Q1 2022 Caterpillar Inc Earnings Call

Okay.

Welcome to the first quarter 2022 Caterpillar earnings conference call.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Ryan feel there. Thank you. Please go ahead.

Thank you Emma and good morning, everyone. Welcome to Caterpillar's first quarter of 2022 earnings call I'm, Ryan Taylor Director of Investor Relations. Joining me today are Jim up will be chairman and CEO , Andrew Bonfield, Chief Financial Officer.

Emily Vice President of the Global Finance Services Division and Rob Rengel Senior IR manager.

During our call today, we'll be discussing our first quarter earnings release, we issued earlier today you can find our slides the news release and our video recap at investors Dot Caterpillar dot com under events and presentations.

Also like to remind everyone that we're hosting caterpillars investor day on May 17th from 10 30, a M to three P. M Central time at the Hilton DFW Lakes' Executive Conference Center in Grapevine, Texas, Our theme is services technology and sustainability, helping our customers build a better world.

Check out the details on our Investor website.

Caterpillar has copyrighted this call and we prohibit use of any portion of it without our prior written approval moving.

Moving to slide two during our call today, we'll make forward looking statements, which are subject to risks and uncertainties.

Also make assumptions that could cause our actual results to be different than the information we're sharing with you on this call.

Please refer to our recent SEC filings.

And the forward looking statements reminder, in the news release for details on factors that individually or in aggregate could cause our actual results to vary materially from our forecast.

On today's call. We'll also refer to non-GAAP numbers for a reconciliation of any non-GAAP numbers to the appropriate U S. GAAP numbers. Please see the appendix of the earnings call slides.

Today, we reported profit per share of $2 86 for the first quarter of 2022, compared with $2 77 sensitive profit per share in the first quarter of 2021, we're including adjusted profit per share. In addition to our U S. GAAP results are adjusted profit per share was $2.88 for the first quarter of 2010.

<unk> compared with adjusted profit per share of $2 87 for the first quarter of 2021 adjusted.

Adjusted profit per share for both quarters, excluding restructuring costs now, let's flip, let's flip to slide three and turn the call over to our chairman and CEO Jim Ogilvie.

Thanks, Ryan Good morning, everyone. Thank you for joining us.

To start by thanking our global team for their contributions to another good quarter.

We continue to execute our strategy for long term profitable growth as demonstrated by our first quarter results.

I'll begin with my perspectives on our performance in the quarter and then I'll provide some insight on our end markets before.

Before discussing our results I'd like to take a moment to say we remain deeply saddened by the tragic events continuing to occur in Ukraine, and hope for a peaceful resolution.

Do the Caterpillar Foundation, we have donated more than $1 million to support both urgent and long term needs of the Ukraine humanitarian crisis.

I'm proud of our employees for their generous contributions to the foundation matching gifts program, which added nearly an additional $1 million of support for your Korean refugees and the <unk>.

Operations front, we suspended production in our Russian manufacturing facilities and will continue to comply with all applicable laws in a bombing sanctions.

Moving onto our quarterly results sales rose in all three of our primary segments due to volume gains and favorable price.

Sales and margins were both slightly better than we expected and similar to the second half of 2021 our topline would have been even stronger without the continuing supply chain constraints.

Overall, we remain encouraged by the strong demand for our products and services. The first quarter of 2020 to Mark the fifth consecutive quarter of higher end user demand compared to the prior year.

Services remained strong in the quarter.

We continue to make progress on our service initiatives, including customer value agreements ecommerce connected assets and prioritize service events.

Moving to slide four sales and revenues increased by 14% slightly better than we expected.

The increase was primarily driven by higher end user demand and the impact of changes in dealer inventories as well as strengthening price realization.

The impact of our price actions started to accelerate in the second half of 2021 .

We generated double digit sales growth in all primary segments and sales Rose in North America, Latin America, Andy Amy Asia Pacific was down by 4%.

Compared with the first quarter of 2021 sales to users rose, 2%, which was about as we expected four machines, including construction industries and resource industries sales to users increased by 3%, while energy and transportation decreased 1%.

Sales to users in construction industries were about flat overall with good growth globally in the first quarter, except for China.

North America grew by double digits as residential construction remains strong and nonresidential contributed to.

Show signs of improvement.

Latin America saw higher end user demand supported by construction and strong commodity prices.

End user demand increasingly Amy due to residential growth and supportive commodity prices.

I'll briefly discuss China.

In the first quarter of 2021, China is greater than 10 ton excavator industry was at an all time high which resulted in a difficult comparable in the quarter.

In the first quarter of 2022, China was lower than we expected due to weaker residential construction and COVID-19 related shutdowns overall.

Overall sales in China were about half the level, we saw in the prior year's quarter keep in mind, China sales are typically 5% to 10% of our enterprise sales.

Outside of China Asia Pacific sales to users grew as we continue to see strong demand in the region.

In resource industries. The overall environment remained positive with sales to users up 13% an improvement from the fourth quarter.

Mining increased at a measured pace, which is in line with the expectations that we've been communicating to you for the last couple of years.

Strong commodity prices supported the high utilization and a low number of parked trucks.

In heavy construction and quarry and aggregates sales to users increased versus the prior year for the fourth straight quarter as end user demand continues to improve.

In energy and transportation sales to users declined 1% versus the prior year.

Solar turbines declined as expected due to the timing of projects, excluding solar sales to users were strong oil and gas sales to users were down in the first quarter with improvement in reciprocating engines more than offset by solar.

Despite continued data center and rental demand strength power generation sales to users were down overall due to timing of some larger projects.

Industrial end user demand strengthened across all regions.

Lastly, transportation benefited from growth off a low base primarily in marine applications.

Now I'll spend a moment on dealer inventory dealers, who are independent businesses increase their inventories by about $1.3 billion in the first quarter.

This compares to a $700 million increase in the first quarter of last year well.

While dealer inventories remain near the low end of the typical range. We continue to work closely with dealers to satisfy higher end user demand.

Andrew will provide additional color about dealer inventory later in the call.

Regarding ongoing supply constraints, we experienced similar challenges to what we highlighted in the fourth quarter, which was in line with our expectations.

We continue to experience constraints with semiconductors and search and other components.

Our team continues to implement solutions to help mitigate the overall situation for.

For example, we executed engineering redesigns to provide customers with alternative options.

We also increased dual sourcing of components in play specialized caterpillar resources at suppliers to help ease constraints.

I remain proud of our global teams ability to deliver double digit sales growth despite supply chain challenges Sim.

Similar to previous quarters absent the supply chain constraints, our topline would have been even stronger when.

When the supply chain conditions ease, we expect to be well positioned to fully meet demand and gain operating leverage from higher volumes.

Operating profit increased 2% in the quarter to $1 $9 billion, driven by strong volume and favorable price realization across all segments, which was partially offset by higher manufacturing costs and SG&A and R&D expenses.

The higher manufacturing costs, primarily reflected increased material and freight cost in the quarter.

While we did see some labor inefficiencies these were not as significant as they were in the fourth quarter.

Operating profit margins were 13, 7% in the first quarter, which was lower than the first quarter of 2021 .

We expected comparisons would be difficult as inflationary impacts to manufacturing cost accelerated in the back half of 2020 , one and remained at a similar level in the first quarter of 2022.

On a sequential basis, our margins improved versus the fourth quarter as we expected.

Our profit per share was $2.86 versus $2 77 in the first quarter of 2021 .

The adjusted profit per share was $2 88 versus $2 87.

In the first quarter of last year.

On slide five we had an M E N T free cash outflow of about $400 million in the quarter, which Andrew will discuss in a few moments.

To remind you our investor day target is to deliver M. E N T free cash flow of between four and $8 billion per year, we expect to be within that range for the full year 2022.

Regarding capital deployment, we completed $800 million of share repurchases and returned $600 million in dividends to shareholders. We.

We remain proud of our dividend aristocrat status, we continue to expect to return substantially all of our M. E&P free cash flow to shareholders over time through dividends and share repurchases.

Now I'll share some high level assumptions on our expectations for the full year.

We expect to achieve our Investor day targets for adjusted operating profit margins and as I've, just mentioned deliver M E T free cash flow within our targeted range in 2022.

As I previously indicated we continue to be encouraged by strong order demand across our segments.

In the first quarter of 2022, our total backlog increased by $3.4 billion as we experienced continued strong demand and supply chain challenges.

Backlog increased in all segments with the largest increase in energy and transportation.

The environment continues to be challenging due to supply chain constraints and the more recent COVID-19 related shutdowns in China.

Although manufacturing costs are expected to remain elevated we expect price to more than offset these cost increases for the full year.

Turning to slide six I'll discuss our expectations for key end markets. This year.

In construction industries in North America residential construction remained strong with non where does that residential continuing to improve.

Despite rising interest rates infrastructure investment is expected to improve in late 2022 and beyond supported by the U S infrastructure investment and jobs Act.

The 10 ton and above excavator market in China was very strong in 2020 2021 .

We now anticipate this market will be slightly lower than 2019 levels the rest of Asia.

<unk> Pacific region is expected to grow due to higher infrastructure spending.

Any amy despite the broader geopolitical concerns we remain cautiously optimistic due to housing growth in the EU investment package that is expected to drive construction demand.

Construction and mining activity in Latin America are supportive of growth it could be impacted by inflation and interest rate policy decisions.

In resource industries, we believe commodity prices will continue to drive higher production and utilization levels, which support more investments in equipment and services in 2022 and beyond.

Within heavy construction and quarry and aggregates. We also anticipate continued growth in 2022.

Lastly, we are seeing increased quoting for our autonomous solutions, which includes large mining trucks drills truck type tractors water trucks and underground machines.

In energy and transportation, we expect improving momentum in 2022 with strong order rates in most applications.

The oil and gas although customers remain disciplined we are encouraged by continued strength in reciprocating engine orders, especially for large engine replacements as asset utilization increases.

Power generation orders remain healthy due to positive economic growth and continued data center strength.

In 2022, well sold our services are expected to remain steady we continue to expect new equipment shipments to be lower than last year due to the lead time of solar products.

So there is new equipment orders strengthened significantly in the first quarter and shipments are expected to improve in late 2022 or early 2023.

Industrial remains healthy with continued momentum in construction agriculture and electric power.

In rail North American locomotive sales are expected to remain muted, but international locomotives are more promising.

We also anticipate growth in high speed marine as customers upgrade aging fleets.

Now onto slide seven from 'twenty, 'twenty, one and into the first quarter of 2020 to caterpillar and our customers announced a number of projects that will contribute to a reduced carbon future.

We recently entered into an agreement with iron near a U S. Based lithium boron minor this will be the first greenfield site in the U S to use autonomous haul trucks.

Lithium is a key component for electric.

For battery electric vehicles, and the minerals from this Nevada mine will help contribute to a more sustainable future.

Our autonomous technology as a competitive advantage as it delivers significant benefits to our customers, including improved safety productivity and efficiency, while lowering greenhouse gas emissions per tonne of material moved.

Our commitment to sustainable innovation remains strong as we continue to execute our strategy for long term profitable growth.

I look forward to hosting you at our Investor day on May 17th.

Where we will be talking more about services technology and sustainability.

That I will turn the call over to Andrew. Thank you, Jim and good morning, everyone I'll begin with a recap of our first quarter results, including the performance of our segments.

Then I'll comment on the balance sheet and free cash flow before concluding with a few comments on our expectations as we move into second quarter of 2022.

Beginning on slide eight sales and revenues for the first quarter increased by 14% $1 $7 billion to $13 6 billion.

Volume, including high due to the inventory build and price drove the increase in sales and revenues, which as Jim mentioned was slightly better than we had expected.

Operating profit increased by 3% to $1 9 billion.

Utilization and volume growth were partially offset by higher manufacturing and period costs.

Our adjusted operating profit margin was 13, 7% slightly better than we had anticipated.

Primarily due to the stronger than expected volumes and favorable price realization.

First quarter profit per share was $2.96 compared to $2.77 in the prior year.

Adjusted profit per share was $2 88 in the first quarter compared to $2.87 Austria.

Adjusted profit per share for both quarters excludes restructuring costs.

Our goal with tax rate in the quarter was about 24% slightly lower than we had guided you to in January .

However, on a comparable basis, the lower tax rate was offset by lower favorable discrete tax benefits compared to the prior year.

Now on slide nine as we added.

We anticipate that the top line improved on stronger volume and price realization.

End user demand increased versus the prior year with the growth rates accelerated on a sequential basis due to tougher comparisons, especially in China.

Dealer inventory rose by about $1 3 billion services revenues remained strong in the quarter price realizations strengthened while currency was a bit of a headwind.

Let me provide some color on dealer inventory.

The $1 3 billion increase versus year end 2021 was nearly double what we had anticipated and about $600 million more than the increase we saw in the same quarter last year.

About half of that $600 million increase year on year came from resource industries due to the timing of shipments for mad dealers to their customers, which can be lumpy.

These units are backed by firm customer orders would not recognize in our reported retail sales for the quarter.

This is in part due to variations in on sides Assembly times.

The other half of the dealer inventory increase was mainly due to the timing of shipments and construction industries late in the quarter.

We anticipate the dealers will start to sell down the inventories in the second quarter following their normal seasonable pattern on strong sales to users.

Our expectations for the full year haven't changed and we do not expect to see a significant benefit from dealer restocking in 2022 as end user demand remains strong.

First quarter sales and revenues increased by double digit percentages in all regions, except Asia Pacific.

Sales in North America Rose by 23% with continued growth in the three primary segments.

<unk> sales increased by 15%, while Latin America sales grew by 26%.

A 4% decrease in Asia Pacific sales were primarily due to softening in China.

Sales in the remainder of that region with positive.

Moving to slide 10, as I mentioned first quarter operating profit increased by 2% on favorable price and volume.

Price realization was slightly better than we had anticipated.

SG&A and R&D costs increased partly due to investments in services and technologies, such as digital autonomy and electrification.

Our first quarter adjusted operating profit margin was 13, 7%, a 210 basis point decrease versus the prior year.

As we said in our fourth quarter 2021 earnings call, we expected the largest nitrogen headwinds to occur in the first quarter.

First quarter margins were lower than the prior year.

Favorable price realization did not offset higher manufacturing costs, but did improve compared to the fourth quarter of 2021.

Margins were slightly better than we had anticipated on stronger probably some volume partially offset by higher than expected short term incentive compensation.

I will discuss expectations for the second quarter and full year margins in a bit more detail later.

Yeah.

Moving to Slide 11, Let's review segment performance, starting with construction industries.

<unk> increased by 12% in the first quarter to $6 1 billion.

Mary driven by favorable price realization and strong sales volume.

End user demand improved in three of the four regions North America had the highest sales growth and sales dollars or 28% increase as nonresidential demand improved residential construction remains strong.

Sales in Latin America increased by 60% as construction activities supported higher demand.

Yeah, Amy sales increased by 18% primarily due to growth in residential construction demand.

However, Asia Pacific sales decreased by 21% due to a reduction in sales in China, which had a very strong quarter a year ago.

The segment's first quarter profit increased by 1% versus the prior year to $1 1 billion.

Price realization and higher sales volume drove the increase more than offsetting increases in manufacturing costs.

Price realization was stronger than we had anticipated, but lagged manufacturing costs in the quarter.

The segment's operating margin decreased by 180 basis points to 17, 3%.

Turning to slide 12 resource industries sales increased by 30% in the first quarter to $2 $8 billion.

Improvement was mostly due to higher end user demand the impact from changes in dealer inventories and favorable price.

End user demand increase in heavy construction and quarry and aggregates as well as mining.

First quarter profit for resource industries increased by 16% to $361 million.

Higher sales volume and favorable price realization were partially offset by higher manufacturing costs and increases in SG&A and R&D expenses.

Manufacturing cost increases were primarily due to freight and material.

The segment's operating margin decreased by 150 basis points versus last year to 12, 8%.

Now slide 13 energy and transportation sales increased by 12% to approximately $5 billion with sales up across all applications.

This includes a 4% sales increase in oil and gas, including after market parts for reciprocating engines.

Power generation sales increased by 5% the smooth reciprocating engine sales improved.

Solar turbine sales were lower in the quarter for oil and gas and power generation applications impacted by higher than usual first quarter in 2021.

Industrial sales rose by 25% with strength across all regions.

Finally transportation increased by 9% from reciprocating engine sales for both after market parts and <unk>.

Marine applications.

Profit for energy <unk> transportation decreased by 20% to $538 million.

Higher sales volume and price realization more than offset by higher manufacturing costs, reflecting continued headwinds from price of material.

In addition, SG&A and R&D expenses increased.

The segment's operating margin decreased by 430 basis points versus last year to 10, 7%.

Let me take a moment to provide a bit more color on energy and transportation margins.

Recently first quarter margins are typically lower compared to the rest of the year in this segment.

What was the first quarter 2022 proved proved a bit more challenging due to continued supply chain constraints, including elevated freight and material costs.

I will discuss freight generally but note that increased freight costs have impacted this segment more than others.

Also energy and transportation took price increases later in the year in 2021, given the differing market dynamics as compared to the other primary segments.

However, similar to the other segments, we expect margins to improve through 2022 as the benefit of higher price realizations starts to pull through.

Yeah.

Moving to slide 14 financial products had another good quarter.

Revenue increased by 3% to $783 million.

Segment profit decreased by 2% to $238 million.

Gross profit was down this represents our second highest first quarter profit and ideas.

The decrease was mainly due to a higher provision for credit losses cat financial related to reserves associated with Russia and Ukraine.

Note, the Russia, and Ukraine, Jiminy accounts about 2% of pet oppose in enterprise sales and there's some 1% of the cat financial portfolio.

Demand for used equipment remained very strong in the quarter and that helped mitigate the impacts of higher provisions.

Moving to our credit portfolio it remains high quality as customers and dealers continued to perform well in the quarter.

Past dues with two points of our 5% the best first quarter performance, we've seen in 15 years.

85 basis points year over year, and up just 10 basis points compared to the fourth quarter, which had March 15 year low.

While new business volume chips decrease versus the fourth quarter. This is typical seasonality.

New business volume was our second highest first quarter performance in eight years second only to the prior year, which benefited from pent up demand following COVID-19 related shutdowns.

Regarding interest rate changes, we are in a good position as a matched funding strategy serves to mitigate that risk.

We also have maintained healthy spreads on new business.

Now on slide 15, we had the NIM E&C free cash outflow of about $400 million, a decrease of $2 1 billion versus the first quarter of 2021.

Let me take a moment to discuss the changes.

In a typical year the first quarter is our weakest from a cash generation perspective, primarily due to the payment of incentives.

We paid approximately $1 3 billion in short term incentive compensation during the first quarter compared to zero in the prior year.

Discounts for the majority of the difference year over year.

In addition, we continue to build production inventory in the quarter by about $1 billion.

Which contributed to a negative net working capital impacts of approximately $600 million.

Despite these first quarter impacts we continue to expect to achieve at Investor day free cash flow target of <unk>.

<unk>, four and $8 billion for the full year.

Moving to shareholder return, we paid around $600 million in dividends during the first quarter.

We also repurchased about $800 million worth of common stock supporting an objective to be in the market.

Consistent basis.

Enterprise cash was $6 5 billion or $2 7 billion decrease compared to the year end.

The $400 million of free cash outflow in the $1 4 billion goes and shareholder returns accounted for the majority of the decrease in our cash position.

In addition, we have moved some of that cash balances into slightly longer dated liquid marketable securities in order to improve the yield on that cash this amounted to about $800 million in the quarter.

Now on slide 16, and lots of the current environment, including supply chain constraints, we continue to refrain from providing annual profit per share guidance.

However, I do want to share some thoughts on the second quarter and the full year.

The first quarter played out slightly better than we had anticipated on the top line, resulting from higher volume and better than expected price tailwind.

Supply chain challenges remained steady, which we expect to continue into the second quarter.

Despite these challenges we anticipate the top line will increase compared to the first quarter and continued strong end user demand and favorable price realization.

Looking to the remainder of the year.

Our order books and backlog remained robust.

We expect continued strong end user demand and pricing, although supply chain challenges will impact the extent to which we'll be able to fully meet demand.

As I mentioned, we do not expect to see a significant benefit from dealer restocking in 2022.

Our margins as we discussed in January we do not expect a typical year.

In a normal year, we'd see strong margins in the first quarter with margins decreasing sequentially through the fourth quarter.

However, this year, we expect margins to improve in the second half of the compared to both the first half and the comparable period of 2021 as the impact of projects actions accelerates.

Comparisons ease in the back half of the year as well as we lapped the manufacturing cost increases from the prior year.

As Jim mentioned, we continue to expect price to more than offset manufacturing costs for the full year.

Specific to the second quarter, we expect similar margins to the prior year as additional price actions should offset manufacturing cost increases.

Looking at the second quarter by segment, we do expect margins in both construction industries and resource industries to be close to or higher than the prior year as price improves and manufacturing cost headwinds are in line with the first quarter.

Margins and then Jean transportation still like the prior yet as the Tommy projections with latest compared to the other segments. However, we expect a lag in the second quarter was not will not be as significant as it was in the first quarter.

As we move into the second half of the year and in June and transportation, we expect a reduction in expediting costs and an improvement in efficiencies.

Increases in large engine turbine volumes versus 'twenty 'twenty. One should also positively contributed to margins in the second half of the year.

However, it's important to note that the majority of our core investments related to the energy transition will impact this segment.

Finally to assist you view more modeling we currently expect to our accrual for short term incentive compensation expense.

About $1 $3 billion a share.

We anticipate a global effective tax rate around 24% and restructuring costs of approximately $600 million for the full year.

Turning to slide 17 in summary form well in a challenging environment and user demand remains strong and we realized $1 7 billion more than revenues.

<unk> was slightly better than we expected looking.

Looking ahead comparisons ease in the second half of the year and we expect to achieve our Investor day targets for adjusted operating profit margins and <unk> free cash flow.

And with that we'll take your questions.

As a reminder, management asks that we limit to one question per analyst.

<unk> will close once the question has been posed as clarification is desired please rejoin the queue.

Your first question comes from the line of Rob Wertheimer with Melius Research. Your line is now open.

Thanks, and good morning, everyone.

Good morning, Rob Millner.

If I have it right I think your backlog increased by the most in a decade, maybe one of the couple best order quarters implied order quarters, you've had and obviously, there's some moving parts you guys addressed the fact that you'd like to ship a little bit more I don't know if you can quantify that I know you've done a lot of work with dealers helping them forecast.

To get the right levels of inventory around too much or too little I don't know, whether you can sort of give context around that backlog increase.

How much more you would like to ship as dealer optimism drive a lot of it or is it is it really end user demand anything you can say to help stop thank you.

Well thanks for the question Rob So just in terms of the backlog the largest backlog increase was actually in energy and transportation and as orders continue to strengthen for both solar and for Recip oil and gas and as you know those products tend to have longer lead times I Havent said that we are certainly working with our dealers tend to.

To help them satisfy end user demand would you have a new S. N O P processing, we do feel good about the quality of the orders that we're getting.

In in E&P, NRI, again, which tend to have some of those longer lead times. So again, just a real positive backdrop moving forward.

Your next question comes from the line of Jamie Cook with Credit Suisse. Your line is now open.

Hi, good morning, and nice quarter, Jim I guess the question I'll direct it towards you because it's with regards to <unk> to run that business. So can you help me understand the top line was a little lighter than I would've thought what are you hearing from your oil and gas customers and how does that impact the trajectory of growth for E&P.

And you know.

This year and then I guess.

On the margin side I understand the puts and takes with solar and pricing having to come through an investment but is there any way you can help us with how to think about sort of E&P margins you know as we exit the year I don't know if its investment some of the investments you're making well.

Hap create pressure on margins I guess over the longer term. So thank you.

You bet.

Oil and gas customers do continue to display capital discipline. However, we are encouraged by the improvement in orders for both reshaping solar as I mentioned earlier those those products tend to have longer lead times.

Higher oil.

Prices, leading to increased utilization and refurbishment of of Frac assets, and it's an approved opportunity for pumps and flow iron as well.

Dan in terms of your question around margins as you can imagine with volume increases in install or in oil and gas and that will help US also we have mentioned previously that we took price action in energy and transportation around engines later than we did machines and as those price actions.

Continued to take effect that will also help margins as we move throughout the year.

Okay.

Headwind to margins.

You know again, it certainly we're making investments in our in and sustainability and some of the things we're doing there around alternative drivetrains. So we're making those investments, but again the the other side of it is of course in improving volume and price.

Okay. Thank you.

And as I indicated Jami, we would expect.

And same for the other segments margins to improve in the second half of the year and energy and transportation.

Okay. Thanks.

Your next question comes from the line of Mig <unk> with Baird. Your line is now open.

Thank you for the question appreciate it.

I guess, maybe a question for Andrew.

Looking at kind of clarify some of your comments.

In terms of price realization I guess, you're pretty clear about this continues to build momentum you talked about <unk> I am curious as to how you were thinking about variable manufacturing costs sequentially second quarter and the back half of the year Rec.

Recognizing that the comps are little bit different, but obviously input.

Input costs.

Changed a little bit versus previous assumptions given all that's been happening in the world. So how should we think about that framework.

Yeah, So if youll recall I think the.

Fourth quarter, we had about $600 million of price and about $800 million increase in manufacturing costs.

Obviously this quarter was a similar level in manufacturing cost.

Cost increases and price was a little bit better than $700 million, we'd probably be about around the same.

The first quarter as we had been in the fourth quarter.

We also indicated that we would expect manufacturing cost increases to continue at this level.

For the lease Q1, and Q2, and then moderate as we get into Q3 Q4.

Because of the impacts of lapping.

The increases that have occurred in Q3 Q4 in the previous year.

Yes, it is likely that those costs will be slightly higher than we had originally anticipated back in January .

Because obviously the input costs all continues to grow however, we have taken extra price actions.

So that's why we sold more than comfortable.

Price will more than offset manufacturing cost increases for the year. So.

That will be probably the way I would look at it as we go out to the remainder of 2022.

Okay.

Your next question comes from the line of Steve Volkmann with Jefferies. Your line is now open.

Thanks, Good morning, everybody, Jim I think in your prepared comments.

When you were speaking about construction industries, you mentioned a couple of times supportive commodity prices, where it was helping demand there and I'm curious for a little more detail can you just talk about how much you think is kind of driven by commodity prices and sort of how that unfolds going forward.

Yeah, Steve I believe I mentioned commodity prices being supportive of our eye as opposed to Ci, but just to talk about C. I a bit again, we talked about residential nonresidential improving.

Infrastructure investments being made by various governments around the world. So those are all all tailwind for for Ci the commodity prices certainly are supportive of investment in our eye on and of course, <unk> as well with oil prices.

Okay.

Yes.

Thank you.

Yes.

Your next question comes from the line of David Raso with Evercore. Your line is now open hi, good morning.

Given the longevity of months it seems like.

Seem that maybe people would have expected three months ago was sort of a rebirth of old energy, let's call. It you mentioned a bit about oil and gas.

Up on the Recip side, and maybe the turbine activity on the order book at least I'm curious on the mining side can you give us a little more color on any change in tone, and obviously coal comes to mind, but even more broadly what are you hearing in the last three months any tone change particular on some of the old energy customers.

Well. Thanks for your question, David and as you know we've been talking about for a couple of years you know we've been expecting moderate.

Increase over time in mining and that's really how it played out our customers are continuing to display capital discipline, but in fact, we're seeing.

Investments were seeing new orders for trucks parked trucks remain at low levels as utilization increases.

In terms of coal.

Certainly coal prices have been up for the last year or so what.

It remains to be seen.

Exactly how this plays out.

If there are prolonged restrictions on natural gas.

We're seeing in Europe , and other places they're there they're in fact could be increased demand for coal, but having said that again, we've seen improved coal prices over the last year and so you know commodities in the mining sector have been supportive of investment.

Ross a wide range of commodities and I put colon that bucket as well.

Your next question comes from the line of Tami Zakaria with Jpmorgan. Your line is now open.

Hi, good morning.

Good morning.

When you are.

<unk> that was what was the growth in that segment in the quarter. What's the total dollar size of the site.

I'd now like Investor day targets, and what are you expecting for services in Tokyo.

Yes.

You bet well, what we were pleased with.

Services growth in the quarter, we we released the annual services sales and revenues once a year and so we will do that in January for a full year of 2022, having said that we continue to make progress with our various initiatives, where we're pleased at the way things are going and we're still driving towards that that target of doubling.

Services sales between 2016 and 2026.

Got it thanks.

Your next question comes from the line of Chad Dillard with Bernstein. Your line is now open.

Hi, good morning, guys.

Okay.

So I just want to go back to your comments about improving orders on the Recip and sell our side and I was just hoping you could talk about how Canada set up for this upcoming oil and gas capex cycle versus priors.

We can talk about just from a product standpoint, or even just like how much extra wallet share you can capture now that you have where under the fold.

And just any interesting like productivity enhancing technology that you have now that you didn't before that would set you apart versus your competition.

Well. Thanks for your question and we do feel good about our competitive position just starting quickly with solar.

They are they have a strong.

They have strong leadership in the market and we're very pleased at the way they are positioned moving forward on the Recip side, we made a number of changes as you know we made the acquisition of from where.

And we now have a more complete product line, which really does put us in a we believe in a strong competitive position as our customers work to reduce their carbon footprint as they increase oil and gas production and as you can imagine, particularly in North America, There's a real strong focus by our oil and gas customers.

To do that so again, we are we feel good about the way, where we're positioned there with our our portfolio now.

E tracking we have gas engines being purchased by our oil and gas customers for E. Frac. So again.

A whole variety of things going on there are customers, who are buying our DGB engines, which allowed them to substitute up to 85% diesel fuel with natural gas. So again, we believe we are we are quite well positioned.

Yes.

Okay.

Your next question comes from the line of Nicole to place with Deutsche Bank. Your line is now open.

Yeah. Thanks, good morning, guys.

Good morning, Nicole.

Just maybe to look at the.

Outwork and elaborate a little on that.

I know you guys said.

<unk>.

You know kind of consistent with what is normal in the business I guess if you.

I'll think about that increase and that any reason why the magnitude of the increase also care would not reflect typical seasonality.

I mean, the one Tony small factor that I would raise and it's a very small factors that obviously that was $300 million of.

<unk> put out by <unk> very late in the quarter in which would otherwise not be a normal season.

So that will impact a little bit of their reported revenues in Q2.

Aside from that we expect normal seasonality as you know demand is very strong for our products.

Biggest challenge is actually being able to supply the market.

We would be able to if we were able to put more products into the into the channel.

We would sell more so that would be the really key factor there.

Your next question comes from the line of Ross <unk> with Bank of America. Your line is now open.

Hey, good morning, Thanks, guys.

Ross.

So Jim you are north American construction.

Retail sales growth and improved quite a bit from Q4 to <unk>.

For Q1, but it continues to significantly lag that growth for the national rental companies, particularly if you look at what United rentals put up for <unk>.

Rental revenue growth.

Last night, I mean is there an accelerating structural change to rental over equipment ownership and in this world. We live in right now with all these supply chain issues and anything you're working on with your dealers to the better positioned cat or the.

Yes.

Rental channel that's been going on for an awfully long time, but if anything it seems like it's accelerating right now.

And just with that your overall dealer sales decelerated, a plus 3% versus plus 5% last quarter does that number get worse and potentially go negative.

Before it gets better or do we see a reacceleration in Q2. Thanks.

Well thanks for your questions. Firstly in terms of of demand for Ci in North America is quite strong and as I mentioned earlier, our supply chain challenges.

Prevented us from high Havent, even higher.

Sales in the quarter, having said that caterpillar has a strong rental business. If you if you add up cat dealers across across North America. It is a strong business and something that our dealers are very focused on and we have a.

Relatively new rental leader, so we're working on improving our capabilities there having said that the real issue is is supply chain.

So if we had in fact more product we could have more more product in the in the rental fleets and our dealers are having to make decisions between putting units in the rental fleet and selling to customers because demand is strong everywhere and so really this is a function of our ability to produce more product due to supply chain constraints as opposed to anything structural.

Rental is important it's a growing part of the business, but it's one that we believe we're very well positioned to participate in the big issue. We have at the moment is again, the ongoing supply chain challenges, which we've been discussing.

And then Ross on your question around on.

Steve I mean, obviously there were a couple of factors in Q1, which caused the deceleration.

I know you're looking to machines.

Energy and transportation, obviously solo was the impact in E&C.

And then obviously China was just proportionately it was a very strong quarter and the tough comps last year and that has a disproportionate impact on we'll need to see how that pans out.

And in Q2 overall, though we do expect.

Actually to see.

Positive.

Again in Q2.

Versus a comparable period.

Yeah.

Your next question comes from the line of Courtney <unk> with Morgan Stanley . Your line is now open.

Hi, Good morning, guys. Thanks for the question.

Maybe if we can dig into resources, a little bit more on obviously sales are were much better than we were expecting this quarter and but you know in the slide deck you call out heavy construction and quarry and aggregates. You know ahead of mining. So just wanted to understand on the OE side as mining.

Reflective of these numbers that we saw or is that still a story that that's on.

On the Com.

And then you know the incremental flow through was also a little bit lower than we would've expected and is that really just a reflection of these supply chain issues that were seen or is that part of this also OE versus aftermarket mix.

Happening and finally, just since much of the Delta this quarter that you mentioned and in dealer inventories occurred in resources just wanted to confirm that the TQ comment that sales will be up.

Also as applying to a tip to that segment as well.

While we remain positive about mining and continued to see increases in end user demand and again its playing out much as we've been predicting the last couple of years with the with improving market conditions, improving orders and improving sales. So we feel good about that minor capex is up.

Commodity prices remained certainly supportive of investment and we're seeing demand for both services parts and and and new machines Park trucks remained at low levels utilization has been increasing and a lot of interest in our <unk> zero emissions as well. So we've seen a lot of announcements there are things that we're doing with customers.

Machine average age continues to increase and so parts rebuilds and aftermarket services.

Are expected to benefit from those age fleets. So again minus is playing out much as we had anticipated.

Just in the quarter, obviously, we did see slightly slightly.

Also growth in the.

Heavy construction and quarry adonijah disposals mining, but we're still both up very strongly.

As regards the retail side, obviously the dealer inventory.

The 300 <unk>.

<unk> $300 million of units throughout the which all being reassemble by the G. Those before being solved.

Those will be reflected in retail units in.

In Q2, so that will help the overall retail sets.

In the second quarter.

Yeah.

Your next question comes from the line of Seth Weber with Wells Fargo. Your line is now open.

Hey, good morning.

Just wanted to ask good morning, I just wanted to ask a question on pricing I am really just trying to understand how.

How dynamic is the pricing environment I think.

Pricing was up about 6% here in the first quarter.

<unk> segment, you've talked about E&P pricing getting better.

Through the year here.

Could could pricing in aggregate the up more than the 6% that you put that you showed in the first quarter I'm just trying to understand how much flexibility you have to.

Change pricing real time here through that through the second and third quarter.

And the way we characterize it here as you know, we do expect price to more than offset manufacturing cost increases in 2022, and we expect more of an impact of pricing in the second half versus the first half we continually monitor the marketplace and in terms of what's going on from a competitive situation. We obviously take into account what's happening from a cost perspective as well.

And we have the flexibility to do what we need to do but but we have taken pricing action and again the pricing actions that we've taken will have a larger impact in the second half of the year versus the first but certainly we always have the flexibility to do to do more if we believe that's appropriate.

Okay.

Your next question comes from the line of Steven Fisher with UBS. Your line is now open.

Thanks. Good morning, so it seems like you raised your incentive compensation expectation for 2022 and that would be kind of flat year over year.

Previously it was expected to be a tailwind, but I guess the positive and that is now you must be expecting something.

Better than your prior expectations I'm wondering if you can just give us a bit of color on what the biggest things are that are contributing to that.

Improvement in incentive comp payout for this year I know you said you know kind of sales were better than expected in Q1, but it sounds like maybe that was a seasonal inventory build so what are there other operational things that are now running better than you expected for <unk> for the balance of the year. Thank you.

Yes, so obviously as you know around incentive compensation schemes, we use a variety of measures not just operating profit OPEC services revenues.

There are other non financial metrics that are out there.

As we said the performance for the first quarter was actually little bit better than we expected.

Not just from a revenue perspective, but also a little bit better on margins.

And so that is reflective of a wave that's feeding through into some of that incentive compensation change.

Thanks.

Your next question comes from the line of Tim Thein with Citigroup. Your line is now open.

Yeah. Thanks, good morning, So a lot of good color on the dealer inventories, but I just wanted to ask Andrew.

Ken inventories.

<unk> continued to increase here and obviously the.

Complexity in supply chain.

Certainly, having some impact but I'm just curious how should we think about that as we as we go through the balance of the year and I'm, especially interested in how that.

The potential implications that have to the extent that's not projected to grow further.

What implications that will have just in terms of absorption and ultimately <unk>.

Incremental margins. Thank you.

Yes, so Tim I mean, obviously, what we have been very clear on is in the situation, where we all with the supply chain challenges switching off supply.

Probably the best is a sensible thing because while you're waiting for individual components to arrive it was better to make sure.

End up with a shortage of something else as a result of switching off so we built a little bit more production.

<unk> inventory than we would normally have we did that at the end of 2020.

As well and that was a deliberate action, reflecting the fact that we expected an upturn obviously that has continued.

No. The demand is out as we know we will be able to burn off pretty quickly.

When we are able to work.

To walk through all the other supply chain challenges are out there.

Our expectation is obviously, we saw a build in Q1.

Aim is probably to be more neutral on working capital for the full year.

And obviously you start to work some of that inventory down as we go through the remainder of the year.

And obviously then that can feed through.

Into into positive cash momentum as we move into 'twenty three and beyond.

Your next question comes from Matt Alcott with Cowen. Your line is now open.

Good morning, if I may switch it up a little bit and ask you guys about the locomotive market clearly the newbuild.

Newbuild market in North America has been largely nonexistent for the last couple of years here.

As we look forward to the next two or three years do you think the railroads might continue to hold off on new builds until.

They make up their mind on whether they want to go in a battery electric hydrogen or even cleaner diesel.

And any updates on the upgrade market, which I think is like our services revenue for you guys would be helpful. Thank you.

Yes. Thank you as you mentioned certainly.

The North American freight locomotive market is is is depressed theres no question about it we do have a services business that is.

That is doing well.

Hope for international this year as well hard to answer your question, it's very difficult to predict what the what the railroads would do over the next couple of years I mean, we can all anyone on the call can build competing cases, there for what's happening. So there's still a park locomotives on the other hand, everyone knows what's going on with supply with some of the freight constraints in the U S. As well so we'll have to see.

See how it all plays out and we are seeing interest in our battery electric locomotives that are used in central switch switching applications and we're pleased with that and you probably have read about.

An agreement that we have to.

To work on a.

Longer term solution for hydrogen based locomotive as well, so again very difficult to predict what the railroads were due but I certainly concur that the currently the market for freight locomotives in North America is quite depressed.

Your next question comes from the line of John Joyner with BMO. Your line is now.

Okay.

Hi, good morning.

Good morning, Joe and Joe maybe.

Maybe this is not a fair question and today's environment. So I appreciate some of the additional assumptions that you provided for the full year, but given that you have internal projections do you anticipate eventually getting back to offering full year EPS guidance, maybe to help give investors some goalpost for the year and possibly.

Boyd what can at times be a wide range of EPS estimates.

Yeah, I mean I think.

As you know.

The challenge in the environment, we're in at the moment is.

Predicting.

What the likely outcome is going to be within the range is probably narrow enough for people to I mean, Unfortunately part of the reason why your estimates wide is because our estimates awards as well because of the uncertainty. So you have to take those into account. So that's part of the reason why we haven't reinstated our guidance.

But I think it is one.

One thing that we will come back to you in due course as and when things stabilize.

I was in the external environment, but so.

Not at this stage.

There is.

Just had a written question and somebody just asked a question about <unk>.

About retail stats and where the pricing is included in retail sites just to be clear.

Retail states all dollar neutralized plus neutralize pricing is not in the retail stats.

So that is a pure volume number on a comparable basis.

Operator, we have time for one more question.

Your final question today comes from the line of Jerry Revich with Goldman Sachs. Your line is now open.

Yes, hi, good morning, everyone.

Good morning, Jeremy.

Jim you've spoken about a steady recovery resources I'm wondering if you could just update us on where lead times stand for large mining trucks today, and you know the revenue level and the business is 50%, 60% below prior cycle highs I'm wondering if it's fair to think about backlogs at comparable levels versus the last site.

As well thanks.

Well as we say.

And earlier certainly mining.

Mining is playing out the way we expected in terms of increased <unk>.

Others are our lead times are not.

Extended as anywhere near as much as they were during the prior.

Peak, a number of years ago.

But we're working with our customers and are working very hard to meet their their lead time requirements and I think we're quite close to that so.

Thank you Tim.

Go ahead go ahead I'm sorry.

That concludes today's Q&A I'll turn the call back over to Jim.

Great. Thank.

Thank you, Jim Andrew and everyone, who joined US today, a replay of our call will be available online. Later. This morning, we will also post the transcript on our Investor Relations website as soon as it is available you will also find our first 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 financials to view those materials.

Do you have any questions. Please reach out to Rob or me you can reach Rob at Wrangle underscore Rob at Cat Dot Com and me at Fiedler underscore Ryan underscore asset got Dot com.

The Investor Relations General phone number is 309 6754549, we hope you enjoy the rest of your day now, let's turn it back to AMETEK you'll recall.

Thank you for attending today's conference call you may now disconnect.

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