Q2 2020 Caterpillar Inc Earnings Call
[music], ladies and gentlemen, thank you for standing by and welcome to the Q2 2020 Caterpillar Inc. earnings Conference call. At this time all participants are in the list.
After the speakers participation there will be a question and answer session to ask a question. During the session you will each press star one on your telephone if you require any further assistance. Please press star Zero I would now like to hand, the conference over to your Speaker today Jennifer. Please go ahead.
Thank you good morning, everyone and welcome to caterpillars second quarter earnings call.
Joining our call today, our Jim Umpleby Chairman of the board and CEO.
And your Bonfield Chief Financial Officer.
I believe vice President of our Global Finance services Division and Rod Wrangle Senior IR manager.
[music] the call today builds on our earnings release, which we issued earlier. This morning, you may find the slides that accompany today's presentation, along with a news release on our recently relaunched Investor Relations website in the Investor section of Caterpillar Dot com.
When you have some time, please take a moment to check out the new luck and improved organization.
Welcome your feedback on any ways that we can make it a better tools for you.
[music] moving on to slide to the forward looking statements. We make today are subject to risks and uncertainties lots of make assumptions that could cause our actual results to be different than the information we've discussed today.
Please refer to our recent FCC filings in the forward looking statements reminder, in the news release for details on factors that individually or in aggregate could cause our actual results to vary materially from our forecast.
[music] Caterpillar has copyright at this call we prohibit use of any portion of it without prior written approval.
This years quarter included a 19 cents per share remeasurement loss, resulting from the settlement of pension obligations.
Provide a non-GAAP reconciliation in the appendix to this morning's news release.
Now, let's flip to slide three and turn the call over to our chairman and CEO, Jim Umpleby Jim.
Thank you Jennifer and good morning, everyone.
Second quarter brought unprecedented challenges for our customers dealers employees and suppliers.
We think those in health care as well as the first responders, hoping fight dependent on the front line.
We also want to think caterpillars global workforce for their commitment to support our customers while keeping each other shape.
Working with our dealers caterpillar is deliver in products and services and enable our customers to provide critical infrastructure that is essential to support society during dependent.
During this time caterpillar is leveraging our strong safety culture in remains dedicated to the safety health in will be more employees.
Our workforce is successfully navigating this uncertain environment by focusing on keeping period cost down managing inefficiencies and continuing to meet customer needs.
The execution of our strategy, including a disciplined management of structural cost during the last three years is also helping us weather the storm created by Cobot 19.
We've reduced discretionary expenses, including consulting travel and entertainment.
Active July one to support our employees, we reinstated 2020 be salary increases except for our most senior executives.
Short term incentive compensation plans for 2020 will remain suspended for most Alfred management employees and all senior executives.
We've also reduced production to match customer demand our teams continue to focus on improving operational excellence, which includes making our cost structure more flexible in competitive.
[music], we've worked through a number of operational challenges relating to the pandemic.
As of mid July substantially all of our primary production facilities across the three main segments continue to operate although many operating at reduced capacity.
We've worked to mitigate disruption to our supply chain by using alternative sources redirected orders to other distribution centers and prioritizing the distribution the most impactful part.
Our global supply chain has been relatively good shape, although the situation remains fluid.
Well continue to work through the challenges.
Financial position is strong and we're confident in our ability to continue serving our global customers on a consolidated basis. Caterpillar ended the second quarter was $8.8 billion of enterprise cash and $18.5 billion available liquidity sources.
Now I'll provide a summary of the second quarter's results on slide four.
Second quarter sales and revenues of $10 billion decreased by 31%.
The decline was mainly due to lower sales volume.
One primarily by lower end user demand and changes in dealer inventories.
This morning, we reported sales to users decreased by 22% in the second quarter that was lots of a drop than we anticipated.
Machine sales to users, including construction industries and research industries decreased by 23% driven by a 40% decline in North America.
Asia Pacific was a bright spot.
The 7% increase in end user demand for machines in Asia Pacific was led by improved demand from China.
Energy and transportation sales to users decreased by 18% as transportation and industrial were soft.
Robert Shipper caving engines for oil and gas chicken continued to decline as expected.
Power generation remained steady with a year ago quarter.
During the second quarter of 2020 dealers decrease their inventory by $1.4 billion.
This compares with a 500 million dollar increase in dealer inventory during the second quarter of 2019.
The year over year change drove nearly half of our sales decline for the quarter.
The decrease in dealer inventories in this past quarter was greater than we expected.
We now anticipate or dealers will reduce their inventories by more than $2 billion by yearend.
Andrew will share more details later in the call.
Lower sales volume was the primary contributor to our 750 basis point margin decline in the quarter to 7.8%.
In spite of the challenging operating environment, we continue to invest in our highest priority R&D programs, including expanded offerings.
We also continue to invest in services, such as enhancing our digital capabilities.
Profit per share for the second quarter was 84 cents compared with $2.83 in the prior year period.
This years quarter included a 19 cents per share pension remeasurement loss.
In the second quarter, we returned $600 million to shareholder largely through our quarterly dividend.
Year to date, we have returned $2.3 billion to shareholders via dividends and share repurchases.
As a reminder, chemical or is paid a quarterly dividend every year since 1933.
Through a variety of challenging business conditions.
We continue to expect strong finance, our strong financial position to support our dividend.
In April we suspended our share repurchase program upon completion of the program we established in January.
At this point, we don't expect to repurchase more shares for the balance of the year.
We anticipate returning substantially all of our and Union T. free cash flow to shareholders through the cycles.
We also retained balance sheet flexibility for compelling M&A opportunities.
Our focus on operational excellence shorter lead times in flux, avoiding manufacturing operations will allow us to react quickly to future changes in market conditions, either positive or negative.
Our financial results for the remainder of 2020 will depend on the duration of the pandemic and its impact on global economic conditions.
We withdrew or financial out looking for 2020 in March of this year, and we're not providing annual guidance today.
We believe it is more helpful. At this time compared to third quarter, just second quarter of 2020.
Our views are based on current conditions, assuming there were no significant changes in the environment compared to where we are today.
Overall for the third quarter, we expect a reduction in sales to use years compared to the previous years quarter of around 20%, which is consistent with a decline to the second quarter.
We normally see modestly lower chemical or sales in the third quarter versus the second.
Turning to slide five.
We expect overall demand to construction industries to follow normal seasonality.
In North America, well nonresidential construction is hard to call, we expect residential construction to begin to improve which would favor smaller equipment.
We see Asia Pacific mixed do the varying effects of the pandemic.
In China, we expect to normal seasonal pattern typically the third quarter is a bit weaker than the second.
Michael Likewise, we anticipate normal seasonality in eating.
In resource industries overall demand in the quarter is expected to remain soft largely due to weakness in nonresidential construction inquiry, an aggregate, especially in North America.
Commodity prices are mixed copper and iron ore improved during the second quarter and gold remained strong.
Demand is likely to remain low for products sold it to cool applications in the oil Sands. In addition earlier this year some mining customer shut down operations relating to the cobot 19 pandemic. However activity in May and June started to improve.
Globally, the average age of large mining trucks of the large mining truck fleet is historically high and in addition customer interest in autonomy remained strong, which we believe represents a competitive advantage for caterpillar.
Conversations with our mining customers indicate the greenfield and brownfield projects are still moving forward.
We remain optimistic about the medium and long term outlook for mining.
Energy and transportation sales typically do not declined in the second half of the year.
We expect continued challenges in oil and gas to impact demand for reciprocating engines.
So our turbans continues to execute their long term projects.
We and we continue to anticipate that the demand for data centers and emergency power will be a relative bright spot within power generation.
Industrial engines and transportation are expected to continue to reflect conditions in the markets. They serve.
Turning to slide six.
During our last earnings call, we reviewed our strategy, which focuses on services expanded offerings and operational excellence.
We also discussed at the impact of Cobot 19 in our business had been more severe in chaotic than any cyclical downturn, we didn't vision.
Importantly, while we've taken actions to reduce costs. We've made a conscious decision to continue to invest in enablers of services growth, including enhancing our digital capabilities and expanded offerings key elements of our strategy for long term profitable growth.
Well, we expect our margins in 2020.
To be better than historical performance at a similar level of sales. We continue to believe it will be challenging for us to achieve the margin targets, we communicated during our 2019 Investor day.
Free cash flow for 2020 is less certain at this time is we're holding incremental inventory to mitigate against the risk of supplier disruption.
It will become clearer as the year unfolds, how much of the inventory needs to be retained.
To wrap up challenges, we've successfully navigated him only strengthen our resolve that we're pursuing the right strategy. That's why even in this environment. We're investing in an expanded offerings in services all of which are key elements of our strategy.
We have strong balance sheet and ample liquidity.
We're ready for changes in market conditions, either positive or negative.
Fully intend to emerge from this crisis, and even stronger company better positioned for long term profitable growth.
Now, let me turn the call over to Andrew for more detailed recap our second quarter results segment performance and our expectations for the third quarter.
Thank you Jim and good morning, everyone.
I'll begin with a review of our second quarter results as well as I cash flow.
Then I'll comment on the quota and that liquidity position before ending with a brief updates on actions, we're taking to improve competitiveness and profitability.
As you can see on slide seven total sales and revenues from second quarter decreased by 31% $10 billion.
Operating profit declined by 65% to $794 million.
Profit per share for the quarter was down by 70% 84 cents per share, including a pension remeasurement loss of 19 cents per share.
This quarter's top and bottom line results largely driven by volume.
So as to use has declined by 22%, which was less of a decline than we had anticipated.
However, this had a minimal impact from reported sales revenues because dealers you see opportunity to reduce the inventory levels by more than we had expected.
Services revenues also declined but as anticipated that we've done listen the original equipment sales.
As you see on slide eight second quarter sales declined by $4.4 billion 3.9 billion of which was the volume decline.
The volume declined reflection of approximately 2 billion dollar reduction in end user demand and a 1.9 billion dollar movements in dealer inventory.
As Jim mentioned dealers decreased inventory by $1.4 billion this quarter compared with an increase of $500 million and the probably use quota.
Volume declined in all segments, but were most pronounced in construction industries and resource industries.
While sales were lower in all regions. The declines were led by North America, which fell by 42%.
Price realization most trials by $259 million.
The negative price was a combination of changes in geographic mix and continued competitive pressures primarily in construction industries.
The Brazilian ROE and the Australian dollar drove the adverse currency movements of $190 million.
What it back to all decreased by about $1.2 billion since the end to the first quarter following our normal seasonal pattern.
It was driven by construction industries and energy and transportation.
Compared with a year ago to backlog declined by $2 billion with decreases in all three pronged segments.
Moving to slide nine.
Operating profit for the second quarter fell by 65% to $794 million.
The volume decline dropped to 1.4 billion dollar decrease in operating profit.
Operating margins decreased by 750 basis points.
Lower manufacturing costs more than offset the unfavorable price realization.
We announced in March that we were suspending the short term incentive payments.
This action along with other cost reductions lowered our manufacturing costs.
As she and I and R&D expenses again this quarter.
For comparison incentive compensation expense in the second quarter 2019 was about $200 billion.
With regard to SGN <unk> and R&D. It is important to note that incentive compensation was a major drivers the decline.
A portion of the remaining decrease was due to reductions in discretionary spend such as travel due to the slowdown of activity in the quarter.
Well certain specific cost actions have been taken we continue to prioritize our spending on those projects that had the greatest opportunity to drive long term profitable growth.
Starting on slide 10, I'll discuss the individual segments results the second quarter.
Second quarter sales of energy and transportation declined by 24% to $4.1 billion with declines in all regions and applications.
The sales decrease was relatively evenly across transportation industrial and oil and gas power generation declining at a lesser right.
Transportation sales declined by 24% driven by reduced rail traffic and lower marine activity.
Industrial sales declined by 29% would lower demand across all regions.
Oil and gas sales decreased by 21% as demand for reciprocating engines in North America remained weak.
With that this was partly offset by higher sales of solar turbines and turbine related services.
Power generation sales decreased by 12% with declines moderated by demand for emergency power and data centers.
The profit shortest energy transportation is similar to the company overall as lower volume dropped to 30% decreased to $624 million.
Partially offsetting the bought him to time were lower manufacturing costs as well as well as Gionee and R&D expenses for the reasons I mentioned a moment ago.
The segment operating margin declined by 120 basis points to 15%.
Turning to slide 11.
Construction industry sales decreased by 37% to the second quarter to $4 billion.
Low end user demand and the impact from changes in dealer inventories drugs. The body me decrease.
We also saw him favorable price realization as a pandemic influence our geographic mix of sales.
By region. This included that 54% decrease in North America, driven by lower <unk> pipeline a road construction activities.
The 10% cells to cotton in Asia Pacific was primarily due to a combination of a price realization and currency impacts.
China sales were about flat as high end user demand was largely offset by changes in dealer inventory I'm, sorry, what price realization.
The segment second quarter profit decreased by 58% to $519 million.
We had lower volume and not favorable price realization, including unfavorable impacts from the geographic mix of sales versus a record second quarter in the prior year.
Lower manufacturing costs, partially offset that as did history at night and all these savings.
The segments profit margin declined by 650 basis points to 12.8%.
As shown on slide 12 resource industries sales decreased by 35% to $1.8 billion in the quarter against a strong comparative from the year ago quarter.
Changes in dealer inventories are low end user demand drove the decline.
Telus decrease inventories in the quarter compared with an increase last year.
We saw alone machine sales into nonresidential inquiry in aggregate applications, while mining equipment declined to a lesser degree.
A mining customers dealt with disruptions in the quarter due to covert non team impacts and adjusted production to address weaknesses in some than demand for some commodities.
The port truck percentage calibre stayed low and we remain positive in the replacement cycle.
And overall prospects of money in the medium and long term.
Resource industries profit decreased by 68% in the second quarter, two 158, what $2 million.
The decline reflected lower sales volume.
Partially offsetting that were favorable manufacturing costs and lower short term incentive spec expense.
Profit margin declined by 880 basis points to 8.3%.
Moving to slide 13 financial products revenues decreased by 13% in the quarter to $763 million.
The decline was due to lower average financing rights I know average, earning assets the loxa, reflecting lower purchase receivables from catching as volumes decline.
Profitability decreased by 23% in the second quarter, two $148 billion led by lower net yield and the low asked about base.
We have also increased provision for credit losses, Buck $58 million compared with the first quarter of Twentytwenty due to the expected impacts on cobot 19 on future credit losses.
We continue to support our dealers and customers during these challenging times.
As we mentioned on last quarters earnings call, we launch customer care programs allow customers around the world to apply for payment relief through a simplified and streamlined process.
It is encouraging to see the new requests for pain relief has slowed dramatically since April.
It's worth reviewing additional key indicators of custom I hope from the quota.
We told you the most customers entered this downturn fairly healthy and columns on their loans.
This quarter postures for 3.74% down from 4.13% the first quarter.
The second quarter benefited from the fact, the lungs with modifications are not considered posture. So we'll be carefully monitoring these accounts as a normal payments read soon.
You business volume declined by 18% compared to second quarter, 2019, but outperformed compared to the first quarter Twentytwenty as we saw an uptick in June across all regions, except Latin America.
As dedicated teams continue to provide financial solutions to qualify customers around the globe.
Turning to cash right.
Free cash growth machinery energy and transportation for the quarter was about $500 million down from $1.8 billion in 2019 on about $1.2 billion lower profit.
We began to reduce caterpillar inventories this quarter, which provided a bit of an offset to the decline in profit.
This was less of a benefit than we would normally see was such a subject substantial reduction on the topline as we are holding at amounts of safety stores, including components and other work in process to mitigate the risk of supply disruption.
The negative working capital component was driven by lower accounts payable as reduced total purchases in the quarter just spending declines.
Let's turn to slide 14.
The full impact with the coping launching pandemic on our business cannot be reasonably estimate at this time.
So while we continue to suspend annual guidance I thought it would be helpful for modeling purposes to share a few of our key source with quota.
As Jim mentioned, we expect normal seasonality in the third quarter, which means a total sales to use as I expect to be blow up and then second quarter.
We expect a similar percentage decline in end user demand in the third quarter as we sort of second.
Whilst we expect dealer inventory to decline in the third quarter, we expect that to be around the level. We saw in the third quarter of last year, and I'll talk a bit more about dealer inventory in a moment.
In terms of profitability, we're now starting to lap some of the benefits of the material cost reductions, which began in the second half of 2019.
So this likely will have a negative impacts on our gross margin.
Well so benefit from incentive compensation will continue the absolute dollar amount will be low in the third quarter than it wasn't second.
So overall, we may not seen improvement operating margins in the third quarter versus the second quarter.
Let me also give you an update on I fully expectations for TV inventory reductions.
And the first half of the Ddas reduce inventories by about $1.2 billion.
As a reminder, dealers are independent businesses and manage their own inventories.
Based on their latest read on end user demand. We currently anticipate the dealers will further reduce their inventories by another $1 billion in the second half of the year.
That is similar to the reduction they made in the second hall for 2019.
We anticipate that this reduction will enable us to produce in line with end user demand in 2021.
As we typically do we expect to be able to update you in January 2021 outlook.
Turning to slide 15 for our capital allocation and cash and liquidity position.
We recently declared a quarterly dividend and remain proud of our status as a dividend our secret.
In combination with our share repurchase program, we have returned about $2.3 billion to shareholders. This year to date.
Turning $600 million returned to shareholders in the second quarter.
At our Investor Day in May 2019, we shared an intention to return substantially all of that free cash flow to shareholders through the cycle by dividends are more consistent share repurchases.
We suspended our share repurchase program in mid April and as Jim indicated we don't expect to recommend ship of repurchases this year.
We ended the second quarter with $8.8 billion, an enterprise cash.
Given the environment, we maintained an incremental $3.9 billion short term credit facility as well as our existing 10.5 billion dollar revolving credit facility.
Both of these liquidity resources remain undrawn.
As we mentioned last quarter, we've also registered $4.1 billion and commercial paper support programs now available in the United States in Canada, and we should $2 billion and corporate bonds.
In July kept financial issued $1.5 billion immediate nodes to for the supplement its liquidity position.
We currently have $11.1 billion, a machine energy and transportation long term debt with no maturities June twentytwenty, unless a $1.4 billion June 2021.
We don't expect to make discretionary contributions the U.S. pension plans for the foreseeable future given the current funding status.
We are comfortable that the strength of our balance sheet enables us to manage through the cycle and we believe well well position to respond to changes in demand either positive or negative as we move into 2021.
You will recall at the sorts of the year, we estimated that we would invest $3 million to $400 million and restructuring expense, including a place holder of $200 million to address certain terms products, which were producing the expected level of okay.
To improve our competitiveness and profitability in the second quarter, we reached an agreement to close lumen and what patrol facilities in Germany.
These facilities manufacture longwall products.
Production will be transition to Asia, and will be closer to end customers and improve its competitiveness.
We also reached an agreement to sell Caterpillar propulsion, I'd, which manufactures propulsion systems and lead marine controls for ships.
Any lost sales from the actions we've taken thus far are not expected to be material. This year wouldn't 2021.
We still expect about $3 million to $400 million in annual restructuring expense as we continue to drive the operating execution model.
In the second quarter, a restructuring expense totaled approximately $147 million.
Compared with $110 million in the probably is quota.
We expect restructuring expense to be higher in the third quarter than it was last year, but it will be slightly lower than it was in the second quarter.
So funny, let's turn to slide 16, and recapture days key points.
We have a strong financial position I'm, a competent and our ability to continue to serve that global customers in the current environment.
We have returned $2.3 billion to shareholders via dividends and buybacks in the year to date.
We're working with that Ddas tremendous customer demand and we expect us to reduce inventories this year by over $2 billion.
I've factories remain agile leveraging lean principles, and we remain ready to respond to positive or negative changes in demand.
In 2021, we expect to produce to demand.
Our strategy is working and we remain focused on operational excellence services and expanded offerings.
We thank all our employees for staying safe, while enabling us to continue to serve our customers supporting some of the critical infrastructure, enabling the transportation of essentials and satisfying global needs for energy.
With that I'll hand, it over to the operator to salt the Q in a session.
Thank you. Our first question comes from the line Rasco Arty from Bank of America. Your line is open.
Good morning Ross.
Rather you muted.
We'll move onto our next question from the line up Stephen Volkmann from Jefferies. Your line is open.
Hi, Good morning, I think I'm here and you hear me.
Steve Mcclaren is a good morning.
Great.
Thanks, and thanks for all the detail here today I guess.
It's possible or you may not want to go too far down this path, but I'm trying to think a little bit about 2021, not not in terms of an outlook, but in terms of just started.
It is Ah things and so.
Thing, we're gonna get some benefit from that Underproducing, but $2 billion, which is probably substantial five or 600 million a tailwind I guess from that but we'll have a headwind because I guess, you'll be reinstating incentive compensation and various other sort of temporary thing. So I guess my questions specifically is what.
Costs.
We're sort of temporary this year that may come back next year irrespective of whatever volume, we may choose to forecast.
Well, Thanks, Stephen as you mentioned certainly you know.
Not giving guidance for next year, obviously because of the only concerned as there are so much depends upon the pandemic and and resulting impact on the on the economy, but you correctly stated that would be reasonable to assume that short term incentive would be a a caution next year that we wouldn't have this year.
We are certainly continuing to look for other ways to reduce costs. You know were challenged all of our leaders to continue to find ways to be more efficient.
We're working on what we do inside what we do outside things, we do inside if they continue to be done inside can we.
Do them in a more efficient lower cost way through a location change or some other change. So again, we're continually working the cost saying every cost and go we can think of.
Probably the biggest one that comes to mind is that is that short term incentive comp as you mentioned.
And Tim are you willing to talk at all about the benefits of all the restructuring that Andrey laid out for us This year, what you might see for benefits and 21.
I mean at this stage, Steve we won talk about it but probably will give you a little bit more of an indication in January when we give the outlook because obviously there'll be lots of puts and takes issue clearly point Tom.
And again.
And again, the biggest attorney factor I suspect will be volume right. So I have to see how the how the economy plays out.
Thanks.
Our next question comes from the line.
Okay. Your line is open.
Thank you sorry about that guys can you hear me now you can Charles good morning Sporting.
Good morning.
I'm trying to piece together, what what's happening with pricing in construction you mentioned that it was influenced by.
Geographic mix and I'm wondering if the overall, 4% decline is heavily biased towards China, perhaps.
Asking is your Asia Pacific construction is down.
Percent, despite the strength that we're all aware of in the China excavator market.
Yes of course, you know as you sell your pricing down 4% for the segment. So is the 10% down 10% specific because China excavator pricing is particularly challenged or is it because the rest of Asia Pacific was hit significantly harder than.
On excavator market any color there will be really appreciate it.
Just one of the issues is we called Geo mix I mean, the biggest pricing factor was the fact that north American sales were down so that has a big impact on on pricing. So that was the number one impact certainly yes, we there's competitive pressures in China were confident in our ability to compete in trying to long term continue to expand our product center.
Sure well positioned but to answer your question. The biggest single issue impacting pricing was the fact that north American sales were down significantly.
Oh, yes.
Hi, Ross, just just give a little bit more color as well done forget those currency impacts in the reported trying to sales and also remember we had built in country.
Head of the Chinese new year, so some of that inventory got burned down things Cie in in Q2.
Okay got it and then just as a follow up.
I'm curious about mining.
And when do you think we'll we'll see positive margin comps again, again and resource industries copper and iron ore prices are very strong capital at the big miners it.
He is very strong yet is it a little bit puzzling. The revenue declines are seem to be intensifying the segment in margins are going lower.
Despite what you're doing on digital I also think you'll be seeing a very favorable mix shift towards art.
Miners refurbishing existing fleet, so I understand that miners are being frugal and deferring capex, but.
Just just curious about that sort of persistent margin.
Aside from the Cobot 19 impact.
Are you getting paid for your new technology that that's obviously generating enormous cost saving for your customers.
The biggest the biggest issue affecting margins of course is volume because of the leverage we have theirs and you've seen that.
As volume came down you saw an impact there. So again, we'll have the biggest impact on operating margins in our eye is higher volume as we mentioned we are we continue to be a positive on mining outlook medium and long term, it's not surprising that in the short term given what's happening with coded.
Patterns are being a bit cautious, but as I mentioned it in my remarks, we haven't seen any projects that were involved in being canceled the greenfield and brownfield projects are moving forward. We've so we haven't seen any significant kinds of cancellation. So again, we're we're bullish about that so the biggest thing that will have an impact certainly is the biggest impact will.
Come from from volume due to operating leverage.
And please remember I one question per person. Thank you.
Thank you.
Yes.
Our next question comes from the line Jerry Revich from Goldman Sachs. Your line is open.
Yes, hi, good morning, everyone.
I want to Jerry.
A question on on digital can you talk about how much progress youve been able to make in this environment in rolling out the full suite of digital tools to your dealers in terms of the ability to assess market share by product and all that analytics that you folks are providing where are we in that rollout.
We slowed.
Others Challenge travel environment and.
By the same token can you also comment on with all that telematics Peter that you're getting.
Do you see any slowdown in utilization rates.
In July with with the flare up.
But in parts of the U.S. Thanks.
You bet, but we continue to invest in our digital capabilities.
From a whole variety perspective, I mean, we've we've created and continue to create tools, which gives us ability a better read internally and where some of the biggest opportunities are in the aftermarket. So that's a tool for both caterpillar and our dealers to use in addition to that we talked about the fact that we hit a million connected assets at the end of last year.
We're looking at ways of leveraging that that data clearly in parts of of the world where economic activity was shut down as you can imagine we saw in impact.
In utilization rate, but again, it's a very fluid dynamics situation. Some areas that went down have come back up and so again, it's very fluid and dynamic as the pandemic impacts economies differently around the world, but again, it's an area that we continue to invest in and I think we're making good progress.
I really haven't slowed down.
Im sorry, just a clarification when do you expect the full suite of market share tools by product to be available to your dealers globally. You can you just provide an update there.
You know, it's it's it's a never ending journey. So I don't think we'll ever get there. So what we're doing is looking at continually adding on new capabilities as we move forward.
So we should we still have a waste ago, there's no question and where again, we'll continually and upon those capabilities that's our intent.
Okay. Thank you.
Our next question.
And Jeff.
JP Morgan your line is open.
Hi, good morning, everyone.
Hi, Good morning, I, just wanted to ask a step I can ask a more long term question.
Secondly on days when there's a cat dealers they would always saying that their life begins and ends with residential construction because if you're building new houses the or eventually putting in.
Page thats been using schools et cetera, et cetera. So I'm just curious if there's any any reason to believe that were not kind of back at the beginning of a brand new cycle, where residential liens nonresidential in terms of at least infrastructure and then you know what well be here thinking in terms.
Rental as opposed to purchase as we move forward it given the uncertainties out there and how would that impact your business long term.
Oh. Thanks for your question and then certainly you know as you asked that question I think it's important to think about our dealer network on a business from a global perspective. So I suspect. Your question is more slanted towards North America, and clearly you know residential construction is important and as you say if in fact, there are builds out build out of new homes on that.
Required infrastructure to support all of that so I certainly understand your question, but again.
Obviously, we have to keep in mind that we have a very strong mining business in oil and gas business and and and other kinds of businesses as well.
Rental I think will what will be important and we'll continue to be important. It's an area that we're focused on I'm not ready to make a call as to whether or not that coldwell have a significant.
Step change in purchase versus rental, but we view rental is an important business that that in that market will continue to grow overtime.
Okay I'll leave it there in the interest uptime. Thank you again.
Our next question comes from the line.
From Evercore ISI your line is open.
Hi, good morning.
Question relates the incremental margin can you give us some sense of how to think about lot of puts and takes you through out there for threeq two year over year, how to think about the decrementals in Threeq you versus the 30% you just posted for two to.
And on the way back up there were some questions alluding since earlier, but Jim you mentioned.
Short term incentive comp come back you would continue to look for other ways to cut cost to offset that would you be lawn and give us some sense of how you think of incremental margins on the way up in totality I know, there's a lot in there with mix and so forth, but yeah, I mean, historically cat after a year of revenue decline, that's put up pretty significant incremental.
Another business has changed a bit but just wanted to get some some level set how you're thinking about.
Yes, David I think this comes down to the fact and as Jim alluded to in the script. The fact that we haven't built in structural costs over the last three years does enable us to actually when you think about.
Absolutely margins going forward, we obviously most sensitive to volume variances, which is probably the biggest single factor driving margin performance.
So obviously in an environment where margin where volumes.
Improving.
We'll see obviously very significant improvement in overall margin.
You'll notice I'm not using incremental Decrementals again.
But that's it do you think that really is the the obviously the biggest single benefit to us as we look out in Q3 as we mentioned.
Obviously normally as you would always expect there was some seasonality because of lower volume in Q3 versus Q2.
That does have an impact on on particularly on gross margin.
You, obviously also we all lapping those material cost changes.
So that will have.
Slightly negative impact on gross margin as I mentioned in my.
Notes, we will see a lower absolute dollar number in.
And in step savings in Q3 was a lower number in the queue in the quarter last year. So that will have some impact. So overall, what was saying is probably.
Margins shouldn't we shouldn't expect to margin improvement as we move into Q3, well that Doesnt mean, though obviously is.
Normally overall I think margins last year in Q3 was slightly lower than they were in Q2.
So I see that would be what we would call relatively good performance year on year within that regard because I think overall margin.
Q3 last year.
Actually starting to Saudi I was 15.8% problem 15.3.
So, but that would sort of hold those who also levels.
So the last comment just be clear it should be roughly around 30 that we saw in Twoq you just ballpark.
It was it shouldn't be it shouldn't be if you do the math you assume margin.
No there's no improvement in operating margins from the 7.8% we've just posted.
Ill gets a 59.8 that will be slightly slightly higher as a percentage.
Okay. Thank you very much appreciate.
Our next question comes from the line of Andy Casey from Wells Fargo Securities. Your line is open.
Thanks, a lot good morning, everybody.
I want to Andy.
Good morning, I just wanted to ask a question. So it's a around the benefits if you wells from the pandemic.
Other companies I've mentioned cost benefits pull ahead from.
Acceleration of initiatives due to.
The pandemic and things like technology.
Could you help us understand whether you're seeing similar opportunities internally.
Are they meaningful and that also.
Kind of back to Jerry's question have you seen any increased I guess indication of interest.
And your digitally enabled product as an outcome, but the response to the pandemic.
It will certainly again as I mentioned, we're continually looking for ways to reduce costs and to be more efficient and certainly a situation like this causes I think every company to step back and look at ways. They can.
Accelerate cost reduction activities and thinking about their structural cost and so again, we're no different than anyone else, we're thinking about those things as well in terms of digital.
Obviously, if in fact things can be done to remotely as opposed to visit and not and an individual does not have to travel and and in and be face to face. There's an advantage in that so we're using digital capabilities, where we can but certainly our dealers continue to support our customers and we have technicians that continue to work on equipment. So again.
This pandemic is really demonstrated is that digital strategies is correct and I think the other area, where obviously is fueled Thomas solutions, where people will be looking.
For those and obviously.
We are.
Optimistic, but this will actually encourage further uptake rather than.
Mike.
Tend to foster and that is that as a very good point because as you know think about our money operation in number of autonomous mining trucks. We yeah. If in fact, you can do more using an autonomous technologies. It reduces the need for thinking about camps and all the things that are mining customers have to do with people in close proximity so that certainly could be an acceleration from.
From a market perspective.
Sure I guess are you seeing any of that the external response at this point or is it more optimism it's going Oh.
As I mentioned in my prepared remarks, so we see very strong interest in our autonomous solution and we do believe quite strongly that we have the best solution, there and that gives us a competitive advantage, but yes.
Interest in autonomy in mining has been very strong.
Lots of conversations with customers about that.
Okay. Thank you very much.
Our next question comes from the line of Jamie Cook from Credit Suisse. Your line is open.
Hi, good morning, everyone aggregate I guess.
Jim I think you mentioned in the prepared remarks, why you don't expect your margin performance to be you know what you outlined at the Analyst Day, you do you expect to get have better margins relative to another downturn I think on similar sales is there anyway, you can help us understand sort of which down turn you're talking about so we can understand the comp.
And then I guess, just as a follow up you know relative to Ann's question or maybe even Ross's you know outside of the pandemic. There does seem to be some green shoots can you just beach markets that you would be more positively inclined to sort of think what recover first sarah or which market structurally you're more concerned about thank you.
Jamie can we talk about.
Margin comparisons to the historical past, we're looking at a year when we had a similar your sales I believe memory serves that would have been 2016.
So again I think we were about $39 billion. So again think about margin. We always think about it is we think about Sim for a similar level of sales, we expect higher operating margins and we expect that to be the case this year as well.
In terms of Green shoots semi China was an area that hit the pandemic at China first and in business has been quite strong in China. So that's quite positive. So again, it's it's very much of a fluid dynamics situation. Obviously, the the virus starts to go away in an area than start then can come back so again, it's very flow.
And so it's difficult for me to to really predict anything other than right now again, we see a lot of strengthen in China.
And just to elaborate that 10% to 21% then a range across cycle.
Okay. Thank you.
Thanks.
Our next question from the line.
We're fine from research your line is open.
Thank you good morning, everyone.
Rob.
So just a simple question I think you talked a lot about sales and users in the trend of the expectation of dealers. These talks that was all very helpful. How did the aftermarket kind of trend into Q. I know you don't give a lot of disclosure we've seen other companies down like 20 years disruption caused lots repair I love that relative tailwind into Threeq, you have a dip that much for you or less and whether you expect.
Just come back.
Yeah. So services in total were down but there were down.
Less significantly then new equipment sales more which is what we'd expect which is one of the reason that.
An advantage to build out our services revenue. So this there was a drop but it wasn't as significant as new equipment.
And then as the economies are site restarted is utilization, we've seen that from komatsu and others up and therefore, an expectation that services kind of comes back or or you're not seeing.
Thanks.
It's a mixed bag it depends on geography and it depends upon.
The area that we're talking about but again in areas, where economic activity has has strengthened certainly we're seeing an improvement there so it tends to follow.
Economic activity leads to more utilization, which leads to more services.
Thanks.
Our next question comes from the line of Nicole Deblase from Deutsche Bank. Your line is open.
Good morning.
Good morning.
I guess my question is around the outlook for retail sales to remain in the same range as they were into Q3 Q on a year on year basis.
Little surprised by Dot to Q, obviously fall the worst impact the pandemic in April and May with respect to end user demand and definitely the comps get easier on the second half.
So just curious to know it maybe there's some conservatism baked in there and maybe if their scope for some upside as if trends continue to improve like into July and threats in the fall.
Yeah. So obviously.
Reached a couple of things one which is obviously there is a seasonable hatton too just to some of our retail stat. So obviously.
If people have missed the summer season, obviously is unlikely that they will revert back so whether there's any pent up demand.
Is unlikely to come through secondly, what we do believe is that if retail status do improve and off slightly better we've actually done most of that production shuttling for the quarter, we would probably see a further acceleration in the reduction in dealer inventory, so probably not much of a surprise to cat inc., but obviously.
We would obviously improve pull through the dealer inventory reductions little bit quicker.
And maybe just restate the obvious we're in a very dynamic market right and what we've said is that we're ready for changes positive or negative. So we're giving you a sense of what we see as to where we should see things today.
Got it we're saying is we're not expecting a further decline in sales to users is what we're saying basically right and so that's that's really the message we don't expect things to to get to get worse and based on what we see today and again.
Things could get better again, it's it's it's very difficult to judge just based on for obvious reasons.
Today, our understanding.
And so called next question comes from the line make you'll break from Baird. Your line is open.
Thank you good morning, and just a follow up on that previous question, if we're kind of thinking about.
The third and fourth quarter here, you're essentially sand that at retail level things aren't really getting worse, maybe they're getting a little bit better billion dollars' worth of dealer.
Restock that you're expecting in the second half.
Well, we create a headwind on a year over year basis.
I guess my question is this as we're thinking about normal seasonality here is that fair to expect that normal seasonal uptick in revenue in the fourth quarter and if so how do you think that's going to translate to margins based on all the moving pieces to the cost structure that you talked about.
Yes so.
Interesting season, obviously varies by business by business as you go through as you know made the one of things you will see probably in the fourth quarter is particularly transportation soda normally traditionally have a strong fourth quarter, which is drives their uptick.
And then particularly in energy and transportation nothing we see today would expect that to be any different.
As regards Q3 in Q4.
Both of those.
See I does have obviously is tends to be a little bit.
Negative in Q3, Inc. Q3 in Q4, obviously, the timing of Chinese new year in Q4 last year.
Well the inventory build one probably you re happened this year. So again, that's another factor to build and as you think about the outlook on them on a high level sort of look through.
And then all right just remains lumpy. It is very much related to project by project.
Particularly on the mining side, so that's difficult to.
To predict and doesn't really have a seasonality is really based around custom orders.
Maybe just one comment about dealer inventory just to add onto that you know one of the things. We're doing is again positioning ourselves both it within caterpillar and dealers to respond quickly to positive or negative demand by.
Our dealers are independent businesses to make their own decisions about inventory, but by in fact.
Having that dealer inventory go down that allows us to produce to demand. So again that will remove potential headwind obviously with for next year.
But just to clarify if revenues are up sequentially in the fourth quarter is it fair for us to expect lower decrementals than what you just talked about for the third quarter.
At this stage, we are not part, yes, but yes normally you would expect if theres a volume increase that obviously that.
Quarter on quarter that does help reported margins however.
Just a point out always we do I see a fourth quarter decline in margins NCR in particular.
That is one of the biggest factors. So again it may not the Decrementals may not change from quarter to quarter, we just need to see what we think the body will be at that point in time and depends on mix as well I mean, so typically as Andrew mentioned, we had a strong fourth quarter. So much if we had a strong fourth quarter and we don't expect that to be any different this year and in that helps our mix perspective, so again.
Mix dependent as well.
Alright, Thank you guys.
Final question today will come from the line Steven Fisher from.
Your line is open.
Great. Thanks, Good morning, so youre machinery, and see cash and your enterprise cash were up by quite a bit.
It sounds like you're still kind of reserving a little bit of caution on deployment. There is there a certain level of cash.
That you'd like to have such that you'd be then comfortable returning more of it or deploying it or is it really just a matter of of timing till you really feel comfortable that that activity levels of the bottom than we have some visibility to the things, possibly turning a little bit better.
It really is just really a function of us looking at at global economic conditions Independencia can just and certainly that's there. So it really is a function of of the pandemic.
Okay fair enough. Thanks.
So now we'd like to turn it back to Jim.
Moving remarks, and then I'll I'll close that at the.
Well again. Thank you. Thank you for your questions today, we greatly appreciate it you as we mentioned we are very well positioned we believe to profitably grow we're a company. Although we've got challenges due to the pandemic. We're continue to invest in in our long term future in new products in enabling our services capabilities and again, we greatly appreciate your time. This morning. Thank you.
Thank you Jim Thanks, everyone, who joined US today, a replay of I call will be available online. Later. This morning, we'll also post the transcripts on the relaunched Investor Relations website I, probably on Monday click on investors that caterpillar Dot com and then click on financials if you.
Got any questions. Please reach out to Rodney you can be try there are a angie I'll underscore Rob I'd cat Dot com and I might just go underscored Jennifer at kept dotcom the Investor Relations General phone number is 3096754 or 549 out of a nice weekend and now let's turn it back to the operator to conclude our comp.
Ladies and gentlemen, thank you for participating. This concludes today's conference call you may now disconnect.
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