Caterpillar Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
January 31, 2023

Key Takeaways

  • Caterpillar reported Q4 sales up 20% year-over-year and full-year sales up 17%, with backlog rising 32% to $30.4 billion, reflecting sustained end-market demand.
  • Adjusted operating profit margin hit an all-time Q4 record of 17% and full-year margin climbed 170 bps to 15.4%, driven by strong price realization and volume growth.
  • The company generated $5.8 billion of free cash flow in 2022—within its $4–8 billion target—and returned $6.7 billion to shareholders through dividends and buybacks.
  • Caterpillar took a $925 million non-cash goodwill impairment charge and $180 million of restructuring costs in its Rail division, reflecting weaker locomotive demand and revised long-term outlook.
  • For 2023, management expects sales and earnings to exceed 2022 levels with updated adjusted margin targets to account for inflation, and free cash flow of $4–8 billion.
AI Generated. May Contain Errors.
Earnings Conference Call
Caterpillar Q4 2022
00:00 / 00:00

There are 14 speakers on the call.

Operator

Welcome to the 4th Quarter 2022 Caterpillar Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ryan Fiedler. Thank you. Please go ahead.

Speaker 1

Thank you, Emma. Good morning, everyone, and welcome to Caterpillar's Q4 of 2022 earnings call. I'm Ryan Fiedler, Vice President of Investor Relations. Joining me today are Jim Uplby, Chairman and CEO Andrew Bonfield, Chief Financial Officer Kyle Eppley, Senior Vice President of the Global Finance Services Division and Rob Rengel, Senior IR Manager. During our call, which will extend to 8:40 am Central, we'll be discussing the Q4 and full year earnings release we issued earlier today.

Speaker 1

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.

Speaker 1

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 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.

Speaker 1

For a reconciliation of any non GAAP numbers to the appropriate U. S. GAAP numbers, Please see the appendix of the earnings call slides. Today, we reported profit per share of $2.79 for the Q4 of 2022 Compared with $3.91 of profit per share in the Q4 of 2021, we're including adjusted profit per share in addition to our U. S.

Speaker 1

GAAP results. Our adjusted profit per share was $3.86 for the Q4 of 2022 compared with adjusted profit per share of 2 point $0.69 for the Q4 of 2021. Adjusted profit per share for both quarters excluded mark to market gains For remeasurement of pension and other post employment benefit plans as well as restructuring items, adjusted profit per share for the Q4 of 2022 Also excluded are goodwill impairment. Now let's turn to Slide 3 and turn the call over to our Chairman and CEO, Jim Umpleby.

Speaker 2

Thanks, Ryan. Good morning, everyone. Thank you for joining us. As we close out 2022, I'd like to start by Our global team for another strong quarter. Our results reflect healthy demand across most end markets for our products and services.

Speaker 2

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 and for the full year. I'll then provide some insights on our end markets. Lastly, I'll provide an update on our sustainability journey. Overall, it was another strong quarter as demand remained healthy for our products and services.

Speaker 2

Sales rose by 20% versus the Q4 of 2021, better than we expected. Supply chain improvements enabled stronger than expected shipments, particularly in Construction Industries and supported an increase in dealer inventories. We achieved double digit top line increases in each of our 3 primary segments and saw sales growth in North America, Latin America and EAME, while Asia Pacific was about flat. Adjusted operating profit margins increased to 17% in the 4th quarter, an all time record as we saw margins improve both on a sequential in year over year basis. Adjusted profit per share was $3.86 which includes an unfavorable 0.41 dollars per share of foreign currency headwind largely due to ME and T balance sheet translation.

Speaker 2

This was caused by the rapid decline in the U. S. Dollar late in the year and reversed much of the favorable impact we saw in the 1st 3 quarters of 2022. We generated a 17% increase in total sales to 50 $9,400,000,000 in the year. Services also increased by 17% to $22,000,000,000 Adjusted operating profit margin for the full year was 15.4%, a 170 basis point increase over the prior year.

Speaker 2

Although we did not achieve our Investor Day margin targets for the year, which I'll discuss more in a moment, I'm pleased that we increased adjusted operating profit By over $2,000,000,000 and grew absolute OPAC dollars, which is our internal measure of profitable growth. For the year, we achieved adjusted profit per share of $13.84 also an all time record. In addition, we generated $5,800,000,000 of ME and T free cash flow firmly in our target range. Finally, despite the strong sales in the 4th quarter, backlog grew by $400,000,000 in the quarter to end the year at $30,400,000,000 A 32% year over year increase. As I've mentioned, we did see some improvement in certain areas of the supply chain in the 4th quarter.

Speaker 2

However, pockets of challenge continue, particularly with some suppliers related to Energy and Transportation and Resource Industries. Similar to previous quarters, our sales would have been higher if not for these supply chain issues. Our global team delivered one Despite the supply chain challenges, Our team achieved double digit top line growth and generated strong ME and T free cash flow. We remain committed to serving our customers, executing our strategy and investing for long term profitable growth. Turning to Slide 4.

Speaker 2

In the Q4 of 2022, sales increased 20% versus last year to $16,600,000,000 The increase was due to favorable price realization and volume growth, which included dealer inventory increases and growth in sales of equipment to end users. Compared with the Q4 of 2021, sales to users increased 8%, broadly in line with our expectations. For machines, including Construction Industries and Resource Industries, sales to users rose by 4%, while Energy and Transportation was up 19%. Sales to users in Construction Industries were up 1% in line with expectations. As a reminder, non residential represents approximately 75% Caterpillar Sales and Construction Industries.

Speaker 2

North American sales to users increased as demand remained healthy for both non residential and residential Despite some moderation in residential, Latin America saw higher sales to users, while EAME in Asia Pacific declined slightly in the quarter. However, excluding China, sales to users in the Asia Pacific region increased. In Resource Industries, Sales to users increased 13%, which was lower than anticipated mainly due to timing issues related to outbound logistics and commissioning. The segment sales to users increased primarily due to heavy construction and quarry and aggregates. In energy and transportation, Sales to users increased by 19%, slightly above our expectations.

Speaker 2

In the 4th quarter, oil and gas sales to users From continued strength in large engine repowers, we also saw strong turbine and turbine related services. Power generation and industrial sales to users continue to remain positive due to favorable market conditions. Transportation declined from a relatively low base, Primarily due to lower locomotive deliveries, all marine was up slightly. Dealer inventory increased by about $700,000,000 in the 4th quarter, which is above our expectations compared to a decrease of about $100,000,000 in the same quarter last year. As I mentioned, Supply chain improvements enabled stronger than expected shipments, particularly in Construction Industries and supported an increase in dealer inventories.

Speaker 2

We saw increases in each of our primary segments. And within Construction Industries, dealer inventories are now in their typical historical range of 3 to 4 months In Construction Industries, the largest dealer inventory increase came in North America, which benefited our most constrained region. Over 70% of the combined year end dealer inventory in Resource Industries and Energy and Transportation is supported by customer orders. As expected, we generated improved adjusted operating profit margin in the quarter, both year over year and sequentially. Our adjusted operating profit margin increased by 5.60 basis points versus last year to 17%, which does not include the non cash goodwill impairment charges and restructuring costs associated with the Rail division.

Speaker 2

I'll provide more detail on Rail later in my remarks. Turning to Slide 5, I'll now provide full year highlights. In 2022, we generated sales of $59,400,000,000 up 17% versus last year. This was due to favorable price realization and higher sales volume driven by the impact from changes in dealer inventory, increased services and higher sales of equipment to end users. As I mentioned, we generated $22,000,000,000 of services revenues in 2022, a 17% increase over 2021.

Speaker 2

Services growth in 2022 benefited from our ongoing initiatives and investments as well as price realization. We now have over 1,400,000 connected assets, up from 1,200,000 in 2021. We delivered over 60% of our new equipment with a customer value agreement and the launch of our new app called CatCentral Help drive growth in e commerce sales to users. We also had the highest level of parts availability in our history. Overall, our confidence continues to increase that we'll achieve our $28,000,000,000 services target in 2026.

Speaker 2

Our full year adjusted operating profit margin was 15.4%, 170 basis point increase over 2021. Although we significantly increased margins in the Q4 versus last year, overall, they did not improve enough for us to achieve our full year Investor Day and margin targets. And our conscious decision to continue to invest for profitable growth. As I mentioned during our last earnings call, our margin targets are progressive, which means we expect to achieve higher operating profit margins as sales increase. In an inflationary environment in a higher inflationary environment Where a relatively larger portion of the sales increase is due to price realization, there's less operating leverage, which makes the delivery of those progressive margins more challenging.

Speaker 2

Andrew will provide more information about our operating profit margin targets. Moving to Slide 6. We generated ME and T free cash flow of $5,800,000,000 for the full year, which was in line with our Investor Day range of $4,000,000,000 to $8,000,000,000 We returned $6,700,000,000 to shareholders or 115 percent of ME and T free cash flow, which included $4,200,000,000 in repurchased stock And $2,400,000,000 in dividends to shareholders. We remain proud of our dividend and aristocrat status and continue to expect to return substantially all And E and T free cash flow to shareholders over time through dividends and share repurchases. Now on Slide 7, I'll share some high level assumptions on our expectations moving forward.

Speaker 2

While we continue to closely monitor global macroeconomic conditions, Overall demand remains healthy across our segments, and we expect 2023 to be better than 2022 on both top and bottom line. Just to remind you, our internal measure of profitable growth is absolute OPEC dollars. We believe increasing absolute OPEC dollars We expect to achieve our updated adjusted operating profit margin targets Endomet free cash flow target range of $4,000,000,000 to $8,000,000,000 during 2023. Now I'll discuss our outlook for key End markets this year, starting with Construction Industries. In North America, overall, we see positive momentum in 2023.

Speaker 2

We expect non residential construction in North America to grow due to the positive impact of government related infrastructure investments, healthy backlogs And rental replenishment. Although residential construction continues to moderate due to tightening financial conditions, it remains at a healthy level. In Asia Pacific, excluding China, we expect growth in construction industries due to public infrastructure spending and support of commodity prices. As we mentioned during our last earnings call, weakness continues in China in the excavator industry above 10 tons. We expect it to remain below 2022 levels due to low construction activity.

Speaker 2

In the AAMI, business activity is expected to be about flat versus last year Based on healthy backlogs and strong construction demand in the Middle East, offset by uncertain economic conditions in Europe, Construction activity in Latin America is expected to be flat to slightly down versus the strong 2022 performance. In Resource Industries, we expect healthy mining demand to continue as commodity prices remain above investment thresholds. That said, our customers remained capital disciplined. We anticipate production and utilization levels will remain elevated And our autonomous solutions continue to gain momentum. We expect the continuation of high equipment utilization and a low level of parked trucks, which both support future demand for our equipment and services.

Speaker 2

We continue to believe the energy transition will support increased commodity demand, Expanding our total addressable market and providing opportunities for profitable growth. In Heavy Construction and Quarry and Aggregates, we anticipate continued Growth supported by Infrastructure and Major Nonresidential Construction Projects. In Energy and Transportation, we expect sales growth due to strong order rates in most applications. In oil and gas, although customers remain disciplined, we are encouraged by continued strength in demand And order intakes for the year. New equipment orders for solar turbines continue to be robust.

Speaker 2

Power generation orders are expected to remain healthy, including data center strength. Industrial remains healthy with momentum continuing for 2023. In rail, North American locomotive sales are expected to remain muted. We anticipate strength in high speed marine as customers continue to upgrade aging fleets. During the Q4, we took a $925,000,000 non cash Goodwill impairment charge related to our Rail division, which is part of the Energy and Transportation segment.

Speaker 2

The impairment was primarily driven by a revision in our long term outlook for the We believe opportunities exist for new locomotives, overhauls, repowers and modernizations, but at lower levels than previously forecasted and occurring over a longer time horizon. In addition to the goodwill impairment charge, We also incurred restructuring cost of $180,000,000 in the quarter, primarily related to non cash inventory adjustments within this division. Importantly, our rail services, including track, signaling and freight car remain robust. ProgressRail plays an integral part Maintaining rail infrastructure in countries around the globe and rail remains one of the most efficient ways of transporting goods across the land. We will continue to offer Tier 4 solutions to our customers.

Speaker 2

However, strategic investments in new locomotive products will continue shifting to competitive sustainable solutions that These alternative power solutions for rail will leverage modularity and scale across resource industries, construction industries and energy and transportation. We believe these enterprise wide investments will provide Caterpillar with a strategic advantage over time. Moving to Slide 8. We continue to advance our sustainability journey in the Q4 of 2022 as we strive to help our customers achieve their climate related objectives. In November, Caterpillar announced the successful demonstration of its first battery electric 793 large mining truck prototype With support from key mining customers participating in Caterpillar's early learner program.

Speaker 2

The truck performed at the same specification as a diesel truck On our 7 kilometer course, achieving a top speed of 60 kilometers per hour carrying a full load in 12 kilometers per hour with that same load At a 10% grade. In addition to the truck, we also unveiled plans to create a working and more sustainable mindset of the future at our Arizona based proving ground. This includes installing and utilizing a variety of renewable energy sources, leveraging technologies from our Electric Power division And new Electrification and Advanced Power Solutions division. We also invested in Lithos Energy, Inc, A lithium ion battery pack producer that manufactures battery packs for the types of demanding environments our CAT equipment thrives in. This collaboration supports our commitment to delivering robust petrified products and solutions to our customers.

Speaker 2

Lastly, in 2022, we continue to advance our autonomous journey, achieving an industry first of moving over 5,000,000,000 tons autonomously across 25 minutees worldwide. During the Q4, we announced our first autonomous solution in the aggregates industry. We'll collaborate with Luckstone, The nation's largest family owned and operated producer of crushed stone, sand and gravel to expand these solutions beyond mining. We'll utilize Cat MineStar Command for hauling system on 777 trucks, contributing to continued improvements in safety And productivity for our customers. These examples reinforce our ongoing sustainability leadership and how we help our customers build a better, more sustainable world.

Speaker 2

We look forward to issuing our 18th Annual Sustainability Report during the Q2. With that, I'll turn the call over to Andrew.

Speaker 3

Thank you, Jim, and good morning, everyone. I'll begin by covering our 4th quarter results, including the performance of our business segments. Then I'll cover the balance sheet and MENT free cash flow before concluding on high level assumptions for 2023, including the Q1. Beginning on Slide 9, sales and revenues for the Q4 increased by 20% or $2,800,000,000 to $16,600,000,000 The sales increase versus the prior year was due to strong price realization and volume, partially offset by currency impacts. Sales were higher than we expected, as supply chain constraints eased in some areas, and we were able to ship more product.

Speaker 3

Operating profit increased by 4 percent or $69,000,000 to $1,700,000,000 as strong price realization and volume growth were mostly offset By a goodwill impairment charge, higher manufacturing costs and restructuring expenses, our adjusted operating profit $2,800,000,000 up $1,200,000,000 versus the prior year and the adjusted operating profit margin was 17.0%. This was an increase of 5.60 basis points versus the prior year quarter due to favorable price realization and volume growth, which outpaced manufacturing cost increases. 4th quarter margins were lower than we were targeting as well as being lower than where we needed them to be to meet our full year Investor Day margin target. I will talk more about that in a moment. Adjusted profit per share increased by 43% to $3.86 in the 4th quarter compared to $2.69 in the Q4 of last year.

Speaker 3

Adjusted profit per share in the Q4 excluded goodwill impairment charge of $925,000,000 for $1.71 per share related to our Rail division, as Jim has explained. This charge is held corporate level and does not impact Energy and Transportation segment margins. Adjusted profit per share figures Also exclude mark to market gains for the re measurement of pension and OPEB plans and restructuring items. Restructuring costs of $209,000,000 Corporate level and the inventory write downs are within cost of goods sold in the income statement. For the full year, restructuring costs were about $600,000,000 Last quarter, we told you that a non cash charge of approximately $600,000,000 could slip into 2023, which it did.

Speaker 3

We expect to close on the divestiture of our longwall business in early February, and the non cash charge will be included in our Q1 2023 restructuring charges. The provision for income taxes in the 4th quarter, excluding the amounts relating to mark to market, goodwill impairment and other discrete items, Finally, our 4th quarter results include an unfavorable non cash foreign currency impact with an other income expense of $0.41 related to MENT balance sheet translation in the quarter. To explain, many of our foreign entities are U. S. Dollar functional.

Speaker 3

These entities are generally in a net liability position causing a favorable translation impact in periods of U. S. Dollar strength. Within each of the first three quarters of the year, we saw some benefit as the dollar sequentially trended stronger. However, within the Q4, this trend reversed.

Speaker 3

Given the significant weakening of the U. S. Dollar within the Q4 of 2022, The negative impact to profit was sizable. As you would imagine, our forward looking assumptions do not include expectations for currency fluctuations. To give a bit more context, other income and expense, excluding the impact of pension mark to market adjustments, Has trended at around $250,000,000 of income per quarter for all of 2021 and for the 1st 3 quarters of 2022.

Speaker 3

This has reflected a number of offsetting items, including currency. In the Q4, excluding pension mark to market, Other income and expense swung to a $70,000,000 expense. The majority of that change is due to the foreign exchange translation adjustment, which is why we have highlighted this. Overall, sales were better than we had expected. As we had anticipated, margins increased, But as I said earlier, not by enough to meet our Investor Day margin targets.

Speaker 3

Adjusted profit per share rose by 43%, That was moderated by the $0.41 non cash foreign currency balance sheet translation charge that I mentioned a moment ago. Moving on to Slide 10. The 20% increase in the top line was driven by favorable price realization and higher sales volume. Volume was supported by the $800,000,000 year over year impact of changes in dealer inventory and an 8% increase in sales to users. From a sales perspective, currency remained a headwind given the strength of the U.

Speaker 3

S. Dollar. As I mentioned earlier, sales were higher than we expected in the quarter, mostly due to some improvements in the supply chain, which enables stronger shipments, particularly in Construction Industries. The increase in dealer inventories reflects the improved shipments in construction industries and customer delivery timing in resource industries in energy and transportation. Overall, market dynamics remain healthy as sales to users continue to increase and our backlog is strong at $30,400,000,000 Moving to Slide 11.

Speaker 3

4th quarter operating profit increased by 4% impacted by the goodwill impairment charge and restructuring Adjusted operating profit increased by 78% as favorable price realization and higher sales volume Continue to outpace higher manufacturing costs. Manufacturing costs increased primarily due to higher material costs And unfavorable cost absorption as we decreased our inventories in the 4th quarter compared to an increase in the prior year. Related to our recent price cost performance, keep in mind that we are still catching up from the increases in manufacturing costs, which have occurred over the last few years. In particular, material and freight costs have increased by about 20% since 2020, and our full year gross margins remain below our 2019 Our 4th quarter adjusted operating profit margin of 17% was a 5 60 basis point increase versus the prior year. As Jim has mentioned, this is our highest ever quarterly adjusted operating margin.

Speaker 3

As I said earlier, we did not achieve our Investor Day margin targets. As Jim said, in a high inflation environment, You do not get the benefit of operating leverage that you would normally see expect when sales increases are volume driven. You will recall that our margin targets are progressive, which means at the top end of the range, for every $1,000,000,000 in sales, incremental revenues, We need to deliver close to 40 percentage points of debt through adjusted operating profit. This is challenging to achieve in a high inflation environment Also, please keep in mind that when we met that we made a conscious decision to continue to invest for future profitable growth. We have not seen inflation anywhere near double digit levels since the targets were introduced in 2017.

Speaker 3

In a low inflation environment, productivity improvements can be made to offset inflationary increases, so nominal targets remain effective. In the current high inflation environment, you cannot achieve the level of productivity, so we are adjusting the target for sales range to reflect the inflationary increases we've seen in 2022. On Slide 12, we've updated our margin target Slope to account for the impact of inflation as depicted on the chart. We still have the same aspirations for margins. However, the corresponding level of sales and costs are generally around 9% higher than they'd have been in a noninflationary environment.

Speaker 3

As you can see, the low end of the sales range is now $42,000,000,000 while the top end is $72,000,000,000 This compares to the previous bookends of $39,000,000,000 $66,000,000,000 respectively. The key point is that despite the inflationary impact on sales and costs, which impact margins, our expectations for profit from cash generation Have not changed and we remain focused on delivering increases in absolute OPEC dollars. Depending on the inflationary environment that we see in 2023, we'll have to revisit the range next January. Moving to Slide 13. Across our 3 primary segments, sales and margins improved in the Q4 versus the prior year, supported by price realization and sales volume.

Speaker 3

As expected, price more than offset manufacturing costs in all three segments. Starting with Construction Industries. Sales increased by 19% in the 4th quarter to $6,800,000,000 driven by favorable price realization and sales volume, Partially offset by currency. Volume increased primarily due to changes in dealer inventory and higher sales to users. Dealer inventory increased in the quarter compared to a reduction last year.

Speaker 3

Sales in North America rose by 34% due mostly to strong pricing, Depository change in dealer inventory and higher sales to users. Sales in Latin America increased by 39% on strong price realization And higher sales volume, the latter due mostly to a favorable change in dealer inventory. In the AME, sales increased by 10% Sales volume was supported by a positive year over year change Dealer inventory as the decrease in the prior year's quarter was larger than this year's decline. Sales in Asia decreased by 10%, mostly due to unfavorable currency impacts, partially offset by stronger price realization. Lower sales volume also contributed to the decline as dealers decreased inventory during the Q4 compared to an increase in the prior year.

Speaker 3

4th quarter profit for Construction Industries increased by 87% versus the prior year to $1,500,000,000 Price realization and higher sales volume drove the increase. Unfavorable manufacturing costs largely reflected higher material costs, Unfavorable cost absorption and increased freight. The segment's operating margin of 21.7 percent was an increase of 780 basis points versus last year. The margin for the quarter was better than we'd expected on stronger volume, price and moderating material costs. As a reminder, the Q4 is usually the weakest quarter for margins in Construction Industries, but with the benefit of price realization, the reverse was true in 2022.

Speaker 3

Turning to Slide 14. Resource Industry sales grew by 26% in the 4th quarter to $3,400,000,000 The improvement was primarily due to favorable price realization and higher sales volume. Volume increased due to the impact of changes in dealer inventories And higher sales of equipment to end users. Dealer inventory increased more during the Q4 2022 than the prior year Due to the timing of customer deliveries, which includes the impact of outbound logistics delays and commissioning, 4th quarter profit for Resource Industries increased by 110% versus the prior year to $605,000,000 mainly due to favorable price realization and higher sales volume. This was partially offset by higher manufacturing costs, primarily material, freight and volume related manufacturing costs.

Speaker 3

The segment's operating margin of 17.6 was an increase of 700 basis points versus last year, strengthening versus the 3rd quarter as we had expected. Now on Slide 15. Energy and transportation sales increased by 19% in the 4th quarter to $6,800,000,000 With sales up across all applications, oil and gas sales increased by 38% due to higher sales of turbines and turbine related services, Reciprocating Engines and Aftermarket Parts. Power generation sales increased by 12% as sales were higher in large reciprocating engines supporting data center applications. Sales increased in small reciprocating engines, turbines and turbine related services as well.

Speaker 3

Industrial sales rose by 19% with strength across all regions. Finally, transportation sales increased by 6% benefiting Benefits of marine applications and reciprocating engine aftermarket parts. Rail services were offset by lower deliveries of locomotives. 4th quarter profit for Energy and Transportation increased by 72% versus the prior year to $1,200,000,000 The improvement was primarily due to higher sales volume and favorable price realization. Higher manufacturing and SG and A and R and D costs acted as a partial offset.

Speaker 3

Manufacturing cost increases largely reflected higher material costs and volume related manufacturing costs. SG and A and R and D expenses increased due to investments aligned with our strategic initiatives, including electrification and services growth. The segment's operating margin of 17.3 percent was an increase of 5.30 basis points versus last year, strengthening versus the 3rd quarter as we had expected. Moving to Slide 16. Financial Products revenue increased by 10% to $853,000,000 Benefited by higher average financing rates across all regions.

Speaker 3

Segment profit decreased by 24% to $189,000,000 The profit decrease was mainly due to a higher provision for credit losses at CAAT Financial and an unfavorable impact from equity securities and insurance services. The increase in provisions reflects changes in general economic factors rather than company specific economic factors. Despite these changes, our leading indicators remain strong. Past dues were 1.89% compared with 1.9 5% at the end of the Q4 of 2021. Also, this was an 11 basis point decrease in past dues compared to the Q3 of 2022.

Speaker 3

Retail new business volume declined versus the prior year, but remained steady compared to the Q3. As I mentioned last quarter, CAAT Financial is not seeing slowing business activity, but continues to see strong competition from banks due to higher interest rates And more customers willing to pay cash for their machines. Used equipment demand remains strong with inventories at historically low levels. We continue to see high conversion rates as well as customers should choose to buy at the end of the lease term. Now on Slide 17.

Speaker 3

ME and T free cash flow in the quarter increased by about $1,200,000,000 versus the prior year to $3,000,000,000 The increase was primarily due to higher profit. On working capital, our inventory decreased by about $600,000,000 in the quarter. Improved availability of some components benefited shipments as we decreased our work in process inventory. We also saw strong shipments of solar turbines in the quarter. We repurchased about $900,000,000,000 common stock in the quarter and paid around $600,000,000 in dividends.

Speaker 3

As Jim mentioned, we generated $5,800,000,000 in ME and T free cash flow for the year, inclusive of CapEx of about $1,300,000,000 We are pleased with the strong free cash flow we generated in a year where we paid $1,300,000,000 in short term incentive compensation And increased our inventories by over $2,000,000,000 Our liquidity remains strong with an enterprise cash balance of $7,000,000,000 And another $1,500,000,000 in slightly longer dated liquid marketable securities, which generate improved yields on that cash. Now on Slide 18, I'll share some high level assumptions for the full year followed by the Q1. As we begin 2023, demand remains constructive given the strong order backlog and improving supply chain dynamics. Although we do not expect the benefit of a dealer inventory tailwind like we saw last year. As a reminder, dealer inventory rose by $2,400,000,000 2022.

Speaker 3

Around 40% of the increase relates to Construction Industries, with the balance reflecting the timing of deliveries to customers For the full year 2023, we anticipate increased sales supported by price realization. Although we expect stronger sales to users in 2023, the headwind from the $2,400,000,000 dealer inventory build in 2022 We'll moderate volume growth. Our planning assumption is that we do not expect a significant change in dealer inventory by the end of the year. We do expect service sales momentum to continue after reaching $22,000,000,000 in 2022. From a sales seasonality perspective, we expect a more typical year with lighter Q1 for total sales.

Speaker 3

For the full year, we expect our adjusted operating profit to increase reflecting higher sales, and we expect to be within the updated adjusted operating margin ranges. Pricing actions from 2022 will continue to roll into 2023, and we will evaluate future actions as appropriate to offset inflationary pressures. We currently expect to see a moderation of input cost inflation as the year progresses and therefore a corresponding moderation in price realization as we move through the year. Price though should still more than offset manufacturing costs for the year. Increases in SG and A and R and D expenses are expected to exceed the benefit of lower short term incentive compensation expense this year as we continue to invest in strategic initiatives such as services growth and technology, including digital, electrification and autonomy.

Speaker 3

Below operating profit, we anticipate a headwind of approximately just over $800,000,000 or about $80,000,000 per quarter And other income and expense at the corporate level related to pension expense due to higher interest costs given higher interest rates. This is a non cash item. For the full year of 2022, the strengthening of the U. S. Dollar acted as a tailwind of $189,000,000 relating to the ME and T balance sheet translation impact that I spoke about earlier.

Speaker 3

This would not recur if the weakening we've seen in rates thus far continues. Based on current rates, we'd see a headwind of around about $80,000,000 Remember that 2022 was not a typical year for us as margins increased sequentially throughout through the year as the benefit of price realization was stronger in the second half of the year. Also, manufacturing volumes were impacted by supply chain issues, which did impact absorption rates from quarter to quarter. These factors will mean that we do not expect to return to our normal seasonal margin Moving on, we expect to achieve our M and T free cash flow target of $4,000,000,000 to $8,000,000,000 for the year, With CapEx in the range of about $1,500,000,000 we'll have about $1,400,000,000 cash outflow in the Q1 related to the payout of last year's We anticipate restructuring expenses of around $700,000,000 this year, the majority of which is related to the longwall divestiture charge that I mentioned earlier. Finally, we anticipate a global effective tax rate of 23% excluding discrete items.

Speaker 3

Now on to our assumptions for the Q1. In the Q1 compared to the prior year, we expect sales to increase on price and slightly stronger volume, reflecting higher sales to users. With regard to diesel inventory, we expect a typical seasonal bent build in the Q1 of this year. As a reminder, dealers increased inventories by $1,300,000,000 in the Q1 of 2022, and we expect a lower build in the Q1 of 2023. Sales should increase across 3 primary segments in the Q1 versus the prior year.

Speaker 3

Compared to the Q4, we anticipate lower sales in the Q1 at the enterprise level following our typical seasonal pattern. We expect lower sales sequentially in each of our 3 primary segments as well. To provide some color, Construction Industries is following an abnormally strong 4th quarter, where shipments exceeded our expectations. Resource Industries had a strong 4th quarter with its highest quarterly shipments since 2012 and expects lower sequential sales in the Q1 due to the timing of shipments, which as you know can be lumpy. Energy and transportation sales should be sequentially lower as well following normal seasonal patterns.

Speaker 3

Keep in mind that solar turbines had a strong 4th quarter. Specific to the Q1 versus the prior year, Keep in mind that the Q1 margin margins last year were very low. We expect substantially strong enterprise and segment margins in the Q1 On favorable price and volume, price realization should more than offset manufacturing costs above the enterprise segment levels as well. Also, we could see headwinds related to pension and currency below operating profit, as I just mentioned. Compared to the Q4 of 2022, we expect adjusted operating profit margins to be flattish to down for the Q1 of the year at the enterprise level.

Speaker 3

Keep in mind that our Q4 of 2022 adjusted operating profit margins were our highest quarterly margins ever. By segment, in Construction Industries, we normally see higher margins in the Q4. However, coming off a very strong Q4, we expect lower volume This is the business which usually drives enterprise wide sequential margin improvement from the Q4 to the first. Similarly, lower volumes should drive sequentially lower margins in Resource Industries. And in Energy and Transportation, We expect lower margins sequentially following a strong Q4, which is the normal pattern for this business.

Speaker 3

Turning to Slide 19, let me summarize. Sales grew by 20%, led by strong price realization and volume gains across the 3 primary segments. The adjusted operating profit margin increased by 5.60 basis points to 17%. ME and T free cash flow was strong at $3,000,000,000 for the quarter, and we continue to return cash to shareholders on a consistent basis. Service revenues were $22,000,000,000 for the full year, a 17% increase as momentum builds in 2022.

Speaker 3

The outlook remains positive with improving supply chain dynamics and net backlog up around $400,000,000 to over $30,000,000,000 We've updated our margin targets curve to account for the impact of inflation on sales and costs, and we expect our 2023 adjusted operating margins to be within our updated range. Despite the inflationary impact on sales and costs, Our expectations for profit and cash flow generation have not changed, and we will continue to execute our strategy for long term profit growth. I want to confirm that our full year 2022 restructuring costs were about $300,000,000 for the year. So apologies if we remain in the Cool. Now that now I'll hand over to questions.

Operator

As a reminder, Management asks that we limit to one question per analyst. Your first question comes from the line of Mig Dobre with Baird. Your line is now open.

Speaker 4

Thank you. Good morning, everyone. Just wanted to appreciate all

Speaker 5

the color on dealer inventories. I guess, it looks to me like about $1,000,000,000 of the build is in construction, a good chunk of that is in North America And retail sales here have been, call it, flattish over the past 3 quarters or so. So I guess I'm curious as you think about Q1 and you think about that seasonal inventory build, Where do you expect that to occur? Is the channel stocked enough in North America construction? And how comfortable are you with dealers actually being able to Put through this inventory to end users in 2023.

Speaker 5

Thank you.

Speaker 2

We typically see an increase ahead of the spring Selling season, so that's why we think it will be a traditional kind of increase. Again, we talked about what we see happening in the various Again, the strength in infrastructure, which is 75% of CI, it's a moderation in residential in North America as we discussed. But again, North America has really been our most constrained region. So we're pleased to see healthier dealer inventories In North America, and we're now in that typical range of 3 to 4 months. And again, we talked about the fact that RI and ENT Typically don't hold a lot of dealer inventory, hoping to get an order over 70% of the year end dealer inventory For RI and ENT is tied to customer orders.

Speaker 2

So again, hope that helps.

Operator

Your next question comes from the line of Rob Wertheimer with Melius Research. Your line is now open.

Speaker 6

Hi, I guess thank you. I'm going to ask about turbines within E and T. Obviously, the global energy mix is Shifting on that gas to Russia and so forth. Are you able to say the order has been strong, I assume, related partly to that. Is the solution sort of already in the pipeline for Solar or there are a lot of projects underway and or under consideration do you expect to keep that Segment elevated for the next several years.

Speaker 2

Well, it's always Rob, it's always good morning. It's always tough to make a multiyear prediction, but I will say that The orders our order rates are quite strong for solar as is quotation activity. And of course, solar is very involved in that natural gas value chain, Compressing a lot of gas to LNG facilities for export around the world. There has been an underinvestment, I'd argue, in oil Over the last few years and then it's starting to be reversed now and that has a positive impact on both our cat oil and gas business and our solar business. So Again, very difficult always to make a multiyear projection not knowing what's happening in the economy.

Speaker 2

But based on what we see today, Business is quite strong for solar, both in the services side and on the new equipment side. And one of the things we have seen, there was For a while thereafter, the decline in oil prices. A few years ago, we saw a decline in international projects That's picked up for solar. So we're seeing more international projects. We're also seeing strength in North American gas compression for solar as well.

Operator

Your next question comes from the line of Jamie Cook with Credit Suisse. Your line is now open. Hey, good morning. I guess my question, can you talk for 2023 where is your opportunity To put through incremental price and where you see deflation. And the question just comes from Jim, just the incremental margins that you put up in the 4th quarter We're fairly impressive.

Operator

So I'm just wondering how big sort of the price cost Tailwind can be in 2023 with the strong pricing actions and supply chain easing and potentially deflation in some areas. Thanks.

Speaker 2

Well, Jamie, we always certainly when we think about price actions, we take a number of things into account. Certainly, we take into account The increases from our suppliers and cost. We also, of course, pay very close attention to Competitive market and always striving to provide more value to our customers. So it's difficult for us to make a prediction as to what will happen. I guess that we demonstrated the ability To pass along price when we need to because of inflationary factors, but again, we always keep competition in mind as well.

Speaker 2

So Again, pleased at how we're doing so far and the way we're managing that balance. Yes. And as I

Speaker 3

think we've said from our planning assumptions perspective, obviously, there is some Carryover price impacting us, in particularly in the first half of the year. As we expect to go through the year, we expect that benefit of price to moderate in the second half, But also, we expect the increases in manufacturing costs to continue to moderate as we go through the year. So but obviously, that's a planning assumption. And as always the case, that is predicated on the assumption that input inflation does moderate. And as Jim said, we'll obviously keep an eye open on that And take pricing actions accordingly.

Operator

Your next question comes from the line of Jerry Revich with Goldman Sachs. Your line is now open.

Speaker 7

Yes. Hi. Good morning, everyone.

Speaker 2

Good morning, Jerry.

Speaker 7

I'm wondering if you could just talk about your production plan in Construction Industries and what are you folks looking for in terms of decision to potentially Curtail production if we do continue to see dealer inventory builds ahead of expectations. Just if you could just touch on the key indicators that You're looking at and how can we gradually affect the production slowdown, if that's indeed what we need to do over the course of 2023? Thanks.

Speaker 2

Thanks, Sherry. And certainly, again, we obviously pay very close attention to what's happening in the marketplace. We pay attention to Stu's. Dealers are independent businesses make their own decisions about inventory, but certainly we do work with them and the last thing we want to do is to have too much Inventory in the channel as it occurs today, as we mentioned earlier, we're now back in our normal typical range and still we still Have many dealers that would like more equipment from us to support customer orders. So we talked about the fact that non resi is 75% of Construction Industries And it is still quite robust and strong and we expect it to grow.

Speaker 2

Yes, some moderation in residential, But again, 75% is non resi. So again, as we always do, we'll pay close attention to the market and we'll modify our production plans as appropriate. There are still some products that we want we need to produce more of quite frankly and we're still dealing with some supply chain issues in some areas. So again, it's not a one size fits all answer. We've talked about the fact that China is slow and we expect it to continue to be slow Below 2022 levels, but in many areas, demand is quite still quite strong.

Operator

Your next question comes from the line of David Raso with Evercore. Your line is now open.

Speaker 8

Hi. Thank you for the time. My question relates to the Q1 guidance. Normal seasonality on sales, EBIT margins usually go up a couple of 100 basis points. I mean that's sort of a 4.50 EPS number.

Speaker 8

What you're implying is a little closer to 4. The margins in particular, you mentioned pension and I know CI is at a high level, so the comp is tough sequentially. But on price cost, what are you assuming on price cost Q1 versus Q4? If you could just give us some color. It's just to see the margins flat to down sequentially even with the tough comp is a bit unique.

Speaker 8

And just if you could help us flesh out sort of the price cost? Thank you.

Speaker 3

Yes. David, great question and part of the reason why I highlighted that CI margins were actually very, very high in the 4th quarter. Part of that was because normally in the Q4, you don't see a deal inventory build as big as we did see in the Q4. The fact that, that release did help overall CI margins come in a little bit better than we expected as well. Obviously, what that does mean is normally, yes, correct, We normally get a 200 to 300 basis points bump in the Q1 based on production and ramping up production.

Speaker 3

Obviously, those production rates aren't quite the same as they would normally be Q4 to Q1, because, obviously, we're looking at a very different profile, Particularly given that obviously we were building production through 2022, particularly in CI. So that is the biggest Challenge and that's probably the biggest single factor which will drive margins sequentially lower. On price cost, We still expect strong price in Q1. It will not be as big as Q4 for the simple reason we are lapping price increases We put through at the beginning of 2022, so that will be coming down slightly, but we do expect price cost to be favorable for the first half of the year. Again, that's just going to create a little bit of noise in the margin structure quarter on quarter.

Speaker 3

Unfortunately, we are not going to go back to the normal Lower margins in Q1, higher margins in Q4, which you guys are going to be able to model is going to still be a little bit different as we go through 2023. Obviously, 2022 was the opposite.

Operator

Your next question comes from the line of Tami Zakaria with JPMorgan. Your line is now open.

Speaker 9

Hi, good morning. Thank you so much. So I'm trying to understand the volume commentary for this year. Since you expect sales to end users to be stronger this year versus last year, But you don't expect dealer inventory restocking benefit. Does that mean dealer inventory could actually decline again from current levels to

Speaker 3

No assumption at the moment, Tammy, and thanks for the question, is that at the moment, It's a planning assumption. As is always the case, the dealer inventories will be flattish for the year, and should not increase or decrease Effectively, what that does mean though is obviously the headwind exists from our shipments on the $2,400,000,000 of dealer inventory That got built in 2022. Remind you, a big chunk of that, around about 60% is in ENT and in RI, which is related to customer orders, which will be fall through into sales to end users in due course. But overall, we expect, again, sales to users to be up year over year and that will and the deal inventory headwind will moderate that level of increase the volume that we will see in our shipments, as I said in my remarks.

Operator

Your next question comes from the line of Mike Senninger with Bank of America. Your line is now open.

Speaker 10

Thank you. Just following up on the solar comments in oil and gas portfolio, ENT was a dominant driver of earnings 78 years Go with leading margins for Cat. It's one of the only segments you're not getting that double digit pricing right now. It's lagged the others. Do you see room for that to pick up following this reversal of underinvestment the last few years?

Speaker 10

And is there anything structurally keeping cat from returning to those prior Peak margins in

Speaker 1

E and T. Thank you.

Speaker 2

Good morning, Mike. Thanks for the question. So you may recall that we put through price increases later In E and T than we did with machines just based on the market dynamics that existed at the time. So having said that, as I mentioned, particularly in oil and gas and power generation Market is quite strong and we expect our volumes certainly in oil and gas to increase and we're dealing with In Kettle Oil and Gas, still some supply chain challenges. So we're dealing with that factor as we ramp up.

Speaker 2

Solar is again, I mentioned earlier, very Strong Q4, but still very robust order rates coming in and a lot of quotation activity. So again, we do expect that ENT to improve in 2023. And I won't try to compare it to where they were a few years ago. I'm going to say that the business is strong and improving.

Operator

Your next question I just wanted to dig into the manufacturing cost side of the price cost equation. It sounds to me reading through the comments you made in response an earlier question that you still expect manufacturing costs to be a headwind year on year in 2023. Can you just kind of talk through the big components of that materials versus freight and why we shouldn't expect at some point in 2023 for manufacturing costs to become a tailwind? Thank you.

Speaker 3

Yes. So I mean, there's a couple of factors obviously that could come into that. Material costs will Still be a headwind we expect. Some of that is material cost inflation that we're still seeing through this year. Some of that material cost inflation is not just necessarily commodity Some of it will be labor cost, and some of it will include energy costs.

Speaker 3

So all of those factors As we are anticipating, we'll moderate as we go through the year. We are starting to see signs of lower levels of A request for price increase is coming from customers from suppliers. So that's a positive sign. And hopefully, As things unwind through the year, some of that will moderate. Again, we have not in our planning assumptions, We based our pricing actions on what we're assuming from a manufacturing cost perspective.

Speaker 3

And obviously, we'll take action as appropriate If we need to, if there are great increases and we're currently expecting in manufacturing costs in 2023.

Operator

Your next question comes from the line of Chad Dillard with Bernstein. Your line is now open.

Speaker 4

Hi, good morning guys.

Speaker 2

Good morning, Chad.

Speaker 4

So In China, I know you mentioned that you're expecting levels to be below 22%, at least on the end market perspective. But maybe you could talk about Just like what you're seeing in like your in the channel from an inventory perspective relative to, I guess, normalized levels. And then how should we think about the business now that you have the GS series for a full China cycle?

Speaker 2

Again, just to reiterate, we had a couple of really strong years in China in 2020, 2021 and we had saw softening in 2, and again, we don't see signs of improvement at this point. We continue to invest in new products to try to maintain our Competitiveness with new products, so that's continuing and we've been pleased with the response to those new products, Including the GX, but that above 10 tonne excavator market, we do expect to be Weaker in 2023 than it was in 2022. And the inventory In the Q4 versus the build in the prior year is lower.

Speaker 3

Yes. So we actually had a reduction in dealer inventory in Asia Pac this year In CI versus a build in the previous year.

Operator

Your next question comes from the line of Tim Thean with Citi. Your line is now open.

Speaker 11

Yes, thanks. Jim, maybe just a follow-up on just mining outlook within RI. I get the point about the miners being capital discipline, which has been in place for some time, but just on the back of What appears to be strong results and outlooks from a competitor in Asia overnight, maybe just say a bit more about Kind of the outlook and your views on the mining piece of our eye for 2023. Thank you.

Speaker 2

Yes. Thank you, Jim. We've been talking for a number of years in our earnings call about what we expected in the mining industry, which was moderate growth year on year. And as opposed to what we saw Going back, thinking about 10 or 12 or 15 years ago where we saw some wild cycles up and down. And really I believe that's a function of Our mining customers remain capital disciplined, and that's a very positive thing, I think, for them and for us.

Speaker 2

And what we've been saying for a number Of years now on our earnings calls that we expected year over year moderate increase and that's exactly the way it's playing out. So we're very encouraged by our quotation activity with Customers, the conversations that are going on, we have a strong backlog, which we feel good about. Park trucks remain at low levels. There's high utilization of equipment. And customers make decisions on a whole variety of factors as to whether or not they're going to rebuild or they're going to buy new trucks and we benefit from either one of those things.

Speaker 2

We're very encouraged by our autonomous solution and we Firmly believe we have the best solution in the industry and that's being demonstrated by the decision, the purchasing decisions Our customers are making. And as a reminder, of course, ROI also includes core and ag, which the trends there are positive as well. A lot of that's driven by infrastructure spending and anticipated infrastructure spending. So again, we feel good about the mining business. And Again, quotation activity is very strong and we're having very good conversations with customers.

Operator

Your next question comes from the line of Matt Elkott with Cowen. Your line is now open.

Speaker 12

Good morning. Thank you. I was hoping you guys can provide us with some more insights into the strength you're seeing in the Middle East. And related to that, but longer term, Saudi Arabia has big plans in both construction and more recently mining. Are there any meaningful incremental opportunities for you guys there?

Speaker 2

Good morning, Matt. And I believe we mentioned in our prepared That EAME, which is Europe after the Middle East is expected to be about flat. And we said that strength in the Middle East is Offsetting some uncertainty in Europe. So certainly, when oil prices are elevated, that tends to provide The investment capabilities for customers in the Middle East, whether it's for oil and gas business or for construction. So again, it is certainly a bright spot and a positive one and one that we feel will continue through 2023.

Operator

Your next question comes from the line of Steven Fisher with UBS. Your line is now open.

Speaker 2

Thanks. Good morning. I'm just curious what was different about the supply chain and construction, which sounds like it was It's pretty smooth versus ENT and Resource, which sounded like we're still a little challenging. Is it just still the randomness that's out there? And then last quarter, you talked about some of the manufacturing inefficiencies due to supply chain.

Speaker 2

Just curious How that played out in Q4 and what you expect for that in 2023? Thank you. Yes. Thanks, Steve. And certainly, we have a diverse Group of suppliers and a diverse product line and we did see some improvement in the quarter, but there are still some areas of strength.

Speaker 2

And we think it's very different product by product. And even though you'll see a number of suppliers in better shape, all it takes is one component To prevent you from shipping an engine or a machine, part of it is just the nature of the beast, I think, as to what's happening in various industries. And if we look at our Large engines, it's more of a struggle frankly than it is with some of our construction machines at the moment. And these things ebb and flow over time, But that's where we are today. We still see some semiconductor availability challenges.

Speaker 2

I know with the higher end chips that's improved significantly in the industry based on Industry reports, but for the semiconductors that we use, it continues to be a challenge. And so in the Q4, we certainly did still experience inefficiencies associated with Supply Chain Challenges and that had an impact on us because we're still doing things like workarounds and it's not anywhere as smooth as it needs to be. Yes.

Speaker 3

And I think if you look out for the rest of the year, what we do expect is that, obviously, we start to lap those in the second half of the year, Those inefficiencies, so we should either see a moderation or actually a reversal of some of that supply chain inefficiency we saw In the second half of the year.

Operator

Your next question comes from the line of Kristen Owen with Oppenheimer. Your line is now open.

Speaker 13

Hi, good morning. Thank you for the question. Good morning. I wanted to follow-up on the services growth. You reported now $22,000,000,000 on track to meet that $28,000,000,000 target by 2026.

Speaker 13

Can you just talk to us about some of the growth drivers in that business And maybe provide us with an update on customer value agreement take rates?

Speaker 2

You bet. So again, we are encouraged, as I mentioned, about Our progress in services that we mentioned when we threw that target out that it wouldn't be a straight line, it wouldn't be linear and we knew we had to make investments to make it happen and we are continuing to invest And a whole variety of things. We've got more connected assets now, dollars 1,400,000 up from $1,200,000 last year. We're investing significantly in our e commerce capabilities. That's one where arguably, I'd argue we were a bit behind, but we made great progress and very proud of what the team is doing there and those sales are increasing.

Speaker 2

To answer your question on customer value agreements, over 60% of new equipment in 2022 was delivered with a CVA. That's really important because it creates that customer touch point and it gives us the ability to demonstrate that value that we can provide. And also we're investing heavily in AI. We have what are called prioritized service events. So what that does is allows us to give dealers a lead on aftermarket service and repair In advance and it provides value to our dealers of course, but it also provides value to our customers because it allows them to avoid unplanned downtime.

Speaker 2

So that's really a bit positive as well. And also, we're working on parts availability. We need to have the right And that's one of the benefits of having connected assets and also utilizing AI With those connected assets to ensure that we anticipate where those parts will be needed and that's a key enabler as well.

Speaker 1

Operator, we have time for one more question.

Operator

Your final question today comes from the line of Steve Volkmann with Jefferies. Your line is now open.

Speaker 2

Thank you guys for fitting me in here. My question is on inventory. The cat inventory on your balance sheet was up $2,200,000,000 or something roughly in 2022, and I'm sure some of that was price. But is there an opportunity To sort of draw that back down as supply chains improve or are we in sort of a new reality where we need a little bit higher inventory because of the vagaries of All the supply chains and international trade and etcetera. We're not running as lean as we I would like us to be and certainly that is A consequence of the supply chain challenges we're having and I think I mentioned in previous calls, the term de commit is one that I hadn't been familiar with until COVID hit and where customers in very short notice decommit and don't give us components when we need them.

Speaker 2

So that's created inefficiencies. It's also Resulted in more inventory. So I wouldn't say it's a permanent condition. As the supply chain situation improves, I do expect us to become Leaner again and to be able to reduce our internal inventory.

Speaker 12

Thank you.

Speaker 2

All right. Well, that's it. And thank you all for joining us. I really do appreciate your questions. Just to summarize here, I'm very proud of our global team.

Speaker 2

They delivered one of the best years we had on record. We had strong overall top line growth. Services grew 17%. We generated strong adjusted operating profit ME and T free cash flow in the year, and we achieved an all time record for adjusted profit per share. As we think about the year, we're encouraged by the strong quotation activity, Our $30,000,000,000 backlog and as we mentioned, we believe 2023 will be in an even better year than 2022 on both the top and bottom line.

Speaker 2

And we continue to remain focused on supporting our customers and executing our strategy for long term profitable growth. Again, thank you for your questions.

Speaker 1

Thank you, Jim and and everyone who joined us today. A replay of our call will be available online later this morning. We'll also post a Transcript on our Investor Relations website as soon as it's available. You'll also find a 4th quarter results video with our CFO and an SEC filing with If you have any questions, please reach out to Rob or me. The Investor Relations general phone number is 309-675-4549.

Speaker 1

We hope you enjoy the rest of your day. Now I'll turn it back to Emma to conclude the call.

Operator

Thank you so much for attending today's call. You may now disconnect.

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