Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2020 Caterpillar Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jennifer Driscoll. Thank you. Please go ahead.

Thank you, Jason. Good morning, everyone. Welcome to Caterpillar's fourth quarter 2020 earnings call. Joining me this morning are Jim Umpleby, Chairman of the Board and CEO; Andrew Bonfield, Chief Financial Officer; Kyle Epley, Vice President of the Global Finance Services Division; and Rob Rengel, Senior IR Manager. During our call, we will be discussing the earnings news release that we issued earlier this morning. Our slides from today, the news release and the videos recap are all in the Investor section of caterpillar.com under Events & Presentations. The forward-looking statements we make today are subject to risks and uncertainties. We will also make assumptions that could cause our actual results to be different than the information we are sharing with you on this call. Please refer to our recent SEC filings and the forward-looking statements reminder in the news release for details on factors that individually or in aggregate could cause our actual results to vary materially from our forecast. Caterpillar has copyrighted this call. And we prohibit use of any portion of it without our prior written approval. Today, we are reporting profit per share of $1.42 for the quarter and $5.46 for the year. We are showing adjusted profit per share in addition to our U.S. GAAP results. Our adjusted profit per share of $2.12 for the fourth quarter excluded remeasurement losses of $0.63 per share, resulting from the settlement of pension and other post-retirement obligation. It also excluded restructuring expenses of $0.07 per share, which Andrew will discuss. For the full-year, adjusted profit per share of $6.56 excluded $0.55 per share, resulting from the settlements of pension and other post-retirement benefit obligations and $0.55 per share in restructuring expenses. We provide a GAAP reconciliation in the appendix to this morning's news release. You can also find information on dealer inventory, backlog, services revenues and full-year 2020 numbers in our slides. Now with that, let's flip to Slide 3 and turn the call over to our Chairman and CEO, Jim Umpleby. Jim?

Thank you, Jennifer, and thanks everyone for joining the call. I would like to start by thanking our global team for their resilience and performance during 2020, the year of unprecedented challenges. The Caterpillar team continue to provide the essential products and services that enabled our customers to support society during the pandemic. In this difficult environment, we leveraged our strong safety culture and had the best year on record for employee safety. Our employees’ generous contributions and volunteerism are also notable. We had a record level of support for worldwide relief efforts in 2020 through the Caterpillar Foundation. Before turning over the call to Andrew for a detailed review of our results, I plan to briefly cover the following topics this morning. I will share my perspectives on CAT’s fourth quarter results. I’ll then provide comments on our performance for the full-year followed by some high-level thoughts about 2021. I’ll close by highlighting several ways for advancing our strategy. Starting on Slide 4, I'll recap fourth quarter results versus a year ago. Sales and revenues of $11.2 billion decreased 15% about as we expected. Lower sales volume drove the decline reflecting lower end user demand and reductions in dealer inventory. Dealers decreased their inventories by $1.1 billion in the fourth quarter of 2020, roughly $400 million more than we expected. For the full-year, dealers reduced their inventories by $2.9 billion. This positions us well to produce closer to demand in 2021, which was our goal when we introduced our enhanced S&OP process. Fourth quarter sales to users declined by 10% versus the previous year. Sales to users for both construction and mining equipment were better than we expected. While fourth quarter 2020 operating margins declined year-on-year, they improved by 230 basis points versus the third quarter. At 12.3%, they…

Thank you Jim and good morning everyone. I'll begin by walking you through the fourth quarter results including sales to users, changes in dealer inventory and segment performance. Then I'll comment on the balance sheet before finishing with our key assumptions for the first quarter of 2021. Starting with the fourth quarter on Slide 8, versus last year sales and revenues declined by 15% to $11.2 billion. Operating profit decreased by 25% to $1.4 billion. Good cost control in the quarter partly offset the impact of lower volume. Fourth quarter 2020 profit per share was $1.42. That include pre-tax remeasurement losses of $438 million or $0.63 per share resulting from the settlements of pension and other post-retirement obligations. Last year's profit per share for the fourth quarter was $1.97. Fourth quarter 2020 adjusted profit per share was $2.12 compared to $2.71 last year. You will have seen from the release that the full year effective tax rate was approximately 28% excluding discrete items. This was lower than the 31% rate we'd anticipated and added $0.26 to profit per share. We also had a $0.05 benefit from discrete tax items in the quarter. Excluding restructuring expense adds another $0.07 per share. The balance of the outperformance reflected better than expected operating results which saw adjusted operating margins improved by 170 basis points versus the third quarter of 2020. Since 2019 we have only reported adjusted profit per share in the fourth quarter when we have mark to market impacts from our pension and other post retirement benefit plans, this change happened because restructuring expense had returned to base levels which was between $100 million and $200 million per annum. This was not considered material and did not warrant adjusting profit per share. However, restructuring expense has risen to $350 million this…

And as we do that, we will just say, to be clear, our goal for services is to double it from 2016 at $14 billion to 2026 to $28 billion. Thank you. Jason?

Excellent. And at this point, we will open the call for Q&A. [Operator Instructions] Your first question comes from the line of Rob Wertheimer from Melius Research. Your line is open.

Hi, good morning, and thanks for the overview of what you’re seeing in the end markets. Given that the decision not to reinstate the outlook and obviously, there is a lot of uncertainty. Could you talk about at least the key points of uncertainty to the upside and/or downside? I mean, where are you seeing where there may still be downside revenues, if there is some? Where are you seeing more upside risk versus 2020 levels? Just a little bit of characterization of why you made the decision and where the points of uncertainties are? Thank you.

You bet. Good morning, Rob. This is Jim. As we indicated in our prepared remarks, we do expect 2021 to be a better year than 2020 for us. We expect higher sales. But just given the uncertainty around the pandemic, the rollout of the vaccine, the resulting impact on the global economy, although we expect tit o be a better year. It's difficult for us to quantify how much better it will be just based on the pandemic. And we mentioned several bright spots whether we - continued strength in China, continued strength in residential activity in the United States, which drives our smaller construction business. We’re generally - continue to be bullish on mining still some concerns around heavy construction and quarry and ag, which impact Resource Industries. But again, it’s – it isn't so much a concern about downside as it is uncertainty as to how much better things will get this year.

Your next question comes from the line of Jerry Revich from Goldman Sachs. Your line is open.

Hi, good morning, everyone.

Good morning, Jerry.

I am wondering if you could talk about the first quarter margin outlook. It's nice to see the margin expansion plan sequentially despite the 2-point headwind from incentive compensation. So that's better cadence than normal seasonality. Can you just talk about how much of that is momentum in price cost improvements versus other drivers. We are pleasantly surprised by that part of the outlook.

Yes. Thanks, Jerry. It's Andrew, and good morning. Yes, I mean, the big driver is really volume. As I said, the fact that we expect a more normal seasonable dealer buying pattern ahead of the spring selling season. And if you recall last year, we only had about $100 million of dealer inventory increase in Q1. That is a big factor, obviously, from a volume perspective. And given the operating leverage that we have in the business, that enables us to more than offset the step increase. We continue to monitor and control costs. We are in an environment where everybody is obviously focused on making sure every dollar counts and that will continue as we go forward. That is something which will obviously continue until we start seeing stronger recoveries and obviously continue to make sure that we are investing in the business. As Jim said, we continue to invest in services. We continue to invest in new products that's really critical for our long-term growth.

You are next question comes from the line of Ann Duignan from JPMorgan. Your line is open.

Hi, good morning. As we contemplate our 2021 models, could you provide us more color in terms of your outlook by sub-segment in E&T? And in particular, you talked about oil and gas, but turbines - in particular, in turbine services and then the other sub-sectors? Thank you.

Well, good morning Ann. We expect starting with your question about solar, we expect solar to have a relatively flat year to 2020. We do believe their services will be up a bit again if there's still uncertainty out there. But our current view is that seller will be about flat year-to-year. We expect power generation to have a stronger year and a lot of that is driven by data center activity. We expect industrial engine activity to strengthen during the year. We do expect in rail to see continued low levels of sales of new locomotives in North America, but we do expect stronger activity internationally for sale of locomotives and also services as well. Marine, I would expect to remain at a relatively low level in the first quarter compared with the fourth quarter of 2020.

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

Hi, good morning. A bigger picture question. I mean, many of the classic signs of CAT's prospects turning positive over there, right, the low inventory, the higher commodity prices. But when we think about the whole cycle, as you're well aware, some investors questions CAT's longer-term growth prospects due to part some people question the sustainability of the reflation trade, but really even more so they believe CAT's business portfolio is poorly positioned for a world evolving their clean energy and carbon-neutral goals. So, Jim, can you provide your thoughts on those two issues, particularly the second issue of the portfolio and how we should think of acquisitions maybe help changing that investor view? I mean, especially given your net debt to EBITDA and that's on a week 2020 EBITDA, is only 0.4. And if you can tie into that with the percentage of aftermarket revenues, you gave this morning it does suggest your aftermarket revenues have to grow at a 9.8% CAGR from 2020 to 2026 to meet your revenue goal of $28 billion in 2026 for aftermarket. So if you can talk to those issues would be helpful as people think about the whole cycle?

Good morning, David. Always good to hear from you. Starting with a question about our portfolio and the way we're positioned. I feel quite good about the way we're positioned. You stop and think about the potential impact on our Resource Industries business over time, particularly in mining as the energy transition occurs, thinking about the commodities that will be required both in terms of investments and infrastructure, electric vehicles. Again, I believe we're very well positioned in our eye to take advantage of that. We also, as when you asked the question last quarter, I talked about the fact that we do intend to continue to support our customers both during and after the transition. And so I believe we're well-positioned to do that. So, again, we continue to work closely with our customers. We continue to invest in new products. Again, last quarter when you asked the question, we talked about some of the things that we're doing in terms of investments with new products and we have an all-electric switch locomotive. We've done things to help make our oil and gas customers more sustainable whether it be an engine that allows them to substitute up to 85% natural gas, substituting natural gas for diesel fuel for well servicing. We're doing things in terms of allowing oil and gas customers to reduce flaring. So again, a whole variety of things that we're doing and we're investing in to support our customers both during and after the energy transition. In terms of your question about services. Certainly, our goal is an ambitious goal and we said that when we introduced that goal and we certainly recognize that it is ambitious, but we're very focused on this as a business. We've been making investments over the last few years in our digital capabilities and our - many of our processes and our models and we're going to work hard to leverage those connected assets and those investments that we've made to grow services going forward. And we think that represents just an excellent opportunity for future profitable growth over the next few years.

And as a reminder if we could have one question per analyst that'd be terrific.

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

Hi, good morning. Jim or Andrew I guess the question for you is on the margin side. You look at resource and construction. Your margins improved year-on-year despite sales declines. You look at your margins for the total year. They are about 11% which is above the low end of your targeted range and taking into account you said you didn't think you'd be able to hit your targeted range when COVID first started. So clearly it looks like the margin performance of the business is doing better than you originally anticipated. So is there any way you can help us understand what's happening there and I'm just trying to figure out if the margin targets that you laid out at the analyst day if there's some upside there, if there's a reason structurally why margins are performing better in particular given some of the headwinds that we face this year with COVID, dealer inventory, etc. Thank you.

Well Jamie thanks for your question and good morning and certainly we are very proud of our team and the fact that we were able to achieve our investor day targets this year despite the fact that we continue to invest in services and expanded offerings and new products and positioning ourselves for long-term profitable growth. As we said in investor day our measure of profitable growth is absolute OPEC dollars and we believe that by growing absolute OPEC dollars that will drive long-term TSR. So certainly we're always looking across the business to find ways to improve our competitiveness, to improve our footprint, to improve cost of our back office operations. So that's a never-ending journey that we're on but we really are growing, attempting to grow long-term absolute OPEC dollars as opposed to just squeezing higher margins out. Again margins will fluctuate over time but again keep in mind two things one is we we're very focused on meeting those investor day targets in terms of margins and free cash flow and we're also very focused on growing absolute OPEC dollars to grow long-term TSR.

And your next question comes from the line of Ross Gilardi from Bank of America. Your line is open.

Hey, thanks. Good morning guys.

Good morning.

Good morning Ross.

Jim yes, I was just wondering if you could just discuss the outlook for reinvestment in 2021 and the next several years. I mean you committed to the $4 billion to $8 billion free cash through the cycle. It sounds like you're planning to raise a dividend and resume the buyback but CAT spent about 60% of depreciation on CapEx and in 2020 you spent the depreciation by a pretty wide measure. I think every year going back to 2013 R&D spend is down about $500 million from where it was at the trough of the last cycle. Should we be expecting some catch-up years on CapEx and R&D in the next several years and if not why not and just with that what are you baking in for R&D and CapEx in 2021?

Yes. We are not going to disclose a discrete number for R&D and CapEx in 2021 but just to make some general comments here we certainly are very committed to continue to invest in our products. One of the things that did impact R&D in 2020 was the lack of stip so keep that in mind as well. That is part of the calculation but we're very committed and we talked about the GX product line. We talked about some of the other investments that we're making in new products and that's something that we will continue to do. We talked about the fact that we recognize there is an energy transition occurring and we are investing in and will continue to invest in new technologies that will allow us to support our customers moving forward. In terms of CapEx one of the things we worked very hard on is lean operations to get more production out of existing bricks and mortar. So rather than continue to build factories we may not need at certain points in the cycle we're really focused on manufacturing flexibility, working across that value chain, reducing lead times, becoming more lean to try to meet those fluctuations in demand in a cost-effective manner.

Yes. Most just said I think we guided my notes between $1 billion and $1.2 billion for CapEx this year 2021 which is our more normal level. Obviously 2020 was disrupted a little bit as well because obviously the impact of COVID some of the things projects would normally have happened have been deferred and delayed.

Your next question comes from the line of Timothy Thein from Citigroup. Your line is open.

Great. Thank you. Good morning.

Good morning.

Maybe Jim if you could go, good morning just go back to mining if we could in terms of you alluded to the order activity and just the healthy level of discussions; maybe just a little bit more in terms of what Denise and team are hearing is as you look at mining markets around the globe in terms of how we're thinking about the how the recovery and the interplay between whole goods versus parts. So maybe again just a little bit more color in terms of your expectations for the mining piece with [RI] thank you.

Certainly. As I mentioned we mean we continue to be optimistic about our mining business that quotation activity is strong. Certainly, base metal markets support additional activity, number of parked mining trucks has declined and I will keep in mind of course RI includes heavy construction of quarry and aggs. So there is some uncertainty there and that business is relatively subdued that could be help stimulus programs but it this point that is relatively depressed but again in mining we are quite bullish. So again as we look at our autonomous solution we believe we have a competitive advantage there and we expect strong activity in new equipment. We expect strong activity in parts. Keep in mind of course our business is quite lumpy both in RI and ENT we will see the fluctuations quarter-to-quarter but again the medium and long term trend were quite bullish on and again I mentioned the energy transition we are very well-positioned to take advantage of that and resource industries.

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

Yes. Thanks. Good morning guys.

Good morning Nicole.

Good morning Nicole.

So I just wanted to ask about the safety stock even though within maybe resources while if there is any there. How do you feel about that compared to what's going on in the market with respect to raw materials, difficulty getting any supplies, can you characterize maybe what you are seeing with respect to COVID and how much of a concern that is as presumably demand really starts to ramp throughout 2021?

Thank you. As I mentioned we did make a conscious decision. We talk with this in previous earnings calls that we would hold some additional inventory to mitigate the potential disruptions on our supply chain of COVID just given the uncertainty of the trajectory of the pandemic and our decision was not to hold finished goods inventory but to hold that inventory in a lean way in components and further up the value chain. So at this point we haven't seen major issues in terms of supply disruptions. So far so good on that count, so based on everything we see today we are confident in our ability to meet demand going forward.

Your next question comes from a line of Mircea Dobre from Baird. Your line is open.

Thank you. Good morning everyone.

Good morning Mircea.

I wanted to ask a question around restructuring unit ‘21 you are excluding now from earnings. It would imply to me that you're expecting restructuring activity to potentially pick up may be quite a bit and I guess I am wondering what's left to do here? What are some of the portions of the business that you believe more tweaking and I am wondering if you've got portions where your outright trying to reduce capacity or take-out footprint. Maybe that goes back to David's question on selling your businesses that maybe have more structural concerns long-term?

Yes. So again as I mentioned earlier, we are continually looking for ways to improve our competitiveness and reduce our cost structure. That means evaluating not just our capacity but also our footprint and where we are. We previously publicly announced the decision to close [indiscernible] operations to get to move closer to our customers and also to reduce cost. So again, in my view that needs to be something that we continually do and it isn't just our factories and brick-and-mortar is also looking at our back office operations as well. And again, always finding ways to improve our cost structure and be more competitive. So really the restructuring that we put in again is more reflective of our continuous journey to improve our competitiveness.

And then just from the accounting perspective to refer to the fact why we excluding it from adjusted profit per share as I said in my remarks let me get to a base level which is between $100 million and $200 million. It is effectively a level with no material and therefore it doesn't warrant us adjusting profit per share for that given the size and spend the magnitude of the spend $354 million and as we say we expect a similar level maybe slightly higher in 2021 that does require us to be consistent with where we have been in historic periods. And therefore to exclude it. I know it's, it closes you guys some challenge because you have to go back and restate your models but unfortunately it is one of those things which from the disclosure perspective is good practice for us to do. As regards what spend is obviously some of the spend will be ongoing programs as Jim mentioned but some of those programs actually do have it on multiyear program. They are not just a single year and so some of that spend does recur. So obviously we are not doing a big restructuring program. We are not announcing anything which comes your question about on some of the backs the questions about more structural long-term concerns. This is just really about tweaking, making sure we're doing the right thing to drive our cost price.

Your next question comes from a line of Noah Kaye from Oppenheimer. You line is open.

Thanks. Jim back to mining and this is really I think pulling up on TES in your presentations there. As you see mining RFP activity coming back in customer engagement growing, can you talk about sort of growth trends and potential share gains for autonomous offering and then clearly with the Marble acquisition you could leverage that to go from a very linear mining ecosystem to move to more dynamic and predictable markets like construction and quarry and way, so can you can talk little bit about that dynamic as well? How you’re seeing that playing out in the new coding activity you are seeing to the extent to which that at the share gain opportunity for you?

Certainly. We do continue to see a strong pull for automation on autonomy economy by our mining customers and again we believe it delivers tremendous value. We have had customers say publicly that they are seeing productivity increases of 30% against their best man sites. Again it's got a safety component for them as well. That helps improve the utilization of their equipment which is so important and we do feel strongly that we have competitive advantage with our autonomous solution and generally it requires a certain size in terms of mine, in terms of number of trucks for the capital investment to make sense but we are continually working on it as well. So there is a lot of opportunity going forward in mining with autonomy and you make a very good point now we are starting to deploy some of those technologies. We've a lot of programs in work to deploy a lot of that technology whether it's autonomy, semi-autonomy, remote control many of those same kinds of technologies into construction industries and it is a one-size-fits-all if it happens over time, but again we do believe there's [indiscernible] ability of many of those technologies to our construction business over time and that something that we are working very hard on and again it’s part of our R&D plan.

And we have time for one more question please.

Your final question comes from the line of Steve Volkmann from Jefferies. Your line is open.

Great. Thanks for fitting me in guys. My question is really about how to think about sort of working capital for 2021? Maybe it's Andrew question, but in the spirit of the S&OP that I think is changed a little bit how you manage all this. I'm just curious if we should expect normal working capital build with revenue increases or if there is anything different to think about there. Thank you.

Yes, Steve thank you and one of the things obviously you would normally have expected in the year where there is a downturn to see a working capital inflows this year in 2020 obviously because of the decision we took around inventories to make sure we held a little bit of extra inventory to buffer against supply disruption and/or demanding changes we have, we will be in an situation in 2021 where we don't expect a big build of inventory so that helps our free cash flows which gives us confidence that will be out to deliver our free cash flow targets in 2021. The other thing just to remember on working capital and cash flow basis is obviously last year in 2020 we paid about $700 of short-term incentive compensation. We will not have that in 2021. So that will be again a strong boost to our cash position as we go through the year but the one thing I would say that to me, that has been really remarkable is to remind you again in year of significant turmoil where we have held sort of additional inventory we are still been able to generate free cash flow of $3.1 billion. This is a hugely cash generating company in one which I think sometimes investors do underappreciate.

Okay and we will turn it back to Jim for our closing remarks.

Well, thanks everyone for joining this morning. We greatly appreciate your questions. Caterpillar faced many challenges in 2020. We are very proud of how our team responded. We met the operating margin target we communicated during our 2019 Investor Day while importantly continuing to invest and expanded offerings and services to secure our long-term future and our team did this while having the best year on record for employee safety. And as I mentioned earlier we fully intend to emerge in a pandemic [indiscernible] company. Thank you again.

Thanks Jim. Thanks everybody who joined us today. We appreciate your time at that. A replay of our call will be available online later this morning. We also post the transcript on our investor relations website later today. Fourth quarter results video with our CFO and SEC filing with our sales users data and our quarter highlights are already posted there. Click on investor.caterpillar.com and then click on financials to find those materials. If you have any questions please reach out to Rob or me. You can reach Rob at rengel_rob@cat.com. And I'm at driscoll_jennifer@cat.com.The Investor Relations general phone number is 309-675-4549. We hope you enjoy the rest of your day and the weekend. And now I will turn it back to Jason to conclude our call.

That concludes today's conference call. Thank you everyone for joining. Have a wonderful day. You may now disconnect.