The operator welcomes participants to the Second Quarter 2024 Caterpillar Earnings Conference Call and introduces the speaker, Ryan Fiedler. Fiedler is joined by other members of the Caterpillar team and they will be discussing the first quarter earnings release. The call is protected by copyright law and any reproduction without permission is prohibited. Forward-looking statements will be made and there will be a discussion of non-GAAP numbers. Participants are referred to the earnings call slides for more information.

In the second quarter, the company achieved higher adjusted operating profit margin, record adjusted profit per share, and generated robust ME&T free cash flow. The results reflect the diversity of the company's end-markets and the disciplined execution of its long-term growth strategy. Sales and revenues were down 4% in the quarter, but services increased. The adjusted operating profit increased to $3.7 billion, a record, and the adjusted operating profit margin improved to 22.4%. The company also achieved a record quarterly adjusted profit per share and generated $2.5 billion of ME&T free cash flow. The backlog increased to $28.6 billion. The company updated its full-year expectations based on its first half results, estimating that sales and revenues will be similar to the previous year. However, the first half sales were slightly below expectations and ended 2% below the prior year.

In the third paragraph, the company states that they expect a decline in sales and revenues in the second half of the year, mainly due to lower dealer inventory in the Resource Industries sector. However, sales in Energy and Transportation have been stronger than expected. Service revenues continue to grow. Despite lower sales, the company's adjusted operating profit margins have been better than expected and are expected to be above the target range for the full year. The company also expects higher adjusted operating profit and profit per share for the full year, as well as remaining in the top half of the free cash flow target range. In the second quarter, sales and revenues declined 4%, with a slightly larger decline in sales volume than expected, offset by better price realization and a decrease in dealer inventory. Overall sales to users decreased 3% compared to the same period last year.

In the machine industry, sales to users declined by 8%, with a 10% increase in energy and transportation sales. North America saw a slight decrease in sales due to weaker rental fleet loading, but government infrastructure projects and residential sales remained steady. Sales to users also declined in EAME and Asia Pacific, but increased in Latin America. In Resource Industries, sales to users declined by 15%, while Energy and Transportation saw a 10% increase. Dealer inventory decreased by $200 million compared to the first quarter. The company attributes their success to their diverse end-markets and strategic execution.

In the second quarter, dealer inventory for machines decreased by $400 million while backlog increased to $28.6 billion. Energy & Transportation drove the increase in backlog, with strong demand for solar turbines and reciprocating engines. Adjusted operating profit margin also increased, exceeding expectations due to lower manufacturing costs and slightly better pricing. ME&T free cash flow for the quarter was $2.5 billion, with $1.8 billion used for share repurchases and $600 million for dividends. In June, an additional $20 billion share repurchase authorization was announced. The company remains committed to consistent share repurchases and has decreased its net share count by 18% since 2019. In the Construction Industries segment, sales to users are expected to decline slightly in the second half of 2024, with lower sales in North America due to weaker than expected rental fleet loading.

The government infrastructure projects are expected to remain healthy, with soft economic conditions in Asia Pacific and weak conditions in Europe. Latin America is expected to see modest growth. The Resource Industries sector is expected to see lower machine volume due to off-highway and articulated trucks, but higher services revenues and strong customer acceptance of autonomous solutions. In the Energy & Transportation sector, oil and gas sales are expected to be stronger overall, with flat to slightly down sales in reciprocating engines due to softness in well servicing. Gas compression is expected to be up for the full year but may soften in the second half.

Caterpillar expects growth in solar turbines and reciprocating engines due to strong demand in the oil and gas industry and data centers. They are also investing in new products and technologies to help customers achieve their sustainability goals, including testing battery-electric and ethanol-powered mining trucks and offering power solutions that can run on hydrogen fuel. Solar turbines is also a leader in burning various fuels, such as hydrogen, natural gas, and biofuels.

In this paragraph, the speaker discusses Caterpillar's growing lineup of technologies to support sustainability and gives two examples of how they are helping customers build a better world. They then turn to a summary of the company's second quarter results, including sales and revenues, operating performance, and adjusted profit per share. They also mention the exclusion of restructuring costs and a discrete deferred tax benefit from the previous year's second quarter. Other income for the quarter was a $28 million benefit due to favorable impacts from commodity hedges.

The provision for income taxes in the second quarter was 22.5%, lower than the previous year, and the decrease in shares outstanding had a positive impact on adjusted profit per share. Sales and revenues decreased by 4% due to lower volume, but were partially offset by favorable price realization. Operating profit decreased by 5%, but adjusted operating profit increased by 2% due to price realization and favorable manufacturing costs, product mix, and price. The adjusted operating profit margin also improved by 110 basis points.

In the second quarter, the price for Energy & Transportation was better than expected, while Construction Industries sales decreased by 7%. This was due to lower sales volume, but partially offset by favorable price realization. Sales in North America were flat, while Latin America saw an increase and EAME and Asia Pacific saw a decrease. Profit for Construction Industries decreased by 3%, but margin increased by 90 basis points. Resource Industries sales also decreased by 10%, primarily due to lower sales volume.

In the second quarter, Resource Industries saw a 3% decrease in profit due to lower sales volume, but this was partially offset by favorable impacts from price realization and manufacturing costs. Energy & Transportation sales increased by 2%, driven by price realization, but offset by lower sales volume in the industrial sector. The segment's profit increased by 20% due to favorable price, and the margin was stronger than expected due to lower manufacturing costs. Financial Products also saw an increase in revenue, but a decrease in profit due to a higher provision for credit losses.

The portfolio remains healthy with low past dues and a record low allowance rate. Business activity is strong, with an increase in new business volume and high demand for used equipment. In the second quarter, the company generated $2.5 billion in ME&T free cash flow and expects to be in the top half of their annual target range for the full year. Share repurchases included a $1 billion accelerated share repurchase agreement, and the company did not issue new bonds due to their strong balance sheet. Sales and revenues are now expected to be slightly lower than the previous year, mainly due to a reduction in dealer inventory and lower sales to users in Construction Industries.

The company expects higher sales in the second half of the year compared to the first, but slightly lower than the previous year due to lower machine sales. Dealer inventories and changes in machines will have a nominal impact. Services revenues are expected to grow in the second half. The company anticipates higher margins for the full year, but lower margins in the second half compared to the first due to typical seasonal trends. However, first half margins were at record levels. The company expects second half margins to be similar to the previous year, with some favorability in manufacturing costs but slightly lower volumes and a headwind from price.

The company expects a decrease in sales and revenues in the third quarter due to lower dealer inventory and a challenging comparison to the prior year. They anticipate lower sales in the Construction and Resource industries, but higher sales in Energy & Transportation. The company also expects to incur restructuring costs and maintain a 22.5% effective tax rate for the year.

In the third quarter, enterprise margins are expected to be similar to the prior year due to lower volume, but offset by favorable manufacturing costs. In Construction Industries, margins are expected to be lower due to lower volume and slightly unfavorable price realization, partially offset by favorable manufacturing costs. Resource Industries is expected to have slightly lower margins due to unfavorable volume and higher SG&A and R&D spend. Energy & Transportation is expected to have higher margins due to stronger volumes and favorable price realization. In the second quarter, strong execution and operating performance led to a record adjusted profit per share of $5.99. The company now expects overall adjusted operating profit margin to be above the top end of the target range for the full year. ME&T free cash flow generation was $2.5 billion in the quarter and the company has deployed $7.6 billion to shareholders through share repurchases and dividends in the first half of 2024. The company continues to execute its strategy for long-term profitable growth.

In this paragraph, Chad Dillard asks Andrew Bonfield to explain the price cost dynamics for the second half of the year, specifically in different segments of the enterprise. Bonfield responds by stating that price will exceed increases in manufacturing costs for the full year, but will moderate in the second half. He also mentions that there will be a continued normalization in the pricing environment and that Energy & Transportation will have positive price, offsetting any weakness in Construction Industries. Jamie Cook then asks about the potential for E&T margins in the long-term, given the capacity investments being made in the business. CEO James Umpleby responds by stating that they are adding capacity in E&T and that it will help in 2025 and 2026.

In the paragraph, the speaker discusses the company's plans to increase capacity for building large engines and solar turbines. They note that this is a multiyear project and will take some time to play out. However, the demand for these products is strong, leading to a margin increase. The speaker also mentions the potential for further margin expansion in the future and the company's strong backlog. They then pivot to discussing Construction Industries and mention lower-than-expected rental fleet loading as a trend in the quarter.

During the earnings call, Caterpillar's CEO was asked about the company's view on rental fleets and their potential for growth. He mentioned that dealer rental income was up for the quarter and that they are working closely with dealers to increase their rental business. Another question was asked about the impact of data centers on Caterpillar's Energy & Transportation segment and whether it would affect the mix and margin. The CEO stated that they are bullish on the opportunity for power generation, and that they have seen interesting applications for solar, which traditionally has been used in combined heat and power applications.

The company has recently sold solar gas turbines for a data center in Ireland, which is a new opportunity for them. They also see potential for growth in distributed power generation using a variety of fuels. The Energy & Transportation business has a strong margin in large engines and solar. Retail sales of machines are expected to decline in the second half of the year, but the company is unsure when they will pick back up. There is no indication from the order book or backlog within CI and RI. The company expects dealer inventory to decrease by the end of the year.

The company has seen lower retail sales in North America due to rental fleet loading by dealers. Europe's retail sales were also softer than expected. As a result, the company has reduced its estimates for retail sales for the year. They expect a small reduction in machine dealer inventory, mostly in Resource Industries due to commissioning. They expect to end the year with dealer inventory staying flat and within the typical range. In terms of segments, the company expects the construction side to be affected by a lower interest rate environment first. The assumption for the comfortability on inventories is based on the current state of dealer retail sales, but they expect it to improve by the end of the year.

James Umpleby and Andrew Bonfield of Caterpillar discuss the impact of interest rates on their business. They note that while some aspects of their business are not as sensitive to interest rate movements, others, such as construction equipment for building warehouses, are more affected. They also mention that they expect a reduction in dealer inventory in line with normal seasonal trends. Jerry Revich of Goldman Sachs asks about the prospect list in Resource Industries, noting a recent decline in orders and deliveries.

A question was asked about when Caterpillar expects to see a reacceleration in sales for mining trucks and other equipment. In response, James Umpleby mentioned that while there is currently capital discipline among customers, there are positive indicators such as high equipment utilization and low parked truck numbers. He also mentioned the company's bullish outlook on the mining business in the medium and long-term, citing interest in commodities like copper and the role of Caterpillar's products in the energy transition. The next question focused on Caterpillar's portfolio of products in the data center market and potential opportunities for the E&T, CI, and RI segments.

The speaker, James Umpleby, believes that the growth of data centers presents many opportunities for their business. This includes the need for backup generators and increased power generation, which their products can help fulfill. The company also provides micro grids and construction machinery, and the production of commodities like copper is also boosted by the data center build-out. Overall, the data center industry benefits various products in their portfolio.

The speaker asks about the potential impact of construction pricing and used prices on the company's performance. The operator responds that there may be some erosion in pricing but not to the extent seen in 2016. The used market has seen some price erosion, but it is not expected to significantly impact the company. The speaker also asks about changes in rental fleet loading and the operator explains that it is a combination of softening demand and managing rental fleets, as well as dealers pushing back on taking fleet.

The increase in dealer rental revenue is driven by the level of activity, but it is slightly less than expected due to dealers managing their fleets and customer timing of final purchases. The rental market is complex and not one size fits all, but the long-term outlook is positive. Caterpillar wants their dealers to have a profitable and growing rental business and does not encourage them to take more equipment than they need. There may be quarterly deviations in the amount of equipment dealers decide to take into the rental fleet.

The speaker discusses the growth opportunity for the company and its dealers in the rental business, with a focus on digital tools and other methods to support their growth. They clarify that OEM sales account for about 40% of revenues and North America is not the only market for CI sales. They also mention a softening in gas compression, but expect it to be higher in 2024 than 2023, with a strong backlog in large engines and gas turbines. The comment about gas compression only applies to recip oil and gas and is expected to soften in the second half of the year.

Angel Castillo from Morgan Stanley asked about the backlog dynamic for CI, but Andrew Bonfield did not provide specific numbers. He did mention a high level of orders in the second quarter and a favorable product mix in CI. Availability for CI is currently good, with a 13 week time period considered the norm. Tim Thein from Raymond James was next to ask a question.

Jim, the speaker, is asked about the balance between market share and pricing in relation to the importance of PINS for Cat. Jim explains that they make pricing decisions based on various factors, including input costs and competition. They also focus on adding value for customers through their dealer network and technology investments. They recognize the importance of PINS for future services growth and are committed to maintaining competitiveness in the market.

In response to a question from Nicole DeBlase of Deutsche Bank, Caterpillar executives discussed the strong performance in Latin America and the challenges in Europe. They credited Brazil for the growth in Latin America and expressed hope for continued success in the region. However, they acknowledged that Europe remains a problem and does not show signs of significant improvement in the near future. Overall, Caterpillar is pleased with their global team's execution and the company's diverse end-markets, which have contributed to their strong results in the first half of the year.

The speaker thanks everyone for joining the call and announces that a replay and transcript will be available online. They also provide information on where to find additional materials and how to contact them for any questions. The operator then concludes the call.

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