter. We continue to make progress on our service initiatives, including customer value agreements, e-commerce, connected assets, and prioritized service events. Moving to slide four, sales and revenues increased by 14%, slightly better than we expected. The increase was primarily driven by higher end-user demand and the impact of changes in dealer inventories, as well as strengthening price realization. The impact of our price action started to accelerate in the second half of 2021. We generated double-digit sales growth in all primary segments, and sales rose in North America, Latin America, and Miami. Asia Pacific was down by 4%. Compared with the first quarter of 2021, sales to users rose 2%, which was about as we expected. For machines, including construction industries and resource industries, sales to users increased by 3%, while energy and transportation decreased 1%. Sales to users and construction industries were about flat overall, with good growth globally in the first quarter, except for China. North America grew by double digits as residential construction remained strong and non-residential contributed to show signs of improvement. Latin America saw higher end-user demand supported by construction and strong commodity prices. End-user demand increased in IEMI due to residential growth in support of commodity prices. I'll briefly discuss China. In the first quarter of 2021, China's greater than 10-ton excavator industry was at an all-time high, which resulted in a difficult comparable in the quarter. In the first quarter of 2022, China was lower than we expected due to weaker residential construction and COVID-19-related shutdowns. Overall, sales in China were about half the level we saw in the prior year's quarter. Keep in mind, China's sales are typically 5% to 10% of our enterprise sales. Outside of China, Asia Pacific sales to users grew as we continue to see strong demand in the region. In resource industries, the overall environment remained positive, with sales to users up 13%, an improvement from the fourth quarter. Mining increased at a measured pace, which is in line with the expectations that we've been communicating to you for the last couple of years. Strong commodity prices supported the high utilization and a low number of parked trucks. In heavy construction and quarry and aggregates, sales to users increased versus the prior year for the fourth straight quarter as end-user demand continues to improve. In energy and transportation, sales to users declined 1% versus the prior year. Solar turbines declined as expected due to the timing of projects. Excluding solar, sales to users were strong. Oil and gas sales to users were down in the first quarter with improvement in reciprocating engines more than offset by solar. Despite continued data center and rental demand strength, power generation sales to users were down overall due to timing of some larger projects. Industrial end-user demand strengthened across all regions. Lastly, transportation benefited from growth off a low base, primarily in marine applications. Now we'll spend a moment on dealer inventory. Dealers who are independent businesses increase their inventories by about $1.3 billion in the first quarter. This compares to a $700 million increase in the first quarter of last year. While dealer inventories remain near the low end of the typical range, we continue to work closely with dealers to satisfy higher end-user demand. Andrew will provide additional color about dealer inventory later in the call. Regarding ongoing supply constraints, we experienced similar challenges to what we highlighted in the fourth quarter, which was in line with our expectations. We continued to experience constraints with semiconductors and certain other components. Our team continues to implement solutions to help mitigate the overall situation. For example, we executed engineering redesigns to provide customers with alternative options. We also increased dual sourcing of components and placed specialized Caterpillar resources at suppliers to help ease constraints. I remain proud of our global team's ability to deliver double-digit sales growth despite supply chain challenges. Similar to previous quarters, absent the supply chain constraints, our top line would have been even stronger. When the supply chain conditions ease, we expect to be well positioned to fully meet demand and gain operating leverage from higher volumes. Operating profit increased 2% in the quarter to $1.9 billion. driven by strong volume and favorable price realization across all segments, which was partially offset by higher manufacturing costs and SG&A and R&D expenses. The higher manufacturing costs primarily reflected increased material and freight costs in the quarter. While we did see some labor inefficiencies, these were not as significant as they were in the fourth quarter. Operating profit margins were 13.7% in the first quarter, which was lower than the first quarter of 2021. We expected comparisons would be difficult as inflationary impacts to manufacturing costs accelerated in the back half of 2021 and remained at a similar level in the first quarter of 2022. On a sequential basis, our margins improved versus the fourth quarter as we expected. Our profit per share was $2.86 versus $2.77 in the first quarter of 2021. The adjusted profit per share was $2.88 versus $2.87 in the first quarter of last year. On slide five, we had an MENT free cash outflow of about $400 million in the quarter, which Andrew will discuss in a few moments. To remind you, our investor day target is to deliver MENT free cash flow of between $4 and $8 billion per year. We expect to be within that range for the full year 2022. Regarding capital deployment, we completed $800 million of share repurchases and returned $600 million in dividends to shareholders. we remain proud of our dividend aristocrat status. We continue to expect to return substantially all of our MENT-free cash flow to shareholders over time through dividends and share repurchases. Now, I'll share some high-level assumptions on our expectations for the full year. We expect to achieve our investor day targets for adjusted operating profit margins and, as I've just mentioned, deliver MENT-free cash flow within our targeted range in 2022. As I previously indicated, we continue to be encouraged by strong order demand across our segments. In the first quarter of 2022, our total backlog increased by $3.4 billion as we experienced continued strong demand and supply chain challenges. Backlog increased in all segments with the largest increase in energy and transportation. The environment continues to be challenging due to supply chain constraints and the more recent COVID-19 related shutdowns in China. Although manufacturing costs are expected to remain elevated, We expect price to more than offset these cost increases for the full year. Turning to slide six, I'll discuss our expectations for key end markets this year. In construction industries in North America, residential construction remains strong, with non-residential continuing to improve. Despite rising interest rates, infrastructure investment is expected to improve in late 2022 and beyond, supported by the U.S. Infrastructure Investment and Jobs Act. The 10-ton and above excavator market in China was very strong in 2020 and 2021. We now anticipate this market will be slightly lower than 2019 levels. The rest of Asia-Pacific region is expected to grow due to higher infrastructure spending. In the AME, despite the broader geopolitical concerns, we remain cautiously optimistic due to housing growth and the EU investment package that is expected to drive construction demand. Construction and mining activity in Latin America are supportive of growth, but could be impacted by inflation and interest rate policy decisions. In resource industries, we believe commodity prices will continue to drive higher production and utilization levels, which support more investments in equipment and services in 2022 and beyond. Within heavy construction and quarry and aggregates, we also anticipate continued growth in 2022. Lastly, we are seeing increased quoting for our autonomous solutions, which includes large mining trucks, drills, truck type tractors, water trucks, and underground machines. In energy and transportation, we expect improving momentum in 2022 with strong order rates in most applications. In oil and gas, although customers remain disciplined, we are encouraged by continued strength in reciprocating engine orders, especially for large engine replacements as asset utilization increases. Power generation orders remain healthy due to positive economic growth and continued data center strength. In 2022, while solar services are expected to remain steady, we continue to expect new equipment shipments to be lower than last year due to the lead time of solar products. Solar's new equipment orders strengthened significantly in the first quarter, and shipments are expected to improve in late 2022 or early 2023. Industrial remains healthy with continued momentum in construction, agriculture, and electric power. In rail, North American locomotive sales are expected to remain muted, but international locomotives are more promising. We also anticipate growth in high-speed marine as customers upgrade aging fleets. Now on to slide seven. In 2021 and into the first quarter of 2022, Caterpillar and our customers announced a number of projects that will contribute to a reduced carbon future. We recently entered into an agreement with Ioneer, a US-based lithium-boron miner. This will be the first greenfield site in the US to use autonomous haul trucks. Lithium is a key component for battery electric vehicles, and the minerals from this Nevada mine will help contribute to a more sustainable future. Our autonomous technology is a competitive advantage as it delivers significant benefits to our customers. including improved safety, productivity, and efficiency, while lowering greenhouse gas emissions per ton of material moved. Our commitment to sustainable innovation remains strong as we continue to execute our strategy for long-term profitable growth. I look forward to hosting you at our Investor Day on May 17th, where we will be talking more about services, technology, and sustainability. With that, I'll turn the call over to Andrew.