Jim Umpleby: Yeah, we do see rental as a growth opportunity, and we’re working with our dealers to improve our rental business. We set up a new division in last year or so with a senior — experienced Senior Vice President leading that division to help increase rental. The rental industry is, in fact, growing. And so we’ve been refreshing our rental growth strategy and working with our dealers to allow them to more sustainably grow revenue in rental. So again, it’s — we do think it’s an opportunity. It’s a good one for us to be focused on.
Operator: And we will take our next question from Kristen Owen with Oppenheimer. Your line is open.
Kristen Owen: Great, good morning. Thank you for the question.
Jim Umpleby: Hey, Kristen.
Kristen Owen: I was wondering if you could provide a little bit more commentary on the manufacturing cost increase in the quarter, just how to think about that going forward. I mean, this was — this is the easiest comparison of the year, and in a more favorable cost environment. So, just trying to think about how much of the manufacturing cost increase was maybe related to timing of orders versus we’re still seeing some inflation in the supply chain.
Andrew Bonfield: Yeah. We are still seeing — it’s a bit mixed across the businesses. Material costs are still growing in some areas, and other areas growing less rapidly. So that’s sort of the bigger part of that from an overall manufacturing cost perspective. Other factors include things like, particularly for us this quarter, things like absorption impacted us, particularly in Resource Industries, for example, where we built inventory last year, and had inventory reductions this year. But overall, we are seeing lower levels of manufacturing cost inflation than we have done historically, and partly offset by some benefits in freight, which are helping us. Really does depend by segment by segment. So, one of the things, just to remind everybody, we are not a uniform business, as far as we only serve one market.
We serve a variety of different markets, markets around different parts of the growth phase as a result of post the COVID impact. That means that therefore, that some of those cost increases are coming through in a different way from business to business, as well as then our ability to price to offset some of that as well.
Operator: And we will take our next question from Mig Dobre with Baird. Your line is open.
Mig Dobre: Yes. Thank you. Good morning. I wanted to ask a question surrounding dealer inventories. They built $2.6 billion year-to-date, which seems to be a little bit different than the way you were framing expectations. So I guess I’m curious, first, how do you expect dealer inventory still exiting 2023? Why is there a bit of a variance relative to your initial expectations? And lastly, if we are indeed going into a bit of a dealer destock mode, does it stand to infer that your incoming orders are going to continue to be soft and, obviously, backlog continues to erode? Thank you.
Andrew Bonfield: Yeah. So, Mig, a couple of comments. One, which we tried to explain in the last quarter. We — dealer inventory, we give you one number for 150 independent dealers with a very large number of products underneath that and underpinning it. So it [isn’t] (ph) very complex. Secondly, CI is a slightly different model from RI and E&T. E&T and RI represent about 40% of the increase in dealer inventory. That’s really a function of commissioning. Over 70% of those orders are for firm customer orders. They’re not sitting on a lot, waiting for somebody to come in and buy them. So there, effectively, it’s less — it’s more difficult to predict because it depends on the commissioning time. And obviously, it’s also more difficult to predict because of the nature of the business and that — how they are moved through, for example, a large mining truck, which is disassembled and then reassembled on site and the revenue recognition coming from the dealer as part of that.
So it’s a very different part of the business. That’s why effectively, we almost can’t predict that with much certainty. It is much more difficult to predict. With regards to CI, we’ve always said probably normal range is between three and four months of inventory. At the moment, we’re within that range. Dealers will have within excavator inventory, they’re slightly at the top end of that range. They want to bring them down. We agree with that. We think that’s a good thing. That will reduce, obviously, inventories as we move in. Within, as we’ve said with BCP and also with earthmoving, particularly in North America, which are the largest markets for those products, we are at the low end of the range, and dealers could actually want to hold a little bit more.
So overall, net-net, we do expect a decline in the fourth quarter. It’s going to have an impact, possibly. Will there be some impact in the first quarter next year? Probably not. Just to remind you, we normally see a dealer inventory build in the first quarter of the year getting ahead of ready for summer selling season. So it may not be quite as big as normal. But overall, there are some seasonality parts of our business. With regards to the backlog, backlog is completely different. Remember, for CI, backlog is a function of dealer orders. For E&T, it is a function of — and RI, it’s much more of a function of firm customer orders underpinning those. Within — so as we think about dealers, how much inventory they’re holding, as they are able to get availability better for machines, they don’t need to order as much in advance.
So one of the things we’ve done, as you know, through our S&OP process is trying to moderate overorders. And we think we’re doing a better job of trying to avoid some of the swings which cause production swings as a result of dealer inventory buying patents. Overall, just to remind you, finally, we still expect sales to users to grow in the fourth quarter of this year. We’re still expecting end demand to remain strong, and that sets us up into 2024 as we move forward.
Operator: And we will take our next question from Mike Shlisky with D.A. Davidson. Your line is open.
Mike Shlisky: Yes, hi, good morning.
Jim Umpleby: Good morning.
Mike Shlisky: I wanted to ask about interest rates real quick. Thank you, yes, hello. On interest rates, you kind of touched on it, but maybe a little more color. How have high interest rates or higher interest rates affected the dealership inventory desire and their ability to actually pull and carry inventory? And secondly, maybe, how is interest rates — have they affected any end user appetite to buy an equipment?
Andrew Bonfield: Yeah. So first of all, let me say on higher interest rates, probably today, just remind you that even though there are many of us who remember 5% as being the norm of interest rates, I know we’ve lived it through lower for the last decade. Overall, though, it’s really a function. Dealers hold inventory based on what their expectations of future demand are, are comfortable holding current levels of inventory. And as I said, we’d like to hold more for particularly BCP and earthmoving products and hold a little bit less of excavators. But that’s a reflection of their expectations of sales to users rather than actually of interest rates. I think they’re a little bit less sensitive to that assuming that they can actually sell the equipment on.
As far as actually our customers are concerned, where it does impact us within Caterpillar is in Cat Financial. We have seen a slight reduction in the share of new machines we are financing within Cat Financial because we fund in the wholesale market. So we’re slightly less competitive against banks. But generally, customers have either been paying cash. They need — they have to work. So they haven’t been sensitive to interest rates as far as buying machine is concerned. And overall, if you look, and this is one thing we keep a very close focus on, write-offs, past dues and the like and provision levels, we are — our customers are in very robust shape and do not appear to be being impacted by the higher interest rates yet. So nothing we’ve seen yet tend to indicate that there’s any impact of that today on that business.
