Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Caterpillar, Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. I would now like to hand the conference over to your speaker today, Jennifer Driscoll. Please go ahead, ma'am.
Thanks, Jacqueline. Good morning, everyone. Welcome to Caterpillar's 1st quarter earnings call. Joining the call today are Jim Umpleby, Chairman of the Board and CEO Andrew Bonfield, CFO Kyle Eppley, Vice President of our Global Finance Services Division and Rob Rangel, Senior IR Manager. Our call today expands on our earnings news release, which we issued earlier this morning.
You can find the slides that accompany today's presentation along with the news release in the Investors section of caterpillar.com under Events and Presentations. The forward looking statements we make today are subject to risks and uncertainties. We'll also make assumptions that could cause our actual results to be different than the information we discuss today. Please refer to our recent SEC filings and the forward looking statements reminder in the news release for details on factors that individually or combined could cause our actual results to vary materially from our forecast. Caterpillar has copyrighted this call.
We prohibit use of any portion of it without our prior written approval. This year's quarter included a $0.38 per share benefit from a remeasurement gain, while last year's quarter included a discrete tax benefit of $0.31 per share. There is a non GAAP reconciliation in the appendix to this morning's news release. In a moment, you'll hear from Andrew about the Q1 results, the actions we've taken to boost our liquidity and a few key financial assumptions for the rest of 2020. But first, please turn to Slide 3 as we turn the call over to our Chairman and CEO, Jim Umbleby.
Jim?
Thank you, Jennifer. Good morning, and welcome to Catacolor's Q1 earnings call. During this difficult time, our thoughts are with those affected by COVID-nineteen. We extend our deepest sympathies to those who have lost a loved one during the pandemic. We thank those individuals in healthcare as well as the first responders helping fight the pandemic on the frontline.
I also want to thank Caterpillar's global workforce. This month, we are celebrating 95 years of operation at Caterpillar. For nearly a century, we have faced and overcome many challenges. As in the past, our employees are rising to the occasion. I appreciate their commitment to support our customers while keeping our facilities and coworkers safe.
As the COVID-nineteen pandemic spread around the world, many governments classified Caterpillar's operations as essential activity for support of critical infrastructure. Working with our dealers, Caterpillar is delivering products and services that enable our customers to provide critical infrastructure that is essential to support society during the COVID-nineteen pandemic. Customers use our products to provide prime and standby power for hospitals, grocery stores and data centers to transport food and critical supplies in trucks, ships and locomotives to maintain clean water and sewer systems and to mine commodities and extract the fuels essential to satisfy global energy demand. While we are serving these important needs, Caterpillar remains dedicated to the safety, health and well-being of our employees. The Caterpillar team achieved our best safety performance on record in 2019 and we are leveraging our strong safety culture during the pandemic.
Employees who can work from home are doing so. In our facilities that remain open, Caterpillar is implementing safeguards to protect our team members in accordance with regulatory requirements and guidance from health authorities. We've also introduced a number of enhanced employee benefits to help them deal with the pandemic. These benefits vary by country based on local medical care systems and various regulatory requirements. Since Caterpillar was founded, our world class global dealer network has provided us with a competitive advantage.
And during this pandemic, our 165 dealers and their employees around the world continue to support our customers as they maintain critical infrastructure. Our team at Cat Financial also continues to support our customers as Andrew will describe in more detail. Cat Finance supports our customers through good times and challenging times, which is one of the reasons we have so many loyal customers. The Caterpillar Foundation has also committed $10,000,000 to support COVID-nineteen response activities being taken by organizations around the world. Now turning to Slide 4.
Caterpillar is well positioned to navigate the COVID-nineteen pandemic. Our financial position is strong and we are confident in our ability to continue serving our global customers. We will continue to execute the strategy we introduced in 2017, which is based on growing services and expanded offerings, while improving operational excellence. The execution of our strategy during the last three years positions us well for these challenging times. Our disciplined management of structural cost will help us weather the storm created by COVID-nineteen.
We held our period costs of SG and A, R and D and manufacturing along with our salaried and management headcount flat from the end of 2016 to 2019, even though sales and revenues increased 40% during the same time frame. While this leaves us less to cut in a downturn, the lower cost base and the need for significantly less restructuring costs mean that our absolute margins and cash flow will be higher than they would have been had we allowed period cost and salary management headcount to increase during the last 3 years. In response to the pandemic, we've taken actions to improve our already strong financial position and increase liquidity. On a consolidated basis, Caterpillar ended the Q1 with $7,100,000,000 of cash and available global credit facilities of $10,500,000,000 In April, we raised $2,000,000,000 of incremental cash by issuing new 10 and 30 year bonds and arranged $8,000,000,000 of additional backup facilities to supplement the company's liquidity position. We've reduced discretionary expenses, including consulting, travel and entertainment.
We've suspended 2020 based salary increases and short term incentive compensation plans for most salary management employees and all senior executives. We are also reducing production costs to match customer demand. We continue to focus on improving operational excellence, which includes making our cost structure more flexible and competitive. We are working through a number of operational challenges related to the pandemic and have suspended operations at certain facilities due to a combination of supply chain issues, weak customer demand and government regulations. As of mid April, approximately 75% of our primary production facilities across our 3 main segments continue to operate.
Some facilities that were temporarily closed have reopened such as in China. We have worked quickly to mitigate disruption to our supply chain by using alternative sources, increasing air freight as needed, redirecting orders to other distribution centers and prioritizing the redistribution of the most impactful parts. Our employees and dealers continue to serve our customers. Now I'll give you a summary of the Q1's results on Slide 5. Sales and revenues of $10,600,000,000 decreased by 21%.
The decline was mainly due to lower sales volume, including lower end user demand and the impact from changes in dealer inventories. End user demand was below our internal expectations for the quarter. Sales to users for the Q1 declined by 16%. The decline was most pronounced in Asia Pacific, where we compete primarily in Construction Industries and in North America, which had weakness from machines and energy and transportation engines. Oil and gas declined 24% for the quarter.
Small bright spots included construction in Latin America, mining in Asia Pacific and the EMEA and power generation. During the Q1 of 2020, dealers increased inventory by $100,000,000 in anticipation of normal seasonal demand from end users. This compares with a $1,300,000,000 increase in dealer inventory during the Q1 of 2019. The year over year change of $1,200,000,000 in dealer inventory also placed pressure on our sales. Our first quarter operating profit margin was 13.2 percent, down 3 20 basis points.
The decline was primarily driven by lower sales volume. Favorable SG and A, R and D and manufacturing costs partially offset the volume decline. The R and D decline was mostly due to lower short term incentive compensation as most of our R and D projects are proceeding consistent with our strategy. Profit per share was $1.98 compared with $3.25 in the prior year's period. This year's quarter included a $0.38 per share benefit from a remeasurement gain, while last year's quarter included a discrete tax benefit of $0.31 per share.
Now moving to Slide 6. In the Q1, we returned $1,600,000,000 to shareholders through dividends and share repurchases. In addition, we declared our normal quarterly dividend earlier this month, and we continue to expect our strong financial position to support the dividend. As a reminder, Caterpillar has paid a quarterly dividend every year since 1933 through a variety of changing challenging business conditions. We remain committed to returning substantially our free cash flow to shareholders through the cycles.
We are temporarily suspending our share repurchase program upon completion of the 10b5-1 program that we established in January. We retain the balance sheet to do M and A for compelling opportunities. Our focus on operational excellence, shorter lead times and flexibility in manufacturing operations will allow us to react quickly to future changes in market conditions, either positive or negative. The ultimate impact of the pandemic on our 2020 results remains uncertain and will be based on the duration of the virus and the magnitude of the economic impact on global demand for our products. We expect the impacts of the pandemic on our results to be more significant in the Q2 and to linger until global economic conditions improve.
Due to the uncertainty associated with COVID-nineteen and its effects, we withdrew our financial outlook for 2020 on March 26 and are not providing one today. At our Investor Day in May 2019, we discussed our strategy based on services, expanded offerings and operational excellence. We highlighted our focus on operational excellence and our goal to be profitable and operate more efficiently through the cycles as we leveraged our foundational strengths, our competitive and flexible cost structure, lean processes, the Safety First culture and quality, including product reliability and durability. We described our success delivering the targets we had set out during our 2017 Investor Day, and we laid out new targets based on the improvements we've made in structural costs that I described earlier. 1 was to improve annual adjusted operating margin by 300 to 600 basis points versus 2010 to 2016 when margins ranged from 7% to 15%.
The second was to increase annual ME and T free cash flow by $1,000,000,000 to $2,000,000,000 above our actual 2010 through 2016 performance to a range of $4,000,000,000 to $8,000,000,000 per year. However, the impact of COVID-nineteen on our business has been significantly more severe and chaotic than any cyclical downturn we had envisioned. Governments have closed suppliers with little or no notice impacting Caterpillar's operational efficiency. Importantly, while we have taken actions to reduce costs, we have made a conscious decision to continue to invest in enablers of services growth and expanded offerings, key elements of our strategy for long term profitable growth. As a result, in 2020, depending upon how the pandemic unfolds, While we expect our margins and free cash flows to be better than our historical performance of 2010 to 2016, it will be challenging for us to achieve the margin and cash flow targets communicated during our 2019 Investor Day.
Our goal is to emerge from this crisis as an even stronger company, better positioned for long term profitable growth. Now let me turn the call over to Andrew for a recap of our Q1 results, short term actions we've taken and the strength of our balance sheet.
Thank you, Jim, and good morning, everyone. I'll begin on Slide 7 with our Q1 results. Then I'll discuss some of the actions we're taking in response to the COVID-nineteen pandemic before turning to our cash and liquidity position. In total, sales and revenue for the Q1 declined by 21 percent to $10,600,000,000 Operating profit decreased by 36% to $1,400,000,000 Profit per share for the quarter decreased by 39% to $1.98 The decline was driven by lower volume as the cost reductions taken to mitigate the pandemic were offset by the impact of a higher tax rate and negative currency movements. This year's quarter included a $0.38 per share remeasurement gain that resulted from the settlement of an international pension obligation.
Last year's quarter included the $0.31 benefit from a discrete tax item. As you see on Slide 8, the results this quarter were primarily driven by volume. Currency and price had a small impact, but volume decreased sales by $2,600,000,000 The volume decline reflected weaknesses in end user demand, coupled with changes in dealer inventories. Geographically, sales declines were led by North America and Asia Pacific. Machine sales to users, including construction industries and resource industries, decreased by 17% for the quarter, while LNG and transportation sales to users decreased by 12%.
You may recall that we expected a decline of 4% to 9% for the year with a stronger second half. Nevertheless, 1st quarter sales to users were below our expectations. Demand in Asia Pacific was weaker than we expected, including a direct impact from COVID-nineteen on sales to users in China. In January, we indicated that we expected a small seasonal build of dealer inventory in the Q1. Dealers increased their inventories by about $100,000,000 this quarter compared with an increase in dealer inventories of $1,300,000,000 in the Q1 of 2019.
This resulted in a $1,200,000,000 swing in revenues, which was nearly half of our sales decline. Also, it is important to note that we reduced shipments to dealers in the quarter because of the lower sales to users. Order backlog increased by about $400,000,000 since year end, again following our normal seasonal pattern. Compared with a year ago, backlog was down by $2,800,000,000 As I've said before, I view our retail sales data as a better indicator of demand, the backlog. And whilst there is a lag in sales to users, I believe that data better represents underlying customer demand for machines and engines.
Moving to Slide 9. Operating profit for the Q1 fell by 36 percent to $1,400,000,000 Volume declines were the main driver of the $803,000,000 decrease in operating profit. Operating margins fell by 320 basis points. Favorable short term incentive compensation expense and lower manufacturing costs only partially offset the impact of the lower volume. For comparison, incentive compensation expense in last year's Q1 was $220,000,000 Now I'll discuss the individual segments results for the Q1.
Starting on Slide 10. 1st quarter sales of energy and transportation declined by 17% to $4,300,000,000 driven by a 24% decline in oil and gas sales. Demand for reciprocating engines in North America slowed significantly as oil prices fell. Within oil and gas, solar sales remained steady with the prior year's Q1. Power generation sales weakened as well, primarily in Asia Pacific and North America.
Industrial and transportation sales both decreased. Profit for the segment decreased by 28%, driven by lower volume, partially offset by the lower short term incentive compensation expense. The segment's operating margin declined by 320 basis points to 13.8%. As shown on Slide 11, Resource Industries sales decreased by 24 percent in the Q1 to $2,100,000,000 Changes in dealer inventories and lower end user demand drove the 1st quarter sales decline. Dealer inventories decreased in the Q1 of this year after increasing in the same period of 2019.
We experienced lower end user demand across most of the industries we serve. Specific to mining, sales were lower as miners remain disciplined in their CapEx deployment amid commodity volatility. However, fleet age is the highest since we began tracking remain positive on mining prospects in the medium and long term. We remain positive on mining prospects in the medium and long term. In addition, we saw declines in heavy construction and quarrying aggregates, particularly in North America.
During the Q1, Newmont Boddington became the 1st gold mine to move completely to autonomous hauling. We expect to begin shipping Newmont the first of its Caterpillar 793F autonomous trucks next year. Currently, Caterpillar has 282 trucks running autonomously using Cat command for hauling. Recall that Resource Industries profit margin in the Q1 of 2019 was very high as we saw the benefits from double digit volume growth and favorable price realization. Lower volume was the primary driver of the 47% profit decrease.
That resulted in a 6 30 basis point decrease in the segment's profit margin, which finished at 14.6%. Now turning to Slide 12. For Construction Industries, sales decreased by 27% to $4,300,000,000 The lower volume was driven by lower end user demand and a change in dealer inventory movements. Sales to users declined by 18% compared with the prior year, including a 28% decrease in Asia Pacific driven by China. Although dealers increased inventories during the quarter, the increase was much lower than in the prior period.
This had a particularly noticeable impact on sales in North America. The segment's 1st quarter profit decreased by 41% due to the volume decrease and negative mix. Lower short term incentive compensation expense and favorable material and period costs provided a slight offset. The margin declined by 360 basis points to 14.9%. Moving to Slide 13.
Financial products revenue decreased by 4% to $814,000,000 on lower average earning assets. Profitability decreased by 50% in the Q1 to $105,000,000 led by the mark to market impact on equity securities in the insurance services portfolio. CAAT Financial has taken important steps to support our dealers and customers during this challenging time. As shown on Slide 14, we launched customer care programs in all regions, allowing customers to apply for payment relief through a simplified and streamlined process. It's an approach we've learned from helping customers after natural disasters.
Typically, we provide principal and interest deferral for 90 days. Interest continues to accrue and the deferred payments added to the end of the loan. When we took similar actions in 2,009, there was a noticeable boost in customer loyalty. Past dues did increase in the quarter to 4.13 percent and we increased our loan loss reserve moderately this quarter due to elevated risk associated with COVID-nineteen. However, there are two points to keep in mind.
First, most of our customers went into the downturn financially healthy and current on their loans. I'll provide you with a comparison. Past dues in both North America and China at the end of 2019 were 1.3%, whereas at the start of the financial crisis, past dues in those regions were 4.3% and 8.5%, respectively. 2nd, our loans are secured by our machines. These are working assets and are critical to our customers' businesses, means they normally prioritize payments to CAAT Financial.
From a funding perspective, the strong action from central banks around the world means we are maintaining a broad and diverse mix of global liquidity sources, including access to Global Commercial Paper and debt financing. On a positive note, our new business volume rose 17% quarter over quarter in North America and was flat across all regions as we continue to provide financial solutions to qualify customers around the globe. Turning to cash flow. ME and T free cash flow in the quarter, while slightly positive, was lower than last year. Lower profits as well as higher Caterpillar inventory levels, which increased from the year end, were partly offset by benefits from lower short term incentive compensation payouts.
The Q1 is typically our weakest of the year from a cash flow perspective due to the payout of annual short term incentive. We paid out approximately $700,000,000 in short term incentive compensation this quarter, about half the amount paid in 2019. Caterpillar inventory levels rose as we bought in production stores in anticipation of higher production levels for the quarter. We will now work these down. Now turning to Slide 15.
As Jim mentioned, the pandemic and its impacts were unprecedented in their speed, depth and level of complexity. Here's more color on some of the actions we've taken thus far. From a demand perspective, we've executed business continuity plans and work to optimize availability in areas where demand remains relatively strong, such as for parts. We are managing our production by segment to ensure we do not overproduce whilst we take care of our dealers and customer needs. We're adjusting our workforce by facility and by segment.
From a stewardship perspective, we have completed scenario analysis aiming to ensure that we're prepared for different potential lengths and depths of this pandemic. We've also taken steps to strengthen our cash position, and I'll describe more about those in a moment, whilst reducing capital expenditures and delaying R and D projects with less visible returns. From a cost control perspective, we reduced discretionary expenses, including consulting, travel and entertainment. Given the COVID-nineteen environment, we suspended 2020 base salary increases and short term incentive compensation plans for many employees and all our senior executives. We'll continue to look for ways to make our cost structure more flexible and competitive.
Turning to our suppliers. We keep a close eye on their financial health as well. In the event that a supplier faces financial distress, we identify solutions to support them whilst also ensuring supply for Caterpillar's products. In particular, our suppliers have access to working capital support through a partnership with 1 of our 3rd party banks. This can provide quick access to cash flow to help them cover their payment commitments, all at no risk to Caterpillar.
Separately, as we stated last quarter, in addition to our normal restructuring programs, we continue to address our challenged products, those that don't meet our goals for OPEC. We recently began a contemplation process that could potentially result in the closing of 2 mining facilities in Germany. We have also taken an impairment charge against 1 of the other challenged products. By addressing these challenged products, we can move forward with a slightly smaller portfolio and deliver a higher level of performance, including better margins and better cash flows. Meanwhile, we continue to drive ongoing cost reduction efforts, including preparing for the outsourcing of certain back office functions and launching a program to reduce our procurement costs, although as we said in January, these benefits will be more impactful in 2021.
Let's turn to Slide 16. And while we aren't providing profit per share guidance, I'll talk about a few key thoughts for 2020. We remain focused on working with dealers to optimize their inventory levels. Our expectation that the decline in dealer inventory by the year end will be at the higher end of our prior range, which was $1,100,000,000 to $1,500,000,000 We now anticipate a higher tax rate in 2020 as well due to changes in the expected geographic mix of profits and the impact of certain U. S.
Tax provisions on non U. S. Income. As you model the 2nd quarter, please remember that deal inventory grew by $500,000,000 in the Q2 last year, setting up a different comparison in the short term. Also, as Jim said, the impact of the virus will be greater in the Q2.
All in all, the situation remains very fluid. Until it becomes clearer, we do not anticipate being able to produce provide guidance as per our normal practice. Turning to Slide 17. I'll touch on our capital allocation and our cash and liquidity position. We recently declared our normal quarterly dividend.
Due to uncertainties associated with COVID-nineteen, we temporarily suspended our share repurchase program in mid April upon completion of the 10b5-1 program that we established in January. We said at our Investor Day in May 2019 that we will return substantially all our free cash flow to shareholders through dividends and more consistent share repurchases. In the Q1, we returned $1,600,000,000 to shareholders through dividends and share repurchases. We ended the Q1 with a strong financial profile, including $7,100,000,000 in enterprise cash. Given the environment, we have had an incremental $3,900,000,000 short term credit facility in addition to our existing $10,500,000,000 revolving credit facility.
Both of these liquidity resources remain undrawn. In addition, we've registered for $4,100,000,000 in commercial paper support programs now available in the United States and Canada, which could provide supplemental liquidity should the need arise. After the quarter end, we leveraged our strong balance sheet to raise $2,000,000,000 of incremental cash by issuing bonds at very attractive rates. Specifically, we issued $800,000,000 in 10 year notes at 2.6 percent and $1,200,000,000 in 30 year bonds at 3.25 percent, the same coupon as our 2019 debt issuance. We currently have $11,200,000,000 in long term debt with no maturities until 2021.
Also, we're not required to make contributions to the U. S. Pension plans for the foreseeable future. Following meetings with credit rating agencies earlier this month, we retain our strong credit ratings. All of this gives us confidence in our ability to weather the storm and emerge from it an even stronger company.
So finally, let's turn to Slide 18 and recap today's key points. We have a strong financial position and are confident in our ability to continue serving our global customers during this difficult time. Our enterprise cash on hand is $7,100,000,000 and we have a total of $20,500,000,000 in available liquidity. We remain committed to returning substantially all our free cash flow through dividends and share repurchases through the cycle, including $1,600,000,000 returned in the Q1. We're actively monitoring customer demand and working closely with dealers on their inventory needs.
Our factories are more agile, leveraging lean principles. We continue to manage our operations to respond positive or negative changes in demand. Our strategy is unchanged focusing on operational excellence, services and expanded offerings. We are energized by our role as a company that supports some of the critical infrastructure, enabling the transportation of essentials such as food and medicine and satisfying global needs for energy. And once again, we thank our employees for how well they've been navigating this global pandemic and serving our customers.
With that, I'll hand it over to the operator to start the Q and A session.
Jacqueline?
At this point we'll begin. Go ahead. Your first question comes from Rob Wertheimer from Melius Research. Your line is open.
Thank you and good morning everybody. I think some of us have already started to sort of trend towards the low end or below some of your 2019 margin targets just given the uncertainty with the virus. But I'd be curious to hear what among the various uncertainties may have kicked you off that trend, whether it's aftermarket falling further than you thought or mining doing something? And then just I wanted to see if you can talk about the trade offs you're choosing to make. Some companies have done salary cuts, temporary or otherwise.
You're choosing to continue to focus on investment and growth. And I'd like to hear the positive trade offs you expect to see from that and whether you might return to cutting more if you need to? Thanks.
Good morning, Rob. Thanks for your question. The first part of your question about margin targets really comes down to the chaotic nature of this downturn. It was not a normal cyclical downturn. So it really wasn't so much a downturn in one area of our business versus another.
It's just the way it happened. So government shutdown suppliers with little or no notice, which had an impact on our operational efficiency. Now we're continuing to serve our customers and work our way through it by redirecting things, but it really has created havoc with our manufacturing operations that we've overcome, but it's not again a normal cyclical downturn. And as we've looked at the various levers we could pull, we're striking a balance that we think is appropriate between short term performance and investment for the long term. We have taken a number of actions to reduce discretionary costs.
And one of the things I'll remind you of is, I mentioned in my remarks, as we really have managed the business differently during the last 3, 3.5 years. We kept our period cost flat and our Sovereign Management headcount flat between the end of 2016 and the end of 2019, even though our sales went up 40%. And we talked a lot in our Investor Day presentations about the fact that we're driving to produce higher absolute margins and higher absolute cash flow at all points in the cycle compared to that historical performance between 2010 2016. And we still intend to do that. Just a bit again, given the chaotic nature of this downturn, what's happened with suppliers, we're saying that it will be challenging for us to achieve those new targets that we established in May of 2019.
But we do expect absolute margins and cash flow to be higher. And I believe our strategy will serve us well during these times. Cash is obviously king in this environment and the fact that we will not incur large amounts of severance costs with large restructuring, I think will serve us well. So the fact that we maintain cost and headcount between end of 2016 2019, I think again positions us very well.
Thank you. And for clarity, is that supply chain disruption seems to have reached a temporary maximum or is it still rising or ongoing?
We're working our way through it. I mean, obviously, the situation it's geographic. The situation in China has obviously improved as the pandemic has lessened in that country. And so all of our facilities are operating in China again and it's and our suppliers are doing much better in China as well. But it's a rolling kind of situation.
So depending on how that pandemic unfolds across the world. But again, we are finding ways to continue to serve our customers, continue to ship products and parts. Our dealers are supporting our customers, but it is making it more challenging and it's having an impact on our operational efficiency as you would expect. Thank you.
You. Your next question comes from Mig Dobre from Robert Baird. Your line is open.
Yes. Thank you. Good morning, everyone. Just to maybe follow-up on Rob's question there. As you look at the Q2, you provided some color and detail there, but maybe you can put it the Q2 within the context of the full year.
Is it fair to assume that this is maybe the most challenging quarter from a production standpoint? Or do you sort of foresee these effects lingering beyond the Q2 given the changes in backlog and what you're seeing in terms of demand? Thanks.
From a financial performance perspective, we certainly expect the Q2 to be weaker than the Q1. As we said, we believe that the impact the financial impact on Caterpillar will linger as long as pandemic continues until those effects wear off. In terms of trying to quantify or give you a description of Q2, Q3, Q4 in terms of our operations. It really is a fluid situation. So it's very difficult for me to make that judgment.
But again, we're finding ways to work our way through it.
Your next question comes from Jamie Cook from Credit Suisse. Your line is open.
Hi, good morning. I guess my question centers around dealer inventory. You cited that the declines will be at the higher end of the range that you provided last quarter. But I guess why not more significant and is the goal still to be able to produce in line with retail as you exit 2020? So that goal, I guess, could we see bigger declines in that?
Or maybe you could just comment on what you saw in April to support what we're saying about the dealer inventory declines? Thank you.
Yes. Thanks, Jamie. It's Andrew. Good morning. So yes, obviously, what we're pointing to is we had the range at the in January of $1,000,000,000 to $1,500,000,000 Based on what we see from a demand perspective, obviously, we expect that to be at the higher end of that range.
Always remember when dealers are looking out, they're making their plans based on what they're seeing going forward. So it depends what happens in 2021 and what their view point is of 2021, which is far too early as Jim just said for us to have any view even beyond the end of this quarter that will determine their final number. So yes, it may be more flexible and obviously depending on what the outlook is that may determine whether they would like to go lower. But we're just pointing out we would expect that at the minimum it would be at the higher end of that range.
And sorry, can you comment on trends you saw in April, if you're able to?
I mean, it's really too early to say. I mean, obviously, we are still in April. We don't have April results yet. With remote working, it's hard to get data. But obviously, we are expecting that April will be a challenging month.
And just particularly things like oil and gas. Remember, we are in a situation where for reciprocating engines, oil and gas prices have been negative in the month.
Okay. Thank you. I hope everyone stays healthy.
Same to you, Jim. Thank you.
Your next question comes from Ann Duignan from JPMorgan. Your line is open.
Thank you and good morning. Maybe on the oil and gas, could you talk about your expectations for permanently impaired impairments in that business and talk about the impact of oil and gas across your various businesses, we'll say oil sands and resource and construction equipment in the construction segment. If you could just give us what you're contemplating in terms of the longer term outlook in those businesses and how weaker oil and gas may impact you more permanently?
Yes, I'll start with maybe the short term impact, then I'll talk about some of the longer term. On the short term, obviously, that we'll have an the oil and gas decline, particularly in WTI, will have an impact on our reciprocating engine businesses for North America, things like well servicing, drilling, gas compression. So we went into the year expecting that our 2020 reship oil and gas sales would be lower. And now obviously, we're expecting they will be even lower than that. So our solar gas turbine business, midstream is holding up well.
You should stop and think about the last downturn we had in oil and gas. The solar turbines compression business continued to hang in there. And of course, a large part of Solar's sales are services related and the turbines continue to run even during low oil prices. So that provides a cushion there. I don't anticipate a permanent impairment in our business.
The old I believe this is my 5th, I think, oil cycle in my 40 year career. And when things are really, really good, people think it will never get worse and when things are really bad, they think it will never get better again. I do believe that the market will recover at some point. It might take a while, but I don't perceive there'll be any kind of permanent impairment on our business.
Not even in non oil and gas like oil sands?
Yes. So there certainly could be an impact in terms of a short term impact on our business. But again, I don't see anything major that is significant. It will be a permanent impairment on our business. And you asked about construction as well.
So we do sell a certain amount of construction equipment in North America that's related to oil and gas. So obviously, that business will be slow as well.
Okay. Thank you. I appreciate it.
Thanks Anne.
You're welcome Anne.
Your next question comes from David Raso from Evercore. Your line is open.
Hi, good morning. Good morning, David. Related to your comment, chaotic nature, the decremental margins, the Q1 at 29% were a little better than I would have thought. I assume the Q2 with the shutdowns would be more challenging. But can you help us a little bit how to think about the decrementals versus what we saw in the Q1?
And related to that chaotic nature question related to the margins, what are local and national governments telling you about the reopening? How are you planning for those reopenings, things that we should be thoughtful about on your ability to ramp up a bit as things open?
Maybe I'll take your second part of your question first. So the closures we've had are temporary and they're due to a combination of supply chain constraints, weak customer demand and government mandates. So many of the facilities that had that were closed have reopened. We're probably going to close some that aren't reopened now. Again, we look at customer demand and we look at supply chain constraints.
Even in a non pandemic situation, we sometimes have facility closures just to align production with customer demand. So we're this is not new for us. We understand how to bring facilities up. So I really don't see a big issue there. And so we've been able to work with local governments and implemented the guidelines that they have provided to us and also best practices by authorities around the world in terms of social distancing.
We've done things like stagger shifts, we've extended lunch hours, We are taking temperatures. We're doing a whole variety of things that are that have been recommended as best practices. So we're continuing to implement those as they come out. And as I mentioned earlier, we're really focused on achieving higher margins at each point in the cycle, compared to what we did between 2010 2016. And so rather than think about it from an incremental and decremental perspective, what we laid out at our 2 Investor Days in 2017 2019 was our ability to achieve higher absolute margins and absolute cash flows at each point in the cycle.
And as I mentioned earlier, I believe that will serve us well in a period where cash is king.
Yes. And David, good morning, it's Andrew. Just to add to that. Obviously, the volume decline in the Q1 was somewhere around about 20%. Obviously, operating leverage is still the biggest factor in what your incrementals and decrementals will be.
If you think about in that terms, because leverage is the single biggest factor. Also just remind you that obviously in the Q1 last year, the actual amount of short term incentive compensation was slightly higher than the average for the remainder of the year. So that will be So to clarify what you're saying a little bit related
So to clarify what you're saying a little bit related to last May's analyst meeting. Whatever we think the revenues will be this year versus history, similar revenues, you would expect the margins to be higher, be it 2016 when equipment sales were $36,000,000,000 or 2017 when there were $42,000,000,000 $43,000,000,000 What you're saying is you expect your margins to be higher at the same revenues this year versus then. Is that fair?
That is correct. That's what I said.
All
right. Thank you very much. I appreciate it.
Thank you, David.
Your next question comes from Adam Uhlman from Cleveland Research. Your line is open.
Hi, good morning everyone. Hope you're all staying healthy. Hey, I had a question about the service sales. Could you expand your thoughts on what you're seeing there? How the revenues are holding up?
And with the growth efforts that you have in place, do you think you could keep the sales declines there and something like a mid single digit range? Or does it get dragged down a bunch, like the new equipment sales? Thanks.
Hi, Adam. It's Andrew. Actually, the services sales in the Q1 were down marginally. Part of that was due to inventory movements year on year. Last year, we saw a small build in services and parts revenues in dealing channels and obviously slight decrease down.
Obviously, we anticipate that services revenues will hold up better than original equipment revenues as we go through the cycle. Obviously, if you look at the history that has always been the way. At this stage, it's too early to predict what percentage they will change by. But obviously and it's going to depend on customer by customer where they're open, are they able to use that what machine utilization rates are and so forth. So we need to see how all that pans out and get a few more data points before we start making predictions in that regard.
Great. Thanks.
And your next question comes from Steven Fisher from UBS. Your line is open.
Thanks. Good morning. Just wanted to ask you about pricing because it seemed to be a little bit more resilient than I would have expected really across the board, but particularly in ENT. So maybe can you just give us a sense of where that strength came from in ENT and how sustainable you think it is? And then maybe just some other comments about competitive dynamics in the other various segments?
Yes, Stephen, it's Andrew. So obviously, overall, if you look at pricing, it was negative in the quarter. Most of that was mostly in Construction Industries and that was really geo mix rather than actually pricing per se, although we did see some competitive pricing pressure in China. Just again to remind you, geo mix does come through, which does distort the pricing mix. So obviously, if you do see favorable sales in different regions, that does have an impact on the mix.
So we don't go down to that level of granularity by discussing by segment. But generally, it has been it has held up. We did put price increases through on the 1st January, but the geo mix was what we were expecting. Competitive position in Asia Pacific hasn't changed.
Thanks. But in ENT it was actually up. So just curious I mean that
seems Yes. Well that's related to the pricing. Yes, that is the price increase across that was put through in the 1st January.
And also in ENT, things can be kind of lumpy as well, so all of our results.
Okay. Thanks very much.
Your next question comes from Raj Shailardi from Bank of America. Your line is open.
Hey, good morning guys.
Good morning. Hi, Ross.
Good morning, Ross.
I just had a question on capital allocation. In the presentation, you say that you're going to return all of your cash, but yet you're suspending the buyback program for now. Does that mean that free cash flow is unlikely to exceed the $2,300,000,000 that gets paid out in the dividend this year? And then the follow-up question to that is, are you still committed to raising the dividend by a high single digit percentage for the next 4 years, given this unforeseeable situation that you couldn't have predicted when you made that commitment? Thanks.
Yes. So I think I'll answer the dividend question first and I'll pitch it back to Andrew. So obviously the dividend is a priority for us. You saw that we raised our dividend already this year, even in this situation. We are not making a prediction as to what we'll do with the dividend for the rest of the year.
Obviously, it's a priority and we feel comfortable in our ability to support the dividend. But in terms of future increases, we'll keep you posted. It's obviously a Board decision and we'll make a recommendation to the Board later in the year and we'll keep you posted.
Okay. Ross, and as far as free cash flow. So if you look in the Q1, we actually paid out $1,600,000,000 if you take the buyback into account plus the dividend. If you then extrapolate that across the remaining 3 quarters of dividends that implies free cash flow of over around about $3,500,000,000 for the full year or $3,500,000,000 of distribution to shareholders for the remainder of the year. Question at the moment is while we're uncertain as to what free cash flow will be, we've decided to put a pause on the buybacks, because obviously we're not yet certain whether we are in that position where we are distributing substantially or maybe even slightly more than our free cash flow for the year.
So that's the uncertainty which causes us to put suspension. As things become clearer, we'll make decisions. We are in a strong financial position. As I said, we had $7,100,000,000 of cash on the balance sheet at the end of the Q1. And if you remember last year, we actually distributed slightly more than our free cash flow for
the year.
Thanks very much.
Your next question comes from Jerry Revich from Goldman Sachs. Your line is open.
Yes. Hi. Good morning, everyone.
Good morning, Jerry. Hi, Jerry.
Andrew, I'm wondering if you could expand on your prepared comments on the restructuring program. Presumably, the range of restructuring spending is wider than what we were contemplating a quarter ago. Can you just expand on what the range of investment could be this year? And what kind of payback periods are we targeting? And for the discontinued product lines, what are the plans to replace those product lines to provide continuity for your dealers?
Thanks.
Yes. So first of all, our expectation at the beginning of the year was that we would have some in the region of $100,000,000 to $200,000,000 of normal restructuring expense and we put a placeholder in place for the $200,000,000 of restructuring for the challenged products. At this stage, we don't see that it's going beyond that at this stage, but that's obviously we'll update you and keep you posted as time goes on. Obviously, again, the timing of these issues timing of these actions is a significant factor on the charge for the year. So for example, as we said in my remarks, we started the contemplation process in Germany.
That may take a while and that will determine those challenged products. Similarly, the impairment was taken along the lines of actually the asset. We do view the asset as being impaired in value. Courtney, it's Andrew. Good morning.
On the dealer inventory side, actually the dealer inventory reductions quarter on quarter were the most significant impact on our RI sale. We don't disclose a specific number, but it was over half of the decline in revenues for the quarter.
And maybe just a comment on mining. I mean, it wouldn't be surprising if the pandemic were any business short term. However, based on the state of the industry, the replacement cycle, we still feel positive about mining in the medium and long term.
Okay. Thanks. And then just can you give us any more color on just the geographic discrepancies you're seeing between North America and Europe? I think some of your peers have talked about
309-675-4549. And now let me ask Jacqueline to conclude our call.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.