Categories Earnings Call Transcripts, Industrials

Caterpillar Inc (CAT) Q4 2021 Earnings Call Transcript

CAT Earnings Call - Final Transcript

Caterpillar Inc  (NYSE: CAT) Q4 2021 earnings call dated Jan. 28, 2022

Corporate Participants:

Jennifer Driscoll — Director of Investor Relations

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Andrew Bonfield — Chief Financial Officer

Analysts:

Jerry Revich — Goldman Sachs — Analyst

Robert Wertheimer — Melius Research — Analyst

David Raso — Evercore — Analyst

Jamie Cook — Credit Suisse — Analyst

Larry De Maria — William Blair — Analyst

Chad Dillard — Bernstein — Analyst

Nicole DeBlase — Deutsche Bank — Analyst

Ross Gilardi — Bank of America — Analyst

Tami Zakaria — J.P. Morgan — Analyst

Stephen Volkmann — Jefferies — Analyst

Courtney Yakavonis — Morgan Stanley — Analyst

Joel Tiss — BMO Capital Markets — Analyst

Matt Elkott — Cowen and Company — Analyst

Mig Dobre — Robert W. Baird — Analyst

Presentation:

Operator

Welcome to the Fourth Quarter 2021 Caterpillar Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Jennifer Driscoll. Thank you, please go ahead.

Jennifer Driscoll — Director of Investor Relations

Thanks, Summer. Good morning, everyone. Thank you for joining the fourth quarter earnings call for Caterpillar. With me are Jim Umpleby, Chairman and CEO; Andrew Bonfield, Chief Financial Officer; Kyle Epley, Vice President of the Global Finance Services Division; and Rob Rengel, Senior Manager in Investor Relations.

Earlier this morning, we issued our earnings news release. You can find the release and accompanying slides on caterpillar.com in the Investors section under Events and Presentations. In the back of the slides, you will find supplemental information on dealer inventory and order backlog. We’ve copyrighted this call. Please don’t use any portion without our prior written approval.

Now on slide 2. During our call, we will make forward-looking statements. These are subject to a host of risks and uncertainties. For more information about the risks and uncertainties that could cause our actual results to vary materially from any forward-looking statements, please refer to our SEC filings including our 10-Q filings for the most recent quarters. On today’s call, we’ll also refer to non-GAAP numbers. For a reconciliation of any non-GAAP numbers to the appropriate US GAAP numbers, please see the appendix of the earnings call slides.

This morning, we announced profit per share of $3.91 for the fourth quarter of 2021, that compares with the profit per share of $1.42 in the fourth quarter of 2020. Our adjusted profit per share was $2.69 in the fourth quarter of 2021, compared with $2.12 in the fourth quarter of 2020. Adjusted profit per share for both quarters excluded restructuring and mark-to-market gains or losses for remeasurement of pension and other post-employment benefit plan. In the fourth quarter of 2021, we had $1.19 per share of remeasurement gain and $0.03 per share of net restructuring income due to a gain on the sale of a facility. In the fourth quarter of 2020, we had $0.63 per share of remeasurement losses and $0.07 per share of restructuring expenses.

Please keep in mind two dates, we’ll announce our first quarter earnings, April 28 and we’ll host our next Investor Day, May 17. And with that, turn to slide 3. We’ll give the call over to Jim Umpleby.

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Thank you, Jennifer. Good morning, everyone. Thank you for joining us. I’d like to start by recognizing our global team for their continued resilience and hard work and what proved to be a challenging and dynamic environment. We’re proud that we achieved our best year on record for employee safety for the third year in a row. In 2021, we continued to execute our strategy for long-term profitable growth while striving to meet strong customer demand.

I’ll briefly cover a number of topics. I’ll start with my perspective on the quarter, then I’ll give a brief update on our supply chain followed by comments on services and our end markets before closing with an update on Caterpillar’s sustainability journey. We were encouraged by the continued strong customer demand in the quarter. Sales and revenues rose in all regions and in the three primary segments due to volume gains and favorable price, and similar to the third quarter, absent the continuation of supply chain constraints, our topline would have been even stronger.

On the other hand, our margins were lower than we expected, primarily because of two factors. First, freight costs were higher than expected due to inflationary pressures as well as our decision to increase the use of premium freight to meet as much customer demand as possible. The second factor was production inefficiencies. As I mentioned, underlying demand is stronger than we can currently supply due to ongoing supply chain constraints. We made the decision to keep our plants open and fully staffed to best serve our customers and meet as much demand as possible. We believe it’s the right decision to incur some short-term margin impact rather than take actions that might limit our ability to more fully satisfy demand when supply chain conditions start to improve.

We also continue to redirect components, alter our assembly processes, and optimize where we can. Some of these actions aimed at maintaining our production flexibility come with additional short-term costs. When the supply chain bottlenecks begin to ease, we expect to be well positioned to increase our production to more fully meet demand and gain operating leverage from higher volume. Material cost also impacted us this quarter, but unlike freight and inefficiencies, it was within the range we had anticipated. As you know, we implemented price increases during 2021. We’re taking further action in 2022 with the intent to offset the impact of underlying inflation. That’s the general picture. Andrew will provide more details on our margins and how the combination of supply chain pressures and pricing will likely affect the cadence of our quarterly margins in 2022.

Now on slide 4. Our topline rows by 23%. The primary drivers of the volume gains were increases in sales to users including the original equipment and services and changes in dealer inventory. For the full year 2021, services sales grew 17% to $19 billion. Services growth in 2021 benefited from investments in our digital capabilities in the increased focus we and our dealers placed on meeting customer needs for services, particularly aftermarket parts, We saw significant increases in 2021 in e-commerce sales, in sales of customer value agreements or CVAs, and in prioritized service events or PSEs.

In 2021, our e-commerce orders increased significantly and now we have critical mass and connectivity with more than $1.2 million [Phonetic] connected assets. It’s encouraging to see services sales in 2021 higher than in 2019 when our total companies — while our total Company sales in 2021 remained lower than in 2019. We continue to strive to meet our aspirational target of doubling services to $28 billion by 2026. Compared with the fourth quarter of 2020, sales to users rose 7%. Gains were across the three segments. For machines including Construction Industries and Resource Industries, sales to users rose 5%. For Energy and Transportation, sales to users increased 12%. Sales to users in Construction Industries rose by 4% with double-digit growth in EMEA and Latin America. In North America, residential construction remains strong and elevated housing construction while non-residential demand continue to improve at a slower pace.

In Asia Pacific, end-user demand slowed, reflecting the expected moderation in China construction. However, excluding China, sales to users were positive in Asia Pacific, driven by favorable commodity prices in government stimulus. In Resource Industries, sales to users rose by 10%, minus our healthy gains in the quarter supported by strong commodity prices and the replacement of ageing equipment. Sales to users increased versus the prior year and heavy construction and quarry and aggregates for the third straight quarter. In Energy and Transportation, sales to users were up across all applications versus the prior year. We saw a double-digit growth in industrial and transportation, although from a low base. We experienced strength across many applications for industrial and international rail deliveries benefited transportation sales as expected. Oil and gas grew from demand for both reciprocating engines and turbines. Finally, power generation sales to users increased as data center demand remained strong. Overall, total sales to users growth in the quarter moderated versus the second and third quarters.

As a reminder, the impact of the pandemic lessened in the fourth quarter of 2020. In addition, the supply chain challenges have constrained our ability to fully meet end-user demand. As independent businesses, dealers make their own decisions about their inventories. Changes in dealer inventories drove about $1 billion tailwind to sales compared with last year. Dealer inventory was nearly flat in the fourth quarter, compared with the third quarter of this year. In the fourth quarter of 2020, dealers decreased their inventory by about $1.1 billion. To put it in context, our year-end dealer inventory in 2021 also finished about flat with year-end 2020 as we expected. Dealer inventories are generally near the low end of the typical range due to strong customer demand and our supply chain challenges. Currently, availability is extended for some products due to the shortage of semiconductors and other components. With the exception of China, end-user demand for equipment remain strong.

Turning to slide 5. In 2021, we met our 2019 Investor Day target for adjusted operating profit margins for the third year in a row. We also met our target for free cash flow from Machinery, Energy, and Transportation or NE&T. Our strong cash flow enabled us to return $5 billion to shareholders this year through dividends and share repurchases. We paid a higher dividend annually for 28 consecutive years and are proud of our status as a dividend aristocrat. We expect to continue to return substantially all of ME&T free cash flow to shareholders through dividends and share repurchases over time.

Next on slide 6, I’ll share some high level assumptions for the full year. First, in 2022, based on what we know today, we expect to achieve our Investor Day targets for adjusted operating profit margins and ME&T free cash flow. That said, the environment remains uncertain due to COVID and other issues including continuing supply chain disruptions, freight and material cost inflation, and labor availability. Our focus is long-term profitable growth. Despite the challenging environment, we continue to invest in services, electrification, autonomy, alternative fuels and digital technology, all of which support our strategy.

Now, I’ll describe our outlook for key end markets this year. Demand remains strong as demonstrated by robust orders. In addition, we’re receiving positive input from our customers and dealers. A key variable remains the supply chain, namely to what degree can we fully meet strong customer demand. In Construction Industries in North America, residential construction continues to be the main growth engine with non-residential also improving. We believe the US Infrastructure Investment and Jobs Act will begin to fuel increased investments in capital equipment late this year, into 2023 and beyond. In China, we expect the industry for excavators above 10 tons to return to 2019 levels, reflecting weakness in housing construction. We expect the balance of Asia-Pacific to have good growth, fueled by higher investments in infrastructure.

Turning to EMEA, positive fundamentals include government stimulus actions, construction confidence, new orders, and commodity prices. Latin America is expected to benefit from construction activity and mining, supported by commodity prices although strong inflation could make it more challenging. In Resource Industries, we anticipate elevated commodity pressures will support continued improvement in demand for mining products and services. We also expect growth in heavy construction in quarry and aggregates to continue in 2022. We now currently operate autonomously on 18 sites in three continents, with more than 500 large mining trucks and have now moved more than 4 billion tons.

Technology and autonomy offerings deliver significant benefits across the board from boosting safety and productivity to more consistent and efficient operations. Autonomous operations enabled higher machine utilization, leading to reductions in idle time and non-productive fuel burn.

In Energy and Transportation, we see improved sales across most applications and we had strong order rates including for large engines in the fourth quarter. While we expect oil and gas customers to continue to display capital discipline, we do expect growth in our reciprocating engines and aftermarket services for oil and gas. We see growth in reciprocating engines for power generation with strength across many applications. Industrial which includes engines for our own equipment and loose engine sold to customers, is projected to grow across many applications including construction, agriculture, and electric power. We expect a modest increase in transportation, primarily in rail services. We also anticipate growth in marine from a low base as customers update ageing fleets.

In 2022, solar is expected to be impacted by the dampening industry cycle. We expect solar’s new equipment sales to be lower this year, which will be partially offset by continued services growth. Solar is experiencing healthy inquiry activity which indicates the likely recovery in customer deliveries in the late 2022 and then to 2023.

Now on slide 7. We significantly advanced our sustainability journey in 2021 and we continue to focus on this important element of our strategy. In 2021, Caterpillar and our customers announced a number of projects that will help contribute to a lower-carbon future. I’ll highlight several [Phonetic] more that occurred since our last earnings call. In November, Newmont announced a strategic alliance with Caterpillar to deliver fully automated zero-emissions mining equipment and technology. The investment encompasses a US surface mine and an Australian underground mine while also deploying Caterpillar mine store across all Newmont sites. We also announced a three-year collaboration with Microsoft and Ballard to demonstrate a power system with large format hydrogen fuel cells to produce backup power for Microsoft data centers. Caterpillar is providing the system integration, electronics and controls that form the central structure of the power solution, which will be fueled by low carbon intensity hydrogen. The project is backed by the US Department of Energy.

In December, Progress Rail entered into a memorandum of understanding with BNSF and Chevron to advance the demonstration on BNSF’s line of locomotive powered by hydrogen fuel cells. Progress Rail plans to design and build a prototype hydrogen fuel cell locomotive with Chevron developing the infrastructure to support it. Earlier this month, Teck Resources, one of Canada’s leading mining companies, announced a partnership with Caterpillar to deploy 30 zero-emissions large haul trucks including Cat 794 ultra-class trucks, if they’re mining operations beginning in 2027. This collaboration will support their goal as to reduce the carbon intensity of their operations by 33% by 2030 and be carbon-neutral by 2050.

And finally, Union Pacific is purchasing 10 Progress Rail battery-electric locomotives, making them our fourth customer for this new technology. In railroads in California and Nebraska, they will be tested in diverse weather conditions and evaluated for broader deployment in support of Union Pacific’s emissions reduction goals. We’re excited about the opportunities associated with the energy transition, which includes rising demand for commodities used in electric vehicles and other applications, benefiting Resource Industries. The significant infrastructure investments associated with the energy transition also support growth in Construction Industries.

In addition, the increased demand for a number of products in our Energy and Transportation segment including distributed power generation in our integrated systems and solutions to help our customers meet their climate related objectives. Caterpillar continues to invest in research and development to support a wide variety of fuel types, energy storage, and hybrid solutions.

In summary, we’re continuing to execute our strategy for long-term profitable growth. The three core elements of the strategy remain services, expanded offerings, and operational excellence. Services growth in our record safety performance are among the many highlights of 2021. We remain committed to a reduced carbon future, both in our operations and helping customers reach their climate-related goals. We continue to introduce products and services that facilitate fuel transition, increased operational efficiency, and reduced emissions. While we continue to face supply chain challenges that negatively impacted our topline and our fourth quarter margin performance, we’re focusing on meeting as much customer demand as possible and remain encouraged by the continuation of strong end market demand. Our team delivered 2021 adjusted operating profit margins and ME&T free cash flow, consistent with the long-term targets we set at our 2019 Investor Day, while continuing to invest in our long-term strategy for profitable growth.

With that, I’ll turn the call over to Andrew.

Andrew Bonfield — Chief Financial Officer

Thanks, Jim, and good morning everyone. I’ll begin with a recap of Caterpillar’s fourth quarter results, including the performance of each segment. Then, I’ll comment onto the balance sheet and cash flow before concluding with a few assumptions about the first quarter and full year 2022.

Starting with the fourth quarter on slide 8, our sales and revenues rose by 23% or $2.6 billion to $13.8 billion. Volume growth led the way and was broad-based as demand remained strong. Operating profit increased by 17% to $1.6 billion as volume growth and favorable price were partially offset by freight, material, and short-term incentive compensation headwinds. As Jim has mentioned, operating margins were lower than we had anticipated, primarily due to elevated freight costs and plant inefficiencies, which I’ll discuss further in a few moments. Fourth quarter profit per share was $3.91 compared to $1.42 last year. We had our usual impacts from mark-to-market accounting for remeasurement of pension and OPEB plans, that included $1.19 per share, favorable in the fourth quarter of this year compared to $0.63 per share unfavorable last year.

Restructuring was actually a net income of $19 million in the quarter due to the gain on the sale of facility. In addition, some of our planned restructuring activities that we had originally expected to complete in the quarter were pushed back into 2022. We reported adjusted profit per share of $2.69 in the fourth quarter, compared to $2.12 last year. This performance included a lower than expected global tax rates and some discrete tax items, which together added approximately $0.36 to fourth quarter profit per share.

Now on slide 9. As we had anticipated, the topline for the fourth quarter was the strongest of the year, coming in slightly better than normal seasonality would imply. Dealer inventory provided about $1 billion tailwind versus the comparable quarter in 2020 when dealers reduced their inventories by $1.1 billion. Sales to users growth decelerated a bit sequentially, but remained strong despite a tougher comparison period, particularly in China. Price realization strengthened as we saw the benefit of additional price actions begin to flow through. Services continue to be a bright spot.

I want to take a moment to provide some color on dealer inventory. Caterpillar dealers typically hold between three and four months worth of inventory based on projected sales for the next 12 months. For the past year, they’ve been near the low end of that range. Because of strong sales to end-users and supply chain constraints, dealers have prioritized customer orders over building inventory. As a result, dealers have been unable to restock as would have been their normal practice. Given the current constrained environment, we don’t expect to see a significant benefit from dealer restocking in 2022. Fourth quarter sales and revenues increased in every region.

In North America, our largest region, sales increased by 27% with strong growth in all three primary segments, but led by Construction Industries and Resource Industries. In EMEA, sales rose by 24% as fundamentals remained strong. Latin America sales grew by 38% from a low base. Asia-Pacific sales increased by 9% as gains in Energy & Transportation and Resource Industries more than offset lower revenues than Construction Industries. Excluding China, Construction Industries’ sales in the regions grew versus the prior year’s quarter. Just to remind you, the quarterly sales profile for China in 2020 was very different from the normal seasonable pattern with a strong second half due to the timing stimulus activity. In 2021, we have returned to more typical profile of a stronger first half of the year, ahead of the selling season. This has made for a particularly tough comparison as China sales were abnormally strong in the fourth quarter of 2020.

Now, let’s review the bottom line on slide 10. Fourth quarter operating profit increased by $231 million or 17%, compared to the prior year’s strong volume and favorable price realization with the principal drivers of the increase. Higher manufacturing costs and SG&A and R&D expenses partially offset these gains. Acceleration of freight, manufacturing inefficiencies, and material costs drove the manufacturing cost increases. The freight costs included both inflation in standard rates and the increased use of premium freight. The reinstatement of short-term incentive compensation had an impact on manufacturing costs and SG&A and R&D expenses, albeit at a slower rate than previous quarters.

Beginning in the second quarter, we told you that we had expected price realization to offset higher manufacturing costs for machines in 2021. We have come up just short of that goal as the unfavorable impacts of rising freight costs and the manufacturing inefficiencies during the fourth quarter were more significant than we expected. As we had noted previously, due to taking price action later in the year, we had expected a lag in Energy and Transportation price realization, so material cost increases and sharply rising freight costs negatively impacted Energy and Transportation margins, more significantly than they did for the machine groups.

Moving to margins. The adjusted operating profit margin was 11.4%, a decrease of 140 basis points with short-term incentive compensation expense, a headwind of roughly 150 basis points of margin in the quarter. As both, Jim and I, have acknowledged, margins for the fourth quarter deteriorated by more than we had expected. To provide a bit more perspective, we typically see margins decreased sequentially by between 100 to 200 basis points from the third quarter to the fourth quarter. However, in the fourth quarter of 2021, the spike in freight costs along with the plant inefficiencies that Jim described caused an additional unfavorable impact of around 100 basis points or so.

Most of this was due to the need to ship components using premium freights and factory inefficiencies that resulted from challenges caused by component shortages as we prioritized meeting customer demand. We believe that these margin headwinds are temporary and will only last as long as the supply chain challenges remain. Our price actions are designed to cover increases in underlying input costs, but do not anticipate factory inefficiencies or premium shipping, which had to be used to serve our customers. There is no doubt that this will impact some part of 2022, but it’s impossible to be certain when these costs will be a little bad [Phonetic].

Now looking at the full year. Our adjusted operating profit margin was 13.7%. As Jim mentioned, we’ve achieved our 2019 Investor Day margin target of adjusted operating profit margins being 300 to 600 basis points better at a comparable level of sales to the reference period of 2010 to 2016. We’ve done so while investing in new product launches, services, and sustainability. Of note, R&D expense including higher short-term incentive compensation, increased by 19% for the full year. Our global effective tax rate for the fourth quarter was approximately 23% versus the 25% we have assumed previously. The improvement is primarily related to changes in the geographic mix of profits from a tax perspective. Adjusted profit per share was $2.69, reflecting the stronger volume, favorable price, as well as the lower-than-expected global tax rate.

Moving to slide 11. Let’s take a look at the segment performance, starting with Construction Industries. Sales increased by 27% in the fourth quarter to $5.7 billion, primarily driven by strong sales volume and favorable price realization. The improvement in volume was due to a small reduction year-over-year in dealer inventories and higher end-user demand. End-user demand improved in three of the four regions. In North America, we saw our largest sales growth as non-residential demand continued to improve and housing construction remained supportive. End-user demand eased in Asia Pacific due to the challenging comparisons in China that I spoke about earlier. The segment’s fourth quarter profit increased by 25% to $788 million on higher sales volume and favorable price realization. Cost increases related to material and freight were more than offset by price increases. However, the segment’s operating margin decreased by 30 basis points versus last year to 13.7% due to the headwinds of factory inefficiencies and higher short-term incentive compensation expense.

Turning to slide 12. Resource Industries sales increased by 27% in the fourth quarter to $2.8 billion. The improvement was mostly due to high end-user demand and favorable price. End-user demand increased in mining as well as heavy construction and quarry and aggregates. Fourth quarter profit for Resource Industries increased by 12% to $305 million. Increased manufacturing costs including freight material costs and higher SG&A and R&D expenses were more than offset by higher selling — sales volume and favorable price realization. The increase in SG&A and R&D expenses was driven by investments and higher short-term incentive compensation. In Resource Industries, price realization takes longer to come through results because of the equipment’s longer lead times between the time of an order and date of delivery. However, as we progressed through 2022, we expect more benefits to flow through from the price increases we have taken. The segment’s operating margin decreased by 150 basis points versus last year to 11.0%

Now on slide 13. Energy and Transportation sales increased by 19% to approximately $5.7 billion with sales up across all applications. That included a 22% sales increase in oil and gas, including aftermarket parts for reciprocating engines. Gas compression also supported reciprocating engine sales. Power generation sales increased by 7%, driven by reciprocating engine aftermarket part sales. Industrial sales rose by 29% with strength across many applications. Loss [Phonetic] Transportation rose by 17% on strong international rail deliveries and services in the quarter. Profit of Energy and Transportation decreased by 2% to $675 million.

Volume and price gains were more than offset by higher manufacturing costs, short-term incentive compensation expense, and investments in growth initiatives such as the energy transition. Keep in mind that the majority of our core investments in the energy transition, for example, in electrification, impact this segment. Freight costs increases were particularly significant in the quarter, driving the higher manufacturing costs. The segment’s operating margin decreased by 250 basis points versus last year to 11.8%.

On slide 14, Financial Products had a very strong quarter. Revenue increased by 4% to $776 million. Segment’s profit increased by 27% year-over-year to $248 million. The year-over-year profit increase is partly due to continued strong demand for used equipment where worldwide sales and new sales were our highest on record in 2021. The segment also benefited from a lower provision for credit losses at Cat Financial.

Moving to our credit portfolio, it’s in good shape as customer health indicators remain positive. Past dues continue to improve across all portfolio segments to 1.95%, that’s down 154 basis points year-over-year and down 46 basis points compared to the third quarter. It is the lowest past dues levels we’ve seen in 15 years. New retail lending hit an eight-year high in the fourth quarter.

On slide 15, ME&T free cash flow was $1.8 billion in the quarter, an increase of about $116 million versus the fourth quarter of last year. The increase was due to higher profit adjusted for non-cash items, which includes higher accruals with short-term incentive compensation. ME&T generated $6 billion in free cash flow this year, almost double compared to the prior year and in line with our Investor Day target of between $4 billion and $8 billion. We recently declared a quarterly dividend of $1.11 per share or around $600 million per quarter. In 2021, we paid around $2.3 billion in dividends. We are proud of our dividend aristocrat status, which we maintain following the 8% quarterly increase announced in June of last year. We completed $1 billion in share repurchases in the fourth quarter for a total of $2.7 billion in 2021.

In aggregate, we returned $5 billion to shareholders, which represents 83% of our ME&T free cash flow for 2021. Over the past four years, on average we’ve returned 99% of our ME&T free cash flow to shareholders. That aligns to our target to return substantially all of our ME&T free cash flow to shareholders over time. The Company ended the year with $9.3 billion in enterprise cash, a strong position. As always, given our Cat Finance organization which helps our customers acquire our equipment, we continue to maintain a strong balance sheet as we prioritize mid-A credit ratings.

Now slide 16. In light of the fluid environment, we will continue to not provide guidance for our annual profit per share. However, to assist with modeling the Company, we will continue to share some high-level assumptions for the upcoming quarter and full year. Looking to the first quarter, we expect the topline to increase versus the prior year on stronger end-user demand and higher prices. We also expect to see a dealer inventory increase, which will follow our normal seasonable pattern as dealers prepare for the spring selling season. However, we anticipate that increase will be slightly less than normal given the supply chain constraints and the high levels of committed orders. For the full year, we expect the environment to support strong end-user demand and higher pricing. The extent that we’ll be able to fulfill that demand will be impacted by the supply chain challenges we’ve discussed today. As these alleviate, we would expect to see an acceleration in sales to end users. As we have noted, our order books and backlog are robust, but we do expect the supply chain to constrain our volumes.

Before I discuss margins, I want to highlight how unusual the last few years have been. In 2020, the full impact of the pandemic started to be felt from end of the first quarter. Whilst demand started to improve through 2021, we then started to see the impacts of commodity and freight inflation as well as significant supply chain pressures go through the year. This makes our normal quarterly facing more difficult to model as there are fundamental changes in the underlying comparatives that make historic norms less relevant.

Let me explain. In 2021, pricing was slow to ramp up and picked up in third and fourth quarters of the year, following mid-year October price increases. From a cost perspective, material and freight costs were about flat in the first quarter and then ramped up through to be at the highest and absolute terms in the fourth quarter. So that sets up our comparisons. Then in this year, we will begin this year with a carryover pricing from mid year and October 2021, and then we expect to have additional pricing in 2022. That’s why we expect pricing to be more or less evenly spread across the quarters as we move through 2022. Then, we will lap those rising material and freight costs and manufacturing inefficiencies as we move towards the back half of the year, so we will have easier comparisons.

In a nutshell, we anticipate the greatest headwinds to margin in 2022 to occur in the first quarter. This is completely counter to the normal historic pattern of strong margins in the first quarter with margins decreasing sequentially to the fourth. We expect those headwinds to margins to abate as the year goes on, as we realize more price and as we lap the higher costs. More importantly, we intend price increases to more than offset manufacturing cost increases in 2022, assuming the current level of supply chain disruption does not deteriorate.

I’ll provide a few more key assumptions for you to keep in mind as well. As short-term incentive compensation expenses anticipated to be around $1 billion for the year or $250 million per quarter, that’s a $50 million tailwind in the first quarter. Also, we’ll have about $1.3 billion cash outflow in the first quarter related to the payouts of losses incentive compensation. We anticipate an increase in R&D, reflecting continued acceleration investments related to initiatives such as sustainability, electrification, and digital. Restructuring spend should be a headwind for the year. We participate around $600 million in restructuring expense in 2022, compared to $90 million in 2021. The increase is larger than usual due to actions to address certain challenged products we’ve already announced, some of which were delayed a bit. Keep in mind that our adjusted profit per share calculation excludes restructuring costs. We also estimate prior restructuring actions will benefit 2022 by around $75 million. In addition, we assume an annual global effective tax rate of around 25%. Finally, we anticipate capex to be in the $1.4 billion range.

Turning to slide 17. Let me recap today’s key points. We met our adjusted operating margin and ME&T free cash flow targets in the challenging year. End-user demand remained strong and in a challenging supply chain environment we kept our factories opened, maintained our production flexibility and recognized $2.6 billion more in revenues. We continue to execute our strategy for long-term profitable growth as we expand our offerings in preparation for the energy transition. We anticipate stronger sales volume in the first quarter versus the prior year, while margins will be pressured in the first quarter as costs remain elevated and the full benefits of pricing flow through evenly throughout the year.

With that, I’ll take your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Jerry Revich with Goldman Sachs. Your line is now.

Jerry Revich — Goldman Sachs — Analyst

Hi, good morning.

Andrew Bonfield — Chief Financial Officer

Good morning, Jerry.

Jerry Revich — Goldman Sachs — Analyst

Hi, good morning. I’m wondering if you can update us on your order prospect pipeline in Resources. Are you expecting an acceleration in replacement orders this year as the utilizations would suggest or to what extent are replacement orders being held back by customers waiting for scaled zero emissions products over the next couple of years?

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Thanks, Jerry, for your question. As we’ve been discussing in the last several earnings calls, we’re positive about mining in just a general environment, everything from the energy transition, driving the need for more commodities, creating opportunities in mine and we’re continuing to see strong inquiry and quotation activity and increase in orders as we discussed. So, certainly we’re working very closely with our customers to help meet their emissions goals as well. There have been a number of announcements, I know, you’re aware of over this year. So again, I don’t believe it’s holding up orders. We’re seeing orders play out much as we had expected and we’ve been communicating with you over the last few calls. Generally, we’re still on the path of expecting not a big spike up, but a continued gradual improvement in mining orders.

Operator

Your next question comes from the line of Robert Wertheimer with Melius Research. Your line is now open.

Robert Wertheimer — Melius Research — Analyst

Thank you. Good morning, everybody.

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Good morning, Rob.

Robert Wertheimer — Melius Research — Analyst

I wonder if you’d be willing to give us any expanded comments on aftermarket strategy. It’s good to see the growth. I don’t know where you stand versus your internal goals when you’ve set this. I don’t know if you’ve identified all the workflows to get to your 2026 goal. What those workflows are? I wonder if you just give any more commentary on that. Thank you.

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Thanks, Rob. We were encouraged to see the 17% increase this year up to $19 billion and this is something that our Company is very focused on, our dealers are very focused on, and we’ve talked about number of the things that we’re doing everything from, continuing to invest in our digital capabilities using analytics or what we call PSEs or prioritize service events, to have sent targeted leads to our dealers, signing more CVAs so that we have those contracts that helps us better serve the customer, minimize downtime and maximize equipment availability, and capture more of the aftermarket well.

So, it’s a win-win-win for the customer, for the dealer, and for Cat. So, we are pleased with the progress that we’re making. I’m never satisfied that we’re moving fast enough and every area of the business I want us to move faster, but I am very pleased to see the commitment by our dealers and by our teams to continue to execute on this initiative. We said it wouldn’t be a straight line up. We knew we had to make a number of investments and we are making those investments and we are starting to see a progress on the topline as well. So again, so far so good. We know it would be a tough slog, but the whole Company is aligned behind that goal.

Operator

Your next question comes from the line of David Raso with Evercore. Your line is now open.

David Raso — Evercore — Analyst

Hi, good morning. If I heard you correctly…

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Good morning.

David Raso — Evercore — Analyst

If I heard you correctly about the first quarter margins expected to be down sequentially from the fourth quarter, that would put us 400 basis points down year-over-year or so in the first quarter, and I know it’s a difficult environment, so we’re just trying to get some sense of the comments you made of price cost being positive for the year and obviously that gets stronger as the year goes on in that assumption. How would you characterize after that first quarter margin decline year-over-year on the prospects for full year margins getting back to flat?

Andrew Bonfield — Chief Financial Officer

It’s Andrew. Apologies if you heard that we were expecting margins to decline sequentially. Actually, we don’t. We expect them to be obviously impacted year-over-year as a result of the impact of higher manufacturing costs versus price. So that actually we do expect still sequentially, as you would normally see. Obviously, there is normally a big bump up between Q1 and Q4. We do expect overall that margin trend will see an increase, but it won’t be as big an increase as you would normally have seen. That impacts obviously and so what we look at as we go through the year and we’re thinking about obviously we saw in the fourth quarter, price was favorable by just over $500 million, manufacturing costs adverse by $800 million.

We expect a little bit better price in Q1 because of the impact of the October price increase we put through. That will then help little bit. Obviously, manufacturing costs will continue at a similar level because last year we actually had a small reduction in material costs in the first quarter. Freight did increase a little bit, so there’ll be a little bit of change between those two, but that will be the impact. As we go through the year, obviously we start to lap those very significant manufacturing cost increases that we saw in Q3 and Q4. So the comps become easier, but price will remain pretty consistent throughout the whole year. And again, just to remind you, our expectation is that revenues will rise in 2022 and obviously that does mean that obviously our margin targets will be impacted by that as a result of trying to maintain that comparable 300 to 600 basis points improvement versus the reference period of 2010 to 2016.

Operator

Your next question comes from the line of Jamie Cook with Credit Suisse. Your line is now open.

Jamie Cook — Credit Suisse — Analyst

Hi, good morning. Sorry just another question on the backlog. Obviously, it was very strong at $22.8 billion. Is there any way you could help us break down how that looks sort of by segment and to what degree the backlog is price protected? And then I guess historically, you’ve seen improvement in backlog. Our backlog is highest in the first and second quarters, is that the way we should think about backlog this year on a seasonal basis? Thank you.

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Good morning, Jamie. I’ll start and then I’ll kick it off to Andrew. So, we do have a strong backlog and the biggest increase was in E&T and we feel good about that because in E&T we tend to typically have a good line of sight to actual customer orders. So, we do feel positive about that. I’ve got Andrew taking that.

Andrew Bonfield — Chief Financial Officer

Yeah. So, on price protection, as you know, obviously it depends segment by segment. We have a mix of some longer-term contracts where you do have escalators, but obviously depending on the timing of an order there will be some impact on a backlog from pricing or price protection. Key thing to note and just to remind you is when we look at our overall expectations, what we see as manufacturing cost increases versus price, we do take into account any price protection when we’re looking and we’ve been able to say we intend obviously full price to more than offset manufacturing cost next year. That takes into account those price protections we do have within that, and obviously it depends by segment by segment. Obviously, if you got a long-term mining order that will have a different contractual response versus obviously something which is a skid steer, which is a retail type customer.

Operator

Your next question comes from the line of Larry De Maria with William Blair. Your line is now open.

Larry De Maria — William Blair — Analyst

Hey, thanks, good morning. I have just two question…

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Good morning, Larry.

Larry De Maria — William Blair — Analyst

Hey, guys. You guys mentioned semiconductors in prepared remarks. I think we are hearing mixed things. In some case getting better and making case getting worse. Can you just talk to semis specifically, your outlook on the timing and magnitude of improvements, and how much maybe inventory or is either would, and willing to go out the door because of semiconductor shortages? Thank you.

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Certainly, semiconductors have been a challenge for us and I would not say that they have not started to get better from our perspective. Of course, it’s very difficult to predict when the improvement will occur, but it’s still creating a challenge for us. Semiconductors go into many kinds of electronic components including engine controllers and you know it’s one of the things that we look at margins in E&T in the fourth quarter. We talked about the premium freight, part of that was a result of just because we couldn’t get engine controllers because the engine controller manufacturer couldn’t get semiconductors. We want air freighting more engines both to internal and external customers than we had anticipated. So, there’re lot of experts out there making predictions on when things will start to improve. We haven’t seen that yet. We’re hopeful as we go through the year that will improve, but we haven’t seen it yet.

Operator

Your next question is from the line of Chad Dillard with Bernstein. Your line is now open.

Chad Dillard — Bernstein — Analyst

Hi, good morning everyone.

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Good morning, Chad.

Chad Dillard — Bernstein — Analyst

I was hoping if you talk about your volume production outlook for ’22. With the current supply chain situation, can you grow production this year? And, are there any segments that will see better production growth versus others?

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Yeah. So, we certainly do expect to have higher production this year. Again, I talked about the fact that customer demand is strong. That’s a positive story and we’ve talked about the challenges with supply chain, so it is difficult to predict the exact extent and we’re not giving that kind of a number. But if it really just comes down to supply chain, the demand is there.

Andrew Bonfield — Chief Financial Officer

Just to add, the only area where obviously we are potentially seeing some slowdown will be probably in construction in China. As we look at 2022, everywhere else it’s really across the board, we’re looking at good volume potential growth.

Operator

Your next question comes from the line of Nicole DeBlase with Deutsche Bank. Your line is now open.

Nicole DeBlase — Deutsche Bank — Analyst

Good morning, guys.

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Good morning, Nicole.

Andrew Bonfield — Chief Financial Officer

Good morning, Nicole.

Nicole DeBlase — Deutsche Bank — Analyst

Just focusing a little bit on the comments on E&T facing the most price-cost headwinds, I guess when we look forward into 2022, you mentioned a pretty — a growing backlog there. Have you increased prices in backlog and I guess when should we start to see pricing show up and start to be reflected in improving sequential margins within the segment?

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Thanks for your question. As I mentioned, we did not increase prices as quickly. So that’s — the first price increase we had for machines didn’t apply to E&T just given the market conditions at the time that we were facing in E&T. Certainly the world has changed since then with increase in oil prices and increasing demand, so we have taken price increases since then and we intend to continue to work to offset input cost. And, I will let Andrew comment in terms of when you may think those that will show up.

Andrew Bonfield — Chief Financial Officer

As we’ve indicated, obviously it’s — as you go through the year, price will be pretty even throughout the year, but we do expect obviously as time goes — as we go through the year, as we start to lap those manufacturing cost increases in the third and fourth quarters, we’ll see the benefit of that. The other thing just always to remember within Energy and Transportation, one, it does have higher short-term incentive compensation, so therefore, as a percentage, that was more significant on E&T for the year as we look through in 2021. So obviously that will no longer be a headwind in 2022. And also, E&T will be the area where we’re making investments, particularly in electrification. So that will be going the opposite way, but overall price now is starting to flow through and obviously we do need to make sure that we get back to stick and to pull through into 2022.

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

And again, supply chain supply chain constraints will also have an impact, right? So if supply chain constraints start to ease, that will help as well.

Operator

Your next question comes from the line of Ross Gilardi with Bank of America. Your line is now open.

Ross Gilardi — Bank of America — Analyst

Yeah, thanks. Good morning, guys. I was just wondering if you could give a little color on what the $600 million restructuring expenses are for. It seems like a big number. And then just on R&D spend, you alluded that it will be up this year. You’ve got a lot of exciting customer announcements on zero emission, then you seem to be taking a pretty customized approach by customer and end market, which I think would be pretty expensive. Are you back up above $2 billion in 2022 and do we get back to prior peak from 2012 of $2.5 billion in the next couple of years? Thanks.

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Yeah, I’ll start with the structure and then I’ll toss it to Andrew. In terms of restructuring, we task our leaders to continue to find ways to improve our competitiveness and the increase that we talked about in 2022 is associated with some specific projects that we have going that we’ve known about for some time and so that really is the reason for that. In terms of a customized approach, I would say that certainly we are working to meet the unique needs of our customers, but there’s a lot of applicability across our products and across our customers for the solutions that we’re developing.

So you shouldn’t assume that each one is a one-off solution, although there is a certain amount of uniqueness. If you think about a mine site, different mine sites will have different — some mine sites will have grid availability, but not very many, some will look at hydrogen, some will look at electrification. So, there is some variability. However, having said that, a lot of the core technologies that we’re developing will be applicable across product lines and across segments. So, it’s not a complete customized approach, and I’ll let Andrew take it from there.

Andrew Bonfield — Chief Financial Officer

Just on the — again, just to add a little bit more color on the $600 million, the biggest single item. There is a non-cash item which relating to one of those challenged businesses which, so therefore, will not actually result in a cash outflow, but is effectively a part of the reason why it’s such a large charge. On R&D spend, there will be puts and takes in as we move into 2022. One, there’ll be slightly lower short-term incentive compensation that will help, but obviously that will be a sort of favorability on that. Then obviously, there will be increased investment, but we don’t actually guide on an individual line item basis, but we do expect to continue to see good growth in R&D and that’s important for us as we prioritize those investments. We will make those investments necessary and as we’ve always remind you, part of the reason why we gave ourselves 300 basis points of flexibility within the margin targets was to enable us to make those right sorts of investments to drive long-term profitable growth as we go through the cycle.

Operator

Your next question comes from the line of Tami Zakaria with J.P. Morgan. Your line is now open.

Tami Zakaria — J.P. Morgan — Analyst

Good morning. Hello, everyone.

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Good morning, Tami.

Jennifer Driscoll — Director of Investor Relations

Good morning, Tami.

Tami Zakaria — J.P. Morgan — Analyst

This is more of a medium to long-term question. From your dealers’ perspective, I believe you mentioned dealer inventory will not be a significant benefit this year. But, do you see dealer inventory gradually making its way back to the pre-pandemic levels over time or has anything structurally changed in their business to rebase it lower now that they are learning to operate with less inventory?

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Well, thanks for your question. Dealer inventory is towards the low end of the normal range and it’s really a function of strong demand and the supply chain challenges that we’ve discussed this morning. We do expect as the supply chain conditions start to ease that they would get within a normal range and we typically don’t think about it in terms of absolute dollar ranges. If you’re thinking about a long-term, it’s more how many months of a dealer has. So again, dealer inventory will depend on a number of things. Assuming that we can supply everything they need, it will depend upon their view of the future, whenever it’s going to happen in that year or in the next year. So again, as we mentioned, we don’t expect a significant change in dealer inventory this year. But assuming the supply chain conditions improve and based on the strong demand that we’re seeing, if at all continues, I would expect over time that dealer inventory would start to come up and get back into more middle of the normal range.

Operator

Your next question comes from the line of Stephen Volkmann with Jefferies. Your line is now open.

Stephen Volkmann — Jefferies — Analyst

Great, thanks for taking my question. Jim, I think you mentioned in your — Good morning. I think you mentioned in your comments, Jim, that the infrastructure bill might start to benefit here in the second half of 2022 and into 2023. I’m wondering if you can just expand on that a little bit. I mean, how much of an improvement do you think this could be for you guys? Hopefully, you’ve had a chance to kind of dig through the bill by now. It’s just hard to figure out kind of what your exposure to that could be.

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Well, thanks for your question. And as you say it is a challenge to figure out the specifics, but just given the amount of money that’s going to be invested in the way that our products are used for infrastructure, we do believe that will provide a bit of a tailwind for us. If nothing else, one of the things that it does is it provides more certainty to our customers who have a contractor. He is trying to decide if in fact they want to make a capital investment to buy a new machine. If they know there is a high probability of a pipeline of work for several years, they’re much more likely to go ahead and pull the trigger and make that capital investment and buy the machine. So, we do expect again it takes a while for these things to manifest themselves into projects then to orders to us, but we do believe, again, it will start to impact us towards the end of this year and into next year. So hopefully with the supply chain — challenges hopefully will ease by then, we will be able to meet that increased demand. But, we’re quite positive about the passage of the bill.

Operator

Your next question comes from the line of Courtney Yakavonis with Morgan Stanley. Your line is now open.

Courtney Yakavonis — Morgan Stanley — Analyst

Hi, good morning guys. If you can just expand a bit on the comment about pricing being relatively even through the year next year, was that a comment meant to be about absolute level in pricing or as we’re thinking about it the year-over-year growth rate, which I think was about 5% to 6% for two of your divisions and obviously a little bit lower in E&T? Should we be thinking about that growth rate being constant through the year or was that a comment more on the absolute level? And then if you can also just expand a little bit on the thoughts of premium freight. I think you’ve been talking about freight costs all year. So, we see a significant difference in the fourth quarter with respect to premium freight and if you can help us quantify how big of a impact that is relative to just regular freight costs. Thanks.

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Okay. Let me start. Obviously as you look through May 2022, although we do see some variability quarter-on-quarter in sales volumes, actually it is not a huge variability. Whether it’s absolute or in percentage terms, it’s not going to be a significant real variability change between the two. But as I say, I think we expect it to be pretty even reason being obviously, you start lapping earlier price increases in 2021. As you go through 2022, then you have some long lead-time items would start to benefit. So that’s part of that mix which is why we think overall it will be pretty even throughout the year. Obviously, that is subject to not needing to put further price increases than we already planning in 2022 through. Obviously that E&T as we say has been lower, but obviously we expect the E&T to catch up with the other segments so that there’ll be variation between the individual business units as we go through. ROI was also slightly less than CI, for example in 2021.

Just on premium freight. interestingly, if you look at the actual dollar value, freight versus material cost is actually normally a very small number, and we have seen really an exponential rise in freight costs. Couple of factors obviously. As I pointed out, the underlying inflation has been significant and that’s well-reported and well recognized. And secondly, obviously we’re premium freighting lot more. That can be premium freighting for part, some of which we will recover from dealers, but some of it will also be premium freighting for components to keep the factories going and always there what you’re trading off is between the cost of holding the factory open and not working versus actually the cost of that freight. So, it has increased a lot.

If you remember, in my comments, I mentioned about we thought of the margins were about 100 basis points, worse than we have originally anticipated for the quarter. In absolute terms, part of that was freight and part of that was freight and part of that was labor and manufacturing inefficiencies is probably about half-half. So, it was probably 50 basis points in the quarter. Obviously one of the things we’ll have to watch and keep an eye on is how do those bottlenecks, particularly on the freight side, unwind as we go through 2022, and also the supply chain bottlenecks as well that will reduce the level of freight that we would need to use.

Operator

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

Joel Tiss — BMO Capital Markets — Analyst

Hey guys, how is it going?

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Good morning, Joel.

Joel Tiss — BMO Capital Markets — Analyst

I know you guys are dancing around a little bit, but I think it would really help us a lot if you could just give us — even if how much you fuzz them up kind of the size of the buckets, about $1 wise how much dealer inventories are below normal? I know you said you don’t measure it that way and how far below your potential — like your production is versus kind of normalized levels? Is it $10 billion or $7 billion or just any sort of an idea I think would be super helpful for everybody. Thank you.

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Joel, I mean just on dealer inventory, yes they are — as you said, the low end of the range. The reality is given the current constrained environment, it’s not going to change in 2022. So, if I could give you a number, that would be speculating about 2023 and that would really depend on what they expect to see as far as revenues in 2023. I mean if you were thinking about it from your modeling perspective, it’s not really going to be anything probably until at least 2023 and obviously as we get an idea we’ll be as transparent as we can. But in the current environment, it will be purely speculative to give you a number. But they are below where they would normally expect to be, so that’s really the challenge.

As far as production levels are concerned, the reality obviously is we can scale production. We are not running anywhere near capacity, so we have plenty of capacity to scale production up. The question really is around the supply chain’s ability to deliver that. And again, you’ve seen the increase in the backlog. Backlogs increased by $9 billion over the year, that is significant. Yes, we could supply — we could produce more, but a lot of those items are also a long lead-time items. So, a lot of that is within Energy and Transportation and within Resource Industries, which generally have a longer lead time anyway. Again, it’s not a — how much of that is production constraints versus real. I mean revenues, remind you, did grow 23% from the quarter. To ramp up much further would be a little bit more challenging. And again, one of the things that we’re doing is we’re focusing on meeting customer as opposed to reviewing building dealer inventory. We’re focused on meeting customer needs and so that’s really what we’re prioritizing with our dealers as we deal with supply chain constraints.

Operator

Your next question comes from the line of Matt Elkott with Cowen. Your line is now open.

Matt Elkott — Cowen and Company — Analyst

Thank you. Good morning. Can you guys talk about the impact on your overall pricing from lower China sales? Just any way to better gauge the potential benefit on pricing? And the other part of my pricing question relates to the broader global construction equipment market. As China demand softens domestically, is there a risk that their exports would increase enough to intensify the competitive pricing dynamic in regions outside China?

Jim Umpleby — Chairman of the Board of Directors and Chief Executive Officer

Onto the last part of the question first. We also have the ability to export outside of China, so that applies to us as well. It’s not just an issue of others being able to export out of China. We can do the same thing, If in fact, we have in the supply chain constrained environment, additional capacity in China, it does allow us to export from there to meet other demands around the world. So, we’re in that same boat. I’ll let Andrew to take first part of the question.

Andrew Bonfield — Chief Financial Officer

Yeah. On geo mix. I mean, which obviously, as you know, it does impact pricing, we did see a small benefit obviously as China reduces, but most of it actually reminds you now that actually a lot of the machines we sell in China are actually the lower spec GC and GX machines. So, the impact on geo mix was slightly less than you would normally have anticipated in Q4.

Jennifer Driscoll — Director of Investor Relations

Operator, we have time for one more question.

Operator

Your final question today comes from the line of Mig Dobre with Baird. Your line is now open.

Mig Dobre — Robert W. Baird — Analyst

Great. Thanks for fitting me in here at the end. Andrew, just a clarification maybe on the manufacturing cost progression here you’ve had $860 million headwind in the fourth quarter and I believe I heard you saying that you’re expecting something similar in Q1. I guess — my own guess would have been that this figure would have been higher sequentially, so kind of looking for you to maybe confirm that. And then related to this, I’m curious as to how you all are planning your raw material purchases for 2022. I do understand that the comps are going to be different on manufacturing costs in the back half, but I’m curious given what we’re seeing developing in steel markets, is it plausible that you’re actually seeing some outright benefit in terms of year-over-year costs as the year progresses? Thank you.

Andrew Bonfield — Chief Financial Officer

Mig, first of all, obviously remind you that actually fourth quarter from a sales and revenues perspective actually is our highest quarter. So actually, sequentially we go down slightly in Q1 versus Q4. That is why we expect manufacturing cost increase to slightly moderate, but not hugely versus what we saw in Q4. With regards to price decreases and input cost increases, as you remember, we’ve told you before we tend to have a three to six month lag. We are still in the position where we are still dealing with price increases, some of those lags coming through. Obviously, if steel prices do continue to reduce, that potentially will be a benefit as we move into later this year. We’re not relying on that for our expectations for the year. Obviously, we’ll see how that pans out. But given that lag, it is a little bit early for us to call to see that coming through, so it would probably be — if it does come through this year, it’ll be very late in the year.

Jennifer Driscoll — Director of Investor Relations

Thank you, Jim and Andrew, and everybody who joined us today. A replay of our call will be available online later this morning. We’ll also post a transcript on our Investor Relations website as soon as it’s available. In addition, you will find a fourth quarter results video with our CFO and an SEC filing with our sales to users data. Click on investors.caterpillar.com and then click on Financials to view these materials. If you have any questions, please reach out to Rob or me. You can reach Rob at rengel_rob@cat.com or me at driscoll_jennifer@cat.com. The Investor Relations general phone number is 3096-754-549. We hope you enjoy the rest of your day and have a great weekend. I’ll turn it back to Emma to conclude our call.

Operator

[Operator Closing Remarks]

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