Q1 2024 Caterpillar Inc Earnings Call
Welcome to the first quarter 'twenty 'twenty four 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. Please go ahead.
Thanks, Todd Good morning, everyone and welcome to Caterpillar first quarter of 2024 earnings call I'm, Ryan Fiedler, Vice President of Investor Relations Joy.
Joining me today are Jim <unk>, Chairman and CEO, Andrew Bonfield, Chief Financial Officer, Kyle athletes Senior Vice President of the Global Finance Services Division and Rob Rengel Senior director of IR. During our call we will be discussing the first quarter earnings release, we issued earlier today you can find our slides the news release.
And a webcast recap at investors Dot caterpillar dot com under events and presentations.
The content of this call is protected by U S and international copyright law, any rebroadcast retransmission reproduction or distribution of all or part of this content without caterpillar prior written permission is prohibited.
Moving to slide two.
During our call today, we will make forward looking statements, which are subject to risks and uncertainties.
So make assumptions that could cause our actual results to be different than the information we're sharing with you on this call. Please.
Please refer to the 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 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 the earnings call slides.
Now I'll turn the turn the call over to our chairman and CEO, Jim up will be.
Thanks, Ryan Good morning, everyone. Thank you for joining us I'd like to start by thanking our global team for delivering another strong quarter, including higher adjusted operating profit margin record adjusted profit per share and strong M E N T free cash flow.
Our strong balance sheet and M E N T free cash flow allowed us to deploy a record $5 $1 billion of cash for share repurchases and dividends in the first quarter.
Our results reflect the continuation of healthy demand for our products and services across most of our end markets.
We remain focused on executing our strategy and continue to invest for long term profitable growth.
I'll begin with my perspective about our performance in the quarter. I'll then provide some insights about our end markets followed by an update on our sustainability journey.
It was another strong quarter sales and revenues were about flat in the quarter versus last year broadly in line with our expectations services revenues increased in the quarter.
Our adjusted up Brady profit increased by 5% to $3 $5 billion.
Adjusted operating profit margin was slightly better than we had expected and improved to 22, 2% up 110 basis points versus last year.
We achieved a record adjusted profit per share of $5 60 up 14% we.
We also generated strong M E N T free cash flow in the quarter of $1 $3 billion. In addition, our backlog increased to $27.9 billion up $400 million versus the fourth quarter of 2023.
We continue to expect 2020 for sales and revenues to be broadly similar to the record 2023 level. We have revised our full year 2024 segment expectations to reflect a slightly stronger topline in energy and transportation offset by softening in the European market for construction industries.
We anticipate services to be higher in 2024, as we strive to achieve our 2026 target of $28 billion.
For the year, we continue to expect adjusted operating profit margin in M. E T free cash flow to be in the top half of our target ranges.
Turning to slide four in the first quarter of 2020 for sales and revenues remained about flat at $15 $8 billion compared to our expectations sales volume was slightly lower what price realization, including geographic mix was better than we anticipated.
Impaired to the first quarter of 2023 overall sales to users decreased 5%. This was slightly lower than we expected mainly due to weakness in Europe for construction industries.
And transportation continue to show strength, where sales to users increased 9%.
For machines, which includes construction industries and resource industries sales to users declined by 9%.
Focusing on construction industries sales to users were down 5% in North America, our largest geographic region for construction industries sales to users increased as expected and demand remained healthy for both nonresidential and residential construction <unk>.
Construction projects as well as government related infrastructure continue to benefit nonresidential demand.
Although residential sales to users in North America were down slightly demand for new housing remains strong sale.
Sales to users declined in the Amy primarily due to weakness in Europe related to residential construction in economic conditions.
Latin America, and Asia Pacific sales to users also saw some declines.
In resource industries sales to users declined 17% in the first quarter compared to a very strong first quarter in 2023.
Mining as well as heavy construction and quarry and aggregates were lower mainly due to softness in off highway and articulated trucks that we mentioned during our last earnings call.
In energy and transportation sales to users increased by 9%.
Oil and gas sales to users benefited from strong sales of turbines and turbine related services.
We also saw increased sales of reciprocating engines in the gas compression and well servicing oil and gas applications.
Power generation sales to users grew as market conditions remain favorable including strong data center growth.
Transportation sales to users increased while industrial declined as we expected from strong levels last year.
In total dealer inventory increased by $1 $4 billion versus the fourth quarter for machines dealer inventory increased by $1 $1 billion, which was slightly higher than our expectations largely due to sales to users being modestly lower than anticipated.
The increase in machine dealer inventory is consistent with normal seasonal patterns of which construction industries' products accounted for the majority of the increase.
The total level of machine dealer inventory is comfortably within the typical range.
As I mentioned backlog increased to $27 $9 billion up $400 million versus the fourth quarter of 2023 led by energy and transportation.
Backlog remains elevated as a percentage of revenues compared to historical levels.
Adjusted operating profit margin increased to 22, 2% in the first quarter of 110 basis point increase over last year, which was slightly better than we anticipated. This.
This was primarily due to better than expected manufacturing costs, mainly related to freight.
Moving to slide five we generated strong M E T pre cash flow of $1 $3 billion in the first quarter, we deployed $5 $1 billion of cash for share repurchases and dividends in the first quarter, including the initiation of a $3 5 billion dollar et cetera accelerated share repurchase program, which may last up to nine months.
We remain proud of our dividend aristocrat status and continue to expect to return substantially all EMEA and T pre cash flow to shareholders over time through dividends and share repurchases.
Now on slide six I'll describe our expectations moving forward.
We expect a continuation of healthy demand across most of our end markets for our products and services.
We continue to anticipate 2020 for sales and revenues to be broadly similar to the record 2023 level.
As I mentioned, we expect services to continue to grow in 2024.
We currently do not anticipate a significant change in dealer inventory of machines in 2024 compared to a 700 million dollar increase in 2023.
This is expected to be a headwind to sales in 2024.
As a reminder, dealers are independent businesses and manage their own inventories.
The vast majority of dealer inventories and energy and transportation are backed by firm customer orders.
The timing of these products being recognized as sales to users is impacted by dealer packaging and commissioning, which is why it is difficult to predict dealer inventory in E N T.
This is why we have become more explicit about the differentiation between machine dealer inventory in total dealer inventory.
As I mentioned, we anticipate that our 2024 results will be within the top half of our target ranges for both adjusted operating profit margin and Damien T free cash flow.
Our strong results continued to reflect the diversity of our end markets as well as the disciplined execution of our strategy for profitable growth.
Now I'll discuss our outlook for key end markets, starting with construction industries.
In North America. After a very strong 2023, we continue to expect demand in the region will remain healthy in 2024 for both nonresidential and residential construction.
We anticipate nonresidential construction to remain at similar levels to slightly higher demand levels.
Appeared to last year due to construction projects as well as government related infrastructure resident.
Residential construction demand is expected to be flat to slightly down versus last year, which remains strong in comparison to historical levels.
In Asia Pacific outside of China, We are seeing some softening in economic conditions.
We anticipate demand in China will remain at a relatively low level for the above 10 ton excavator industry.
In the Amy we anticipate that weak economic conditions in Europe will continue somewhat offset by strong construction activity in the middle East.
Construction activity in Latin America remains mixed but overall, we're expecting modest growth.
In addition, we expect the ongoing benefit of our services initiatives will positively impact construction industries in 2024.
Next I'll discuss resource industries after strong performance in 2023 in mining as well as heavy construction and quarry and 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 resource industries dealer inventories during 2024 versus a slight increase last year.
While we continue to see a high level of quoting activity overall, we anticipate lower order rates as customers display capital discipline.
We expect to see higher services revenues, including robust rebuild activity.
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 to energy and transportation.
In oil and gas, we expect reciprocating engines and services to be about flat. After a strong 2023 performance, we expect reciprocating gas compression demand to be higher in 2024 than it was in 2023.
Well servicing demand in North America America is expected to soften.
Cat reciprocating engine demand for power generation is expected to remain strong largely due to continued data center growth relating to cloud computing and generative AI.
Last quarter I mentioned, we are making a multi year capital investment and our large reciprocating engine division, including increasing capacity for both new engines and aftermarket parts.
This investment will approximately double output for large engines and aftermarket parts as compared to 2023.
We leverage these large engines across a variety of applications, including data centers oil and gas large mining trucks and distributed power generation.
For solar turbines are backlog and quoting activity, both remained strong for oil and gas and power generation.
As we said previously industrial demand is expected to soften relative to a strong 2023.
In transportation, we anticipate high speed Marine new increase as customers continue to upgrade aging fleets.
Moving to slide seven I'll provide an update on our sustainability journey.
We are contributing to our reduced carbon future and continued to invest in new products technologies and services to help our customers achieve their climate related objectives.
In January we announced the signing of an electrification the strategic agreement with CRH to advance the deployment of Caterpillar zero exhaust emission solutions.
T. R. H is the number one aggregates producer in North America in the first company in that industry to sign such an agreement with caterpillar.
The agreement is focused on accelerating the deployment of Caterpillar 70 to 100 ton class battery electric off highway trucks and charging solutions.
See our HIV in North America.
Through the agreement C. R. H will participate in caterpillars early learner program for battery electric off highway trucks.
In February Caterpillar oil and gas announced the launch of the cat hybrid energy storage solution to help drillers and operators cut fuel consumption.
Our total cost of ownership and reduce emissions and oil and gas operations the.
The custom designed energy storage system stores excess power from the job site and then discharge as it is needed.
In a hybrid system that combines the cat hybrid energy storage solution and the natural gas fueled generator set the transient responses, even quicker than a conventional diesel only rigs to.
Depending upon site configuration, the hybrid energy storage solution has proven to deliver up to 30% people cost savings with natural gas, 85% fuel cost savings with fuel gas and up to an 80% reduction in nitrogen oxides.
Carbon dioxide equivalent reductions of up to 11% and 7% are possible with natural gas and fuel gas respectively.
In addition, we look forward to issuing our 19th annual sustainability report in May.
The material in a report reinforce our ongoing commitment to sustainability with that I'll turn it over to Andrew.
Andrew: Jim and good morning, everyone I'll begin by commenting on our first quarter results, including the performance of our segments.
Andrew: Then I'll discuss our balance sheets in EMEA and <unk> free cash flow before concluding with a few comments on the full year and our assumptions for the second quarter.
Andrew: Beginning on slide eight our operating performance was strong with both adjusted operating profit margin and adjusted profit per share being better than we had expected.
Andrew: Sales and revenues of $15 $8 billion were about flat compared to the prior year broadly in line with our expectations.
Andrew: Adjusted operating profit increased by 5% to $3 $5 billion and the adjusted operating profit margin was 22, 2% an increase of 110 basis points versus the prior year, which was slightly better than we had expected.
Andrew: Profit per share was $5.75 in the first quarter compared to $3.74 in the first quarter of last year.
Andrew: Adjusted profit per share increased by 14% to $5 60 in the first quarter compared to $4 91 last year.
Andrew: Adjusted profit per share excluded net restructuring income of <unk> 15 per share.
Andrew: Compares to restructuring expense $1 17, which was excluded in the first quarter of 2023.
Andrew: Other income of $156 million for the quarter was higher than the first quarter of 2023 by $124 million.
Andrew: It is primarily related to favorable <unk> balance sheet translation.
Andrew: The provision for income taxes in the first quarter, excluding discrete items reflected a global annual effective tax rate of 22, 5% compared with 23% in the first quarter of 2023.
Andrew: Included in profit per share and adjusted profit per share was a benefit of $38 million or <unk> for a discrete tax item related to stock based compensation.
Andrew: A comparable benefit of $32 million or <unk> <unk> per share was including the first quarter of 2023.
Andrew: The year over year impact of a reduction in the number of shares primarily due to share repurchases over the past year had a favorable impact on adjusted profit per share of approximately <unk> 24.
Andrew: This included a favorable impact from the initial shares we received from the three and a half billion accelerated share repurchase agreement that Jim mentioned earlier.
Andrew: Before I move on US you will have seen some additional detail in the earnings release segment commentaries.
Andrew: We continue to highlight the primary drivers of year over year changes in sales and profit by segment as we have done previously.
Andrew: But in addition, we are now also quantifying those significant variances.
Andrew: You will also find some additional information on the historical dealer inventory, including at the machine level in the appendix of todays slides.
Andrew: Moving to slide nine I'll discuss our top line results from the first quarter.
Andrew: Sales remained about flat compared to the prior year as lower volume was largely offset by favorable price realization.
Andrew: The decline in volume was primarily due to lower sales to users.
Andrew: As Jim mentioned, the 5% decrease in sales to users was slightly more than our expectations, mainly driven by weakness in Europe for construction industries.
Andrew: Changes in total dealer inventories did not have a significant impact on sales as the increase of $1 4 billion in the quarter was similar to the increase last year.
Andrew: As Jim Jim mentioned, the $1 $1 billion increase machines was slightly higher than we had anticipated primarily as sales to users were modestly lower than we had expected.
Andrew: As compared to our expectations for the quarter sales were broadly in line.
Andrew: Sales volume was slightly lower than we had anticipated or price realization, including geographic mix was better than we had expected.
Andrew: By segment sales and construction industries were lower than we had anticipated our sales in energy and transportation exceeded our expectations.
Andrew: Resource industries sales were about in line.
Andrew: Moving to operating profit on slide 10.
Andrew: First quarter operating profit increased by 29% to $3 5 billion.
Andrew: As a reminder, the prior year included a $586 million charge that arose from the divestiture of the company's long haul business.
Andrew: Adjusted operating profit increased by 5% to $3 5 billion.
Andrew: Price realization benefited the quarter, while lower sales volume accident partial offset.
Andrew: The adjusted operating profit margin of 22, 2% improved by 110 basis points versus the prior year.
Andrew: Margins were slightly better than we had anticipated mainly due to favorable manufacturing costs as freight costs were lower than we had expected.
Andrew: Price, including a benefit from geographic mix was also better than we had anticipated.
Andrew: Now on Slide 11, I'll review segment performance, starting with construction industries sales decreased by 5% in the first quarter to $6 4 billion, primarily due to lower sales volume, partially offset by favorable price realization.
Andrew: Sales were slightly lower than we had anticipated.
Andrew: Sales in North America increased by 6% in the quarter.
Andrew: In the EMEA region sales fell by 25% and in particular Europe was lower than we had anticipated impacted by weakness in residential construction and economic conditions.
Andrew: In Latin America sales decreased by 1% and Asia Pacific sales to increase by 14%.
Andrew: First quarter profit for construction industries was $1 8 billion, a slight decrease versus the prior year.
Andrew: The decrease was mainly due to lower sales volume, partially offset by favorable price realization and manufacturing costs.
Andrew: The segment's margin of 27, 5% was an increase of 100 basis points versus last year.
Andrew: This was better than we had expected due to favorable manufacturing costs, which largely reflected lower freight costs.
Andrew: Turning to slide 12 <unk>.
Andrew: Resource industries sales decreased by 7% in the first quarter to $3 2 billion.
Andrew: Which was about in line with our expectations.
Andrew: The decrease was primarily due to lower sales volume, partially offset by favorable price realization.
Andrew: The decrease in sales volume was mainly driven by lower sales of equipment to end users, which Jim explained.
Andrew: First quarter profit for resource industries decreased by 4% versus the prior year to $730 million.
Andrew: The decrease was mainly due to lower sales volume, partially offset by favorable price realization.
Andrew: The segment's margin of 22, 9% was an increase of 60 basis points versus last year.
Andrew: This was better than we had expected on stronger price and favorable manufacturing costs, driven mainly by lower freight costs.
Andrew: Now on slide 13 energy and transportation sales increased by 7% in the first quarter to $6 7 billion.
Andrew: The increase was primarily due to higher sales volume and favorable price.
Andrew: Sales was stronger than we had expected mostly due to increased deliveries of large engines.
Andrew: By application power generation sales increased by 26% oil and gas sales improved by 19%.
Andrew: Transportation sales were higher by 9%, while industrial sales decreased by 21%.
Andrew: First quarter profit for energy and transportation increased by 23% versus the prior year to $1 $3 billion.
Andrew: The increase was primarily due to favorable price realization.
Andrew: The segment's margin of 19, 5% was an increase of 260 basis points versus the prior year.
Andrew: The margin was significantly stronger than we had anticipated due to lower than expected manufacturing costs higher volume and better price.
Andrew: Moving to slide 14.
Andrew: Product revenues increased by 10% to $991 million, primarily due to higher average financing rates across all regions and higher average net earning assets in North America.
Andrew: Segment profit was strong increasing by 26% to $293 million.
Andrew: The increase was mainly due to an insurance settlement and a favorable impact from equity securities.
Andrew: Our portfolio continues to perform well as cost Jews remained near historic lows at 178% at 22 basis points of improvement compared to the first quarter of 2023.
Andrew: This is the lowest first quarter past juice since 2006.
Andrew: In addition, the allowance rate was our lowest on record a 1.01%.
Andrew: Business activity remains strong as new business volume increase versus the prior year, primarily driven by North America.
Andrew: We continued to see strong demand for used equipment and inventories remain close to historically low levels with just slight increases over recent quarters.
Andrew: Moving on to slide 15.
Andrew: As Jim mentioned, EMEA and free cash flow remains strong reach.
Andrew: We generated $1 3 billion in the quarter after taking into account the $1 $7 billion payments made for 2023 short term incentive compensation and capex spend of about $500 million.
Andrew: Spend for both short term incentive compensation and Capex was higher than it was in the first quarter of 2023.
Andrew: For the full year, we expect to be in the top half of our EMEA achieve free cash flow target range, which correlates to between seven and a half and $10 billion.
Andrew: We still expect to spend between two and $2 <unk> billion dollars in Capex and we will continue to <unk> investments around Ace, which is autonomy alternative fuels connectivity and digital and electrification.
Andrew: Moving to capital deployment we.
Andrew: We continue to expect to return substantially all of <unk> free cash flow to shareholders over time through dividends and share repurchases.
Andrew: Of the record $5 $1 billion of cash deployed in the first quarter share repurchase spend was $4 5 billion.
Andrew: Including the $3 $5 billion accelerated share repurchase or ASR.
Andrew: The $3 $5 billion were deployed in the first quarter and the Ace or ASR agreement may last for up to nine months.
Andrew: They saw it provides us with favorable pricing as compared to shorter term asos, which we have carried out previously which makes it more attractive.
Andrew: Prices finally determined relative to the volume weighted average price or be web over the duration of the agreement.
Andrew: Approximately 70% of the shares were delivered to the company upfront with the balance calculated when the agreement is terminated based on the actual average fee waiver.
Andrew: As a reminder, our objective is to be in the market on a more consistent basis with share repurchases. So this is a great mechanism for us to use.
Andrew: As I mentioned, our balance sheet remains strong we have ample liquidity with an enterprise cash balance of $5 billion.
Andrew: And we hold an additional $2 2 billion and slightly longer dated liquid marketable securities to improved yields on that cash.
Andrew: Moving to slide 16, our share at a high level assumptions for the full year.
Andrew: As compared to a quarter ago, our assumptions for the full year generally remain unchanged on.
Andrew: On the top line, we anticipate broadly some of the sales and revenues as compared to the record 2023 level consistent with what we mentioned last quarter.
Andrew: Although our top level sales expectations remain the same segment inputs have shifted a bit.
Andrew: We now see a slightly stronger topline in energy and transportation. After a strong first quarter, while I expect expectations have been tempered slightly in construction industries due to economic economic conditions in the European market.
Andrew: We continue to expect slightly favorable price realization versus the prior year.
Andrew: Our expectations on dealer inventory also remain unchanged.
Andrew: We currently do not expect a significant change in dealer inventory of machines in 2024 compared to a $700 million increase in 2023.
Andrew: This is expected to be a headwind to sales.
Andrew: We also continue to anticipates another year services growth across each of our primary segments as we strive to achieve our 2020 target of $28 billion in services revenues.
Andrew: At the segment level, we now expect construction industries sales to users to be slightly lower compared to 2023 due.
Andrew: Due to the softer economic conditions in Europe.
Andrew: We expect demand in North America to remain at healthy levels as Jim discussed.
Andrew: We also anticipate changes in dealer inventory to act as a headwind constructions industry sales in 2024.
Andrew: We expect sales service revenues to be positive versus the prior year.
Andrew: Yeah.
Andrew: In resource industries, we continue to expect lower sales impacted by lower machine volume, primarily in off highway and articulated trucks, where the comparison versus the prior year is challenging.
Andrew: We anticipate changes in dealer inventory to act as a headwind to sales in this segment as well.
Andrew: In energy and transportation, a 2024 sales expectations have increased slightly after the strong first quarter.
Andrew: We continue to see strong demand for reciprocating engines and power generation as well as healthy order and quoting activity for solar turbines for both oil and gas and power generation.
Andrew: This supports our improved optimism for higher sales in energy and transportation in 2024.
Andrew: Also as typical seasonality would suggest we expect to see some sales ramp in energy and transportation as we move through the full year.
Andrew: On full year adjusted operating profit margin, we continue to expect to be in the top half of the margin target range at our expected sales levels.
Andrew: As I mentioned last quarter, we expect a relatively small pricing benefits to be weighted towards the first half of the year given carryover from increases in the second half of last year.
Andrew: We now expect flattish manufacturing costs this year versus the prior year as we anticipate more favorable freight costs, although unfavorable the unfavorable impact from cost absorption could act as a partial offset.
Andrew: As I mentioned a quarter ago, given better availability. This year, we anticipate shipping a more normal mix of products. This year.
Andrew: We anticipate this dynamic Max as a slight headwind to margins.
Andrew: SG&A and R&D expenses are expected to ramp through the remainder of the year as we continue to invest in strategic initiatives aimed at lung at future long term profitable growth.
Andrew: This will be offset by the benefit of lower short term incentive compensation.
Andrew: In addition from a segment perspective keep in mind that margins in construction industries tend to trend lower as the year progresses.
Andrew: Finally, we continue to anticipate restructuring costs of $300 million to $450 million, a share and our expectation for our annual effective tax rate excluding discrete items is now 22, 5%.
Speaker Change: Now on slide 17, I will discuss our expectations for the second quarter, starting with the top line.
Andrew: We expect lower sales in the second quarter compared to the prior year as we anticipate a headwind due to changes in dealer inventory of machines, which will impact volumes.
Andrew: We expect dealer inventory machines to decline this quarter in line with normal seasonal trends versus the atypical $200 million increase that occurred in the second quarter of 2023.
Andrew: However, we anticipate a continuation of healthy demand across most of our end markets for our products and services.
Andrew: And price is expected to remain positive year over year.
Andrew: Following the typical seasonal pattern, we do expect higher sales in the second quarter as compared to the first.
Andrew: By segment compared to the prior year, we anticipate lower sales in construction industries as we expect changes in dealer inventory taxes as a headwind.
Andrew: Favorable price should that provide a partial offset.
Andrew: We expect lower sales in resource industries versus the prior year, driven by lower volume, partially offset by favorable price.
Andrew: In energy and transportation, we anticipate similar sales versus the prior year.
Andrew: On enterprise margins in the second quarter, we expect the adjusted operating profit margin to be similar to the prior year and lower versus the first quarter. Following the typical seasonal pattern.
Andrew: As compared to the prior year, we expect that price will remain favorable from the continued carryover benefit from increases taken in the second half of 2023.
Andrew: We expect flattish manufacturing costs compared to the prior year as favorable freight is expected to offset the impacts of unfavorable cost absorption.
Andrew: We also anticipate an increase in SG&A and R&D expenses related to strategic investments. Although this will be offset by lower short term incentive compensation.
Andrew: By segment in both construction industries and resource industries, we expect similar margins in the second quarter compared to the prior year as we expect favorable price to be offset by lower volume.
Andrew: In energy and transportation, we expect a higher margin versus the prior year on better price and favorable mix.
Andrew: Unfavorable manufacturing costs, and SG&A and R&D spend related to strategic investments are expected to act as a partial offset in this segment.
Andrew: Note that we expect a headwind to enterprise margins and corporate costs in the quarter, where we anticipate unfavorable year over year impacts from timing differences.
Speaker Change: So turning to slide 18, let me summarize.
Speaker Change: The strong operating performance continued in this quarter with the adjusted operating profit margin at 22, 2% and record adjusted profit per share of $5 60.
Speaker Change: We deployed a record $5 $1 billion of cash for share repurchases and dividends in the quarter.
Speaker Change: Our assumptions for the full year remains similar and we expect to be in the top half of our target ranges for both adjusted operating profit margin in EMEA and see free cash flow.
Speaker Change: 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 we will now begin the question and answer session. If you have dialed in I would like to ask a question. Please press star one on your telephone keypad duration and join the queue. If you would like to withdraw your question simply press Star one again.
Speaker Change: Ask that you. Please limit yourself to one question to allow everyone an opportunity to ask a question.
Speaker Change: We will take our first question from Tami Zakaria at J P. Morgan.
Tami Zakaria: Hi, Good morning. Thank you so in line to where you think having a nice.
Tami Zakaria: Hi, how are you.
Tami Zakaria: So nice margin performance in the quarter and hence my question is around margins you guided for the second quarter.
Tami Zakaria: So if if sales are expected to be lower year over year I'm, assuming volumes are down too so what essentially would help margins remain.
Tami Zakaria: Relatively flattish is it price I know you mentioned some factors, but just wanted more color is it price cost is it some cost savings initiatives.
Tami Zakaria: Is it something else.
Tami Zakaria: That's going on so any color there would be helpful.
Speaker Change: Yeah. So at the moment there are two factors, one which is obviously price will still be positive.
Speaker Change: The second quarter.
Speaker Change: And that will help overall margins and will help to offset the impacts of lower volume.
Speaker Change: So we.
Tami Zakaria: We do expect to see some.
Tami Zakaria: Flattening of manufacturing costs versus the prior year.
Tami Zakaria: Mostly because of freight we would expect the benefit of lower freight costs to offset the impact of cost absorption, which may occur in the quarter. So those are.
Tami Zakaria: Two factors.
Tami Zakaria: And then we will expect.
Tami Zakaria: Increase in investments, we're making behind our strategic investments in SG&A and R&D to be offset by lower short term incentive compensation expense. So those are all the moving parts.
Tami Zakaria: But overall as we said, we expect margins to be about flat year over year in the second quarter versus second quarter of 2023.
Tami Zakaria: Well move next to Michael Feniger at Bank of America.
Michael J. Feniger: Great. Thanks for taking my question I know Youre guiding Q2 sales will be lower year over year and the full year to be broadly similar so maybe you could give us some context of what's driving that second half that slight hiccup is it deliveries in a certain market like E&P.
Tami Zakaria: Expectations that end user dealer retail sales, which which pulled back in in Q1 do you think that's the low point for the year and that starts to improve through the year to match that full year guide any context, there would be helpful.
Speaker Change: Yes, so overall as we said really what's happening in Q2 as.
Speaker Change: Principally the impact of lower volume will be around.
Tami Zakaria: The impact of dealer inventory movements, particularly on the machine side last year as I said, we actually had a very atypical build in the second quarter as you know the strike trend as always during the selling season to see particularly on the <unk> side.
Tami Zakaria: Dealer inventory to decrease so that was really the main driver.
Tami Zakaria: Overall as we've indicated for the year, we still expect healthy volume in North America in Ci.
Tami Zakaria: We do have some impact now on Europe that means we now expect <unk> to be slightly lower year over year.
Tami Zakaria: Where we're seeing more positivity.
Tami Zakaria: Then we are seeing as far as students are concerned.
Tami Zakaria: The overall guide we made for the year, which is sales and revenues will be broadly flat with 2023.
Tami Zakaria: We will move to our next question from Jamie Cook with Securities.
Jamie Lyn Cook: Hey, good morning, everyone nice quarter.
Jamie Lyn Cook: Jim I guess my question under your leadership I think the earnings power of Caterpillar has far exceeded anyone's expectation and a lot of that was driven by the <unk> business model and your focus on profitable growth.
Jamie Lyn Cook: At the same time, you're allocating capital.
Jamie Lyn Cook: <unk> been allocating capital to higher return products right. That's part of the strategy at the same time you were talking about doubling.
Jamie Lyn Cook: I think you said youre large engine capacity to meet demand for data centers and this is <unk>.
Jamie Lyn Cook: Now you are lower at this point, it's lower margin.
Jamie Lyn Cook: So I guess understanding right now with <unk>, we have investment in AC and capacity, but like over time why shouldn't in key margins.
Jamie Lyn Cook: Surely be higher than the other two segments in particular, given where construction margins are all right now I'm just wondering if the market underappreciated where margins can go given the capacity additions you are talking about thank you.
Jamie Lyn Cook: Jamie It's a good question one of the things to keep in mind is that many of the investments we're making around electrification.
Jamie Lyn Cook: Other areas the costs are absorbed in energy and transportation. So that's one of the things that has an impact on the margin of the total segment.
Jamie Lyn Cook: And as you quite rightly mentioned, we're very focused on investing in areas that represent the best opportunities for future profitable growth and as we look at the margin opportunities around large engines that certainly an area that very much deserves our investment in both capital and expense and management attention as well.
Speaker Change: So certainly.
Speaker Change: <unk>.
Jamie Lyn Cook: As you know our primary measure of profitable growth as is absolute OPEC dollars. We're trying to increase that having said that we provided our margin our margin targets and we said we'd be in the upper half of the range, but again.
Jamie Lyn Cook: We're investing in areas that that represent very good opportunities for profitable growth and that includes large engines. So I'm I'm I'm, not saying that that margins won't go up in E&P.
Jamie Lyn Cook: Again, the one thing to keep in mind here is that is that a lot of cost go into that segment.
Jamie Lyn Cook: It really benefits some of the other segments.
Jamie Lyn Cook: We'll move next to David Raso at Evercore ISI.
David Michael Raso: Hi, Thank you for your time.
David Michael Raso: I think some of the concern around the second half of the year sales having to be positive to offset the first half being down.
David Michael Raso: It'd be helpful. If you can give us a little sense of the implied orders for the quarter actually did turn slightly positive year over year can you give us any color that you can around sort of what moved in the backlog sequentially.
David Michael Raso: E&P Ci.
David Michael Raso: Just so we can get a sense of was the order improvement year over year solely E&P.
David Michael Raso: Was there any order improvement year over year in ROI in Ci, just maybe build more confidence in the second half of the year sales growth and of course any color around some of the E&C orders.
David Michael Raso: Get the impression some are very long dated orders just trying to get a sense of that.
David Michael Raso: Order flow in E&C, how soon can those orders show up in our revenues.
Speaker Change: Thank you.
Speaker Change: So David Let me, let me ask the last part of your question first so in terms of E&P.
Speaker Change: But 80% of our total cat backlog is expected to be sold within 12 months.
Speaker Change: And we don't put put orders into the we don't put things into the backlog unless we have a firm customer order. So we work really closely with our customers. As an example, with customers that are looking for large engines for data centers and we have a sense going out multiple years of what it is they want but we don't put.
Speaker Change: Any of that into the backlog until they give us a firm order so it doesn't.
Speaker Change: Backlog doesn't go out as far as you might you might think.
Speaker Change: So I'll start with that and then ill turn it over to Andrew for the first part of your question yes.
Speaker Change: Dave.
Andrew: Your facts on the implied order rate is correct, yes, the implied orders are up year over year.
Andrew: That is one of the factors, which gives us confidence.
Andrew: As we look out.
Andrew: And also.
Andrew: The relative strength of the backlog gives us a low confidence within the business lines of where they are as regards the backlog.
Andrew: Obviously most of the increase has been in AT&T.
Andrew: As you would expect given that that those all the businesses now which is showing more strength relatively versus Ci and ROI.
Andrew: And that just is reflected in that that order positioning as we as we as as we go out.
Robert Cameron Wertheimer: We will go next to Robert timer at <unk> research.
Robert Cameron Wertheimer: Hi, My question is around cash capabilities in power Gen in Datacenters, and so forth and how that may or may not be changing with the rise of AI and kind of massive increases in scale of data centers.
Robert Cameron Wertheimer: Specifically.
Robert Cameron Wertheimer: My impression is that historically solar turbines, where more combined heat and power and power Gen. I don't know whether they serve the data center market I am curious as to whether you would now have an opportunity as those data centers are bigger to sell turbines Intuit and just your general sense of how the world is changing.
Speaker Change: Thank you.
Speaker Change: Thank you Robyn we are.
Speaker Change: Very excited about what we view as a secular growth opportunity around data centers. Both in terms of increasing based power loads, but also the specific opportunities to serve those data centers. So as you probably know traditionally we have provided.
Speaker Change: Reciprocating.
Speaker Change: Generator sets as backup for those data centers, but what you say is very correct that business is changing and I believe that we are uniquely positioned because we have a combination of both gas turbines and research that burn a whole variety of fuels and so we have had some projects now where we've shifted gas turbines to provide prime power.
Speaker Change: For data centers, because in some places when data centers.
Speaker Change: Want to go into a geographic area that utility can't handle the load of those and will in fact, there's natural gas available we've seen situations, where a customer will will take gas turbines installed those burn natural gas to produce their own base power for the data centers and in addition to that then there is also.
Speaker Change: The reciprocating engine Gen sets as backup if something were to happen, but typically again.
Speaker Change: We are we are seeing a change youre right. The market is changing and we're very excited about that opportunity.
Speaker Change: We will move to our next question from Chad Dillard at Bernstein.
Charles Albert Edward Dillard: Hi, good morning, guys.
Charles Albert Edward Dillard: Good morning, Jed so.
Charles Albert Edward Dillard: So my question for you is on <unk>, just trying to understand where the lead times are what the lead times are specifically in power Gen. And then just like how long it'll take to your capacity expansion online and just how to think about what.
Charles Albert Edward Dillard: Just like when you can actually run for revenues there.
Speaker Change: Yes, so we're starting to make again, we started to make those cap capacity investments and those that capacity is expected to ramp up over the next four years. So its gradually phased in so that'll happen over a four year period.
Charles Albert Edward Dillard: Yes.
Charles Albert Edward Dillard: In terms of <unk>, obviously, I mentioned that solar turbines has strong quotation and order activity as well so they and they have the ability certainly to increase their production. So again.
Charles Albert Edward Dillard: The capacity in large engines the investments that we specifically mentioned is expected to gradually phase up over the next four years.
Charles Albert Edward Dillard: And just just a quick point to make obviously power Gen is the fastest growing business today within energy and transportation just to note.
Charles Albert Edward Dillard: And actually as a percentage of <unk> sales. It has gone up from 25% in the first quarter of last year.
Charles Albert Edward Dillard: 29% this year so.
Charles Albert Edward Dillard: It is an area of exciting opportunity even before we build the capacity.
Charles Albert Edward Dillard: And obviously an area where there is potential for further growth as well and maybe just one add on you know one of the beauties about our business model, we're making this capacity investment and large engines, but those large engines just don't have the ability to serve the power generation market I mean, they serve a whole variety of markets. So those sustained large engines are used for oil and gas. They are used for large mining trucks.
Charles Albert Edward Dillard: They are used for data center backup, but we also believe there is an opportunity over time for distributed generation as well. So again, we're making this capital investment.
Charles Albert Edward Dillard: Just based on one opportunity in the marketplace, but upon multiple opportunities in different industries and again, we think that diversity.
Charles Albert Edward Dillard: Of our end market opportunities is one that really makes us an excellent investment.
Charles Albert Edward Dillard: And we'll move to our next question from Jerry Revich of Goldman Sachs.
Jerry David Revich: Yes, hi, good morning, everyone.
Jerry David Revich: Good morning, Gary Jim.
Jerry David Revich: Jim Andrew I Wonder if you can just talk about in construction industries.
Jerry David Revich: Cycles the industry.
Jerry David Revich: It has pass through lower input costs in terms of lower prices to customers when input costs have declined in the first quarter. We saw a nice price cost spread on the positive side for you folks here I'm wondering to what extent do you think for you folks in the industry could we see that price cost gap.
Jerry David Revich: Continue to widen since.
Jerry David Revich: The industry has taken a more disciplined approach in cutting production.
Jerry David Revich: Sooner realm.
Jerry David Revich: Relative to the soft spot.
Jerry David Revich: You mentioned in your prepared remarks.
Speaker Change: Yeah. So Jerry is as we've indicated.
Jerry David Revich: <unk>.
Jerry David Revich: Price has been favorable, but we expect the benefit of a favorable price to moderate as the year progresses.
Jerry David Revich: And that obviously holds true for <unk> as it does for the other segments.
Jerry David Revich: And that really will obviously.
Jerry David Revich: Mean that the benefits of margin expansion will become much much tougher to see.
Jerry David Revich: As particularly as you get into the second half of the year, where you won't see that spread.
Jerry David Revich: Do see manufacturing costs being broadly flattish.
Jerry David Revich: And part of the reason for that is because of the favorability of freight which is more than offsetting the impact of cost absorption. So overall.
Jerry David Revich: We've obviously taken.
Jerry David Revich: The approach that.
Jerry David Revich: Where where we have got the benefit of price, we will obviously be trying to hold that as best as we can.
Jerry David Revich: Obviously and we've been as.
Jerry David Revich: As Brian pointed out <unk> been pretty disciplined about making sure that we have cut production like for example in excavators. These were in the fourth quarter, where we do see softness or weakness in the market.
Jerry David Revich: We will take our next question from Stephen Volkmann of Jeffries.
Stephen Edward Volkmann: Great. Good morning, guys I'm wondering if we could tack back to the dealer inventory commentary I wanted to make sure I understand that right because that seems to be a bit of focus for the market. This morning.
Stephen Edward Volkmann: I think if I'm not mistaken that the dealers did build a little more than you expected in the first quarter I'm curious why that might be and if you can provide some sense of how much of that total one four kind of has a customer name on it.
Stephen Edward Volkmann: And I guess the Bottomline is why don't you worry that that kind of inventory build that.
Speaker Change: Sort of Max things less.
Speaker Change: Going forward. Thank you.
Speaker Change: Yeah. The reason the dealer inventory increased a bit more than we expected is primarily due to the softness in the European construction. It was it was.
Speaker Change: That really is the reason for that reason that build in dealer inventory.
Speaker Change: Dealer inventory is well within our typical range comfortably within our what we consider a typical range. So we are not concerned about it.
Speaker Change: Just the other bit of granularity, which we've tried to give and just spread too.
Speaker Change: It is about splitting out between machine in dealer inventory.
Speaker Change: Dealer inventory as a whole principally because obviously in energy and transportation.
Speaker Change: It is that most of that.
Speaker Change: Inventory as we said previously and also within resource industries over 70% of that is backed by firm customer orders is not really inventory sitting on dealers' lots waiting often is.
Speaker Change: As a city getting ready for commissioning.
Speaker Change: That is part of the reason for that.
Speaker Change: Overall as Jim reiterated them just to reiterate we are comfortably within the range on machine dealer inventory.
Speaker Change: We do expect for the year that inventory level to be about flat year over year.
Speaker Change: That's our expectation of a planning assumption at the moment.
Mig: We'll move to our next question from Mig <unk> Baird.
Mig: Yes. Thank you good morning.
Mig Baird: Hi, maybe we can talk a little bit about about resource industries.
Mig Baird: I guess one of the things that stood out to me was was the.
Mig Baird: Pretty significant decline in dealer deliveries and this in this segment.
Mig Baird: And I'm curious on mining specifically.
Mig Baird: What's going on there.
Mig Baird: Are you actually starting to see maybe a pullback in demand for your costs from your customers is the investment cycle maturing narrow or is this just sort of a temporary aberration.
Mig Baird: Yes, so we had expected some softness certainly NRI this year and we talked about that.
Mig Baird: And believe in our first quarter call. So a number of things first of all on the positive side the number of parked trucks and some indices that we look at to really judge the health of the mining industry and so some positives that the number of parked trucks is relatively low.
Mig Baird: Utilization of our customers' products of our products by our customers is high and the age of the fleet is relatively elevated so those are positive things, having said that we our customers are displaying capital discipline.
Mig Baird: Not.
Mig Baird: Rising just given what's happened in economic conditions around the world, but those indices really do.
Mig Baird: Bode well for US in addition to that we've seen great strength, great acceptance of our of our autonomous solutions for those who have been those have been accepted well also we expect a robust rebuild activity this year because our products are being used.
Mig Baird: So extensively by our customers. So again really I think it just it really mostly a function of.
Mig Baird: Bit of a dealer inventory change.
Mig Baird: And also our customers displaying capital discipline.
Speaker Change: So just to add to that a little bit just to remind you that the first quarter of 2023 was very strong and actually the highest level of.
Speaker Change: Skus.
Speaker Change: In resource industries for over 10 years at the time, so that was a significant factor secondly, as we've talked about there are two product lines, where because of supply chain. There was a backlog which was used up.
Speaker Change: Principally in the in 2023.
Speaker Change: Highway trucks.
Speaker Change: And also then.
Speaker Change: Also articulated trucks.
Speaker Change: Just as an FYI large mining trucks are still growing which I know is one of the factors of many of you look at so there is no issue there at all.
Speaker Change: In regards to that and again, you think about the market changing yet we're still very bullish on the fact longer term that we believe the energy transition will support increased commodity demand over time that will expand our total addressable market and provide us further opportunity for long term profitable growth to think about everything that has to happen for evs, there's no way around that being accomplished with.
Speaker Change: Our customers producing more commodities and of course, they use our products to produce those additional commodities.
Speaker Change: We will go next to Angel Castillo at Morgan Stanley.
Angel Castillo: Hi, good morning, and thanks for taking my question just wanted to clarify going back to North America Ci in the second quarter, you talked about seeing continuing kind of healthy demand there, but just wanted to clarify as we think about kind of dealer inventories coming down in the second quarter.
Angel Castillo: And then you also have a little bit of a tougher tougher comps there as you think about retail sales.
Speaker Change: When we kind of look at retail sales for the second quarter of this year just to clarify is that expected to be still positive or do you expect that to turn.
Speaker Change: Modestly negative.
Speaker Change: As you kind of talk about that and provide more color on that could you also talk about what youre seeing in April in terms of kind of quarter to date trends in retail sales.
Speaker Change: Yes, as I think we've indicated overall, we for the full year, we expect see.
Speaker Change: Hi.
Speaker Change: Overall, <unk> revenues to be skus to be slightly negative for the full year.
Speaker Change: The first quarter.
Speaker Change: January we said, we thought there would be about flat for the full year.
Speaker Change: So that does imply some acceleration through the year in order to get back to that sort of.
Speaker Change: To be to be just slightly.
Speaker Change: <unk>.
Speaker Change: With regards to.
Speaker Change: Sure.
Speaker Change: Trends in April, but we're not going to talk about what was happening.
Speaker Change: As is always the case.
Speaker Change: Sure.
Speaker Change: Quarter on quarter, you see changes, which can relate to its commissioning and also has a number of factors.
Speaker Change: But we're comfortable with that will be a forecast for Ci and North America is our is our strongest.
Speaker Change: The largest geographic area for Ci.
Speaker Change: As we said earlier, we certainly expect.
Speaker Change: Demand in North America to remain healthy.
Speaker Change: We've got we expect it to be.
Speaker Change: Flat to slightly higher in nonresident resi residential flat to slightly down so again in that North American market, which is so important to us business continues to be strong.
Speaker Change: Our next question comes from Christian Owen at Oppenheimer.
Christian Owen: Great. Thank you for taking my question.
Christian Owen: I wanted to ask about capital allocation here, just given the ASR that you put in place.
Christian Owen: Bought back more shares FERC.
Christian Owen: You do all year.
Speaker Change: I appreciate you providing women with EMEA.
Speaker Change: Free cash flow deployment, but your stock is also at all time high.
Speaker Change: Im just wondering how we spoke about interim folds and how to weigh that ASR.
Speaker Change: Dividend increase.
Speaker Change: Yes, so obviously as you know we have.
Speaker Change: Both a dividend policy as well as a share buyback policy.
Speaker Change: As far as the dividend's concerned we have one more year of a high single digits. That's a board decision, which will probably be made around June time.
Speaker Change: And then after that we will probably come back and look at what the future policy will be remembered.
Speaker Change: Remember the objective is to pay out no more than 60% to 65% of.
Speaker Change: Our free cash flow.
Speaker Change: In a low environment for us.
Speaker Change: Poured for the dividend so that will be part of.
Speaker Change: That comes into part of the policy and the way we look at that.
Speaker Change: With regards to intrinsic value obviously as is always the case with guests we do take into account intrinsic value.
Speaker Change: And Thats been made that decision has been made as part of the longer term ASR obviously.
Speaker Change: But remind you that the benefit of the ASR is really around the fact that you are in the market more consistently we don't try and market time, we all really just trying to be in the multi consistently to return that cash to shareholders. Overall, we believe that's the best approach.
Speaker Change: But we're.
Speaker Change: We're very comfortable.
Speaker Change: We're putting that in place.
Speaker Change: Joe we have time for one more question.
Speaker Change: Thank you that question comes from Nicole the Blaze at Deutsche Bank.
Nicole: Yeah. Thanks, good morning, guys.
Nicole: I also wanted to focus on Ci so a lot of discussion obviously about Europe kind of being the problem child. This quarter. I guess are you guys seeing as you've kind of progressed through the quarter. Some signs of stabilization or is there a risk that Europe could still get worse and then I guess also like with dealer inventories being up in that.
Nicole: Being the driver.
Nicole: Are you concerned about the level of dealer inventories in Europe Ci specifically thank you.
Nicole: Yes at first of all as I mentioned earlier, we are we believe that inventory is is comfortably within what we would consider the typical range.
Nicole: When we think about EMEA, we talked about construction weakness in Europe, but also there is there is strength in the middle East a lot of connection activity in the middle East.
Nicole: So again that that provides a bit of a buffer there to the total EMEA region and again I keep coming back to North America and as our as our largest is our largest most important region for Ci and the fact that that nonresidential construction is underpinned by the government infrastructure projects, which again is a very positive thing for us so that I think it's in there.
Nicole: Important thing to keep in mind as you think about Ti.
Speaker Change: All right well again, thank you for joining us and we certainly appreciate all your questions I'd like to just buy close by thanking our global team for their strong performance in the first quarter.
Speaker Change: <unk> higher adjusted operating profit margin record adjusted profit per share and strong EMEA <unk> free cash flow.
Speaker Change: Our strong results continued to reflect the diversity of our end markets as well as the disciplined execution of our strategy for long term profitable growth with that I'll turn it back to Ryan.
Ryan: Thanks, Jim Andrew and everyone, who joined US today, a replay of our call will be available online. Later. This morning, we'll also post the transcript on our Investor Relations website as soon as it's available.
Ryan: You'll also find our first quarter results video with their CFO and an SEC filing with our sales to users data click on investors Dot Caterpillar Dot com and then click on financials to view those materials. If you have any questions. Please reach out to Robert me now.
Speaker Change: Now, let's turn the call back to <unk> to conclude our call.
Speaker Change: Thank you and that does conclude our call. Thank you for joining you may now disconnect.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Sure.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Okay.