Q3 2024 Caterpillar Inc Earnings Call
Welcome to the third quarter 2024 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. Please go ahead.
Ryan Fiedler: Thanks to Aladra, good morning everyone and welcome to caterpillars 3rd quarter of 2024 earnings call.
Ryan Fiedler: I'm Ryan Fiedler, Vice President of Investor Relations.
Ryan Fiedler: 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, Alex Kapper, Vice President-Elect of IR, and Rob Rangel, Senior Director of IR.
Ryan Fiedler: During our call, we'll be discussing the third quarter earnings release we issued earlier today. You can find our slides, the news release, and a webcast recap at investors.caterpillar.com under events and presentations.
Ryan Fiedler: Content of this call is protected by U.S. and international copyright law. Any rebroadcast, retransmission.
Ryan Fiedler: Reproduction or distribution of all or part of this content without Caterpillar's prior written permission is prohibited.
Ryan Fiedler: Moving to slide 2. During our call today we'll make forward-looking statements which are subject to risks and uncertainties.
Ryan Fiedler: 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.
Ryan Fiedler: 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.
Ryan Fiedler: could cause our actual results to vary materially from our forecast. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. On today's call, we'll also refer to non-GAAP numbers.
Ryan Fiedler: for a reconciliation of any non-GAAP numbers to the appropriate U.S. GAAP numbers, please see the appendix of the earnings call slides. Now let's turn to slide 3 and turn the call over to our Chairman and CEO, Jim Umpleby.
Jim Umpleby: Thanks Ryan. Good morning everyone. Thank you for joining us. As we close out the third quarter, I want to thank our global team for another good quarter as our results reflect the benefit of the diversity of our end markets.
Jim Umpleby: We delivered strong adjusted operating profit margin and adjusted profit per share, which were consistent with our expectations, although our top line was lower than we anticipated.
Jim Umpleby: We also generated M, E, and T-free cash flow of 2.7 billion dollars in the third quarter.
Jim Umpleby: Our robust MENT pre-cash flow, along with our strong balance sheet, allowed us to deploy over $9 billion to shareholders through share repurchases and dividends during the first three quarters of the year, including $1.5 billion this quarter. We continue to remain disciplined in the execution of our strategy for long-term profitable growth.
Jim Umpleby: I'll begin with my perspectives about our performance in the quarter, and we'll provide an update on our full year expectations.
Jim Umpleby: I'll then provide some insights about our end markets, followed by an update on our strategy and sustainability journey.
Jim Umpleby: Moving to quarterly results. Sales and revenues were down 4% in the third quarter versus last year. The lower expectations due to the impact of lower than expected sales to users and construction industries and timing of deliveries in resource industries and energy and transportation.
Jim Umpleby: Services increased in the quarter compared to 2023. Adjusted operating profit margin was generally in line with our expectations at 20%.
Jim Umpleby: We achieved quarterly adjusted profit per share of $5.17 in line with our expectations at the time of the last earnings call. In addition, our backlog increased slightly to $28.7 billion and remains at a very healthy level.
Jim Umpleby: For the full year, although we've updated our expectations since our last earnings call to reflect sales being slightly below our prior estimate, our expected adjusted operating profit margin is unchanged and remains above the top of the range.
Jim Umpleby: Also, our expectation for adjusted profit per share is unchanged. We are increasing our expectations for MENT pre-cash flow and now anticipate it will be near the top of our target range of five to ten billion dollars.
Jim Umpleby: Turning to slide four, in the third quarter of 2024, sales and revenues declined 4% to $16.1 billion due to lower sales volume.
Jim Umpleby: Compared to the third quarter of 2023 overall sales to users decreased six percent. For machines, which includes construction industries and resource industries, sales to users declined by ten percent, which was below our expectations.
Jim Umpleby: Energy and transportation continue to grow as sales to users increased 5%.
Jim Umpleby: Sales to users in construction industries were down 7% year over year. In North America, sales to users were down primarily due to lower rental fleet loading and the absence of a large pipeline deal in the third quarter of 2023.
Jim Umpleby: Excluding these two items, sales-to-users were about flat versus the prior year.
Jim Umpleby: Compared to our expectations, sales to users were lower than expected, impacted by rental fleet loading. Our dealer's rental revenue continued to grow in the quarter.
Jim Umpleby: Sales to users declined in IEMI primarily due to ongoing weakness in construction activity in Europe. Sales to users in Asia-Pacific declined while Latin America increased.
Jim Umpleby: In resource industries, sales to users declined 18%, generally in line with their expectations, versus a strong third quarter of 2023.
Jim Umpleby: Mining, as well as heavy construction, and quarry and aggregates were lower, mainly due to softness we previously discussed for two products, articulated trucks and off-highway trucks.
Jim Umpleby: In energy and transportation, sales to users increased by 5% and we continue to see growth in all applications except industrial.
Jim Umpleby: Looking ahead to the fourth quarter, our current planning assumptions forecast a reduction in machine dealer inventory and we expect machine dealer inventory to end the year around the same level as year end 2023.
Jim Umpleby: Dealers are independent businesses and make stacking decisions across a wide range of products based on multiple factors across the product portfolio. While machine dealer inventory is currently around the top end of the typical range, we remain comfortable with the overall level of dealer inventory.
As I mentioned backlog increased slightly versus the second quarter to $28 7 billion.
Jim Umpleby: Energy and transportation increased as we continue to see strong demand for solar turbines in oil and gas and power generation as well as strong demand for reciprocating engines for power generation.
Jim Umpleby: Moving to slide five.
Jim Umpleby: We generated robust in E&C pre cash flow of $2 $7 billion in the third quarter and $6 4 billion in the first three quarters of 2020 for.
Jim Umpleby: As I mentioned year to date, we deployed more than $9 billion to shareholders through share repurchases and dividends.
Jim Umpleby: 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 Umpleby: Now on slide six I will describe our expectations for our three primary segments moving forward.
Jim Umpleby: In construction industries, we expect lower sales to users in the fourth quarter, but we remain positive about the longer term demand outlook.
Jim Umpleby: During our August earnings call, we noted a lower level of rental fleet loading in North America, which continued into the third quarter and in.
Jim Umpleby: And we now expect the trend to persist in the fourth quarter.
Jim Umpleby: Although we have lowered our expectations for sales to users in the fourth quarter, primarily due to lower rental fleet loading dealer rental revenue continues to grow.
Jim Umpleby: In addition government related infrastructure projects are expected to remain healthy supported by funding yet to be spent from the ion E J E and.
Jim Umpleby: In Asia Pacific outside of China, We expect soft economic conditions to continue we anticipate.
Jim Umpleby: Weak demand in China will remain at a relatively low level for the above 10 ton excavator industry.
Jim Umpleby: In EMEA, we anticipate that weak economic conditions in Europe will continue.
Jim Umpleby: Italy offset by continued healthy construction demand in the middle East <unk>.
Jim Umpleby: Construction activity in Latin America remains healthy and we are expecting modest growth to continue.
Jim Umpleby: In addition, we expect the ongoing benefit of our services initiatives will positively impact construction industries.
Jim Umpleby: Next I'll discuss resource industries. After a strong performance in 2023 in mining as well as heavy construction and quarry and aggregates. We continue to anticipate lower machine volume in the fourth quarter of 2024 versus last year. However, the rate of decline for sales to users in the fourth quarter is expected to moderate versus the previous <unk>.
Jim Umpleby: <unk>.
Jim Umpleby: We expect to see higher services revenues, including robust rebuild activity.
Jim Umpleby: Customer product utilization remains high the number of parked trucks remains relatively low the age of the fleet remains elevated and our autonomous solutions continue to see strong customer acceptance custom.
Jim Umpleby: Customers continued to display capital discipline. However, 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 for.
Jim Umpleby: For power generation demand is expected to remain strong and we expect robust growth in the fourth quarter and full year sales for both cat reciprocating engines and solar turbines.
Jim Umpleby: Overall strength in power generation continues to be driven by data center growth relating to cloud computing and generative AI and we expect this trend to continue in.
Jim Umpleby: In oil and gas in total we continue to expect a stronger year overall in 2024 versus 2023.
Jim Umpleby: Solar turbines Houston oil and gas applications, we expect a strong fourth quarter, but sales are expected to be lower than the fourth quarter of 2023 due to the timing of deliveries.
Jim Umpleby: The increase in power generation that solar will mostly offset solar as decline in oil and gas. So we expect solar as total sales in the fourth quarter to be roughly flat compared to last year.
Jim Umpleby: <unk> has a strong backlog as well as healthy order and inquiry activity and we continue to expect full year growth for solar and oil and gas.
After a strong 2023, we expect we expect reciprocating engine sales in oil and gas to be slightly down this year, primarily due to ongoing softness in well servicing.
We still expect gas compression to be up for the full year. However, we expected to soften in the near term as equipment lead times have normalized.
Jim Umpleby: As we have previously mentioned, we can leverage our large engine platforms across a variety of applications.
Jim Umpleby: Based on current market conditions, and well servicing applications, where you're able to serve additional power generation demand as we continue to meet oil and gas customer needs, while optimizing our overall large engine capacity.
Jim Umpleby: Industrial demand has continued to remain at a relatively low level compared to 2023 and transportation, we anticipate full year growth in both rail services and marine applications.
Jim Umpleby: Moving to slide seven now I will provide an update on our strategy and sustainability journey.
Jim Umpleby: In February of 2024, we announced a multi year capital investment in our large.
Jim Umpleby: Reciprocating engine division to approximately double output capability compared to 2023 for new engines and aftermarket parts.
Jim Umpleby: Based on increasing expectations of future demand growth today, we are announcing an additional multi year investment to further expand our large engine volume output capability to more than 125% compared to 2023.
Jim Umpleby: As I mentioned, we leveraged these large engines across a variety of applications, including data centers oil and gas large mining trucks and distributed power generation.
Jim Umpleby: Moving on to sustainability.
Jim Umpleby: We continue to invest in new products technologies and services to help our customers achieve their climate related objectives. In September we unveiled an innovative solution to help solve one of the most complex aspects of the mining industries energy transition energy management.
Jim Umpleby: That dynamic energy transfer or <unk> is a fully caterpillar develop system that can transfer energy to both diesel electric and battery electric large mining trucks, while they are working around them on site.
Jim Umpleby: Can also charge of batteries batteries, while operating with increased speed on grade improving operational efficiency and machine uptime.
Jim Umpleby: At <unk> is comprised of a series of integrated elements, including a power module that converts energy from our mine sites power source and electrified rail system to transmit the energy and the machine system to transfer the energy to the trucks powertrain.
Jim Umpleby: <unk> will integrate with a cat mind Star command for hauling solution merging autonomy and electrification technologies to provide a holistic site solution. We believe mine sites will benefit from enhanced efficiency with the integration of electrification and automation when combined these technologies will help miners achieved production targets.
Jim Umpleby: Simultaneously managing energy demands this.
Speaker Change: This example, highlights how we leverage our industry, leading technology through an integrated approach across our portfolio to help our customers build a better more sustainable world with that I'll turn it over to Andrew.
Andrew Bonfield: Thank you Jim and good morning, everyone.
Andrew Bonfield: As usual I'll begin with a high level summary of the third quarter, and then provide more detailed comments, including the performance of the segments.
Andrew Bonfield: I'll, then discuss the balance sheet and free cash flow before concluding with comments on our assumptions for the full year in the fourth quarter.
Andrew Bonfield: Beginning on slide eight although sales and revenues were lower than we had expected our adjusted operating profit margin was 20.0% Jimmy and generally in line with what we had anticipated.
Andrew Bonfield: Adjusted profit per share was in line with our expectations. Despite adjusted operating profit being impacted by the lower sales and revenues.
Andrew Bonfield: Will highlights a few of the moving parts in a moment.
Andrew Bonfield: As Jim mentioned, our full year margin expectations remain unchanged and we continue to anticipate the adjusted operating profit margin will be above the top end of the target range. Despite the slightly lower outlook for the top line.
Our expectations for adjusted profit per share remained unchanged versus our expectations at the time of our last earnings call.
Andrew Bonfield: Also we have increased our expectations for <unk> free cash flow for the year, which.
Andrew Bonfield: Which we now anticipate will be near the top about $5 billion to $10 billion target range.
Andrew Bonfield: In the third quarter sales and revenues of $16 1 billion decreased by 4% compared to the prior year.
Andrew Bonfield: The adjusted operating profit margin of 20.0% was 80 basis points.
Andrew Bonfield: Sure when compared to the prior year.
Andrew Bonfield: Profit per share was $5 <unk> in the third quarter compared to $5 45 in the third quarter of last year.
Andrew Bonfield: Structuring costs were 11 in the quarter versus seven in the prior year.
Andrew Bonfield: Adjusted profit per share was $5 17 in the quarter compared to $5 and 52 last year.
Andrew Bonfield: Other income and expense was $119 million headwind versus the prior year, mostly driven by an unfavorable currency impact related to <unk> balance sheet translation.
Andrew Bonfield: We do not forecast the impact of foreign currency translation on our adjusted profit per share. So this acted as a headwind compared to our expectations for the quarter.
Andrew Bonfield: Excluding discrete items the provision for income taxes in the third quarter in both 2023 and 'twenty 'twenty four reflected a global annual effective tax rate of 22, 5%.
Andrew Bonfield: We recorded a discrete tax benefit, which we had which had an <unk> 11 favorable impact within the quarter.
Andrew Bonfield: We do not anticipate discrete items.
Andrew Bonfield: Finally, the year over year impact from the reduction in the average number of shares outstanding primarily due to share repurchases resulted in an unfavorable impact on adjusted profit per share of approximately <unk> 26 cents as compared to the third quarter of 2023.
Andrew Bonfield: This was slightly better than we had expected.
Andrew Bonfield: Moving to slide nine.
Andrew Bonfield: I'll discuss our top line results for the third quarter.
Andrew Bonfield: Sales and revenues decreased by 4% compared to the prior year, primarily impacted by lower sales volume as a result of lower sales to users and impacts from changes in dealer inventories.
Andrew Bonfield: Total sales to users decreased by 6% as a 10% decrease machines was partially offset by a 5% increase for energy and transportation.
Andrew Bonfield: The impact from changes in total dealer inventories accidents, a sales headwind of about $200 million in the quarter.
Andrew Bonfield: For machine zone.
Andrew Bonfield: Inventory increased by about $100 million.
Andrew Bonfield: A smaller increase in the $400 million increase in the prior year, but slightly above our expectations of being flattish to slightly lower.
Andrew Bonfield: Service revenues increased versus the prior year as we had anticipated.
Andrew Bonfield: Moving to operating profit on slide 10 operating profit in the third quarter decreased by 9% to 30 to $3 1 billion.
Andrew Bonfield: Adjusted operating profit decreased by 8% to $3 2 billion.
Mainly due to the impact of lower sales volume, partially offset by favorable price realization and manufacturing costs.
Andrew Bonfield: Since early 2022 price realization has been a strong has been strong and often exceeded our expectations.
Andrew Bonfield: Over the past several quarters, we have highlighted the price will begin to moderate in the second half of this year.
In the third quarter. This moderation began to occur as price realization was lower than previous quarters and generally in line with our expectations.
Andrew Bonfield: As I mentioned for the third quarter. The adjusted operating profit margin was 20.0%, which was generally in line with our expectations.
Andrew Bonfield: By segment margin in construction industries and resource industries was slightly below our expectations on lower volume.
Andrew Bonfield: While energy and transportation was about in line.
Andrew Bonfield: Financial products had a slightly stronger quarter than we had expected.
Andrew Bonfield: On slide 11, construction industries sales decreased by 9% in the third quarter to $6 3 billion slightly below our expectations.
Andrew Bonfield: The decrease versus the prior year was primarily due to lower sales volume and unfavorable price realization.
Andrew Bonfield: The decrease in sales volume was mainly driven by lower sales of equipment to end users.
Andrew Bonfield: Changes in dealer inventories also acted as a slight headwind to sales.
Andrew Bonfield: By region construction industry sales in North America decreased by 11%.
Andrew Bonfield: In Latin America sales increased by 19% sales in the EMEA region decreased by 15% in Asia Pacific sales declined by 12%.
Andrew Bonfield: Third quarter profit for construction industries was $1 5 billion at.
Andrew Bonfield: A 20% decrease versus the prior year.
Andrew Bonfield: This was mainly due to the profit impact of lower sales volume and unfavorable price realization.
Andrew Bonfield: This segment's margin of 23, 4% was a decrease of 300 basis points versus the prior year.
Andrew Bonfield: Turning to slide 12 resource industries sales decreased by 10% in the third quarter to three zero billion.
Andrew Bonfield: Which was slightly below our expectations.
Andrew Bonfield: The decline versus the prior year was primarily due to lower sales volume, mainly driven by lower sales of equipment to end users given the challenging comparisons to the prior year.
Andrew Bonfield: Third quarter profit for resource industries decreased by 15% versus the prior year to $619 million.
Andrew Bonfield: This was mainly due to the profit impact of lower sales volumes.
Andrew Bonfield: The segment's margin of 24% was a decrease of 140 basis points versus the prior year.
Speaker Change: Now on slide 13 energy and transportation sales increased by 5% in the third quarter to $7 $2 billion.
Speaker Change: Slightly lower than we had expected driven by the timing of deliveries.
The increase versus the prior year was primarily due to favorable price realization and higher sales volume, including higher intersegment sales.
Speaker Change: By application power generation sales increased by 26%.
Speaker Change: Transportation sales were higher by 3% oil.
Speaker Change: Oil and gas sales decreased by 1% and industrial sales decreased by 16%.
Speaker Change: Third quarter profit for energy <unk> transportation increased by 21% versus the prior year to $1 4 billion.
Speaker Change: The increase was mainly due to favorable price realization.
Speaker Change: The segment's margin at 19, 9% was an increase of 270 basis points versus the prior year.
Speaker Change: Moving to slide 14 financial products revenues increased by 6% to about $1 billion.
Speaker Change: Primarily due to higher average, earning assets driven by North America, and high average financing rates across all regions.
Speaker Change: Segment profit increased by 21% to $246 million.
Speaker Change: This was mainly due to a favorable impact from equity securities and a lower provision for credit losses.
Speaker Change: Our customers' financial health is strong.
Speaker Change: Past dues remained near historic lows of 174% in the quarter down 22 basis points versus the prior year.
Speaker Change: Our allowance rate was 0.87% our lowest on record.
Speaker Change: Business activity at Cat financial remains healthy.
Speaker Change: Our retail new business volume increased by 17% versus the prior year supported by our financing packages for customers choosing to buy caterpillar equipment.
Speaker Change: The caterpillars retail machine sales volume was lower proportionally more sales being financed through cat financial which highlights the attractiveness of the financing offer of options, we are offering to our customers.
Speaker Change: We also continue to see healthy demand for used equipment and inventories remained at low levels.
Speaker Change: Conversion rates are also strong as customers choose to buy equipment at the end of their lease term.
Speaker Change: Moving on to slide 15, we generated about $2 $7 billion in EMEA and <unk> free cash flow in the quarter third quarter and deployed about $1 5 billion in share repurchases and dividends.
Speaker Change: Our balance sheet remains strong with an enterprise cash balance of $5 6 billion.
Speaker Change: In addition, we hold $1 8 billion and slightly longer dated liquid marketable securities to improved yields on that cash.
Now on slide 16, I will share our high level assumptions for the full year.
Speaker Change: For the full year, we have updated outlook to reflect sales and revenues that are slightly lower than our expectations at the time of our last earnings call driven by lower than expected third quarter sales and an update to our expectations for dealer rental fleet loading and construction industries.
Speaker Change: We continue to anticipate services growth in 2024.
Speaker Change: As I mentioned earlier, our full year expectations for adjusted operating profit margin and adjusted profit per share remained unchanged compared to our last earnings call.
Speaker Change: We continue to expect adjusted operating profit margin to be above the top end of the target range.
Speaker Change: In addition, we are increasing our expectations from E&P free cash flow for the year, which we now anticipate to be near the top of a $5 billion to $10 billion target range.
Speaker Change: To assist you with your modeling for the full year, we now anticipate capex of around $2 billion.
Speaker Change: And restructuring cost of approximately $400 million.
Speaker Change: Our expectation for the global annual effective tax rate, excluding discrete items remains at 22, 5%.
Speaker Change: Turning to slide 17, I'll provide a few comments on the fourth quarter, starting with the top line.
Speaker Change: We expect slightly lower sales and revenues in the fourth quarter compared to the prior year impacted by lower machine sales to users versus a strong comparison.
Speaker Change: Our machine dealer inventory our planning assumptions include the expectation that dealers will reduce their inventories in the fourth quarter, while balancing the need to be preferred for 2025.
The magnitude of the decline for machine dealer inventory is expected to be less than the $1 $4 billion decrease we saw in the fourth quarter of 2023.
For perspective, we expect machine dealer inventory to end the year around the same level as year end 2023.
Speaker Change: Also the ongoing benefit of our services initiatives is expected to positively impact sales in the fourth quarter.
Speaker Change: By segment in the fourth quarter compared to the prior year, we anticipate a sales decrease in construction industries. This is impacted by lower sales to users, which Jim Jim mentioned, along with unfavorable price realization.
Speaker Change: In resource industries, we expect slightly lower sales impacted by lower sales to users versus a strong fourth quarter of 2023.
Speaker Change: In energy and transportation, we anticipate slightly higher sales versus the prior year supported by power generation.
Speaker Change: Enterprise margin in the fourth quarter is expected to trend lower compared to the third quarter. Following the typical seasonal pattern.
Speaker Change: However versus the prior year, we expect a modestly higher adjusted operating profit margin despite lower sales.
Speaker Change: We anticipate favorable manufacturing costs, and lower SG&A and R&D expenses will more than offset the profit impact of lower sales volume.
Speaker Change: Lower SG&A and R&D expenses are primarily primarily driven by the benefit of lower short term incentive compensation versus a higher expense in the prior year quarter.
Speaker Change: Compared to the prior year, mainly due to lower volume and prioritization of strategic investments around services growth and Ace, which is autonomy alternative fuels connectivity and digital and electrification.
Speaker Change: Favorable manufacturing costs should act as a partial offset.
In energy and transportation, we expect a higher margin versus the prior year, primarily impacted by favorable price realization.
Speaker Change: So turning to slide 18, let me summarize.
Although sales and revenues were lower than we had expected adjusted operating profit margin and adjusted profit per share were generally in line with our expectations.
Speaker Change: We now anticipate our top line for the full year will be slightly below our prior estimate.
Speaker Change: Our backlog increased slightly and remains at a very healthy level.
Speaker Change: Our expectations for full year, adjusted operating profit margin and adjusted profit per share remained unchanged compared to a quarter ago.
Speaker Change: We continue to expect adjusted operating profit margin to be above the top end of the target range for the full year based on our expected sales levels.
Speaker Change: We are now increasing our expectations for free cash flow, which we anticipate to be near the top of our target range for the full year.
Speaker Change: And team executed well in the quarter and our results continue to benefit to reflect the benefit of the diversity of our end markets and the disciplined execution of our strategy for long term profitable growth.
Speaker Change: And with that we'll now take your questions.
Speaker Change: Thank you we will now begin the question and answer session. If you have dialed in and I would like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question simply press Star. One again, we ask that you. Please limit yourself to one question to allow everyone an opportunity to ask a question.
Speaker Change: Ken.
We will take our first question from Jerry Revich of Goldman Sachs.
Jerry Revich: Yes, hi, good morning, everyone.
Speaker Change: Good morning, Gerry Andrew Hi.
Jerry Revich: I'm wondering if we could just take a step back.
Jerry Revich: Our margin performance. This year is really outstanding relative to the long term.
Speaker Change: As calls is really primarily due to a couple of products articulated trucks and off highway trucks, and we had a we had a strong backlog there that we had to work our way through and that's created a comp issue for us in resource industries. This year, having said that we obviously, we're not going to give.
Speaker Change: Our guidance around 2025, we will talk about 2025 in January but certainly we continue to be.
Speaker Change: Quite bullish on the long term aspects for mining just given all the commodities that need to be produced to support the energy transition.
Speaker Change: Our mining customers use our products to produce those products things like copper so our customers are displaying capital discipline, but but we certainly are bullish about the long term, we do expect higher services revenues because of the utilization of our products is quite high the age of the fleet is relatively elevated and the number of <unk>.
Trucks is relatively low so those are all positive things one of the things that we also see is a lot of inquiry activity.
Speaker Change: And order activity around large mining trucks. So we're pleased at that so that's one of the things that also is a reason for optimism as well.
Speaker Change: Next we'll move to Angel Castillo at Morgan Stanley.
Angel Castillo: Hi, Good morning, Thanks for taking my question I was wondering if you could expand maybe a little bit good morning.
Angel Castillo: I was wondering if you could expand a little bit more on what youre hearing from your dealers and customers around in terms of construction industries, particularly in terms of orders.
Angel Castillo: Does that kind of shaking out for that segment, specifically and then more so qualitatively what are you hearing into 'twenty 'twenty five in terms of sentiment and kind of inclination to buy kind of heading into that year.
Angel Castillo: Versus the macro that remains a little bit I'm sorry.
Speaker Change: Yeah, well a couple of things firstly in the quarter as I mentioned earlier.
Speaker Change: The primary reasons for the decline quarter to quarter was based on lower rental fleet loading by our dealers and of course, it's important to note that our dealers rental revenue continues to increase so it's really an issue of them.
Having lower loading into their rental fleets. In addition to that we had a large pipeline deal in the third quarter of last year, which obviously didn't reoccur and that created an issue as well I mean from a positive perspective, we expect government related infrastructure to remain healthy I mean, if we look at some facts from art, but which is the American road and trans.
Speaker Change: Rotation builders Association they noted that.
Only 27% of the $348 billion in total.
A funding has been spent as of August of 2024, but 47% of its been committed to only 27% of its been spent so that's quite healthy as well. So theres a lot of infrastructure activity out there that are that our dealers are working with our customers to help support so we feel good about that as well.
Speaker Change: We'll go next to Jamie Cook at tourists Securities.
Jamie Cook: Hi, good morning, and I'm, sorry, I'm flipping between multiple calls, but Jim I think you said.
Jamie Cook: The prepared remarks that you guys are.
Jamie Cook: Adding incremental large engine capacity relative to your previous announcements. So I guess my question is there is there any way you can frame the capital investment and more importantly, what you think.
Jamie Cook: The longer term revenue revenue opportunity for Caterpillar as you continue to increase capacity here and then sort of what does that imply for margins for the segment again, we're adding a lot of capacity, but the margins are below.
Jamie Cook: Resourcing construction should margins be structurally higher as the volumes ramp. Thank you.
Speaker Change: Thanks for your question, Jamie we haven't quantified the amount of capital investment in that capacity increase but we did talk about the fact that we expect that with this incremental investment that we will have increased our large engine volume output capability to more than 20, 525% compared to 2023 and of course those engines are you.
Speaker Change: Used across a wide variety of applications and certainly what's driving the demand today is data centers we sell.
Speaker Change: Backup generator sets for data centers, but we're also quite excited about the opportunity going forward for what we call distributed generation data centers of course don't just create an opportunity for us for backup generator sets, but of course the base load requirements.
Speaker Change: On the grid is going up as well because of the data centers and as much been written about that and so just given the fact that there's been relative underinvestment in traditional power plants over the last few years. The fact that more renewables have been added to the grid, which are intermittent in nature and the fact that now we have data centers increasing base load requirements on the grid, we think that creates an opportunity.
Speaker Change: For us for both our our gas turbine generator sets and our reciprocating engine generator sets and what we call distributed power applications distributors across the grid and our guest turbines in Gen sets can burn a wide variety of fuels natural gas biofuels hydrogen blends. So we're quite excited about that long term opportunity.
Speaker Change: That is starting to manifest itself in your question about about margins certainly you saw a nice margin increase quarter to quarter in energy and transportation and just because of mix and because of increased volume and just the fact that business should be higher again, we have the opportunity to increase margins in energy and transportation going forward, but I'm not going to quantify that at this point.
Speaker Change: But certainly it's an opportunity.
Speaker Change: We will take our next question from David Raso at Evercore ISI.
David Raso: Hi, Thank you yeah, looking as everybody more more bread crumbs for 2025.
David Raso: A question I guess two pieces the comment about the drag right the lag of discounting for Ci it'll show itself more as some of those orders get shipped.
David Raso: Into 25 can you give us a sense of just where we stand right now, let's assume no further deterioration, maybe NCI pricing, but what we're booking right now with those discounts what is the most acute like period and 25 that that shows up like essentially it's how long are these orders out for as this second quarter.
David Raso: Third quarter next year that should be the most acute drag from from the incremental discounting right now and then on the positive side that you kind of just said you didn't want to quantify it but the investments in E&C. The large engines, which I also go to large mining trucks, but let's think of it as E&P in particular right now.
Speaker Change: Is there any way to think about regular throughput improvement any capacity additions that can show up in 'twenty five to give us a sense of Alicia throughput capability twenty-five versus 24, just some order of magnitude.
Speaker Change: Yes. Thank you.
Speaker Change: Yes. Thanks for your question, David So one of the things we talked about when we announced the initial investment to increase our large engine capacity is that would increase over a four year period and so we haven't laid it out year by year and it's again, it's a four year increase so I'm afraid I'm not going to answer your question to give a sense of additional output for 2025.
Andrew Bonfield: Andrew or answer your question about margins, yes, so on the impacts of pricing. This is one of those accounting quotes.
Andrew Bonfield: We sometimes have the the way it works David is the accrual was done on a historic 12 month basis to build up the reserve so potentially this could impact us for several quarters.
Andrew Bonfield: It is as the merchandising programs increase you then have the amount that's in inventory, but you have to effectively catch up on overtime and that's done over 12 months period. So Gemini will be for the next several quarters, but.
Andrew Bonfield: But we are starting to see the merchandising programs hit more normal levels now.
And obviously.
Creates a little bit of a headwind on price.
Andrew Bonfield: To quantify it a little bit more when we get through 2025 guidance for you in January.
Speaker Change: Next we'll go to Michael Feniger at Bank of America.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: <unk>.
Michael Feniger: For taking my question I would just love to get a sense of on the oil and gas side obviously.
So those were up a little bit you talked about the differentiation of what youre seeing in terms of the recip side, and well services versus maybe gas compression some of the other areas just when we look into 2025, if we see more LNG permitting in the Gulf is that positive for the solar business do we need a higher Nat gas.
Michael Feniger: Obviously, the oil prices has been kind of stuck.
Michael Feniger: Stuck in a range. So just curious how are we sticking with oil and gas being very strong and up in 'twenty. Four you kind of made some comments on Q4, what are we kind of think about the bread crumbs for 25 for that business. Thank you.
Speaker Change: So again I'll resist given our guidance for 225, but I'll just give you some color on the industry. Certainly we mentioned the fact that well servicing continues to be a bit weak gas compression for reshape for catering and gas we expect to be up for the total year, but a bit of softening in the fourth quarter and solar turbines and oil and gas business is quite strong a lot of booking activity a lot of quotation activity.
Speaker Change: Both for gas compression, but also for international projects as well so again.
Speaker Change: Solar business quite quite robust.
Speaker Change: And I have described reshape it remains to be seen obviously if if.
Speaker Change: If LNG exports then are again start again, if that pruning process starts again I would think certainly medium long term that would be a positive for us.
Speaker Change: We will move to our next question from Christian <unk> of Oppenheimer <unk> company.
Speaker Change: Great. Thank you for taking the question Jim I wanted to come back to the Ci competitive dynamics, particularly in North America, and you've called out the three fleeting issue a couple of quarters in a row now, but you are at the higher end of that the inventory range. Just wondering can you help us understand how much maybe.
Speaker Change: The incremental and international competition, you are seeing given the depreciation of the yen and just continued disappointment in China activity, if anything youre seeing on shift in the competitive landscape there.
Speaker Change: Well certainly we're very focused on remaining competitive in the competitive situations continually changes so if I could.
Speaker Change: Every year I've been in this job.
Speaker Change: And before that the competitive situation always changes, but we are quite confident in our ability to continue to compete we continue to invest in new technologies.
Speaker Change: To allow.
Speaker Change: As an example to allow operators to more effectively.
Speaker Change: <unk>.
Operate their machines as an example, taking a less experienced operator and through technology, allowing them to operate more like an experienced operator, we continue to invest in digital capabilities.
Speaker Change: Our dealers continue to invest in their capabilities as well. So we're quite confident in our ability to continue to compete and be successful. The competitive situation. There are currency changes that occur and youre right. The yen has been has been relatively weak and that debt for a period of time can create a bit of a.
Speaker Change: A tailwind for our competitor, but those things change over time as currency as currencies change, but again, what we're really focused on is providing that long term value to our customers by continuing to invest in things like technology or digital capabilities service capabilities and all the rest.
Speaker Change: And can I just make a comment on your comment about the higher end of that.
Speaker Change: Inventory range I mean, one of the things just to remember is dealer inventory is a complex thing we have 150 dealers around the world we have three business segments.
Speaker Change: We have lots of different products. There are some actual product lines with actually dealers holding more inventory would actually be a good thing from a competitive perspective, not necessarily always reducing so.
Speaker Change: Not necessarily a without them burning it down.
Speaker Change: Obviously, you work with them through that process, where they do need to think about dealer inventory reduction and that's why we're anticipating in the fourth quarter, but there are also some business segments. We're actually at times, we would like Divas, probably hold a little bit more for competitive reasons as well.
Speaker Change: We'll go next to Steven Fisher of UBS.
Steven Fisher: Thanks, Good morning.
Steven Fisher: Jim You mentioned, the four year process on power Gen capacity expansion, but the power Gen growth actually accelerated to about 26% year over year from 15% in Q2.
Steven Fisher: So with being at capacity on some of the bigger projects products can you talk about what drove that acceleration in.
To what extent is that maybe a function of shifting some of your oil and gas engines into into power Gen.
Steven Fisher: Should we expect some sort of quarter to quarter fluctuations in that rate of growth in power Gen going forward based on comps and how you are able to shift capacity around thank you yeah just to be.
Speaker Change: Thanks for your question just to be clear when we ship a generator set.
Speaker Change: Two in oil and gas customer for an oil and gas application, we count that as oil and gas net power generation just to be clear so.
Speaker Change: So a variety of reasons for the increase certainly of course as I mentioned in my prepared remarks, we do have the ability to reallocate if their demand for oil and gas is not there and we have excess capacity, we can shift those engines from oil and gas and power generation and back and forth depending on the needs of our customers. So that's there.
Speaker Change: So our power generation again that solar business in power generation is also increasing and that also had an impact on it as well and we've been of course working in our in our reciprocating engine facilities to increase capacity, yes. The major impact will come later because of the the big capital investment, we're making but we're working on.
Speaker Change: Increasing throughput and getting more out of our existing facilities as well as the demand goes up.
Speaker Change: Yeah.
Speaker Change: We will take our next question from Kyle <unk> of Citigroup.
Speaker Change: Thanks for taking the question I was hoping if you could discuss inventories a little bit more. So this planned reduction in dealer inventories in <unk> is that enough to make you guys feel pretty good about machine inventories heading into next year and then also be helpful. Just to hear your thoughts on used inventory it sounds like they remain at low.
Speaker Change: Levels, but are you seeing.
Speaker Change: Used to tick up a little bit and is there any cause for concern that used inventories could become an issue in 2025.
Speaker Change: Yes, So first of all let me I mentioned on used as we say used inventory levels actually remained pretty low levels based on history.
Speaker Change: That had ticked up slightly.
Speaker Change: <unk> pricing has become a little bit lower but pricing still is actually okay.
Speaker Change: From a cat financial perspective, so no concern at this point.
Speaker Change: Around used inventory at all from from from an overall perspective.
With regards to deal inventory.
Speaker Change: Obviously, we work closely with our dealers through what we call <unk> process.
Speaker Change: Sales and operations planning process.
Speaker Change: We go down by dealer byproduct really to understand what their expectations what their requirements are.
Speaker Change: What theyre ordering needs are.
Speaker Change: That's part of a way of us helping to manage.
Speaker Change: The factory factories and production efficiently.
Speaker Change: At this point in time, we expect that reduction we see to bring about the industry overall to about flat year over year.
Speaker Change: That seems to be the right level based on what we're hearing from dealers at this stage.
Speaker Change: I don't see any reason.
Speaker Change: At this point in time that there would be a need to reduce them significantly more.
Speaker Change: But obviously, that's a discussion process that will occur through 2025.
But obviously, we already in prepaid.
Speaker Change: To manage.
Speaker Change: <unk> managed production accordingly, with regards to as I made the point a moment ago Theyre all some product lines, we actually dealers really could hold more inventory so.
Speaker Change: He is going to be very very careful about looking at it as a holistic.
Speaker Change: But overall, we're very comfortable with the total level of expectations for the year end.
Speaker Change: We will go next to Chad Dillard at Bernstein.
Hey, good morning, all.
Chad Dillard: I wanted to.
Speaker Change: I guess Darren.
Chad Dillard: So I just wanted to revisit the comments about pricing.
Chad Dillard: So first just wanted to understand like when do you actually expect.
Chad Dillard: Pricing pressure.
Chad Dillard: And then secondly, if we think about the other side of the ledger cost side.
Chad Dillard: Steel coming down.
Chad Dillard: Sure.
Chad Dillard: Moving on.
Chad Dillard: <unk> and R&D cost so I'm, just trying to think through whether you'll be able to offset some of that pricing pressure.
Chad Dillard: Some improved.
Chad Dillard: Hi.
Chad Dillard: All right.
Speaker Change: Yes, So let me just first of all coming back to the the overall if you would actually look at our overall gross margins for the quarter gross margins were about flat. Despite lower volume. So we have been able to find offsets some of that obviously is with positive price within the E&C and some of that is low in manufacturing.
Speaker Change: So theyre always and that's part of the benefit of having a broad portfolio of businesses.
Speaker Change: We're able to manage that appropriately.
Speaker Change: Obviously, we are looking at commodity input costs, and obviously working from a procurement perspective always remind you that theres always a lag it's never because of the contracting that we do we often don't necessarily buy at spot prices, we buy contracts at prices, which might even be lower than spot. So all of those things all factors, which feed and takes a little.
Speaker Change: But at a time for that to fall through with regards to the pricing pressure.
Speaker Change: Immediately already.
Speaker Change: The merchandising programs, we put in place all flowing through to the P&L within Ci So that's immediate.
Speaker Change: I was talking about was the lag impact on the <unk>.
Speaker Change: The reserve, we have which is really just a balance sheet impact.
Which impacts that will impact over the next several quarters, we'll give you a little bit more update of that when we get to January.
Speaker Change: Next we'll go to Tim Thein at Raymond James.
Tim Thein: Thank you good morning, Jim I was hoping you could maybe give.
Tim Thein: Some color on the backlog.
Tim Thein: The orders, which were pretty strong in the quarter and just in terms of <unk>.
A key driver to our kind of what's behind that and I guess more significantly I'm just curious if the I presume youre going to highlight data centers as part of that and is there a shift in terms of.
Tim Thein: How you think or how we should think about ultimately the delivery.
Tim Thein: And those deliveries.
Tim Thein: That.
Speaker Change: Given the tightness in capacity I presume so.
Speaker Change: Your bigger data center customers are like looking to secure capacity further out so anyway. So just.
Question around the maybe the driver of that new orders and then.
Speaker Change: Should we think about any change in terms of.
Speaker Change: Ultimate delivery and cadence of those orders. Thank you.
Speaker Change: Yes. Thanks for your question so the backlog increase in energy and transportation was quite robust and that more than offset a decrease in backlog for machines and of course.
Speaker Change: It's not surprising that tobacco machines went down anticipation of the machine delivered in dealer inventory reduction that we previously talked about in the fourth quarter. So the backlog increase in energy and transportation.
Speaker Change: Being driven a lot by of course by power generation for reshape also being driven by robust orders and solar turbines for both oil and gas and reshape so that's really what's behind it.
Speaker Change: So certainly certainly typically lead times for Solaris eight to 12 months typically.
Speaker Change: For Recip and power generation.
Speaker Change: We're working hard to meet the demands of our customers there, but we do have orders going out 18 to 24 months on the on the outside four four.
Speaker Change: Power generation and reshaped.
Speaker Change: Next we'll move to make at Baird.
Speaker Change: Yes, Thank you and just to follow up on Tim's question is there is there a way to maybe quantify what percentage of the backlog is.
Speaker Change: Deliverable here in the next 12 months.
Speaker Change: And I'm also curious given the fact that the lead times are what they are in power Gen.
Speaker Change: How are competitive dynamics do you versus your competitors in that part of the business.
Speaker Change: Is there somebody else out there maybe with better lead times than you.
Speaker Change: Can you gain share.
Speaker Change: Improve your lead times faster than others.
Speaker Change: I appreciate some thoughts on that.
Speaker Change: You bet generally overall the way we think about it is about 75% of our backlog is expected to be sold within 12 months that gets had kind of a general number for total as I mentioned some of the large engine orders are out a bit more than that.
Speaker Change: Certainly if we if we can produce more engines, we can sell more engines for.
Speaker Change: For power generation Recip engines, that's certainly the case and again, that's again just given the.
Speaker Change: The strength that we see in that market is obviously, why we decided to make an incremental investment in our capability to increase engines and parts. So again that business is quite strong.
Speaker Change: It's it's very very encouraging.
Speaker Change: Next we'll go to Jairam Nathan at Daiwa.
Jairam Nathan: Yeah, Hi, Thanks for taking my question.
Speaker Change: Two.
Jairam Nathan: Go with some of the year.
Speaker Change: Are you a position in China, there's a lot of talk about some of this not sure how.
Speaker Change: And it would be but if.
Speaker Change: If you could just remind us.
Speaker Change: And market position, the freshness of products that a bit.
Speaker Change: Yes, certainly so as we've discussed previously.
Speaker Change: For a long period of time, we talked about China, being roughly 10%, 5% to 10% of our consolidated sales and revenues has certainly been less than that the last couple of years and to continue in the market but.
Speaker Change: The market itself continues to be quite weak and so it is it is below that 5% again. This year. So it's a relatively small piece of our total enterprise sales.
Speaker Change: Certainly we have a significant presence in China in terms of facilities and we've integrated our supply chain suppliers.
Speaker Change: Manufacturing and local leadership as well and dealers.
Speaker Change: And but again the market is in fact quite depressed and we have and this is a reminder for us that market is primarily.
Speaker Change: Excavators above 10 ton and so.
Speaker Change: I've asked about the stimulus we certainly it's too early for us to have seen any impact of that and we have not.
Speaker Change: Joe we have time for one more question.
Speaker Change: And today's final question comes from the line of Rob Wertheimer with Melius research.
Rob Wertheimer: Thank you good morning.
I wanted to follow up last quarter, you kind of touched.
Rob Wertheimer: On expanding opportunities at solar turbines and power Gen. In todays call. I mean, you mentioned some of the strong demand you're seeing in the recip side on capacity expansion et cetera on for Novus call. They had some strong trends in aero derivative turbines, which I think are cross sell a little bit above your power range, but I'm wondering if you might just talk about this business and the opportunity Youre seeing.
Rob Wertheimer: King.
Rob Wertheimer: In the power Gen segment for solar what that means is it mean behind behind the <unk>.
Rob Wertheimer: <unk>.
Data center is that mean data centers, what is the opportunity youre seeing and then <unk>.
Rob Wertheimer: And the capacity and research do you have room to grow and turbines or would you.
Rob Wertheimer: Youre big enough that youre thinking about expanding there to just a general overview of thanks.
Speaker Change: Yeah, Thanks, Rob So certainly.
We are seeing an increase in business in for power generation and solar turbines.
Speaker Change: It's we're showing trailer is units now and that's being driven by a whole variety of factors one of the things that we're doing is selling into some rental fleets, where rental fleets are positioning themselves to to help satisfy what they believe will be increased electricity demand across the grid and primarily in North America and sometimes those.
Speaker Change: Units will be rented to to a utility sometimes if you run into a data center, but there is a whole variety of uses for that so we are seeing an increase in power generation at solar solar is not out of capacity. They certainly have the ability to continue to to increase their production and one of the things you might be aware of is that we are in the process of inter.
Speaker Change: Reducing our newer larger gas turbine for solar turbines, its our largest yet called the tightened $3 50, and that really will allow us to compete in some areas that we have not been able to compete.
Speaker Change: In the past to compete for in the past because we just didn't have a turbine that was a large enough and so we're quite excited about that new product. It's early days in terms of just starting to get those.
Speaker Change: A shift, but we are quite encouraged by the amount of customer interest and discussions we're having with our customers about that new product. So again, that's something that's very exciting for us.
Speaker Change: Okay with that I, just want to thank everyone for joining us and certainly appreciate your questions just wanted to think by again.
Speaker Change: Our global team for delivering.
Speaker Change: Strong adjusted operating profit margin and adjusted profit per share and again, while generating robust free cash flow.
Speaker Change: As we discussed today our results continue to reflect the benefit of the diversity of our end markets as well as the execution of our strategy for long term profitable growth again. Thank you for your time.
Speaker Change: Thank you, Jim Andrew and everyone, who joined US today, a replay of our call will be available online later this morning.
Speaker Change: We will also post the transcript to our Investor Relations website as soon as it's available you'll also find our third quarter results video with our CFO and an SEC filing with our sales to users data click on investors that caterpillar Dot Com, then click on financials to view those materials.
Speaker Change: You have any questions. Please reach out to Alex Robber me the Investor Relations General phone number is 390 675 for $5 49, and now I will turn the call back to <unk> to conclude.
Speaker Change: Thank you that does conclude our call. Thank you for joining you may all disconnect.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].