Q1 2020 Earnings Call
Welcome to the Q1 2020 try to pilloried.
In each earnings conference call.
This time all participants are in listen only mode I would now like to hand, the conference over to your speaker today, Jennifer Driscoll. Please go ahead.
Thanks, Jacqueline good morning, everyone welcome to Caterpillar's first quarter earnings call, joining the call today or Jim Umpleby Chairman of the board and CEO, Andrew Bonfield, CFO Count up Lee Vice President of our Global Finance Services Division and Rod Wrangle Senior IR manager.
Our call today expands on our earnings news release, which we issued earlier. This morning, you can find the slides that accompany today's presentation, along with a news release in index investors section of Caterpillar dotcom under events and presentations.
The forward looking statements, we make today are subject to risks and uncertainties well also make assumptions that could cause our actual results to be different than the information. We discussed today. Please refer to our recent SEC filings and the forward looking statements reminder, in the news release for details on factors the individually or combined could cause our actual result.
It's a very materially from our forecast.
Caterpillar is copyrighted this call, we probably had the use of any portion of it without our prior written approval.
This years quarter included a 38 cents per share benefit I'm, a remeasurement gain while last year's quarter included a discrete tax benefit of 31 cents per share. There is a non-GAAP reconciliation in the appendix to this morning news release.
In a moment, you'll hear from Andrew about the first quarter results. The actions, we've taken to boost our liquidity and a few key financial assumptions for the rest of 2020, but first please turn to slide three as we turn the call over to our chairman and CEO, Jim Umpleby Jim.
Thank you Jennifer good morning, and welcome to categories first quarter earnings call. During this difficult time.
I would those affected by cobot Nike.
We extend our deepest sympathies to those who have lost a lot one during the pandemic.
We think those individuals on health care as well as the first responders, hoping fight dependent on the front lawn.
I also want to thank Canaccord global workforce. This month, we're celebrating 95 years from operation a caterpillar for nearly a century, we have faced in overcome many challenges as in the past our employees are rising to the occasion I appreciate their commitment to support our customers, while keeping our facilities in co worker shape.
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As the cobot 19 pandemic spreads spread around the world. Many governments classified categories operations as essential activity for support and critical infrastructure.
Working with our dealers caterpillar is delivering products and services that enable our customers to provide critical infrastructure. It is essential to support society during the cobot 19 pandemic.
Customers use our products to provide prime in standby power for hospitals grocery stores in data centers to transport food and critical supplies in trucks shifts and locomotives to maintain clean water and sewer systems into mine commodities and extracted fuels essential to satisfy global energy demand.
Well, we are sure in these important need caterpillar remains dedicated to the safety health and will be well being a more employees.
The caterpillar team achieved our best safety performance on record in 2019, and we are leveraging our strong safety culture during the pen.
She can work from home are doing so.
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Caterpillar is implementing secrets to protect our team.
In accordance with regulatory requirements and guidance.
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We've introduced a number of enhanced or your benefits to help them deal with them.
It's varied by country medical care systems in various regulatory requirements.
Since Caterpillar was founded a world class Global dealer network has provided us with competitive advantage and during this pandemic are 165 viewers and their employees around the world continue to support our customers is they maintain critical infrastructure.
Our team has kept financial also continues to support our customers is Andrew will describe in more detail.
Can't find and supports our customers through good times in challenging times, which is one of the reasons we have so many loyal customers.
The Caterpillar Foundation is also committed $10 million to support Cobot 19 response activities being taken by organizations around the world.
Now turning to slide four.
Caterpillar is well positioned to navigate the cobot 19 pandemic, our financial position is strong and we're confident in our ability to continue serving global customers.
We will continue to execute the strategy. We introduced in 2017, which is based on growing services and expanded offerings, while improving operational excellence.
The execution of our strategy during the last three years positions us well for these challenging times.
Our disciplined management of structural cost will help us weather the storm created by Cobot Nike.
We held our pureed cost of SGN, a R&D and manufacturing along with our salaried management headcount flat from the end of 2016 to 2019, even though sales and revenues increased 40% during the same time frame.
While this leaves us less to cut in a downturn the lower cost base and the need for significantly less restructuring costs, I mean that our absolute margins and cash flow will be higher than they would have been had we allowed puria cost and Saturday management head count to increase during the last three years.
In response to the pandemic, we've taken actions to improve our already strong financial.
Position increased liquidity.
On a consolidated basis Caterpillar ended the first quarter was $7.1 billion of cash in available global credit facilities of $10.5 billion.
In April we raised $2 billion of incremental cash by issuing new 10 in 30 year bonds and arranged $8 billion of additional backup facilities to supplement the company's liquidity position.
We've reduced discretionary expenses, including consulting travel and entertainment.
We suspended 2020 be salary increases and short term incentive compensation plans for most salaried management employees and all senior executives.
We're also reducing <unk> production cost to match customer demand.
We continue to focus on improving operational excellence, which include you, making our cost structure more flexible and competitive.
We are working through a number of operational challenges related to the pandemic and have suspended operations at certain facilities due to a combination of supply chain issues, we customer demand and government regulations.
As of mid April approximately 75% of our primary production facilities across Earth across our three main segments continue to operate.
Some facilities that were temporarily closed have reopened such as in China.
We have worked quickly to mitigate disruption to our supply chain by using alternative sources, increasing airfreight is needed redirect unit orders to other distribution centers and prioritizing redistribution of the most impactful parts.
Our employees in dealers continue to serve our customers.
Now I'll give you a summary of the first quarter's results on slide five.
Sales and revenues of $10.6 billion decreased by 21%.
The decline was mainly due to lower sales volume, including lower end user demand in the impact from changes in dealer inventories.
End user demand was below our internal expectations for the quarter.
Sales to uses for the first quarter declined by 16%. The decline was most pronounced in Asia Pacific, where we compete primarily in construction industries and in North America, which had weakness from machines in energy and transportation engines.
Oil and gas declined 24% for the quarter.
Small bright spots included construction in Latin America mining in Asia Pacific any Amy and power generation.
During the first quarter of 2020 dealers increased inventory by $100 million in anticipation of normal seasonal demand from end users.
This compares with a 1.3 billion dollar increase in dealer inventory during the first quarter of 2019.
The year over year change of $1.2 billion and dealer inventory also placed pressure on our sales.
Our first quarter operating profit margin was 13.2% down 320 basis points.
The decline was primarily driven by lower sales volume.
Favorable less DNA, R&D and manufacturing costs, partially offset the volume decline.
The R&D decline was mostly due to lower short term incentive compensation as most of R&D projects are proceeding consistent with our strategy.
Profit per share was $1.98 compared with three dollar $23 25 in the prior years period.
This years quarter included a 38 cents per share benefit from it remeasurement gain while last year's quarter included just a discrete tax benefit of 31 cents per share.
Now moving to slide six.
In the first quarter, we returned $1.6 billion to shareholders through dividends and share repurchases. In addition, we declared our normal quarterly dividend earlier this month.
And we continue to expect our strong financial position to support the dividend.
As a reminder, caterpillar has paid a quarterly dividend every year since 1933 through a variety of changing challenging business conditions.
We remain committed to returning substantially our free cash flow shareholders through the cycles.
We are temporarily suspending our share repurchase program upon completion of the Tenbfive One program that we established in January.
We retained the balance sheet to do M&A for compelling opportunities.
Our focus on operational excellence shorter lead times and flexibility in manufacturing operations will allow us to react quickly to future changes in market conditions, either positive or negative.
The ultimate impact of the pandemic on our 2020 results remains uncertain and will be based on the duration of the virus in the magnitude of the economic impact on global demand for our products.
We expect the impacts of the pandemic on our results to be more significant in the second quarter and to linger into a global economic conditions improve.
Due to the uncertainty associated with Cobot 90 minutes effects, we withdrew our financial outlook for 2020 on March 26, and are not providing one today.
And our Investor day in May 2019, we discussed our strategy based on services expanded offerings in operational excellence.
We highlighted are focused on operational excellence and our goal to be profitable and operate more efficiently through the cycles as we leveraged our foundational strengths are competitive in flexible cost structure lean processes safety first culture, and quality, including product reliability and durability.
We described our success delivering the targets we had set up during our 2017 Investor day, and we laid out new targets based on the improvements we've made and structural costs that I described earlier.
One was to improve annual adjusted operating margin by 300 to 600 basis points versus 20 tend to 2016 when margins ranged from 7% to 15%.
The second was to increase annual M E and T. free cash flow by $1 billion to $2 billion above our actual 2010 through 2016 performance to a range of $4 billion to $8 billion per year.
However, the impact of Cobot 19 on our business has been significantly more severe and chaotic than any cyclical downturn, we had envisioned.
Governments of close suppliers with little or no notice impacting caterpillars operational efficiency.
Importantly, while we have taken actions to reduce costs. We have made a conscious decision to continue to invest in enablers of services growth and expanded offerings key elements of our strategy for long term profitable growth.
As a result in 2020, depending upon how that pandemic unfolds, while we expect our margins and free cash flows to be better than our historical performance of 20 tend to 2016, it will be challenging for us to achieve the margin and cash flow targets communicated during during our 2019 Investor day.
Our goal is to emerge from this crisis as it even stronger company better positioned for long term profitable growth.
Now, let me turn the call over to Andrew for Recapping, our first quarter results short term actions, we've taken and the strength of our balance sheet.
Thank you Jim and good morning, everyone.
I'll begin on slide seven without first quarter results.
Then I'll discuss some of the actions we're taking in response to the cobot 19 pandemic before turning to our cash and liquidity position.
In total so some revenue for the first quarter declined by 21% to $10.6 billion.
Operating profit decreased by 36% to $1.4 billion.
Profit per shift for the quarter decreased by 39% to $1.98 cents.
The decline was driven by lower volume as a cost reductions taken to mitigate the pandemic will offset by the impacts of the high tax rate and negative currency movements.
Vicious quarter included a 38 cents per show Remeasurement gain that resulted from the settlement over in international pension obligation.
Last year's quarter included the 31 cents benefit from a discrete tax item.
As you see on slide eight the results this quarter were primarily driven by volume.
Currency in price had a small impact volume decreased sales by $2.6 billion.
The volume to try and respect to weaknesses in end user demand coupled with changes in dealer inventories.
Geographically sales declines were led by North America in Asia Pacific.
Machine sales to uses including construction industries resource industries decreased by 17% for the quarter.
While energy and transportation socio uses decreased by 12%.
You may recall that we expected, it's kind of 4% to 9% for the year with a stronger second home.
Nevertheless, first quarter sales to use as well below our expectations.
Demand in Asia Pacific was weaker than we expected, including a direct impact from Cowen 19 on sales to users in China.
In January we indicated that we expect to the small season, we'll go to dealer inventory in the first quarter.
Do this increase inventories by about 100 million this quarter compared with an increase over and dealer inventories of $1.3 billion in the first quarter of 2019.
This resulted in a $1.2 billion swinging revenues, which was nearly half of ourselves to cone.
Also it is important to note that we reduced shipments to be was in the quarter because of the lowest sales to users.
Order backlog increased by about $400 million since year end again, following a normal seasonal.
Compared with a year ago backlog was down by $2.8 billion.
As I've said before our view retail sites was a better indicator of demand. The backlog I'm also has a lag in sales to users I believe that takes a better represents underlying customer demand for machines and engines.
Moving to slide nine operating profits the first quarter fell by 36% to $1.4 billion.
Volume declines with the main driver of the $803 million decrease in operating profit.
Operating margins fell by 320 basis points.
Favorable short term incentive compensation expense and lower manufacturing costs, partially offset the impact of the lower volume.
For comparison incentive compensation expense in last year's first quarter was $220 million.
Now ill discuss individual segments results for the first quarter.
Starting on slide 10.
First quarter sales of energy and transportation declined by 17% to $4.3 billion, driven by 24% decline in oil and gas sales.
Demand for reciprocating engines in North America, so significantly as oil prices fell.
Within oil and gas solar cells remained steady with the prior years first quarter.
Power generation sales, we can does well primarily in Asia Pacific and North America.
Industrial and transportation sales both decrease.
Probably the segment decreased by 28% driven by lower volume, partially offset by the lower short term incentive compensation expense.
The segment's operating margin declined by 320 basis points to 13.8%.
As shown on slide 11 resource industry sales decreased by 24% in the first quarter $2.1 billion.
Changes in dealer inventories and low end user demand growth first quarter sales decline.
Dealer inventories decreased in the first quarter of this.
Soft increasing in the same period of 2019.
We experienced low end user demand across most of the industries we serve.
Specific to mining sales were lower as much as remain disciplined in their capex deployment.
Commodity volatility.
However fleet age is the highest since we began tracking it and utilization roommates rates remain high.
While we expect to this current uncertainty may delay fleet replacements remain positive and mining prospects in the medium and long term.
In addition, we saw declines in heavy construction inquiry in aggregates, particularly in North America.
During the first quarter Newmont Boddington became the first goal million to move complete these which one was holding.
We expect to begin shipping newmont. The first two is cataclysm 93, ETF autonomous trucks next year.
Currently Caterpillar has 292 trucks running autonomously using tech come on for holding.
Recall that resource industries profit margin in the first quarter of 2019 was very high as you saw the benefits from double digit volume growth.
We will price realization.
Lower volume was the primary driver of the 47% profit decrease.
That resulted in the 630 basis point decrease in the segments profit margin, which finished finished a 14.6%.
Now turning to slide 12.
Well construction industries sales decreased by 27% to $4.3 billion.
The lower volumes driven by low end user demand and a change in dealer inventory movements.
Sales to use has declined by 18% compared with the prior year, including a 20% decrease create decrease in Asia Pacific driven by China.
Although dealers increased inventories during the quarter the increase was much lower than in the prior period.
This had a particularly noticeable impact on sales in North America.
The segment's first quarter profit decreased by 41% due to the volume decrease negative mix.
No short term incentive compensation expense and favorable material empiric costs provided to slide offset.
The margin declined by 360 basis points to 14.1%.
Moving to slide 13 financial products revenue decreased by 4% $814 million on low average earning assets.
Profitability decreased by 50% in the first quarter, two $105 million led by the Mark to market impacts on equity securities in the insurance services portfolio.
Confidential as taken important steps to support our dealers and customers during this challenging time.
As shown on slide 14, we launched customer care programs in all regions and customers to apply for pain relief through a simplified and streamlined process.
It's an approach we've learned from helping customers often natural disasters.
Typically we provide principal and interest deferral from 90 days.
Interest continues to accrue and the deferred payments to the end of the alone.
When we took similar actions in 2009, there was a notes will boost in customer loyalty.
POS Jews did increase in the quarter, such a 4.13% and we increased our loan loss reserve moderately this quarter due to elevated risk associated with coated non team.
However, there are two points to keep in mind.
First most of that customers went into the downturn financially healthy.
Currency on their loans.
I'll provide you with the comparison.
Posture use in both North American China at the end of 2019 will 1.3%.
Whereas at the start of the financial crisis posture use in those regions were 4.3% and 8.5% respectively.
Second our loans secured by machines. These are watching assets and all critical to our customers businesses, which means they normally prioritized payments to cat financial.
From a funding perspective, the strong action from central banks around the world means we are maintaining a broad and diverse mix of global liquidity sources, including access to global commercial paper and debt financing.
On a positive note on new business volume rose, 17% quarter over quarter in North America.
Flat across all regions as we continue to provide financial solution solutions to qualify customers around the globe.
Turning to cash flow.
Let me into free cash flow the quarter was slightly positive was lower than last year.
No it profits as well as higher capital accounted for the inventory levels, which increased from the year end were partly offset by benefits from lower short term incentive compensation payouts.
The first quarter is typically a weakness of the from a cash flow perspective due to the payoffs of Agnew short term incentive.
We paid out approximately 700 million goes in short term incentive compensation this quarter about half the amount paid in 2019.
Caterpillar inventory levels rose as reported production stores in anticipation of high production levels for the quarter, we will now what piece down.
Now turning to slide 15.
As Jim mentioned the pandemic in this impacts what unprecedented in the speed depth and level of complexity.
It is more color on some of the actions we've taken this fall.
From a demand perspective, we've executed business continuity plans and work to optimize availability in areas with demand remains relatively strong such as for parts.
Managing our production by segment to ensure we do not overproduce, whilst we take care of dealers and customer needs.
We're adjusting our workforce by facility and by segment.
From a stewardship perspective, we have completed scenario analysis, I mean to ensure that we prepaid for different potential lens and debts of this pandemic.
We've also taken steps to strengthen our cash position and I will describe more about those in a moment, whilst reducing capital expenditures and delaying R&D projects with less visible returns.
From a cost control perspective, we've reduced discretionary expenses, including consulting travel and entertainment.
Given the coated 19 environment, we suspended 2020 by salary increases and children's incentive compensation plans for many employees and all our senior executives.
We will continue to both ways to make our cost structure more flexible and competitive.
Turning to our supplies, we keep a close eye on their financial health as well.
In the event at the supply their faces financial distress, we identify solutions to support them well, while also ensuring supply for kind of goes products.
In particular, I suppose have access to working capital support through a partnership with wanted to third party bags.
This could provide a quick access to cash flow to help them couple of their payment commitments.
Oh, no risk to Kevin.
Separately as we stated last quarter. In addition to a normal restructuring programs. We continue to address a challenge products those that don't meet our goals for Opex.
We recently began a concentration process that could potentially results in the closing of two money facilities in Germany.
We've also taken an impairment charge against one of the other Jones products.
By addressing these chums products, we can move forward with a slightly smaller portfolio and deliver a high level performance, including better margins embedded cash flows.
Meanwhile, we continue to drive ongoing cost reduction efforts, including preparing for the outsourcing of certain back office functions and launching a program to reduce our procurement costs. Although as we said in January these benefits will be more impactful in 2021.
Let's turn to size 16, and while we all providing profit per share guidance or talk about a few key source for 2020.
We remain focused on what can be telus optimize the inventory levels.
Our expectation that the decline in dealer imagery and by the year end, we'll be at the higher end about prior range, which was $1.1 billion to $1.5 billion.
We now anticipate a high tax rates and twentytwenty as well to should changes and we expect to geographic mix of profits and the impact of sudden newest tax provisions on non U.S. income.
As you model second quarter.
Please remember the dealer inventory grew by $500 million in second quarter last year.
Setting up a different comparisons shorter.
Also as Jim said, the impacts of the bars will be greater in the second quarter.
All in all the situation remains very fluid until it becomes clearer, we do not anticipate being able to produce provide guidance as normal practice.
Turning to slide 17, I'll touch on our capital allocation and our cash and liquidity position position.
We recently declared our normal quarterly dividend.
Due to uncertainties with associated with covered non team we temporarily suspended our share repurchase program in mid April upon completion of the Tenbfive One program that we established in January.
We said at our Investor day in May 2019 that we will return substantially all of free cash flow to shareholders through dividends are more consistent share repurchases.
In the first quarter, we returned $1.6 billion to shareholders through dividends and share repurchases.
We ended the first quarter with a strong financial profile, including $7.1 billion, an enterprise cash.
Given the environment, we have had an incremental $3.9 billion short term credit facility. In addition to our existing 10.5 billion dollar revolving credit facility.
Both of these liquidity resources remain undrawn.
In addition, weve registered for $4.1 billion in commercial paper support programs now available in the United States in Canada, which could provide supplemental liquidity should the need.
Rise.
After the call trained we leveraged our strong balance sheet to raise $2 billion of incremental cash by issuing bonds, a very attractive rates.
Specifically, we should $800 million and tenure notes, a 2.6% and $1.2 billion in fidia bonds at 3.25% the same coupon as our 2019 debt issuance.
We currently have $11.2 billion and long term debt with no maturities until 2021.
Also would not required to make contributions to the U.S. pension plans for the foreseeable future.
Following meetings with the credit rating agencies earlier this month, we retain a strong credit ratings.
All of this gives us confidence in our ability to weather the storm and emerge from it an even stronger company.
So finally, let's turn to slide 18, and recap today's key points.
We have a strong financial position and our confidence in our ability to continue serving a global customers. During this difficult time.
Our enterprise cash on hand, $7.1 billion, and we have a totaling $20.5 billion in available liquidity.
We remain committed to returning substantially all of free cash flow through dividends and share repurchases through the cycle, including $1.6 billion returned in the first quarter.
We are actively monitoring customer demand and working closely with dealers on the inventory names.
I factories remote agile leveraging lean principles.
We continue to manage operations to respond to positive or negative changes in demand.
Our strategy is unchanged focusing on operational excellence services and expanded offerings.
We are energized by our role as a company that supports some of the critical infrastructure, noting the transportation of essentials, such as food and medicine and satisfying globally needs the energy.
And once again, we thank our employees for how what they've been navigating the scope endemic and serving our customers.
With that I'll hand, it over to the operator, just salt, which you and I said.
Jacqueline.
We will now begin.
Go ahead.
Please limit yourself to one question only your first question comes from Rob Worth Meyer from Melia Research. Your line is open.
Thank you and good morning, everybody.
I think some others had already started this sort of trend towards the low end or below some of your 2019 margin targets just given the uncertainty.
Yes, let me curious to hear what.
Among the various uncertainty it may have kick you off that trend whether its aftermarket falling further than you thought or buying goods.
And then just I wanted to see if you talk about the trade offs, you're choosing to make some companies have done salary cuts temporary or otherwise.
You're choosing to continue to focus on investment in growth and I'd like to hear the Pos to trade offs expected Steve from that.
Whether whether they might return to cutting warrants entering into thanks.
Hey, good morning, Rob Thanks for your question.
It is in first the first part of your question about margin targets really comes down to the chaotic nature of this of this downturn. It was not a normal normal cyclical downturn. So it really wasn't so much a.
Downturn in one area of our business versus another is just the way it happened so government shutdown suppliers with little little or no notice, which had an impact on our operational efficiency now we're continuing to serve our customers and work our way through it I redirecting things, but it really has created habich with our manufacturing operations that we've overcome but it's not again a normal.
Google downturn and as we've looked at.
The various levers we can pull we're striking a balance that we think is appropriate between short term performance and investment for the long term.
We have taken a number of actions to reduce discretionary costs and when things I'll remind you of as I mentioned in my remarks, as we we really have managed the business differently. During the last three three and a half years, we kept our period costs flat in our Saturn management head count flat between the end of 2016 to 20 and of 19, even though our sales on a 40% and we talked a lot in.
Our Investor day.
Presentations about the fact that we're driving to produce higher absolute margins in higher absolute cash flow at all points in the cycle compared to that historical performance between 20 tenant 2016, and we still intend to do that just a bit again, given the caddick nature of this downturn, what's happening with suppliers.
We're saying it will be challenging for us to achieve those new targets that we established in may of 2019, but we do expect absolute margins and cash flow to be higher and I believe our strategy will will service well. During these times cash is obviously king in this environment and the fact that we will not incur.
A large amounts of severance costs with large restructuring I think will serve as well. So the fact that we maintain cost in head count between.
End of 16 in 19, I think again positions us very well.
Thank you and enter clarity is that supply chain disruptions team reached a temporary maximum or is it still.
Yeah, we're working our way through it I mean, obviously that situation its geographic situation in China has obviously improved as the is the pandemic has lessened in that country and so all of our facilities are opening operating in China again, and it's in our suppliers are doing much better in China as well, but it's a rolling kind of situation. So.
Depending on how that pandemic unfolds across.
Across the world, but again, we are finding ways to continue to serve our serve our customers continue to ship products in parts. Our dealers are supporting our customers, but it is making it more challenging and it's having an impact on our operational efficiency as you would expect.
Thank you.
As a reminder, please limit yourself to one question only your next question comes from Mig Dobre from Robert Baird. Your line is open.
Yes. Thank you good morning, everyone.
Just to maybe follow up on on Rob's question there.
If you look at the second quarter, you provided some color and detailed there, but maybe you can put it at the second quarter.
Within the context of the full year.
Is it fair to assume that this is maybe the most challenging quarter from a production standpoint, or do you sort of for the these effect lingering beyond the second quarter, given the changes in backlog and what you're seeing in terms of in terms of them. Thanks.
If our financial performance perspective, we certainly expect a second quarter to be a weaker than the first quarter. As we said, we believe that the impact the financial impact on cash flow will linger as long as as the.
The pandemic continues until those effects were off.
In terms of of trying to quantify or give you description of.
Q2, three four in terms of operations. It really is a fluid situation to its its very difficult for me to to make that judgment.
But again, we're finding ways to work our way through it.
Your next question comes from Jamie Cook from Credit Suisse. Your line is open.
Hi, Good morning, I guess my question centers around dealer inventory you cited that the declines will be the higher end of the range that you provided last quarter.
I guess why not more significant and it's the goal still to be able to produce in line with retailers you as you exit 2020, so that that goal I guess.
Could we see bigger declines in that or maybe you could just comment on what you saw in April to support what we're saying about the dealer inventory declined. Thank you.
Yes, Thanks, Jamie it's Andrew and good morning, So yes, obviously, what we're pointing to is we had the range at the January of one to 1 billion based on what we see from a demand perspective, obviously, we expect that to be at the higher into that range.
Always remember when do those all looking out that making their plans based on what basing going forward. So it depends what happens in Twentytwenty, one and what they viewpoint is off 2021, which is far too early as Jim just said for us to have any view even beyond the end of this quarter.
That will determine their final numbers. So yes, it may be more flexible and obviously depending on what the outlook is that may determine whether they would like to go lower.
So we just pointing out we would expect the at the minimum.
It would be at the high in that range.
Sorry can you comment on trends you saw on April if you're able to.
I mean, it's really too early to say I mean, obviously.
We are still in April we don't have April results yet.
You know with remote working as hard to get data, but obviously.
We are expecting that April will be a challenging month.
And just purely given the long term impact and the impact, particularly things like oil and gas.
Remember, we all in a situation where for reciprocating engines oil and gas prices have been negative in the and among.
Okay. Thank you I hope everyone stays healthy.
Yes. Thank you.
Your next question comes from and Dikeman from Jpmorgan. Your line is open.
Thank you and good morning.
Maybe on the oil and gas you talk about.
Your expectations for permanently impaired.
Impairments and up business I'm talking about the impact of oil and gas across your various businesses when say oil sands in resource and.
Construction equipment in the construction segment I think just give us what you're contemplating in terms of longer term outlook and up in those businesses and how weak our oil and gas may impact you more permanently.
Yeah, I'll start with that maybe the short term impact then I'll talk about someone longer term on the short term, obviously that will have an the oil and gas decline, particularly in WG I will have an impact on our reciprocating engine businesses for North America things like well servicing drilling.
Gas compression and so we we went into the you're expecting that our 2020 reset oil and gas sales would be lower now obviously, we're expecting there.
He be even lower than that so our solar gas turbine business midstream is holding up holding up well.
You should stop and think about the last downturn, we had an oil and gas the solar turbans compression business continued to to hang in there and of course, a large part of Solars.
Sales our services related and the turbines continue to run even during low oil prices. So that provides a cushion there.
I don't I don't anticipate a permanent impairment and our business.
The old.
The old I've lived is my fifth I think oil cycle, my 40 year career and and when things are really really good people think it will never get worse again. It when things are really bad to think it'll never get better again I do believe that the market will recover at some point it it'll it might take awhile, but I don't perceive it will be any kind of permanent impairment on our business.
Not even in non oil and gas like oil sands.
Yes, so sir it's there certainly could be an impact in terms of.
Short term impact on on our business, but again I don't I don't see anything major that is that a significant via a permanent impairment on our business.
And you asked about construction as well. So so you know we use sell certain money construction equipment in North America, that's related to oil and gas. So obviously that that business will be slow as well.
Okay. Thank you appreciate that.
Thanks, Ed Rachman.
Your next question comes from David Raso from Evercore. Your line is open.
Hi, good morning.
I wanted to hear your comment chaotic nature.
The decremental margins the first quarter at 29% were a little better than I would've thought I assume the second quarter with the shutdowns be more challenging but can you help us a little bit how to think about the decrementals versus what you saw in the first quarter.
Related to that chaotic nature question related to the margins.
What are local and national governments, telling you about the reopening how are you planning.
For those Reopenings things that we should be thoughtful about on your ability to to ramp up a bit as things open.
Yes, maybe I'll take your second part of your question first so that the closures, we've had our temporary and their due to a combination of.
Supply chain constraints.
We customer demand and and government mandates. So many of the facilities that have that were never close of reopened we're probably going to close some that are reopened now again, we look at at customer demand and we look at supply chain constraints, even in a non pandemic situation, we sometimes have.
Facility closures just to align production with customer demand. So we're this is not new for us we understand how do to bring facilities up so I really don't see a big issue there and so we've been able to work with local governments and implemented the guidelines that they have have provided to us and also best practices.
By authorities around the world in terms of social distancing, we've done things like stagger shifts we've extended lunch hours we.
Taking temperatures were doing a whole variety of things that are that have been recommended as best practices. So we're continuing to implement those as they come out.
And as I mentioned earlier, we're really focused on achieving higher margins at each point in the cycle.
Compared to what we did between 20 tenant 2016, and so rather than think about it from an incremental or decremental perspective, what we laid out at our two investor days in 2017 in 2019 was our ability to achieve higher.
Absolute margins NAPSLO cash flows it each pointing to cycle and as I mentioned earlier I believe dental service well in a period, where cash is king and Dave David Good morning Center, just to add to that obviously.
The volume declined in the first quarter Osama roundabout, 20%, obviously operating leverage is still the biggest factor and module Incrementals and Decrementals will be if you think about in that turns.
Because beverages is the single biggest factor.
Also just remind you that obviously in the first quarter last year.
The actual amounts of short term incentive compensation was slightly higher than the average for the remainder of the.
So that will be slightly negative on margins going forward. Because you. Obviously you won't have as much offset against that as we go through the remaining quarters. The so will vary a little bit.
So the clarify what you're saying a little bit related to the last May's analyst meeting.
Whatever we think the revenues will be this year.
Versus history.
Similar revenues you would expect the margins to be higher be at 2016 on equipment sales were 36 billion or 2017. When there are 40 to 43 billion, where you're saying do you expect your margins would be higher at the same revenues. This year versus that is that that is correct that that is correct. That's what I said.
Alright, Thank you very much I appreciate it.
Thank you David.
Your next question comes from Adam Allman from Cleveland Research. Your line is open.
Hi, Good morning, everyone Hope you all stand healthy Yeah. No question about the surface sales could you expand your thoughts on what your stand there how the revenues are holding up then with the growth efforts that you haven't place.
Do you think you could keep sales declines there and.
Something like a mid single digit range or does it get dragged down a bunch like the new equipment sales. Thanks.
Hi, Adam insight as Andrew actually services housed in the first quarter were down marginally.
Lot of that was due to inventory movements year on year last year, we saw a small build and.
Services.
On parts revenues.
Daily channels, obviously slot decreased down.
Obviously, we anticipate that services revenues will hold up better than original equipment revenues as we go through the cycle.
Obviously hit butyl could the history.
That is always been the the way.
At this stage is too early to predict what percentage or they will change by.
But obviously.
And it's going to depend on customer by customer where Theyve opened are they able to use that you'd like it won't machine utilization rates on so for so we need to see how will that pans out and get a few more data points before we saw making predictions in that product.
Great. Thanks.
Your next question comes from Steven Fisher from UBI.
Your line is open.
Thanks. Good morning, just wanted to ask you about pricing is it seemed to be a little bit more resilient than I would've expected really across the board the particularly in Ti. So maybe can you just give us a sense of where that strength came from and in T. and how sustainable you think it is and then maybe.
Some other comments about competitive dynamics.
The other various segments.
Yes, Stephen it's Andrew So obviously overall Utica pricing it was negative in the quarter on most of that was mostly in construction industries and that was really geo mix rather than actually.
Pricing per se, although we did see some competitive pricing pressure.
In China.
But again to remind you geo mix does come through which does distort the pricing mix. So obviously, if you do see.
Favorable cells in different regions.
Does have an impact on on on the make so.
We don't go down to that level of granularity and by discussing by segment, but generally.
It has been it has held up.
We did put price increases through on the poster January.
But the Geo mix was what we were expecting competitive positioning in Asia Pacific hasn't changed.
Yes.
Hi, Thanks, but in in T was actually up so just curious I mean, yes, well that's fine I think the pricing, yes that is the price increase across that was put through in the first January.
And also any into he thinks and the kind of lumpy as well so.
Our results.
Okay. Thanks very much.
Your next question comes from Ross Gilardi from Bank of America. Your line is open.
Good morning, guys.
Hi, Ross.
Hi, Ross I, just I had I had a question on capital allocation in the presentation, you say that you're going to return all of your cash.
But yet you're suspending the buyback program for now does that mean that free cash flow is unlikely to exceed.
The 2.3 billion that gets paid out in the dividend. This year and then a follow up question to that is.
Are you still committed to raising the dividend by a high single digit percentage for the next for the next four years given you know this unforeseeable situation.
Yes.
Couldn't have predicted when you made that.
Committed thanks.
Yes, So I think I'll answer the dividend question first of all pitcher back to Andrew. So obviously the dividend is a priority for US are you saw that we raised our dividend already this year even in this situation.
We are not making a prediction as to what we'll do with a dividend for the rest of the year, obviously, it's a priority and we feel comfortable in our ability to support the dividend, but in terms of future increases, we'll we'll keep you well keep you posted its obviously a board decision and older make a recommendation to the board later in the year and we'll keep you posted.
Hi, Ross on as far as free cash flow. So if you look in the first quarter, we actually get paid out $1.6 billion. If you take the buyback into account close a dividend.
If you then extrapolate that across for the remaining three quarters of dividends that implies free cash rather buy with roundabout three and hoping in dollars for the full year.
All 3.5 billion of distribution to shareholders for the remainder of the question. The moment is while we're uncertain as to what free cash flow will be.
We decided to put a pause on the buybacks.
Because obviously, we're not yet certain whether we are in that position, whether we have disrupting substantially all well, maybe even slightly more than our free cash flows. The so that's the uncertainty which causes us to put suspension as things become clearer will make decisions. We on the strong financial position, let's say, we had 7.1, but.
In dollars of cash on the balance sheet at the end of the first quarter and if you remember last year, we actually distributors slightly more than that free cash flow for the.
Thanks very much.
So again.
It's tough to one question only your next question comes from Jerry Revich from Golden Goldman Sachs. Your line is open.
Yes, hi, good morning, everyone.
Good morning, Gerry Jerry.
Hi, Andrew I'm wondering if you could expand.
Prepared comments on the restructuring program, presumably the range of restructuring spending is wider than what were consequently in quarter go can you just expand what the range of investment.
Could be if this year and what kind of payback periods are we targeting and.
For the discontinued product lines, what our plans to replace those product lines.
Continuity for your dealers. Thanks.
Yes, so first of all our.
Expectation beginning India was that we would have some in the region of hundreds $200 million a normal restructuring expense and we put a place holder in place for the $200 million of restructuring for the challenge products.
At this stage, we don't see that it's going beyond that at this stage, but that's obviously, we'll update you in keep you posted as time goes on.
Obviously again the timing of these fact issued a timing of with these actions is a significant factor on the charge for the year. So for example, as we said in my remarks, we started the contemplation process in Germany that may take a wall and that will determine how much we charge in the financial yeah relating to.
Those are those those most challenged product similarly, the impairment was taken along the lines or actually.
The extra week, we do view the asset as being in paid in value.
And so the action we took that action in Q1. So we'll keep you posted obviously a and make sure. If we do believe it's outside that range, we'll update at this stage, we're still within the original range, we talked about in January.
Maybe just to add additional comment about costs and we continually.
Ask our our managers to focus on cost to find ways to be more efficient and obviously during this environment, we ramped that up so whether or not it falls into a restructuring bucket, regardless, we are really focusing on finding ways to be more efficient and reduce costs.
And the dealer product line part of the question.
I'm sorry, what are they plan to replace the product lines. He said Oh, they exited businesses well the the the point is actually we have made decisions to exit any of those businesses at this stage. So that's why.
Tras Ddas concerned.
Obviously is not an issue for them at this stage.
Okay. Thank you and and there are ways to restructure without exiting so just leave it there.
Your next question comes court.
Yes.
From Morgan Stanley.
That's helpful.
Hi, Thanks, just wanted to.
Jim with your comments on the positive or medium.
Long term positive outlook for mining, but you're seeing from uncertainty in the near term and more restrictive capex from the miners to can you just comment on that and then I think you did see dealer inventory decline in resources. This quarter set you can just.
Ah help us understand how big of an impact that isn't how big the overhang in resource to start with passion that heavy construction inquiry not forget side. Thanks.
Yes, sorry I.
Cody and it's Andrew and good morning on the dealer inventory side I actually the.
Dealer inventory reductions quarter on quarter was the most significant impact on our ri cells.
It was the small majority of it.
We don't disclose a specific number.
But it was over half of the the decline in revenues.
Maybe just to comment on mining and it wouldn't be surprising if they depend Democrat to have an impact on our armed our mining business short term. However, based on the state of the industry. The replacement cycle, we still feel positive about mining in the medium and long term.
Okay. Thanks, and then.
Can you give us anymore.
You know color on a geographic that's from these you're seeing between North American Europe I think some of your parents have talked about your feeling a little bit weaker because that's some of the more or worse restrictions over there, but it seems like Europe has actually been holding up fairly after you.
Based on your retail felt that that if you can just share on what you're seeing there in April right.
Yeah, I think KONI they've couple of factors, one which is obviously is depending how strong the comparative period was.
And if you remember last year Europe was not particularly strong the first quarter of last year. So I think that is why year on year.
Some of that data looks a little bit better.
In Europe.
On.
On the retail side.
Obviously, we are starting to see.
In the U.S., where we obviously had a very strong.
Particularly nonresidential construction a cycle.
That has started to diminish that hadn't we hadn't seen strong strain.
Enormous residential construction in Europe, which is another factor.
But this is this is Jim this is just to make a statement I had been informed that I mistakenly use the word raised when I talked about the dividend earlier. This year, we did not raise the dividend we maintained a dividend so my apologies for that mistake.
And we now have time for one more question before we go to Jens wrap up.
Your final question is from Joe O'dea from vertical research.
Your line is open.
Hi, good morning.
Can you just comment on financial services with past dues up about a 100 bips sequentially and allowances up 20 Bips and.
Your comfort level overall, with where that allowance figure stands and I think most importantly, your thoughts on on the direction of provisions over the next.
Corridor or to whether it's more likely that those provisions are moving up before they start to move down.
Hi, Joe, It's Andrew and obviously I mentioned, a little color. This a little bit in my remarks remarks, but the the if you look at the 4.13% Apollo skews a de ended the quarter significant drivers of that with the legacy cat financial portfolio.
And then also some hot spots around Middle East and Latin America, both of which were.
Issues, which we were dealing with historically.
Been factors, where actually the reserve.
Has been quite significant in the past so those are ongoing issues, which we are dealing with.
As I mentioned in my remarks actually.
Our customers came into the crisis in a very healthy position so.
Postures in North America, the end of last year were 1.3%.
At the Baton to the financial crisis. They were 4.3%. So that gives you an indication of the health of our customer base and in China, there were 1.3% versus 8.3% in the financial crisis. So again that is a very different scenarios, we didnt modestly increase the reserves in the.
Quarter.
Obviously the difference.
It is obviously, we now have the Cecil process. The we are required to reserve against.
The reason why our loan reserves will be lower than you would see in many other financial institutions is because the security we have over the loan.
Which is the low new secured on the machine so on that reduces your risk from a Roger perspective. So.
That is again gives us comfort the was yes, we do expect.
We will inevitably we'll see some write offs as we go through the remainder of the.
We do think that will be a lot lower than it would have been historically.
Thank you.
And then turn it back to Jim for closing remarks horrible. Thank you everyone for your questions I just to wrap up period of Canada has been an operation for 95 years and we face in overcome many challenges we have a very strong financial position, which we just.
Described to you. This morning, we're continuing to pursue our strategy focused on services expanded offerings and operational excellence once again I'd like to thank Mike Caterpillar colleagues around the world for staying focused on their safety and for working with our dealers to deliver products and services and enable our customers to fight the good fight against Cobot 19.
Our goal is to emerge from the pandemic, even stronger than before better position for a long term profitable growth. Thank you again with that I'll turn it back to Jennifer for some closing reminders.
Thanks, John and Andrew and everyone, who joined US today, if you missed any portion of the call you can catch it by replay on line. Later. This morning, we will post the transcript on the Investor Relations website within one business day.
If you have any questions. Please reach out to Rob Kearney, you can reach rod that our NGL under scarab at Cat Dotcom and that just go underscore Jennifer a cat Dotcom Investor Relations General phone number is 3096754 or 549 and now let me ask Jacqueline to conclude our call.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.
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