Q2 2022 Caterpillar Inc Earnings Call
Okay.
Welcome to the second 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, Brian Fiedler. Thank you. Please go ahead.
Thank you Emma and good morning, everyone and welcome to Caterpillar second quarter of 2022 earnings call.
Hi, Brian Fiedler, Vice President of Investor Relations. Joining me today are Jim <unk>, Chairman and CEO , Andrew Bonfield, Chief Financial Officer, Kyle Epley, Senior Vice President of Global Finance Services Division and Rob Rengel Senior IR manager.
Our call today, we'll be discussing our second quarter earnings release, we issued earlier today you can find our slides the news release and a webcast recap at investors that caterpillar dot com under events and presentations.
This call is protected by U S and international copyright law, any rebroadcast retransmission reproduction or distribution of all or part of this content without caterpillar's. Prior written permission is prohibited.
Moving to slide two during our call today, we will make forward looking statements, which are subject to risks and uncertainties. We'll also make assumptions that could cause our actual results to be different than the information we're sharing with you on this call.
Please refer to our recent SEC filings and the forward looking statements reminder, in the news release for details on factors that.
Individually or in aggregate could cause our actual results to vary materially from our forecast on today's call will 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 $3.13 for the second quarter of 2022.
With $2.56 of profit per share in the second quarter of 2021.
We're including adjusted profit per share in addition to our U S GAAP results.
Our adjusted profit per share was $3.18 for the second quarter of 2022, compared with adjusted profit per share of $2 60 for the second quarter of 2021.
Adjusted profit per share for both quarters exclude restructuring costs.
Now, let's turn to slide three and turn the call over to our chairman and CEO Jim <unk>.
Thanks, Ryan and good morning, everyone. Thank you for joining us as we close out the first half of 2022 I want to thank our global team for delivering another good quarter with double digit top line and adjusted profit per share growth. Despite ongoing supply chain challenges, our second quarter results reflect healthy demand across most of our end markets.
We remain focused on executing our strategy for long term profitable growth.
In today's call I'll begin with my perspectives on our performance in the quarter and then I'll provide some insights on our end markets Lastly, I'll provide an update on our sustainability journey.
For the quarter sales were broadly in line with our expectations as we generated better than expected price and strong services revenue, which were offset by lower than expected sales to users.
Similar to previous quarters, our top line would have been even stronger if not for our supply chain constraints.
We remain focused on executing creative solutions to help mitigate our supply chain challenges.
Overall, we remain encouraged by the strong demand in our end markets for our products and services.
Seeing strong momentum in services due to our service initiatives and investments.
As I mentioned at our Investor day in May our confidence is increasing that we'll achieve our goal to double services to $28 billion by 2026.
Operating profit margins came in slightly lower than our expectations, mostly due to lower than expected volume and unfavorable mix.
Price realization more than offset manufacturing cost increases which occurred earlier in the year than we had anticipated.
This is the only.
This only partially offset the impact of volume and mix.
Dealer inventory remains at the low end of the typical range and rental fleets continue to age as dealers prioritize trying to meet the demand from retail customers.
Orders remained solid and our backlog grew by approximately $2 billion in the quarter.
We expect a volume and price realization to improve in the second half of the year, which should lead to sales growth in the remaining quarters of the year, both sequentially and year over year.
We also expect adjusted operating profit margins will improve both sequentially and year over year in the second half of 2022 is there a price realizations will more than offset manufacturing cost increases.
Despite ongoing inflation and supply chain challenges, we continue to expect to achieve our investor day, adjusted operating profit margin and M. E N T free cash flow targets for the full year.
Moving to slide four sales and revenues increased by 11% broadly in line with our expectations. The increase was primarily driven by strengthening price realization and higher sales volume.
Second quarter sales and revenues increased across our three primary segments versus the prior year with sales higher in all regions, except amey.
Sales in North America rose by 18% with double digit growth in the three primary segments.
Strength in Latin America continued its 27% sales growth was supported by strong construction activity.
Any Amy sales decreased by 3%, primarily due to currency impacts.
Asia Pacific sales increased by 3% as lower sales in China were more than offset by stronger sales elsewhere within the region.
Compared to the second quarter of 2021 sales to users declined 3% for machines, including construction industries and resource industries sales to users decreased by 4%, while energy and transportation was flat overall.
Sales to users were below our expectations largely due to the impact of supply chain constraints.
These constraints were mostly due to component shortages, which resulted in production delays and shortfall against our schedules.
For example engine control modules have continued to be one of the most significant bottlenecks, mostly due to the shortage of semiconductors.
We were unable to completely satisfy strong customer demand for our machines and engines and continue to incur additional costs due to factory inefficiencies in freight expenses.
Sales to users in construction industries decreased 4%, primarily due to weakness in China and continued supply chain constraints nor.
North America sales to users declined slightly mainly due to supply chain challenges.
And America saw higher sales to end users well Amy declined slightly.
Asia Pacific sales to users were down in the quarter, However, excluding China, The Asia Pacific region sales to users increased.
The same holds true for construction industries overall.
In resource industries sales to users decreased 2% due to supply chain challenges and one off disruptions, including commissioning delays.
Orders remained strong although slightly lower than recent high levels.
We continue to see high equipment utilization and parked trucks remained at low levels, both supporting continued demand for our equipment and services.
In energy and transportation sales to users were flat versus the prior year oil and gas sales to users were down in the second quarter due to lower turbine and turbine related services, which were partially offset by continued improvement in reciprocating engines.
As we mentioned during our last earnings call, we expected solar turbines, new equipment shipments to be lower in the first half power.
Power generation and industrial sales to users remained strong due to favorable market conditions.
Transportation decreased slightly.
Now I'll spend a moment on dealer inventory.
Dealer inventory declined by about $400 million in the second quarter, reflecting typical seasonality similar to the second quarter of last year.
Dealer inventories remain near the low end of the typical range and we continue to work closely with our global dealer network to satisfy customer demand.
As a reminder, dealers are independently owned businesses.
Operating profit increased 9% in the quarter to $1 9 billion the increase was.
Driven by higher sales across our three primary segments, which largely reflected favorable price realization and volume.
And was partially offset by higher manufacturing costs, and SG&A and R&D expenses.
Higher manufacturing cost in the quarter reflected increased material and freight costs as.
As I mentioned favorable price realization more than offset manufacturing cost increases.
Operating profit margins were 13, 6% in the second quarter of 2022 compared to 13, 9% in the second quarter of last year.
Although our adjusted operating profit margins improved sequentially in the quarter, they were slightly lower than our expectations, mostly due to lower than expected volumes and unfavorable mix.
Andrew will discuss the consolidated and segment level margins in a few minutes.
Our profit per share was $3 13.
Versus $2.56 in the second quarter of 2021 the.
The adjusted profit per share was $3 18 versus.
Versus $2 60 in the second quarter of last year.
Now to slide five we.
We generated $1 $1 billion of M E N T free cash flow in the quarter, we continue to expect to be within our $4 billion to $8 billion in E&P free cash flow range for the full year of 2022.
Andrew will discuss this in more detail.
Regarding capital deployment in the quarter, we repurchased $1 $1 billion of stock and returned $600 million in dividends to shareholders.
In May our board approved a new authorization to repurchase repurchase an additional $15 billion of common stock, which was effective on August one we.
We also announced we're increasing our quarterly cash dividend by 8% to $1 20 per share.
We remain proud of our dividend aristocrat status we continue.
We expect to return substantially all of our M E&P free cash flow to shareholders over time through dividends and share repurchases.
Now on slide six I will share some high level assumptions on our expectations for the full year.
Overall demand remains healthy across our segments. However, the environment remains challenging primarily due to continuing supply chain disruptions. Our teams are working hard to mitigate supply chain challenges and we expect to achieve our investor day targets for adjusted operating profit margins in EM E&P free cash flow.
We expect continued top line growth for the second half of the year, reflecting healthy demand favorable price realization and our teams' persistent efforts to mitigate supply chain disruptions.
As I mentioned, our total backlog increased by about $2 billion in the quarter led by energy and transportation.
The backlog for resource industries, and construction industries remain elevated.
Although we continue to anticipate inflationary pressures in manufacturing costs, we expect price will more than offset these cost increases for the full year.
Now I'll turn to our expectations for key end markets. This year.
And construction industries in North America, we expect nonresidential construction to continue to be strong due to construction backlogs.
We also expect the ramping of projects from the U S infrastructure investment and job act to occur in late 2022 and into 2023 resident.
Residential construction is moderating from the very strong levels experienced since early 2021.
In China, the above 10 ton excavator market was very strong during the first half of 2021.
During our last earnings call, we indicated that the industry would be slightly lower than 2019 levels.
We now anticipate the industry will be lower than we previously expected.
The rest of the Asia Pacific region is expected to grow due to a higher infrastructure spending and commodity prices.
N E. Amy the EU has proposed an infrastructure investment package, however business activity has moderated.
Strong growth continues for construction activity in Latin America due to supportive commodity prices overall.
Overall, we expect healthy demand for the remainder of the year and construction industries and.
In resource industries, while our mining customers continue to display capital discipline commodity prices remain supportive of investment. Despite recent moderation we.
We expect production and utilization levels will remain elevated and our autonomous solutions continued to gain momentum.
We expect the continuation of high equipment utilization and a low level of PARP trucks, which both support future demand for equipment and services.
We continue to believe the energy transition will support increased commodity demand over the medium and long term expanding our addressable market and providing opportunities for profitable growth.
In heavy construction and quarry and aggregates, we expect continued growth in 2022.
In energy and transportation, we expect improving momentum in 2022 with strong order rates in most applications.
Oil and gas although customers remain disciplined we remain encouraged by continued strength in reciprocating engine orders, especially for large engine replacements as asset utilization increases and.
In 2022, while solar services are expected to remain steady new equipment orders strengthened significantly in the first half, particularly in oil and gas, indicating sales growth in late 2022 and into 2023.
Our generation orders remain healthy due to positive economic growth and continued data center strength.
Industrial remains healthy with continued momentum in construction construction agriculture and electric power.
In rail North American locomotive sales are expected to remain muted.
We also anticipate growth in high speed marine as customers upgrade aging fleets.
Moving to slide seven since our last quarterly earnings call. We published our 2021 sustainability report in May to highlight progress on our sustainability journey in the report we reiterated our commitment to further enhance our sustainability reporting and disclosures by utilizing the task force on climate related financial disclosure.
Tcf D framework and also committed to begin reporting estimated scope III greenhouse gas emissions in 2023.
As we continue to advance our sustainability journey through the second quarter of 2020 to caterpillar and our customers announced a number of projects that will help contribute to a lower carbon future.
In May we announced a low carbon intensity fuel project with district energy St. Paul to demonstrate a combined heat and power or CHP system fueled by various combinations of hydrogen and natural gas CHP systems from caterpillar provide both electricity and heat simultaneously, increasing overall efficiency and reducing exhaust emissions.
With support and partial funding from the U S Department of energy demonstration project will compare how hydrogen and hydrogen blends can be integrated into a waste heat and power solution. This.
This quarter, we also announced the acquisition of tangent energy solutions.
S based energy as a service company.
<unk> suite of intelligent energy solutions will allow us to provide value to customers by helping them reduce energy costs increased energy efficiency reduce emissions monetize electric good support and provide resiliency for their operations.
In summary, we continue to support our customers' climate related objectives, with new equipment and services that facilitate fueled transition increased operational efficiency and reduce emissions.
We remain committed to contributing to our reduced carbon future as we help our customers build a better more sustainable world.
With that I'll turn the call over to Andrew Thank.
Thank you Jim and good morning, everyone.
I'll start by walking you through our second quarter results, including the performance of our segments.
Then I'll comment on the balance sheet and free cash flow before concluding with our expectations for the third quarter and remainder of the year.
Beginning on slide eight sales and revenues for the second quarter increased by 11% or $1 4 billion to $14 2 billion.
The increase was due to price and volume partially offset by currency.
Operating profit increased by 9% or $155 million to $1 9 billion.
As price realization and volume growth, partially offset by higher manufacturing and SG&A and R&D costs.
Our adjusted operating profit margin was 13, 8% slightly below the year ago level, despite the underlying inflation rate in supply chain pressures.
Adjusted profit per share was $3 18 in the second quarter compared to $2 60 last year.
Adjusted profit per share for both quarters, excluding restructuring costs, which had a similar impact in both quarters.
Taxes included discrete tax impacts, which benefited the quarter by about 10 cents.
Now on slide nine as Jim mentioned, the top line was generally in line with our expectations on strong price and service revenues.
With a bit of currency as a headwind as a U S dollar continued to strengthen.
Machine sales to users were impacted by supply chain challenges that was slightly worse than we had anticipated.
Overall, we are not seeing signs of slowing demand as order levels and backlog remained healthy.
Our retail statistics or sales to users are normally strongly correlated to demand in a typical environment.
However, the ongoing supply chain constraints continue to impact our ability to ship equipment.
Dealer inventory changes had a minimal impact on the topline is a $400 million decrease versus the first quarter was similar to the reduction seen in the prior year.
Services remains strong as we benefit from the impact of our services growth initiatives.
Okay.
Moving to slide 10.
As I mentioned second quarter operating profit increased by 9% on favorable price volume.
Price realization was better than we had anticipated due to the strong demand for machines.
Manufacturing costs were also slightly higher than expected, primarily due to continued material and freight cost pressures as well as the impacts of supply chain on that factory performance.
Overall price exceeded manufacturing costs for the quarter, which reverses the trend we've seen for most of the past year.
SG&A and R&D costs increased partly due to investments along with our strategy for profitable growth. In addition to higher short term incentive compensation.
Our second quarter adjusted operating profit margin of 13, 8% was 30 basis point decrease versus the prior year.
This was slightly lower than we had anticipated in April principally as equivalent volume lagged our expectations.
We also saw some negative mix within our segments.
The net impact of higher prices and increased manufacturing cost was about neutral.
Before I discuss segment results I want to address the impact of high inflation and inventory build had.
On a segment margins in the quarter.
For background in periods with rapidly rising input costs in the inventory growth.
A portion of these rising costs will be appropriately included and caterpillar is ending inventory.
In order to promote effective management decision, making within our segment results, we recognize the material and freight cost changes as soon as the impacts of our input costs.
For enterprise reporting this negative impact on segment results is offset by a favorable impact of the corporate level.
In a nutshell inflationary cogs cost pressures were elevated negatively impacting margins at the segment level, while the enterprise margins performed much closer to our expectations.
This dynamic is timing related meaning we'll see things balance out as that inventory starts to decline and inflationary costs subside.
Moving to slide 11.
Let's review segment performance, starting with construction industries.
Sales increased by 7% in the second quarter to $6 billion driven by favorable price realization.
Volume decreased slightly as lower sales of equipment to end users was mostly offset by higher sales of aftermarket parts.
North America had the highest growth in sales dollars, a 20% increase due to strong pricing a favorable change in dealer inventory and continued strength in services.
Sales of equipment to end users lagged the prior year slightly driven by supply chain challenges.
Residential nonresidential demand remained healthy although we saw some moderation in residential.
Sales in Latin America increased by 48% as robust construction activity supported higher sales of equipment to end users.
And the Amy sales decreased by 7%, primarily driven by the changes in getting inventories in currency, while price was a partial offset.
Asia Pacific sales decreased by 17% due impart to lower sales of equipment to end users, primarily in China, which had a strong quarter a year ago.
Second quarter profit for construction industries decreased by 4% versus the prior year to $989 million.
Price realization more than offset manufacturing costs.
<unk> decreased due to the impact of lower sales volume and mix.
Unfavorable manufacturing costs, largely reflected higher material and freight.
The segment's operating margin decreased by 180 basis points versus last year to 16, 4%.
Inflationary cost pressures impacted the segment margins as I mentioned a moment ago.
Turning to slide 12.
Resource industries sales increased by 16% in the second quarter to $3 billion.
Improvement was primarily due to favorable price realization and higher sales volume.
Volume increase on sales of after market parts.
Second quarter profit for resource industries increased by 2% to $355 million as price and volume more than offset unfavorable manufacturing costs, which largely reflected higher material and freight costs.
The segment's operating profit margin decreased by 170 basis points versus last year to 12%.
As impatient inflationary cost pressures impacted the segment margins similar to construction industries.
Yeah.
Now on slide 13 energy and transportation sales increased by 15% to approximately $5 7 billion with sales up across all applications.
This included an 8% sales increase in oil and gas sales are off the market pilots reciprocating engines and engines used for well servicing and gas compression increase.
So, let's hope ourselves and get oil and gas applications lagged the prior year.
Power generation sales increased by 13% on stronger sales volume in small reciprocating engines and after market after market parts.
Sales of solar turbine turbines increased and power generation.
Industrial sales rose by 24% with strength across all regions.
Finally transportation sales increased by 7% from reciprocating engine aftermarket part sales and strengthen rail services.
Second quarter profit for energy <unk> transportation decreased by 11% to $659 million higher.
Higher manufacturing costs reflected continued headwinds from inflationary cost pressures and freights and material, which were partially offset by favorable price realization and higher sales volumes.
As a reminder, energy and transportation took price increases later in the year in 2021, given the different market dynamics as compared to the other primary segments.
In addition, SG&A and R&D expenses increased due to investments aligned with our strategic initiatives, including electrification and services growth coupled with higher short term incentive compensation.
The segment's operating margin decreased by 320 basis points versus last year.
Seven 6% impacted by the same inflationary cost pressures as the other primary segments.
Moving to slide 14.
Financial products revenue increased by 3% to $798 million.
Segment profit decreased by 11% to $217 million.
The profit decrease was mainly due to an unfavorable impact from movements in equity securities and insurance services.
A higher provision for credit losses at Cat financial primarily relating to reserves associated with Russia, and Ukraine also weighed on profit.
A favorable impact from we're trying to reposition equipment subs as a partial offset.
Moving to our credit portfolio customers and team has continued to perform well as a leading indicators remain strong.
Past dues, which are a good proxy for the financial health of our customers with $2, one 9% compared to two 5% at the end of the second quarter of 2021, that's down 39 basis points year over year.
As is typical retail new boot barn.
Business volume improved sequentially versus the first quarter.
And while we did see a 12% decrease versus the prior year nearly half of that decline was attributable to China, where we saw COVID-19 restrictions reinstated.
In addition, although our match funding strategy serves to mitigate that risk from interest rate changes.
Rising rates typically do benefit banks from a competitive financing perspective.
We saw this play out in the second quarter as I showed up machines finance declined slightly.
We continue to benefit from robust demand for used machines from both a volume and price perspective.
This reflects the underlying demand trends, we are seeing for equipment.
Now on slide 15, we generated about $1 1 billion, mainly E&P free cash flow during the quarter, a decrease of about $600 million versus the second quarter of 2021.
We continue to build production inventory to help manage through supply chain challenges.
Looking ahead, we expect stronger free cash flow in the second half due to the absence of the payments of incentive compensation.
We also do not anticipate a working capital to rise as it did in the first half of the year.
Therefore, we continue to expect to achieve our Investor day, <unk> free cash flow target of between four and $8 billion for the full year.
As Jim mentioned, we paid around $600 million in dividends. In addition to repurchasing about $1 $1 billion worth of common stock supporting our objective to be in the market on a more consistent basis.
Enterprise cash was $6 billion or $500 million decrease compared to the first quarter of 2022.
The decrease was primarily driven by the $1 $7 billion in shareholder return niche immune GE free cash flow generation.
We also continue to hold some of that on our cash balances and slightly longer data liquid market marketable securities in order to improve the yield on that cash and liquidity remains strong.
Now on slide 16, and lots of the current environment, including supply chain constraints, we continue to refrain from providing annual profit share guidance.
However, I will share some thoughts on our third quarter and full year.
As a reminder, the second quarter played out about as we had anticipated on the top line, although the inputs fared somewhat.
<unk> was better than expected, while sales of equipment and uses blackjack space expectations due to supply chain challenges additional weakness in China.
Looking to the third quarter. We currently anticipate the top line will increase compared to the prior year on higher sales to users and favorable price realization.
Strong demand demand should support higher sales across the three primary segments subject to our ability to navigate through the ongoing supply chain challenges.
For the second half of the year, we expect revenues to be higher compared to the first half.
To reiterate Jim's comment we remain encouraged by the strong demand in our end markets for our equipment and services.
Order levels and backlogs remained strong.
Inventory levels remain at the low end of the typical range and rental fleets are aging.
Finally infrastructure investment later in the year should be supported.
Our margins in the third quarter, we anticipate gains across our three primary segments as compared to the prior year first half.
Construction industries and resource industries margins should improve as price realization continues to flow through and more than offset manufacturing cost inflation.
In energy and transportation, we expect pricing to continue to gain momentum and offset manufacturing costs.
For the second half of the at both the enterprise and segment levels, We anticipate adjusted operating profit margin improvement compared to both the first half and the comparable periods of 2021.
The impacts of price actions should accelerate although we anticipate continued increases in manufacturing costs. We are starting to lap significantly increases, particularly in freight and material costs that we saw in the second half of the last year.
Finally to assist you with that Youre modeling. We currently expect our accrual for short term incentive compensation to be around $1 $6 billion of sure.
We continue to anticipate a global effective tax rate of around 24% and restructuring spend of approximately $600 million for the full year.
Turning to slide 17.
In summary performed well in the quarter with demand generally remains strong for our ability to satisfy that demand was constrained by supply chain challenges.
Despite this backdrop, we realized $1 $4 billion more in sales and revenue supported by strong price realization and services.
Looking ahead comparisons should ease in the second half of the year and despite the challenging environment. We continue to expect to achieve our investor day.
<unk> for adjusted operating profit margin and they mean Qi free cash flow for the full year.
And with that we'll now take your questions.
Yeah.
As a reminder management asks.
We limit one question per analyst.
I will close once you have a question has been posed this clarification is desired please rejoin the queue.
Your first question comes from the line of Jamie Cook with Credit Suisse. Your line is now open.
Hi, good morning.
Good morning, Good question, Hi, I understanding challenging environment. It sounds like the second quarter was a little short of your expert expectations, yet we're raising our short term incentive comp. So just trying to get some clarification around that and then any help on.
Confidence level sales to users are improving in the back half of the year, he seeing any improvement in supply chain on and sort of how we should think about it. Thanks.
Jamie asked answering your first question. So we we we accrue for incentive compensation based on our expectation for full year results and as you know from our proxy primarily our incentive compensation is based on.
Operating profit OPEC and services revenues. So again the increase in the quarter was not due to the quarter, but it was due to our expectations for the full year.
Your second question we had.
<unk> seen a significant improvement in supply chain, it's still a hand to hand combat. Our teams are working our way through those issues again very proud of the team that they were able to turn in double digit sales growth. Despite those supply chain challenges, but we have not seen them ease it changes from component to component of one day. That's one issue one day, it's another issue, but at the macro level.
We have not yet seen an improvement.
However, let me just add.
One of the things if you recall Jamie is normally we have a stronger first half from a production perspective, particularly in construction industries.
Obviously as you'd normally you would see our revenues declined in the second half.
We don't expect that because obviously, we expect to be able to now use some of that production capacity to meet some of the end user demand.
Within resource industries, we will expect we've had some commissioning delays we've continued to see that we expect those to ease which will help us in the second half was through perspective. So that's not really supply chain related and then finally in energy and transportation you as always we do expect a stronger second half of that.
Overall gives us confidence without actually any change in supply chain that we should be able to see through improvement in the second half of the year.
Your next question comes from the line of Tami Zakaria with Jpmorgan.
Your line is now open.
Hi, Good morning, Thanks for taking my question good morning, gentlemen.
Hi could you share what your volume expectation is for the back half it seems like your volume growth in the first half was 3% to 4% range do you expect that volume to improve sequentially in both <unk> and <unk> and what about pricing for the back half.
Should we expect similar 8% to 9% pricing as well like you saw in the second quarter.
So to answer your first question, we do expect volume to grow and price to improve sequentially and year over year in the third and fourth quarters.
And as far as as far as actually the percentage is concerned obviously.
The issue obviously in the second half on a volume basis.
There is.
Volume includes both services revenues as well as <unk>.
So obviously, it's dependent on how both of those perform.
And on the sort of pricing level.
We've said consistently we expect pricing to improve in the second half of the year, which should drive.
<unk> improvement as we go through.
A reminder, we do have some price increases in the second half of 2021 as well.
Your next question comes from the line of Nicole to Blaze with Deutsche Bank. Your line is now open.
Hi, Nicole.
Hi, Heiko.
Maybe just sticking on that last question from Cornell about that on the outlook for volume is that improvement that you're expecting in the second half all are predominantly a function of end user demand or now what are your expectations for dealer inventory as well.
Yes, I mean, obviously a.
Expectation is still for the full year that we don't expect a significant change in dealer inventory as you know we have had a small build year to date.
Obviously, it's dependent again, where demand is product by product.
For how those dealer inventory movements will occur for the remainder of the year.
But obviously and also part of the inventory build is within resource industries, where we are having some commissioning delays we expect those to work out as we go through the year.
Really is mostly a function of end user demand as we say.
The challenge for us at the moment is around being able to beat that end user demand from a supply chain perspective.
Is it typically the case energy and transportation will have strong will be stronger at the end of the year than they were in the first half of the year, particularly solar turbines.
Your next question comes from the line of David Raso with Evercore. Your line is now open hi, good morning.
Your backlog surprisingly went up sequentially in the backlog right now it seems like it covers most of your back half of the year, but.
Historically, not all of the backlog shifts that quickly.
So I'm just curious the order flow that you are getting for 'twenty three right now can you give us some insight into like we know you have a big backlog and still some supply chain issues price cost is getting better, but really trying to think about demand into 'twenty. Three you do have some window with some of the order programs.
Bomb program that you have where guys can order early for 'twenty. Three can you just give us some perspective on what you are saying for equipment appetite for next year.
Yeah, a couple of comments. So you know our backlog increase of $2 billion towards primarily driven was led by energy and transportation and as we've mentioned previously we have seen an increase in orders from solar turbines oil and gas customers that will start to impact us in late 2022 and into 2023.
Our backlog in resource industries remains healthy.
And would have increased if not for some Russia cancellations that we had so again as we look forward.
We're not making a prediction about 2023, but again that strong backlog does does.
Help us feel good the other thing that is in construction industries.
The infrastructure Bill we believe it will start to impact us in late 2022 and into 2023, so again for those.
Ill provide that as color, although obviously, we're not making a 2023 prediction at this point.
Yeah.
Your next question comes from the line of Jerry Revich with Goldman Sachs. Your line is now open.
Hi, good morning, everyone.
Sure.
Jim I'm wondering if you just weigh in with your views on how you are mining customers will respond given the commodity price volatility we've seen over the past months.
How different is this environment versus 2018 were for it.
Period of time and the correction we saw.
Slowing replacement demand as the miners hit the pause button just wondering if you could compare and contrast based on your conversations with mining customers on prospective orders today. Thanks.
Well certainly you know our mining customers continue to display capital discipline, having said that we're encouraged by the conversations that we're having with our mining customers, they're making decisions based on a very long term view and of course, the energy transition is creating perceived additional demand for many commodities moving forward.
Think about electric vehicles, I think about other other other kinds of minerals that will need to be mined based.
To support the energy transition, but having said that I mean, we mentioned that we had some cancellations in Russia.
But again, we remain quite positive based on for the medium and long term outlook for mining based on the conversations that we're having with customers.
Okay.
Your next question comes from the line of Chad Dillard with Bernstein. Your line is now open.
Hi, good morning, guys.
Okay.
I have a question for you guys on.
Manufacturing costs, you did about I think it was $966 million year on year increase.
Is the high watermark.
Mark for the year and then.
Just how to think about.
<unk>.
Or if you can quantify that inventory impact in corporate expenses for the quarter and how you're thinking about for the year.
Yes, Chad so first of all obviously as we started the year, we did expect a moderation of.
<unk> of supply chain, our manufacturing cost increases as we went through the year.
And obviously, we start to lap some of the significant.
Increases in the back half.
Both material cost and freight cost inflation and remains so.
So I think.
We've taken the appropriate pricing actions.
So we are optimistic about the ability for us to more than offset.
Obviously, I'm not going to predict about where we are looking in Q3 and Q4, however, the delta between price and manufacturing cost, which is really the most important part from our perspective, we'll actually get wider and that really is to help us actually catch back up some of the shortfalls, we've seen over the previous few quarters.
From a margin perspective that will be a positive.
With regards to the corporate expenses I mean, just again just to reiterate corporate items and eliminations include a lot of items, which are.
They relate to the business units.
But obviously they are not accounted for on a business unit specific basis.
The inventory impact.
It's a reasonably sized number we.
Hi.
We actually I think it was about 100 odd million last quarter and.
Some of the number this quarter the other things and that includes things like.
Warranty costs.
And.
Pulp inventories all of those things are impacts, which actually do underlying the impact the overall margins within the segment. So just wanted to challenging for you guys to model, but obviously I'm just trying to be as clear as we kind of August .
Your next question comes from the line of Michael Feniger with Bank of America. Your line is now open.
Hi, everyone. Thanks for Michael.
Hi, everybody. Thanks for answering my question.
With America retail sales and construction, obviously minus 2% and discuss the supply constraints.
Im curious when we look at some of the rental branches and companies reported another quarter of double digit growth there.
You feel there is any competitive dynamics going on there maybe losing share in maybe smaller construction equipment by chance because of the supply constraints, how does caterpillar how to deal with this issue with rental continue to it feels like gained share in tight tight market curious your views there. Thank you.
Well. Thanks for your question, Michael and of course, we have our rental business as well that our dealers are very focused on and again, where we are in a supply chain constrained environment. So dealer has to make a decision between putting something in the rental fleet or selling it to a retail customer who wants that equipment and so our retail fleet is aging I Havent said that you know what.
We're not concerned about share we're holding our own it's really an issue of.
Still strong demand and just our ability to completely meet that strong demand again, we did turned in.
Total company level double digit sales growth.
And fundamentally I mean, obviously <unk>.
Rental is a financing decision.
And obviously it has cost implications.
And so obviously for a lot of our customers who are using the machine on a more frequent basis rental is not necessarily the best option because of the cost implications. That's why we do believe over time.
The supply Chinese as they will be buying machines, and we know that they do on those machines, but obviously in a short term basis. They may use rentals as a stopgap until they are able to get that machine from us.
Your next.
Next question comes from the line of Stephen Volkmann with Jefferies. Your line is now open.
Hey, good morning, guys. Thanks for taking the question.
My question is on the cost side.
We've seen decreases and some of the metals and energy and freight indices that are sort of big and broad and I'm wondering if you're starting to see any moderation in those costs, yet or if there is perhaps another quarter or two before that would start to kind of flow through.
Yeah, you know, we're still dealing with an inflationary environment and we have not seen.
A decrease from our suppliers as a result of commodity price reductions as you know it takes a while for those those kind of changes to work their way through the supply chain and of course, there is volatility there as well so.
No. The short answer that question is no we haven't seen any moderation in those costs.
Your next question comes from the line of Nick <unk> with Baird. Your line is now open.
Thank you good morning.
Can it.
Going back to the <unk>.
Pricing discussion.
Done a little better than 9% in the quarter.
But.
I'm sort of curious if we're sort of thinking about the order intake that you had this quarter relative to what actually flowed through the P&L can you give us a sense for how the pricing is looking for.
The most recent orders that you had here and I'm also.
Thinking about your competitors right. We saw some of your Japanese competitors report much lower price increases. So I'm curious how you think about competitive dynamics globally around that thank you.
Yeah, So I mean, obviously.
As we go through I mean, obviously as you know we do have some price protection on orders in the backlog.
That is as we say as was taken into account when we're thinking about the decisions.
As far as the competitive dynamic.
We are not seeing any impact on <unk>.
Sure relative as a result of the price increases we've taken.
So we all obviously.
We'll always keep a close eye on that.
But generally we are as we said, we actually saw price be slightly better than we expected in the quarter.
And so that is a net positive for us and around and obviously demand for machines remained strong which helps from a pricing environment perspective, and as you know we've been very focused on services. The last few years and one of the main elements of that is to increase the value that we provide to our customers. So it's not simply a.
It was a price discussion we know we must be competitive that's very important but we also strive to two.
Deliver increased value of our customers minimizing downtime maximizing availability great parts support dealers do a great job supporting them. So again, it's more than just price. We are really focused on through our services initiatives, increasing the value that we provide to our customers.
And that's all part of their purchasing decisions.
Your next question comes from the line of Kristen Owen with Oppenheimer. Your line is now open.
Alright, good morning.
I wanted to follow up actually on the services and after market strength that you reported in the quarter and just if you could offer some context around how much of that is owing to some of the surface alert capabilities in the agreements that you've been finding over the last several years versus just what youre seeing from a utilization perspective, how much of the.
Aftermarket parts is related to just the equipment, that's being used more frequently.
It's a whole variety of issues and certainly utilization is up which we feel good about but we're also gaining traction on our service initiatives everything from the investments that we've made to increased parts availability using the system that we call pickup which allows us to work with our dealers to ensure that we have the right parts and anticipate what customers want.
Need we now have $1 2 million connected assets, so that gives us much better visibility for for everything from getting the right parts to the right either.
So that the customers get them when they need it to allowing us to help customers avoid downtime maximizing availability maximize production. We've also invested significantly in our e-commerce capability and we're seeing good progress there.
Again, a whole range of digi.
Digital investments that we're making are really starting to produce results and we're very bullish on that so.
It's really a combination of both certainly utilization is up but also were seeing positive results from all the hard work of our teams over the last few years.
Your next question comes from the line of Steven Fisher with UBS. Your line is now open.
Hey, Thanks, Good morning, just.
Regional question on the construction segment on Europe first you've talked about or can you talk a little bit more about what youre seeing from the end user demand there and the feedback you're getting from dealers in.
The wake of softer market conditions.
Or maybe a one quarter thing ahead of what some of the stimulus might.
Flow through there or do you think.
Kind of settling in for some of that could be a little bit longer period of weakness there and then similarly in.
In China are you getting any sense that.
Recent announcements around stimulus could start to to move the needle there more of a positive direction. Thank you.
Starting with Europe revenues were down in the quarter largely a result of the strengthening dollar so it's really a currency issue.
General business activity has moderated in the EU and we will keep a close eye on that but.
When there are as you know there has been there was an EU infrastructure package that passed and we're watching that closely as well and that certainly could positively impact us moving forward. So again, we're watching it very closely.
There are some positives there are some things that aren't so positive. So we'll see how it all plays out in China, we have seen.
The market weakened as I mentioned, we had a couple of very strong years in 2020, and particularly in 2021, it's too early for us to really predict what's going to happen there.
To your specific question again, we'll we'll continue to support our customers there and again, what we see now of courses is a weaker market for that 10 ton above excavator actuated market, then and we had previously.
Okay.
Your next question comes from the line of Matt Alcott with Cowen. Your line is now open.
Good morning, good morning, Thanks, guys.
To see the continued strong net growth in the backlog I was hoping you guys can tell us if you've had any backlog cancellations not related to Russia, as we've discussed but ones that we can.
Can be attributable to directly or indirectly to higher interest rates lower commodity prices or the cooling and the housing market.
And since the answer to this question may be short on that.
Syed I was.
Hoping you can comment on I think your competitor just received a $1 billion order from a class one.
Locomotives.
I was hoping you can talk about your outlook for locomotive upgrades going forwards and do local upgrades go into your service revenue.
Yes, so the first answer to your question the answer to your first question is no we haven't seen cancellations outside of Russia. So again demand remains strong.
Across most of our end markets and as we've been discussing here. This morning, our backlog is up.
So again, we haven't seen.
Cancellations.
In rail yes, there are obviously, we're always working to to produce our two to maximize our service revenue in locomotives and yes.
Upgrades and that we perform do go into services. If we do service work on those locomotives. So again.
You know the number of stored locomotives is still is still high its below the 2020 peak, but again, we continue to support our customers and that produces service opportunities for us in rail.
Your next question comes from the line of Tim <unk> with Citigroup. Your line is now open.
And I just wanted to circle back.
Hi, there just circle back to the discussion earlier on rental but more from the standpoint of.
On the potential opportunity for cat into 'twenty, three and you mentioned.
The aging of the fleet, but we're hearing a lot from dealers at least in the U S.
About the size of the rental fleet being smaller than they'd like so I'm. Just curious is there I know you are not going to give us a point estimate but is there a way to think about.
A range of outcomes in terms of.
Reinvestment in rental assets in the 'twenty three by the dealer base.
And obviously what that could mean.
Cats standpoint.
As you replenish those rental yards. Thank you.
Right well thank you.
And certainly dealer inventory and dealer rental fleets are lower than most dealers would like at the moment due to the combination of strong demand and the supply chain supply chain constraints. We have so I do believe that when supply chain constraints start to ease both of those represent an opportunity for us to get our.
Dealer inventory back more towards what would be typical for them to expect and also give them an opportunity to increase their rental fleets as well. So I do believe again not not not time bounding that but certainly when supply chain conditions ease that does create an opportunity for us.
Your next question comes from the line of Dan coming with Morgan Stanley . Your line is now open.
Hey, good morning, guys. Thanks for the question.
Just wondering if you could kind of expand on your prepared remarks in terms of what youre seeing on the resi side of the construction portfolio versus the non res side. I think you had mentioned residue in particular has been pretty strong for you guys for almost the past two years I'd imagine dealer inventories are probably pretty lean at this point, but I guess do you feel like that part of the portfolio might start.
Starts to become a drag and went back at the year just.
Into next year, just given some of the softening that we've seen in housing related data points.
Residential demand today remains healthy for us.
Certainly it could moderate somewhat due to interest rates and inflation. However.
Nonresidential demand is is is stable outside of China.
And again as I mentioned due to the infrastructure Bill we are we are bullish that.
That nonresidential construction in North America U S, particularly will improve due to the bill in late 2022, and then into 2023.
And just to remind everybody when we do see demand softening in certain areas that always need.
Because we're all in the supply chain constrained.
Time, and particularly around things like engine control modules that means those can be reallocated to areas, where there is stronger demand. So net net actually shouldnt actually have any impact on those overall.
Operator, we have time for one more question.
Your final question today comes from the line of Rob Wertheimer with Melius Research. Your line is now open.
Hi, Thanks, Good morning, everybody good morning, Rob.
My question is really on kind of production and manufacturing.
The segment discussion that you gave was interesting sort of maybe a leading indicator given the current cost accounting on segments and so one question is this price alone gets you to your margin expectations for the back half or do you have to improve anything on supply chain and manufacturing to get there given the segments look lower than the total and then more funded.
Mentally Jim I don't know if you can address how you feel the production system is working how.
The metrics you look at whether it's quality or safety or flow are doing are we seeing just cost inflation and a mismatch with price versus cost or are we seeing any tangled and production systems that are more fundamental thank you.
Yeah, So obviously, yes I mean.
Rob we are still seeing issues in the factories, which are closing some.
Impacts on variable labor and burdens.
Ross that obviously, our assumption in the second half is that those all will be slightly better, but not necessarily flowing through as efficiently as possible. We are continually working through as best as we can.
To make sure that price is the biggest driver.
Because obviously as you know.
We put through those increases in order to try and offset some of that material costs and inflation, that's gone through but yes. There is an efficiency, but we're hoping that some of them. Some of that will ease as we go through the remainder of the year, Rob maybe just to add on to that so as you know we've worked very hard on our lean manufacturing processes over the last few years and.
And it has been.
Struggled just given the supply chain challenges and we have and we all learned a new term called Decommit, where a supplier or one of their suppliers decommit. So we get some last minute surprises. So we're certainly not operating our factories as efficiently as we would like and as efficiently as we did before.
<unk>.
We started to come out of the pandemic, but again, we're continuing to work those issues hard in and.
Again, it's something that proud of the team. Despite those issues, which has created some inefficiencies which has created some additional costs. We were still able to turned in double digit topline growth during the quarter.
Okay.
Alright, Thank you, Jim Andrew and everyone, who joined US today, a replay of our call will be available online later this morning.
We'll also posted transcript on our investors Investor Relations website as soon as its available you will also find a second quarter results video with our CFO and an SEC filing with our sales to users data click on investors Dot Caterpillar Dot com and then click on financials to view those materials.
You have any questions. Please reach out to Robert <unk>.
The Investor Relations General phone number is $309 75 or 549.
We hope you have a great rest of the day now, let's turn the call back to <unk> to conclude our call.
Yeah.
Thank you for attending today's conference call you may now disconnect.
Yes.
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Okay.
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Yes.
Sure.