Andrew Bonfield
Chief Financial Officer at Caterpillar
Thanks, Jim, and good morning, everyone. I'll begin by providing further color on the first quarter results, including the performance of our segments. Then I'll cover the balance sheet and EAME free-cash flow before concluding with a few comments on the full-year and our assumptions for the second quarter.
Beginning on slide 8, sales and revenues for the first quarter increased by 17% or $2.3 billion to $15.9 billion. The sales increase versus the prior year was due to strong price realization and higher volume, partially offset by currency impacts. Sales were higher than we had expected in January with price realization, dealer inventory and end user demand, each slightly better than we had anticipated.
Operating profit increased by 47% or $876 million to $2.7 billion, which includes the impact of the divestiture of the company's long-haul business.
Adjusted operating profit increased by 79%, or $1.5 billion to $3.3 billion. Favorable price realization and higher sales volume was partially offset by higher manufacturing costs. The adjusted operating profit margin was 21.1%, an increase of 740 basis-points versus the prior year.
As Jim mentioned, the adjusted operating margin was much better than we had anticipated. Lower than expected manufacturing costs including efficiencies and absorption with the largest variable, while price realization and volume were also stronger than we had envisaged. I'll provide additional color in a moment.
Adjusted profit per share increased by 70% to $4.91 in the first-quarter, compared to $2.88 in the first-quarter of last year. Adjusted profit per share in the first quarter of 2023 excluded pretax restructuring costs of $611 million, most of this related to the non-cash charge from the divestiture of the company's long-haul business. This compares to pre-tax restructuring costs of $13 million in the first quarter 2022. Other income of $32 million in the quarter was lower than the first-quarter 2022 by $221 million. The year-over-year decline included about $100 million unfavorable currency impacts related to ME&T balance sheet translation, and adverse impact of $80 million for pension expense.
The dollar strengthened marginally since our last earnings call, so the currency impact within the first quarter of 2023 was about $30 million better than we had anticipated than when we spoke to you in January.
Finally, the provision for income taxes in the first-quarter, excluding discrete items reflected a global annual effective tax-rate of 23%.
Moving on to slide 9. The 17% increase in the topline versus the prior year was driven by favorable price realization and higher sales volume, while currency remained a headwind to sales. Volume improved in part due to a 13% increase in sales to users. The impact from changes in dealer inventory was minimal as a $1.4 billion build in the first quarter was similar to that seen in the first quarter 2022.
Services sales volume was slightly down, mainly due to dealer ordering patterns, while services to their customers remain positive. Compared to our expectations a quarter ago, sales were higher than we anticipated, largely due to slightly stronger volume and better than expected price realization.
On volume, sales to users outpaced our expectations due to strong demand. In addition, the improving supply-chain supported higher levels of production across our primary segments. This enables dealers to increase their inventory levels ahead of the selling season by slightly more than we had expected.
Moving to slide 10, first-quarter operating profit increased by 47% to $2.7 billion. Adjusted operating profit increased by 79% versus the prior year quarter as favorable price realization outpaced higher manufacturing costs. Sales volume was also of benefit. Our first quarter adjusted operating profit margin of 21.1% was a 740 basis-point increase versus the prior year. Now let me explain why our adjusted operating profit margin was so much better than we had expected.
While manufacturing cost did increase year-over-year, the increase was less than we had anticipated, and was the most important factor in the quarter. As we have mentioned, volumes were better than expected due to favorable demand and improvements in the supply chain. This helped manufacturing costs as both factory efficiency and cost absorption were better than expected. Freight costs were also lower than we had anticipated due to lower premium freight utilization and rate reductions. Material costs were in-line with our expectations and did not impact the margin outperformance.
In addition to lower manufacturing costs, price realization was also stronger than we had anticipated a quarter ago. Stronger-than-anticipated volume had a smaller beneficial impact on margins. Spend on strategic investments was also lower than expected as projects spend ramped-up slower than we had planned.
Moving to Slide 11, I'll review segment performance. Starting the Construction Industries, sales increased by 10% in the first quarter to $6.7 billion due favorable price realization, partially offset by lower sales volume and unfavorable currency impacts. The decrease in sales volume is driven by the impact from changes in dealer inventories which increased by less than the first quarter of 2023 when compared to the prior year. Compared to our expectations, sales were higher due to stronger volumes. While sales to end users were as we had anticipated, the dealer inventory increase was slightly above our expectations.
By region, sales in North America rose by 33% due to favorable price realization and higher sales volume. Supply chain improvements enabled stronger-than-expected shipments in North-America, supporting dealer restocking in the region. This is a positive as North America continues to be our most constrained region from a dealer inventory perspective.
Sales in Latin America decreased by 4% primarily due to lower sales volume, partially offset by favorable price realization. In EAME, sales increased by 5% on favorable price realization, partially offset by favorable currency impacts.
Sales in Asia-Pacific decreased by 21%, primarily due to lower sales volume and unfavorable currency impacts, partially offset by favorable price realization. First quarter profit for Construction Industries increased by 69% versus the prior year to $1.8 billion. Price realization mainly drove the increase. This was partially offset by lower sales volume, including an unfavorable product mix and higher manufacturing costs.
The segment's operating margin of 26.5% was an increase of 920 basis-points versus last year. The segment margin for the quarter exceeded our expectations on moderating manufacturing costs and better than expected price and volume. Manufacturing costs were lower than we had expected on favorable freight, manufacturing efficiencies and absorption. Production volume was more favorable than we had anticipated, which drove the usual favorable benefits margins from the fourth quarter to the first. You will recall that in January, we said we did not expect that to happen.
Turning to slide 12, Resource Industry sales grew by 21% in the first quarter to $3.4 billion. The increase was primarily due to favorable price realization and higher sales volume. Although aftermarket sales volumes were lower in Resource Industries due to dealer buying patterns, dealer services to customers remained positive.
First quarter profit for Resource Industries increased by 112% versus the prior year to $764 million, mainly due to favorable price realization and higher sales volume. This was partially offset by unfavorable manufacturing costs. The segment's operating margin of 22.3% was an increase of 950 basis points versus last year. Segment margin was better than we expected due to lower manufacturing costs, including favorable absorption, efficiencies and freight. Price realization and volume benefits also exceeded our expectations.
Now on slide 13, Energy and Transportation sales increased by 24% in the first quarter to $6.3 billion, the sales up double-digits across all applications. Oil and gas sales increased by 39%, power generation sales by 27%, industrial sales rose by 23% and finally, transportation sales increased by 14%.
First quarter profit for Energy and Transportation increased by 96% versus the prior year to $1.1 billion. The increase was mainly due to favorable price realization and higher sales volume. Unfavorable manufacturing costs and higher SG&A and R&D expenses acted as a partial offset. SG&A and R&D expenses increased primarily due to investments aligned with our strategic initiatives, including electrification and services growth.
The segment's operating margin of 16.9%, with an increase of 620 basis-points versus last year, but lower than the fourth quarter as is typical from a seasonality perspective. Compared to our expectations last quarter, margin was better than anticipated on lower manufacturing costs, due in-part to favorable absorption. Volume was also modestly stronger than we had expected.
Moving to slide 14, Financial Products revenue increased by 15% to $902 million, primarily due to higher average financing rates across all regions. Segment profit decreased by 3% to $232 million. The slide profit decrease was mainly due to unfavorable impacts from equity securities, currency exchange losses, and mark-to-market adjustments on derivative contracts. However, higher net yield on average earning assets and lower provision for credit losses acted as a partial offset.
Business activity remains strong and the portfolio continues to perform well. Past dues in the quarter were 2.00%, a 5 basis-point improvement compared to the first quarter of 2022. This is the lowest first quarter past dues percentage since 2006. And whilst retail new business volume declined compared to the first quarter of 2022, this was expected as higher interest rates drove more cash dues and increased competition from banks. Finally, we continue to see strong demand for used equipment as prices remain elevated, while used equipment inventory is at historic lows.
Before I move on, I want to point out that Cat Financial has strong liquidity and broad access to funding. We are funded through the wholesale debt markets rather than from customer deposits, and we match assets and liabilities based on duration, currency and interest-rate profile. As we've mentioned previously, in a rising interest rate environment, banks are able to provide more competitive interest rates than Cat Financial, and we tend to lose some share of the machines financed. In the event of a slowdown in lending from regional banks, we are well-positioned to step in and fund creditworthy customers, so they can purchase their machines.
Now on slide 15. We continue to generate strong ME&T free-cash flows. ME&T free-cash flow of $1.4 billion in the quarter was about a $1.8 billion increase compared to an outflow in the prior year. The increase was primarily driven by higher profit. This increase was notable in the quarter that included our annual short-term incentive pay-out, and the rising working capital impacted by an increase in Caterpillar inventory. As Jim mentioned, following the strong half -- strong first quarter, we expect to end the year in the top half of our ME&T free-cash flow range of $4 billion to $8 billion.
Capex was around $400 million in the quarter, and we still expect to spend around $1.5 billion for the year. As Jim mentioned, capital deployment was about $1 billion in the quarter for dividends and share repurchases. Our balance sheet remains strong and we have ample liquidity with an enterprise cash balance of $6.8 billion.
Now on slide 16. I will share some high-level assumptions for the full year, followed by the second quarter. Looking at the full-year, we expect a strong top-line supported by price and higher sales to users with healthy underlying end-markets. As Jim mentioned, we expect full year reported sales for Construction Industries to be impacted by dealer inventory movements, particularly in the second-half of the year. Underlying demand remains strong, and as we do expect Construction Industries sales to users to show positive growth in the next three quarters.
We anticipate continued strength in Resource Industries end-markets and stronger end user sales in 2023. In addition, as typical seasonality would suggest, we expect to see some sales ramp in the second half in energy and transportation, given strong demand for large engines and turbines.
Moving on to margins, based on our current planning assumptions, we anticipate full-year adjusted operating profit margins to be in the top half of our target range. Given the favorable impact of cost absorption in the first quarter, which we do not expect to recur, we anticipate margins in the remaining quarters of the year will be lower than the first-quarter level, while underlying demand and end-markets remained strong.
Also, despite the slower-than-expected start, we anticipate the spend related to strategic investments within SG&A and R&D will ramp through the year. We expect price to continue to be favorable, although the absolute dollar value of the year-over-year price increases were moderate as we lap through the increases put through in 2022.
We also expect the relationship between price and manufacturing costs for machines to normalize as the year progresses, as we've now caught up to the manufacturing cost increases, which had outpaced price in late 2021 and early 2022. This means that the benefits of margins of price outpacing manufacturing cost inflation will moderate, tempering the possibility of further margin expansion.
Keep in mind, similar to the first-quarter, we still anticipate a headwind of about $80 million per quarter at the corporate level related to pension expense. We also continue to anticipate restructuring expenses of around $700 million a share with around $100 million remaining following the first quarter. And the global effective tax-rate should be around 23%, excluding discrete items.
Now on to our assumptions for the second quarter. We expect higher sales in the second quarter compared to the prior year on strong sales to users and price. Following the typical seasonal pattern, we expect higher sales in the second-quarter as compared to the first. We expect energy and transportation sales will accelerate given strong sales to users, which are supported by healthy demand. We expect to report flattish sales levels compared to the first quarter in Construction Industries and Resource Industries. Both segments are expected to report positive sales to users.
In the second quarter of 2022, we saw a decrease in dealer inventory to $400 million. We expect a smaller decrease in the second quarter of 2023.
Specific to second-quarter margins versus the prior year, adjusted operating margins at the enterprise and segment level should be substantially stronger than the prior on favorable price and volume. However, we do expect to see a return to the typical seasonal pattern of lower second-quarter margins compared to the first quarter, despite higher sales. We expect the year-over-year benefit of price realization in the second quarter to moderate compared to the benefit we saw in the first quarter as we lap prior year increases.
In addition, SG&A and R&D investment spend should increase as we continue to accelerate our strategic investments in areas like autonomy, alternative fuels, connectivity, digital and electrification.
Finally, we do not anticipate that the favorable absorption impact that we saw in the first quarter will be repeated. At the segment level in Construction Industries, we expect lower second quarter margins compared to the first quarter, largely due to the lack of a favorable impact from absorption and the ramp-up in strategic investment spend. Likewise, second quarter margins in Resource Industries will likely be lower than the first quarter as is the typical seasonal pattern. Conversely, energy and transportation should see a slight margin improvement compared to the first quarter levels, supported by stronger sales volume as demand remains healthy.
Now turning to slide 17, let me summarize. Sales grew by 17% led by strong price realization and volume gains. The adjusted operating profit margin increased by 740 basis-points to 21.1%. ME&T free-cash flow was strong at $1.4 billion, and we expect to be at the top half of our ME&T free-cash flow range of $4 billion to $8 billion for the full year. After a strong first quarter, we currently expect our 2023 adjusted operating profit margins will be in the top half of our target range.
The environment remains positive with improving supply-chain dynamics, a strong backlog and healthy underlying end-markets. We will continue to execute our strategy for long-term profitable growth.
And with that, we'll take your questions.
