Q2 2023 Caterpillar Inc Earnings Call
Ladies and gentlemen, welcome to the second quarter 2023 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 Sir.
Okay.
Thanks, Debbie and good morning, everyone. Welcome to Caterpillar's second quarter of 2023 earnings call I'm, Ryan Fiedler, Vice President of Investor Relations. Joining me today are Jim <unk>, Chairman and CEO , Andrew Bonfield, Chief Financial Officer, Kyle at least senior Vice President of the Global Finance Services Division.
And Rob Rengel senior IR manager during our call we'll be discussing the second quarter earnings release, we issued earlier today you can find our slides the news release and the webcast recap at investors Dot Caterpillar dot com under events and presentations. The contents of 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 will also make assumptions that could cause our actual results to be different than the information. We're sharing with you on this call. Please refer to our recent SEC filings and the forward looking statements reminder, in the news release for details on factors that.
<unk> or in aggregate could cause our actual results to vary materially from our forecast.
A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings 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.
Now, let's turn to the slot to slide three and turn the call over to our chairman and CEO , Jim up will be.
Thanks, Ryan Good morning, everyone. Thank you for joining us.
We closed out the first half of 2023 I want to recognize our global team for delivering a very strong second quarter. This included double digit topline growth higher adjusted operating profit margin record adjusted profit per share in robust M E T free cash flow.
Our results continue to reflect healthy demand across most end markets for our products and services.
We remain focused on executing our strategy and continued to invest for long term profitable growth.
In today's call I'll begin with my perspectives on our performance in the quarter.
And then provide some insights on our end markets.
Lastly, I'll provide an update on our sustainability journey.
It was another strong quarter sales and revenues increased 22% in the second quarter versus last year.
Adjusted operating profit margin improved 21, 3% up sequentially in year over year.
We also generated $2.6 billion of M E T pre cash flow in the quarter.
Our second quarter results were better than we expected for sales and revenues adjusted operating profit margin and the M. E. T free cash flow. In addition, we ended the quarter with a healthy backlog of $37 billion.
We continue to see improvement in the supply chain, which allowed us to increase production in the quarter. However areas of challenge remained particularly for large engines, which impacts energy and transportation and some of our larger machines.
While we continue to closely monitor global macroeconomic conditions, we now expect our 2023 results to be better than we had previously anticipated.
Turning to slide four in the second quarter of 2023 sales and revenues increased by 22% to $17 $3 billion. This was primarily due to higher sales volume and price realization.
Sales volumes were higher than we expected largely due to an increase in dealer inventory relating to energy and transportation, which is supported by customer orders we.
We saw double digit increases in sales and revenues in each of our three primary segments.
Compared to the second quarter of 2022 overall sales to users increased 16% for machines, which includes construction industries and resource industries sales to users rose by 8%.
Energy and transportation was up 47%.
Sales to users in construction industries were up 3%.
North American sales to users increased and were better than expected as demand remained healthy for nonresidential and residential construction.
Nonresidential continue to benefit from government related infrastructure and construction projects.
Initial sales to users in North America also increased in the quarter.
E. Amy so lower sales to users due to weaker than expected market conditions in Europe .
The middle East continued to demonstrate strong construction activity and.
In Latin America, and Asia Pacific sales to users declined in the quarter.
In resource industries sales to users increased 26% in.
In mining sales to users increased supported by commodities remaining above investment thresholds.
Within heavy construction and quarry and aggregates sales to users also increased supported by growth for infrastructure related projects in.
In energy and transportation sales to users increased by 47% in the second quarter.
All applications, so higher sales to users in the quarter.
Oil and gas sales to users benefited from strong sales of turbines and turbine related services.
We also saw continued strength in sales of reciprocating engines in the oil and gas applications, such as tier four dynamic gas blending gas compression and repowering active well servicing fleets.
Our generation sales to users continue to remain positive due to favorable market conditions, including strong data center growth.
Industrial and transportation sales to users also increased.
Dealer inventories increased by $600 million in the quarter led by energy and transportation.
We are very comfortable with the total level of dealer inventory, which remains in the typical range.
Adjusted operating profit margin increased to 21, 3% in the second quarter as we saw improvements both on a sequential and year over year basis.
Adjusted operating profit margin was better than we had anticipated primarily due to better than expected volume growth and lower than expected manufacturing costs, including freight.
Moving to slide five.
We generated strong M E T pre cash flow of $2.6 billion in the second quarter.
We returned $2 billion to shareholders, which included about $1.4 billion and repurchase stock and $600 million in dividends.
In June we announced an 8% dividend increase.
Since may of 2019, when we introduced our current capital allocation strategy, we have increased our quarterly dividend per share by 51%.
We remain proud of our dividend aristocrat status and continue to expect to return substantially all M E T free cash flow to shareholders over time through dividends and share repurchases.
Now on slide six I'll describe our expectations moving forward well.
While we continue to closely monitor global macroeconomic conditions, our second quarter results lead us to expect that full year 2023 will now be even better than we described during our last earnings call.
We now expect adjusted operating profit margins to be close to the top of the targeted range relative to the scores corresponding expected level of sales.
This positive operating performance increases our expectations for M E T free cash flow, which we now expect to be around the top of the $4 billion to $8 billion range for the full year.
Our current expectations for adjusted operating profit margin and M. E T free cash flow reflect continuing healthy customer demand and our strong operating performance.
Now I'll discuss our outlook for key end markets this year, starting with construction industries.
In North America overall, we continue to see positive momentum in 2023, we.
We expect continued growth in nonresidential construction in North America due to the positive impact of government related infrastructure investments and a healthy pipeline of construction projects.
Although residential construction growth has moderated we expect the rest of 2023 to remain healthy.
In Asia Pacific, Excluding China, we expect growth in construction industries due to public infrastructure spending and supportive commodity prices.
We mentioned during our last earnings call that we expected sales in China to be below the typical 5% to 10% of our enterprise sales.
We now expect further weakness is the 10 ton and above excavator industry has declined even more than we anticipated.
Any Amy we anticipate that it will be flat to slightly up overall with the middle east exhibiting strong construction demand, whereas Europe is expected to be down.
Construction activity in Latin America is expected to be down in 2023 versus <unk>.
Strong 2022 performance.
In resource industries, we expect healthy mining demand to continue as commodity prices remain above investment thresholds.
As I've mentioned previously customers remain capital disciplined which supports a gradual increase in mining overtime.
We anticipate production and utilization levels will remain elevated.
We also expect the age of the fleet and the low level of park trucks to support future demand for our equipment and services.
We continue to believe the energy transition will support increased commodity demand expanding our total addressable market and providing further opportunities for profitable growth.
In heavy construction and quarry and aggregates, we anticipate continued growth due to major infrastructure and nonresidential construction projects.
Now I will discuss energy and transportation for Cat reciprocating engines in oil and gas applications. Although customers remain disciplined we are encouraged by continuing strong demand for gas compression.
Cat reciprocating engine demand for power generation is expected to remain healthy, including strong data center growth.
New equipment orders and services for solar turbines, and both oil and gas and power generation remained robust.
Industrial continues to be healthy.
In transportation, we anticipate strength in high speed marine as customers continue to upgrade aging fleets.
Moving to slide seven we continued to advance our sustainability journey.
Since our last quarterly earnings call, we published our 2022 sustainability report, which disclosed our estimated scope three greenhouse gas emissions for the first time.
We also published our first ever task force on climate related financial disclosures report.
We're helping our customers achieve their climate related goals by continuing to invest in new products technologies and services that facilitate fuel flexibility increased operational efficiency and reduced emissions.
For example, a customer in Chile is really realising fuel savings and lower emissions after purchasing our cat D. Six X E. The world's first high drive diesel electric drive dozer.
The customer reported a 30% reduction in fuel consumption versus the previous model working in the same operation.
This example, reinforces our ongoing sustainability leadership and how we help our customers build a better more sustainable world.
With that I'll turn the call over to Andrew.
Thank you Jim and good morning, everyone I'll begin with commentary on the second quarter results, including the performance of our business segments.
Then I'll discuss the balance sheet and free cash flow before concluding with our assumptions for the remainder of the year, including color on the third quarter.
Beginning on slide eight our team delivered a very strong second quarter as overall results exceeded our expectations on strong operating performance.
We saw healthy top line growth.
Improved operating margins and robust free cash growth.
For the year, we now expect our adjusted operating profit margin to be close to the top.
Of the targeted range and our anticipated sales level.
We also expect <unk> free cash flow to be around the top of about $4 billion to $8 billion target range.
To summarize the results sales and revenues increased by 22% or $3 1 billion to $17 3 billion.
Sales increased versus the prior year was due to higher sales volume and price realization.
Operating profit increased by 88% or $1 7 billion to $3 7 billion.
The adjusted operating profit margin was 21, 3% an increase of 750 basis points versus the prior year.
Adjusted profit per share increased by 75% to $5.55 in the second quarter compared to $3 19 since last year.
Profit per share was $5 67 in the second quarter of this year.
This included disc.
Deferred tax benefit of <unk> 17 per share while restructuring costs were five per share flat compared to the prior year.
We continue to expect restructuring expenses of about $700 million for the full year.
Other income of $127 million in the quarter was lower than the second quarter of 2022 by $133 million.
The year over year decline was primarily driven by an unfavorable currency impact related to EMEA in T balance sheet translation.
And the recurring increase in quoting pension expense of approximately $18 million, which we initially spoke to you about in January .
Higher investment and interest income acts as a partial offset.
The provision for income tax in the second quarter, excluding discrete items reflected a global annual effective tax rate of approximately 23%, which remains our expectation for the full year.
Moving on to slide nine.
22% increase in the top line versus the prior year was due to higher sales volume and price.
Volume improved sales to users increased by 16% and from changes in dealer inventory.
Sales for the quarter were higher than we had anticipated mostly due to volume.
Devoting about performance reflected a dealer inventory increase which was primarily due to a stronger than expected shipments in energy and transportation, particularly in power generation, which is in line with strong data center demand.
Price realization was in line with our expectations for the quarter.
As I mentioned sales to users grew by 16% in the quarter.
As Jim has discussed demand remains healthy across most end markets for our products and services and is supported by healthy order backlog.
Moving to slide 10 second quarter operating profit increased by 88%, while adjusted operating profit increased by 87% to $3 $7 billion.
Year over year favorable price realization and higher sales volume were partially offset by higher manufacturing costs, which largely reflected higher material costs.
An increase in SG&A and R&D expenses included higher strategic investment spend.
The adjusted operating profit margin of 21, 3% was better than we had anticipated.
Volume exceeded our expectations, which supported the margin outperformance.
In addition manufacturing costs increased less than we expected due to lower freight costs and the lower than anticipated impact from cost absorption.
SG&A and R&D expenses were about in line.
Moving to slide 11, I'll review the segment performance.
Construction industry sales increased by 19% in the second quarter to $7 $2 billion due to price realization and higher sales volume.
By region sales in North America rose by 32% due to higher sales volume and price realization.
Stronger demand and supply chain improvements enabled stronger than expected shipments in North America.
This supported stronger sales of equipment to end users and some dealer restocking and what remains our most constrained region.
Sales in Latin America decreased by 11%, primarily due to lower sales volume, partially offset by price realization.
<unk> sales increased by 20%, primarily the result of higher sales volume and price realization.
Sales in Asia Pacific were about flat.
Second quarter profit for construction industries increased by 82% versus the prior year to $1.8 billion.
The increase was mainly due to price realization and higher sales volume.
The segment's operating margin of 25, 2% was an increase of 890 basis points versus last year.
Margin exceeded our expectations largely due to better than expected volume and freight costs, which were lower than we had anticipated.
Turning to slide 12 resource industries sales grew by 20% in the second quarter to three $6 billion.
The increase was primarily due to price realization and higher sales volume.
Volume increased due to higher sales of equipment to end users.
Although after market sales volumes were lower seamless sales to customers for services remained positive.
Second quarter profit for resource industries increased by 108% versus the prior year to $740 million.
Finally, june's price realization and higher sales volume.
This was partially offset by unfavorable manufacturing costs largely material costs.
The segment's operating margin of 28% was an increase of 890 basis points versus last year.
The segment's margin was better than we had expected primarily due to favorable volume timing of SG&A, and R&D spend and lower than anticipated freight costs.
Now on slide 13.
Energy and transportation sales increased by 27% in the second quarter to $7 $2 billion.
Sales were up double digits across all applications.
Oil and gas sales increased by 43%.
Our generation sales increased by 39% industrial sales rose by 18% and transportation sales increased by 12%.
Second quarter profit for energy <unk> transportation increased by 93% versus the prior year to $1 $3 billion.
The increase was mainly due to higher sales volume and price realization, partially offset by unfavorable manufacturing costs and higher SG&A and R&D expenses.
The segment's operating margin of 17, 6% with an increase of 600 basis points versus last year.
The margin was generally in line with our expectations.
Moving to slide 14 financial products revenue increased by 16% to $923 million, primarily due to high average financing base across all regions.
Segment profit increased by 11% to $240 million.
The increase was mainly due to a lower provision for credit losses at cat financial partially offset by an increase in SG&A expense.
Business activity remains strong and our portfolio continues to perform well.
Pass throughs in the quarter with $2, one, 5% or four basis points of improvement compared to the second quarter of 2022.
This is the lowest second quarter postures percentage since 2007.
Retail new business volume performed well increasing versus the prior year and the first quarter.
In addition, we continue to see strong demand for used equipment.
Now on slide 15, Arabian teen free cash flow generation was again robust as we generated $2 $6 billion in the quarter.
This is an increase of $1 5 billion compared to the prior year.
With approximately $4 billion generated in the first half we now expect <unk> free cash flow to be around the top of a $4 billion to $8 billion target range for the full year.
Capex in the second quarter was about $300 million and we still expect to spend around $1 $5 billion for the full year.
As Jim mentioned, we returned about $3 billion through share repurchases and dividends in the second quarter.
Our balance sheet remains strong we have ample liquidity with an enterprise cash balance of $7 4 billion.
And we also hold an additional $2 billion in slightly longer dated liquid marketable securities to improve yields on that cash.
Now turning to slide 16, I will share some high level assumptions for the second half and the third quarter.
In the second half of 2023, we expect higher total sales and revenues as compared to the second half of last year.
We anticipate both sales to users and price realization will be positive in the second half.
Keep in mind that on a comparative basis, we start to lap the stronger price we saw from the third quarter onwards last year.
Caterpillar sales will be impacted by changes in dealer inventories as dealers increased their inventories in the second half of last year, which is not typical versus our expectation of a more typical reduction in the second half of 2023.
I want to spend just a few moments talking about dealer inventories.
Dealers are independent businesses and they make their own decisions around the level of inventory they hold.
We obviously work closely with them because this impacts our production levels.
As Jim mentioned, we are very comfortable with the levels of inventory that dealers are holding.
We talk about dealer inventory in aggregate.
This is difficult to predict with certainty as it arises from three different business segments.
Over 150 dealers and hundreds of different products.
In resource industries, and energy and transportation.
Inventory is mainly a function of the commissioning pipeline.
Keep in mind that over 70% of dealer inventory in these segments is backed by firm customer orders.
For construction industries dealer inventory is principally a function of end user demand and availability from the factory.
In construction industries dealers typically increase inventories during the first half of the year.
Around 60% of the $2 billion increase during the first half of this year was from products in this segment.
The remaining 40% is in resource industries, and energy and transportation.
For resource industries, and energy <unk> transportation, we currently anticipate a slight reduction in levels in the second half, but this is dependent on commissioning.
In construction industries dealers are currently holding around the mid point of the typical three to four month range.
Some dealers would like to increase inventories of certain products, such as BCP and earthmoving due to strong customer demand.
Firstly, some figures will act to reduce the levels of excavator in inventory because of high availability.
In addition, we are scheduled to replace third party engines with cat engines in certain products, which will impact production of these products during the second half.
Our current planning assumption for construction industries is that dealers will reduce the overall levels.
Inventory in the second half of 2023 with a principal focus on excavators.
Overall at the enterprise level, we currently expect dealer inventory should be slightly higher at the end of 'twenty two 'twenty three versus last year.
Moving on.
On this slide we provide our adjusted op profit margin target to assist you in your modeling process.
Based on our current planning assumptions, we anticipate full year adjusted operating profit margin to be close to the top of about 300 basis points target range at our expected sales level.
Your expectation for total enterprise sales to share we will inform you where on the curve margin should finish for the year.
Specific to the second half, we anticipate adjusted operating profit margins in the remaining quarters of the <unk>.
We'll be above the European go levels, although they will be lower than levels. We saw in the first two quarters of this year.
As compared to the first half, we anticipate a margin headwind from cost absorption in the second half.
We do not expect to build that inventory as we did in the first half and then protests anticipate that there will be some inventory reduction if we continue to see sustained supply chain improvements.
In addition spend related to strategic growth initiatives should continue to ramp.
Price realization should remain positive that the magnitude of the favorability versus the prior year is expected to be lower in the second half as we lap the more favorable pricing trends from last year.
Therefore, the increases in margins that we have occurred that have occurred from price outpacing manufacturing cost inflation should moderate in the second half of this year.
Now, let's move on to our assumptions that are specific to the third quarter.
We anticipate third quarter sales to be higher than the third quarter of 2022, but to exhibit the typical sequential decline when compared to the second quarter of 2023.
In construction industries as is our normal seasonal trend, we expect lower sales compared to the second quarter.
In resource industries, which can be lumpy, we anticipate slightly lower sales compared to the second quarter.
We expect sales in energy and transportation will increase slightly compared to the second quarter.
Specific to third quarter margins versus the prior year adjusted operating profit margins at the enterprise level and segment margins should be stronger.
However, we do expect lower enterprise adjusted operating profit margins in the third quarter compared to the second quarter of this year on lower volume and impacts from cost absorption.
We also anticipate investment spend will ramp across our primary segments as we continue to accelerate our strategic investments in areas like autonomy alternative fuels connectivity and digital and electrification.
At the segment level for construction industries, we expect a lower margin compared to the second quarter as is typical.
This is largely due to lower quarter on quarter volume increased investment in strategic initiatives and slightly higher manufacturing costs, including a headwind from cost absorption.
Favorable price realization will act as a partial offset.
We also anticipate lower third quarter margin in resource industries compared to the second quarter, primarily due to lower volume quarter on quarter.
Conversely, we expect third quarter margins in energy and transportation will be slightly higher compared to the second quarter on higher volume and stronger price realization, partially offset by higher manufacturing costs and spend relating to strategic initiatives.
Now turning to slide 13, let me summarize we generated strong adjusted operating profit margin with a 750 basis point increase to 21, 3%.
We now expect to be close to the top of our targeted range for adjusted operating margin profit margin for the full year based on our expected sales levels.
<unk> free cash flow generation was robust at $2 $6 billion in the quarter.
We returned $2 billion to shareholders through share repurchases and dividends.
We now expect <unk> free cash flow to be around the top of a $4 billion to $8 billion range for the full year.
Lastly, we continue to execute our strategy for long term profitable growth.
And with that we'll now take your questions.
Thank you.
If you would like to ask a question during this time simply press star.
Followed by the number one on your telephone keypad, if you would like to remove your line from the question queue Press Star one a second time.
We will pause for just a moment to compile the Q&A roster.
And your first question comes from the line of Jamie Cook with Credit Suisse. Your line is open.
Hi, good morning, Matt.
Nice quarter.
Thanks, Jamie Thanks, Jamie Good morning, Real reason, you decided not to retiring.
These results coming.
[laughter] that was a compliment my real question is you know the first one you know based on your performance in the first half of the year and what you are saying for sales and margins for 2023. It looks to me like you can achieve the high end of your margin targets in around the 21% on lower sales versus the 72 billion.
Target so do we.
You need to sort of revisit our targets again and adjust the margins on lower sales I'm, just trying to understand whats going on structurally here or is this just all price I think it's great for your story and then just my second follow up on 2024.
I know you don't want to guide, but youre seeing here with record backlog I guess, youre, saying dealer inventories are going to be slightly higher supply chain can I E. You know, what's the probability that you think you could potentially grow your EPS in 2024 or is there anything out there that's.
Given your caution and if so are pulling any levers.
Okay.
Well thanks, Jamie.
We mentioned in our prepared remarks, we expect our operating profit margin adjusted operating profit margin to be close to the top of the targeted range for the year.
We will look at our ranges at the end of the year and make an assessment as to what makes sense moving forward from there.
As we look forward to next year and you mentioned some of the dynamics that are going on we are closely monitoring economic conditions, but we do feel good about the business, but as I'm sure. You know, we're not going to make a 24 prediction at this point.
And we will take our next question from the line of David Raso with Evercore ISI. Your line is open.
Hi, Thank you for the time I'm just curious the backlog was was surprising to me how strong it was and I'm just curious any thoughts around the backlog you can help us with in your framework in the guide for this year on how it moves from here sequentially anything unique in the backlog about you know what percent of its ships in the next 12 months versus normal just trying.
To get a handle on that and if you could give any early color around pricing for 'twenty four with the on the base Order management program opening up this month, just trying to get a sense of how you're thinking about pricing for 24. Thank you.
Well, thank you David and certainly our backlog does remain healthy and we didn't have a dramatic change quarter to quarter. It was up.
Up modestly and then of course backlog includes of course, everything for energy and transportation resource industries, and also and also Ci.
For the energy and transportation and ROI projects that are in that in that backlog. You know those are typically tied to firm customer orders solar has cancellation charge schedules and so again, we feel good about the quality of the backlog.
In terms of a price for next year.
As is always the case, we will assess market conditions, we look at our input cost and we'll make a call on that later in the year, but it's a bit too early to really predict that.
And your next question comes from the line of Michael Feniger with Bank of America. Your line is open.
Great. Thanks for taking my questions just a broad question on on inventories when investors hear inventories are coming out.
There is always concern on the impact of the margins there were big Destocking periods in the second half in years like 2019, 2015 2012, what makes this second half of the year different from those other destocking periods is it less broad based is the fact that retail sales accelerated that gives you confidence we don't have that type of deal.
Stocking back that we've had in prior cycles.
Yeah. So.
That Tom Michael and Thanks for the question. Obviously, we were in a situation where actually demand was reducing when we did see those inventory reductions from dealers.
And what that did mean, obviously was the production levels, we're declining much more rapidly which impacted overall.
Both leverage.
As well as absorption.
As we look out over this period of time, we are still seeing healthy demand as we've indicated we actually still expect positive sales to users in the second half of the year well that does mean is when we are making modest inventory adjustments of demos, making modest inventory adjustments, we are able to absorb that in a little bit better than we have done historically the whole.
Point about all of this is just to remind everybody we were around the midpoint of the range.
We are actually being proactive with our dealers, particularly around things like excavators with us a little bit better availability to actually help them reduce inventory at a time when actually demand remains very strong out there in the market.
And Andrew just to put a fine point on it obviously dealer retail sales accelerated in the quarter to inform your view that dealer inventories.
For the rest of the year your comparability around that do you expect those retail sales to accelerate that your base case is it to moderate slightly and remained positive just directionally can you give us comparability with the second half how are your retail sales outlook in the second half informing your view on the inventory levels out there. Thank you.
Yeah. So if you actually take the view that we expect.
Retail sales team to continue to grow in the second half, we're not giving a prediction as to whether they'll accelerate or decelerate.
That's always going to be saying about that but just a point is actually with an alien inventory reduction and with actually increased retail sales the levels of inventory that axiom team was hold on a month's basis actually will decline by the end of the year, that's how the math works.
Thank you.
And your next question comes from the line of Rob Wertheimer with Melius Research. Your line is open.
Hi.
So my question is actually on Cat, one inventories and I know you've got rising sales to deal with at least so far but I'm curious are you still holding safety stock on raw materials and components as any of the finished goods waiting on completion or is it all just.
Rising sales flowing through and then just maybe how much cash could come out of inventory.
As inventories normalized slightly thanks.
Good morning, Rob. Thanks for your question. So certainly we are still seeing supply chain challenges as I mentioned earlier, there is an overall improvement, but it only takes one part to prevent us from shipping a machine or engine and so we're still dealing with supply chain constraints around.
Large engines, which impact.
Both <unk> and machines and we also have some issues with things like semiconductors for displays that are impacting other machines as well so to answer your question our inventory quite frankly is a bit higher than that I would like and I do expect over time as supply chain conditions improve that we will be able to to be more lean.
And improve our turns so you know the good news is that even with.
Our factories not running as lean as we would like and having a bit more inventory internally then we would like we still of course produce very strong cash in the quarter. So I won't quantify how much cash can come out of inventory, but certainly.
If in fact, we were when we get back excuse me when we get back to pre pandemic.
Levels are in the supply chain, we should be able to free up some additional cash.
Since you answered.
Okay.
So well you look at your margins it looks like your crushing operations and you look at inventory and it's like Okay I understand.
Some pockets where deliveries hold it up.
Thank you on the totality of how cases, managing production factory floor et cetera safety like other indicators you do I mean whats your assessment is this the best you've done.
Is there a problem spots just an overall look at how catalyst managing et cetera, and I'll stop there. Thank you.
Well, thanks, Rob and certainly you know I'm very proud of the team and the strong performance that they were producing.
We put out a new strategy in 2017, and we ask people to have faith in our ability to produce higher operating profit margins and higher more consistent free cash flow and I'm really pleased with the team's been able to achieve that we always have areas that we can we can do better.
Talked about the fact that we're not as lean as I would like us to be in our manufacturing operations.
We're doing a good job growing services, but I always want to grow it faster. So theres always things, we can do a better job of it again, just I'm very proud of the team and the fact that we have been able to meet the targets that we set out to our investors few years ago.
Thank you. Your next question comes from the line of Tami Zakaria with Jpmorgan. Your line is open.
Hi, good morning. Thank you so much so going back to backlog.
So going back to backlogs.
It went up by 200 million sequentially, what exactly drove that was it purely driven by pricing or did you see a net increase in order volumes in the quarter as well.
Yes. So there are a couple of factors obviously.
Price does have some impact.
Overall.
And that was probably the major impact on the increase for the quarter.
Obviously volumes fluctuate by quarter by quarter and depend on availability, but overall, we're pleased with the backlog is holding at healthy levels and maybe just one additional comment there you know.
Honestly, some customers are waiting longer for products that I would like and so our backlog is a function of course of demand, but it's also a function of our ability to ship. So as in fact supply chain conditions ease and we're able to ship more quickly customers shouldn't have to wait as long for certain products, which should bring our our backlog down so again.
Declining backlog wouldn't be a bad thing if in fact, it's the result of our ability to shorten lead times and improve availability.
Got it if I can ask a quick follow up for the back half is it fair to assume price realization.
It's down to lets say mid to high single digit growth and do you have any incremental pricing plan for later this year.
Yes. So obviously, we've we've seen very strong price as you've seen through the year, obviously, we expect that to reduce as we go through the second half.
If you take a function of lapping price increases I think you get closer to a.
It's a single digit number obviously.
Obviously, we don't estimate that by quarter.
But yes, the price range will come down as we move through the remainder of the year.
Can I just to remind everybody. Please can I just remind everybody. Please can we just ask one question. So that we can get through everybody on the Q just out of.
Courtesy for your Oh.
Other analysts out there please.
Thank you and we will move to our next question from Nicole <unk> with Deutsche Bank. Your line is open.
Yeah. Thanks, good morning, guys.
One of the nickel and nickel.
And just on the retail sales trends this quarter there was some deterioration across like you know.
Both of the machines businesses and Amy can you just talk about what you're seeing from that region. I think there have been some indications on a little bit of slowing in Europe . So would love to hear what paths hearing on the ground.
Yes, we have seen a bit of a slowing in Europe as I mentioned, but middle East is quite strong. So it's a mixed bag there so.
We're seeing a lot of strong construction activity in the middle East a lot of nonresidential construction projects going on but we have we are seeing a bit of weakness in Europe around construction.
Okay.
If you would like to ask a follow up question. Please press star one and we will move to our next question from the line of Stifel <unk> with Jefferies. Your line is open.
I'd say.
Good morning, guys. Thanks for taking the question.
Wanted to just ask a little bit about productivity, because I guess I guess I'm hearing you say that supply chain is improving but theyre still issues.
Are there still kind of productivity head.
Headwinds or penalties that you are paying in the factories because the supply chain is not yet as smooth as we'd like it to be and obviously I'm trying to think about whether there is some margin opportunity.
When supply chains, when and if supply chains are sort of normal again.
Yeah, you know as I mentioned, because we do have some supply chain constraints overall the situation has improved there is no question, but.
We've gone to six pages of shortages for certain machine, it's down to one page that's an improvement, but you still have some shortages that you have to deal with them and it has not allowed us to operate our factories as lean as we have in the past and as lean as I would like them. So so again I do expect that as supply chain conditions ease in the future.
We should be able to get back to running our factories with more just in time manufacturing leaner, which should help us reduce.
Increased inventory turns and reduce the amount of of absolute inventory, we hold based on our current level of sales.
So there's still an opportunity to answer your question.
Yeah.
Your next question comes from the line of Tim Thein with Citigroup. Your line is open.
Thanks, Good morning, just a question.
Parts. Good morning, Yeah, just on parts.
I guess, we can broaden it to cat.
Across the board, but specifically ours interestingly commenting.
<unk>.
So for down volumes.
Is that just maybe a function of that.
And then prioritizing whole goods.
In light of the constrained availability or in that.
I wouldn't imagine there's there's much by way of Destocking going on with the dealers. So maybe just.
Any more comments you have.
On that comment.
<unk> parts volumes.
Sure.
Maybe just to start with an overall so certainly.
For services sales were up year over year, and we have seen fluctuations in dealer buying patterns, which impacts volumes.
Services dealer sales to customers were up in the quarter.
Availability of has improved so our ability to ship parts to our dealers has improved and that has had an impact on it as well. So again net net not concerned about it but it really just a function of as our availability improves dealers oftentimes conclude they're unable to held a bit less inventory, which will.
Have an impact.
Yeah.
And your next question comes from the line of Chad Dillard with Bernstein. Your line is open.
Hi, good morning, guys.
How are you.
So I wanted to focus mainly on construction industries and just wanted to get a better answer for.
For your for your orders that came in the quarter can you just giving a rough breakdown between retail versus stock and bond picking.
About inventory shifts.
That's really helpful stat about 70%.
Retail for E&P and resource industries could you do the same for construction industries.
Yeah, so when.
Women spoke about it I mean, obviously, we don't.
Breakdown, what dealers are take the orders fall between retail and the stock in <unk>.
A significant proportion of.
The purchases they make all based on customer orders, particularly if there is a degree of customization that is needed and there will be somewhere.
Once the machine has actually been delivered to the data.
They will have a number of things to our attachments to put on which will impact the timing of commissioning so theres a little bit of commissioning with NCI, but obviously it is nowhere near around the 70% costs are.
When we talk about for E&C and for resource industries.
What we are seeing as as I indicated is theyre all patches, particularly in BCP I noticed moving.
Our dealers are constrained and I actually would like to have more inventory available to them.
And that impacts their order. So obviously orders in those segments. All those divisions are much stronger, obviously with excavators and excavators and impacts of what's happening, particularly so for example in China.
Well, obviously demand is reduced.
That means we have more availability.
And dealers are likely to decrease their inventory of excavators.
So it's a bit of an expired, but as I say.
We only have <unk> only have three and a half months of inventory on hand.
That percentage will actually.
The decrease are around <unk>.
But I would certainly get to the year end.
Great. Thank you.
Your next question comes from the line of Steven Fisher with UBS. Your line is open.
Thanks, Good morning, I Wonder if you could talk a little bit about the drivers of the morning, but the drivers of the broad oil and gas segment, where do you think we are in the kind of the rebuild cycle of equipment. There to what extent do you need rig counts to rebound to keep the current levels of revenue sustained or are there really.
Other drivers within this segment to be aware of is obviously, a very strong acceleration of sales to users.
Just kind of curious for color on the drivers and the longevity of the strong trend in this segment.
And we'll see them and we're certainly not dependent upon rig counts to drive.
Oil and gas that's just one element of the one of the many applications that we sell into so as I mentioned earlier, we are.
Encouraged by the strong demand that continues for gas compression for cat branded Recip engines, that's quite positive we have seen a bit of slowing in well servicing but that's expected to to increase again based on most analysts.
Views over the coming months so our.
Continues to have quite robust sales into a number of oil and gas applications, including gas compression, but also offshore platforms and international.
Business as well.
So again.
At this point oil and gas certainly looks strong and in some areas where we are.
We're quite bullish on what we see moving forward.
Thank you very much.
Your next question comes from the line of Kristen Owen with Oppenheimer. Your line is open.
Great. Thank you for taking my question I wanted to come back to a question on pricing and first for for the second quarter. If you can help US excuse me understand you know what's supporting the strength. There I think that was a little bit ahead of where we were expecting price to be a function of mix or just the better than expected end user demand.
And then as we think about that stepping down to the back half of the year to get to that single digit number that you outlined on a previous answer.
Just how we should think about the cadence of that stepping down throughout the remainder of the year. Thank you.
Yes, so price realization was about in line with our expectations and certainly you know as we as we.
We look at price and the price we realize it's a function of a whole variety of things you mentioned mix, but a lot of it has to do with of course, the competitive situation that that we and our dealers are facing in a particular market. So.
We saw significant increases in price in the second half of last year and that will lap in the second half of 2023, but we still expect to benefit from positive price in the second half, but it will moderate.
Certainly understandable based on that again, the strong price increases in the second half of last year and as always we'll continue to monitor the global price environment.
We'll determine if actions need to be taken.
And just a Christian just to add on just if you recall last year price continued to improve from research to the fourth quarter. So you probably should see the reverse of that this year, which will price will be slightly stronger than the third versus the fourth.
Thank you.
And your next question comes from the line of Mig <unk> with Baird. Your line is open.
Thank you good morning.
But in aviation.
Yes. Good morning, a quick clarification based on where you are kind of thinking about that.
Inventory destocking in the back half in order to make that happen.
Do you have to adjust production sequentially in any way maybe you can comment on that and then related to this.
Lower manufacturing costs of $283 million drag.
Should we think that this this drag lessens in.
The back half and could that actually be a positive benefit as we think about the fourth quarter on a year over year basis. Thank you.
Yeah. So first of all on this obviously production.
Indicated from the beginning of the year.
Last year, we did see.
If you remember production was rising throughout the whole yeah.
As we went through the year as the supply chain starting to improve.
That.
And construction will be slightly different this year.
Obviously, we will see some headwind as we do see some dealer inventory reduction in the second half.
We are already making production adjustments as we move on that's part of the business, we do that day in day out.
And those will continue and there will be some impact in the second second second half of the year.
But overall still expect positive revenues.
During that period of time for caterpillar as a whole.
Talking about manufacturing cost, yes manufacturing costs will decrease, but obviously price benefit David benefit that will reduce as well so the net goodness of the two.
It will mean, we won't see quite that margin improvement.
But we did see.
As we went through.
The last four quarters. So, yes, we still expect price to offset manufacturing cost the second half of the year.
But then that while it's that will reduce silver price as well so no real benefits margins.
We think through the remainder of the year and just to expand upon the answer you know we talked earlier about the fact that there is enough excavator dealer inventory out there should we.
We certainly would expect to produce less excavators as an example in the next six months and we also mentioned the fact that we're going to have some changeovers and some of our BCP products, where we're switching to cat engines, which is certainly the right thing to do for the long time and growing services, but that'll have an impact on production as well during the last six months of the year, but keep in mind that we have said we now.
We expect to be close to the top of our targeted range for adjusted operating profit margin so that all.
Goes into the mix.
Thank you.
And your next question comes from the line of Mike <unk> with D. A Davidson your line is open.
Yes, hi, good morning, and thanks for taking my question.
Good morning historically.
Yeah.
So historically prior to the pandemic your operating margin in the fourth quarter, where usually a bit of a step downward compared to the third quarter.
That's mainly construction and resource.
A little off pattern in the last couple of years, obviously for a few reasons, but I was wondering if you could tell us whether you will be back to that sort of more normal seasonality on margins here in the second half of this year or if operationally.
So kind of changed permanently here.
No I think that definitely we would expect a step down in margins in the fourth quarter in both.
Particularly in construction as is the normal seasonal trend. It does tend to be the lower production period also when they on JV again, just as Jim mentioned, we will have the impact of the BCP changeover, which will impact us slightly stronger in the fourth quarter. So that will be some impacts as we move through the fourth quarter.
Thank you.
And your next question comes from the line of Matt Alcott with TD Cowen Your line is open.
Good morning.
Have a higher level question on nonresidential construction.
Good to see the tailwind that the infrastructure packages continue to materialize, but can you help us gauge what inning you think we're in with these tailwind can we can we expected like an acceleration next year or just study. Thank you.
Yes. Thanks for your question I'm going to try to avoid a baseball analogy here, but as I mentioned earlier, we are starting to see some benefit of the.
Numerous infrastructure bills that are past some.
Some of that is coming from the states, but as you can imagine permitting takes time for a number of projects and it's as you can imagine very difficult to judge exactly how long that permitting process will take and how this will play out but I do expect it to last for some time difficult for me to to estimate alright, what will what will the acceleration being 86 months or one year period, but.
Again, it's a very positive thing for us and it's a positive thing for our customers that we have these projects coming down the pipe.
Great. Thank you very much.
Thank you.
And your next question comes from the line of Stanley Elliott with Stifel. Your line is open.
Hey, good morning, everyone. Thank you all for fitting me in.
Quick question on the cash flow you guys have.
<unk> been consistent that discussing returning all of the free cash.
You have basically let's call it another kind of.
Four 5 billion.
Run rate in the back half of the year should we think all of that going back to share repurchases or you're using for other investments or any thoughts there would be great. Thanks.
Yes, you know as we said our intent is to return substantially all of our NDA for cash flow to shareholders through dividends and share repurchases over time.
We do maintain a healthy balance sheet for a whole variety of reasons you know when we went in.
<unk> in 2020, I was very pleased that we had a strong balance sheet.
We also have increased our <unk>.
Our dividend since we introduced our new capital.
Capital allocation strategy in May of 2019, we've increased the dividend per share by 51% since that period of time. So again, you know we're proud of aristocrat status. So certainly wouldnt be surprised it's a board decision, but if we continue to increase our dividend and continue to share purchase repurchases as well.
Today's final question comes from the line of Jerry Revich with Goldman Sachs. Your line is open.
Yes, hi, good morning, everyone.
Hi, Jerry.
Jim.
Wondering if you just expand on your comments in mining your biggest competitor in trucks is posting 250% book to Bill.
Im wondering if youre seeing that level of bookings activity and are we finally at a point, where we're hitting the sweet spot of that.
Replacement cycle.
For what we delivered a decade ago or are there some idiosyncratic ebbs and flows.
And the data points.
Well. Thank you. Thank you Jerry and certainly as we've talked about many times you know mining is a kind of a lumpy business quarter to quarter.
And our mining customers are remaining capital disciplined.
What we've talked about for some time is what we expect is a gradual increase over time and our mining business and that's certainly the way it's played out certainly.
At the moment.
Large truck sales or activity that activity is robust that quotation activity is quite robust.
And some other products not quite as strong, but again just based on what we see required in terms of commodity production increases to support the energy transition we feel very good about that business. We do believe quite strongly that we have.
Best Autonomous mining solutions, we now have about 600 autonomous trucks in operation around the world and one of the great things. That's happened is that is that we've been able to reduce the cost such that now a smaller mine can make a capital investment to put autonomy and so when we're talking to miners now autonomies almost always part of that discussion we're down to about.
12% to 14 trucks by minus about until the 14 trucks it could pencil to put autonomy and we've actually seen mines.
Adapt autonomy with that low number of trucks. So we're quite bullish about what we see coming in again.
We're leveraging that autonomous solutions, whether it's in iron ore copper gold.
Oil sands, a whole variety of applications, but again, we're we're certainly long term bullish about about that business.
Alright, well thank you if I can.
Thanks. Thank you all for joining us and we certainly appreciate your questions again I want to thank our global team one more time for just an outstanding quarter and to reiterate based on our strong operating performance due to the strong results that we achieved in the second quarter. We now believe that 2023 will be even better than we had previously anticipated during our last earnings call that includes higher full year.
<unk> for adjusted operating profit margin M E&P free cash flow, which again reflects that continuing healthy customer demand in our performance.
Please stay safe thanks for your interest.
Thanks, Jim Andrew and everyone, who joined US today, a replay of our call will be available online. Later. This morning, we'll also post the transcript on our Investor Relations website as soon as its available you'll also find our second quarter results video with our CFO and an SEC filing with our sales to users data click on investors dot.
<unk> Dot com and then click on financials to view those materials do you have any questions. Please reach out to Robert Me Investor Relations General phone number is 390 675 or 549 now lets turn it back over to Abbvie to conclude our call.
Thank you.
Ladies and gentlemen that concludes our call today and thank you for joining you may all disconnect.
[music].