Ryan Fiedler :

Thanks, Audra. Good morning, everyone. Welcome to Caterpillar's first quarter of 2024 earnings call. I'm Ryan Fiedler, Vice President of Investor Relations. Joining me today are Jim Umpleby, Chairman and CEO; Andrew Bonfield, Chief Financial Officer; Kyle Epley, Senior Vice President of the Global Finance Services Division; and Rob Rengel, Senior Director of IR. During our call, we'll be discussing the first quarter earnings release we issued earlier today. You can find our slides, the news release, and a webcast recap at investors.caterpillar.com under Events and Presentations. The content of this call is protected by U.S. and international copyright law. Any rebroadcast, retransmission, reproduction, or distribution of all or part of this content without Caterpillar's prior written permission is prohibited. Moving to slide two. During our call today, we'll make forward-looking statements which are subject to risks and uncertainties. We'll also make assumptions that could cause our actual results to be different than the information we're sharing with you on this call. Please refer to the recent SEC filings and the forward-looking statements reminder in the news release for details on factors that, individually or in aggregate, could cause our actual results to vary materially from our forecast. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. On today's call, we'll also refer to non-GAAP numbers. For a reconciliation of any non-GAAP numbers to the appropriate U.S. GAAP numbers, please see the appendix of the earnings call slides. Now I'll turn the call over to our Chairman and CEO, Jim Umpleby.

Andrew Bonfield:

Thank you, Jim. Good morning everyone. I'll begin by commenting on the first quarter results, including the performance of our segments. Then I'll discuss 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 eight. Our operating performance was strong with both adjusted operating profit margin and adjusted profit per share, being better than we had expected. Sales and revenues of $15.8 billion were about flat compared to the prior year, broadly in line with our expectations. Adjusted operating profit increased by 5% to $3.5 billion and the adjusted operating profit margin was 22.2% an increase of 110 basis points versus the prior year which was slightly better than we had expected. Profit per share was $5.75 in the first quarter, compared to $3.74 in the first quarter of last year Adjusted profit per share increased by 14% to $5.60 in the first quarter, compared to $4.91 last year. Adjusted profit per share excluded net restructuring income of $0.15 per share, this compares to restructuring expense of $1.17 which was excluded in the first quarter of 2023. Other income of $156 million for the quarter, was higher than the first quarter of 2023 by $124 million, this primary related to favorable ME&T balance sheet translation. The provision for income taxes in the first quarter excluding discrete items, reflected a global annual effective tax rate of 22.5% compared with 23% in the first quarter of 2023. Included in profit per share and adjusted profit per share was a benefit of $38 million or $0.08 for a discrete tax item related to stock based compensation. A comparable benefit of $32 million or $0.06 per share was included in the first quarter of 2023. The year-over-year impact of a reduction in the number of shares primarily due to share repurchases over the past year, had a favorable impact on adjusted profit per share of approximately $0.24. This included a favorable impact from the initial shares we received, from the $3.5 billion accelerated share repurchase agreement that Jim mentioned earlier. Before, I move on you will have seen some additional detail on earnings release segment commentaries. We continue to highlight the primary drivers of year-over-year changes in sales and profit by segment, as we have done previously, but in addition we are now also quantifying those significant variances. You will also find some additional information on historical dealer inventory, including at the machines level in the appendix of today's slides Moving to slide nine. I'll discuss our top line results in the first quarter. Sales remained about flat compared to the prior year, as lower volume was largely offset by favorable price realization. The decline in volume was primarily due to lower sales to users. As Jim mentioned, the 5% decrease in sales to users was slightly more than our expectations, mainly driven by weakness in Europe for Construction Industries. Changes in total dealer inventories did not have a significant impact on sales, as the increase of $1.4 billion in the quarter was similar to the increase last year. As Jim mentioned, the $1.1 billion increase for machines was slightly higher than we had anticipated, primarily as sales to users were modestly lower than we had expected. As compared to our expectations for the quarter, sales were broadly in line. Sales volume was slightly lower than we had anticipated, while price realization, including geographic mix, was better than we had expected. By segment, sales in Construction Industries were lower than we had anticipated, while sales in Energy & Transportation exceeded our expectations. Resource Industry sales were about in line. Moving to operating profit on Slide 10. The first quarter operating profit increased by 29% to $3.5 billion. As a reminder, the prior year included a $586 million charge that arose from the divestiture of the company's long-haul business. Adjusted operating profit increased by 5% to $3.5 billion. Price realization benefited the quarter, while lower sales volume acted as a partial offset. The adjusted operating profit margin of 22.2% improved by 110 basis points versus the prior year. Margins were slightly better than we had anticipated, mainly due to favorable manufacturing costs, as freight costs were lower than we had expected. Price, including a benefit from geographic mix, was also better than we had anticipated. Now on slide 11, I'll review segment performance, starting with Construction Industries. Sales decreased by 5% in the first quarter to $6.4 billion, primarily due to lower sales volume, partially offset by favorable price realization. Sales were slightly lower than we had anticipated. Sales in North America increased by 6% in the quarter. In the EAME region, sales fell by 25%, and in particular, Europe was lower than we had anticipated, impacted by weakness in residential construction and economic conditions. In Latin America, sales decreased by 1%. In Asia Pacific, sales decreased by 14%. First quarter profit for Construction Industries was $1.8 billion, a slight decrease versus the prior year. The decrease was mainly due to lower sales volume, partially offset by favorable price realization and manufacturing costs. The segments margin of 27.5% was an increase of 100 basis points versus the last year. This was better than we had expected due to favorable manufacturing costs, which largely reflected lower freight costs. Turning to slide 12, Resource Industries sales decreased by 7% in the first quarter to $3.2 billion, which was about in line with our expectations. The decrease was primarily due to lower sales volume, partially offset by favorable price realization. The decrease in sales volume was mainly driven by lower sales of equipment to end users, which Jim explained. First quarter profit for Resource Industries decreased by 4% versus the prior year to $730 million. The decrease was mainly due to lower sales volume, partially offset by favorable price realization. The segments margin of 22.9% was an increase of 60 basis points versus last year. This is better than we had expected on stronger price and favorable manufacturing costs, driven mainly by lower freight costs. Now on slide 13, Energy & Transportation sales increased by 7% in the first quarter to $6.7 billion. The increase was primarily due to higher sales volume and favorable price. Sales were stronger than we had expected, mostly due to increased deliveries of large engines. By application, power generation sales increased by 26%, oil and gas sales improved by 19%, transportation sales were higher by 9%, while industrial sales decreased by 21%. First quarter profit for Energy & Transportation increased by 23% versus the prior year to $1.3 billion. The increase was primarily due to favorable price realization. The segments margin of 19.5% was an increase of 260 basis points versus the prior year. The margin was significantly stronger than we had anticipated due to lower than expected manufacturing costs, higher volume, and better price. Moving to slide 14, Financial Products revenues increased by 10% to $991 million, primarily due to higher average financing rates across all regions and higher average net earning assets in North America. Segment profit was strong, increasing by 26% to $293 million. The increase was mainly due to an insurance settlement and a favorable impact from equity securities. Our portfolio continues to perform well as past dues remain near historic lows at 1.78%, a 22 basis point improvement compared to the first quarter of 2023. This is the lowest first quarter past dues since 2006. In addition, the allowance rate was our lowest on record at 1.01%. Business activity remains strong as new business volume increased versus the prior year, primarily driven by North America. We continue to see strong demand for used equipment and inventories remain close to historically low levels, with just slight increases over recent quarters. Moving on to slide 15. As Jim mentioned, our ME&T free cash flow remains strong. We generated $1.3 billion in the quarter after taking into account the $1.7 billion payments made for 2023 short-term incentive compensation and CapEx spend of about $500 million. Spend for both short-term incentive compensation and CapEx was higher than it was in the first quarter of 2023. For the full year, we expect to be in the top half of our ME&T free cash flow target range, which correlates to between $7.5 billion and $10 billion. We still expect to spend between $2 billion and $2.5 billion in CapEx, and we will continue to prioritize investments around AACE, which is autonomy, alternative fuels, connectivity, and digital and electrification. Moving to capital deployment. We continue to expect to return substantially all our ME&T free cash flow to shareholders over time through dividends and share repurchases. Of the record $5.1 billion of cash deployed in the first quarter, share repurchase spend was $4.5 billion, including the $3.5 billion accelerated share repurchase, or ASR. The $3.5 billion were deployed in the first quarter, and the ASR agreement may last for up to nine months. The ASR provides us with favorable pricing as compared to shorter-term ASRs, which we have carried out previously, which makes it more attractive. Price is finally determined relative to the volume-weighted average price, or VWAP, over the duration of the agreement. Approximately 70% of the shares were delivered to the company up front, but the balance calculated when the agreement is terminated based on the actual average VWAP. As a reminder, our objective is to be in the market on a more consistent basis with share repurchases, so this is a great mechanism for us to use. As I mentioned, our balance sheet remains strong. We have ample liquidity with an enterprise cash balance of $5 billion, and we hold an additional $2.2 billion in slightly longer-dated liquid marketable securities to improve yields on that cash. Moving to slide 16, I will share our high-level assumptions for the full year. As compared to a quarter ago, our assumptions for the full year generally remain unchanged. On the top line, we anticipate broadly similar sales and revenues as compared to the record 2023 level, consistent with what we mentioned last quarter. Although our top-level sales expectations remain the same, segment inputs have shifted a bit. We now see a slightly stronger top line in Energy & Transportation after a strong first quarter, while our expectations have been tampered slightly in Construction Industries due to economic conditions in the European market. We continue to expect slightly favorable price realization versus the prior year. Our expectations on dealer inventory also remain unchanged. We currently do not expect a significant change in dealer inventory of machines in 2024 compared to a $700 million increase in 2023. This is expected to be a headwind to sales. We also continue to anticipate another year of services growth across each of our primary segments as we strive to achieve our 2026 target of $28 billion in services revenues. At the segment level, we now expect Construction Industries sales to users to be slightly lower compared to 2023 due to the softer economic conditions in Europe. We expect demand in North America to remain at healthy levels, as Jim discussed. We also anticipate changes in dealer inventory to act as a headwind to Construction Industries sales in 2024. We expect sales service revenues to be positive versus the prior year. In Resource Industries, we continue to expect lower sales impacted by lower machine volume, primarily in off-highway and articulated trucks, where the comparison versus the prior year is challenging. We anticipate changes in dealer inventory to act as a headwind to sales in this segment as well. In Energy & Transportation, our 2024 sales expectations have increased slightly after the strong first quarter. We continue to see strong demand for reciprocating engines in power generation, as well as healthy order and quoting activity for Solar Turbines for both oil and gas and power generation. This supports our improved optimism for higher sales in Energy & Transportation in 2024. Also, as typical seasonality would suggest, we expect to see some sales ramp in Energy & Transportation as we move through the full year. On full year adjusted operating profit margin, we continue to expect to be in the top half of the margin target range at our expected sales levels. As I mentioned last quarter, we expect a relatively small pricing benefit to be weighted towards the first half of the year, given carryover from increases in the second half of last year. We now expect flattish manufacturing costs this year versus the prior year, as we anticipate more favorable freight costs, although the unfavorable impact from cost absorption could act as a partial offset. As I mentioned a quarter ago, given better availability this year, we anticipate shipping a more normal mix of products this year. We anticipate this dynamic may act as a slight headwind to margins. SG&A and R&D expenses are expected to ramp through the remainder of the year as we continue to invest in strategic initiatives aimed at future long-term profitable growth. This will be offset by the benefit of lower short-term incentive compensation. In addition, from a segment perspective, keep in mind that margins in Construction Industries tend to trend lower as the year progresses. Finally, we continue to anticipate restructuring costs of $300 million to $450 million this year, and our expectation for annual effective tax rate, excluding discrete items, is now 22.5%. Now on slide 17, I'll discuss our expectations for the second quarter, starting with the top line. We expect lower sales in the second quarter compared to the prior year, as we anticipate a headwind due to changes in dealer inventory of machines which will impact volumes. We expect dealer inventory of machines to decline this quarter in line with normal seasonal trends, versus the atypical $200 million increase that occurred in the second quarter of 2023. However, we anticipate a continuation of healthy demand across most of our end markets for our products and services, and prices expected to remain positive year-over-year. Following the typical seasonable pattern, we do expect higher sales in the second quarter as compared to the first. By segment compared to the prior year, we anticipate lower sales in Construction Industries as we expect changes in dealer inventory to act as a headwind. Favorable price should that provide a partial offset. We expect lower sales in resource industries versus the prior year, driven by lower volume, partially offset by favorable price. In Energy & Transportation, we anticipate similar sales versus the prior year. On enterprise margins in the second quarter, we expect the adjusted operating profit margin to be similar to the prior year, and lower versus the first quarter, following the typical seasonable pattern. As compared to the prior year, we could expect that price will remain favorable from the continued carryover benefit from increases taken in the second half of 2023. We expect flattish manufacturing costs compared to the prior year, as favorable freight is expected to offset the impacts of unfavorable cost absorption. We also anticipate an increase in SG&A and R&D expenses related to strategic investments, although this will be offset by lower short-term incentive compensation. By segment, in both Construction Industries and Resource Industries, we expect similar margins in the second quarter compared to the prior year, as we expect favorable price to be offset by lower volume. In Energy & Transportation, we expect a higher margin versus the prior year on better price and favorable mix. Unfavorable manufacturing costs and SG&A and R&D spend related to strategic investments are expected to act as a partial offset in this segment. Note that we expect a headwind to enterprise margins and corporate costs in the quarter, where we anticipate unfavorable year-over-year impacts from timing differences. So turning to slide 18, let me summarize. The strong operating performance continued in this quarter, with the adjusted operating profit margin at 22.2%, and record adjusted profit per share of $5.60. We deployed a record $5.1 billion of cash per share repurchases and dividends in the quarter. Our assumptions for the full year remain similar, and we expect to be in the top half of our target ranges for both adjusted operating profit margin and ME&T free cash flow. We continue to execute our strategy for the long-term profitable growth. And with that, we'll take your questions.

Tami Zakaria:

Hi, good morning. Thank you so much.

Tami Zakaria:

Hi. How are you? So, nice margin performance in the quarter, and hence my question is around margins you guided for the second quarter. So if sales are expected to be lower year-over-year, I'm assuming volumes are down too. So what essentially would help margins remain relatively flattish? Is it price? I know you mentioned some factors, but just wanted more color. Is it price cost? Is it some cost-savings initiatives or is it something else that's going on? So, any color there would be helpful.

Operator:

We'll move next to Michael Feniger at Bank of America.

Andrew Bonfield:

Yeah. So overall as we said, really what's happening in Q2 is principally the impact on lower volume will be around the impact of dealer inventory movements, particularly on the machine side. Last year, as I said, we actually had a very atypical build in the second quarter. As you know, the historic trend is always during selling season to see, particularly on the CI side, dealer inventory to decrease. So that was really the main driver. Overall, as we've indicated for the year, we still expect healthy volume in North America in CI. We do have some impact now on Europe. That means we now expect CI STUs to be slightly lower year-over-year. We are seeing that offset though by expected sales growth in energy and transportation, where we're seeing more positivity than we've seen. As far as STUs are concerned, obviously the first quarter was impacted by those, principally the European conditions which we mentioned a moment ago. Overall, we're still very comfortable, but the overall guide we've made for the year, which is sales and revenues, will be broadly flat with 2023.

Jamie Cook:

Hey. Good morning, everyone. Nice quarter. Jim, I guess my question, under your leadership, I think the earnings power of Caterpillar has far exceeded anyone's expectation, and a lot of that was driven by the O&E business model and your focus on profitable growth. At the same time, you've been allocating capital to higher return products right, that's part of the strategy. At the same time, you are talking about doubling, I think you said your large engine capacity to meet demand for data centers and this is, now your lower – at this point it's your lower margin segment. So I guess understanding right now with ME&T, we have investment in AACE and capacity. But like over time, why shouldn't E&T margins structurally be higher than the other two segments, in particular given where construction margins are right now? I'm just wondering if the market under appreciates where E&T margins can go, given the capacity additions you are talking about. Thank you.

Operator:

We'll move next to David Raso at Evercore ISI.

Jim Umpleby:

David, let me answer the last part of your question first. So, in terms of E&T, about 80% of our total CAT backlog is expected to be sold within 12 months, and we don't put orders into the – we don't put things into the backlog unless we have a firm customer order. So we work really closely with our customers, as an example with customers that are looking for large engines for data centers, and we have a sense going out multiple years of what it is they want, but we don't put any of that into the backlog until they give us a firm order. So, it doesn't – our backlog doesn't go out as far as you might think. So I'll start with that and then I'll turn it over to Andrew for the first part of your question.

Operator:

We'll go next to Rob Wertheimer at Melius Research.

Jim Umpleby:

Thank you, Rob. We are very excited about what we view as a secular growth opportunity around data centers, both in terms of increasing base power loads, but also the specific opportunities to serve those data centers. So as you probably know, traditionally we have provided reciprocating generative sets as backup for those data centers. But what you say is very correct. That business is changing, and I believe that we are uniquely positioned, because we have a combination of both gas turbines and research that burn a whole variety of fuels. And so we have had some projects now where we've shipped gas turbines, to provide prime power for data centers, because in some places when data centers want to go into a geographic area, the utility can't handle the load of those, and when in fact there's natural gas available, we've seen situations where a customer will take gas turbines, install those, burn natural gas to produce their own base power for the data centers. In addition to that then, there's also the reciprocating engine gen sets as backup if something were to happen. But typically again, we are seeing a change, you are right. The market's changing, and we're very excited about that opportunity.

Chad Dillard:

Hi. Good morning, guys.

Chad Dillard:

So, good morning. So, my question for you is on E&T. Just trying to understand, where the lead times or what the lead times are, specifically in Power Gen. And then, just like how long it will take to get your capacity expansion online, and just how to think about, just like when you can actually ramp the revenues there.

Andrew Bonfield:

Yeah, and just a quick point to make. Obviously Power Gen is the fastest-growing business today within energy and transportation, just to note. And actually, as a percentage of E&T sales, it has gone up from 25% in the first quarter of last year to 29% this year. So it is an area of exciting opportunity, even before we build the capacity, and obviously an area where there's potential for further growth as well.

Operator:

And we'll move to our next question from Jerry Revich at Goldman Sachs.

Jim Umpleby:

Good morning, Jerry.

Andrew Bonfield:

Yes. So Jerry, as we've indicated, obviously price has been favorable, but we expect the benefit of favorable price to moderate as the year progresses and that obviously holds true for CI as it does for the other segments. And that really will obviously mean that the benefits on margin expansion will become much, much tougher for CI, as particularly as you get into the second half of the year where you won't see that spread. We do see manufacturing costs being broadly flattish, and part of the reason for that is because of the favorability of freight, which is more than offsetting the impact of cost absorption. So overall, we've obviously taken the approach that where we have got the benefit of price, we will obviously be trying to hold that as best as we can obviously. And we've been, as you rightly pointed out, we’ve been pretty disciplined about making sure that we have cut production, like for example in the excavators that you saw in the fourth quarter, where we do see softness or weakness in the market.

Stephen Volkmann:

Great. Good morning, guys. I'm wondering if we could tack back to the dealer inventory commentary. I want to make sure I understand that right, because that seems to be a bit of a focus for the market this morning. I think if I'm not mistaken, that the dealers did build a little more than you expected in the first quarter. I'm curious why that might be. And if you can provide some sense of how much of that total 1.4 kind of has a customer name on it, and I guess the bottom line is, why don't you worry that that's kind of an inventory build that sort of makes things less bullish going forward? Thank you.

Andrew Bonfield:

And just the other bit of granularity which we tried to give and just is about spilling out between machine and dealer inventory and dealer inventory as a whole. Principally because obviously in energy and transportation, it is that most of that inventory as we said previously, and also within resource industries, over 70% of that is backed by firm customer orders. It's not really inventory sitting on a dealer's lot waiting. Often it's a city getting ready for commissioning, and that is part of the reason for that. Overall, as Jim reiterated and just to reiterate, we are comfortably within the range on machine dealer inventory. We do expect for the year that inventory level to be about flat year-over-year. That's our expectation and then planning assumption at the moment.

Mig Dobre:

Yes, thank you. Good morning.

Mig Dobre:

Hi. Maybe we can talk a little bit about resource industries. I guess one of the things that stood out to me was the pretty significant decline in dealer deliveries in this segment, and I'm curious in mining specifically, what's going on there? Are you actually starting to see maybe a pullback in demand from your customers? Is the investment cycle maturing there or is this just sort of a temporary aberration?

Andrew Bonfield:

Yeah, and just to add to that a little bit, just to remind you that the first quarter of 2023 was very strong and actually the highest level of STUs in resource industries for over 10 years at the time. So that was a significant factor. Secondly, as we talked about, there are two product lines, where because of supply chain there was a backlog which was used up principally in 2023, off-highway trucks and also articulated trucks. Just as an FYI, large mining trucks are still growing, which I know is one of the factors that many of you look at. So there was no issue there at all with regards to that.

Operator:

We'll go next to Angel Castillo at Morgan Stanley.

Andrew Bonfield:

Yeah, as I think we've indicated overall, for the full year, we expect CI revenues to be, STUs to be slightly negative for the full year. The first quarter, in January we said we thought they would be about flat for the full year. So that does imply some acceleration through the year in order to get back to that sort of – to be just slightly negative. With regards to trends in April, look we're not going to talk about what's happening. I mean, as is always the case, quarter-on-quarter you see changes, which can relate to commissioning and all sorts of number of factors, but we're comfortable with that full year forecast for CI.

Operator:

Our next question comes from Kristen Owen at Oppenheimer.

Andrew Bonfield:

Yeah. So obviously as you know, we have both a dividend policy as well as a share buyback policy. As far as the dividend is concerned, we have one more year of our high single digits. That's a board decision which will probably be made around June time, and then after that we'll probably come back and look at what the future policy will be. Remember, the objective is to pay out no more than 60% to 65% of free cash flow in a low environment for the dividend. So that will be part of our – that comes into part of the policy and the way we look at that. With regards to intrinsic value, obviously as is always the case, yes, we do take into account intrinsic value, and that decision has been made as part of the longer term ASR, obviously. But remind you that the benefit of the ASR is really around the fact that you are in the market more consistently. We don't try and market time. We are really just trying to be in the market consistently to return that cash to shareholders. Overall, we believe that's the best approach, but we're very comfortable with putting that in place. Audra, we have time for one more question.

Nicole DeBlase:

Yeah, thanks. Good morning, guys. I also wanted to focus on CI. So a lot of discussion obviously about Europe kind of being the problem child this quarter. I guess, are you guys seeing as you kind of progress through the quarter, some signs of stabilization or is there risk that Europe could still get worse? And then I guess also like, with dealer inventories being up and not being the driver, are you concerned about the level of dealer inventories in Europe CI specifically? Thank you.

Jim Umpleby:

All right. Well again, thank you for joining us and we certainly appreciate all your questions. I'd like to just close by thanking our global team for their strong performance in the first quarter, including higher adjusted operating profit margin, record adjusted profit per share and strong EM&T free cash flow. Our strong results continue to reflect the diversity of our end markets, as well as the disciplined execution of our strategy for long term profitable growth. With that, I'll turn it back to Ryan.

Operator:

Thank you. And that does conclude our call. Thank you for joining. You may all now disconnect.

Ryan Fiedler:

Thanks, Abby. Good morning, everyone, and welcome to Caterpillar's fourth quarter of 2023 earnings call. I'm Ryan Fiedler, Vice President of Investor Relations. Joining me today are Jim Umpleby, Chairman and CEO; Andrew Bonfield, Chief Financial Officer; Kyle Epley, Senior Vice President of the Global Finance Services Division; and Rob Rengel, Senior Director of IR. During our call, we'll be discussing the fourth quarter earnings release we issued earlier today. You can find our slides, the news release, and a webcast recap at investors.caterpillar.com under Events and Presentations. The content of this call is protected by US and international copyright law. Any rebroadcast, retransmission, reproduction, or distribution of all or part of this content without Caterpillar's prior written permission is prohibited. Moving to Slide 2. During our call today, we'll make forward-looking statements, which are subject to risks and uncertainties. We'll also make assumptions that could cause our actual results to be different than the information we're sharing with you on this call. Please refer to our recent SEC filings in the forward-looking statements reminder in the news release for details on factors that, individually or in aggregate, could cause our actual results to vary materially from our forecast. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. On today's call we'll also refer to non-GAAP numbers. For a reconciliation of any non-GAAP numbers to the appropriate US GAAP numbers, please see the appendix of our earnings call slides. Now, let's turn the call over to our Chairman and CEO, Jim Umpleby.

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.

Rob Wertheimer:

Thank you. My question [Technical Difficulty] on inventory, kind of at all levels. You had a healthy destock in the quarter. I think your volumes were down around 4%, retail sales up 8%, and so that's nice. I wanted to see how inventory was versus what you expect out of the business at the dealer level at your finished goods level and also at your WIP [raws] (ph), where your own inventories have been elevated. So just -- how do you feel the business is performing at those levels? And then what's the path from here, especially on your own inventory? Thank you.

Andrew Bonfield:

Yeah. Just a couple of things to add. I mean if you look at our days inventory outstanding, Rob, it's running at about 15% to 20% higher than historic levels. So that gives us an opportunity over the next several years to work that down in a way that manages also from a supply base perspective, not to create undue problems for them in their outlook. So we'll continue to look at that. And then just a mention on dealer inventory, particularly within construction dealer inventory is about the middle of the range, the target range we talk about of three to four months. So it's pretty much bang on there. So dealers are holding what probably we would continue to expect them to hold.

Michael Feniger:

Yeah. Thank you for taking my question. You guys just reported a record sales and earnings. There's a view that many of your businesses are operating at peak levels. I'm curious when you look at your overall portfolio, especially maybe on a unit basis versus prior cycles, are there areas and regions where you feel like your business is still not operating at peak levels or record levels? Do you feel it as we go in the back half of this year, if rates come down, financial conditions ease, is there a torque in areas of your business where you feel like the backlog could start to maybe bottom and pick up as those conditions start to get a little bit better through the year? Thank you.

Operator:

And your next question comes from Tami Zakaria, JPMorgan. Your line is open.

Jim Umpleby:

Well, thank you for your question. We've been pleased by the progress we've made. You recall, we started with that 2016 baseline of $14 billion, and we have increased it to $23 billion. Our teams continue to strive to achieve that $28 billion number. And one of the things we said when we laid out the target is we didn't expect it to be in a straight line. We thought it would be relatively back-end loaded. But we continue to invest in our digital capabilities, e-commerce. I talked earlier about CVAs and the other things that we're doing. We're working very closely with our dealers as well. So we do believe that there's an opportunity regardless of industry growth to increase services. And again, we continue to strive to achieve that number. One of the things that we also would notice is STUs were positive as well. And one of the things that impacts, of course, our services sales is dealer buying patterns [around parts] (ph), but we're encouraged by the fact that STUs were positive.

David Raso:

Hi, thank you. First, just a clarification in your answer, if you could. The operating margin guidance, I know you have the sales framework, but just if you can just help us, do you expect your operating margins to be flat, up or down for the year? But my real question is the backlog. I'm just trying to understand the size of the backlog, the relationship it usually has with next year's sales would imply a lot stronger growth than you're forecasting. And I'm just trying to understand that maybe the orders in the quarter were okay. The dealer inventory drag, right, the growth last year, but not growth this year, that's a drag year-over-year. That one in account come closer really to accounting for where the sales would normally be guided for next year with this level of backlog. So I'm just trying to put my head around, with that size backlog, the flat sales, is that a concern that -- again, the orders were good for the quarter, that you're seeing slower orders coming? Just trying to correlate that backlog to only flat sales. Thank you.

Operator:

And your next question comes from Nicole DeBlase with Deutsche Bank. Your line is open.

Jim Umpleby:

Good morning, Nicole.

Jim Umpleby:

Yeah. So as we talked about, I mentioned part of the decline in part sales in Resource Industries was relating to dealer buying patents. We don't include -- obviously, we're talking about dealer inventory, that's machines and engines. It's not actually parts. And what we did see as availability improved as we went through 2023, we did see dealers reduce their inventory a little bit. It's probably more at normalized levels now. Obviously, they'll continue to monitor it. They make their independent decisions. And as we always remind you, it's very complex, with over 150 dealers globally and a large number of parts that they order, but they obviously try and optimize their network. Next year, we do expect a benefit from services revenue growth. Obviously, if we are to achieve our target, we would hope for a little bit of an acceleration versus what we saw in 2023. Obviously, that does depend a little bit on what happens with the dealers and buying patents. And on resources, given the amount of truck utilization, we do expect services revenues to improve as we go through 2024 based on the need for rebuilds, particularly of the large mining trucks. So that's where we are on services.

Mig Dobre:

Yes. Thank you. Thank you for the question. Going back to construction, I'm curious to get your thoughts in terms of how you think about margin here. And it sounds like you're guiding Q1 flat margin year-over-year, which would be tremendous given the comp there. Are margins sustainable at this level? Is there any insight you can give us as to how you see the year progressing beyond Q1?

Operator:

And your next question comes from Jerry Revich with Goldman Sachs. Your line is open.

Jim Umpleby:

Good morning, Jerry.

Jerry Revich:

Jim, Andrew, I'm wondering if you could just say more about the increase to the free cash flow guidance, a bigger increase there than on the margin framework. And we're a couple of years away, where you folks in 2020 were below the $5 billion number. So can you just talk about what's playing out better than you folks expected to drive the much stronger outlook for free cash flow conversion? And obviously, we're seeing a little performance here as well, but I'm wondering if you could just expand on the comments on the confidence through the cycle?

Andrew Bonfield:

And that is part of the reason why we've upped the bottom end of the range because we are now more confident that, that OPACC will flow through to the bottom line. Obviously, with margins, the issue you have there is in a period of time where revenues decline, margins become an impact of a function of what happens from a gross margin perspective. Actually on free cash flow, we can generate more free cash flow by actually using up some of our working capital and bringing that back through. And that's one of the things we expect as well and if that happens.

Operator:

And your next question comes from Angel Castillo with Morgan Stanley. Your line is open.

Andrew Bonfield:

Yeah. So I mean, one of the things you will have seen over the last couple of years is the improvement in gross margins. That obviously -- effectively with the progressive margin range, what happens obviously is, the leverage is what benefits us as we go through, which gives us more confidence now that there's more opportunity from a leverage perspective to drive the top end of the range. But that obviously means on a declining volume basis, there's more pressure. So that really was the reason why we kept the bottom end of the range as it was. Interestingly, if you go back to the previous ranges, this is within -- the top end of the range now is virtually within a very, very marginal difference to the old margin target ranges that we had before.

Chad Dillard:

Hi, good morning, guys.

Andrew Bonfield:

Good morning, Chad.

Andrew Bonfield:

Yeah. So I think what we guided to is that we expect price to exceed manufacturing costs for the full year. We expect price to be positive in the first half of the year, more positive in the first half of the year because of carryover pricing. Obviously, there will be some other factors that go through there. Geographic mix, for example, was positive this year. That may not be as positive as we go through the second part of the year. So those are the sort of mix things that can happen. At this stage, we're not giving you a prediction -- a firm prediction. We know what we think overall for the full year, but most of that price benefit will come through in the first half.

Steve Volkmann:

Hey, good morning, everybody. Thanks for fitting me in.

Steve Volkmann:

Jim, I wanted to go back, if I could, to a response to one of the earlier questions where you talked about supply chain has kind of improved a little bit, but it's still causing productivity issues. And I guess I'm trying to think that through as we go forward, if supply chain continues to normalize, is there any reason to think we wouldn't get that productivity back?

Operator:

And your next question comes from Kristen Owen with Oppenheimer. Your line is open.

Jim Umpleby:

Yeah. Again, most of the capital -- the investments that we're making around large engines, around parts, and new engines, that's really what the focus of it is.

Ryan Fiedler:

We have time for one more question.

Stanley Elliott:

Hey, good morning everyone. Thank you very much for fitting me in and congratulations. And can you talk a little bit more about the free cash flow? I mean, you got $1 billion to $2 billion more additional that you're looking at and targeting. You've done a very nice job of increasing the dividend on a steady basis. Should we think of this as accelerated repurchase activity into '24? Is there something on the M&A front? Any color there would be greatly helpful. Thank you.

Jim Umpleby:

Okay. With that, I just would like to thank everyone for joining the call. I appreciate all your questions. I'd like to just close by thanking our global team for another great quarter and just an exceptional record year. As we discussed, we're increasing the top end of our target range for adjusted operating profit margins, and we've raised our target range for ME&T free cash flow. And this reflects continuing healthy customer demand as well as our strong operating performance. And we remain focused on executing our strategy and continue to invest for long-term profitable growth. Again, I appreciate you joining us. Stay safe.

Operator:

Thank you. Ladies and gentlemen, that concludes our call. We thank you for joining. You may now disconnect.

Ryan Fiedler:

Thanks, Abby. Good morning, everyone, and welcome to Caterpillar's third quarter of 2023 earnings call. I'm Ryan Fiedler, Vice President of Investor Relations. Joining me today are Jim Umpleby, Chairman and CEO; Andrew Bonfield, Chief Financial Officer; Kyle Epley, Senior Vice President of the Global Finance Services Division; and Rob Rengel, Senior IR Manager. During our call, we'll be discussing the third quarter earnings release we issued earlier today. You can find our slides, the news release, and a webcast recap at investors.caterpillar.com under Events and Presentations. The content of this call is protected by US and international copyright law. Any rebroadcast, retransmission, reproduction, or distribution of all or part of this content without Caterpillar's prior written permission is prohibited. Moving to Slide 2. During our call today, we'll make forward-looking statements, which are subject to risks and uncertainties. We'll also make assumptions that could cause our actual results to be different than the information we're sharing with you on this call. Please refer to our recent SEC filings, and the forward-looking statements reminder in the news release for details on factors that individually, or in aggregate, could cause our actual results to vary materially from our forecast. A detailed discussion of our many factors that we believe may have a material effect on our business, on an ongoing basis, is contained in our SEC filings. On today's call, we'll also refer to non-GAAP numbers. For a reconciliation of any non-GAAP numbers to the appropriate US GAAP numbers, please see the appendix of the earnings call slides. Now, let's turn to Slide 3, and turn the call over to our Chairman and CEO, Jim Umpleby.

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.

Michael Feniger:

Yeah, thank you for taking my question. Just based on where the backlog sits today, you discussed the easing supply conditions impacting lead times, orders. As that normalizes, do you expect the backlog to consolidate at these levels and then move higher? You mentioned some capital discipline with customers. Just [Technical Difficulty] Jim with where commodity prices are for oil, iron ore, copper, is that enough to support growth in 2024? Thank you.

Andrew Bonfield:

Yeah, let me just give you some numbers to add to that. I mean, if you look at the backlog as a percentage of trailing 12-month revenues in the period of 2017, it was 37%, in 2018, it was 32%. Currently today, it's around 44%. So, backlog still is elevated based on historic trends, and remind you also that services revenues now are a higher proportion of our total revenue base as well.

Tami Zakaria:

Hi, good morning. Thank you so much. So, staying on backlog…

Tami Zakaria:

Thank you. Staying on backlog, I think orders were down in the third quarter. Have you seen any improvement in order trends quarter-to-date, or if orders continue to be down, what would support a good year in 2024, like you mentioned in your call?

Andrew Bonfield:

And, Tami, just to add, again, a little bit more. Remind you that specifically in the third quarter, there were two factors which did impact order rates, one which is, obviously, as we've talked about the Cat engine changeover for a number of quarters, that happening in the fourth quarter. If you think about when dealers will place orders for BCP machines, they would tend to impact us in the third quarter, which is why we saw those order rates decline. Similarly, we also saw some excavator orders decline in anticipation of dealers reducing their inventory levels as well. So overall, those are specific factors in the third quarter results, which actually moderated the overall order rates as well.

Operator:

And we'll take our next question from Rob Wertheimer with Melius Research. Your line is open.

Jim Umpleby:

You bet. And Rob, we have talked in the past about the fact that we are very bullish about our autonomous solution. We do believe we have the best solution in the industry because our trucks move faster, and we're able to allow our customers to produce more commodity in a 24-hour period. We continue to invest in our autonomous capabilities, and continue to add more value, and that's really resulting in us receiving the orders like the ones that -- the one that was announced this morning. Certainly, we're always striving to add more value that helps, again, it's not just about cost competition, it's providing more value to customers to make them more successful. We had talked about the fact that our customers in mining are displaying capital discipline. That's not surprising. Quotation activity is quite high, and number of parked trucks is low. So again, if one thinks about the energy transition, combines that with our autonomous solution, we do feel good about Resource Industries, particularly in mining moving forward.

David Raso:

Hi, thank you for the time. The question is on the fourth quarter margins. I know the framework you historically work within for providing margin guidance, but I must say the fourth quarter, I mean, it's implying a range of EPS that you can drive a truck through. So, I'm just trying to get a little better sense of -- I think I heard you say the margins in CI and RI slightly below the third quarter, and E&T similar. But then when you give that range of [whatever] (ph) you think your sales are, I mean, we have a rough idea of what you're thinking for sales given the fourth quarter guide. I'm just trying to get a sense of margins year-over-year at least appear that they'll be up. Is that a fair statement? But the slight on RI and CI almost make it seem like it's down only 100 bps or 150 bps sequentially. So, I apologize for the granularity, but it's just a wide range. I just want to make sure we understand. Thank you.

Operator:

We will take our next question from Steven Fisher with UBS. Your line is open.

Jim Umpleby:

Well, thank you, Steven. And as we mentioned, we do expect pricing to moderate just based on lapping the price increase that -- increases that we had last year. We're continually focused on having a lower cost structure. We're looking for ways to reduce structural cost. A lot of things there back office now being performed in lower-cost countries, more engineering done in lower-cost countries, looking at ways to become more efficient. I also mentioned the fact that we -- supply chain has improved, but we still have some challenges, and some surprises there that create some incremental cost due to inefficiencies based on having shortages. So, I do believe there's still an opportunity for us moving forward to operate more efficiently in our manufacturing operations, and also to find ways to reduce structural costs. We really try to make that a way of life going forward as always finding ways to reduce structural costs.

Tim Thein:

Hi. Good morning. Thanks for the time. Yeah, maybe just continuing on that thread there in terms of pricing, and just thinking about kind of the outlook into '24, I'm interested from a competitive dynamic, if you look historically, especially focused in CI in a market with a lot of global competitors, and just looking at the dollar-yen relationship where it is at near decade-high levels, just maybe talk about what you're seeing -- what your dealers are seeing from a competitive dynamics, and your thoughts into '24 in terms, and how that interplays with pricing. Thank you.

Operator:

And we will take our next question from Nicole DeBlase with Deutsche Bank. Your line is open.

Jim Umpleby:

Good morning, Nicole.

Nicole DeBlase:

Just on the parts demand, noticed that you guys caught out a decline in aftermarket parts in resource as a driver of volume decline there. If you could talk a little bit about that? And then any color on parts demand in construction or E&T? Thank you.

Jim Umpleby:

And dealer sales to customers were up in the quarter.

Operator:

And we will take our next question from Chad Dillard with Bernstein. Your line is open.

Jim Umpleby:

Hi, Chad.

Jim Umpleby:

Yeah, we do see rental as a growth opportunity, and we're working with our dealers to improve our rental business. We set up a new division in last year or so with a senior -- experienced Senior Vice President leading that division to help increase rental. The rental industry is, in fact, growing. And so we've been refreshing our rental growth strategy and working with our dealers to allow them to more sustainably grow revenue in rental. So again, it's -- we do think it's an opportunity. It's a good one for us to be focused on.

Kristen Owen:

Great, good morning. Thank you for the question.

Kristen Owen:

I was wondering if you could provide a little bit more commentary on the manufacturing cost increase in the quarter, just how to think about that going forward. I mean, this was -- this is the easiest comparison of the year, and in a more favorable cost environment. So, just trying to think about how much of the manufacturing cost increase was maybe related to timing of orders versus we're still seeing some inflation in the supply chain.

Operator:

And we will take our next question from Mig Dobre with Baird. Your line is open.

Andrew Bonfield:

Yeah. So, Mig, a couple of comments. One, which we tried to explain in the last quarter. We -- dealer inventory, we give you one number for 150 independent dealers with a very large number of products underneath that and underpinning it. So it [isn’t] (ph) very complex. Secondly, CI is a slightly different model from RI and E&T. E&T and RI represent about 40% of the increase in dealer inventory. That's really a function of commissioning. Over 70% of those orders are for firm customer orders. They're not sitting on a lot, waiting for somebody to come in and buy them. So there, effectively, it's less -- it's more difficult to predict because it depends on the commissioning time. And obviously, it's also more difficult to predict because of the nature of the business and that -- how they are moved through, for example, a large mining truck, which is disassembled and then reassembled on site and the revenue recognition coming from the dealer as part of that. So it's a very different part of the business. That's why effectively, we almost can't predict that with much certainty. It is much more difficult to predict. With regards to CI, we've always said probably normal range is between three and four months of inventory. At the moment, we're within that range. Dealers will have within excavator inventory, they're slightly at the top end of that range. They want to bring them down. We agree with that. We think that's a good thing. That will reduce, obviously, inventories as we move in. Within, as we've said with BCP and also with earthmoving, particularly in North America, which are the largest markets for those products, we are at the low end of the range, and dealers could actually want to hold a little bit more. So overall, net-net, we do expect a decline in the fourth quarter. It's going to have an impact, possibly. Will there be some impact in the first quarter next year? Probably not. Just to remind you, we normally see a dealer inventory build in the first quarter of the year getting ahead of ready for summer selling season. So it may not be quite as big as normal. But overall, there are some seasonality parts of our business. With regards to the backlog, backlog is completely different. Remember, for CI, backlog is a function of dealer orders. For E&T, it is a function of -- and RI, it's much more of a function of firm customer orders underpinning those. Within -- so as we think about dealers, how much inventory they're holding, as they are able to get availability better for machines, they don't need to order as much in advance. So one of the things we've done, as you know, through our S&OP process is trying to moderate overorders. And we think we're doing a better job of trying to avoid some of the swings which cause production swings as a result of dealer inventory buying patents. Overall, just to remind you, finally, we still expect sales to users to grow in the fourth quarter of this year. We're still expecting end demand to remain strong, and that sets us up into 2024 as we move forward.

Mike Shlisky:

Yes, hi, good morning.

Mike Shlisky:

I wanted to ask about interest rates real quick. Thank you, yes, hello. On interest rates, you kind of touched on it, but maybe a little more color. How have high interest rates or higher interest rates affected the dealership inventory desire and their ability to actually pull and carry inventory? And secondly, maybe, how is interest rates -- have they affected any end user appetite to buy an equipment?

Operator:

We will take our next question from Jerry Revich with Goldman Sachs. Your line is open.

Jim Umpleby:

Hi, Jerry.

Jim Umpleby:

Yeah. So we have been working hard to bring lead times down, as I mentioned. We do feel good about where we are in that process. And so we had over the last couple of years, some real challenges around availability, but it has gotten better in most areas. Probably the area that's still a challenge is large engines. But in mining we do feel good about where we are in terms of the progress we've made around lead times.

Ryan Fiedler:

Abby, we have time for one more question.

Steve Volkmann:

Great. Good morning, everybody. Thanks for fitting me in. I just wanted to go back to rental, if I could. And I'm curious, Jim, would you characterize the Cat dealer rental fleets in terms of size? Do they want more equipment? And can you also just comment on what you think the age would be in that Cat rental fleet?

Jim Umpleby:

All right. Well, thank you. That was our last question. Thanks all for joining us, and we always appreciate your questions. I'd like to just close by thanking our team for another great quarter. As I mentioned earlier, due to our strong results in the third quarter, we now do believe that 2023 will be even better than we had previously anticipated during our last call, and that includes higher full year expectations for adjusted operating profit margin and ME&T free cash flow. And that reflects continuing healthy customer demand and our strong operating performance. And we're continuing to execute our strategy and investor long-term profitable growth. And we look forward to updating you again in January.

Operator:

Thank you. Ladies and gentlemen, this concludes today's call. We thank you for your participation. You may all disconnect.

Ryan Fiedler:

Thanks, Abby, and good morning, everyone, and welcome to Caterpillar's second quarter of 2023 earnings call. I'm Ryan Fiedler, Vice President of Investor Relations. Joining me today are Jim Umpleby, Chairman and CEO; Andrew Bonfield, Chief Financial Officer; Kyle Epley, Senior Vice President of the Global Finance Services Division; and Rob Rengel, Senior IR Manager. During our call, we'll be discussing the second quarter earnings release we issued earlier today. You can find our slides, the news release and a webcast recap at investors.caterpillar.com under Events and Presentations. The content of this call is protected by U.S. and international copyright law. Any rebroadcast, retransmission, reproduction or distribution of all or part of this content without Caterpillar's prior written permission is prohibited. Moving to Slide 2. During our call today, we'll make forward-looking statements, which are subject to risks and uncertainties. We'll also make assumptions that could cause our actual results to be different than the information we're sharing with you on this call. Please refer to our recent SEC filings and the forward-looking statements reminder in the news release for details on factors that individually or in aggregate, could cause our actual results to vary materially from our forecast. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. On today's call, we'll also refer to non-GAAP numbers. For a reconciliation of any non-GAAP numbers to the appropriate U.S. GAAP numbers, please see the appendix of the earnings call slides. Now let's turn to Slide 3 and turn the call over to our Chairman and CEO, Jim Umpleby.

Andrew Bonfield:

Thank you, Jim, and good morning, everyone. I'll begin with commentary on the second quarter results, including the performance of our business segments. Then I'll discuss the balance sheet and free cash flow before concluding with our assumptions for the remainder of the year, including color on the third quarter. Beginning on Slide 8. Our team delivered a very strong second quarter as overall results exceeded our expectations on strong operating performance. We saw a healthy top-line growth, improved operating margins and robust ME&T free cash flow. For the year, we now expect our adjusted operating profit margin to be close to the top of the targeted range at our anticipated sales level. We also expect ME&T free cash flow to be around the top of our $4 billion to $8 billion target range. To summarize the results, sales and revenues increased by 22% or $3.1 billion to $17.3 billion. Sales increase versus the prior year was due to higher sales volume and price realization. Operating profit increased by 88% or $1.7 billion to $3.7 billion. The adjusted operating profit margin was 21.3%, an increase of 750 basis points versus the prior year. Adjusted profit per share increased by 75% to $5.55 in the second quarter compared to $3.18 last year. Profit per share was $5.67 in the second quarter of this year. This included a discrete deferred tax benefit of $0.17 per share, while restructuring costs were $0.05 per share, flat compared to the prior year. We continue to expect restructuring expenses of about $700 million for the full-year. Other income of $127 million in the quarter was lower than the second quarter of 2022 by $133 million. The year-over-year decline was primarily driven by an unfavorable currency impact related to ME&T balance sheet translation and a recurring increase in quarterly pension expense of approximately $80 million, which we initially spoke to you about in January. Higher investment and interest income acted as a partial offset. The provision for income tax in the second quarter, excluding discrete items reflected a global annual effective tax rate of approximately 23%, which remains our expectation for the full-year. Moving on to Slide 9. The 22% increase in the top-line versus the prior year was due to higher sales volume and price. Volume improved as sales to users increased by 16% and from changes in dealer inventory. Sales for the quarter were higher than we had anticipated, mostly due to volume. The volume outperformance reflected a dealer inventory increase, which was primarily due to our stronger than expected shipments in Energy & Transportation, particularly in power generation, which is in line with strong data center demand. Price realization was in line with our expectations for the quarter. As I mentioned, sales to users grew by 16% in the quarter. As Jim has discussed, demand remains healthy across most end markets for all our products and services and is supported by a healthy order backlog. Moving to Slide 10. Second quarter operating profit increased by 88%, while adjusted operating profit increased by 87% to $3.7 billion. Year-over-year favorable price realization and higher sales volume were partially offset by higher manufacturing costs, which largely reflected higher material costs. An increase in SG&A and R&D expenses included higher strategic investment spend. The adjusted operating profit margin of 21.3% was better than we had anticipated. Volume exceeded our expectations, which supported the margin outperformance. In addition, manufacturing costs increased less than we expected due to lower freight costs and a lower than anticipated impact from cost absorption. SG&A and R&D expenses were about in line. Moving to Slide 11. I'll review the segment performance. Construction Industries sales increased by 19% in the second quarter to $7.2 billion due to price realization and higher sales volume. By region, sales in North America rose by 32% due to higher sales volume and price realization. Stronger demand and supply chain improvements enabled stronger than expected shipments in North America. This supported stronger sales of equipment to end users and some delivery stocking in what remains our most constrained region. Sales in Latin America decreased by 11%, primarily due to lower sales volume, partially offset by price realization. In EAME, sales increased by 20%, primarily the result of higher sales volume and price realization. Sales in Asia/Pacific were about flat. Second quarter profit for Construction Industries increased by 82% versus the prior year to $1.8 billion. The increase was mainly due to price realization and higher sales volume. The segment's operating margin of 25.2% was an increase of 880 basis points versus last year. Margin exceeded our expectations, largely due to better than expected volume of freight costs, which were lower than we had anticipated. Turning to Slide 12. Resource Industries sales grew by 20% in the second quarter to $3.6 billion. The increase was primarily due to price realization and higher sales volume. Volume increased due to higher sales of equipment to end users. Although aftermarket sales volumes were lower, dealer sales to customers for services remained positive. Second quarter profit for Resource Industries increased by 108% versus the prior year to $740 million, mainly due to price realization and higher sales volume. This was partially offset by unfavorable manufacturing costs, largely material costs. The segment's operating margin of 20.8% was an increase of 880 basis points versus last year. The segment's margin was better than we had expected, primarily due to favorable volume, timing of SG&A and R&D spend and lower than anticipated freight costs. Now on Slide 13. Energy & Transportation sales increased by 27% in the second quarter to $7.2 billion. Sales were up double-digits across all applications. Oil and gas sales increased by 43%, power generation sales increased by 39%, industrial sales rose by 18% and transportation sales increased by 12%. Second quarter profit for Energy & Transportation increased by 93% versus the prior year to $1.3 billion. The increase was mainly due to higher sales volume and price realization, partially offset by unfavorable manufacturing costs and higher SG&A and R&D expenses. The segment's operating margin of 17.6% was an increase of 600 basis points versus last year. The margin was generally in line with our expectations. Moving to Slide 14. Financial Products revenue increased by 16% to $923 million, primarily due to higher average financing rates across all regions. Segment profit increased by 11% to $240 million. The increase was mainly due to a lower provision for credit losses at Cat Financial, partially offset by an increase in SG&A expense. Business activity remains strong, and our portfolio continues to perform well. Past dues in the quarter were 2.15%, a 4 basis points improvement compared to the second quarter of 2022. This is the lowest second quarter past dues percentage since 2007. Retail new business volume performed well, increasing versus the prior year and the first quarter. In addition, we continue to see strong demand for used equipment. Now on Slide 15. Our ME&T free cash flow generation was again robust as we generated $2.6 billion in the quarter. This was an increase of $1.5 billion compared to the prior year. With approximately $4 billion generated in the first half, we now expect ME&T free cash flow to be around the top of our $4 billion to $8 billion target range for the full-year. CapEx in the second quarter was about $300 million, and we still expect to spend around $1.5 billion for the full-year. As Jim mentioned, we returned about $2 billion through share repurchases and dividends in the second quarter. Our balance sheet remains strong. We have ample liquidity with an enterprise cash balance of $7.4 billion, and we also hold an additional $2 billion in slightly longer-dated liquid marketable securities to improve yields on that cash. Now turning to Slide 16. I will share some high level assumptions for the second half and the third quarter. In the second half of 2023, we expect higher total sales and revenues as compared to the second half of last year. We anticipate both sales to users and price realization will be positive in the second half. Keep in mind that on a comparative basis, we start to lap the stronger price we saw from the third quarter onwards last year. Caterpillar sales will be impacted by changes in dealer inventories as dealers increased their inventories in the second half of last year, which is not typical, versus our expectation of a more typical reduction in the second half of 2023. I want to spend just a few moments talking about dealer inventories. Dealers are independent businesses, and they make their own decisions around the level of inventory they hold. We obviously work closely with them because this impacts our production levels. As Jim mentioned, we are very comfortable with the levels of inventory that dealers are holding. We talk about dealer inventory in aggregate. This is difficult to predict with certainty as it arises from three different business segments, over 150 dealers and hundreds of different products. In Resource Industries and Energy & Transportation, dealer inventory is mainly a function of the commissioning pipeline. Keep in mind that over 70% of dealer inventory in these segments is backed by firm customer orders. For Construction Industries, dealer inventory is principally a function of end user demand and availability from the factory. In Construction Industries, dealers typically increase inventories during the first half of the year. Around 60% of the $2 billion increase during the first half of this year was from products in this segment. The remaining 40% is in Resource Industries and Energy & Transportation. For Resource Industries and Energy Transportation, we currently anticipate a slight reduction in levels in the second-half, but this is dependent on commissioning. In Construction Industries, dealers are currently holding around the midpoint of the typical three to four months range. Some dealers would like to increase inventories of certain products, such as BCP and earth moving due to strong customer demand. Conversely, some dealers would like to reduce the levels of excavated inventory because of high availability. In addition, we are scheduled to replace third-party engines with Cat engines and certain products, which will impact production in these products during the second half. Our current planning assumption for the Construction Industries is that dealers will reduce their overall levels in inventory in the second half of 2023 with a principal focus on excavators. Overall, at the enterprise level, we currently expect dealer inventory should be slightly higher at the end of 2023 versus last year. Moving on. On this slide, we provide our adjusted profit margins target charge to assist you in your modeling process. Based on our current planning assumptions, we anticipate full-year adjusted operating profit margin to be close to the top of that 300 basis points target range at our expected sales level. Your expectation for total enterprise sales this year will inform you where on the curve margins should finish for the year. Specific to the second half, we anticipate adjusted operating profit margins in the remaining quarters of the year will be above the year ago levels, although they will be lower than the levels we saw in the first two quarters of this year. As compared to the first half, we anticipate a margin headwind from cost absorption in the second half. We do not expect to build our inventory as we did in the first half and anticipate that there will be some inventory reduction if we continue to see sustained supply chain improvement. In addition, spend related to the strategic growth initiatives should continue to ramp. Price realization should remain positive that the magnitude of the favorability versus the prior year is expected to be lower in the second half as we lap the more favorable pricing trends from last year. Therefore, the increases in margins that we have occurred -- that have occurred from price outpacing manufacturing cost inflation should moderate in the second half of this year. Now let's move on to our assumptions that are specific to the third quarter. We anticipate third quarter sales to be higher than the third quarter of 2022, but to exhibit the typical sequential decline when compared to the second quarter of 2023. In Construction Industries, as is our normal seasonal end, we expect lower sales compared to the second quarter. In Resource Industries, which can be lumpy, we anticipate slightly lower sales compared to the second quarter. We expect sales in Energy & Transportation will increase slightly compared to the second quarter. Specific to third quarter margins versus the prior year, adjusted operating profit margins at the enterprise level and segment margins should be stronger. However, we do expect lower enterprise adjusted operating profit margins in the third quarter compared to the second quarter of this year on lower volume and impacts from cost absorption. We also anticipate investment spend will ramp across our primary segments as we continue to accelerate our strategic investments in area like autonomy, alternative fuels, connectivity and digital and electrification. At the segment level, for Construction Industries, we expect a lower margin compared to the second quarter as is typical. This is largely due to lower quarter-on-quarter volume, increased investment in strategic initiatives and slightly higher manufacturing costs, including a headwind from cost absorption. Favorable price realization will act as a partial offset. We also anticipate lower third quarter margins in Resource Industries compared to the second quarter, primarily due to lower volume quarter-on-quarter. Conversely, we expect third quarter margins in Energy & Transportation will be slightly higher compared to the second quarter on higher volume and stronger price realization, partially offset by higher manufacturing costs and spend relating to strategic initiatives. Now turning to Slide 13, let me summarize. We generated strong adjusted operating profit margin with a 750 basis point increase to 21.3%. We now expect to be close to the top of the targeted range for adjusted operating margin -- profit margin for the full-year based on our expected sales levels. ME&T free cash flow generation was robust at $2.6 billion in the quarter. We returned $2 billion to shareholders through share repurchases and dividends. We now expect ME&T free cash flow to be around the top of our $4 billion to $8 billion range for the full-year. Lastly, we continue to execute our strategy for long-term profitable growth. And with that, we'll now take your questions.

Jamie Cook:

Hi, good morning. And congrats on a nice quarter.

Andrew Bonfield:

Thanks, Jamie. Good morning.

James Umpleby:

Well, thanks, Jamie. And as we mentioned in our prepared remarks, we expect our operating profit margin -- adjusted operating profit margin to be close to the top of the targeted range for the year. We will look at our ranges at the end of the year and make an assessment as to what makes sense when moving forward from there. As we look forward to next year, and you mentioned some of the dynamics that are going on, we're closely monitoring economic conditions, but we do feel good about the business. But as I'm sure you know, we're not going to make a '24 prediction at this point.

David Raso:

Hi, thank you for the time. I'm just curious, the backlog was surprising to me, how strong it was. And I'm just curious, any thoughts around the backlog you can help us with in your framework in the guide for this year on how it moves from here sequentially? Anything unique in the backlog about what percent of it ships in the next 12 months versus normal? Just trying to get a handle on that. And if you could give any early color around pricing for '24 with the base order management program opening up this month. Just trying to get a sense of how you're thinking about pricing for '24? Thank you.

Operator:

And your next question comes from the line of Michael Feniger with Bank of America. Your line is open.

Andrew Bonfield:

Yes. So at that time, Michael, and thanks for the question, obviously, we were in a situation where actually demand was reducing when we did see those inventory reductions from dealers. And what that did mean, obviously, was the production levels were declining much more rapidly, which impacted overall, both leverage as well as absorption. As we look it out over this period of time, we are still seeing healthy demand as we've indicated. We actually still expect positive sales to users in the second half of the year. What that does mean is when we are making modest inventory adjustments and dealers are making modest inventory adjustments, we are able to absorb that a little bit better than we have done historically. The whole point about all of this is, just to remind everybody, we're around the midpoint of the range. We are actually being proactive with our dealers, particularly around things like excavators, where there's a little bit better availability to actually help them reduce inventory at a time when actually demand remains very strong out there in the market.

Andrew Bonfield:

Yes. So if you actually take the view that we expect retail sales to continue to grow in the second half, we're not giving a prediction as to whether they'll accelerate or decelerate. That's all we're going to be saying about that. But just a point is actually, with a deal inventory reduction and with actually increased retail sales, the levels of inventory that actually dealers hold on a month basis actually would decline by the end of the year. That's how the math works.

Operator:

And your next question comes from the line of Rob Wertheimer with Melius Research. Your line is open.

James Umpleby:

Good morning, Rob. Thanks for your question. So certainly, we are still seeing supply chain challenges. As I mentioned earlier, there is an overall improvement but it only takes one part to prevent us from shipping a machine or engine. And so we're still dealing with supply chain constraints around large engines, which impact both E&T and machines. And we also have some issues with things like semiconductors for displays that are impacting other machines as well. So to answer your question, our inventory, quite frankly, is a bit higher than I would like. And I do expect over time, as supply chain conditions improve, that we will be able to be more lean and improve our turns. So the good news is that even with our factory is not running as lean as we would like and having a bit more inventory internally than we would like, we still of course, produced very strong cash in the quarter. So I won't quantify how much cash could come out of inventory. But certainly, if in fact, we were -- when we get back to pre-pandemic levels in the supply chain, we should be able to free up some additional cash.

James Umpleby:

Thanks, Rob. And certainly, I'm very proud of the team and the strong performance that we're producing. We -- as you know, we put out a new strategy in 2017, and we asked people to have faith in our ability to produce higher operating profit margins and higher and more consistent free cash flow, and I'm really pleased that the team has been able to achieve that. We always have areas that we can do better. I mean, I talked about the fact that we're not as lean as I would like us to be in our manufacturing operations. We're doing a good job growing services, but I always want to grow it faster. So there's always things we can do a better job. But again, just I'm very proud of the team and the fact that we have been able to meet the targets that we set out to our investors a few years ago.

Operator:

Your next question comes from the line of Tami Zakaria with JPMorgan. Your line is open.

Andrew Bonfield:

Yes. So there are a couple of factors. Obviously, price does have some impact overall. And that was probably the major impact on the increase for the quarter. Obviously, volumes fluctuate by quarter by quarter and depend on availability. But overall, we're pleased that the backlog is holding at healthy levels.

Tami Zakaria:

Got it. If I can ask a quick follow-up, for the back half, is it fair to assume price realization down to let's say, mid- to high single-digit growth and do you have any incremental pricing planned for later this year?

Operator:

Thank you. And we will move to our next question from Nicole DeBlase with Deutsche Bank. Your line is open.

James Umpleby:

Good morning, Nicole.

Nicole DeBlase:

Just on the retail sales trends this quarter, there was a deterioration across like both of the machines businesses in EAME. Can you just talk about what you're seeing from that region? I think there have been some indications of a little bit of slowing in Europe. So would love to hear what's capturing on the ground. Thanks.

Operator:

[Operator Instructions]. And we will move to our next question from the line of Steve Volkmann with Jefferies. Your line is open.

Stephen Volkmann:

Good morning guys. Thanks for taking the question. I wanted to just ask a little bit about productivity because I guess I'm hearing you say that supply chain is improving, but there's still issues. Are there still kind of productivity headwinds or penalties that you're paying in the factories because the supply chain is not yet as smooth as we'd like it to be? And obviously, I'm trying to think about whether there's some margin opportunity when supply chains -- when and if supply chains are sort of normal again.

Stephen Volkmann:

Thank you.

Timothy Thein:

Thanks. Good morning. Just a question on parts -- yes, just on parts. I guess we can broaden it to Cat across the board. But specifically, I was interested in the comment on RI for down volumes. Is that just maybe a function of kind of prioritizing whole goods just in light of the constrained availability? Or is that -- I would imagine there's notch by way of destocking going on with the dealer. So maybe just any more comments you have just on that comment on parts volumes in RI? Thanks.

Operator:

And your next question comes from the line of Chad Dillard with Bernstein. Your line is open.

Chad Dillard:

Hi, good morning guys. How are you? So I wanted to focus mainly on Construction Industries. And I just wanted to get a better sense of -- for your orders that came in the quarter, can you just give us a rough breakdown between retail versus stock? And then look, as you're thinking about like inventory shift, you do that really helpful stat about 70% is retail for E&T and Resource Industries. Could you do the same for Construction Industries?

Chad Dillard:

Great, thank you.

Steven Fisher:

Thanks. Good morning. Wonder if you could talk a little bit more about the drivers of the broad oil and gas segment. Where do you think we are in the kind of the rebuild cycle of equipment there? To what extent do you need rig counts to rebound to keep the current level of revenue sustained? Or are there really other drivers with this segment to be aware of? It was obviously a very strong acceleration of sales to users. So just kind of curious for color on the drivers and the longevity of the strong trend in the segment.

Steven Fisher:

Thank you very much.

Kristen Owen:

Great, thank you for taking the questions. I wanted to come back to a question on pricing. First, for the second quarter, if you can help us understand what's supporting the strength there. I think that was a little bit ahead of where we were expecting price to be. Is that a function of mix or just the better than expected end user demand? And then as we think about that stepping down through the back half of the year, to get to that single-digit number that you outlined on a previous answer, just how we should think about the cadence of that stepping down throughout the remainder of the year? Thank you.

Andrew Bonfield:

And just, Kristen, just to add on. Just if you recall last year, price continues to improve from the third to the fourth quarter. So you probably should see the reverse of that this year, which will -- price will be slightly stronger than the third versus the fourth.

Operator:

And your next question comes from the line of Mig Dobre with Baird. Your line is open.

James Umpleby:

Good morning, Mig.

Andrew Bonfield:

Yes. So first of all on this, obviously, production level, as we've indicated from beginning of the year, last year, we did see, if you remember, production was rising throughout the whole year as we went through the year as the supply chain started to improve. That, particularly in construction, will be slightly different this year. And that obviously, we will see some headwind as we do see some dealer inventory reduction in the second half. We are already making production adjustments as we move on. That's part of the business. We do that day in, day out. And those will continue, and there will be some impact in the second half of the year. But overall, we still expect positive revenues through that period of time for Caterpillar as a whole. Talking about manufacturing costs. Yes, manufacturing costs will decrease, but obviously price benefit will reduce as well. So the net of the two will mean we won't see quite that margin improvement that we did see as we went through the last four quarters. So yes, we still expect price to offset manufacturing costs in the second half of the year, but they won't that will reduce so will price as well. So no real benefits to margins as we get through the remainder of the year.

Mircea Dobre:

Thank you.

Michael Shlisky:

Yes, hi. Good morning and thanks for taking my questions.

Michael Shlisky:

Good morning. So historically, prior to the pandemic, your operating margins in the fourth quarter were usually a bit of a step downward compared to the third quarter. That's mainly construction and resource. I think it got a little off better than the last couple of years, obviously, for a few reasons. But I was wondering if you could tell us whether you will be back to that sort of more normal seasonality on margins here in the second half of this year or if operationally, these have kind of changed permanently here?

Michael Shlisky:

Thank you.

Matthew Elkott:

Good morning. Kind of a higher-level question on nonresidential construction. Good to see the tailwinds of the infrastructure packages continuing to materialize. But can you help us gauge what innings you think we're in with these tailwinds? Can we expect like an acceleration next year or just steady? Thank you.

Matthew Elkott:

Thank you very much.

Operator:

And your next question comes from the line of Stanley Elliott with Stifel. Your line is open.

James Umpleby:

Yes. As we said, our intent is to return substantially all of our ME&T free cash flow to shareholders through dividends and share repurchases over time. We do maintain a healthy balance sheet for a whole variety of reasons. When we went into COVID in 2020, I was very pleased that we had a strong balance sheet. We also have increased our dividend since we introduced our new capital allocation strategy. In May of 2019, we've increased the dividend per share by 51% since that period of time. So again, we're proud of our Aristocrat status. So certainly wouldn't be surprised. It's a Board decision, but if we continue to increase our dividend and continue to share repurchases as well.

Jerry Revich:

Yes, hi. Good morning everyone.

Jerry Revich:

Jim, I'm wondering if you could just expand on your comments in mining. Your biggest competitor in trucks is posting 250% book-to-bill. I'm wondering if you're seeing that level of bookings activity? And are we finally at a point where we're hitting the sweet spot of that replacement cycle for what we delivered a decade ago? Or are there some idiosyncratic ebbs and flows in the data points? Thanks.

Ryan Fiedler:

Thanks, Jim, Andrew and everyone who joined us today. A replay of our call will be available online later this morning. We'll also post a transcript on our Investor Relations website as soon as it's available. You'll also find the second quarter results video with our CFO and an SEC filing with our sales to users data. Click on investors.caterpillar.com and then click on Financials to view those materials. If you have any questions, please reach out to Rob or me. Investor Relations general phone number is 309-675-4549. Now let's turn it back over to Abby to conclude our call.

Ryan Fiedler:

Thanks Emma. Good morning, everyone. And welcome to Caterpillar's first quarter of 2023 earnings call. I'm Ryan Fiedler, Vice President of Investor Relations. Joining me today are Jim Umpleby, Chairman and CEO; Andrew Bonfield, Chief Financial Officer; Kyle Epley, Senior Vice President of the Global Finance Services Division; and Rob Rengel, Senior IR Manager. During our call today we'll be discussing the first quarter earnings release we issued earlier today. You can find our slides, the news release and a webcast recap at investors.caterpillar.com under Events & Presentations. The content of this call is protected by U.S. and international copyright law. Any rebroadcast, retransmission, reproduction or distribution of all or part of this content without Caterpillar's prior written permission is prohibited. Moving to Slide 2, during our call today, we'll make forward-looking statements, which are subject to risks and uncertainties. We'll also make assumptions that could cause our actual results to be different than the information that we're sharing with you on this call. Please refer to our recent SEC filings and the forward-looking statements reminder in the news release for details on factors that, individually or in aggregate, could cause our actual results to vary materially from our forecast. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. On today's call, we'll also refer to non-GAAP numbers. For reconciliation of any non-GAAP numbers to the appropriate U.S. GAAP numbers, please see the appendix of the earnings call slides. Now let's turn to Slide 3 and turn the call over to our Chairman and CEO, Jim Umpleby.

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.

Rob Wertheimer:

Thank you.

Rob Wertheimer:

Good morning. My question is really on North American construction, where – I’m curious whether your end users have seen infrastructure dollars starting to flow have started to make orders based on that, whether your dealers make orders in anticipation of that? Or whether a lot of that is still ahead? So I’ll stop there.

Rob Wertheimer:

Thank you.

Tami Zakaria:

Hi good morning. Thanks so much for taking my question. Just to clarify the operating margin expectation for the year, I think you said you’re expecting it to be at the top half of the target range. So can you remind us what that range exactly is? Are we talking about the 18% to 21% that we saw in the prior quarter’s presentation? What exactly is that range you’re talking about?

Tami Zakaria:

Okay, got it. That’s helpful. Thank you so much.

Operator:

Your next question comes from the line of Michael Feniger with Bank of America. Your line is now open.

Jim Umpleby:

Yes. So certainly, one of the things we’ve done is worked hard on our S&OP process over the last few years to really minimize the impact of that kind of an issue. Firstly, to keep in mind, the way we are – the market is positioned now, we have strong sales to users, and we feel good about the underlying demand in our end markets. So, I’ll start with that. During a period of supply constraints, which really has occurred because of all the issues you’re aware of during the last few years, it’s not unusual for us to have dealers ordering a bit more, and they couldn’t really get the kind of dealer inventory that they would like to have. They’ve been able with some easing in supply chain, although we still have periods – areas of real constraint. They have been able to start to increase dealer inventory. Having said that, we have talked about the fact that we expect dealer inventory to end the year about flat as to where it ended in 2022 and expect a slight decrease during the year. But again, with our S&OP process, the way we look at that now, the way we work with our dealers, we’re comfortable in that process that we’ve really improved it.

Jim Umpleby:

And dealer inventory is within a typical range of three to four months, and again we have strong market conditions.

Jamie Cook:

Hi. Good morning and congratulations on a nice quarter. I guess my question...

Jamie Cook:

Jim, just the market I think is going to be worried that the performance this quarter is backward-looking. So can you like speak to how you're thinking about backlog or book-to-bill in the back half of the year? Can that continue to be positive? Do you think backlog will be higher at the end of this year versus where we were this quarter? And then just my second question, Andrew, on the margins can you talk to margins in the back half of the second half versus first half? Just trying to understand how much lower the margins would be in the second half and what's being weighed down by strategic investment? Thank you.

Andrew Bonfield:

Yes. And again, just to add to that before talking about margins, just a reminder, backlog is one of the metrics we look at – to look at where we think about demand as the demand signal. It really does often reflect availability from the – and therefore, often there's one part of that equation. Other things we look at is STUs order rates and also our conversations with dealers, which give us optimism rather than just purely focusing on the backlog per se. With regards to margins, as we said in the second half you would normally see, we're probably returning more to a more typical pattern within construction. We didn't expect that. If you remember last in January, we didn't expect to see the normal increase from the fourth quarter to the first. We did. We would not expect to see the normal pattern of margins being declining as we go through the year. That's a function of production. Obviously, as the year progresses, we produce less, which impacts on absorption in particular and also factory efficiencies. Within RI, that tends to bounce around a little bit more and obviously is impacted by the level of sales and revenues. And in E&T, we expect margins actually will progress as we go through the year as per the normal pattern.

Operator:

Your next question comes from the line of David Raso with Evercore. Your line is now open.

Andrew Bonfield:

Yes. So just to clarify, David, obviously versus last year where we saw an increase. So remind you there's a $700 million increase in both the third and the fourth quarter. We would expect to decrease this year. Yes, it's not unseasonable, but it is a decrease versus the year-over-year. So just that does create a gap between overall, so that's part of the reason we're just highlighting it now just to remind everybody.

David Raso:

Yes. Okay. I just want to make sure there wasn't something unique the behavioral pattern is to take it down in the second half, but...

David Raso:

Real simple question, 2024, I know lead times in some areas are getting better, some are still challenged. But it does appear the dealers are willing to order a little earlier for next year than a normal at this time of the year ordering for next year. Just any early signs you have on order books for 2024, I think would be very helpful? Thank you.

Operator:

Your next question comes from the line of Jerry Revich with Goldman Sachs. Your line is now open.

Andrew Bonfield:

Hello, Jerry.

Jim Umpleby:

Yes. Of course, as we serve a variety of industries and there's – it's not a one size fits all. So we look very carefully at the market conditions and the competitive situation for each product that we sell into the various markets that we have. Certainly, in some areas product is still constrained, and it's still quite challenging to get product. And in others, as we mentioned like an excavation, there is more availability. So that has an impact as well. But really what we do is, as you can imagine, look at – we always take into account our cost inputs, and then we look at the competitive situation for each product in each market and we make a decision based on that.

Steve Volkmann:

Great, and good morning everybody. I wanted to go back, Jim, I think I heard you say that you thought North American commercial construction was like 1% of CI. Correct me if I got that wrong, but it made me wonder what you think really the key drivers are of that business, so that we can sort of monitor those going forward?

Steve Volkmann:

No, I'm sorry, I understand – if commercial is only 1% of CI, what's the other 99%?

Steve Volkmann:

Yes. I agree. Thank you.

Operator:

Your next question comes from the line of Chad Dillard with Bernstein. Your line is now open.

Jim Umpleby:

Good morning.

Jim Umpleby:

Yes. So lead times – so because of easing supply chain constraints in some areas, lead times have improved. We still really have challenges in certain areas. Earthmoving is a great example. We have challenges around availability and lead times around some BCP products as well. Excavation, as I mentioned earlier has in fact eased, but we are making some changes in factory – changes in the second half. Actually we're going from a third-party engine to a Caterpillar engine and some products. So as we make that change over, that will in fact, have a bit of an impact on production. And it's obviously temporary, and it's a positive thing for us long term to get our own engines in those products. So we'll be making that change later in the year.

Chad Dillard:

Yes. I was going to – can you just clarify your comment about the second half you talked about destocking some in the second half? So I just want to know, does that mean that 3Q and 4Q will be seasonally weaker than the normal on a stencil basis?

Chad Dillard:

Great. Thank you.

John Joyner:

So, thank you for taking my question. And sorry to ask another question about the dealer stocks. But I guess, if demand and sales to end users have stayed strong, and inventories are not elevated, why would there be dealer destocking and not some restocking? I mean does it possibly imply a bit of hesitation among dealers when looking ahead?

Andrew Bonfield:

Yes. And also, if you recall, we've talked about the new sales and operations planning process and one of the things we're trying to avoid through that process is dealers holding more inventory than is really necessary. They are independent businesses. They make their own decisions of our inventory, but we try to work with them to avoid any overstocking, which then has an impact when we later on where you have to destock. So we're trying just to be more proactive in that regard than we have been historically.

John Joyner:

Got it. Thank you.

Matt Elkott:

Good morning. Thank you. So I know the backlog was unchanged. But how has the timing of the backlog changed? I mean, does it go out further? Did any orders get pushed out because of all the macro uncertainty? And did you have – you guys have any major cancellations that were offset by new orders?

Matt Elkott:

Got it. Thank you very much.

Kristen Owen:

Great. Thank you for taking the question. I'm going to switch it up here a little bit and ask you to talk about the NMG announcement that you recently made for the zero-emission fleet. Looks like that includes some related infrastructure. So just a couple of pointed questions there. First, how do you see the rollout progression of product – a project like this? And then second, how should we think about this in terms of a blueprint for future mine site decarbonization opportunities? Like how do you price for that? How do you think about packaging that sort of deal? Thank you.

Operator:

Your next question comes from the line of Tim Thein with Citi. Your line is now open.

Andrew Bonfield:

Yes. So obviously, some of our assumptions are that we do not expect the absorption impact to continue. And obviously, yes some of that will reverse as we move our product out of the plant into the dealer channel, and that's forecasted within our expectations for margins as we go through the remainder of the year. The other factor, obviously, to take into account is the potential benefit to cash flow. As we've said, we did see a very strong free cash flow in the first quarter, despite an increase in Caterpillar inventory. Obviously, over time, we expect, as the supply chain improves, to start working that inventory down and start to see a full benefit of that from a cash perspective and converting that back into cash. So that is part of the reason why we're expecting obviously strong cash flow as we go through the remainder of the year.

Mig Dobre:

Thank you. Good morning. Jim, I appreciate your comment earlier about taking a proactive approach to sort of managing this dealer inventory dynamic. But I'm sort of curious here, as you look at the last, call it, 18 months to two years, do you get a sense that there's been some ordering on a part of dealers that was just a reaction to elongated lead times, and that those sort of patterns are subject to you see some pretty meaningful shifts now that your lead times in the supply chain are getting better? And as you – as the year progresses, if the destock that you're expecting sort of fails to materialize at the pace that you're anticipating, are we to understand here that you're going to take a proactive approach to adjusting production in the back half of this year? Thank you.

Operator:

Your next question comes from the line of Steven Fisher with UBS. Your line is now open.

Andrew Bonfield:

Hi, Steven.

Jim Umpleby:

Well, we sell industrial engines for a whole variety of applications, not just the other construction equipment. So part of it is power gen, and we sell industrial engines to drive everything from cement mixers. It's a whole variety of applications. So again, a lot of strength there. The business is doing quite well. There's a lot of momentum. In terms of power generation, we provide generator sets for a whole variety of applications. Data centers is one of them, and we've highlighted data centers because it has been quite strong over the last few years. And if we look forward, we feel good about that continuing. Just thinking about AI, thinking about the cloud, thinking about all of the data center users, we feel good about that. But we provide gen sets for a whole variety of applications. But the one that is really driving a lot of the growth at the moment is data centers, which is why we highlighted it.

Ryan Fiedler:

Emma, we have time for one more question.

Dillon Cumming:

Great. Good morning. Thanks for the question. I just wanted to ask one on the kind of financing environment. I think you guys called out the opportunity for Cat Financial maybe having some more flexibility to finance customers that might have more difficult to getting kind of financing from smaller banks. Just curious, first, you can kind of with some numbers around that and what the kind of share opportunity there is. And secondarily, if you're actually seeing evidence on the ground with regards to customers not being able to get financing at the moment over the last three months or so.

Dillon Cumming:

Thank you.

Ryan Fiedler:

Thanks, Jim. Andrew. Yes, thanks, Jim, Andrew and everyone who joined us today. A replay of our call will be available online later this morning. We'll also post a transcript on our Investor Relations website as soon as it is available. You'll also find a first quarter results video with our CFO and an SEC filing with our sales to users data. Click on investors.caterpillar.com and then click on Financials to view those materials. If you have any questions, please reach out to Rob or me. The Investor Relations general number is (309) 675-4549. Now we'll turn the call back to Emma to conclude the call.

Ryan Fiedler:

Thank you, Emma. Good morning, everyone, and welcome to Caterpillar's fourth quarter of 2022 earnings call. I'm Ryan Fiedler, Vice President of Investor Relations. Joining me today are Jim Umpleby, Chairman and CEO; Andrew Bonfield, Chief Financial Officer; Kyle Epley, Senior Vice President of the Global Finance Services Division; and Rob Rengel, Senior IR Manager. During our call, which will extend to 8:40 AM Central, we'll be discussing the fourth quarter and full-year earnings release we issued earlier today. You can find our slides, the news release and a webcast recap at investors.caterpillar.com under Events & Presentations. The content of this call is protected by US and international copyright law. Any rebroadcast, retransmission, reproduction or distribution of all or part of this content without Caterpillar's prior written permission is prohibited. Moving to slide 2. During our call today, we'll make forward-looking statements, which are subject to risks and uncertainties. We'll also make assumptions that could cause our actual results to be different from the information we're sharing with you on this call. Please refer to our recent SEC filings and the forward-looking statements reminder in the news release for details on factors that individually or, in aggregate, could cause our actual results to vary materially from our forecast. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. On today's call, we'll also refer to non-GAAP numbers. For a reconciliation of any non-GAAP numbers to the appropriate US GAAP numbers, please see the appendix of the earnings call slides. Today, we reported profit per share of $2.79 for the fourth quarter of 2022 compared with $3.91 of profit per share in the fourth quarter of 2021. We're including adjusted profit per share in addition to our US GAAP results. Our adjusted profit per share was $3.86 for the fourth quarter of 2022 compared with adjusted profit per share of $2.69 for the fourth quarter of 2021. Adjusted profit per share for both quarters excluded mark-to-market gains for remeasurement of pension and other post-employment benefit plans as well as restructuring items. Adjusted profit per share for the fourth quarter of 2022 also excluded a goodwill impairment. Now, let's turn to slide 3 and turn the call over to our Chairman and CEO, Jim Umpleby.

Andrew Bonfield :

Thank you, Jim. And good morning, everyone. I'll begin by covering our fourth quarter results, including the performance by our business segments. Then I'll cover the balance sheet and ME&T free cash flow before concluding on high level assumptions for 2023, including the first quarter. Beginning on slide 9. Sales and revenues for the fourth quarter increased by 20% or $2.8 billion to $16.6 billion. The sales increase versus the prior year was due to strong price realization and volume, partially offset by currency impacts. Sales were higher than we expected as supply chain constraints eased in some areas and we were able to ship more product. Operating profit increased by 4% or $69 million to $1.7 billion as strong price realization and volume growth were mostly offset by a goodwill impairment charge, higher manufacturing costs and restructuring expenses. Our adjusted operating profit was $2.8 billion, up $1.2 billion versus the prior year, and the adjusted operating profit margin was 17.0%. This was an increase of 560 basis points versus the prior quarter due to favorable price realization and volume growth, which outpaced manufacturing cost increases. Fourth quarter margins were lower than we were targeting as well as being lower than where we needed them to be to meet our full-year Investor Day margin target. I will talk more about that in a moment. Adjusted profit per share increased by 43% to $3.86 in the fourth quarter compared to $2.69 in the fourth quarter of last year. Adjusted profit per share in the fourth quarter excluded goodwill impairment charge of $925 million or $1.71 per share related to our rail division, as Jim has explained. This charge is held at the corporate level and does not impact Energy & Transportation segment margins. Adjusted profit per share figures also exclude mark-to-market gains for the remeasurement of pension and OPACC plans and restructuring items. Restructuring costs of $209 million or $0.29 in the quarter were primarily related to non-cash inventory write-downs within our Rail division. Again, these charges impact at the corporate level and the inventory write-downs are within cost of goods sold in the income statement. For the full year, restructuring costs were about $600 million. Last quarter, we told you that a non-cash charge of approximately $600 million could slip into 2023, which it did. We expect to close on the divestiture of longwall business in early February and the non-cash charge will be included in our first quarter 2023 restructuring charges. The provision for income taxes in the fourth quarter excluding the amounts relating to mark-to-market, goodwill impairment and other discrete items reflects at a global annual effective tax rate of approximately 23%, as we had expected. Finally, our fourth quarter results including unfavorable non-cash foreign currency impact within other income and expense of $0.41 related to ME&T balance sheet translation in the quarter. To explain, many of our foreign entities are US dollar functional. These entities are generally in a net liability position, causing a favorable translation impact in periods of US dollar strength. Within each of the first three quarters, we saw some benefit as the dollar sequentially trended stronger. However, within the fourth quarter, this trend reversed. Given the significant weakening of the US dollar within the fourth quarter of 2022, the negative impact to profit was sizeable. As you would imagine, our forward-looking assumptions do not include expectations for currency fluctuations. To give a bit more context, other income and expense excluding the impact of pension mark-to-market adjustments has trended around $250 million of income per quarter for all of 2021 and for the first three quarters of 2022. This is reflected in a number of offsetting items, including currency. In the fourth quarter, excluding pension mark-to-market, other income and expense swung to a $70 million expense. The majority of that change is due to the foreign exchange translation adjustment, which is why we have highlighted this. Overall, sales were better than we had expected, as we had anticipated margins increase, but as I said earlier, not by enough to meet our Investor Day margin targets. Adjusted profit per share rose by 43%, but that was moderated by the $0.41 non-cash foreign currency balance sheet translation charge that I mentioned a moment ago. Moving on to slide 10. The 20% increase in the top line was driven by favorable price realization and higher sales volume. Volume was supported by the $800 million year-over-year impact of changes in dealer inventory and an 8% increase in sales to users. From a sales perspective, currency remained a headwind, given the strength of the US dollar. As I mentioned earlier, sales were higher than we expected in the quarter, mostly due to some improvements in the supply chain, which enables stronger shipments particularly in Construction Industries. The increase in dealer inventories reflects the improved shipments in Construction Industries and customer delivery timing in Resource Industries and Energy & Transportation. Overall market dynamics remain healthy as sales to users continued to increase and our backlog is strong at $13.4 billion. Moving to slide 11. Fourth quarter operating profit increased by 4%, impacted by the goodwill impairment charge and restructuring expenses. Adjusted operating profit increased by 78% as favorable price realization and higher sales volume continued to outpace higher manufacturing costs. Manufacturing costs increased primarily due to higher material costs and unfavorable costs absorption as we decreased our inventories in the fourth quarter compared to an increase in the prior year. Related to our recent price cost performance, keep in mind that we are still catching up from the increases in manufacturing costs, which have occurred over the last few years. In particular, material freight costs have increased by about 20% since 2020 and as full-year gross margins remain below our 2019 levels. Our fourth quarter adjusted operating profit margin of 17% was a 560 basis point increase versus the prior year. As Jim has mentioned, this is our highest ever quarterly adjusted operating margin. As I said earlier, we did not achieve our Investor Day margin targets. As Jim said, in a high inflation environment, you do not get the benefit of operating leverage that you would normally expect when sales increases are volume driven. You will recall that our margin targets are progressive, which means that the top end of the range, for every $1 billion in sales incremental revenues, we need to deliver close to 40 percentage points of that through adjusted operating profit. This is challenging to achieve in a high inflation environment when sales are increasing due to price realization designed to mitigate increases in manufacturing costs. Also, please keep in mind that we made a conscious decision to continue to invest for future profitable growth. We have not seen inflation anywhere near double digit levels since the targets were introduced in 2017. In a low inflation environment, productivity improvements can be made to offset inflationary increases, so nominal targets remain effective. In the current high inflation environment, you cannot achieve the level of productivity. So we are adjusting the target for sales range to reflect the inflationary increases we've seen in 2022. On slide 12, we've updated our margin target slope to account for the impact of inflation as depicted on the chart. We still have the same aspirations for margins. However, the corresponding level of sales and costs are generally around 9% higher than they'd have been in a non-inflationary environment. As you can see, the low end of the sales range is now $42 billion, while the top end is $72 billion. This compares to the previous bookends of $39 billion and $66 billion, respectively. The key point is that, despite the inflationary impact on sales and costs, which impact margins, our expectations for profits and cash generation have not changed and we remain focused on delivering increases in absolute OPACC dollars. Depending on the inflationary environment that we see in 2023, we'll have to revisit the range next January. Moving to slide 13, across our three primary segments, sales and margins improved in the fourth quarter versus the prior, supported by price realization and sales volume. As expected, price more than offset manufacturing costs in all three segments. Starting with Construction Industries, sales increased by 19% in the fourth quarter to $6.8 billion, driven by favorable price realization and sales volume, partially offset by currency. Volume increased primarily due to changes in dealer inventory and higher sales to users. Dealer inventory increased in the quarter compared to a reduction last year. Sales in North America rose by 34%, due mostly to strong pricing, the positive change in dealer inventory and higher sales to users. Sales in Latin America increased by 39% on strong price realization and higher sales volume, the latter due mostly to a favorable change in dealer inventory. In the EAME, sales increased by 10% on price realization and sales volume, partially offset by unfavorable currency. Sales volume was supported by positive year-over-year change in dealer inventory as the decrease in the prior year's quarter was larger than this year's decline. Sales in Asia Pacific decreased by 10%, mostly due to unfavorable currency impacts, partially offset by stronger price realization. Lower sales volume also contributed to the decline as dealers decreased inventory during the fourth quarter compared to an increase in the prior year. Fourth quarter profit for Construction Industries increased by 87% versus the prior year to $1.5 billion. Price realization and higher sales volume drove the increase. Unfavorable manufacturing costs largely reflected high material costs, unfavorable cost absorption and increased freight. The segment's operating margin of 21.7% was an increase of 780 basis points versus last year. The margin for the quarter was better than we'd expected on strong volume, price and moderating material costs. As a reminder, the fourth quarter is usually the weakest quarter for margins in construction industries, but the with the benefit of price realization, the reverse was true in 2022. Turning to slide 14. Resource Industries sales grew by 26% in the fourth quarter to $3.4 billion. The improvement was primarily due to favorable price realization and higher sales volume. Volume increased due to the impact of changes in dealer inventories and higher sales of equipment to end users. Dealer inventory increased more during the fourth quarter 2022 than the prior year due to the timing of customer deliveries, which includes the impact of outbound logistics delays and commissioning. Fourth quarter profit for Resource Industries increased by 110% versus the prior year to $605 million, mainly due to favorable price realization and higher sales volume. This was partially offset by higher manufacturing costs, primarily material, freight and volume related manufacturing costs. The segment's operating margin of 17.6% was an increase of 700 basis points versus last year, strengthening versus third quarter, as we had expected. Now on slide 15. Energy & Transportation sales increased by 19% in the fourth quarter to $6.8 billion, with sales up across all applications. Oil and gas sales increased by 38% due to higher sales of turbines and turbine related services, reciprocating engines and aftermarket parts. Power generation sales increased by 12% as sales were higher in large reciprocating engines, supporting data center applications. Sales increased in small reciprocating engines, turbines and turbine related services as well. Industrial sales rose by 19%, with strength across all regions. Finally, transportation sales increased by 6%, benefited by marine applications and reciprocating engine aftermarket parts. Rail services were offset by lower deliveries of locomotives. Fourth quarter profit for Energy & Transportation increased by 72% versus the prior year to $1.2 billion. The improvement was primarily due to higher sales volume and favorable price realization. Higher manufacturing and SG&A and R&D costs acted as partial offset. Manufacturing cost increases largely reflected high material costs and volume related manufacturing costs. SG&A and R&D expenses increased due to investments aligned with our strategic initiatives, including electrification and services growth. The segment's operating margin of 17.3% was an increase of 530 basis points versus last year, strengthening versus third quarter as we had expected. Moving to slide 16. Financial Products revenue increased by 10% to $853 million, benefited by higher average financing rates across all regions. Segment profit decreased by 24% to $189 million. The profit decrease was mainly due to a higher provision for credit losses at Cat Financial and an unfavorable impact from equity securities in insurance services. The increase in provisions reflects changes in general economic factors, rather than company specific economic factors. Despite these changes, our leading indicators remain strong. Past dues were 1.89% compared with 1.95% at the end of the fourth quarter of 2021. Also, this was an 11 basis point decrease in past dues compared to the third quarter of 2022. Retail new business volume declined versus the prior year, but remained steady compared to the third quarter. As I mentioned last quarter, Cat Financial is not seeing slowing business activity, but continues to see strong competition from banks due to higher interest rates and more customers willing to pay cash for their machines. Used equipment demand remains strong, with inventories at historically low levels. We continue to see high conversion rates as well, as customers choose to buy at the end of the lease term. Now on slide 17. ME&T free cash flow in the quarter increased by about $1.2 billion versus the prior to $3 billion. The increase was primarily due to higher profit. On working capital, our inventory decreased by about $600 million in the quarter. Improved availability of some components benefited shipments as we decreased our work-in-process inventory. We also saw strong shipments of solar turbines in the quarter. We repurchased about $900 million of common stock in the quarter and paid around $600 million in dividends. As Jim mentioned, we generated $5.8 billion in ME&T free cash flow for the year, inclusive of CapEx of about $1.3 billion. We are pleased with the strong free cash flow we generated in a year where we paid $1.3 billion in short term incentive compensation and increased our inventories by over $2 billion. Our liquidity remains strong with an enterprise cash balance of $7 billion and another $1.5 billion and slightly longer-dated liquid marketable securities, which generate improved yields on that cash. Now on slide 18. I'll share some high level assumptions for the full year, followed by the first quarter. As we begin 2023, demand remains constructive given the strong order backlog and improving supply chain dynamics, although we do not expect the benefit of a dealer inventory tailwind like we saw last year. As a reminder, dealer inventory rose by $2.4 billion in 2022. Around 40% of the increase related to Construction Industries, with the balance reflecting the timing of deliveries to customers in Resource Industries and Energy & Transportation. As Jim mentioned, about 70% of the combined end dealer inventory in Resource Industries and Energy & Transportation is supported by customer orders. For the full year 2023, we anticipate increased sales supported by price realization. Although we expect stronger sales to users in 2023, the headwind from the $2.4 billion dealer inventory build in 2022 will moderate volume growth. Our planning assumption is that we do not expect a significant change in dealer inventory by the end of the year. We do expect service sales momentum to continue after reaching $22 billion in 2022. From a sales seasonality perspective, we expect a more typical year with lighter first quarter for total sales. For the full year, we expect our adjusted operating profit to increase, reflecting higher sales, and we expect to be within our updated adjusted operating margin ranges. Pricing actions from 2022 will continue to roll into 2023, and we will evaluate future actions as appropriate to offset inflationary pressures. We currently expect to see a moderation of input costs inflation as the year progresses, and therefore a corresponding moderation in price realization as we move through the year. Price, though, should still more than offset manufacturing costs for the year. Increases in SG&A and R&D expenses are expected to exceed the benefit of lower short term incentive compensation expense this year as we continue to invest in strategic initiatives, such as services growth and technology, including digital, electrification and autonomous. Below operating profit, we anticipate a headwind of approximately just over $800 million or about $80 million per quarter in other and income and expense at the corporate level related to pension expense due to higher interest costs, given higher interest rates. This is a non-cash item. For the full year of 2022, the strengthening US dollar acted as a tailwind of $189 million relating to the ME&T balance sheet translation impact that I spoke about earlier. This would not recur if the weakening we've seen in rates thus far continues. Based on current rates, we'd see a headwind of around about $80 million in the first quarter. Remember that 2022 was not a typical year for us as margins increased sequentially through the year as the benefit of price realization was stronger in the second half of the year. Also, manufacturing volumes were impacted by supply chain issues, which did impact absorption rates from quarter to quarter. These factors will mean that we do not expect to return to our normal seasonal margin patterns in 2023. Moving on, we expect to achieve our ME&T free cash flow target of $4 billion to $8 billion for the year, with CapEx in the range of about $1.5 billion. We'll have about a $1.4 billion cash outflow in the first quarter related to the payout of last year's incentive compensation, slightly higher than we saw in the first quarter of 2022. We anticipate restructuring expenses of around $700 million this year, the majority of which is related to the long haul divestiture charge that I mentioned earlier. Finally, we anticipate a global effective tax rate of 23% excluding discrete items. Now on to our assumptions for the first quarter. In the first quarter compared to the prior year, we expect sales to increase on price and slightly stronger volume, reflecting higher sales to users. With regard to dealer inventory, we expect a typical seasonable build in the first quarter of this year. As a reminder, dealers increased inventories by $1.3 billion in the first quarter of 2022, and we expect a lower build in the first quarter of 2023. Sales should increase across the three primary segments in the first quarter versus the prior. Compared to the fourth quarter, we anticipate lower sales in the first quarter at the enterprise level, following our typical seasonal pattern. We expect lower sales sequentially in each of our three primary segments as well. To provide some color. Construction Industries is following an abnormally strong fourth quarter, where shipments exceeded our expectations. Resource Industries had a strong fourth quarter, with its highest quarterly shipments since 2012, and expects lower sequential sales in the first quarter due to the timing of shipments which, as you know, can be lumpy. Energy & Transportation sales should be sequentially lower as well, following normal seasonal patterns. Keep in mind that solar turbines had a strong fourth quarter. Specific to the first quarter versus the prior year, keep in mind that first quarter margins last year were very low. We expect substantially strong enterprise and segment margins in the first quarter on favorable price and volume. Price realization should more than offset manufacturing costs above the [Technical Difficulty] primary segment levels as well. Also, we could see headwinds related to pension and currency below operating profit, as I have just mentioned. Compared to the fourth quarter of 2022, we expect adjusted operating profit margins to be flattish to down for the first quarter of the year at the enterprise level. Keep in mind that our fourth quarter of 2022 adjusted operating profit margins were our highest quarterly margins ever. By segment, in Construction Industries, we normally see higher margins in the first quarter. However, coming off a very strong fourth quarter, we expect lower volume to weigh on margin sequentially. This is the business which usually drives the enterprise-wide sequential margin improvement from the fourth quarter to the first. Similarly, lower volumes should drive sequentially lower margins in Resource Industries. And in Energy & Transportation, we expect lower margins sequentially following a strong fourth quarter, which is the normal pattern for this business. Turning to slide 19. Let me summarize. Sales grew by 20%, led by strong price realization and volume gains across three primary segments. The adjusted operating profit margin increased by 560 basis points to 17%. ME&T free cash flow was strong at $3 billion for the quarter, and we continue to return cash to shareholders on a consistent basis. Service revenues were $22 billion for the full year, a 17% increase as momentum built in 2022. The outlook remains positive with improving supply chain dynamics and the backlog up around $400 million to over $30 billion. We've updated our margin target scope to account for the impact of inflation on sales and costs and we expect our 2023 adjusted operating margins to be within our updated range. Despite the inflationary impact on sales and costs, our expectations for profit and cash flow generation have not changed, and we will continue to execute our strategy for long term profit growth. I want to confirm that full-year 2022 restructuring costs were about $300 million for the year. So apologies if we made an error in the call. Now, I'll hand over to questions.

Mircea Dobre:

Just wanted to appreciate all the color on dealer inventory. I guess it looks to me like about a billion dollars of the build is in construction. A good chunk of that is in North America. And retail sales here have been, call it, flattish over the past three quarters or so. So I guess I'm curious, as you think about Q1 and you think about that seasonal inventory build, where do you expect that to occur? Is the channel stocked enough in North America construction? And how comfortable are you with dealers actually being able to put through this inventory to end users in 2023?

Operator:

Your next question comes from the line of Rob Wertheimer with Melius Research.

James Umpleby III:

Rob, it's always tough to make a multi-year prediction. But I will say that order rates are quite strong for solar, as is quotation activity. And of course, solar is very involved in the natural gas value chain, compressing a lot of gas to LNG facilities for export around the world. There has been an under investment, I'd argue, in oil and gas over the last few years and that is starting to be reversed now, and that has a positive impact on both our Cat oil and gas business and our solar business. So again, very difficult always to make a multi-year projection, not knowing what's happening in the economy. But based on what we see today, business is quite strong for solar, both on the services side and on the new equipment side. And one of the things we have seen, there was a – for a while there, after the decline in oil prices a few years ago, we saw a decline in international projects. That's picked up for solar. So we're seeing more international projects. We're also seeing strength in North American gas compression for solar as well.

Jamie Cook:

I guess my question, can you talk for 2023 where's your opportunity to put through incremental price and where you see deflation? And the question just comes from, Jim, just the incremental margins that you've put up in the fourth quarter were fairly impressive. So I'm just wondering how big sort of the price cost tailwind can be in 2023 with the strong pricing actions and supply chain easing and potentially deflation in some areas.

Andrew Bonfield:

As I think we've said from a planning assumptions perspective, obviously, there is some carryover price impacting us, in particular in the first half of the year. As we expect to go through the year, we expect that benefit of price to moderate in the second half. But also, we expect the increases in manufacturing costs to continue to moderate as we go through the year. But, obviously, that's a planning assumption. And as always the case, that is predicated on the assumption that input inflation does moderate. And as Jim said, we'll obviously keep an eye open on that and take pricing actions accordingly.

Jerry Revich:

I'm wondering if you'd just talk about your production plan in Construction Industries? What are you folks looking for in terms of decision to potentially curtail production if we do continue to see dealer inventory builds ahead of expectation? Just if you could just touch on the key indicators that you're looking at and how can we gradually affect that production slowdown if that's indeed what we need to do over the course of 2023?

Operator:

Your next question comes from the line of David Raso with Evercore.

Andrew Bonfield:

And part of the reason why I highlighted that CI margins were actually very, very high in the fourth quarter, part of that was because normally, in the fourth quarter, you don't see a dealer inventory build as big as we did see in the fourth quarter and the fact that that release did help overall CI margins come in a little bit better than we expected as well. Obviously, what that does mean is, normally – yes, correct, we normally get a 200 to 300 basis points bump in the first quarter based on production and ramping up production. Obviously, those production rates aren't quite the same as they would normally be fourth quarter to first quarter because, obviously, we're looking at a very different profile, particularly given that, obviously, we were building production through 2022, particularly in CI. So that is the biggest challenge and that's probably the biggest single factor which will drive margins sequentially lower. On price cost, we still expect strong price in Q1. It will not be as big as Q4 for the simple reason we are lapping price increases that we put through at the beginning of 2022. So that will be coming down slightly, but we do expect price cost to be favorable for the first half of the year. Again, that's just going to create a little bit of noise in the margin structure quarter-on-quarter. Unfortunately, we are not going to go back to the normal lower margins in Q1, higher margins in Q4, which you guys are going to be able to model is going to still be a little bit different as we go through 2023. Obviously, 2022 was the opposite.

Tami Zakaria:

I'm trying to understand the volume commentary for this year. Since you expect sales to end users to be stronger this year versus last year, but you don't expect dealer inventory stocking benefit. Does that mean dealer inventory could actually decline again from current levels to support the stronger sales to end users?

Operator:

Your next question comes from the line of Michael Feniger with Bank of America.

James Umpleby III:

You may recall that we put through price increases later in E&T than we did with machines just based on the market dynamics that existed at the time. So having said that, as I mentioned, particularly in oil and gas and power generation, market is quite strong. And we expect our volumes, certainly in oil and gas, to increase. And we're dealing with in kind of oil and gas still some supply chain challenges. So we're dealing with that. That factor was your ramp up. So, our, again, I mentioned earlier, very strong fourth quarter, but still very robust order rates coming in and a lot of quotation activity. So, again, we do expect that E&T to improve in 2023. And I won't try to compare it to where they were a few years ago. I'm going to say that the business is strong and improving.

Nicole DeBlase:

I just wanted to dig into the manufacturing cost side of the price cost equation. It sounds to me, reading through the comments you made in response to an earlier question, that you still expect manufacturing costs to be a headwind year-on-year in 2023. Can you just kind of talk through the big components of that, materials versus freight, and why we shouldn't expect at some point in 2023 for manufacturing costs to become a tailwind?

Operator:

Your next question comes from the line of Chad Dillard with Bernstein.

James Umpleby III:

Again, just to reiterate, we had a couple of really strong years in China in 2020, 2021. And we had saw softening in 2022. And again, we don't see signs of improvement at this point. We continue to invest in new products to try to maintain our competitiveness with new products. So that's continuing. And we've been pleased with the response to those new products, including the GX. But that above 10 ton excavator market, we do expect to be weaker in 2023 than it was in 2022. And the inventory in the fourth quarter versus the build in the prior year is lower.

Operator:

Your next question comes from the line of Timothy Thein with Citi.

James Umpleby III:

We've been talking for a number of years in our earnings call about what we expect in the mining industry, which was moderate growth year-on-year. And as opposed to what we saw going back, thinking about 10 or 12 or 15 years ago, where we saw some wild cycles up and down, and really I believe that's a function of our mining customers remaining capital disciplined. And that's a very positive thing, I think, for them and for us, and what we've been saying for a number of years now in our earnings calls, that we expect a year-over-year moderate increase. And that's exactly the way it's playing out. So we're very encouraged by our quotation activity with customers, the conversations that are going on. We have a strong backlog, which we feel good about. Parked trucks remained at low levels. There's high utilization of equipment. And customers make decisions on a whole variety of factors as to whether or not they're going to rebuild or they're going to buy new trucks and we benefit from either one of those things. We're very encouraged by our autonomous solution. And we firmly believe we have the best solution in the industry. And that's been demonstrated by the decision, the purchasing decisions that our customers are making. And as a reminder, of course, RI also includes quarry and ag, which trends there are positive as well. A lot of that's driven by infrastructure spending and anticipated infrastructure spending. So, again, we feel good about the mining business. Again, quotation activity is very strong and we're having very good conversations with customers.

Matthew Elkott:

I was hoping you guys can provide us with some more insight into the strength you're seeing in the Middle East. And related to that, but longer term, Saudi Arabia has big plans in both construction and, more recently, mining. Are there any meaningful incremental opportunities for you guys there?

Operator:

Your next question comes from the line of Steven Fisher with UBS.

James Umpleby III:

Certainly, we have a diverse group of suppliers and a diverse product line and we did see some improvement in the quarter, but there are still some areas of strength. And it's very different product by product. And even though you'll see a number of suppliers in better shape, all it takes is one component to prevent you from shipping an engine or machine. And part of it's just the nature of the beast, I think, as to what's happening in various industries. And if we look at our large engines, it's more of a struggle, frankly, than it is with some of our construction machines at the moment. And these things ebb and flow over time. But that's where we are today. We still see some semiconductor availability challenges. I know with the higher end chips, that's improved significantly in the industry based on industry reports, but for the semiconductors that we use, it continues to be a challenge. And so, in the fourth quarter, we certainly did still experience inefficiencies associated with supply chain challenges. And that had an impact on us because we're still doing things like workarounds. And it's not anywhere near as smooth as it needs to be.

Operator:

Your next question comes from the line of Kristen Owen with Oppenheimer.

James Umpleby III:

Again, we are encouraged, as I mentioned, about our progress and services. And we mentioned, when we threw that target out that it wouldn't be a straight line, it wouldn't be linear. And we knew we had to make investments to make it happen. And we are continuing to invest in a whole variety of things. We've gotten more connected assets now, 1.4 million, up from 1.2 million last year. We're investing significantly in our ecommerce capabilities. That's one more arguably, I'd argue, we were a bit behind. But we made great progress and very proud of what the team is doing there. And those sales are increasing. To answer your question on customer value agreements, over 60% of new equipment in 2022 was delivered with a CVA. And that's really important because it creates that customer touch point and it gives us the ability to demonstrate that value that we can provide. And also, we're investing heavily in AI. We have what are called prioritized service events. So what that does is allows us to give dealers a lead on aftermarket service and repair in advance. And it provides value to our dealers, of course, but it also provides value to our customers because it allows them to avoid unplanned downtime. So, that's really positive as well. Also, we're working on parts availability. We need to have the right parts at the right place at the right time. And that's one of the benefits of having connected assets and also utilizing AI with those connected assets to ensure that we anticipate where those parts will be needed. And that's a key enabler as well.

Operator:

Your final question today comes from the line of Steve Volkmann with Jefferies.

James Umpleby III:

We're not running as lean as I would like us to be. And certainly, that is a consequence of the supply chain challenges we're having. And like I mentioned in previous calls, the term decommit is one that I hadn't been familiar with until COVID hit and where customers in a very short notice decommit and don't give us components when we need them. And so, that's created inefficiencies. It's also resulted in more inventory. So, I wouldn't say it's a permanent condition. As the supply chain situation improves, I do expect us to become leaner again and to be able to reduce our internal inventory.

Ryan Fiedler:

Thank you, Jim, Andrew, and everyone who joined us today. A replay of our call will be available online later this morning. We'll also post a transcript on our Investor Relations website as soon as it's available. You'll also find a fourth quarter results video with our CFO and an SEC filing with our sales to users data. Click on investors.caterpillar.com and then click on financials to view those materials. If you have any questions, please reach out to Rob or me. The investor relations general phone number is 309-675-4549. We hope you enjoy the rest of your day. Now I'll turn it back to Emma to conclude the call.

Ryan Fiedler:

Thank you, Emma. Good morning, everyone, and welcome to Caterpillar’s third quarter of 2022 earnings call. I’m Ryan Fiedler, Vice President of Investor Relations. Joining me today are Jim Umpleby, Chairman and CEO; Andrew Bonfield, Chief Financial Officer; Kyle Epley, Senior Vice President of the Global Finance Services Division; and Rob Rengel, Senior IR Manager. During our call today, we’ll be discussing the third quarter earnings release we issued earlier today. You can find our slides, the news release and a webcast recap at investors.caterpillar.com under Events & Presentations. The content of this call is protected by U.S. and international copyright law. Any rebroadcast, retransmission, reproduction or distribution of all or part of this content without Caterpillar’s prior written permission is prohibited. Moving to Slide 2. During our call today, we’ll make forward-looking statements, which are subject to risks and uncertainties. We’ll also make assumptions that could cause our actual results to be different from the information we’re sharing with you on this call. Please refer to our recent SEC filings and the forward-looking statements reminder in the news release for details on factors that individually or in aggregate could cause our actual results to vary materially from our forecast. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. On today’s call, we’ll also refer to non-GAAP numbers. For a reconciliation of any non-GAAP numbers to the appropriate U.S. GAAP numbers, please see the appendix of the earnings call slides. In addition, the appendix includes a calendar of expected earnings dates in 2023, starting with January 31 for our fourth quarter call. Today, we reported profit per share of $3.87 for the third quarter of 2022, compared with $2.60 of profit per share in the third quarter of 2021. We’re including adjusted profit per share in addition to our U.S. GAAP results. Our adjusted profit per share was $3.95 for the third quarter of 2022 compared with adjusted profit per share of $2.66 for the third quarter of 2021. Adjusted profit per share for both quarters excluded restructuring costs. Now, let’s turn to Slide 3 and turn the call over to our Chairman and CEO, Jim Umpleby.

Andrew Bonfield:

Thank you, Jim, and good morning, everyone. I’ll start by walking you through our third quarter results, including the performance of our segments. Then I’ll discuss the balance sheet and ME&T free cash flow before concluding as usual with our expectations for the fourth quarter and full year. Beginning on Slide 8. Sales and revenues for the third quarter increased by 21% or $2.6 billion to $15 billion. The increase was due to strong price realization and volume partially offset by currency impacts. Operating profit increased by 46% or $761 million to $2.4 billion as price realization and volume growth were partially offset by higher manufacturing and SG&A and R&D costs. Our adjusted operating profit margin of 16.5%, increased by 280 basis points versus the prior year’s quarter as the impact of price realization and volume growth outpaced continued manufacturing cost increases. Adjusted profit per share increased by 48% to $3.95 in the third quarter compared to $2.66 last year. Adjusted profit per share for both quarters excluded restructuring costs, which were $0.08 per share this quarter compared to $0.06 in the prior year. In total, taxes benefited profit per share by about $0.06 per share for the quarter. During the third quarter of 2022, we reached a settlement with the U.S. Internal Revenue Service that resolves all issues for tax years 2007 through 2016. We are pleased to have settled the audit without any penalties and within our reserves. The settlement includes, amongst other issues, the resolution of disputed tax treatment of profits earned by Caterpillar SARL in certain parts transactions. The final tax assessed by the IRS for all issues under the settlement was $490 million for the 10-year period. [Indiscernible] this was paid in the third quarter of 2022 and the associated estimated interest of $250 million is expected to be paid by the end of the year. The settlement was within reserves, and the company recorded a discrete tax benefit of $41 million to reflect changes in estimates of prior year taxes and related interest, net of tax. Now on Slide 9. The top line increased by 21% on strong price realization and volume and our currency was a headwind within the strong U.S. dollar. Overall, sales were about as we expected. Regarding volume, the largest benefit versus the prior year was a $1 billion favorable quarter-over-quarter change in dealer inventory. Sales to users increased by 7%. While there is continued uncertainty regarding the macroeconomic backdrop, demand indicators remain supported as sales to users increased by 7%. Backlog grew by $1.6 billion to $30 billion and dealer inventory remains at the low end of the typical range. As we’ve seen in recent quarters, the dealer inventory increase was primarily due to issues resulting from the timing of deliveries from dealers to customers and delays in the commissioning machines as a result of labor shortages and dealers. The main impact was that sales to users was slightly lower than expected, with the corresponding offset increase in dealer inventories. As both Jim and I have indicated, we believe that the majority of this is timing and is not an indicator of changing market dynamics. Dealer inventories remained at the low end of the typical range. Moving to Slide 10. As I mentioned, third quarter operating profit increased by 46% on favorable price realization and volume. Price realization was in line with our expectations and was supported by healthy demand. Manufacturing costs continue to increase versus the prior year, primarily due to material and freight cost increases as well as manufacturing inefficiencies due to supply chain constraints. Overall, the impact of favorable price realization exceeded manufacturing costs for the quarter. Finally, SG&A and R&D costs increased primarily due to investments aligned with our strategy for profitable growth, which included services growth and technology such as digital, electrification and autonomy. Our third quarter adjusted operating profit margin of 16.5% was a 280 basis point increase versus the prior year. The impact of price actions accelerated so price realization was strong. Although, we began to let the significant increases in material and freight costs seen in the second half of last year, we are still seeing cost increases from suppliers for materials in particular. Finally, related to our recent price cost performance, keep in mind that we are still catching up from the increases in manufacturing costs, which have occurred over the last few years. In particular, material and freight costs have increased by about 20% since 2020. Our gross margin of 28.5% for the third quarter is now only just getting back in line with the levels seen in the third quarter of 2019, despite sales and revenues being higher. Moving to Slide 11. As we expected, segment sales and margins improved in the third quarter. Starting with construction industries, sales increased by 19% to $6.3 billion, driven by favorable price realization and sales volume, partially offset by currency. Volume increased primarily due to changes in dealer inventories, which increased in the quarter compared to a reduction last year. Sales in North America rose by 29% due mostly to strong pricing and a favorable change in dealer inventory. Dealers in North America decreased their inventories in the third quarter of last year, whilst we saw some build this year. North American dealer inventories still are very low, which impacts their ability to supply the region. Sales in Latin America increased by 51% on strong price realization, higher sales of equipment to end users, and a favorable impact due to changes in dealer inventories in both EAME and Asia/Pacific, sales were relatively flat. A strong price realization was offset by currency. Third quarter profit for construction industries increased by 40% to $1.2 billion versus the prior year. Price realization and higher sales volume drove the increase as price more than offset manufacturing costs. Unfavorable manufacturing costs largely reflected high material and freight costs in addition to manufacturing inefficiencies. The segment’s operating margin of 19.3% was an increase of 280 basis points versus last year. Turning to Slide 12. Resource Industry sales grew up 30% in the third quarter to $3.1 billion. The improvement was primarily due to favorable price realization and higher sales volume. Volume increased due to the impact of changes in dealer inventories, higher sales of aftermarket parts and higher sales of equipment to end users. Third quarter profit for Resource Industries increased by 81% to $506 million. As price realization more than offset manufacturing costs, which largely reflected high material freight and manufacturing inefficiencies. The segment’s operating margin of 16.4%, was an increase of 460 basis points versus last year. Now on Slide 13. Energy & Transportation sales increased by 22% to $6.2 billion with sales up across all applications. While in gas sales increased by 22% due to higher sales of reciprocating engine aftermarket parts and engines used in well servicing applications and gas compression. Power generation sales increased by 31% as sales increase for both turbines and reciprocating engines as data center activity remains strong. Industrial sales rose by 22% with strength across all regions. Finally, transportation sales increased by 9% on reciprocating engine aftermarket parts and relative strength in our marine applications. International locomotive deliveries also benefited sales. Third quarter profit for Energy & Transportation increased by 32% to $935 million. The improvement was primarily due to favorable price realization and higher sales volume, partially offset by higher manufacturing and SG&A and R&D costs. As anticipated price realization narrowly offset manufacturing costs. Manufacturing cost increases larger reflected high material and freight costs coupled with manufacturing inefficiencies. Also, SG&A and R&D expenses increased due to investments aligned with our strategic initiatives, including electrification and services growth, in addition to high short-term incentive compensation expense. Segment’s operating margin of 15.1% was an increase of 120 basis points versus last year. Moving on to Slide 14. Financial Products revenue increased by 7% to an $819 million, benefiting from higher average financing rates in North America and Latin America. Segment profit increased by 27% to $220 million. The profit increase was mainly due to a favorable impact from a lower provision for credit losses at Cat Financial. Moving to our credit portfolio, our leading indicators remain strong. Past dues are good proxy for the financial health of our customers were 2.00% compared with 2.41% at the end of the third quarter of 2021. We also saw a 19 basis points decrease in past dues compared to the second quarter of this year. Retail new business volume did decline compared to the record levels in the prior year. However, at this point, Cat Financial is not seeing slowing business activity but is instead impacted by strengthening competition from banks. This is typical in a realizing interest rate environment as banks benefit from a lower cost of funds, especially due to customer deposits. Finally, used equipment demand remains strong as elevated prices have stabilized and inventories remain low. Now on Slide 15. ME&T free cash flow in the quarter increased by about $1.2 billion versus the prior year to $2.1 billion. The increase was primarily due to higher profit and favorable networking capital. We did continue to build production inventory to support shipments and mitigate component delivery delays and increase of about $1 billion versus the second quarter. Cumulatively, ME&T free cash flow year-to-date is $3.8 [ph] billion, despite the increase in inventories and the payment of incentive compensation in the first quarter of 2022. Looking ahead, we continue to expect to achieve our Investor Day ME&T free cash flow target between $4 billion and $8 billion for the full year. As Jim mentioned, we paid around $600 million in dividends in addition to repurchasing about $1.4 billion worth of common stock, supporting our objective to be in the market on a more consistent basis. Enterprise cash was $6.3 billion, about a $300 million increase compared to the second quarter 2022. The increase was primarily driven by higher free cash flow. Our liquidity remains strong as we continue to hold some of our cash balances in slightly longer dated liquid marketable securities in order to improve the liquidity to improve the yield on that cash. Now on Slide 16. I will share some thoughts on the fourth quarter and the full year. As a reminder, the third quarter was generally in line with our expectations on the top line, and while margins were better than the prior, they were marginally lower than we had anticipated. Pricing gain momentum against a backdrop is stronger demand, while manufacturing costs increase on continuous inflationary cost headwinds for our suppliers and manufacturing inefficiencies due to the ongoing disruption to the supply chain. We also continue to invest for future profitable growth. Looking ahead, we anticipate the fourth quarter will reflect our highest quarterly sales for the year, which is in line with typical seasonality. Compared to the prior year, highest sales to users and price realization should support the top line growth. At year end, we expect deal inventories to remain at similar levels as they ended in the third quarter. We also expect sales increases across the three primary segments both year-over-year and sequentially. Infrastructure spending should continue to benefit our segments over time as non-residential building accelerates and large projects commence. On margins, we should see slightly higher adjusted operating margins in the fourth quarter compared to the third on higher volume and continued pricing momentum. We do anticipate the manufacturing cost increases, including manufacturing inefficiencies, will act as a partial offset. At the segment level, we expect to see similar margins to the strong third quarter performance in construction industries. In Resource Industries and Energy & Transportation margins should strengthen compared to the third quarter and prior year. Compared to last year, all three primary mid segments should benefit from price realization and higher volume. We expect price realization to more than offset manufacturing costs across our three primary segments in the fourth quarter. Finally, to assist you with your modeling, we continue to expect our accrual for short-term incentive compensation expense of about $1.6 billion this year. CapEx is expected to be about $1.4 billion. We anticipated global effective tax rate of around 23%, slightly lower than previously expected due to changes in the geographic mix of profits from a tax perspective. Finally, restructuring charges expect to be up to $800 million for the full year. There's a possibility that the largest item, which is a non-cash charge of approximately $600 million relating to divestiture may slip into 2023. So turning to Slide 17. Let me summarize. Sales grew by 21% led by strong price realization and volume gains across all the segments. The adjusted operating profit margin increased by about 280 basis points to 16.5%. ME&T free cash flow was strong at $2.1 billion and we continued to retain cash to shareholders on a consistent basis. The outlook remains positive with sales to users up 7% and the backlog up $1.6 billion to $30 billion. We continue to execute our strategy for long-term profitable growth. And with that, we'll take your questions.

Rob Wertheimer:

Thanks and good morning, everybody.

Andrew Bonfield:

Good morning, Rob.

Jim Umpleby:

Well, thanks Rob for your question. We're always focused on remaining competitive in the markets that we serve around the world, and we certainly factor that into all pricing decisions. It's not a one size fits all situation. We do pay attention to the different dynamics and the different markets we serve. We are comfortable with our competitive position. Again, it's always something that we focus on, so…

Stephen Volkmann:

Great. thank you. Good morning, everybody.

Andrew Bonfield:

Good morning, Steve.

Andrew Bonfield:

Yes, Steve as we – as I indicated effectively manufacturing costs was slightly adverse to our expectations. That was why margins overall came in slightly lower than we had anticipated. Most of that is due, and it is a relatively small, this as a result of manufacturing inefficiencies. We don't break down manufacturing costs for a number of reasons. They do vary and all the buckets do vary quarter-on-quarter, but you are absolutely correct. Once we get past the supply chain bottleneck, we do believe these inefficiencies will normalize. For example, they may be including things like additional labor in the factories which are there to help support out of process work as we keep continuing to make sure we get machines out as quickly as possible. That will normalize when supply chain changes on normal. So we will expect that to moderate over time as we go forward.

Operator:

Your next question comes from the line of David Raso with Evercore. Your line is now open.

Andrew Bonfield:

Hi, David.

Jim Umpleby:

Yes, David, of course, as you can imagine here in this call, we're not going to talk about 2023 and what our expectations are for profit. But again, we are pleased at the way that the team performed in the year. And we talked about the fact that we still have supply chain struggles that we're dealing with, but we also have strong demand across most of our end markets.

Operator:

Your next question comes from the line of Jamie Cook with Credit Suisse. Your line is now open.

Jim Umpleby:

Hi, Jamie.

Jamie Cook:

Good morning. Sorry to touch on 2023 again, but I'm just trying to think through as well. You think about Volkmann’s question on inefficiencies going away and ask those question on the $4 per quarter runway. I guess the other thing is we think about 2023 dealer inventories are still exceptionally low and the rental fleet is also aged. So as you look at 2023, assuming the macro holds, would you expect to get dealer inventories back to more normalized levels and replenish the rental fleet, which would also sort of be additive to 2023? Thank you.

Jamie Cook:

Okay, Thank you.

Operator:

Your next question comes from the line of Michael Feniger with Bank of America. Your line is now open.

Andrew Bonfield:

Hey, Michael.

Jim Umpleby:

Well, certainly, as we mentioned, we do see our customers displaying capital discipline. However, we do see as I mentioned in my prepared remarks, a lot of strength in oil and gas. I mean, reciprocating engines is an area of strength. Solar turbines, their order rates have improved quite substantially, which should help us in 2023. So one of these to keep in mind, of course, is that customers need to maintain oil and gas production to maintain a certain level of production requires continued investment to just to maintain a flat level of production. And so, again, we are certainly encouraged by the signs that we see in terms of the order rates that are coming and based on the conversations we're having with customers. We feel good about our prospects there.

Jim Umpleby:

Hi, Tim.

Tim Thein:

Hi, good morning. Thanks. Just maybe another one back on the manufacturing cost. And again, I get it, there's a ton of pieces within that. But maybe we just circle back on the point about material and freight. Especially on the freight side, we've seen more real time, some fairly significant declines there. Obviously that doesn't impact you the next day, but what kind of lagged relationship would there be or should we expect? Again, just as we think about some fairly significant declines here in recent months, especially on the freight side and when that potentially begins to impact Cat. Thank you.

Operator:

Your next question comes from the line of Jerry Revich with Goldman Sachs. Your line is now open.

Jim Umpleby:

Good morning, Jerry.

Jerry Revich:

Jim, really interesting to hear you talk about full year margins at the low end of your Analyst Day range considering how good the results were versus consensus expectations this quarter. I’m wondering if you could talk about to get to the mid-point of the range? Is it as simple as the pricing actions that are already locked in? Or are there other discrete steps that you’re planning in any of the businesses to get you to the targeted levels. I guess based on the 2023 list prices that you folks have in place, it feels like pricing should be accelerating further into the first quarter. So I’m wondering, does that get you to where you want to be? Thanks.

Jerry Revich:

Thanks.

Operator:

Your next question comes from the line of Stanley Elliott with Stifel. Your line is now open.

Stanley Elliott:

Hey, good morning, everyone. Thank you all for the question.

Stanley Elliott:

One quick question. You mentioned if supply chain gets a little bit better, you start to see the dealer inventory piece kind of square back up a little bit into next year. Even if we do get a supply chain improvement, will you still be below kind of what would be normal historical levels at the dealer inventory? Just curious how to think about that. Thanks.

Andrew Bonfield:

Yes. And just to remind you that dealers are independent businesses, so they make their own decisions about the inventory is not something we can control. So they will actually build it based on what they – their expectations of the outlook as well.

Operator:

Your next question comes from the line of Chad Dillard with Bernstein. Your line is now open.

Andrew Bonfield:

Good morning, Chad.

Jim Umpleby:

Yes. So the profitability around diesel engine versus batteries. There’s a lot of puts and takes there. And again, we are still working our way through what our services model would be and all that. We are excited about the opportunities that exist. And one of the things that we believe positions us very well is the fact that we have an energy and transportation segment, which allows us to have additional opportunities with our mining customers to help them get the site ready. So just to resolve any confusion, the trucks that we start shipping next year for that mine will not be 100% battery trucks. So I think that was inherent in your question. So they’re diesel electric trucks. Just to clarify that and that can be a misunderstood my statement.

Jim Umpleby:

You bet.

Jim Umpleby:

Hi, Steve.

Jim Umpleby:

We’re working closely with our suppliers and as I think all companies are doing, thinking about our supply chain, and certainly, resilience is very important. And of course, given the capital-intensive nature of our business and our suppliers, it isn’t easily to make changes quickly, but we are working closely with our suppliers trying to ensure that we have second sources and as many cases. In most instances, we’re doing things in our factories as well to really try to anticipate issues that are happening. There’s no single magic button that we can push to make these issues go away. Again, it really comes down to our teams and our factories working to be creative to find ways to mitigate disruptions and again, working with our suppliers to try to get as much supply as we can get.

Steven Fisher:

Thank you.

Jim Umpleby:

Good morning, Kristen.

Andrew Bonfield:

Good morning, Kristen.

Jim Umpleby:

If we step back and think about it from a global macro perspective, certainly, the increased investment in oil and gas benefits our business and that’s been driven by a whole variety of issues. The situation in Europe is only one of them. But as an example, if in fact the U.S. looks to export more LNG as an example, Caterpillar participates across a wide portion of that natural gas value chain where engines are used for drilling, our engines, reset engines drive ship compressors for gas gathering. We’re very involved at the well servicing side now with our acquisition from where oil and gas, we play a larger portion there. Our solar gas turbines driving our [indiscernible] natural gas compressors compress gas down the pipelines. So as an example, there is a drive for more LNG. Again, that that would benefit our business. So again, a lot – there are a lot of factors there that are driving, of course, the dynamics in the oil and gas business. But our participation there, again, I believe, stands to benefit from just the increased investment that most believe will happen over the next few years.

Jim Umpleby:

Yes, great example is the HS2 project in the UK, right, where a lot of Caterpillar equipments being used. So infrastructure in Europe is important. And a lot of that, of course, is government support.

Andrew Bonfield:

Emma, are you there?

Matt Elkott:

Good morning. Thank you. And if I may take it back to North America. I know you guys have touched on the unfavorable trends in residential construction in recent quarters. But I’d love to hear your thoughts on how the current housing downturn feels relative to prior housing downturns from perspective? In other words, the impact you’ve seen so far on your equipment business this year relative to a similar point of the housing cycle downturn. I know that’s probably not super easy to gauge, but any thoughts would be helpful.

Matt Elkott:

Great. Thank you very much.

Larry DeMaria:

Thanks. Good morning. Relates to the prospects of oncoming recession, are you seeing any concerns out there yet aside from residential? Obviously, overall, orders are pretty strong. And are you doing anything to prepare now for one or is it more or less wait and see, considering the backlog is strong and it’s low inventory?

Larry DeMaria:

Thank you.

John Joyner:

Hey, good morning.

John Joyner:

Thank you for taking my – good morning. So I hate to pile on the manufacturing inefficiencies. But I guess how would you characterize the constraints today versus, say, six months ago, a year ago or earlier this year was a 10 with 10 being the worst, what would it be today? I mean I’m just trying to gauge how much things have improved or not? And maybe are there any areas that might not ever normalize?

Andrew Bonfield:

Yes. And in terms of value, they are higher now than they were in Q2 and Q1. And obviously, that is something we’re monitoring and keeping a very close eye on most of the manufacturing inefficiencies. It’s not just how the process works. It is actually labor related. And part of that is obviously in an environment where we still see strong demand signals. You don’t want to – even though your labor may be slightly higher than you would need for the level of production you’ve got you will actually keep those people working in the plants because there’s plenty for them to do. So that is the main cause of inefficiency that we’re seeing today.

Operator:

Your next question comes from the line of Seth Weber with Wells Fargo. Your line is now open.

Jim Umpleby:

Yes. Honestly, it is a mixed bag. Caterpillar, as you know, has a very diverse product line, and we have a very diverse group of suppliers, thousands of suppliers around the world, and there isn’t one answer there. So we continue to see semiconductor availability challenges are impacting things like engine control modules, which have an impact on many of our products. So that’s still a challenge even though, certainly, we follow what happens in the semiconductor industry, and we’ve read about some of the improvements for the ones that we use. And again, those that go into ECMs, that’s still a bit of a challenge. My sense is that – so many suppliers that are struggling now are quite reluctant to make any kind of predictions because many people have made predictions since we’ve gone into the situation that have proved to be wrong about improvement. So again, what we’re doing is working with them as closely as we can to help them get as much supply out as they can. And as we mentioned earlier, to try to mitigate the impact of those shortages in our factories and that’s really our focus.

Operator:

Excellent. Today’s final question comes from the line of Tami Zakaria with JPMorgan. Your line is now open.

Tami Zakaria:

Hi. How are you? Thank you for taking my question. So based on the orders you’re taking and the backlog you’re clearing, any comments on what pricing may look like next year? Because it seems like you’re going to get double-digit pricing this year. Should double-digit pricing sustain at least to the first half of next year as we run through the backlog?

Andrew Bonfield:

As regards the run rate, obviously, just to highlight, we’re not talking about 2023 yet, but just think about the fourth quarter. We are actually wrapping some price increases that we saw in the third quarter – fourth quarter of last year. So we will see slight moderation of price in the fourth quarter, still very strong. Obviously, that will help us as we move into 2023. But obviously, as Jim said, we’re not yet into that situation where we have a plan that we can give you. And obviously, competitive positioning is obviously critical as part of that.

Ryan Fiedler:

Great. Thank you, Jim, Andrew and everyone who joined us today. A replay of our call will be available online later this morning. We’ll also post a transcript on our Investor Relations website as soon as it’s available. You’ll also find a third quarter results video with our CFO and an SEC filing with our sales to users data. Click on investors.caterpillar.com and then click on Financials to view those materials. If you have any questions, please reach out to Rob or me. The Investor Relations general phone number is (309) 675-4549. We hope you enjoy the rest of your day. And now I’ll turn it back to Emma to conclude the call.

Ryan Fiedler:

Thank you, Emma. Good morning, everyone, and welcome to Caterpillar's Second Quarter of 2022 Earnings Call. I'm Ryan Fiedler, Vice President of Investor Relations. Joining me today are Jim Umpleby, Chairman and CEO; Andrew Bonfield, Chief Financial Officer; Kyle Epley, Senior Vice President of the Global Finance Services Division; and Rob Rengel, Senior IR Manager. During our call today, we'll be discussing the second quarter earnings release we issued earlier today. You can find our slides, the news release and a webcast recap at investors.caterpillar.com under Events and Presentations. The content of this call is protected by U.S. and international copyright law. Any rebroadcast, retransmission, reproduction or distribution of all or part of this content without Caterpillar's prior written permission is prohibited. Moving to Slide 2. During our call today, we'll make forward-looking statements, which are subject to risks and uncertainties. We'll also make assumptions that could cause our actual results to be different than the information we're sharing with on this call. Please refer to our recent SEC filings and the forward-looking statements reminder in the news release for details on factors that individually or in aggregate could cause our actual results to vary materially from our forecast. On today's call, we'll also refer to non-GAAP numbers. For a reconciliation of any non-GAAP numbers to the appropriate U.S. GAAP numbers, please see the appendix of the earnings call slides. Today, we reported profit per share of $3.13 for the second quarter of 2022 compared with $2.56 of profit per share in the second quarter of 2021. We're including adjusted profit per share in addition to our U.S. GAAP results. Our adjusted profit per share was $3.18 for the second quarter of 2022 compared with adjusted profit per share of $2.60 for the second quarter of 2021. Adjusted profit per share for both quarters exclude restructuring costs. Now let's turn to Slide 3 and turn the call over to our Chairman and CEO, Jim Umpleby.

Andrew Bonfield:

Thank you, Jim, and good morning, everyone. I'll start by walking you through our second quarter results, including the performance of our segments. Then I'll comment on the balance sheet and free cash flow before concluding with our expectations for the third quarter and remainder of the year. Beginning on Slide 8. Sales and revenues for the second quarter increased by 11% or $1.4 billion to $14.2 billion. The increase was due to price and volume, partially offset by currency. Operating profit increased by 9% or $155 million to $1.9 billion as price realization and volume growth were partially offset by higher manufacturing and SG&A and R&D costs. Our adjusted operating profit margin of 13.8% was slightly below the year-ago level despite the underlying inflationary and supply chain pressures. Adjusted profit per share was $3.18 in the second quarter compared to $2.60 last year. Adjusted profit per share for both quarters excluded restructuring costs, which had a similar impact in both quarters. Taxes included discrete tax impacts, which benefited the quarter by about $0.10. Now on Slide 9. As Jim mentioned, the top line was generally in line with our expectations on strong price and service revenues with a bit of currency as a headwind as the U.S. dollar continued to strengthen. Machine sales to users were impacted by supply chain challenges was slightly worse than we had anticipated. Overall, we are not seeing signs of slowing demand as order levels and backlog remain healthy. Our retail statistics, or sales to users, are normally strongly correlated to demand in a typical environment. However, the ongoing supply chain constraints continue to impact our ability to ship equipment. Dealer inventory changes had a minimal impact on the top line as a $400 million decrease versus the first quarter was similar to the reduction seen in the prior year. Services remain strong as we benefit from the impact of our services growth initiatives. Moving to Slide 10. As I mentioned, second quarter operating profit increased by 9% on favorable price and volume. Price realization was better than we had anticipated due to the strong demand for machines. Manufacturing costs were also slightly higher than expected, primarily due to continued material and freight cost pressures as well as the impact of supply chain on our factory performance. Overall, price exceeded manufacturing costs for the quarter, which reverses the trend we had seen for most of the past year. SG&A and R&D costs increased partly due to investments aligned with our strategy for profitable growth, in addition to higher short-term incentive compensation. Our second quarter adjusted operating profit margin of 13.8%, a 30 basis point decrease versus the prior year. This was slightly lower than we had anticipated in April, principally as equipment volume lagged our expectations. We also saw some negative mix within our segments. The net impact of higher price and increased manufacturing costs was about neutral. Before I discuss segment results, I want to address the impact of high inflation and inventory build had on our segment margins in the quarter. For background, in periods with rapidly rising input costs and inventory growth, a portion of these rising costs will be appropriately included in Caterpillar's ending inventory. In order to promote effective management decision-making within our segment results, we recognize material and freight cost changes as soon as they impact our input costs. For enterprise reporting, this negative impact on segment results is offset by a favorable impact at the corporate level. In a nutshell, inflationary cost pressures were elevated negatively impacting margins at the segment level, while enterprise margins performed much closer to our expectations. This dynamic is timing related, meaning we'll see things balance out as the inventory starts to decline and inflationary costs subside. Moving to Slide 11. Let's review segment performance, starting with Construction Industries. Sales increased by 7% in the second quarter to $6 billion, driven by favorable price realization. Volume decreased slightly as lower sales of equipment to end users was mostly offset by higher sales of aftermarket parts. North America had the highest growth in sales dollars, a 20% increase due to strong pricing, a favorable change in dealer inventory and continued strength in services. Sales of equipment to end users lagged the prior year slightly, driven by supply chain challenges. Residential and nonresidential demand remained healthy, although we saw some moderation in residential. Sales in Latin America increased by 48% as robust construction activity supported higher sales of equipment to end users. In EAME, sales decreased by 7%, primarily driven by the changes in inventories and currency while price was a partial offset. Asia Pacific sales decreased by 17% due in part to lower sales of equipment to end users, primarily in China, which had a strong quarter a year ago. Second quarter profit for Construction Industries decreased by 4% versus the prior year to $989 million. Price realization more than offset manufacturing costs. The profit decreased due to the impact of lower sales volume and mix. Unfavorable manufacturing costs largely reflected higher material and freight. The segment's operating margin decreased by 180 basis points versus last year to 16.4% as inflationary cost pressures impacted the segment margins, as I mentioned a moment ago. Turning to Slide 12. Resource Industries sales increased by 16% in the second quarter to $3 billion. The improvement was primarily due to favorable price realization and higher sales volume. Volume increase on sales of aftermarket parts. Second quarter profit for Resource Industries increased by 2% to $355 million as price and volume more than offset unfavorable manufacturing costs, which largely reflected higher material and freight costs. The segment's operating profit margin decreased by 170 basis points versus last year to 12% as inflationary cost pressures impacted the segment margins similar to Construction Industries. Now on Slide 13. Energy & Transportation sales increased by 15% to approximately $5.7 billion with sales up across all applications. This included an 8% sales increase in oil and gas as sales of aftermarket parts, reciprocating engines and engines used for well servicing and gas compression increased. Solar turbine sales and oil and gas applications lagged the prior year. Power generation sales increased by 13% on stronger sales volume in small reciprocating engines and aftermarket parts. Sales of solar turbines increased in power generation. Industrial sales rose by 24% with strength across all regions. Finally, transportation sales increased by 7% on reciprocating engine aftermarket part sales and strength in rail services. Second quarter profit for Energy & Transportation decreased by 11% to $659 million. Higher manufacturing costs reflected continued headwinds from inflationary cost pressures in freight and material, which were partially offset by favorable price realization and higher sales volume. As a reminder, Energy & Transportation took price increases later in the year in 2021, given the different market dynamics as compared to the other primary segments. In addition, SG&A and R&D expenses increased due to investments aligned with our strategic initiatives, including electrification and services growth, coupled with higher short-term incentive compensation. The segment's operating margin decreased by 320 basis points versus last year to 11.6%, impacted by the same inflationary cost pressures as our other primary segments. Moving to Slide 14. Financial Products revenue increased by 3% to $798 million. Segment profit decreased by 11% to $217 million. The profit decrease was mainly due to an unfavorable impact from movements in equity securities and insurance services. Our higher provision for credit losses at Cat Financial primarily relating to reserves associated with Russia and Ukraine also weighed on profit. A favorable impact from return to repossessed equipment served as a partial offset. Moving to our credit portfolio. Customers and dealers continue to perform well as our leading indicators remain strong. Past dues, which are a good proxy for the financial health of our customers were 2.19% compared to 2.58% at the end of the second quarter 2021. That's down 39 basis points year-over-year. As is typical, retail new business volume improved sequentially versus the first quarter. And while we did see a 12% decrease versus the prior year, nearly half of that decline was attributable to China, where we saw COVID restrictions reinstated. In addition, although our match funding strategy serves to mitigate our risks from interest rate changes, rising rates typically do benefit banks from a competitive financing perspective. We saw this play out in the second quarter as our share of machines financed declined slightly. We continue to benefit from robust demand for used machines from both a volume and price perspective. This reflects the underlying demand trends we are seeing for equipment. Now on Slide 15. We generated about $1.1 billion in ME&T free cash flow during the quarter, a decrease of about $600 million versus the second quarter 2021. We continue to build production inventory to help manage through supply chain challenges. Looking ahead, we expect stronger free cash flow in the second half due to the absence of the payment of incentive compensation. We also do not anticipate our working capital rise as it did in the first half of the year. Therefore, we continue to expect to achieve our Investor Day ME&T free cash flow target of between $4 billion and $8 billion for the full year. As Jim mentioned, we paid around $600 million in dividends, in addition to repurchasing about $1.1 billion worth of common stock, supporting our objective to be in the market on a more consistent basis. Enterprise cash was $6 billion, a $500 million decrease compared to the first quarter of 2022. The decrease was primarily driven by the $1.7 billion in shareholder return, net of ME&T free cash flow generation. We also continue to hold some of our cash balances and slightly longer dated liquid marketable securities in order to improve the yield on that cash. Our liquidity remains strong. Now on Slide 16. In light of the current environment, including supply chain constraints, we continue to refrain from providing annual profit per share guidance. However, I will share some thoughts on our third quarter and full year. As a reminder, the second quarter played out about as we had anticipated on the top line, although the inputs varied somewhat. Pricing was better than expected, while sales of equipment to end users lagged our expectations due to supply chain challenges and additional weakness in China. Looking at the third quarter, we currently anticipate the top line will increase compared to the prior year on higher sales to users and favorable price realization. Strong demand should support higher sales across the three primary segments, subject to our ability to navigate through the ongoing supply chain changes. For the second half of the year, we expect revenues to be higher compared to the first half. To reiterate Jim's comment, we remain encouraged by the strong demand in our end markets for our equipment and services. Order levels and backlogs remain strong. Dealer inventory levels remain at the low end of the typical range and rental fleets are aging. Finally, infrastructure investment later in the year should be supportive. On margins in the third quarter, we anticipate gains across our three primary segments as compared to the prior year and first half. Construction Industries and Resource Industries margins should improve as price realization continues to flow through and more than offset manufacturing cost inflation. In Energy & Transportation, we expect pricing to continue to gain momentum and offset manufacturing costs. For the second half of the year, both the enterprise and segment levels, we anticipate adjusted operating profit margin improvement compared to both the first half and the comparable periods of 2021. The impact of price actions should accelerate and though we anticipate continued increases in manufacturing costs, we are starting to let the significant increases, particularly in freight and material costs, that we saw in the second half of the last year. Finally, to assist you with year modeling, we currently expect our accrual for short-term incentive compensation to be around $1.6 billion this year. We continue to anticipate a global effective tax rate of around 24% and restructuring spend of approximately $600 million for the full year. Turning to Slide 17. In summary, we performed well in the quarter where demand generally remains strong, but our ability to satisfy that demand was constrained by supply chain challenges. Despite this backdrop, we realized $1.4 billion more in sales and revenue, supported by strong price realization and services. Looking ahead, comparisons should ease in the second half of the year, and despite the challenging environment, we continue to expect to achieve our Investor Day targets for adjusted operating profit margin and ME&T free cash flow for the full year. And with that, we'll now take your questions.

Jamie Cook:

I guess my question, understanding challenging environment, it sounds like the second quarter was a little short of your expectations yet we're raising our short-term incentive comp. So just trying to get some clarification around that. And then any -- on confidence level sales to users are improving in the back half of the year. Are you seeing any improvement in supply chain and sort of how we should think about it?

Andrew Bonfield:

However, let me just add, one of the things, if you recall, Jamie, is normally, we have a stronger first half from a production perspective, particularly in Construction Industries. Obviously, as you -- normally, you would see revenues decline in the second half. We don't expect that because, obviously, we expect to be able to now use some of that production capacity to meet some of the end user demand. Within Resource Industries, we will expect -- we've had some commissioning delays. We've continued to see that. We expect those to ease, which will help us in the second half from a Street perspective. So that's not really supply chain related. And then finally, in Energy & Transportation, as always, we do expect a stronger second half of the year. That overall gives us confidence without actually any change in supply chain that we should be able to see through improvement in the second half of the year.

Tami Zakaria:

Could you share what your volume expectation is for the back half? It seems like your volume growth in the first half was in the 3% to 4% range. Do you expect that volume to improve sequentially in both 3Q and 4Q? And what about pricing for the back half, should we expect similar 8% to 9% pricing as well like you saw in the second quarter?

Andrew Bonfield:

Yes. And as far as actually the percentage is concerned, obviously, the issue, obviously, in the second half on a volume basis, there's a -- volume includes both services revenues as well as SKUs. So obviously, it's dependent on how both of those perform. And on the sort of pricing level, as we've said consistently, we expect pricing to improve in the second half of the year, which should drive overall improvement as we go through the year. Reminder, we did have some price increases in the second half of 2021 as well.

Nicole DeBlase:

Maybe just digging into that last question from Tami a little bit. On the outlook for volume, is that improvement that you're expecting in the second half fall, or predominantly a function of end user demand? Or what are your expectations for dealer inventories as well?

Jim Umpleby:

And as it typically the case, Energy & Transportation will have strong -- will be stronger at the end of the year than they were in the first half of the year, particularly solar turbines.

David Raso:

Your backlog surprisingly went up sequentially. And the backlog right now, seems like it covers most of your back half of the year, but historically, not all the backlog ships that quickly. So I'm just curious, the order flow that you're getting for '23 right now, can you give us some insight into -- we know you have a big backlog and still some supply chain issues, price cost is getting better, but really trying to think about demand into '23. You do have some window with some of the order programs, the BOM program that you have where guys can order early for '23. Can you just give us some perspective on what you're seeing for equipment appetite for next year?

Operator:

Your next question comes from the line of Jerry Revich with Goldman Sachs.

Jim Umpleby:

Well, certainly, our mining customers continue to display capital discipline. Having said that, we're encouraged by the conversations that we're having with our mining customers. They're making decisions based on a very long-term view. And of course, the energy transition is creating perceived additional demand for many commodities moving forward, think about electric vehicles, think about other kinds of minerals that will need to be mined based to support the energy transition. So having said that, we mentioned that we had some cancellations in Russia. But again, we remain quite positive based on -- for the medium and long-term outlook for mining based on the conversations that we're having with customers.

Chad Dillard:

I have a question for you guys on manufacturing costs. You did about, I think it was $966 million year-on-year increase. Is that the high watermark for the year? And then just how to think about the -- or if you can quantify that inventory impact in corporate expenses for the quarter and how to think about it for the year?

Operator:

Your next question comes from the line of Michael Feniger with Bank of America.

Jim Umpleby:

Well, thanks for your question, Michael. And of course, we have a rental business as well that our dealers are very focused on. And again, we are in a supply chain constrained environment. So dealer has to make a decision between putting something in the rental fleet or selling it to a retail customer who wants that equipment. And so our retail fleet is aging. Having said that, we're not concerned about share. We're holding our own. It's really an issue of still strong demand and just our ability to completely meet that strong demand. Again, we did turn in a total company level, double-digit sales growth.

Operator:

Your next question comes from the line of Stephen Volkmann with Jefferies.

Jim Umpleby:

Yes, we're still dealing with an inflationary environment, and we have not seen a decrease from our suppliers as a result of commodity price reductions. As you know, it takes a while for those kind of changes to work their way through the supply chain. And of course, there's volatility there as well. So, no. The short answer to the question is no, we haven't seen any moderation in those costs.

Mig Dobre:

Just going back to the pricing discussion. You've done a little better than 9% in the quarter. But I'm sort of curious if we're sort of thinking about the order intake that you had this quarter relative to what actually flowed through the P&L, can you give us a sense for how the pricing is looking for the most recent orders that you had here? And I'm also thinking about your competitors, right? We saw some of your Japanese competitors report much lower price increases. So I'm curious how you think about competitive dynamics globally around that?

Jim Umpleby:

And as you know, we've been very focused on services in the last few years and one of the main elements of that is to increase the value that we provide to our customers. So it's not simply a always a price discussion. We know we must be competitive, that's very important, but we also strive to deliver increased value to our customers, minimizing downtime, maximizing availability, great product support, dealers do a great job supporting them. So again, it's more than just price. We're really focused on through our services initiatives, increasing the value that we provide to our customers. And that's all part of their purchasing decision.

Kristen Owen:

I wanted to follow up actually on the services and aftermarket strength that you reported in the quarter. And just if you could offer some context around how much of that is owing to some of the service alert capabilities and the agreements that you've been signing over the last several years versus just what you're seeing from a utilization perspective, how much of the aftermarket parts is related to just equipment that's being used more frequently?

Operator:

Your next question comes from the line of Steven Fisher with UBS.

Jim Umpleby:

Well, starting with Europe. Revenues were down in the quarter, largely a result of the strengthening dollar. So it's really a currency issue. General business activity has moderated in the EU, and we'll keep a close eye on that. But there are -- as you know, there has been -- there was an EU infrastructure package that passed and we're watching that closely as well, and that certainly could positively impact us moving forward. So again, we're watching it very closely. There's some positives. There are some things that aren't so positive. So we'll see how it all plays out. In China, we have seen the market weaken, as I mentioned. We had a couple of very strong years in 2020 and particularly in 2021. It's too early for us to really predict what's going to happen there. To your specific question, again, we'll continue to support our customers there. And again, what we see now, of course, is a weaker market for that 10-ton and above excavator market than we had previously.

Matt Elkott:

Good to see the continued strong net growth in the backlog. I was hoping you can tell us if you've had any backlog cancellations not related to Russia, as you discussed, but ones that can be attributable to directly or indirectly to higher interest rates, lower commodity prices or the cooling in the housing market? And since the answer to this question may be short, on the locomotive side, I was hoping if you can comment on, I think, your competitor just received a $1 billion order from a Class 1 on locomotive mods. I was hoping you can talk about your outlook for locomotive upgrades going forward and do local upgrades go into your service revenue?

Operator:

Your next question comes from the line of Tim Thein with Citi Group.

Jim Umpleby:

Right. And certainly, dealer inventory and dealer rental fleets are lower than most dealers would like at the moment due to a combination of strong demand and the supply chain constraints we have. So I do believe that when supply chain constraints start to ease, both of those represent an opportunity for us to get our dealer inventory back more towards what would be typical for them to expect and also give them an opportunity to increase their rental fleets as well. So I do believe, again, not time-bounding that, but certainly, when supply chain conditions ease, that does create an opportunity for us.

Dillon Cumming:

Just wondering if you could kind of expand on your prepared remarks in terms of what you're seeing on the resi side of the construction portfolio versus the non-res side. I think you mentioned resi, in particular has been pretty strong for you guys for almost the past two years, I imagine dealer inventories are probably pretty lean at this point. But I guess, do you feel like that part of the portfolio might start to become a drag on back half of the year just into next year, just given some of the softening that you're seeing in the housing-related data points?

Andrew Bonfield:

And just a reminder to everybody, when we do see demand softening in certain areas that always mean -- and because we are in a supply chain constrained time and particularly around things like engine control modules, that means those can be reallocated to areas where there's stronger demand. So net-net, actually shouldn't actually have any impact on us overall.

Operator:

Your final question today comes from the line of Rob Wertheimer with Melius Research.

Andrew Bonfield:

Yes. So obviously, yes, I mean, Rob, we are still seeing issues in the factories, which are causing some impacts on variable labor and burdens across that. Obviously, our assumption in the second half is that those will be slightly better, but not necessarily flowing through as efficiently as possible. We're continually working through as best as we can to make sure that. But price is the biggest driver because obviously, as you know, we put through those increases and order to try and offset some of that material cost inflation that's gone through. But yes, there is inefficiency, but we're hoping that some of that will ease as we go through the remainder of the year.

Ryan Fiedler:

All right. Thank you, Jim, Andrew and everyone who joined us today. A replay of our call will be available online later this morning. We'll also post a transcript on our Investor Relations website as soon as it's available. You'll also find a second quarter results video with our CFO and an SEC filing with our sales to users data. Click on investors.caterpillar.com and then click on Financials to view those materials. If you have any questions, please reach out to Rob or me. The Investor Relations general phone number is (309) 675-4549. We hope you have a great rest of the day. Now let's turn the call back to Emma to conclude our call.

Ryan Fiedler:

Thank you, Emma. Good morning, everyone and welcome to Caterpillar’s first quarter of 2022 earnings call. I am Ryan Fiedler, Director of Investor Relations. Joining me today are Jim Umpleby, Chairman and CEO; Andrew Bonfield, Chief Financial Officer; Kyle Epley, Vice President of the Global Finance Services Division; and Rob Rengel, Senior IR Manager. During our call today, we will be discussing the first quarter earnings release we issued earlier today. You can find our slides, the news release and a video recap at investors.caterpillar.com under Events and Presentations. I would also like to remind everyone that we are hosting Caterpillar’s Investor Day on May 17 from 10:30 a.m. to 3 p.m. Central Time at the Hilton DFW Lakes Executive Conference Center in Grapevine, Texas. Our theme is services, technology and sustainability, helping our customers build a better world. Please check out the details on our investor website. Caterpillar has copyrighted this call and we prohibit use of any portion of it without our prior written approval. Moving to Slide 2. During our call today, we will make forward-looking statements, which are subject to risks and uncertainties. We will also make assumptions that could cause our actual results to be different than the information we are sharing with you on this call. Please refer to our recent SEC filings and the forward-looking statements reminder in the news release for details on factors that individually or in aggregate could cause our actual results to vary materially from our forecast. On today’s call, we will also refer to non-GAAP numbers. For a reconciliation of any non-GAAP numbers to the appropriate U.S. GAAP numbers, please see the appendix of the earnings call slides. Today, we reported profit per share of $2.86 for the first quarter of 2022 compared with $2.77 of profit per share in the first quarter of 2021. We are including adjusted profit per share in addition to our U.S. GAAP results. Our adjusted profit per share was $2.88 for the first quarter of 2022 compared with adjusted profit per share of $2.87 for the first quarter of 2021. Adjusted profit per share for both quarters excluded restructuring costs. Now, let’s flip to Slide 3 and turn the call over to our Chairman and CEO, Jim Umpleby.

Andrew Bonfield:

Thank you, Jim and good morning everyone. I will begin with a recap of our first quarter results, including the performance of our segments. Then I will comment on the balance sheet and free cash flow before concluding with a few comments on our expectations as we move into the second quarter of 2022. Beginning on Slide 8, sales and revenues for the first quarter increased by 14% or $1.7 billion to $13.6 billion. Volume, including higher dealer inventory build and price drove the increase in sales and revenues, which as Jim mentioned was slightly better than we had expected. Operating profit increased by 2% to $1.9 billion as price realization and volume growth were partially offset by higher manufacturing and period costs. Our adjusted operating profit margin of 13.7% was slightly better than we had anticipated primarily due to the stronger-than-expected volumes and favorable price realization. First quarter profit per share was $2.86 compared to $2.77 in the prior year. Adjusted profit per share was $2.88 in the first quarter compared to $2.87 last year. Adjusted profit per share for both quarters excludes restructuring costs. Our global tax rate in the quarter was about 24%, slightly lower than we had guided you in January. However, on a comparable basis, the lower tax rate was offset by lower favorable discrete tax benefits compared to the prior year. Now on Slide 9, as we anticipated, top line improved on stronger volume and price realization. End user demand increased versus the prior year, but the growth rate accelerated on a sequential basis due to tougher comparisons, especially in China. Dealer inventory rose by about $1.3 billion. Services revenues remained strong in the quarter. Price realization strengthened, while currency was a bit of a headwind. Let me provide some color on dealer inventory. The $1.3 billion increase versus year end 2021 was nearly double what we had anticipated and about $600 million more than the increase we saw in the same quarter last year. About half of that $600 million increase year-on-year came from Resource Industries due to the timing of shipments from our dealers to their customers, which can be lumpy. These units are backed by firm customer orders, but were not recognized in our reported retail sales for the quarter. This is in part due to variations in onsite assembly times. The other half of the deal inventory increase was mainly due to the timing of shipments in Construction Industries late in the quarter. We anticipate that dealers will start to sell down the inventories in the second quarter following their normal seasonable pattern on strong sales to users. Our expectations for the full year haven’t changed and we do not expect to see a significant benefit from dealer restocking in 2022 as end-user demand remains strong. First quarter sales and revenues increased by double-digit percentages in all regions, except Asia-Pacific. Sales in North America rose by 23% with continued growth in the three primary segments. In EAME, sales increased by 15%, while Latin America sales grew by 26%, a 4% decrease in Asia-Pacific sales was primarily due to softening in China. Sales in the remainder of that region were positive. Moving to Slide 10. As I mentioned, first quarter operating profit increased by 2% on favorable price and volume. Price realization was slightly better than we had anticipated. Manufacturing costs remain elevated, but in line with our expectations primarily due to continued material and freight cost headwinds. SG&A and costs increased partly due to investments in services and technologies such as digital, autonomy and electrification. Our first quarter adjusted operating profit margin was 13.7%, a 210 basis point decrease versus the prior year. As we said in our fourth quarter 2021 earnings call, we expected the largest margin headwinds to occur in the first quarter. First quarter margins were lower than the prior year. Favorable price realization did not offset higher manufacturing costs, but did improve compared to the fourth quarter of 2021. Margins were slightly better than we had anticipated on stronger price and volume partially offset by higher than expected short-term incentive compensation. I will discuss our expectations for the second quarter and full year margins in a bit more detail later. Moving to Slide 11, let’s review segment performance starting with Construction Industries. Sales increased by 12% in the first quarter to $6.1 billion primarily driven by favorable price realization and strong sales volume. End-user demand improved in three of the four regions. North America had the highest sales growth in sales dollars, a 28% increase, as non-residential demand improved and residential construction remains strong. Sales in Latin America increased by 60% as construction activity supported higher demand, EAME sales increased by 18% primarily due to growth in residential construction demand. However, Asia-Pacific sales decreased by 21% due to a reduction in sales in China, which had a very strong quarter a year ago. The segment’s first quarter profit increased by 1% versus the prior year to $1.1 billion. Price realization and higher sales volume drove the increase more than offsetting increases in manufacturing costs. Price realization was stronger than we had anticipated but lagged manufacturing costs in the quarter. The segment’s operating margin decreased by 180 basis points to 17.3%. Turning to Slide 12. Resource Industries sales increased by 30% in the first quarter to $2.8 billion. The improvement was mostly due to higher end-user demand, the impact from changes in dealer inventories and favorable price. End-user demand increased in heavy construction and quarrying aggregates as well as mining. First quarter profit for Resource Industries increased by 16% to $361 million. Higher sales volume and favorable price realization were partially offset by higher manufacturing costs and increases in SG&A and R&D expenses. Manufacturing cost increases were primarily due to freight and material. The segment’s operating margin decreased by 150 basis points versus last year to 12.8%. Now on Slide 13. Energy & Transportation sales increased by 12% to approximately $5 billion with sales up across all applications. This included a 4% sales increase in oil and gas, including aftermarket parts for reciprocating engines. Power generation sales increased by 5%. Small reciprocating engine sales improved. Solar turbine sales were lower in the quarter for oil and gas and power generation applications, impacted by a higher-than-usual first quarter in 2021. Industrial sales rose by 25%, with strength across all regions. Finally, transportation increased by 9% on reciprocating engine cells for both aftermarket parts and marine applications. Profit for Energy & Transportation decreased by 20% to $538 million. Higher sales volume and price realization were more than offset by higher manufacturing costs, reflecting continued headwinds from freighter material. In addition, SG&A and R&D expenses increased. The segment’s operating margin decreased by 430 basis points versus last year to 10.7%. Let me take a moment to provide a bit more color on Energy & Transportation margins. Seasonally, first quarter margins are typically lower compared to the rest of the year in this segment. However, the first quarter of 2022 proved a bit more challenging due to continued supply chain constraints, including elevated freight and material costs. I’ll discuss very generally, but note that increased freight costs have impacted this segment more than others. Also, Energy & Transportation took price increases later in the year 2021 given the different marketing dynamics as compared to the other primary segments. However, similar to the other segments, we expect margins to improve through 2022 as the benefit of higher price realization starts to pull through. Moving to Slide 14. Financial Products had another good quarter. Revenue increased by 3% to $783 million. Segment profit decreased by 2% to $238 million. Whilst profit was down, this represents our second highest first quarter profit in 8 years. The decrease was mainly due to a higher provision for credit losses at Cat Financial related to reserves associated with Russia and Ukraine. Note, the Russian-Ukraine generally accounts for about 2% of Caterpillar’s enterprise sales and less than 1% of the Cat Financial portfolio. Demand for used equipment remained very strong in the quarter, and that helped mitigate the impact of higher provisions. Moving to our credit portfolio. It remains high quality as customers and dealers continue to perform well in the quarter. Past dues were 2.05%, the best first quarter performance we’ve seen in 15 years. That’s down 85 basis points year-over-year and up just 10 basis points compared to the fourth quarter, which had marked a 15-year low. While new business volume typically decreased versus the fourth quarter, this is typical seasonality. New business volume was our second highest first quarter performance in 8 years, second only to the prior year, which benefited from pent-up demand following COVID-related shutdowns. Regarding interest rate changes, we are in a good position as our matched funding strategy serves to mitigate that risk. We also maintained healthy spreads on new business. Now on Slide 15. We had an ME&T free cash outflow of about $400 million, a decrease of $2.1 billion versus the first quarter of 2021. Let me take a moment to discuss the changes. In a typical year, the first quarter is our weakest from a cash generation perspective, primarily due to the payment of our incentives. We paid approximately $1.3 billion in short-term incentive compensation during the first quarter compared to zero in the prior year. This accounts for the majority of the difference year-over-year. In addition, we continue to build production inventory in the quarter by about $1 billion, which contributed to a negative net working capital impact of approximately $600 million. Despite these first quarter impacts, we continue to expect to achieve our Investor Day free cash flow target of between $4 billion and $8 billion for the full year. Moving to shareholder return. We paid around $600 million in dividends during the first quarter. We also repurchased about $800 million worth of common stock supporting our objective to be in the market on a more consistent basis. Enterprise cash was $6.5 billion, a $2.7 billion decrease compared to the year-end. The $400 million free cash outflow and the $1.4 billion in shareholder returns accounted for the majority of the decrease in our cash position. In addition, we have moved some of our cash balances into slightly longer-dated liquid marketable securities in order to improve the yield on that cash. This amounted to about $800 million in the quarter. Now on Slide 16. In light of the current environment, including supply chain constraints, we continue to refrain from providing annual profit per share guidance. However, I do want to share some thoughts on the second quarter and the full year. The first quarter played out slightly better than we had anticipated on the top line, resulting from higher volume and better-than-expected price tailwinds. Supply chain challenges remained steady, which we expect to continue into the second quarter. Despite these challenges, we anticipate the top line will increase compared to the first quarter and continued strong end user demand and favorable price realization. Looking to the remainder of the year, our order books and backlog remain robust. We expect continued strong end-user demand and pricing, although supply chain challenges will impact the extent to which we will be able to fully meet demand. As I mentioned, we do not expect to see a significant benefit from dealer restocking in 2022. On margins, as we discussed in January, we do not expect a typical year. In a normal year, we’d see strong margins in the first quarter with margins decreasing sequentially through the fourth quarter. However, this year, we expect margins to improve in the second half of the year compared to both the first half and the comparable period of 2021 as the impact of price actions accelerate. Comparisons ease in the back half of the year as well as we let the manufacturing cost increases from the prior year. As Jim mentioned, we continue to expect price to more than offset manufacturing costs for the full year. Specific to the second quarter, we expect similar margins to the prior year as additional price actions should offset manufacturing cost increases. Looking at the second quarter by segment. We do expect margins in both Construction Industries and Resource Industries to be close to or higher than the prior year as price improves and manufacturing cost headwinds are in line with the first quarter. Margin in Energy & Transportation still lag the prior year as the timing of price actions is late as compared to the other segments. However, we expect the lag in the second quarter was not – will not be as significant as it was in the first quarter. As we move into the second half of the year in Energy & Transportation, we expect a reduction in expediting costs and an improvement in efficiencies. Increases in large engine and turbine volumes versus 2021 should also positively contribute to margins in the second half of the year. However, it’s important to note that the majority of our core investments related to the energy transition will impact this segment. Finally, to assist with more modeling, we currently expect to add accrual for short-term incentive compensation expense to be around $1.3 billion this year. We anticipate a global effective tax rate of around 24% and restructuring costs of approximately $600 million for the full year. Turning to Slide 17. In summary, we performed well in a challenging environment. End-user demand remains strong, and we realized $1.7 billion more in revenues. Sales and margins were slightly better than we expected. Looking ahead, comparisons ease in the second half of the year, and we expect to achieve our Investor Day targets of adjusted operating profit margins and ME&T free cash flow. And with that, we will take your questions.

Rob Wertheimer:

Thanks and good morning, everyone.

Andrew Bonfield:

Good morning, Rob.

Jim Umpleby:

Thanks for your question, Rob. So just in terms of the backlog, the largest backlog increase was actually in Energy & Transportation and as orders continue to strengthen for both solar and for recip oil and gas. And as you know, those products tend to have longer lead times. Having said that, we are certainly working with our dealers to help them satisfy end-user demand. We do have a new S&OP process, and we do feel good about the quality of the orders that we’re getting in E&T and RI, again, which tend to have some of those longer lead times. So again, just a real positive backdrop moving forward.

Jamie Cook:

Hi, good morning and nice quarter.

Jamie Cook:

Jim, I guess my question, I’ll direct it towards you because it’s with regards to the E&T and you used to run that business. So can you help me understand – the top line was a little lighter than I would have thought. What are you hearing from your oil and gas customers? And how does that impact the trajectory of growth for E&T this year? And then I guess, on the margin side, I understand the puts and takes with solar and pricing having to come through an investment. But is there any way you can help us with how to think about sort of E&T margins as we exit the year, I don’t know if it’s investment – some of the investments you’re making will sort of create pressure on margins, I guess, over the longer term, so, thank you.

Jamie Cook:

So no structural headwind to margins.

Jamie Cook:

Okay, thank you.

Jamie Cook:

Okay, thanks.

Mig Dobre:

Thank you for the question. Appreciate it. I guess maybe a question for Andrew. Looking to kind of clarify some of your comments. In terms of price realization, I guess you were pretty clear that this continues to build momentum. You talked about E&P. I’m curious as to how you’re thinking about variable manufacturing costs sequentially, second quarter and the back half of the year, recognizing that the comps are a little bit different, but obviously, input costs have changed a little bit versus previous assumptions given all that’s been happening in the world. So how should we think about that framework?

Operator:

Your next question comes from the line of Steve Volkmann with Jefferies. Your line is now open.

Jim Umpleby:

Yes, Steve, I believe I mentioned commodity prices being supportive of RI as opposed to CI. But just to talk about CI a bit. Again, we talked about residential, non-residential improving infrastructure investments being made by various governments around the world. So, those are all tailwinds for CI. The commodity prices certainly are supportive of investment in RI and of course, E&T as well with oil prices.

Operator:

Your next question comes from the line of David Raso with Evercore. Your line is now open.