Caterpillar (CAT)

Q1 2011 Earnings Call

April 29, 2011 11:00 am ET

Executives

Edward Rapp - Chief Financial Officer and Group President of Corporate Services

Douglas Oberhelman - Chairman and Chief Executive Officer

Mike DeWalt - Director of Investor Relations

Analysts

Ann Duignan - JP Morgan Chase & Co

Jerry Revich - Goldman Sachs Group Inc.

Stephen Volkmann - Jefferies & Company, Inc.

Henry Kirn - UBS Investment Bank

Eli Lustgarten - Longbow Research LLC

Robert Wertheimer - Morgan Stanley

David Raso - ISI Group Inc.

Ted Grace - Susquehanna Financial Group, LLLP

TheStreet Recommends

Robert McCarthy - Robert W. Baird & Co. Incorporated

Jamie Cook - Crédit Suisse AG

Presentation

Operator

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Good morning, ladies and gentlemen, and welcome to the First Quarter 2011 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mike DeWalt. Sir, the floor is yours.

Mike DeWalt

Thank you. And good morning, everyone, and welcome Caterpillar's First Quarter Earnings Call. I'm Mike DeWalt, the Director of Investor Relations. And I'm pleased to have our Chairman and CEO, Doug Oberhelman; and our Group President and CFO, Ed Rapp, with me on the call today.

This call is copyrighted by Caterpillar Inc., any use, recording or transmission of any portion of this call without the expressed written consent of Caterpillar is strictly prohibited. If you'd like a copy of today's call transcript, we'll be posting it in the Investors section of our caterpillar.com website. It'll be in the area labeled Results Webcast.

This morning, we'll be discussing forward-looking information that involves risks, uncertainties and assumptions that could cause our actual results to differ materially from the forward-looking information. A discussion of some of those factors that individually or in the aggregate we believe could make actual results differ materially from our projections can be found in our cautionary statements under Item 1A, Risk Factors, of our Form 10-K filed with the SEC on February 22, 2011, and also in the forward-looking statement language contained in today's release.

Okay, this morning, we were pleased to report financial results for the first quarter of 2011 that were significantly better than last year's first quarter. Sales and revenues were over $12.9 billion, and profit was $1.84 a share in the quarter. Sales and revenues were up 57%, and profit was up over 400%. It was the best quarter for profit in our history. You'll also see in this morning's release that we raised the full-year outlook for 2011 sales and revenues and profits. And to start this morning, I'll summarize the results, then Doug, Ed and I will take your questions.

Also, in this morning's release, you may have noticed that we have made changes in our reporting format, including revised segment disclosures. As a part of the strategy update that Doug rolled out last year, the company was reorganized around end-to-end businesses managed by our Group President. That's how we're managing the company, and that's now how we're reporting. This morning's release is structured around those new segments. We're reporting sales and revenues by segment, and geography, and operating profit by segment, and we're providing sales and operating profit commentary by segment.

The segments that make up our Machinery and Power Systems businesses include both the sales of new equipment and aftermarket support for the businesses they serve. While there is a more complete description of each of the segments in the glossary in today's release, and I encourage you to read them, in a nutshell, the segments are: Construction Industries, which are essentially the businesses of CAT that support customers in most types of construction all around the world, everything from compact machines for a landscaper to larger machines to build a highway. Then there's Resource Industries, where we serve customers in areas such as mining, quarrying, and forestry. Next is Power Systems, which encompasses reciprocating engines and turbines across industries serving oil and gas, electric power, marine and industrial engines; and our Rail-related businesses, including new locomotives from EMD, and Rail Services from Progress Rail. We're reporting Financial Products in this segment, and there's an All Other Segments. The largest sales contributor to the all other segment is External Logistics and Remanufacturing. Again, I'd encourage you to read through the glossary of this morning's release to better understand what's in each segment.

Okay, let's get to the numbers. And again, sales and revenues were up 57%. Now in that number, Financial Products revenues were nearly flat, and Machinery and Power Systems sales were up 63% or $4.7 billion. Now in that 63% increase in sales, Construction Industries were up 71%; Resource Industries, up 84%; and Power Systems sales were up 51%. Another way to look at the $4.7 billion increase in sales, $4.1 billion of it was from higher sales volume. And most of the sales volume increase was driven by customer demand, with first quarter dealer-machine sales to end-users, up 61%. In addition, during the first quarter, dealers did increase dealer-machine inventory about $800 million from year-end 2010, and dealers commonly increased their inventories during the first quarter of the year to support higher end-user sales levels that usually occur during the spring and summer selling season. We do not expect to see this level of increase during the rest of the year. In the first quarter of 2010, by comparison, dealer-machine inventories were about flat with year-end 2009.

Now in addition to the higher volume, $295 million of today's sales increase was from improved price realizations. $264 million was from the acquisition of EMD that was not included in the first quarter of 2010, and currency impacts were positive to sales by $94 million. Sales improved in all 4 major geographic regions; North America, up 72%; Latin America, up 90%; Europe Africa/Middle East, up 67%; and Asia/Pacific, up 35%. Now the increase in North America may seem surprising with the continuing depressed level of construction activity in the United States. Housing starts are at historic lows. Commercial Construction is still very weak. But in the phase of weak construction activity, sales from our Construction Industry segment were 92% in North America. While the growth rate is dramatic, remember, it's coming off of a very low base in 2010. And sales of new construction equipment in North America remained well below the 2006 peak, in fact, new machine volume is still only about half of the 2006 peak levels. Now most of the machines sold in North America, we think, are likely replacing aging machines and customer fleets and in dealer rental fleets.

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