Caterpillar, Inc. (CAT) Q2 2014 Earnings Conference Call July 24, 2014 11:00 AM ET
Mike DeWalt - VP, Strategic Services
Brad Halverson - Group President - Corporate Services and CFO
Doug Oberhelman - Chairman and CEO
Andrew Kaplowitz - Barclays Capital
Robert Wertheimer - Vertical Research Partners
Jamie Cook - Credit Suisse
Nicole DeBlase - Morgan Stanley
Timothy Thein - Citigroup
Larry De Maria - William Blair
Theoni Pilarinos - Raymond James
Ross Gilardi - Bank of America Merrill Lynch
Jerry Revich - Goldman Sachs
David Raso - ISI Group
Good morning, ladies and gentlemen and welcome to the Caterpillar Second Quarter 2014 Earnings Results Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. Now I’d like to turn the floor over to your host, Mike DeWalt. Sir, the floor is yours.
Thank you very much, and good morning, everyone, and welcome to our second quarter earnings call. I'm Mike DeWalt, Caterpillar's Vice President of Strategic Services. And on the call today, I'm pleased to have our Chairman and CEO, Doug Oberhelman; and Group President and CFO, Brad Halverson.
Now this call is copyrighted by Caterpillar Inc. and any use, recording or transmission of any portion of the call without the expressed written consent of Caterpillar is strictly prohibited. And if you'd like a copy of today's call transcript, we will be posting it in the Investors section of our caterpillar.com Web site, and it'll be in the section labeled Results Webcast.
So this morning, we'll be discussing forward-looking information and it certainly involves risks and uncertainties and assumptions that could cause our actual results to differ materially from the forward-looking information. A discussion of some of those factors that either individually or in the aggregate could make actual results differ materially from our projections can be found in our cautionary statements under Item 1A, which is Risk Factors, out of our Form 10-K filed with the SEC in February of 2014, and also in the forward-looking statements language in today's release.
Now in addition to that, a reconciliation of non-GAAP measures can also be found in our release today and again it’s posted on caterpillar.com in the Investors section.
Okay, let’s get started this morning and I’ll be covering three themes before we get into the Q&A. Second quarter sales and profit, the outlook for 2014 and our announcement this morning of additional share repurchase expected in the third quarter. Now before we really get into the quarterly numbers I thought it might be helpful to summarize the major themes from this morning’s release. In other words what were the key points we’re trying to get across. The first point is around stability and consistency. Back in October of 2013, we provided a preliminary outlook for 2014 sales and revenues and back then we said it looked to us like 2014 would be a relatively flat year with 2013. That was the case then and that’s the case today. The midpoint of our outlook today is within about 1% of 2013’s sales and revenues.
The second main theme this morning is around execution which has been good. Manufacturing, SG&A and R&D costs are close to 500 million, favorable in the first half versus the first half of 2013. Cash flows continue to be strong, we’ve improved inventory turns, PINS continue to improve and we’ve raised our profit outlook again this morning.
Now the third major theme this morning is cash deployment, and the actions we’ve taken to help drive shareholder return. With the stock buyback we announced this morning, we expect that from the start of 2013 last year to the end of the third quarter of this year that we will have repurchased $6.2 billion worth of CAT stock and made two substantial increases in the quarterly dividend. So, that’s three themes, consistency, execution and shareholder friendly cash deployment.
Okay now let’s get into the second quarter results. Sales and revenues were 14.2 billion, and that was about 3% below the second quarter last year. Construction Industries was up 11%, Resource Industries down 29 and the rest, energy and transportation, financial products and our all other segment combined to be roughly flat with the second quarter of last year.
Now for construction, North America has been an area of strength and you might be surprised to hear so is our EAME region particularly Europe in the second quarter, it’s been better as well. Now construction sales in the Latin America were about flat with the second last year but as we get into the third quarter, Latin America will likely turn a bit negative versus last year, and that’s not driven by big economics, it’s primarily related to large sales of Backhoe Loaders and Motor Graders now that we’ve had to the Brazilian government. It was positive for sales last year and through the first half of this year but those orders are complete. So you should expect to see in the retail statistics of your release each month some decline there so don’t be surprised if you see that we expect that it is included in our outlook.
Now construction sales in Asia Pacific were down slightly and that includes weaker sales in China. Now in China we started the year 2014 with the improving construction equipment demand but over the second quarter it weakened a bit. Our resource industries segment which again is mostly mining was down 29%. It was down 35% to 40% in every region of the world except North America. North America was much less negative than the other regions partly because the steep sales decline in North America started earlier, in other words it was probably closer to the bottom a year ago. In addition better sales to chlorine aggregate customers was also a factor that part of resource industries tends to be a little more closely aligned with construction and the particularly in North America that has been performing better, so again overall mining sales weak.
However, this was the first quarter since 2012 that resource industries sales were higher than the previous quarter. So that means second quarter of 2014 sales were about 6% higher than the first quarter. Sales improved from first to second for both new equipment and for parts. In fact for parts it is the second consecutive quarterly improvement. Q1 of 2014 was up slightly from Q4 of ’13 and Q2 this year was a little better than Q1. Now it is too soon to suggest that the mining business is turning around but it’s going to see sequential improvement.
Moving on to energy and transportation it has been incredibly stable high performing business over the past few years and this quarter was no exception. Overall sales for energy and transportation were stable with the second quarter of last year. And even if you take it down to the next level and you look at sales in the major industry served by energy and transportation that’s oil and gas, PowerGen, transportation and industrial the sales were individually pretty flat with the exception of PowerGen and that was down sort of high single-digits but even there we see that being an issue around the timing of some large projects.
So in summary on second quarter sales and as you probably expected going into the quarter, construction sales were up nicely, mine sales were lower everything else was pretty much flat.
Okay I will shift from sales to profit in the second quarter. Headline numbers, profit per share of $1.69 excluding restructuring and $1.57 including restructuring costs. In comparison profit was $1.45 in the second quarter of 2013. Now by segment resource industries was the only segment that we had that declined versus the second quarter last year the rest were up. And a couple of big bright spots were a profit increase of more than 80% for construction industries and an all time record profit for energy and transportation and in fact their first quarterly profit over a $1 billion.
From a consolidated perspective we provide an operating profit comparison by region in our release and today that’s on -- that is the graphic on Page 6 of our financial release because the individual buckets in that waterfall graph were relatively small I’m not going to go into each of them in any detail. But I would summarize by saying that manufacturing cost and products utilization were modestly positive and the negatives were a bit lower sales volume, the restructuring costs in the quarter and absence of a sizable $135 million gain that we had in the second quarter last year related to a settlement with the owners of -- previous owners of our Siwei acquisition.
So that’s the quarter, let’s turn to the outlook for 2014 where we’ve made a modest change to sales and revenues and increased our outlook for profit. With sales half of the year is behind us and we have tightened up the range and lowered the midpoint slightly. Now as I mentioned at the outset of the call this morning our view of 2014 sales and revenues has remained reasonably constant, in another words a flattish year versus 2013. We thought that was the case last year we think that’s still the case today.
That said with half of the year over we have tighten the range and we have -- the updated range is a forecast of 54 billion to 56 billion in sales and revenues and for reference to previous range was 56 billion plus or minus 5% that meant a range of just over 53 billion to just under 59 billion. The middle of the new range is 55 billion and that is slightly lower than the previous midpoint of 56 billion and most of that change is in construction industries and reflects the weaker sales expectations in China based on the reporting out of China that probably shouldn’t be much of a surprise and decline in expectations in the CIS and in the Africa, Middle East region and given the political turmoil in those parts of the world that’s probably not a big surprise.
In terms of profit, for a better understanding of results, we are providing outlook, again both with and without restructuring costs. Today, we have increased the outlook for both. Now excluding restructuring costs, we have increased it to $6.20 a share, that’s a $0.10 increase from the prior forecast. Now our expectation for restructuring costs is near the bottom end of our 400 million to 500 million range. And with restructuring cost all in, our updated outlook is profit per share of 5.75 which is $0.20 per share, better than the previous outlook.
Now to help you think about the rest of the year, the third and the fourth quarter, there’s one more thing I would like to cover and that’s how we are thinking about the last two quarters. There is typically seasonality in our sales and we think that’s going to be the case this year as well. So we have got half of the year behind us and you know the midpoint of our outlook. We basically have the second half of the year, not a lot different than the first half.
Now we expect sales and revenues in the third quarter to be similar to the first quarter of 2014, and fourth-quarter sales to be more in line with the second quarter of 2014. In terms of profit per share, with lower sales in the third quarter, it would likely be the weakest profit quarter of the year and with higher sales in the fourth quarter, profit per share should be similar to the average of the first and second quarters of 2014. I hope that helps you think about our expectations and how the third and fourth quarter could play out. And if you missed writing that down, again we will be reposting the transcript of this call on our caterpillar.com Web site.
Now in addition to our financial results this morning we announced that we expect to purchase or repurchase another $2.5 billion of caterpillar stock in the third quarter. This repurchase is a part of the 10 billion that the Board authorized earlier this year. Now the context behind our repurchases really over the past two years is consistent with our cash deployment priorities. Coming out of the 2008 and 2009 great recession, we had work to do to improve the strength of the balance sheet. We needed to invest for growth, and with very low interest rates our employee benefit plans needed additional funding.
Over the past few years we have made significant progress. Our machinery engines and transportations at the capital ratio is at the low-end of our target range. Benefit plan funding is in good shape. And we generally have the production capacity in place that we think we will need for the next few years. And although we will continue to be opportunistic, we aren’t expecting any large acquisitions. So with nearly 9 billion of machinery engines and transportation operating cash flow last year in 2013 and nearly 4 billion in the first half of this year, and with significant cash on hand we have had the opportunity to take substantial actions to improve shareholder return.
In 2013 we repurchased $2 billion worth of stock and raised the dividend by 15%. In June of 2014 we increased the dividend again an additional 17%, and by the end of the third quarter of this year we expect to have repurchased about 4.2 billion of stock in 2014. That’s a 1.7 billion in the first quarter, and the 2.5 billion in the third quarter. Rewarding stockholders is an important goal and our actions demonstrate our commitment. So, in summary we had a pretty good second quarter. We raised the profit outlook for 2014 and we announced another $2.5 billion of stock repurchase.
So with that we’re ready to shift over to the Q&A portion of the call.
Earnings Call Part 2: