Q1 2021 Caterpillar Inc Earnings Call
Ladies and gentlemen, and thank you for standing by and welcome to the first quarter 2021 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. Thank you. Please go ahead.
Thank you Jason Good morning, everyone and welcome to Caterpillar is first quarter 2021 earnings call. Joining me. This morning are Jim and Bob <unk> Chairman of the board and CEO, Andrew Bonfield, Chief Financial Officer, Kyle Epley, Vice President of other Global Finance Services Division and Rob Rengel Senior IR manager during our call today, and we'll be discussing that.
And earnings news release, we issued earlier. This morning, you can find our slides the news release and a video recap and investors that caterpillar dot com by clicking on events and presentations all.
Also please note that we've published a new caterpillar and 2020 data book for investors, which you can also find today on the homepage of the IR website.
The forward looking statements, we make today are subject to risks and uncertainties well also make assumptions that could cause our actual results to be different than the information. We're sharing with you on this call. Please refer to our recent SEC filings and the forward looking statements reminder, and the news release for details on factors that individually or in aggregate and could cause our actual results.
All to vary materially from our forecast.
Caterpillar has copyrighted this call and we prohibit use of any portion of it without the prior written approval of the company.
Today, we reported profit per share of $2.77 for the first quarter compared with one dollar and 98 cents and the first quarter of 2020, we're showing adjusted profit per share and addition to our U S. GAAP results are adjusted profit per share was $2.87 for the first quarter that compares with the first part of 2020.
Adjusted profit per share of $1.65 adjusted profit per share for both quarters, excluding restructuring costs. The first quarter of 2020 also excluded a remeasurement gain of 38 cents per share, resulting from the settlement of a non U S pension obligation.
We provide on non-GAAP reconciliation and the appendix on this morning's news release, you can also find information on dealer inventory and backlog and all.
Earnings call slides speaking of slides before I turn it to Jim there have been a few questions. This morning on slide 16 key thoughts on the second quarter the final bullet.
We expect the operating profit margin percentage and the second quarter of 2021 to be moderately below the margin and the first quarter of 2021.
Now with that let's flip to slide three and turn the call over to our chairman and CEO Jim on body.
Good morning, Thanks, Jennifer I'd like to begin by thanking our global team for continuing to safely provide the essential products and services that enable our customers to support society. During the pandemic. Our engage team continues to execute our strategy, which is demonstrated by our first quarter results I'll begin with my perspectives on the first quarter and our supply chain before.
Discussing our end markets.
Starting with the top line on slide four we're pleased with the strong sales and profit performance and the first quarter sales increased 12% on better than expected growth and end user demand and the favorable impact of changes and dealer inventory.
The decision to hold extra caterpillar inventory to prepare for a potential increase in market demand served us well.
Total sales to users rose about 8% sales to users have trended better for the last three quarters from a year over year comparative perspective machine sales to users increased 13% in the quarter and construction industries and resource industries were stronger than we expected within construction industries Asia Pacific was particularly.
Strong led by robust growth in China.
Resource industries sales to users were flat as market conditions continue to improve in mining.
While sales to users for energy and transportation declined by 5% for the quarter. These results were roughly in line with our expectation and.
And reflected industry trends.
Dealer inventory increased about $700 million, which was about the seasonal build we expected that compares with an increase of about $100 million in last year's first quarter.
Operating profit and the quarter increased 29% to $1 $8 billion, driven primarily by higher volume and effective cost control and financial products.
We delivered an operating margin of 15, 3% adjusted.
Operating margin came in at 15, 8% and improvement of 230 basis points versus a year ago, and 300 basis points higher than our fourth quarter of last year, which had a lower level of sales.
Operating margins expanded in all three primary segments with the largest increase coming from construction industries Andrew.
Andrew will provide more color concerning our margin performance and a few minutes.
M E T free cash flow was very strong and approximately $1 $7 billion for the quarter.
Our quarterly dividend was unchanged and share repurchases remain paused in the first quarter.
I'll now provide a few additional comments about the external environment.
As Andrew will discuss we're not providing annual earnings guidance at this time.
We're pleased with our strong start to the year and there are positive signs and a number of our end markets. However, we're monitoring on a variety of external factors that could moderate the positive impact of continuing improvement in market conditions.
And these include the Pandemics recent acceleration and several overseas markets the potential for supply chain disruptions and cost pressures.
Areas of particular focus include semiconductors transportation and raw materials.
While none of these has significantly impacted our operations there remains the potential for impact later this year the situation remains very fluid.
And our team has been developing contingency plans, including workarounds and our factories that may lead to increased costs, we're working very hard to avoid or minimize having supply chain issues lead to production shortfalls that might impact our ability to fully meet improving customer demand.
And now moving to slide five I'll share some thoughts on our end markets based on what we see today star.
Starting with construction industries, North America will continue to benefit from strong residential demand.
We see nonresidential construction recovery and a gradual pace with infrastructure recover and faster than non residential building.
We expect growth in Asia Pacific to remain robust through the first half driven by China.
Government spending on infrastructure and China has fueled strong excavator demand, including strong demand for our new G ex excavator and line.
We see improving demand in E. Amy and continued recovery in Latin America as well, although we are monitoring the recent acceleration of COVID-19 and some Latin American countries.
Turning to resource industries, we anticipate continued improvement in demand, particularly in mining.
Favorable commodity prices support higher capex for mining customers.
We continue to feel optimistic about mining.
We have a strong value proposition, particularly in autonomy enabled products.
We also expect growth and heavy construction and quarry and aggregates off a low base.
And energy and transportation, we expect strengthening across a number of applications.
Oil and gas should continue to slowly improve from low levels as customers remain disciplined with our capex spend.
The power generation market should benefit from continued strength in data centers.
Industrial is expected to see growth with activity strengthening across most applications.
In transportation rail and marine are expected to see slight improvements from the first quarter, although from a low base.
We expect the company's topline to reflect normal seasonality in the second quarter.
Turning to slide six we expect to meet our Investor day targets for adjusted operating margins and 2021.
As we stated before our target is 300 to 600 basis points of improvement and our adjusted operating margins versus the 2010 to 2016 period.
We've delivered at this level for four straight years now, including during the pandemic, which is a testament to our talented team and focused execution of our strategy.
Machine energy and transportation and free cash flow was strong and the first quarter. These.
These results strengthen our confidence that we'll meet our investor day target for M. E T free cash flow in 2020 one the.
And the target is $4 billion to $8 billion are $1 billion to $2 billion higher than we generated in the 'twenty 10 to 2016 period.
We paid annual higher dividends to shareholders for 27 consecutive years, and we're proud of our status as a dividend aristocrat.
And we're working with our board of directors on decisions concerning the potential dividend increase later this year.
We're also discussing with our board the appropriate time to recommence share repurchases.
It remains our intention to return substantially all of our M E T free cash flow to shareholders through the cycles.
Turning to slide seven and we remain committed to our strategy, which we launched in 2017.
The strategy is focused on services expanded offerings and operational excellence to drive long term profitable growth.
We continue to invest and expanded offerings and new technologies and services as we did throughout 2020.
In February we closed on our acquisition of the oil and gas division of the Weir Group plc, and launched S. P M oil and gas.
This strategic transaction enhances our ability to serve existing customers by enabling us to offer a more complete integrated solution from engine to wellhead.
In fact to lower their carbon footprint. Some customers have placed orders for S. P. M 5000 horsepower pumps paired with Cat G 35, 20 natural gas power generator sets for used and electrified pumping applications.
We also continued to invest and our digital capabilities to allow us to leverage our more than 1 million connected assets.
And we're developing proprietary all grew rhythms called prioritize service events or P. S sees that.
Mike qualified services leads to our global dealer network.
Our leads arrange from repair options that our asset serial number specific to complete fleet level solutions.
We continue to make it easy for customers to have more predictable maintenance costs through customer value agreements or C. D. A's.
During the past quarter, we released our first diversity and inclusion report.
The report describes our journey to build a more globally diverse workforce and inclusive environment to support our employees and the communities, where we live and work we value diverse perspectives and strive to ensure our global team reflects the many communities and customers we serve around the world.
We're currently preparing our 2020 sustainability report, which will highlight progress against our 2020 goals and introduced new sustainability goals.
We're committed to contributing to our reduced carbon future by continuing to reduce caterpillars greenhouse gas emissions and helping customers achieve their climate related objectives.
In summary, I'm pleased with our strong start to the year and proud of the performance by our global team.
With that I'll turn the call over to Andrew.
Thank you Jim and good morning, everyone.
I will start out with an overview of our first quarter results.
And then I will discuss segment performance and the balance sheet before concluding with some comments on the second quarter and remainder of 2021.
As we reported this morning and shown on slide eight sales and revenues for the first quarter increased by 12% to $11.9 billion on higher volumes.
Operating profit of $1 $8 billion rose by 29%, reflecting margin expansion, primarily due to higher volumes.
First quarter profit per share was $2.77 compared to one Goldman 98 cents and 2020.
Adjusted profit per share was $2.87.
It was a strong quarter and.
And user demand was better than our expectations, primarily and construction industries, which also led to higher operating margins than we anticipated.
Our adjusted operating profit margin increased by 230 basis points to 15, 8%.
The higher operating profit reflected higher volume solid execution, good cost management and strength and the financial products portfolio.
These benefits more than offset the impact of reinstating the short term incentive compensation program.
Looking more closely at the top line on slide nine the 12% increase from reported sales from revenues reflected strong growth and Asia Pacific Latin America and the Amy.
North America was about flat.
In aggregate sales to users increased by 8%.
Dealer inventory rose as is seasonally typical led by construction industries.
It increased by about $700 million versus an increase of about $100 million last year.
Sales to users for construction industries increased by 17% versus the prior year as end user demand principally in North America was better than our expectations.
All geographic regions improved.
ZIP Pacific Rose, 36%, Latin America Rose, 38% and D. Amy Rose 11%.
North America increased 5%, making making marking its third straight quarter of sequential improvement and quarter over quarter end user demand.
Resource industries, which tends to be lumpy was flat, whereas we had expected a modest decline.
Energy and transportation sales to users decreased by 5%, which is broadly in line with our expectations.
And stronger demand availability remains within our normal ranges for the vast majority of our products.
However, we've had some isolated instances impacting a handful of products such as to compact product families and that building construction products portfolio.
And these cases, we haven't been up to ramp up production as quickly as we'd like mostly due to isolated issues with a small number of specific surprise and all labor availability.
We are working hard to resolve these issues.
Now moving to slide 10.
Operating profit increased to one $8 billion to 29% improvement reflected better volume and a three primary segments and high profit from financial products.
That was partly offset by the impact of restore and short term incentive compensation and some of them from unfavorable price.
Excluding the impact of short term incentive compensation and manufacturing costs were favorable.
We did see some benefit from lower material and warranty costs.
We also had benefits from high absorption of our manufacturing costs due to the level of caterpillar inventory, we built and head of our second quarter selling season.
And obviously sudden and spending such as travel and consulting is still being impacted by the lingering effects of COVID-19, which further improves our overall margins.
In total we delivered an adjusted operating margin of 15, 8%.
The effective tax rate is 26%, which is the lower end of the range we anticipated in January.
That excludes discrete tax benefits of $43 million or eight cents per share and the first quarter.
Now, let me discuss the individual segments results for the first quarter beginning on slide 11.
For construction industries sales increased by 27% to $5 $5 billion compared to the prior year.
Volume improved due to higher end user demand and the impact from increases and dealer inventories.
And uses demand increased across all regions and was especially pronounced in Asia Pacific.
This was led by China, which was negatively impacted by the pandemic and the first quarter of 2020, while supported and the first quarter of this year by government and infrastructure spend.
And North America High end user demand was primarily fueled by residential construction.
In total Divas increase inventories by more this quarter compared to the prior year, principally in the Asia Pacific region, which benefited from a later Chinese new year.
The segments first quarter profit increased by 62% to $1.035 billion due to leverage on higher sales volume.
Unfavorable price realization and reflect a geographic mix as the mix of shows sales shifted towards the Asia Pacific region.
This and the impact from Green setting of short term incentive plan, partly offset the volume benefits.
The segment operating margin increased by 410 basis points to 19%.
As shown on slide 12 resource industries sales increased by 6% versus the prior year to $2 $2 billion.
The most significant drivers were changes and dealer inventories and higher end user demand for equipment and after market parts.
And user demand increases were driven by mining.
Commodity prices, coupled with an increased mine side activity were both supported.
Demand in heavy construction and quarry and aggregates remains subdued.
Sales increase and Latin America, and D. Amy were about flat and Asia Pacific and decreased and North America.
The segments first quarter profit increased by 8% to $328 million.
The improvement was mainly due to lower manufacturing costs and higher sales volumes.
Manufacturing costs reflected benefits from cost absorption lower warranty expense and improvements and efficiency.
Price realization was a partial offset and the quarter due to several large strategic deals.
These field support a higher fuel population and services growth and the future making them attractive over the long term.
These benefits were partly offset by the impact of reinstating a short term incentive plan.
The segments operating margin rose by 20 basis points to 14, 8%.
Now turning to slide 13, first quarter sales of energy and transportation increased by 4% to $4 $5 billion.
That included 6% sales increase and oil and gas largely due to higher sales of reciprocating engine after market parts and North America.
Power generation sales improved by 13% due to increased sales with turbines and Toby and related services as well as large reciprocating engine applications as data center activity remains strong.
Industrial sales were about flat.
Transportation to come by 12%, mostly due to lower deliveries of locomotives and related services and North America, as well as lower activity and marine.
And in TS first quarter profit increased by 11% to $656 million.
The improvement was led by higher sales volume, including inter segment sales and favorable variable manufacturing costs.
That was partially offset by the impacts of short term incentive compensation expense.
This segments operating margin increased by 100 basis points to 14, 8%.
And as Jim mentioned, we closed on on acquisition of SPM oil and gas and early February and the integration is going well.
The impact was not material to other sales or earnings for the quarter.
Moving to slide 14.
Financial products revenue decreased by $53 million or 7% to $761 million.
The decline was due to lower average financing rates and lower average, earning assets and North America.
However segment profit improved on both a year over year and sequential basis.
Segment profit of $244 million increased 132% year over year led by the Mark to market impacts on equity securities and our insurance services portfolio and.
In addition to a lower provision for credit losses at Cat financial.
The provision was favorable due to impart the absence of forecast and COVID-19 related impacts, which reduced our allowance for credit losses.
Beyond these have impacts financial products profit was relatively flat and the quarter.
Post use at the end of the first quarter with two 9% down 123 basis points year over year and down 15 on basis points compared to the fourth quarter of last year.
Credit applications remained strong as well up 25% compared with the first quarter 2020.
While credit applications and the first quarter decreased compared to the fourth quarter. The sequential reduction was much smaller than normal seasonality would suggest which bodes well for the future.
Loan modifications with generally inline with historical trends aside from a few countries where government. The government is still mandating modifications due to COVID-19.
We're pleased to see the overall our customers remain in good financial health.
Now on slide 15, as Jim mentioned, we expect to achieve our Investor day targets and machinery energy and transportation and free cash flow of $4 billion to $8 billion. This year.
Free cash flow from Amy and T was about $1 7 billion goes and the quarter versus about zero and the first quarter last year.
The increase reflects higher profit the absence of a short term incentive compensation payout and favorable working capital the latter being due to a higher payables.
And the first quarter Caterpillar inventory rose about $700 million versus the fourth quarter as we increased production to meet improving and user demand.
We are happy with that decision to hold a higher levels of inventory as we exited 2020 as this and has enabled us to ramp up production and the first quarter to meet that demand signals.
As Jim said, there is potential for supply chain disruptions and cost pressures on the horizon and we're working hard to meet those challenges.
We maintain a strong liquidity position and ended the first quarter with $11 $3 billion and enterprise cash.
Our balance sheet remained strong we now have mid a credit ratings across all of the major major rating agencies as Moody's upgraded its rating on Caterpillar last week.
And our intention continues to be return to return substantially all immune T free cash flow to shareholders through the cycles via dividends and share repurchases.
And the last three years, we've returned a 106% about immune T free cash flow to shareholders.
We recently declared our normal quarterly debut and dividend of $1 <unk> per share or $560 million per quarter.
We expect the board will review and potential dividend increase later this year.
We also expect to recommence share repurchases later this year.
We are not providing guidance for two trench and 21 and I'll explain the reason why.
And the current time, we are positive about the improving market conditions.
On the other hand, there are some known risk, which are hard to quantify and the impacts of such that the range of possible outcomes for 2021 while still positive is actually quite wide at this stage of the year.
Turning to slide 16, overall, we expect second quarter sales to follow normal seasonality.
We also expect overall growth and sales to users versus the prior year's quarterly comparative to be a significantly higher percentage than we saw and the first quarter.
That is mainly due to easier comparisons.
And I reminded that the second and third quarters. So the biggest impacts from the pandemic on total sales who uses and 2020.
We also don't expect to see a significant change and dealer inventories compared to the to the end of the first quarter of this year.
And construction industries, we expect sales to users use us to show continued positive growth as strength in residential construction in North America continues.
Non residential construction is expected to recover at a gradual pace throughout the year.
We expect China construction to remains strong, although the comparator switch China become more challenging and the second half of 2021 versus the prior year as China recovered more quickly from the effects of the pandemic.
We expect strong end user demand and resource industries compared to the prior year's quarter as demand and both mining and heavy construction and quarry and aggregates are expected to increase due to supportive commodity prices and the restart from investments that would delayed last year.
We expect to see continued improvement and end user demand of the rest of the year as orders are strong amid increasing monarch monarch capex spend.
We also expect the recovery of heavy construction and quarry aggregate and aggregates from their low levels in 2020.
We expect energy and transportation sales increase versus second quarter of 2020.
We expect oil and gas sales to have a slight growth, but customers rule remained disciplined with capex.
Solar has a strong second quarter and 2020 due to the timing and deliveries, which will make the comparisons tougher.
Power generation and industrial all expected to grow versus the prior year.
We expect slight improvement and transportation sales and.
Marine should improve but remain at low levels and ROE is expected to be relatively flat.
Looking ahead to the rest of the year, we expect a modest recovery through the year sales and the and tea and coffee.
The increase across all applications.
Recovery in oil and gas should be slower as excess capacity and inventory overhang could limit limit upside.
And power generation and data centers should lead and overall improving industry.
Our expectations, so, let's not change and so we expect a relatively flat year.
Industrial should grow moderately.
Transportation should improve on strength and rail services and international business, while we expect marine to remain at lower levels.
Dealer inventory remains near the low and at the normal range.
Changes in dealer inventories going forward will depend on a number of factors, including their views of future demand as well as supply chain and limitations.
At this stage, we do not expect a significant benefit from restocking in 2021.
As I discussed earlier first quarter adjusted operating margins were particularly strong improving by 230 basis points. Despite the impacts of reinstating short term incentive compensation.
There are a number of reasons why we expect the margin improvement moderates as we go through the second quarter and the rest of the year.
We saw positive material costs from the first quarter as the benefits of holding more inventory in 2020 flow through the P&L.
With the supply chain pressures and rising commodity costs, we expect material costs to become a headwind starting with the second quarter.
Freight costs were negative in the quarter.
The constraints on price of all known and will continue to impact us as we go through the year.
Specific to the second quarter, we do expect absorption to be a headwind as we built caterpillar and between the first quarter hit and selling season.
On the other side of the equation, we expect price to become favorable as we go through the year as geographic mix improves and the impact from price increases increasingly flow through particularly in the second half.
SG&A and R&D expenses increased from the first quarter due to short term incentive compensation expense.
And as we progress through the year, we expect spend in these areas to accelerate.
COVID-19 related restrictions on things like travel or impacting spend and we all also anticipating ramping up R&D project spending to support our services growth strategy as well as new product development.
Investments in R&D can be comfortably manage within our Investor day March and targets.
As Jim mentioned, we remain positive, but were diligently monitoring the risks and their potential impact going forward.
It's a fluid situation in terms of potential supply changes raw material cost pressures and pandemic related concerns areas, where we have varying levels of control.
Our aim is to minimize the impact of these factors and maximize factory uptime. So we can satisfy improving customer demand.
Looking at some of our technical guns, we had approximately $350 million from restructuring expense and 2020 and.
And we still expect about $400 million from restructuring expense for 2021.
The headwind from incentive compensation will now be approximately $325 million per quarter versus the $225 million estimate and in January.
We now anticipate a tax rate of 26% for the full year, which is at the lower end of our product range.
Our estimate for Capex this year remains about $1 $2 billion.
Turning to slide 17 and.
In summary, we expect to beat on Investor day targets for adjusted operating margin and Amy and T free cash flow in 2020 one we.
We continue to execute our strategy by investing in services and expanded offerings.
These help us achieve a strong topline growth and solid margin expansion and our three primary segments as well as higher profits from financial products.
He was a strong start to the year, they're awesome list that we have to deal with this moving forward, particularly around the supply chain, but we all positive about the year and our team's ability to meet improving customer demand.
With that we're happy to take questions.
That kind of thing.
At this time, we will open the Q&A session. Please limit your questions to one we will pause for just a moment chicken Paul the Q&A roster.
Your first question comes from the line of Ann Duignan from Jpmorgan. Your line is open.
Hi, good morning, everybody and good.
And then.
And so.
My question and your last comments, there, but I will just go back to it again for modeling purposes could you talk a little bit about the cadence.
Revenue and earnings through the rest of day or I appreciate that margins would and began in Q2, given the absorption you got from inventory and building in Q1.
Things and King control can you talk about them and a little bit more detail and R&D spend for the year SG&A as a percent of sales.
Maybe and how much of your steel is hedged versus not hedged given.
And the stronger than expected demand and then yes.
Comments and.
Potentially not being able to meet and market demand this year and.
Are you confident that dim.
And when we roll into 2020, two and extend the cycle or is there any risk that.
And it is market share on that day.
And at disappearances and market and as customers get such great. Thank you.
Well good morning, and I think all of this is Jim I'll answer your last question first and I'll turn it back over to Andrew for the rest.
Just on the supply chain as we mentioned you know, we're working very hard to avoid or minimize allowing supply chain issues too to lead your production shortfalls that that would impact our ability to meet but is improving customer demand. So at this point, we are not saying that will definitely have a problem. We want to flag that it's a risk that we're managing.
But certainly our goal is to again work very hard to to minimize or limit any any impact there. So I don't want to speculate on going beyond that that's really where we are.
Okay, and then talking about overall margins as I indicated.
A few months ago.
We actually saw material cost favorability and the first quarter.
So a couple of reasons, obviously the inventory that we held at the end of 2020 flow through the P&L now.
And also as you we do buy steel forward.
We have about a three to six months for contract normally on and still purchases.
So we do expect a material cost to move from positive and negative as we move forward.
However, we all pricing accordingly, and with Jim and Geo mix as well as becoming favorable we hope to be able to offset the two obviously there is continued risk obviously on immature and inflation as we look all overall, though as we always remind you commodity costs are commodity increases all net positive for us of caterpillar.
Because it helps our customers buy more.
On SG&A and R&D.
Spain was relatively low and Q1 part of that obviously, although obviously, we did have a short term incentive comp increases part of that obviously is and the environment was still working and it is still ramping up going on on projects. You. Obviously, if you've got a new project. We ended a lot of projects at the end of last year, starting them it becomes a lot more.
And in an environment, where people on all together, we expect that to accelerate as we go through the year that particularly will impact all R&D spend.
And then obviously travel will impact SG&A as we get people back out on the road and people want to go out and meet customers that will impact as we go forward. So those all of the sort of beds. So far as the top line is concerned I mean, obviously.
And that's going to depend on as we talked about the ability to meet.
The demand profile out there and.
And how I see customers feel as we go through the year as.
As we indicated demand signals are improving.
And obviously, that's going to be something we'll continue to monitor and may impact overall, how the quarters trend out from a topline perspective.
And just a reminder, one question per analyst day, and see what next.
Your next question comes from the line of Brett Linzey from vertical research. Your line is open.
Good morning, and thank you.
I wanted to come back to your comment that you expect to meet your adjusted operating margin target.
Maybe just a little more context, there or are you, suggesting the and the midpoint is a reasonable expectation or are there particular.
Corridors within that range, you know upper half lower half as a good planning assumption for the year.
Good morning, Brett. Thanks for your question you know, we're not going on going to try and go into that level of detail. So what we're saying is that we will be within our our our target range for adjusted <unk> adjusted operating margins, but again with all the puts and takes that we've described this morning were not going to get into.
Telling you exactly where we are within that range and we expect to be within it.
Your next question comes from the line of Jamie Cook from Credit Suisse. Your line is open.
Hi, good morning, and nice clutter Mike.
And as with Mike. My question is with regards to research I think you talked about in your prepared remarks, some strategic deals as you're trying to grow.
And your service business. So I'm just wondering is this sort of a one off thing is there's something.
And that will happen more often within resource that you try and agree with that.
Your service business and the implications for margins for your resource business throughout the cycle because of these initiatives. Thanks Bob.
Thanks, Jamie and you know within resource industries, and we have it and energy and transportation and occasionally as well, it's a lumpy business, where you can have a large project move quarter to quarter and move our margins move our price realization and the comments that we made were in the context of price and we talked about the fact that we had a large strategic because and larger dziedzic deals.
Count and the corner book and the quarter that impacted price. So we always when we look at a project we take into account the future services opportunity, we always do that and so again with those multi businesses you should expect things to move around quarter to quarter and what we're really focused on is that long term profitable growth that comes from growing services ceding.
Seeding the seeding the population growing the aftermarket, but youll see things move around up and down.
You know, we see that and both <unk> and T and and resource industries, and I think that will continue.
Your next question comes from the line of make Dobra from Baird. Your line is open.
Thank you good morning, everyone.
I was wondering if you can maybe provide a little more context around what youre seeing and mining certainly youre sounding more positive and kind of curious if you can.
Maybe talk a little bit about how your order you all.
The backlog has been progressing.
So on commodity prices out there are back to prior highs and 2011. So I'm kind of wondering here are you actually starting to see a real.
A replacement cycle on the OE side, starting to develop thank you.
Mike Thanks for your question and and as you indicated certainly copper iron iron ore gold all very very strong and we've been talking about this and for the last few quarters that you know, we're having very positive conversations with our mining customers, certainly, they're being disciplined and their and their capital expenditures, but things are improving so our orders are.
Our improving there's a number of projects that we're tendering that are multi year in nature.
And we feel very positive about our competitive position because of our autonomous solution.
Across a number of products so again.
As I've talked about earlier, we're not expecting it.
Very fast ramp up or spike, we're seeing more of a gradual improvement and and that's continuing and so again, we're quite encouraged by what we see and we stop and think about how caterpillar is positioned from a from a mining perspective as the energy transition occurs with the growth of Evs with just the amount of demand that will be created by that cash.
And we're very well positioned to take advantage of that and and to serve our customers make them more successful and it'll be good for us and our dealers as well.
Your next question comes from the line of Rob Wertheimer from Melius Research. Your line is open.
Hi, good morning, and thank you.
And my question is on connected asset you touched on it briefly and I just wonder if you can detail.
Any more progress for the opportunities seem to be widening as you look into what you can do for your customers.
And your targets and then just in general we've seen some industrial company and start to partner with.
You know with tech companies and maybe for the AI or the.
And machine learning analytics side of it and you've maybe on foot.
On that road.
Back again.
Does it feel like your strategy is fully flushed out and what you're going to do with it or are you still learning and might you still partner or is there something else you need.
And update please thank you.
Thanks, Rob and.
Services is it and never ending journey, and so and it will never be done and you know wage is and I know youre aware, we've we've invested heavily in our digital capabilities and we're continuing to do that.
We are we've got over a million connected assets and we are now working to leverage those connected assets to find ways to add value our customers and again that net and also adds value to caterpillar and our dealers.
I mentioned in my prepared remarks about prioritize service events or <unk> that is something that were flushing out and to continue into and invest in so if your question is are we there yet no. We're not there we're continuing to invest this is a long journey.
But we're more pleased by the progress that we've been making over the last two or three years.
Your next question comes from the line of Ross Gilardi from Bank of America. Your line is open.
Thanks, Good morning, guys.
Warner on Earth.
I just wanted to go back to a question I asked a few quarters ago, it sort of piggy backs off of Bob.
Migs question.
On mining and is.
Is there anything structural that that's holding you back and your core mining equipment business to offset some of these positives that.
And that you mentioned and I'm not talking heavy construction and quarry that is core mining equipment, whether it's coal exposure I mean, it's autonomy and any way cannibalizing newly.
New equipment demand, it's just it's a bit puzzling that the business is still doing two to two and a $5 billion of revenue per quarter, which is pretty much where <unk> been since 2014 and should we think of all.
All right.
Sort of long term just range bound and an $8 billion to $10 billion annual revenue range through the cycle.
Well as I mentioned earlier again, we are optimistic about our mining business, we believe that mining and will benefit from many of the trends that are occurring in terms of the energy transition and we're very pleased with our competitive position due to autonomy and and and other capabilities that we have as well our dealers are products support so actually work.
And quite optimistic and so you know on it.
Quite the opposite really of being negative about it we're quite optimistic about the opportunity for future profitable growth and mining.
And we've been talking for a number of quarters that we don't expect a rapid P. Carb rapid acceleration, we've talked about a gradual improvement and and I think we've talked about the last few the last few quarters and that's what we're starting to see so again things are playing out very much as we had expected and as we shared with all of you and our previous earnings calls.
Your next question comes from the line of Nicole <unk> from Deutsche Bank. Your line is open.
Thanks, Good morning, guys and.
Good morning.
Can we just talk a bit about the price cost.
Amit.
And from a competitive perspective, your ability to raise price to combat raw material inflation throughout the rest of the year.
Yes, and Nicole it's Andrew and good morning, Yes, I mean, obviously as I am.
Indicated in my remarks, we do expect that.
Obviously raw material inflation is going to have some impact later this year through the remainder of the year, we all pricing for that.
We do not see at this stage and issue with that pricing.
So we all comfortable increases we're putting through on not going to have an impact as you always know caterpillar is normally the price leader on.
That helps us and the environment, we put through very modest price increases and the beginning of the year. So that data enabled us to have a little bit more scope to put further price increases from now.
Your next question comes from the line of Steven Fisher from UBS. Your line is open.
Thanks, and good morning wanted to just ask you a little bit more about the mix in construction and how that will affect margins.
Sounds like Youre on.
Anticipating a little bit of a shift from residential to perhaps.
Commercial and heavier applications and maybe there could be a bit of a rotation from Asia to North America is that how you're seeing it and maybe about the timing of that shift and.
And sort of what you're counting on and to help mitigate the price cost dynamics from mix over the course of the year. Thank you.
Well good morning, Steven.
And I don't believe we talk really about a shift from one of the other and what we talked about is that the fact that the residential is quite strong and we see some improvement in AR and in heavy construction starting to happen.
Asia, there's the visits and a normal.
And the selling season that occurs and China associated with Chinese new year. So I wouldn't talk about it really is a rotation I would just talking about it as and in some ways and normal seasonal patterns, but in other ways again and improvement in that heavy construction, which has been quite.
Right.
Quite depressed so we're starting to see some improvement there.
I'd characterize it that way as opposed to a rotation and I think also Steve as we always look out I mean, we tend to look at margins and managing them over many quarters, rather than just individual quarters. So obviously.
While there may be mix impacts from quarter to quarter pricing impacts from things like genomics and so forth obviously, they're all other things that go the other way. So we will always looking at the overall margin structure and.
And making sure we manage that appropriately.
Your next question comes from the line of Adam Uhlman from Cleveland Research. Your line is open.
Hey, guys good morning.
Good morning, I was wondering.
I was wondering if we could.
Expand on the dealer inventory positions right now and.
If you could share your thoughts about how you're thinking about that and the rest of the year. Because I think you indicated that you thought they would be stable into the second quarter.
At the same time dealer inventories at the low end of your range and.
I think you indicated that you're at normal availability for the majority of your products I guess whitewood dealers not build up more to get kind.
The average level of your targeted ranges.
Well and thanks for your question and and Oh, we have to remind you of course dealers are independent businesses and they control their on inventory and what we.
We're really focused on is meeting and user demand.
We've talked about the strength and stews and the improving situation and a number of markets that we serve and we've talked a bit about some of the supply chain challenges, but our laser focus will be on ensuring that doing our very best to meet that debt and use your demand and all we're saying again dealers are independent businesses all were trying to predict here at this point.
Is that we don't anticipate as we sit here today, a significant increase in dealer inventory in 2020. One so we're producing closer to demand and and of course dealer inventory.
Again be dependent on a whole wide variety of factors.
Your next question comes from the line of Steven Volkmann from Jefferies. Your line is open.
Great and good morning, everybody I had a mixed question as well, but in resource from the channel checks seem to suggest that we are seeing stronger order activity from machines relative to parts, which is a little bit counterintuitive from wells Fargo.
On the segment I'm, just curious if youre seeing that as well and and why you think it might be.
And I think maybe what we're seeing is is just <unk> and improvement in OE again, as we've mentioned earlier on the call. We're starting to see some some improvement in the heavy construction part of our eye off of a relatively low base, but we're also seen and and <unk>.
<unk> churn in mind and orders that is gradual but as you'll see that that that certainly could have an impact on mix.
Your next question comes from the line of Chad Dillard from Bernstein. Your line is open.
Hi, good morning, guys.
Morning, Jeff.
Just a question on all cost.
And our margins are and sell to clarify a couple of things.
So first of all with price cost and assuming commodity and stay where they are.
Do you foresee the price cost balance at least neutral exiting this year or you will probably take.
Like 22 products materialize.
And then just on operating margins and mine.
All right.
Assuming that op margins.
Highest and <unk> drifting down through the rest of the year.
Yeah. So first of all on the on the <unk>.
Sort of price cost what we're expecting is for the overall for the full year to be and about balance that space on plans today.
Forecast today, all the C. One of the things we're pointing out is supply chain risks are out there, which doesn't mean that there and that.
And that includes raw material risks, which might impacts on pricing as we go forward, particularly on the cost side as we go through the balance of the year. So that's one of the things we.
We will keep on on Odyssey.
What we talked about and.
Where we've done everything we were really saying about operating margins at this stage is that they will be within the investor day target range.
And that obviously and the first from Q1 to Q2.
We do expect that obviously operating margins will moderate slightly in Q2, mostly due to the factors I spoke about earlier absorption rates being one of them, but also obviously the timing of our price cost as well as that comes through.
Your next question comes from the line of Joel tests from BMO. Your line is open.
Hey, guys How's it going on the Orange Rockland.
Nice quarter, good good free cash flow unbelievable.
Wonder if you could just give us a little.
Your editorial on between customer commentary on your unique position in this market like like how durable do you feel like.
The customer commentary like the recovery is going to be and for 'twenty. Two 'twenty three I'm not asking from forecast just sort of your color from all the different inputs you guys get.
Okay. Joe you asked it most difficult question on the morning, so far.
So so so certainly we've talked about maybe the way to do this just talk about various markets. We've talked about mining and we've talked about the fact that we we expect that that gradual increase to continue we have no reason to think that it will stop but again, it's very difficult for us to try to to judge out what's going to happen two or three years and when we put our strategy.
And together and 'twenty and 2017 when things were really focused on is performing better at all points in the cycle and we talked about having 306 hundred basis points better on operating margin, regardless of where we were and that cycle compared to the historical past, which we defined as 2010 and 2016 and also producing $1 billion to $2 billion of incremental and E&P free cash flow.
And all points in the cycle. So that's what really what we're really focused on so.
And again as we sit here today, we are optimistic about what we see.
Things are improving and some markets that had been been depressed we've talked about the strength and mining, but again, it's just very difficult to try to judge what will happen two or three years out. There's so many factors that can impact it.
Your next question comes from the line of David Raso from Evercore ISI. Your line is open.
Thank you all my questions on the dealer inventory.
And in 2020 at the lower end of the normal range of months and sale.
And if we're not going to see a restock this year.
Inventory, while retail sales will grow with it does suggest the months of inventory.
Relative to sales is going to be even lower at the end of the year.
Obviously that sets up a very positive 22 from your machine production.
And if retail sales were flat.
Yes.
And this is Tom.
And that too.
Scenario plays out on how far below normal.
Would you expect dealer inventory to be at the end of the year.
Yes, David as we've tried to indicate we're not expecting this year is a significant increase and dealer inventory that doesn't mean, there won't be any so dicey because obviously as you quite rightly pointed out if the delorme single continues to improve obviously dealers would normally want to hold more inventory with folks.
On is making sure we can meet demand and the current year and.
And end user demand and given some of the all obviously challenges and risks that are out there that is really our focus rather than concentrating on what we think actually gear and inventory will be obviously, we'll see how that pans out for the remainder of the year and see how dealers are thinking about 2022, as we get to the end of the year at this stage.
Your next question comes from the line of Jerry Revich from Goldman Sachs. Your line is open.
Yes, hi, good morning, everyone. Good morning, Gerry Gerry.
One other points from your customers on the mining side is there also studying their long term C. O two reduction targets and I'm. Just wondering if you can talk about the opportunities that they have with your products to reduce their C O two levels.
You'd care to comment on when hydrogen and mining trucks is feasible in your view.
Within that equation. Thanks.
Alright, well, thanks, Gerry and certainly we're working with our customers and mining and in other areas of our business as well to help them achieve their climate related objectives, and you know it's a bit early to make any any kind of announcements here. This morning, but certainly we're in discussions with with our mining customers and we'll work to help them meet their their objectives.
Okay with that and I'll turn it back to Jim to make and for closing remarks.
All right well again I appreciate everyone. Joining us this morning couldn't be more proud of the team and how they how they performed and the first quarter.
A lot of positive signals, we've talked about some challenges we had but we're managing our way through those we appreciate everyone's attention. This morning. Thank you.
Thank you Jan Thanks, Andrew and everybody, who joined US on the call today. We appreciate your time with that a replay of our call will be available online. Later. This morning, we'll post the transcript on our Investor Relations Web site later today.
Quarter on results and video with our CFO and and SEC filing with their sales to users data are already posted there has our updated five and the new caterpillar 2020 data, Bob and I mentioned earlier.
Find the diversity and inclusion and report that Jim referenced click on caterpillar dotcom and careers and diversity and inclusion and if you have any questions. Please reach out to rather me you can reach rabbit wrangle underscore rabbit cat dotcom and not just go underscored Jennifer Cat Dot Com Investor Relations General phone number is 309.
Six seven and 54549 and we hope you enjoy the rest of your day and have a nice weekend and now I'll turn it back to Jason to conclude our call.
That concludes today's conference call. Thank you everybody for joining you may now disconnect.
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