June 9, 2021
Today we hosted Caterpillar’s Annual Shareholder Meeting, once again using a virtual format to allow shareholders to participate in the meeting while ensuring everyone’s health and safety.
I encourage you to read my remarks recapping Caterpillar’s strong 2020 performance and highlighting the work of our outstanding global team.
Thank you, Nikki. Welcome, everyone, and thank you, again, for joining us at Caterpillar’s 2021 Annual Shareholders’ Meeting.
I want to begin by thanking our global team for their resilience and performance during 2020, a year of unprecedented challenges.
The Caterpillar team has done a remarkable job adapting to new ways of working and demonstrating flexibility and creativity as they continue to provide the essential products and services that enable our customers to support society during the pandemic. In this difficult environment, we leveraged our strong safety culture, and in 2020, we had the best safety performance on record for the second consecutive year, which is a testament to our employees’ safety-first mindset.
I want to extend my appreciation to our production, distribution and support employees who continue performing essential work in our facilities to support our dealers and customers. Their enduring commitment – while keeping our facilities and coworkers safe – indicates their high level of engagement.
Likewise, our independent, global network of 161 dealers has leveraged its extensive sales and service network to support our customers as they maintain critical infrastructure for a world in need.
The health, safety and well-being of our employees is our top priority. From the beginning of the pandemic, we have been following the protective measures outlined by the World Health Organization and the U.S Centers for Disease Control. Now, as vaccines become more widely available, we’ve been strongly encouraging employees to get vaccinated to protect themselves against COVID-19.
In alignment with our Caterpillar Foundation’s vision to help create stronger, more resilient communities, we supported worldwide COVID-19 relief efforts through a 10-million-dollar donation from the foundation in 2020. In May of this year, Caterpillar and the Foundation donated an additional 3.4 million dollars in COVID-19 relief to support India and Brazil as the countries struggle with a significant rise of COVID-19 cases and to assist with increased access to and education of vaccines around the globe. The foundation has been improving lives around the world for nearly 70 years, and its exceptional level of support speaks to our Caterpillar team’s generosity.
Our Values in Action are the foundation of our enterprise strategy: Integrity, Excellence, Teamwork, Commitment and Sustainability. We are mindful of our individual and collective responsibility to create an environment of respect and inclusivity, both at work and in our communities. Our Values have shaped our company for almost 100 years, and they will see us through future challenges.
Caterpillar is steadfast in its commitment to diversity and inclusion. We believe each person is unique and valued, and we’re committed to ensuring our workplace is diverse and representative of the many customers and communities we serve around the globe. When we leverage our diversity in an inclusive environment, we get various perspectives that help us achieve our best work and improve our communities.
Caterpillar published its first Diversity and Inclusion Report on March 31. The report provides extensive data and insights about the diverse composition of our organization, illustrating in detail our ongoing commitment to diversity and inclusion. It also includes a link to the company’s EEO-1 report, which provides additional transparency.
Our D&I report describes our continuing journey to create a more diverse and inclusive organization.
In December of 2020, Caterpillar was proud to join forces with other major employers to form OneTen, a coalition of companies that have committed to upskill, hire and advance one million Black Americans over the next 10 years into family-sustaining jobs with opportunities for advancement. As a founding member of OneTen, Caterpillar is also making an annual financial commitment of 1.5 million dollars and an annual hiring and retention commitment of 200 or more Black American employees.
As one of our five Values in Action, Caterpillar has a long-standing commitment to sustainability, which inspires us to help our customers build a better world through products and services that help fulfill society’s basic needs – such as shelter, clean water, education and reliable energy – in a sustainable way.
We’re contributing to a reduced-carbon future and supporting global efforts to mitigate the impact of climate change. This is demonstrated through our significant progress in reducing greenhouse gas emissions from our operations and our continued investment in new products, technologies and services to help customers achieve their climate-related objectives by providing products that increase operational efficiency and reduce emissions.
We work alongside our customers to identify their challenges, understand their requirements and deliver solutions that help them be more successful with Caterpillar than anyone else.
Our innovations include reciprocating engines and gas turbines that burn hydrogen blends, landfill gas and other biogases. We’re also developing a variety of alternative power solutions to support a lower carbon future, including battery-powered construction machines.
Customers are already putting many of our sustainable offerings to work.
Last year we introduced the zero-emissions battery-powered switcher locomotive, and for our mining customers, we have the new battery electric-powered, zero-emissions underground loader. And our Tier 4 Dynamic Gas Blending engine, which won the 2020 EPA Clean Air Excellence award, can substitute up to 85% of diesel fuel with natural gas. This proven solution is capable of operating with natural gas blends with up to 20 percent hydrogen, further reducing our customer’s carbon footprint.
Innovation is a continuous journey, and our global team is working on many projects that underscore our commitment to improve the quality of the environment. One such project involves Cat® generator sets providing standby power for Microsoft’s datacenters in Sweden, which will be available later this year. The Caterpillar standby power solution at each datacenter is capable of operating on an eco-labeled fuel that contains renewable raw materials. This supports increased renewable content and lower carbon emissions in support of Microsoft’s carbon reduction goals.
Another example of our team’s ingenuity involves our MWM gas generators, which are helping transform an environmental hazard into an eco-friendly treasure at Lake Kivu – known as one of Africa’s great lakes in Rwanda. Massive quantities of methane at the bottom of the lake are at risk of bubbling to the surface and triggering a dangerous gas eruption. We’ve delivered 19 gas generator sets for the power plant being built nearby. It will extract the methane and use it to generate electricity. When the power plant goes live in early 2022, it will supply the local region with power – and in time, it’s expected to play a key role in supplying significant amounts of electricity to support Rwanda’s energy needs.
We’re excited about the opportunities the energy transition provides for Caterpillar and our dealers. For example, our mining customers use our equipment to extract commodities such as copper, nickel and lithium for electric vehicles and other infrastructure that are required to support the energy transition.
We’ve set ambitious environmental, social and governance goals – also known as ESG goals – that we report our progress against. This year we’re introducing seven new goals for 2030 focused on our customers’ and other stakeholders’ most relevant issues; five are centered on climate and the environment, and two focus on employee and customer safety. You can read about our accomplishments to date and new ESG goals in our 2020 Sustainability Report.
We’re proud of our Wall Street Journal ranking – currently number 21 on its list of the 100 Most Sustainably Managed Companies, among more than 5,500 publicly traded companies around the world.
Next, I’ll recap our team’s 2020 performance, beginning with our financial results.
Our sales and revenues of 41.7 billion dollars during 2020 reflected lower end user demand and impacts from changes in dealer inventories compared to 2019. We finished the year with an operating profit margin of 10.9%. We were pleased our adjusted operating profit margin of 11.8% was within the targeted range we announced during our 2019 investor day, despite a 22% decline in sales and revenues and our continued investment in services and expanded offerings for future profitable growth.
Our ability to produce higher operating margins across economic cycles illustrates the effectiveness of our strategy for long-term profitable growth.
Although we serve a number of cyclical industries, we’ve demonstrated the ability to generate relatively stable cash flows since we introduced our strategy in 2017. By implementing more financial rigor in terms of investment and capital disciplines, we produced 5 to 6 billion dollars in free cash flow from Machinery, Energy and Transportation, or ME&T, between 2017 and 2019. During 2020, when the economic conditions associated with the pandemic resulted in a 22% reduction in sales & revenue, we still generated more than 3 billion dollars in free cash flow from ME&T.
In the last three years, we returned 106% of our ME&T free cash flow to shareholders through dividends and share repurchases. This aligns with our 2019 investor day target to return substantially all ME&T free cash flow to shareholders over the cycles. Even in 2020, when our top line declined significantly, we returned 110% of the 3.1 billion dollars in free cash flow from ME&T to shareholders.
We also achieved a 92% higher adjusted profit per share in 2020 compared to 2016 on only 8% higher sales and revenues.
Caterpillar’s dividend remains a high priority. We’ve paid higher annual dividends to shareholders for 27 consecutive years, and we’re proud of our status as a Dividend Aristocrat.
Successfully navigating the many obstacles we faced in 2020 has only strengthened our resolve that we have the right strategy – based on operational excellence, expanded offerings and services – and we are well-positioned for long-term profitable growth.
The operational excellence element of our strategy has served us well, resulting in disciplined management of structural costs. By carefully managing costs and improving efficiencies, we went into the pandemic with a strong financial position. We continued to invest in expanded offerings and services to help make our customers more successful and position us for future profitable growth.
An example of continued investment in expanded offerings is our new GX line of excavators launched last fall in China. The GX series provides a more competitive offering by delivering the durability, safety and services customers expect, plus up to 15% lower fuel consumption than prior models and up to 25% lower maintenance cost.
We’ve intensified our focus on growing services by working more closely with our dealers. Services are the value we provide to customers after the equipment purchase – everything from aftermarket parts to maintenance agreements to financing. Services help increase customer value by minimizing downtime, maximizing availability and improving efficiency – and most importantly – asset utilization.
Our digital strategy is also improving the customer experience by helping them conveniently manage their equipment and conduct business with Caterpillar and our dealers. Investing in digital capabilities enables us to leverage our more than 1 million connected machines and engines to further expand our offerings and services. For example, we are using analytics to provide qualified service leads to our global dealer network, enabling them to recommend the right maintenance, wear, repair and rebuilds to customers at the right time, based on their asset’s lifecycle and industry equipment management practices.
An essential contributor to growing services includes our remanufacturing and rebuild options. These solutions help customers manage owning and operating costs and deliver multiple sustainability benefits by returning components at the end of their initial serviceable lives to same-as-new condition. Our newly established Caterpillar Remanufacturing Division is accelerating our work with Cat® dealers as we seek to expand our range of repair, rebuild and remanufacturing services for Cat products.
We are well known for our high quality and durable products, and customers also depend on our leading-edge technology to help keep their people safe, manage costs and improve performance.
In summary, during a year of unprecedented challenges, our global team rose to the occasion. With resilience, innovation and engagement, they supported our customers as they performed the essential work of society. I want to again thank our global team for their strong performance in 2020, as they put safety first, remained productive and continued to deliver for our customers and stakeholders.
We continue to execute our strategy for profitable growth by improving operational excellence and investing in expanded offerings and services to help our customers succeed and achieve their climate-related objectives as they build a better, more sustainable world. We are emerging from the pandemic as a stronger company, well positioned for long-term profitable growth.
Thank you for joining us today. And on behalf of our outstanding global team, thank you for your continued support of Caterpillar.
Chairman and CEO