Welcome to the Third Quarter 2021 Caterpillar Earnings Conference Call. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jennifer Driscoll. Thank you. Please go ahead, ma'am.

Thanks, [Ali] (ph). Good morning, everyone. Thanks for joining Caterpillar 's third quarter earnings call. Our speakers today will be Jim Umpleby, Chairman and CEO and Andrew Bonfield, Chief Financial Officer. Also here with us for the call are Kyle Epley, Vice President of the Global Finance Services division and Rod Rengle, Senior Manager in Investor Relations. During our call this morning, we will discuss the earnings news release we issued earlier today. Note that we have slides to accompany our presentation in the appendix, you will see some additional information, including dealer, inventory and order backlog. You may find the news release, our slides, a video recap with Andrew Bonfield, and other important information at investors.caterpillar.com, simply click on Events and Presentations. We have copyrighted this call and ask you not to use any portion of it without our prior written approval. Moving to Slide 2, today we'll be making forward-looking statements. These statements are subject to a variety of risks and uncertainties. For information on some of the risks and uncertainties that could cause our actual results to vary materially from any forward-looking statements. Please refer to our SEC filings, including our Form 10-K for 2020, and our Form 10-Q s for the most recent quarters. We'll also make use of non-GAAP numbers. For a reconciliation of our non-GAAP numbers to the appropriate U.S. GAAP number, please see the tables in the appendix to the earnings call slides. This morning, we announced profit per share of $2.60 for the Third Quarter of 2021, compared with $1.22 for the Third Quarter of 2020. Our adjusted profit per share was $2.66 for the Third Quarter, compared with $1.52 in the Third Quarter of 2020. adjusted profit per share for both quarters excluded restructuring costs, which totaled $0.06 per share this quarter, and $0.18 per share in last year's quarter. Last year's quarter also excluded remeasurement losses of $0.12 per share resulting from the settlements of pension obligations. I do have two important calendar announcements. First, we recently selected our earnings dates for calendar year 2020. We show the dates on slide 20, starting with January 28th for our fourth quarter call, we hope you'll join us. Second, we plan to host our next Investor Day on Tuesday, May 17th, 2022, near our headquarters. The event also will be audio webcast and details will be provided closer to that time. So with that, please flip to slide three and we'll turn the call over to our Chairman and CEO Jim Umpleby.

Thanks, Jennifer. Good morning, everyone. Thank you for joining us. I'd like to start by thanking our global team for another good quarter. We continue to execute our strategy for long-term profitable growth, while working to mitigate the impact of supply chain challenges as we serve our customers. Before turning over the call to Andrew for a detailed review of our results I'll briefly cover three topics this morning. I'll start with my perspective on the quarter's results, including an update on the supply chain, I will then provide a few comments on the market conditions. I will finish with an update on recent developments concerning Caterpillar sustainability journey. Sales and revenues were higher in all segments and in all regions during the quarter. Customer demand and order rates were strong. We experienced supply chain challenges like many other industrial companies. We believe our sales in the third quarter would have been higher, if not for these issues. We are however pleased by our global teams ability to continue to execute in a challenging environment. Turning to Slide 4, the topline increased by 25%, primarily due to higher volumes, which was driven by strong end-user demand. Compared with the Third Quarter of 2020, sales to users rose about 14%. Sales to users rose in the three primary segments and in most regions. For machines sales to users increased by 17%. For Energy and Transportation sales to users increased 8%. Our assumption had been that third quarter growth in year-over-year sales to users would be significantly higher than the 15% growth reported in the second quarter. The growth rate in sales to users was less than we assumed at 14%, as Construction Industries grew a bit slower than the second quarter pace. This was primarily due to constraints in the supply chain, which I'll cover in a moment. In Resource Industries and Energy and Transportation, the gross rate in sales to users accelerated on a sequential basis. On a year-over-year basis, sales to users grew in all segments, in all regions, except Asia Pacific, driven by China, which was a bright spot in the third quarter of last year. We remain optimistic about demand in our three primary segments for the remainder of the year. Dealers, each of whom are independent businesses, decreased inventory by $300 million in the Third Quarter versus a decrease of $600 million in last year's Third Quarter. To put it in context, dealer inventory is about flat versus year end 2020. Reported revenues for the quarter also benefited from growth in services, favorable price, and currency. Turning to the supply chain, our global team works to mitigate the challenges we encountered in the Third Quarter, which were more significant than we expected. Our suppliers also experienced availability issues and freight delays leading to pressure on production in our facilities. We put control towers in place to spotlight areas of concern across our operations and our value chain. We've proactively redirected components and altered our assembly processes as much as possible to keep output flowing. In addition, Caterpillar inventory grew by about $1 billion in the third quarter compared to the second quarter of 2021. Of the $1 billion increase, over half was an increase in production inventory. Our team continues to work closely with our suppliers to mitigate supply chain impacts on production. We experienced rising material and freight costs during the quarter. We continue to take appropriate price actions in response to rising costs and are monitoring the situation. Operating profit for the third quarter increased by 69% to $1.7 billion. The increase in operating profit came from higher volume, favorable price, and restructuring costs that were lower than last year. The adjusted operating profit margin improved to 13.7% up 260 basis points versus 11.1% in the Third Quarter of last year. That's despite the reinstatement of short-term incentive compensation this year. Margins were slightly stronger than we expected. Compared to the prior year operating profit margins expanded in each of the three primary segments. Our profit per share was $2.60 versus $1.22 in the third quarter of 2020, the adjusted profit per share was $2.66 versus $1.52 in the third quarter of last year. Now on slide five, ME&T free cash flow for the quarter of around $800 million reflected higher volumes. Those benefits were partly offset by the increase in Caterpillar inventory. We completed $1.4 billion in share repurchases this quarter. We also returned about $600 million in dividends to shareholders, reflecting the 8% dividend increase we announced in June. We paid a higher dividend annually for 27 consecutive years, and we remain proud of our status as a dividend aristocrat. We continue to expect to return substantially all of our ME&T free cash flow to shareholders over time through dividends and share repurchases. Turning to Slide 6. Let me share a few high level assumptions about the full year. Looking at 2021 as a whole, we still expect to achieve our Investor Day target for adjusted operating profit margins of 300 to 600 basis points of improvement versus our performance during the reference period of 2010 to 2016 at a similar level of sales. We also expect to achieve the free cash flow targets we set of an incremental $1 to $2 billion annually versus our cash flow performance during 2010 to 2016. Please turn to Slide 7. Overall, we remain optimistic about global demand which has remained strong. However, supply chain challenges may impact our ability to fully meet customer demand. In Construction Industries, we remain positive as we've seen end-market demand increase in most regions. In North America, residential construction continues to be a strong driver of industry growth. Non-residential is also improving, although activity remains below pre -pandemic levels. We're hopeful that Congress passes the Infrastructure Investment and Jobs Act, which could boost customer confidence and help support future demand. In China, we continue to expect the industry for excavators above 10 tons to be about flat in 2021 with declines in the second half of the year offsetting growth in the first half. Outside of China, we expect the Asia Pacific region to remain strong in the fourth quarter, backed by strong housing activity, favorable commodity prices, and the benefits of government stimulus. In EAME, fundamentals remain positive. Stimulus actions continue and construction confidence improves. We expect the industry in Latin America to be supported by construction activity and the continued mining recovery. Turning to Resource Industries, elevated commodity prices and strong minor CapEx expectations support continued improvement in customer demand. The number of [markets with] (ph) parked trucks in the field remains low and utilization has been improving. We also remain optimistic in heavy construction and quarry and aggregates, where we continue to see improving demand. Finally, in Energy and Transportation, we expect demand to improve during the fourth quarter compared to last year. In Oil & Gas, we expect services growth, and a focus on sustainability to drive demand for new equipment in the form of repowers. We expect that to be balanced though by continued capital discipline by our oil and gas customers. Recip power generation is expected to remain strong with strength in data centers. Industrial is expected to see continued strength across all applications. A modest increase is anticipated in Transportation with improvement in rail, primarily in services and international locomotives. Now on slide 8. Sustainability remains an important element of our strategy for long-term profitable growth. Recently, we took 3 actions that advance our sustainability efforts. We named Julie Lagacy as our first Chief Sustainability and Strategy Officer. We committed to incorporate ESG performance into our 2022 incentive plan for executives, and we announced our plan to analyze the disclosure recommendations of the task force on climate-related financial disclosures, or TCFD, and to utilize the TCFD framework to enhance our sustainability reporting starting in 2023. This past May, we disclosed our sustainability goals for 2030. Caterpillar is committed to contributing to a reduced carbon future. We demonstrate this in many ways, including through our significant progress in reducing greenhouse gas emissions from our operations and our continued investments in new products, technologies, and services to help our customers achieve their climate related objectives as they build a better, more sustainable world. This quarter, our customers announced some exciting news in cooperation with Caterpillar. BHP and Caterpillar have agreed to test zero emissions battery-powered large mining trucks at BHP sites to reduce their operational greenhouse gas emissions. We also signed an agreement with Rio Tinto for the world's first fleet of 793 zero emissions autonomous haul trucks to support its mining operations in Western Australia. This agreement help support Rio Tinto's sustainability goals. This mine is also home to the world's first fully autonomous water truck, the CAT 789D. Enhancing grid stability is also critical for our customers. Our battery's energy storage and bi-directional power inverters are built to provide continuous, reliable electric power in oil and gas sites. They can also be leveraged at remote mining sites such as Barrick and Gold Corporation's Kibali gold mine in the Democratic Republic of Congo. Collaborating with our customer and our local dealer, Tractafric to battery energy storage capacity for the mine's microgrid saves Barrick an estimated 3 million liters of diesel fuel annually. We displayed the solution in our mine Expo exhibit in Las Vegas in September, and it's a great example of how our technologies apply across our segments to provide customers with full-site solutions. In summary, we continue to execute in your strategy for long-term profitable growth or investing in services and expanded offerings while driving operational excellence. We continue to remain focused on sustainability. We're developing products and services that facilitates fuel transition, increased operational efficiency, and reduce emissions to help our customers achieve their environmental in carbon reduction goals. We had a strong Third Quarter overall with volume growth in all 3 primary segments and sales gains in every region. Operating profit margin expanded due largely to the volume gains. While material costs and [Indiscernible], so as price realization with strong performance, year-to-date, we remain on track to meet our Investor Day targets for ME&T margins and free cash flow for the year. Now, let me turn the call over to Andrew.

Thank you, Jim and good morning, everyone. I'll start on slide nine with MCU [Indiscernible] Caterpillar, third Quarter results, including the performance of each segment. Then I'll turn to the Balance Sheet and conclude with a few assumptions about the forth quarter and full year. As Jim noted, as sales and revenues for the quarter rose by 25% or tripling $5 billion to $12.4 billion. This was primarily due to higher volumes. Operating profit increased by 69% to $1.7 billion. Third quarter profit per share was $2.60 compared to $1.22 in the Third Quarter of 2020. Adjusted profit per share increased by 75% to $2.66 compared to $1.52 last year. Turning to Slide 10, Third Quarter sales and revenues grew by double-digit percentage points for the three primary segments. [Indiscernible] were the main growth [Indiscernible] with higher sales to users leading the way. In addition, dealer inventory provided a tailwind to come about $300 million this quarter versus the $600 million in decrease last year. Services, revenues, favorable price, and currency also contributed to the top-line gain. Looking at it sequentially, sales in the Third Quarter were around 4% lower than in the Second Quarter, which is in line with normal seasonality. Third Quarter sales and revenues increased in every region. In North America, our largest region, sales increased by 28% with strong growth in all three primary segments. In [Indiscernible] sales rose by 23% as infrastructure spending supported higher demand. Latin America sales grew by 72% from a low base. Asia Pacific sales increased by 8% with gains in Resource Industries and Energy and Transportation, more than offsetting lower revenues in construction industries. As Jim mentioned, China was a bright spot in the Third Quarter of 2020, so the decline in construction industry sales in China was in line with our expectations. As usual, we have separately reported quarterly sales to users. Globally sales to users increased by around 14% versus the year ago. As Jim previously commented, the 14% growth rate was below our expectations, primarily due to supply chain constraints. Sales to users and Construction Industries rose by 12% with double-digit growth in North America, EAME, and Latin America. Asia Pacific sales to users to convert 10% reflecting the expected moderation in China following the strong growth earlier this year. We still anticipate that the above [Indiscernible] Industry will be about flat for the full year when compared with the June last year's very strong performance. Sales to users rose by 33% in Resource Industries. Growth was consistent across the segment, as opposed mining as well as Heavy Construction from Korean aggregates, so strong gains. In Energy and Transportation sales to users increased by 8%, reflecting gains in industrial and oil and gas applications, partially offset by reductions in both power generation and transportation. Now, let's review the bottom line on Slide 11. Third Quarter operating profit increased by $679 million or 69%. The higher volume was the principal driver of the increase in operating profit for the quarter. Volume gains and favorable price realization were partly offset by higher SG MA, R&D, and manufacturing costs, which included both short-term in-center compensation expense, as well as higher material and freight costs. Year-over-year, the adjusted operating profit margin rose by 260 basis points to 13.7%. Versus the second quarter, the adjusted operating profit margin declined by about 40 basis points, which was slightly better than we had anticipated. The main reason was a strong new growth margin due to better price and slightly lower material costs than we had expected. Our global effective tax rates for the third quarter was 25%, versus the 26% we had assumed previously. Restructuring expenses of $35 million decreased by $77 million compared to last year. Adjusted profit per share of $2.66 was higher than we expected, reflecting the strong operation performance, as well as the lower-than-expected global tax rate and discrete tax benefits. These accounted for about $0.14 per share in aggregate for the quarter. We also saw some currency benefits from hedging in the quarter primarily related to the Euro. Moving to Slide 12. Let's take a look at the segment performance starting with Construction Industries. Sales increased by 30% in the third quarter to $5.3 billion, primarily driven by higher sales volume and favorable price realization. The improvement in volume was due to higher end-user demand and the impact of changes in dealer inventories. The increase in end-user demand was led by North America where nonresidential construction demand continued to improve, and we also saw continued strength in residential construction. Overall, dealers reduced their construction equipment inventories less than the Third Quarter of 2021, than they did in the Third Quarter of 2020. The segment's Third Quarter profit went up by 47% to $859 million. The increase came from higher sales volume and favorable price realization. This is partially offset by unfavorable manufacturing costs, which largely reflected higher freight and material costs. The segment's operating margin increased by 190 basis points versus last year to 16.3%. Turning to Slide 13, resource industry sales increased by 32% in the Third Quarter to $2.4 billion. The improvement was mostly due to higher end-user demand for equipment and aftermarket costs, both mining as well as Heavy Construction inquiry and aggregates. This is partially offset by changes in dealer inventories. Third Quarter profit for Resource Industries increased by 78% to $297 million. The increase was mainly due to higher sales volume and favorable price realization, partially offset by higher freight and material costs. The segment's operating margin at 12.3% increased by 310 basis points when compared to 2020. Now on Slide 14, Energy and Transportation sales increased by 22% to approximately $5.1 billion that included a 48% sales increase in Oil & Gas, which came off a low base and also introduced the addition of SPM Oil & Gas. Here we saw higher sales in both reciprocating engines and turbines. Power generation sales, declined slightly as turbines and related services were unfavorably impacted by the timing of customer projects. Industrial sales rose by 30%, with demand higher across all regions. Transportation rose by 12% over low base on higher [Indiscernible] services and marine sales. Profit for Energy and Transportation increased by 41% to $696 million. The improvement reflected higher sales volume that was partially offset by a couple of factors, unfavorable manufacturing costs, including freight material, the impact of short-term central compensation, and acquisition-related expenses primarily SPM Oil & Gas. Keep in mind that the Third Quarter of 2020, including an unfavorable impact from inventory write-downs and asset impairments. The segment's operating margin increased year-over-year by a 190 basis points to 13.7%. As we mentioned last quarter, we do expect to SPM Oil & Gas to modestly impact margins for Energy and Transportation this year as it will take some time for the synergies to be realized. We remain very pleased with how the integration's going and expect to see the full benefits of the transaction as we move forward. On Slide 15, financial products revenue increased by 5% to $762 million. Segment profit increased by 22% year-over-year to $173 million. A year-over-year profit increase was partly due to favorability in returned or repossessed equipment [Indiscernible] for used equipment remains very strong. We also benefited from a lower provision for credit losses along with the higher net yield on average earning assets due to a favorable change in weighted average interest rates. These benefits were partially offset by the impact of higher short-term incentive compensation expense. Our credit portfolio remains in good shape as customer health indicators are positive. Past dues continue to improve across all portfolios segments to 2.41%, that's down a 140 basis points year-over-year and down 17 basis points compared to the second quarter. This is below our 10-year average. New business volume also continued to improve. In fact, the third quarter of 2021 was the highest new business volume in the third quarter for 10 years. On Slide 16, any and free cash flow was $237 million in the quarter, slightly lower than we saw in the Third Quarter of last year. Higher profits were partially offset by $1 billion increase in Caterpillar inventory in the third quarter compared to the second quarter of 2021. The growth in Caterpillar inventory reflected an increase in production inventory due to shortages of certain components and higher end-user demand. The Company ended the quarter with $9.4 billion in enterprise cash. We continue to maintain a solid liquidity position as we prioritized a strong midday credit ratings. ME&T is generated free cash flow of $4.2 billion year-to-date. We said at our 2019 Investor Day that we intended to return substantially all of our ME&T free cash flow to shareholders over time using a combination of dividends and share repurchases. We've repurchased about $1.4 billion of our common shares this quarter, which brings the total to $1.6 billion year-to-date. We paid a dividend in the Third Quarter of $1.11 per share, or about $600 million in aggregate, reflecting the 8% increase we announced in June. Through the end of the Third Quarter, we've returned $3.4 billion to shareholders through dividends and share repurchases. Now on Slide 17, in light of the hardly [Indiscernible] environment for continued not providing guidance for our annual profit per share. To assist you with your modeling now, we'll continue to share some high-level assumptions for the upcoming quarter. We expect a stronger topline in the fourth quarter compared to the third, which would follow and normal seasonable pattern. As we said before, we do not expect a significant benefit from [Indiscernible] restocking in 2021. We expect our adjusted operating profit margin in the fourth quarter to generally follow the seasonable pattern of lower margins versus the third quarter. So currently, we see continued pressure from higher material and freight costs, which accelerated during the quarter and are likely to remain elevated in the fourth quarter. We anticipate this will be partly offset by price realization. We continue to expect price offset higher manufacturing costs for machines in 20 21, although further disruptions in the supply chain can make that more difficult. As we said previously, price realization will not offset manufacturing costs within Energy and Transportation. But as the Fourth Quarter is typically a stronger sales quarter in this segment, that will help this overhaul operating margin. As Jim (ph) mentioned, based on our results to-date, we continue to anticipate meeting our Investor Day target for adjusted operating profit margins in 2021. Despite the nearly 300 basis points of pressure from reinstating the short-term incentive compensation programs. We currently anticipate 2021 restructuring expense of $150 million to $200 million, compared with our previous estimate of $250 million. This compares to restructuring expenses of $354 million in 2020. We now expect the global effective tax rates VHP 25%, down from 26% earlier. We anticipate capital expenditures for the year of about $1 billion to $1.1 billion versus our previous estimate of $1 billion to $1.2 billion. We also continue to anticipate reaching our target for ME&T free cash flow in 2021. Turning to slide 18. In summary, demand remains strong and we performed well in the quarter that presented additional complexity due to the challenges within the supply chain. Our operating performance was strong with sales up 25% and adjusted profit per share up 75% versus the prior year. We remain on track to meet our Investor Day targets for adjusted operating margins and free cash flow to the year. With that, we'll now take your questions.

As a reminder, management asks that we limit to 1 question per analyst. Your line will close once the question has been post. If clarification is desired, please rejoin the queue. And your first question comes from the line of Jamie Cook with Credit Suisse.

Hi, good morning. And nice job on the quarter. I guess my first question, you mentioned your sales to users were below expectation because of supply chain, but we're still making our margin targets. So what's performing better than you would have expected? And on price costs, you're covering your price cost on machines in 2021, I'm just trying to think about the ability to continue to recover price or have priced higher than your costs in 2022 and begin to get price realization on E&T as well. Thanks.

Within the quarter, as I mentioned that gross margin did come in slightly better than we expected. Price was strong and a little bit better than we expected. And some of the material cost increases which we are anticipating haven't run through, they came some quite late in the quarter. Obviously, that will impact Q4 a little bit more. And obviously we'll probably will see just -- as we talked about the fact that for the full year, we expect the machines price offset manufacturing cost increases. That's including short-term incentive compensation. We will expect to see a slight negative in Q4 as a result. Jim will -- with regard to future pricing, obviously, we continue to monitor the environment. We’ve taken appropriate price actions as we gone through the year. And we will be taking, obviously, looking at taking price actions as well within E&T and energy and transportation as well as part of those actions and those end markets all starting to recover as well. If you remember the beginning of year, we didn't take the price action as a result of the demand outlook within those applications.

Jamie, it's always a balance. We'll look at what's happening with our cost picture. Always have to be competitive as well. So again, we will balance all those inputs and make pricing decisions going forward in ways that we think makes sense.

And your next question will come from the line of Ann Duignan with JPMorgan.

Hi, good morning. I'd like to focus on Oil & Gas, please. You mentioned during the slide presentation that you saw an increase in services for both reciprocating engines and turbines. If you could separate both businesses and the fundamentals of both, when might you expect to see an increase in demand for products or reciprocating engines, whether they'd be well completion, equipment, and turbines, particularly for natural gas compression? So if you could address each one of those, I'd appreciate it.

In recip Oil & Gas we are starting, as you mentioned, services are strong. We are starting to see some new equipment activity that's mainly for repowers. Our customers are focused on their sustainability objectives and reducing their carbon footprints. And with given some of the new solutions we have, we are starting to see some new equipment activity again, mainly for repowers and recip. And for Solar, Solar tends to go into a downturn and they tend to into that downturn a bit later and then come out of it later just because of the lead times of both the projects our customers are constructing and also Solar's lead times. So as you mentioned, Solar services sales are strong and improved. And again, your equipment sales are really hanging in there. But we'll have to see how that plays out in the months ahead. But again, typically they go into a -- they go into a downturn a bit later on commodities, a bit later compared to the recip part of the business.

Our next question will come from the line of Mig Dobre with Baird.

Thank you, Good morning everyone. I want to ask a question -- good morning. I want to question surrounding your backlog, being if I look at your backlog here is the highest in about 10 years, dealer inventories on the other hand, seems to be close to 10-year lows. So that looks a little bit unusual, and I'm curious from your perspective, how much of this dynamic is owed to dealer is literally not being able to restock given the supply chain. Items that you talked about earlier and how that might change on a go-forward basis if things loosen up. And then also related to the backlog, since you do have as much as you do, how is the price cost dynamic in the backlog that you currently have? Should we expect more of a price cost headwinds early in the 22, as you're converting on this backlog or is this backlog properly priced at this point? Thank you.

All right. Well, in terms of dealer inventory, of course, dealers are independent businesses and make their own decisions about their inventory. But having said that, the dynamics here that I believe are impacting that dealer inventory are combination of strong customer demand, which we talked about in our previous comments. So that's positive. And then on the other side of it, as we mentioned, we are having some supply chain challenges as well, fully meeting all the demand that's out there. So it's a combination of those two factors, very strong demand and supply chain challenges. Again, those independent dealers make their own decisions, but those two factors do have an impact on that low dealer inventory. Now, I'm going to ask you to clarify the question that Andrew

On the -- whether there is actually a price challenge within the backlog. Obviously, we do normally, it’s just normal practice where a customer has an order. Remember these are orders to the -- from the dealers, most of the time rather than from customers where there is an order from the customer to the dealer, then when we have certain lead times, that normally would go in, that is taking into account obviously, if customers are ordering before price increase, they will pay it based on the price of the day the order is made. But obviously, a lot of those orders you were talking about in backlog are dealer orders and therefore will be priced at the appropriate price level rather than when the customer [Indiscernible] orders. So the vast majority of the backlog will be properly priced.

Great. Thank you.

Our next question will come from the line of David Raso with Evercore ISI.

Following up on the backlog, I was curious, just given some of the long lead times we hear in the channel, what percent of this backlog do you expect to ship the next 12 months? We usually get that data point in the filings, but I'm just curious. Is there something about this backlog where it looks large, but it is expected to ship over a lot longer time than normal? Or is it that normal, 20% to 25% of the backlog is not expected to be shipped the next 12 months or said the other way, 75% to 80% of it is expected to be shipped in the next 12 months?

David, I mean, obviously I don't actually have the Q in front of me and it is in our filing documents, and that will be available. We'll come back to you with the question - with the answer of what that will be in a little while. I mean, obviously, one of the challenges, as you know, always with backlog is where it is and what it is. So obviously, things like solar and rail are more direct businesses. And those all customer orders and some of those have pretty much long lead times anyway as part of that process. But we'll come back to you on the part of your question relating to the percentage that's not due to be shifted in the next 12 months.

And how that backlog plays out going forward will depend obviously on both, if customer demand remains strong and supply chain challenges remain, then that'll have an impact on the backlog. So we’ll have to see how it all plays out.

Thank you. Our next question is going to come from the line of Matt Elkott with Cowen and Company.

Good morning. Thank you for taking my question. On the mining side with an up-cycle looming and the majors confidence increasing, do you think the equipment replacement cycle will finally kick in, that's been expected for several years now?

You know what, we've been talking about in our last earnings calls, is a gradual improvement in mining. The fundamentals of their commodity prices are generally supportive of reinvestment. Our mining customers are disappointing capital discipline as we've talked about before. But having said that, we do see mining continue to gradually improve. And one thing to keep in mind is if in fact a customer decides to keep a truck running longer than they normally would, that's not a bad thing for us either because we have the opportunity to re-power and have services and parts, and that's good as well. So again, you know what, what we've been talking about is a steady, gradual increase in mining activity, and that continues to play itself out. So it's again, turning out as much as we had expected.

And sorry, I was just going out to find out the answer to David's question, so it will be -- it's about less than 20% that is not expect to be fulfilled in the next 12 months.

Thank you. Our next question will come from the line of Rob Wertheimer with Melius Research.

Hi. Good morning, everybody and thank you.

Hi, Rob.

My question is also on mining. There's been a lot of turmoil around China Construction lately. Actually your dealer sales didn't seem to be too bad there given some of the peers. Are you hearing any concern or any reevaluation from mining customers as you looked at the potential for harder landing in China real estate, or is that really not on the board? Everything else seems pretty constructive, I guess.

Certainly my continued conversations with mining CEO's, I believe they see the environment is positive. Commodity prices, the energy transition I believe represents just an excellent opportunity for both mining customer and for Caterpillar. Thinking about all the minerals [Indiscernible] mind for EVs and everything else that has to happen. We believe that's quite positive. So again, it is playing out much as we had anticipated in terms of a gradual increase in mining. And we -- based on everything we see today, we believe that will continue. So no. The answer to your question is no, we haven't heard a lot of concerns about a downturn there.

Our next question will come from the line of Courtney Yakavonis with Morgan Stanley.

Hi, good morning, guys. If you could just comment, you had mentioned that sales would have been higher if we didn't have some of these supply chain issues. If you can quantify that at all and also just which segments do you feel like are most impacted by that, and is it entirely reflected in dealer inventory. And then just on the guidance, when we think about typical seasonality for the fourth quarter, if you can just disaggregate the different divisions. Is there any nuance there or should we be thinking about all of those segments performing in line with seasonality?

So it's very difficult to quantify and we're not going to try to give you a number today. There's a lot of moving pieces here. You stop and think about dealer inventory changes. And again -- so we're not going to try to quantify it. Clearly, it would've been higher. If you look at our -- the Caterpillar inventory that gives you some indication of, again, the fact that we are having some challenges. But we're not going to quantify that number. We mentioned earlier that our sales to users came in lower than we anticipated due to supply chain challenges. But again, very, very difficult to quantify. And in terms of seasonality, at this point we expect things to play out as they normally do. I can't think of an example. I'll let Andrew to chime in here if [Indiscernible] something is going to be unusual.

I mean, the only part of the world that's really on usual loan is around China, because if you remember, China. Last year, was very strong in the second half of the year, which is unusual. As a result of COVID and we expect overall this year trying to sales to be, as you said, about flattish. And so the [Indiscernible] above excavator market. So effectively China will be weaker in the Second Half. That is the only one which will be normal. The other business segments are very much more in line with normal seasonal patterns.

And just to clarify there, China will be probably typical this year. Slower second half and the first half, but it was unusual last year, which will create some challenging comps, so last year, again, very unusual, and at the second half was stronger than the first two, as Andrew mentioned, due to COVID.

Our next question comes from the line of Ross Gilardi with Bank of America Merrill Lynch.

Yes. Thanks. Good morning, guys.

Morning, Ross.

Morning, Ross.

Jim, maybe this one's for you. Just an E and P question. I mean, Your Girardi big oil and gas customers, I imagine are seeing a real surge and free cash flow just given where oil and natural gas prices have gone, what are the conversations like with some of your bigger customers? Do they seem to be looking at a lot of new project activity, particularly around pipelines, are they accelerating refurbishments? Are they still very tenanted around new investment like what you've seen from your mining customers first for some time right now?

Well, thanks for the question. Certainly, we do expect our oil and gas customers to continue to display capital discipline. Having said that, as I mentioned earlier, we are seeing increases in services for both 3 ship on the Solar and we are seeing increase in new equipment activity and some of it -- well a lot of it is around customers being focused on reducing their carbon footprint. And we have a lot of new solutions to help them do that. Whether it's dynamic Gas blending where they can substitute 80-85% diesel fuel and natural gas and a number of other solutions we had as well, which can help them reduce their carbon footprint. so we're seen that happening, but again, I mentioned earlier the Solar tends to go into the trough a bit sooner than other companies and come out of it a bit later. But their services are strong as well. We're seeing pickup in international activity for Solar. That has picked up -- quotation activity has certainly picked up over the so, last few months.

Thank you.

Our next question is going to come from the line of Nicole DeBlase with Deutsche Bank?

Yes. Thanks. Good morning, guys.

Good morning, Nicole.

I just want to dig into what you're seeing from a supply chain perspective a bit more. What I'm looking for is, are there any signs that maybe we are seeing a stabilization at the higher end of the impact? Is this possibly the worst of the impact? And kind of similar around margins, when you think about the impacts you faced it from higher labor, freight material costs, do you think that this is as bad as it gets?

Supply chain, it's a very -- obviously, a difficult question to answer. We're seeing a situation where, let's say that there's a shortage in one component. And we're very focused on that, that will ease. And then, another component will create a problem and then, it goes back and forth. A number of our suppliers are dealing with a whole variety of issues, so more suppliers are having labor issues or their suppliers are having labor issues, so it's very difficult to make a prediction as to where we are with this issue. Again, it depends upon the component. It depends upon the region of the world. So again, I'm not going to try to call this to say it's going to get better from here, it's going to get worse from here. It's a very fluid, dynamic situation. But we're dealing with it. Again, I'm very proud of the team that we were able to post a 25% increase in sales quarter-to-quarter. Given those challenges, as I mentioned earlier, we are taking appropriate price action in response to the cost pressures and we had solid price realization in the quarter. So again, very difficult to judge exactly what's going to happen moving forward. But I do feel confident in our ability to manage the situation. Again, as we did in the third quarter; balancing price with cost, balancing, taking care of our customers. Again, it's challenging, but we intend to work our way through, and again, when [Indiscernible] keep in mind is of course the demand, the good news is that what's driving a lot of this is customer demand is so strong. That's the great news, we have strong customer demand in what we're talking about here with the supply chain challenges is that challenging fully meeting that strong customer demand. And of course that's very important. So something to keep in mind.

Thank you. Our next question will come from the line of Chad Dillard with Bernstein.

Good morning, everyone.

Good Morning, Chad.

Given the supply chain charges and you can't manufacture everything that you'd like. Can you talk about how you're prioritizing manufacturing? Are you putting the larger, higher SEC ahead of the others? All else equal. And how has that approach changed as we've gone through the year?

Absolutely, we certainly do try to make conscious decisions. We try to take care of our long-term customers, but we do also look at [Indiscernible] our production, where it makes sense so that is something that we keep in mind.

Also, one terms as remember, is not all machines are made with common components. So one of the problems often is, one component to be impacting production in one area today and it could be something different tomorrow. So that game, as Jim said, complexity also is attractive.

And we may keep in mind as well is if we don't have new equipment our dealers have the opportunity to rent equipment [Indiscernible] to sell used equipment as well. As we have a lot of options to bring in the marketplace to serve our customers. Oftentimes, our customer -- and it depends on the customer, depends on the product, but many customers are in fact willing to wait even though things are taking a bit longer. many customers are willing to wait for that equipment. So that's something to keep in mind as well. You got a lot of very loyal customers.

Thank you. Our next question will come from the line of Adam Uhlman with Melius Research.

Hey, guys. Good morning.

Good morning, Uhlman.

I was wondering if you could share what's your service revenue growth has been so far this year. And if not, maybe if you can just share some perspective about if you're running above plan or below your plan for that line of business, because I assume that you'd be shipping and running at above plan given the demand environment, but you also have some pretty lofty service revenue growth goals for the next several years. So maybe you could update us on where you stand with that initiative and some of the key drivers that you're working there.

We will share with you our services revenue for the year in January as we said, we would. Services has been a bright spot this year. Certainly services are higher this year than last, but we're not going to quantify it at this point, but again, it is a bright spot for us.

Thank you. Our next question will come from the line of Larry De Maria with William Blair.

Alright, thanks. Good morning, everybody.

Good morning Larry.

You noticed some environmental wins, obviously earlier in the quality prepared remarks. Just curious, I think it's structurally different margin and or aftermarket profiles, and is there a risk that customers wait on equipment upgrades to see how this market develops or do you think customers will just order this as they want to layered in.

Customers have to, first and foremost, have to keep their equipment operating, right? So there's a certain amount of flexibility there, but only so much more they have to again, make those decisions to keep equipment operating. So. they -- we serve as a variety of different industries. So mining is different than construction. But again, we don't see things creating -- we don't see a problem there. They're generally customers have to make decisions to keep equipment operating so they'll either, put in the service work or in fact of buying new equipment wanted together. And if they can't get the new equipment, as long as they can, and then potentially do a rebuild. So again, services are strong for the year.

Yeah. And as we are talking about different margin and off-the-market profiles. Obviously, at this stage, a lot of these all very early stage products that we're developing with them. And you will [Indiscernible] in a situation where we all actually [Indiscernible] what pricing will be so that will be part of the equation as we go through the next period of time.

Thank you. Our next question will come from the line of Steven Fisher with UBS.

Great, thanks. Good morning. There's been a number of questions on the Oil & Gas piece, but I had a bigger picture question about E&T overall and the potential to get back to the 2019 peak levels. really wondering how you're thinking about that potential and what strategy and visibility you might have to get back there over the next, say, 2-3 years. If that's what you're thinking and maybe it's the carbon point [Indiscernible] a bigger factor of the other parts of the business beyond Oil & Gas that can step up. Is this a business that can really get back to that 2019 peak level overall.

[Indiscernible] over it really doing is looking at each element of the Energy and Transportation business and focus on profitably growing it. I mean, if you stop and think about our rail business, it is particularly for a U.S. freight locomotives it is at a very, very, very low period. A slight bit of improvement there and services. But again, I -- that only has one way to go. If you look at look at how low that businesses Oil & Gas, of course, had been depressed for the reasons that you are all aware of. As I mentioned, we're seeing increase in services, seen an increase in new equipment. And the recent end helping our customers meet some of their sustainability goals with repowers, Power generation business, that remains strong in terms of data centers. We just happen to just think about why the way the world continues to change. I suspect that there will be lots of opportunities for data centers moving forward. On the industrial business. We're seeing an increase there across all applications. And generally that industrial business does well in periods of global economic expansion. So that's positive also. So again, I mean it's the Energy and Transportation businesses is a diverse group of products that serves a diverse group of industries. But certainly am bullish about our long-term prospects. They're both from the market size and our ability to be competitive to serve that market.

Thank you. Our next question will come from the line of Tim Thein with Citigroup.

Thank you. Good morning. Maybe just to drill down a bit further on the pricing discussion we've had this with respect to CI. s Nearly 5.5% price realization in the quarter. As we think about that, maybe in the near-term, My understanding is there was an additional price actions taken, at least in North America here and open the last month or so. But obviously just given these long lead times that will take some time to come into effect. So how should we think about just maybe the near-term path of pricing again, in your largest segment, not just in the Fourth Quarter, but how that ready dovetails into next year as start to ship some of these orders. Thank you.

again, back to the point I was making obviously, earlier, where we do obviously put price increases through if a customer orders ahead of that price increase they get the old products, that'll be price per [Indiscernible]. Obviously, they are some products which are longer return. But the vast majority of the backlog will flow through at the current list price. Also, there will -- there's a lag, but it's a huge lag, that will come through. With regards to pricing as we move into 2022, I think

we've indicated what we expect for the rest of the year. Obviously, we're in the middle of our planning process that you should expect that we will continue to take the appropriate actions, both from a cost perspective to try and reduce costs where possible. And some of those costs headwinds. And also from a pricing perspective, to make sure at the same time that we price competitively to make sure we continue to grow the business and meet customer demand. It's a balancing act but that will be something we will continue to work on. As you say, as we go through 2022.

And it's complicated, you start to think about there is the list price and then there's certain support that we provide our dealers in terms of variance to help them capture strategic deals. There's a lot that goes into this, so it's very difficult to put into costs’ a spreadsheet, but again, our intent here is to continue to monitor the cost situation and to take appropriate price action in response to that cost environment, and so far so good.

Thank you. Our next question comes from the line of Joel Tiss with BMO.

Hey, guys. How is it going?

Hey, Joel. Good morning.

Morning. I just wanted to have a little bit of a clarification from Mig 's question earlier about dealer inventories. Can you give us a little bit of sense of all the technology you are putting into your products and all that. If the dealer inventories are going to go back to historic levels, or you think the new go-forward levels might be whatever half of where we were before? And then my real question is, if you can give us a little insight on why prices seem to be lagging a little bit in Resource Industries. Is that just the nature of the contracts or anything else? Thank you.

Yes. So in terms of dealer inventory, it does remain near the low end of the range. And as I mentioned earlier, it's a combination of two things impacting that. One is strong customer demand in the supply chain challenges that we've talked about. Very difficult. Again, dealers are independent businesses to make a prediction as to how that will play out. But I will tell you it is at the low end of the normal range. Certainly, with our new processes, we're trying to be -- maybe an improved process to try to match our production with end-user demand. Having said that, again, inventory is at the low end of the range. In terms of --

In terms Resource Industries, a couple of factors there. One, if you remember the beginning of the we did have a couple of deals which would negative price in Q1 which impacted and then actually what's also happening is a lot of services also into Australia, we reduced prices because of the change in price between the Aussie dollar and the dollar and that came through a little bit in this quarter. We should expect to see price become more favorable as we moved through the remainder of the year.

We'll take our last question, please.

Okay. Our last question will come from the line of Jerry Revich with Goldman Sachs.

Yes, hi. Good morning, everyone.

Hey, Jerry.

A really strong zero admissions product pipeline that you folks have across the businesses. I'm wondering if you can talk about the R&D required to support that investment over the next couple of years. Can you do it within the level of R&D to sales that you folks have had over the past couple of years or is there a need to be a step-up and can you tie into that? Is there have been a part of the equation here to accelerate the development path? Is that going to be a use of capital as you folks see it?

I think you are right. On the question is certainly we're very willing enable to invest R&D to help meet the sustainability goals, both for us and our customers that we've talked about. We knew, answer to this question is we intend to invest the R and D when we need to invest, but we also intend to meet our Investor Day targets for operating margins and free cash flow, so that's really the way we look at it, and as we develop those products, as always, it will be a combination of things. If it makes sense for us to have an acquisition that helps us there, we can do that. I believe that the vast majority of it will come from our own R&D in investing in the products. But you know, we have made a few acquisitions here over the last, over the last couple of years, small acquisitions that have helped us from a technology perspective. And we're continually on the hunt for other potential acquisition opportunities that can help us in our journey. But I suspect the vast majority of it will come to organic investment in our products.

Thanks everyone for your questions and now I would like to turn it back to Jim for his closing remarks.

Well, thanks, everyone for your time this morning and for your questions. Again [Indiscernible] Just quite a few takeaways. We're continuing to execute our strategy for long-term profitable growth through services, expanded offerings, and operational excellence. We had a solid quarter increased sales and revenues in all segments and all regions. And we improved our operating profit margins. We do as we mentioned, we remain optimistic about demand and our team continues to work closely with suppliers to mitigate the supply chain challenges that are having an impact on production. We're working hard with our customers to support them as they build a better, more sustainable world. We've announced some key actions on our sustainability journey. And as we've mentioned a few times here this morning, we remain on track to meet our Investor Day targets for margins in free cash flow. Thanks again for joining us.

Thank you, Jim, and thanks, Andrew, and everyone who joined our call 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. In addition, you'll find a Third Quarter results video with our CFO and an SEC filing with our sales to users data, click on investors.caterpillar.com and then click on financials to view these materials. If you have any questions, please reach out to Rob or me. You can reach Rob at RENGEL _ Rob @cat.com and I'm at Driscoll _ Jennifer @cat.com. The Investor Relations general phone number is 309-675-45-49. We hope you enjoy the rest of your day, and let's turn back to Holly to conclude our call.

And with that, we will conclude today's conference call. Thank you for participating in the Caterpillar Earnings Conference Call. You may now disconnect.