Caterpillar at Morgan Stanley Notes

Tom Pellette – President, Energy & Transportation

Oil usage is here to stay

“there is a lot of, you can go out on YouTube and see a lot of pundits talk about the end of the internal combustion engine or you hear countries that are announcing they’re not going to have any more internal combustion engines after a certain year. You also hear a lot about peak oil demand that as I detailed in my presentation yesterday, the world population is growing we still have 15% of the world population of 7.5 billion people that don’t have access to electricity and particularly in developing parts of the world there will be continued need for fossil fuels. In fact, the prediction is that the absolute usage even though the percentage will decrease, the absolute usage will continue to grow 2040 and beyond. So, we are very heavily focused on becoming more efficient cleaner engines but continuing to provide reciprocating engines to the industries that we serve and in fact oil and gas usage continues to advance as people want to improve their lives”

There’s an economic balance point for electric vehicles

“we talk about electric cars and still the adoption rate is very low and they are still more expensive than conventional cars. When people say, when they look at a country like Norway, they have a high adoption rate of electric cars, but then you look at it and it’s all subsidized. So eventually that economic balance point will be reached and then these technologies will be embraced a lot more quickly we’ll be ready.”

Amy Campbell

China construction has surprised with its strength

“So, China Construction has surprised us all year with its strength. We expected China to do better, we thought but it’s quite better than we thought it would. For many reasons, one being that the used equipment market there is not as robust and we think that’s driving some of the higher demand and more matured European and North America market you get lot more used equipment to leverage for the industry.”

Caterpillar 2Q17 Earnings Call Notes

D. James Umpleby – Caterpillar, Inc.

Construction in China was a highlight

“A number of our markets remain challenged, but there were improvements in a few of our key markets this quarter. Construction in China and gas compression in North America were highlights. Mining and oil related activities have come off recent lows and we’re seeing improving demand for construction in most regions. ”

Amy A. Campbell – Caterpillar, Inc.

Expect inventory restocking in China

No, we think that there’s still dealer restocking to come. So if you look at dealer inventories in China, we probably typically target about 2.5 months of sales. China’s target for dealer inventory months of sale is a little lower than the rest of the world. They have less variety in the configurations they sell. We are about, quite a bit lower than that at the end of the second quarter, even though we did take dealer inventory up some. So we do expect to continue to be rebuilding dealer inventory levels through the back half of the year. But as I mentioned, certainly in China, the strong selling season for end users is in the first half.

Seeing healthy demand for mining equipment

” I think commodity prices right now are supportive. They need to stay supportive. If we were to see change materially, that could change the story. But where they are right now, we are seeing healthy demand for mining equipment”

Price pressure has been there

“I’d say the price pressure has been there, but we expect it to continue. And we expect, I’d say our competitors, as we continue to see the strong dollar work against us from a competitive standpoint to put additional price pressure in the back half of the year”

Infrastructure spend has really disappointed in the US

“I think if you go back to the chart on Construction Industries sales that’s in the presentation pack, I think what you’ll see is we have seen healthy growth and non-residential and residential spend, although we still think from a residential perspective we’re not keeping up with population growth in the U.S. But what has, I’d say, disappointed for the last several years has been a lack of growth in infrastructure investment, which is really, I think, the area that looks prime to need some more investment and some more growth.”

Caterpillar at Deutsche Bank Conference Notes

Denise Johnson – Group President, Resource Industries

We are seeing a good solid recovery in mining

“So, I talked a little bit about the recovery. We are seeing a good solid recovery from a really low level. If you see on the left, certainly the commodity dollar index, as the last chart has shown with it returning here in 2017. We are also seeing that our equipment is being utilized at fairly high rates. And you see the chart on the right hand side which really shows parked truck utilization overall

Mining companies are forecasting CapEx to increase

“We are also seeing that the mining companies are forecasting CapEx to increase, I’ll say, although they have been very stingy with those CapEx dollars. Wherever possible, they are looking to maintain the equipment that they have. They are rebuilding more than ever. ”

High level of interest in autonomous fleets

“One area that we’re very heavily focused on is technology, and I talked about that a little bit. One highlight that I’m very proud of is the fact that we are a supplier in production on autonomous fleets. We have two fleets in production in Australia and we have a number of customer contracts that have been signed for additional autonomous fleets to be deployed, one in the oil sands, one in Brazil, and another in the U.S. So, I will say in general, there’s a high level of interest in autonomy, mainly for the benefit that it provides for productivity.”

Technology controlling mines has changed

“So, if you look at what’s happening in mining, certainly the industry itself is poised to grow. The mining methods of the past have changed. And where we’re controlling mines from for the future from pit support is located in office buildings instead of the mine sites. So, recognizing the technology needs to be — the solution step that’s used and leveraged to a larger degree is something that we definitely see and it’s getting a lot of pull for, and I think something that really is the game changer in this industry.”

Iron ore customers are not pulling off production even at lower prices

“We are watching that really closely. I would say, in general though, most of our iron ore customers have been extremely focused on lowering their costs. So, even though pricing is going lower, they are still at a point where they are not looking to pull off from production. So, it hasn’t impacted us to a large degree. Now, I would say that there are few of those customers that are — we had thought were going to order trucks and had decided to delay the order. So, it’s just a delay. But for the most part, they haven’t — it just hasn’t stopped them from to normal activity.”

One big customer trying to be fully autonomous by 2025

“I was talking to a customer last week about autonomy and they have a goal to be fully autonomous on every mine site by 2025. And they have thousands of pieces of equipment. So, you’ve got these bold goals being placed out there. So, clearly, the momentum is moving. We’re getting calls every day from mining customers asking for us to come in and talk to them about what we can do together. So, there is certainly a pull there. And so, it will happen, it’s just how fast. There is — it still is the technology that’s evolving. And we do have a lot of tech companies out there that are also trying to fill that space. So, it will be interesting to see how it evolves, but it will clearly go there.”

Caterpillar (CAT) Q1 2017

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.”

Caterpillar 4Q16 Earnings Call Notes

James Umpleby

Michael DeWalt

China positive

“Construction in China has been positive, and that’s good. But that said, it’s dependent upon continued economic growth and government support for construction in China as we go into 2017.”

Not seeing big increase in CapEx from mining customers in 2017

“Now, in terms of concerns, and we talked about these in the release, mining customers, our estimates and what we’ve read, we’re not seeing – we’re seeing better sentiment, for sure, but we’re not seeing expectations for a big increase in CapEx in 2017, although it does look like that could occur in 2018. We’ve had weakness in North American construction over the past year. There’s been a lot of used equipment in the market. The slide in oil and gas over the last couple of years has been a negative for our sales.”

Not looking for major declines in US construction but maybe a little softer

“Let me try to address that, Ross. We’re not looking for major declines in North America next year. On balance, Construction looks – our Construction industry segment looks fairly neutral year-to-year. Our view is that the Middle East and North America will be a little softer, and Asia Pacific may be up a little, but we’re not signaling some large continuing decline. I wouldn’t want to give you that impression whatsoever. And we have a range out there. And you never know if economic growth is faster than we think, if tax reform comes sooner, if infrastructure spending comes sooner, maybe we can be towards the high end. So I don’t want to make it sound like we’re super negative on Construction, because that’s not the case.”

Pricing environment not getting any worse

“I think what’s happened is that stabilized. It doesn’t look like it’s getting any worse. I don’t think the pricing environment is any better on an absolute basis, but we don’t see it getting kind of worse from here. We do use our operating and execution model, and you don’t want to be doing silly things. You don’t want to, for example, have big sales discounts on products you don’t make much money on.”

Caterpillar at Credit Suisse Conference Notes

Denise Johnson – Group President-Resources Industries

Increased optimism among mining customers

“As we talk to our mining customers, we clearly see that they have some increased optimism certainly with commodity prices improving their financial viability improving they do have an optimistic outlook moving forward. Yes this has not yet translated into any tangible machine sale increases for Caterpillar. At this point in time, the focus of our mining customers continues to be and maximizing the utilization of their existing assets, they are getting more productivity, improved levels of performance out of that existing fleet. Certainly, we have seen an increase in aftermarket part, a trend upwards through this year, and we expect that could continue beyond this year, certainly more rebuilds, very tight focus on maintaining the fleets at very high levels. Machine replacements, we do see coming over time. Certainly, the age of the fleet are getting older, but there certainly is a heavy focus, as I indicated earlier, on getting every, every available hour out of the existing fleet before a repurchase would occur.”

Integrating technology is the game changer for the future

“And certainly I would see the game changer for the future is going to be an integrating technology not only with the existing products that we have in the field, but also moving forward with solutions that allow technology to even provide additional levels of productivity beyond what we see today. And that would mean everything from longer cycles before repairing to continuing to improve productivity and up time in the fleets, and that’s why we’re looking very heavily to partner with our customers to do just that.”

We are not seeing orders at this point although there are things to be positive about

“while there are things out there to be positive about, we are not seeing orders at this point. We still expect the first half to be a little softer. It was acquirer uptick in the second half. And to make sure that we have our cost structure in place, so that we can deliver on expectations and hit those incremental targets that we’ve committed to”

Don’t see much more decline in dealer inventories

“So going back to dealer inventory I would say over the – dealer inventory overall are about at levels. We don’t see much more decline in dealer inventories overall. We’ve taken out over the last year and a half over $1 billion of inventory between dealer and Caterpillar in the Resource Industries. And so we see a translation of – there may be some pockets in Saudi Arabia for instance where we have some large tractors or in South America where we have some troubles. But there would be very small pockets of excess inventory overall.”

Amy Campbell

Higher prices for copper and iron ore should impact after market sales next year, but still don’t see an increase in new equipment

“the mining prices have gone up meaningfully since the third quarter release for both copper and iron ore specifically. And we believe this will impact aftermarket part sales next year. However, we still do not expect 2017 to see a significant increase for new equipment sales in mining.”

Construction has been strong in China

“Construction in China has been strong this year and our base cases for this to continue, so potential monetary of fiscal policy changes could quickly reverse course. Machine sales into many developing countries like Brazil are such low levels has been likely that they could get worse and while incremental infrastructure bill is a long overdue and would be good for Caterpillar, we would not expect much impact in 2017. So, now let’s focus on the concerns.”

Caterpillar 3Q16 Earnings Call Notes

Caterpillar (CAT) Q3 2016 Results

Douglas R. Oberhelman – Caterpillar, Inc.

Splitting Chairman and CEO role around transition of CEO

“We did make a change in governance with a split Chair and CEO role. I think most of you know we’ve had a shareholder proposal on that for several years in a row and we have a couple of large shareholders that are fundamentally for that. They push that at transition times. And obviously, this was a time the board considered that because we’re in transition.”

Mike DeWalt

Lowered 2016 outlook

“Let’s look at the outlook. We did lower the 2016 outlook. Previously, we were thinking $40 billion to $40.5 billion for the year and $2.75 profit per share, $3.55 without restructuring costs. Now, we’ve lowered that. We think sales and revenues are going to be about $39 billion this year, and profit will be $2.35 a share, or $3.25 excluding restructuring costs.”

Decline in construction, particularly in NA

“Now, the decline for construction is particularly North America. And the weakness in North American construction is impacted both our Construction Industries segment and, to some degree, Resource Industries for large equipment. So I think that’s one of the bigger reasons for the decline in the outlook”

Commodity prices still not quite good enough to drive substantial sales increases next year

“we don’t think commodity prices are still quite good enough to drive substantial sales increases next year. We would like to see commodity prices rise more next year. And if that happens, that, we think, logically would be upside for the second half of next year; if that doesn’t happen, probably not upside then.”

Remain very cautious on the first half of next year

” On balance, we’re not seeing a significant difference, but we’ve said this in the release. I think we’re much more cautious about the first half of the year. And the flattish for the year relies on a bit of improvement in the second half of the year. So I think to your point on costs, I would suspect as we wrap this up, we will be planning and trying to set a cost structure for something that’s probably a little bit more conservative than where we’re thinking sales for the year could be. So there will remain a very big focus on cost and cost reduction.”

I don’t really want to answer your question about goodwill impairment so I’ve going to talk around it rather than give a direct answer

“Well, those are big questions, so I’ll try to talk around it rather than giving you a direct answer, because our credit rating is up to the rating agencies. But first off, if we knew what the result of the fourth quarter goodwill testing would be, we’d book it. We don’t. We go through a defined process every year. We’re going through that now. And we’re pretty straight up. If there’s an impairment, we’ll book it. If there’s not, we won’t.”

We don’t have a Bucyrus, there is no Bucyrus

“First, there is no Bucyrus. Bucyrus does not exist. And the goodwill is not in one measurement bucket. We measure goodwill. We do the work based on which of our business it’s in and that goodwill is spread across more than one business. And also remember that some of the intangibles in goodwill changed after we acquired Bucyrus and sold a portion of it to dealers…So we don’t have a Bucyrus. Everybody wants to think we do, but it’s been integrated in across a couple of different businesses within the company. And so the measurement is not just Bucyrus, because it doesn’t exist. It’s each of those businesses that we have. That’s how it’s done.”

Problem in NA construction is infrastructure spend hasn’t been robust and too much used equipment

If you look at construction in North America, housing seems to be motoring on and has been okay. The problem we find ourselves in, I think, is the larger projects, the infrastructure, the infrastructure spending is maybe not quite as robust as housing would be right now, and that’s a bigger sweet spot for us. We have this other dynamic going on and I’ll try to describe it like this. We have too much used equipment in the marketplace right now, and used equipment prices are fairly depressed.”

D. James Umpleby – Caterpillar, Inc.

New CEO

“Thanks, Doug, and hello again to everyone on the line. It’s an honor and privilege to be selected as the next CEO of Caterpillar. I’ve worked with Doug for many years. I have great respect for him and am proud to be part of his team that has kept Caterpillar strong throughout some of the most difficult market conditions that we faced. Like other incoming CEOs, I’ll pull together a team of leaders that will refresh our enterprise strategy in the coming months. Again, it’s an honor to have been chosen to lead this great company. Thank you.”

Caterpillar 2Q16 Earnings Call Notes

Douglas R. Oberhelman – Chairman & Chief Executive Officer

Don’t think it was a surprise that Joy was acquired

I’ll take that one. It’s Doug Oberhelman here. I don’t think it was any surprise that Joy was acquired with what’s happened to them and the mining industry in general and all the mining customers, particularly coal customers, that are out there around the world. Obviously, we’ve known Komatsu for decades. We’ve known Joy intimately as well the last decade or so since they emerged from bankruptcy and we entered mining in a bigger way. So neither one of these are new players. Certainly it’s a consolidation that makes sense in the mining world.

Michael Lynn DeWalt – Vice President-Finance Services Division

Taken down sales guidance as everything we’re seeing around the world is not giving us more confidence

“Talk a little bit about the outlook for the year. When we were sitting here a quarter ago, we were expecting sales in a range of $40 billion to $42 billion, so $41 billion as a midpoint. We’ve taken that down, from midpoint to midpoint, about $0.75 billion. And the gist of that is just everything that we’re seeing in the economy today around the world. Additional risk; everything from the results of the Brexit vote and the short-term uncertainty that that causes, the trouble we’ve seen in Turkey, all the negative rhetoric around the U.S. elections. Oil prices have come off a little over the last couple of months. It’s not any one thing, I would say. And we said this in the outlook. You know, we have sluggish economic growth throughout the world in general, but not enough to drive growth in our end markets. And the news we’ve seen over the last few months is definitely not giving us more confidence.”

There is some improvement in mining

“I would say there’s some improvement in mining on the horizon around aftermarket. We are seeing a little more activity on dealer rebuilds and we would hope that that would translate into higher sales for us. I think one of the things that might distinguish us a little bit from competitors is that we sell through dealers. So a lot of these projects might hit them quicker than they hit us. We’re still expecting a decline in dealer inventory this year and particularly in the second half of the year. So if we were just selling to end user demand, sales would be a bit better than they are right now.”

dealer inventories are not excessive but will likely come down in the second half

“If our delivery – let’s say things ticked up, orders ticked up, the markets heated up, and let’s say we had trouble keeping up, that would concern dealers and they would order even more. They would want to hold even more. But just the opposite is happening right now. We have excellent delivery performance. They can get pretty much what they need when their customers need it. And so that’s causing them to hold, or want to hold less. And the more – the better we do with lean, the more that’ll probably be the case. So I’m trying to stress the point I don’t think dealer inventories are excessive. I mean, there’s a reasonable range but I think they will come down over the second half of the year.”

Caterpillar 1Q16 Earnings Call Notes

Douglas R. Oberhelman – Chairman & Chief Executive Officer

Chinese government policy centers around shift from investment economy to consumer economy

“First of all, around China, I was over there about three weeks ago, as I usually do in March, to attend a state-sponsored forum of CEOs from Europe and United States. And there was a lot of sharing about government policy, where they’re going with the five-year plan, where they’re going with the 10-year plan for that matter as well, and a lot of discussion around the transition from an investment economy to a consumer economy, and I think that’s part of what we’re all feeling. They also announced about the same time, or a little bit before that actually, a little bit of a stimulus, which was minor. And frankly, we’re feeling that.”

Seeing an uptick in construction in China for the first time in three years

“This is the first post-Chinese New Year in probably three that we have seen a continued industry uplift for the industries that we serve around construction. It’s not a hockey stick. It’s not a boom. It’s not a 2010. But it is the first time we’ve seen that happen, and we have lifted our schedules as a result of that this year. ”

Any market that’s away from oil is doing well in the US

“In the U.S., any – just about any market that’s away from oil is doing pretty good. Southeastern U.S., Southwest U.S., we’re feeling the benefit now more of housing. In fact, construction and paving segments were up about 7%, and that’s positive. When you get around the oil pads, there’s an oversupply of everything and that’s kind of shadowing the numbers. I think once that balances out, we’ll be back to – or be able to show a fairly anemic, but stable growth.”

400k connected assets

“Today, we’ve got 400,000 connected assets and growing. By this summer, every one of our machines will come off the line being able to be connected and provide some kind of feedback in operational productivity to the owner, to the dealer and to us, where improvements down the road the idea being to get to a point where we can show the customer on his iPhone everything going on with his machine, his fleet, its health, its run rate, its productivity and so on. ”

I would be very cautious on China. We don’t know how sustainable the uptick is but there is an uptick

“I would share the caution in China. I am pretty sure that it’s more than just the tier change, the Tier 3 institution implementation on April 1. Our folks over there were pretty emphatic that that’s going to hold and that this is beyond pre-buy. But I am very cautious about how far that goes, and I would share that as well. We’re going to have to watch this month by month and see where it goes. There’s no question though that the government is concerned about growth. And too slow of a growth and a change in growth will be much more negative than some stimulus now, and I think that’s what they’re trying to balance. So I’m not going to declare a bottom in China, I don’t know. But certainly, this is, as I said earlier, the first post-Chinese New Year where we’ve had sustained shipments now 60 days going on 90 days past the New Year in several years. So I am watching that, and I am cautious, but that’s a better statistic than we’ve had.”

Europe is more positive

“going over to Europe, we met with hundreds of customers and all of our major dealers over there. And it was hard to find any more pessimism than that’s been there for several years. They all recognize it’s been a seven-year slog. They all recognize there’s not a boom coming, but at the same time, the stories were much more positive.”

Caterpillar at JP Morgan Conference

Mike DeWalt –VP Finance Services

China change is logical

“From an economic standpoint, I think it’s our view what’s happening there is logical. They can’t drive an economy that big that fast on just fixed asset investment. I mean, the conversion to a bit more of a consumer-led economy overall have happened. It will have, as it’s been the last couple of years for our business, it will have fits and starts and a different impact overall.”

Demand has come down a lot over the last few years in China

“That said, it’s been pretty tough on our business. I mean demand has come down a lot over the last few years, particularly for construction and mining equipment. It seems to be stabilizing now. Our kind of view of China for this year is certainly not as much change as we’ve had over the last few years of a more stable environment, and we are out there looking for kind of short-term changes.”

February was a decent month but January was not so it’s still wait and see

“I know, month of February was a decent month for excavator sales but we’re trying not to get overly excited about that. You always have to consider the timing of the Chinese New Year. January was not a very good month. So I think it’s still wait-and-see.”

Inventory is in a normal range but sales forecast is lower so it needs to come down again

“I think our inventory in general at dealers and our finished inventory, you would say is kind of right in the overall normal range. But our sales forecast this year is down $5 billion from last year, and I think as a result of that, dealer inventory will need to step down a little bit to keep that ratio of inventory to sales in line. So, yes, I think this will be another year where we’ll under-sell end market demand a little bit.”

Currency is bad for our sales but neutral to profit

“currency, a frequently misunderstood subject with us, I can’t tell you how many times I hear the financial press, every time the dollar strengthens, it’s going to be a big disaster for us. And it impacts sales negatively but it’s usually, because of how we’ve diversified the cost base, it’s usually fairly neutral to profit. ”