Q4 2020 Caterpillar Inc Earnings Call
Ladies and gentlemen, thank you for Sterling by and welcome to the Q4, 'twenty and 'twenty Caterpillar earnings Conference call.
At this time all participants are in a listen only mode. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and I would now like to hand, the conference over to your speaker today, Jennifer Driscoll and thank you. Please go ahead.
Thank you Jason Good morning, everyone and welcome to Caterpillar's fourth quarter, 'twenty and 'twenty earnings call. Joining me. This morning are Jim and Bob <unk> Chairman of the board and CEO, Andrew Bonfield, Chief Financial Officer, Count I believe Vice President of Global Finance Services Division and Rob Rengel Senior IR manager during our call we'll be discussing the earnings news release.
Issued earlier this morning, our slides from today, the news release and a video and recap our all in the investors section of Caterpillar dot com under events and presentations.
The forward looking statements, we make today are subject to risks and uncertainties. We'll also make assumptions that could cause our actual results to be different than the information. We're sharing with you on this call. Please refer to our recent SEC filings and the forward looking statements reminder, in the news release for details on factors that individually or in aggregate could cause our actual results to vary.
Really from our forecast.
Caterpillar has copyrighted this call and we prohibit use of any portion of it without a prior and approval.
Today, we're reporting profit per share of $1.42 for the quarter and $5 46 for the year, we're showing adjusted profit per share and addition to our U S. GAAP results, our adjusted profit per share of $2.12 for the fourth quarter excluded remeasurement losses of 63 per share, resulting from the settlement of pension and other.
And so retirement obligations and also excluded restructuring expenses of seven per share, which Andrew will discuss for the full year adjusted profit per share of $6.56 excluded 55 cents per share, resulting from the settlement of pension and other postretirement benefit obligations and 55 per share and restructuring.
Expenses.
We provided a GAAP reconciliation and the appendix to this morning's news release you can also find information on dealer inventory backlog services revenues and full year 2020 numbers and our slides.
Now with that let's flip flip to slide three and turn the call over to our chairman and CEO, Jim <unk> Jim.
Thank you Jennifer and thanks, everyone for joining the call I'd like to start by thanking our global team for their resilience and performance during 2020, a year of unprecedented challenges. The caterpillar team continued to provide the essential products and services that enabled our customers to support society during the pandemic in.
And this difficult environment, we leveraged our strong safety culture and had the best year on record for employee safety.
Our employees generous contributions and volunteerism are also notable we had a record level of support for worldwide relief efforts in 2020 through the Caterpillar Foundation.
Before turning over the call to Andrew for a detailed review of our results I plan to briefly cover the following topics. This morning.
And I'll share my perspectives on cats fourth quarter results all.
And then provide comments on our performance for the full year, followed by some high level thoughts about 'twenty 'twenty, one and I'll close by highlighting several ways, we're advancing our strategy.
Starting on slide four I'll recap fourth quarter results versus a year ago sales and revenues of $11 $2 billion decreased 15% about as we expected lower sales volume drove the decline, reflecting lower end user demand and reductions in dealer inventory.
Dealers decreased their inventory by $1 $1 billion and the fourth quarter of 2020, roughly $400 million more than we expected.
For the full year dealers reduced their inventories by $2 $9 billion. This positions us well to produce closer to demand in 2021, which was our goal when we introduced our enhanced <unk> process.
Fourth quarter sales to users declined by 10% versus the previous year.
Sales to users for both construction and mining equipment were better than we expected.
Fourth quarter 2020, operating margins declined year on year, the improved by 230 basis points versus the third quarter and <unk>.
12, 3% they were better than we expected, reflecting better operational performance.
Restructure and expense was lower than we expected as was the effective tax rate.
Profit per share and the fourth quarter was $1.42 adjusted profit per share was $2 12.
Regarding our full year results on slide five we sit set at the start of the pandemic it would be challenging to achieve the operating margin target. We communicated during our 2019 investor day due to the impact of COVID-19 on our operations and supply chain as well as our intent to continue investing and new products and services to drive long.
Term profitable growth.
So we're pleased that our final operating margin for 2020 was within our targeted range.
We finished 2020 was sales and revenues of $41 $7 billion and and adjusted operating profit margin of 11, 8%.
R. M E N T free cash flow for the full year was $3 $1 billion.
While we did not achieve our targeted for M. E&P free cash flow of $4 billion to $8 billion, our free cash flow performance improved as the year progressed.
Our decision to hold higher caterpillar inventory to mitigate potential supply chain disruptions and to position ourselves for changes and market demand also impacted our free cash flow generation and 2020 as Andrew will discuss shortly.
We remain focused on returning substantially all M E T free cash to shareholders through the cycles, and we returned $3 4 billion or 110% of our free cash flow through dividends and share repurchases in 2020.
Turning to slide six I'll provide some comments on our end markets.
Market conditions remain fluid due to the pandemic. However, I'll provide some thoughts based on what we see today.
And construction industries, we see construction and North America benefiting from increased residential demand.
We expect a strong selling season in China, including demand for our new G ex excavator and line.
We expect continued recovery and the rest of Asia Pacific.
The current shutdown and some regions of E. Amy may constrained construction activity in Europe, and the short term.
However, we expect improved market conditions due to a favorable expansionary policies as well as benefits from higher commodity prices and Africa, the middle East and Eurasia.
And Latin America, we see Brazil's construction sector supportive of machine demand, while weakness outside Brazil is expected to continue at least and the short term.
Turning to resource industries, the improvement and mining fundamentals is expected to continue.
We anticipate most of mine sites to continue operating with limited disruptions and high levels of truck activity.
In addition metal prices are supportive of reinvestment and quoting activity continues to be robust.
The number of parked trucks continues to decline.
We continue to see strong interest and autonomy.
Heavy construction and quarry and aggregate markets remain uncertain.
Our U S infrastructure Bill would likely have a positive impact on these end markets.
Moving to energy and transportation, we expect typical seasonality.
Although we are encouraged by recent moves and oil prices, we expect oil and gas will continue to reflect conditions in that market.
We expect some improvement and power generation supported by data center activity.
We expect growth and industrial across all applications and transportation should grow due to services and higher international rail activity later in the year.
Overall, we expect our sales and 21 and 2021 to be stronger due to the lack of a dealer inventory reduction and improving market conditions as I've described.
We also expect services revenues to increase during the year.
Given the continuing uncertainty, we're not providing earnings guidance at this time.
Andrew will provide several assumptions for the first quarter and a moment, but we expect the first quarter to benefit from stronger year over and your sales to users and dealer restocking.
We also expect modestly higher margins and the first quarter of 2021 compared to the fourth quarter of 2020.
You may recall that during our third quarter earnings call I said that I felt better today than I did a quarter ago and the same is true today for the reasons I explained earlier concerning our markets.
In addition, we're executing well against our strategy for long term profitable growth.
We expect to achieve our Investor day operating margin targets in 2021, despite the impact of reinstating short term incentive compensation.
We also expect to meet our Investor day free cash flow targets this year.
Given our intention to return substantially all of our M E T free cash flow to shareholders as well as <unk>, our desire to be and the market on a regular basis, we expect to revisit our current pause and share repurchases later this year.
We have paid higher annual dividends to shareholders from 27 consecutive years, and we're proud of our status as a dividend aristocrat.
As I mentioned on our last earnings call all decisions concerning the dividend are made by our board of directors, but we anticipate recommending an increase and the current year.
We signed an agreement last quarter to acquire worse oil and gas business we.
We see a strong fit between wear and our current offerings.
This strategic transaction enhances our ability to serve our existing customer base, while adding services revenue opportunities.
We anticipate the acquisition will close very soon.
Turning to slide seven we remain committed to our strategy, which we launched in 2017.
We're focused on operational excellence and continued to invest and services and expanded offerings during the pandemic.
An example of our continued investment and expanded offerings was our new G. Ex line of excavators launched in November and China, which has received a positive response from our customers.
The Gx series provides the durability safety and services that customers expect plus 15% lower fuel consumption than the prior models.
It also offers 25% for maintenance cost.
Our technology, along with our engineering Knowhow and global dealer network has always played a pivotal role and making our customers more successful with caterpillar.
For the first time, we displayed some of our technology at the consumer Electronics show earlier this month.
We featured Cat mine Star a suite of technology and solutions that powers, our autonomous trucks with Cat mine star customer say their employees are safer machines, and more efficient and operations and more consistent and productive Cup.
Customers have realized productivity increases of up to 30% with zero reportable injuries.
We believe our autonomous capabilities provide a competitive advantage in mining.
We were recently awarded research funding from the U S Department of energy for two development projects. The first project, which is expected to launch and the first quarter of this year is a three year program for a hydrogen fuel cell system for data center power.
The second project is expected to launch in mid 2021 and has a three year program related to our flexible natural gas and hydrogen combined heat and power system.
Caterpillar announced 'twenty and 'twenty sustainability goals in 2006, and we're proud of our progress.
By 2019, we reduced our greenhouse gas emissions by 54% from our 2006 baseline exceeding our goal of 50%.
And more than 35% of our electrical energy was obtained from renewables or alternative sources exceeding our 2020 goal of 20%.
We will disclose our final 2020 goal attainment and May when we also plan to disclose our new sustainability goals for the next horizon.
I'll also comment on services, which is an important element of our strategy as.
As you know we have a target of doubling our services revenue from 2012 to 2026.
Our annual services revenue declined 13% to $16 billion, and 'twenty and 'twenty versus the prior year.
As we expected services were less cyclical than original equipment and rose as a percentage of sales representing 41% of M. E T sales in 2020.
Year over year services declines reflected the reduction and machine hours related to the pandemic and customer decisions to delay planned maintenance and rebuilds as they sought to conserve cash.
However, we did see an increase and customer value agreements both on the number and the average length.
With over 1 million connected assets, we feel we have critical mass from a connectivity perspective, which will leverage to increase services sales over time.
In the coming year, we expect to return to growth and services. We did see positive momentum from the third to the fourth quarter of 2020.
All three segments have detailed plans to increase services by making our customers more successful.
In summary, we continue executing our strategy, improving operational excellence and investing and expanded offerings and services to help our customers succeed.
We continue to maintain a strong balance sheet and intend to deliver higher margins and free cash flow through the cycles as outlined during our 2019 Investor day.
And we're grateful for our team's accomplishments in 2020, including their high level of engagement, we have a great team and we will emerge from the pandemic has and even stronger company well positioned for long term profitable growth.
With that I'll turn it over to Andrew.
Jim and good morning, everyone.
I'll begin by walking you through the fourth quarter results, including sales to users changes and dealer inventory and Sigma and performance.
And then I'll comment on the balance sheet before finishing with our key assumptions for the first quarter of 2021.
Starting with the fourth quarter on slide eight.
Versus last year sales from that and used to call and by 15% to 11 2 billion.
Operating profit decreased by 25% to $1 4 billion.
Good cost control and the quarter, partly offset the impact of lower volume.
Fourth quarter 2020 profit per share was $1.42.
That include pretax remeasurement losses of $438 million or <unk> 63 per share, resulting from the settlement of pension and other post retirement obligations.
Last year's profit per share for the fourth quarter was $1 97.
Fourth quarter 2020, adjusted profit per share was $2 12 compared to $2.71 last year.
You will have seen from the release of the full year effective tax rate was approximately 28% excluding discrete items.
This was lower than the 31% rate, we'd anticipated and added 26 cents to profit per share.
We also had a <unk> <unk> benefit from discrete tax items and the quarter.
Excluding restructuring expense adds another seven cents per share.
The balance of the outperformance from reflected better than expected operating results, which saw adjusted operating margins improved by 170 basis points versus the third quarter of 2020.
Since 2019, we have only reported adjusted profit per share and the fourth quarter. When we had multiple impacts from our pension and other post retirement benefit plans.
This change happened because restructuring expense and return to base levels, which was between 100 and $200 million per annum.
This was not considered material and did not warrant adjusted profit per share.
However, restructuring expense has risen to $350 million. This year as we took additional actions to address certain challenge products.
We also expect restructuring expense and 'twenty 'twenty, one to be similar to or even greater than the 2020 total as we continue to take the necessary actions to improve that cost competitiveness.
So and now reporting adjusted profit per share excluding restructuring charges, and we reported adjusted profit per share each quarter and the coming year to exclude restructuring.
We've also adjusted the prior year numbers, so they're on a comparable basis.
Our restructuring efforts in 2020, Mike Good progress and we expect $150 million benefit and 2021 from these actions.
And as shown on slide nine overall sales and revenues finished credit close to what we anticipate and October a stronger and user demand was offset by further reductions and dealer inventory.
The top line declined by $1 9 billion to $11 $2 billion, primarily due to lower volume and a larger year on year reduction and dealer inventory.
As Jim mentioned sales to users decreased by 10% for the fourth quarter.
Sales to users for construction industries declined by 1% versus the prior year.
It was a mixed bag geographically is Asia Pacific Rose by 16% benefiting from stimulus spending and China.
Latin America also improved up 11%.
North America was down 8%, a solid improvement from the third quarter trend.
Resource industries, which tends to be lumpy had a 3% decline for the quarter.
Energy and transportation sales to users decreased by 25%.
The largest driver of that decline was attributed to lower levels of activity and oil and gas.
Between earnings calls, we've been reporting loading three months sales to users every month.
Going forward, we will report to sales to users on the once per quarter. When we discuss earnings. So we can put them in the proper context.
Machine orders improved in the fourth quarter as Dean has begun preparing for the spring selling season, and the Chinese new year.
Machine orders accelerated by the double digit percentage terms from the fourth third quarter to the fourth in line with normal trends.
David This decrease inventories by $1 $1 billion during the fourth quarter.
That compares with a decrease of $700 million and the fourth quarter of last year.
Improving sales to users enabled dealers to reduce their inventory by about $400 million more than we had anticipated on October.
Dealers reduced inventory over the course of 2020 by $2 9 billion.
This change both debt inventory levels, the lower end of that normal range from months of sales.
As you know dealers are independent businesses and make debt own decisions on inventory.
And the first quarter of 2020, we finished the rollout of our new <unk> process, which we believe promoted better alignment between us and $19 through a volatile year.
This dealer inventory reduction and positions us well for 2021.
Reported sales decreased versus the prior year and all three primary segments.
Energy and transportation contributed the majority of the decrease and total sales declining by 19%.
This segment had weakness and all four applications led by oil and gas and transportation.
Sales and construction industries declined by 10% due to lower sales volume associated with the reduction and end user demand and.
Changes and dealer inventories.
Sales and resource industries decreased by 9% due to lower end user demand for equipment and after market parts.
I'll now move to slide 10.
Operating profit for the fourth quarter fell by 25% to $1 $4 billion, mostly due to volume declines.
Similar to the trend we've seen throughout the year lower manufacturing costs, and SG&A and R&D expense, partially mitigated the decline in volume.
We delivered an adjusted operating margin of 12, 8%.
Restructuring expense for the quarter was flat at $58 million compared with $54 million and the fourth quarter of 2019.
I'll discuss the individual segments results for the fourth quarter and starting on slide 11 with construction industries.
For construction industries sales decreased by 10% to $4 5 billion.
Volume declines resulted from changes and dealer inventories and led by North America, and lower end user demand.
We also saw less lower sales in China, and part due to lower dealer inventories, which included the impact of a later Chinese new year and 2021.
However, sales to users were better than expected and we're seeing momentum and residential construction, although we're still seeing weakness and pipeline and road construction.
The segments fourth quarter profit decreased by 4% to $630 million, driven by lower volume and higher warranty expense.
That was partially offset by favorable cost absorption and.
Lower SG&A and R&D expenses, including the absence of short term incentive compensation.
Margins remained resilient rising 90 basis points versus 2019% to 14.0%.
Versus the third quarter margins were down slightly.
This was a smaller seasonal decline that we normally see reflecting the improvements and the top line quarter over quarter.
As shown on slide 12 resource industries sales decreased by 9% and the fourth quarter $2 2 billion.
We experienced lower end user demand for equipment and after market parts supported supporting heavy construction and quarry and aggregates and to a lesser extent and mining.
As anticipated sales for resource industries improved compared with the third quarter.
Despite lower sales and the fourth quarter profit increased to $273 million compared with $261 million and.
And the fourth quarter of 2019.
The segments profit margin of 12, 5% rose by 160 basis points compared to 2019 on strong cost controls.
Variable labor and burden and efficiencies as well as material costs were favorable despite the low sales volume.
SG&A and R&D expenses benefited from lower short term incentive compensation and other cost reduction actions.
And benefits were realized from prior restructuring programs.
Versus the third quarter, the operating improved by 330 basis points, mainly reflecting the higher volume.
Turning to slide 13 fourth quarter sales of energy and transportation declined by 19% to $4 $8 billion.
The decline included a 29% sales decrease in oil and gas mainly due to lower demand in North America for reciprocating engines used in gas compression and well servicing.
Sales were also lower for turbines and turbine related services.
Power generation sales decreased by 9% this.
This decline was primarily due to lower sales volume and small reciprocating engines turbines and toga and related services and engine after market pause.
Transportation and industrial sales decreased by 28% and 19% respectively.
Transportation declines reflected lower locomotive deliveries and related service revenues, primarily in North America, as well as lower sales and marine.
Profit for the segment decreased by 41% to $687 million.
Due to lower sales volume.
That was partially offset by lower SG&A, R&D and period manufacturing costs.
The segments operating margin declined to 14, 3%, a 530 basis point decrease in comparison to our record quarter a year ago.
Versus the third quarter, the operating margin improvement was 250 basis points, reflecting the higher volume and favorable mix, partially offset by the timing of product development expenses, which we mentioned and the third quarter call.
Moving to slide 14 to wrap up the segment commentary.
Financial products revenue decreased by $103 million or 12% to $743 million.
The decline was due to lower average financing rates across all regions and lower average, earning assets and North America.
The latter reflected lower purchase receivables, which resulted from volume declines.
Segment profit of $195 million declined by seven percentage year over year, mostly reflecting higher provision for credit losses, and lower earning assets.
While used prices were flat to up and construction equipment. We also had an unfavorable impact from returned or repossessed marine and mining products.
Our customers remain in good financial condition.
Credit applications continued to rebound and the quarter up 6% compared to the third quarter and up 15% compared to a year ago.
Cash financial supported customers during the year with a streamlined process for loan modifications, but modification activity declined significantly and requests was second modifications remain very limited.
Pulse shoes, with 349% up 35% year over year, but and an improvement of 32 basis points from the third quarter.
As has been the case cat financial will continue to work closely with customers as they manage the impacts of COVID-19 on their business and cash flow.
But we are pleased to see that our customers remain in good financial health.
Now on slide 15 free cash flow from machinery energy and transportation was about $1 7 billion and the quarter.
A decrease of about $200 million versus the fourth quarter of 2019.
The decrease reflected changes and caterpillar inventory as our inventories remained stable and the fourth quarter of 2020.
Compared to a decrease in 2019.
As we've mentioned previously we continue to hold higher caterpillar inventory, primarily and components and other work and process to ensure that any potential disruptions to supply do not affect our customers and to make sure we're able to respond quickly to improve demand.
However, free cash flow from Amy and T did increase by $800 million versus the third quarter of this year.
The sequential improvement was driven largely due to the higher profit and favorable working capital.
We generated $3 $1 billion of <unk> free cash flow and 2020.
Although this was below our investor day range of $4 billion to $8 billion, we expect to return to our Investor day cash targets and 2021.
We ended the fourth quarter with non <unk> 4 billion and enterprise cash and maintained a strong liquidity position.
You'll recall that we issued $2 billion and debt last year, partly to increase liquidity and Paul at the anticipation of $1 4 billion.
And schedule of maturities this year.
Our credit ratings remain strong.
We recently declared and normal quarterly dividend of $1 <unk> per share, which translates to around $560 million.
As Jim has indicated we're proud of our status as a dividend aristocrat.
All decisions concerning the dividend on made by our board of directors, but we anticipate recommending an increase from the current year.
Last year, including the quarterly dividend as well as share repurchases made early in the year, we returned $3 4 billion to shareholders.
And our intention and Investor day was to return substantially all EMEA and T free cash flow to shareholders through the cycles.
And in 'twenty and 'twenty, we returned 110% of our Amy and T free cash flow to shareholders.
And in fact of the past three years on average we've returned 106% and we've reduced our quarterly average diluted shares outstanding by about 10% since the first quarter of 2019.
While share repurchases were paused and April due to uncertainties associated with COVID-19, we aim to be and the market on a regular basis.
Given what we're seeing and the business, we expect to revisit the decision to pause the share repurchase program later this year.
We also continue to maintain a strong balance sheet, which we can use for compelling M&A opportunities such as our pending agreement to purchase the weird groups oil and gas business.
Whilst we're not providing annual guidance, we do have a few thoughts on the first quarter.
A summary of our key assumptions as shown on slide 16.
And the first quarter, we expect stronger year over year sales to users due mainly to growth and construction industries.
We anticipate ongoing strength in China and benefits from the pickup and residential construction and North America, Although nonresidential remains subdued.
We expect resource industries, a lumpy business to begin the year, a little lower with a similar year over year to trend to what we saw in Q4.
Energy and transportation is also expected to have a negative starts of the year. Although the trends are expected to improve versus the sharp drops in sales to users reported and the third and fourth quarters of 2020.
As a reminder, sales to use as well and the impact of margin and the first quarter of 2020. So we expect strong <unk> growth and the remainder of 2021.
We expect a normal seasonal inventory build and anticipation of the spring selling season.
Note that the Chinese new year is about three weeks later this year. So the inventory build for Asia Pacific has shifted more to the first quarter of 2021, rather and occurring in the fourth quarter has happened between 2019 and 2020.
All right and this year is to produce closer to end user demand and we anticipate dealers will remain within the normal range for sales months of sales and inventories.
Again, we will benefit in 2021 from not having the headwind of the dealer inventory reductions that took place in 2020.
With respect to operating margins, we expect a sequential improvement and the first quarter versus the fourth even with the impact of about $225 million from restoring short term incentive compensation.
On a year over year basis, the benefit of higher volumes will almost entirely offset the impact of short term incentive compensation, which means we expect operating margins to be about flat versus Q1 and 2020.
As Jim mentioned in his comments, we do expect to deliver margins and the Investor day range as the benefits of operating leverage and leased and the restructuring cost actions I mentioned earlier will all.
Offset the impacts of short term incentive compensation and higher expenses were deferred into 'twenty 'twenty one.
Looking at margins by segment and construction industries stronger sales and leverage on higher volumes are anticipated to drive the sequential margin expansion and the first quarter compared to the fourth quarter. Despite the impact of short term incentive compensation.
Resource industries is also anticipated to have a higher margin sequentially on higher sales and leverage along with favorable mix.
However from a margin perspective energy and transportation is likely to have a weaker start to the year, which is in line with typical seasonality.
This excludes any impact from the wire acquisition, which we anticipate will close very soon although we don't expect it to be material to our full year results.
In addition, we assume a tax rate from the first quarter of about 26% to 28% consistent with what we project for the full year based on the current U S statutory tax rate.
This is in line with the tax rate we reported in 2020.
We would expect normal capex at a pace that would translate to about 1 billion to $1 2 billion for the year.
So finally, let's turn to slide 17, and let me recap today's key points.
We continue to execute our strategy for profitable growth.
We're investing and services and expanded offerings, while improving operational excellence.
And the fourth quarter trends and sales to users improved compared to the third quarter dealer inventories declined and we improved adjusted operating margins relative to Q3.
We expect to see improved margins sequentially and stronger volumes and the first quarter.
We're grateful to all employees for ensuring we provided the essential products and services that enable our customers to support a world and need.
And and most importantly for doing so safely.
With that I'll hand, it back to Jason to prepare for the Q&A session and as we do that let's just say to be clear.
For services is to double net fan.
And 2016 at 14 day into 2026 to 28 million and thank you.
Jason.
Excellent and at this point, we will open the call for Q&A as a reminder, we will be limiting questions to one or time constraints, we will pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Robert Wertheimer from Melius Research. Your line is open.
Hi, good morning, and thanks for the overview of what Youre seeing in the end markets.
Given that the decision not to reinstate the outlook and obviously, there's a lot of uncertainty.
Could you talk about at least the key points.
Uncertainty and the upside and downside and where are you seeing where there may still be downside revenues and if there is some where are you seeing more upside risk versus 2020 levels.
A little bit of characterization on why you made the decision and what are the points of us and uncertainty on thank you.
You bet and good morning, Rob This is Jim.
We indicated in our prepared remarks, we do expect 2021 to be a better year than 2020 force we expect higher.
Higher sales.
But just given the uncertainty around the pandemic.
And out of the vaccine and the resulting.
Impact on on on the global economy, Although we expect it to be a better year, it's difficult for us to quantify how much better it will be just based on the pandemic and and we mentioned several bright spots whether continued strength and China continued strength in residential.
Activity in the United States, which drives our smaller construction business. We're generally continue to be bullish on on mining still some concerns around heavy construction and quarry and agg, which impact resource industries, but again, it's it isn't so much a concern about downside as it is uncertainty as to how much better things.
And we'll get this year.
Your next question comes from the line of Jerry Revich from.
Goldman Sachs. Your line is open.
Hi, good morning, everyone.
And then Jay.
I'm wondering if you could talk about the.
First quarter margin outlook, it's nice to see.
The margin expansion plans sequentially. Despite a two point headwind from incentive compensation. So that's better cadence and normal seasonality can you just talk about how much of that is momentum and price cost improvements versus other drivers.
We were pleasantly surprised by that part of the outlook.
Yeah, Thanks, Jerry and Sandra and good morning, Yes, and the Big driver is really volume as I said.
The fact that we expect.
A more normal seasonable dealer buying pattern ahead of the.
And the spring selling season.
And if you recall last year, we only had about $100 million of dealer inventory and increase in Q1 that is a big factor, obviously from a volume perspective, and given the operating leverage that we have and the business that enables us to more than offset the step increase.
We continue to monitor and control costs.
We are in an environment where everybody.
There is obviously a focus on making sure every dollar accounts.
And that will continue as we go forward debt is something which we will obviously continue until we start seeing stronger recoveries and obviously continues to make sure that we're investing in the business as Jim said, we continue to invest and services, we continue to invest and new products, that's really critical for our long term growth.
Your next question comes from the line of Ann Duignan from JP Morgan Your line is open.
Hi, Yes, good morning, and as we contemplate our 2021 models could you provide us more color in terms at all.
And by sub segment, and and T and in particular.
You talked about oil and gas turbines in particular and turbine and surfaces and and the other sub sectors. Thank you.
Well good morning, and we expect starting with your question about solar and we expect <unk> to have a relatively flat year. Two to 2020. We do believe there are services will be up a bit again, it's there's still uncertainty out there, but our current view is that that seller will be about flat year to year.
Yeah, we expect power generation to be to have a have a stronger year and lot of that is driven by data center activity and we expect industrial engine activity to strengthen during the year, we do expect and rail to see continued low levels of sales of new locomotives and North America, but we do expect stronger activity internationally.
Ashley for sale of locomotives and also services as well Marine and I would expect to remain at a relatively low level and the first quarter compared with the fourth quarter of 2020.
Your next question comes from the line of David Raso from Evercore ISI. Your line is open.
Hi, good morning, a bigger picture question.
And many of the classic signs of cats prospects, turning positive and Theyre right below inventory and the <unk>.
Higher commodity prices, but when we think about the whole cycle.
As you're well aware at some investors questions caps longer term growth prospects and due to park. Some people question and the sustainability of the reflation trade.
And really even more so they believe cap business portfolio is poorly positioned for a world evolving their clean energy and carbon neutral goals.
Jim can you provide your thoughts.
On those two issues, particularly the second issue of the portfolio and how we should think of acquisitions now maybe helped changing that investor view, I mean, especially given your net debt to EBITDA and that's on a weak 2020 EBITDA is only <unk> four and.
And if you can tie into that with the percentage of aftermarket revenues. You gave this morning. It does suggest.
Your aftermarket revenues have to grow it at nine 8% CAGR from 2020 to 26.
Media revenue goal of 28 billion and 2026 for aftermarket.
And talk to those issues would be helpful. As people think about all cycle.
Good morning, David always good to hear from you starting with the question about our portfolio and the way we're positioned I feel quite good about the way we're positioned you stop and think about.
And the potential impact on our resource industries business over time, particularly in mining as the energy transition occurs.
Thinking about the commodities that will be required both in terms of investments and infrastructure electric vehicles again, I believe we're very well positioned.
And our Oi to take advantage of that we also as a as when you asked the question last quarter I talked about the fact that we do intend to continue to support our customers both during and after the transition and so I believe we're well positioned to do that.
So again, we continue to work closely with our customers, we continue to invest and new products.
Again last quarter. When you asked the question we talked about some other things that that we're doing in terms of investments with new products and we have on all electric switch locomotive, we've done things to help make our oil and gas customers more sustainable whether it be.
And engine that allows them to substitute up to 85% natural gas and substituting.
Natural gas for diesel fuel for well servicing.
Doing things in terms of allowing oil and gas customers to reduce flaring.
So again, a whole variety of things that we're doing and we're investing in.
To support our customers both during and after the energy transition in terms of your question about services certainly our goal is an ambitious goal and we said that when we when we introduced that goal and we certainly recognize net.
Net net it is ambitious but we're very focused on this as a business we've been making investments over the last few years and our digital capabilities and our many of our processes and our models and and we're going to work hard to leverage those connected assets and those investments that we've made to grow services going forward and we think that represents just an excellent opportunity for future profit.
All growth over the next few years.
And as a reminder, if we could have one question per analyst that'd be terrific.
Your next question comes from the line of Jamie Cook from Credit Suisse. Your line is open hi.
Hi, good morning, Jim.
Andrew I guess the question for you is on the margin side. You know you look at resource and construction your margins improved year on year despite sales declines.
Look at your margins for the total year, they're up about 11%.
It is above the low end of your targeted range and.
And taking into account you said you didn't think you'd be able to hit your target range. When Covid first started so clearly.
It looks like the margin performance of the business is doing better than you originally anticipated so.
Is there any way you can help us understand what's happening there.
And I'm just trying to figure out if the margin targets that you laid out at the analyst day, and if theres. Some upside there. If there is a reason structurally why.
Margins are performing better and particular, given some of the headwinds that we faced this year with COVID-19 dealer inventory et cetera. Thank you.
Got that.
Jamie Thanks for your question and good morning, and certainly we are very proud of our team and the fact that we were able to achieve our investor day targets. This year. Despite the fact that that we continued to invest in and services and expanded offerings and new products and positioning ourselves for long term profitable growth.
As we said and in Investor day are our measure of profitable growth is absolutely co packed dollars and we believe that by growing absolute OPEC dollars that will drive long term tsi and so certainly we're always looking across the business to find ways to improve our competitiveness to improve our footprint to improve.
Cost of our back office operations, So thats, a never ending journey that we're on but but we really are growing and attempting to grow long term absolute OPEC dollars as opposed to just squeezing and higher margins out again margins will will fluctuate over time, but again keep in mind two things one is we.
And we're very focused on meeting those investor day targets in terms of margins and free cash flow and we're also very focused on growing absolute <unk> dollars two two to grow long term GSR.
Your next question comes from the line of Ross Gilardi from Bank of America. Your line is open.
Hey, Thanks, good morning, guys.
Good morning, and one of those.
Jamie I was just wondering if you could just discuss the outlook for reinvestment and.
2021, and the next several years and you've committed to the $4 8 billion and free cash through the cycle.
It sounds like you're planning to raise the dividend and resume the buyback, but cat spent about 60% of depreciation on Capex and 2020 under spent depreciation by a pretty wide measure.
Every year and going back to 2013, R&D spend is down about $500 million from where it was at the trough of the last cycle.
And you should we be expecting some catch catch up years on Capex and R&D and the next several years and if not why not and interest with that what are you baking and for R&D and Capex in 'twenty and 'twenty one.
Yeah, we're going to disclose a discreet number 444.
R&D and Capex in 'twenty and 'twenty, one, but just to make some general comments here and we certainly are very committed to continue to invest and our products one of the things that did impact R&D and.
2020, what the lack of step so keep that in mind as well that is part of the.
<unk>, but we're very committed and we talked about the G X product line and we talked about some of the other investments that we're making in new products and Thats something that we will continue to do we talked about the fact that we have.
Recognize there is an energy transition occurring and we are investing and and we'll continue to invest and new technologies that allow us to support our customers moving forward in terms of Capex.
And the things were worked very hard on is lean operations to get more production out of existing bricks and mortar so rather than build continue to build factories, we may not need at certain points and the cycle. We're really focused on manufacturing flexibility working across that value chain, reducing lead times, becoming more lean.
To try and meet those fluctuations in demand and a cost effective manner.
And let's just said I think we got it.
Notes are between one and $1 2 billion for Capex. This year, which is more a 2021, which is on more normal level all.
Obviously 2020 was disrupted a little bit as well because obviously the impact of Covid. Some of the thing and projects that would normally have happened had been deferred and delayed.
Your next question comes from the line of Timothy <unk> from Citigroup. Your line is open.
Great. Thank you and good morning.
Good morning, just to go back to mining if we could in terms of all.
You alluded to the <unk>.
Order book order activity.
And just all healthy level of discussions maybe just a little bit more in terms of what Denise and team are hearing.
And you look at mining markets.
Around the globe in terms of.
How we're thinking about there.
And how the recovery and the interplay between.
Homegoods versus parts.
So maybe again, just a little bit more color in terms of your expectations for for Mike The.
The mining piece within all right. Thank you.
Certainly as I mentioned, we mean, we continue to be optimistic about on our mining business. The quotation activity is strong certainly base metal markets.
And our support additional activity.
The number of parked and mining trucks has declined and now keep in mind and of course, our Oi includes heavy construction and quarry and agg. So there's some uncertainty there and that and that business is relatively subdued that could be helped by stimulus programs, but at this point that is is.
Relatively depressed, but again and mining were quite bullish so again as we look at our economist solution. We believe we have a competitive advantage, there and and we expect strong activity and and.
And in new equipment, we expect strong activity and parts keeping in mind of course, our business and it's quite lumpy.
Both in our eye and ear and T. We'll see.
<unk>.
For the quarter, but again, the medium and long term trend and we're quite bullish on and again I mentioned the energy transition, we're very well positioned to take advantage of that in resource industries.
Your next question comes from the line of Nicole <unk> from Deutsche Bank. Your line is open and yes. Thanks, Good morning, guys.
One on the clinical and so.
I guess I wanted to ask about the safety.
And with that.
And maybe within resource as well if there is any of that or how do you feel about that and compared to what's going on on the market with respect to raw materials difficulty getting.
And any any supply maybe characterize what youre seeing with respect to COVID-19 and how much of a concern that is.
Presumably demand really starts to ramp throughout 2021.
Well, thank you and so as I mentioned, we did make a conscious decision and we talked about this in previous earnings calls that we would hold some additional inventory to mitigate the potential disruptions of on our supply chain of Covid, just given the uncertainty of the trajectory of the pandemic and and our decision was not to hold finished goods inventory, but the whole debt.
Tori and a lean way in and components and farther up the value chain. So at this point, we haven't seen major issues in terms of supply disruptions. So.
So far so good on that on that count so based on everything we see today, we are confident and our ability to meet demand going forward.
Your next question comes from the line of Mike Dobro from Baird. Your line is open.
Thank you and good morning, everyone all right.
And then ask.
I wanted to ask a question around restructuring.
Restructuring and in 'twenty one.
And excluding and now from earnings.
It would imply to me that youre expecting restructuring activity and should we.
Picked up maybe quite a bit and.
I guess I'm wondering what's left to do here what are some other portions of the business that you believe you need.
More tweaking and I'm wondering if you've got portions where youre outright trying to either reduce capacity where take all footprint, maybe that goes back to David's question on on Europe and.
Some of your businesses that maybe you have some.
More structural concerns.
Long term.
Yes.
So again as I mentioned earlier, we are continually looking for ways to improve our competitiveness and reduce our cost structure.
And that means evaluating.
Not just our capacity, but also our footprint and where we are we previously publicly announced the decision to close that the Dortmund and lunar and hotel operations.
And to get to move closer to our customers and also to reduce cost. So again and my view that needs to be something that we continually do and it isn't just our factories and brick and mortar. It's also looking at <unk> at our back office operations as well and again always finding ways to improve our cost structure and be more competitive.
And so really the restructure and that we put in again is more reflective of our of our continuous journey to improve our competitiveness.
And I make just from the accounting perspective too referred to the fact, why we are excluding it from from.
Adjusted profit per share as I said in my remarks, when we get to a base level, which is between 100 $200 million. It is effectively.
At a level, where it's not material and therefore, it doesn't warrant us adjusting.
<unk> per share for that given the size of the spend the magnitude of the spend $354 million and as we say, we expect a similar level, maybe slightly higher and 2021.
That does require us to be consistent with where we've been in historic periods.
And therefore to exclude it on.
No.
And it causes you guys some challenge and because you have to go back and restate your models.
But unfortunately it is one of those things, which from a disclosure perspective is good practice for us to do.
Regards what the spend is obviously some of the spend will be ongoing programs as Jim mentioned, but some of those programs actually do have it on a multiyear program, they're not just a single year and so some of that spend does recur so all.
Obviously, we're not doing a big restructuring program would not announcing anything.
And it comes to your question about.
On some of the.
Thanks for the questions about all all is a more structural and long term concerns and this was.
Just really about tweaking, making sure we're doing the right thing to drive out cost.
Cost price.
Your next question comes from the line of Noah Kaye from Oppenheimer. Your line is open.
Thanks, Jim.
And this is really I think following up on.
Yes.
And your and your presentations there.
And you're seeing.
Mining RFP activity coming back.
And customer engagement growing can you talk about sort of growth trends.
And potential share gains or autonomous offerings.
And then clearly with the Marvell acquisition and you could leverage that to go from a very linear mining ecosystems and move to more dynamic on predictable markets like construction and quarry and waste. So can you talk a little bit about that dynamic as well, how youre seeing that playing out and the new quoting activity, you're seeing and the extent to which that.
The share gain opportunity.
And certainly we do continue to see a strong pull for automation and on autonomy by our mining customers and again, we believe it it delivers tremendous value. We've had customers say publicly that they are seeing productivity increases of 30% against their best man sites again, it's got a safety component for them as well that helps improve the utilization.
Their equipment, which is so important and we do feel strongly that we have.
Our competitive advantage with our autonomous solution and.
Generally and it requires a certain size in terms of our mind in terms of number of trucks for the capital investment to make sense, but we're continually working on and that as well. So theres a lot of opportunity going forward in mining with autonomy and you make a very good point now we are starting to.
Deploy some of those technologies, we have a lot of programs and work to apply to deploy a lot of that technology, whether it's autonomy semi autonomy remote control. Many of those same kinds of technologies into construction industries and it isn't one size fits all it happens over time, but again, we do believe there's applicability of many of those technologies.
Two our construction business over time, and that's something that we're working very hard on and again, that's part of our our R&D plan and.
And then time for one more question. Please.
Your final question comes from lost all of its.
Steve Volkmann from Jefferies. Your line is open.
Great. Thanks for fitting me in guys. My question is really about how to think about sort of working capital for 2021, maybe its and Andrew a question, but in the spirit of the SLP that I think has changed a little bit how you manage.
And all of this and I'm just curious if we should expect a normal working capital build with Rev.
Our revenue increases or if theres anything different to think about there. Thank you.
Yeah, Steve Thank you and.
One other things obviously, you would normally have expected and the year, where there was a downturn to see a working capital inflow.
This year and 2020, obviously because of the decision we took around inventories to make sure we held a little bit of extra inventory to.
And to buffer against supply disruption and all.
Demanding changes we have we will be in a situation and 2021, where we don't expect a big build of inventory so that helps.
Free cash flow, which gives us confidence that we'll be able to deliver on our free cash flow targets.
In 2021, the other thing just to remember on the working capital and cash flow basis, and is obviously last year and trade.
And in 'twenty, we paid about $700 million.
Short term incentive compensation, we will not have debt in 2021, so that will be again.
A strong boost to our cash position as we go through the year, but the one thing I would say that to me.
That has been really remarkable just to remind you again and <unk>.
And of significant turmoil well we've held.
And.
Sort of and additional inventory.
We've still been able to generate free cash flow of $3 1 billion.
This is a hugely cash generative company and one.
Which is I think sometimes investors do underappreciated.
Okay, and then we'll turn it back to Jim for closing remarks.
Well thanks, everyone for your time. This morning, we greatly appreciate your questions and Caterpillar face many challenges in 2020, and we're very proud of how our team responded we met the operating margin target that we communicated during our 2019 Investor day, well importantly, continuing to invest and expanded offerings and services to secure a long term future and and our team did this while having the best year.
<unk> on record for for employee safety and as I mentioned earlier, we <unk>.
Fully intend to emerge from the pandemic has and even stronger company. Thank you again.
Thanks, Jim and thanks, everybody, who joined US today, we appreciate your time with that every day.
Play of our call will be available online later. This morning, we'll also post the transcript on our Investor Relations website later today and.
Fourth quarter result, the video with our CFO and SEC filing with their sales to users data and our quarterly highlights are already posted their click on investors that caterpillar dot com and then click on financial to find those materials. If you have any questions. Please reach out to rather me you can reach rabbit R. E N G E. All underscore Robert.
Dot com and on metrics underscore, Jennifer and Cat Dot Com Investor Relations General phone number is 30967 and 54549, we hope you enjoy the rest of your day and the weekend and now I'll turn it back to Jason to conclude our com.
That concludes today's conference call. Thank you everyone for joining have a wonderful day you may now disconnect.
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