7 things we learned from Caterpillar’s latest trading update
02 May 2023
![Caterpillar's 350 excavator at work in a quarry setting.](/Images/480xany/20221208-105604-Cat-350-excavator.jpg)
Last week saw Caterpillar unveil a strong performance for the first quarter of 2023, driven in large part by growth in North America.
Sales in its construction industries division increased by 10% to US$6.7 billion, while operating margin in the segment was 26.5%.
Here’s seven things we learned about Caterpillar’s performance, what it says about the wider construction industry, and where it could be heading:
1) Supply chain pressure is easing
Caterpillar reported better equipment availability thanks to improving supply chain conditions. But “pockets of challenge” still remain, particularly for large engines which could impact some of its larger machines.
In general, the supply chain improvements meant that Caterpillar was able to make stronger-than-expected shipments in North America, which is Caterpillar’s most constrained region as far as dealer inventory is concerned.
2) Availability of excavators is better
Caterpillar noted that there is now improved availability of its excavators. That has come about as a result not just of the lower pressure on supply chains but also because of a slowing of demand in China.
Caterpillar said it expected China’s above 10t excavator industry to remain below 2022 levels this year due to low construction activity, while its sales in China would be below the typical range of 5-10% of total Caterpillar sales in 2023.
3) Dealers will start to wait longer to place orders as availability improves
![Caterpillar chairman and CEO Jim Umpleby](/Images/480xany/20230502-142423-caterpillar-chairman-and-CEO-Jim-Umpleby.jpg)
The better availability of some types of machine in turn means that Caterpillar expects dealers to scale back their levels of inventory in the second half of the year, even though overall demand remains healthy.
The second half of 2022 saw dealers build their inventories to the tune of $1.4 billion. Talking to analysts, Caterpillar chairman and CEO Jim Umpleby said, “We are not planning for this trend to repeat [in the second half of 2023]. Instead, we expect to see dealers decrease inventories compared to the first quarter levels and end 2023 about flat relative to the end of 2022.”
4) Strong prices and lower manufacturing costs meant bumper margins
Caterpillar’s overall adjusted operating profit margin for the period was 21.1% and hit 26.5% in the construction industries division. In a call with analysts, chief financial officer Andrew Bonfield explained that while Cat’s manufacturing costs did increase, they increased by less than the company anticipated.
Better-than-expected sales volumes meant factories could operate more efficiently, while freight costs were also lower. Meanwhile, the average price Caterpillar was able to charge for machines was higher than it had expected. These factors combined to boost the company’s profit margins.
But Bonfield said he did not expect the favourable effects of absorbing costs to last in the second half of the year, with margins in the remaining quarters of the year expected to be lower than the first quarter as the relationship between price and manufacturing costs normalized.
5) US government stimulus is already filtering through to new orders
![](/Images/480xany/20230314-123037-Cat-compact-tracked-loader--smart-blade.jpg)
The US government has pledged to pump billions of dollars into infrastructure investments through measures such as the Bipartisan Infrastructure Law (BiL), which it is claimed involves up to $550 billion in new spending.
Umpleby confirmed that Caterpillar had started to see the positive impact of those infrastructure dollars in orders.
Speaking to analysts, he said, “The projects that don’t require a lot of permitting, things like resurfacing roads, have already started and we’re seeing the positive benefit of that.
“When customers believe there’s a pipeline of projects coming, they’re more likely typically to make that capital investment, to make a purchase of a new piece of equipment. It has started and we expect it to continue for some time.”
6) European construction is more resilient than expected
Caterpillar said it expected business activity in Europe, Middle East and Africa to increase in 2023 as compared to 2022. While that was down in large part to particularly strong construction demand in the Middle East, and while uncertain economic conditions remain, the company noted that European construction was “more resilient than we previously anticipated”.
7) The energy transition spells strong future demand for machinery
When it came to mining equipment, Umpleby said he expected healthy demand, driven by the transition to new forms of energy. He noted that commodity prices remain above investment thresholds and said he expected production utilization levels to remain elevated.
He added, “We also expect the aging of the fleet and a lower level of parked trucks to support future demand for our equipment and services. We continue to believe the energy transition will support increased commodity demand, expanding our total addressable market and providing further opportunities for profitable growth.”
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