Andrew R.J. Bonfield
Chief financial officer at Caterpillar
Thank you, Jim, and good morning, everyone. I'll begin with a high level summary of the quarter. Then I'll provide more detailed comments on our second quarter results, including the performance of the segments. Next, I'll discuss the balance sheet and free cash flow and then conclude with comments on our assumptions for the remainder of the year.
Beginning on Slide 8. Although sales and revenues were slightly below our expectations, we had strong operating performance in the quarter, including higher adjusted operating profit margin and record adjusted profit per share, both of which were stronger than we had anticipated. Sales and revenues of $16.7 billion decreased by about 4% compared to the prior year. Adjusted operating profit increased by 2% to $3.7 billion. And the adjusted operating profit margin was 22.4%, an increase of 110 basis points versus the prior year. Profit per share was $5.48 in the second quarter compared to $5.67 in the second quarter of last year. Adjusted profit per share increased by 8% to $5.99 in the quarter compared to $5.55 last year.
Adjusted profit per share excluded restructuring costs of $0.51 per share mainly due to a loss on the divestiture of two non-US entities. This compares to restructuring costs of $0.05 per share and a discrete deferred tax benefit of $0.17 per share, which were both excluded in the second quarter of 2023.
Other income of $155 million for the quarter was a $28 million benefit versus the prior year and was primarily driven by favorable impacts from commodity hedges. The provision for income taxes in the second quarter, excluding discrete items, reflected a global annual effective tax rate of 22.5% compared with 23% in the second quarter of 2023.
Finally, the year-over-year impact from the reduction in the average number of shares outstanding primarily due to share repurchases over the past year had a favorable impact on adjusted profit per share of approximately $0.29.
Moving on to Slide 9. I'll discuss our top line results in the second quarter. Sales and revenues decreased by 4% compared to the prior year as lower volume was partially offset by favorable price realization. Lower volume was mainly driven by the impact from the changes in dealer inventories. As you may recall, we anticipated a sales decline this quarter versus last year as an atypical dealer inventory increase in the second quarter of 2023 made for a challenging comparison.
To explain, dealer inventory decreased by about $200 million in the second quarter. In comparison, we saw an increase of $600 million in the second quarter of last year. For machines only, dealer inventory followed the typical seasonal trend this quarter with a decrease of $400 million as compared to a $200 million increase in the second quarter of last year.
Sales were slightly below our expectations due to lower-than-expected volume being partially offset by better-than-expected price realization, including geographic mix. Moving to operating profit on Slide 10. Operating profit in the second quarter decreased by 5% to $3.5 billion. This included a $227 million unfavorable impact from higher restructuring costs. Adjusted operating profit increased by 2% to $3.7 billion.
Price realization benefited the quarter while the profit impact of lower sales volume acted as a partial offset. The adjusted operating profit margin of 22.4% improved by 110 basis points versus the prior year. Margins were better than we expected mainly due to favorable manufacturing costs, product mix and price. Versus our expectation, price was slightly better than we anticipated driven by Energy & Transportation.
On Slide 11, Construction Industries sales decreased by 7% in the second quarter to $6.7 billion. This is primarily due to lower sales volume, partially offset by favorable price realization. Sales volume was impacted by unfavorable changes in dealer inventories. Dealer inventory was about flat in the second quarter of 2024 versus an increase in the second quarter of last year.
Lower sales to users also impacted volume. Sales in Construction Industries were lower than we had anticipated due to lower-than-expected rental fleet loading in North America and continued weakness in Europe. By region, sales in North America were about flat and Latin America sales increased by 20%. Sales in the EAME region decreased by 27%. In Asia Pacific, sales declined by 15%.
Second quarter profit for Construction Industries was $1.7 billion, a 3% decrease versus the prior year. This was mainly due to lower sales volume, partially offset by favorable price realization, which benefited from geographic mix effects. Favorable manufacturing costs provided some tailwind as well largely reflecting lower material costs.
The segment's margin of 26.1% was an increase of 90 basis points versus last year. Margin was better than we had expected primarily due to a favorable product mix and the timing of planned SG&A and R&D spend. Price was in line with our expectations.
Turning to Slide 12. Resource Industries sales decreased by 10% in the second quarter to $3.2 billion, which was about in line with our expectations. The decline was primarily due to lower sales volume, partially offset by favorable price realization. Sales volume was impacted by changes in dealer inventories as dealer inventory decreased more during the second quarter of 2024 than during the second quarter of last year. In addition, we saw lower sales to users in the segment as anticipated given the challenging comparison.
Second quarter profit for Resource Industries decreased by 3% versus the prior year to $718 million. This is mainly due to lower sales volume, partially offset by favorable impacts from price realization and manufacturing costs, including lower freight.
The segment's margin of 22.4% was an increase of 160 basis points versus last year. Margin was better than we had expected mainly driven by the timing of planned SG&A and R&D spend and a favorable product mix.
Now on Slide 13. Energy & Transportation sales increased by 2% in the second quarter to $7.3 billion. The increase was due to favorable price realization, which was partially offset by lower sales volume driven by industrial, which declined in line with our expectations. The segment sales were slightly better than we had anticipated primarily driven by price.
By application, power generation sales increased by 15%. Transportation sales were higher by 7%. Oil and gas sales improved by 4%, while industrial sales decreased by 21%. Second quarter profit for Energy & Transportation increased by 20% versus the prior year to $1.5 billion. The increase was primarily due to favorable price. The segment's margin of 20.8% was an increase of 320 basis points versus the prior year. Margin was significantly stronger than we had anticipated due to better price and lower-than-expected manufacturing costs, which largely reflected favorable inventory absorption, lower freight and lower material costs.
Moving to Slide 14. Financial Products revenues increased by 9% to about $1 billion primarily due to higher average financing rates across all regions and higher average earning assets in North America. Segment profit decreased by 5% to $227 million. This was mainly due to a higher provision for credit losses, which largely reflected the absence of a nonrecurring reserve release from the prior year. The portfolio remains healthy as past dues of 1.74% on near historic lows and reflect a 41 basis point improvement compared to the prior year. In addition, the allowance rate was 0.89% our lowest rate on record. Business activity remains healthy as new business volume increased versus the prior year primarily driven by North America. We also continue to see healthy demand for used equipment where inventories remain close to historical low levels.
Moving on to Slide 15. We generated $2.5 billion in ME&T free cash flow in the second quarter and we expect our full year free cash flow to be in the top half of our annual target range of between $7.5 billion to $10 billion. Our expectations for capex remain between $2 billion and $2.5 billion for the year.
On share repurchases, the more than $1.8 billion deployed in the second quarter included a $1 billion accelerated share repurchase agreement. Approximately 75% of those shares were delivered to the company upfront with the balance to be delivered when the agreement is terminated prior to year-end.
Note that we also had an ME&T bond maturity of $1 billion in the second quarter. And given our healthy liquidity position, we did not issue new bonds. Our balance sheet remains strong with an enterprise cash balance of $4.3 billion. In addition, we hold $1.8 billion in slightly longer-dated liquid marketable securities to improve yields on that cash.
Now on Slides 16 and 17. I will show our high-level assumptions for the remainder of the year. As Jim mentioned, we now anticipate sales and revenues to be slightly lower this year versus the record 2023 level. This compares to our previous expectation for broadly similar sales. This change reflects an updated assumption of a slight reduction in machine dealer inventory, primarily in Resource Industries and lower-than-expected sales to users in Construction Industries mainly due to lower rental fleet loading in North America.
Now specific to our second half assumptions. We typically see higher sales in the second half as compared to the first and we expect sales to follow that normal seasonable trend this year. As compared to the prior year, we now anticipate slightly lower sales in the second half driven by lower machine sales to users.
Changes in dealer inventories and machines are expected to have a nominal impact as the decrease in the second half of this year should be similar to the decrease observed in the second half of 2023, which was about $1 billion.
However, note that machine dealer inventory changes will impact the quarters differently as we expect a sales headwind in the third quarter as dealers built their inventories in the third quarter of 2023 and a sales tailwind in the fourth quarter due to a smaller inventory decline than the prior year.
Finally, we continue to anticipate services growth in the second half of the year as we strive to achieve our 2026 target of $28 billion in services revenues.
Moving on to our margin expectations. As Jim mentioned, the strength of our first half performance combined with the more favorable expectations for the second half mean that we now anticipate overall adjusted operating profit margin to be above the top end of the target range for the full year.
Specific to second half margins, despite higher sales, we do expect lower margins versus the first half, which follows a typical seasonable trend. However, keep in mind that first half margins were at record levels and the magnitude of the second half decline may be slightly larger than is typical.
As compared to the prior year, we expect our adjusted operating profit margin in the second half will be similar to the prior year level. While we anticipate some favorability in manufacturing costs on improved operational efficiencies, we do expect slightly lower volumes and a slight headwind from price in the second half versus a year ago.
On price, the impact of lapping the increases taken in the second half of 2023 means that the benefit in the second half of this year will be significantly lower. In addition, we expect that improved availability across the industry will result in the normalization of the pricing environment.
To assist you with your modeling for the full year, please note that we now anticipate restructuring costs of around $450 million and that our expectations for the annual effective tax rate, excluding discrete items, remains at 22.5%.
Now on Slide 18. I'll provide a few comments on the third quarter, starting on the top line. We expect slightly lower sales and revenues in the third quarter compared to the prior year as we anticipate a dealer inventory headwind for machines, which will impact volumes.
We expect dealer inventory machines to be flattish to slightly lower in the third quarter as is typical, which compares to the atypical $400 million increase in the prior year. We also anticipate lower machine sales to users versus a strong comparison.
We expect flattish price realization in the third quarter versus the prior year due to the normalization that I mentioned a moment ago. We also anticipate that the ongoing benefit of our service initiatives will positively impact sales in the third quarter.
By segment in the third quarter compared to the prior year, we anticipate lower sales in Construction Industries primarily due to a headwind from changes in dealer inventories. In Resource Industries, we expect lower sales as sales to users are impacted by a challenging comparison similar to that which we have observed in the first two quarters of this year.
In Energy & Transportation, we anticipate higher sales versus the prior year, supported by strengthen in power generation, oil and gas and transportation. Lower sales in industrial should act as a partial offset.
For enterprise margins in the third quarter, we expect similar adjusted operating profit margin compared to the prior year as we anticipate lower volume will be offset primarily by favorable manufacturing costs.
By segment in the third quarter, in Construction Industries, we anticipate lower margin compared to the prior year on lower volume and slightly unfavorable price realization. Favorable manufacturing costs should act as a partial offset.
For Resource Industries, we anticipate slightly lower margins in the third quarter compared to the prior year due to unfavorable volume and higher SG&A and R&D spend. In Energy & Transportation, we expect a higher margin versus the prior year and stronger volumes and favorable price realization.
So turning to Slide 19, let me summarize. Strong execution and operating performance continued in the second quarter. Higher adjusted operating profit margin of 22.4% offset the decrease in sales and revenues and led to a record adjusted profit per share of $5.99.
We now expect overall adjusted operating profit margin to be above the top end of the target range for the full year based on our expected sales levels, which should now be slightly lower than levels in 2023. The net of these factors leads to our current expectation for higher adjusted operating profit and adjusted profit per share as compared to what we contemplated at the beginning of the year.
ME&T free cash flow generation was $2.5 billion in the quarter. We continue to expect to be in the top half of our target range for the full year. We have deployed $7.6 billion to shareholders through share repurchases and dividends in the first half of 2024. We continue to execute our strategy for long-term profitable growth.
And with that we'll take your questions.
