Caterpillar (CAT) Q1 2017

posted in: Earnings Call, Notes | 0

D. James Umpleby – CEO

In sum

”….generally weak economic conditions and commodity price volatility have made the last few years challenging and have significantly impacted the industries we serve…Quarterly sales and revenues were up for the first time since 2015… Profit per share, excluding restructuring, is twice what it was a year ago. There are encouraging signs and promising quotation activity in many of the markets we serve…there is still a great deal of geopolitical and market uncertainty, along with economic volatility around the world that continues to present risks.”

 

Bradley M. Halverson – President and CFO

On China

“Strength in China has mainly been driven by a strong execution of public-private partnership projects, particularly related to infrastructure and strong housing investment. Credit growth has remained supportive and better than we previously expected. High replacement demand and a tight used machine inventory market have also helped. While March and April are traditionally the highest months for industry opportunity in China’s peak selling season, if policy remains supportive we expect strong market conditions in China to continue at least through mid-year.”

Strong order demand in North America

“North America dealer inventory increased, but by less than a year ago. And end user demand was lower. Both contributed to the sales decline in North America. However, order activity in North America has been very strong, which has contributed to the increase in the backlog. The Middle East and Brazil remain weak..”

Increases oil and gas rigs means more demand for equipment

“The number of oil and gas rigs in service continues to increase and has more than doubled the lows that were reached last May. This has resulted in an increase in aftermarket parts demand to support the overhaul and rebuild of well servicing fleets. We are also seeing a significant increase in demand for our large reciprocating engines used for midstream gas compression applications. Demand for drilling and production application remains very low.”

Positive business sentiments…

“There are several positive sentiments. World business confidence is at a two-year high and world growth is accelerating. There are also positive indicators for North America construction demand. Many states have passed infrastructure bills. Pipeline projects that were previously stuck in permitting are now moving ahead and residential and nonresidential demand in certain parts of the U.S. remains robust. We believe business optimism, which may be contributing to elevated quoting and ordering activity in North America, is partially a reflection of the benefits of pro-business policy in regards to infrastructure and tax reform. However, we don’t expect to see any meaningful impact from these changes until 2018.”

…offset by some risks

“…there are other risks to the outlook that we believe are prudent to take into account. Outside of Asia-Pacific, retail stats for construction industries remain negative. Demand for overhauls and rebuilds in mining and oil and gas could diminish as those units go back to work. Brazil remains weak. The Middle East continues to struggle as a result of lower oil prices. Competitively, the pricing environment remains very challenging. The potential for oversupply of oil could drive volatility in the price of that commodity. And geopolitical uncertainty across the globe is elevated….there’s still a lot of uncertainty in the world. And there’s still the potential for volatility both in commodity prices and oil prices.”

 More positive outlook

“The backlog is up $2.7 billion on strong order activity in all segments. China construction equipment industry is robust with industry sales up sharply versus last year. Gas compression demand for reciprocating engines is very strong. And miners’ balance sheets are improving, and they are expecting increases to CapEx…We do believe that there may have been some restocking of dealer shelves in the first quarter. And certainly if you look at the hours of utilization of the mining equipment versus where it was at its depth, kind of middle of last year, mining equipment is being used quite a bit more extensively. And I think that you can conclude from that that it’s driving consumables of filters and fluids and other things like that as well.”