CAT
#Well, thanks, Jim
Good morning to everybody
As Jim stated, it was a strong quarter with higher sales across all regions and improved margins, and we raised the profit outlook
Our commitment to running the business using the operating and execution model is evident in the team's focus on profitable growth and cost discipline building on our restructuring efforts
Let's turn to slide 4, and I'll quickly walk through the numbers
Sales and revenues of $11.4 billion were up 25% from the third quarter of last year, our strongest quarter-over-quarter in terms of sales and revenue growth since the fourth quarter of 2011. About half of the increase in sales volume was from higher end-user demand
The other half was from favorable changes to dealer inventory
The favorable change to dealer inventory was mostly due to the absence of dealer inventory reductions that occurred last year during a full-year run of dealers reducing inventory by over $6 billion, not from dealers building significant inventory this year
Dealers reduced inventory $700 million in the third quarter of last year as compared to a $200 million dealer inventory increase in the third quarter this year, a net change of $900 million
While changes to dealer inventory were favorable, it is important to note that dealer inventory in terms of months of sales are low based on historical levels and are lower than at the end of the second quarter
Profit per share was up $1.29 from $0.48 to $1.77. Adjusted profit per share more than doubled, up $1.10 from $0.85 in the third quarter 2016 to $1.95. Higher sales volume and favorable price realization were the largest drivers to the increase in profit
Let's turn to slide 5. Third quarter operating profit was $1.577 billion as compared with $481 million in 2016, up almost $1.1 billion
Positive changes to operating profit came from several areas
The largest increase to profit was a result of higher sales volume
About half of the change was from higher end-user demand and half was from a favorable change to dealer inventories
All four geographic regions saw sales and revenue increases ranging from 20% to 29% versus a year ago
However, keep in mind that, in some cases, this was off a very low base, especially in Latin America
Dollar sales increase was highest in North America primarily due to higher end-user demand for both new equipment and aftermarket parts as well as favorable changes to dealer inventories as dealers in North America held inventory about flat in the quarter versus reducing inventories in the third quarter a year ago
Asia/Pacific saw the second highest increase in dollar sales primarily due to higher end-user demand for construction equipment
About half of the increase was in China with strength also broadening to other countries in the region
Price improved $343 million in the quarter
The favorable change was primarily due to Construction Industries
Variable manufacturing costs were favorable $143 million largely due to the favorable impact of period costs absorbed, as inventories increased in many of our factories to support higher production levels
As we ramp up production, we remain focused on lean principles, and the inventory turns improved in all three primary segments
As we ramp, we are working closely with our supply base to reduce lead times and raise production levels, in some cases, off of a very low base
Our focus is getting product to customers quickly, but also efficiently
However, we are focused on improving availability to meet higher end-user demand
For the first time in several years, material cost increased in the quarter
We expect higher steel costs to put pressure on material costs moving forward
Total period costs were higher by $349 million
When you exclude the higher short-term incentive accrual, period costs were about flat despite a significant increase in sales volume
This is a reflection of our continued cost discipline that has enabled us to control costs while making targeted investments in key areas to drive future profitable growth
Restructuring actions continue
These actions are important to achieving the flexible cost structure required to remain profitable through the cycles
Restructuring costs were $90 million in the quarter, $234 million less than in the third quarter of 2016. Before we walk through the segments, I want to touch on the balance sheet
ME&T debt-to-capital at the end of the second (sic) [third] (10:28) quarter was 36.1%, an improvement from 38.6% at the end of the second quarter
Year-to-date, ME&T operating cash flow was $4.2 billion, $2.4 billion higher than the first nine months of last year
Enterprise cash at the end of the quarter was $9.6 billion
Now let's move on and we'll go through the segments, starting on slide 6. And we'll start with Construction Industries
Construction Industries sales were up 37% to $4.9 billion
Higher sales in all regions and favorable price realization contributed to the increase
Order activity was strong in the quarter across all regions, and the backlog increased about $500 million
About half of the sales volume increase was from favorable changes to dealer inventories
Most of this favorable dealer inventory change occurred in North America and EAME, where there was significant reductions to dealer inventory in the third quarter of last year
Asia/Pacific and EAME dealers increased inventory in the quarter
Construction Industries dealer inventory is up about $300 million from the start of the year, but from a month of sales metric, they're low versus historical levels
The other half of the sales volume increase was a result of higher end-user demand
North America end-user demand increased primarily due to increasing activity in the oil and gas industry, including an uptick in pipeline construction and improving residential and nonresidential construction
Asia/Pacific saw strength across the region
However, China continues to be a bright spot and a surprise to the upside
Our current estimate for 2017 is for the 10-ton-and-above excavator industry in China to more than double versus last year, which would result in sales that are higher than our estimate of normal replacement demand for the region
We believe that some demand has been pulled forward into 2017 so that construction projects can be completed before activity slows in the winter months
While we are seeing strengthening fundamentals in parts of EAME, the favorable sales increase was primarily due to favorable dealer inventory changes, not end-user demand
Price realization also contributed to the increase
Latin America, especially Brazil, remains challenged, and sales are still at very low level
However, end-user demand did increase due to stabilizing economic conditions in several countries in the region
Construction Industries segment profit of $884 million was favorable $558 million, driven by higher sales volume and favorable price realization
The increase in period costs was due to higher short-term incentive compensation
Excluding the short-term incentive compensation, period costs were about flat
Segment profit margin in the quarter was 18.1%, an increase of about 900 basis points from the third quarter of last year and about flat with the second quarter of this year
Let's move to Resource Industries on slide 7. Favorable changes to dealer inventories combined with strong demand for aftermarket parts to support overhauls and maintenance work, as well as improved price realization were the primary drivers of the $500 million increase in sales and revenues for Resource Industries, an increase of 36%
Dealer deliveries of new equipment increased slightly
As we have stated previously, the mining cycle has started to turn
The parked fleet has come down from its peak and stabilized for several months
The initial surge earlier this year in trucks coming into service bays for overhauls has started to subside, especially in Australia, where we first saw demand increase, but demand for aftermarket parts remains at a healthy level
Utilization on trucks has steadily trended higher over the past eight months and recently achieved a five-year high
While the number of trucks being overhauled has come down, the higher utilization and number of trucks working in the mines has also contributed to an increase in aftermarket parts demand
For the third quarter in a row and after four years of dealers reducing their inventories and our factories producing below retail demand, dealer inventories were about flat in the quarter, driving a favorable change to sales
Year-to-date, Resource Industries dealer inventory is up just slightly from the end of 2016. Although price realization was favorable in the quarter, the competitive environment in Resource Industries continues to put pressure on pricing for many of our products
Order activity across all regions remained strong in the quarter, and the backlog increased about $300 million from the second quarter
However, Resource Industries new equipment sales and production levels still remain at historically low levels
Segment profit was $226 million, up $303 million from a loss of $77 million in 2016. The improvement in profit resulted from higher sales volume, favorable price realization, lower manufacturing cost, primarily due to cost absorption as inventories increased in the quarter and were about flat a year ago
Period costs were about flat as the benefits from a number of restructuring and cost reduction actions offset higher short-term incentive compensation
Segment profit as a percent of sales improved to 11.6% from a loss position a year ago
It was the best quarter this year for Resource Industries in terms of both segment profit and profit as a percent of sales
Now we'll move to Energy & Transportation on slide 8. Energy & Transportation sales, including inter-segment sales, were up about $600 million or 16% in the quarter to $4.8 billion
Sales were higher across all applications
New engines and aftermarket sales for industrial applications increased in all regions to support higher equipment demand across several industrial customers' end markets
In oil and gas, demand for aftermarket parts to support well servicing applications increased in the quarter
In addition, the build-out of North American natural gas infrastructure, combined with new wells that have had a higher concentration of natural gas than previous wells, continued to drive strong demand in midstream gas compression
Sales into power generation were up, largely due to timing of projects in North America and EAME
Transportation sales were also up, as rail services demand increased to support higher North America rail traffic in the quarter
Segment profit for Energy &Transportation was up $178 million from $572 million to $750 million
This was largely attributable to higher sales volume and a favorable impact from cost absorption, as inventories increased in the third quarter of this year to support higher production levels and were flat last year
Period cost increased in the quarter, primarily driven by higher short-term incentive compensation
Segment profit as a percent of sales improved 180 basis points to 15.5% from 13.7%
Before I move on to the outlook, a few comments on Financial Products
Operating profit was about flat versus the third quarter of last year
The portfolio remains healthy with past dues down 4 basis points from the third quarter of 2016 and used equipment prices continued to improve
Now let's move on to the outlook on slide 9. In July, we provided an outlook for sales and revenues of $42 billion to $44 billion
As a result of encouraging order rates, good economic indicators and an increasing backlog, we are providing new guidance for sales and revenues of about $44 billion
We have raised the profit per share outlook to about $4.60 and raised the adjusted profit per share outlook from $5 at the midpoint of the previous sales and revenue range to about $6.25. The increase in the profit outlook is largely a result of a higher estimate for sales combined with a favorable mix, improved price realization, and the slower ramp of period cost spend for targeted investments
These positives are slightly offset by an increase in short-term incentive compensation expense and higher material cost
Sales and revenues in 2016 were $38.5 billion, and profit per share was a loss of $0.11 with adjusted profit per share of $3.42. Our revised outlook is sales and revenues of about $44 billion, profit per share of $4.60, and adjusted profit per share of $6.25. This equates to adjusted profit per share up more than 80% on about a 14% sales and revenues increase
The implied fourth quarter is for sales and revenues of about $11.4 billion and adjusted profit per share of $1.53. We expect higher material cost and period cost spend for targeted investments will negatively impact operating leverage in the fourth quarter
Now let's discuss the sales outlook starting on slide 10. We now expect Construction Industries' sales for the year to be up about 20% versus the previous outlook of up 10% to 15%, driven largely by higher end-user demand across all regions
The increase on the sales outlook is driven primarily by a higher sales forecast for Asia/Pacific and North America, with strength in Asia/Pacific expanding beyond just China
Order rate for Construction Industries have been strong across all regions, although in many cases off a very low base
The backlog is up significantly from the third quarter of 2016 and also up from the second quarter of 2017. For Resource Industries, we now expect sales to be up about 30% for the full year versus the previous outlook of up 20% to 25%
In our prior outlook, we expected aftermarket parts sales to decline in the second half of the year, as machine rebuilds were expected to slow and for sale of new equipment to offset this decrease
As predicted, we did see some slowing in aftermarket parts sales in the third quarter; however, not to the pace that was anticipated
The increase to the sales outlook for Resource Industries is largely driven by our higher expectation for aftermarket parts sales
Our forecast for new equipment sales has not changed from our previous outlook
We continue to see strong order activity for Resource Industries, and the backlog increased from both the third quarter 2016 and the second quarter of this year
Energy & Transportation sales are forecasted to be up about 10% for the year versus the previous outlook of up 5% to 10%
The largest driver of the increase in the sales outlook for Energy & Transportation is a higher forecast for the sale of engines into industrial applications, as our customers across several industrial end markets are seeing strength in their industries
Energy & Transportation 2017 sales growth is largely due to the strength in onshore North America oil and gas
We continue to see strong rebuild activity in wells servicing for engines, transmissions, pumps and flow iron as well as demand for new equipment
We also expect shipments to North America gas compression customers to be higher this year, driven largely by demand for reciprocating engines, as solar sales into oil and gas applications are expected to be flat for the full year
Transportation is now expected to be up, as higher rail traffic has driven higher demand for rail services
Power generation industry remains challenged, and we anticipate sales to be about flat to slightly up for the full year
While order activity has been strong for the first three quarters of 2017 and the backlog is up, geopolitical uncertainty, global and regional GDP growth and commodity volatility will be risks as we move into 2018. Potential tax reform and an infrastructure bill would be positives for the long term
At this time, we are focused on operational excellence, and our segments are in the process of planning and implementing strategies to drive profitable growth
It is too early to comment on 2018, and we will share more on 2018 in January
So, let's wrap up with a few takeaways on slide 11. In the third quarter, we saw encouraging order rates and an increasing backlog in the quarter
Year-over-year sales and revenues were higher by more than $2 billion
Operational performance for the year has been strong, as third quarter segment margins continued to improve as a result of our commitment to the O&E model, operational excellence and profitable growth
The balance sheet remains strong with $9.6 billion of enterprise cash on hand and a debt-to-cap ratio of 36.1%
Given year-to-date performance and confidence in our end markets, we raised the 2017 profit outlook
We are focused on delivering the new strategy that Jim rolled out in September at Investor Day and are focused on driving profitable growth through margin expansion, asset efficiency and expanded offerings, especially services
With that, I'll now turn it back to you, <UNK>
