Caterpillar Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
July 29, 2021

There are 15 speakers on the call.

Operator

Welcome to

Speaker 1

the Second Quarter 2021 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, Jennifer Driscoll. Thank you. Please go ahead.

Speaker 2

Thank you, Whitney. Good morning, everyone. Welcome to Caterpillar's to Solar's Q2 2021 earnings call. With me here today are Jim Umpleby, Chairman of the Board and CEO Andrew Bonfield, Chief Financial Officer conference over to Kyle Appley, Vice President of the Global Finance Services Division and Rob Rangel, Senior IR Manager. During our call this morning, we'll be a discussion of the earnings news release we issued earlier today.

Speaker 2

You may find our slides, the news release and a video recap at investors. Caterpillardot

Operator

conference over to Tom.

Speaker 2

Simply click on Events and Presentations. Moving to Slide 2, the forward looking statements we make today are subject to risks the conference over to the operator for questions. 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. Conference over 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. Caterpillar has copyrighted this call and we prohibit use of any portion of it without our prior written approval.

Speaker 2

Conference over to you. Today, we reported profit per share of $2.56 for the Q2 of 'twenty one compared with $0.84 share in the Q2 of 2020. We're showing adjusted profit per share in addition to our U. S. GAAP results.

Speaker 2

Our adjusted profit per share was $2.60 a question on the Q2 compared with Q2 2020 adjusted profit per share of $1.27 Adjusted profit per share for both quarters excluded restructuring costs. The Q2 of 2020 also excluded a remeasurement loss conference call of $0.19 per share resulting from the settlement of pension obligation. We provide a non GAAP reconciliation in the appendix to this morning's news release. Conference over to the operator. You also can find information on dealer inventory and backlog in our slides.

Speaker 2

Now let's flip to Slide 3 call over to our Chairman and CEO, Jim Umbleby.

Speaker 3

Thanks, Jennifer. Good morning, everyone. As we close out the first half of twenty twenty one, I'd like to thank our global team for their strong performance in a challenging dynamic environment. We continue to execute our strategy for profitable growth call over to Andrew. Thank you, Andrew.

Speaker 3

Thank you, Andrew. Thank you, Andrew. Thank you, Andrew. Thank you, Andrew. Thank you, Andrew.

Speaker 3

Conference over to Andrew for a detailed review of our results, I'll briefly cover 3 topics this morning. Call over to Mr. Caddo. I'll share my perspectives on Caterpillar's 2nd quarter results. I'll then review our end markets before discussing the sustainability report, conference over to our Q2, including our new climate and energy statement that we published during the Q2.

Speaker 3

On Slide 4, conference over to Eric. We're pleased with the strong sales and profit performance during the Q2. Sales and revenues increased 29%, primarily due to higher sales volume. Call over to the operator. The 2 main drivers of our top line were strong end user demand and the impact of changes in dealer inventory.

Speaker 3

Call over to the Q2 of last year, sales to users rose roughly 15% and changes in dealer inventories provided about a $1,000,000,000 tailwind. Back to you. During our Q1 call, we mentioned that growth in sales to users would be significantly higher than the 8% we saw in the Q1.

Operator

Conference over to the operator.

Speaker 3

Sales to users rose about 15% versus the Q2 of last year and trended better for the 4th consecutive quarter. Conference over to Mr. President. We had gains in all three of our primary segments. Machines rose 20% with similar increases in both construction industries the call over to the operator.

Speaker 3

Thank you, Steve.

Operator

Thank you. Thank you. Thank you.

Speaker 3

Thank you. Thank you. Thank you. Our next question comes from the line of Chris R. C.

Speaker 3

Call

Operator

over to the operator. And demand related to non residential improved.

Speaker 3

Mining was also up. Quotation activity for miners remained strong call over to Steve. And we've seen a significant improvement in orders through the 1st two quarters. We were also pleased that heavy construction and quarry and aggregate strengthened call over to you as did several end markets within energy and transportation. Energy and transportation sales to users turned positive, rising 1%.

Speaker 3

Call over to Steve. Keep in mind that the slowdown in end user demand in 2020 affected energy and transportation later than the other segments as some of the applications are impacted call back to the operator by timing of large products. From a geographic perspective, we had strength in sales across all regions. Conference over to the operator. North America was quite strong as expected.

Speaker 3

E and E and Latin America also showed double digit sales growth. Call over to the operator. Asia Pacific saw good growth in most areas outside of China. China declined modestly in the quarter call back to the operator for the Q2 of 2020, leading to a tougher comparison. We also had modest benefits to sales this quarter

Operator

call back to the operator for the Q1

Speaker 3

of 2019. As we noted in our Q1 call, Q2 2020 call over

Operator

to the operator.

Speaker 3

So a decline in dealer inventory of $1,400,000,000 but we did not expect a significant change during 2021.

Speaker 4

Conference over to the operator.

Speaker 3

Dealer inventory declined $400,000,000 during the Q2. Similar to the Q1 of this year, dealer inventory remains near the low end the call over to the operator. I'll now provide an update on Caterpillar supply chain. In spite of the unprecedented challenges impacting the industrial sector, call over to Mr. President.

Speaker 3

I'm proud of the work by our team to minimize disruptions, which are relatively modest during the Q2. For the majority of our products, call over to you. We mentioned on the last earnings call that the supply chain situation, including transportation, was challenging call over to Mr. Chairman. And that our team was preparing contingency plans such as alternative assembly processes at our facilities.

Speaker 3

During the quarter, call over to Mr. President. Our team implemented some of those plans and continue to work closely with our suppliers to mitigate supply chain impacts on production. Conference over to Mr. President.

Speaker 3

We still anticipate that supply chain challenges will remain throughout the year and our goal is to minimize the impact on our ability to meet improving customer demand. Conference over to Mark. In addition, as we mentioned during our last earnings call, we do not expect a significant benefit from dealer restocking during 2021. Conference over to you. Operating profit in the 2nd quarter increased 128 percent to $1,800,000,000 Volume growth, call back to the operator.

Speaker 3

Price utilization and strong results from Financial Products drove the improvement. We did have some favorable price call over to the operator to discuss the financial results. We also saw higher short term incentive compensation expense call over to Andrew. And some higher material costs, including steel and other commodities as expected. Andrew will discuss margins in more detail.

Speaker 3

Call over to the operator. The adjusted operating profit margin improved to 14.1% versus 9.3% call over to the operator for the Q2 of 2020 as we expected. Operating margins increased in both Construction Industries and Resource Industries call over to the operator. Despite headwinds from short term incentive compensation and supply chain challenges, profit per share was $2.56 conference call back to the call back to the call. Versus $0.84 in the Q2 of 2020.

Speaker 3

Adjusted profit per share was $2.60 conference over to the operator to discuss the call over to the operator to discuss the financial results. Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve.

Speaker 3

Call over to Mr. Chairman. Free cash flow from Machinery, Energy and Transportation was another highlight of the quarter. We generated $1,700,000,000 of ME and T free cash back to the call over to Craig. Thank you, Steve.

Speaker 3

Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve.

Speaker 3

Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve.

Speaker 3

Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve.

Speaker 3

Good morning, Steve. Good morning, everyone. Conference over to you. We also announced we're increasing our quarterly dividend by 8% to $1.11 per share. We paid a higher dividend annually for 27 consecutive years.

Speaker 3

Conference over to Mark. We returned about $800,000,000 to shareholders in the Q2 via the dividend and share repurchases. Conference over to Mr. President. We expect to repurchase sufficient shares between now and the end of the year to at least offset absolute dilution from shares issued this year.

Speaker 3

Conference over to Mark. In light of the highly fluid environment, we will continue our practice of not providing profit per share guidance. However, we'll share some high level assumptions for the call back to the Q1 and the full year. For 2021, as we said on the last earnings call, we expect to achieve the targets for call over to the operator. The adjusted operating profit margin that we set out at our 2019 Investor Day of 300 to 600 basis points of improvement conference over to the operator to discuss our performance during the 2010 to 2016 period at similar sales similar levels of sales and revenues.

Speaker 3

Conference

Operator

over to Mr. President. We also expect to achieve

Speaker 3

the free cash flow targets we set for ME and T at Investor Day of an incremental $1,000,000,000 to $2,000,000,000 at all points in the cycle. Conference over to Andrew will elaborate with a few of our assumptions for the upcoming quarter in a few moments. Please turn to Slide 6, conference over to you, and I'll walk through our expectations by end market. Overall, we're becoming more optimistic about our end markets since our last earnings call. Conference over to the operator.

Speaker 3

We're pleased that many end markets continue to improve and demand continues to strengthen. Global demand is strong and the outlook is positive. Conference over to Mr. President. In Construction Industries, for example, we're optimistic about the industry as we expect end market demand to show continued positive growth.

Speaker 3

Conference over to the operator. Residential and non residential construction demand is expected to remain strong, led by North America. Conference over to Mr. President. In China, we expect the industry for excavators above 10 tons to be about flat in 2021 compared to a very strong 2020.

Operator

Conference over to Mr. President.

Speaker 3

Please keep in mind that demand was very strong in this market during the Q1. Our newly introduced GX models continue to perform well call over to Mr. President. And we're still receiving positive customer feedback. In the balance of Asia Pacific, we believe stronger than expected commodity prices, housing strength call over to the operator for questions.

Speaker 3

Switching to Resource Industries. In mining, we continue to call back to reflect improvement in miner CapEx as commodity prices remain supportive of growth. Parked large mining trucks decreased in the quarter conference over to the operator for the call. And remain at relatively low levels in all regions as utilization increases. Customer interest in Caterpillar's autonomous mining solution remains high conference over to our operator.

Speaker 3

And customers now autonomously operate or are deploying CAT machines on 18 sites around the world. Call over to Mr. President. While our mining customers continue to display capital discipline, we expect mining to continue to improve over the long term call over to Mr. President.

Speaker 3

As the energy transition drives higher demand for commodities. In heavy construction and quarry and aggregates, conference over to the operator. We've seen improvement in the Q2, particularly in North America and EMEA. We expect continued strengthening in this part of the portfolio. Conference over to you.

Speaker 3

Finally, in Energy and Transportation, we expect oil and gas to continue to strengthen gradually. We expect customers call over to the operator to continue to demonstrate capital discipline and pockets of excess capacity remain. In power generation, strengthened data center should continue. Conference over to you. Industrial demand is expected to improve along with the global economic recovery.

Speaker 3

Transportation should see strength in rail services the call over to the operator. Thank you, Steve. And growth in international deliveries for locomotives and marine demand is projected to grow modestly while remaining at low levels. Conference over to you. Now on Slide 7.

Speaker 3

Since our last quarterly earnings call, we published our 2020 Sustainability Report conference over to the operator to establish and report progress against our environmental, social and governance goals. We also released a new climate and energy statement. Conference over to you. Caterpillar shares the concerns of governments and the public about the risks of climate change and supports global efforts to mitigate its impact. Conference over to Mr.

Speaker 3

President. We are committed to contributing to a reduced carbon future. This commitment is reflected in our sustainability vision call over to the operator to provide a brief update on our financial results. We are pleased to announce that we

Operator

are pleased to announce

Speaker 5

that we are well positioned

Speaker 3

to improve the quality of

Operator

the environment and our communities. Some of the way

Speaker 3

we do this are by further reducing greenhouse gas emissions from our operations call over to Mr. Chairman. Thank you, Mr. Chairman. Thank you, Mr.

Speaker 3

Chairman. Thank you, Mr. Chairman. Thank you, Mr. Chairman.

Speaker 3

Call over to Mr. President. Our 2020 Sustainability Report highlights 7 new environmental, social and governance goals we've set to achieve by 2,030. Call over to Mr. President.

Speaker 3

These goals, which address issues most relevant to our customers and other stakeholders, are focused on the climate and environment in addition to safety. Call over to you. One of these goals is to ensure that 100 percent of Caterpillar's new products through 2,030 will be more sustainable than the previous generation. Call over to Mr.

Operator

Kelly. It's an inspiring time to

Speaker 3

be a Caterpillar employee. I'm pleased with all the good work already underway across the company. Call over to Mr. President. We're developing products and services that facilitate fuel transition, increased operational efficiency and reduced emissions to help communities thrive call over to Mr.

Speaker 3

Chairman. And to help our customers achieve their environmental goals. By establishing and reporting progress on our ESG targets, we provide transparency about our progress conference over to the operator and the operator to further increase transparency, we will strive to provide an update or example during our earnings calls. Conference over to you. This quarter, I'll close with an example.

Speaker 3

Recently, Nivomong BiTE or NMG conference. Announce the collaboration with us to fully power their Naturwini graphite mine with 0 emissions machines by 2028. Call over to Catepillar will be the exclusive equipment, technology and service provider for NMG. We'll be developing, testing and producing Cat 0 emission machines conference over to the project in Saint Michel Deschamps in Quebec, Canada. In conclusion, we continue to execute our strategy for long term profitable growth back to the operator to discuss our financial results.

Speaker 3

Looking forward, we're optimistic about our ability to mitigate supply chain challenges and are encouraged by customer demand conference over to Andrew.

Speaker 6

Thank you, Jim, and good morning, everyone. Call over to Mr. President. I'll start by walking you through 2nd quarter results, including some color on the segment performance. Then I'll turn to the balance sheet and our thoughts for the Q3.

Operator

Conference over to you.

Speaker 6

Beginning on Slide 8, as Jim noted, sales for the Q2 increased by 29% to $12,900,000,000 due to higher volumes. Conference over to

Speaker 3

the operator.

Speaker 6

Operating profit of $1,800,000,000 increased by 128%, reflecting margin expansion primarily due to higher volumes. Call over to the operator. 2nd quarter profit per share was $2.56 compared with $0.84 in 2020. Adjusted profit per share more than doubled to 2.60

Operator

call back to the operator

Speaker 6

for the Q1. I'll start with the top line on Slide 9, where we continue to see strong volume gains. Conference over to you. Sales and revenue growth was in the double digits percent for all three of our primary segments and on a consolidated basis for every region. Call over to Chris.

Speaker 6

Growth in North America, our largest region, is up 30%, reflecting strong results in construction industries and resource industries. Call over

Operator

to the operator. Growth in the

Speaker 4

EAME was also robust, up 33%.

Speaker 6

Latin America rose by 67%, albeit off a slow base conference. Asia Pacific sales grew by 12%. Overall, sales to users increased by 15%. Conference over to you. The acceleration from the 8% rate of growth in the Q1 was in line with our expectations of a significantly higher percentage as we discussed last quarter.

Speaker 6

Conference over to the operator. Sales to users in construction industries rose by 20%, led by North America. Residential construction continued to be strong in North America and EAME. Conference. Non residential construction in North America is recovering well as well.

Speaker 6

Latin America showed very good growth in sales to users off a low base. Call over to the operator. Asia Pacific was lower due to a modest decline in China. As Jim mentioned, the Chinese market started to recover earlier in 2020 than other countries, call over to a tougher comparative. Overall, we still expect China to have another strong year with the industry in the above the call over to Tim's on the excavator market about flat, retaining last year's large gain.

Operator

Conference over to the operator.

Speaker 6

Sales to users in Resource Industries increased by 21%, reflecting growth from heavy construction and quarry and aggregates. Call. Demand for equipment and mining also improved this quarter. And as Jim mentioned, we remain encouraged about the upside potential in mining. Conference over to the operator.

Speaker 6

In Energy and Transportation, sales to users rose by 1% in positive territory despite the fact that E and T sales to users were impacted to a lesser extent call over to the operator and other segments in the Q2 of last year due to the timing of large deals. Now turning to Slide 10. Conference over to the operator. Operating profit increased to $1,800,000,000 The 128% improvement reflected higher volume in our 3 primary segments, back to the operator to discuss favorable price and higher profits from Financial Products. That was partly offset by the impact of restoring short term incentive compensation.

Speaker 6

Call over to the operator. The assumption for short term incentive compensation in the quarter was also raised by about $100,000,000 compared to the Q1 conference over to the operator to reflect our strengthening results. We now expect our full year charge to be about $1,500,000,000 conference over to Mr. President. This quarter, we had $25,000,000 in restructuring expense, over $100,000,000 lower than a year ago.

Speaker 6

Conference over to Mr. President. We now expect around $250,000,000 in restructuring expenses this year. We also had a full quarter impact of SPNN Oil and Gas, call over to Mr. President, including some M and A related costs, which I'll cover in a bit more detail when we discuss Energy and Transportation.

Speaker 6

Call over to the operator.

Operator

The adjusted operating profit margin rose 480 basis points to 14.1%.

Speaker 6

As we expected, research and development call over to the operator for questions. And selling, general and administrative expenses rose. These increases reflected not only the impact of incentive compensation, conference over to you, but also investments in key priorities such as growing services and investing in product development to help our customers achieve their climate objectives. Conference over to you. As we explained in April, we did expect a sequential decline in margins versus the Q1.

Speaker 6

Margins were broadly in line with our expectations. Conference over to you. As we said, price realization turned positive in the quarter, while material and freight costs were negative. Conference over to you. We did see a lower margin reduction than expected from absorption as production rates remain strong.

Speaker 6

However, the increase in short term incentive compensation more than offset call over to Eric. The global tax rate remains about 26%. Adjusted profit per share of call back to the operator for the Q2.60 excludes $0.04 of restructuring expense versus $0.24 of restructuring expense as well as $0.19 for the settlement of pension obligations conference over to Slide 11. Let's take a look at segment performance, conference over to you. Starting with Construction Industries.

Speaker 6

Sales increased by 40% to $5,700,000,000 conference. As I mentioned earlier, the increase in end user demand was led by North America, where residential construction remains strong the conference over to the operator. Overall, dealers reduced their construction equipment inventory call back to the operator for questions. Less in the Q2 of 2021 than in the Q2 of 2020. The segment's 2nd quarter profit increased by 98 call back to the presentation to $1,000,000,000 The near doubling came from higher sales volume and favorable price realization, including geographic mix.

Speaker 6

Call over to the operator. Cost absorption and efficiencies were positive in the quarter. That was partly offset by 2 items, the impact to short term incentive compensation and we started to call over to 18.1%. Turning to Slide 12. Resource Industry sales increased by 41% in the 2nd quarter call back to the operator for the Q1 of 2019.

Speaker 6

The increase was mostly due to higher end user demand for equipment and aftermarket parts and changes in dealer inventories.

Operator

Call over to Mr.

Speaker 6

Chairman. As we expected, heavy construction and quarry and aggregates began to improve and we expect continued improvement from here. Call. End user demand in mining also continued to improve. Sales were up in all regions.

Speaker 6

2nd quarter profit for Resource Industries more than doubled, call over to the operator for the call. Increasing by 138 percent to $361,000,000 The increase was mainly due to higher sales volume, call over to you. Partially offset by the impact of our short term incentive compensation expense. Price was slightly negative, mostly due to changes in prices call over to the operator

Operator

for Australian dollar denominated

Speaker 6

aftermarket parts. These were reduced to reflect currency movements versus the U. S. Dollar. The call over to the operator.

Speaker 6

The operating margin increased by 5 70 basis points to 14%. Conference over to you. Now on Slide 13. Energy and transportation sales increased by 20% to $5,000,000,000 conference over to you. That includes an 11% sales increase in oil and gas, largely due to higher sales of reciprocating engine aftermarket parts,

Operator

call over to the operator. Driven in part by the addition of SPM Oil and Gas.

Speaker 6

Power generation sales improved by 18%, reflecting increased sales for large back to the operator. Industrial sales increased by 33% with demand across all regions. Call over to the operator. The presentation rose by 10% on higher rail services and lean sales. Profit for E and T increased by 17% to $731,000,000 conference over to the operator.

Speaker 6

The improvement was due to higher sales volume. That was partially offset by a couple of factors, including the impact of short term incentive compensation call over to the operator for the Q and A session. And acquisition related expenses primarily for SPM Oil and Gas. Higher freight costs were offset by manufacturing efficiencies. The call over to the operator.

Speaker 6

The segment's operating margin declined by 30 basis points to 14.7%. With regards to SPM Oil and Gas, we do expect this the conference over to the operator. This was the 1st full quarter since the acquisition and it will take some time for the synergies to be realized. Conference over to Mr. President.

Speaker 6

We're very pleased with the acquisition and expect to see the full benefits of the acquisition as we move forward. Call

Operator

over to you.

Speaker 6

On Slide 14, financial products revenue increased by 1% to $774,000,000 as the portfolio remained relatively constant. Conference over to the operator. Segment profit remains strong, increasing by 64% year over year to $243,000,000 which was about flat compared to the Q1 of 2021. Conference over to you. The year over year profit increase was due to a lower provision for credit losses at CAAT Financial compared to the year ago quarter, call over to Mr.

Speaker 6

President, which

Operator

reflected the absence

Speaker 4

of forecasted

Speaker 6

COVID-nineteen related impacts. In addition, we had a higher net yield and average earning call back to the operator. Thank you, Steve. Thank you, Steve. Thank you, Steve.

Speaker 6

Thank you, Steve. Good morning, everyone. Good morning, everyone. Conference over to you. Our credit portfolio remains in good shape as indicators of customer health are all positive.

Speaker 6

Past views continue to improve to conference over to you. Credit applications remain strong as well, up 5% compared to the Q2 of 2020 and up 9% compared to the Q1. Conference over to you. New business volume continues to trend up, led by North America. Request for loan modifications conference over to Slide 15.

Speaker 6

We're confident that in 2021, we'll achieve our Investor Day call over to $500,000,000 last year. The increase in ME and T free cash flow reflected higher profit offset in part by a $500,000,000 a sequential increase in Caterpillar inventory in the Q2 of 2021. The inventory increase is primarily in components and work in process inventory conference over to you. And reflects strengthening end user demand and our response to supply chain challenges. The call over to Mr.

Speaker 6

President. We continue to maintain a solid liquidity position in support of our strong mid day credit rating. Conference over to Mr. President. The company ended the period with $10,800,000,000 of enterprise cash.

Speaker 6

Conference over to Mr. President.

Operator

We've said that we intend

Speaker 6

to return substantially all of our MUT free cash flow to shareholders through the cycles. We've said that we will do it through a combination of dividends call over to our shareholders. We will now be conducting a few additional share repurchases, reserving our balance sheet to fund additional growth initiatives and mergers and acquisitions. Conference over to you. In the past 3 years, we've returned on average 106% of our ME and T free cash flow to shareholders.

Speaker 6

Conference over to Mr. President. This quarter, we announced we'll increase our quarterly dividend by 8% to $1.11 per share, which is about $600,000,000 per quarter. Conference over to you. I'm happy to say we expect to extend our status as a dividend aristocrat for another year.

Speaker 6

Call over to Mr. Chairman. We repurchased about $250,000,000 of our common shares this quarter. We have about $4,600,000,000 remaining under the current share repurchase authorization. Conference over to the operator.

Speaker 6

We expect to continue to repurchase shares in the second half and intend to at least offset absolute dilution from shares issued during the year. Conference over to Jim. As Jim mentioned, there's no change to our current practice relating to guidance. However, as we've been doing, we are providing color on the call over to the coming quarter to give you a sense of what we're expecting to happen. Moving to Slide 16.

Speaker 6

Call over to Mr. President. Again, we expect to achieve our Investor Day targets for adjusted operating profit margins in 2021 despite reinstating the short term incentive compensation program. Conference over to you. That's now projected to be a headwind of $1,500,000,000 for the year or about 300 basis points of pressure on margins.

Speaker 6

Conference over to you. We expect stronger sales than normal seasonality would imply. The growth rate in sales to users conference call over to the Q3 when compared to the prior year and should be significantly higher than the 15% rate we saw in the current quarter. Conference over to Mr. President.

Speaker 6

In Construction Industries, we expect improvement in residential and nonresidential construction demand to continue. As we discussed last quarter, conference over to the operator. We see tougher

Operator

comparisons in China.

Speaker 6

Resource Industries end user demand should see support from both mining and heavy construction and quarrying and aggregates. Conference over to Mr. President. We also expect energy and transportation sales to increase on stronger underlying demand. All of this is expected call back to the operator to lead to good volume growth in the 3rd quarter even while we manage supply chain challenges.

Speaker 6

Call over to Mr. Chairman. As we told you last quarter and as Jim mentioned today, whilst dealers are independent businesses and make their own decisions about their inventory, call over to Mr. Scott. We don't expect a significant benefit from restocking in 2021.

Speaker 6

Call over to the operator. 3rd quarter margins are expected to be stronger than the prior year with leverage from strong volume more than offsetting the impact of reinstating short term incentive compensation. Conference over to the operator. However, we anticipate 3rd quarter margins to moderate versus the second quarter as we see some cost headwinds in the second half of the year. Conference over to you.

Speaker 6

Within machines, we currently expect price to offset higher manufacturing costs in 2021. Conference over to you. In the Q2, price was strongly positive, reflecting strong geographic mix benefits and higher price realization. Conference over to the operator. We did put through price increases from machines at the end of the second quarter, which will be positive, but geographic mix will be less of a benefit.

Speaker 6

Call over to Mr. President. Although we did take pricing actions, we do expect higher manufacturing costs, which means that our gross margin percentage will be moderately low in the second half back the call back to the call. We should also see accelerated spend in SG and A and R and D in the back half of the year call over to Mr. Chairman.

Speaker 6

As business gets back to normal. Specifically within Energy and Transportation, we expect some margin headwinds in the second half of the year. Call over to Mr. The conference over to the operator. I would now like to hand the conference over to the operator to discuss the financial results.

Speaker 6

In addition, as many of the ENT applications are back over to the operator. Experiencing different levels of demand, we did not put through additional price increases in the second half second quarter. Conference over to you. So this means material and freight cost increases will be a headwind for that segment. In summary, on Slide 17, conference over to the operator.

Operator

Thank you, Steve.

Speaker 6

Thank you, Steve. Thank you, Steve. Good morning, everyone. Thank you, Steve. Good morning, everyone.

Speaker 6

Good morning, everyone. Good morning, everyone. Good morning, everyone. The conference over to the operator. Adjusted profit per share more than doubled in the quarter.

Speaker 6

Conference over to Mr. President. We are confident in the outlook for our end markets and expect to achieve our Investor Day margin and free cash flow targets. Call over to

Speaker 1

you. Your first question comes from the line of Jamie Cook from Credit call over to you. As a reminder, management ask that we limit to one question per analyst. Your line will be muted after you ask your question. However, If your question is not answered for any reason or clarification is needed, please get back into the queue.

Speaker 1

Jamie, your line is open.

Speaker 7

Call over to you. Hi, good morning. Good

Operator

morning, Jamie.

Speaker 7

My first question, Jim, if you could just provide some more color on what you're seeing on the supply chain side the call over to you. And when you expect some of the supply chain issues to ease and I guess to what degree is your 2021 top line limited by supply chain or the inability to get product out the door. Thank you.

Speaker 3

Thanks, Jamie. And first of all, we really appreciate the efforts of our employees call over to Steve. And one of the things that we're seeing, of course, is improving end user demand is adding pressure in the supply chain and on freight as well. The call back over to the operator. And some of the supply chain challenges are more broad based than occurs in a normal upturn.

Speaker 3

You may think about the last upturn, we had casting issues and some other back the call back to the operator. This time, it's more broad based than is typical. Having said that again, as we said in the last call, our team is working very hard call back over to the operator to avoid or minimize those supply chain challenges that would impact our ability to meet to fully meet improving customer demand. Call back over to the Q2. We think that the impact to the Q2 was modest.

Speaker 3

And again, we're working very hard to try to call. We haven't had some of the large factory shutdowns for weeks that you've read about with some other industrial companies. We've also taken some actions to do things like the conference over to the operator. With the resins, we

Operator

changed our material

Speaker 3

spec due to shortages that were out there and it helped us keep production going. Again, majority of our products for end users are delivered within call over to the operator. Some of the bigger challenges have been on the smaller products, BCP. A lot of those products are used in residential in North America. So those are some of the bigger challenges we're having in terms of availability.

Speaker 3

But again, the majority of our products for the call back to questions. Our end users are within the normal ranges, and we're working very closely with our dealers to try to ensure that we meet actual customer demand.

Operator

Call over to you.

Speaker 1

Your next question is from the line of Jerry Revich with Goldman Sachs.

Speaker 8

Yes. Hi, good morning.

Speaker 3

Call back

Speaker 8

over to Jim and Andrew, I'm wondering if we could just dig into the environmental goal targets that you just updated us call. In terms of when we look at just quantifying the mix of orders today, that's either your autonomous solutions and mining or 0 emissions products the conference over to the operator. In across the portfolio, can you just help us quantify where we stand now in terms of back to you. Actually driving orders for those types of products for you folks today that also improve back And hit the environmental goals for your customers. Thanks.

Speaker 3

Thank you, Jerry. You mentioned autonomy the call. The demand for autonomous products continues to be quite strong. A lot of quotation activity going on. As I mentioned earlier, we currently are deploying the conference over to the operator.

Speaker 3

Autonomous mining equipment in 18 different sites, 10 customers, 3 continents for a whole variety of commodities, iron ore, copper, oil sands, gold, coal mines. Call. And so again, we believe that will continue to grow at a rapid pace. We're also expanding our autonomous solutions to other support equipment like dozers, drills, underground the conference over to the operator for questions. In terms of 0 emissions products, we're very focused and working closely with our call back to questions.

Speaker 3

We talked about the NMG announcement during the call here already this morning. That's a great example of one where the customer has a need, they have a date, the call over to Steve. We're working very closely with them as their exclusive supplier with product and technologies to make it happen. So again, the call over to Steve. We're working very closely to develop products to meet customer demand.

Speaker 3

And as you can imagine, it's a big topic a discussion and focus by our leadership team. It's something we'll continue to do moving forward. And some of the goals we put out call back to the operator. In our sustainability report, we talked about 100% of our new products through 2,030 will be more sustainable than the previous generation in some manner, call back over to Tom. And we're very focused on doing that.

Speaker 3

So again, if you look at our climate and energy statement, it talks more about some of our approaches and our specific goals conference over to the operator for reducing greenhouse gas emissions in our own operations. So again, our strategy here will work on greenhouse gas emissions and be more sustainable in our own operations call. And are very focused on helping our customers meet their goals as well.

Speaker 1

Your next question from the line of Rob Wertheimer with Melius Research.

Speaker 9

Hi, thank you. Good morning, everybody.

Speaker 3

Call back to you. Good morning, Rob.

Speaker 9

I actually had a question on autonomy as well. The expansion of 18 sites is back momentum for sure. You've talked in the past about examples of where sites have saved 20% or 30%, I think 30% productivity. Back So not just a driver, but mining more with less cost, less time, less waste, etcetera. I wonder if you have any update on just call.

Speaker 9

As you've expanded, is that consistent? You've seen that you mentioned a bunch of different sites you're at, different minerals. Is that consistent across sites? And then the call over

Operator

to Chad. Is there

Speaker 9

a potential at least for Cat to share in some of those savings? Are you selling hardware to this point or do you have developing revenue models with customers where you can promise greater productivity and sharing some of the benefits? Thank you.

Speaker 3

Yes. Thank you, Rob. So that 30% call. Productivity increase is actually something that was stated by a customer, not us. And so in our view, our customers are in fact seeing productivity gains, which is one of the reasons that conference over to you.

Speaker 3

Adoption continues to move forward. So I believe it's also really accelerating. So it's clear that our customers are seeing the benefit or they wouldn't be continuing conference over to put an autonomous operation. There's a variety of models that we have that we use with our customers. The Typically, there's a monthly kind of fee that we receive.

Speaker 3

Of course, we sell the equipment to them as well. But again, Commercial models are very dependent upon individual customer negotiations.

Speaker 1

Call. Your next question is from the line of David Raso with Evercore ISI.

Speaker 10

Hi, good morning. Good morning, David. Just a straightforward kind of near term question. Call. The supply chain issues, when we think of your normal, at least historical normal sequential revenue, conference.

Speaker 10

2Q, 3Q, 3Q, 4Q, given the supply constraints, but balance of course demand strong, how should we expect the revenue cadence to the historical norm of 3rd quarters down about 5% and then the 4th quarter was back about 10%. Thank you. Conference

Speaker 6

over to you. Thanks, David, and hi. Yes, obviously, what we are seeing though is this is an atypical year. Conference over to you. And as we've indicated, we don't necessarily expect a normal seasonable pattern between Q2 and Q3.

Speaker 6

Call over to Mr. President. Obviously, underlying volumes, we do believe and particularly in end user stews, we do expect to grow significantly and that rate of growth to be higher back the call

Speaker 4

back to the call back

Speaker 6

to the call back to the call back

Operator

to the call back to the call back to

Speaker 6

the call back to the

Operator

call back to the call back to the call back to the call back to the call back to the call back to the call back to the call

Speaker 3

back to

Operator

the call back to the call back to the call back to

Speaker 4

the call back to the call back

Operator

to the call back to

Speaker 6

the call back to the call back to the call back to the call back to the call back to the call

Operator

back to the call back to the

Speaker 6

call back to the call back conference over to you. And that's a factor which we have to look at. And obviously, at the moment, we haven't updated about the Q4, but we'll give you an update probably in October.

Speaker 1

The call over to you. Your next question is from the line of Steven Volkmann with Jefferies.

Speaker 11

Call over to Chris. Hi, good morning guys. My question is on Resource Industries and I'm curious if you can give us any color call back over to Steve. In terms of the growing backlog there on kind of machines relative to parts and I'm just trying to think about sort of the mix of that business call back over

Speaker 5

to Scott going forward. Yes.

Speaker 3

Thank you, Steven. So as we've mentioned over the last few quarters, we're bullish on the call over to the operator. The trend in mining, we're seeing robust quotation activity. We are seeing increased orders. We talked about autonomy already this morning.

Speaker 3

Conference over to Tom. We have seen certainly strength in aftermarket for mining, but we also see strength in OE as well. Call over to Steve. So again, as utilization improves, as the energy transition drives higher commodity prices, conference over to you. That is driving activity for us in both parts and OE.

Speaker 1

Call over to you. Your next question is from the line of Ross Gilardi with Bank of America.

Speaker 10

Hey, good morning guys.

Speaker 6

Conference over to Ross.

Speaker 12

Jim, I just had

Speaker 10

a question just on pipeline activity in general. I mean, there seems to be pretty limited new pipeline activity back to the operator. Despite the run up in energy prices, would you agree with that? And are you seeing that across your business? I mean, maybe just talk about what you're seeing with solar and with to the operator for the Q1 of 2019.

Speaker 10

And then just comment on the choice not to raise prices in E and T despite the call over

Speaker 3

to the operator. Is there just

Speaker 10

too much excess capacity out there to risk losing market share in the second half? Thanks.

Speaker 3

Call over to Tom. Thank you. Thank you, Ross. As I mentioned earlier, we do expect our customers are displaying capital discipline and we expect that to continue. Call back over to the operator.

Speaker 3

In terms of pipeline activity, our business, I believe, was actually up in the Q2. So that is the call over to the operator. One data point. Again, it's we'll see how the future unfolds here in terms of oil and gas. Conference over to you.

Speaker 3

We are we do feel good about a gradual turn in that business. Oil prices are supportive of investment. But again, our customers are displaying that capital discipline. Conference over to you. There was a lot of strength in natural gas pipelines for a few years and that tends to be a cyclical business.

Speaker 3

I mean, if you look back over the last 30 years, just in my experience, conference. You go through periods of very strong activity that followed by periods of lower activity. So again, it's a cyclical business that goes up and down. Conference over to Chris. But for our business, we did see an improvement in the 2nd quarter and pipeline versus the first.

Speaker 6

Yes. And on the Specifically on the price increase side, just given that the nature of the recovery within ENT is slightly different call over to where we're seeing in CI and RI, where there's obviously much stronger underlying demand signals. So if you saw in the quarter, call back to the operator. Machines, STOOM's end user sales were up 20%, ENT was up 1%. They are in slightly different places, conference.

Speaker 6

And therefore, it is a very logical decision to actually take the view that obviously you don't want to put at risk the recovery within the ENT markets. Conference over to you. So we'll take a little bit of pain on price in the short term. However, obviously within our construction businesses and then with RI, we do call over to the operator. And just remind you, in manufacturing costs, call over to you.

Speaker 6

A significant amount of that is actually a step increase, which we would not price for as well and some of that is also going to impact E and T.

Operator

The call over to you.

Speaker 1

Your next question is from the line of Mig Dobre with Baird.

Speaker 9

Thank hand the call over to Mr. Just looking to make sure that I have this straight. It sounds to me call back to you. That you expect revenues to be up sequentially in the Q3 relative to the second based on your end user demand commentary. Call back to the line.

Speaker 9

In terms of the margin moderating sequentially, it's pretty clear that this is going to be the case with Energy and Transportation. Conference over to you. But will the other segments see a similar dynamic? And if so, can you help us understand kind of moving pieces and why? Thank you.

Speaker 5

Call over to you. Yes.

Speaker 6

So overall, as we've indicated, we do expect the Q3 to be strong. Call over to Steve. And obviously, that will effectively, stews will be higher the rate of growth of stews will be higher back to the operator to

Operator

review the financial results.

Speaker 6

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 6

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 6

Thank you. Our next question comes from the line of call over to you. As far as the margin, yes, ENT will moderate. That's an impact, as we said, of not putting price through. Conference over to the operator.

Speaker 6

Within CI and RI, within the machines businesses, obviously, we've seen price benefit. Part of that price benefit is geo mix. Conference over to you. Geo mix will come off a little bit, so there will be an offset between geo mix and price. And that's really due to the mix of sales between the different geographies, which impacts call over to GeoMx.

Speaker 6

So price won't improve, but obviously you will start seeing some material cost increases call back over to the operator. And probably some increasing freight costs based on what we're seeing in the market today, that will be where the margin pressure is back to you on the machine side, both CI and RI. Also in addition, obviously, as I said, call over to you. We do expect some increases in the underlying SG and A and R and D spend as the return to work normalizes call back. And some of the things like travel start opening up, and we start seeing some of those expenses come back.

Operator

Call over to you.

Speaker 1

Your next question is from the line of Jairam Nathan with Daiwa.

Operator

Call over to you.

Speaker 5

Hi, thanks for taking my question. I just wanted to kind of try to get your strategy call back to you. On batteries and fuel cells, recently, I think Wabtec announced an agreement with GM where they will be sourcing GM's call back to you. I just wanted to understand what your strategy is on that. Would it be more internal or would you be open to external sourcing?

Speaker 5

Call over to you.

Speaker 3

Thank you, Jeremy, for your questions. So you may recall that we introduced last year the first zero emission switch locomotive the call back to a couple of customers something we're excited about. But we're very flexible and we will do certain things ourselves. We'll do certain things with partners and suppliers. But again, we're those discussions are ongoing and we'll come up with as we do with all of our products.

Speaker 3

Call. Some things we'll make ourselves, some things we'll get from suppliers, some things we'll get from partners and we're working our way through that.

Operator

Call over to you.

Speaker 1

Your next question is from the line of Stanley Elliott with Stifel.

Speaker 4

Hey, good morning, everyone. Thank you for taking the question. Quick question around infrastructure and the timing of when you all would see that. Certainly, lots of discussion here in the U. S, but really elsewhere, back Those monies take some time to flow through the system.

Speaker 4

Do you end up seeing end market demand pick up ahead of that and more concurrent with it? Just trying to get a frame from when we could see that benefit.

Speaker 3

Call over to you. Thanks. Well, thank you for your question. And we already are seeing stronger heavy construction activity, something we saw in the Q2, and we expect conference. That improvement to continue.

Speaker 3

So that is irrespective of an infrastructure bill in the United States being passed. We're seeing conference call over to the operator. It's always difficult to estimate timing. Typically that helps the confidence of our customers, conference call over to Mr. President, which helps our business, but we are already seeing an improvement in our heavy construction activity.

Speaker 3

And as again, we expect that strength call back to continue moving forward regardless of the dealer now.

Speaker 1

Call over to you. Your next question is from the line of Ann Duignan with JPMorgan.

Speaker 2

Conference over to you. Yes. Hi, good morning. Maybe just

Speaker 13

back to your comments on the geographic mix in CI and RI being negative. Back

Speaker 1

to the

Speaker 13

to just your comment on the non res sector, or maybe geographic mix, I can appreciate that. But maybe you could just walk us crew a comment on the negative mix in both of those segments as we go forward.

Speaker 6

Call back to the operator. Sorry, I didn't quite confuse you. It's actually not negative, the conference over to the operator. It is sequentially lower the benefit of GeoMx. And most of that is obviously if you remember last year, when we looked at the call back to the operator.

Speaker 6

There was a big move between obviously China in the second half of the year was very strong recovery. The U. S, we saw inventory reductions and softer demand. So there was a negative drag on GeoMx. 1st quarter, obviously, China was very strong in CI, the U.

Speaker 6

S. Slightly weaker. Call over to Steve. Obviously, now in the Q2, we've seen that turn around quite significantly and that gave us a big benefit of GeoMx in Q2. Conference.

Speaker 6

That will moderate because the relative gap of North America versus the other geographies will actually diminish. Call. So that's how it works and that's why we think it will actually still be a benefit, but will be less positive than it was call back to the operator for questions. However, we do expect the price increases that we put through to offset that, so we'll see other price realization mitigate that impact.

Operator

Call over to you.

Speaker 1

Your next question is from the line of Nicole DeBlase with Deutsche Bank. Call over to Nicole. Can we just talk a little bit more about what's going on in China construction? And I guess, back to you what's driving your confidence in a flat outcome for the year given the tough comps throughout the rest of the year? And also if you could talk a little bit about what you're seeing from a pricing call back to you in that market.

Speaker 1

Thank you.

Speaker 3

You bet. So just as a reminder, last year was a very strong market in China, very strong. Call back over to Steve. And we saw a very strong Q1 this year as well. We did see the industry decline modestly in the second quarter

Speaker 5

call back to the operator. And that's

Operator

again as we expected and

Speaker 3

that's I think some policy normalization there drove that weakness. But just based on everything we see, we are expecting conference. I mentioned earlier about the fact that our GX models have been well received. We're very pleased at that product introduction. The call over to Mr.

Speaker 3

President. It is a competitive market. You asked about pricing, it's a competitive market. But again, by introducing new products, by continuing to build out our dealer network, call. We're confident in our ability to continue to be able to compete in China.

Speaker 1

Your next question is from the line of Joel Tiss with BMO.

Speaker 14

Hi, thanks for giving me a chance here. Can you give us an idea how much call over to Steve. I know it's a moving target. And also is that more of a call over to Catching up in 2022 or the way things look today that some of that might leak into 2023?

Speaker 6

Call over to Joe. Thanks. This is Andrew. I mean, obviously, as we said, we expect this year not to see any significant benefit the call over to Steve. Obviously, and our prioritization given some of the supply chain challenges is absolutely meeting end user demand.

Speaker 6

Conference over to the operator. Obviously, we need to see how things pan out in 2022. Again, we will always prioritize making sure that we are meeting end user demand over back to the operator. Obviously, that will be something we will continue to work with our dealers on and making sure that they do it. So the call over to you.

Speaker 6

It's way too early to predict whether when deal inventory will rise. Obviously,

Speaker 1

call. Your question from the line of Noah Kaye with Oppenheimer. Good morning, everyone. This is Kristian on for Noah. Thank you for taking our question.

Speaker 1

Call over to the line of David. I wanted to follow-up on the mining activity and some of the quoting that you talked about. You indicated that call back to the operator for questions. Just given commodity basket near historic highs, the high utilization that you talked about, conditions seem really right for a significant mining up cycle. So as you talk to your customers, what's holding the end market back at this point?

Speaker 1

And when do you think that spending breaks loose? Thank you.

Operator

Call over to Chris.

Speaker 3

Good morning, Kristen. Thanks for your question. Well, as we've been discussing for several quarters, mining, we've been bullish on the long term call back to the operator. And we are seeing an improvement in that business. It does tend to be lumpy, but again, the the So I wouldn't say anything is holding it back.

Speaker 3

It's really manifesting itself much as we've been predicting for the last the call over to the operator for questions. Thank you. A steady improvement in mining and it's continuing to happen. So again, a lot of quotation activity. It's call over to Steve.

Speaker 3

Our customers are always very focused on capital discipline. But having said that, utilization is high. Park trucks are low across all regions. Commodity prices, as you indicated, are quite strong. So it's turning out as we expected, which is a steady gradual improvement in mining, conference over to you.

Speaker 3

We're very pleased with that. Honestly, that kind of a profile, I think, is better for everybody than a spike ups and then a drop and a spike up and a drop. So call. We'd love to see that steady improvement.

Speaker 1

And your final question for today comes from Chad Dillard with Bernstein.

Operator

Call over

Speaker 12

to Chris. Hi, good morning guys. Thanks for squeezing me in. Hi,

Speaker 3

Chad. Hi, Chad. Good morning.

Speaker 12

So a couple of questions for you. Call over to you. First more near term, can you quantify the material and freight costs for the second half and twenty twenty one? And then call over to you. Longer term, can you just talk about your conversations with mining customers on electric drive equipment?

Speaker 12

By when do you think there's broader adoption? Conference over to you. What are you thinking in terms of like parts intensity versus internal combustion? And what if any new revenue streams call back to the operator for the question.

Speaker 6

Yes. So obviously, conference over to you. I do not give a guidance on what we think the cost will be. As we said, we do think they will be higher in the second half. Call over to Mr.

Speaker 6

President. Again, just to remind you, price will be about the same. We expect for the full year for machines for price to more than offset the call over to the operator. And the increases in manufacturing costs also include short term incentive compensation, which again is not only higher versus last year, call over to the operator. It is also above our baseline level given the results we have.

Speaker 6

So it is a moving part. There's lots of bits of moving parts within there. Call back to the operator. Absorption rates have an impact and so forth as well. So overall though, yes, they are increasing, they are a pressure.

Speaker 6

However, call over to Steve. Probably, we don't see it's more that we saw such strong favorability. Remember, Q1, we actually had material costs as a back to questions. And also we saw very minimal price, so stronger price in Q2 and a small increase back to the question and answer session. That just means that the manufacturing costs will get greater and more sort of mitigate offset the call back to the line of Chris.

Speaker 3

And to answer your mining question, we're working very closely with our customers to to help them achieve their sustainability goals. There's a wide variety of different approaches, as you can imagine, between from customer to customer, call back over to John. But also from geography to geography as well. And so there's no one answering to that. Again, we're working very closely with our customers.

Speaker 3

Call. Announcements will be made at the appropriate time. We had one in NMG this quarter. It's just an example of some of the things that we're doing to support our customers. Call back to the operator.

Speaker 3

So again, those adoption rates will vary geographically and by customer.

Speaker 2

Call over to Jim Lumpy. Okay. And with that, we'll conclude our Q and A session. Now let me turn the call back over to Jim Lumpy.

Speaker 3

Well, thanks, everyone. Really appreciate you joining the call this morning, call over to you. Thank you for all your questions. We continue to focus on executing our strategy for long term profitable growth, which as you recall, will include services, expanded offerings and operational excellence. Call over to Steve.

Speaker 3

Congratulations to our team. We had a strong quarter. We're pleased that there's strengthening demand coming from all regions the conference over to you. And we're optimistic about our ability to solve the challenges that arise and also to continue supporting our customers as they move forward. Thank you again.

Operator

Conference over to you.

Speaker 2

Thanks, Jim. We'll close with a few final reminders. A replay of our call will be available online later this morning. We'll also post a transcript conference call on the Investor Relations website later today. If you look there now, you'll find a second quarter results video with our CFO and an SEC filing with our sales to users data.

Operator

Conference call. Click on investors.

Speaker 2

Caterpillar.com and then click on Financial to view those materials. If you have any questions, please reach out over to Rob or me. You can reach Rob at rengelrobcat.com and me at driscolljennifercat.com.

Speaker 1

Call

Speaker 2

over to Mr. Chairman. Thank you, Ms. Chairman. To Whitney to conclude the call.

Speaker 1

Okay. That does conclude today's conference call. Thank you everybody for joining.

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Earnings Conference Call
Caterpillar Q2 2021
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