Q3 2021 Caterpillar Inc Earnings Call
Yeah.
Welcome to the third quarter 2021, Caterpillar earnings Conference call. Please be advised today's conference is being recorded I would now like to hand, the conference over to your speaker today, Jennifer Driscoll. Thank you. Please go ahead ma'am.
Good morning, everyone. Thanks for joining caterpillar's third quarter earnings call. Our speakers today will be Jim Applebee's, Chairman and CEO, and Andrew Bonfield, Chief Financial Officer.
Here with us for the call are Kyle Epley, Vice President of Global Finance Services Division and Rob Rengel Senior manager Investor Relations.
During our call. This morning, we will discuss the earnings news release, we issued earlier today that we have.
Slides to accompany our presentation in the appendix, you'll see some additional information, including dealer inventory and order backlog you may find the news release, our slides video cat recap with Andrew Bonfield, and other important information and investors that caterpillar dotcom simply click on events and presentations.
We have copyrighted this call and ask you not to use any portion of it without our prior written approval.
Moving to slide two today, we will be making forward looking statements. These statements are subject to a variety of risks and uncertainties for information on some of the risks and uncertainties that could cause our actual results to vary materially from any forward looking statements. Please refer to our SEC filings, including our Form 10-K for 2020 and our.
10, Qs for the most recent quarters.
We will also make use of non-GAAP numbers for a reconciliation of our non-GAAP numbers to the appropriate U S. GAAP number please see the tables in the appendix to the earnings call slides.
This morning, we announced profit per share of $2 60 for the third quarter of 2021 compared with $1.22 for the third quarter of 2020, our adjusted profit per share was $2 66 for the third quarter compared with $1.52 in the third quarter of 2020 adjusted profit per share for both quarters.
Excluded restructuring costs, which totaled six cents per share this quarter and 18 cents per share in last year's quarter last year's quarter also excluded remeasurement losses of 12 cents per share, resulting from the settlement of pension obligations I do have two important calendar announcements first we recently selected our.
Earnings dates for calendar year 2020, we show the data on slide 20, starting with January 28 for our fourth quarter call, we hope you'll join us.
Second we plan to host our next Investor day on Tuesday may 17th 2022 near our headquarters.
That also will be audio webcast and details will be provided closer to that time.
So with that please flip to slide three and I'll turn the call over to our chairman and CEO Timothy.
Thanks, Jennifer and good morning, everyone. Thank you for joining us I'd like to start by thanking our global team for another good quarter, we continue to execute our strategy for long term profitable growth, while working to mitigate the impact of supply chain challenges as we serve our customers before.
Before turning over the call to Andrew for a detailed review of our results I'll briefly cover three topics. This morning, I'll start with my perspective on the quarters results, including an update on the supply chain.
I'll then provide a few comments on market conditions.
Finish with an update on recent developments concerning caterpillar sustainability journey.
Sales and revenues were higher in all segments and in all regions during the quarter.
Customer demand and order rates were strong we experienced supply chain challenges like many other industrial companies.
We believe our sales in the third quarter would have been higher if not for these issues. We are however, pleased by our global teams ability to continue to execute in a challenging environment.
Turning to slide four the top line increased by 25%, primarily due to higher volumes, which was driven by strong end user demand.
Paired with the third quarter of 2020 sales to users rose about 14%.
Sales to users rose in the three primary segments and in most regions.
For machine sales to users increased by 17%.
For energy <unk> transportation sales to users increased 8%.
Our assumption had been that third quarter growth in year over year sales to users would be significantly higher than the 15% growth reported in the second quarter.
The growth rate in sales to users was less than we assumed at 14% as construction industries grew a bit slower than the second quarter pace.
This first primarily due to constraints in the supply chain, which I'll cover in a moment.
In resource industries, and energy and transportation the gross rate in sales to users accelerated on a sequential basis.
On a year over year basis sales to users grew in all segments and all regions, except Asia Pacific driven by China, which was a bright spot in the third quarter of last year.
We remain optimistic about demand in our three primary segments for the remainder of the year.
Dealers each of whom are independent businesses decreased inventory by $300 million in the third quarter versus a decrease of $600 million in last year's third quarter to put it in context dealer inventory is about flat versus year end 2020.
Reported revenues for the quarter also benefited from growth in services favorable price and currency.
Turning to the supply chain, our global team worked to mitigate the challenges we encountered in the third quarter, which were more significant than we expected.
Our suppliers also experienced availability issues in freight delays leading to pressure on production in our facilities.
We put control towers in place to spotlight areas of concern across your operations into our value chain.
We've proactively redirected components and altered our assembly processes as much as possible to keep output flowing.
In addition, caterpillar inventory grew by about $1 billion in the third quarter compared to the second quarter of 2021.
Of the 1 billion dollar increase over half was an increase in production inventory.
Our team continues to work closely with our suppliers to mitigate supply chain impacts on production.
We experienced rising material and freight costs during the quarter, we continue to take appropriate price actions in response to rising costs and are monitoring the situation.
Operating profit for the third quarter increased by 69% to $1 $7 billion.
The increase in operating profit came from higher volume favorable price and restructuring costs that were lower than last year.
The adjusted operating profit margin improved to 13.7% up 260 basis points versus 11.1% in the third quarter of last year.
That's despite the reinstatement of short term incentive compensation this year.
Margins were slightly stronger than we expected compared to the prior year operating profit margins expanded in each of the three primary segments.
Yes.
Our profit per share was $2 60 versus $1.22 in the third quarter of 2020.
The adjusted profit per share was $2.66 versus $1.52 in the third quarter of last year.
Now on slide five Emmy and T free cash flow for the quarter of around $800 million reflected higher volumes.
Those benefits were partly offset by the increase in caterpillar inventory.
We completed $1.4 billion in share repurchases. This quarter. We also returned about $600 million in dividends to shareholders, reflecting the 8% dividend increase we announced in June with.
We paid a higher dividend annually for 27 consecutive years and we remain proud of our status as a dividend aristocrat. We continue to expect to return substantially all of our M. E N T free cash flow to shareholders over time through dividends and share repurchases.
Turning to slide six let me share a few high level assumptions about the full year.
Looking at 2021 as a whole we still expect to achieve our investor day targets for adjusted operating profit margins of 300 to 600 basis points of improvement versus our performance. During the reference period of 2010 to 2016 at a similar level of sales.
We also expect to achieve the free cash flow targets, we set of an incremental $1 billion to $2 billion annually versus our cash flow performance during 2010 to 2016.
Please turn to slide seven.
Overall, we remain optimistic about global demand, which has remained strong however supply chain challenges may impact our ability to fully meet customer demand.
In construction industries, we remain positive as we've seen the end market demand increase in most regions.
In North America residential construction continues to be a strong driver of industry growth non.
Nonresidential is also improving although activity remains below pre pandemic levels. We are hopeful that Congress passes the infrastructure investment and jobs act, which could boost customer confidence and help support future demand and.
In China, we continue to expect the industry for excavators above 10 tons to be about flat in 2021 with declines in the second half of the year offsetting growth in the first half.
Outside of China, We expect the Asia Pacific region to remain strong in the fourth quarter backed by strong housing activity favorable commodity prices and the benefits of government stimulus.
In the Amy fundamentals remained positive as stimulus actions continue and construction confidence improves.
We expect the industry in Latin America to be supported by construction activity and continued.
And the continued mining recovery.
Turning to resource industries elevated commodity prices and strong minor capex expectations support continued improvement in customer demand. The number of marked parked trucks in the field remains low and utilization has been improving.
We also remain optimistic in heavy construction and quarry and aggregates, where we continue to see improving demand.
Finally in energy and transportation, we expect demand to improve during the fourth quarter compared to last year in.
In oil and gas, we expect services growth and a focus on sustainability to drive demand for new equipment in the form of free powers.
We expect that to be balanced, though by continued capital discipline by our oil and gas customers.
We shipped power generation is expected to remain strong with strength in data centers.
Industrial is expected to see continued strength across all applications.
Modest increases anticipated in transportation with improvement in rail primarily in services and international locomotives.
Now on slide eight sustainability remains an important element of our strategy for long term profitable growth recently.
Recently, we took three actions that advance our sustainability efforts, we named Julie legacy as our first chief sustainability and strategy officer, we committed to incorporate ESG performance into our 2022 incentive plan for executives.
And we announced our plan to analyze the disclosure recommendations of the task force on climate related financial disclosures or T. C. F D and to utilize the T. C. F D framework to enhance our sustainability reporting starting in 2020 three.
This past may we disclosed our sustainability goals for 2030.
Caterpillar is committed to contributing to our reduced carbon future.
We demonstrate this in many ways, including through our significant progress in reducing greenhouse gas emissions from our operations and our continued investment in new products technologies and services to help our customers achieve their climate related objectives as they build a better more sustainable world.
This quarter, our customers did announced some exciting news in cooperation with Caterpillar BH.
P H P and caterpillar have agreed to test zero emissions battery powered large mining trucks at BHP sites to reduce their operational greenhouse gas emissions.
We also signed an agreement with Rio Tinto for the world's first fleet of 793 zero emissions autonomous haul trucks to support its mining operations in Western Australia.
Disagreement help support Rio Tinto sustainability goals.
This mine is also home to the world's first fully autonomous water truck the cat 790.
Enhancing grid stability is also critical for our customers our battery energy storage in bidirectional power Inverters are built to provide continuous reliable electric power and oil and gas sites.
They can also be leveraged at remote mining sites, such as Barrick Gold Corp's Kibali Gold mine in the Democratic Republic of Congo.
Collaborating with our customer and our local dealer track to free the battery energy storage capacity for the mine's Microgrid saves Barrick, an estimated 3 million liters of diesel fuel annually.
We displayed the solution in our mine Expo exhibit in Las Vegas in September and it's a great example of how our technologies apply across our segments to provide customers with full site solutions.
In summary, we continue executing our strategy for long term profitable growth we're.
We're investing in services and expanded offerings, while driving operational excellence, we continue to remain focused on sustainability.
We're developing products and services that facilitate fuel transition increase operational efficiency and reduce emissions to help our customers achieve their environmental and carbon reduction goals.
We had a strong third quarter overall with volume growth in all three primary segments and sales gains in every region.
Operating profit margin expanded due largely to the volume gains while material cost and freight have risen so as price realization with strong performance year to date, we remain on track to meet our Investor day targets for M. E N T margins and free cash flow for the year.
Now, let me turn the call over to Andrew.
Jim and good morning, everyone I'll start on slide nine with my thoughts on Caterpillar third quarter results, including the performance of each segment.
Then I'll turn to the balance sheet and conclude with a few assumptions about the post quarter and full year.
Yeah.
And as Jim noted, our sales and revenues for the third quarter rose about 25% or $2 $5 billion to $12 $4 billion.
This was primarily due to higher volumes.
Operating profit increased by 69% to $1 $7 billion.
Third quarter profit per share was $2 60 compared to $1.22 in the third quarter of 2020.
Adjusted profit per share increased by 75% to $2.66 compared to $1.52 Australia.
Turning to slide 10 third quarter sales and revenues grew by double digit percentage points for three primary segments.
Volume gains were the main growth driver with higher sales to users leading the way.
In addition dealer inventory provided toned declining by $300 million this quarter versus the $600 million decrease last year.
Services revenues favorable price in country also contributed to the top line game.
Looking at it sequentially sales in the third quarter were around 4% lower than in the second quarter, which was in line with normal seasonality.
Third quarter sales and revenues increase in every region in North America, our largest region sales increased by 28% with strong growth in all three primary segments.
And Amy sales rose by 23% as infrastructure spending supported higher demand.
Latin America sales grew by 72% from a low base.
Asia Pacific sales increased by 8% with gains in resource industries, and energy and transportation more than offsetting lower revenues in construction industries.
As Jim mentioned, China was a bright spot in the third quarter of 2020, so the decline in construction industry sales in China was in line with our expectations.
As usual, we have separately reported according sales to users.
Globally sales to users increased by around 14% posted a year ago.
As Jim previously commented the 14% growth rate was below our expectations, primarily due to supply cranes constrained supply chain constraints.
So she uses in construction industries rose by 12% with double digit growth in North America, and Latin America.
Asia Pacific sales to users to combo, 10%, reflecting the expected moderation in China. Following the strong growth of this year.
We still anticipate that the above 10 ton excavator industry will be about flat for the full year when compared to last year's very strong performance.
Sales to users rose by 33% in resource industries.
Growth was consistent across the segment as both mining as well as heavy construction and quarry and aggregates saw strong gains.
In energy and transportation sales to users increased by 8%, reflecting gains in industrial and oil and gas applications, partially offset by reductions in both power generation and transportation.
Now, let's review the bottom line on slide 11.
Third quarter operating profit increased by $679 million or <unk>, 69%.
The higher volume was the principal driver of the increase in operating profit for the quarter.
Volume gains and favorable price realization were partly offset by higher SG&A R&D and manufacturing costs, which included both short term incentive compensation expense as well as higher material and freight costs.
Year over year, the adjusted operating profit margin rose by 260 basis points to 13, 7%.
Versus the second quarter. The adjusted operating profit margin declined by about 40 basis points, which was slightly better than we had anticipated that.
The main reason was the stronger gross margin due to better prices and slightly lower material costs than we had expected.
Our global effective tax rate for the third quarter was 25% versus the 26% we had assumed previously.
Restructuring expenses of $35 million decreased by $77 million compared to Australia.
Adjusted profit per share of $2.66 was higher than we expected, reflecting the strong operational performance as well as the lower than expected global tax rate and discrete tax benefits.
These accounted for about 14 cents per share in aggregate for the quarter.
We also saw some currency benefits from hedging in the quarter primarily related to the euro.
Moving to slide 12, let's take a look at Sigma performance, starting with construction industries.
Sales increased by 30% in the third quarter to $5 3 billion, primarily driven by higher sales volume and favorable price realization.
The improvement in volume was due to higher end user demand and the impacts of changes in dealer inventories.
The increase in end user demand was led by North America, where nonresidential construction demand continued to improve and we also saw continued strength in residential construction.
Overall dealers reduced their construction equipment inventories lessen in the third quarter 2021 than they did in the third quarter of 2020.
The segment's third quarter profit went up by 47% to $859 million.
The increase came from higher sales volume and favorable cross fertilization.
This was partially offset by unfavorable manufacturing costs, which largely reflected higher freight and material costs.
The segment's operating margin increased by 190 basis points versus last year to 16, 3%.
Turning to slide 13 resource industry sales increased by 32% in the third quarter to $2.4 billion.
The improvement was mostly due to higher end user demand for equipment and after market parts, both money as well as heavy construction and quarry and aggregates.
This was partially offset by changes in dealer inventories.
Third quarter profit for resource industries increased by 78% to $197 million.
The increase was mainly due to higher sales volume and favorable price realization, partially offset by higher freight and material costs.
The segment's operating margin of 12, 3% increased by 310 basis points when compared to 2020.
Now on slide 14 energy and transportation sales increased by 22% to approximately $5 $1 billion.
That included a 48% sales increase in oil and gas, which came off a low base and also included the addition of SPM oil and gas.
Yeah.
Here, we saw higher sales in both reciprocating engines and turbine.
Power generation sales declined slightly as turbines and related services were unfavorably impacted by the timing of customer projects.
Industrial sales rose by 30% with demand higher across all regions.
Transportation rose by 12% over low base on higher rail services and marine cells.
Profit, finishing transportation increased by 41% to $696 million.
The improvement reflected higher sales volume.
That was partially offset by a couple of factors unfavorable manufacturing costs, including fragrance to the.
The impact of short term incentive compensation.
And acquisition related expenses, primarily S. P M for oil and gas.
Keep in mind that the third quarter of 2020, including an unfavorable impact from inventory write downs and asset impairments.
The segment's operating margin increased year over year by 190 basis points to 13, 7%.
As we mentioned last quarter, we do expect S. P M oil and gas to modestly impact margins for energy and transportation. This year as it will take some time for the synergies to be realized.
We remain very pleased with how the acreage question is growing and expected to see the full benefits of the transaction transaction as we move forward.
Yeah.
On slide 15 financial products revenue increased by 5% to $762 million.
Segment profit increased by 22% year over year to $173 million.
The year over year profit increase was partly due to favorability in returned repossessed equipment as demand for used equipment remains very strong.
We also benefited from a lower provision for credit losses, along with a higher net yield on average earning assets due to a favorable change in weighted average interest rates.
These benefits were partially offset by the impact of higher short term incentive compensation expense.
Our credit portfolio remains in good shape as customer health indicators are positive.
Past dues continued to improve across all portfolio segments to 2.41%.
That's down 140 basis points year over year, and down 17 basis points compared to the second quarter. This.
This is below our 10 year average.
New business volume also continued to improve in fact, the third quarter of 2021 was the highest new business volume in the third quarter to 10 years.
On slide 16, Ami and cheap free cash flow was $837 million in the quarter slightly lower than we saw in the third quarter of last year.
Higher profits were partly offset by a $1 billion increase in caterpillar inventory in the third quarter compared to the second quarter of 2021.
The growth in caterpillar inventory reflected an increase in production inventory due to a shortage of certain components and higher end user demand.
The company ended the quarter with $9 4 billion goes in enterprise cash we continue to maintain a solid liquidity position as we prioritize a strong mid a credit ratings.
M. A N T has generated free cash flow of $4 $2 billion year to date.
We said it at COVID-19, Investor day that we intended to return substantially all of EMEA and Chi free cash flow to shareholders over time.
Using a combination of dividends and share repurchases.
We've repurchased about $1.4 billion of our common shares this quarter, which brings the total to $1 $6 billion year to date.
We paid a dividend in the third quarter of $1.11 per share or about $600 million in aggregate, reflecting the 8% increase we announced in June.
Through the end of the third quarter, we've returned $3 $4 billion to shareholders through dividends and share repurchases.
Now on slide 17 in light of the highly fluid environment will continue not providing guidance for annual profit per share.
To assist you with your modeling, though will continue to share some high level assumptions for the upcoming quarter.
We expect a stronger top line in the fourth quarter compared to the third which would follow a normal seasonable pattern.
As we said before we do not expect a significant benefit from dealer restocking in 2021.
We expect our adjusted operating profit margin in the fourth quarter. It should generally follow the seasonable pattern of lower margins versus third quarter.
Sequentially, we see continued pressure from higher material and freight costs, which accelerated during the quarter and are locking to remain elevated in the fourth quarter.
We anticipate this will be partly offset by price realization.
We continue to expect price to offset higher manufacturing costs for machines in 2021 although further disruptions in the supply chain can make that more difficult.
As we said previously price realization will not offset manufacturing costs within within energy and transportation.
Free cash flow in 2021.
Turning decided 18.
In summary demand remains strong and we perform well in a quarter that presented additional complexity due to the challenges within the supply chain.
Our operating performance was strong with sales up 25% and adjusted profit per share up 75% versus the prior year.
We remain on track to meet our Investor day targets for adjusted operating margins and free cash flow of the year.
With that will now take your questions.
As a reminder management asked.
That we limit one question per analyst you're lying about clothes. Once the question has been passed if clarification as desired. Please freaked joined they killed.
And your first question comes from the line of Jamie Cook with Credit Suisse.
Hi, good morning, a nice job on the quarter.
I guess my first question you mentioned yourself.
Okay because of supply chain, but we're still making our our margin targets. So what's performing better than you would have expected and on price costs, you're covering your price.
<unk> your price cause I'm machines in 2021, I'm, just trying to think about the ability to continue to recover price or you know have price higher than your costs in 2022, and can we begin to get price realisation on N T as well thanks.
Okay. So within the quarter as I mentioned gross margin did come in slightly better.
The we expected.
Rice with strong in a little bit better than we expected and some of the material cost increases, which we are anticipating ham from through that came through quite late in the quarter, obviously that will impact queue for a little bit more.
And obviously, we will probably will see just as we talked about the fact that for the full year.
We expect from machines Prost offset the children.
Manufacturing cost increases, including that's including short term incentive compensation.
We will expect to see a slight negative in queue for as a result.
Jim move.
With regard to future pricing.
Obviously, we continue to monitor the environment, we've taken appropriate projections as we've gone through the year.
And we will be taking obviously looking you are taking projections as well within Ian T N.
Energy and transportation as well as part of those actions.
And markets are starting to recover as well if you remember the beginning of the year, we didn't take the price action as a result of the demand outlook within those applications, yes, Jamie it's always a balance will look at.
What's happening with our cost picture almost have to be competitive as well. So again will balance all those inputs and make personal decisions going forward.
In ways that we think makes sense.
And your next question will come from the lineup and diagnosed with J P. Morgan.
Hi, good morning.
I'd like to focus on oil and gas please.
Mentioned during a slide presentation that you saw an increase in.
Service.
Both reciprocating engines and turbines.
If you could separate boat.
And the fundamentals the boat when like you expect to see an increase in demand for.
Products are reciprocating engines, whether they be well completion equipment.
And turbines at particularly or natural gas compression.
Address each one of those I'd appreciate it.
And in in reshape reshape oil and gas we are starting as you mentioned services are strong we are starting to see some new equipment activity. That's mainly for re powers. Our customers are very focused on their sustainability objectives in reducing their carbon footprints in with given some of the new solutions. We have we are starting to see some.
New equipment activity again, mainly for re powers and reset.
In for Soul, our solar tends to go into.
There's a downturn and they tend to go into that downturn a bit later and then come out of it later just because of the lead times of both the projects our customers are construction and also solarz lead times. So as you mentioned so our services.
Sales are strong and are have improved and again, they're they're new equipment sales are are really ah hanging in there and again, but we'll have to see how that plays out in the months ahead.
But again typically they go into they go into a downturn a bit later and come out of it a bit later compared to the reset part of the business.
Our next question will come from the line and make Dubray with bird.
Thank you and good morning, everyone.
Ask a question good morning, I'll ask a question.
Running a backlog.
If I look at your backlog here is the highest.
In about 10 years dealer inventories on the other hand seemed to be close to 10 year lows such that that looks a little bit unusual and I'm sort of curious from your perspective, how much of this dynamic is owed to dealer is literally not being able to restock given the supply chain.
Items that you talked about earlier and how that might change on a go forward basis as things loosen up and then also related to the backlog.
You do have as much as you do.
How is the price caused dynamic in the backlog that you currently have should we expect more of a price cost headwind early in the 22 is your converting on this backlog or is this backlog properly priced at this point.
Alright, well you know in terms of dealer inventory of course do as your independent businesses to make their own decisions about their inventory having said that.
The dynamics here that I believe are impacting that dealer inventory are a combination of strong customer demand what you talked about in our previous comments to that's that's positive and then on the other side of it as we mentioned we are having some supply chain challenges as well fully meeting all the demand that's out there. So it's a combination of those two factors very strong <unk>.
Demand and supply chain challenges again, those those independent dealers to make their own decisions, but those two factors do you have an impact on that that low dealer inventory and I'm going to ask you that to clarify the question the Andrew.
On the on the wood about whether there is actually a price challenge within the backlog, obviously, we do normally as normal practice, where the customer has an order remember these orders to the from the dealers most of the time rather than from customers, where there's an order from the customer to the dealer.
Normally has certainly time that normally would go in that is taken into account obviously, if the customers are ordering before price increase they will pay based on the price of the day, we always made but obviously a lot of those orders food, you're talking about and back dog ordeal orders and therefore will be priced at the appropriate price level.
Rather than with the customer protected orders. So the vast majority of the backlog will be property price.
Great. Thank you.
Our next question will come from the lineup, David Raso with Evercore ISI.
Following up on the backlog I was curious just given some of the long lead times, we hear in the channel.
What percent of this backlog do expect to ship. The next 12 months, we usually get that data point in the filings, but I'm. Just curious is there something about this backlog where it looks large but it is expected of shipped over a lot longer time than normal or is it that normal.
Twenty-five percent of the backlog is not expected to be shipped the next 12 months or the other way, 75% to 80% of it is expected to be shipped to the next.
12 months.
David I mean, obviously I don't actually have the queue in front of me and it is in.
Our farming documents and will that will be available will come back to you with the question the answer what that will be.
And a little while I mean, obviously.
One of the the challenges as you know was with backlog is.
Is where it is and what it is so obviously things are so law.
And rail are more direct businesses.
And those all customer orders and some of those have pretty much long lead times anyway.
As part of that.
Process, but we will come back to you on the part of your question relating to the percentage that's not.
Not due to be shipped in the next 12 months and how that backlog.
Plays out going forward too dependent obviously on.
Both.
If customer demand remains strong and supply chain challenges remain and then it'll have an impact on on the backlog. So I want to see it all plays out.
Thank you. Our next question is going to come from the line of Matt L Cat with Cowen and company.
Good morning, Thank you for taking my question.
On the mining filed.
And upcycle looming and the majors.
Increasing do you think the equipment replacement cycle will finally kick in that's unexpected for for several years now.
You know what we've been talking about it in our last earnings calls is a gradual improvement in mind fundamentals of their commodity prices are generally supportive of reinvestment.
Our our mining customers are disappointing capital discipline, as we've talked about before but having said that we.
We do see mining continued to gradually improve and one other thing to keep in mind as if if in fact, a customer decides to keep a truck running.
Longer than they normally would.
That's not a bad thing for us either because we have the opportunity to repower and have services in parts and that's good as well so again.
What what we've been talking about is a steady gradual increase in mining activity and that's continues to play itself out. So it's again turning that as much as we had expected.
And so I just went out and found out the answer to David's question. So it's about less than 20% that is not expect to be fulfilled in the next 12 months.
Thank you. Our next question will come from the line.
Rob.
Wertheimer with Natalie It's research.
Hi, good morning, everybody and thank you.
Rodolfo in mining.
Spent a lot of.
Moral around China, construction lately and actually a dealer sales didn't seem to be too bad they're given given some of the fears are you hearing any concern or any reevaluation from money customers. As you look at the potential for harder landing in China real estate or is that really not on the board everything else seems pretty constructive I guess.
Certainly my continued conversations with mining Ceos.
Aleve.
They see that the environment is positive commodity prices you know the energy transition I believe represents just an excellent opportunity for both mining customers and for caterpillar.
Thinking about all the all the minerals that need to be mined for for <unk> and everything else that has to happen. We believe that's quite positive so again.
It is plain that much as we had anticipated in terms of a gradual increase in mining and we basically everything we see today. We believe that will continue so no natural that direct question is no. We haven't heard a lot of concerns about.
A downturn there.
Thank you.
Our next question will come from the line of Courtney, Yeah, Cavani with Morgan Stanley.
Hi, Good morning, guys and you could just.
Comment.
You had mentioned that sales have been higher if we didn't have somebody at the pie tin issues and if you can quantify that at all and also just.
Which segments do you feel like for most impacted by that and is it entirely reflected in and dealer inventory and then just on the on the guidance. When we think about typical seasonality for the fourth quarter. If you can just disaggregate the different divisions is there any new ones, there or should we be thinking about.
All of this.
And performing alignment seasonality.
Yeah. So so it's very difficult to quantify and we're not going to try to give you a number today, there's a lot of moving pieces here you stop and think about.
Dealer inventory changes.
And again, so we're not going to try to quantify it.
Clearly it would have been higher I mean, if you look at our.
Caterpillar inventory that gives you some indication of again, the fact that we are having some challenges, but we're not going to quantify that number.
You know.
We mentioned earlier that our sales to use yours came in lower than we anticipated due to supply chain challenges.
But again very very difficult to quantify and in terms of seasonality at this point, we expect things to play out as they normally do I can't think of an example on let Andrew chime in here or something is going to be.
Unusual yeah, I mean, the only part of the World. That's really unusual at the moment is around China, because if you remember ciano last year.
Was very strong in the second half of the.
Which is unusual which is unusual.
As a result of Covid.
And we expect overall this year, China, So b as we said about flattish and so the chin tunnel above excavator market.
So effectively China will have be weaker in the second half that is the only one which will be norm be.
Normal the other business segments of gooey very much more in line with their normal season move patterns and just to clarify their China will be probably typical this year.
Slower second hand in the first half, but it was unusual last year, which will create some challenging cops. So last year again very unusual in that the second half was stronger than the first two to as Andrew mentioned due to Covid.
Our next question will come from the line, Nebraska Lardy with Bank of America Merrill Lynch.
Yeah, Thanks for the warning guys.
Rosalind and Ross.
Jim maybe this one's for you just an antique question I mean, you're you're big oil and gas customers I I imagine are seeing a real surge in free cash flow, just given where boyland natural gas prices have gone what what are the conversations like with somebody a bigger customers today seem to.
Can be looking at a lot of new project activity, particularly around pipelines are they accelerating refurbishments are they still very candidate around new investment kind of like what you've seen from your mining customers for some <unk> for some time right now.
Yeah.
Well. Thanks for the question certainly we do expect our oil and gas customers to continue to to display capital discipline, having said that as I mentioned earlier, we are seeing increases in services for both reach upon the solar and we are seen.
An increase in new equipment activity and summit in a lot of it is around customers being focused on reducing their carbon footprint and we have a lot of.
New solutions to help them do that whether it's dynamic guess blending where they can substitute it at 80, 85% diesel fuel natural gas.
We have a number of other solutions, we have as well, which can help them reduce their carbon footprint. So we are seeing that happening.
Sure.
But again.
Again, I mentioned earlier, the solar tends to go into the trough a bit a bit a bit sooner than.
Other companies and.
Come out of it a bit later, but their services are strong as well we are seeing pick up an international activity for solar that has picked up.
And that quotation activity is certainly picked up over the last the last few months.
Thank you.
And our next question is going to come from the line of Nicole to place with Deutsche Bank.
Yeah. Thank you good morning, guys.
Good morning musical.
I, just Wanna dig into what you're seeing comments of hygiene perspective, a bit more I guess you know what I.
I'm looking for is are there any signs that maybe we're seeing a stabilization at the higher end of the empathic, possibly the worst of the impact.
And kind of similar around margins I guess, when you think about the impact face it from higher labor great material cost you think that this is the.
That is it yet.
Yeah supply chain, it's a very obviously a challenge difficult question to answer.
We're seeing a situation where they'll say the b a shortage in one component.
And we're very focused on that that will ease and then another component will create a problem and then it goes back and forth. So a number of our suppliers are dealing with a whole variety of issues. Some of our suppliers are having labor issues or their suppliers are having labor issues.
So it's very difficult to make a prediction as to where we are with this issue again it. It's it depends upon the component it depends upon the region of the world. So again not going to try to call. This to say, it's it's going to get better from here, it's going to get worse from here, just a very fluid dynamics situation, but we're dealing with it again.
And I'm proud.
Proud of the team that we were able to to post to 25% increase in sales quarter to quarter given those challenges.
As I mentioned earlier, we are taking appropriate price action in response to to the cost pressures and we had we had solid price realisation in the quarter. So again very difficult to judge exactly what's going to happen moving forward, but I do feel confident in our ability to manage the situation.
Again, as we did in the third quarter.
Balancing price with cost balancing taken care of our customers. So again, it's challenging but we intend to work our way through.
And again when they keep in mind is of course demand. The good news is that what's driving a lot of this is customer demand is so strong. So you know that's the great news, we have strong customer demand and what we're talking about here with a supply chain challenges is is challenging fully meeting.
Strong customer demand and of course, that's that's very important so something to keep in mind.
Thank you. Our next question will come from the line of Chad Dillard with Bernstein.
Hi, good morning, everyone.
Okay.
So given the supply chain charges and you can't manufacture everything that you you'd like can you talk about higher prioritizing manufacturing are you putting the larger at higher step ahead of the others.
Of equal.
And how has that approach changed as we've gone through the year.
Yeah, So we certainly do.
Try to make conscious decisions.
We try to take care of our longterm customers. We are but we do also look at.
OPEC Biocine, our production, where it makes sense. So that is something that that we keep in mind.
Yeah, and I often.
One of the challenges remembers not all machines, all made with common components. So one of the problems often as a one component can be impacting production whoops area today and it could be something different tomorrow. So that again best Jim said that complexity also.
As a factor in when they keep in mind as well if we don't have new equipment, our dealers have the opportunity to rent equipment. They have the ability to sell used equipment as well. So we have a lot of options to bring in the marketplace to serve our customers.
And oftentimes our customers and it depends on the customer depends on the product but.
Many customers are in fact willing to wait even though things are taken bit longer many customers are willing to wait for that equipment. So that's something to keep in mind as well, we've got a lot of very loyal customers.
Thank you. Our next question will come from the line add.
Add an omen with Cleveland research.
Hey, guys good morning good.
Good morning.
I was wondering if.
You could share with your service revenue growth has been so far this year and if not maybe.
Maybe if you could just share some perspective about if you are running above plan or below your plan for that line of business, because I assume that it would be.
It should be running it above plan given the demand environment, but you also have some pretty lofty service revenue growth goals for the next several years. So maybe you could update us on where you stand with that initiative and some of the key drivers that you're working there.
And we will we will share with you our services revenue for the year in January as we as we said we would services has been a bright spot. This year. So certainly services are higher this year than last but.
But we're not going to quantify it at this point, but again it is it is a bright spot for us.
Thank you. Our next question will come from the line as Larry them Maria with William Blair.
Alright, Thanks, good morning, everybody.
You notice environmental wins, obviously earlier in the quality prepared remarks, just curious of these structurally different margin and or aftermarket profiles and is there a risk that customer's weight on equipment upgrade to see how this market develops or do you think customers will this order this ethics essay.
If they want to layer it in.
Well, you know customers have to first and foremost have to keep their their equipment operating right. So.
There's a certain amount of of.
Flexibility, there, but only so much where they have to again make those decisions to keep equipment operator, so it.
We serve as you know a variety of different industry. So mine is different in construction, but.
Again, we don't see things.
Creating we don't see a problem there generally customers have to make decisions to keep equipment, operator until they'll either put and they'll do the service work or in fact, I'll buy new equipment, one or the other and if they can't get the new equipment.
No wait as long as they can and then potentially do a rebuilt so.
Again services are strong for the year and as far as.
You're talking about different margin and off the market profiles I mean, obviously at this age among these all very early stage products that we're developing with them and.
You will not in the situation, where we are actually determining what pricing will be.
So that will be part of the equation as we go through the next period of time.
Thank you. Our next question will come from the line of Stephen to share with you B S.
Great. Thanks, Good morning, there's been a number of questions on the oil and gas piece, but I had a bigger picture question about Ian T. Overall, and the potential to get back to that kind of 2019 peak levels really wondering how you're thinking about that potential and what strategy and visibility it might have to get back there.
Over the next 823 years, if that's what you're thinking and maybe it's this carbon point B a bigger factor are there other parts of the business beyond oil and gas that can step up as if a business that can really kind of get back to that that 2019 peak level overall.
And what we're really doing is looking at each element of the <unk>.
Energy and transportation business and focused on profitably growing it.
If you stop and think about our real business. It is particularly for U S. Freight locomotives. It is at a very very very low period.
Slight bit of improvement there and services, but again that only has one way to go if you look at look at how low that businesses oil.
Oil and gas of course had been depressed for the reasons that you are all aware of as I mentioned, we're we're seeing an increase in services seen an increase in new equipment, and the recip and helping our.
[noise] customers Meacham their sustainability goes with re powers power generation business remains strong in terms of data centers. If you stop and just think about the way the way the world continues to change.
I suspect that there will be lots of opportunities for data centers moving forward.
And the industrial business, we're seeing an increase there across all applications and generally that industrial business does well in periods of global economic expansion. So that's positive also so again I mean, it's the energy and transportation businesses is a is a diverse group of products that servers that serves a diverse group of.
Industries, but certainly M. A bullish about our long term prospects, they're both from.
The market size in our ability to be competitive to serve that market.
Thank you. Our next question will come from the line of Tin thing with Citigroup.
Thank you good morning, maybe just to drill down a bit further on that.
The pricing discussion, we've had just with respect to see I.
Yeah.
Nearly 5.5% price realisation and a quarter.
As we think about that maybe in the near termite. My understanding is there was some additional price actions taken.
At least in North America.
Here and open the last.
A month or so, but obviously just given these long lead times that'll take some time to come into effect. So how should we think about it just maybe the near term path of of pricing again, and your largest segment yeah that just in the fourth quarter, but how that really dovetailed into next year's and you start to.
Start to ship some of these orders thank you.
Yeah. So I mean again back to the point I was making obviously earlier, the where we do obviously put a price increases through if a customer orders ahead at that price increase they get the old price.
That'll be price protect.
Obviously, there are some products, which are longer lead time.
But the vast majority of.
Of the backlog will flow through at the current list price.
So then there's a blank but.
Not a huge lag there will come through with regards to pricing as we move into.
22, I think.
No.
Indicated what we expect for the rest of the.
Obviously, we're in the middle of our planning process.
But you should expect that we will continue to take the appropriate actions both from a cost perspective to try and reduce costs were possible.
And some of those close headwinds and also from a from a pricing perspective.
To make sure at the same time that we priced competitively.
To make sure we continue to grow the business somebody customer demand. So it's a balancing act, but that will be something we will continue to work on as you say as we go through 2022.
It is complicated and you just have to think about theirs list price and then there's certain support that we provide our dealers in terms of variance to help them capture strategic deals. There was a lot that goes into this so it's very difficult to to you know.
To put into a spreadsheet, but again our intent here is to continue to monitor the cost situation into take appropriate price action in response to that cost environment and so far so good.
Thank you.
Our next question will come from the line of Joel Kiss with BMO.
Hey, guys How's it going.
Good morning.
I just wanted to have a a little bit of a clarification from mixed question earlier about a dealer inventories if if you.
Can you give us a little bit of sense of you know all the technology, we're putting into your products and all that if the dealer inventories are gonna go back to historic levels or you think the new go forward levels might be whatever half of where we were before and then my my real question is if.
If you can give us a little insight on why prices seemed to be lagging a little bit and resource industries is that just the nature of the contracts or anything else. Thank you.
Yeah. So in terms of of dealer inventory. It does remain near the low end of the range and as I mentioned earlier.
A combination of two things impacting that one is a strong customer demand and the supply chain challenges that we've talked about very difficult again dealers are independent businesses to make it a prediction as to how that will play out but I will tell you. It is at the low end of the normal range certainly with our new processes, we're trying to be.
To be we've been improved process to try to match.
Our production with and use your demand, having said that again inventories at the low end of the range.
In terms of.
In terms of resource industries Coupla factors there.
One if you remember the beginning of the year, we did have a couple of deals which would negative price in Q1.
Which which impacted and then actually what's also happening is.
Laura.
Services are sold into.
And to Australia, and we reduced prices because of this change in price between Yohji dollar and the dollar.
It came through a little bit in this quarter, we should expect to see price become more favorable as we move through the remainder of the year, we'll take our last question. Please.
Okay and last question will come from the lineup carry relish with Goldman Sachs.
Yes, hi, good morning, everyone.
Oh really.
Really strong zero emissions product pipeline that you folks have.
Across the businesses I'm wondering if you could talk about the R&D required to the sport that investment over the next couple of years can you do it within the level of R&D sales that you folks have had over the past couple of years or is there needs to be a step up and can you time to that is there have been a part of the equation here.
Or or to to accelerate the development path is that going to be.
Use of capital as you folks at.
Hey, Jerry So will answer the question is certainly were very willing and able to invest R&D to help meet the.
The sustainability goals, both for us and our customers that we've talked about.
We maybe the way to answer. This question is we intend to invest the R&D, we need to invest but we also intend to meet our investor day target for operating margins of free cash flow. So that's really the way we look at it and as we as we develop those products as always it'll be a combination of things if it makes sense for us.
To have an acquisition that helps us there we can do that.
I believe that the vast majority of it will come from our own R&D in investing in the products, but you know we have made a few acquisitions here over the last over the last couple of years, you know small acquisitions that have helped us are much now with technology perspective, and we're continually on the hunt for.
Other potential acquisition opportunities that can help us in our journey, but I suspect the vast majority of it will come to organic investment in our in our products.
Thanks, everyone for your questions and now I'd like to turn it back to Jim for his closing remarks, well. Thanks, everyone for your time this morning and for your questions.
Again somewhere else just.
If you takeaways, we're continuing to execute our strategy for long term profitable growth through services expanded offerings and operational excellence.
And a solid quarter increased sales and revenues and all segments annual regions and we improved our operating profit margins. We do is we mentioned remain optimistic about demand and our team continues to work closely with suppliers to mitigate the supply chain challenges that are having an impact on production.
We're working hard with our customers to to support them as they build a better more sustainable world We've announced.
Key actions in our sustainability journey and as we mentioned it a few times here. This morning, we remain on track to meet our Investor day targets for margins are free cashflow. Thanks. Thanks again for joining us take your damn and thanks, Andrea and everyone, who would join a call today a replay of our call will be available online later this morning, but also posted a transcript and our investor relations.
Site as soon as it's available. In addition, you'll find that third quarter results video with our CFO and an SEC filing with our sales to users' data click on investors that caterpillar Dot com and then click on financial to view these materials.
If you have any questions. Please reach out to Rad Army you can reach rabbit R. E N T E L underscore Rab at Cat Dot Com and I met Driscoll underscore Jennifer at Cat Dot Com the Investor Relations General phone number is 3096754549, we hope you enjoy the rest of your day and.
Turn it back to Holly to conclude our call.
And with badly Luckily today's conference call. Thank you for participating in the Caterpillar earnings Conference call you may now disconnect.
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