Q3 2023 Caterpillar Inc Earnings Call

Ladies and gentlemen, welcome to the third 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.

Thanks, Debbie good morning, everyone and welcome to Caterpillar's third quarter of 2023 earnings call.

I'm, Brian Fiedler, Vice President of Investor Relations join.

Joining me today are Jim <unk>, Chairman and CEO, Andrew Bonfield, Chief Financial Officer, Kyle Epley Senior Vice President of the Global Finance Services Division and Rob Rengel Senior IR manager.

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

The content 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.

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 a detailed discussion of our 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 slide three and turn the call over to our chairman and CEO Jim Ogilvie.

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

Before discussing our results I'd like to take a moment to acknowledge the tragic events in the middle East.

We are deeply saddened by the loss of life and are hopeful for a quick and peaceful resolution.

The Caterpillar Foundation has donated $1 million to the American Red Cross and its network of Red Crescent societies in the region to support the humanitarian needs of those impacted.

As we close out the third quarter I want to thank our global team for delivering another strong quarter. This included double digit top line growth strong adjusted operating profit margin and robust M E N T free cash flow.

Our results continue to reflect healthy demand across most of our end markets for our products and services.

We remain focused on executing our strategy and continued to invest for long term profitable growth.

I'll begin with my perspective about our performance in the quarter I will then provide some insights about our end markets.

Lastly, I'll provide an update on our sustainability journey.

Moving to quarterly results. It was another strong quarter sales revenues increased 12% in the third quarter versus last year adjusted operating profit margin improved to 28% up significantly year over year. We also generated $2 $9 billion of M E T free cash flow in the quarter.

Sales were generally in line with our expectations, while both adjusted operating profit margin and M. E T free cash flow in the third quarter were better than we expected.

In addition, we ended the quarter with a healthy backlog of $28 $1 billion.

Backlog is a function of demand and lead times as I've mentioned demand remains healthy in most of our end markets due to improving supply chain conditions product availability and lead times have improved for many products.

Dealers and customers can wait longer to place orders, which has led to a moderation in order rates as expected in.

In addition, we have seen a reduction in dealer orders for building construction products, which we anticipated due to the changeover to cat engines that we previously discussed and for excavation in anticipation of dealers, reducing their inventories in the fourth quarter.

Although our backlog declined as expected it still remains elevated as a percentage of revenues compared to historic levels.

While we continue to closely monitor global macroeconomic conditions, we now expect our full year 2023 results to be better than we anticipated during our last earnings call.

Turning to slide four in the third quarter of 2023 sales and revenues increased by 12% to $16 $8 billion, driven primarily by favorable price realization as well as volume growth.

Sales increased in each of our three primary segments.

Compared with the third quarter of 2022 overall sales to users increased 13%, which was below our expectations.

Energy and transportation sales to users increased 34%, but was lower than expected due to some supply chain challenges for large engines and the timing of gas turbine in international locomotive deliveries.

Four machines, which includes construction industries and resource industries sales to users rose by 7% in line with expectations.

Sales to users in construction industries were up 6%.

North American sales to users increased as demand remained healthy for nonresidential and residential construction.

Nonresidential continued to benefit from government related infrastructure and construction projects.

Residential sales to unit in North America also increased in the quarter.

Amy sales to users were up slightly primarily due to continuing strength in middle east construction activity.

In Latin America, and Asia Pacific sales to users declined in the quarter.

In resource industries sales to users increased 10% in.

In mining sales to users increased with 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 energy and transportation sales to users increased by 34%.

All applications saw 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 into oil and gas applications, such as tier four dynamic gas blending repowering, well servicing fleets and gas compression.

Power generation sales to users continued to remain positive due to a 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 construction industries, and followed by energy and transportation.

In construction industries. The increase was in North America, and some of our most constrained product lines, including BCP and earthmoving.

We remain very comfortable with the total level of dealer inventory, which is within the typical range.

Andrew will provide more color later in the call.

Adjusted operating profit margin increased to 28% in the third quarter of 430 basis point increase over last year.

Operator: Ladies and gentlemen, welcome to the third quarter 2023 Caterpillar earnings conference call. Please be advised that today's conference is being recorded.

Adjusted operating profit margin was better than we had anticipated.

Abby: I would now like to hand the conference over to your speaker today, Ryan Fiedler. Thank you and please go ahead. Thanks, Abby.

Relative to our expectations, we saw lower than expected manufacturing costs, including freight as well as slightly favorable price realization, which included a positive impact from geographic mix.

Ryan Fiedler: Good morning, everyone, and welcome to Caterpillar's third quarter of 2023 earnings call. I'm Ryan Fiedler, Vice President of Investor Relations. Joining me today are Jim Mumpelby, Chairman and CEO, Andrew Bonfield, Chief Financial Officer, Kyle Eppley, Senior Vice President of the Global Finance Services Division, and Rob Rangle, Senior IR Manager. During our call, we'll be discussing the third quarter earnings release we issued earlier today. You can find our slides, the news release and a webcast recap at investors.caterpillar.com under events and presentations.

Moving to slide five we generated strong M E T free cash flow of $2 $9 billion in the third quarter and $6 $8 billion in the first three quarters of 2023.

Year to date, we returned $4 $1 billion to shareholders, which included about $2 $2 billion and repurchase stock and $1 $9 billion in dividends.

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.

Ryan Fiedler: The content of this call is protected by US 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'll make four 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.

Now on slide six I'll describe our expectations moving forward.

As I mentioned earlier, we now anticipate the full year to be better than we previously expected we.

We expect our adjusted operating profit margin to be slightly above the targeted range relative to the corresponding level of sales.

This positive operating performance increases or expectation for M. E T free cash flow, which we now expect will exceed the $4 billion to $8 billion.

<unk> range for the full year.

Ryan Fiedler: Please refer to our recent SEC filings and the four looking statements reminder in the news release for details on factors that individually or an aggregate could cause our actual results very materially from our forecast. A detailed discussion of our 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-gap numbers. For reconciliation of any non-gap numbers to the appropriate US gap numbers, please see the appendix of the earnings call slides.

This outlook for the adjusted operating profit margin and M. E T free cash flow reflects healthy customer demand and our strong operating performance.

Now I will discuss our outlook for key end markets, starting with construction industries in North America overall, we continue to see positive momentum.

We expect continued growth in nonresidential construction in North America due to the impact of government related infrastructure investments and a healthy pipeline of construction projects.

Although residential construction growth has moderated we expect it to remain healthy.

Jim Umpleby: Now, let's turn this slide three in turn of the caller number to our chairman and CEO, Jim Opelby. Thanks, Ryan. Good morning, everyone. Thank you for joining us.

In Asia Pacific, Excluding China, we expect growth in construction industries due to public infrastructure spending and supportive commodity prices.

Jim Umpleby: Before discussing our results, I'd like to take a moment to acknowledge the tragic events in the Middle East. We are deeply saddened by the loss of life and are hopeful for a quick and peaceful resolution. The California Foundation is donating $1 million to the American Red Cross and its network of Red Crescent Societies in the region to support the humanitarian needs of those impacted. As we close out the third quarter, I want to thank our global team for delivering another strong quarter.

As we've mentioned during previous earnings calls, we anticipate continued weakness in China and expect it to remain well below our typical range of 5% to 10% of enterprise sales.

In a Amy we anticipate the region will be slightly down as weakness continues in Europe, partially offset by continuing strong construction demand in the middle East.

Construction activity in Latin America is expected to be about flat versus a strong 2022 performance.

Jim Umpleby: This included double-digit top line growth, strong adjusted operating profit margin, and robust MENT free cash flow. Our results continue to reflect healthy demand across most of our end markets for our products and services. We remain focused on executing our strategy and continue to invest for long-term profitable growth. I'll begin with my perspectives about our performance in the quarter. I'll then provide some insights about our end markets. Lastly, I'll provide an update on our sustainability journey.

In resource industries, we continue to see a high level of quoting activity.

In mining customer product utilization remains high the number of parked trucks remains low in the age of that fleet remains elevated.

Order rates are slightly lower than we expected at this time, reflecting continued capital discipline by our customers.

We continue to believe the energy transition will support increased commodity demand over time, expanding our total addressable market and providing further opportunities for long term profitable growth.

In addition customer acceptance of our autonomous solutions continues to grow.

Jim Umpleby: Moving to quarterly results, it was another strong quarter. Sales and revenues increased 12 percent in the third quarter versus last year. Adjusted operating profit margin improved to 20.8 percent, up significantly year over year. We also generated $2.9 billion of MENT free cash flow in the quarter. Sales were generally in line with their expectations, while both adjusted operating profit margin and MENT free cash flow in the third quarter were better than we expected.

This is evidenced by the announcement this morning, with Freeport Mcmoran, who will convert their fleet of Cat 793, large mining trucks. It in Arizona copper mine to autonomous haulage using Cat mine Star Command.

We also expect heavy construction and quarry and aggregates to remain at healthy levels due to major infrastructure and nonresidential construction projects.

Moving to energy and transportation.

In oil and gas we remain encouraged by continuing strong demand for cat reciprocating engines and gas compression.

Jim Umpleby: In addition, we ended the quarter with a healthy backlog of $28.1 billion. Backlog is a function of demand and lead times. As I've mentioned, demand remains healthy in most of our end markets. Due to improving supply chain conditions, product availability and lead times have improved from any products. Dealers and customers can wait longer to place orders, which has led to a moderation in order rates as expected. In addition, we have senior reduction in dealer orders for building construction products, which we anticipated due to the change over to cat engines that we previously discussed and for excavation in anticipation of dealers reducing their inventories in the fourth quarter.

As we said last quarter well servicing in North America is showing some short term moderation, but we remain optimistic about future demand.

Kept reciprocating engine demand for power generation is expected to remain strong primarily driven by data center growth.

New equipment and services for solar turbines, and both oil and gas and power generation remain robust.

Industrial demand is expected to soften slightly from recent high levels, but remains well above our historical averages.

Transportation, we anticipate strength in high speed marine as customers continue to upgrade aging fleets.

As we've described we continue to see strength in most of our end markets.

Jim Umpleby: Although our backlog decline is expected, it still remains elevated as a percentage of revenues compared to historic levels. While we continue to closely monitor global macroeconomic conditions, we now expect our full year of 2023 results to be better than we anticipated during our last earnings call. Turning slide four. In the third quarter of 2023, sales and revenues increased by 12 percent to $16.8 billion, driven primarily by favorable price realization as well as volume growth.

Based on our backlog dealer inventory and current market conditions, we expect to have another good year in 2024.

We will provide additional information during our fourth quarter call.

Moving to slide seven we continued to advance our sustainability journey.

We're helping our customers achieve their climate related to objective is by continuing to invest in new products technologies and services that facilitate fuel flexibility increased operational efficiency and reduced emissions.

Jim Umpleby: Sales increased in each of our three primary segments. Compared with the third quarter of 2022, overall sales to users increased 13 percent, which was below our expectations. Energy and transportation sales to users increased 34 percent, but was lower than expected due to some supply chain challenges for large engines and the timing of gas turbine and international locomotive deliveries. For machines, which includes construction industries and resource industries, sales to users rose by 7 percent in line with expectations.

For example, caterpillar provides a number of low carbon intensity solutions to customers.

In construction industries, the cat 980, <unk> wheel loader, which features a cat designed and manufactured continuous variable transmission.

Improves fuel efficiency by as much as 35% and reduces C O two emissions by as much as 17% compared to the previous model.

We also introduced the new Cat G 3600, Gen. Two engine the latest evolution of the powerful <unk> 3600 series offering lower emissions.

Jim Umpleby: Sales to users and construction industries were up 6 percent. North American sales to users increased as demand remained healthy for non-residential and residential construction. Non-residential continued to benefit from government-related infrastructure and construction projects. Residential sales to users in North America also increased in the quarter. The Amy sales to users were up slightly, primarily due to continuing strength in Middle East construction activity. In Latin America and Asia Pacific, sales to users declined in the quarter.

With more than 8500 Cat G 3600 units in the field. The Gen. Two engine is designed to build upon the platforms robust performance to provide a 10% increase in power and lower emissions compared to the previous model.

We've also made several joint announcements with customers that demonstrate our commitment to supporting their climate related objectives.

I'll highlight one here.

In September Caterpillar and Albemarle introduced a unique collaboration aimed to support their efforts to establish Kings Mountain North Carolina as the first ever zero emissions lithium mine in North America, while also making lithium available for use and caterpillar battery production.

Jim Umpleby: In resource industries, sales to users increased 10 percent. In mining, sales to users increased with 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 energy and transportation, sales to users increased by 34 percent. All applications saw higher sales to users in the quarter. Oil and gas sales to users benefited from strong sales of turbines and turbine-related services.

These examples reinforce our ongoing sustainability leadership and how we're helping our customers build a better more sustainable world.

With that I'll turn it over to Andrew.

Thank you Jim and good morning, everyone.

Begin with commentary on the third quarter results, including the performance by segments.

Then I'll discuss the balance sheet and cash flow before concluding with our assumptions for the fourth quarter and full year.

Beginning on slide eight overall operating performance was strong.

Jim Umpleby: We also saw continued strength in sales of reciprocating engines into oil and gas applications such as tier 4 dynamic gas blending, repowering well-servicing fleets and gas compressions. Foundation. Power generation sales to users continued to remain positive due to favorable market conditions, including strong data center growth. Industrial and transportation sales to users also increased. Relicive to our expectations, we saw lower than expected manufacturing costs, including freight, as well as slightly favorable price realization, which included a positive impact from geographic mix.

Adjusted operating profit margin adjusted profit per share and <unk> free cash flow all were better than we expected while sales grew in line with our expectations.

Based on the strong third quarter and year to date operating performance. We now expect that the adjusted operating profit margin for the year will be slightly above the top end of our target range of the corresponding level of sales.

We also anticipate that <unk> free cash flow will exceed the target range of $4 billion to $8 billion.

In summary, sales and revenues increased by 12% or $1 8 billion to $16 $8 billion.

The sales increase versus the prior year was driven primarily by price realization as well as higher sales volume.

Operating profit increased by 42% a $1 billion to $3 4 billion.

The adjusted operating profit margin was 28% an increase of 430 basis points versus the prior year.

Profit per share was $5 45 in the third quarter of this year.

This included restructuring costs of <unk> <unk> per share as compared to eight in the prior year.

We continue to expect restructuring expenses of about $700 million for the full year.

Jim Umpleby: Moving to slide five, we generated strong MENT free cashflow of $2.9 billion in the third quarter and $6.8 billion in the first three quarters of 2023. Year to date, we returned $4.1 billion to shareholders, which included about $2.2 billion in repurchased stock and $1.9 billion in dividends. We remain proud of our dividend aristocrat status and continue to expect to return substantially all MENT free cashflow to shareholders over time through dividends and share repurchases.

Adjusted profit per share increased by 40% to $5 52 in the third quarter compared to $3 and 95 last year.

Other income of $195 million was lower than that than the third quarter of 2022 by $47 million.

The decline was driven by less favorable currency impacts in the quarter related to an E&P balance sheet translation as compared to the prior year.

Along with recurring increase in pension expense of approximately $18 million per quarter.

Jim Umpleby: Now on slide six, I'll describe our expectations moving forward. As I mentioned earlier, we now anticipate the full year to be better than we previously expected. We expect our adjusted operating profit margin to be slightly above the targeted range relative to the corresponding level of sales. This positive operating performance increases our expectation for MENT free cashflow, which we now expect will exceed the $4.8 billion target range for the full year. This outlook for the adjusted operating profit margin and MENT free cashflow reflects healthy customer demand and our strong operating performance.

Higher investment and interest income access as a partial offset.

The provision for income taxes in the third quarter, excluding discrete items.

Reflected a global annual effective tax rate of 22, 5%, which is the rate we now expect for the full year.

The slightly lower than expected tax rate along with discrete items added about 14 profit per share in the quarter.

Moving on to slide nine as.

As I mentioned, the 12% increase from the top line versus the prior year was primarily due to price realization as well as higher sales volume.

Jim Umpleby: Now we'll discuss our outlook for key and markets starting with construction industries. In North America, overall, we continue to see positive momentum. We expect continued growth in non-residential construction in North America due to the impact of government-related infrastructure investments and a healthy pipeline of construction projects. Although residential construction growth is moderated, we expect it to remain healthy. In Asia Pacific, excluding China, we expect growth in construction industries due to public infrastructure spending and supportive commodity prices.

Volume improved sales to users increased by 13% while year over year changes in dealer inventory accidents slides offset.

Overall, the magnitude of the sales increase was in line with our expectations.

However by segment construction industry sales were higher.

We sold industries were in line and energy and transportation sales were lower than we had anticipated.

Services revenues increased in the third quarter.

Jim Umpleby: As we have mentioned during previous earnings calls, we anticipate continued weakness in China and expected to remain well below our typical range of 5-10% of enterprise sales. In Yami, we anticipate the region will be slightly down as weakness continues in Europe, partially offset by continuing strong construction demand in the Middle East. Construction activity in Latin America is expected to be about flat versus strong 2022 performance.

We will update you with our progress towards our services growth target when we report our fourth quarter results.

As a normal practice.

Price realization was slightly better than we had unexpected for the quarter.

However, as we anticipated we did see the magnitude of the year over year price effects moderate compared to the second quarter as we lapped prior year price increases.

Jim Umpleby: In resource industries, we continue to see a high level of coding activity. In mining, customer product utilization remains high. The number of park truck remains low and the age of the fleet remains elevated. Ltd. Order rates are slightly lower than we expected at this time, reflecting continued capital discipline by our customers. We continue to believe the energy transition will support increased commodity demand over time, expanding our total addressable market and providing further opportunities for long-term profitable growth. We also expect heavy construction and quarry and aggregates to remain in healthy levels due to major infrastructure and non-residential construction projects.

Volume was slightly below our expectations.

As Jim mentioned sales to users were lower than we had anticipated principally in energy and transportation.

However, this was nearly offset by the increase in dealer inventory versus our expectations of it being about flat for the quarter.

The increase in G&A inventory was driven primarily by construction industries. There we had stronger than expected shipments in North America, particularly in building construction products and earthmoving.

Within North America these products remain constrained.

Near the bottom end of the typical dealer inventory range of three to four months of sales.

Yeah.

We also saw some dealer inventory increase in energy and transportation within the quarter.

I'll remind you that dealer inventory in energy and transportation and resource industries is mainly a function of the commissioning pipeline with over 70% of dealer inventory in these segments back spot firm customer orders.

Jim Umpleby: Moving to energy and transportation. In oil and gas, we remain encouraged by continuing strong demand for cat reciprocated engines and gas compression. As we said last quarter, well servicing in North America is showing some short-term moderation but we remain optimistic about future demand. Cat reciprocating engine demand for power generation is expected to remain strong, primarily driven by data center growth. New equipment and services or solar turbines in both oil and gas and power generation remain robust.

Because steel inventories more functioning function of commissioning and resource industries and energy and transportation.

It is difficult for us to predict in these two segments.

I will discuss further our full year expectations for dealer inventories a little bit later.

Moving to slide 10 third quarter operating profit increased by 43% to $3 4 billion.

While adjusted operating profit increased by 41% to $3 5 billion.

Jim Umpleby: Industrial demand is expected to soften slightly from recent high levels but remains well above our historical averages. In transportation, we anticipate strength and high speed marine as customers continue to upgrade aging fleets. As we've described, we continue to see strength in most of our end markets. Based on our backlog, dealer inventory and current market conditions, we expect to have another good year in 2024.

Price realization, which included a slight benefit from a shift in the geographic mix of sales and sales volume was favorable in the quarter.

Our largest headwinds operating profit were higher SG&A, and R&D expenses and higher manufacturing costs.

SG&A and R&D expenses included highest strategic investment spend.

Manufacturing cost increases included higher material costs.

Jim Umpleby: We will provide additional information during our fourth quarter call.

And unfavorable cost absorption as we reduced our inventories compared to a corresponding increase in the third quarter of 2022.

Jim Umpleby: Moving to slide 7, we continue to advance our sustainability journey. We're helping our customers achieve their climate-related objectives by continuing to invest in new products, technologies and services that facilitate fuel flexibility, increased operational efficiency, and reduced emissions. For example, catapillar provides a number of low carbon intensity solutions to customers. In construction industries, the Cat 980XE wheel loader, which features a cat designed and manufactured continuous variable transmission, improves fuel efficiency by as much as 35% and reduces CO2 emissions by as much as 17% compared to the previous model.

Lower freight costs acted as a partial offset with the manufacturing costs.

The adjusted operating profit margin of 28% improved by 430 basis points.

This was better than we had anticipated primarily due to favorable manufacturing costs of which freight was the largest contributor.

Also the slightly better than expected price helped margins.

Now I'll discuss the performance of the segments.

On slide 11, construction industry sales increased by 12% in the third quarter to $7 billion.

Jim Umpleby: We also introduced the new Cat G3600 Gen II engine, the latest evolution of the powerful G3600 series, offering lower emissions. With more than 8500 Cat G3600 units in the field, the Gen II engine is designed to build upon the platform's robust performance to provide a 10% increase in power and lower emissions compared to the previous model. We've also made several joint announcements with customers that demonstrate our commitment to supporting their climate-related objectives.

Primarily due to favorable price realization.

By region sales in North America rose by 31% due to higher sales volume and favorable price.

As I mentioned supply chain improvements and maybe stronger than expected shipments in North America, which supported some dealer restocking.

Sales of equipment to end users were in line with our expectations for the region.

Sales in Latin America decreased by 31%, primarily due to lower sales volume, partially offset by favorable price.

In EMEA sales increased by 8%, mainly due to favorable price and currency impacts.

Jim Umpleby: I'll highlight one here. In September, Catapillar and Albomoral introduced a unique collaboration aimed to support their efforts to establish King's Mountain North Carolina as the first ever zero emissions lithium mine in North America, while also making lithium available for use in Catapillar battery production. Richard. These examples reinforce our ongoing sustainability leadership in how we're helping our customers build a better, more sustainable world.

Sales in Asia Pacific decreased by 8%, primarily due to lower sales volume driven by lower sales of equivalent to end users.

Third quarter profit for construction industries increased by 53% versus the prior year to $1 8 billion.

The increase was mainly due to favorable price realization.

The segment's operating margin of 26, 4% was an increase of 710 basis points versus last year.

Andrew Bonfield: With that, I'll turn it over to Andrew. Thank you, Jim, and good morning, everyone. I'll begin with commentary on the third quarter results, including the performance of our segments.

Margin exceeded our expectations of better volume price and lower than anticipated manufacturing costs, primarily freight.

Andrew Bonfield: Then I'll discuss the balance sheet and cash flow before concluding with our assumptions for the fourth quarter and for the year. Beginning on slide eight, our overall operating performance was strong. Adjusted operating profit margin, adjusted profit per share, and MENT free cash flow all were better than we expected, while sales grew in line with our expectations. Based on the strong so-called and year-to-date operating performance, we now expect that the adjusted operating profit margin for the year will be slightly above the top end of our target range at the corresponding level of sales.

Turning to slide 12 <unk>.

Resource industries sales grew by 9% in the third quarter to $3 $4 billion. They.

The increase was primarily primarily due to favorable price realization, partially offset by lower sales volume.

Volume decrease was higher sales of equipment to end users were more than offset by lower after market parts volume.

Which reflected changes in dealer buying patents.

Third quarter profit for resource industries increased by 44% versus the prior year to $730 million, mainly due to favorable price realization.

Andrew Bonfield: We also anticipate the MENT free cash flow will exceed the target range of $4 to $8 billion. In summary, sales and revenues increased by 12% or $1.8 billion to $16.8 billion. The sales increased versus the prior year was driven by primarily by price realization as well as higher sales volume. Operating profit increased by 42% or $1 billion to $3.4 billion. The adjusted operating profit margin was 20.8% and increased of 430 basis points versus the prior.

Profit was partially offset by the impacts of lower sales volume, which included unfavorable product mix.

The segment's operating margin of 21, 8% was an increase of 540 basis points versus last year.

Margin was better than we had expected primarily due to lower than anticipated manufacturing costs, driven by freight and price.

Now on slide 13.

Energy <unk> transportation sales increased by 11% in the third quarter to $6 9 billion.

Sales were up across all applications.

Andrew Bonfield: Profit per share was $5.45 in the third quarter of this year. This included restructuring costs of $0.7 per share as compared to $0.8 in the prior. We continue to expect restructuring expenses of about $700 million for the full year. A adjusted profit per share increased by 40% to $5.52 in the third quarter compared to $3.95 last year. Other income of $195 million was lower than that than the third quarter of 2022 by $47 million.

Oil and gas sales increased by 26% power generation sales were higher by 21% industrial sales rose by 5% and transportation sales increased by 6%.

Third quarter profit for energy <unk> transportation increased by 26% versus the prior year to $1 $2 billion.

The increase was mainly due to favorable price realization and higher sales volume, partially offset by higher SG&A and R&D expenses unfavorable manufacturing costs and currency impacts.

SG&A and R&D expenses reflected ramping investments related to strategic growth initiatives.

Andrew Bonfield: The decline was driven by less favourable currency impacts in the quarter related to MENT balance sheet translation has compared to the prior year, along with the recurring increase in the pension expense of approximately $80 million per quarter. Higher investment and interest income access as a partial offset. The provision for income taxes in the third quarter, excluding discrete items, reflected a global annual effective tax rate of 22.5%, which is the rate we now expect for the full year. The slightly lower than expected tax rate along with discrete items added about 14 cents to profit per share in the quarter.

A reminder, most of our strategic investments relating to electrification and alternative fuels occur in this segment, which impacts reported margins.

The segment's operating margin of 17, 2% was an increase of 210 basis points versus the prior year.

Margin was lower than we had anticipated primarily due to lower than expected sales volume impacted by supply chain challenges for large engines and delivery delays for solar turbines.

Moving to slide 14.

Financial products revenue increased by 20% to $979 million, primarily due to higher average financing rates across all regions.

Andrew Bonfield: Moving on to slide 9. As I mentioned, the 12% increase in the top line versus the prior was primarily due to price realisation as well as higher sales volume. Volume improved a sales to users increased by 13% while year-over-year changes in dealer inventory acted as a slight offset. Overall, the magnitude of the sales increase was in line with our expectations. However, by segment, construction industry sales were higher, resorted industries were in line, and energy and transportation sales were lower than we had anticipated, and the third quarter. Services revenues increase in the third quarter.

Segment profit decreased by 8% to $203 million.

The decrease was mainly due to a higher provision for credit losses of Cat financial.

The unfavorable impact reflects a challenging comparison as we had reserve releases in the prior year as compared to a more typical provision expense in the third quarter of 2023.

Of note, though through the third quarter of this year provision expense for comparable nine months period is at the lowest level for over 20 years.

Business activity remains strong with Apple and our portfolio continues to perform well with pass throughs and write offs at historic low levels.

Andrew Bonfield: We will update you with our progress towards our services growth target when we report our fourth quarter results in as is our normal pro-practice. Price realisation was slightly better than we had expected for the quarter. However, as we anticipated, we did see the magnitude of the year-over-year price effects moderate compared to the second quarter as we lacked prior year-price increases. Volume was slightly below our expectations. As Jim mentioned, sales to users were lower than we had anticipated principally in energy and transportation.

Past dues in the quarter were 196% a four basis point improvement compared to the third quarter of 2022, and a decrease of 19 basis points compared to the second quarter.

Retail new business volume increased versus the prior year and though it declined compared to the second quarter. This follows the typical seasonal pattern.

In addition, we continue to see strong demand for used equipment and used inventory remains at low levels.

Andrew Bonfield: However, this was nearly offset by the increase in dealer inventory versus our expectations of being about flat for the quarter. The increase in dealer inventory was driven primarily by construction industries. There we had stronger than expected shipments in North America, particularly in building construction products and earth moving. Within North America, these products remain constrained and are near the bottom end of the typical dealer inventory range of three to four months of sales.

Now on slide 15, RM E&P free cash flow has been robust this year with another $2 $9 billion generated during the third quarter.

With $6 $8 billion generated through the first three quarters of this year, we expect to exceed that target of $4 billion to $8 billion a share.

From a working capital perspective, we had a small inventory decrease of around $200 million in the quarter.

Looking ahead, we expect our inventory levels will continue to decrease as we've seen sustained supply chain improvements.

Andrew Bonfield: We also saw some dealer inventory increase in energy and transportation within the quarter. I remind you that dealer inventory and energy and transportation and resource industries is mainly a function of the commissioning pipeline with over 70% of dealer inventory in these segments backed by firm customer orders. Because dealer inventory is more a functioning function of commissioning in resource industries and energy and transportation, it is difficult for us to predict in these two segments.

Capex in the third quarter was around $400 million.

With about $1 1 billion and Capex through the first three quarters, we continue to expect around $1 5 billion for the full year.

Our balance sheet remains strong we have ample liquidity with an enterprise cash balance of $6 5 billion.

And we hold an additional $4 3 billion in.

And slightly longer dated liquid marketable securities to improve yields on that cash.

Now on slide 16, I will share some high level assumptions for the fourth quarter and the full year.

Andrew Bonfield: I will discuss further our order operating profit increased by 42% to $3.4 billion, while adjusted operating profit increased by 41% to $3.5 billion. Price realization which included a slight benefit from a shift in the geographic mix of sales and sales volume were favourable in the quarter. Our largest headwinds operating profit were higher SGNA and R&D expenses and higher manufacturing costs. SGNA and R&D expenses included higher strategic investment spend. Manufacturing costs increases included higher material costs and unfavourable cost absorption as we reduced our inventory compared to a corresponding increase in the third quarter of 2022.

During the fourth quarter, we anticipate slightly higher sales as compared to the prior year.

Price should remain favorable.

We expect sales to us is to continue to support good underlying growth.

So changes in dealer inventories should act as an offset.

As a reminder, we saw dealers increased inventories by $700 million in the fourth quarter of 2022, whilst we expected decrease in the fourth quarter of this year.

Specifically in construction industries, we do not expect the seasonal sales increase typically seen from the third to the fourth quarter.

Sales to users are expected to increase on both a sequential and year over year basis.

Andrew Bonfield: Lower freight costs acted as a partial offset within manufacturing costs. The adjusted operating profit margin of 20.8% improved by 430 basis points. This was better than we had anticipated, primarily due to favourable manufacturing costs of which freight was the largest contributor. Also the slightly better than expected price held margins.

Instead, we anticipate lower shipment volumes as we complete the cat engine changeover and building construction products and dealers reduced their inventories principally of excavators.

This compares to a dealer inventory increase in the fourth quarter of 2022.

Though we now expect that dealer inventory in construction industries will be higher at the end of 2023 than it was at year end 2022, we still expect it to be within the typical three to four months of sales range.

Andrew Bonfield: Now I will discuss the performance of the segments. On slide 11 construction industry sales increased by 12% in the third quarter to $7 billion, primarily due to favourable price realization. By region sales and North America rose by 31% due to higher sales volume and favourable price.

A reminder, this is an average across all dealers and all products in construction industries and is difficult to predict with precision given over 150 independent dealers and hundreds of different products.

Andrew Bonfield: Chris. As I mentioned, supply chain improvements enable stronger than expected shipments in North America, which supported some dealer restocking. Sales of equipment to end users were in line with our expectations for the region. Sales in Latin America decreased by 31%, primarily due to lower sales volume, partially offset by favourable price. In the AME sales increased by 8%, mainly due to favourable price and currency impacts. Sales in Asia Pacific decreased by 8%, primarily due to lower sales volume driven by lower sales of equipment to end users.

Similar to last quarter, there are still areas and rolled products with dealers would like to have more inventory.

As Jim has mentioned we are very comfortable with the level of deal of inventory held by dealers overall.

In resource industries, we anticipate slightly lower sales as compared to the third quarter as a result of improvements in availability.

We also expect lower sales versus the prior year driven by changes in dealer inventory in.

In the fourth quarter of 2022, there was an increase in dealer inventories for resource industries, while we expect a decrease in the fourth quarter of this year.

Andrew Bonfield: Third quarter profit construction industries increased by 53% versus the prior to $1.8 billion. The increase was mainly due to favourable price realisation. The segments operating margin of 26.4% was an increase of 710 basis points versus last year. Margin exceeded our expectations on better volume, price and lower than anticipated manufacturing costs, primarily freight. Turning to slide 12, resource industry sales grew by 9% in the third quarter to $3.4 billion. The increase was primarily due to favourable price realisation, partially offset by lower sales volume.

We expect sales in energy and transportation to increase in the fourth quarter as compared to the third quarter with higher solar turbines and rail deliveries.

However, keep in mind that we continue to work through supply chain challenges, primarily impacting large engines.

We also anticipate some moderation in industrial sales during the fourth quarter compared to recent high levels.

Now I'll comment on our expectations for margins we.

We provided our adjusted operating profit margin target chart to assist you in your modeling process.

Based on our current planning assumptions, we anticipate the adjusted operating profit margin to be slightly above the target range for the full year 2023.

Andrew Bonfield: Volume decreases higher sales of equipment to end users were more than offset by lower aftermarket subparts volume, which reflected changes in dealer buying patterns. Third quarter profit for resource industries increased by 44% versus the prior year to $730 million, mainly due to favourable price realisation. Profit was partially offset by the impact of lower sales volume, which included unfavourable product mix. The segments operating margin of 21.8% was an increase of 540 basis points versus last year.

This is based on the corresponding estimated level of sales.

Your expectation of total enterprise sales this year will inform where margins could finish for the year.

Specific to the fourth quarter, we anticipate the adjusted operating profit margin to be lower than the third quarter.

We anticipate lower than normal volume leverage, particularly impacting construction industries for the reasons I mentioned previously.

We also anticipate a negative segment mix impact too.

Andrew Bonfield: Margin was better than we expected, primarily due to lower than anticipated manufacturing costs driven by freight and price. Now on slide 13, energy and transportation sales increased by 11% in the third quarter to $6.9 billion. Sales were up across all applications. Oil and gas sales increased by 26%, power generation sales were higher by 21%, industrial sales rose by 5%, and transportation sales increased by 6%. Third quarter profit energy and transportation increased by 26% versus the prior year to $1.2 billion.

The impact operating budget margins as construction industry sales would be a lower proportion of total sales as compared to the third quarter.

Price realization should remain positive that we expect the magnitude of the favorability versus the prior year to moderate as we continue to lap more favorable pricing trends from last year.

Therefore, the increases in margins that have occurred from price outpacing manufacturing cost inflation.

Moderates in the fourth quarter.

In addition, as you look down the income statement for the prior year. There are a couple of points to note.

First short term incentive in spades in the fourth quarter of 2022 was lower than normal due to the true up for the final outcomes for the financial year.

Andrew Bonfield: The increase was mainly due to favourable price realisation and higher sales volume, partially offset by higher SGNA and R&D expenses, unfavourable manufacturing costs and currency impacts. SGNA and R&D expenses reflected ramping investments related to strategic growth initiatives. A reminder that most of our strategic investments relating to electrification and alternative fuels occur in the segment which impacts reported margins. The segments operating margin of 17.2% was an increase of 210 basis points versus the prior year. Margin was lower than we had anticipated, primarily due to lower than expected sales volume impacted by supply chain challenges for large and delivery delays for solar turbos.

This will be a headwind for year over year operating margins.

However, this will be partially offset by favorability in other operating income and expense as we do not expect a significant currency translation losses that we saw in the fourth quarter of last year to recur.

By segment in construction industries, we expect slightly lower margin compared to the third quarter, assuming lower volume.

We also anticipate lower sequential margins in resource industries as is typical impacted by cost absorption along with higher spend related strategic investments.

In energy and transportation, we expect margins will be similar to the third quarter with stronger volume offset by manufacturing costs and an unfavorable mix of products, which includes international locomotive deliveries and rail.

Andrew Bonfield: Williams. Moving to slide 14. Financial products revenue increased by 20% to $979 million, primarily due to higher average financing rates across all regions. Segment profit decreased by 8% to $203 million. The decrease was many due to a higher provision for credit losses that kept financial. The unfavorable impact reflects a challenging comparison as we had reserved releases in the prior as compared to a more typical provision expense in the third quarter of 2023.

Now turning to slide 17, let me summarize.

Adjusted profit per share was $15 98 through the first three quarters of the year, which already exceeds our previous full year record by 15%.

We generated strong adjusted operating profit margin with a 430 basis point increase to 28%.

Andrew Bonfield: Of note though, through the third quarter of this year, provision expense for a comparable nine month period is at the lowest level for over 20 years. Business activity remains strong and our portfolio continues to perform well with past views and write-offs at historic low levels. Past views in the quarter will 1.96% of four basis point improvement compared to the third quarter of 2022, and a decrease of 19 basis points compared to the second quarter.

We now expect to be slightly above the targeted range for adjusted operating profit margin for the full year based on our expected sales levels.

<unk> free cash flow remained robust with $6 $8 billion year to date.

We now expect <unk> free cash flow to exceed at $4 billion to $8 billion target range for the full year.

We continue to execute our strategy for long term profitable growth.

And with that we'll take your questions.

Andrew Bonfield: Retail new business volume increased versus the prior and though it declined compared to the second quarter, this follows the typical seasonal pattern. In addition, we continue to see strong demand for used equipment and used inventory remains at low levels.

Thank you.

I'd like to ask a question press star one on your telephone keypad.

Please note we are only allowing one question per analyst and your first question comes from Michael Feniger with Bank of America. Your line is open.

Yes. Thank you for taking my question just based on where the backlog sits today you discussed the easing supply condition impacting lead times orders as that normalizes do you expect the backlog to consolidate at these levels and then move higher you mentioned some capital discipline with customers.

Andrew Bonfield: Now in slide 15, our MENT free cash row has been robust this year with another $2.9 billion generated during the third quarter. With $6.8 billion generated through the first three quarters of this year, we expect to exceed that target of $4 to $8 billion this year. From a working capital perspective, we had a small inventory decrease of around $200 million in the quarter. Looking ahead, we expect our inventory levels will continue to decrease as we see sustained supply chain improvement.

And Jen with where commodity prices are for oil iron ore copper is that enough to support growth in 2024. Thank you.

Yes, as I mentioned, we do expect another good year in 2024 and will provide more detail in January when we talked about this a bit in our last quarterly call. Our backlog is higher than it normally would be because our lead times are higher than I'd like them to be frankly, and what we've talked about is as supply conditions continue to improve we expect lead times.

Andrew Bonfield: CapEx in the third quarter was around $400 million. With about $1.1 billion in CapEx through the first three quarters, we continue to expect around $1.5 billion for the full year. At balance sheet remains strong. We have ample liquidity with an enterprise cash balance of $6.5 billion, and we hold an additional $4.3 billion in slightly longer-dated liquid marketable securities to improve yields on that cash.

To come down which should have a corresponding.

Impact on our backlog our backlog should come down. So that's a positive thing if you look at our backlog over over a number of years, it's still elevated compared to where it normally would be based on.

On revenue so again.

We do feel good about about market conditions.

Andrew Bonfield: Now in slide 16, I will share some high level assumptions for the fourth quarter in the full year. During the fourth quarter, we anticipate slightly higher sales as compared to the prior. Price should remain favorable. We expect sales to use as to continue to support good underlying growth, though changes in dealer industries should act as an offset. As a reminder, we saw dealers increase industries by $700 million in the fourth quarter of 2022, whilst we expected decrease in the fourth quarter of this year. Specifically in construction industries, we do not expect the seasonal sales increase typically seen from the thirds of the fourth quarter. Those sales to users are expected to increase on both the sequential and year-over-year base.

And we expect that as we improve lead times that backlog as a percentage of revenue would come down to more normal levels. Yeah. Let me just give you some numbers to add to that I mean, if you look at the backlog as a percentage of trailing 12 months revenues in the period of 2017, it was 37% and 20.

<unk>. It was 32% currently today is around 44%. So backlog still is elevated based on historic trends and remind you also the services revenues now a higher proportion of our total revenue base as well.

And we will take our next question from Tami Zakaria with Jpmorgan. Your line is open.

Hi, good morning, Thank you so much.

Andrew Bonfield: Curtis. Instead, we anticipate lower shipment volumes as we complete the cat engine change over in building construction products and dealers reduce their inventories principally of excavators. This compares to a dealer inventory increase in the fourth quarter of 2022. Though we now expect that dealer inventory and construction industries will be higher at the end of 2023 than it was in the year in 2022, we still expect it to be within the typical three to four months of sales range.

So staying on backlog.

Thank you staying on backlog I think orders were down in the third quarter.

Have you seen any improvement in order trends quarter to date or if orders continue to be down.

Whats support a good year.

Plenty plenty for like you mentioned in the call.

Yes, again, we expected some moderation in order rates based on again, improving availability, so that wasn't a surprise to us.

Andrew Bonfield: A reminder, this is an average across all dealers and all products in construction industries and is difficult to predict with precision given over 150 independent dealers and hundreds of different products. Similar to last quarter, there are still areas and or products where dealers would like to have more inventory. As Jim has mentioned, we are very comfortable with the level of inventory held by dealers overall. In resource industries, we anticipate paid slightly lower sales as compared to the third quarter as a result of improvements in availability.

Again, what would.

Give us another good year in 2024 is is the market conditions I mean again, if we look at where we are in most of the markets. We serve we feel quite good.

Starting with just with construction industries in North America, the infrastructure investments that are being made by the government. Although we are starting we have seen some benefit of that we expect more benefit in 2024.

Residential although the growth rate has continued to moderate in North America. It is still growing.

In oil and gas still remains quite healthy for solar turbines.

Gas compression in oil and gas is strong as well. So again, there's a lot of positive things power generation datacenter growth continues to.

Andrew Bonfield: We also expect lower sales versus the prior driven by changes in dealer inventory. In the fourth quarter of 2022, there was an increase in dealer inventories for resource industries while we expect a decrease in the fourth quarter of the share. We expect sales and energy and transportation to increase in the fourth quarter as compared to the third quarter with higher solar turbines and rail deliveries. However, keep in mind that we continue to work through supply chain challenges, primarily impacting large engines. We also anticipate some moderation industrial sales during the fourth quarter compared to recent high levels.

To provide a tailwind as well so again theres a lot in the market conditions would lead us to believe that we will have another good year next year and Jamie just to add again, a little bit more remind you that.

Specifically in the third quarter, there were two factors, which did impact order rates, one which is obviously as we talked about the cat engine changeover for a number of quarters that happening in the fourth quarter. If you think about when deals will close orders BCP machines that would tend to impact us in the third quarter, which is why we sold those order rates decline.

Andrew Bonfield: Now I'll comment on our expectations from margins. We provided our adjusted operating profit margin target chart to assist you in your modeling process. Based on our current planning assumptions, we anticipate the adjusted operating profit margin to be slightly above the target range for the full year 2023. This is based on the corresponding estimated level of sales. Your expectation for total enterprise sales this year will inform where margins could finish for the year.

Similarly, we also saw some excavator and orders decline in anticipation of dealers, reducing their inventory levels as well. So overall those are specific factors in the third quarter themselves, which actually moderated the overall order rates as well maybe just another comment about that BCP changeover, we deliberately limit the number of orders because we have a thick.

The amount of machines being built prior to that changeover to the new model and then we closed the order board at some point when we run out of allocation spots and we haven't yet opened the order board for the new model. So again that helps us helps explain the reduction in order rates.

Andrew Bonfield: Specific to the fourth quarter, we anticipate the adjusted operating profit margin to be lower than the third quarter. We anticipate lower than normal volume leverage, particularly impacting construction industries for the reasons I mentioned previously. We also anticipate a negative figment mix impact to impact operating margins as construction industry sales would be a lower proportion of total sales as compared to the third quarter. Price realisation should remain positive though we expect the magnitude of the favorability versus the prior to moderate as we continue to lap more favorable pricing trends from last year. Therefore the increases in margins that have occurred from price outpacing manufacturing cost inflation should moderate in the fourth quarter.

For BCP around that engine changeover.

And again as expected we also talked about the fact that we expect dealers to bring down excavator inventory.

And again that would reflect that would result in a lower order rate as well for Ci for excavators. So again, none of this is surprising.

And we'll take our next question from Rob Wertheimer with Melius Research. Your line is open.

Yeah, Hi, My question is on resources, and it's going to be basically on.

Business model revenue model and margin and so you announced the deal with report today on retrofit autonomous mining trucks, and I know you've had retrofit for a while I don't recall on announcements quite as big.

Maybe I missed one or two.

But the question is really as you as you see deals like that deliver.

Andrew Bonfield: In addition, as you look down the income statement for the prior, there are a couple of points to note. First, short term incentive in Spain in the fourth quarter of 2022 was lower than normal due to the true up for the final outcomes for the financial year. This will be a headwind for year-over-year operating margins. However, this will be partially offset by favoritility and other operating income in Spain as we do not expect the significant currency translation losses that we saw in the fourth quarter of last year to recur.

To deliver value to customers through to autonomous operation savings on direct and indirect cost. How do you think about margin support for you guys and then how do you thing about market share going forward I think a year ago, you had sort of won a large majority of autonomous mining contracts. There are tenders out there and I'm wondering if you can give us an update on that so kind of market share margin and business development.

Thank you.

You bet.

We have talked in the past about the fact that we are very bullish.

Bullish about our autonomous solution. We do believe we have the best solution in the industry, because our our trucks move faster and we're able to allow our customers to produce more more commodity in a 24 hour period.

Andrew Bonfield: By segmenting construction industries, we expect slightly lower margin compared to the third quarter, assuming lower volume. We also anticipate lower sequential margins and resource industries, as is typical impacted by cost absorption along with higher spend relating to strategic investments. In energy and transportation, we expect margins will be similar to the third quarter, with stronger volume offset by manufacturing costs, and an unfavorable mix of products which include international locomotive production of deliveries in rail.

We continue to invest in our autonomous capabilities and continue to to to add more value and that is really resulting in us.

Receiving the orders like the ones. The one that was announced this morning.

Certainly we're always striving to add more value that helps again, it's not just about cost competition, it's providing more value to customers to make them more successful.

We have talked about the fact that our customers in mining your discipline capital discipline, that's not surprising quotation activity is quite high.

Andrew Bonfield: Now, turning to slide 17, let me summarize. Adjusted profit per share is $15.98 through the first three-quarters of the year, which already exceeds our previous full year record by 15%. We generated strong adjusted profit margin with a 430 basis point increase to 20.8%.

And number of parked trucks is low so again, if one thinks about the energy transition combines that with our autonomous solution. We do feel good about.

Resource industries, particularly in mining moving forward.

And we'll take our next question from David Raso with Evercore. Your line is open hi.

Andrew Bonfield: We now expect to be slightly above the target range for adjusted operating profit margin for the full year based on our expected sales levels. MENT free cash flow remained robust with $6.8 billion a year to date. We now expect MENT free cash flow to exceed a $4.8 billion target range for the full year.

Hi, Thank you for the time the questions on the fourth quarter margins I know the framework you historically worked with them.

For providing margin guidance, but.

I must say the fourth quarter I mean, it's implying a range of EPS that you can drive a truck through so I'm, just trying to get a little better sense of.

I think I heard you say the margins in Ci and <unk>.

Ryan Fiedler: We continue to execute a strategy for long-term profitable growth, and with that, we'll take your questions. Thank you.

<unk> below the third quarter.

And similar.

But then when Greg.

Yes that range of already we think yourselves are I mean, we have a rough idea of what youre thinking for sales given the fourth quarter guide.

Operator: If you would like to ask a question, press star one on your telephone keypad. Please note, we are only allowing one question per analyst.

I'm, just trying to get a sense of that.

Margins year over year.

Michael Feniger: And your first question comes from Michael Finnegger with Think of America. Your line is open. Yes, thank you for taking my question. Just based on where the backlog sits today, you discussed the easing supply condition impacting lead times orders. As that normalizes, do you expect the backlog to consolidate at these levels and then higher? You mentioned some capital discipline with customers just as Jim with where commodity prices are for oil, iron or copper. Is that enough to support growth in 2024?

At least appear there'll be up is that a fair statement that the slight yet on ROI and C. I almost make it seem like it's down only 100 bps or 150 sequentially. So I apologize for the granularity but.

It's just a wide wide range I just wanted to make sure.

We understand thank you.

Yes, David.

So obviously was slightly different so if you go to think about it from a sequential basis and also year over year. So.

We try to give a little bit of color on both.

On a sequential basis.

Jim Umpleby: Thank you. As I mentioned, we do expect another good year in 2024, and we'll provide more detail in January. We talked about this a bit in our last quarterly call. Our backlog is higher than it normally would be because our lead times are higher than I'd like them to be frankly. And what we talked about is as supply conditions continue to improve, we expect lead times to come down, which should have a corresponding deep impact on our backlog.

We do expect obviously, both Ci and ROI margins to decline. If you think normally there is seasonality for both of those.

What exacerbates that probably above the normal level of seasonality, particularly in Ci is your expectations for volume to impact be impacted by dealer inventory. So that will have a slightly bigger impact than normal on ci.

Jim Umpleby: Our backlog should come down, so that's a positive thing. If you look at our backlog over over a number of years, it's still elevated compared to it normally would be based on on revenue. So again, we do feel good about market conditions and we expect that as we improve lead times, that backlog as a percentage of revenue would come down to more normal levels.

Oh.

As I said, we expect them to be broadly flat compared to the third quarter. Some of that is due to product mix and timing of international rail deliveries, which are low margin business.

Then on top of that so thats sequential quarter over quarter driving that and then if you look year over year. Obviously, yes, we do expect both Ci NRI and Emt to show margin improvement year over year, what was slightly offset that will be some increase in corporate items as a result of the true up of.

Jim Umpleby: Yeah, let me just give you some numbers to add to that. I mean, if you look at the backlog as a percentage of trading 12 month revenues in the period of a 2017 it was 37% in 2018 it was 32% currently today is around 44% so backlog still is elevated based on historic trends and remind you also that services revenues now are a higher proportion of our total revenue base as well.

Of incentive comp that I talked about a moment ago.

On a PPS basis offsetting that will be some favorability in other income and expense because last year. If you remember we did have a big one time charge.

For currency translation losses.

Which impacted the fourth quarter. So hopefully that gives you a little bit more color.

Tami Zakaria: And we will take our next question from Tami Zakaria with JP Morgan. Your line is open. Hi, good morning. Thank you so much. So staying on backlog. Thank you. Stay on backlog. I think orders were down in the third quarter. Have you seen any improvement in order to date or if orders continue to be down? What would support a good year in 2024 like you mentioned in your call? Yeah, again, we expected some moderation in order rates based on again improving availability so that wasn't a surprise to us.

Overall.

But that's sort of trying to get the way. We can guide you from them from a margin perspective, hopefully that's helpful.

Yes.

We will take our next question from Steven Fisher with UBS. Your line is open.

Yes.

Thanks, Good morning, So clearly terrific margins. This year that pricing is such a strong driver at the moment, but year over year. As you said is moderating a bit I was just curious about your strategy on how to manage in a lower pricing growth environment going forward.

To what extent do you think you can ramp up the cost focus there.

And if thats a key part of the plan.

What are the biggest opportunities for cost savings next year or do you think it's sort of a narrow narrower price versus cost is really just the base case from here.

Tami Zakaria: Again, what would give us another good year in 2024 is market conditions. I mean, again, if we look at where we are and most of the markets we serve, we feel quite good. Starting with just with construction industries in North America, the infrastructure investments that are made by the government, although we have seen some benefit of that, we expect more benefit in 2024. Residential, although the growth rate is continued to moderate in North America, it is still growing in oil and gas still remains quite healthy for solar turbines.

Well, thank you, Steve and as we mentioned we do expect.

Pricing to moderate just based on lapping the price increase at <unk> that we had last year, we're continually focused on having a lower cost structure, we're looking for ways to to reduce structural costs.

A lot of things their back office now being performed in lower cost countries more engineering done in lower cost countries looking at ways to become more efficient I also mentioned the fact that.

Tami Zakaria: Gas compression and oil and gas is strong as well. So again, there's a lot of positive things. Power generation, data center growth continues to provide a tailwind as well. So again, there's a lot in the market conditions would lead us to believe that we'll have another good year next year. And tell me just to add again, a little bit more, remind you that specifically in the third quarter, there were two factors which did impact order rates.

Supply chain has improved but we still have some challenges and some surprises there that create some incremental cost due to inefficiencies based on having shortages. So I do believe there is still an opportunity for us moving forward to operate more efficiently in our manufacturing operations and also to find ways to reduce structural costs, we really tried to make that a way of life.

Tami Zakaria: One, which is obviously as we've talked about the engine change over for a number of quarters. That happening in the fourth quarter. So if you think about when dealers replace orders for BCP machines, they would tend to impact us in the third quarter, which is why we saw those order rates decline. Similarly, we also saw some excavator in orders decline in anticipation of dealers reducing their inventory levels as well. So overall, those are specific factors in the third quarter themselves, which actually moderate the overall order rates as well.

Going forward as always finding ways to reduce structural costs.

And we will take our next question from Tim Thein with Citigroup. Your line is open.

Hi, good morning, Thanks for the time, maybe just continuing on that on that thread there in term loans.

And just thinking about.

Outlook in 'twenty four.

And interesting from a competitive dynamic.

If you look historically.

Especially <unk>.

Focusing on Ci in a market with a lot of global competitors and just looking at it.

Tami Zakaria: Maybe just another comment about that DCP changeover. We deliberately limit the number of orders because we have a fixed amount of machines being built prior to that changeover to the new model. And then we close the order board at some point when we run out of allocation spots and we haven't yet opened the order board for the new model. So again, that helps explain the reduction in order rates for BCP around that engine changeover.

Dollar yen relationship where it is at near decade high levels, just maybe talk about.

What youre seeing what youre dealing as youre seeing from.

Competitive dynamics and your thoughts into 'twenty four.

In terms of how that plays with that.

Thank you.

Yeah, a lot of dynamics there one of course is the strength of the market. So if you think about the strength of the market in North America for the reasons. We've described infrastructure spending and continued growth in residential certainly we feel good about market conditions competition. We've always had competition. We always will we make pricing decisions based on a whole variety of factors.

Tami Zakaria: And again, it's expected. We also have talked about the fact that we expect dealers to bring down excavator inventory. And again, that would reflect that would result in a lower order rate as well for CI for excavators. So again, none of this is surprised.

Jim Umpleby: Lucy. We'll take our next question from Rob Wertheimer with Melius Research. Your line is open. Hi, my question is on resources and it's going to be basically on business model, revenue model, and margin. And so, you announced the deal with report today on retrofit of autonomous mining trucks. And I know you've had retrofit for a while. I don't recall an announcement, you know, quite this big, although maybe I've missed one or two.

Certainly we look at input cost we look at our competitors, we looked at other factors in the market and we make.

Jim Umpleby: But the question is really as you see deals like that, you know, you deliver value to customers through autonomous operations, saving them direct and indirect costs. How do you think about margin support for you guys? And then how do you think about market share going forward? I think a year ago, you'd sort of want a large majority of autonomous mining contracts or tenders out there. And I'm wondering if you can give us an update on that.

Decisions, there's no one big decision we make.

So a variety of decisions based on what we're seeing in the market and any one time.

We're always focused on remaining competitive pricing for value and no one likes to raise prices but of course in the last couple of years have been in an inflationary cost environment, but we're always looking to add more value to our customers, adding technology thing things to make our customers more efficient and you stop and think about the labor shortage that we have now some of that.

Technology that we're putting into our construction industries' products allows less experienced operators to be more effective more quickly and so all of those kinds of things help add value to our customers and of course, we're investing in our digital capabilities and our services capabilities as well to help reduce downtime unplanned downtime incur.

Jim Umpleby: So kind of market share margin and business development. Thank you. You bet. And Rob, we have talked to the past about the fact that we are very bullish about our autonomous solution. We do believe we have the best solution in the industry because our trucks move faster and we're able to allow our customers to produce more, more commodity in a 24 hour period. We continue to invest in our autonomous capabilities and continue to add more value and that's really resulting in us receiving orders like the ones that was announced this morning.

Productivity, so that all goes into it but certainly we recognize its a competitive world out there always has been always will be but we feel confident about our ability to continue to compete effectively.

Okay.

And we will take our next question from Nicole <unk> with Deutsche Bank. Your line is open.

Yes, thanks, good morning, guys.

Wherein the Konin Nicole.

Just on the.

The parts demand noticed that you guys caught out decline in aftermarket parts and resource as the driver of volume decline. There. If you could talk a little bit about that and then any color on parts demand and.

Jim Umpleby: Certainly, we're always striving to add more value that helps again. It's not just about cost competition, it's providing more value to customers to make them more successful. We have talked about the fact that our customers and mining are displaying capital discipline, that's not surprising. Quotation activity is quite high and number of park trucks is low. So again, if one thinks about the energy transition, combines that with our autonomous solution, we do feel good about resource industries, particularly in mining moving forward.

Construction or E&P. Thank you.

Yes, Nicole thank you.

Within resource industries, the volume did decline doesn't necessarily mean, the absolute dollar value decline for the volume decline was partly due to dealer buying patents.

And so that was a factor within resources overall, we're still very comfortable with the growth rate of after market parts volumes and we will give you the update as per normal as I said in my remarks.

Rob Wertheimer: And we will take our next question from David Raffo with Evercore. Your line is open. Hi, thank you for the time. The question is on the fourth quarter margins. I know the framework you historically work within for providing margin guidance, but I must say the fourth quarter, I mean, it's implying a range of EPS that you can drive a truck through. So I'm just trying to get a little better sense of, I think I heard you say the margins and CI and RI slightly below the third quarter and E&T similar.

In January.

But overall services revenue still continues to grow.

Rob Wertheimer: But then when you get that range of what everything your cells are, I mean, we have a rough idea of what you're thinking for sales, given the fourth quarter guide. I'm just trying to get sense of the margins year over year, at least appear that they'll be up. Is that a fair statement of the slight on RI and CI almost make it seem like it's down only 100 pips or 150 sequentially. So I apologize for the granularity, but it's just a wide range. I just want to make sure, you know, we understand. Thank you. Yeah, David, thank you. So obviously was slightly different.

And are a very good factor for us as you know given our drive to double services revenue.

28 billion by 2026 and dealer sales to customers were up in the quarter.

We will take our next question from Chad Dillard with Bernstein. Your line is open.

Hi, good morning, guys.

You may have more of a bigger picture question.

So I was hoping you could give us an update on your approach to rental.

To what extent are you looking to expand your footprint.

Through dealers in this channel.

Sure how much you can still come through this channel today.

And then we do see little near term air pocket.

Thank.

For an expansion could provide an offset.

If we do see rental as a growth opportunity and we're working with our dealers to improve our rental business we've set up.

A new division.

David Raffo: So if you've got to think about it from a sequential basis and also year over year. So so we try to give a little bit of color on both. On a sequential basis, we do expect obviously both CI and RI margins to decline. If you think normally there's a seasonality for both of those. What exacerbates that probably above the normal level of seasonality, particularly in CI is the expectations for volume to impact be impacted by delimitry.

Then last year or so with a senior experienced senior Vice president leading that division to help increase rental the.

The rental industry is in fact growing and so we've been refreshing our rental growth strategy and working with our dealers to allow them to more sustainably grow.

Revenue in rental so.

Again, it's we do think it's an opportunity that's a good one for us to be focused on.

And we will take our next question from Kristen Owen with Oppenheimer. Your line is open.

David Raffo: So that will have a slightly bigger impact than normal on CI. On BNT, as I said, we expect them to be broadly flat compared to the so quarter. Some of that is due to product mix and timing of international rail deliveries, which are low margin.

Yes.

Great. Good morning, Thank you for the question.

Chris if you could provide a little bit more commentary on the manufacturing cost increase in the quarter, just how to think about that going forward.

This isn't the easiest comparison of the year and in a more favorable cost environment. So just trying to think about how much of the manufacturing cost increases may be related to timing of orders versus you know, we're still seeing some inflation in the supply chain.

Andrew Bonfield: Thomas. Then on top of that, so that's sequential quarter over quarter, driving that. And then if you look year over year, obviously yes, we do expect both CI and RRI and E&T to show margin improvement year over year. What will slightly offset that will be some increase in corporate items as a result of the true up of incentive comp that I talked about a moment ago, on a PPS basis, offsetting that will be some favorability in other income and expense, because last year, if you remember, we did have a big one-time charge for currency translation losses, which impacted the fourth quarter. So hopefully that gives you a little bit more color overall, but that's sort of trying to get the way we can guide you from a margin perspective. Hopefully that's helpful.

Yes, we are still seeing and so it's a bit mixed across the businesses material costs are still growing in some areas and other is growing less.

Rapidly so that's sort of.

Bigger.

Part of that from a from an overall manufacturing cost perspective.

Other factors include things like.

Particularly for US this quarter things.

Things like absorption impacted us, particularly in resource industries for example.

Where we built inventory last year and had inventory reductions this year.

But overall.

We are seeing.

Lower levels of manufacturing cost inflation, but we have done historically.

Steven Fisher: We will take our next question from Steven Fisher with UBS. Your line is open. Thanks, good morning. So clearly, terrific margins this year. Pricing is such a strong driver at the moment, but year over year, as you said, is moderating a bit. I'm just curious about your strategy on how to manage in a lower pricing growth environment going forward. To what extent do you think you can ramp up the cost focus there?

And partly offset by some benefits in freight.

Which are helping us really does depend by segment by segment. So one of the things just to remind everybody we are not a.

Steven Fisher: And if that's a key part of a plan, that's kind of one of the biggest opportunities for cost savings next year. Or do you think the sort of a narrower price versus cost is really just the base case from here?

Uniform business as far as we are and if so while market we serve a variety of different markets.

Markets are on different parts of the growth phase as a result of.

Post.

The COVID-19 impact that means that therefore that some of those cost increases are coming through in a different way from business to business.

As well as then our ability to price to offset some of that as well.

Jim Umpleby: Well, thank you, Steven. And as we mentioned, we do expect pricing to moderate this based on the lapping, the price increases that we had last year. We're continually focused on having a lower cost structure. We're looking for ways to reduce structural cost. A lot of things there are back office now being performed in lower cost countries, more engineering done in lower cost countries, looking at ways to become more efficient. I also mentioned the fact that supply chain has improved, but we still have some challenges and surprises there that create some incremental cost due to inefficiencies based on having shortages.

Yeah.

And we'll take our next question from Mig <unk> with Baird. Your line is open.

Yes. Thank you good morning.

Wanted to ask a question surrounding dealer inventories.

Bill $2 6 billion year to date.

Which seems to be a little bit different than the way you are.

Framing expectations, So I guess I'm curious.

How do you expect.

Inventories exited.

Exiting 2023.

Wilder.

<unk> relative to your initial expectations.

Lastly, if we R&D going into.

Jim Umpleby: So I do believe there's still an opportunity for us moving forward to operate more efficiently in our manufacturing operations and also to find ways to reduce structural cost. We really tried to make that a way of life going forward as always finding ways to reduce structural cost.

Bit of a dealer destock mode. This is stanton for your incoming orders.

<unk> continued to be soft.

Backlog continues to grow thank you.

Yes, so make a couple of comments, one which we tried to explain in the last quarter. We deal inventory, we would give you one number.

Jim Umpleby: And we will take our next question from Kim Thien with City Group. Your line is open. Hi, good morning. Thanks for the time. Yeah, maybe just continuing on that on that thread there in terms of pricing and just thinking about the outlook in the 24. I'm interested in from a competitive dynamic. You know, if you look historically, you know, especially focused in CI and a market with with a lot of global competitors.

450, independent dealers with a very large number of products underneath that and underpinning. It. So it is very complex.

Secondly, Ci is a slightly different model from Oreille and E&P.

E&C NRI represent about 40% of the increase in dealer inventory, that's really a function of commissioning over 70% of those orders off of firm customer orders theyre not sitting on a lot waiting for somebody to come in and buy them. So they're effectively is list is more difficult to predict because it depends on the commissioning.

Jim Umpleby: And you're just looking at the dollar, young relationship where it is at, you know, near decade high levels, just maybe talk about what you're seeing, what your dealers are seeing from competitive dynamics and your thoughts into 24 in terms of how that interplays with pricing, and a lot of dynamics there. One of course is the strength of the market. So if you think about the strength of the market in North America for the reasons we've described infrastructure spending and continued growth and residential, we feel good about market conditions.

Hi.

And obviously, it's also more difficult to predict.

Because of the nature of the business and how they all moved through for example, a large mining truck, which is just assembled and then reassembled onsite and the revenue recognition coming from the dealer as part of that so it's a very different part of the business. That's why effectively we almost can't predict with much certainty.

Jim Umpleby: Competition, we've always had competition, we always will, we make pricing decisions based on a whole variety of factors. Certainly we look at input costs, we look at our competitors, we've looked at other factors in the market, and we make decisions. There's no one big decision, we make a whole variety of decisions based on what we're seeing in the market in any one time. We're always focused on remaining competitive, pricing for value.

It is much more difficult to predict with regards to Ci. We've always said public normal range is between three and four months of inventory.

Yeah.

At the moment, we're within that range dealers will have within excavator inventory that's slightly at the top end of that range. They want to bring them down we agree with that we think thats a good thing that will reduce obviously inventories as we move in we then as we've said with BCP and also with US moving particularly in North America.

Jim Umpleby: No one likes to raise prices, but of course in the last couple of years we've been in an inflationary cost environment, but we're always looking to add more value to our customers. Adding technology, things to make our customers more efficient. And you stop and think about the labor shortage that we have now. Some of the technology that we're putting into our conversion industries products, allows less experienced operators to be more effective more quickly.

Jim Umpleby: And so all those kinds of things help add value to our customers and of course, we're investing in our digital capabilities and our services capabilities as well to help reduce downtime, unplanned downtime, increase productivity so that all goes into it. But certainly we recognize that it's a competitive world out there, always has been, always will be.

Which all of the largest markets for those products. We are at the low end of the range and dealers could actually want to hold a little bit more.

So overall net net we do expect a decline in the fourth quarter.

It's going to have an impact possibly.

Will there be some impact in the first quarter next year, probably not just remind you we normally see a dealer inventory build in the first quarter of getting ahead of ready for summer selling season. So it may not be quite as big as normal but overall there are some seasonality in parts of our business with regards to the backlog backlog is completely different remember for Ci.

Jim Umpleby: But we feel confident about our ability to continue to compete effectively.

Backlog is a function of dealer orders for E&P is a function of.

Nicole DeBlase: And we will take our next question from Nicole to Blaze with Deutsche Bank. Your line is open. Yeah, thanks.

Oreille, it's much more of a function of firm customer orders underpinning those.

Within <unk>, so as we think about dealers how much inventory they're holding.

Nicole DeBlase: Good morning, guys. Where are they going to go? Just on the parts demand. Notice that you guys caught out decline in aftermarket parts in resource as the driver of volume decline there. If you could talk a little bit about that and then any color on parts demand in construction or ENT, thank you. Yeah, Nicole, thank you. We'll then resource industries. The volume did decline. Doesn't necessarily mean the absolute dollar value decline, but the volume declined was partly due to the buying patterns.

They are able to get availability better for machines, they don't need to order as much in advance. So one of the things we've done as you know through our <unk> process is trying to moderate overall orders and we think we're doing a better job of trying to avoid some of the swings which caused production swings as a result.

Between buying patents overall, just to remind you finally.

Still expect sales to users to grow in the fourth quarter of this year, we're still expecting.

Nicole DeBlase: And so that was a factor with them resources. Overall, we're still very comfortable with the growth rate of aftermarket parts volumes and will give you the update as per normal, as I said in my remarks in January. But overall services revenue still continue to grow and are a very good factor for us, as you know, given that drive to double services revenue, but to 28 billion by 2026. And dealer sales to customers were up in the quarter. Yeah.

Demand to remain strong and that sets us up into 2024 as we move forward.

And we will take our next question from Mike <unk> with D. A Davidson your line is open.

Yes, hi, good morning.

Wanted to ask about interest rates real quick thank you, yes Hello.

On interest rates, you kind of touched on it but maybe a little more color.

How have high interest rates are higher interest rates affected the dealership inventory desire.

Charles Dillard: And we will take our next question from Chad Dillard with Bernstein. Your line is open. Hi, good morning, guys. I have a bigger picture question. So I hope you give us an update on your approach to rental. So to what extent are you looking to expand your footprint through dealers on this channel? If you can share how much of your sales today come through this channel today. And then you know, if we do see any near term air pocket, do you think any food expansion could provide an offer?

And their ability to actually hold in carrying inventory in second lien.

How is interest rates have they affected and your appetite to buy.

<unk>.

Yes, So first of all let me say on the higher interest rates.

Jim Umpleby: If we do see rental as a growth opportunity and we're working with our dealer to improve our rental business, we set up a a new division than the last year or so with an experienced senior vice president leading that division to help increase rental. You know, the rental industry is in fact growing and so we've been refreshing our rental growth strategy and working with our dealers to allow them to more sustainably grow revenue in rental. So again, we think it's an opportunity to get a good one for us to be focused on.

Probably today, just remind you that even though there are many of US who remember 5% has been the movement of interest rates, although we've lifted through lower for the last decade.

Overall, though it's really a function dealers hold inventory based on what our expectations of future demand.

Our comfortable holding our current levels of inventory and as I said, we'd like to hold off of particularly BCP and those moving products.

Hold a little bit less of excavators, but thats a reflection of their expectations of sales.

To use those rather than actually of.

Interest rates, I think that a little bit less sensitive to that assuming that they can actually sell the equipment on.

As far as actually our customers are concerned where it does impact us within caterpillar is in cat financial.

Have seen a slight reduction in the share of new machines, we are financing within cat financial because we funded in the wholesale market, so a slightly less competitive against banks.

Kristen Owen: We will take our next question from Kristen Owen with Oppenheimer. Your line is open. Great. Good morning. Thank you for the question.

But generally customers have either been paying cash.

They need they have to work so they haven't been sensitive to interest rates and as far as buying machines concerned.

Andrew Bonfield: I was wondering if you could provide a little bit more commentary on the manufacturing cost increase in the quarter just how to think about that going forward. I mean, this was the easiest comparison of the year and in a more favorable cost environment. So just trying to think about how much of the manufacturing costs increase is maybe related to timing of orders versus, you know, we're still seeing some inflation in the supply chain.

And overall, if you look and this is one thing that we keep a very close focus on write offs past dues and.

And the like and provision levels.

Our customers are in very robust shape.

And do not appear to be being impacted by the higher interest rates yet so nothing we've seen yet changed to indicate that there's any impact of that today on a bolt on that business.

Andrew Bonfield: Yeah, we are still seeing, you know, it's a bit mixed across the businesses. Material costs are still growing in some areas and other areas growing less rapidly. So that's sort of, you know, the bigger, you know, part of that from a overall manufacturing cost perspective. Other factors include things like particularly for us, this quarter, things like absorption impacted us, particularly in resource industries, for example, where we built inventory last year and had inventory reductions this year.

We will take our next question from Jerry Revich with Goldman Sachs. Your line is open.

Okay.

Yes, hi, good morning, everyone.

Hey, Jim.

Hi, Jim I'm wondering if you could just talk about where lead times stand then.

Mining equipment I know, it's a broad range of products, but can you give us a sense for how far visibility.

And if you're willing to quantify the comments you made earlier about really good pipeline just within the context of.

Andrew Bonfield: But overall, we, you know, we are seeing, you know, lower levels of manufacturing cost inflation that we have done historically. And partly offset by some benefits and freight, which are helping us. Really does depend by segment by segment.

Relative to the really strong bookings we've had.

Year to date.

A way to quantify the pipeline versus the bookings run rate we've been at thank you.

And so we have been working hard to bring our lead times down as I mentioned we.

Andrew Bonfield: So one of the things just to remind everybody, we are not a uniform business as far as we only serve one market. We serve a variety of different markets at markets or on different parts of their growth phase as a result of, you know, post the COVID impact. That means that, therefore, that some of those cross-increases are coming through in a different way from business to business, as well as then our ability to price to offset some of that as well.

We do feel good about where we are.

In that process and so we had over the last couple of years, a real challenges around availability, but it has gotten sky has gotten better.

In most areas probably the area that's still a challenge it is large engines, but in mining we do feel good about where we are in terms of the progress we've made around lead times.

Yes, and as far as the closing activity there is a lot of activity Jerry going on.

Mircea Dobre: And we will take our next question from Nick Dobre with Beard. Your line is open. Yes, thank you. Good morning. I wanted to ask a question surrounding dealer inventory. They built 2.6 billion here today, which seems to be a little bit different in the way you were framing expectations. So I guess I'm curious, first, how do you expect these other inventory still like exiting 2023? Why is there a bit of a variance relative to your initial expectations?

As we've said one of this slight disappointment was slightly we would anticipated more of that coming into order rates. This seemed to be some slight delay in actually pushing the button.

On committing to two firm orders.

As we as we have seen.

Abbvie, we have time for one more question.

Thank you.

Our final question will come from the line of Steve Volkmann with Jefferies. Your line is open.

Great. Good morning, everybody. Thanks for fitting me in I just wanted to go back to rental if I could.

Mircea Dobre: And lastly, if we are indeed going into a bit of a dealer, these stock models, there's a standard for that your incoming orders are going to continue to be solved and obviously that will continue to work. Thank you.

And I'm curious Jim would you characterize the cat dealer rental fleets in terms of size to do they want more equipment and can you also just comment on what you think the age would be in that cat rental fleet.

Jim Umpleby: Yeah, so make a couple of comments, one which we try to explain in the last quarter. We deal inventory, we give you one number for 150 independent dealers with a very large number of products underneath that and underpinning it. So it is very complex. Alex. Secondly, C.I, is a slightly different model from RI and ENT. ENT and RI represent about 40% of the increase in dealer inventory. That's really a function of commissioning over 70% of those orders of a firm customer orders.

Yeah, one of the thing that's been happening over the last year or so is that there has been some.

Upgrading of that fleet, because it had gotten quite old because of some of the supply challenges we've had in.

So.

I'm reluctant to characterize the size of that in total, but again, we are working with our dealers to to help them grow rental we want them to have a successful profitable rental business and that means having the right size of rental inventory for the amount of business that they execute so again it has been a bit age.

Jim Umpleby: They're not sitting on a lot, waiting for somebody to come in and buy them. So there effectively it's less, it's more difficult to predict because it depends on the commissioning time. And obviously it's also more difficult to predict. Because of the nature of the business and how they are moved through, for example, a large mining truck, which is disassembled and then reassembled on site and the revenue recognition coming from the dealer as part of that.

It's improved a bit but there's still some room there to.

Have newer machines going into the fleet because it had again it got quite aged and again our expectation here is as we grew our rental.

The fleet should grow but again, we want the goal is not to have higher <unk>.

<unk> rental fleets. The goal is to have profitable growing rental businesses by our dealers, which.

They want to be as efficient as they can with turns.

Jim Umpleby: So it's a very different part of the business. That's why effectively we almost can't predict that with much certainty. It is much more difficult to predict. With regards to C.I, we've always said it's probably normal ranges between three and four months of inventory. At the moment, within that range dealers will have within excavator inventory. They're slightly at the top end of that range. They want to bring them down. We agree with that.

And but over time that should result in larger rental fleet.

Okay.

Yeah.

Alright, well. Thank you that was our last question that thanks. Thank you all for joining us and we always appreciate your questions I'd like to just close by thanking our team for another great quarter.

As I mentioned earlier due to our strong results in the third quarter. We we now do believe that 2022 will be even better than we had previously anticipated during our last call and that includes higher full year expectations for adjusted operating profit margin in EMEA free cash flow.

Jim Umpleby: We think that's a good thing that will reduce obviously industries as we move in. Within, as we've said, with BCP and also with Earth moving, particularly North America, which are the largest markets for those products. We are at the low end of the range and the biggest could actually want to hold a little bit more.

That reflects continuing healthy customer demand in our strong operating performance and will continue to execute our strategy and investor long term profitable growth and we look forward to updating you again in January.

Jim Umpleby: So overall net net, we do expect to decline in the fourth quarter. It's going to have an impact possibly, you know, will there be some impacts in the first quarter next year? Probably not, just remind you. We normally see a dealer inventory build in the first quarter of the year getting ahead of ready for some seven season. So it may not be quite as big as normal. But overall, there are some seasonality parts of our business.

Great. Thanks, Jim Andrew and everyone, who joined us today.

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 it's available.

Youll also find our third quarter results video with our CFO and an SEC filing with our sales to users data click on investors that caterpillar Dot com and then click on financials to view those materials.

Jim Umpleby: With regards to the backlog, backlog is completely different. Remember for C.I, backlog is a function of dealer orders. The ENT is a function of R.I. It's much more a function of firm customer orders, underpinning those within. So as we think about dealers, how much inventory they're holding, as they are able to get availability better for machines, they don't need to order as much in advance. So one of the things we've done, as you know, through S&OP process, is trying to moderate over orders. And we think we're doing a better job of trying to avoid some of the swings, which cause production swings as a result of dealer inventory by patents.

You have any questions. Please reach out to Robert <unk>.

The general phone number is 390 675 or $5 49.

Now I will turn it over to Abbvie to conclude the call.

Thank you ladies and gentlemen, this concludes today's call and we thank you for your participation you may now disconnect.

Okay.

[music].

Jim Umpleby: Overall, just to remind you, finally, we still expect sales to use us to grow in the fourth quarter of this year. We're still expecting any demand to remain strong. And that sets us up into 2024s.

Jim Umpleby: We move forward.

Mike Schleske: And we will take our next question from Mike Schleske with DA Davidson. Your line is open. Yes, hi. Good morning. Want to ask about interest rates real quick. Thank you. Yes. Hello. On interest rates, you kind of touched on it, but really more color. How have high interest rates or higher interest rates affected the dealership inventory, desire, and their ability to actually hold and carry inventory? And secondly, maybe have house interest rates, have they affected any end you're appetite to buy any equipment.

Jim Umpleby: Yeah, so first of all, let me say on higher interest rates, probably today, just remind you that even though there are many of us who remember 5% has been the norm of interest rates, I know we've lived it through lower for the last decade. Overall, though, it's really a function dealers hold inventory based on what their expectations are future demand are, comfortable holding current levels of inventory. And as I said, we'd like to hold more for particularly BCP and those moving products and hold a little bit less of excavators, but that's the reflection of their expectations of sales to users rather than actually of interest rates. I think they're a little bit less sensitive for that, assuming that they can actually sell the equipment on.

Jim Umpleby: As far as actually our customers are concerned, where it does impact us within Caterpillar is in Caffinantial. We have seen a slight reduction in the share of new machines we're financing within Caffinantial because we fund in the wholesale market. So we're slightly less competitive against banks, but generally customers have either been paying cash. They have the work, so they haven't been sensitive to interest rates in as far as buying machines concerned.

Jim Umpleby: And overall, if you look, and this is one thing we keep a very close focus on, right off past Jews and the like and provision levels, our customers are in very robust shape and do not appear to be being impacted by the higher interest rates yet. So nothing we've seen yet can to indicate that there's any impacts of that today on that on that business.

Jerry Revich: We will take our next question from Jerry Rubich with Goldman Sachs. Your line is open. Yes, hi. Good morning, everyone. Jim, hi. Jim, I'm wondering if you just talk about where lead time stand and mining equipment. I know it's a broad range of products. But can you get us a sense for how far visibility you have? And if you're willing to quantify the comments you made earlier about really good pipeline, just within the context of relative to the really strong bookies rate.

Jerry Revich: We've had a year to date anyway to quantify the pipeline versus the bookies run rate. We've been at thank you. So we have been working hard to bring lead time down as I mentioned. You know, we we do feel good about where we are in that process. And so, you know, we had over the last couple of years, some real challenges around availability, but it has gotten gotten better in most areas.

Jerry Revich: Probably the area that's still a challenge is large engines. But, you know, in mining, we do feel good about where we are in terms of the progress we've made around lead time. Yeah, and as far as the quoting activity, there is a lot of activity, Jerry going on. You know, as we've said, one of this, you know, slight disappoint. You were slightly, we would have anticipated more of that coming into order rates. There seemed to be some slight delay in actually pushing the button on committing to firm orders as we as we have seen. Christine.

Operator: Abby, we have time for one more question. Thank you.

Steve Volkmann: Today's final question will come from the line of Steve Volkmann with Jeffries. Your line is open. Great.

Jim Umpleby: Good morning, everybody. Thanks for fitting me in. I just wanted to go back to Rental if I could. And I'm curious, Jim, would you characterize the Cat Dealer Rental Sleeps in terms of size that do they want more equipment and can you also just comment on what you think the age would be in that cat rental sleep? Yeah, one of the things that's been happening over the last year or so is that there has been some upgrading of that fleet because it had gotten quite old because of some of the supply challenges we've had.

Jim Umpleby: And so I'm reluctant to characterize the size of that in total. But again, we are working with our dealers to help them grow Rental. We want them to have a successful profitable rental business and that means having the right size of rental inventory for the amount of business that they execute. So again, it has been a bit aged. It's improved a bit, but there's still some room there to have newer machines going into the fleet because it had again, it gotten quite aged.

Jim Umpleby: And again, our expectation here is as we grow rental, that the fleet should grow. But again, we want the goal is not to have higher bigger size rental fleets. The goal is to have profitable growing rental businesses by our dealers, which they want to be as efficient as they can with turns. But over time, that should result in large rental fleets.

Jim Umpleby: All right. Well, thank you. That was our last question. Thanks for joining us and we always appreciate your questions. I'd like to just close by thanking our team for another great quarter. As I mentioned earlier, due to our storm results in the third quarter, we now do believe that 2022 will be even better than we had previously anticipated during our last call. And that includes higher full-year expectations for adjusted operating profit margin and MENT pre-cash flow and that that reflects continuing healthy customer demand in our strong operating performance. And we'll continue to execute our strategy and investor long-term profitable growth.

Abby: And we look forward to updating you again in January. Great. But thanks, Jim, Andrew, and everyone who joined us today. A replay of a call will be available online later this morning. We'll also post a transcript on our investor relations website as soon as it's available. You'll also find a third quarter results video with our CFO and an SEC filing with our sales users data. Click on investors.caterpillar.com then click on financials to view those materials. If you have any questions, please reach out to Robert Me. The general phone number is 309-675-4549.

Abby: Now we'll turn over to Abby to conclude the call. Thank you.

Operator: Ladies and gentlemen, this concludes today's call and we thank you for your participation. You may all disconnect.