Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2021 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, and welcome to Caterpillar's First Quarter 2021 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 today, we will be discussing the earnings news release we issued earlier this morning. You can find our slides, the news release, and a videos recap at investors.caterpillar.com by clicking on Events & Presentations. Also please note that we published a new Caterpillar 2020 Data Book for investors, which you can also find today on the homepage of the IR website. 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 the prior written approval of the company. Today, we reported profit per share of $2.77 for the first quarter compared with $1.98 in the first quarter of 2020. We are showing adjusted profit per share in addition to our U.S. GAAP results. Our adjusted profit per share was $2.87 for the first quarter that compares with first quarter 2020 adjusted profit per share of $1.65. Adjusted profit per share for both quarters excluded restructuring costs. The first quarter of 2020 also excluded a remeasurement gain of $0.38 per share, resulting from the settlement of a non-U.S. pension obligation. We provide a non-GAAP reconciliation in the appendix to this morning's news release. You can also find information on dealer inventory and backlog in our earnings call slides. Speaking of slides, before I turn it to Jim, there have been a few questions this morning on slide 16 key thoughts on the second quarter, the final bullet, we expect the operating profit margin percentage in the second quarter of 2021 to be moderately below the margin in the first quarter of 2021. Now with that, let's flip to slide three and turn the call over to our Chairman and CEO, Jim Umpleby.

Good morning. Thanks, Jennifer. I'd like to begin by thanking our global team for continuing to safely provide the essential products and services that enable our customers to support society during the pandemic. Our engaged team continues to execute our strategy, which is demonstrated by our first quarter results. I'll begin with my perspectives on the first quarter and our supply chain before discussing our end markets. Starting with the top line on slide four, we’re pleased with the strong sales and profit performance in the first quarter. Sales increased 12% on better-than-expected growth in end user demand and the favorable impact of changes in dealer inventory. The decision to hold extra Caterpillar inventory to prepare for a potential increase in market demand served us well. Total sales to users rose about 8%. Sales to users have trended better for the last three quarters from a year-over-year comparative perspective. Machine sales to users increased 13% in the quarter as Construction Industries and Resource Industries were stronger than we expected. Within Construction Industries, Asia-Pacific was particularly strong led by robust growth in China. Resource Industries sales to users were flat as market conditions continued to improve in mining. While sales to users for Energy & Transportation declined by 5% for the quarter, these results were roughly in line with our expectation and reflected industry trends. Dealer inventory increased about $700 million, which was above the seasonal build we expected. That compares with an increase of about $100 million in last year's first quarter. Operating profit in the quarter increased 29% to $1.8 billion, driven primarily by higher volume, effective cost control, and financial products. We delivered an operating margin of 15.3%. Adjusted operating margin came in at 15.8%, an improvement of 230 basis points versus a year ago and 300 basis…

Thank you, Jim, and good morning, everyone. I will start out with an overview of our first quarter results. Then, I'll discuss segment performance and the balance sheet before concluding with some comments on the second quarter and remainder of 2021. As we reported this morning and shown on slide eight, sales and revenues for the first quarter increased by 12% to $11.9 billion on higher volumes. Operating profit of $1.8 billion rose by 29%, reflecting margin expansion, primarily due to higher volumes. First quarter profit per share was $2.77 compared to $1.98 in 2020. Adjusted profit per share was $2.87. It was a strong quarter. End user demand was better than our expectations, primarily in Construction Industries, which also led to higher operating margins than we anticipated. Our adjusted operating profit margin increased by 230 basis points to 15.8%. The higher operating profit reflected higher volume, solid execution, good cost management, and strength in the financial products portfolio. These benefits more than offset the impact of reinstating the short-term incentive compensation program. Looking more closely at the top line on slide nine. The 12% increase in reported sales and revenues reflected strong growth in Asia-Pacific, Latin America, and EAME. North America was about flat. In aggregate, sales to users increased by 8%. Dealer inventory rose as is seasonally typical led by Construction Industries. It increased by about $700 million versus an increase of about $100 million last year. Sales to users for Construction Industries increased by 17% versus the prior year as end user demand, principally North America, was better than our expectations. All geographic regions improved. Asia-Pacific rose 36%, Latin America rose 38%, and EAME rose 11%. North America increased 5% making -- marking its third straight quarter of sequential improvement in quarter-over-quarter end user demand. Resource Industries,…

Thank you, Jason.

At this time, we will open the Q&A session. [Operator Instructions] Your first question comes from the line of Ann Duignan from JPMorgan. Your line is open.

Hi. Good morning, everybody.

Good morning, Ann.

You answered a lot of my questions in your last comments there, but I will just go back through it again for modeling purposes. But could you talk a little bit about the cadence of revenue and earnings through the rest of the year? I appreciate that margins would be down in Q2 given the absorption you got from inventory building in Q1? But of the things you can control, can you talk about them in a little bit more detail, R&D spend for the year, SG&A as a percent of sales, maybe how much of your steel is hedged versus not hedged given the stronger than expected demand. And then, your comments about potentially not being able to meet end market demand this year, are you confident that that demand will roll into 2022 and extend the cycle or is there any risk that you lose market share or that demand disappears as end market -- as customers get frustrated? Thank you.

Well, good morning, Ann. This is Jim. I'll answer your last question first, and I'll turn it back over to Andrew for the rest. Just -- on that supply chain, as we mentioned, we're working very hard to avoid or minimize allowing supply chain issues to lead to production shortfalls that would impact our ability to meet this improving customer demand. So, at this point, we're not saying that we'll definitely have a problem. We want to flag that it's a risk that we're managing, but certainly our goal is to, again, work very hard to minimize or limit any impact there. So, I don't want to speculate on -- go beyond that. That's really where we are.

Okay. And then, talking about our overall margins, as I indicated a few months ago, I mean, we actually saw material cost favorability in the first quarter. That's for a couple of reasons. Obviously, the inventory we held at the end of 2020 flows through the P&L now. And also, as you -- we do buy steel forward. We have about three-to-six-month full contract, normally on steel purchases. So, we do expect material costs to move from positive to negative as we move forward, however, we are pricing accordingly, and with geo mix as well becoming favorable, we hope to be able to offset the two. Obviously, there is continued risk obviously on material inflation as we look out. Overall though, as we always remind you commodity costs -- commodity increases are a net positive for us at Caterpillar, because it helps our customers buy more. On SG&A and R&D, spend was relatively low in Q1, part of that, obviously -- although -- obviously we did have short-term incentive comp increases, part of that obviously is in the environment. We’re still working and we’re still ramping up, going on projects -- –obviously, we [ph] got new projects. We ended a lot of projects at the end of last year. Starting them becomes a lot more difficult in an environment where people aren’t altogether. We expect that to accelerate as we go through the year, that particularly will impact R&D spend. And then obviously travel will impact SG&A as we get people back out on the road and people want to go out and meet customers. That will impact as we go forward. So, those are the sort of bits. As far as the top line is concerned, I mean, obviously, that's going to depend on as we talked about the ability to meet the demand profile out there, and how actually customers feel as we go through the year. As we indicated, demand signals are improving. And obviously, that's going to be something we'll continue to monitor and may impact overall how the quarters trend out from a topline perspective.

And just a reminder, one question per analyst, if you would. Next?

Your next question comes from the line of Brett Linzey from Vertical Research. Your line is open.

Good morning and thank you. Wanted to come back to your comment that you expect to meet your adjusted operating margin target, maybe just a little more context there. Are you suggesting the midpoint is a reasonable expectation or are there particular corridors within that range, upper half, lower half as a good planning assumption for the year? Thanks.

Good morning, Brett. Thanks for your question. We're not going to try to go into that level of detail. So, what we're saying is that we'll be within our target range for adjusted operating margins, but again with all the puts and takes that we described this morning, we're not going to get into -- telling you exactly where we are within that range, but we expect to be within it.

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

Hi, good morning and nice quarter.

Thanks, Jamie.

My question is with -- my question is with regards to research. I think you talked about in your prepared remarks, some strategic deals as you're trying to grow your service business. So, I'm just wondering, is this sort of a one-off thing? Is this something that will happen more often within Resource that you're trying to grow the -- your service business and implications for margins for your Resource business throughout the cycle because of these initiatives? Thanks.

Well, thanks Jamie. Within Resource Industries, we have Energy & Transportation occasionally as well. It's a lumpy business where you can have a large project move quarter-to-quarter, move our margins, move our price realization. And the comments that we made were in the context of price. And we talked about the fact that we had a large strategic -- in large strategic deals count in the quarter, book in the quarter that impacted price. So, we always -- when we look at a project, we take into account the future services opportunity. We always do that. And so, again, with those lumpy [ph] businesses, you should expect things to move around quarter-to-quarter, and what we're really focused on is that long-term profitable growth that comes from growing services, seeding the population, growing the aftermarket, but you'll see things move around up and down. We see that in both E&T and in Resource Industries, and I think that will continue.

Your next question comes from the line of Mig Dobre from Baird. Your line is open.

Thank you. Good morning, everyone. I was wondering if you can maybe provide a little more context around what you're seeing in mining. Certainly, you're sounding more positive, but I'm kind of curious if you can maybe talk a little bit about how your orders or backlog have been progressing here, and look I mean, some of the commodity prices out there are back to prior highs, 2011highs. So, I'm kind of wondering here, are you actually starting to see a real replacement cycle on the OE side starting to develop? Thank you.

Mig, thanks for your question. And as you indicated, certainly copper, iron, iron ore, gold, all very, very strong, and we've been talking about this for the last few quarters that we're having very positive conversations with our mining customers. Certainly, they're being disciplined in their capital expenditures, but things are improving. So, our orders are improving. There's a number of projects that we're tendering that are multi-year in nature where we feel very positive about our competitive position because of our autonomous solution across a number of products. So, again, as I talked about earlier, we're not expecting a very fast ramp up or a spike. We're seeing more of a gradual improvement, and that's continuing. And so, again, we're quite encouraged by what we see, and we start to think about how Caterpillar is positioned from a mining perspective as the energy transition occurs with the growth of EVs with just the amount of demand that will be created by that, Caterpillar is very well-positioned to do -- to take advantage of that and to serve our customers, make them more successful, and it'll be good for us and our dealers as well. [End]

Your next question comes from the line of Rob Wertheimer from Melius Research. Your line is open.

Hi. Good morning and thank you. My question is on connected asset. You touched on it briefly. I just wonder if you can detail any more progress where the opportunities seem to be widening as you look into what you can do for your customers versus your targets. And then, just in general, we've seen some industrial companies start to partner with a tech company maybe for the AI or the machine learning analytics side of it, and you've maybe gone a foot down that road and back again. Does it feel like your strategy is fully fleshed out, and what you're going to do with it or are you still learning and might you still partner? Is there something else you need? Just an update, please. Thank you.

Thanks, Rob. Services is a never-ending journey, so it will never be done. And as I know, you're aware we've invested heavily in our digital capabilities, and we're continuing to do that. We are -- we've got over a million connected assets, and we are now working to leverage those connected assets to find ways to add value to our customers. And again, that also adds value to Caterpillar and our dealers. I mentioned in my prepared remarks about prioritized service events, or PSEs. That is something that we're fleshing out and continuing to invest in. So, if your question is, are we there yet? No, we're not there. We are continuing to invest. This is a long journey, but we're pleased by the progress that we've been making over the last two or three years.

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

Thanks. Good morning, guys.

Good morning, Ross.

I just wanted to go back to the question I asked a few quarters ago. It sort of piggybacks off of Mig’s question on mining. And is there anything structural that's holding you back in your core mining equipment business to offset some of these positives that you mentioned? I'm not talking heavy construction or quarry, but just core mining equipment, whether it's your coal [ph] exposure. I mean, is autonomy in any way cannibalizing new equipment demand? It's just -- it's a bit puzzling that the business is still doing $2 billion to $2.5 billion of revenue per quarter, which is pretty much where you've been since 2014, and should we think of RI just sort of long term, just range bound in an $8 billion to $10 billion annual revenue range through the cycle?

Well, as I mentioned earlier, again, we are optimistic about our mining business. We believe that mining will benefit from many of the trends that are occurring in terms of the energy transition. We're very pleased with our competitive position due to autonomy and other capabilities that we have as well, our dealers our product support. So, actually, we're quite optimistic. And so, I'm quite the opposite really of being negative about it. We're quite optimistic about the opportunity for future profitable growth in mining. We've been talking for a number of quarters that we don't expect a rapid peak or a rapid acceleration. We've talked about a gradual improvement, and I think we talked about it the last few quarters, and that's what we're starting to see. So, again, things are playing out very much as we had expected and as we shared with all of you in our previous earnings calls.

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

Thanks. Good morning, guys.

Good morning.

Can we talk just a bit about the price cost environment in construction and [technical difficulty] what you are seeing from a competitive perspective, your ability to raise price to combat raw material inflation throughout the rest of the year?

Yeah. Nicole, it’s Andrew, and good morning. Yes. I mean, obviously, as I indicated in my remarks, we do expect that obviously raw material inflation is going to have some impact later this year through the remainder of the year. We're pricing for that. We do not see at this stage an issue with that pricing, so we're all comfortable -- what increases we’re putting through are not going to have an impact. As you always know, Caterpillar is normally the price leader, and that helps us in the environment. We put through very modest price increases at the beginning of the year, so that did enable us to have a little bit more scope to put forward the price increases for now.

Your next question comes from the line of Steve Fisher from UBS. Your line is open.

Thanks. Good morning. I wanted to just ask you a little bit more about the mix in construction and how that will affect margins. It sounds like you're anticipating a little bit of a shift from residential to perhaps commercial and heavier applications, and maybe there could be a bit of a rotation from Asia to North America. Is that how you're seeing it? And maybe about the timing of that shift and sort of what you're counting on to help mitigate the price cost dynamics from mix over the course of the year. Thank you.

Good morning, Steven. So, I don't believe we talked really about a shift from one to the other. What we talked about is the fact that the residential is quite strong, and we see some improvement in heavy construction starting to happen. Asia, there's a normal selling season that occurs in China associated with Chinese New Year. So, I wouldn't talk about it really as a rotation. I would just talk about it as, in some ways normal seasonal patterns, but in other ways, again an improvement in that heavy construction which has been quite depressed. So, we're starting to see some improvement there. So, I'd characterize it that way as opposed to a rotation.

Yeah. And I think, also, Steve, as we always look out, I mean, we tend to look at margins and managing them over many quarters rather than just individual quarters. So obviously, while there may be mixed impacts from quarter-to-quarter, pricing impacts from things like geo mix and so forth, obviously there are other things that go the other way. So, we're always looking at the overall margin structure and making sure we manage that appropriately.

Your next question comes from the line of Adam Uhlman from Cleveland Research. Your line is open.

Hey, guys. Good morning.

Good morning.

Wondering -- I was wondering if we could expand on the dealer inventory positions right now, and if you could share your thoughts about how you're thinking about that for the rest of the year, because I think you indicated that you thought that it would be stable until the second quarter. At the same time, dealer inventory is at the low end of year range. And I think you indicated that you are at normal availability for the majority of your products. So, I guess why would dealers not build up more to get to kind of the average level of your targeted ranges? Thanks.

Well, Adam, thanks for your question, and I always have to remind you, of course, dealers are independent businesses, and they control their own inventory. What we're really focused on is meeting end user demand, and we talked about the strength in STUs [ph] and the improving situation in a number of markets that we serve. We talked a bit about some of the supply chain challenges, but our laser focus will be on ensuring that -- doing our very best to meet that end user demand. And all we're saying again, dealers are independent businesses. All we're trying to predict here at this point is that we don't anticipate as we sit here today a significant increase in dealer inventory in 2021. So, we're producing closer to demand, and of course dealer inventory will again be dependent on a whole wide variety of factors.

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

Great. Good morning, everybody. I had a mix question as well, but in Resource, some of the channel checks seem to suggest that we're seeing stronger order activity for machines relative to parts, which is a little bit counterintuitive from this part of the cycle. I'm just curious if you're seeing that as well, and why do you think it might be?

Well, I think maybe what we're seeing is just an improvement in OE. Again, as we mentioned earlier in the call, we're starting to see some improvement in the heavy construction part of RI off a relatively low base, but we're also seeing an upturn in mining orders. That is gradual, but as you see that, that certainly could have an impact on mix.

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

Hi. Good morning, guys.

Good morning, Chad.

Good morning, Chad.

Just had a question on price comps and Op margins, wanted to just clarify a couple of things. So, first of all, with the price cost and assuming commodities stay where they are, do you foresee the price cost balance at least being neutralizing this year or will it probably take into like 2022 for that to materialize? And then, just on operating margins, am I right in assuming that Op margin is going to be the highest in 1Q and drifting down through the rest of the year?

Yeah. So, first of all, on the sort of price cost, what we’re expecting is -- for the -- overall for the full year to be in about balance. That's based on plans today and forecast today. Obviously, one of the things we’re pointing out is supply chain risks are out there, which do mean that they include raw material risks, which may impact pricing as we go forward, particularly on the cost side as we go through the balance of the year. So, that’s one of the things we’ll keep an eye on. Obviously, what we talked about in -- where we -- the only thing we're really saying about operating margins at this stage is that they will be within the Investor Day target range. And then, obviously, in the first -- from Q1 to Q2, we do expect that obviously operating margins will moderate slightly in Q2, mostly due to the factors I spoke about earlier, absorption rates being one of them, but also obviously the timing of price costs as well as that comes through.

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

Hey, guys. How it going? Nice quarter, good free cash flow, unbelievable. I wonder if you could just give us a little sort of your editorial between customer commentary and your unique position in this market, like how durable do you feel like the customer commentary like the recovery is going to be for 2022, 2023. I'm not asking for forecast, just sort of your color from all the different inputs you guys get.

Okay. Joel, you asked the most difficult question of the morning so far. So, certainly, we've talked about -- maybe the way to do this is talk about various markets. We talked about mining, and we've talked about the fact that we expect that gradual increase to continue. We have no reasons to think that it will stop, but again it’s very difficult for us to try to judge out what's going to happen two or three years. And when we put our strategy together in 2017, one of things we really focused on is performing better at all points in the cycle. We talked about having 300 basis points to 600 basis points better on operating margin regardless of where we're in that cycle compared to the historical past, which we defined as 2010 and 2016 and also producing $1 billion to $2 billion of incremental ME&T free cash flow at all points in the cycle. So, that's what we're really focused on. So, again, as we sit here today, we are optimistic about what we see. The things are improving in some markets that have been depressed. We've talked about the strength in mining, but again it's just very difficult to try to judge what will happen two or three years out. There are so many factors that could impact it.

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

Hi. Thank you. My question was the dealer inventory. You noted you ended 2020 at the lower end of the normal range of months of sales, and if we're not going to see a restock this year of inventory while retail sales will grow, it does suggest the month of inventory relative to sales is going to be even lower at the end of the year, and obviously that sets up a very positive 2022 for your machine production even if retail sales were just flat. So, I was hoping if you can just give us some sense of magnitude where your scenario plays out on how far below normal would you expect dealer inventory to be at the end of the year?

Yeah. David, as we’ve tried to indicate, we're not expecting this year is a significant increase in dealer inventory. That doesn’t mean that there won’t be any. So that actually puts obviously, as you quite rightly point out, if the demand signal continues to improve, obviously dealers would normally want to hold more inventory. What we are focused on is making sure we can meet demand in the current year and end user demand. And given some of the, obviously, challenges and risks that are out there, that is really our focus rather than concentrating on what we think actually year-end inventory will be. Obviously, we'll see how that pans out for the remainder of the year and see how dealers are thinking about 2022 as we get to the end of the year at this stage.

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

Yes. Hi. Good morning, everyone.

Good morning, Jerry.

One of the points from your customers on the mining side is, they are also setting their long-term CO2 reduction targets, and I am just wondering if you can talk about the opportunities that they have with your products to reduce their CO2 levels, and if you care to comment on when hydrogen and mining trucks is feasible in your view within that equation? Thanks.

Thanks, Jerry. And certainly, we are working with our customers in mining and in other areas of our business as well to help them achieve their climate-related objectives. It’s a bit early to make any kind of announcements here this morning, but certainly we are in discussions with our mining customers, and we will work to help them meet their objectives.

Okay. With that, we will turn it back to Jim to make his closing remarks.

All right. Well, again, I appreciate everyone joining us this morning. Couldn’t be more proud of the team and how they performed in the first quarter, a lot of positive signals. We talked about some challenges we have, but we are managing our way through those. We appreciate everyone’s attention this morning. Thank you.

Thank you, Jim. Thanks, Andrew, and everybody who joined us on the call today. We appreciate your time with us. A replay of our call will be available online later this morning. We will post the transcript on our Investor Relations website later today. Our first quarter results video with our CFO and an SEC filing with our sales to users data are already posted there as our updated slides and the new Caterpillar 2020 Data Book that I mentioned earlier. To find the Diversity & Inclusion Report that Jim referenced, click on caterpillar.com, then Careers, then Diversity & Inclusion. If you have any questions, please reach out to Rob or me. You can reach Rob at rengel_rob@cat.com. I am 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 have a nice weekend. And now, I will turn it back to Jason to conclude our call.

That concludes today's conference call. Thank you everybody for joining. You may now disconnect.