Q2 2021 Caterpillar Inc Earnings Call
Okay.
Okay.
Welcome to the second quarter of 2021 Caterpillar earnings.
Conference call. Please be advised that today's conference is being reported I would now like to hand, the conference over to your speaker today, Jennifer Driscoll. Thank you. Please go ahead.
Thank you Whitney and.
Good morning, everyone welcome to Caterpillar second quarter 2021 earnings call with me here today are Jim I'm, Bob <unk> Chairman of the board.
And CEO, Andrew Bonfield, Chief Financial Officer.
Hell I believe vice President of Global Finance Services Division, and Rob Rengel Senior IR manager.
During our call. This morning, we'll be discussing the earnings news release, we issued earlier today you may find our slides the news release and a video recap at investors that caterpillar Dot com.
Simply click on events and presentation moving to slide 2 the forward looking statements. We make today are subject to risks and uncertainties. We will 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 the 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 materially from our forecast cash.
Pillar is copyrighted this call and we prohibit use of any portion of it without our prior written approval.
Today, we reported profit per share of $2.56 for the second quarter of 'twenty, 1 compared with 8.
All of it or 84 cents every night $84 a profit per share in the second quarter of 'twenty 'twenty, we're showing adjusted profit per share. In addition to our U S. GAAP results. Our adjusted profit per share. It was $2.60 from the second quarter compared with second quarter 2020, adjusted profit per share of $1.27 adjusted profit.
But per share for both quarters, excluding restructuring costs. The second quarter of 2020 also excluded a remeasurement loss of <unk> 19 per share, resulting from the settlement of pension obligations. We provide a non-GAAP reconciliation in the appendix to this morning's news release, you also can find information on dealer inventory.
<unk> backlog in our slides.
Now, let's flip to slide 3 as we turn the call over to our chairman and CEO Jim empathy.
Jennifer Good morning, everyone as we close out the first half of 2021 I'd like to thank our global team for their strong performance in a challenging dynamic environment, we continue to X.
Cute our strategy for profitable growth and remain focused on the safety of our employees.
We're encouraged by higher end user demand in the majority of our end markets.
Before turning over the call to Andrew for a detailed review of our results I'll briefly cover 3 topics. This morning.
I will share my perspectives on Caterpillar second quarter.
Quarter results.
I'll then review our end markets before discussing the sustainability report, including our new climate and energy statement that we published during the second quarter.
On slide 4 we're pleased with the strong sales and profit performance during the second quarter sales.
Sales and revenues increased 29% primarily.
Higher sales volume.
2 main drivers of our top line, we're strong end user demand and the impact of changes in dealer inventory.
Compared to the second quarter of last year sales to users rose roughly 15% and changes in dealer inventories provided about a $1 billion tailwind.
During our first quarter call, we mentioned that growth in sales to users would be significantly higher than the 8% we saw in the first quarter.
Sales to users rose about 15% versus the second quarter of last year and trended better for the fourth consecutive quarter.
We had gains in all 3 of our price.
Due to our segments.
Machines rose, 20% with similar increases in both construction industries and resource industries with improvement in all regions.
Demand from residential construction remains strong and demand related to non residential improved.
Mining was also up quotation activity for miners.
Primary and strong and we've seen a significant improvement in orders through the first 2 quarters.
We were also pleased that heavy construction and quarry and aggregate strengthened as did several end markets within energy and transportation.
Energy and transportation sales to users turned positive rising 1%.
Keep in.
In mind that the slowdown in end user demand in 2020 effective energy and transportation later than the other segments and some of the applications are impacted by timing of large products.
From a geographic perspective, we had strength in sales across all regions North America was quite strong as expected.
<unk> in Latin America also showed double digit sales growth.
Asia Pacific saw good growth in most areas outside of China.
China declined declined modestly in the quarter after rebounding strongly beginning in the second quarter of 2020, leading to a tougher comparison.
We also had modest.
Benefits to sales this quarter from currency and price.
As we noted in our first quarter call second quarter 2020 saw a decline in dealer inventory of $1.4 billion.
But we did not expect a significant change during 2021.
Dealer inventories declined $400 million during the second quarter.
Similar to the first quarter of this year dealer inventory remains near the low end of the normal range.
I'll now provide an update on caterpillar supply chain.
In spite of the unprecedented challenges impacting the industrial sector.
Proud of the work by our team to minimize disruptions, which were relatively modest during the second.
Quarter.
For the majority of our products availability remains within our normal ranges.
We mentioned on our last earnings call at the supply chain situation, including transportation was challenging and that our team was preparing contingency plans such as alternative assembly processes at our facilities.
During the quarter our team implemented some of those plans and continue to work closely with our suppliers to mitigate supply chain impacts on production.
We still anticipate that supply chain challenges will remain throughout the year and our goal is to minimize the impact on our ability to meet improving customer demand.
In addition, as we mentioned during our last earnings call. We do not expect a significant benefit from dealer restocking during 2021.
Operating profit in the second quarter increased 128% to $1.8 billion.
Volume growth price realization and strong results from financial products drove the.
Improvement.
We did have some favorable price flow through this quarter, mostly in construction industries.
We also saw higher short term incentive compensation expense and some higher material costs, including steel and other commodities is expected.
Andrew will discuss margins in more detail.
They'll be adjusted operating profit margin improved to 14.114, 1% versus 9.3% in the second quarter of 2020 as we expected.
Operating margins increased in both construction industries and resource industries, despite headwinds from short term incentive compensation and supply chain challenges.
Profit per share was $2.56.
Versus 84 in the second quarter of 2020.
Adjusted profit per share was $2.60.
Versus $1.27.
In the second quarter of 2020.
Moving to slide 5 free cash flow from machinery energy and transportation.
Rotation was another highlight of the quarter, we generated $1.7 billion.
E&P free cash flow with higher profit, partly offset by an increase in caterpillar inventory.
We resumed share repurchases in the second quarter we.
We also announced we are increasing our quarterly dividend by 8%.
To $1.11 per share we paid a higher dividend annually for 27 consecutive years.
We returned about $800 million to shareholders in the second quarter via the dividend and share repurchases.
We expect to repurchase sufficient shares between now and the end of the year to at least offset absolute dilution.
From shares issued this year.
In light of the highly fluid environment, we will continue our practice of not providing profit per share guidance. However, we will share some high level assumptions for the upcoming quarter and the full year.
For 2021, as we said on the last earnings call, we expect to achieve the targets for adjusted.
Operating profit margin that we set out at our 2019 Investor day of 300 to 600 basis points of improvement versus our performance. During the 2010 to 2016 period at similar sales similar levels of sales and revenues.
We also expect to achieve the free cash flow targets, we set for <unk>.
Adjusted on Investor day of an incremental $1 billion to $2 billion at all points in the cycle.
Andrew will elaborate with a few of our assumptions for the upcoming quarter in a few moments.
Please turn to slide 6 and I'll walk through our expectations by end market overall.
Overall, we're becoming more optimistic about our end.
End markets since our last earnings call. We're pleased that many end markets continued to improve and demand continues to strengthen.
Global demand is strong and the outlook is positive.
In construction industries. For example, we are optimistic about the industry as we expect end market demand to show continued Pos.
<unk> <unk> <unk>.
Residential and nonresidential construction demand is expected to remain strong led by North America.
In China, we expect the industry for excavators above 10 tons to be about flat in 2021 compared to a very strong 2020. Please.
Please keep in mind that demand was very.
Very strong in this market during the first quarter.
Our newly introduced <unk> models continued to perform well and we are still receiving positive customer feedback.
And the balance of Asia Pacific, We believe stronger than expected commodity prices housing strength in government infrastructure expenditures will support continued sales growth.
Is it a grainy Amy we see end market demand regaining momentum on strunk strong construction activity higher commodity prices and improved confidence.
Latin America should also show continued strengthening due to increased construction activity.
Switching to resource industries.
In mining we cannot.
We expect improvement in minor capex as commodity prices remain supportive of growth.
Parked large mining trucks decreased in the quarter and remain at relatively low levels in all regions as utilization increases.
Customer interest in caterpillars autonomous mining solution remains high and customers now.
Autonomously operate or deploying cat machines on 18 sites around the world.
While our mining customers continue to display capital discipline, we expect mining to continue to improve over the long term as the energy transition drives higher demand for commodities.
In heavy construction and quarry and aggregates.
<unk> seen improvement in the second quarter, particularly in North America and the Amy.
We expect continued strengthening in this part of the portfolio.
Finally in energy and transportation, we expect oil and gas to continue to strength and gradually we expect customers to continue to demonstrate capital.
Discipline and pockets of excess capacity remained.
In power generation strength in data centers should continue.
Industrial demand is expected to improve along with the global economic recovery.
Transportation should see strength in rail services and growth in international deliveries.
Leverage for locomotives and marine demand is projected to grow modestly while remaining at low levels.
Now on slide 7 since our last earnings are since our last quarterly earnings call. We published our 2020 sustainability report to establish and report progress against our environmental social and.
In governance goals.
We also released a new climate and energy statement.
Caterpillar shares the concerns of governments and the public about the risks of climate change and supports global efforts to mitigate its impact we are committed to contributing to our reduced carbon future.
This commitment is reflected in our.
Ability vision to improve the quality of the environment and our communities.
Some of the way, we do this or by further reducing greenhouse gas emissions from our operations and helping customers meet their climate related to objectives by investing in innovative new products technologies and services.
Our sustain our 2020 sustainability report highlight 7 new environmental social and governance goals, we've set to achieve by 2030.
These goals, which address issues most relevant to our customers and other stakeholders are focused on the climate and environment. In addition to safety.
1 of these goals is to ensure that.
100% of caterpillars, new products through 2030 will be more sustainable than the previous generation.
It's an inspiring time to be a caterpillar employee I'm pleased with all the good work already underway across the company.
We're developing products and services that facilitate fueled transition increased operational efficiency.
And reduce emissions to help communities thrive and to help our customers achieve their environmental goals.
By establishing and reporting progress on our ESG targets, we provide transparency about our progress and innovation.
In order to further increase transparency, we will strive to provide an update or example during our earnings.
<unk> calls.
This quarter I'll close with an example.
<unk> neutral mall graphite or in Mg announced the collaboration with us to fully power there Matt to Winnie graphite mine with a zero emissions machines by 2028 cash.
Caterpillar will be the exclusive equipment technology and.
And service provider for AMG will.
We will be developing testing and producing cat zero emission machines for the project in San Michele Deshawn and Quebec, Canada.
In conclusion, we continue to execute our strategy for long term profitable growth by investing in services expanding our <unk>.
<unk> and improving operational excellence.
It was a strong quarter from a financial and operational perspective, and a good first half.
Looking forward, we are optimistic about our ability to mitigate supply chain challenges and are encouraged by customer to customer demand that strengthening and is broad based across all regions.
Now I'll turn the call over to Andrew.
Thank you Jim and good morning, everyone.
I'll start by walking you through second quarter results, including some color on the segment performance.
Then I'll turn to the balance sheet and are sourced from the third quarter.
Beginning on slide 8 as Jim noted sales from the second quarter increased by 29.
Percentage of $12.9 billion due to higher volumes.
Operating profit of $1.8 billion increased by 128%, reflecting margin expansion, primarily due to higher volumes.
Second quarter profit per share was $2 from 56 compared with 84 in 2020.
Adjusted profit per.
Steven doubled to $2.60, compared with $1.27 last year.
I'll start with the top line on slide 9 where we continue to see strong volume gains.
Sales and revenue growth was in the double digits per cent for all 3 of our primary segments and on a consolidated basis for every region.
The share of growth in North America, our largest region was up 30%, reflecting strong results in construction industries and resource industries.
Growth in the Amy was also robust up 33%.
Latin America rose by 67%, albeit off a slow base in Asia Pacific sales grew by 12%.
Overall associate users increased by 15% the.
The acceleration from the 8% rate of growth from the first quarter was in line with our expectations of a significantly higher percentage as we discussed last quarter.
Sales to users in construction industries rose by 20% led by North America.
Residential construction.
Ctrip is strong in North America and the Amy.
Non residential construction in North America is recovering well as well.
Latin America showed very good growth in sales to users of a low base.
Asia Pacific was lower due to a modest decline in China.
As Jim mentioned, the Chinese market started to recover it earlier in 2000.
'twenty than other countries, leading to a tougher comparative.
Overall, we still expect China to have another strong year with the industry and the above 10 ton excavator excavator market about flat retaining last year last year's large gain.
Sales to users in resource industries.
<unk> increased by 21%, reflecting growth from heavy construction and quarry and aggregates.
Demand for equipment and mining also improved this quarter and as Jim mentioned, we remain encouraged about the upside potential in mining.
In energy and transportation sales to users rose by 1% in positive territory. Despite.
The fact that <unk> sales to users were impacted to a lesser extent than other segments in the second quarter of last year due to the timing of large deals.
Now turning to slide 10.
Operating profit increased to $1.8 billion.
The 128% improvement reflected higher volume in our 3 primary.
England's favorable price and higher profits from financial products.
That was partly offset by the impacts of restoring short term incentive compensation.
The assumption for short term incentive compensation in the quarter was also raised by about $100 million compared to the first quarter to reflect a strengthening results.
Amy said, we now expect our full year charge should be about $1.5 billion.
This quarter, we had $25 million in restructuring expense over $100 million lower than a year ago.
We now expect around $250 million from restructuring expenses of share.
We also had a full quarter impact.
<unk> oil and gas, including some M&A related costs, which I'll cover in a bit more detail when we discuss energy and transportation.
The adjusted operating profit margin rose 180 basis points to 14, 1%.
As we expected research and development and selling general and administered.
<unk> expenses rose.
These increases reflected not only the impact of incentive compensation, but also investments in key priorities, such as growing services and investing in product development to help our customers achieve their common objectives.
As we explained in April we did expect a sequential decline.
And margins versus the first quarter.
Margins were broadly in line with our expectations.
As we said price realization turn positive in the quarter, while material and freight costs were negative.
We did see a lower margin reduction than expected from absorption as production rates remained strong.
However.
Administration short term incentive compensation more than offset that.
The global tax rate remains about 26%.
Adjusted profit per share of $2.60 excludes <unk> <unk> of restructuring expense versus 24 cents, a restructuring expense as well as 19 for the settlement of pension obligations.
That occurred in the second quarter of last year.
Moving to slide 11, let's take a look at segment performance starting with construction industries.
Sales increased by 40% to $5.7 billion.
Primarily driven by higher sales volume and favorable price realization.
The improvement in volume was due to higher end user demand and the impact from changes in dealer inventories.
As I mentioned earlier the increase in end user demand was led by North America, where residential construction remained strong and nonresidential construction strengthen.
Overall dealers reduced their construction equipment inventories.
Less than the second quarter of 2021 than in the second quarter of 2020.
The segment's second quarter profit increased by 98% to $1 billion.
The near doubling came from higher sales volume and favorable price realization, including geographic mix.
Cost absorption and efficiencies.
<unk> positive in the quarter.
That was partly offset by 2 items the impact of short term incentive compensation and we started to see the impacts of unfavorable material costs. Although this was a modest in the quarter.
The segment operating margin increased by 530 basis points to 18, 1%.
These were planning to slide 12 resource industry sales increased by 41% from second quarter, it's $2.6 billion.
The increase was mostly due to higher end user demand for equipment and aftermarket parts and changes in dealer inventories.
As we expected heavy construction and quarry and aggregates began to.
Improved and we expect continued improvement from here.
End user demand in mining also continued to improve.
Sales were up in all regions.
Second quarter profit for resource industries more than doubled increasing by 138% to $361 million.
The increase was mainly.
The higher sales volume, partially offset by the impact of our short term incentive compensation expense.
Price was slightly negative mostly due to changes in prices for Australian dollar denominated after market parts. These will reduce to reflect currency movements versus U S. Dollar.
The operating.
<unk> operating margin increased by 570 basis points to 14%.
Now on slide 13.
Energy and transportation sales increased by 20% to $5 billion.
That included an 11% sales increase in oil and gas largely due to higher sales.
<unk> engine after market parts.
Given in part by the addition of SPM oil and gas.
Power generation sales improved by 18%, reflecting increased sales with large reciprocating engine applications primarily for data centers.
Industrial sales increased by 33% with demand across all.
All regions.
Transportation rose by 10% on higher rail services and marine sales.
Profit for AT&T increased by 17% to $731 million.
The improvement was due to higher sales volume.
That was parked partially offset by a couple of factors, including the impact of short term.
Incentive compensation.
And acquisition related expenses, primarily for SPM oil and gas.
Higher freight costs were offset by manufacturing efficiencies.
The segment's operating margin declined by 30 basis points to 14, 7%.
With regards to SPM oil and gas we do.
Do you expect this to be a modest drag on margins PMT for the remainder of the year.
This was the first full quarter since the acquisition and it will take some time for the synergies to be realized we're very pleased with the acquisition and we expect to see the full benefits of the acquisition as we move forward.
On slide 14.
Financial products from your increased by 1% to $774 million.
As the portfolio remained relatively constant.
Segment profit remained strong increasing by 64% year over year to $243 million, which was about flat compared to the first quarter of 2021.
The year over year profit.
<unk> increase was due to a lower provision for credit losses at cat financial compared to the year ago quarter.
Which reflected the absence of forecast of COVID-19 related impacts.
In addition, we had a high net yield on average earning assets due to a favorable change in weighted average interest rates and a favorable impact from returned or repossessed equipment.
Benefiting from high demand for used equipment.
Our credit portfolio remains in good shape as indicators of customer health are all positive.
Past dues continued to improve to 258% down 116 basis points year on year, and down 32 basis points compared to the first quarter.
Credit applications remained strong as well up 5% compared to the second quarter of 2020 and up 9% compared to the first quarter.
New business volume continues to trend up led by North America.
Requests per loan modifications have returned to historical trends.
Moving to slide 15, we are confident in 2021, we will achieve our investor day targets <unk> free cash flow of $4 billion to $8 billion.
I mean free cash flow was $1.7 billion from the second quarter compared to $500 million last year.
The increase in <unk> free cash flow reflected higher profit.
Offset in part by a $500 million sequential increase in caterpillar inventory in the second quarter of 2021.
The inventory increase is primarily in components and work in process inventory and reflect strengthening end user demand and our response to supply chain challenges.
<unk> free.
Free cash flow has been $3.4 billion year to date benefiting from higher profit as well as the absence of paying short term incentive compensation in the first quarter.
We continue to maintain a solid liquidity position and support a strong mid a credit rating.
The company ended the period with $10.8 billion of enterprise cash.
Cash we've said that we intend to return substantially all of <unk> free cash flow to shareholders through the cycles.
We've said that we will do it through a combination of dividends and share repurchases preserving our balance sheet to fund additional growth growth initiatives and mergers and acquisitions.
In the past 3 years, we've returned on average 100.
6% about <unk> free cash flow to shareholders.
This quarter, we announced will increase our quarterly dividend by 8% to $1.11 per share, which is about $600 million a quarter.
I'm happy to say, we expect to extend our status as a dividend aristocrat for another year.
We repurchased about $250 million of our common shares this quarter.
We have about $4.6 billion remaining under the current share repurchase authorization, we expect to continue to repurchase shares in the second half and intend to at least offset absolute dilution from shares issued during the year.
Hundred as Jim mentioned, there is no change to our current practice relating to guidance.
However, as we've been doing we are providing color on the upcoming quarter to give you a sense of what we're expecting to happen.
Moving to slide 16, again, we expect to achieve our Investor day targets for adjusted operating profit margins in 2020.
Despite reinstating the short term incentive compensation program.
That's now projected to be a headwind of 1.5 billion per year or about 300 basis points of pressure on margins.
We expect stronger sales from normal seasonality would imply.
The growth rate in sales to.
<unk> should continue to accelerate in the third quarter when compared to the prior year.
And should be significantly higher than the 15% rate we saw in the current quarter.
In construction industries, we expect improvement in residential and nonresidential construction demand to continue as.
As we discussed last quarter.
We use a tougher comparisons in China.
Resource industries and user demand should see support from both mining and heavy construction and quarry and aggregates.
We also expect energy <unk> transportation sales to increase on stronger underlying demand.
All of this is expected to lead to good volume growth in the third quarter.
We see even while we manage supply chain challenges.
As we told you last quarter and as Jim mentioned today, while dealers are independent businesses and make their own decisions about their inventory, we don't expect a significant benefit from restructure restocking in 2021.
Third quarter margins are expected to be stronger than the prior year with leverage from strong volume more than offsetting the impacts of green statue short term incentive compensation.
However, we anticipate third quarter margins to moderate versus the second quarter as we see some cost headwinds in the second half of the year.
Within machines, we currently.
Water, we expect price to offset higher manufacturing costs in 2021.
In the second quarter price was strongly positive, reflecting strong geographic mix benefits and higher price realization.
We did put through price increases from machines at the end of the second quarter, which will be positive.
But.
But geographic mix will be less of a benefit.
Although we did take pricing actions, we do expect higher manufacturing costs, which means that our gross margin percentage will be moderately lower than the second half of the year versus the first half.
We should also see accelerated spend in SG&A and R&D.
In the back half of the year as business gets back to normal.
Specifically within energy and transportation, we expect some margin headwinds in the second half of the year.
As E&P is a lumpy business with very margin structures across the applications, we expect variability in both price and mix, particularly.
As larger deals were recognized into revenue.
In addition, as many of the E&C applications are expecting experiencing.
Experiencing different levels of demand, we did not put through additional price increases in the second half second quarter. So this means material and freight cost increases will be a headwind for that segment.
In summary on slide 17 demand continued to strengthen in the quarter, leading to strong volume growth.
Adjusted operating profit margins improved by 480 basis points, driven by higher volumes, which more than offset the nearly 300 basis headwind of short term incentive compensation and a small.
The headwinds of supply chain disruption of material cost inflation.
Adjusted profit per share more than doubled in the quarter.
We are confident in the outlook for our end markets and expect to achieve our investor day margin and free cash flow targets.
And with that we'll take your questions.
<unk> question comes from the line of Jamie Cook from Credit Suisse. As a reminder, management ask that we limit to 1 question per analyst. Your line will be muted. After you ask your question. However, if your question is not answered it for any reason or clarification is needed. Please get back into the queue. Jamie Your line is open.
Hi, good morning.
Hum.
My first question, Jim If you could just provide some more color on what you're seeing on the supply chain side and when do you expect some of the supply chain issues to ease and I guess to what degree is your 2021 topline limited by supply chain or the inability to get product out the door. Thank you.
Yeah. Thanks, Jamie first of all we greatly appreciate the efforts of our employees to manage the challenges in the supply chain and 1 of the things that we're seeing of course is in improving end user demand is adding pressure in the supply chain and on freight as well.
And some of these supply chain challenges are more broad based and incursion of normal upturn you may think about.
The last upturn, we had cash issues and some other individual component issues.
At this time, it's more broad based than its typical having said that again as we said in our last call. Our team is working very hard to avoid or minimize those supply chain challenges that would impact our ability to meet to fully meet improving customer demand and we think.
The impact of the second quarter was modest.
And again, we're working very hard to try to limit them. We haven't had some of the large factory shutdown for weeks that you've read about with some other industrial companies. We've also taken some actions to do things like with resins, we changed our materials spec.
Due to shortages.
There are and it helped us keep production going again juruti of our products for end users are delivered within our normal ranges availability. Some of the bigger challenges have been on the smaller products BCP a lot of those products are used in residential in North America. So those are some of the bigger challenges, we're having in terms of availability, but again.
The majority of our products for our end users are within the normal ranges and we're working very closely with our dealers to try to ensure that we meet actual customer demand.
Your next question is from the line of Jerry Revich with Goldman Sachs.
Yes, hi, good morning.
Morning, Jerry Good morning Gerry.
Jimmy Andrew I'm wondering if we could just dig into the environmental gold targets.
You just updated us.
In terms of when we.
Look at just quantifying the mix of orders today, that's either your autonomous solutions in mining or zero emissions products.
Across the portfolio can you just help us quantify where we stand now in terms of actually driving orders for those types of products.
Are you folks today that also improve.
And hit the.
Environmental goals for for your customers. Thanks.
Thank you Gerry you mentioned autonomy and and you know the demand for our products continues to be quite strong.
Lot of quotation activity going on as I mentioned earlier, we currently are deploying autonomous mining equipment in 18 different sites 10 customers 3 continents for a whole variety of commodities iron ore copper oil.
Oil sands gold coal mines, and so again, we believe that will continue to grow at a rapid pace. We're also expanding our autonomous solutions to other support equipment like Joseph drills underground.
Equipment and water trucks as well in terms of <unk>.
Zero emissions products, we're very focused on working closely with our customers.
<unk> to meet their needs, we talked about the N M. G announcement during the call here already this morning. That's a great example of 1 where a customer has a need they have a date they have to to meet and we're working very closely with them as their exclusive supplier with product technologies to make it happen. So again.
We're working very closely.
To develop products to meet customer demand and as you can imagine its a big topic of discussion and focus by our leadership team and something we'll continue to do moving forward and some of the goals we put out.
In our sustainability report, we talked about 100 per cent of our new products through 2030 will be more sustainable than the previous generation in some manner.
And we're very focused on doing that.
So again, if you if you look at our climate and energy statement. It talks more about some of our approaches and our specific goals for reducing greenhouse gas emissions in our own operations. So again, our strategy here, but work on greenhouse gas emissions and be more sustainable in our own operations and are very focused on helping our customer.
Customers meet their goals as well.
Your next question is from the line of Rob Wertheimer with Melius research.
Alright, Thank you and good morning, everybody.
Rob I just had a question on the economies.
On autonomy as well the expansion to 18.
18 sites.
As our momentum for sure.
You've talked in the past about examples of where sites are saved 20, or 30, I think 30% productivity. So not just not just a driver but mining more.
With less cost per ton less waste et cetera, I wonder if you have any update on just as you have expanded.
Consistent or you're seeing that you know you mentioned a bunch of different sites you're at different minerals is that consistent across sites and then is there a is there a potential at least for cat too.
<unk> 2 share and you know if you're in some of those savings you're selling hardware at this point or do you have developing revenue models with customers, where you can promise you know greater.
The insurance a little bit of it. Thank you.
Thank you, Rob so that that 30% productivity increase is actually something that was stated by a customer and not us and so you know in our view our customers are in fact seeing productivity gains, which is 1 of the reasons that.
Adoption continues to move forward. So I believe it's also really accelerating so.
So it's clear that our customers are seeing the benefit or they wouldn't be continuing to put too.
Put an autonomous operation.
There's a variety of of.
Models that we have that we use with our with our customers.
Typically there's a there's a.
Our monthly kind of fee that we received of.
Of course, we sell.
From a shipment to them as well.
But again.
Commercial models are dependent upon individual customer negotiations.
Your next question is from the line of David Raso with Evercore ISI.
Hi, Good morning, just wanted David.
<unk>.
Kind of near term question.
The supply chain issues.
Of your normal historical normal sequential revenue.
2 Q3, Q3 Q4 Q1.
Given the supply constraints book balance of course demand strong how should we expect the revenue.
Sure it has to be versus the historical norm of third quarter is down about 5% and then the fourth quarter was back about 10%.
<unk>.
Yeah. Thanks, David.
Yes, obviously, what we are seeing though is.
This is an atypical year and as we've indicated.
Revenue.
Mississippi do you expect a normal seasonable pattern between Q2 and Q3.
Obviously underlying volumes, we do believe and particularly and use as soon as we do expect to grow significantly in that rate of growth to be higher than the 15% are.
We saw it and and.
We've got 2 so that will mean that probably we don't expect that normal pattern and that's that's a factor, which we have to look at and obviously at the moment, we haven't updated about the fourth quarter, but we'll give you an update probably in October.
Your next question.
In Q from the line of Steven Volkman with Jefferies.
Hi, Good morning, guys. My question is on resource industries, and I'm curious if you can give us any color.
In terms of the growing backlog there on kind of machines relative to parts and I'm, just trying to think about sort of the.
The mix of that business going forward.
Yes. Thank you Steven so as we've mentioned over the last few quarters.
We're bullish on the trend in mining we're seeing.
Bust quotation activity, we are seeing increased orders, we've talked about autonomy already this morning.
We have seen.
<unk> certainly strength in in aftermarket.
For mining, but we also see strength in OE as well, so again as utilization improves as.
The energy transition drives higher commodity prices that is driving net activity for us in both.
<unk> parts and OE.
Yeah.
Your next question is from the line of Ross Gilardi with Bank of America.
Hey, good morning, guys.
And Ross.
Jim I just had a question just on pipeline activity.
In general I mean, there seems to be pretty limited new pipeline activity. Despite the run up in energy prices would you agree with that.
And are you seeing that across your business I mean, maybe just talk about what youre seeing with solar and with construction equipment than anything else as it relates to pipeline activity and then just comment on the choice not to raise prices in E&P. Despite.
Right.
Cost pressure or is there just too much excess capacity out there to risk losing market share in the second half. Thanks.
Thank you. Thank you Ross as you mentioned earlier you know we do expect our customers are displaying capital discipline and we expect that that to continue in terms of pipeline activity our business.
I believe it was actually up in the second quarter. So that that is that is 1.1 data point.
Again, it's.
We'll see how the future unfolds here in terms of oil and gas. We are we are we do feel good about our graduate will turn that business oil prices are supportive of an investment.
But again, our customers are displaying net net capital discipline.
There was a lot of strength in net natural gas pipelines for a few years and that tends to be a cyclical business. I mean, if you look back over the last 30 years just in my experience you go through periods of very strong activity that but followed by periods of lower activity. So again, it's a cyclical business that goes.
Up and down but for our business, we did see an improvement in the second quarter and pipeline versus the first yeah and on the specifically on the.
The price increase side.
Given that the nature of the recovery within the E&C is slightly different from where we are seeing in Ci and ROI.
Where there's odyssey.
See a much stronger underlying demand signals if you saw in the quarter.
<unk> stews end user sales were up 20% DMT was up 1%. They are in slightly different places and therefore it is a very logical decision to actually take the view that obviously you don't want to put.
At risk the recovery within the.
T markets. So we will take a little bit of a paint on price in the short term. However.
However, obviously within our construction businesses I haven't removed all awry, we do expect overall price to more than offset manufacturing cost increases and just remind you in manufacturing cost.
Significant amount of that is actually.
A step increase which we would not price for as well and some of that was also going to impact E N T.
Your next question is from the line of make bilberry with Baird.
Thank you for the question good morning, everyone.
Just looking at Mike.
Just wanted to make sure that I have this straight it sounds to me that you expect revenues to be up sequentially in the third quarter relative to the second based on Europe.
End user demand commentary.
In terms of the margin moderating sequentially, it's pretty clear that there's going to be the case with energy and transportation, but.
Will the other segments see a similar dynamic and if so can you help us understand kind of moving pieces and why thank you.
Yeah. So overall as we've indicated we do expect our the third quarter should be strong and obviously that will effectively skus will be.
Higher day rates of growth as choose will be higher in Q3 than Q2.
We don't give specific guidance on absolute revenue numbers, but obviously, we're giving us a little bit of color there.
As far as the margin, yes, <unk> will moderate Ah that's an impact as we said of not putting price.
But.
Within Ci and all ROI within the machines businesses obviously.
We are seeing price benefit part of that price benefit is geo mix Geo mix will come off a little bit so there'll be an offset between geo mix and price and that's really due to the mix of sales between the different geographies, which impacts.
<unk>.
So price won't improve but obviously you will start seeing some material cost increases and probably some increasing freight costs based on what we're seeing in the market today that will be where the margin pressure is.
<unk>.
On the machine side, both Ci and all right.
Also in addition, obviously as I said, we do expect some increases in the underlying.
SG&A and R&D spend as the return to work normalizes and some of the things like travel start opening up and we start seeing some of those expenses come back.
The next question is from the line of Jairam Nathan with Tyler.
Hi, Thanks for taking my question I, just wanted to kind of.
Try to get to your.
Strategy on on.
On batteries and fuel sales recently.
<unk> announced an agreement with GM that they will be sourcing gms.
Fuel cells. So I just wanted to understand what your status is on that would it be more internal or would you be open to external sources.
Well. Thank you John for your question. So you may recall that we introduced last year.
No.
The first zero emission switch locomotive.
So net to a couple of.
Something we're excited about but we're very flexible and we're working we will do certain things ourselves will do certain things with partners and suppliers, but again, where we are.
Those those discussions are ongoing and well.
We'll come up with as we do with all of our products. Some things, we'll make ourselves some things won't get from supplier some things will get from partners.
And we're working our way through that.
Your next question is from the line of Stanley Elliott with Stifel.
Hey, good morning, everyone. Thank you for taking the question.
Quick question around infrastructure and the timing of when you all would see that certainly lots of discussion here in the U S, but really elsewhere.
<unk>.
Those monies takes some time to flow through the system do you end up seeing end market demand pick up ahead of that more concurrent with it just trying to get a frame from from when we can see that benefit.
Well. Thank you for your question and we already are seeing stronger heavy construction activity is something we saw in the second quarter and we expect.
That improvement to continue so that is irrespective.
Of an infrastructure bill in the United States being passed we're seeing improvement in that business being driven by a whole variety of things. If in fact, there is an infrastructure deal it's always difficult to.
Estimate timing typically that helps the confidence.
Of our customers, which helps our business, but we are already seeing an improvement in our heavy construction activity and as again, we expect that strength to continue moving forward.
Regardless, regardless of a deal or not.
Your next question is from.
From the line of Ann Duignan with JP Morgan.
Yes, hi, good morning, maybe Joseph.
So your comment on the geographic mix and Ci NRI being negative.
I don't maybe fully understand.
The C&I comment given the strength you are talking about in North America and in particular, just your comments on <unk>.
The non res sector alright, maybe.
Graphic mix I kind of appreciate that maybe you could just walk us through.
The comment on the negative mix in both of those segments as we go forward.
So it's already identified Covid confusion not high.
If it's.
It's actually not it's not negative, but it's sequentially lower benefit of Geo mix.
Most of that is obviously, if you remember last year when we looked at Geo mix there was a big move between obviously China.
Second half EBITDA was very strong recovery.
We sold dealer inventory reductions and softer demand. So there was a negative drag on genomics first quarter, obviously, China was very strong in the U S slightly weaker obviously now in the second quarter, we've seen that turn around quite significantly and that.
And then a big benefit of genomics in Q2 that will moderate because.
Relative GAAP of North America versus the other geographies will actually diminish so that's how it works and that's why we think it will actually be a benefit but will be less positive than.
And then it was in Q2.
Gabe So we do expect the price increases we put through to offset that so we will see how the price realization mitigate that impact.
Your next question is from the line of Nicole <unk> with Deutsche Bank.
Yes, thanks, good morning, guys.
Nicole can.
Can we just talk.
However, a bit more about what's going on in China, construction, and I guess whats driving your confidence in a flat outcome for the year given the tough comps throughout the rest of the year and also if you could talk a little bit about what youre seeing from a pricing perspective in that market. Thank you.
You bet. So just as a reminder, last year was a very strong market.
Very strong.
And we saw a very strong first quarter this year as well.
We did see the industry declined modestly in the second quarter and that's again as we expected and it's.
I think some policy normalization there drove that weakness, but just based on everything we see we are.
And she had a full year to be roughly flat to last year, but as a reminder, that is a very healthy level because last year was so strong. So that's what we see.
I mentioned earlier about the fact that our GFS models have been have been well received we're very pleased at that product introduction.
It is a competitive.
Market you asked about pricing, it's a competitive market, but again by introducing new products by continuing to build out our dealer network. We are confident in our ability to continue to be able to compete in China.
Your next question is from the line of Joel <unk> with BMO.
Hi, Thanks for giving me a chance.
It's here.
Can you give us an idea how much dealer inventory is needed to get back to more normalized levels. I know, it's a moving target and also is that more of a catching up in 2022 or the way things look today that some of that might leak into 2023.
Hey, Joel.
Yes, Andrew I mean, obviously as we said we expect this year not to see any significant benefit from dealer restocking obviously.
Prioritization, given some of the supply chain challenges absolutely meeting end user demand.
Obviously, we need to see how things pan out in 2022.
I think we will always prioritize making sure that we are meeting end user demand over increasing inventory in the dealer channel obviously that will be something we will continue to work with our dealers on making sure that they that day.
Do it so it's way too early to predict with a win win deal inventories will rise.
Again, obviously, we'll continue to monitor that and we'll update you as we go through every quarter.
Your next question is from the line of Noah Kaye with Oppenheimer.
Good morning, everyone. This is Christian on from now I. Thank you for taking our question.
I wanted to follow up on the mining Act.
And kind of recording that you've talked about.
You indicated that debt.
And what's driving that strength more than mining.
Given commodity basket near historic highs.
You said that you talked about <unk>.
<unk> seem really right first significant mining up cycle. So as you talk to your customers.
At closing the end market back at this point and when do you think that spending thankfully. Thank you.
Good morning Christian Thanks for your question well as we've been discussing for several quarters mining.
Mining we've been bullish on the long term trend in mining and we are seeing an improvement.
In that business it does tend to be lumpy, but again that.
The trend is quite positive so I wouldn't say anything is holding it back it's really.
Manifesting itself much as we've been predicting for the last 3 or 4 earnings calls a steady improvement in mining and its continuing to happen. So again a lot of quotation activity.
Our customers are always very focused on capital discipline.
But having said that utilization high as high park trucks or low across all regions commodity.
Commodity prices as you as you indicated are quite strong. So it's turning out as we expected, which is a which is a steady gradual improvement in mining and we're very pleased at that honestly.
That kind of a profile I think is better for every.
Body than a spike ups and then a drop in the spike up in a drop so we'd love to see that steady improvement.
And your final question for today comes from Chad Dillard with Bernstein.
Hi, Good morning, guys. Thanks for squeezing me in.
Hi, Chad good.
So a couple of questions for you.
First more near term can you quantify the material and freight costs for that the second half and in 2021.
And then longer term can you just talk about your conversations with mining customers.
On electric drive equipment by when do you think theres broader adoption.
Good morning.
What are your what are you thinking in terms of Mike parse intensity versus internal combustion.
And what if any new revenue streams could there be from that transition.
Yes, so obviously.
We.
We do not give a guidance on.
On what we think the cost will be as we said, we do think they will be higher in the second half.
Again, just to remind you.
<unk> will be about the same we expect for the full year.
All machines full price more than offset increases in manufacturing costs and that increases in manufacturing costs. Also include short term incentive compensation.
Option, which again is not only higher.
Versus last year, but there's also Bob that baseline level given the results. We have so it is a moving parts there's lots of bits of moving parts within the absorption rates have an impact and so forth as well. So overall, though yes. They are increasing they are a pressure however.
We don't see it's.
All that we saw such strong favorability remember Q1, we actually had material causes.
Manufacturing costs were favorable.
And also we saw very minimal price, we saw stronger price in Q2.
And the small increase in manufacturing.
Problems that just means that the manufacturing costs will get greater and more sort of mitigate offset some of that price from seen so that gives you a sort of range to work too.
And in answer to your mining question, we're working very closely with our customers to help them achieve their sustainability goals.
There is.
<unk>.
A wide variety of different approaches as you can imagine between from customer to customer, but also from geography to geography, as well and so there's no 1 answer to that again, we're working very closely with our customers' announcements will be made at the appropriate time, we had 1 in Mg. This quarter. It's just an example of some of the things that we're doing to support our customers.
During call again, it'll those adoption rates will vary geographically and by customer.
Okay and with that we'll conclude our Q&A session now let me turn the call back over to Jim Bob will be well. Thanks, everyone really appreciate you joining the call. This morning.
We thank you for all your questions.
We continue.
To focus on executing our strategy for long term profitable growth, which as you recall includes services expanded offerings and operational excellence.
Congratulations to our team we had a strong quarter, we're pleased that the strengthening of demand coming from all regions and we are optimistic about our ability to solve the challenges that arise and also.
So to continue supporting our customers as they move forward. Thank you again.
Thanks, Jen will close with a few final reminders a replay of our call will be available online. Later. This morning, we'll also post a transcript on the Investor Relations Web site. Later today. If you look there now you'll find our second quarter results video with our CFO and in our SEC filings.
With our sales to users data click on investors that caterpillar Dot com and then click on financial to view those materials.
If you have any questions. Please reach out to Rob or me you can reach Rob at R. E. N G E I'll underscore Robert Cat Dot Com and net Jessica underscored Jennifer at Cat Dot Com Investor Relations General phone number.
Is 3096754549, we hope you enjoy the rest of your day and have a fun weekend now I'll turn it back to Whitney to conclude the call.
That does conclude today's conference call. Thank you everybody for joining.
Okay.
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Andrew.
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