Caterpillar, Inc.

Welcome to the first quarter 2023 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.

Thanks, Emma. Good morning, everyone, and welcome to Caterpillar's first quarter of 2023 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 first quarter earnings release that 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 the 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. Now, let's turn to slide three and turn the call over to our chairman and CEO, Jim Upleby.

Thanks, Ryan. Good morning, everyone. Thank you for joining us. I'd like to start by thanking our global team for a strong first quarter, including double-digit top-line growth, higher operating profit margins, record-adjusted profit per share, and strong MENT-free cash flow. Our results reflect healthy customer 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. I'll then provide some insights on our end markets. Lastly, I'll provide an update on our sustainability journey. It was a very strong quarter. Sales and revenues were better than we expected, with price realization increasing dealer inventory, and sales to users, each slightly better than we anticipated. Sales to users were higher than expected in energy and transportation and resource industries. Overall, sales and revenues rose by 17% versus the first quarter of 2022. The year-over-year increase was due to strong price realization and volume growth, which was driven by higher sales of equipment to end users. We achieved double-digit top-line increases in each of our three primary segments. Adjusted operating profit margins increased to 21.1% in the first quarter as we saw margins improve both on a sequential and year-over-year basis. The adjusted operating profit margins were significantly better than we had anticipated, primarily due to better-than-expected manufacturing costs, including efficiencies in absorption, stronger price realization, and volume growth. Andrew will discuss in detail later. Backlog ended the quarter at $30.4 billion, flat relative to the fourth quarter of 2022. Equipment availability increased during the quarter due to improving supply chain conditions. While dealer order rates are lower, they remain at healthy levels. As you know, as availability improves, order rates typically normalize as dealers can wait longer to place orders for long lead time items. Our healthy backlog continues to underpin our constructive views about our end markets. Despite the improvement in supply chain, pockets of challenge remain as we increase production, particularly for large engines, which impacts energy and transportation and some of our larger machines. We delivered a strong first quarter, which positions us well for an even better year in 2023 than we previously anticipated. While we continue to closely monitor global macroeconomic conditions, overall demand remains healthy across our products and services. Turning to slide four, in the first quarter of 2023, sales and revenues increased 17% versus last year at $15.9 billion. This was primarily due to favorable price and volume growth. Compared with the first quarter of 2022, overall sales to users increased 13%. For construction industries and resource industries, sales to users rose by 5%, while energy and transportation was up 39%. Sales to users in construction industries were flat, in line with our expectations. North American sales to users increased as demand remained healthy for both non-residential and residential, despite some moderation of the growth rate in residential. Overall, our North American sales to users were better than we expected. IAMI also saw higher sales to users, led by strength in the Middle East. In Latin America and Asia Pacific, sales to users declined in the quarter. The decline in Asia Pacific included further weakening in China. In resource industries, sales to users increased 18%, which was our third consecutive quarter of accelerating sales to users. In mining, sales to users benefited from a higher level of commissioning in the quarter. Within heavy construction and quarrying aggregates, sales to users also increased, supported by growth for infrastructure-related projects. In energy and transportation, Sales to users increased by 39%. In the first quarter, oil and gas sales to users benefited from continued strength in new engine sales to customers, including repowering active fleets, upgrading technology to Tier 4 dynamic gas blending, and adding incremental gas compression units. We also saw strong sales of turbines 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 timing in marine deliveries, which was partially offset by deliveries of international locomotives. Dealer inventory increased by about $1.4 billion in the first quarter, which was slightly above our expectations, compared to a $1.3 billion increase in the same quarter last year. In construction industries, the increase in dealer inventory was primarily due to stronger North American shipments. which remains our most constrained region. As we mentioned last quarter, over 70% of the combined dealer inventory in resource industries and energy and transportation is supported by customer orders. Moving to slide five, we generated strong MENT-free cash flow of $1.4 billion in the first quarter. We returned $1 billion to shareholders, which included about $600 million in dividends and $400 million in repurchased stock. 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 commentary on our expectations moving forward. While we continue to closely monitor global macroeconomic conditions, our first quarter results lead us to expect that 2023 will be even better than we had previously anticipated on both the top and bottom line. For 2023, we currently expect to be in the top half of the targeted range for both adjusted operating profit margin and MENT free cash flow. Andrew will provide additional color. Before I discuss our outlook for key and markets, I'll provide some color on how we expect our top line to progress through this year. As I mentioned, We expect a strong top line for 2023, supported by price and higher sales to users with healthy underlying end markets. We expect higher sales in the second quarter compared to the first, as is the typical seasonal pattern. Looking to the second half of 2023, it is important to highlight the second half of last year included the dealer inventory build of $1.4 billion as dealers began to restock their inventories. We are not planning for this trend to repeat. Instead, we expect to see dealers decrease inventories compared to the first quarter levels and end 2023 about flat relative to the end of 2022. Although we expect sales to users to remain positive for our primary segments in each quarter, our planning assumption is that Caterpillar second half sales will have a dealer inventory impact. Let me explain. First, although dealer inventory in some products and regions have normalized, others remain constrained. For example, in North America, dealer inventory remains below the typical range for many products. However, there is greater excavator inventory in a few regions as supply dynamics improved in 2022, which, coupled with the slowing in China, has resulted in improved excavation product availability. Given the improved availability of excavators, we expect that dealers will scale back their levels of excavator inventory in the second half of the year even though demand remains healthy. As a reminder, divas are independent businesses and control their own inventory. Second, in late 2023, we have scheduled a couple of new product changeovers in construction industry factories that will also impact the second half. Now I'll discuss our outlook for key end markets this year, starting with construction industries. In North America, overall, we continue to see positive momentum in 2023. We expect growth in non-residential construction in North America due to the positive impact of government-related infrastructure investments and a healthy pipeline of construction projects. Although residential construction housing starts have softened, the growth rate of our residential construction equipment remains positive as the supply chain pressures alleviate. 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 previous earnings calls, we expect China's above 10-ton excavator industry to remain below 2022 levels due to low construction activity. In 2023, sales in China are expected to be below the typical range of 5% to 10% of total Caterpillar sales. In Iemi, business activity is now expected to increase versus last year based on healthy construction project activity particularly strong construction demand in the Middle East. Although uncertain economic conditions remain, European construction is proving to be more resilient than we previously anticipated. Construction activity in Latin America is expected to be down in 2023 versus the strong 2022 performance. There is some concern about the potential impact of a commercial real estate slowdown. We estimate that North American commercial real estate accounts for about 1% of total construction industry sales. Any slowdown related to this sector should not have a significant impact on construction industries. In resource industries, we expect healthy mining demand to continue as commodity prices remain above investment thresholds. As I've mentioned during the last few years, customers remain capital disciplined, which supports a gradual increase in mining over time. We anticipate production utilization levels will remain elevated. We also expect the aging of the fleet and a lower level of parked trucks to support future demand for equipment and services. We continue to believe the energy transition will support increased commodity demand, expanding our total addressable market, and providing further opportunities for profitable growth. In heavy construction and quarry and aggregates, we anticipate continued growth due to major infrastructure and non-residential construction projects. In energy and transportation, We expect to follow our normal seasonal pattern with higher sales in the second half of the year versus the first half. In oil and gas reciprocating engines, although customers remain disciplined, we are encouraged by continued strength and demand for both well servicing and gas compression. Power generation reciprocating engine demand is expected to remain healthy, including strong data center growth. New equipment orders and services for solar turbines in both oil and gas and power generation are robust. Industrial remains healthy. In transportation, we anticipate strength in high-speed marine as customers continue to upgrade aging fleets. Moving to slide seven, we are contributing to a reduced carbon future and continue to invest in new products, technologies, and services to help our customers achieve their climate-related objectives. We recently completed an upgrade of more than 50 models across our entire next-generation hydraulic excavator line. The new models reduce fuel consumption by up to 25% compared to previous models and provide another option for customers to lower emissions while improving operational efficiency. A customer can realize meaningful emissions reductions by simply moving to the newest next-gen model. This example reinforces our ongoing sustainability leadership in how we help our customers build a better, more sustainable world. In addition, we look forward to issuing our 18th Annual Sustainability Report in May. With that, I'll turn the call over to Andrew.