Caterpillar, Inc.

Welcome to the fourth 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 fourth quarter of 2022 earnings call. I'm Ryan Fiedler, Vice President of Investor Relations. Joining me today are Jim Upleby, 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, which will extend to 8.40 a.m. Central, we'll be discussing the fourth quarter and full year 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 and 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 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. 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. Today, we reported profit per share of $2.79 for the fourth quarter of 2022, compared with $3.91 of profit per share in the fourth quarter of 2021. We're including adjusted profit per share in addition to our U.S. GAAP results. Our adjusted profit per share was $3.86 for the fourth quarter of 2022, compared with adjusted profit per share of $2.69 for the fourth quarter of 2021. Adjusted profit per share for both quarters excluded mark-to-market gains for remeasurement of pension and other post-employment benefit plans, as well as restructuring items. Adjusted profit per share for the fourth quarter of 2022 also excluded a goodwill impairment. Now, let's turn to slide three and turn the call over to our chairman and CEO, Jim Umpleby.

Thanks, Ryan. Good morning, everyone. Thank you for joining us. As we close out 2022, I'd like to start by recognizing our global team for another strong quarter. Our results reflect 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 for the full year. I'll then provide some insights on our end markets. Lastly, I'll provide an update on our sustainability journey. Overall, it was another strong quarter as demand remained healthy for our products and services. Sales rose by 20% versus the fourth quarter of 2021, better than we expected. Supply chain improvements enabled stronger than expected shipments, particularly in construction industries, and supported an increase in dealer inventories. We achieved double-digit top-line increases in each of our three primary segments and saw sales growth in North America, Latin America, and Miami, while Asia Pacific was about flat. Adjusted operating profit margins increased to 17% in the fourth quarter, an all-time record, as we saw our margins improve both on a sequential and year-over-year basis. Adjusted profit per share was $3.86, which includes an unfavorable 41 cent per share of foreign currency headwind, largely due to MENT balance sheet translation. This was caused by the rapid decline in the U.S. dollar late in the year and reversed much of the favorable impact we saw in the first three quarters of 2022. We generated a 17% increase in total sales to $59.4 billion in the year. Services also increased by 17% to $22 billion. Adjusted operating profit margin for the full year was 15.4%, a 170 basis point increase over the prior year. Although we did not achieve our investor day margin targets for the year, which I'll discuss more in a moment, I'm pleased that we increased adjusted operating profit by over $2 billion and grew absolute OPEC dollars, which is our internal measure of profitable growth. For the year, we achieved adjusted profit per share of $13.84. also an all-time record. In addition, we generated $5.8 billion of MENT-free cash flow firmly in our target range. Finally, despite the strong sales in the fourth quarter, backlog grew by $400 million in the quarter to end the year at $30.4 billion, a 32% year-over-year increase. As I've mentioned, we did see some improvement in certain areas of the supply chain in the fourth quarter. However, pockets of challenge continue, particularly with some suppliers related to energy and transportation and resource industries. Similar to previous quarters, our sales would have been higher if not for these supply chain issues. Our global team delivered one of the best years in our nearly 100-year history, including record full-year adjusted profit per share. achieved double-digit top-line growth, and generated strong MENT pre-cash flow. We remain committed to serving our customers, executing our strategy, and investing for long-term profitable growth. Turning to slide four, in the fourth quarter of 2022, sales increased 20% versus last year to $16.6 billion. The increase was due to favorable price realization and volume growth, which included dealer inventory increases and growth in sales of equipment to end users. Compared with the fourth quarter of 2021, sales to users increased 8%, broadly in line with our expectations. For machines, including construction industries and resource industries, sales to users rose by 4%, while energy and transportation was up 19%. Sales to users in construction industries were up 1%, in line with expectations. As a reminder, non-residential represents approximately 75% of Caterpillar sales and construction industries. North American sales to users increased as demand remained healthy for both non-residential and residential, despite some moderation in residential. Latin America saw higher sales to users, while EAMI in Asia Pacific declined slightly in the quarter. However, excluding China, sales to users in the Asia Pacific region increased. In resource industries, sales to users increased 13%, which was lower than anticipated, mainly due to timing issues related to outbound logistics and commissioning. The segment sales to users increased primarily due to heavy construction and quarry and aggregates. In energy and transportation, sales to users increased by 19%, slightly above our expectations. In the fourth quarter, oil and gas sales to users benefited from continued strength and large engine repowers. We also saw strong turbine and turbine-related services. Power generation and industrial sales to users continued to remain positive due to favorable market conditions. Transportation declined from a relatively low base, primarily due to lower locomotive deliveries, while marine was up slightly. Dealer inventory increased by about $700 million in the fourth quarter, which was above our expectations, compared to a decrease of about $100 million in the same quarter last year. As I mentioned, supply chain improvements enabled stronger than expected shipments, particularly in construction industries, and supported an increase in dealer inventories. We saw increases in each of our primary segments, and within construction industries, dealer inventories are now in their typical historical range of three to four months of projected sales. In construction industries, the largest dealer inventory increase came in North America, which benefited our most constrained region. Over 70% of the combined year-end dealer inventory in resource industries and energy and transportation is supported by customer orders. As expected, we generated improved adjusted operating profit margin in the quarter, both year-over-year and sequentially. Our adjusted operating profit margin increased by 560 basis points versus last year to 17%, which does not include the non-cash goodwill impairment charges and restructuring costs associated with the rail division. I'll provide more detail on rail later in my remarks. Turning to slide five, I'll now provide full year highlights. In 2022, we generated sales at $59.4 billion, up 17% versus last year. This was due to favorable price realization and higher sales volume, driven by the impact from changes in dealer inventory, increased services, and higher sales of equipment to end users. As I mentioned, we generated $22 billion of services revenues in 2022, a 17% increase over 2021. Services growth in 2022 benefited from our ongoing initiatives and investments, as well as price realization. We now have over 1.4 million connected assets, up from 1.2 million in 2021. We delivered over 60% of our new equipment with a customer value agreement and the launch of our new app, called Cat Central helped drive growth in e-commerce sales to users. We also had the highest level of parts availability in our history. Overall, our confidence continues to increase that we'll achieve our $28 billion services target in 2026. Our full year adjusted operating profit margin was 15.4%, 170 basis point increase over 2021. Although we significantly increased margins in the fourth quarter versus last year, Overall, they did not improve enough for us to achieve our full-year investor-day margin targets. Our margins in 2022 were impacted by supply chain inefficiencies, ongoing inflationary pressures within manufacturing costs, and our conscious decision to continue to invest for profitable growth. As I mentioned during our last earnings call, our margin targets are progressive, which means we expect to achieve higher operating profit margins as sales increase. In a higher inflationary environment, where a relatively larger portion of the sales increases due to price realization, there's less operating leverage, which makes the delivery of those progressive margins more challenging. Andrew will provide more information about our operating profit margin targets. Moving to slide six, we generated MENT pre-cash flow of $5.8 billion for the full year, which was in line with our investor day range of $4 to $8 billion. We returned $6.7 billion to shareholders. or 115% of MENT pre-cash flow, which included $4.2 billion in repurchase stock and $2.4 billion in dividends to shareholders. We remain proud of our dividend and restocrate status and continue to expect to return substantially all MENT pre-cash flow to shareholders over time through dividends and share repurchases. Now on slide 7, 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, and we expect 2023 to be better than 2022 on both top and bottom line. Just to remind you, our internal measure of profitable growth is absolute OPEC dollars. We believe increasing absolute OPEC dollars will lead to continued higher total sharehold returns over time. We expect to achieve our updated adjusted operating profit margin targets and MENT-free cash flow target range of $4 to $8 billion during 2023. Now I'll discuss our outlook for key end markets this year, starting with construction industries. In North America, overall, we see positive momentum in 2023. We expect non-residential construction in North America to grow due to the positive impact of government-related infrastructure investments healthy backlogs, and rental replenishment. Although residential construction continues to moderate due to tightening financial conditions, it remains at a healthy level. In Asia Pacific, excluding China, we expect growth in construction industries due to public infrastructure spending and supportive commodity prices. As we mentioned during our last earnings call, weakness continues in China in the excavator industry above 10 tons. We expect it to remain below 2022 levels due to low construction activity. In IEMI, business activity is expected to be about flat versus last year based on healthy backlogs and strong construction demand in the Middle East, offset by uncertain economic conditions in Europe. Construction activity in Latin America is expected to be flat to slightly down versus the strong 2022 performance. In resource industries, we expect healthy mining demand to continue, as commodity prices remain above investment thresholds. That said, our customers remained capital disciplined. We anticipate production and utilization levels will remain elevated, and our autonomous solutions continue to gain momentum. 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 expanding our total addressable market and providing opportunities for profitable growth. In heavy construction and quarrying aggregates, we anticipate continued growth supported by infrastructure and major non-residential construction projects. In energy and transportation, we expect sales growth due to strong order rates in most applications. In oil and gas, although customers remain disciplined, we are encouraged by continued strength in demand and order intakes for the year. New equipment orders for solar turbines continue to be robust. Power generation orders are expected to remain healthy, including data center strength. Industrial remains healthy with momentum continuing for 2023. In rail, North American locomotive sales are expected to remain muted. We anticipate strength in high-speed marine as customers continue to upgrade aging fleets. During the fourth quarter, we took on a $925 million non-cash goodwill impairment charge related to our rail division, which is part of the energy and transportation segment. The impairment was primarily driven by a revision in our long-term outlook for the company's locomotive offerings. We believe opportunities exist for new locomotives, overhauls, repowers, and modernizations, but at lower levels than previously forecasted and occurring over a longer time horizon. In addition to the goodwill impairment charge, we also incurred restructuring cost of $180 million in the quarter. primarily related to non-cash inventory adjustments within this division. Importantly, our rail services, including track, signal and freight car, remain robust. Progress Rail plays an integral part in supporting and maintaining rail infrastructure in countries around the globe, and rail remains one of the most efficient ways of transporting goods across the land. We will continue to offer Tier 4 solutions to our customers. However, strategic investments in new locomotive products will continue shifting to competitive, sustainable solutions that help customers meet their carbon reduction initiatives, including hybrid, full battery electric, and alternative fuel power sources, including hydrogen. These alternative power solutions for rail will leverage modularity and scale across resource industries, construction industries, and energy and transportation. We believe these enterprise-wide investments will provide Caterpillar with a strategic advantage over time. Moving to slide eight, we continue to advance our sustainability journey in the fourth quarter of 2022 as we strive to help our customers achieve their climate-related objectives. In November, Caterpillar announced the successful demonstration of its first battery electric 793 large mining truck prototype with support from key mining customers participating in Caterpillar's Early Learner program. the truck performed at the same specification as a diesel truck on our seven-kilometer course, achieving a top speed of 60 kilometers per hour carrying a full load and 12 kilometers per hour with that same load at a 10% grade. In addition to the truck, we also unveiled plans to create a working and more sustainable mindset of the future at our Arizona-based proving ground. This includes installing and utilizing a variety of renewable energy sources, leveraging technologies from our electric power division and new electrification and advanced power solutions division. We also invested in Lithos Energy Inc., a lithium-ion battery pack producer that manufactures battery packs for the types of demanding environments our CAD equipment thrives in. This collaboration supports our commitment to delivering robust, electrified products and solutions to our customers. Lastly, in 2022, we continue to advance our autonomous journey achieving an industry-first of moving over 5 billion tons autonomously across 25 mine sites worldwide. During the fourth quarter, we announced our first autonomous solution in the aggregates industry. We'll collaborate with Luckstone, the nation's largest family-owned and operated producer of crushed stone, sand, and gravel, to expand these solutions beyond mining. We'll utilize CAT MindStar Command for hauling system on 777 trucks, contributing to continued improvements in safety and productivity for our customers. These examples reinforce our ongoing sustainability leadership and how we help our customers build a better, more sustainable world. We look forward to issuing our 18th annual sustainability report during the second quarter. With that, I'll turn the call over to Andrew.