The operator introduces Ryan Fiedler, the speaker for the Fourth Quarter 2023 Caterpillar Earnings Conference Call. Fiedler is joined by several executives and they will be discussing the fourth quarter earnings release. The call is recorded and can be accessed on the company's website. The content of the call is protected by copyright law and any unauthorized distribution is prohibited. The executives will be making forward-looking statements and referring to non-GAAP numbers. A detailed discussion of potential factors that could affect the company's actual results can be found in their SEC filings. A reconciliation of non-GAAP numbers to US GAAP numbers can be found in the earnings call slides.

In the fourth quarter of 2023, Caterpillar delivered strong results, with record sales and revenues, profit margins, and free cash flow. The CEO, Jim Umpleby, praised the global team for their efforts and highlighted healthy demand in most end markets. The company remains focused on long-term growth and sustainability. In the quarter, sales and revenues increased by 3%, while adjusted operating profit saw a 15% increase and adjusted operating profit margin improved by 190 basis points. For the full year, Caterpillar saw a 13% increase in total sales and revenues, with record services revenue of $23 billion. Adjusted operating profit and profit per share also saw significant increases, exceeding expectations.

The company exceeded their target range for ME&T free cash flow by $2 billion, leading to continued growth in profitable growth. As a result, they are increasing their target range for adjusted operating profit margin and ME&T free cash flow. In the fourth quarter of 2023, sales and revenues increased by 3% due to favorable price realization, but volume was slightly lower. Overall sales to users increased 8%, with Energy & Transportation sales increasing by 20%. Sales to users in North America and EAME and Latin America were down slightly, but increased in Asia Pacific.

In the Resource Industries sector, sales to users increased by 1%, while in mining there was an increase as well, but a decline in heavy construction and quarry and aggregates. In Energy & Transportation, sales to users increased by 20%, mainly driven by strong sales in oil and gas and power generation. Dealer inventory decreased by $900 million, with the largest decline in Construction Industries. Adjusted operating profit margin also increased by 190 basis points to 18.9%. For the full year, sales and revenues reached $67.1 billion, a 13% increase from the previous year, driven by higher sales volume and favorable prices. Services revenue also saw a 5% increase to $23 billion.

In summary, the company has seen improvement in customer value agreements and strong e-commerce sales growth. They have also added new customers to their online channel and exceeded their e-commerce goals. By utilizing data and advanced analytics, they are helping customers avoid unplanned downtime. The company has a target of $28 billion in service initiatives and had a 20.5% adjusted operating profit margin in 2023. They also generated strong ME&T free cash flow and returned a record amount to shareholders. Moving forward, they expect overall demand to remain healthy and anticipate similar sales and revenues in 2024, with strength in end user demand and a slight benefit from carryover pricing offset by a dealer inventory headwind.

The company does not expect significant changes in dealer inventory for 2024, with a healthy construction industry in North America and potential growth in Latin America. However, there may be some softening in economic conditions in Asia Pacific and EAME. Resource industries may see lower machine volume and a decrease in dealer inventory due to customers displaying capital discipline, but services revenues are expected to increase. Customer product utilization and acceptance of autonomous solutions remain strong.

The company believes that the energy transition will lead to increased demand for commodities, providing opportunities for long-term growth. They expect slight increases in reciprocating engines and services in the oil and gas sector, with a strong demand for power generation from data centers. The company is also investing in their large engine division to meet growing customer demand and contribute to future growth and shareholder return.

In 2023, Caterpillar made significant progress in their sustainability journey and announced several initiatives to reduce carbon emissions. These include a goal for all new products to be more sustainable, such as the 420 XE Backhoe Loader with a 10% decrease in fuel consumption and emissions. They also collaborated with Microsoft and Ballard Power Systems to demonstrate the viability of using hydrogen fuel cells for backup power. In the fourth quarter, Caterpillar's sales and revenues, adjusted operating profit margin, adjusted profit per share, and ME&T free cash flow all exceeded expectations.

In the fourth quarter, the company saw a 15% increase in adjusted operating profit and a 190 basis point increase in adjusted operating profit margin. Profit per share also increased, with a 35% increase in adjusted profit per share. The 3% increase in sales was driven by price realization, partially offset by lower volume due to dealer inventory changes. The decrease in dealer inventory was led by Construction Industries, particularly in excavators and Cat engine changeover in building construction products.

In the fourth quarter, there was a decrease of $1.4 billion in dealer inventory of machines, but an increase in dealer inventory in Energy & Transportation due to extended commissioning timelines and strong shipments. Sales in Construction Industries and Energy Transportation were slightly higher than expected, while sales in Resource Industries were in line with expectations. Adjusted operating profit increased by 15%, with price realization and favorable manufacturing costs offsetting higher SG&A and R&D expenses and lower sales volumes. The adjusted operating profit margin improved by 190 basis points. Construction Industries sales decreased by 5% due to lower sales volume, with North America being the only region to see an increase in sales.

In the fourth quarter, Construction Industries saw a 3% increase in profit, primarily due to favorable prices but offset by lower sales volume. Resource Industries had a 6% decrease in sales, also due to lower volume, but their profit only decreased by 1%. Energy & Transportation had a 12% increase in sales, driven by higher volume and favorable prices, with profit increasing by 21% due to these factors as well as higher expenses and currency impacts.

The increase in SG&A and R&D expenses was due to investments in strategic growth initiatives and higher short-term incentive compensation. The operating margin for the segment was higher than expected due to increased volume and favorable mix and price. In the Financial Products segment, revenues and segment profit both increased, mainly due to lower provision for credit losses and higher average earning assets. Past dues and allowance rates were at historic lows and business activity remained strong. Used equipment demand and pricing also remained strong.

In 2023, ME&T had a record $10 billion in free cash flow, with $3.2 billion in the fourth quarter. They plan to invest $2 billion to $2.5 billion in CapEx in 2024, with a focus on large engine capacity, AACE, and supply chain resilience. ME&T returned $3.4 billion to shareholders in the fourth quarter, with a decrease in net share count of 14% since 2019. They also increased their dividend by 8% in 2023 and have a strong balance sheet with ample liquidity. ME&T exceeded their progressive target range in 2023 and is confident in their strong execution and operating performance to potentially achieve higher adjusted operating profit margins than previously expected.

The company has increased the top end of their target range for sales by 100 basis points, but the bottom end remains unchanged. They will now target adjusted operating profit margins of 10% to 14% at $42 billion in sales and revenues, and 18% to 22% at $72 billion in sales and revenues. They are confident in their ability to consistently generate positive ME&T free cash flow and have introduced an updated target range of $5 billion to $10 billion. The company also plans to return their free cash flow to shareholders through dividends and share repurchases.

In 2024, the company anticipates similar sales and revenues as 2023 with favorable price realization and continued strong demand. They expect services growth and minimal change in dealer inventory. Construction Industries is predicted to have similar sales to 2023, while Resource Industries may have lower sales due to a challenging comparison. Energy & Transportation is expected to have slightly higher sales, but industrial sales may be lower. The company expects to be in the top half of their margin target range and anticipates a small pricing benefit in the first half of the year. Overall, they predict price will exceed manufacturing costs for the full year.

The company expects the pricing trends from 2023 to continue, resulting in a moderate decrease in absolute dollar terms. Short-term incentive compensation expense is expected to be lower, but this will be offset by increased SG&A and R&D expenses due to investments in strategic initiatives. There may also be a negative impact on margins due to a more normalized mix of products and a higher proportion of sales in the Energy & Transportation segment. The company anticipates being within the top half of their ME&T free cash flow target range. The first quarter is expected to have similar sales and revenues as the previous year, with favorable pricing and healthy demand.

The company anticipates a lower dealer inventory build in the first quarter, which will impact sales. Sales in Construction Industries are expected to be flat or slightly higher due to favorable pricing, while Resource Industries will see lower sales due to lower volume. Energy & Transportation is expected to see flat or slightly higher sales. The company expects margins to be similar to the prior year, with price offsetting manufacturing costs. However, there will be an increase in SG&A and R&D expenses due to strategic investments. In Construction Industries, the margin is expected to be similar to the prior year, while Resource Industries will see a lower margin due to lower volume. Energy & Transportation is expected to have a similar margin as the prior year. Overall, the company's adjusted profit per share has exceeded the previous full year record by 53%.

The company exceeded its targeted ranges for adjusted operating profit margin and ME&T free cash flow, and has increased its top end range for adjusted profit margin and ME&T free cash flow. They expect to be in the top half of their updated margin and ME&T free cash flow target ranges in 2024 and anticipate another year of services growth. The company also had a healthy destock in the quarter and is working on improving their internal manufacturing operations to reduce inventory. Dealer inventory decisions are made independently.

The speaker responds to a question about whether the company's businesses are operating at peak levels. They mention that their days inventory outstanding is higher than historic levels, allowing them to work down inventory in the next few years without causing issues for their supply base. They also mention that dealer inventory is within the expected range. The speaker then discusses the potential for growth in certain areas of the business if interest rates decrease and financial conditions improve.

The company is excited about the energy transition increasing demand for commodities and expanding their total addressable market. They are also optimistic about the growth potential in large engines and the data center market. While the Chinese market has been weak, they see opportunities for growth in Europe and other regions.

The speaker thanks the questioner for their question about the growth of services in the medium to long term. They mention that services grew by 5% in 2023 and to reach the $28 billion target, growth would need to accelerate to a high single-digit percentage annually. They explain that this growth may not be in a straight line and that they are investing in digital capabilities and working closely with dealers to achieve the target. They also mention that STUs were positive and that backlog is a concern. The speaker clarifies that they have a sales framework but does not provide a specific answer about expected operating margins for the year.

The speaker is trying to understand the relationship between the backlog and next year's sales. They note that the backlog is not solely related to machines and that some of it will convert in 2025 and beyond. They also mention that their guidance for flat sales and top half margin ranges is based on a range of outcomes and their focus is on continuing to drive exceptional performance.

During a conference call, a Deutsche Bank analyst asked Caterpillar's CEO Jim Umpleby about the decline in parts sales in the Resource Industries sector. Umpleby explained that part of the decline was due to dealers reducing their inventory levels, which have now normalized. He also mentioned that they expect a benefit from services revenue growth in 2024, but it will depend on dealer buying patterns. In terms of construction, Umpleby did not provide specific margin guidance.

The company is guiding for flat margins in Q1, which would be impressive given the comp. The sustainability of margins at this level is uncertain due to potential mix impact and continued investment in the business. Free cash flow guidance has increased more than margin guidance, and the company is on track to exceed the $5 billion mark in 2024.

The company's focus on OPACC and reducing structural costs has led to increased free cash flow, even during a year of declining revenue. This has increased confidence in the company's ability to generate free cash flow and has led to an increase in the bottom end of the range. The use of working capital is also expected to contribute to higher free cash flow.

The speaker discusses the underappreciated ability of their company to generate cash and transform the business to produce higher free cash flows consistently. They then answer a question about their operating profit margin and explain their confidence in keeping the low end of the range despite potential challenges. They also mention the improvement in gross margins and how leverage benefits them, but declining volumes could put pressure on the bottom end of the range. They note that the top end of the current range is similar to their previous margin target ranges. The call then moves on to the next question.

The speaker discusses the company's supply chain and productivity issues. They mention that supply chain has improved but is still causing problems, and that they are working to regain lost productivity. They also mention constraints in the large engines area and the need to improve efficiency in that area.

The company is facing challenges with their engines and machines due to shipping issues and supply chain conditions. They are working towards becoming more efficient and investing in their engine capacity to improve operations. The hydrogen fuel cell pilot program is a long-term opportunity for the company, and they are considering expanding their services in the distributed generation market. The call is then opened up for one more question.

The operator thanks Stanley Elliott for his question about Caterpillar's free cash flow and asks CEO Jim Umpleby to provide more details. Umpleby explains that the company plans to return all free cash flow to shareholders through dividends and share repurchases, and that they are primarily focused on organic growth rather than M&A opportunities. He also thanks the global team for a successful quarter and announces an increase in the target range for adjusted operating profit margins and ME&T free cash flow.

The company's strong operating performance and customer demand are reflected in their fourth quarter results. They are focused on executing their strategy and investing for long-term growth. A replay of the call will be available online and a transcript will be posted on the Investor Relations website. Contact information for Investor Relations is provided. The call is now concluded.

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