Q4 2023 Caterpillar Inc Earnings Call

Operator: Ladies and gentlemen, welcome to the fourth 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, Ryan Fiedler. Thank you, and please go ahead.

Ladies and gentlemen, welcome to the fourth quarter 2023 Caterpillar earnings conference call.

<unk>.

Please be advised that today's conference is recorded.

I would now like to hand, the conference over to your Speaker today Ryan Fiedler.

You and please go ahead.

Yeah.

Ryan Fiedler: Thanks, Abby. Good morning, everyone, and welcome to Caterpillar's fourth quarter 2023 earnings call. I'm Ryan Fiedler, Vice President of Investor Relations. Joining me today are Jim Umpleby, Chairman and CEO, Andrew Bonfield, Chief Financial Officer, Kyle Epley, Senior Vice President of the Global Finance Services Division, and Rob Rangel, Senior Director of IR. During our call, we'll be discussing the fourth 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. 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.

Ryan Fiedler: Thanks, Abby good morning, everyone and welcome to Caterpillar's fourth quarter of 2023 earnings call I'm, Brian Fiedler, Vice President of Investor Relations. Joining me today are Jim <unk>, Chairman and CEO, Andrew Bonfield, Chief Financial Officer, Kyle at least senior Vice President of the Global Finance Services Division and Rob.

Speaker Change: <unk> senior director of IR during our call, we'll be discussing the fourth 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.

Speaker Change: Contents of this call is protected by U S and international copyright law, any rebroadcast retransmission reproduction or distribution of all or part of this content without caterpillar's. Prior written permission is prohibited move.

Speaker Change: Moving to slide two during our call today, we will make forward looking statements, which are subject to risks and uncertainties.

Ryan Fiedler: Moving to slide two. During our call today, we'll make forward-looking statements that are subject to risks and uncertainties. We'll also make assumptions that could cause our actual results to be different than the information we're sharing with you on this call. Please refer to our recent SEC filings in 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 the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filing. 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 for our earnings call slide. Now, I'll turn the call over to our Chairman and CEO, Jim Umpleby. Thanks, Ryan. Good morning, everyone.

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

Speaker Change: 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 the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC.

Speaker Change: SEC filings on today's call will also refer to non-GAAP numbers for a reconciliation of any non-GAAP numbers to the appropriate U S. GAAP numbers. Please see the appendix of our earnings call slides.

Speaker Change: Now, let's turn the.

Speaker Change: The call over to our chairman and CEO Jim Ogilvie.

Jim Ogilvie: Thanks, Ryan Good morning, everyone. Thank you for joining us as we close out 2023, I'd like to start by recognizing our global team for delivering another strong quarter and the best year in our 98 year history for the year, we delivered record sales and revenues record adjusted profit margin record adjusted profit per share.

Donald James Umpleby: Thank you for joining us. As we close out 2023, I'd like to start by recognizing our global team for delivering another strong quarter and the best year in our 98-year history. For the year, we delivered record sales and revenues, record adjusted profit margin, record adjusted profit per share, and record M, E, and 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 continue to invest for long-term profitable growth. I'll begin with my thoughts on our performance in the quarter and for the full year. I'll then provide some insights into our end markets, followed by an update on our strategy and sustainability journey.

Jim Ogilvie: <unk> and record M E T free cash flow.

Jim Ogilvie: Our results continued to reflect healthy demand across most of our end markets for our products and services.

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

Jim Ogilvie: I'll begin with my perspectives about our performance in the quarter and for the full year.

Jim Ogilvie: I'll then provide some insights about our end markets followed by an update on our strategy and sustainability journey.

Donald James Umpleby: Moving to quarterly results, it was another strong quarter. While sales and revenues increased 3% in the fourth quarter versus a strong quarter last year, our adjusted operating profit increased by 15%. Adjusted Operating Profit Margin improved to 18.9%, up 190 basis points from last year. We also generated $3.2 billion of M, E, and T free cash flow in the quarter.

Jim Ogilvie: Moving to quarterly results. It was another strong quarter, while sales and revenues increased 3% in the fourth quarter versus a strong quarter last year, our adjusted operating profit increase.

Jim Ogilvie: We increased by 15%.

Jim Ogilvie: Adjusted operating profit margin improved to 18, 9% up 190 basis points versus last year. We also generated $3 $2 billion of M. E T free cash flow in the quarter sale.

Donald James Umpleby: Sales, Adjusted Operating Profit Margin, Adjusted Profit Per Share, and MENT Pre-Cash Flow in the fourth quarter were all better than we expected. For the full year, we generated a 13% increase in total sales and revenues to $67.1 billion. Service revenue has also increased by 5% to $23 billion, a record. We generated $13.7 billion of adjusted operating profit in 2023, up 51% from 2022. The Adjusted Operating Profit Margin for the full year was 20.5%, a 510 basis point increase over the prior year.

Jim Ogilvie: Sales adjusted operating profit margin adjusted profit per share in M. E T free cash flow in the fourth quarter were all better than we expected.

Jim Ogilvie: For the full year, we generated a 13% increase in total sales and revenues to $67 $1 billion.

Jim Ogilvie: Services also increased by 5% to $23 billion a record we generated $13 $7 billion of adjusted operating profit in 2023 up 51% from 2022.

Jim Ogilvie: Adjusted operating profit margin for the full year was 25% a 510 basis point increase over the prior year. This exceeded the top end of our target margin range for this level of sales by 80 basis points adjust.

Donald James Umpleby: This exceeded the top end of our target margin range for this level of sales by 80 basis points. Adjusted profit per share in 2023 was $21.21, a 53% increase over 2022. In addition, we also generated $10 billion of M, E, and T pre-cash flow, exceeding the high end of our target range by over $2 billion for the full year.

Jim Ogilvie: Adjusted profit per share in 2023 was $21.21, a 53% increase over 2022 in.

Jim Ogilvie: In addition, we also generated $10 billion of M E T free cash flow exceeding the high end of our target range by over $2 billion for the full year. This performance led to continued growth in absolute OPEC dollars, which is our internal measure of profitable growth.

Donald James Umpleby: This performance led to continued growth in absolute OPEC dollars, which is our internal measure of profitable growth. As a result of our strong execution and record financial performance, we are increasing our target range for Adjusted Operating Profit Margin and MENT free cash flow. We are increasing the top end of our adjusted operating profit margin range by 100 basis points relative to the corresponding level of sales. Moving to M, E, and T free cash flow, we've generated more than $30 billion over the last five years, including a record $10 billion in 2023. Based on our demonstrated ability to generate strong free cash flow, we are raising our MENT free cash flow target range to $5 to $10 billion, up from $4 to $8 billion. Andrew will provide additional details around these updated targets.

Jim Ogilvie: As a result of our strong execution and record financial performance, we are increasing our target range for adjusted operating profit margin and M E T free cash flow.

Jim Ogilvie: We are increasing the top end of our adjusted operating profit margin range by 100 basis points relative to the corresponding level of sales.

Moving to M E T free cash flow, we've generated more than $30 billion over the last five years, including a record $10 billion in 2023.

Jim Ogilvie: Based on our demonstrated ability to generate strong free cash flow, we are raising our M. E T free cash flow target range to $5 billion to $10 billion up from $4 billion to $8 billion.

Jim Ogilvie: Andrew will provide additional details around these updated targets.

Donald James Umpleby: Turning to slide 4, in the fourth quarter of 2023, sales and revenues increased by 3% to $17.1 billion, driven by favorable price realization and partially offset by lower volume. Both price and volume were slightly better than we expected. Compared to the fourth quarter of 2022, overall sales to users increased 8%, slightly better than our expectations. Energy and transportation sales to users increased 20 percent. For machines, which includes construction industries and resource industries, sales-to-users rose by 3 percent. Sales to users in construction industries were up 4%. North American sales to users increased as demand remained healthy for non-residential and residential construction, while non-residential continued to benefit from government-related infrastructure and construction projects.

Jim Ogilvie: Turning to slide four in the fourth quarter of 2023 sales and revenues increased by 3% to $17 $1 billion, driven by favorable price realization and partially offset by lower volume both.

Jim Ogilvie: Both price and volume were slightly better than we expected.

Jim Ogilvie: Compared to the fourth quarter of 2022 overall sales to users increased 8% slightly better than our expectations.

Jim Ogilvie: Energy and transportation sales to users increased 20%.

Jim Ogilvie: Four machines, which includes construction industries and resource industries sales to users rose by 3%.

Jim Ogilvie: Sales to users in construction industries were up 4%.

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

Jim Ogilvie: Non residential continues to benefit from government related infrastructure and construction projects.

Donald James Umpleby: Residential sales to users in North America also increased in the quarter. Sales to users in the YAMI and Latin America were down slightly relative to a strong comparison. In Asia-Pacific, sales to users declined in the quarter. In resource industries, sales to users increased 1%. In mining, sales to users also increased. And in heavy construction and quarry and aggregates, sales to users declined against a strong comparison in 2022.

Jim Ogilvie: Residential sales to users in North America also increased in the quarter.

Jim Ogilvie: Sales to users in the Amy in Latin America were down slightly relative to a strong comparative in.

Jim Ogilvie: In Asia Pacific sales to users declined in the quarter.

Jim Ogilvie: In resource industries sales to users increased 1% in mining sales to users also increased and then heavy construction and quarry and aggregates sales to users declined against a strong comparative in 2022.

Jim Ogilvie: In energy and transportation sales to users increased by 20% oil.

Donald James Umpleby: In energy and transportation, sales to users increased by 20%. 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 gas compression and well-servicing oil and gas applications, including the Tier 4 dynamic gas blending engines used in well-servicing fleets. Power generation sales to users increased. Power generation sales to users continue to remain positive due to favorable market conditions, including strong data center growth. Transportation sales to users also increased, while industrial declined from historically strong levels in 2022. Dealer inventory decreased by $900 million versus the third quarter, and machines declined by $1.4 billion, slightly more than we expected. We saw the largest decline in construction industries as inventory decreased across all regions.

Jim Ogilvie: Oil and gas sales to users benefited from strong sales of turbines and turbine related services.

Jim Ogilvie: We also saw continued strength in sales of reciprocating engines into gas compression and well servicing oil and gas applications, including the cheer for dynamic gas blending engines used in well servicing fleets.

Jim Ogilvie: Power generation sales to users increased.

Jim Ogilvie: It gives me power generation sales to users continued to remain positive due to favorable market conditions, including strong data center growth.

Jim Ogilvie: Transportation sales to users also increased while industrial declined from historically strong levels in 2022.

Jim Ogilvie: Dealer inventory decreased by $900 million versus the third quarter.

Jim Ogilvie: Machines declined by one $4 billion slightly more than we expected we saw the largest decline in construction industries is dealer inventory decreased across all regions. The largest decline was in excavators.

Donald James Umpleby: The largest decline was in excavators. However, we remain comfortable with the total level of machine dealer inventory, which is within the typical range. Adjusted Operating Profit Margin increased to 18.9% in the fourth quarter, a 190 basis point increase over last year. Adjusted operating profit margin was slightly better than we had anticipated. Relative to our margin expectations, we saw higher price utilization and higher sales volume, both marginally better than expected. Turning to slide five, I'll now provide full year highlights.

Jim Ogilvie: We remain comfortable with the total level of machine dealer inventory, which is within the typical range.

Jim Ogilvie: Adjusted operating profit margin increased to 18, 9% in the fourth quarter of 190 basis point increase over last year.

Jim Ogilvie: Adjusted operating profit margin was slightly better than we had anticipated.

Jim Ogilvie: Relative to our margin expectations, we saw higher price realization and higher sales volume both marginally better than expected.

Jim Ogilvie: Turning to slide five I'll now provide full year highlights in 2023, we generated sales and revenues of $67 1 billion.

Donald James Umpleby: In 2023, we generated sales and revenues of $67.1 billion, up 13% versus last year. This was due to favorable prices and higher sales volume, driven primarily by higher sales of equipment to end users. As I mentioned, we generated $23 billion of services revenue in 2023, a 5% increase over 2022. We continue to see improvement in customer value agreements with new equipment, which remains an important part of our services growth initiative. We saw strong e-commerce sales growth as we continued to enhance our digital tools to make it easier for customers to identify and purchase the right parts. We added more than 100,000 new customers to our online channel. We also exceeded the e-commerce goal we shared at our May 2022 Investor Day. By combining the data from more than 1.5 million connected assets with our engineering expertise, advanced analytics, and AI, we are helping customers avoid unplanned downtime through intelligent leads, which we call prioritized service events (or PSEs).

Jim Ogilvie: Up 13% versus last year.

Jim Ogilvie: This was due to favorable price and higher sales volume driven primarily by higher sales of equipment to end users.

Jim Ogilvie: As I mentioned, we generated $23 billion of services revenue in 2023% to 5% increase over 2022.

We continue to see improvement of customer value agreements with new equipment, which remains an important part of our services growth initiatives.

Jim Ogilvie: We saw strong ecommerce sales growth as we continued to enhance our digital tools to make it easier for customers to identify and purchase the right parts.

Jim Ogilvie: We added more than 100000, new customers to our online channel. We also exceeded the ecommerce goal we shared at our May 2022 Investor day.

Jim Ogilvie: By combining the data for more than $1 5 million connected assets with their engineering expertise advanced analytics and AI, we are helping customers avoid unplanned downtime through intelligent leads which we call prioritize service events for <unk>.

Donald James Umpleby: We continue to execute our various service initiatives as we strive to achieve our 2026 target of $28 billion. Our full-year adjusted operating profit margin was 20.5%, a 510 basis point increase over 2022. Moving to slide six, we generated strong MENT free cash flow of $10 billion in 2023, a $3.7 billion or 58% increase over our previous record. We returned a record $7.5 billion to shareholders through repurchase stock and dividends.

Jim Ogilvie: We continue to execute our various service initiatives as we strive to achieve our 2026 target of 28 billion.

Jim Ogilvie: Our full year adjusted operating profit margin was 25% a 510 basis point increase over 2022.

Moving to slide six we generated strong M E T free cash flow of $10 billion in 2023, $3 $7 billion or 58% increase over our previous record we.

Jim Ogilvie: We returned a record $7 $5 billion to shareholders through repurchase stock and dividends.

Donald James Umpleby: We remain proud of our dividend aristocrat status and continue to expect to return substantially all M, E, and T free cash flow to shareholders over time through dividends and share repurchase. Now on slide seven, I'll describe our expectations moving forward. Overall demand remains healthy across most of our end markets for our products and services. We ended 2023 with a backlog of $27.5 billion, which remains elevated as a percentage of revenues compared to historical levels.

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

Jim Ogilvie: Now on slide seven I'll describe our expectations moving forward.

Overall demand remains healthy across most of our end markets for our products and services.

Jim Ogilvie: We ended 2023 with a backlog of $27 $5 billion, which remains elevated as a percentage of revenues compared to historical levels.

Donald James Umpleby: We currently anticipate 2024 sales and revenues to be broadly similar to the record 2023 level. We expect continued strength in end-user demand, including services growth, and a slight benefit from carryover pricing, offset by a dealer inventory headwind, which was a $2.1 billion benefit in 2023. We currently do not anticipate a significant change in dealer inventory of machines in 2024 as compared to an increase in 2023. Now, I'll discuss our outlook for key end markets, starting with the construction industries. In North America, after a very strong 2023, we expect the region to remain healthy in 2024. We expect non-residential construction to remain at similar demand levels due to government-related infrastructure investment. Residential construction is expected to remain healthy relative to historical levels.

Jim Ogilvie: We currently anticipate 2020 for sales and revenues to be broadly similar to the record 2023 level.

Jim Ogilvie: We expect continued strength in end user demand, including services growth and a slight benefit from carryover pricing offset by a dealer inventory headwind, which was at $2 $1 billion benefit in 2023.

Jim Ogilvie: We currently do not anticipate a significant change in dealer inventory of machines in 2024 as compared to an increase in 2023.

Jim Ogilvie: Now I'll discuss our outlook for key end markets, starting with construction industries.

Jim Ogilvie: In North America. After a very strong 2023, we expect the region to remain healthy in 2024, we expect nonresidential construction to remain at similar demand levels due to government related infrastructure investments.

Residential construction is expected to remain healthy relative to historical levels.

Donald James Umpleby: In Asia-Pacific, excluding China, we are seeing some softening in economic conditions. We anticipate Chinese demand will remain at a relatively low level for the above 10 ton excavator industry. In IEMI, we anticipate the region will be slightly down due to economic uncertainty in Europe, somewhat offset by continuing strong construction demand in the Middle East. Construction activity in Latin America is expected to increase due to easing financial conditions. In addition, we also anticipate the ongoing benefit of our services initiatives will positively impact construction industries in 2024. Next, I'll discuss the resource industry. After strong performance in 2023 in mining, heavy construction, and quarrying aggregates, we anticipate lower machine volume versus last year, primarily due to off-highway and articulated trucks. In addition, we anticipate a small decrease in dealer inventory during 2024 versus a slight increase in dealer inventory last year.

Jim Ogilvie: In Asia Pacific, Excluding China, we are seeing some softening in the economic conditions.

Jim Ogilvie: We anticipate China will remain at a relatively low level for the above 10 ton excavator industry.

Jim Ogilvie: Any Amy we anticipate the region will be slightly down due to economic uncertainty in Europe somewhat offset by continuing strong construction demand in the middle East.

Jim Ogilvie: Construction activity in Latin America is expected to increase due to easing financial conditions.

Jim Ogilvie: In addition, we also anticipate the ongoing benefit of our services initiatives will positively impact construction industries in 2024.

Speaker Change: Next I will discuss resource industries.

Speaker Change: After a strong performance in 2023 in mining heavy construction and quarry and aggregates, we anticipate lower machine volume versus last year, primarily due to off highway and articulated trucks.

Speaker Change: In addition, we anticipate a small decrease in dealer inventory during 2024 versus a slight increase in dealer inventory last year.

Donald James Umpleby: While we continue to see a high level of quoting activity overall, we anticipate lower order rates as customers display capital discipline. Additionally, we expect to see higher services revenues, including robust rebuild activity. Customer product utilization remains high, the number of parked trucks remains low, the age of the fleet remains elevated, and our autonomous solutions continue to see strong customer acceptance. 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. Moving on to energy and transportation.

While we continue to see a high level of quoting activity overall, we anticipate lower order rates as customers display capital discipline.

Speaker Change: We expect to see higher services revenues, including robust rebuild activity.

Speaker Change: Customer product utilization remains high the number of parked trucks remains low the age of the fleet remains elevated and our autonomous solutions continue to see strong customer acceptance.

Speaker Change: 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.

Speaker Change: Moving to energy and transportation and oil and gas, we expect reciprocating engines and services to increase slightly after a strong 2023.

Donald James Umpleby: In oil and gas, we expect reciprocating engines and services to increase slightly after a strong 2023. As we said during the last two quarters, well-servicing in North America is showing some short-term moderation. Gas compression order backlog remains healthy, and overall, we continue to remain optimistic about future demand. Cat reciprocating engine demand for power generation is expected to remain strong due to continued data center growth. Solar turbines have a strong backlog and continue to experience robust coating activity.

Speaker Change: As we said during the last two quarters well servicing in North America is showing some short term moderation.

Speaker Change: Gas compression order backlog remains healthy and overall, we continue to remain optimistic about future demand CAD.

Speaker Change: <unk> reciprocating engine demand for power generation is expected to remain strong due to continued data center growth.

Speaker Change: Solar turbines has a strong backlog and continues to experience robust quoting activity as.

Donald James Umpleby: As we said in the last quarter, industrial demand is expected to soften in the near term from a strong 2023. In transportation, we anticipate high-speed marine demand to increase slightly as customers continue to upgrade aging fleets. Moving to slide 8.

Speaker Change: As we said in the last quarter industrial demand is expected to soften in the near term from a strong 2023.

Speaker Change: In transportation, we anticipate high speed marine to increase slightly as customers continue to upgrade aging fleets.

Speaker Change: Moving to slide eight now I will provide an update on our strategy and sustainability journey.

Donald James Umpleby: Now I'll provide an update on our strategy and sustainability journey. Over the past year, we have discussed constraints for our large engines given the robust demand and power generation for data centers and in oil and gas. We believe that our total addressable market is expanding due to the secular growth trend for data centers relating to cloud computing and generative AI. We also expect the energy transition to create opportunities for distributed generation. As more renewables are added to the grid, our reciprocating engine and gas turbine generator sets can help provide grid stability.

Speaker Change: Over the past year, we have this disc.

Speaker Change: <unk> discussed constraints for our large engines given the robust demand in power generation for data centers and in oil and gas.

Speaker Change: We believe that our total addressable market is expanding due to the secular growth trend for data centers relating to cloud computing and generative AI.

Speaker Change: We also expect the energy transition to create opportunities for distributed generation.

Speaker Change: As more renewables are added to the grid, our reciprocating engine and gas turbine generator sets can help provide grid stability.

Donald James Umpleby: We are making a large, multi-year capital investment in our large engine division, including increasing capacity for both new engines and aftermarket parts. This will help us satisfy growing customer demand and contribute to future absolute OPEC dollar growth, which we believe has the highest correlation to total shareholder return over time. We continue to advance our sustainability journey in 2023. I'll highlight some recent announcements demonstrating our commitment to a reduced carbon future. Caterpillar has a goal that 100% of new products will be more sustainable than the previous generation, including by lowering fuel consumption and thus corresponding emissions. One recent example is our 420XE backhoe loader with a CAT 3.6 engine.

Speaker Change: We are making a large multi year capital investment and our large engine division, including increasing capacity for both new engines and aftermarket parts.

Speaker Change: This will help us satisfy growing customer demand and contribute to future absolute OPEC dollar growth, which we believe has the highest correlation to total shareholder return over time.

Speaker Change: We continue to advance our sustainability journey in 2023.

Speaker Change: I'll highlight some recent announcements demonstrating their commitment to a reduced carbon future.

Speaker Change: Caterpillar has a goal that 100% of new products will be more sustainable than the previous generation, including by lowering fuel consumption and thus corresponding emissions when.

Speaker Change: One recent example is our $4 20 X E backhaul loader with a cat three six engine through.

Donald James Umpleby: Through internal testing in a typical mix of applications, it consumed up to 10% less fuel and produced up to 10% less tailpipe emissions than the previous model. Earlier this year, we announced the success of our collaboration with Microsoft and Ballard Power Systems to demonstrate the viability of using large format hydrogen fuel cells to supply reliable and sustainable backup power for data centers. The demonstration validated the hydrogen fuel cell power system's performance at more than 6,000 feet above sea level and in below freezing conditions.

Speaker Change: Through internal testing in a typical mix of applications. It consumed if the 10% less fuel and produced up to 10% less tailpipe emissions than the previous model.

Speaker Change: Earlier this year, we announced the success of our collaboration with Microsoft and Ballard power systems to demonstrate the viability of using large format hydrogen fuel cells to supply reliable and sustainable backup power for data centers.

Speaker Change: The demonstration validated the hydrogen fuel cell power systems performance and more than 6000 feet above sea level and below freezing conditions.

Andrew Robert John Bonfield: Caterpillar led the project, providing the overall system integration, power electronics, and microgrid controls that form the central structure of the hydrogen power solution. These examples reinforce our ongoing sustainability leadership. With that, I'll turn it over to Andrew. Thanks, Jim, and good morning, everyone.

Speaker Change: Caterpillar led the project, providing the overall system integration power electronics, and micro grid controls that form the central central structure of the hydrogen power solution.

Speaker Change: These examples reinforce our ongoing sustainability leadership.

With that I'll turn it over to Andrew.

Andrew Robert John Bonfield: Thanks, Jim and good morning, everyone.

Andrew Robert John Bonfield: I'll begin with commentary on the fourth-quarter results, including the performance of our segment. Then I'll discuss the balance sheet and cash flow, followed by an update to our target ranges for adjusted operating profit margins and MENT-free cash flow. I'll conclude with our high-level assumptions for 2024 and our expectations for the first quarter. Beginning on slide 9, strong operating performance continued in the fourth quarter as sales and revenues, adjusted operating profit margin, adjusted profit per share, and MET free cash flow were all better than we had expected. In summary, sales and revenues increased by 3% to $17.1 billion, and adjusted operating profit increased by 15% to $3.2 billion.

Andrew Robert John Bonfield: I'll begin with commentary on the fourth quarter results, including the performance of our segments.

Andrew Robert John Bonfield: Then I'll discuss the balance sheet and cash flow followed by an update to our target ranges for adjusted operating profit margins and <unk> free cash flow.

Andrew Robert John Bonfield: I'll conclude with a high level assumptions for 2024, and our expectations for the first quarter.

Andrew Robert John Bonfield: Beginning on slide nine strong operating performance continued in the fourth quarter, our sales and revenues adjusted operating profit margin adjusted profit per share and Amy you can see free cash flow were all better than we had expected.

Andrew Robert John Bonfield: In summary sales and revenues increased by 3% to $17 1 billion.

Andrew Robert John Bonfield: Adjusted operating profit increased by 15% to $3 2 billion.

Andrew Robert John Bonfield: The adjusted operating profit margin was 18, 9% an increase of 190 basis points versus the prior year.

Andrew Robert John Bonfield: The adjusted operating profit margin was 18.9%, an increase of 190 basis points versus the prior year. Earnings per share was $5.28 in the fourth quarter compared to $2.79 in the fourth quarter of last year. Profit per share in the quarter included favourable mark-to-market gains of $0.14 for the remeasurement of pension and au pair plans and certain favourable deferred tax valuation adjustments of $0.04. It also included restructuring costs of $92 million, or 13 cents. Adjusted profit per share increased by 35% to $5.23 in the fourth quarter, compared to $3.86 last year. The provision for income taxes in the fourth quarter, excluding the amounts related to mark-to-market and discrete items, reflected a global annual affected tax rate of 21.4%.

Andrew Robert John Bonfield: Profit per share was $5 28 in the fourth quarter compared to $2 79 in the fourth quarter of last year.

Andrew Robert John Bonfield: Profit per share in the quarter included a favorable mark to market gains of 14.

Andrew Robert John Bonfield: For the re measurement of pension and <unk> plans and certain favorable deferred tax valuation adjustments or <unk>.

Andrew Robert John Bonfield: It also included restructuring costs $92 million or <unk> 13.

Andrew Robert John Bonfield: Adjusted profit per share increased by 35% to $5 23 in the fourth quarter compared to $3.86 last year.

Andrew Robert John Bonfield: The provision for income tax taxes in the fourth quarter, excluding the amounts related to mark to market and discrete items reflected a global annual effective tax rate of 21, 4%.

Andrew Robert John Bonfield: This was lower than we had expected a quarter ago due to favorable changes in the geographic mix of profits.

Andrew Robert John Bonfield: This was lower than we had expected a quarter ago due to favorable changes in the geographic breakdown of profit. The lower rate benefited performance in the quarter by about 24 cents. Moving on to slide 10.

Andrew Robert John Bonfield: The lower rate benefitted performance in the quarter by about 24 cents.

Andrew Robert John Bonfield: Moving on to slide 10.

Andrew Robert John Bonfield: I'll discuss topline results in the fourth quarter. The 3% sales increase versus the prior year was primarily driven by price realization, partially offset by lower volume, as impacts from dealer inventory changes more than offset the 8% increase in sales to users. Both price and volume were slightly better than we had anticipated. However, the dealer inventory change resulted in an unfavorable sales impact of $1.6 billion compared to the prior year. Dealer inventory decreased in the fourth quarter by $900 million overall, compared to an increase of approximately $700 million during the fourth quarter of 2022.

Speaker Change: I will discuss top line results from the fourth quarter.

Speaker Change: The 3% sales increase versus the prior year was primarily driven by price realization, partially offset by lower volume as impacts from dealer inventory changes more than offset the 8% increase in sales to users.

Speaker Change: Both price and volume was slightly better than we had anticipated.

Speaker Change: The dealer inventory change resulted in unfavorable sales impact of one 6 billion versus the prior year.

Speaker Change: Dealer inventory decrease from the fourth quarter by $900 million overall compared to an increase of approximately $700 million during.

Speaker Change: During the fourth quarter of 2022.

Speaker Change: The dealer inventory decrease in the fourth quarter was led by construction industries with a reduction was at the high end of expectations.

Andrew Robert John Bonfield: The dealer inventory decrease in the fourth quarter was led by Construction Industries, where the reduction was at the high end of expectations. The decrease in this segment was led by excavators and the impact of the CAT engine changeover in building construction products that we have mentioned in previous earnings. Dealers also reduced their inventories in resource industries. Overall, the decrease in dealer inventory of machines was $1.4 billion in the quarter.

Speaker Change: The decrease in this segment was led by excavators and the impacts of the Cat engine changeover and building construction products that we have mentioned in previous earnings calls.

Speaker Change: <unk> also reduced our inventories in resource industries.

Speaker Change: Overall, the decrease in dealer inventory of machines was $1 4 billion in the quarter.

Speaker Change: Conversely dealer inventory and ended June transportation increase mostly due to extended commissioning timelines, resulting from strong shipments, which was supported by healthy demand.

Andrew Robert John Bonfield: Conversely, deal inventory and energy and transportation increased, mostly due to extended commissioning timelines resulting from strong shipments, which were supported by healthy demand. As a reminder, dealer inventory in both energy and transportation and resource industries is mainly a function of the commissioning pipeline, and over 70% of dealer inventory in these segments is backed by firm customer orders. Looking at sales by segment, sales in the construction industries and energy transportation were slightly higher than we had anticipated, while sales in the resource industries were about in line with our expectations. Moving to Operating Profit on slide 11. Adjusted operating profit increased by 15% to $3.2 billion. Price realization and favorable manufacturing costs benefited the quarter, while higher SG&A and R&D expenses and lower sales volumes acted as a partial offset. The increase in SG&A and R&D expenses was primarily driven by higher short-term incentive compensation expense and strategic investment spend.

Speaker Change: As a reminder deal inventory in both energy and transportation and resource industries is mainly a function of the commissioning pipeline and over 70% deal in between these segments is backed by firm customer orders.

Speaker Change: Looking at sales by segment sales and construction industries and energy transportation was slightly higher than we had anticipated.

Speaker Change: While sales in resource industries were about in line with our expectations.

Speaker Change: Moving to operating profit on slide 11.

Speaker Change: Adjusted operating profit increased by 15% to $3 2 billion.

Speaker Change: Price realization and favorable manufacturing costs benefited the quarter, while higher SG&A and R&D expenses and lower sales volumes exited as a partial offset.

Speaker Change: The increase in SG&A and R&D expenses was primarily driven by higher short term incentive compensation expense and strategic investment spend.

Speaker Change: The adjusted operating profit margin of 18, 9% improved by 190 basis points versus the prior year.

Andrew Robert John Bonfield: The adjusted operating profit margin of 18.9% improved by 190 basis points versus the prior year. Margins were slightly higher than we had anticipated, on volumes and price being marginally better than we had expected. Now on slide 12.

Speaker Change: Margins were slightly higher than we had anticipated on volumes and price being marginally better than we had expected.

Speaker Change: Now on slide 12 <unk>.

Andrew Robert John Bonfield: Construction industry sales decreased by 5% in the fourth quarter to $6.5 billion due to lower sales volume, partially offset by favorable price realization. Lower sales volume was primarily due to the changes in dealer inventories that I mentioned earlier and more than offset the favorable sales to users. The dealer inventory changes impacted all of the regions. By region, sales in North America increased by 4%, in Latin America, sales decreased by 25%, and sales in EMEA decreased by 18%; this region accounted for the largest dealer inventory decline in the quarter. In Asia-Pacific, sales decreased by 4%.

Speaker Change: Construction industries sales decreased by 5% in the fourth quarter to $6 5 billion due to lower sales volume, partially offset by favorable price realization.

Speaker Change: Lower sales volume was primarily due to the changes in dealer inventories that I mentioned earlier and more than offset the favorable sales to users.

Speaker Change: The dealer inventory changes impacted all of the regions.

Speaker Change: By region sales in North America increased by 4% in Latin America sales decreased by 25% sales in EMEA increased decreased by 18%. This region accounted for the largest dealer inventory declined in the quarter.

Speaker Change: In Asia Pacific sales decreased by 4%.

Speaker Change: Fourth quarter profit for construction industries was $1 5 billion.

Andrew Robert John Bonfield: Fourth quarter profit for construction industries was $1.5 billion, an increase of 3% versus the prior year. The increase was primarily due to a favorable price, partially offset by the profit impact from lower sales volume. The segment's operating margin of 23.5% was an increase of 180 basis points versus last year. This is broadly in line with our expectations. Turning to slide 13.

Speaker Change: <unk> increased by 3% versus the prior year.

Speaker Change: The increase was primarily due to favorable price, partially offset by the profit impact from lower sales volume.

Speaker Change: The segment's operating margin of 23, 5% was an increase of 180 basis points versus last year.

Speaker Change: This was broadly in line with our expectations.

Speaker Change: Turning to slide 13.

Andrew Robert John Bonfield: Resource industry sales decreased by 6% in the fourth quarter to $3.2 billion. The decrease was primarily due to lower sales volume, partially offset by favorable price realization. Lower volume was impacted by changes in dealer inventories as dealers decreased inventories during the fourth quarter of 2023 compared to an increase in the prior year's quarter. Volume was also impacted by slightly lower aftermarket part sales volume, partly due to dealer buying patterns. Fourth quarter profit for resource industries decreased by 1% versus the prior year to $600 million.

Speaker Change: Resource industries sales decreased by 6% in the fourth quarter to $3 2 billion.

Speaker Change: The decrease was primarily due to lowest lower sales volume, partially offset by favorable price realization.

Speaker Change: Lower volume was impacted by changes in dealer inventories as dealers decrease inventories during the fourth quarter of 2023 compared to an increase from the prior year's quarter.

Speaker Change: Volume was also impacted by slightly lower ophthalmology market part sales volume, partly due to dealer buying patterns.

Speaker Change: Fourth quarter profit for resource industries decreased by 1% versus the prior year to $600 million.

Andrew Robert John Bonfield: The segment's operating margin of 18.5% was an increase of 90 basis points versus last year and was in line with our expectations. Now on slide 14. Energy and transportation sales increased by 12% in the fourth quarter to $7.7 billion. The increase was primarily due to higher sales volume and favorable price realization. Sales volume benefited from higher shipments of large engines and solar turbines and turbine-related services in the quarter. By application, oil and gas sales increased by 23%. Power generation sales were high by 29%, industrial sales decreased by 5%, and transportation sales increased by 11%.

Speaker Change: The segment's operating margin of 18, 5% was an increase of 90 basis points versus last year and was in line with our expectations.

Speaker Change: Now on slide 14.

Speaker Change: Energy and transportation sales increased by 12% from the fourth quarter to $7 7 billion.

Speaker Change: The increase was primarily due to higher sales volume and favorable price realization.

Speaker Change: Sales volume benefited from the heart from higher shipments of large engines and solar turbines and turbine related services in the quarter.

Speaker Change: By application oil and gas sales increased by 23% power.

Speaker Change: Power generation sales were higher by 29% industrial sales decreased by 5% and transportation sales increased by 11%.

Speaker Change: While industrial sales decrease they remain at healthy levels.

Andrew Robert John Bonfield: While industrial sales decreased, they remain at healthy levels. Fourth quarter profit for energy and transportation increased by 21% versus the prior year to $1.4 billion. The increase was primarily due to favorable price and higher sales volume, partially offset by higher SG&A and R&D expenses, currency impacts, and unfavorable manufacturing costs. The increase in SG&A and R&D expenses reflected ramping investments related to strategic growth initiatives and higher short-term incentive compensation expenses. As a reminder, most of our strategic investments relating to electrification and alternative fuels are in energy and transportation, which therefore impacts this segment's margin. The operating margin of 18.6% was an increase of 130 basis points versus the prior year. Margin exceeded our expectations on higher volume, including a favorable mix and price. Moving to slide 15.

Speaker Change: Fourth quarter profit for energy <unk> transportation increased by 21% versus the prior year to $1 4 billion.

Speaker Change: The increase was primarily due to favorable price and higher sales volume, partially offset by higher SG&A and R&D expenses.

Speaker Change: Currency impacts and unfavorable manufacturing costs.

Speaker Change: The increase in SG&A, and R&D expenses reflected ramping investments related to strategic growth initiatives and higher short term incentive compensation expense.

Speaker Change: As a reminder, most of our strategic investments relating to electrification and alternative fuels are in energy and transportation.

Speaker Change: Which therefore impacts this segment's margin.

Speaker Change: The operating margin of 18, 6% was an increase of 130 basis points versus the prior year.

Speaker Change: <unk> exceeded our expectations on higher volume, including favorable mix and price.

Speaker Change: Yes.

Speaker Change: Moving to slide 15 financial products.

Andrew Robert John Bonfield: Financial products revenues increased by 15% to $981 million, primarily due to higher average financing rates across all regions and higher average earning assets in North America. Segment profit increased by 24% to $234 million, mainly due to a lower provision for credit losses at Cap Financial.

Speaker Change: Revenues increased by 15% to $981 million, primarily due to high average financing rates across all regions and higher average, earning assets in North America.

Speaker Change: Segment profit increased by 24% to $234 million.

Speaker Change: The increase was mainly due to a lower provision for credit losses at Cat financial high average, earning assets and the high net yield on average earning assets.

Andrew Robert John Bonfield: High Average Earning Assets and a High Net Yield on Average Earnings. Our portfolio continues to perform well, with past views near historic levels at 1.79%. We saw a 10 basis point improvement compared to the fourth quarter of 2022 and a 17 basis point improvement compared to the third quarter. This is the lowest fourth quarter past-use percentage since 2006. The year-end allowance rate was our lowest fourth quarter rate on record at 1.18% and was the second lowest quarterly rate ever.

Speaker Change: Our portfolio continues to perform well with past use near historic levels of 179%.

Speaker Change: We saw a 10 basis point improvement compared to the fourth quarter of 2022, and a 17 basis point improvement compared to the third quarter.

Speaker Change: This is the lowest fourth quarter past use percentage since 2006.

Speaker Change: The year end allowance rate was was our lowest fourth quarter rates on record of $1, one, 8% and was the second lowest quarterly rates ever.

Speaker Change: In addition provision expense in 2023.

Andrew Robert John Bonfield: In addition, provision expense in 2023 was at the lowest level we've seen in over 20 years. Meanwhile, business activity remains strong as retail new business volume increased versus the prior year and the third quarter. The increase versus the prior year reflected higher end-user sales and rental conversions in the U.S. In addition, we continue to see strong demand for used equipment. Though used inventories have ticked up slightly, they remain close to historically low levels.

Speaker Change: The lowest level, we've seen it in over 20 years.

Speaker Change: Business activity remains strong as retail new business volume increase versus the prior year in the third quarter.

Speaker Change: The increase versus the prior year reflected higher end user sales and rental conversions in the U S.

In addition, we continued to see strong demand for used equipment.

Speaker Change: Those used inventories have ticked up slightly but remained close to historically low levels.

Andrew Robert John Bonfield: Despite some moderation in news pricing on improved availability, it is still comfortably above historic norms. Moving on to slide 16. The record $10 billion in ME&T free cash flow for the year included $3.2 billion in the fourth quarter, an increase of $200 million versus the prior year. On CapEx, we continue to make disciplined investments that are right for our business, governed by our focus on growing absolute OPEC dollars. We spent about $1.7 billion in 2023. Looking to 2024, we expect CapEx in the range of two to two and a half billion dollars. This is higher than our recent run rate and includes the investment in large engine capacity, which Jim referenced a moment ago. We also plan to invest more in ACE, which is Autonomy, Alternative Fuels, Connectivity, and Digital and Electrification.

Despite some moderation in used pricing pricing on improved availability. It is still comfortably above historic norms.

Speaker Change: Moving on to slide 16.

Speaker Change: The record $10 billion in EMEA and <unk> free cash flow for the year included $3 2 billion in the fourth quarter, an increase of $200 million versus the prior year.

Speaker Change: On Capex, we continue to make disciplined investments that are right for our business governed by our focus on growing absolute opex dollars.

Speaker Change: We spent about $1 7 billion in 2023.

Speaker Change: Looking to 2024, we expect Capex in the range of two to $2 5 billion.

Speaker Change: This is higher than our recent run rate and includes the investments in large engine capacity.

Speaker Change: Which Jim referenced a moment ago.

Speaker Change: We also plan to invest more around ace, which is autonomy alternative fuels connectivity and digital in electrification.

Speaker Change: In addition, we are investing to make our supply chain more resilient.

Andrew Robert John Bonfield: In addition, we are investing to make our supply chain more resilient. Moving to capital deployment, we returned $3.4 billion to shareholders in the fourth quarter, including $2.8 billion in share repurchases. Our net share count has decreased by approximately 14% since 2019 when we shared our intention to return substantially all M&T free cash flow to shareholders over time and on a consistent basis.

Speaker Change: Moving to capital deployment, we returned $3 4 billion to shareholders in the fourth quarter, including $2 8 billion in share repurchases.

Speaker Change: Our net share count has decreased by approximately 14% since 2019, when we shared our intention to return substantially all free cash flow shareholders overtime and on a consistent basis.

Andrew Robert John Bonfield: Our dividend remains a priority as we increased our quarterly payout by 8% in 2023. You will recall from our investor day in 2022, we shared that we were expected to increase our dividend by at least high single digits for the next three years. The increase in 2023 reflected the second of those three years. Our balance sheet remains strong.

Speaker Change: Our dividend remains a priority as we increased our quarterly payout by 8% in 2023.

Speaker Change: You will recall from our Investor day in 2022, we shared that we expected to increase our dividend by at least high single digits for the next three years.

Speaker Change: The increase in 2023 reflected the second of those three years.

Speaker Change: Our balance sheet remains strong we have ample liquidity with an enterprise cash balance of $7 billion.

Andrew Robert John Bonfield: We have ample liquidity with an enterprise cash balance of $7 billion, and we hold an additional $3.8 billion in slightly longer-dated liquid marketable securities to improve yields on that cash. Now, on slide 17, I'll discuss our revised Adjusted Operating Profit Margin Target. We exceeded our progressive target range in 2023, and we are confident that our strong execution and operating performance support the potential for higher top-end adjusted operating profit margins than were reflected in the prior range. Therefore, we have increased the top end of the range by 100 basis points relative to the corresponding level of sales. Achieving the top end of the range will remain challenging as we are committed to increasing investments in our strategic initiatives supporting long-term profitable growth. The bottom end of the target range remains unchanged.

Speaker Change: And we hold an additional $3 8 billion.

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

Speaker Change: Now on slide 17, I'll discuss our revised adjusted operating profit margin targets.

Speaker Change: We exceeded our progressive target range in 2023, and we are confident that our strong execution and operating performance supports the potential for higher top and adjusted operating profit margins than were reflected in the prior range.

Speaker Change: Therefore, we have increased the top end of the range by 100 basis points relative to the corresponding level of sales.

Speaker Change: Achieving the top end of the range will remain challenging as we are committed to increase investments in our strategic initiatives supporting long term profitable growth.

Speaker Change: The bottom end of the target range remains unchanged.

Andrew Robert John Bonfield: To explain, while higher gross margins support increasing the top end of the range, they actually pressure our margins in periods of decreasing volume. For that reason, we believe that the bottom end of the range remains challenging but achievable. We will now target adjusted operating profit margins of 10-14% at $42 billion of sales and revenues, increasing to 18-22% at $72 billion of sales and revenues. Now on slide 18. When I joined Caterpillar just over five years ago, I was impressed with the potential of our business to deliver higher, more consistent MENT-free cash flow as a result of the operating and execution model and our focus on generating absolute OPAC dollars. This is how we define winning at Caterpillar.

Speaker Change: To explain while higher gross margin support increasing the top end of the range to actually pressure our margins in periods of decreasing volume.

Speaker Change: For that reason, we believe that the bottom end of the range remains challenging but achievable.

Speaker Change: We will now target adjusted operating profit margins of 10% to 14% at $42 billion, a thousand revenues, increasing to 18% to 22% at $72 billion of sales and revenues.

Speaker Change: Now on slide 18.

Speaker Change: When I joined Caterpillar just over five years ago I was impressed with the potential of our business to deliver higher more consistent <unk> free cash flow.

Speaker Change: As a result of the operating and execution model and our focus on generating absolute opex dollars.

Speaker Change: This is how we define winning at caterpillar.

Speaker Change: We believe increasing absolute OPEC will lead to higher shareholder returns over time.

Andrew Robert John Bonfield: We believe increasing absolute OPEC dollars will lead to higher shareholder returns over time. Since the beginning of 2019, we have generated $30 billion in immunity-free cash flow, including a record $10 billion in 2023. We are confident in our ability to consistently generate positive MENT-free cash flow over time. Therefore, we are introducing an updated target range for ME&T free cash flow, which is between $5 and $10 billion. Our strong operating performance, as well as confidence in our future execution, supports the higher range. The updated target range still maintains our flexibility to invest in our strategic initiatives, which is a priority. We also continue to expect to return substantially all of our M.E. and T. free cash flow to shareholders over time through dividends and share repurchases. Moving to slide 19.

Speaker Change: Since the beginning of 2019, we have generated $30 billion in AT&T free cash flow, including a record $10 billion in 2023.

Speaker Change: We are confident in our ability to consistently generate positive free cash flow over time.

Speaker Change: Therefore, we are introducing an updated target range for <unk> free cash flow, which is between $5 and $10 billion.

Speaker Change: Our strong operating performance as well as confidence in our future execution supports the higher range.

Speaker Change: The updated target range still maintains our flexibility to invest in our strategic initiatives, which is a priority.

Speaker Change: We also continue to expect to return substantially all of our immune to free cash flow to shareholders over time through dividends and share repurchases.

Speaker Change: Moving to slide 19.

Andrew Robert John Bonfield: I will share our high-level assumptions for the full year. As Jim mentioned, in 2024, we anticipate sales and revenues will be broadly similar to 2023. We expect slightly favourable price realisation and continued healthy underlying demand across the business as a whole. We anticipate another year of services growth as we continue to target $28 billion by 2026. We do not expect a significant change in dealer inventory for machines by the end of this year. And for energy and transportation, it is difficult to predict with certainty what will happen to dealer inventory, as we have discussed previously. In total, dealer inventory increased by $2.1 billion in 2023.

Speaker Change: Our share of high level assumptions for the full year.

Speaker Change: As Jim mentioned in 'twenty 'twenty, four we anticipate sales and revenues will be broadly similar to 2023.

Speaker Change: Expect slightly favorable price realization and continued healthy underlying demand across the business as a whole.

Speaker Change: We anticipate another year of services growth as we continue to target $28 billion by.

Speaker Change: By 2026.

Speaker Change: We do not expect a significant change in dealer inventory for machines by the end of this year.

Speaker Change: And for energy and transportation it is difficult to predict with certainty what will happen to deal inventory as we have discussed previously.

Speaker Change: And total dealer inventory increased by $2 1 billion in 2023.

Andrew Robert John Bonfield: By segment, in the construction industry, sales of equipment to end users should remain roughly similar compared to the strong year we saw in 2023. However, we do not expect a dealer inventory build as we saw last year. We also anticipate our services initiatives will benefit the segment in 2024. In resource industries, we anticipate lower sales versus 2023, impacted by lower machine volume, primarily in off-highway and articulated trucks. We had strong sales of these products in 2023 as we converted our elevated backlog into sales, making for a challenging comparison. We also anticipate an unfavorable year-over-year change in dealer inventory.

By segment.

Speaker Change: <unk> and construction industry sales of equipment to end users should remain roughly similar compared to the strong year, we saw in 2023.

Speaker Change: However, we do not expect to dealer inventory build as we saw last year.

Speaker Change: We also anticipate our services initiatives will benefit the segment in 2024.

Speaker Change: In resource industries, we anticipate lower sales versus 2023 impacted by lower machine volume, primarily in off highway and articulated trucks.

Speaker Change: We had strong sales of these products in 2023, as we converted our elevated backlog into sales, making for a challenging comparison.

Speaker Change: We also anticipate.

Speaker Change: Unfavorable year over year change in dealer inventories.

Andrew Robert John Bonfield: However, we expect services revenues to increase in this segment. In energy and transportation, we expect slightly higher sales in 2024. Power generation, oil, and gas, and transportation sales should be positive, while industrial sales are expected to be lower compared to historically strong levels in 2023. On fully adjusted operating profit margin, we currently expect to be in the top half of the updated margin target range at our expected sales level. I'll discuss some of the puts and takes. In 2024, we expect a small pricing benefit weighted towards the first half of the year, given carryover from increases taken in the second half of 2023. For the full year, we expect price to modestly exceed manufacturing cost. Compared to last year, price and absolute dollar terms should moderate as we experience the more favourable pricing trends from 2023. Short-term incentive compensation expense will be about $1.7 billion in 2023.

Speaker Change: However, we expect services revenues will increase in this segment.

Speaker Change: In energy and transportation, we expect slightly higher sales in 2024.

Speaker Change: Power generation oil and gas and transportation sales should be positive while industrial sales are expected to be lower compared to historically strong levels in 2023.

Speaker Change: Our full year adjusted operating profit margin. We currently expect to be in the top half of the updated margin target range at our expected sales levels.

Speaker Change: Ill discuss some of the puts and takes.

Speaker Change: In 2024, we expect a small pricing benefit weighted towards the first half of the year given carryover from increases taken in the second half of 2023.

Speaker Change: For the full year, we expect price to modestly exceed manufacturing costs.

Speaker Change: Versus last year price in absolute dollar terms should moderate as we lap the more favorable pricing trends from 2023.

Speaker Change: Short term incentive compensation expense was about $1 7 billion in 2023.

Andrew Robert John Bonfield: While we anticipate $1.2 billion in 2024, we expect the benefit of that low expense will be offset by increases in SG&A and R&D expenses as we continue to invest in strategic initiatives aimed at future long-term profitable growth. Investments are focused on services, new product introductions, and ACE. We also anticipate there may be some negative marginal impact due to MIGS this year. I'll explain.

Speaker Change: While we anticipate $1 2 billion in 2024.

Speaker Change: We expect the benefit of that LOE expense will be offset by increases in SG&A and R&D expenses as we continue to invest in strategic initiatives aimed at future long term profitable growth.

Speaker Change: Investments are focused and services new product introductions and ace.

Speaker Change: We also anticipate there will may be some negative margin impact due to mix this year.

Speaker Change: I'll explain.

Andrew Robert John Bonfield: During 2023, when availability was somewhat challenged, we biased our production and shipments to products with the highest OPEC potential. Given that availability has improved, we anticipate a more normalized mix of products in 2024. We may also see an impact on margins from the mix of different segments as we anticipate sales in 2024 will be slightly more weighted towards energy and transportation than they were in 2023. Moving on, we expect to be within the top half of our updated MENT free cash flow target range of 5 to 10 billion dollars. As you consider our cash position, keep in mind the $1.7 billion cash outflow in the first quarter related to the payout of last year's incentive compensation expenditure. We also anticipate restructuring charges of three to four hundred and fifty million dollars this year. Finally, we expect a global effective tax rate in the range of 22.5% to 23.5%, an increase versus the 21.4% in 2023.

Speaker Change: During 2023 when available <unk> was somewhat challenged we bias our production and shipments to products with the highest OPEC potential.

Speaker Change: Given that availability has improved we anticipate a more normalized mix of products in 2024.

Speaker Change: We may also see an impact on margins from the mix of different segments. As we anticipate in sales in 2024 will be slightly more weighted towards energy and transportation than they were in 2023.

Moving.

Speaker Change: <unk> on we expect to be within the top half of our updated I mean free cash flow target range of $5 billion to $10 billion.

Speaker Change: As you consider our cash position keep in mind, the $1 7 billion cash outflow in the first quarter related to the payout of last year's incentive compensation expense.

Speaker Change: We also anticipate restructuring charges of $3 million to $450 million a share.

Speaker Change: Finally, we expect global effective tax rate in the range of $22 five to 23, 5% an increase versus the 21, 4% in 2023.

Speaker Change: Now on slide 20, our expectations for the first quarter, starting with the top line.

Andrew Robert John Bonfield: Now on slide 20, our expectations for the first quarter, starting with the top line. We expect first quarter sales and revenues to be broadly similar to the prior year. We anticipate price to be favorable, although significantly less in absolute dollar terms than had occurred through 2023. We expect demand to remain healthy. However, we anticipate a slightly lower deal inventory bill for machines in the first quarter compared to a $1.1 billion build in the first quarter of 2023. This will act as a headwind for Seoul.

Speaker Change: We expect first quarter sales and revenues to be broadly similar to the prior year.

Speaker Change: We anticipate price to be favorable although significantly less in absolute dollar terms that had occurred through 2023.

Speaker Change: We expect demand to remain healthy however, we anticipate a slightly lower deal inventory build for machines in the first quarter compared to a $1 $1 billion build in the first quarter of 2023.

Speaker Change: This will act as a headwind to sales.

Speaker Change: At the segment level in construction industries, we anticipate flattish to slightly higher first quarter sales versus the prior year, primarily due to favorable price.

Andrew Robert John Bonfield: At the segment level, in construction industries, we anticipate flattish to slightly higher first quarter sales versus the prior year, primarily due to favorable price. We anticipate lower sales in resource industries compared to the prior year driven by lower volume, partially offset by favorable price. In energy and transportation, we expect flashy.

Speaker Change: We anticipate lower sales in resource industries compared to the prior year, driven by lower volume, partially offset by favorable price.

Speaker Change: In energy and transportation, we expect flattish.

Andrew Robert John Bonfield: Slightly higher sales versus the prior year with updated favorable volume benefiting, The Upside Scenario, On margins, we expect the enterprise-adjusted operating profit margin in the first quarter to be broadly similar to the first year prior. Price should more than offset manufacturing costs as price actions from 2023 roll into 2024. We expect the price will be low in absolute dollar terms versus the prior year.

Speaker Change: Slightly higher sales versus the prior year with updates of favorable volume benefiting.

Speaker Change: The upside scenario.

Speaker Change: Our margins, we expect the enterprise adjusted operating profit margin first quarter to be broadly similar to the first prior year.

Speaker Change: Price should more than offset manufacturing cost as price actions from 2023 roll into 2024.

Speaker Change: We expect price will be low in absolute dollar terms versus the prior year.

Andrew Robert John Bonfield: We anticipate manufacturing costs to increase compared to last year, principally impacted by cost absorption, as we do not expect an inventory build like we saw in the first quarter of 2023. We also anticipate an increase in SG&A and R&D expenses related to the Strategic Investment. By segment, in the construction industries, we anticipate a similar margin as compared to the prior year. We expect price... to offset strategic investment spend and slightly higher manufacturing costs, including cost absorption. In resource industries, we expect a lower margin compared to the prior year, impacted by lower volume, partially offset by favorable price. In energy and transportation, we anticipate a similar margin versus the prior year, a slightly stronger price should be offset by higher manufacturing costs. Turning to slide 21, let me summarize. A just-to-profit per share of $21.21 exceeded our previous full-year record by 53%.

Speaker Change: <unk> manufacturing costs to increase compared to last year, principally impacted by cost absorption as we do not expect an inventory build like we saw in the first quarter of 2023.

Speaker Change: We also anticipate an increase in SG&A and R&D expenses related to strategic investment spend.

Speaker Change: By segment in construction industries, we anticipate a similar margin as compared to the prior year.

Speaker Change: We expect priced.

Speaker Change: Offset strategic investments spend and slightly higher manufacturing costs, including cost absorption.

Speaker Change: In resource industries, we expect a lower margin compared to the prior year impacted by lower volume, partially offset by favorable price.

Speaker Change: In energy and transportation, we anticipate a similar margin versus prior year, a slightly stronger price should be offset by higher manufacturing costs.

Speaker Change: Turning to slide 21, let me summarize.

Speaker Change: Adjusted profit per share of $21 21.

Speaker Change: Exceeded our previous full year record by 53%.

Speaker Change: We exceeded the top end of our targeted ranges for adjusted operating profit margin in EMEA <unk> free cash flow.

Andrew Robert John Bonfield: We exceeded the top ends of our targeted ranges for Adjusted Operating Profit Margin and ME&T Free Cash Flow. We have increased the top end of our Adjusted Operating Profit Margin range, and we have raised our ME&T Free Cash Flow target range. We expect to be in the top half of our updated margin and MET free cash flow target ranges in 2024, and we anticipate another year of services growth as we continue to execute our strategy for long-term profitable growth. And with that, we'll take your questions. Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, press star 1 a second time.

Speaker Change: We have increased the top end of our adjusted profit margin range and we have raised <unk> free cash flow target range.

Speaker Change: We expect to be in the top half of our updated margin in EMEA achieved free cash flow target ranges in 2024, and we anticipate another year of services growth as we continue to execute our strategy for long term profitable growth.

Speaker Change: And with that we'll take your questions.

Speaker Change: Thank you thank.

Speaker Change: If you would like to ask a question. Please press star one on your telephone keypad. If you would like to withdraw your question Press Star one a second time.

Operator: Please note, we are only allowing one question per analyst. And your first question comes from the line of Rob Wertheimer with Milius Research. Your line is open. Thank you. My question is on inventory kind of at all levels. You had a healthy D stock in the quarter. I think your volumes are down around four, retail sales are up eight. And so that's nice.

Speaker Change: Please note we are only allowing one question per analyst.

Speaker Change: And your first question comes from the line of Rob Wertheimer with Melius Research. Your line is open.

Rob Wertheimer: Thank you.

My question on inventory kind of at all levels and yet you had a healthy destock in the quarter I think your volumes are down around four retail sales up eight and so that's nice.

Donald James Umpleby: I wanted to see how inventory was versus what you expect out of the business at the dealer level, at your finished goods level, and also at your whip raws, where your own inventory is better elevated. So just, you know, how do you feel the business is performing at those levels? And then what's the path from here, especially with your own inventory?

Rob Wertheimer: I wanted to see how inventory wireless versus what you expect out of the business at the dealer level and your finished goods level and also at your whip raws, where your own inventories, but an elevated so just how do you feel the business is performing at those levels and then what's the path from here, especially on your own inventory. Thank you.

Donald James Umpleby: Thank you. Well, good morning, Rob. Starting with our inventory, you know, as we discussed in previous calls, just because of the supply chain constraints we've had, our internal manufacturing operations are not running as efficiently as I would like. But we believe we still have an opportunity to do a better job there. Certainly, the supply chain constraints have started to ease, and that's made things a bit easier, but we still are dealing with some areas of constraints. So again, I think we have opportunities there, and we'll continue to work on that, trying to get more lean. In terms of dealer inventory, again, we talked about it in our prepared report and remarks. Of course, dealers are independent businesses that make their own decisions, and, you know, their decisions on inventory are a combination of what they see in future demand but also availability, and our ability to reduce lead times allows them and our customers to place orders later.

Speaker Change: Well good morning, Rob starting with our inventory as we discussed in previous calls that because of the supply chain constraints we've had.

Speaker Change: Our internal manufacturing operations are not running as efficiently as I would like we believe we still have an opportunity to do a better job. There certainly the supply chain constraints that started to ease and thats made things a bit easier where we sell are dealing with some areas of constraint. So again I think we have opportunities there and we'll continue to work on that try to get to get more lean in terms.

Speaker Change: A dealer inventory again, we talked about it in our prepared remarks of course dealers are independent businesses make their own decisions.

Speaker Change: Their decisions on inventory or a combination of what they see in future demand, but also availability.

Speaker Change: And our ability to reduce lead times allows them and our customers to place orders later, so again, we've talked about the fact that we don't expect a significant change in dealer inventories in 2024, but again they are independent businesses that will make their own decisions.

Andrew Robert John Bonfield: So again, you know, we talked about the fact that we don't expect a significant change in dealer inventories in 2024, but again, they're independent businesses and will make their own decisions. Yeah, just a couple of things to add. I mean, if you look at Dave's inventory outstanding, Rob, it's running at about 15 to 20 percent higher than historic levels. So that gives us an opportunity over the next several years to work that down in a way that manages, also from a supply-based perspective, not to create undue problems for them in their outlook. So we'll continue to look at that. And then just a mention on dealer inventory, particularly within construction. Dealer inventory is about the middle of the range, the target range we talk about of three to four months. So it's pretty much bang on there. So dealers are holding what we probably would continue to expect them to hold...

Speaker Change: Yeah, just a couple of things Ed I mean, if you look at our days inventory outstanding Rob it's running at about 15% to 20% higher than historic levels. So that gives us an opportunity over the next several years to work that down.

Speaker Change: In a way that manages also from a supply base perspective, not to create undue problems for them in.

Speaker Change: And that outlook. So we will continue to look at that and then just adventure on dealer inventory.

Speaker Change: Particularly within construction.

Speaker Change: Dealer inventory is about the middle of the range of the target range, we talk about three to four months. So it's pretty much bang on there. So dealers are holding more probably we would continue to expect them to <unk>.

Speaker Change: And your next question comes from Michael Feniger with Bank of America. Your line is open.

Andrew Robert John Bonfield: And your next question comes from Michael Feniger with Bank of America. Your line is open. Yes.

Donald James Umpleby: Thank you for taking my question. You guys just reported record sales and earnings. There's a view that many of your businesses are operating at peak levels. I'm curious, when you look at your overall portfolio, especially maybe on a unit basis versus prior cycles, are there areas and regions where you feel like your business is still not operating at peak levels or record levels? Do you feel that as we go into the back half of this year, if rates come down, and financial conditions ease, is there a torque in areas of your business where you feel like a backlog could start to maybe bottom and pick up as those conditions start to get a little bit better through the year? Thank you.

Michael J. Feniger: Yes. Thank you for taking my question you guys just reported a record sales and earnings there's a data at many of our businesses are operating at peak levels. I'm curious when you look at your overall portfolio, especially maybe on a unit basis versus prior cycles other areas and regions, where you feel like your business is still not operator.

Michael J. Feniger: At peak levels of record levels do you feel it as we go into back half of this year if rates come down financial conditions ease.

Michael J. Feniger: Our core areas of our business, where you feel like the backlog constructing maybe bottomed and pick up as those conditions start to get a little bit better after the year. Thank you.

Donald James Umpleby: All right, well, thanks for your question. Maybe we can just talk about some of the areas that we're most excited about as we move forward. And, you know, without putting a time dimension on this, but you know, one of the things that we've talked about is that we believe that the energy transition will increase demand for commodities over time, thereby expanding our total addressable market. So, you know, as we look forward, and you think about the increased adoption of things like EVs and the amount of minerals that will need to be produced by our mining customers to satisfy that demand, we believe that And also, we're very excited about the opportunities around large engines. There's a secular growth trend going on in data centers related to, as I mentioned, cloud computing and generative AI.

Speaker Change: Alright, well thanks for your question, maybe just talk about some.

Speaker Change: Some of the areas that we're most excited about as we move forward and without putting a time dimension on this but what are the things that we've talked about is that we believe that the energy transition.

Speaker Change: It will we will.

Speaker Change: Increased demand for commodities over time, thereby expanding our total addressable market. So.

Speaker Change: As we look forward and you think about the increased adoption of things like Evs and the amount of minerals that will need to be produced by our mining customers to satisfy that demand we believe that.

Speaker Change: Again creates an opportunity for us moving forward over the next few years and also we're very excited about the opportunities around <unk>.

Speaker Change: Large engines, there is a secular growth trend going on in data centers related to as I mentioned related to cloud computing and generous of AI and so we're we're very excited about that we're making an investment to increase our large engine capacity. So again, we believe that is an area of <unk>.

Donald James Umpleby: And so we're very excited about that. We're making an investment to increase our large engine capacity. So again, we believe that this is an area of increase in our total addressable market. And just kind of think about around the world. One of the things we talked about in previous calls is the fact that our market in China is relatively weak. You know, over time, that market has been 5 to 10% of enterprise sales, and we had strong years in China in 2020 and 2021.

Speaker Change: Increasing our total addressable market as well and just kind of think about when you think about around the world and one of the things we talked about in previous calls is the fact that our market in China is relatively weak.

Speaker Change: Over time that market has been 5% to 10% of enterprise sales and we had strong years in China in 2020 in 2021, and we saw a decline in 2022, a further decline in 2023, and we expect that market to still be relatively weak again. This year. So we're not in a situation where we're hitting on all cylinders.

Donald James Umpleby: We saw a decline in 2022, and a further decline in 2023. And we expect that market to still be relatively weak again this year. So, you know, we're not in a situation where we're hitting all cylinders and all markets around the world, both from a product and geographic perspective. Europe is, again, we believe there are opportunities there over time, depending on what happens in the economic cycle. So again, it's not a situation where, if you look around the world, we're hitting, you know, all the cylinders going as well as they can.

Speaker Change: <unk> in all markets around the world.

Speaker Change: Both from a product and geographic perspective, Europe is again.

Speaker Change: We do believe there's opportunities there over time, depending on what happens in the economic cycle. So again, it's not a situation where if you look around the world we're hitting all.

Speaker Change: All the cylinders going as good as they can so we believe we have opportunities here.

Donald James Umpleby: So we believe we have opportunities here. And your next question comes from Tami Zakaria, JP Morgan. Your line is open.

Speaker Change: Your next question comes from Tami Zakaria with Jpmorgan. Your line is open.

Tami Zakaria: Hi, good morning. Thank you so much for taking my question my content as more of a medium to long term.

Donald James Umpleby: Hi, good morning. Thank you so much for taking the time to answer my question. My question is more of a medium to long term in nature.

Donald James Umpleby: So services growth was 5% in 2023. If you want to hit the $28 billion target, it seems like growth would need to accelerate from that to call it a high single-digit percent number over the next three years. So can you help us understand what could drive this acceleration in growth and do you need industry growth to remain positive during these next three years to support that aspiration, or can services grow independent of the end market or industry growth? Well, thank you for your question.

Tami Zakaria: So services growth was 5%.

Tami Zakaria: And if you want to hit the $20 billion target it seems like growth would need tax level.

Tami Zakaria: From that to call. It a high single digit percent number over the next two years early.

Tami Zakaria: So can you help us understand what could drive this acceleration in growth and do you need industry growth remained positive. During these next ges to support that aspiration or Ken services grow and depended on top end market our industrial growth.

Well. Thank you for your question you know we've been pleased by the progress. We've made you recall, we started with that 2016 baseline of $14 billion and we have increased it to $23 billion. Our teams continue to strive to achieve that $28 billion number and one of the things. We said when we laid out the target as we didn't expect it to be in a straight line, we thought it would be relatively <unk>.

Donald James Umpleby: You know, we're pleased by the progress we've made. You recall, we started with that 2016 baseline at $14 billion, and we have increased it to $23 billion. Our teams continue to strive to achieve that $28 billion number. And one of the things we said when we laid out the target is that we didn't expect it to be in a straight line.

Donald James Umpleby: We thought it would be relatively back-end loaded. But, you know, we continue to invest in our digital capabilities, e-commerce. I talked earlier about CBAs and the other things that we're doing. We're working very closely with our dealers as well. So, you know, we do believe that there is an opportunity, regardless of industry growth, to increase services. And, again, we continue to strive to achieve that number.

Tami Zakaria: Back end loaded, but we continue to invest in our digital capabilities E Commerce I talked.

Tami Zakaria: Earlier about Cvs and the other things that we're doing we're working very closely with our dealers as well. So we do believe that there is an opportunity regardless of industry growth to increase services and.

And again, we continue to strive to achieve that number.

Donald James Umpleby: You know, one of the things that... We also noticed that stews were positive as well, and one of the things that impact, of course, our services sales is dealer buying patterns around parts, but we're encouraged by the fact that stews were positive. And your next question comes from David Raso with Evercore ISI. Your line is open. Hi, thank you.

Tami Zakaria: One of the things that we.

Tami Zakaria: We also had noticed.

Tami Zakaria: <unk> were positive as well and one of the things that impacts of course, our services sales as dealer buying patterns around parts, but we're encouraged by the fact that skews were positive.

Tami Zakaria: And your next question comes from David Raso Evercore ISI. Your line is open.

Andrew Robert John Bonfield: First, just a clarification in your answer, if you could. The operating margin guidance, I know you have the sales framework, but just, if you can just help us, do you expect your operating margin to be flat up or down for the year? Um, but my real question is the backlog. I'm just trying to understand the size of the backlog. The relationship it usually has with next year's sales would imply a lot stronger growth than you're forecasting. And I'm just trying to understand. I mean, the orders in the corridor were okay...

David Raso: Hi, Thank you first just a clarification in your answer if you could the operating margin guidance I know you have the sales framework, but just if you can just help US do you expect your operating margins to be flat up or down for the year.

The real question is the backlog I'm, just trying to understand the size of the backlog.

David Raso: The relationship it usually has with next year's sales would imply a lot stronger growth than you're forecasting.

David Raso: And I'm, just trying understand I mean, the orders in the quarter were okay.

Andrew Robert John Bonfield: The dealer inventory drag, right, the growth last year but not growth this year, that's a drag year over year that wouldn't come close to accounting for where the sales would normally be guided for next year with this level of backlog. So I'm just trying to put my head around with that size backlog and flat sales. Is that a concern that, again, the orders were good for the quarter, but you're seeing slower orders coming? Just trying to correlate that backlog to only flat. Thank you.

David Raso: The dealer inventory drag right the growth last year, but not growth. This year, that's a drag year over year.

David Raso: On an account come close really to accounting for.

David Raso: Where the sales would normally be guided for next year with this level of backlog. So I'm just trying to put my head around what that size backlog.

David Raso: <unk> sales is that a concern that again the orders were good for the quarter that youre seeing slower orders coming just trying to correlate that backlog to only flat sales. Thank you.

Speaker Change: Yes, David let me saw in the backlog.

Andrew Robert John Bonfield: Yeah, David, let me start with backlog, and then talk about margin guidance afterwards. On backlog, obviously, backlog conversion varies. The one thing you should always think about is, again, backlog is not a single type of activity. It's not just related to, for example, machines. Some of it's related to large engines, and some of it's related to solar.

Speaker Change: And then talk about margin guidance afterwards on backlog obviously.

Speaker Change: Backlog conversion varies.

Speaker Change: The one thing you should always think about is again backlog is not a single type of activity is not just related to for example machines. Some of it's related to our large engines and some of it's related to solar not all of those elements of the backlog actually all in 2020 for some of those will come.

Andrew Robert John Bonfield: Not all of those elements of the backlog are actually in 2024. Some of those will be converted in 2025 and beyond. So, actually, that's one of the factors, which is a little bit different than maybe versus history, and so why you wouldn't actually necessarily convert that, but that's part of it. Again, just when we talk about guidance and what we're guiding around, around flattish sales, and also around top-off margin ranges, we are talking about ranges of outcomes. Obviously, it's the beginning of the year.

Speaker Change: <unk> in 2025 and beyond so actually that's one of the factors, which is little bit different than maybe versus history.

Speaker Change: So why you wouldn't actually necessarily convert that but thats part of it again, just when we talk about guidance and what we are guiding around around flattish sales and also around top off margin ranges. We are talking about ranges of outcomes. Obviously is at the beginning of the year.

Andrew Robert John Bonfield: We've indicated where there will be some puts and takes, but obviously, performance this year has been exceptional, and our aim is to continue to drive that level of performance. That's what we're focused on, and I think that's what the organization is focused on as well. Transcript Emily Beynon. And your next question comes from Nicole DeBlase with Deutsche Bank. Your line is open. Yeah, thanks. Good morning, guys. Good morning, Nicole.

Speaker Change: We indicated way there will be some puts and takes.

Speaker Change: But obviously performance this year has been exceptional.

Speaker Change: Our aim is to continue to drive to that level of performance.

Speaker Change: That's what we're focused on and nothing Thats, what the organization is.

Speaker Change: Focus on as well.

Speaker Change: And your next question comes from Nicole <unk> with Deutsche Bank. Your line is open.

Nicole: Yeah. Thanks, good morning, guys.

Nicole: Good morning, Nicole.

Andrew Robert John Bonfield: Just a few on parts. So if you could elaborate on the parts decline that you saw in resource, any color on the magnitude of parts growth that you might expect for 24? And then how would you characterize parts inventory levels in the dealer network right now? Thank you.

Nicole: Just.

Nicole: On part so if you could elaborate on the parts decline that you saw in research.

Nicole: Any color on the magnitude of parts spreads that you might expect for 'twenty four and then how would you characterize parts inventory levels in the dealer network right now thank you.

Andrew Robert John Bonfield: Yeah, so as we talked about, I mentioned, part of the decline in pot sales in resource industries was relating to dealer buying patterns. We don't include, obviously, when we talk about dealer inventory, that's machines and engines, it's not actually parts.

Nicole: Yes, so as we talked about.

Nicole: Mentioned part of the decline in part sales in resource industries was relating to dealer buying patterns.

Nicole: We don't include obviously, when we talk about dealer inventory, that's machines and engines, it's not actually parts.

Andrew Robert John Bonfield: And what we did see as availability improved as we went through 2023, we did see dealers reduce their inventory a little bit. It's probably more at normalized levels now. Obviously, they'll continue to monitor it. They make their independent decisions.

Nicole: And we did see as availability improved as we went through 2023.

Nicole: We did see dealers reduced their inventory a little bit.

Nicole: Probably more at normalized levels now.

Nicole: Obviously.

Nicole: We'll continue to monitor that makes it very independent decisions and as we always remind you. It's very complex with over 150 dealers globally and a large number of parts that they order.

Andrew Robert John Bonfield: As we always remind you, it's very complex with over 150 dealers globally and a large number of parts that they order. But they obviously try and optimize their network. Next year, we do expect to benefit from services revenue growth. However, obviously, if we are to achieve our target, we would hope for a little bit of an acceleration versus what we saw in 2023. Obviously, that does depend a little bit on what happens with the dealers and buying patterns and on resources.

But they obviously try and optimize the network.

Nicole: Next year, we do expect benefit.

Nicole: From services revenue growth, obviously, if we are to achieve that target, we would hope for a little bit of an acceleration.

Nicole: Versus what we saw in.

Nicole: In 2023.

Nicole: Obviously that does depend a little bit on what happens with the dealers and buying patents and on resources given the amount of truck utilization.

Andrew Robert John Bonfield: Given the amount of truck utilization, we do expect services revenues to improve as we go through 2024 based on the need for rebuilds, particularly for large mining trucks. So, that's where we are on services. And your next question comes from Mig Dobre with Baird. Your line is open. Yes, thank you. Thank you for the question.

We do expect so.

Nicole: <unk> revenues to improve as we go through 2024.

Nicole: Based on the need for rebuilds.

Nicole: Particularly for large mining trucks so.

Nicole: That's where we on services.

Nicole: And your next question comes from Mig <unk> with Baird. Your line is open.

Mig: Thank you. Thank you for the question.

Mig: Go back to construction.

Andrew Robert John Bonfield: I'm curious to get your thoughts in terms of how you think about margin here. It sounds like you're guiding Q1 flat margin year over year, which would be tremendous given the comp there. Are margins sustainable at this level? Is there any insight you can give us as to how you see the year progressing beyond Q1? Yeah, there's going to be a couple of things, Mig, which are going to happen as we go through 2024. The one that's a little bit hard to predict at the moment is any potential mixed impact.

Mig: Curious to get your thoughts in terms of how you think about margin here.

Mig: You're guiding Q1 <unk>.

Mig: That margin year over year, which would be tremendous given given the comp there.

Mig: Our margin sustainable at this level is there any any insight you can give us into how you see the year progressing beyond Q1.

Speaker Change: Yes, that's going to be a couple of things make which are going to happen as we go through.

Speaker Change: 2024.

One that's a little bit hard to predict at the moment as any potential mix impact.

Andrew Robert John Bonfield: As we said, when we were going through 2023, we biased our production towards machines with the highest levels of OPAC. That's what customers wanted as well, so we met customer demand, particularly for those products.

Speaker Change: As we said.

Speaker Change: When we were going through 2023, we biased our production towards machines with the highest levels of OPEC.

Speaker Change: That's what customers wanted as well so it met customer demand, particularly for those products. We expect a more normal mix of product that may have some impact on margins.

Andrew Robert John Bonfield: We expect a more normal mix product, and that may have some impact on margins as we go through the year. Obviously, it's a little bit difficult to predict that at this stage, given that we're at the beginning of the year. But that potentially is the one.

As we go through the year, obviously, it's a little bit difficult to predict.

Speaker Change: At this stage given the way I need to at the beginning of the year.

Speaker Change: But.

Speaker Change: That potentially is the one we will continue to invest in the business we.

Andrew Robert John Bonfield: We will continue to invest in the business. We are continuing to drive services and growth. As you know, that's possible upside potential, particularly in construction, where we have the largest opportunity. So those are the sort of big things, big buckets I would look at as we think through 2024. And both of those, one will be slightly negative, and the other one, possibly, will be slightly more positive. So those are the sort of puts and takes at the moment. 2019 The Ultimate Parody Site!

Speaker Change: We are continuing to drive our services and services growth as you know that's a possible upside potential, particularly in construction, where we had the largest opportunity. So those are the sort of big things are big buckets I would look at.

Speaker Change: As we think through 2024 and both of those one will be slightly negative and the other one possibly will be slightly more positive. So those are the sort of puts and takes at the moment.

Donald James Umpleby: All rights reserved. And your next question comes from Jerry Revich with Goldman Sachs. Your line is open. Transcribed by https://otter.ai. Yes, hi.

Speaker Change: And your next question comes from Jerry Revich with Goldman Sachs. Your line is open.

Jerry Revich: Yes, hi, good morning, everyone.

Jerry Revich: Good morning, Jerry.

Operator: Good morning, everyone. Morning, Jerry. Morning, Jerry.

Jerry Revich: Jim Andrew I'm wondering if you just say more about the increase to the free cash flow guidance.

Operator: Jim, Andrew, I'm wondering if you could just say more about the increase in free cash flow guidance, a bigger increase there than in the margin framework, and you know, we're a couple of years away from where you folks in 2020 will be below the $5 billion number, so can you just talk about what's playing out better than you folks expected to drive the much stronger outlook for free cash flow conversion, and obviously, we're seeing a little Thanks. You bet! Well, Jerry, you recall when we launched our strategy in 2017, you know, we really focused very heavily on OPEC, Operating Profit After Capital Charge, and we're really challenging our teams to work to ensure that we get a return for every dollar of capital that we invest, and we've also worked hard to reduce our structural costs.

Jerry Revich: Bigger increase there then on the margin framework.

Speaker Change: Couple of years away where.

Speaker Change: You folks in 2020, we're below the $5 billion number. So can you just talk about whats playing out better than you folks expected to drive the much stronger outlook for free cash flow conversion and obviously, we're seeing it in the performance here as well, but I'm wondering if you just expand on those comments on the conference through the cycle.

Speaker Change: You bet Jerry you recall, when we launched our strategy in 2017, we really focused very heavily on OPEC operating profit after capital charge and we're really challenging our teams to work to ensure that we get a return for every dollar of capital that we invest and we've also worked hard to reduce our structural costs and again with that.

Operator: And again, with OPEC as our measure, that obviously helps us produce more cash. You know, again, we demonstrated the ability to produce higher free cash flows. If I remember the numbers correctly, you know, between 2019 and 2022, we produced $5 to $6 billion of free cash flow, and then, you know, in 2020, we had a 22% decline in our top line, and even that year, even during the COVID year, when our top line dropped more than 20%, we still produced $3 billion of free cash flow. So again, we have the whole organization based on OPEC, and that's working And, you know, that is part of the reason why we've upped the bottom end of the range because we are now more confident that OPEC will flow through to the bottom line.

<unk> as our measure that obviously helps us produce more cash.

Again, we demonstrated.

Speaker Change: <unk> ability to produce higher free cash flows I remember the numbers correctly between 22019 and 2022, we produced $5 to $6 billion of free cash flow and then the <unk> in 2020, we had a 22% decline in our topline and even that year, even during the COVID-19 year, when our top line dropped more than 20%, we still produced 3 billion.

Speaker Change: Free cash flow. So again, we have the whole organization based on OPEC and Thats.

Speaker Change: Working all of those levers every single day and that helps us drive increased free cash flow.

Speaker Change: Yes that is part of the reason why we've up the bottom end of the range.

Speaker Change: Because we are now more confident that that OPEC will flow through through to the bottom line.

Operator: Obviously, with margins, the issue you have there is that in the period of time when revenues decline, margins become an impact of, you know, a function of what happens from a gross margin perspective. Obviously, with free cash flow, we can generate more free cash flow by actually using up some of our working capital and bringing that back through, and that's one of the things we expect as well, if that happens. I'm really glad you asked that question. I think, honestly, that's one thing that maybe is underappreciated about our performance.

Speaker Change: Obviously with margins.

Speaker Change: The issue you have there is.

Speaker Change: And the period of time, where revenues decline margins become an impact of.

Speaker Change: A function of what happens from a gross margin perspective actually on free cash flow, we can generate more free cash flow by actually using up some of that working capital.

Speaker Change: Bringing that back through and Thats one of the things we've.

Speaker Change: We expect as well and if that happens so I'm really glad you asked that question I think honestly. That's one thing that may be underappreciated about our performance is just our ability to produce cash and the way we've really transformed the business over the last few years to produce higher free cash flow is more consistently.

Donald James Umpleby: It's just our ability to produce cash, and the way we've really transformed the business over the last few years to produce higher free cash flow is more consistent. www.circlelineartschool.com. Your next question comes from Angel Castillo with Morgan Stanley. Your line is open. Hi, good morning, and thanks for taking my question. I just wanted to maybe continue on that note. I wanted to understand a little bit, maybe the reasoning or the thought process around not lowering the kind of low end of your operating profit margin range.

Speaker Change: And your next question comes from Angel Castillo with Morgan Stanley. Your line is open.

Angel Castillo: Hi, good morning, and thanks for taking my question I just wanted to maybe continue on that note I wanted to understand a little bit maybe the reasoning or the thought process around.

Angel Castillo: Lowering the.

Angel Castillo: Kind of low end of your operating profit margin range that you talked about the gross margin and you mentioned this in the prior response, but gross margin dynamic maybe on volumes potentially also leading to a little bit more challenged lower end of the range. So maybe what gives you confidence in keeping that.

Andrew Robert John Bonfield: You talked about gross margin, and you mentioned this in the prior response, but gross margin dynamics maybe on volumes potentially leading to a little bit more challenging lower end of the range. So maybe what gives you confidence in keeping that rather than lowering that as well, and how do you kind of think about a wider range overall through the cycle rather than kind of a step higher? Yeah, so one of the things you'll have seen over the last couple of years is the improvement in gross margins. Obviously, you know, effectively, with the progress of the margin range, what happens is that leverage is what benefits us as we go through, which gives us more confidence now that there's more opportunity from a leverage perspective to drive the top end of the range. But that obviously means on a declining volume basis, there's more pressure. So that really was the reason why we kept the bottom end of the range as it was.

Angel Castillo: Other than than lowering that as well and how do you kind of think about a wider range overall through the cycle rather than kind of a step higher.

Speaker Change: Yes, so I mean.

Speaker Change: One of the things you would have seen.

Speaker Change: Over the last couple of years is the improvement in gross margins.

Speaker Change: Obviously.

Speaker Change: <unk> with the progressive margin range.

Speaker Change: What happens obviously is.

Speaker Change: The leverage is what benefits us.

Speaker Change: As we go through which gives us more confidence now that there's more opportunity from a leverage perspective.

Speaker Change: To drive the top end of the range, but that obviously means on a on a declining volume basis theres more pressure. So that really was the reason why we kept the bottom end of the range as it was interestingly if you go back to the previous ranges. This is within the top end of the range now is virtually within.

Andrew Robert John Bonfield: Interestingly, if you go back to the previous ranges, this is within the top end of the range now, and it is virtually within a very, very marginal difference to the old margin target ranges that we had before. And your next question comes from Chad Dillard with Bernstein. Your line is open. All right, good morning, guys. Morning, Chad.

Speaker Change: Very very marginal difference to.

Speaker Change: The old margin target ranges that we had before.

And your next question comes from Chad Dillard with Bernstein. Your line is open.

Speaker Change: Yes.

Chad Dillard: Hi, good morning, guys.

Chad Dillard: Morning, Jeff.

Chad Dillard: So on the price cost.

Andrew Robert John Bonfield: So on the price cost, um, so I think, you know, in your four-year guide, you've talked about price modestly exceeding manufacturing costs for the full year, but then also you talk about, I guess, um, you know, some carryover benefit in the first part, so just trying to understand the exceedance on that, and just confirming, do you expect price cost to be positive through each quarter through the balance of the year? Yeah, so what we are guided to is that we expect the price to exceed manufacturing costs for the full year. We expect prices to be positive in the first half of the year, and more positive in the first half of the year because of carryover pricing. Obviously, there will be some other factors that go through there.

Speaker Change: One more for you.

Speaker Change: Our guide we talked about smartphone even among National Hospital for Europe, and then also talk about I guess.

Speaker Change: Welcome to <unk> first park, so I'm, just trying to understand the cadence on that.

The final rule.

Speaker Change: Price cost to be positive for each quarter through the balance of the year.

Speaker Change: Yes, so I think what we guided to is that we expect price to exceed manufacturing costs for the full year, we expect price to be positive in the first half of the year.

More positive in the first half of the year because of the carryover pricing obviously that.

Speaker Change: There will be some other factors that go through that geographic mix. For example was positive this year.

Andrew Robert John Bonfield: Geographic mix, for example, was positive this year, but it may not be as positive as we go through the second part of the year. So those are sort of mixed things that can happen at this stage.

Speaker Change: That may not be as positive as we go through the second part of the year. So those are the sort of mixed things that can happen.

Speaker Change: At this stage, we're not giving you a prediction a firm prediction, we know what we think for overall for the full year, but most of that price benefit will come through in the first half.

Andrew Robert John Bonfield: We're not giving you a prediction, a firm prediction. We know what we think for the full year, but most of that price benefit will come through in the first half. And your next question comes from Steve Volkmann with Jeffreys. Your line is open. Great. Good morning, everybody. Thanks for fitting me in. Good morning, State.

Speaker Change: Your next question comes from Steve Volkmann with Jefferies. Your line is open.

Stephen Edward Volkmann: Great. Good morning, everybody. Thanks for fitting me in.

Stephen Edward Volkmann: Good morning, Steve.

Stephen Edward Volkmann: Jim I wanted to go back if I could to a response to one of the earlier questions, where you talked about.

Donald James Umpleby: Jim, I wanted to go back, if I could, to a response to one of the earlier questions where you talked about supply chain having kind of improved a little bit, but it's still causing productivity issues. And I guess I'm trying to think that through as we go forward. If supply chain continues to normalize, is there any reason to think we won't get that productivity back?

Stephen Edward Volkmann: Supply chain has kind of improved a little bit, but is still causing productivity issues and I guess I'm trying to think that through as we go forward. If supply chain continues to normalize is there any reason to think we wouldn't get that productivity back.

Donald James Umpleby: Well, certainly that's what we're driving our teams to do. And, you know, one of the things we talked about, of course, is that we still have constraints on large engines and that, you know, we're not clearly not running as lean as I would like in that area. And, of course, when you have some issues with engines, that can also impact machines as well, just because of the dynamics of shipping engines to our machine lines.

Stephen Edward Volkmann: It will certainly that's what we're driving our teams to do and one of the things. We talked about of course is that we have still constraints and large engines and that we're not clearly youre not running as lean as I would like in that area and of course when you. When you have some issues in engines that can also impact machines as well just because of that.

Stephen Edward Volkmann: The dynamics of shipping engines to our to our machine lines. So certainly our goal is to become more lean in to get back into.

Donald James Umpleby: So certainly, our goal is to become more lean and to get back into a, you know, a better operating cadence. And it has improved, and supply chain conditions have improved, but we still have a ways to go. But again, it's difficult to predict how long it'll take that to happen.

Stephen Edward Volkmann: A better operating cadence.

Stephen Edward Volkmann: It has improved and supply chain conditions have improved but we still have a ways to go but.

Stephen Edward Volkmann: Difficult to predict how long it will take that to happen our engine.

Donald James Umpleby: Our engine investment, as we mentioned earlier, is a multi-year investment to increase that capacity for both new engines and for parts. And I think that'll be an important element of us achieving better lean operations and getting some of that inventory out internally. And your next question comes from Kristen Owen with Oppenheimer. Your line is open. Great, thank you so much for taking the question. Just a longer-term question here related to the hydrogen fuel cell pilot program.

Stephen Edward Volkmann: Investment as we mentioned earlier is a multi year investment to increase that that capacity for both new engines and for parts and that I think that'll be an important element of us.

Stephen Edward Volkmann: Achieving.

Stephen Edward Volkmann: Better lean operations and getting some of that inventory out internally.

Stephen Edward Volkmann: And your next question comes from Christopher <unk> with Oppenheimer. Your line is open.

Christopher: Great. Thank you so much for taking the question.

Christopher: Longer term question here related to the hydrogen fuel cell.

Christopher: Pilot program, just given that secular growth opportunity in data center.

Donald James Umpleby: Just given that secular growth opportunity in data centers, how quickly can you commercialize this? And should we expect the business model for CAT to be more systems integration and components? Or is there some additional vertical integration and like the balance of systems that is being supported by this capital campaign that you outlined? Yeah, again, most of the capital, the investments that we're making around large engines, around parts, and new engines, that's really what the focus of it is. Yeah, and so overall, you know, when we look out, one of the opportunities for us, particularly when Jim was talking about distributed generation, was the fact that obviously grid stability is going to be an issue, and one of the things that's going to be needed is there are whole system projects that will be part of that.

Christopher: Quickly can you commercialize this and should we expect the business model for cat to be more systems integration and components or is there. Some additional vertical integration in like the balance of systems that is being supported by this capital campaign that you outlined.

Christopher: Again, most of the capital that the investments, we're making around large engines around parts and new engine Thats really what the focus of it is yes.

Christopher: And so I mean overall when we look out one of the opportunities for us, particularly when Jim was talking about distributed generation was the fact that obviously grid stability is going to be an issue.

Christopher: And one of the things that is going to be needed as there are system whole system projects that will be part of that so I think there is definitely an opportunity for us there.

Andrew Robert John Bonfield: So I think there is definitely an opportunity for us there to think more broadly about services in those environments as well. We have time for one more question. Thank you. And today's final question comes from Stanley Elliott with Stiefel. Your line is open.

Christopher: Two to think more broadly about services in those environments as well.

Christopher: We have time for one more question.

Christopher: Thank you and today's final question comes from Stanley Elliott with Stifel. Your line is open.

Stanley Stoker Elliott: Hey, good morning, everyone. Thank you very much for fitting me in and congratulations.

Donald James Umpleby: Thank you very much for fitting me in, and congratulations. Can you talk a little bit more about the free cash flow? I mean, you've got $1 billion to $2 billion more additional that you're looking at and targeting.

Stanley Stoker Elliott: And could you talk a little bit more about the free cash flow, having to get $1 billion to $2 billion more additional that you're looking at and targeting you have done a very nice job of increasing the dividend on a steady basis should we think of this as accelerated repurchase activity into 'twenty. Four is there something on the M&A front any color there would be it would be greatly helpful. Thank you.

Donald James Umpleby: You've done a very nice job of increasing the dividend on a steady basis. Should we think of this as accelerated repurchase activity into 2024? Is there anything on the M&A front? Any color there would be greatly helpful.

Donald James Umpleby: Thank you. Yeah, really, what we're continuing to talk about is the fact that we, you know, we will, we intend to return essentially all free cash flow to shareholders over time through the accommodation of dividends and sure repurchases. In terms of M&A, you know, we're, we're, we're always open to opportunities. But Frankly, we believe we have outstanding opportunities to grow our business organically. And so while we have made some relatively small acquisitions to do things like gain some technology, or we think about the Weir SPM and oil and gas to expand our product line a bit, we're really focused on our grant organically growing our business because we think we have great opportunities around services. We've talked about the secular growth trend and around data centers, we've, we've, you know, LNG, additional LNG exports, the fact that the energy transition will create opportunities for commodities to increase over time.

Stanley Stoker Elliott: Yes, really we continue to talk about is the fact that we will we intend to return essentially all free cash flow to shareholders over time through a combination of dividend dividends and share repurchases in terms of M&A.

Stanley Stoker Elliott: We're always open to opportunities, but frankly, we believe we have outstanding opportunities to grow our business organically and so while we have made some relatively small acquisitions to do things like gain some technology or do you think about the way our SPM in oil and gas.

Stanley Stoker Elliott: To expand our product line a bit we are really focused on our grant organically growing our business. Because we think we have great opportunities around services, we've talked about the secular growth trend in around data centers.

Stanley Stoker Elliott: LNG conditional LNG exports.

Stanley Stoker Elliott: That the energy transition will create opportunities for.

Stanley Stoker Elliott: Commodities increase over time, so again, our primary focus is on organically growing our business.

Speaker Change: Okay with that just would like to thank everyone for joining the call I. Appreciate all your questions I would like to close by thanking our global team for another great quarter, and just an exceptional record year as we discussed we are increasing the top end of our target range for adjusted operating profit margins and we've raised our target range for <unk> free cash flow and this reflects continuing healthy customer demand.

Donald James Umpleby: So again, our primary focus is on organically growing our business. Okay, with that, I just would like to thank everyone for joining the call. I appreciate all your questions. I'd like to just close by thanking our global team for another great quarter and another exceptional record year. As we discussed, we're increasing the top end of our target range for adjusted operating profit margins, and we've raised our target range for MENT free cash flow, and this reflects continuing healthy customer demand as well as our strong operating performance. We remain focused on executing our strategy and continuing to invest for long-term profitable growth. Again, we appreciate you joining us. Stay safe. Thanks, everybody.

And as well as our strong operating performance and we remain focused on executing our strategy and continue to invest for long term profitable growth.

Speaker Change: I appreciate you joining us stay safe.

Speaker Change: Thanks, everybody and thank you, Jim Andrew and everyone, who joined the call today, a replay of our call will be available online. Later. This morning, we will also post the transcript on our Investor Relations website as soon as its available you'll also find our fourth quarter results video with our CFO and an SEC filing with our sales to users data.

Speaker Change: Click on investors that caterpillar dot com and then click on financials to view those materials. If you have any questions. Please reach out to Robert <unk> Investor Relations General phone numbers 390, 670, 5494 of 549 now lets turn the call back to Abbvie to conclude our call.

Operator: And thank you, Jim, Andrew, and everyone who joined the call today. A replay of our 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 fourth-quarter results video with our CFO and an SEC filing with our sales to users data. Click on investors.caterpillar.com and then click on financials to view those materials.

Abbvie: Thank you, ladies and gentlemen that concludes our call. We thank you for joining you may now disconnect.

[music].

Operator: If you have any questions, please reach out to Rob or me. Investor Relations' general phone number is 309-675-4549. Now, let's turn the call back to Abby to conclude our call. Thank you. Ladies and gentlemen, that concludes our call. We thank you for joining. You may now disconnect.

Abbvie: Okay.

Abbvie: [music].

Abbvie: Okay.

Abbvie: [music].

Abbvie: Yes.

[music].

Abbvie: Yes.

Abbvie: [music].

Abbvie: Okay.

Abbvie: Yes.

Abbvie: [music].