Caterpillar, Inc.

Ladies and gentlemen, welcome to the second 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, sir.

Thanks, Abby, and good morning, everyone. Welcome to Caterpillar's second 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, we'll be discussing the second 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. 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. 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 the first half of 2023, I want to recognize our global team for delivering a very strong second quarter. This included double-digit top-line growth, higher adjusted operating profit margin, record adjusted profit per share, and robust MENT pre-cash flow. Our results continue to 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. I'll then provide some insights on our end markets. Lastly, I'll provide an update on our sustainability journey. It was another strong quarter. Sales and revenues increased 22% in the second quarter versus last year. Adjusted operating profit margin improved 21.3%, up sequentially and year over year. We also generated $2.6 billion of MENT-free cash flow in the quarter. Our second quarter results were better than we expected for sales and revenues, adjusted operating profit margin, and MENT-free cash flow. In addition, we ended the quarter with a healthy backlog of $30.7 billion. We continue to see improvement in the supply chain, which allowed us to increase production in the quarter. However, areas of challenge remain, particularly for large engines, which impacts energy and transportation and some of our larger machines. While we continue to closely monitor global macroeconomic conditions, we now expect our 2023 results to be better than we had previously anticipated. Turning to slide four, in the second quarter of 2023, Sales and revenues increased by 22% to $17.3 billion. This was primarily due to higher sales volume and price realization. Sales volumes were higher than we expected, largely due to an increase in dealer inventory relating to energy and transportation, which is supported by customer orders. We saw double-digit increases in sales and revenues in each of our three primary segments. Compared with the second quarter of 2022, overall sales to users increased 16%. For machines, which includes construction industries and resource industries, sales to users rose by 8%. Energy and transportation was up 47%. Sales to users in construction industries were up 3%. North American sales to users increased and were better than expected as demand remained healthy for non-residential and residential construction. Non-residential continued to benefit from government-related infrastructure and construction projects. Residential sales to users in North America also increased in the quarter. IAMI saw lower sales to users due to weaker-than-expected market conditions in Europe. The Middle East continued to demonstrate strong construction activity. In Latin America and Asia Pacific, sales to users declined in the quarter. In resource industries, sales to users increased 26%. In mining, sales to users increased, supported by commodities remaining above investment thresholds. Within heavy construction and quarry and aggregates, sales to users also increased, supported by growth for infrastructure-related projects. In energy and transportation, sales to users increased by 47% in the second quarter. All applications saw higher sales to users in the quarter. Oil and gas sales to users benefited from strong sales of turbines and turbine-related services. We also saw continued strength in sales of reciprocating engines into oil and gas applications, such as Tier IV dynamic gas blending, gas compression, and repowering active oil servicing fleets. Power generation sales to users continued to remain positive due to favorable market conditions, including strong data center growth. Industrial and transportation sales to users also increased. Dealer inventories increased by $600 million in the quarter, led by energy and transportation. We are very comfortable with the total level of dealer inventory, which remains in the typical range. Adjusted operating profit margin increased to 21.3% in the second quarter, as we saw improvements both on a sequential and year-over-year basis. Adjusted operating profit margin was better than we had anticipated, primarily due to better-than-expected volume growth and lower-than-expected manufacturing costs, including freight. Moving to slide five. We generated strong MENT free cash flow of $2.6 billion in the second quarter. We returned $2 billion to shareholders, which included about $1.4 billion in repurchase stock and $600 million in dividends. In June, we announced an 8% dividend increase. Since May of 2019, when we introduced our current capital allocation strategy, we have increased the quarterly dividend per share by 51%. 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 describe our expectations moving forward. While we continue to closely monitor global macroeconomic conditions, our second quarter results lead us to expect that full year 2023 will now be even better than we described during our last earnings call. We now expect adjusted operating profit margins to be close to the top of the targeted range relative to the corresponding expected level of sales. This positive operating performance increases our expectations for M, E, and T free cash flow, which we now expect to be around the top of the $4 to $8 billion range for the full year. Our current expectations for adjusted operating profit margin and M, E, and T free cash flow reflect continuing healthy customer demand and our strong operating performance. 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 continued 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 growth has moderated, we expect the rest of 2023 to remain healthy. In Asia Pacific, excluding China, we expect growth in construction industries due to public infrastructure spending and supportive commodity prices. We mentioned during our last earnings call that we expected sales in China to be below the typical 5 to 10 percent of our enterprise sales. We now expect further weakness as the 10-ton and above excavator industry has declined even more than we anticipated. In IEMI, we anticipate that it will be flat to slightly up overall, with the Middle East exhibiting strong construction demand, whereas Europe is expected to be down. Construction activity in Latin America is expected to be down in 2023 versus strong 2022 performance. In resource industries, we expect healthy mining demand to continue as commodity prices remain above investment thresholds. As I've mentioned previously, customers remain capital disciplined, which supports a gradual increase in mining over time. We anticipate production and utilization levels will remain elevated. We also expect the age of the fleet and the low level of parked trucks to 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 further opportunities for profitable growth. In heavy construction, in quarry and aggregates, we anticipate continued growth due to major infrastructure and non-residential construction projects. Now we'll discuss energy and transportation. For CAT reciprocating engines in oil and gas applications, although customers remain disciplined, we are encouraged by continuing strong demand for gas compression. CAT reciprocating engine demand for power generation 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 remain robust. Industrial continues to be healthy. In transportation, we anticipate strength in high-speed marine as customers continue to upgrade aging fleets. Moving to slide seven, we continue to advance our sustainability journey. Since our last quarterly earnings call, we published our 2022 sustainability report, which disclosed our estimated Scope 3 greenhouse gas emissions for the first time. We also published our first-ever Task Force on Climate-Related Financial Disclosures report. We're helping our customers achieve their climate-related goals by continuing to invest in new products, technologies, and services that facilitate fuel flexibility, increased operational efficiency, and reduced emissions. For example, a customer in Chile is realizing fuel savings and lower emissions after purchasing our CAT D6XE, the world's first high-drive diesel electric drive dozer. The customer reported a 30% reduction in fuel consumption versus the previous model working in the same operation. This example reinforces our ongoing sustainability leadership in how we help our customers build a better, more sustainable world. With that, I'll turn the call over to Andrew.