Jim Umpleby: Thanks, Ryan. Good morning, everyone. Thank you for joining us. I'd like to start by thanking our global team for a strong first quarter, including double-digit top line growth, higher operating profit margins, record adjusted profit per share and strong ME&T free cash flow. Our results reflect healthy customer demand to most end markets for our products and services. We remain focused on executing our strategy and continue to invest for long-term profitable growth. In today's call, I'll begin with my perspectives on our performance in the quarter. I'll then provide some insights on our end markets. Lastly, I'll provide an update on our sustainability journey. It was a very strong quarter. Sales and revenues were better than we expected, with price realization, dealer inventory and sales to users each slightly better than we anticipated. Sales to users were higher than expected in Energy & Transportation and Resource Industries. Overall, sales and revenues rose by 17% versus the first quarter of 2022. The year-over-year increase was due to strong price realization and volume growth, which was driven by higher sales of equipment to end users. We achieved double-digit top line increases in each of our three primary segments. Adjusted operating profit margins increased to 21.1% in the first quarter, as we saw margins improve, both on a sequential and year-over-year basis. The adjusted operating profit margins were significantly better than we had anticipated primarily due to better-than-expected manufacturing costs, including efficiencies and absorption, stronger price realization and volume growth. Andrew will discuss in detail later. Backlog ended the quarter at $30.4 billion, flat relative to the fourth quarter of 2022. Equipment availability increased during the quarter due to improving supply chain conditions. While dealer order rates are lower, they remain at healthy levels. As you know, as availability improves, order rates typically normalize, as dealers can wait longer to place orders for long lead time items. Our healthy backlog continues to underpin our constructive views about our end markets. Despite the improvement in supply chain, pockets of challenge remain as we increase production, particularly for large engines, which impacts energy and transportation and some of our larger machines. We delivered a strong first quarter, which positions us well for an even better year in 2023 than we previously anticipated. While we continue to closely monitor global macroeconomic conditions, overall demand remains healthy across our products and services. Turning to Slide 4, in the first quarter of 2023, sales and revenues increased 17% versus last year at $15.9 billion. This was primarily due to favorable price and volume growth. Compared with the first quarter of 2022, overall sales to users increased 13%. For Construction Industries and Resource Industries, sales to users rose by 5%, while Energy & Transportation was up 39%. Sales to users in Construction Industries were flat, in line with our expectations. North American sales to users increased, as demand remained healthy for both nonresidential and residential, despite some moderation of the growth rate in residential. Overall, our North American sales to users were better than we expected. EAME also saw higher sales to users, led by strength in the Middle East. In Latin America and Asia Pacific, sales to users declined in the quarter. The decline in Asia Pacific included further weakening in China. In Resource Industries, sales to users increased 18%, which was our third consecutive quarter of accelerating sales to users. In Mining, sales to users benefited from a higher level of commissioning in the quarter. Within heavy construction and quarry and aggregates, sales to users also increased, supported by growth for infrastructure-related projects. In Energy & Transportation, sales to users increased by 39%. In the first quarter, oil and gas sales to users benefited from continued strength in new engine sales to customers, including repowering active fleets, upgrading technology to Tier 4 Dynamic Gas Blending and adding incremental gas compression units. We also saw strong sales of turbines and turbine-related services. Power Generation and Industrial sales to users continue to remain positive due to favorable market conditions. Transportation declined from a relatively low base primarily due to timing in marine deliveries, which was partially offset by deliveries of international locomotives. Dealer inventory increased by about $1.4 billion in the first quarter, which was slightly above our expectations compared to a $1.3 billion increase in the same quarter last year. In Construction Industries, the increase in dealer inventory was primarily due to stronger North American shipments, which remains our most constrained region. As we mentioned last quarter, over 70% of the combined dealer inventory in Resource Industries and Energy & Transportation is supported by customer orders. Moving to Slide 5, we generated strong ME&T free cash flow of $1.4 billion in the first quarter. We returned $1 billion to shareholders, which included about $600 million in dividends and $400 million in repurchase stock. We remain proud of our dividend aristocrat status and continue to expect to return substantially all ME&T free cash flow to shareholders over time through dividends and share repurchases. Now on Slide 6, I'll share some commentary on our expectations moving forward. While we continue to closely monitor global macroeconomic conditions, our first quarter results lead us to expect that 2023 will be even better than we had previously anticipated on both the top and bottom line. For 2023, we currently expect to be in the top half of the targeted range for both adjusted operating profit margin and ME&T free cash flow. Andrew will provide additional color. Before I discuss our outlook for key end markets, I'll provide some color on how we expect our top line to progress through this year. As I mentioned, we expect a strong top line for 2023, supported by price and higher sales to users, with healthy underlying end markets. We expect higher sales in the second quarter compared to the first, as is the typical seasonal pattern. Looking to the second half of 2023, it is important to highlight the second half of last year included the dealer inventory build of $1.4 billion, as dealers began to restock their inventories. We are not planning for this trend to repeat. Instead, we expect to see dealers decrease inventories compared to the first quarter levels and end 2023 about flat relative to the end of 2022. Although we expect sales to users to remain positive for our primary segments in each quarter, our planning assumption is that Caterpillar second half sales will have a dealer inventory impact. Let me explain. First, although dealer inventory in some products and regions have normalized, others remain constrained. For example, in North America, dealer inventory remains below the typical range for many products. However, there is greater excavator inventory in a few regions, as supply dynamics improved in 2022, which, coupled with the slowing in China, has resulted in improved excavation product availability. Given the improved availability of excavators, we expect that dealers will scale back their levels of excavator inventory in the second half of the year, even though demand remains healthy. As a reminder, dealers are independent businesses and control their own inventory. Second, in late 2023, we have scheduled a couple of new product changeovers in construction industry factories that will also impact the second half. Now I'll discuss our outlook for key end markets this year, starting with Construction Industries. In North America, overall, we continue to see positive momentum in 2023. We expect growth in nonresidential construction in North America due to the positive impact of government-related infrastructure investments and a healthy pipeline of construction projects. Although residential construction housing starts have softened, the growth rate of our residential construction equipment remains positive as the supply chain pressures alleviate. In Asia Pacific, excluding China, we expect growth in Construction Industries due to public infrastructure spending and supportive commodity prices. As we mentioned during our previous earnings calls, we expect China’s above ten-ton excavator industry to remain below 2022 levels due to low construction activity. In 2023, sales in China are expected to be below the typical range of 5% to 10% of total Caterpillar sales. In the EAME, business activity is now expected to increase versus last year based on healthy construction project activity, particularly strong construction demand in the Middle East. Although uncertain economic conditions remain, European construction is proving to be more resilient than we previously anticipated. Construction activity in Latin America is expected to be down in 2023 versus the strong 2022 performance. There is some concern about the potential impact of a commercial real estate slowdown. We estimate that North American commercial real estate accounts for about 1% of total construction industry sales. Any slowdown related to this sector should not have a significant impact on Construction Industries. In Resource Industries, we expect healthy mining demand to continue, as commodity prices remain above investment thresholds. As I have mentioned during the last few years, customers remain capital disciplined, which supports a gradual increase in mining over time. We anticipate production utilization levels will remain elevated. We also expect the aging of the fleet and a lower level of parked trucks to support future demand for our equipment and services. We continue to believe the energy transition will support increased commodity demand, expanding our total addressable market and providing further opportunities for profitable growth. In heavy construction and quarry and aggregates, we anticipate continued growth due to major infrastructure and nonresidential construction projects. In Energy & Transportation, we expect to follow our normal seasonal pattern, with higher sales in the second half of the year versus the first half. In oil and gas, reciprocating engines, although customers remain disciplined, we are encouraged by continued strength and demand for both well servicing and gas compression. Power generation reciprocating engine demand is expected to remain healthy, including strong data center growth. New equipment orders and services for solar turbines in both oil and gas and power generation are robust. Industrial remains healthy. In transportation, we anticipate strength in high-speed Marine as customers continue to upgrade aging fleets. Moving to Slide 7. We are contributing to a reduced carbon future and continue to invest in new products, technologies and services to help our customers achieve their climate-related objectives. We recently completed and upgraded more than 50 models across our entire next-generation hydraulic excavator line. The new models reduced fuel consumption by up to 25% compared to previous models and provide another option for customers to lower emissions, while improving operational efficiency. A customer can realize meaningful emissions reductions by simply moving to the newest next-gen model. This example reinforces our ongoing sustainability leadership and how we help our customers build a better, more sustainable world. In addition, we look forward to issuing our 18th annual sustainability report in May. With that, I'll turn the call over to Andrew.

adjusted operating profit margins first quarter

adjusted operating profit margins 21.1% first quarter


Andrew Bonfield: Thanks, Jim, and good morning, everyone. I'll begin by providing further color on the first quarter results, including the performance of our segments. Then I'll cover the balance sheet and ME&T free cash flow before concluding with a few comments on the full year and our assumptions for the second quarter. Beginning on Slide 8. Sales and revenues for the first quarter increased by 17% or $2.3 billion to $15.9 billion, the sales increase versus the prior year was due to strong price realization and higher volume, partially offset by currency impacts. Sales were higher than we had expected in January, with price realization, dealer inventory and end user demand each slightly better than we had anticipated. Operating profit increased by 47% by $876 million to $2.7 billion, which includes the impact of the divestiture of the company's longwall business. Adjusted operating profit increased by 79% or $1.5 billion to $3.3 billion. Favorable price realization and higher volume was partially offset by higher manufacturing costs. The adjusted operating profit margin was 21.1%, an increase of 740 basis points versus the prior year. As Jim mentioned, the adjusted operating margin was much better than we had anticipated. Lower-than-expected manufacturing costs, including efficiencies and absorption were the largest variable, while price realization and volume were also stronger than we had envisioned. I'll provide additional color in a moment. Adjusted profit per share increased by 70% to $4.91 in the first quarter compared to $2.88 in the first quarter of last year. Adjusted profit per share in the first quarter of 2023 excluded pretax restructuring costs of $611 million, most of this related to the noncash charge from the divestiture of the company's longwall business. This compares to pretax restructuring costs of $13 million in the first quarter of 2022. Other income of $32 million in the quarter was lower than the first quarter of 2022 by $221 million. The year-over-year decline included about $100 million unfavorable currency impact related to ME&T balance sheet translation and an adverse impact of $80 million for pension expense. The dollar strengthened marginally since our last earnings call, so the currency impact within the first quarter of 2023 was about $30 million better than we had anticipated than when we spoke to you in January. Finally, the provision for income tax in the first quarter, excluding discrete items, reflected a global annual effective tax rate of 23%. Moving on to Slide 9. The 17% increase in the top line versus the prior year was driven by favorable price realization and higher sales volume, while currency remained a headwind to sales. Volume improved in part due to a 13% increase in sales to users. The impact from changes in dealer inventory was minimal, as the $1.4 billion build in the first quarter was similar to that seen in the first quarter of 2022. Services sales volume was slightly down, mainly due to dealer ordering patterns while services to their customers remain positive. Compared to our expectations a quarter ago, sales were higher than we anticipated, largely due to slightly stronger volume and better-than-expected price realization. On volume, sales to users outpaced our expectations due to strong demand. In addition, the improving supply chain supported higher levels of production across our primary segments. This enabled dealers to increase their inventory levels ahead of the selling season by slightly more than we had expected. Moving to Slide 10. First quarter operating profit increased by 47% to $2.7 billion. Adjusted operating profit increased by 79% versus the prior year quarter as favorable price realization outpaced higher manufacturing costs. Sales volume was also a benefit. Our first quarter adjusted operating profit margin of 21.1% was a 740 basis point increase versus the prior year. Now let me explain why our adjusted operating profit margin was so much better than we had expected. While manufacturing costs did increase year-over-year, the increase was less than we had than anticipated and was the most important factor in the quarter. As we have mentioned, volumes were better than expected due to favorable demand and improvements in the supply chain. This helped manufacturing cost as both factory efficiency and cost absorption were better than expected. Freight costs were also lower than we had anticipated due to lower premium freight utilization and rate reductions. Material costs were in line with our expectations and did not impact the margin outperformance. In addition to lower manufacturing costs, price realization was also stronger than we had anticipated a quarter ago. Stronger-than-anticipated volume had a smaller beneficial impact on margins. Spend on strategic investments was also lower than expected, as project spend ramps up slower than we had planned. Moving to Slide 11, I'll review segment performance. Starting with Construction Industries, sales increased by 10% in the first quarter to $6.7 billion due to favorable price realization, partially offset by lower sales volume and unfavorable currency impacts. The decrease in sales volume was driven by the impact from changes in dealer inventories, which increased by less in the first quarter of 2023 than compared to the prior year. Compared to our expectations, sales were higher due to stronger volumes. While sales to end users were as we'd anticipated, the dealer inventory increase was slightly above our expectations. By region, sales in North America rose by 33% due to favorable price realization and higher sales volume. Supply chain improvements enabled stronger-than-expected shipments in North America, supporting dealer restocking in the region. This is a positive, as North America continues to be our most constrained region from a dealer inventory perspective. Sales in Latin America decreased by 4% primarily due to lower sales volume, partially offset by favorable price realization. In EAME, sales increased by 5% on favorable price realization, partially offset by favorable currency impacts. Sales in Asia-Pacific decreased by 21% primarily due to lower sales volume and unfavorable currency impacts, partially offset by favorable price realization. First quarter profit for Construction Industries increased by 69% versus the prior year to $1.8 billion, price realization mainly drove the increase. This was partially offset by lower sales volume, including an unfavorable product mix and higher manufacturing costs. The segment's operating margin of 26.5% was an increase of 920 basis points versus last year. The segment margin for the quarter exceeded our expectations on moderating manufacturing costs and better-than-expected price and volume. Manufacturing costs were lower than we had expected on favorable freight, manufacturing efficiencies and absorption. Production volume was more favorable than we had anticipated, which drove the usual favorable benefits margins from the fourth quarter to the first. You will recall that in January, we said we did not expect that to happen. Turning to Slide 12. Resource Industries sales grew by 21% in the first quarter to $3.4 billion. The increase was primarily due to favorable price realization and higher sales volume. Although, aftermarket sales volumes were lower in resource industries due to dealer buying patterns, dealer services to customers remain positive. First quarter profit for Resource Industries increased by 112% versus the prior year to $764 million, mainly due to favorable price realization and higher sales volume. This was partially offset by unfavorable manufacturing costs. The segment's operating margin of 22.3% was an increase of 950 basis points versus last year. Segment margin was better than we expected due to lower manufacturing costs, including favorable absorption, efficiencies and freight. Price realization and volume benefits also exceeded our expectations. Now on Slide 13. Energy & Transportation sales increased by 24% in the first quarter to $6.3 billion, with sales up double-digits across all applications. Oil and gas sales increased by 39%, power generation sales by 27%, industrial sales rose by 23%. And finally, transportation sales increased by 14%. First quarter profit for Energy & Transportation increased by 96% versus the prior year to $1.1 billion. The increase was mainly due to favorable price realization and higher sales volume. Unfavorable manufacturing costs and higher SG&A and R&D expenses acted as a partial offset. SG&A and R&D expenses increased primarily due to investments aligned with our strategic initiatives, including electrification and services growth. The segment's operating margin of 16.9% was an increase of 620 basis points versus last year, but lower than the fourth quarter as is typical from a seasonality perspective. Compared to our expectations last quarter, margin was better than anticipated on lower manufacturing costs due in part to favorable absorption. Volume was also modestly stronger than we had expected. Moving to Slide 14. Financial Products revenue increased by 15% to $902 million primarily due to higher average financing rates across all regions. Segment profit decreased by 3% to $232 million. The slight profit decrease was mainly due to unfavorable impacts from equity securities, currency exchange losses and mark-to-market adjustments on derivative contracts. However, higher net yield on average earning assets and lower provision for credit losses acted as a partial offset. Business activity remains strong, and our portfolio continues to perform well. Past dues in the quarter were 2.00%, a 5 basis point improvement compared to the first quarter of 2022. This is the lowest first quarter past dues percentage since 2006. And whilst retail new business volume declined compared to the first quarter of 2022, this was expected as high interest rates drove more cash deals and increased competition from banks. Finally, we continue to see strong demand for used equipment, as prices remain elevated while used equipment inventory is at historic lows. Before I move on, I want to point out that CAT Financial has strong liquidity and broad access to funding. We are funded through the wholesale debt markets rather than from customer deposits, and we match assets and liabilities based on duration, currency and interest rate profile. As we have mentioned previously, in a rising interest rate environment, banks are able to provide more competitive interest rates than CAT Financial, and we tend to lose some share of the machines financed. In the event of a slowdown in lending from regional banks, we are well positioned to step in and fund creditworthy customers, so they can purchase their machines. Now on Slide 15. We continue to generate strong ME&T free cash flows. ME&T free cash flow of $1.4 billion in the quarter was about a $1.8 billion increase compared to an outflow in the prior year. The increase was primarily driven by higher profit. This increase is notable in the quarter that included our annual short-term incentive payout and a rise in working capital impacted by an increase in Caterpillar inventory. As Jim mentioned, following the strong half – first – strong first quarter, we expect to end the year in the top half of our ME&T free cash flow range of $4 billion to $8 billion. CapEx was around $400 million in the quarter, and we still expect to spend around $1.5 billion for the year. As Jim mentioned, capital deployment was about $1 billion in the quarter for dividends and share repurchases. Our balance sheet remains strong, and we have ample liquidity with an enterprise cash balance of $6.8 billion. Now on Slide 16, I will share some high-level assumptions for the full year, followed by the second quarter. Looking at the full year, we expect a strong top-line supported by price and higher sales to users, with healthy underlying end markets. As Jim mentioned, we expect full year reported sales for Construction Industries to be impacted by dealer inventory movements, particularly in the second half of the year. Underlying demand remains strong and as we do expect Construction Industries sales to users to show positive growth in the next three quarters. We anticipate continued strength in Resource Industries end markets and stronger end user sales in 2023. In addition, as typical seasonality would suggest, we expect to see some sales ramp in the second half in Energy & Transportation given strong demand for large engines and turbines. Moving on to margins. Based on our current planning assumptions, we anticipate full year adjusted operating profit margins to be in the top half of our target range. Given the favorable impact of cost absorption in the first quarter, which we do not expect to recur, we anticipate margins in the remaining quarters of the year will be lower than the first quarter level, while underlying demand and end markets remain strong. Also despite the slower-than-expected start, we anticipate the spend related to strategic investments within SG&A and R&D will ramp through the year. We expect price to continue to be favorable, although the absolute dollar value of the year-over-year price increases will moderate as we lap through the increases put through in 2022. We also expect the relationship between price and manufacturing costs for machines to normalize as the year progresses, as we’ve now caught up to the manufacturing cost increases, which have outpaced price in late 2021 and early 2022. This means that the benefit to margins of price outpacing manufacturing cost inflation will moderate tempering the possibility of further margin expansion. Keep in mind, similar to the first quarter, we still anticipate a headwind of about $80 million per quarter at the corporate level related to pension expense. We also continue to anticipate restructuring expenses of around $700 million this year, with around $100 million remaining following the first quarter. And the global effective tax rate should be around 23%, excluding discrete items. Now on to our assumptions for the second quarter. We expect higher sales in the second quarter compared to the prior year on strong sales to users and price. Following the typical seasonal pattern, we expect higher sales in the second quarter as compared to the first. We expect Energy & Transportation sales will accelerate given strong sales to users, which are supported by healthy demand. We expect to report flattish sales levels compared to the first quarter in Construction Industries and Resource Industries. Both segments are expected to report positive sales to users. In the second quarter of 2022, we saw a decrease in dealer inventory of $400 million. We expect a smaller decrease in the second quarter of 2023. Specific to second quarter margins versus the prior year, adjusted operating margins at the enterprise and segment level should be substantially stronger than the prior year on favorable price and volume. However, we do expect to see a return to the typical seasonal pattern of lower second quarter margins compared to the first quarter, despite higher sales. We expect the year-over-year benefit of price realization in the second quarter to moderate compared to the benefit we saw in the first quarter, as we lapped prior year increases. In addition, SG&A and R&D investment spend should increase, as we continue to accelerate our strategic investments in areas like autonomy, alternative fuels, connectivity, digital and electrification. Finally, we do not anticipate that the favorable absorption impact that we saw in the first quarter will be repeated. At the segment level, in Construction Industries, we expect lower second quarter margins compared to the first quarter largely due to the lack of a favorable impact from absorption and a ramp-up in strategic investment spend. Likewise, second quarter margins in Resource Industries were likely to be lower than the first quarter as is the typical seasonal pattern. Conversely, Energy & Transportation should see a slight margin improvement compared to the first quarter levels, supported by stronger sales volume as demand remains healthy. Now turning to Slide 17, let me summarize. Sales grew by 17% led by strong price realization and volume gains. The adjusted operating profit margin increased by 740 basis points to 21.1%. ME&T free cash flow was strong at $1.4 billion, and we expect to be at the top half of our ME&T free cash flow range of $4 billion to $8 billion for the full year. After a strong first quarter, we currently expect our 2023 adjusted operating profit margins will be in the top half of our target range. The environment remains positive with improving supply chain dynamics, a strong backlog and healthy underlying end markets. We will continue to execute our strategy for long-term profitable growth. And with that, we’ll take your questions.

adjusted operating profit margin first quarter 2023

adjusted operating profit margin 21.1% first quarter


James Umpleby: Thanks, Ryan. Good morning, everyone. Thank you for joining us. As we close out the first half of 2023, I want to recognize our global team for delivering a very strong second quarter. This included double-digit top-line growth, higher adjusted operating profit margin, record adjusted profit per share and robust ME&T free cash flow. Our results continued to reflect healthy demand across most end markets for our products and services. We remain focused on executing our strategy and continue to invest for long-term profitable growth. In today's call, I'll begin with my perspectives on our performance in the quarter. I'll then provide some insights on our end markets. Lastly, I'll provide an update on our sustainability journey. It was another strong quarter. Sales and revenues increased 22% in the second quarter versus last year. Adjusted operating profit margin improved 21.3%, up sequentially and year-over-year. We also generated $2.6 billion of ME&T free cash flow in the quarter. Our second quarter results were better than we expected for sales and revenues, adjusted operating profit margin, and ME&T free cash flow. In addition, we ended the quarter with a healthy backlog of $30.7 billion. We continue to see improvement in the supply chain, which allowed us to increase production in the quarter. However, areas of challenge remain, particularly for large engines, which impacts energy and transportation and some of our larger machines. While we continue to closely monitor global macroeconomic conditions, we now expect our 2023 results to be better than we had previously anticipated. Turning to Slide 4. In the second quarter of 2023, sales and revenues increased by 22% to $17.3 billion. This was primarily due to higher sales volume and price realization. Sales volumes were higher than we expected, largely due to an increase in dealer inventory relating to energy and transportation, which is supported by customer orders. We saw double-digit increases in sales and revenues in each of our three primary segments. Compared with the second quarter of 2022, overall sales to users increased 16%. For machines, which includes Construction Industries and Resource Industries, sales to users rose by 8%. Energy & Transportation was up 47%. Sales to users in Construction Industries were up 3%. North American sales to users increased and were better than expected as demand remained healthy for non-residential and residential construction. Non-residential continue to benefit from government-related infrastructure and construction projects. Residential sales to users in North America also increased in the quarter. EAME saw lower sales to users due to weaker than expected market conditions in Europe. The Middle East continued to demonstrate strong construction activity. In Latin America and Asia/Pacific, sales to users declined in the quarter. In Resource Industries, sales to users increased 26%. In mining, sales to users increased, supported by commodities remaining above investment thresholds. Within heavy construction and quarry and aggregates, sales to users also increased, supported by growth for infrastructure-related projects. In Energy & Transportation, sales to users increased by 47% in the second quarter. All applications saw higher sales to users in the quarter. Oil and gas sales to users benefited from strong sales of turbines and turbine-related services. We also saw continued strength in sales of reciprocating engines into oil and gas applications, such as Tier 4 dynamic gas blending, gas compression, and repowering active well servicing fleets. Power generation sales to users continued to remain positive due to favorable market conditions, including strong data center growth. Industrial and transportation sales to users also increased. Dealer inventories increased by $600 million in the quarter, led by energy and transportation. We are very comfortable with the total level of dealer inventory, which remains in the typical range. Adjusted operating profit margin increased to 21.3% in the second quarter as we saw improvements, both on a sequential and year-over-year basis. Adjusted operating profit margin was better than we had anticipated, primarily due to better than expected volume growth and lower than expected manufacturing costs, including freight. Moving to Slide 5. We generated strong ME&T free cash flow of $2.6 billion in the second quarter. We returned $2 billion to shareholders, which included about $1.4 billion in repurchase stock and $600 million in dividends. In June, we announced an 8% dividend increase. Since May of 2019, when we introduced our current capital allocation strategy, we have increased the quarterly dividend per share by 51%. We remain proud of our dividend aristocrat status and continue to expect to return to substantially all ME&T free cash flow to shareholders over time through dividends and share repurchases. Now on Slide 6, I'll describe our expectations moving forward. While we continue to closely monitor global macroeconomic conditions, our second quarter results lead us to expect that full-year 2023 will now be even better than we described during our last earnings call. We now expect adjusted operating profit margins to be close to the top of the targeted range relative to the corresponding expected level of sales. This positive operating performance increases our expectations for ME&T free cash flow, which we now expect to be around the top of the $4 billion to $8 billion range for the full-year. Our current expectations for adjusted operating profit margin and ME&T free cash flow reflect continuing healthy customer demand and our strong operating performance. Now I'll discuss our outlook for key end markets this year, starting with the Construction Industries. In North America, overall, we continue to see positive momentum in 2023. We expect continued growth in non-residential construction in North America due to the positive impact of government-related infrastructure investments and a healthy pipeline of construction projects. Although residential construction growth has moderated, we expect the rest of 2023 to remain healthy. In Asia/Pacific, excluding China, we expect growth in Construction Industries due to public infrastructure spending in support of commodity prices. We mentioned during our last earnings call that we expected sales in China to be below the typical 5% to 10% of our enterprise sales. We now expect further weakness as the 10-tons and above excavator industry has declined even more than we anticipated. In EAME, we anticipate that it will be flat to slightly up overall, with the Middle East exhibiting strong construction demand, whereas Europe is expected to be down. Construction activity in Latin America is expected to be down in 2023 versus a strong 2022 performance. In Resource Industries, we expect healthy mining demand to continue as commodity prices remain above investment thresholds. As I've mentioned previously, customers remain capital disciplined, which supports a gradual increase in mining over time. We anticipate production and utilization levels will remain elevated. We also expect the age of the fleet and the low level of park trucks to support future demand for our equipment and services. We continue to believe the energy transition will support increased commodity demand, expanding our total addressable market and providing further opportunities for profitable growth. In heavy construction and quarry and aggregates, we anticipate continued growth due to major infrastructure in non-residential construction projects. Now I'll discuss Energy & Transportation. For Cat reciprocating engines and oil and gas applications, although customers remain disciplined, we are encouraged by continuing strong demand for gas compression. Cat reciprocating engine demand for power generation is expected to remain healthy, including strong data center growth. New equipment orders and services for solar turbines in both oil and gas and power generation remain robust. Industrial continues to be healthy. In transportation, we anticipate strength in high speed marine as customers continued to upgrade aging fleets. Moving to Slide 7. We continued to advance our sustainability journey. Since our last quarterly earnings call, we published our 2022 sustainability report, which disclosed our estimated Scope 3 greenhouse gas emissions for the first time. We also published our first ever task force on climate-related financial disclosures report. We're helping our customers achieve their climate-related goals by continuing to invest in new products, technologies and services that facilitate fuel flexibility, increased operational efficiency and reduced emissions. For example, a customer in Chile is realizing fuel savings and lower emissions after purchasing our Cat D6 XE, the world's first high drive diesel-electric drive dozer. The customer reported a 30% reduction in fuel consumption versus the previous model working in the same operation. This example reinforces our ongoing sustainability leadership in how we help our customers build a better, more sustainable world. With that, I'll turn the call over to Andrew.

adjusted operating profit margin second quarter

adjusted operating profit margin 21.3% better than we had anticipated


Andrew Bonfield: Thank you, Jim, and good morning, everyone. I'll begin with commentary on the third quarter results, including the performance of our segments. Then, I'll discuss the balance sheet and cash flow, before concluding with our assumptions for the fourth quarter and full year. Beginning on Slide 8. Our overall operating performance was strong. Adjusted operating profit margin, adjusted profit per share, and ME&T free cash flow, all were better than we expected, while sales grew in line with our expectations. Based on the strong third quarter, and year-to-date operating performance, we now expect that the adjusted operating profit margin for the year will be slightly above the top end of our target range, at the corresponding level of sales. We also anticipate that ME&T free cash flow will exceed the target range of $4 billion to $8 billion. In summary, sales and revenues increased by 12% or $1.8 billion to $16.8 billion. The sales increase versus the prior year was driven by -- primarily by price realization, as well as higher sales volume. Operating profit increased by 42% or $1 billion to $3.4 billion. The adjusted operating profit margin was 20.8%, an increase of 430 basis points versus the prior year. Profit per share was $5.45 in the third quarter of this year. This included restructuring costs of $0.07 per share as compared to $0.08 in the prior year. We continue to expect restructuring expenses of about $700 million for the full year. Adjusted profit per share increased by 40% to $5.52 in the third quarter compared to $3.95 last year. Other income of $195 million was lower than that -- than the third quarter of 2022 by $47 million. The decline was driven by less favorable currency impacts in the quarter, related to ME&T balance sheet translation, as compared to the prior year, along with the recurring increase and a pension expense of approximately $18 million per quarter. Higher investment and interest income acted as a partial offset. The provision for income taxes in the third quarter, excluding discrete items, reflected a global annual effective tax rate of 22.5%, which is the rate we now expect for the full year. The slightly lower-than-expected tax rate, along with discrete items, added about $0.14 to profit per share in the quarter. Moving on to Slide 9. As I mentioned, the 12% increase in the top line versus the prior year was primarily due to price realization, as well as higher sales volume. Volume improved as sales to users increased by 13% while year-over-year changes in dealer inventory acted as a slight offset. Overall, the magnitude of the sales increase was in line with our expectations. However, by segment, construction Industries sales were higher, Resource Industries sales were in line, and Energy & Transportation sales were lower than we had anticipated. Services revenues increased in the third quarter. We will update you with our progress towards our services growth target when we report our fourth quarter results, and as is our normal practice. Price realization was slightly better than we had anticipated for the quarter. However, as we anticipated, we did see the magnitude of the year-over-year price effects moderate compared to the second quarter, as we lap the prior-year price increases. Volume was slightly below our expectations. As Jim mentioned, sales to users were lower than we had anticipated, principally in Energy & Transportation. However, this was nearly offset by the increase in dealer inventory versus our expectations of being about flat for the quarter. The increase in dealer inventory was driven primarily by Construction Industries. There, we had stronger-than-expected shipments in North America, particularly in building construction products, and earthmoving. Within North America, these products remain constrained, and are near the bottom end of the typical dealer inventory range of three to four months of sales. We also saw some dealer inventory increase in Energy & Transportation within the quarter. I'll remind you that dealer inventory in Energy & Transportation and Resource Industries is mainly a function of the commissioning pipeline, with over 70% of dealer inventory in these segments backed by firm customer orders. Because dealer inventory is more a functioning -- function of commissioning in Resource Industries and Energy & Transportation, it is difficult for us to predict in these two segments. I will discuss further our full-year expectations for dealer inventories a little bit later. Moving to Slide 10. Third quarter operating profit increased by 42% to $3.4 billion, while adjusted operating profit increased by 41% to $3.5 billion. Price realization, which included a slight benefit from a shift in the geographic mix of sales and sales volume were favorable in the quarter. Our largest headwinds to operating profit were higher SG&A and R&D expenses, and higher manufacturing costs. SG&A and R&D expenses included higher strategic investment spend. Manufacturing cost increases included higher material costs, and unfavorable cost absorption, as we reduced our inventories compared to a corresponding increase in the third quarter of 2022. Lower freight costs acted as a partial offset within manufacturing costs. The adjusted operating profit margin of 20.8% improved by 430 basis points. This was better than we had anticipated, primarily due to favorable manufacturing costs, of which freight was the largest contributor. Also, the slightly better-than-expected price helped margins. Now, I'll discuss the performance of the segments. On Slide 11, Construction Industries sales increased by 12% in the third quarter to $7 billion, primarily due to favorable price realization. By region, sales in North America rose by 31% due to higher sales volume and favorable price. As I mentioned, supply chain improvements enabled stronger-than-expected shipments in North America, which supported some dealer restocking. Sales of equipment to end users were in line with our expectations for the region. Sales in Latin America decreased by 31%, primarily due to lower sales volume, partially offset by favorable price. In EAME, sales increased by 8%, mainly due to favorable price and currency impacts. Sales in Asia Pacific decreased by 8%, primarily due to lower sales volume, driven by lower sales of equipment to end users. Third quarter profit for Construction Industries increased by 53% versus the prior year to $1.8 billion. The increase was mainly due to favorable price realization. The segment's operating margin of 26.4% was an increase of 710 basis points versus last year. Margin exceeded our expectations on better volume, price, and lower-than-anticipated manufacturing costs, primarily freight. Turning to Slide 12, Resource Industries sales grew by 9% in the third quarter to $3.4 billion. The increase was primarily due to favorable price realization, partially offset by lower sales volume. Volume decreased as higher sales of equipment to end users were more than offset by lower aftermarket [sale parts] (ph) volume, which reflected changes in dealer buying patterns. Third quarter profit for Resource Industries increased by 44% versus the prior year to $730 million, mainly due to favorable price realization. Profit was partially offset by the by the impact of lower sales volume, which included unfavorable product mix. The segment's operating margin of 21.8% was an increase of 540 basis points versus last year. Margin was better than we had expected, primarily due to lower-than-anticipated manufacturing costs, driven by freight and price. Now on Slide 13. Energy & Transportation sales increased by 11% in the third quarter to $6.9 billion. Sales were up across all applications. Oil and gas sales increased by 26%, power generation sales were higher by 21%, industrial sales rose by 5% and transportation sales increased by 6%. Third quarter profit for Energy & Transportation increased by 26% versus the prior year to $1.2 billion. The increase was mainly due to favorable price realization, and higher sales volume, partially offset by higher SG&A and R&D expenses, unfavorable manufacturing costs, and currency impacts. SG&A and R&D expenses reflected ramping investments related to strategic growth initiatives. As a reminder, the most of our strategic investments relating to electrification and alternative fuels occur in this segment, which impacts reported margins. The segment's operating margin of 17.2% was an increase of 210 basis points versus the prior year. Margin was lower than we had anticipated, primarily due to lower-than-expected sales volume, impacted by supply chain challenges for large engines, and delivery delays for solar turbines. Moving to Slide 14. Financial Products revenue increased by 20% to $979 million, primarily due to higher average financing rates across all regions. Segment profit decreased by 8% to $203 million. The decrease was mainly due to a higher provision for credit losses at Cat Financial. The unfavorable impact reflects a challenging comparison as we had reserve releases in the prior year, as compared to a more typical provision expense in the third quarter of 2023. Of note though, through the third quarter of this year, provision expense for a comparable nine-month period is at the lowest level for over 20 years. Business activity remains strong with our -- and our portfolio continues to perform well, with past dues and write-offs at historic low levels. Past dues in the quarter were 1.96%, a 4 basis point improvement compared to the third quarter of 2022, and a decrease of 19 basis points compared to the second quarter. Retail new business volume increased versus the prior year, and though it declined compared to the second quarter, this follows the typical seasonal pattern. In addition, we continue to see strong demand for used equipment, and used inventory remains at low levels. Now on Slide 15. Our ME&T free cash flow has been robust this year with another $2.9 billion generated during the third quarter. With $6.8 billion generated through the first three quarters of this year, we expect to exceed our target of $4 billion to $8 billion this year. From a working capital perspective, we had a small inventory decrease of around $200 million in the quarter. Looking ahead, we expect our inventory levels will continue to decrease as we've seen sustained supply chain improvement. CapEx in the third quarter was around $400 million. With about $1.1 billion in CapEx through the first three quarters, we continue to expect around $1.5 billion for the full year. Our balance sheet remains strong. We have ample liquidity with an enterprise cash balance of $6.5 billion, and we hold an additional $4.3 billion in slightly longer-dated liquid marketable securities to improve yields on that cash. Now on Slide 16. I will share some high-level assumptions for the fourth quarter and the full year. During the fourth quarter, we anticipate slightly higher sales as compared to the prior year. Price should remain favorable. We expect sales to users to continue to support good underlying growth, though, changes in dealer inventories should act as an offset. As a reminder, we saw dealers increase inventories by $700 million in the fourth quarter of 2022, whilst we expect a decrease in the fourth quarter of this year. Specifically in Construction Industries, we do not expect the seasonal sales increase typically seen from the third to the fourth quarter. Those sales to users are expected to increase on both a sequential and year-over-year basis. Instead, we anticipate lower shipment volumes, as we complete the Cat engine changeover in building construction products, and dealers reduced their inventories, principally of excavators. This compares to a dealer inventory increase in the fourth quarter of 2022. Though we now expect that dealer inventory in Construction Industries will be higher at the end of 2023 than it was at year end 2022, we still expect it to be within the typical three to four months of sales range. A reminder, this is an average across all dealers and all products in Construction Industries, and it's difficult to predict with precision, given over 150 independent dealers, and hundreds of different products. Similar to last quarter, there are still areas and/or products where dealers would like to have more inventory. As Jim has mentioned, we are very comfortable with the level of inventory held by dealers overall. In Resource Industries, we anticipate slightly lower sales as compared to the third quarter, as a result of improvements in availability. We also expect lower sales versus the prior year, driven by changes in dealer inventory. In the fourth quarter of 2022, there was an increase in dealer inventories for Resource Industries, while we expect a decrease in the fourth quarter of this year. We expect sales in Energy & Transportation to increase in the fourth quarter as compared to the third quarter, with higher solar turbines and rail deliveries. However, keep in mind that we continue to work through supply chain challenges, primarily impacting large engines. We also anticipate some moderation in industrial sales during the fourth quarter, compared to recent high levels. Now, I'll comment on our expectations for margins. We provided our adjusted operating profit margin target charge to assist you in your modeling process. Based on our current planning assumptions, we anticipate the adjusted operating profit margin to be slightly above the target range for the full year 2023. This is based on the corresponding estimated level of sales. Your expectation for total enterprise sales this year will inform where margins could finish for the year. Specific to the fourth quarter, we anticipate the adjusted operating profit margin to be lower than the third quarter. We anticipate lower-than-normal volume leverage, particularly impacting Construction Industries, for the reasons I mentioned previously. We also anticipate a negative segment mix impact to impact operating margins, as Construction Industries sales would be a lower proportion of total sales, as compared to the third quarter. Price realization should remain positive, though we expect the magnitude of the favorability versus the prior year to moderate as we continue to lap more favorable pricing trends from last year. Therefore, the increases in margins that have occurred from price outpacing manufacturing cost inflation, should moderate in the fourth quarter. In addition, as you look down the income statement for the prior year, there are a couple of points to note. First, short-term incentive expense in the fourth quarter of 2022 was lower than normal due to the true up for the final outcomes for the financial year. This will be a headwind for year-over-year operating margins. However, this will be partially offset by favorability in other operating income and expense, as we do not expect the significant currency translation losses that we saw in the fourth quarter of last year to recur. By segment, in Construction Industries, we expect slightly lower margin compared to the third quarter, assuming lower volume. We also anticipate lower sequential margins in Resource Industries, as is typical, impacted by cost absorption, along with higher spend, relating to strategic investments. In Energy & Transportation, we expect margins will be similar to the third quarter, with stronger volume offset by manufacturing costs, and an unfavorable mix of products, which includes international locomotive deliveries in rail. Now turning to Slide 17, let me summarize. Adjusted profit per share was $15.98 through the first three quarters of the year, which already exceeds our previous full year record by 15%. We generated strong adjusted operating profit margin, with a 430 basis point increase to 20.8%. We now expect to be slightly above the targeted range for adjusted operating profit margin for the full year, based on our expected sales levels. ME&T free cash flow remained robust with $6.8 billion year-to-date. We now expect ME&T free cash flow to exceed our $4 billion to $8 billion target range for the full year. We continue to execute our strategy for long-term profitable growth. And with that, we'll take your questions.

adjusted operating profit margin 20.8% third quarter


Jim Umpleby: Thanks, Ryan. Good morning, everyone. Thank you for joining us. Before discussing our results, I'd like to take a moment to acknowledge the tragic events in the Middle East. We are deeply saddened by the loss of life, and are hopeful for a quick and peaceful resolution. The Caterpillar Foundation is donating $1 million to the American Red Cross, and its network of Red Crescent Societies in the region, to support the humanitarian needs of those impacted. As we closed out the third quarter, I want to thank our global team for delivering another strong quarter. This included double-digit top line growth, strong adjusted operating profit margin, and robust ME&T free cash flow. Our results continue to reflect healthy demand across most of our end markets for our products and services. We remain focused on executing our strategy, and continue to invest for long-term profitable growth. I'll begin with my perspectives about our performance in the quarter. I'll then provide some insights about our end markets. Lastly, I'll provide an update on our sustainability journey. Moving to quarterly results, it was another strong quarter. Sales and revenues increased 12% in the third quarter versus last year. Adjusted operating profit margin improved to 20.8%, up significantly year-over-year. We also generated $2.9 billion of ME&T free cash flow in the quarter. Sales were generally in line with our expectations, while both adjusted operating profit margin, and ME&T free cash flow in the third quarter were better than we expected. In addition, we ended the quarter with a healthy backlog of $28.1 billion. Backlog is a function of demand and lead times. As I've mentioned, demand remains healthy in most of our end markets. Due to improving supply chain conditions, product availability and lead times have improved for many products. Dealers and customers can wait longer to place orders, which has led to a moderation in order rates, as expected. In addition, we have seen a reduction in dealer orders for building construction products, which we anticipated, due to the changeover to CAT engines that we previously discussed, and for excavation, in anticipation of dealers reducing their inventories in the fourth quarter. Although, our backlog declined as expected, it still remains elevated as a percentage of revenues compared to historic levels. While we continue to closely monitor global macroeconomic conditions, we now expect our full-year 2023 results to be better than we anticipated during our last earnings call. Turning to Slide 4. In the third quarter of 2023, sales and revenues increased by 12% to $16.8 billion, driven primarily by favorable price realization, as well as volume growth. Sales increased in each of our three primary segments. Compared with the third quarter of 2022, overall sales to users increased 13%, which was below our expectations. Energy & Transportation sales to users increased 34%, but was lower than expected due to some supply chain challenges for large engines, and the timing of gas turbine in international locomotive deliveries. For machines, which includes Construction Industries and Resource Industries, sales to users rose by 7%, in line with expectations. Sales to users in Construction Industries were up 6%. North American sales to users increased as demand remained healthy for non-residential, and residential construction. Non-residential continued to benefit from government-related infrastructure and construction projects. Residential sales to users in North America also increased in the quarter. EAME sales to users were up slightly, primarily due to continuing strength in Middle East construction activity. In Latin America and Asia-Pacific, sales to users declined in the quarter. In Resource Industries, sales to users increased 10%. In mining, sales to users increased with commodities remaining above investment thresholds. Within heavy construction, and quarry and aggregates, sales to users also increased, supported by growth for infrastructure-related projects. In Energy & Transportation, sales to users increased by 34%. All applications saw higher sales to users in the quarter. Oil and gas sales to users benefited from strong sales of turbines, and turbine-related services. We also saw continued strength in sales of reciprocating engines into oil and gas applications such as Tier 4 dynamic gas blending, repowering well servicing fleets and gas compression. Power generation sales to users continued to remain positive, due to favorable market conditions, including strong data center growth. Industrial and transportation sales to users also increased. Dealer inventories increased by $600 million in the quarter, led by Construction Industries and followed by Energy & Transportation. In Construction Industries, the increase was in North America in some of our most constrained product lines including BCP and Earthmoving. We remain very comfortable with the total level of dealer inventory, which is within the typical range. Andrew will provide more color later in the call. Adjusted operating profit margin increased to 20.8% in the third quarter, a 430 basis point increase over last year. Adjusted operating profit margin was better than we had anticipated. Relative to our expectations, we saw lower-than-expected manufacturing costs, including freight, as well as slightly favorable price realization, which included the positive impact from geographic mix. Moving to Slide 5. We generated strong ME&T free cash flow of $2.9 billion in the third quarter, and $6.8 billion in the first three quarters of 2023. Year-to-date, we returned $4.1 billion to shareholders, which included about $2.2 billion of repurchased stock, and $1.9 billion in dividends. We remain proud of our Dividend Aristocrat status, and continue to expect to return substantially all ME&T free cash flow to shareholders over time through dividends and share repurchases. Now on Slide 6, I'll describe our expectations moving forward. As I mentioned earlier, we now anticipate the full year to be better than we previously expected. We expect our adjusted operating profit margin to be slightly above the targeted range relative to the corresponding level of sales. This positive operating performance increases our expectations for ME&T free cash flow, which we now expect will exceed the $4 billion to $8 billion target range for the full year. This outlook for the adjusted operating profit margin, and ME&T free cash flow, reflects healthy customer demand and our strong operating performance. Now, I'll discuss our outlook for key end markets starting with Construction Industries. In North America overall, we continue to see positive momentum. We expect continued growth in non-residential construction in North America due to the impact of government-related infrastructure investments, and a healthy pipeline of construction projects. Although, residential construction growth has moderated, we expect it to remain healthy. In Asia Pacific, excluding China, we expect growth in Construction Industries due to public infrastructure spending, in support of commodity prices. As we have mentioned during previous earnings calls, we anticipate continued weakness in China, and expect it to remain well below our typical range of 5% to 10% of enterprise sales. In EAME, we anticipate the region will be slightly down as weakness continues in Europe, partially offset by continuing strong construction demand in the Middle East. Construction activity in Latin America is expected to be about flat versus strong 2022 performance. In Resource Industries, we continue to see a high level of quoting activity. In mining, customer product utilization remains high. The number of parked trucks remains low, and the age of the fleet remains elevated. Order rates are slightly lower than we expected at this time, reflecting continued capital discipline by our customers. We continue to believe the energy transition will support increased commodity demand over time, expanding our total addressable market, and providing further opportunities for long-term profitable growth. In addition, customer acceptance of our autonomous solutions continues to grow. This is evidenced by the announcement this morning with Freeport-McMoRan, who will convert their fleet of Cat 793 large mining trucks at an Arizona copper mine to autonomous haulage using Cat MineStar Command. We also expect heavy construction, and quarry and aggregates to remain in healthy levels due to major infrastructure in non-residential construction projects. Moving to Energy & Transportation. In oil and gas, we remain encouraged by continuing strong demand for Cat reciprocating engines and gas compression. As we said last quarter, well servicing in North America is showing some short-term moderation, but we remain optimistic about future demand. Cat reciprocating engine demand for power generation is expected to remain strong, primarily driven by data center growth. New equipment and services for solar turbines in both oil and gas and power generation remain robust. Industrial demand is expected to soften slightly from recent high levels, but remains well above our historical averages. In transportation, we anticipate strength in high-speed marine as customers continue to upgrade aging fleets. As we've described, we continue to see strength in most of our end markets. Based on our backlog, dealer inventory, and current market conditions, we expect to have another good year in 2024. We will provide additional information during our fourth quarter call. Moving to Slide 7. We continue to advance our sustainability journey. We're helping our customers achieve their climate related objectives by continuing to invest in new products, technologies, and services, that facilitate fuel flexibility, increased operational efficiency, and reduced emissions. For example, Caterpillar provides a number of low-carbon intensity solutions to customers. In Construction Industries, the Cat 980 XE Wheel Loader, which features a Cat designed and manufactured continuous variable transmission, improves fuel efficiency by as much as 35%, and reduces CO2 emissions by as much as 17% compared to the previous model. We also introduced the new Cat G3600 Gen 2 engine, the latest evolution of the powerful G3600 series, offering lower emissions. With more than 8,500 Cat G3600 units in the field, the Gen 2 engine is designed to build upon the platform's robust performance, to provide a 10% increase in power, and lower emissions compared to the previous model. We've also made several joint announcements with customers that demonstrate our commitment to supporting their climate-related objectives. I'll highlight one here. In September, Caterpillar and Albemarle introduced a unique collaboration, aimed to support their efforts to establish Kings Mountain, North Carolina as the first-ever zero emissions lithium mine in North America, while also making lithium available for use in Caterpillar battery production. These examples reinforce our ongoing sustainability leadership, and how we're helping our customers build a better, more sustainable world. With that, I will turn it over to Andrew.

adjusted operating profit margin third quarter

adjusted operating profit margin 430 basis point third quarter of 2023


Andrew Bonfield: Thanks, Jim, and good morning, everyone. I'll begin with commentary on the fourth quarter results, including the performance of our segments. Then I'll discuss the balance sheet and cash flow, followed by an update to our target ranges for adjusted operating profit margins and ME&T free cash flow. I'll conclude with our high-level assumptions for 2024 and our expectations for the first quarter. Beginning on Slide 9. Strong operating performance continued in the fourth quarter as sales and revenues, adjusted operating profit margin, adjusted profit per share and ME&T free cash flow were all better than we had expected. In summary, sales and revenues increased by 3% to $17.1 billion. Adjusted operating profit increased by 15% to $3.2 billion. The adjusted operating profit margin was 18.9%, an increase of 190 basis points versus the prior year. Profit per share was $5.28 in the fourth quarter compared to $2.79 in the fourth quarter of last year. Profit per share in the quarter included favorable mark-to-market gains of $0.14 for the remeasurement of pension and OPEB plans and certain favorable deferred tax valuation adjustments of $0.04. It also included restructuring costs of $92 million or $0.13. Adjusted profit per share increased by 35% to $5.23 in the fourth quarter compared to $3.86 last year. The provision for income taxes in the fourth quarter, excluding the amounts related to mark-to-market and discrete items, reflected a global annual effective tax rate of 21.4%. This was lower than we had expected a quarter ago due to favorable changes in the geographic mix of profits. The lower rate benefited performance in the quarter by about $0.24. Moving on to Slide 10. I'll discuss top line results in the fourth quarter. The 3% sales increase versus the prior year was primarily driven by price realization, partially offset by lower volume as impacts from dealer inventory changes more than offset the 8% increase in sales to users. Both price and volume was slightly better than we had anticipated. The dealer inventory change resulted in an unfavorable sales impact of $1.6 billion versus the prior year. Dealer inventory decreased in the fourth quarter by $900 million overall compared to an increase of approximately $700 million during the fourth quarter of 2022. The dealer inventory decrease in the fourth quarter was led by Construction Industries, where the reduction was at the high end of our expectations. The decrease in this segment was led by excavators and the impact of the Cat engine changeover in building construction products that we have mentioned in previous earnings calls. Dealers also reduced their inventories in resource industries. Overall, the decrease in dealer inventory of machines was $1.4 billion in the quarter. Conversely, dealer inventory in Energy & Transportation increased mostly due to extended commissioning time lines, resulting from strong shipments, which was supported by healthy demand. As a reminder, dealer inventory in both Energy & Transportation and Resource Industries is mainly a function of the commissioning pipeline, and over 70% of dealer inventory in these segments is backed by firm customer orders. Looking at sales by segment. Sales in Construction Industries and Energy Transportation was slightly higher than we had anticipated, while sales in Resource Industries were about in line with our expectations. Moving to operating profit on Slide 11. Adjusted operating profit increased by 15% to $3.2 billion. Price realization and favorable manufacturing costs benefited the quarter, while higher SG&A and R&D expenses and lower sales volumes acted as a partial offset. The increase in SG&A and R&D expenses was primarily driven by higher short-term incentive compensation expense and strategic investment spend. The adjusted operating profit margin of 18.9% improved by 190 basis points versus the prior year. Margins were slightly higher than we had anticipated on volumes and price being marginally better than we had expected. Now on Slide 12. Construction Industries sales decreased by 5% in the fourth quarter to $6.5 billion due to lower sales volume, partially offset by favorable price realization. Lower sales volume was primarily due to the changes in dealer inventories that I mentioned earlier and more than offset the favorable sales to users. The dealer inventory changes impacted all of the regions. By region, sales in North America increased by 4%. In Latin America, sales decreased by 25%. Sales in EAME increased -- decreased by 18%. This region accounted for the largest dealer inventory decline in the quarter. In Asia Pacific, sales decreased by 4%. Fourth quarter profit for Construction Industries was $1.5 billion, an increase by 3% versus the prior year. The increase was primarily due to favorable price, partially offset by the profit impact from lower sales volume. The segment's operating margin of 23.5% was an increase of 180 basis points versus last year. This was broadly in line with our expectations. Turning to Slide 13. Resource Industries sales decreased by 6% in the fourth quarter to $3.2 billion. The decrease was primarily due to lower sales volume, partially offset by favorable price realization. Lower volume was impacted by changes in dealer inventories as dealers decreased inventories during the fourth quarter of 2023 compared to an increase in the prior year's quarter. Volume was also impacted by slightly lower aftermarket market part sales volume, partly due to dealer buying patterns. Fourth quarter profit for Resource Industries decreased by 1% versus the prior year to $600 million. The segment's operating margin of 18.5% was an increase of 90 basis points versus last year and was in line with our expectations. Now on Slide 14. Energy & Transportation sales increased by 12% in the fourth quarter to $7.7 billion. The increase was primarily due to higher sales volume and favorable price realization. Sales volume benefited from higher shipments of large engines and solar turbines and turbine-related services in the quarter. By application, oil and gas sales increased by 23%, power generation sales were higher by 29%, industrial sales decreased by 5% and transportation sales increased by 11%. While industrial sales decreased, they remain at healthy levels. Fourth quarter profit for Energy & Transportation increased by 21% versus the prior year to $1.4 billion. The increase was primarily due to favorable price and higher sales volume, partially offset by higher SG&A and R&D expenses, currency impacts and unfavorable manufacturing costs. The increase in SG&A and R&D expenses reflected ramping investments related to strategic growth initiatives and higher short-term incentive compensation expense. As a reminder, most of our strategic investments relating to electrification and alternative fuels are in Energy & Transportation, which therefore impacts this segment's margin. The operating margin of 18.6% was an increase of 130 basis points versus the prior year. Margin exceeded our expectations on higher volume, including favorable mix and price. Moving to Slide 15. Financial Products revenues increased by 15% to $981 million, primarily due to higher average financing rates across all regions and higher average earning assets in North America. Segment profit increased by 24% to $234 million. The increase was mainly due to lower provision for credit losses at Cat Financial, higher average earning assets and a higher net yield on average earning assets. Our portfolio continues to perform well with past dues near historic levels of 1.79%. We saw a 10 basis point improvement compared to the fourth quarter of 2022 and a 17 basis point improvement compared to the third quarter. This is the lowest fourth quarter past dues percentage since 2006. The year-end allowance rate was our lowest fourth quarter rate on record of 1.18% and was the second lowest quarterly rate ever. In addition, provision expense in 2023 was at the lowest level we've seen in over 20 years. Business activity remains strong, as retail new business volume increased versus the prior year and the third quarter. The increase versus the prior year reflected higher end user sales and rental conversions in the US. In addition, we continue to see strong demand for used equipment. Though used inventories have ticked up slightly, they remain close to historically low levels. Despite some moderation in used pricing on improved availability, it is still comfortably above historic norms. Moving on to Slide 16. The record $10 billion in ME&T free cash flow for the year included $3.2 billion in the fourth quarter, an increase of $200 million versus the prior year. On CapEx, we continue to make disciplined investments that are right for our business, governed by our focus on growing absolute OPACC dollars. We spent about $1.7 billion in 2023. Looking to 2024, we expect CapEx in the range of $2 billion to $2.5 billion. This is higher than our recent run rate and includes the investment in large engine capacity, which Jim referenced a moment ago. We also plan to invest more around AACE, which is autonomy, alternative fuels, connectivity and, digital and electrification. In addition, we are investing to make our supply chain more resilient. Moving to capital deployment. We returned $3.4 billion to shareholders in the fourth quarter, including $2.8 billion in share repurchases. Our net share count has decreased by approximately 14% since 2019, when we shared our intention to return substantially all ME&T free cash flow to shareholders over time and on a consistent basis. Our dividend remains a priority as we increased our quarterly payout by 8% in 2023. You will recall from our Investor Day in 2022, we shared that we expected to increase our dividend by at least high single digits for the next three years. The increase in 2023 reflected the second of those three years. Our balance sheet remains strong. We have ample liquidity with an enterprise cash balance of $7 billion, and we hold an additional $3.8 billion in slightly longer-dated liquid marketable securities to improve yields on that cash. Now on Slide 17, I'll discuss our revised adjusted operating profit margin targets. We exceeded our progressive target range in 2023, and we are confident that our strong execution and operating performance supports the potential for higher top end adjusted operating profit margins than were reflected in the prior range. Therefore, we have increased the top end of the range by 100 basis points relative to the corresponding level of sales. Achieving the top end of the range will remain challenging, as we are committed to increase investments in our strategic initiatives supporting long-term profitable growth. The bottom end of the target range remains unchanged. To explain, while higher gross margin support increasing the top end of the range, they actually pressure our margins in periods of decreasing volume. For that reason, we believe that the bottom end of the range remains challenging, but achievable. We will now target adjusted operating profit margins of 10% to 14% at $42 billion of sales and revenues, increasing to 18% to 22% at $72 billion of sales and revenues. Now on Slide 18. When I joined Caterpillar just over five years ago, I was impressed with the potential of our business to deliver higher, more consistent ME&T free cash flow as a result of the operating and execution model and our focus on generating absolute OPACC dollars. This is how we define winning at Caterpillar. We believe increasing absolute OPACC dollars will lead to higher shareholder returns over time. Since the beginning of 2019, we have generated $30 billion in ME&T free cash flow, including a record $10 billion in 2023. We are confident in our ability to consistently generate positive ME&T free cash flow over time. Therefore, we are introducing an updated target range for ME&T free cash flow, which is between $5 billion and $10 billion. Our strong operating performance as well as confidence in our future execution supports the higher range. The updated target range still maintains our flexibility to invest in our strategic initiatives, which is a priority. We also continue to expect to return substantially all of our ME&T free cash flow to shareholders over time through dividends and share repurchases. Moving to Slide 19. I will share our high-level assumptions for the full year. As Jim mentioned, in 2024, we anticipate sales and revenues will be broadly similar to 2023. We expect slightly favorable price realization and continued healthy underlying demand across the business as a whole. We anticipate another year of services growth as we continue to target $28 billion by 2026. We do not expect a significant change in dealer inventory for machines by the end of this year. And for Energy & Transportation, it is difficult to predict with certainty what will happen to dealer inventory as we have discussed previously. In total, dealer inventory increased by $2.1 billion in 2023. By segment, in Construction Industries, sales of equipment to end users should remain roughly similar compared to the strong year we saw in 2023. However, we do not expect a dealer inventory build as we saw last year. We also anticipate our services initiatives will benefit the segment in 2024. In Resource Industries, we anticipate lower sales versus 2023, impacted by lower machine volume primarily in off-highway and articulated trucks. We had strong sales of these products in 2023 as we converted our elevated backlog into sales, making for a challenging comparison. We also anticipate an unfavorable year-over-year change in dealer inventories. However, we expect services revenues will increase in this segment. In Energy & Transportation, we expect slightly higher sales in 2024. Power generation, oil and gas, and transportation sales should be positive, while industrial sales are expected to be lower compared to our historically strong levels in 2023. On full year adjusted operating profit margin, we currently expect to be in the top half of the updated margin target range at our expected sales levels. I'll discuss some of the puts and takes. In 2024, we expect a small pricing benefit weighted towards the first half of the year given carryover from increases taken in the second half of 2023. For the full year, we expect price to modestly exceed manufacturing costs. Versus last year, price in absolute dollar terms should moderate as we let the more favorable pricing trends from 2023. Short-term incentive compensation expense was about $1.7 billion in 2023, while we anticipate $1.2 billion in 2024. We expect the benefit of that low expense will be offset by increases in SG&A and R&D expenses as we continue to invest in strategic initiatives and of future long-term profitable growth. Investments are focused in services, new product introductions and AACE. We also anticipate there may be some negative margin impact due to mix this year. I'll explain. During 2023, when availability was somewhat challenged, we biased our production and shipments to products with the highest OPACC potential. Given that availability has improved, we anticipate a more normalized mix of products in 2024. We may also see an impact on margins from the mix of different segments as we anticipate in sales in 2024 will be slightly more weighted towards Energy & Transportation than they were in 2023. Moving on, we expect to be within the top half of our updated ME&T free cash flow target range of $5 billion to $10 billion. As you consider our cash position, keep in mind, the $1.7 billion cash outflow in the first quarter related to the payout of last year's incentive compensation expense. We also anticipate restructuring charges of $300 million to $450 million this year. Finally, we expect global effective tax rate in the range of 22.5% to 23.5%, an increase versus the 21.4% in 2023. Now on Slide 20. Our expectations for the first quarter, starting with the top line. We expect first quarter sales and revenues to be broadly similar to the prior year. We anticipate price to be favorable, although significantly less in absolute dollar terms than had occurred through 2023. We expect demand to remain healthy. However, we anticipate a slightly lower dealer inventory build for machines in the first quarter compared to a $1.1 billion build in the first quarter of 2023. This will act as a headwind to sales. At the segment level, in Construction Industries, we anticipate flattish to slightly higher first quarter sales versus the prior year, primarily due to favorable price. We anticipate lower sales in Resource Industries compared to the prior year, driven by lower volume, partially offset by favorable price. In Energy & Transportation, we expect flattish to slightly higher sales versus the prior year, with updated favorable volume benefiting the upside scenario. On margins, we expect the enterprise adjusted operating profit margin in the first quarter to be broadly similar to the first -- prior year. Price should more than offset manufacturing costs as price actions from 2023 rolled into 2024. We expect price will be lower in absolute dollar terms versus the prior year. We anticipate manufacturing costs to increase compared to last year, principally impacted by cost absorption as we do not expect an inventory build like we saw in the first quarter of 2023. We also anticipate an increase in SG&A and R&D expenses related to the strategic investment spend. By segment, in Construction Industries, we anticipate a similar margin as compared to the prior year. We expect price to offset strategic investment spend and slightly higher manufacturing costs, including cost absorption. In Resource Industries, we expect a lower margin compared to the prior year, impacted by lower volume, partially offset by favorable price. In Energy & Transportation, we anticipate a similar margin versus prior year, a slightly stronger price should be offset by higher manufacturing costs. Turning to Slide 21. Let me summarize. Adjusted profit per share of $21.21 exceeded our previous full year record by 53%. We exceeded the top end of our targeted ranges for adjusted operating profit margin and ME&T free cash flow. We have increased the top end of our adjusted profit margin range, and we have raised our ME&T free cash flow target range. We expect to be in the top half of our updated margin and ME&T free cash flow target ranges in 2024, and we anticipate another year of services growth as we continue to execute our strategy for long-term profitable growth. And with that, we'll take your questions.

adjusted operating profit margin fourth quarter


Jim Umpleby: Thanks, Ryan. Good morning, everyone. Thank you for joining us. As we close out 2023, I'd like to start by recognizing our global team for delivering another strong quarter and the best year in our 98-year history. For the year, we delivered record sales and revenues, record adjusted profit margin, record adjusted profit per share, and record ME&T free cash flow. Our results continue to reflect healthy demand across most of our end markets for our products and services. We remain focused on executing our strategy and continue to invest for long-term profitable growth. I'll begin with my perspectives about our performance in the quarter and for the full year. I'll then provide some insights about our end markets, followed by an update on our strategy. I'll then provide some insights about our end markets, followed by an update on our strategy and sustainability journey. Moving to quarterly results, it was another strong quarter. While sales and revenues increased 3% in the fourth quarter versus a strong quarter last year, our adjust operating profit increased by 15%. Adjusted operating profit margin improved to 18.9%, up 190 basis points versus last year. We also generated $3.2 billion of ME&T free cash flow in the quarter. Sales, adjusted operating profit margin, adjusted profit per share and ME&T free cash flow in the fourth quarter were all better than we expected. For the full year, we generated a 13% increase in total sales and revenues to $67.1 billion. Services also increased by 5% to $23 billion, a record. We generated $13.7 billion of adjusted operating profit in 2023, up 51% from 2022. Adjusted operating profit margin for the full year was 20.5%, a 510 basis point increase over the prior year. This exceeded the top end of our target margin range for this level of sales by 80 basis points. Adjusted profit per share in 2023 was $21.21, a 53% increase over 2022. In addition, we also generated $10 billion of ME&T free cash flow, exceeding the high end of our target range by over $2 billion for the full year. This performance led to continued growth in absolute OPACC dollars, which is our internal measure of profitable growth. As a result of our strong execution and record financial performance, we are increasing our target range for adjusted operating profit margin and ME&T free cash flow. We are increasing the top end of our adjusted operating profit margin range by 100 basis points relative to the corresponding level of sales. Moving to ME&T free cash flow, we've generated more than $30 billion over the last five years, including a record $10 billion in 2023. Based on our demonstrated ability to generate strong free cash flow, we are raising our ME&T free cash flow target range to $5 billion to $10 billion, up from $4 billion to $8 billion. Andrew will provide additional details around these updated targets. Turning to Slide 4. In the fourth quarter of 2023, sales and revenues increased by 3% to $17.1 billion, driven by favorable price realization and partially offset by lower volume. Both price and volume were slightly better than we expected. Compared to the fourth quarter of 2022, overall sales to users increased 8%, slightly better than our expectations. Energy & Transportation sales to users increased 20%. For machines, which includes Construction Industries and Resource Industries, sales to users rose by 3%. Sales to users in Construction Industries were up 4%. North American sales to users increased as demand remained healthy for non-residential and residential construction. Non-residential continued to benefit from government related infrastructure and construction projects. Residential sales to users in North America also increased in the quarter. Sales to users in EAME and Latin America were down slightly relative to a strong comparative. In Asia Pacific, sales to users declined in the quarter. In Resource Industries, sales to users increased 1%. In mining, sales to users also increased and in heavy construction and quarry and aggregates, sales to users declined against a strong comparative in 2022. In Energy & Transportation, sales to users increased by 20%. Oil and gas sales to users benefited from strong sales of turbines and turbine related services. We also saw continued strength in sales of reciprocating engines into gas compression and well servicing oil and gas applications, including the Tier 4 dynamic gas blending engines used in well servicing fleets. Power generation sales to users increased -- excuse me, power generation sales to users continued to remain positive due to favorable market conditions, including strong data center growth. Transportation sales to users also increased, while industrial declined from historically strong levels in 2022. Dealer inventory decreased by $900 million versus the third quarter. Machines declined by $1.4 billion, slightly more than we expected. We saw the largest decline in Construction Industries as dealer inventory decreased across all regions. The largest decline was in excavators. We remain comfortable with the total level of machine dealer inventory, which is within the typical range. Adjusted operating profit margin increased to 18.9% in the fourth quarter, a 190 basis point increase over last year. Adjusted operating profit margin was slightly better than we had anticipated. Relative to our margin expectations, we saw higher price realization and higher sales volume, both marginally better than expected. Turning to Slide 5, I'll now provide full year highlights. In 2023, we generated sales and revenues of $67.1 billion, up 13% versus last year. This was due to favorable price and higher sales volume, driven primarily by higher sales of equipment to end users. As I mentioned, we generated $23 billion of services revenue in 2023, a 5% increase over 2022. We continue to see improvement of customer value agreements with new equipment, which remains an important part of our services growth initiatives. We saw strong e-commerce sales growth as we continued to enhance our digital tools to make it easier for customers to identify and purchase the right parts. We added more than 100,000 new customers to our online channel. We also exceeded the e-commerce goal we shared at our May 2022 Investor Day. By combining the data from more than 1.5 million connected assets with our engineering expertise, advanced analytics and AI, we are helping customers avoid unplanned downtime through intelligent leads, which we call prioritized service events, or PSEs. We continue to execute our various service initiatives as we strive to achieve our 2026 target of $28 billion. Our full-year adjusted operating profit margin was 20.5%, a 510 basis point increase over 2022. Moving to Slide 6. We generated strong ME&T free cash flow of $10 billion in 2023, a $3.7 billion, or 58% increase over our previous record. We returned a record $7.5 billion to shareholders through repurchase stock and dividends. We remain proud of our Dividend Aristocrat status and continue to expect to return substantially all ME&T free cash flow to shareholders over time through dividends and share repurchases. Now on Slide 7, I'll describe our expectations moving forward. Overall demand remains healthy across most of our end markets for our products and services. We ended 2023 with a backlog of $27.5 billion, which remains elevated as a percentage of revenues compared to historical levels. We currently anticipate 2024 sales and revenues to be broadly similar to the record 2023 level. We expect continued strength in end user demand, including services growth, and a slight benefit from carryover pricing, offset by a dealer inventory headwind, which was a $2.1 billion benefit in 2023. We currently do not anticipate a significant change in dealer inventory of machines in 2024 as compared to an increase in 2023. Now, I'll discuss our outlook for key end markets, starting with construction industries. In North America, after a very strong 2023, we expect the region to remain healthy in 2024. We expect non-residential construction to remain at similar demand levels due to government-related infrastructure investments. Residential construction is expected to remain healthy relative to historical levels. In Asia Pacific, excluding China, we are seeing some softening in economic conditions. We anticipate China will remain at a relatively low level for the above 10-ton excavator industry. In EAME, we anticipate the region will be slightly down due to economic uncertainty in Europe, somewhat offset by continuing strong construction demand in the Middle East. Construction activity in Latin America is expected to increase due to easing financial conditions. In addition, we also anticipate the ongoing benefit of our services initiatives will positively impact construction industries in 2024. Next, I'll discuss Resource Industries. After strong performance in 2023 in mining, heavy construction and quarry and aggregates, we anticipate lower machine volume versus last year, primarily due to off-highway and articulated trucks. In addition, we anticipate a small decrease in dealer inventory during 2024 versus a slight increase in dealer inventory last year. While we continue to see a high level of quoting activity overall, we anticipate lower order rates as customers display capital discipline. We expect to see higher services revenues, including robust rebuild activity. Customer product utilization remains high, the number of parked trucks remains low, the age of the fleet remains elevated, and our autonomous solutions continue to see strong customer acceptance. We continue to believe the energy transition will support increased commodity demand over time, expanding our total addressable market and providing further opportunities for long-term profitable growth. Moving to Energy & Transportation. In oil and gas, we expect reciprocating engines and services to increase slightly after a strong 2023. As we said during the last two quarters, well servicing in North America is showing some short-term moderation. Gas compression order backlog remains healthy. And overall, we continue to remain optimistic about future demand. Cat reciprocating engine demand for power generation is expected to remain strong due to continued data center growth. Solar Turbines has a strong backlog and continues to experience robust quoting activity. As we said in the last quarter, industrial demand is expected to soften in the near term from a strong 2023. In transportation, we anticipate high-speed marine to increase slightly as customers continue to upgrade aging fleets. Moving to Slide 8. Now I'll provide an update on our strategy and sustainability journey. Over the past year, we have discussed constraints for our large engines, given the robust demand in power generation for data centers and in oil and gas. We believe that our total addressable market is expanding due to the secular growth trend for data centers relating to cloud computing and Generative AI. We also expect the energy transition to create opportunities for distributed generation. As more renewables are added to the grid, our reciprocating engine and gas turbine generator sets can help provide grid stability. We are making a large multiyear capital investment in our large engine division, including increasing capacity for both new engines and aftermarket parts. This will help us satisfy growing customer demand and contribute to future absolute OPACC dollar growth, which we believe has the highest correlation to total shareholder return over time. We continued to advance our sustainability journey in 2023. I'll highlight some recent announcements demonstrating our commitment to a reduced carbon future. Caterpillar had a goal that 100% of new products will be more sustainable than the previous generation, including by lowering fuel consumption and thus, corresponding emissions. One recent example is our 420 XE Backhoe Loader with the Cat 3.6 engine. Through internal testing in a typical mix of applications, it consumed up to 10% less fuel and produced up to 10% less tail pipe emissions than the previous model. Earlier this year, we announced the success of our collaboration with Microsoft and Ballard Power Systems to demonstrate the viability of using large-format hydrogen fuel cells to supply reliable and sustainable backup power for data centers. The demonstration validated the hydrogen fuel cell power systems performance in more than 6,000 feet above sea level and in below freezing conditions. Caterpillar led the project, providing the overall system integration, power electronics and microgrid controls that form the central structure of the hydrogen power solution. These examples reinforce our ongoing sustainability leadership. With that, I'll turn it over to Andrew.

adjusted operating profit margin 20.5% 510 basis points prior year