Q4 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to the Caterpillar for Q2 thousand 19 Analyst Conference. At this time all participants are in place on listen only mode and we will open the floor for your questions and comments. After the presentation. It has now my pleasure so trying to show over to your host Jennifer Driscoll Maam the floor is yours.
Thank you Paul.
Good morning, everyone welcome to caterpillars fourth quarter earnings call.
Joining us today, our Jim Umpleby chairman of the board and CEO .
Do bonfield CFO .
I believe vice President of our Global Finance services Division and Rob Wrangle Senior IR manager.
Our call today expands our earnings release, which we issued earlier this morning, you'll find slides to accompany today's presentation, along with the release and investors section is caterpillar dotcom under events and presentation for retail stats look at our 8-K filed a few minutes after that.
As shown on slide two any forward looking statements. We made today are subject to risks and uncertainty. We also make assumptions that could cause our actual results to be different any information we discussed today.
Please refer to our recent FCC filing and the forward looking statements reminder, in today's news release for details on factors that individually or collectively could cause our actual results to vary materially from our far cath.
Let me remind you that caterpillar has copyrighted this call we probably hit it use of any portion of it without prior written approval.
As previously indicated today, we're reporting adjusted profit per share in addition to our U.S. GAAP results.
Our adjusted profit per share for the fourth quarter exclude a pension OPEB Mark to Mark Tonight, My adjustment for the Remeasurement of pension and other post employment benefit plans you adjustment was 65 cents per share in the fourth quarter or 64 cents per share for the fiscal year.
Our adjusted profit per share for the full year also excludes the 31 cent discrete tax items from the first quarter of 19.
In the 2018 fiscal year adjusted profit per share excludes restructuring costs. In addition to both tax related and pension OPEB mark to market adjustment.
Our U.S. GAAP based guidance for 2020 profit per share includes estimated restructuring cost for the year and continues to exclude pension and OPEB mark to market impacts.
Now, let's turn to slide three and turn the call over to Jim for his perspective on 2019 and our outlook for 2020.
Thanks, Jennifer good morning, everyone. Thank you for joining categories fourth quarter earnings call.
I plan to cover three topics. This morning, first I'll summarize our fourth quarter and full year 2019 results also provide an update on the progress of our enterprise strategy as well or some color on how the year ended versus our Investor day targets all finished with our expectations for 2020.
I'm pleased with the way our team is executing notwithstanding the difficult economic environment, which led to a decline in sales to users during the fourth quarter.
I'll describe the segments later on the call, but just to give you a brief overview.
Sales to users for all three segments were lower than our expectations.
In resource industries, we continue to see strong quoting activity in mining.
As most commodities remain investable levels, but customers are being cautious due to global economic conditions.
Well, we experienced a decline in mind sales in the fourth quarter. We continue to believe there will be a gradual recovery in our sales to mining customers.
Our mining sales are lumpy. So there can be significant variation between quarters.
Energy and transportation was a mixed bag due to the diversity of our end markets.
North American onshore oil and gas activity remained depressed.
As we expected both solar and rail had a solid fourth quarter.
And construction industries end user demand has softened, particularly in North America.
As our earnings guidance indicates we see some slowing across all three primary segments.
We are ready to respond quickly to positive or negative developments in our end markets.
We're doing what we shouldn't be do at our Investor day in May.
Given our financial targets continuing to invest in services and expanded offerings and returning cash more consistently to shareholders.
Sales and revenues for the fourth quarter declined 8% pushes our assumption of down mid single digits.
Volume primarily caused by changes in dealer inventory drove a majority of the decline.
Dealer inventory for the quarter decreased 700 million compared to an increase of 200 million in the prior years quarter.
End user demand, which we released this morning was also suffer than we anticipated doubt about 4% versus our assumption of flat end user demand for the quarter.
Price realization a currency were unfavorable for the quarter as well.
Our fourth quarter operating profit decreased 2% driven primarily by the lower volume.
<unk> increased or operating profit margin percent through disciplined cost control and stronger results from financial products.
For the fourth quarter adjusted profit for sure was $2 63, compared with 255 in 2018.
Turning to slide for sales and revenues for the full year declined about 2%, mainly driven by the movements in dealer inventory.
Dealer inventory increased $800 million in 2019 versus an increase of 2.3 billion in 2018.
End user demand increased about 2% for the year.
The other two sales drivers, namely favorable price realization, but in line and unfavorable currency essentially offset each other.
For the full year operating profit was flat on nearly 1 billion lower sales and revenues.
Volume reduction was offset by strong cost control.
Favorable price realization more than offset manufacturing cost increases.
Turning to profit per share. We ended 2019 at an adjusted profit per share up 11 of six compared with 11 22 for 2018.
Now I'll summarize our 2019 results versus our Investor day targets and the progress we made this past year executing our strategy as shown on slide slide five.
In operational excellence, we're pleased to report we achieved our best safety performance on record.
We delivered a solid operating margin of 15.4% on 53.8 billion of sales and revenues.
Our operating margin finished well within the target ranges, we set at our Investor Day last May which you may recall was an improvement of between three and six percentage points above the historical margins. We delivered in the 2010 to 2016 period.
Our free cash flow a 5.3 billion was also within our Investor day target range.
We returned 6.2 billion or about a 115% of our 2019 free cash flow to shareholders in dividend and share repurchases.
That includes the 20% dividend increase we announced at Investor day, which reflected our confidence in the company's ability to deliver improved cash flows through the cycles and or intention to return substantially all free cash flow to shareholders.
We reduced our quarterly average diluted shares outstanding by about 9% since the first quarter of 2018.
Our services revenues increased 2% in or around 18 billion in 2019.
We indicated during our Investor day in May that our path to doubling services revenues to 28 billion from our 2016 baseline would not be linear and we continue to invest in services, including expanded our digital capabilities to meet this target by 2026.
Please turn to slide six.
At the center of our strategy is profitable growth.
We made good progress this year on all three elements of the strategy operational excellence expanded offerings in services.
Beginning with operational excellence as I mentioned earlier, we achieved our best safety performance on record.
Even one injury is one too many as we want all of our employees to go home safely every day.
We're proactively managing our production levels in our lead times are now at targeted levels for the majority of our products.
This allows us to respond more quickly to both positive or negative changes in demand.
Shorter lead times also allow our dealers to carry less inventory, which helps dampened the overall impact of economic cycles.
Turning to expanded offerings one of our most successful areas in our GC line.
Well, we've launched six new models in 2019 or 11, new models to date.
These new GC products, including excavators articulated trucks motor graders wheel loaders, and PV products have broadened our product line to provide customers a full range of choices when determining the best machine for their various applications.
In energy and transportation the team launched large generator sets that burn lean methane Rita as a byproduct of the mining process.
The Cat G 30, 516 see uses methane that could otherwise be better to the atmosphere, thereby reducing the mines greenhouse gas emissions.
These engines are capable of burning relatively low concentrations of methane, while reliably providing the engines full power and high efficiency.
Customers appreciate the value of Uncompromised engine performance over a wide range of gas quality.
Finally, we reach some significant milestones with autonomous solutions in 2019.
We continue to believe or read a tipping point for adoption of autonomy in mining.
In 2019, the number of mining trucks running cats autonomous solutions rose to 275, an increase of 48% over 2018.
Or autonomous solutions are not working for seven customers across 11 sites on three continents.
Some customers have reported productivity benefits it up to 30% and have also reported positive enhancements to safety.
Our customers are focusing on improving performance across their sites. So we've expanded our autonomy made it solutions to include a broader portfolio of trucks drills tractors and underground mining products.
We know many of you will be in Las Vegas at Con Expo in March and that mine Expo in September we look forward to showcasing many of our new products and services at these exhibitions.
Services are a very important element of our strategy.
In 2019, one of our primary goals was to improve parts availability to minimize customers downtime.
We are helping dealers better forecast custard <unk> customer demand through advanced analytics, which enables them to prove.
Parts availability.
Services are a key differentiator for many of our businesses, particularly when we help customers avoid unplanned downtime.
In 2019, we achieved our target of connecting 1 million assets by yearend.
Thanks to investments we've made during the past several years, we now have one of the largest fleets of connected assets in the industries we serve.
Connected products, such as cat and non cat assets provide rich data, including operating hours location and product health, enabling customers to better manage and plan their maintenance.
Having critical mass and the connectivity enables us to work with customers in a very personalized way.
Can I can assets also improved your capabilities such as remote trouble shooting that can reduce technician time and provide increased customer uptime.
We'll continue to connect new products coming out of our factories.
Turning to slide seven today, we established 2020 profit per share guidance of 850 to $10 compared with our 2019 adjusted profit per share of 11 no six.
Our planning assumptions for machinery energy and transportation or the dealers will reduce their inventories by about $1 billion to $1.5 billion.
End user demand will decline by about 4% to 9% compared to 2019 and the services sales will grow modestly.
Global economic conditions are very fluid due to a variety of factors.
We will continue to closely monitor our environment it will be ready to respond quickly to positive or negative changes in demand.
Our 2020 outlook includes normal restructuring as well as a 200 million dollar place holder for strategic restructuring actions.
We plan to address a small number of products that are not deliver insufficient opac into ensure we're allocating resources towards those are areas with the best opportunity for future profitable growth.
Meanwhile, we will continue to invest in services and expanded offerings to improve the value caterpillar and our dealers provide to our customers.
Andrew will provide more details on the outlook assumptions later in the call.
Our cash flow remained strong during 2019, we paid dividends of 2.1 billion.
As we said it or 2019 Investor day, we expect to increase our dividend by at least the high single digits percent during 2020, continuing our heritage as a dividend aristocrat.
We repurchased 4 billion of common stock in 2019.
We expect continued strong cash flow in 2020 and share repurchases should be roughly similar to 2018 in 2019 levels.
This is in line with our commitment to more consistently return substantially all free cash flow to shareholders.
In 2020, turning to slide eight.
2020, we continue to execute our strategy for profitable growth.
In the area of expanded offerings, we plan to rollout five additional GC models. This year as we continue to invest in new products.
Within operational excellence, we are focused on improving our cost structure with a focus on back office in procurement costs.
Finally in services, we will continue to invest in our digital capabilities. So we can fully leverage our connected assets in our investing in other areas such as customer focus designs.
Now, let me close by sharing our industry expectations for 2020 on slide nine.
In construction industries, we expect slowing end user demand.
In North America, while we expect stable spending on state and local infrastructure residential and nonresidential construction is construction is expected to decline.
Turning to Asia Pacific, We expect our sales in China to be flat to down 5%.
We are actively monitoring the corona virus for any potential impact.
We expect any construction activity will be flat to slightly up with growth in Europe slowing.
In Africa in the Middle East beginning to recover from low levels.
The recovery in Latin America should continue although from a low base led by Brazil.
As a result of these conditions, we expect that dealers, particularly in North America will further reduce their inventories.
For resource industries, we expect end user demand to be roughly flat.
In nonresidential construction, we anticipate lower 2020 end user demand.
In mining, we expects mid single digit growth for end user demand as quoting activity continues to be positive and commodity prices generally remain supportive of investment.
Customers remain cautious and have more flexibility on order timing due to our improve lead times.
We continue to believe there will be a gradual recovery in sales to mining customers.
We anticipate resource industry sales will be softer in the first half of 2020 with possible upside in the second half as mining confidence improves.
As a result of these conditions, we expect dealers will further reduce their inventories.
Turning to energy and transportation, we expect modestly lower overall demand.
Oil and gas, we expect end user demand to weaken in North America for well servicing recip gas compression in drilling.
Oil price volatility in capital discipline by our customers are both contributing factors.
Solar sales are expected to be flat to slightly up in 2020.
Industrial demand is expected to decline modestly.
Mainly led by Europe .
We expect power generation and transportation to grow modestly this year.
With that I will turn the call over to Andrew for a closer look at our financials.
Thank you Jim and good morning, everyone.
I'll begin on slide 10, with total company results for the fourth quarter.
A couple of the segment results for both the cooks in the full year, then I'll walk you through 2020 gardens, and poses some comments on cash flow and capital deployment.
In total so some revenues for the fourth quarter declined by 8% to $13.1 billion.
Operating profit decreased less than sales and was down 2% to $1.9 billion.
Adjusted profit Patricia the quota increased by 3% to two dose 63, mostly reflecting the benefit of the lower than expected tax rate.
No to this year as adjusted profit per share results include restructuring expense was last year is excludes it.
Mark to market adjustments with some of them. Both period is about $470 million in 2019 and about $500 million in 2000.
18.
As you see on slide 11 sales decreased by 1.2 billion goes in the quota.
This result was below our expectation of a mid single digit decrease in cells in the quota.
Well priced and currency was slightly unfavorable probably fracs, who was a 7% decrease in body.
As we've discussed them. So quota, we expect to dealers to reduce inventories caught lead you to improve lead times, which allowed us to hold less inventory.
Impart due to uncertainty in the global economy.
Culturing from trade tensions and other factors.
This morning, we released the quarters retail sales data, which showed a decrease in retail sales to users of 4%.
We had anticipated the retail sales of course schools, we probably segments would be flat, but construction industry cells to use has declined by 3%.
Source industries declined by 10%.
And then Jim transportation, so so users to count by 3%.
This weaker than expected end user demand that the whilst we cut back to shipments Divas dealer inventories came down by $200 million less than we expected or around 700 million goes in the quarter.
The 700 million dollar reduction due to inventory compared with 200 million dollar increase in dealer inventories in the fourth quarter 2019.
The movement in dealer inventories together with the reduction in end user demand explain the volume to time in the quarter.
Order backlog was weaker at the end of the down $900 million across the segments.
I know many of you focus on backlog.
I went to remind you that except for a direct businesses and so the ROE the backlog represents dealer demand.
That means it takes into account Divas view of what inventory that needs to hold in addition to their expectations of end user demand.
We view, our retail sales data as a best indicator of demand over that Todd I'm also has a lag we believe retail sales just pay so best of represents underlying customer behavior.
In addition to sells for users we have other indicators of custom out.
For example, we look at post user kept financial which actually improved in the quarter.
That said, we saw a small uptick in repossessions equipment in units and dollars.
Auction prices and use crosses the scene downward pressure.
These factors first of all retail sales gives us a very mixed picture.
We will this will say prepared for an acceleration deceleration in demand.
Moving to slide 12.
Operating profit for the fourth quarter fell by 2% to one belies you thought $1.85 billion.
These figures on a like for like basis as both use include restructuring expense.
Let me walk you through the changes in operating profit before discussing the changes in operating margin.
[noise] volumes the largest reis reach reason for the Dick's on an operating profit.
Price was also makes it geographic mix and programs, we started to stimulate demand.
Favorable mature and freight costs offset by adverse warranty expenses, which continue to impact us.
As we said in October we had some targeted product quality issues, which we continue to address.
Favorable short term compensation expense embedded cost control at the positive impact on operating profit in the fourth quarter.
Finally financial products had a strong quarter too.
These tailwinds more than offset the negative impacts from operating margin I mentioned a moment ago.
This meant that the operating margin improved by 100 basis points quarter over quarter.
Now, let me discuss the individual segments results from the fourth quarter and full year.
Personal side, so it's seen fourth quarter sales of energy and transportation declined by 5% by weakness in oil and gas and low intersegment sales.
Slowing demand for reciprocating engines in North America used to power gas compression applications and low a turbine project deliveries contributes to an 11% decrease lower than gas sales.
So a 5% increase and transportation as marine sales in the IB improved.
Power generation industrial sales also improved slightly in the quarter.
The segment's fourth quarter profit increased by 8% driven by lower short term incentive expense and lower manufacturing costs, which more than offset the impact of the volume decline.
Segment operating margin improved by 240 basis points to launching 0.6%.
For the energy and transportation sales decreased by 3% fixing slow so some oil and gas and low intersegment sales.
Oh the segment profit remained about flat in 2019 as low sales volume was offset by reduced short term incentive expense.
Segment margin grew to 17.7% an increase of 40 basis points versus 2018.
Now turning to slide 14, construction industry sales decreased by 12% in the fourth quarter due to low volume.
Dealers in North America, the Amy Kevin counted on adjusting their inventories.
We continue to season, Latin American sales increase off a low base, while Asia Pacific Pacific remained about flat.
Within Asia Pacific unfavorable price was mostly offset by higher volumes and a few countries.
Sales in China Rose in the fourth quarter, driven by Ddas eyes to build inventory ahead of budget Chinese new year.
The segment's fourth quarter profit margin fell by 170 basis points to 13.1%.
Volume decrease and lower price realization will partially offset by savings from material costs and short term incentive expense.
The on favorable price realization reflected changes in geographic mix that we had anticipated including reductions in dealer inventory North America.
And some programs we put in place to stimulate end user demand.
On a full year basis construction industries declined by 3%.
Margins pension, 17.4% healthy level, yes, a decrease of 60 basis points versus 2018.
The time was driven by the impacts of volume manufacturing inefficiencies and an unfavorable mix of products, partially offset by favorable cost price realization.
Changing societysix 15.
Resource industries sales decreased by 14% to the fourth quarter due to reductions in dealer inventories and low end the use of demand.
To this decrease inventories in the fourth quarter the shape of increasing the inventories in the same period of 2018.
The inventory reductions taken in the fourth quarter were primarily related to non residential construction to better align end to end user demand.
Turning to money, we've seen continued discipline disciplined capex spend by miners and I've excluded and swung the delays between deal signings in the place when the borders.
Lower volume was a primary drivers the 340 basis point decrease in the segments corporate margin to not 10.9% for the quarter.
For the full year resource industry sales were about flat.
Profit margin improved by 30 basis points to 15.9% as favorable price realization offset the impact of increased manufacturing costs, including high warranty expense.
Moving to slide 16, we were pleased with the results from financial products, which increases profitability by $191 million in the fourth quarter versus a challenging quarter a year ago.
Hello allowance rates in 2019 was the main driver of the improvement.
Cost of genes, we don't view into 2019 as well.
The financial product segment profit rose by $327 million for the full year $832 billion.
Free cash flows for the quarter remains strong the $1.9 billion.
So a significant reduction in that inventory levels in the fourth quarter as we reduce production levels in our plans.
The full year free cash flow was $5.3 billion, excluding the discretionary pension contribution but in the third quarter.
Now I'll talk about government on slide 17.
I will share the folio look a few key planning assumptions and some observations on phasing in 2020 .
We anticipate profit to show a totals Physpeed 10 goes in 2020 compared with an adjusted $11.06 in 2019.
The range reflects current uncertainty in the global economy, which is causing customers to delay will defer purchases of large capital goods.
We no longer give sales guidance.
I would like to share a few of our planning assumptions, which we have used to derive their profit to shake guidance for 2020.
First we are assuming low and end user demand of between four and 9%.
We expect any into services revenues to increase modestly as we continue at journey towards $28 billion and 2026.
The full year guidance, we put together also assumes a pricing is about flat and the Ddas will decrease the inventories by between one and one of the hoping in dollars and 2020 .
Keep in mind, Ddas, all independent indices and controlled on inventories.
Given the slowdown in customer demand and the increase about it but what's your product due to lower lead times, we do expect pieces will reduce the inventory levels for them.
This reduction is expected to be led by construction industries, but will also impact resource industries.
I will talk a little bit more on how we expect beulah buying patterns impact phasing in 2021 moment.
As Jim said, we will make sure production ASCO to meet demand.
Ready to respond to signals from the market positively or negatively.
The top and bottom ends of the profit range roughly correspond to the top and bottom up the ranges for declines in sales to users and dealer inventories.
We expect material costs declined this year, including the impact of low steel prices procurement savings and lower freight.
We also expect increases warranty costs moderates in 2020.
We're committed to doing all weekend to maintain a competitive and flexible cost structure and with tightly controlling discretionary spending.
As part of that we're moving towards the outsourcing some of that back office functions, which is expected to produce run rate savings beginning the full.
We're also looking to improve that procurement processes as a way to reduce direct and indirect spending.
These changes in our immediate as we realize benefits cost a new contracts again and better prices rose.
Inventory.
Last year restructuring expense was for $236 million slightly above our expectation.
This year, we expect normalize over to restructuring expense.
In addition, we're looking at taking strategic restructuring actions relating to certain products that are not realizing sufficient okay.
You put a 200 million dollar place holder for that and that guidance and we'll keep you updated screwed the as we gain will certainty around the actual costs.
Keep in mind that we also expect a headwind.
For normalized incentive compensation expense in 2020.
We're committed to delivering our investor day targets of improving operating margins by between three and six percentage points throughout the cycle compared with our historical performance in 2010 to 2016.
We believe that 2020 plan will enable us to deliver this while at the same time continuing to invest in the greatest opportunities to drive long term profitable growth.
Based on the low tax rate in 2019, we now expect the effective tax rate in 2020 to be around 25%.
As you build to quarterly earnings models for 2020.
I want to remind you of a few things that may impact on normal seasonable patents.
Overall, ddas increase inventory by $1.8 billion in the first half of 2019.
This is principally in construction industries Omnisource industries.
We expect a modest increase in dealer inventory and construction industries in the first quarter ahead of the most setting season.
That will be worked down by the end of the first half.
In resource industries due to industry dealer inventories rose in the first off for 2019, but we expect some modest reduction in the first off 2020.
Energy and transportation has a different seasonable patent sales and revenues in southern rail being more backend loaded.
We expect oil and gas wells to be impacted in the first off as we had a significant backlog of orders at the beginning of 2019, which is different from the current situation.
As a reminder, reduced volume also impacts leverage so that will be effect to in the first half of the.
Moving onto cash flow and capital structure on slide 18.
Working capital improved in the fourth quarter as reduced levels of inventory held by the company.
We expect working capital to be neutral to positive in 2020.
The reductions in caterpillar inventory to give them expected lower payouts of short term incentive compensation.
Should help offset the lower operating profit.
Recall that the 2019 payout was against results for 2018, which was a record year.
We will so do not anticipate any you as pension contributions in 2020.
Capex in 2019 was $1.1 billion, we expect Capex in 2020 to be around 1.2 billion Boes.
Our commitment at the Investor day was to improve that free cash flow by between one and $2 billion through the cycle versus our historical performance in 2010 to 2016.
This together with a strong cash position, which was $8.3 billion of year end has enabled us to increase of quarterly dividend, but 20% this year and being a market more consistently share repurchases.
As Jim noted, we've returned 6.2 billion of cash to shareholders in 2019.
Dividends and share buybacks.
We remain committed to returning substantially all of our free cash flow to shareholders through the cycles.
As we look ahead, we expect to increase the dividend by high single digits in 2020, and the next three years off the bat.
And based on expected strong cash vote to repurchase a similar level of shares in 2020 as we have done in 2018 2019.
So finally, let's turn to slide 19, and recap today's key points.
2019, so some of them use declined by 2% to $53.8 billion.
Operating profit was down 2% and profit per share talking $10 74 or $11.06 on an adjusted basis.
We've established a 2020 outlook range by totals 50 to $10 per person profit per share based on expectations for end users to respond to decline between four and 9%.
I talked about modeling assumption or fix $1 billion to $1 billion of low inventory really low revenue from dealers further reducing the inventory levels.
We're keeping a close on production so we can respond quickly.
We're working on the competitiveness of our cost structure and the operating execution, but remains at the center of everything we do.
We will continue to invest and serves as an expanded offerings.
Overall financial position remains strong and we expect strong cash flow and 2020 as well.
We remain committed to our strategy of profitable growth and deployment of capital back to shareholders through a growing dividend and consistent be per share repurchases.
With that I'll hand, the call batch Jennifer.
Thank you Andrew.
We'll now move to the Q and a portion of the car.
In order to include question, it's been more of our covering analysts.
We ask that you please limit yourself to a single question.
If you had a follow up question, we Didnt get you to reenter the queue.
Please begin the couponing.
Certainly ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time once again, we asked about posing a question you keep it to one question per analyst. Please hold while we pull for questions.
And the first question is coming from I'm tightness of JP Morgan Securities and your line is lies.
Hi, good morning, everybody.
So many questions I don't have to pick one, but I think I'll focus on pricing. If you could just expand on your flat pricing guidance for 2020 or where are you seeing pricing.
Improvement I sense that pricing degradation and then you said you increased your marketing programs in two parts to stimulate demand, but it doesn't look like it happened. So yes, you could talk about pricing across the businesses and across the regions like appreciate that thank you.
And thank you it's Andrew.
Yes, so a couple of factors within a Q4 as I mentioned, one geographic mix was a factor as well. So obviously, if you think about the way we price.
You know and particularly North America.
A stronger pricing region.
And so that geographic mix given the reduction in between countries.
Yes on we expect that to continue as we do reduce due to inventory through 2020 that so that will have an impact on pricing, particularly.
As you look at that mix through the so probably actually in.
First off pricing will be a little bit weaker than we see expected for the second while.
We have put modest prices increases through.
Honestly, we need to see how much of that stakes again, how much. We you have to go back into programs. Yes. In your point about we didnt see much demand being stimulated yes, because we didn't see reduction in so season. The full quota. We believe that had we not actually put that pricing behind but they may have actually been a little bit worse than that so that was.
Part of the programs being put in place.
I'm, sorry, I didn't fully understand your North America, Clatskanie Antares had pricing, it's stronger in North America or price reductions are greater in North America Nice it's the geographic mix. So we have a as you go through if you listen that processing line. It includes changes in geographic.
Next we base on a.
Right per unit.
And obviously north American units tend to have a higher price and probably a process all because a high stakes in process across the rest of the world. So therefore, you do day intent then see a negative price variance coming through as a result of that.
With lower North American sales.
And just time care <unk>, China pricing is down year over year that expectation going forward and into contained to China.
Duncan said anything about China pricing, we're talking about China sales.
We said, we expect to China sales to be down to flat to slightly down in 2020 , we haven't talked about pricing, but by territory and welcome.
Okay and interest at time I'll get back in Q.
I would like some clarification offline. Thank you.
Thank you and the next question is coming from Joe O'dea of vertical Research partners. Joe Your line is last.
Good morning.
Hey.
Wanted to.
Ask about retail sales and when we look at the trends it looks like a rather sharp sequential slowing from threeq into Fourq, you and you commented that it was a bigger step down than you expected, but just in terms of how you interpret those trends and based on conversations you're having with.
Customers and dealers the degree to which you're able to parse out how much of that is a bit of a spend freeze at the ended the year. The degree to which you have any insight based on January .
Versus in noting kind of December demand levels is.
Something that we should be extrapolating going forward.
Hey, good morning, Jos I really have to look at it by fire various industry. There's no one answer that covers all of those we talked about the fact that in.
In.
In mining that business can be quite lumpy and that can be reflected in both our our sales in our retail stats as well activity in mining continues to be strong a lot lot of discussions with customers lots of quotes but our customers are being cautious as we mentioned earlier, but we do expect that slow gradual increase to to occur.
In mining and we're expecting a stronger six months than six months last six months I need to be starting in the first six in oil and gas we do anticipate.
The the depressed market conditions in North American onshore production to continue and well servicing reset gas compression in drilling we do expect that the consent to continue.
See I is is it is a bit of a on a mixed bag again.
We talked about our expectations there for shy.
Yeah, I'd, rather have anything to add on top of that.
Okay. Thank you.
Thank you and the next question is coming from Ross Gilardi of Bank of America Merrill Lynch Ross. Your line is lives yeah. Thanks, guys. Good morning.
When interest.
Jim I you know you know this oil and gas business. The caterpillar has a bit better than anybody and I'm just wondering how your spare parts and service.
He and key both upstream missteps in turbines, how they're behaving I mean, where they stable in the fourth quarter on are you expecting may be stable within your outlook I mean, clearly the new equipment outlook is very soft but.
So our has traditionally.
Been able to whether a lot of these downturns and I'm wondering if you you expect to the.
The other parts and service components of your oil and gas business too.
Remain resilient, particularly in an oversupplied natural gas market.
Yes, starting with solar is we indicated.
Solar had a solid fourth quarter, both on the OE and on the service side and we do expect their service sales going forward to remain resilient.
That's been fruit many many times. So we do expect that to be the case, we had mentioned a number of times over the last year that there was a bit of a pent up demand for oil and gas parts for rebuilds that that resulted in increased sales in 2017 in 2018, so with the with the pressure on.
North American oil and gas.
That that business will remain challenged to 2020.
Okay. Thank you.
Okay. Thank you and the next question is coming from Jerry Revich from Goldman Sachs Cherry Your line is lives.
Yes, hi, good morning, everyone.
Merger.
If you could just expand on your decremental margin assumptions it looks like you're embedding, 35% decrementals give or take and at the 20 outlook and when we look at your Decrementals in the last sales downturn. There were generally in that 20% range. So I'm just wondering futures.
Rich or that is that to give yourselves room to execute in a challenging environment can you just share the pieces just to richest between the historical decremental margin performance versus the dark target for 20.
Yeah.
Great question, Jerry It's Andrew Thank you very much for the.
So this is exactly why we don't talk about Incrementals and Decrementals anymore. What we have done obviously through the law sound to Oh for company totality significant novel structural costs and as we've gone through the last couple of years, where we've seen an up cycle, we have not put that cost back in the business well that men's obviously as margins improve.
Absolutely margins improve.
Over time, which is why we gave the investor day target, so improving margins by 3% to 6% against historical performance.
On the way down obviously, you all because we are not don't haven't put a lot of structural cost Bakken, there's not a lot of structural cost to cut. So you will see obviously hi, a de leverage as you go down also because we're expecting this relatively to be a pause rather than some fundamental change in the mall.
Okay.
We are continuing to invest in both services and in R&D.
Particularly for new NPR.
New product introductions that is important for us because that drives long term growth. So we maintain effects will be how we are managing it is we are managing against those margin talked as we look at the absolute margin to make sure we stayed within that 3% to 6% range.
Again, some level of the red cells in revenues, we expect to next year and we do believe the plan we got does do that.
Hi, Andrew Good can you just expand maybe a little bit on the variable cost structure part of that discussion because you know more variable cost structure would suggest lower incremental one decremental margin. So I appreciate the comment on we have less restructuring opportunities now, but maybe you can expand on that point because that would sound like it would reduce the cyclicality in operating leverage.
Yes, So obviously volume is going to have a major impact next year as we as we go through obviously that that is the biggest single site, a and obviously operating leverage.
Right.
In the a in the margin.
With regards to the other part so I mean, obviously, we're expecting processing to be about flat next year.
We are expecting some favorability and material cost as I mentioned, particularly around steel and also because of some AD programs. We put in place how much about feed through into margins next year will depend about how quickly we will we get those programs run.
Inventory and actually into in into sales.
We will start expecting lower freight next year.
Freight costs have been high for the last couple of years and partly because of obviously trying to meet the end user demand, but now with lead times being in a better place we've done expects as much premium freight to institute.
Thank you.
Maybe just expand on that answer just a bit you know what are the things that Andrew mentioned earlier as we are really paying a lot of attention to end user demand and work and dealer our dealers are independent businesses, but we're working with them to ensure that we don't have too much dealer inventory and in the past I'd argue that some of our cyclicality has been exacerbated by.
Movements in dealer inventory, so I shortening our lead times, having dealer inventory that is appropriate for market demand. We believed that we will have a dampening effect on our cyclicality, which is part of what we're trying to accomplish.
Thank you.
Thank you on the next question is coming from Seth Weber of RBC capital markets Sats. Your line is last hey, good morning.
Weren't just wanted to ask about China construction market I know you met you mentioned your expectations for the market to be kind of flat to down.
You know cats been picking up share there recently over the last few months I'm. Just can you just can you speak to your expectations for cat, particularly.
You know what's been driving the market share gains have you sort of changed stacked with some of your marketing programs is there a new product that's.
Kind of gaining good acceptance and can you just talk broadly about your expectations relative to the market things.
He said, what we indicated I believe is that we expect.
Our sales to be flat to slightly down in 2020, we talked earlier about the fact that we're continually introducing new products as part of our expanded offerings strategies.
She products and certainly a big part of that target audience customer audience is in China. We continued to build out our dealer network continue to build out our footprint there along with connected assets and all the other things. We're doing we believe that we're well positioned to compete in trying to moving forward.
Okay, sorry, so so CAD is flat to down is that better than what you're seeing for the market. Then I thought that was a market.
I believe it's roughly somewhere.
Yes.
Okay. Thank you very much.
Okay.
Thank you and the next question is coming from David Raso of Evercore ISI. David Your line is last hi, Thank you my questions about EPS guidance, but.
About it related to the dealer inventory swings so.
So the inventory reduction this year targeting mid points won in the quarter billion, but the headwind fuse actually greater on a year over year basis right because the inventory went up.
700 million last year. So we're looking at a 195 drag year over year.
But the way you spoke to the inventory.
Sequentially.
Appear and correct me, if I'm wrong, almost all of that billion nine five L. A very large majority of it that year over year drag is really concentrated in the first half a year is that correct.
David It's Andrew Yes that is correct.
So when I think about the the P.S. cadence right pricing.
Have a struggle to start the year.
The big inventory swing for the full year is really focused on the first half.
Just sort of such up to the answer I'm just trying to figure out then I mean normally the first quarter. The last yet whatever 20 years. The median it's up a little bit from the fourth quarter. Your fourth quarter was on the high side. So is it fair to say, it's that's not the case. This year, we start low in the first half the first quarters below four Q and then at climbs from there.
I'm just trying to get again, a sense of how much is yes. So so part of the reason why I tried to talk a little bit about the phasing for Nextshares, yes, do not expect the.
Historic trends to prevail.
Yes, you know as you know normally first quarter is a is a relatively strong quarter. It was a strong quarter from a margin perspective.
As we build inventory heading into selling season.
And then obviously the second half a is slightly weaker.
The first off but that is the normal patent both from a sales revenue and also from a profitability perspective.
You assumptions, you're making all rolled off fairly accurate based on what we're saying Oh, we do expect dealer inventory to have an impact on the first off as I said see I will see some build in Q1, but that was should be will be flat by Q2, ROI, we will see a steady decline through the through the first off of the.
This is a build last year. So that is a the lobby outcome as we move and so yes.
You can just you won't be out just to be able to use the seasonal trends was was as a plug in your model I'm afraid.
And just to be clear Jim last year, obviously, the inventory reduction was a little disappointing the management's commitment to take care of this inventory in the first half of the year.
I just want to be clear I know, they're independent dealers, but are we looking to take out.
The year over year swing.
Completely avoid the normal seasonal build.
Not looking to build inventory at all in the first half of the year and that's that big year over year drag I'm, just making sure from the prior.
Let's say disappointments on the inventory the last couple of quarters is there a firm commitment to address this in the first half and not let this linger into the back half yeah, David I mean, obviously I always as as we work with the team as they are managing their businesses themselves. So we all know we conte.
Manage the industry for them, however, based on our expectations on order patterns, we're seeing from dealers, we do expect but they will be working hard to would you say in between the first half of the.
You know who can make a 100% commitment, but obviously, we do expect the boss majority of that to happen in the first hall and one of the reason is that our fourth quarter inventory didn't decline as much as we anticipated because end user sales were lower than our expectations. It's obviously end user sales has an impact on inventory in the core.
I appreciate it thank you so much.
Thank you, ladies and gentlemen, just a reminder to keep it for one question for analysts. Please. Your next question is coming from small Rob Wertheimer Malaise research Rob. Your line is last Ah. Thank you, let's see if this works just a quick clarification on North American construction, you have residential and nonresidential construction to decline is that industry.
Dollar spent on construction or is that construction equipment for the industry.
And I can my question is really I mean that reduction lead time is a fantastic thing for cat and reduction in volatility would be a great thing for cat any color around you know the work you've done to achieve that and if dealers are starting to recognize it in wanting to hold structure lower inventory.
Thanks.
So yes so.
With regards to residential non residential construction equipment relating to that.
What we're expecting to see the decline in perfect.
And then as regards the imaging them and that back to <unk>.
Yeah in terms of lead times, and we were working on that this lean journey for a long time. It obviously, if we can find ways to reduce our lead times. It helps us both in the upcycle to respond more quickly to increases in changes in demand. It also allows us to cut back more quickly. So we don't have an overhang, which helps them and dampened the impact of the cycles and that again, we've got our.
Total team focused on reducing cycle times, all part of that lean journey, and really trying to synchronize across the value chain.
I think we're doing a better job of that than we have in the past.
But it's it's a never ending journey.
Okay. Thanks, Tim.
Q and the next question as coming from Ashish scooped out from Stephens Ashish align us last.
Thanks, So much I'm just wondering if you can expand on your GC comments related to China, maybe you can give us a sense of.
Right or you know where you're looking for incremental improvement in 2020, I guess I'm just referring to.
Sort of the market share losses through most of the year, although it did improve in the end just kind of trying to think about how much of a contributor that could be in 2020, and and beyond you know where the successes were and where you can see some incremental improvement.
Yeah, whether it's China or any other part of the World you know the competitive landscape is continually changing as we introduce new products our competitors introduce new products. So that's nothing new and so we again you look at anywhere in the world overtime, we see changes in that in the competitive situation. I mean, we have demonstrated our ability to successfully compete in China.
Yeah, Weve localized we have local leadership team, we have dozens of factories, we have localized our our supply chain and we continue to build that our dealer network and increased services and connectivity and introduce new products. So again, it's competitive situation in China or anywhere in the world is fluid, but we're very committed to be successful in them.
Okay and I believe it demonstrated we we can be successful competitive.
Thank you and the next question is coming from Jamie Cook from Credit Suisse Securities. Jamie Your line is lives.
Hi, good morning.
If you could add clarification. If you could just elaborate you talked about the normal restructuring of 200 million and then Oh, I'm, sorry, normal restructuring, which I assume is 200 million and then the strategic stuff you, revealing another 200 million I'm just trying to understand what's in there.
The E P S guy that you're not adjusting out and then I guess my question is are there you talked about reviewing products you talked about you know some cost cutting realizing it's not what we had him there's not the opportunity in prior cycles, but as we get to the back half here I'm just trying to understand are there any savings associated with these measures argued that play more into 2021.
Thanks, Yeah, Okay. Jamie So we we have said that we would.
This year, we expected to begin idea, we said for 2019, we expect to restructuring costs now to normalize of between one and 200 million goals yeah.
We were slightly above that.
You've heard me say, we were $236 million for 2019.
We expect to normal level in Twentytwenty, so between the $1 million to $200 million is the sort of normal level, we would have.
The 200 million dollar is actually a yes, you're correct it does relate to.
You know some products, which on delivering opac.
They will some action we've got to go through between the evaluation of the actions we can do.
And you know at the moment guidance does not take into account that would be any savings associated with these measures and twentytwenty. We thing most more likely that will be in twentytwenty one anyway.
And is there any way to think about of savings associated with that are just too early into confirmed.
Great.
And your he has got right Yep Yep repurchases in the PS Guide and yes, we will we will keep you updated on this because I think as the charges come through we'll we'll we'll we'll pick it up and then we told you about what what we expect to from a benefit perspective.
And you know we're also just just Jimmy that to add in there were also continuing looking at ways to reduce our structural cost, particularly in areas of back office, a procurement of all the rest and we do expect a get over time to have improved performance as a result of that again relatively limited impact in 2020, but we're really trying to pick the right steps in 2020 to set ourselves up for the future.
Well the lower structural cost.
Thank you that's helpful.
Okay.
Thank you and your final question as coming from Stephen Volkmann from Jefferies and company Stephen Your line is last.
Hi, good morning, guys.
Andrew Thanks for all the comments relative to sort of the P.S. cadence, but I'm wondering Jim if I can ask how you're thinking about the markets you talked about this earlier I think you sort of characterized it as a pause so the down 4% to 9% in end user demand is that sort of significant.
The lower in the first half and then maybe kind of closer to breakeven in the second half or just Didnt do you think this kind of runs its course and and the fourth quarter run rate could actually be kinda back to growth again or are you just sort of predicting kind of steady continuous weakness and then.
User demand.
Yes, I think it really have to look at it by by segments. So it in resorts injuries in mining in particular, we believe that the second half will be stronger than the first half again, we are up we feel there's a a slow gradual recovery current in mining our customers are our cautious but just based on the quoting activity in the mountains of that that's going on.
We do anticipate that would be a stronger last half of the year than first half.
Construction don't anticipate any dramatic changes first have to second half <unk>.
Oil and gas onshore, we expect that to be remain depressed throughout the year I sold on rail typically have strong fourth quarters. That's you know that that's something that way almost every year and we no reason to think that wouldn't happen again.
Great I appreciate it thanks guys.
Q.
Okay with that let me turn it back into his closing remarks farwell. Thank you all for joining the call and appreciate your questions. Okay faced several challenges in 2019 and I'm very proud of our team of employees, how they met those challenges with determination of they allowed us to meet.
Our operating margin targets that we set our investor day and do the other things. We said we would do we continue to advance our strategy for profitable growth. We are investing significantly in service has expanded offerings and working on that operational excellence record safety year shortening lead times working on the cost structure, and certainly 2020, well bring its own.
Set of challenges and opportunities, but we remain focused on delivering additional value to our customers and our shareholders and will continue to execute our strategy for profitable growth. Thanks for your time.
Thanks, Jim Thanks, everybody, who joined us for a call today. If you missed any portion of the call you can catch it by replay on line. Later this morning, we well post the transcript on the Investor Relations site within when does it say if you have any follow up questions. Please reach out to not any right is that our E and GE.
Well under Skyride at Cat, Dotcom, and that Tesco underscored, Jennifer <unk> Dot com and the general phone number and Investor Relations. Its cost line 3096, 75, four or five fine nine and now I'll, Let me ask Paul to conclude our comp.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time have a wonderful day. Thank you for your participation.
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