Caterpillar Inc Q2 2023 Earnings Conference Call Insights

Key highlights from Caterpillar Inc (CAT) Q2 2023 Earnings Concall

Management Update:

• [00:03:42] Caterpillar expects its full-year 2023 results to be better than previously expected.

• [00:26:04] CAT expects price realization to remain positive, but the magnitude of the favorability versus the prior year is expected to be lower in 2H as it laps the more favorable pricing trends from last year.

• [00:27:13] The company expects lower 3Q margins in Construction and Resource Industries, primarily due to lower volume QonQ.

Q&A Highlights:

• [00:30:20] Jamie Cook with Credit Suisse asked that based on CAT’s performance in 1H, should the company revisit its sales and margin targets for 2023 and probability of growing EPS in 2024. James Umpleby CEO said CAT expects its adjusted operating profit margin to be close to the top of its target range for 2023 and will review its ranges at the end of the year. The company is not making any predictions for 2024 at this time.

• [00:31:43] David Raso with Evercore ISI enquired about backlog and how it will move sequentially, and pricing for 2024. James Umpleby CEO replied that CAT’s backlog is healthy and is expected to remain so in the near term. The company is confident in the quality of the backlog, which is tied to firm customer orders. Pricing for 2024 will be assessed later in the year based on market conditions and input costs.

• [00:33:09] Michael Feniger with Bank of America asked about the differences between the current inventory situation and previous destocking periods, and why is CAT confident that the current situation will not lead to a significant margin impact. Andrew Bonfield CFO answered that in the past, inventory reductions from dealers have led to production declines and margin compression. However, the current situation is different because demand is still strong, so production levels can absorb the inventory reductions without a significant impact on margins.

• [00:34:49] Michael Feniger with Bank of America also enquired how is CAT’s view on dealer retail sales in 2H informing its view on dealer inventory levels. Andrew Bonfield CFO replied that if retail sales continue to grow in 2H and dealer inventories decline, dealer inventory levels will be lower at the end of the year.

• [00:36:11] Rob Wertheimer with Melius Research queried about the amount of cash CAT could generate from inventory normalization, and are there any safety stocks or finished goods waiting on completion. James Umpleby CEO said CAT’s inventory is higher than desired due to supply chain constraints, but the company expects to be able to reduce inventory and free up cash as supply chain conditions improve.

• [00:37:56] Rob Wertheimer with Melius Research enquired about the assessment of CAT’s overall production and factory management, and are there any other problem spots. James Umpleby CEO answered CAT is proud of the team’s performance and has met the targets set out to investors a few years ago. However, there are still areas for improvement, such as manufacturing operations and services growth.

• [00:40:08] Tami Zakaria with JP Morgan enquired if it’s fair to assume that price realization will moderate to mid to high single-digit growth in 2H, and if CAT has any incremental pricing planned for later this year. James Umpleby CEO said CAT expects price realization to moderate to single-digit growth in 2H23, as lapping price increases will reduce the overall price range.

• [00:41:19] Nicole DeBlase with Deutsche Bank queried about more detail on the deterioration of retail sales trends in EAME and what you are seeing on the ground in Europe. James Umpleby CEO said CAT is seeing a slowdown in construction activity in Europe, but the Middle East is seeing strong construction activity.

• [00:42:23] Steve Volkmann with Jefferies asked if there is still productivity headwinds due to supply chain disruptions, and will margins improve when supply chains normalize. James Umpleby CEO said CAT is still facing some supply chain constraints, but the situation has improved. As supply chain conditions ease, the company expects to be able to operate its factories more leanly and reduce inventory levels.

• [00:45:16] Chad Dillard with Bernstein asked for a rough breakdown of retail versus stock orders for Construction Industries and the percentage of retail orders for inventory shift. Andrew Bonfield CFO replied that CAT’s Construction Industries segment is seeing a mixed pattern of retail and stock orders, with dealers in some segments wanting more inventory and others wanting to reduce inventory.

• [00:47:34] Steven Fisher with UBS asked about the drivers of the oil and gas segment, and how long will the strong trend in the segment last. . Andrew Bonfield CFO answered that CAT is not dependent on rig counts to drive oil and gas sales, and the company is seeing strong demand for its products in a number of other applications.

• [00:51:08] Mig Dobre with Baird enquired if the $283 million manufacturing cost drag would lessen in 2H23 , and could this lead to positive YoY benefits in 4Q. James Umpleby CEO replied that CAT expects manufacturing costs to decrease in 2H23, but price benefits will also decrease. This will result in no real benefit to margins.

• [00:53:40] Mike Shlisky at D.A. Davidson queried if CAT’s operating margins in 4Q will return to their historical seasonal pattern, or have they permanently changed due to the pandemic. James Umpleby CEO answered that CAT expects margins to decline in the fourth quarter, due to seasonality and the BCP changeover.

• [00:56:09] Stanley Elliott with Stifel asked how CAT will allocate its $4-5 billion in free cash flow in 2H23 and will it all be used for share repurchases, or other investments. James Umpleby CEO said the company plans to return substantially all of its free cash flow to shareholders through dividends and share repurchases, and it has a history of increasing its dividend.