The operator introduces the participants of the Third Quarter 2023 Caterpillar Earnings Conference Call and hands over the call to Ryan Fiedler, who is the Vice President of Investor Relations. Fiedler is joined by other senior executives to discuss the third quarter earnings release. The call will include forward-looking statements and non-GAAP numbers, and the participants are advised to refer to SEC filings for more information. The call can be accessed through the Caterpillar website and any unauthorized reproduction or distribution of the call's content is prohibited.

In this paragraph, the speaker, Jim Umpleby, thanks the listeners for joining the call and acknowledges the recent tragic events in the Middle East. He also mentions that the Caterpillar Foundation is donating $1 million to support humanitarian needs in the region. Umpleby then discusses the company's strong performance in the third quarter, with double-digit top line growth, improved operating profit margin, and robust free cash flow. He also mentions that demand remains healthy in most of their end markets and that supply chain conditions have improved, leading to better product availability and shorter lead times. The company ended the quarter with a healthy backlog of $28.1 billion.

In the third quarter of 2023, Caterpillar saw a moderation in order rates due to dealers and customers waiting longer to place orders. The company also experienced a reduction in dealer orders for building construction products and excavation, as dealers reduce their inventories. However, the company's backlog remains elevated compared to historic levels. Despite closely monitoring global economic conditions, Caterpillar expects its full-year 2023 results to be better than previously anticipated. In the third quarter, sales and revenues increased by 12%, driven by favorable price realization and volume growth in all three primary segments. Sales to users increased by 13%, with Energy & Transportation sales up 34% and Machine sales up 7%. North American sales remained strong, while sales in EAME were up slightly and sales in Latin America and Asia-Pacific declined. In Resource Industries, sales to users increased by 10%.

In the third quarter, sales to users in the mining, heavy construction, quarry and aggregates, and Energy & Transportation industries all increased, with strong performance in oil and gas, power generation, and industrial and transportation applications. Dealer inventories also increased, but the company remains comfortable with the overall level. Adjusted operating profit margin increased by 430 basis points, driven by lower manufacturing costs and favorable price realization. The company also generated strong ME&T free cash flow and returned $4.1 billion to shareholders in the first three quarters of 2023.

Caterpillar is proud of their Dividend Aristocrat status and plans to return most of their free cash flow to shareholders through dividends and share repurchases. They expect their adjusted operating profit margin and ME&T free cash flow to exceed previous targets for the full year, thanks to healthy customer demand and strong operating performance. They anticipate growth in non-residential construction in North America and Asia Pacific, but continued weakness in China. In Resource Industries, they are seeing a high level of quoting activity and high customer product utilization in mining.

The company is experiencing low numbers of parked trucks and a high age of their fleet due to customers' capital discipline. They believe the energy transition will lead to increased demand and growth opportunities. Customer acceptance of their autonomous solutions is growing, as seen with the recent announcement with Freeport-McMoRan. They expect healthy levels of activity in heavy construction and quarry and aggregates. In the energy and transportation sector, they remain encouraged by demand for their reciprocating engines and gas compression, and anticipate strength in high-speed marine. They expect another good year in 2024 based on their backlog, dealer inventory, and current market conditions. The company is also focused on advancing their sustainability journey.

Caterpillar is helping their customers achieve their climate-related goals by investing in new products and technologies that improve fuel efficiency and reduce emissions. They have introduced low-carbon intensity solutions such as the Cat 980 XE Wheel Loader and the Cat G3600 Gen 2 engine. They have also made joint announcements with customers, such as their collaboration with Albemarle to establish a zero emissions lithium mine. In the third quarter, Caterpillar had a strong operating performance and a solid balance sheet and cash flow. They anticipate continued success in the fourth quarter and full year.

In the third quarter, the company's adjusted operating profit margin, adjusted profit per share, and ME&T free cash flow exceeded expectations, with sales growing as expected. The company now expects the adjusted operating profit margin for the year to be above the top end of their target range, and ME&T free cash flow to exceed the target range. Sales and revenues increased by 12%, driven by price realization and higher sales volume. Operating profit increased by 42%, and the adjusted operating profit margin increased by 430 basis points. Profit per share was $5.45, including restructuring costs. Adjusted profit per share increased by 40% to $5.52. Other income was lower due to less favorable currency impacts and a recurring increase in pension expense. The provision for income taxes reflected a global annual effective tax rate of 22.5%.

In the third quarter, the 12% increase in top line was primarily due to price realization and higher sales volume. Construction Industries sales were higher, Resource Industries sales were in line, and Energy & Transportation sales were lower than expected. Services revenues increased and price realization was slightly better than anticipated. Volume was slightly below expectations due to lower sales to users, but this was offset by an increase in dealer inventory, particularly in Construction Industries and Energy & Transportation. Dealer inventory in these segments is mainly driven by firm customer orders.

In the third quarter, operating profit and adjusted operating profit increased by 42% and 41%, respectively. Price realization and sales volume were favorable, but there were headwinds from higher SG&A and R&D expenses, and manufacturing costs. The adjusted operating profit margin improved by 430 basis points, better than expected due to favorable manufacturing costs and slightly better price. In Construction Industries, sales increased by 12% due to favorable price realization, with North America seeing a 31% increase in sales and Latin America seeing a 31% decrease. EAME saw an 8% increase in sales due to favorable price and currency impacts.

In the third quarter, Caterpillar's sales in Asia Pacific decreased by 8% due to lower sales volume. However, the Construction Industries segment saw a 53% increase in profit thanks to favorable price realization and a 26.4% operating margin. Resource Industries also saw growth, with a 9% increase in sales and a 44% increase in profit, driven by favorable price realization. Energy & Transportation sales increased by 11%, with all applications seeing growth. Profit for this segment increased by 26%, mainly due to favorable price realization. However, there were some offsetting factors such as higher SG&A and R&D expenses, unfavorable manufacturing costs, and currency impacts.

The company's SG&A and R&D expenses increased due to strategic investments in electrification and alternative fuels, resulting in a lower-than-expected operating margin. Financial Products revenue increased, but segment profit decreased due to a higher provision for credit losses. However, the company's portfolio continues to perform well with low past dues and write-offs. ME&T free cash flow remained strong in the third quarter, generating $2.9 billion.

In the first three quarters of this year, the company has generated $6.8 billion and expects to exceed their target of $4 billion to $8 billion. They have seen a decrease in inventory and anticipate it to continue, as well as a decrease in CapEx. Their balance sheet is strong with ample liquidity. For the fourth quarter and full year, they anticipate slightly higher sales, favorable prices, and good underlying growth, but changes in dealer inventories may act as an offset. In Construction Industries, there will be a decrease in shipment volumes due to completing the Cat engine changeover and dealer inventory reduction. This is in contrast to the dealer inventory increase in the fourth quarter of 2022.

The company expects dealer inventory in Construction Industries to be higher at the end of 2023, but still within the typical range. There are still areas where dealers would like more inventory, but overall the company is comfortable with current levels. In Resource Industries, sales are expected to be slightly lower in the fourth quarter compared to the third quarter, but lower than the previous year due to changes in dealer inventory. In Energy & Transportation, sales are expected to increase in the fourth quarter, but there may be challenges with supply chain and a moderation in industrial sales. The company anticipates their adjusted operating profit margin to be slightly above the target range for the full year 2023.

In summary, the fourth quarter is expected to have a lower adjusted operating profit margin compared to the third quarter. This is due to lower volume leverage, a negative impact from segment mix, and a moderation in price realization compared to last year. There will also be a headwind from lower short-term incentive expenses, but this will be partially offset by other operating income and expense. In terms of segments, Construction Industries and Resource Industries are expected to have slightly lower margins, while Energy & Transportation will have similar margins as the third quarter.

The company has exceeded its previous full year record and expects to have a strong adjusted operating profit margin for the full year. They have also generated robust ME&T free cash flow and are confident in their strategy for long-term profitable growth. The backlog is currently higher than usual due to supply conditions, but is expected to decrease as lead times improve. The company expects another good year in 2024 and will provide more details in January.

The company's backlog as a percentage of revenue is expected to decrease as lead times improve. Backlog is currently higher than historic trends due to an increase in services revenue. Orders were down in the third quarter, but this was expected and market conditions remain positive for a strong year in 2024. Infrastructure investments, residential growth, and strength in oil and gas and power generation are all contributing to this outlook.

The speaker discusses the market conditions and predicts a good year ahead. They also mention two specific factors that affected order rates in the third quarter, including the Cat engine changeover and dealers reducing inventory levels. They also mention the announcement of a deal with Freeport for retrofitting autonomous mining trucks, which is a part of their business model for resources.

The speaker is asked about the company's margin support and market share in light of recent deals. They express confidence in their autonomous solution and mention their continued investment in it. They also mention their customers' capital discipline and overall positive outlook for Resource Industries. The next question is about fourth quarter margins, which the speaker acknowledges as being difficult to predict.

The speaker is trying to clarify the expected margins for the company in the upcoming quarter. They mention that margins for CI and RI are expected to decline due to seasonal factors and dealer inventory, while E&T margins will remain flat due to product mix and timing of deliveries. However, year-over-year, all three segments are expected to show margin improvement, although this may be offset by an increase in corporate items.

The speaker discusses the company's strategy for managing in a lower pricing growth environment and mentions their focus on reducing structural costs and becoming more efficient in manufacturing operations. They also mention ongoing challenges in the supply chain that may lead to additional costs.

The speaker discusses the company's focus on reducing structural costs and remaining competitive in pricing decisions. They mention the strength of the market and competition from global competitors, but state that they make pricing decisions based on a variety of factors. The company is also focused on adding value to customers through technology, especially in light of the current labor shortage.

The company is focused on adding value for its customers through investments in digital and service capabilities. They are confident in their ability to compete in a competitive market. In the resource industries, there was a decline in aftermarket parts due to dealer buying patterns, but overall, services revenue is still growing. The company will provide an update on this in January. They are also looking to expand their rental footprint through dealers.

Caterpillar CEO Jim Umpleby discusses the company's growth opportunities in the rental industry and how they are working with dealers to improve their rental business. He also mentions the increase in manufacturing costs, which is mainly due to rising material costs and absorption issues in Resource Industries.

The company is seeing lower levels of manufacturing cost inflation and some benefits in freight. They serve a variety of markets, which means cost increases are different for each segment. Dealer inventories have increased by $2.6 billion, which is different than expected. The company explains that this is due to the complexity of dealer inventory and the different models they use. The increase in dealer inventory is mainly due to firm customer orders, not unsold products.

The unpredictability of commissioning time and the nature of the business make it difficult to predict revenue for a company that deals with disassembling and reassembling large mining trucks. The company expects a decline in the fourth quarter due to dealers wanting to reduce excavator inventory, but there may not be a significant impact in the first quarter. Backlog is dependent on dealer orders for CI and firm customer orders for E&T and RI.

The company is expecting sales to users to grow in the fourth quarter and end demand to remain strong in 2024. They are working to moderate overorders through their S&OP process and believe they are doing a better job of avoiding production swings caused by dealer inventory buying patterns. Interest rates have not significantly affected dealers' desire to hold inventory, as it is more based on their expectations of future demand. The company would like to hold more inventory for certain products but is currently comfortable with their levels.

The speaker discusses the impact of interest rates on Caterpillar's customers and their financing through Cat Financial. They mention that there has been a slight reduction in the share of new machines financed due to competition from banks, but overall customers have been able to pay cash. They also mention that there has been no significant impact on the business yet and that their customers are in good financial shape. The speaker then answers a question about lead times in mining equipment and mentions that they have been working to bring them down and feel good about their progress. They also mention that large engines are still a challenge in terms of availability.

The company is satisfied with the progress made in the mining sector, especially in terms of lead times. There is a lot of activity in terms of quoting, but there have been delays in firm orders. The final question is about the Cat dealer rental fleets, which have been upgraded due to supply challenges but still need newer machines. The company wants to help dealers have a successful and profitable rental business, but the goal is not to have bigger rental fleets.

During the third quarter earnings call, Caterpillar's CEO, Jim Umpleby, thanked the team for their strong results and stated that they now anticipate 2023 to be even better than previously expected. This includes higher expectations for adjusted operating profit margin and ME&T free cash flow, reflecting healthy customer demand and strong operating performance. Caterpillar is continuing to execute their strategy for long-term profitable growth and will provide further updates in January. A replay of the call, a transcript, and additional materials can be found on the Investor Relations website.

This summary was generated with AI and may contain some inaccuracies.