Caterpillar Inc. (CAT) Earnings Call Transcript & Summary

Quite so, a lot of you in the room for the panel discussion, I'd like to invite Susanta Mazumdar out to the stage. Susanta, of course, is from Tribeca, and he is the portfolio manager for their investment partners. Susanta, where are you? [indiscernible] It's one of those moments in time. How are you, Susanta? Come on up here, sir. Welcome sir. I am going to hand you over my microphone and get you to introduce everyone that's coming up on the stage for this panel. I'm also going to give you the task of sending everyone off to afternoon too, which is going to be very short, okay?

Thank you. Thank you. Welcome to all. Good afternoon, ladies and gentlemen. We'll wait for the other speakers. Okay. We have Dr. Roger Knight from Energys. And we have Brett Woods from Santos. We have Nic Pollock from K2fly, and we have Cameron Sharp from Caterpillar.

Oh! You are here.

Thank you very much. Good afternoon, ladies and gentlemen. We are going to talk about energy transition. It's a pretty complex topic to start with. It's probably the most challenging human endeavor we have done since the discovery of hydrocarbon, which is around 150 years back. Therefore, we believe that the journey of decarbonization is probably more important than the destination partly because as the technology evolves and the understanding of BioSphere improves, our target will keep changing. More importantly, if we look at last 150 years of GDP growth and human lifestyle, they are intrinsically linked with fossil fuels. So if we think about we will decarbonize the entire world in the next 30 years, it's quite difficult, quite challenging in a realistic way. And that is why the journey of decarbonization is more important rather than just the destination. And some of the most fundamental industries like, fertilizer, like cement, like petrochem, steel, these are yet to be decarbonized. They're still primarily fossil fuel dependent in addition to the baseload power and as well as the transportation like marine and aviation. And therefore, I think we need all kind of supply measures and as well as demand measures to reach that decarbonization. This includes renewables. This includes maybe carbon capture. This includes maybe hydrogen. We need all kind of technology to reach to that goal. And in that context, we have got 4 very distinguished members. Ms. Jen Tan of Sembcorp couldn't come. She had to travel urgently outside Singapore. So she's not here. She has sent apologies to all of you. I will introduce our speakers. I will start with Dr. Roger Knight, Energys. Energys Australia is a visionary leader and manufacturer of hydrogen fuel cell products over a decade. It produces products from portable 10-kilo gensets to all the way multi-utility skilled hydrogen powerhouse. He has 30 years of executive leadership experience, and throughout his career, he has developed growth strategy and oversees operational performance. Next Dr. Knight, we have Mr. Brett Woods of Santos. Santos really doesn't need any introduction. It's one of the largest upstream company with very large LNG exposure in Australia. Mr. Brett Woods had over 25 years' experience in oil and gas industry, and he is President of Santos Energy Solutions and driving Energy's -- Santos midstream gas processing as well as clean field decarbonization and carbon credit. The third [ in the cell ] is Mr. Nic Pollock. It's very interesting story, he is -- is the ESG software company. And does the kind of auditing and ESG rating of the mining industry. Mr. Pollock has 25 years of experience in enterprise software business and more than 20 years in global, APAC and regional leadership team. He has spent 17 years in Resource industry, 10 years in Resource governance and 5 years in sustainability. On the fourth, we have got Mr. Cameron Sharp from Caterpillar. Caterpillar doesn't need any introduction, but he's in charge of Caterpillar electric power. And he got -- he has very strong technical background with mechanical and electrical [ cell. ] He has in-depth knowledge in power generation, solar power and energy storage technology as well as decarbonization mining industry.

So with this background, probably I will start with my first question to Dr. Knight. Yes. I think the key thing is that what are the different ways we are looking at decarbonization. And in that role, what is the role of hydrogen can play along with other renewable and other storage in decarbonizing mining industry?

Okay. Thank you. And yes, thank you for having me here today. I think hydrogen is one piece of the puzzle. What we've seen from a lot of mines and a lot of large industrial sites that solar, wind, and battery in particular, which is with regard to sort of low-hanging fruit because I think there's a lot of really good capability around in terms of being able to deploy that to get some very good return for reducing, particularly spinning generators, which are your emitting generators. Hydrogen sort of builds from there. And so one of the challenges, opportunities is how to make hydrogen work well as part of that mix. And so those first 3 things, it's interesting Sembcorp, not here today, but I had a look at their website and they offer -- sorry, they offer battery as a storage. They offer wind, they offer solar and then they offer carbon credits. And so they're missing the next piece, which is, well, how else do you get beyond that sort of maybe 30%, 40% that you might be able to get out of the lower hanging fruit of those things. Hydrogen potentially plays that role. It's -- there's always discussion around cost. But if you're looking at the blended cost of the mine site, for instance, where you're looking at say, let's pick a number, $0.25 per kilowatt hour, that has some very low cost solar and [ stuff ] because that is clearly cheap. And then you have some -- you trying to cover your whole mine for the operating for the year. And if you want to go to 100% renewables, there's some expensive parts of that to achieve that outcome. And so hydrogen definitely offers that opportunity. Products that are available. As we said before, we do kilowatt, we do megawatt. It's been deployed globally. There's megawatt scale electrolysis for generation of hydrogen. So it's all there. I think one of the speakers from a previous panel was talking about one of the capability challenges of rolling out lithium mines, I'm talking 6 to 8 a year. That's a challenging thing to do if you don't have enough people that actually know how to execute that. And I think hydrogen is a bit similar. It's early in its days, and there's maybe some limited understanding about how to apply it well. And so I think that's one of the challenges to make sure that it plays a very commercial reliable role within that sort of broader mix to take you all the way towards 100% renewable at a site. Thank you.

Thank you, Dr. Knight. Mr. Brett, I think Australian companies are always there on the -- for a wrong reason in the decarbonization agency -- agenda. But upstream companies themselves are looking for a clean fuel and you have been quite pioneer within Australia on Blue Hydrogen, Carbon Capture. Could you talk about your decarbonization journey?

Yes. I think the point was just made is spot on. I think we're coming from a world of ubiquitous energy solution through hydrocarbons. And now we were moving into a world where technology is moving so fast. Everyone is trying different things, whether it be wind, solar, batteries, hydrothermal, geothermal, nuclear. Every terrain will have a different benefit. Australia certainly has benefit of great wind and sun. So a lot of people are playing heavily in that space. And certainly, for Santos, we're kind of looking at several key things. Firstly, decarbonize ourselves through things like carbon capture and storage, electrification across all our operations, including our plants, long-duration battery storage where lithium mine is not really going to solve that, thermal-type solutions as well as decarbonizing others. So in West Australia, for instance, working with some of the largest miners about reinventing the way they get their power and capturing all the emissions from them. And then moving into hydrogen. We've probably spent the last 4 years studying the hydrogen supply chain really closely. And I think that kind of really started off with how do we convert -- it's quite simple to convert gas to hydrogen. It releases a lot of CO2, so we can capture that CO2 and sequester in the ground through carbon capture and storage. And then some challenges occurred through global activism. The world is short of energy at the moment through the situation in Ukraine. Europe is certainly very short as well as Asia because energy is being diverted. So what was probably going to start in terms of hydrogen as low-cost steam reformation from gas to hydrogen to start the supply chain of cheap hydrogen has probably hit a bit of a bump in the road. And the challenge is that, that hydrogen is probably not there. It's very hard for me to divert gas to a short Australian market or through Asian market to convert into hydrogen until market is not there. So companies like ours are probably starting to think of jumping past a little bit of blue hydrogen and going straight to green. But then, the challenge is cost where green hydrogen is like 4 to 5x more expensive than gray and blue hydrogen. So you've seen in Australia, for instance, 15% to 20% increase in energy prices has had cataclysmic effect on inflation and Australia is kind of coming to a halt because of inflation. And imagine what it does when you turn energy prices up to 3 to 4x. So I think companies like ours, and I think the intent of much of the talks over the last few days is really about how do you deliver low-cost sustainable energy through the transition. And that's why we're working very closely with our partners to try and decouple the end effect. How do we decarbonize, how do we electrify. And ultimately, how do we generate on that backbone, clean fuels outcomes that can be consistently lower emissions for the future.

Mr. Nic, I think it will be very interesting to talk about your bit of your company. And in the current context of the ESG train and the public reporting, there has been a lot of issues there. So how do you take it as like a kind of neutral role and to kind of play that what investors are getting and reading on the ESG side is the correct one.

Yes, sure. So K2fly provides software to our clients. And we focus on our resource governance and resource governance is there for our customers to help capture the information in and around their operations, both mineral and land that contribute to the ESG story. Importantly, as we said, the rapid evolution of ESG requirements and the plethora of requirements coming in from all sorts of stakeholders, how those organizations not just get their license to operate in the first place, and we see a lot of presentations today and tomorrow about new starters and getting license to operate, getting permits, things like -- how do you maintain it? And how do you talk to the industry or talk to the stakeholders more broadly about you are right for that. And we've seen many examples of organizations rapidly destroy that trust with the community by poor systematization and those sorts of things. So it's not a one-off type of thing at the beginning, you've got to systematize it, and we call it the golden thread between the resource and into the ESG, [ making ] that practicing just like we've done with health and safety. But we provide the systems that support the standards, whether they be regulatory standards like the mineral resource reporting standards, JORC, SAMREC et cetera, and they're increasingly talking more and more about ESG, building those in, and there's all sorts of things like that. And then capture that information. And then they're always building to the standard one, creating the standard, what the expectations are and then the disclosure and making sure those disclosures are very, very well governed and you can stand by them.

Thank you, Nic. Thank you. Appreciate. Cameron. I think one of the most difficult things -- everybody wants electrification and they want to make everything as much as electrified, but mining trucks, bulldozer, dump -- these are the most difficult ones to do there. And that's probably the most challenging [ stack. ] How do you see what kind of role Caterpillar is playing in there?

Yes, certainly. Well, I mean, my career spanned 25 years now. I started off working on large engines. And it's been interesting to see the transition that's taking place over that period of time. Renewable energy is becoming very big hybrid power systems, decarbonization of mining fleet. It's very interesting to work with a company like Caterpillar, who are seeing our technology kind of flipped on its head. We've been in electric power since 1939. We produced the first generator set. We have been doing hybrid power systems since 2008 with the U.S. military. So it's really interesting to be seeing this electrification of large mining fleets and what that encompasses. I'm not so involved with the mobile fleet itself. I'm more involved with the electrical infrastructure and charging aspects. But it's huge. And with my previous employer, I saw some of the first hybrid systems that were deployed in Australia, incorporating renewables, gensets, batteries, et cetera, the mining industry. And with Caterpillar, I am in a fortunate position where I'm seeing some of the first deployments of some battery electric fleets. So it's fantastic times, and it's exciting. It's exciting times to be part of the mining industry and part of the supply infrastructure intercede mining industry.

Thank you very much. Probably, I will start maybe with you, Cameron is that what else mining industry can do to decarbonize itself in addition to, let's say, electrification of machinery. What else they can do?

Well, I mean, we're seeing a lot of electric power systems, which are now incorporating high percentage of renewables. There's some in Australia that are looking at 80% to 85% renewables. So the diesel and gas generation are purely there for firming infrastructure of said power. Obviously, renewables has intermittency based on wind and solar availability. But it's really interesting to see what's going on across the full mining industry, from camp power to power for processing right through to the mobile fleet. So there's -- I wouldn't say there's an area that's being not looked at, just some of them are higher priority than others. You've got to look at the most polluting or the most -- where the most emissions come from, so...

Thank you. Mr. Wood -- Mr. Brett. I think question will be like we have heard lot of energy security versus energy transition. Are they mutually exclusive or we can achieve both the angle, particularly from, let's say, Australian angle, can we achieve the both without like sacrificing other agenda?

Yes, that's a great question. So energy security is kind of a bit of a reimagined concept in Australia. Europe certainly knows about it. Japan knows about it. Japan take 10% of their LNG out of Sakhalin which is in Russia, so they're questioning whether they should be still taking that gas, for instance. So they're thinking where do they get it next. So the whole world needs to be carbonized and that's clear and that's facing everyone. But they shouldn't be mutually explicit. For instance, we're working with our Korean partner, who with an intention to take LNG from Australia, turned that into hydrogen in Korea to establish their hydrogen supply chain to drive their emissions down in that country. And then to export their CO2 to stores like what we're working at within Australia, effectively a closed-loop supply chain system. So I think that for me, the key message is, we shouldn't be demonized in different parts of the sector. Alan Finkel, who is some -- of the Aussies in the room may know as Australia's ex-leading scientists describes gas generation plus CCS has a lower carbon footprint than green hydrogen. So you can sit there and you have to understand what is your problem and how to solve it. And these systems should be able to work together. And the point about gas firming is critical. You have to firm renewables. And if you can solve through decarbonization through things like CCS or other methodologies, and you can effectively eradicate emissions, then all those systems make perfect sense. Hydrogen, for instance, I think people don't realize that we can put hydrogen in the existing pipelines and transport that around Australia. But it's 3 to 4x less energy dense than the standard fuels that we use. So -- you go and put 10% hydrogen in your pipeline from Central Australia to say Queensland, you only effectively get a 3% benefit of emissions reduction because the energy density variations between hydrogen and standard hydrocarbons -- so ironically, the best way to transport hydrogen is probably not as ammonia, as most people would kind of imply is -- actually is methane if you [ conserve ] carbon. And when I was a boy, at school, we used to learn about things like acid rain, and that was going to end the world. And technology solve that. Black Forest was going to end. Monuments around Europe were going to vanish, but we removed sulfur dioxide and nitrogen dioxide out of the atmosphere. So I think alongside all the technologies and the mining solutions that have been worked at the moment, we still have all the technologies about fixing eradicating because companies like -- countries like Japan physically can't rebuild all their infrastructure. So if I can synthesize gas out of sunlight, out of water and add a direct air capture of carbon from the atmosphere, which is scope 1, 2 and 3 neutral net or negative. And that is probably going to be a solution for many of the Asian countries that don't necessarily have that ubiquitous land mass that enable large-scale renewables.

Thank you. Dr. Knight, I think another issue with hydrogen as in -- again, Mr. Brett will talk about it. Transportation and the scalability. I mean we talk about gigawatt hydrogen plant, and we have still like largest plant is probably a couple of megawatts. So how do you solve this scalability issue and probably transportation issue, if you have any insight on that?

Yes. Thank you. Just a quick one to add to that. We're also seeing hydrogen as a -- to be carried around as methanol. So in particular, the marine space, is very -- very interested in methanol as a way. So that brings different challenge because you need methanol reformation, be able to produce the hydrogen to then use it which does create CO2. So if you got green methanol, it's a neutral source or there's a way in which you can capture that as well. So that's one way to overcome. Methanol is easy to carry, it's easy to store. It's low cost for storage as well. So I think a lot -- as you said, there's a lot of different things being looked at, which will provide substantially lower economic solutions for people rather than sometimes some very costly storage options. Pricing and scaling, it's an interesting one. So yes, so put it in context, I think the biggest electrolyzer -- PEM electrolyzer I should say, there are alkaline ones out there. The biggest PEM is about a 20-megawatt system that's running. So on the generation side, a lot of the major suppliers have actually done a very good job of building, building blocks. So they can scale them quite easily because they're just multiples of that. Now there is an economic issue. So -- but for the moment, there is really good scalability and a number of the major international suppliers have done a really good job of building blocks that they can just scale out. So that will come. So people wish to put in 50, 100 megawatts and above, then that can be managed through those scalable blocks. On the generation sides or the power generation side of the fuel cell, it's a similar process where in the small-scale systems, we've got really great building blocks. If anyone is interested out in the [indiscernible] area, you can actually see there's a fuel cell rack out there, just come have a look. And then they are used as racks to build large building blocks. So you can buy one, you can buy 100. And one of the things I think that's happened in -- as the maturities come into our space, we've been lucky to tap into the solar sector and the battery sector in that. And so there's a lot of power electrics which have gone down way down the cost curve. They're very reliable. They're very available, and they are basic building blocks for big systems for the hydrogen space as well. So I think we've benefited from a lot of extra maturity in other parts of the market. And I think our market sector as well as matured to a point now where we can offer up good reliable building blocks that are economic. Fuel cells are very different to diesels. Diesels are much lower cost to upfront, but that cost a lot to run. It costs a lot to service. Fuel cells have a higher capital cost upfront, but the through-life cost over a 10-year or even less than 10 years, it's lower to run because they require very little maintenance and that's a big difference. And I think that's one of the things that the industry adopting is going to get passed as well. They've got to have the confidence of the through-life cost of a product rather than just a capital cost.

Absolutely. So essentially, you are saying the modularity of the electrolyzer will solve -- can actually help hydrogen industry to scale up?

Yes, absolutely. So I think a lot -- as I said, a lot of -- there's been a lot of -- I mean fuel cells -- people talk about fuel cells. There are tens of thousands of fuel cells running around the U.S. in forklifts. They've been used in the Navy, in submarines for years. So they are a reliable piece of tech. What we're seeing now is just scale up into larger packages. And I think there's a lot of very good -- and they are using trains all around Europe as well. So there's a lot of very good reliable information about how they perform. And so the industry, as it's matured, has taken that information and is putting into good packages now, which will allow that scalability.

Thank you. Question to Nic. I think we -- since morning we had quite a bit of fascinating story of different mining companies projects and particularly, which are very critical for the battery materials projects. From your side, again, you were looking for kind of like a third-party observer, you were involved, but you were looking from a neutral perspective. What do you think are the key challenges for these projects to come and what I think company should do, the right thing to do?

Yes. So I think I touched on that before in terms of being ready with the right systems in place. But in terms of the sorts of standards, that these organizations should be looking for. There's -- it's like drinking from the fire hydrant. That's the wonderful things about standards and particularly as it pertains to ESG recently, the industry is awash with them, all the industries, not just mining. And carbon is a great example. I mean I think that's probably one -- in some ways, some of them are better governed and well-understood ways of reporting but still that mining companies specifically, there's additional overhead for mining companies because there's mining specific requirements. I'll talk about 2 of those. And some of those have been brought about by the industry, bringing them upon themselves. And the most recent and headline worthy, I suppose was the Brumadinho disaster in Brazil. Tragically, 225 people died, communities were wiped out. That was the failings of the tailings dams, tailings dams have been failing for years and years and years. So the investment community and others like the ICMM got together and said, that's not good enough anymore. We need to have better management of these facilities, 0 fatality goal, working with communities to make sure they're safe and then ultimately, disclosing what you're doing about that. There's 17,000 to 30,000 of these dams in the world that need to be managed and maintained and talked about. So that's a really important thing, not so much for startups because they don't have the legacy, but certainly for the legacy operators or the people that have been operating for a while, more traditionally, you have the mineral disclosure codes, which go across the different stock exchanges, and that's something we're very involved in globally. So we work with companies all over the world reporting on multiple listings and then multiple different codes that go with that. And all of those codes sort of a cycle, whether that be JORC or SAMREC or S-K 1300 are constantly revolving and looking more and more at how they integrate ESG factors into your disclosure of your mineral resource and reserve, which is obviously the foundation of a resource company's economics. And it's fascinating because traditionally, if you look at the tenants of those codes, a big part of that is competence and the competence of the geologists to sign off on that mineral resource and reserve. And you've got to ask yourself, what's the geologists competence in actually building in the ESG factors where -- and I'm not talking about boilerplate answers, I'm talking about a true understanding of what the value implications are. And that's not a criticism of geologist by the way. It's just the nature of change and these codes changing. So it's a massive challenge for the industry. And it's one we hear about all the sorts of standards coming, but that one is not talked about very much. And it's constantly evolving. And I think it's something that I'll urge people to be aware of and make sure that you're paying attention to.

Can I have one question or maybe -- okay. No, thank you very much. Thank you all for coming and spending time and talking about some of these things. Thank you.

Thank you.