Caterpillar, Inc.

Welcome to the third 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 third quarter of 2022 earnings call. I'm Ryan Fiedler, Vice President of Investor Relations. Joining me today are Jim Umpleby, Chairman and CEO, Andrew Bonfield, Chief Financial Officer, Kyle Epley, Senior Vice President of the Global Finance Services Division, and Rob Rangel, Senior IR Manager. During our call today, we'll be discussing the third quarter earnings release we issued earlier today. You can find our slides, the news release, and a webcast recap at investors.caterpillar.com under Events and Presentations. The content of this call is protected by U.S. international copyright law. Any rebroadcast, retransmission, reproduction, or distribution of all or part of this content without Caterpillar's prior written permission is prohibited. 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 from 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. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. 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. In addition, the appendix includes a calendar of expected earnings dates in 2023, starting with January 31st for our fourth quarter call. Today, we reported profit per share of $3.87 for the third quarter of 2022, compared with $2.60 of profit per share in the third quarter of 2021. We're including adjusted profit per share in addition to our U.S. GAAP results. Our adjusted profit per share was $3.95 for the third quarter of 2022, compared with adjusted profit per share of $2.66 for the third quarter of 2021. Adjusted profit per share for both quarters excluded restructuring costs. Now, let's turn to slide three and turn the call over to our chairman and CEO, Jim Humplebee.

Thanks, Ryan. Good morning, everyone. Thank you for joining us. As we close out the third quarter, I want to thank our global team for delivering another good quarter, including strong top-line growth, higher operating profit margins, and robust MENT free cash flow, despite continuing supply chain challenges. Our third quarter results reflected healthy demand across most end markets for our products and services. We remain focused on executing our strategy and continue to invest for long-term profitable growth. In today's call, I'll begin with my perspectives on our performance in the quarter, and then I'll provide some insights on our end markets. Lastly, I'll provide an update on our sustainability journey. Turning to slide four, overall, it was a very strong quarter. Sales increased 21% in line with our expectations. Operating profit improved by 46%, although the margin improvement of 280 basis points was slightly less than we had anticipated. The sales growth was led by price realization and volume growth. Sales were higher in all regions with double-digit increases in each of our three primary segments. Services growth momentum continued in the third quarter as a result of our services initiatives and investments. Similar to previous quarters, our top line would have been even higher if not for ongoing supply chain constraints. We generated strong operating profit margin improvements in the quarter both on a year-over-year and sequential basis. The adjusted operating profit margin was 16.5%. Adjusted profit per share increased 48% to $3.95. We generated robust MENT free cash flow of $2.1 billion. Our backlog continued to grow. It increased by $1.6 billion in the quarter and is now $30 billion. Compared with the third quarter of 2021, sales to users increased 7%. For machines, including construction industries and resource industries, sales to users increased by 2%, while energy and transportation was up 22%. Timing of deliveries from dealers to customers resulted in sales to users that were slightly below our expectations. Sales to users in construction industries were about flat. North American sales to users were up slightly. Dealer inventories in North America remained at relatively low levels due to healthy demand and supply chain constraints. Latin America experienced higher sales to users, while IEMI declined slightly. Asia Pacific sales to users were down in the quarter. However, excluding China, sales to users in the Asia Pacific region increased. In resource industries, Sales to users increased 10% with increases in mining as well as heavy construction and quarry and aggregates. In energy and transportation, sales to users increased by 22%. Oil and gas sales to users benefited in the third quarter from continued improvement in reciprocating engines. Turbine and turbine-related services were about flat. Power generation and industrial sales to users remained strong due to favorable market conditions. Transportation increased from a relatively low base, primarily on strength in marine and international locomotives. Dealer inventory increased by about $700 million in the third quarter, compared to a decrease of about $300 million in the same quarter last year. Most of the increase relates to timing differences between when we ship products to dealers and when the dealers, in turn, are able to deliver completed orders to customers. Although the rise in dealer inventory was greater than our expectations, inventories remain near the low end of the typical range. As I mentioned, adjusted operating margins improved by 280 basis points to 16.5%. Strong price and volume offset increases in manufacturing costs and SG&A and R&D expenses. Manufacturing cost increases reflected continued higher material and freight costs and manufacturing inefficiencies caused by supply chain disruptions. resulting in our margins for the quarter being slightly lower than we had anticipated. Moving to slide five, we generated $2.1 billion of MENT-free cash flow in the quarter. We repurchased $1.4 billion of stock and returned about $600 million in dividends to shareholders. We remain proud of our dividend aristocrat status and continue to expect to return substantially all MENT-free cash flow to shareholders over time through dividends and share repurchases. Now, on slide six, I'll share some high-level assumptions on our expectations moving forward. While we continue to closely monitor global macroeconomic conditions, overall demand remains healthy across our segments. We expect top-line growth in the fourth quarter, both year-over-year and sequentially. This expected performance reflects healthy demand and favorable price realization. We anticipate sales increases across the three primary segments as order levels and backlog remains strong. As a reminder, dealers have been focused on supplying customer orders and will look to replenish aging rental fleets over time when the supply chain situation improves. We expect adjusted operating profit margins to be significantly higher in the fourth quarter versus the prior year and slightly higher than in the third quarter. However, we now anticipate that our full year margins will be at the low end or slightly below the low end of the investor day target range. The headwind is primarily due to ongoing manufacturing efficiencies related to supply chain constraints, ongoing inflationary pressures within manufacturing costs, and our conscious decision to continue to invest for profitable growth. That said, we expect to achieve our investor day MENT free cash flow target range of $4 to $8 billion. Now I'll turn to our outlook for key end markets. Residential construction generally accounts for about 25% of sales in construction industries, while non-residential is the remainder. In North America, residential construction is moderating due to tightening financial conditions, but remains at relatively high levels. We expect non-residential construction in North America to strengthen, supported by the impact of government-related infrastructure investments. In Asia Pacific, excluding China, we expect moderate growth due to higher infrastructure spending and commodity prices. As we mentioned last quarter, weakness continues in China in the excavator industry above 10 tons. It is expected to remain below the 2019 levels due to low construction activity. In Yemi, business activity is expected to be flat to slightly down versus last year based on uncertain economic conditions in Europe. However, strong backlogs in announced infrastructure plans limit the decline. Construction activity in Latin America is expected to grow due to supportive commodity prices. In resource industries, our mining customers continue to exhibit capital discipline. However, commodity prices remain supportive of continued investment, despite trending lower recently. We expect production and utilization levels will remain elevated and our autonomous solutions continue to gain momentum. I'll highlight an example in a moment. We expect the continuation of high equipment utilization and a low level of parked trucks, which both support future demand for our equipment and services. We continue to believe the energy transition will support increased commodity demand, expand our total addressable market, and provide opportunities for profitable growth. In heavy construction and quarry and aggregates, we anticipate continued growth in the fourth quarter. In energy and transportation, we expect continued sales momentum in the fourth quarter due to 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 repowers as asset utilization increases. New equipment orders for solar turbines have strengthened significantly, particularly in oil and gas. indicating sales growth in late 2022 and into 2023. Solar services revenue is expected to remain steady. We expect a strong fourth quarter, which is typically our highest sales quarter of the year for solar. Power generation orders remain healthy due to positive industry dynamics and continued data center strength. Industrial remains healthy with continued momentum in construction, agriculture, and electric power. In rail, North American locomotive sales are expected to remain muted. We also anticipate growth in high-speed marine as customers continue to upgrade aging fleets. Moving to slide seven. As we continue to advance our sustainability journey through the third quarter of 2022, Caterpillar, cat dealers, and our customers announced a number of projects that will help contribute to a lower carbon future. I'll highlight two today. In late August, we announced a significant step in this journey when BHP Group Limited, Caterpillar, and Finning International announced an agreement to replace BHP's entire haul truck fleet at the Escondida mine in Chile, the world's largest copper-producing mine. We will replace one of the industry's largest mixed fleets that is currently comprised of over 160 haul trucks with new Caterpillar 798AC electric drive haul trucks. Deliveries begin in 2023 and will extend over 10 years. The new electric drive trucks will feature technology that delivers significant improvements in material moving capacity, efficiency, reliability, and safety. The agreements allow BHP to accelerate the implementation of its autonomy plans by transitioning the fleet to include technology that enables autonomous operation. In addition, the agreement set forth a path for BHP to meet its decarbonization goals through the progressive implementation of zero-emission trucks. Second, we're currently displaying four battery electric machine prototypes at Bauma in Munich, Germany, including mini and medium excavators, a GC medium wheel loader, and a compact wheel loader. Each machine is powered by Caterpillar battery prototypes and includes onboard AC chargers. We also plan to offer an off-board DC fast charging option. Leveraging our deep system integration experience, the batteries are scalable to industry and customer performance needs and maximize sustainability throughout their lifecycle, including recycling and reuse at the end of life. The Caterpillar-designed batteries in these machines will also be available to power other industrial applications, highlighting our ability to leverage technology across the enterprise. With that, I'll turn the call over to Andrew.