June 8, 2022
This week we hosted Caterpillar’s Annual Shareholder Meeting.
I encourage you to read my remarks recapping Caterpillar’s strong 2021 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 2022 Annual Shareholder Meeting.
I’ll begin by expressing my appreciation for our global team’s strong performance throughout 2021, in what proved to be another challenging operating environment. They persevered through ongoing difficulties – whether pandemic or supply-chain related – working to meet strong customer demand while maintaining a safety-first mindset.
I also want to note the significant role of our independent global dealer network in helping to ensure our customers’ long-term success. 160 Caterpillar dealers have more than 2,700 locations in 193 countries. When customers buy our products, they know they’ll be supported by the most capable and reliable service network. With an average tenure of more than 50 years, our dealers are aligned with our customers. It’s a clear competitive advantage. Our innovative products and services, backed by our global dealer network, provide exceptional value that helps our customers succeed.
We launched our strategy for long-term profitable growth in 2017, and we’ve made great progress executing it over the past five years. Our Values in Action – Integrity, Excellence, Teamwork, Commitment and Sustainability – are the foundation, defining what we do in all aspects of our business.
Our culture is further strengthened by our commitment to ensure our workplace is diverse and representative of the many customers we serve around the globe, and that each person is respected, seen, heard and valued. Caterpillar recently published its Diversity & Inclusion Report, which describes our advancements in 2021 and several key initiatives to create a more diverse and inclusive environment where our employees can do their best work.
Through the Caterpillar Foundation we responded to needs around the world – including a record number of natural disasters, crises, continued COVID-19 assistance and an increased community giving footprint. The Foundation has invested nearly 851 million dollars in global communities since 1952. During its 70th anniversary this year, the Foundation is focused on investing in the skills people need to join the modern workforce, and the natural and vital infrastructure they rely upon.
Next, I’ll briefly recap our team’s 2021 performance, beginning with our financial results.
Our global team increased sales by 22% last year to 51 billion dollars, despite supply chain constraints. We also achieved our 2019 Investor Day targets for adjusted operating profit margin and free cash flow from Machinery, Energy and Transportation, or ME&T. Our strong ME&T free cash flow enabled us to return 5 billion dollars to shareholders through dividends and share repurchases. We’ve paid a higher dividend annually for 28 consecutive years and are proud of our status as a Dividend Aristocrat.
Our strategy for profitable growth is based on four main focus areas: operational excellence, expanded offerings, services and sustainability.
Operational excellence includes safety, quality, Lean, and a competitive and flexible cost structure. In terms of safety, even one injury is one too many. We want everyone to return home safely every day. The same goes for quality. Our enterprise quality metrics don’t mean a thing to a customer who experiences downtime because of a defect. We are striving for perfection in safety and quality in a continuous, never-ending journey. The same is also true for Lean. We are committed to continuing our Lean manufacturing journey by synchronizing across our value chains, reducing lead times, optimizing working capital and increasing availability.
The next focus area of our strategy is expanded offerings. It’s based on having the right products and solutions for various types of customers at the right value point to ensure an acceptable return for Caterpillar and our dealers, while always ensuring our customers are more successful using Caterpillar products than they would be with the competition.
Services includes all the ways we help our customers succeed after they buy a piece of equipment. We’ve been increasing our investments to enable services growth, including enhancing our digital capabilities.
Our strategy is supported by data and insight using Caterpillar’s Operating and Execution model, or O&E model.
As I mentioned, services are a key element of our strategy for profitable growth. Due to its importance, I’ll highlight several key services initiatives which are creating strong momentum for growth.
Today, we have over 1.2 million connected assets, up over 20% from our 2019 Investor Day.
We’ve also invested to improve our go-to-market digital capabilities, generating over 20% more online parts sales in 2021 than the previous year.
Our Customer Value Agreements, or CVAs, continue to grow. More than 50% of all equipment is now sold with a CVA.
I like to describe this as win/win/win. It’s a win for our customers, allowing them to minimize downtime, improve utilization and extend the life of their Caterpillar products. We increase services revenues, and our dealers sell aftermarket parts and related services.
We’re pleased about the growth we’re seeing as we utilize data analytics and machine learning to help our customers predict critical service events.
We continue to see strong demand for remanufactured products and components, helping to reduce waste and minimize the need for raw materials, energy and water to produce new components.
Lastly, we are working with our dealers through our leadership table process, to determine the largest services opportunities at a granular level by region, customer and product. We use that data to develop opportunity-based targets to help grow services together with our dealers.
In 2019, we announced a goal to double ME&T services sales to 28 billion dollars over 10 years, from 14 billion dollars in 2016 to 28 billion in 2026. We increased services sales by 5 billion in 2021, a 36% increase from 2016. We previously noted that the road to 28 billion in 2026 would not grow in a straight line. As I mentioned, we’re seeing strong momentum across the board in our services initiatives and investments. Our confidence is increasing that we’ll achieve our 28 billion services goal in 2026.
We recently updated our strategy to specifically call out sustainability as a key focus area, since sustainability, including the energy transition, represents a significant opportunity for profitable growth. The addition of sustainability as a focus area highlights our work to help customers build a better, more sustainable world. Caterpillar shares the concerns of governments and the public about the risks of climate change and supports global efforts to mitigate it. We support the goals of the Paris Agreement to limit global temperature rise and we are committed to contributing to a reduced-carbon future. We demonstrate our commitment in many ways, including through significant progress in reducing greenhouse gas emissions from our operations and by continuing to invest in new products, technologies and services to help our customers achieve their climate-related objectives.
The energy transition expands opportunities for profitable growth in a variety of ways, including accelerating mining commodity demand. Global energy demand is also rising, with growth in both renewables and many traditional forms. The energy transition will require a significant global infrastructure investment, while expanding service opportunities for Caterpillar.
The growing momentum of the energy transition requires more electric vehicles, battery storage, wind and solar power. These solutions require a significant amount of critical minerals, such as copper, lithium, nickel and cobalt, to name a few. To satisfy this increasing demand, mining companies need to expand their footprints, open new mines and enhance utilization. We expect miners to increase capital spending, and Caterpillar’s technologies are designed to support reduced emissions, while improving efficiency, automation, productivity and equipment utilization.
Global energy demand is expected to continue to increase due to population growth, improved standards of living in developing nations, increasing urbanization and higher energy needs on a per capita basis.
There are many different perspectives on how growing global energy demand will be met in the coming decades. Caterpillar is well positioned to benefit from increasing global energy demand, regardless of the mix between renewables and traditional sources of energy.
Increasing renewable energy drives demand for mined commodities and is also expected to increase demand for gas turbine and reciprocating generator sets for grid modernization and stability. Our gas turbines and reciprocating engines can burn a wide variety of fuels, including natural gas, hydrogen and biofuels. The energy transition also requires construction-related investments to install wind turbines, solar power, transmission lines and other infrastructure.
For the reasons I’ve described the combination of the energy transition and growing global energy demand is increasing Caterpillar’s total addressable market. This results in opportunities to grow original equipment and services in Resource Industries, Construction Industries, and Energy and Transportation.
Technology is also a key area of focus for Caterpillar. Over the past 20 years, we’ve invested over 30 billion dollars in R&D to deliver best-in-class innovation. We’ve also continued to consistently invest in autonomy, alternative fuels, connectivity, digital and electrification over the past several years. Going forward, we’ll continue to invest at an even higher rate in these areas as we work with our customers to help them achieve their sustainability objectives.
Caterpillar has been a technology leader for nearly a century. We have significant experience developing innovative technologies through consistent R&D investments, which will help us maintain our leadership during the coming decade. For example, Solar’s gas turbine generator sets have had the capability to run hydrogen blends since 1985. Today, both our gas turbines and reciprocating engine generator sets can operate on 100% hydrogen. We began developing our first autonomous mining truck over 25 years ago, and now they’ve driven about 100 million miles in production applications. We’ve also committed that by 2030, 100% of our new products will be more sustainable than the previous generation.
In the 2000s, we started investing more heavily in our digital and connected assets, with tools such as VisionLink and MineStar, to help customers succeed. We developed our first hybrid-electric mini excavator about 10 years ago. We’ve invested to connect over 1.2 million assets globally, provided fully electric solutions to underground mining customers, and have expanded our autonomous fleet, which now includes dozers, drills, water trucks and compactors.
We’ve also made strategic acquisitions, such as CarbonPoint Solutions, which helps customers with carbon-capture technology, and now Tangent, with a solution that monitors patterns from the grid and utilizes our power generation products to maximize returns and provide reliable power.
We leverage R&D across our company, allowing us to be more efficient with R&D, while maintaining our leadership.
In closing, 2021 was certainly a challenging year. Yet our global team once again persevered, demonstrating resilience and dedication as they worked to meet strong customer demand. Services growth is among the many highlights of 2021. The energy transition and growing global energy demand are expanding Caterpillar’s total addressable market, and we are well positioned to contribute to a reduced carbon future while profitably growing our company.
I've never been more optimistic about Caterpillar’s future as we help our customers build a better, more sustainable world.
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