CAT
#Well, good morning, and thanks, Jim
If you have the slide deck in front of you, I'd ask if you could please turn to page 4, slide 4, and we'll start with our first quarter results
2017 has started off very well and exceeded our expectations for the quarter
Sales and revenues increased about $400 million or about 4% on the first quarter of 2016 to $9.8 billion in the first quarter of this year
This is the first time in 10 quarters that sales and revenues were higher than the prior year, although sales are coming off a very low base
Resource Industries had the largest increase, followed by Energy & Transportation and Construction Industries
In the quarter we announced our decision to close the Gosselies, Belgium, and Aurora, Illinois, facilities
Total restructuring costs were $752 million in the quarter, $591 million more than the first quarter of 2016. As a result, profit per share was down $0.14 from $0.46 to $0.32 in the first quarter 2017. On a 4% increase in sales and revenues, profit per share excluding restructuring doubled from a year ago from $0.64 in the first quarter 2016 to $1.28 this quarter
The increase was driven by higher sales, favorable mix, improved price, and lower costs
As you know we've been working hard on lowering our cost structure, right-sizing our footprint, and allocating resources directly to the highest profit opportunities
All these actions were key in delivering a very strong quarter
Let's turn to slide 5, and we'll look at first quarter operating profit
First quarter operating profit was $417 million, as compared with $494 million in 2016. As I already mentioned, restructuring costs were up $591 million
Excluding restructuring costs, operating profit was up $514 million
Positive changes to operating profit came from several areas
The largest increase to profit was the result of higher sales volume and favorable mix
About half of the sales volume profit change came from a favorable mix of products sold in the quarter
And that favorable mix impact was about equally spread across all three of our primary segments
While the market remains very competitive from a pricing perspective, price realization was favorable $88 million, with more than all of the positive variance coming from Construction Industries, partially offset by negative price in Resource Industries
Variable manufacturing costs were favorable by $96 million, with about half of that positive variance coming from continued improvement in material cost
We continue to reap the benefits of collaboration efforts between our dedicated procurement team, suppliers, and engineers, but we do not expect material costs to be – but we do expect material costs to be under pressure as the year proceeds due to an expectation of higher commodity prices, especially steel, in the back half of the year
Lower period costs were better by $140 million
Lower period costs are a result of our restructuring and cost reduction initiatives that we have implemented over the last several years and delayed timing of R&D spend, partially offset by higher incentive compensation expense of about $100 million
We also had strong ME&T operating cash flow, which was $1.5 billion in the quarter compared to $200 million in the first quarter of 2016. And we ended the quarter with $9.5 billion in cash
Now let's look at each of the segments, starting on slide 6. Construction Industries' sales and revenues were up slightly to $4.1 billion
Positive price realization of $123 million drove more than all of the sales increase
While the construction industry market remains very competitive, especially in North America, favorable price realization was due to a particularly weak pricing environment in the first quarter of 2016 and previously announced price increases impacting the first quarter of 2017. However, the sales story is more than just price
Very strong demand in Asia-Pacific was largely offset by lower sales volume in North America
The strong demand in China resulted in a reduction in Asia-Pacific dealer inventory, as demand outpaced our sales to dealers
Strength in China has mainly been driven by a strong execution of public-private partnership projects, particularly related to infrastructure and strong housing investment
Credit growth has remained supportive and better than we previously expected
High replacement demand and a tight used machine inventory market have also helped
While March and April are traditionally the highest months for industry opportunity in China's peak selling season, if policy remains supportive we expect strong market conditions in China to continue at least through mid-year
North America dealer inventory increased, but by less than a year ago
And end user demand was lower
Both contributed to the sales decline in North America
However, order activity in North America has been very strong, which has contributed to the increase in the backlog
The Middle East and Brazil remain weak
Construction Industries' operating profit was favorable by about $200 million on about flat sales as a result of favorable price realization and lower cost
Construction Industries' multi-year focus on OPACC, as we call it, our operating profit after capital charge, delivered the strongest quarter for operating margin percent in a long time
And this on sales that are about 20% below the highs reached in the second quarter of 2011. If we move to slide 7, we'll look at Resource Industries
We are very happy to report that we have good news in our Resource Industries segment
Sales were $1.7 billion or up 15% versus 2016, and operating profit was $158 million
After four years of declining sales, the part fleet has come down and is now under 20%
Hours of utilization on trucks is up
And for the fourth quarter in a row, parts sales have increased to support rebuild and maintenance needs
Sales increases for aftermarket parts were broad based, and they were the primary driver of the change in sales
As you saw in the retail stats that were published yesterday, sales to users remain negative
However, after 16 quarters of underproducing retail demand, dealer inventory remained about flat in the quarter, with a positive change in inventory more than offsetting negative retail sales and driving Resource Industries OEM sales up
We are seeing sporadic order activity for mining equipment and expect to ship significantly more mining trucks than we did in 2016. Resource Industries delivered positive operating profit for the first time since the second quarter of 2015, which is the result of significant actions that have been taken to lower their breakeven point
The improvement in operating profit resulted from higher sales volume and lower costs, partially offset by higher incentive compensation expense
Let's move to slide 8 and look at E&T
Energy & Transportation sales were up slightly in the quarter, from $3.3 billion to $3.4 billion
Higher sales into oil and gas applications, primarily in North America, were partially offset by lower Power Gen sales into EAME
Sales into industrial and transportation applications were about flat
The number of oil and gas rigs in service continues to increase and has more than doubled the lows that were reached last May
This has resulted in an increase in aftermarket parts demand to support the overhaul and rebuild of well servicing fleets
We are also seeing a significant increase in demand for our large reciprocating engines used for midstream gas compression applications
Demand for drilling and production application remains very low
Operating profit for Energy & Transportation was up $142 million, from $410 million to $552 million
This was largely attributable to higher sales volume, a favorable impact from cost absorption, and improved material costs
Period costs were about flat as the favorable impact of restructuring and cost reduction actions was about offset by a higher short term incentive compensation expense
I want to add a quick comment on financial products
Operating profit was up $15 million
The portfolio remains healthy and past dues were 2.64% versus 2.78% in the first quarter of 2016. Write-offs were down and used equipment prices are starting to recover
Well, let's move to slide 9, and we'll look at our full-year outlook
We announced this morning that we are raising the outlook for full-year sales and revenues
In January we provided an outlook for sales and revenues of $36 billion to $39 billion
As a result of better-than-expected first quarter, strong order rates, and an increase in our backlog, we are providing new guidance for sales and revenues in a range of $38 billion to $41 billion with a midpoint of $39.5 billion, which is up $2 billion from our previous outlook
At the midpoint of the sales and revenue range we have changed the profit-per-share outlook to $2.10, reflecting our decision to close the Gosselies and Aurora facilities
And we have raised the profit-per-share, excluding restructuring costs, outlook to $3.75. We turn to the next
While there are positive signs across many of our end markets, and we have seen a significant increase in order activity and the backlog, we believe given the political uncertainty around the globe and the potential for volatility in commodity prices, that it is prudent at this point in the cycle and at this point in the year to consider both the positive and negative as we look at our end markets and what could impact sales as the year progresses
There are several positive sentiments
World business confidence is at a two-year high and world growth is accelerating
There are also positive indicators for North America construction demand
Many states have passed infrastructure bills
Pipeline projects that were previously stuck in permitting are now moving ahead and residential and nonresidential demand in certain parts of the U.S
remains robust
We believe business optimism, which may be contributing to elevated quoting and ordering activity in North America, is partially a reflection of the benefits of pro-business policy in regards to infrastructure and tax reform
However, we don't expect to see any meaningful impact from these changes until 2018. The backlog is up $2.7 billion on strong order activity in all segments
China construction equipment industry is robust with industry sales up sharply versus last year
Gas compression demand for reciprocating engines is very strong
And miners' balance sheets are improving, and they are expecting increases to CapEx
However, there are other risks to the outlook that we believe are prudent to take into account
Outside of Asia-Pacific, retail stats for construction industries remain negative
Demand for overhauls and rebuilds in mining and oil and gas could diminish as those units go back to work
Brazil remains weak
The Middle East continues to struggle as a result of lower oil prices
Competitively, the pricing environment remains very challenging
The potential for oversupply of oil could drive volatility in the price of that commodity
And geopolitical uncertainty across the globe is elevated
If we go to slide 11, we'll look at it quickly by segment
We now expect Construction Industries sales for the year to be about flat to up 5%, driven largely by demand in China
We have yet to see retail stats in the rest of the world turn positive
While order rates are encouraging, they will need to be sustained by continued strength and business confidence
For Resource Industries we now expect sales and revenues to be up 10% to 15% for the full year, driven by higher parts sales in the first half of the year to support rebuilds and maintenance work
And then transitioning in the second half to new equipment sales to support increased CapEx spending from the miners
We now expect Energy & Transportation sales revenues to be about flat for the year
Improvements in oil and gas to support overhauls in maintenance for well servicing fleets and higher demand for reciprocating engines used in gas compression applications are largely being offset by slight weakness across Power Gen, industrial and transportation
If we move to slide 12, we'll look at the outlook for profit
While there are several small puts and takes, the raise in the profit per share from $2.90 to $3.75, excluding restructuring, is primarily the result of an increase in sales volume of about $2 billion and a corresponding variable margin we would expect on higher sales, partially offset by an increase in short-term incentive compensation expense of about $200 million
The outlook reflects just slightly more than half of the year's sales and revenues in the first half, which would be similar to trends in recent years
We had a very strong quarter
And if you compare the first quarter to the average of the last three quarters, we expect some real headwinds, due to less favorable mix than we experienced in the first quarter, pressure on price and material costs, and the timing of period cost spend
That said, at a midpoint of $39.5 billion in sales and revenues, and a PPS excluding restructuring cost outlook of $3.75 for the full year, at this sales range we would expect – we expect to deliver an operating profit pull-through of just less than 50%, well ahead of our target range of 25% to 30%
So we'll wrap up on slide 13. First quarter was a great way to start the year, with higher sales and very strong operating performance across the board
We raised the outlook for sales and revenues to reflect a strong quarter and improved market conditions across many of our end markets
While uncertainty and the potential for volatility in commodity prices remain, we are ready to respond as demand increases
We remain very focused on cost management
And we are using our operating and execution models to be very deliberate about where to invest so that we deliver the highest shareholder value, investments that include lean, R&D, and digital
Before we turn it back to the operator for the Q&A portion, I believe Jim has a few additional comments
Good morning, <UNK>
Good morning, Steve
