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.

Thanks, Ryan. Good morning, everyone. Thank you for joining us. As we close out the first half of 2023, I want to recognize our global team for delivering a very strong second quarter. This included double-digit top-line growth, higher adjusted operating profit margin, record adjusted profit per share, and robust ME&T free cash flow. Our results continued to reflect healthy demand across most end markets for our products and services. We remain focused on executing our strategy and continue to invest for long-term profitable growth. In today's call, I'll begin with my perspectives on our performance in the quarter. I'll then provide some insights on our end markets. Lastly, I'll provide an update on our sustainability journey. It was another strong quarter. Sales and revenues increased 22% in the second quarter versus last year. Adjusted operating profit margin improved 21.3%, up sequentially and year-over-year. We also generated $2.6 billion of ME&T free cash flow in the quarter. Our second quarter results were better than we expected for sales and revenues, adjusted operating profit margin, and ME&T free cash flow. In addition, we ended the quarter with a healthy backlog of $30.7 billion. We continue to see improvement in the supply chain, which allowed us to increase production in the quarter. However, areas of challenge remain, particularly for large engines, which impacts energy and transportation and some of our larger machines. While we continue to closely monitor global macroeconomic conditions, we now expect our 2023 results to be better than we had previously anticipated. Turning to Slide 4. In the second quarter of 2023, sales and revenues increased by 22% to $17.3 billion. This was primarily due to higher sales volume and price realization. Sales volumes were higher than we expected, largely due to an increase in dealer inventory relating to energy and transportation, which is supported by customer orders. We saw double-digit increases in sales and revenues in each of our three primary segments. Compared with the second quarter of 2022, overall sales to users increased 16%. For machines, which includes Construction Industries and Resource Industries, sales to users rose by 8%. Energy & Transportation was up 47%. Sales to users in Construction Industries were up 3%. North American sales to users increased and were better than expected as demand remained healthy for non-residential and residential construction. Non-residential continues to benefit from government-related infrastructure and construction projects. Residential sales to users in North America also increased in the quarter. EAME saw lower sales to users due to weaker than expected market conditions in Europe. The Middle East continued to demonstrate strong construction activity. In Latin America and Asia/Pacific, sales to users declined in the quarter. In Resource Industries, sales to users increased 26%. In mining, sales to users increased, supported by commodities remaining above investment thresholds. Within heavy construction and quarry and aggregates, sales to users also increased, supported by growth for infrastructure-related projects. In Energy & Transportation, sales to users increased by 47% in the second quarter. All applications saw higher sales to users in the quarter. Oil and gas sales to users benefited from strong sales of turbines and turbine-related services. We also saw continued strength in sales of reciprocating engines into oil and gas applications, such as Tier 4 dynamic gas blending, gas compression, and repowering active well servicing fleets. Power generation sales to users continued to remain positive due to favorable market conditions, including strong data center growth. Industrial and transportation sales to users also increased. Dealer inventories increased by $600 million in the quarter, led by energy and transportation. We are very comfortable with the total level of dealer inventory, which remains in the typical range. Adjusted operating profit margin increased to 21.3% in the second quarter as we saw improvements, both on a sequential and year-over-year basis. Adjusted operating profit margin was better than we had anticipated, primarily due to better than expected volume growth and lower than expected manufacturing costs, including freight. Moving to Slide 5. We generated strong ME&T free cash flow of $2.6 billion in the second quarter. We returned $2 billion to shareholders, which included about $1.4 billion in stock repurchases and $600 million in dividends. In June, we announced an 8% dividend increase. Since May of 2019, when we introduced our current capital allocation strategy, we have increased the quarterly dividend per share by 51%. We remain proud of our dividend aristocrat status and continue to expect to return to substantially all ME&T free cash flow to shareholders over time through dividends and share repurchases. Now on Slide 6, I'll describe our expectations moving forward. While we continue to closely monitor global macroeconomic conditions, our second quarter results lead us to expect that full-year 2023 will now be even better than we described during our last earnings call. We now expect adjusted operating profit margins to be close to the top of the targeted range relative to the corresponding expected level of sales. This positive operating performance increases our expectations for ME&T free cash flow, which we now expect to be around the top of the $4 billion to $8 billion range for the full-year. Our current expectations for adjusted operating profit margin and ME&T free cash flow reflect continuing healthy customer demand and our strong operating performance.

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 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.

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

Thanks, Jamie.

Thanks, Jamie. Good morning.

You decided not to retire on part, because you results coming. That was a compliment. My real question is the first one, based on your performance in the first half of the year and what you're saying for sales and margins for 2023, it looks to me like you can achieve the high end of your margin targets around the 21% on lower sales versus the $72 billion target. So do we need to sort of revisit our targets again and adjust the margins on lower sales? I'm just trying to understand what's going on structurally here? Or is this just all price? I think it's really important for your story. And then just my second follow-up. On 2024, I know you don't want to guide, but you're sitting here with record backlog. I guess you're saying dealer inventories are going to be slightly higher. Supply chain is going to ease. What's the probability that you think you could potentially grow your EPS in 2024? Or is there anything out there that's giving you caution? And if so, are pulling any levers? Thanks.

Well, thanks, Jamie. As we mentioned in our prepared remarks, we expect our adjusted operating profit margin to be close to the top of our targeted range for the year. We will review our ranges at the end of the year and assess what makes sense moving forward. Looking ahead to next year, we are closely monitoring economic conditions, and while we feel optimistic about the business, we are not making a prediction for 2024 at this time.

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.

Well, thank you, David. And certainly, our backlog does remain healthy. We didn't have a dramatic change quarter-to-quarter. It was up modestly. And of course, backlog includes, of course, everything for Energy & Transportation, Resource Industries and also CI. For the Energy & Transportation and RI projects that are in that backlog, those are typically tied to firm customer orders. Solar has cancellation charge schedules. And so again, we feel good about the quality of the backlog. In terms of price for next year, as is always the case, we'll assess market conditions. We look at our input costs, and we'll make a call on that later in the year, but it's a bit too early to really predict that.

Great. Thanks for taking my questions. Just a broad question on inventories. When investors hear inventories are coming out, there's always concern on the impact to the margins. There were big destocking periods in the second half in years like 2019, 2015, 2012. What makes this second half of the year different from those other destocking periods? Is it less broad-based? Is it the fact that retail sales accelerated that gives you confidence we don't have that type of destocking effect that we've had in prior cycles?

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.

Hi, so my question is actually on Cat's own inventories. And I know you've got rising sales to deal with, at least so far. But I'm curious, are you still holding safety stock on raw materials and components? Is any of the finished goods waiting on completion? Or is it all just rising sales flowing through? And then just maybe how much cash could come out of inventory if inventories normalize slightly? Thanks.

Good morning, Rob. Thank you for your question. We are still experiencing supply chain challenges. While there has been some overall improvement, it only takes one component to hinder our ability to ship a machine or engine. We are still facing supply chain constraints concerning large engines, which affect both our E&T and machines. Additionally, we have issues with semiconductors for displays that are impacting other machines as well. In response to your question about our inventory, it is currently higher than I would prefer. However, I anticipate that as supply chain conditions improve over time, we will be able to streamline our operations and enhance our inventory turns. The positive aspect is that despite our factory not operating as efficiently as we would like and holding more inventory internally, we still generated strong cash flow in the quarter. While I won't specify the exact amount of cash that could emerge from our inventory, if we return to pre-pandemic supply chain levels, we should be able to free up some additional cash.

Thanks, Rob. I'm very proud of the team and the strong performance we've achieved. Since introducing our new strategy in 2017, we asked for confidence in our ability to increase operating profit margins and generate higher and more consistent free cash flow, and I'm thrilled that the team has met those expectations. There are always areas for improvement; I mentioned that our manufacturing operations aren't as streamlined as I would prefer. While we're successfully growing our services, I always aim for faster growth. There's always room for enhancement, but I truly commend the team's efforts in meeting the targets we set for our investors a few years back.

Hi, good morning. Thank you so much. So going back to backlog, it went up by $300 million sequentially. What exactly drove that? Was it purely driven by pricing? Or did you see a net increase in order volumes in the quarter as well?

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 and depend on availability. But overall, we're pleased that the backlog is holding at healthy levels.

And maybe just one additional comment there. Honestly, some customers are waiting longer for products than I would like. And so backlog is a function, of course, of demand, but it's also a function of our ability to ship. So as in fact, supply chain conditions ease and we're able to ship more quickly, customers shouldn't have to wait as long for certain products, which should bring our backlog down. So again, a declining backlog wouldn't be a bad thing if, in fact, it's the result of our ability to shorten lead times and improve availability.

Yes, thanks. Good morning guys. 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.

Yes, we have observed some slowing in Europe, as I mentioned, but the Middle East is performing very well. It's a mixed situation overall. We are experiencing significant construction activity in the Middle East, with numerous non-residential construction projects underway, although we are noticing some weaknesses in the construction sector in Europe.

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.

Well, Steven, we're certainly not dependent upon rig counts to drive oil and gas. It's just one element of the applications that we sell into. So as I mentioned earlier, we are encouraged by the strong demand that continues for gas compression for Cat-branded reset engines. That's quite positive. We have seen a bit of slowing in well servicing, but that's expected to increase again based on most analyst views over the coming months. Solar continues to have quite robust sales into a number of oil and gas applications, including gas compression, but also offshore platforms and international business as well. So again, at this point, oil and gas certainly looks strong. And in some areas, we're quite bullish on what we see moving forward.

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.

Yes. Price realization met our expectations. The price we achieve is influenced by various factors, including market mix and the competitive landscape we and our dealers encounter. We experienced significant price increases in the latter half of last year, which will be compared to in the same period of 2023. We still anticipate seeing positive pricing in the second half, although it will be less pronounced due to last year's high increases. As always, we will keep a close watch on the global pricing environment and assess if any actions are necessary.