Caterpillar Inc.
Q2 2019 Earnings Call Transcript

Published: 24 Jul 2019

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Caterpillar 2Q 2019 Analyst Conference. At this time, all participants have been placed on a listen-only mode. And we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Jennifer Driscoll. Ma’am, the floor is yours.

[Jennifer Driscoll:]

Thanks, Catherine. Good morning, everyone, and welcome to Caterpillar second quarter earnings call. Joining us today are Jim Umpleby, Chairman of the Board and CEO; Andrew Bonfield, CFO; and Kyle Epley, Vice President of our Global Finance Services Division. We’ve provided slides to accompany the presentation. You can find them along with our earnings news release in the Investors section of the caterpillar.com under Events & Presentations. Today, we will make forward-looking statements, which are subject to risks and uncertainties. We will also make assumptions that could cause our actual results to be different than the information discussed. For details on factors that individually or in aggregate could cause actual results to vary materially from our projections, please refer to our recent SEC filings and the forward-looking statements reminder in today’s news release. As indicated on last quarter's call, we're not reporting adjusted profit per share again this quarter, as restructuring costs are expected to be lower in 2019. It’s our intention to report adjusted profit per share at the end of the first -- fourth quarter of 2019 to exclude any mark-to-market gain or loss for the re-measurement of pension and any other post-employment benefit plans, as well as any other discrete items. As a reminder, our U.S. GAAP-based guidance for profit per share continues to include the benefit of the $0.31 discrete tax item we recognized in the first quarter. Please keep in mind that Caterpillar has copyrighted this call. We expressly prohibit use of any portion of the call without our written approval. Before I turn the call over to Jim, let me inform you about a change we're making due to investor preferences around the timing of earnings calls. Beginning next quarter, we plan to shift our earnings call to begin at 8

[Jim Umpleby:]

Thank you, Jennifer. Good morning to everyone on the call. Please turn to slide 3 for our second quarter highlights. Sales and revenues this quarter rose 3%, to $14.4 billion. Operating profit rose 2% to $2.2 billion. Profit per share of $2.83 was slightly ahead of last year's record second quarter of $2.82. We delivered strong operating cash flow of $2 billion in the quarter. At our Investor Day in May, we announced our intention to return substantially all free cash flow to shareholders through a combination of dividend growth and more consistent share repurchases.

[Andrew Bonfield:]

Thank you, Jim, and good morning, everyone. Starting with slide 6, I will begin with a closer look of results. Then I'll touch on backlog and dealer inventories before turning to our outlook for the second half and full year. Starting with the headlines. Sales and revenues for the quarter totaled $14.4 billion, up 3% from last year's quarter, driven by Construction Industries and Resource Industries. Overall operating profit increased by 2% or $46 million to $2.213 billion. Second quarter profit per share was $2.83 was up by $0.01 versus the prior year's record second quarter. There were a number of factors, which impacted the overall performance of the quarter. First, negative mix had an unfavorable impact on profits. This has bolstered the product and the segment length of level. Second, oil and gas sales remained weak as we wait for the Permian takeaway issues to be resolved. We now expect this to occur in the fourth quarter. Finally we booked significant restructuring expenses in the quarter, which means that we expect this spend to be immaterial for the rest of the year.

[Jennifer Driscoll:]

Catherine, thank you. If you could now queue up the questions.

[Operator:]

Certainly. Ladies and gentlemen, the floor is now open for questions. Your first question is coming from Rob Wertheimer from Millennium Capital. Sir, your line is live.

[Rob Wertheimer:]

Thank you, and good morning, everyone.

[Jennifer Driscoll:]

Good morning.

[Jim Umpleby:]

Good morning, Rob.

[Rob Wertheimer:]

So, thanks for the color on the dealer inventory. I think that will be something investors want to talk about. I wanted to ask for just a little bit more clarity around it. I mean obviously you don't control what the dealers do and it's their own decisions. But do you have a sense of what led to the change of the building a little bit of inventory through the year versus the prior expectation? It doesn't seem like sales have inflected up sharply since then. And then just wrap my follow-up into it. I mean is the $900 million gap between what you thought and what sounds like it will be, is that the difference between your ideal level and where it may end versus the downtime risk for ongoing? Or maybe if you just characterize how big that gap is versus ideal? Thanks.

[Jim Umpleby:]

Hey Rob, it's Jim, I'll take the first part of that question and maybe ask Andrew to do the second part. So, as you mentioned dealers are independent businesses and they control their own inventory levels. Inventory levels were lower than they normally are and with that increase, we're back up to what is considered more of a normal level. I did talk about the fact that we had -- we have been successful in reducing our product lead times which also has an impact here as well. So, that gives dealers a lot more flexibility in terms of where they place orders. Andrew I'll let you have the second.

[Andrew Bonfield:]

On the $900 million reduction, we expect for the remainder of the year, reduction to about $900 million. I mean we are slightly at the high end; we'd like to be in the middle of the range. We keep a range for each segment. We're always comfortable being at sort of midpoint in the range. This gets us around about the midpoint from our perspective, Rob. So there would be potentially further reduction, but we were very low in that range previously. And as Jim indicated they did have some impact on availability. Ultimately at the end of the day, we want to make sure that dealers have the right amount of inventory to be able to meet customer demand and probably there was given that the challenges we've had previously there may have been some loss of sales at dealer level as a result of not being under supply quickly enough.

[Rob Wertheimer:]

Okay. I beg your pardon. So with the -- I guess reduction from here to the end of the year, you're saying you're going to be roughly in the middle of the range not certainly low of where you'd like to be? Is that what you're saying?

[Andrew Bonfield:]

Yeah, that would characterize it. Yes, Rob.

[Rob Wertheimer:]

Okay, thank you.

[Operator:]

Your next question is coming from Jamie Cook from Credit Suisse. Your line is live.

[Jamie Cook:]

Hi, good morning. I just wanted to follow-up on the mix issues in the second quarter, how much that hurt earnings and what's implied for the back part of the year. And then just within oil and gas specifically I think before you said you had expected orders to pick up in the back part of the year in the second half now you're seeing the first -- fourth quarter. I guess just, sort of, what gives you confidence that you should see that acceleration? And how much cushion could we potentially get from solar in the fourth quarter? Thank you.

[Jim Umpleby:]

Good morning Jamie, it's Jim. So our oil and gas guidance for the year is dependent on certainly solar having a strong fourth quarter. Solar has as you know the lead times are relatively long. They have the orders in hand to -- for the new equipment side to execute that. There's always some variability in service, but we are expecting a big fourth quarter from Solar and fully expect them to make that happen. We are also expecting in the fourth quarter some recovery in recip engine sales in North America as the Permian constraint issues continue to be resolved.

[Andrew Bonfield:]

Jamie on the mix issues, obviously, the mix did have quite an impact in the quarter. If you look at we saw a small increase in volume, the sales level but a negative move in the operating profit level. Principally in CI that was mostly due to the fact that we also sold more small machines in the quarter while they have similar margins that can be quite sensitive to be able to mix impact. And then, obviously, there's also a segmental mix and those mixed within E&T similar mix issue in E&T particularly with low smaller engines being sold. And then also there's a segmental mix impact, obviously, because E&T does have very strong margins and obviously the margin deterioration impacted the reported mix as we look at variable margin in that business. All of those factors have been built into our guidance, so we have put that into why we expect to be at the low end of the range along with a delay particularly in oil and gas sales.

[Jamie Cook:]

Okay, thank you. I’ll get back in queue.

[Operator:]

Your next question is coming from David Raso from Evercore ISI. Your line is live.

[David Raso:]

Hi, good morning. I'm trying to think through the second half implied guidance. Just so we set the framework. It looks like you're implying revenues down say about $500 million first half to second half. But the EPS grows about $0.25 to $0.50. And I'm just trying to understand I can see about $0.15 from lower restructuring sequentially. It maybe about $0.05 from a lower share count so it's about $0.20. But then I would have figured rest would have been you see better price cost second half than first half, more than offsetting some overhead absorption issues with the lower volume. But I thought earlier you made a comment price cost maybe I missed it. So it's sort of neutral the rest of the year. Can you clarify that? Just trying to get the EPS walk first half to second half.

[Andrew Bonfield:]

Yeah. Thanks, David. And – yeah, so first of all, we don't give sales guidance, so your assumption around sales maybe slightly different from our assumptions. So that may have been part of the impact that we're seeing. As Jim indicated, we do expect both rail and solar and oil and gas to pick up in the fourth quarter. All of those will have an impact and remember that obviously E&T is down for the first half of the year, when you look at that. So as you think about it from a top line perspective, there maybe some variability, we see versus where you are on your top line. With regards to margins and operating margins obviously there are seasonal factors that come into play. As we did indicate, we're all starting to see a little bit of relief from pricing – from underlying manufacturing cost increases. Obviously, the tariffs we saw – start now anniversary-ing freight costs, started to pick up in the second quarter of last year. So those factors will have less of an impact on overall manufacturing cost. Offset against a little bit will be some variability, if we do actually take down some production. Obviously, we'll have a little bit lower inventory absorption. So those are all factors, which we weighed into our guidance. Then, obviously, we are starting to see some things like steel cost come down, steel obviously we do a lot of our steel buying on a contractual basis, and there is a lag, but we're all starting to see some of those things flow through as well into the second half.

[David Raso:]

And then trying to set-up the look into 2020. We've already discussed the inventory but for the backlog. Seasonally, you can see how CI might continue to go down. But when you think about your commentary, the rest of the year on mining and engines E&T are we making the assumption into the backlog is somewhat bottoming out here, because RI and E&T offset CI sequentially? We're just trying to sort get a baseline kind of exiting the year. Have we seen generally speaking the bottom of the backlogs with this $15 billion?

[Andrew Bonfield:]

Yeah. I mean, I think David one of the problems with focusing very much on the backlog is remind you that this is reflected about dealer demand. There would have been some elements of as a result of an ability to delays in supplying orders availability of product that dealers may actually have been putting slots in the queue and we have seen that happen before and that may have happened this time as well. Obviously, what does happen with the order backlog is it is lumpy, particularly in places like RI, rail, solar. So we are keeping an eye on it. There's nothing indicating that from a retail, if you look at the retail stats just remind you they are up again. So there's nothing indicating underlying customer demand is changing. This maybe behavior by dealers and their ordering patterns as well.

[Jim Umpleby:]

And, again, just to expand upon how you think about the lumpiness in Solar and Rail. Obviously, if you have a big fourth quarter, there is a lot of shipments that were in the backlog, obviously the backlog will go down. Again, that's – it happens every year that's the nature of the beast.

[David Raso:]

Okay. I'm sorry, Jim. So a part of the $15 billion, you would argue is reflective of why you're confident in the fourth quarter shipments of those businesses, but at the same time it could help the backlog down from here there aren't new orders to fill it in so to speak?

[Jim Umpleby:]

Yes. And certainly and again that happens every year. So -- I say every year typically, Solar in particular has a big fourth quarter, so we would expect again shipments occur, backlog goes down. But again the business continues to be healthy and good quotation activity. So we would expect that there'll be a normal seasonal pattern in Solar in terms of backlog and inventory.

[David Raso:]

Terrific, thank you very much.

[Operator:]

Your next question is coming from Ross Gilardi from Bank of America. Your line is live.

[Ross Gilardi:]

Hey good morning, guys.

[Jim Umpleby:]

Good morning, Ross.

[Ross Gilardi:]

I was just wondering if you could give a little more color on the three new Greenfield sites for autonomous, you know the timing there. Are these retrofits or new trucks and equipment? And is that a positive driver into 2020? Or is it much further out?

[Jim Umpleby:]

Yes, it's a multiyear. We're going to make deliveries over a number of years and so they are new trucks. Again these are Greenfield sites. So again a lot of new technology, but the deliveries will occur not just in one year, it'll be over more than one year.

[Ross Gilardi:]

Okay. And then can you talk a little bit about your confidence in the China excavator outlook for the second half of 2019? I mean, it sounds like your full year outlook is broadly unchanged and as you’ve cited there is some competitive pressure there. I mean, how much visibility do you have on that business for the rest of 2019?

[Andrew Bonfield:]

Based on everything that we see, we believe that overall the market demand will be stable. We have mentioned the fact that we have some competitor pricing pressures from local competitors. We're certainly taking steps to ensure our competitiveness long term in China. We're introducing a number of new GC products that will help us compete as well. But again we are -- we feel good about our forecast there in China.

[Ross Gilardi:]

And then just lastly Andrew, you mentioned your share count should be down 9% by the end of this year with the buybacks. Beyond 2019, if you did 4 billion to 5 billion in buybacks, I think that will retire about 6% of the share count at today's price. I was just wondering how much of that 6% is fair to assume for -- is offset by share issuance for employees options et-cetera. Just net of equity issuance, I'm just trying to get a better sense for how much the share count should be falling each year beyond this year?

[Andrew Bonfield:]

Yes. So obviously the 9% -- around 9% is a net number. So that's niche of new issuance. So effectively given that we'd spend 3.8 last year, we expect somewhat to be in the sort of at least the 2.1 in the first quarter -- first half something similar in the second half. If you're doing about 4, you generally retire about 4.5% of the share capital each year.

[Ross Gilardi:]

Okay. So share count just sort of this base case assumption at the current stock prices is probably falling 4% to 5% a year beyond 2019?

[Andrew Bonfield:]

Yes. Yes.

[Ross Gilardi:]

Okay. Thank you.

[Operator:]

Your next question is coming from Joel Tiss from BMO Capital. Your line is live.

[Joel Tiss:]

Hey guys, how is it going?

[Andrew Bonfield:]

Good. How are you?

[Joel Tiss:]

So just -- it sounds like some pieces you're setting up 2020 to be a little bit more of a difficult year with the incentive comp down, so much this year and the dealer inventory is up a little more. Can you give us some of the pieces that to kind of balance that out? What would be on the other side of that? I'm not asking for forecast just kind of a couple of factors -- bigger factors to think about.

[Andrew Bonfield:]

Yes. I mean let's remember that we have had quite a tough year in E&T so far. Obviously, Permian takeaway issues are resolved and drilling activity goes up that would be one area where we'd see some upside in 2020. I think if you look also at underlying demand for machines, it remains strong. So, again that's other opportunities for us as we move into 2020. We will always retain our focus on a flexible and competitive cost structure. We want to invest in the right things for the business to drive long-term profitable growth but we still always do need to make sure that we are operating as efficiently as possible and those are other areas where we will continue to see some opportunity to drive growth as we move forward.

[Joel Tiss:]

That's great. And then my second question is about something you mentioned there too. The cost reductions like it's you guys have done a lot a lot of work there. And it seems like the cost structure is seemingly not as responsive to the fluctuations like quarterly fluctuations in the business. Is that more structural? Or is it cyclical just your kind of scrambling to get stuff out the door? Or can you give us any color behind the scenes of what to think about? Or are those kind of more long-term changes to the company and we can't worry about the near-term results?

[Andrew Bonfield:]

Yes. I think we don't respond to quarterly -- by quarter movements we're trying to drive the business for the long-term. So, Joel as we look at the cost structure we do try to make sure we got a long-term focus on that and don't do things just for short term cost-cutting measures. We can all do those. We've all seen people do those. Longer term it's not what drives you well because what tends to happen is investment then gets cut off which isn't the right thing to do for long-term shareholder value creation.

[Jim Umpleby:]

But I would say that Joe we certainly challenge all of our leaders to find ways to become more efficient to reduce cost. So, we still believe we have opportunities over next few years to continue to improve our cost structure. So, again, while -- as Andrew mentioned while continuing to invest in those areas particularly like services like our digital capabilities to drive long-term profitable growth.

[Andrew Bonfield:]

And so Joel just add one thing on 2020 which I did forget was about Resource Industries. I mean obviously mining we are only in the start of recovery phase and replacement cycle. There is a lot of potential still but there is to run as miners start actually bumping up CapEx. All commodities remain at investable levels so we do expect that to continue to improve as we look out as well.

[Joel Tiss:]

That's awesome. Thank you so much.

[Jennifer Driscoll:]

You're welcome.

[Operator:]

Your next question is coming from Jairam Nathan from Daiwa Capital. Your line is live.

[Jairam Nathan:]

Hi thanks for taking my question. My question was regarding rail. You mentioned a strong 4Q, but you're seeing some of the implementation of PSR on the railroad side, they are cutting down a number of locomotives they use. And at the same time volumes are starting to decline as well rail volumes. So, I'm just wondering is this expectation of the U.S. or more international?

[Jim Umpleby:]

Yes, it's really based overall on the backlog that we have in rail for new locomotives. But certainly I mentioned earlier the one example we gave of repower. As our rail business is a direct business and there's a large service element to it as well. So, it is not completely dependent upon new locomotives sales. Having said that, of course, we are expanding internationally. We've shipped our first transit locomotives since we made the acquisition of EMD a number of years ago. So again we are not totally dependent upon new locomotives in North America. We certainly understand the environment, in which we're operating. But again what we're not talking about is an expected strong fourth quarter based on backlog on hand for the rail.

[Jairam Nathan:]

Thanks. And my last question was on margins on resource, you mentioned warranty expense increased. Can you expand on that? Is that more volume related? Or is there something…?

[Andrew Bonfield:]

It was a particular issue with a particular product that happened, these things do happen they do tend to be lumpy and that's been a driver in this quarter.

[Jairam Nathan:]

Okay, thank you. That’s all I had.

[Operator:]

Your next question is coming from Sameer Rathod from Macquarie Research. Your line is live.

[Sameer Rathod:]

Thank you for taking my question. There are some -- have been some interesting developments made in electrifying the frack. So my question is how does Caterpillar see this market evolving? Do you think it can post a risk longer term to the diesel engine and parts business? Or do you think the applications are limited? Thank you.

[Jim Umpleby:]

And I'm sorry, I can barely hear you. Did you say electrification and fracking? Is that the question?

[Sameer Rathod:]

Yes. Electrification and fracking.

[Jim Umpleby:]

You bet. So we have been very involved working with customers both on the recip engine side and on the gas turbine side and what people called the e-fracking opportunity. So we are well-positioned to participate in both of those areas. We have sold some gas turbines, which are generator sets that allow customers to do e-fracking. We're also working on recip solutions as well, working with customers. So I believe it will be a mix market with both and we'll see, which one is stronger in the end but we participate in both ways, both for electrification and now also both in our recip engines and with gas turbines. So we're well-positioned to play directly across the value chain.

[Sameer Rathod:]

Okay. Thanks.

[Jim Umpleby:]

Thank you.

[Operator:]

Your next question is coming from Jerry Revich from Goldman Sachs. Your line is live.

[Jerry Revich:]

Yes hi, good morning.

[Jim Umpleby:]

Good morning, Jerry.

[Andrew Bonfield:]

Good morning.

[Jerry Revich:]

You folks have sounded more positive tone on large mining truck order cadence than I think we've heard from you in a while. Can you just talk about what in your view has driven a slower replacement cycle in this recovery so far? Is it the autonomous decisions that have to be made? And can you just expand a bit more Andrew on your comments that there's a scope for move towards replacement as you think about moving pieces around2020? So it does sound like you expect order decisions to be made, obviously, in advance of 2020 for that to play out. So maybe I can get you to expand on that too?

[Jim Umpleby:]

Hi, Jerry this is Jim. I'll take it. So we see strong quotation activity on a global basis for all commodities. So as we work directly with our customers and with our dealers there is increasing quotation activity. There's a lot of projects that are being developed. We've talked about some orders that we received. Certainly I believe and I actually hope there’ll be less volatility than will be -- that there has been in the past it will be more of a slow steady ramp up. But the quotation activity is quite strong. And again it's across all commodities.

[Jerry Revich:]

Okay.

[Andrew Bonfield:]

And just to add, I mean the pulp feed is at an all-time low since we've been tracking that number in 2013. So, it is an opportunity. Definitely, we do believe that now we will be starting to see replacements solvency come through.

[Jim Umpleby:]

And we do expect our mining customers to be disciplined in their capital expenditures. So, again, that ties into my earlier comment about more of a slow steady increase than a volatile increase. And they will be again cautious and disciplined. But we expect the business to continue to improve on a slow and steady basis.

[Jerry Revich:]

Okay. And in Construction Industries, you folks have worked really hard to get the cost structure to where it is today. Given the dealer inventory builds both across new equipment, used equipment and the utilization pressures, I guess, can you talk about what's the potential for you folks to more actively manage orders. You mentioned there are some slots that are potentially placeholders et cetera, so what's the opportunity for you folks to get ahead of the eventual order declines given what some of the leading indicators are doing, cut production earlier to keep the swings from being really painful on the manufacturing base.

[Jim Umpleby:]

Yes. Just to be clear, so firstly, let me start with the -- we released our retail stats this morning. And so, business is improving. So let's start with that. But certainly shortened lead times is very important. We've been on this for lean journey for a long time and having shorter lead times allows us to respond much more quickly to changes in demand.

[Jerry Revich:]

Andrew, the count was I guess more focus on North America than overall. So the retail sales were up 7%, the company sales were up 28%, so we're building inventories in North America specifically. So, I'm wondering what the potential to get on in front and cut production early in the cycle?

[Andrew Bonfield:]

Yes. So we did -- so Jerry part of -- as we -- as I spoke in my comments, we did see some takedown of Caterpillar inventory, finished goods inventory, so we do continue to focus on that. Obviously with lean manufacturing, we are obviously -- we don't hold a lot of finished goods inventory. Most of the inventories held actually in the component levels are actually both in. So actually that is the one thing we continue to focus on. But obviously, we will look at making sure that we don't -- as we said, we will take down dealer inventory in the second half and then we'll have some impact on production base.

[Jerry Revich:]

Okay. Thank you.

[Jennifer Driscoll:]

You’re welcome. Next question please?

[Operator:]

Your next question is coming from Ann Duignan from JPMorgan. Your line is live.

[Ann Duignan:]

Hi, good morning. If I could turn back to oil and gas, I'd like to really understand your confidence in the fourth quarter pickup in sales. Is this products that dealers have ordered? So it's shipments to dealers? Or is it the rail end-market demand? And if you could just talk about your mix in oil and gas well completion versus drilling, so we know which one is more important to demand for your products. Thank you.

[Jim Umpleby:]

Ann, so good morning. Again starting -- part of the oil and gas pickup as I mentioned earlier is due to Solar where we have the backlog and the orders on hand. It's a matter of executing always some variability in service, but we feel good about that. So that is part of it. If you go to the Recip side of it, gas compression remains strong. We are expecting an increase in end-user demand for fracking that will impact our business towards the end of the year.

[Ann Duignan:]

And on the fracking side, is that actually drilling or is that well completions? I'm trying to understand if this one's right or if there's more.

[Jim Umpleby:]

It's mostly well service.

[Ann Duignan:]

Okay. Appreciate that. And then my follow-up question is more, if you look back at year-to-date performance, sales are up but in fact adjusted net income is down. So Jim, should we be growing concerns, should investors be growing concerned about your commitment to profitable growth? I mean, I know you can say you're at record levels, but net income is actually down and just the basis year-to-date.

[Jim Umpleby:]

Yes. So we are so very committed to profitably growing our business and we're making investments to make that happen. And we are -- we talked about this at Investor Day as well that we do expect quarterly variability in our performance, but we are very much focused on improving year to year. We've talked in our call this morning about some of the issues we had in terms of lumpiness in restructuring charges and we had some inventory impact. We do have some mixed impact and we will have just given the nature of our business, we will have quarterly deviations in our performance. But we're really driving for is medium and long-term profitable growth and we're investing to make that happen. We're committed to take on -- to continue to improve our cost structure structurally. I talked about that earlier and we believe we have opportunities there over the next few years to take that on and we're very committed to that profitable growth story. But again, we will have quarterly deviations. There's no question.

[Ann Duignan:]

And yes, but if I look at six of the last seven quarters your stock has underperformed. So, is there something you can do structurally going forward to help us understand this variability?

[Jim Umpleby:]

Yes. Again, what we're driving towards is profitably growing our company. And if we profitably grow our company, I believe that will be reflected in the stock price. And we're going to have -- again as we talked earlier, we expect to have another record year in earnings per share this year. It’s another record year.

[Ann Duignan:]

Okay. I'll leave it there. Thank you.

[Jim Umpleby:]

Thank you.

[Operator:]

Your next question is coming from Timothy Thein from Citigroup. Your line is live.

[Timothy Thein:]

Thank you and good morning. The first question is on RI and specifically, Andrew, you had mentioned earlier that OE was a big driver or a driver for growth in the quarter. So, I'm not sure exactly what that means for part sales. But really the question relates to the sustainability of pricing which was up against some pretty tough comp again in the second quarter. And just, as you see basically the question is the trade-off on as your OE volumes presumably capture a bigger part of the total within mining, how should we expect that trade-off to play out in terms of pricing on OE relative to parts?

[Andrew Bonfield:]

Yes. So obviously, we did have -- in the first quarter, actually, we had really strong quarter. I think it was a record quarter for part sales within Resource Industries and part of that was driven by the fact obviously, its rebuilds are still continuing. Yes, there will be a mixed impact. It depends on what equipment we’re selling and the relative mix of parts versus and services versus OE. That will be part of why -- how we manage that business. Obviously, the advantage we have on OE is as you improve throughput, you do improve operating leverage. And as I say, we actually have seen these two quarters, the first and the second quarter have been the two best quarters in our eyes since 2012 when actually sales revenues were nearly doubled what they are today. So I think we will see lumpiness, we will see movement that's the nature of that business particularly given the way we actually deliver our products to customers, but we're quite comfortable with the sort of the relative margin performance. And again, we will look at them over time rather than just purely quarter-to-quarter.

[Timothy Thein:]

Okay. Got it. And then Jim maybe one last one on oil and gas, and specifically your comments to the question recently just on well servicing. A number of the big service companies have commented just in the past few days about cutting CapEx budgets some of them pretty significantly. So I'm just – I just want to come back in terms of kind of what's underlying that assumption that we do get this pickup of recovery in the fourth quarter.

[Jim Umpleby:]

Yeah, again it's our perception of what's going to happen as the takeaway issue in the Permian are resolved. So I'll leave it there.

[Timothy Thein:]

All right. Thank you.

[Jim Umpleby:]

And thank you. I think we have time for one last question.

[Operator:]

Your last question is coming from Courtney Yakavonis from Morgan Stanley. Your line is live.

[Courtney Yakavonis:]

Hi. Thanks. Just a couple of clarifications. First on restructuring, can you just help us understand I think the first quarter you said was pretty minimal? So how much of that $158 million was hitting this quarter? And in which segments it was showing up? And then if you could also quantify the warranty charge that was in resources. And then just more broadly when we think about your China business with APAC sales down as much as they were this quarter in construction. How should we be thinking about the margin for that business as you're continuing to introduce these GC products relative to what you had been getting in light of all these competitive pricing pressures?

[Andrew Bonfield:]

Yes. Courtney, maybe start with restructuring. The charge in the first quarter was $48 million and the second quarter was $110 million. The $48 million is inactive, so you can now always refer back to that. Most of it actually was incurred and is held within the corporate item. There is some move back into the business but very limited and very small not materially impacting their reported margins. With regards to warranty expense, we don't actually break down the analysis and manufacturing cost, but the fact we’re calling out to shows it was a significant item in the quarter. But obviously, and it did have an impact on the overall performance in RI in the comparison in Q1 versus Q2.

[Courtney Yakavonis:]

China new products?

[Andrew Bonfield:]

Yeah, sorry. On China new products, obviously GC products are in lower price point, but had similar margins as we said before. So overall this shouldn't impact reported margins as much. Obviously, the most important thing is making sure we retain a good competitive position. This quarter was impacted in part – the reported revenues were impacted part by timing of the Chinese New Year. We did see the benefit of that in Q1, which did have a negative impact in Q2.

[Courtney Yakavonis:]

Okay. Thank you.

[Jennifer Driscoll:]

And with that, we'll turn it back to Jim.

[Jim Umpleby:]

Well, thank you everyone for joining us on the call today. Just a few closing comments. We view our competitive position is very strong. We're continuing to invest to achieve our strategy of a long-term profitable growth including doubling services sales in ME&T by 2026. We had – we expect record profits this year, our second consecutive record from an EPS perspective. And as we talked about we continue to generate strong cash flow, which underpins our commitment to return substantially all free cash to shareholders through our buybacks and dividends. And as Andrew talked about if you take new account 2018 and 2019 by the end of the year, we expect to have a 9% share count reduction by the year -- by the end of the year. With that, I, thank you, for your questions and we look forward to chatting with you next quarter.

[Jennifer Driscoll:]

Thank you, Jim and thanks everyone who joined us today. We appreciate your interest in Caterpillar. If you have any questions please reach out to me or Rob Rengel in IR and e-mail at [e-mail] or [e-mail]. And now let me ask Catherine to conclude our call.

[Operator:]

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.