Caterpillar Inc. (CAT) Earnings Call Transcript & Summary

Okay. Good morning, good afternoon, and good evening. I'm Jerry Revich at Wells Fargo Securities, and I'm thrilled to welcome Joe Creed, Chairman and CEO of Caterpillar. Joe has 3 decades of service at Caterpillar. Also joining us from Cat is Alex Kapper, Vice President of Investor Relations; and Alex has nearly 2 decades of service at Caterpillar. Joe and Alex, thank you very much for joining us. Before we get started, Alex has a few reminders for us.

Before we begin, we encourage those attending remotely to be mindful of your local safety protocols. Today, we'll make forward-looking statements, which are subject to risks and uncertainties. For a full list of risks that could cause our actual results to vary materially from the information we're sharing with you today, please see our most recent SEC filings, including our 10-K. We also may refer to non-GAAP numbers. For a reconciliation to the appropriate U.S. GAAP numbers, please see the appendix of our most recent earnings presentation. In addition, please note that Caterpillar policy does not allow meetings to be recorded with smartphones or other devices unless specific approvals have been granted prior to the start of this meeting. And then finally, we'll post a video and a transcript on our website at investors.caterpillar.com. Now I'll turn it back to our host.

Thanks, Alex. With everything [indiscernible]. So Joe if you look back to your Analyst Day roughy a year ago, you raised your revenue targets. Can you just [ complete the conversation ] update us on how the organization is tracking on these strategic pillars that you outlined in November from a high level standpoint?

Jerry, and thanks and I appreciate everyone dialing in [indiscernible] to everybody. Hardly, it's been just a little under a year since we had our Analyst Day and launched our refresh strategy, but I couldn't be happier with how the team is rallying around it and how things are going. As you know, even in the spring, just due to some continued increased demand and discussions with our customers, we even increased revenue CAGR to 6% to 9% in 2030 compared to 2024 and increased our capacity investment in our large engines to 3x 2024 levels. But from our standpoint, we're off to a great start. We had a good year in 2025, but really off to a really amazing year start here in our first half in 2026. And we think we'll see mid- to high teens top line growth. Our organic growth has been tremendous, which is we say to everybody that our definition of winning. And so each of the segments has great tailwinds. I mean we have a lot of attention on Power and Energy right now, and we continue to have strong backlog growth. We're working really hard to increase capacity every single day for our customers, as many as we can and better throughput through our existing capacity. So that's been a challenge for the team, both on the turbine side and the large engine side. Any time you're trying to increase capacity, but also increase your throughput and work the supply chain, those guys are really busy, but they're doing an amazing job getting that done. But we've also seen in Power and Energy, really, really strong years, both last year, a record year even and this year on pace to do better in oil and gas. I think power generation gets a lot of attention right now, but our oil and gas business is doing really, really well. particularly around natural gas and gas compression, all these -- the increase in power generation is going to have to be fed. Most of it, a lot of it will be gas-fired in the future. And so we're going to move a lot of natural gas in the next few years, and I think that's also a very strong part of our Power and Energy business. And then when you look at CI, they had a really great second quarter and off to a great start this year. We've been able to outperform the industry over the last 18 months. Last year, we instituted some merchandising programs that really boosted us and got us off to a great start. And then those continue to pay dividends. And then our strategy around commercial excellence is paying off. And I think there were some parts of the construction industry that frankly, we were maybe not paying as close attention to or underserving or our strategy maybe wasn't lined up to meet those customer needs and particularly Cat Compact, which we launched at CONEXPO. We're really excited about being a little more retail-friendly for that small customer who owns 1 or 2 pieces of equipment and buys every few years. It's a very fast-growing part of the construction industry for us. And then on the rental, in the last earnings call, we talked about the dealer JV on major projects. And so we're -- that will allow us to compete with our equipment on some of these mega projects where an individual dealer rental fleet maybe didn't have the fleet to support that type of project. And so we're seeing great sales to users growth this year, both retail and then rental fleet loading as well. And then we've been pleased with RI. The orders in RI have been really strong. I think that's going to be a little steadier growth, but we're seeing great order intake on large mining trucks and then heavy construction is kind of a follow-on to CI. And then across the board, in particular, in RI as well, we're seeing great services growth and it start to pick up. There was about -- it kind of flattened out a little bit last year, but services is still a really important piece of our strategy and how we take care of our customers after they buy our equipment. Mining rebuilds are picking back up again and CI is seeing great services growth as well. So when you look across the business, it's nice to see all 3 segments that are performing well. Our industries are in good shape and the strategy is starting to take hold. We've been spending a lot of time on the road as well as an executive team, having regional leadership conferences, spent before last was in Asia with the team and really talking about the strategy refresh and getting the teams rallied and leaders globally rallied behind it, and we're starting to see the benefits of it.

Super, Joe. And maybe we can dive in, in Power and Energy. You folks have been able to bring capacity online ahead of our expectations. And I'm wondering if you could just talk about if you've been ahead of your plan for reciprocating engines and turbines. And if so, what have been the drivers of that? And the pace that you're adding capacity, it feels like you're adding about 20% per year as the supply base ramps as we think about the 2030 targets, anything that we need to keep in mind in terms of any points that become lumpy as you bring additional supply online?

Yes. It's been -- like I said, the team is working really hard, both teams, the turbine team and the large engine team. They're doing a great job. I would say turbine capacity additions are on plan. We announced that one a little bit later than the large engine capacity increase. Large engines, we've been able to be slightly ahead, 2 or 3 months, I would say. But it's a hand-to-hand combat. As I said, you're adding capacity while we're trying to increase throughput. We're getting more through our existing assets. There's a lot of work going on in the supply base as well, which is a lot of the investment is going towards the supply base. So that we can continue to increase our capacity for large engines, but also our services growth really depends on having large engine parts and components to support the aftermarket. So this capacity investment is really for our oil and gas and power generation and services growth objectives as well as the other diverse uses of the large engines. I think it's never -- it's not going to be a straight smooth line up and to the right, but it's also not going to be a cliff event. So like I said, we've been ahead, things can happen if we have a machine go down in the factory, I mean we're hand to mouth every day. So we can see some -- there's not a lot of slack in the system. So we can see some bumps in the road as we go. But having said that, we're trying every quarter to get more product out to customers. We're talking to them on their deliveries and make sure we meet their needs. And I think we'll continue to -- every year, there won't be a cliff event, try to get more units out. So it's been -- the team has done an amazing job because there's a lot going on. And I think you were able to visit what was a year ago, we were in Lafayette, and we just had the new building up and now they are packaging units in there. And we're trying to do some creative things as well to -- time is of the essence here because the demand is on top of us. We talked about using for turbine packaging, our Wamego facility repurposing it. We were able to do that in 12 months. We're looking at our existing assets. We brought back the 10-megawatt former MaK medium-speed engine, which is great for power generation that we're able to start shipping units here, hopefully later this year. And so we're going to look at all of our existing footprint because that's the fastest way for us to do this. One of the things we're looking at now is we have an engine facility that does locomotive engines that's -- and that business is not at capacity by any means. So with some minor investment, can we do some large engine, Cat engines in there just to relieve some of the pressure. So we're still working on some of those things. But those are the types of things that the ideas that the team on the ground keeps coming up with, and I'm proud of how they've been able to react.

And that's a really interesting comment. Is that the 10-megawatt unit? Or is that the 3,500 to 2.5 megawatt units when you say repurposing those facilities?

Yes. I mean -- or if we can put them in there with existing capacity. So the facility Wamego was really PGM packaging for Solar. The 10 megawatt, we are using the footprint that we have, a lot of the supply base and the footprint that we had just stopped building those engines 3 years ago, I guess, 2022, 2023. What we're looking at potentially in our existing footprint, our 3600s because we are seeing strong demand for gas compression too, which is primarily what that engine platform is used in. So it's a great situation to be in. We -- one of the things we're doing is getting -- continuing to stay even closer to our customers. Our oil and gas customers have been with us a really long time. So we want to make sure that we have a great position in that industry, particularly when it comes to moving natural gas, and we want to make sure we have the supply needed for those customers over the next 2 to 3 years as we see the build-out and the need to move a lot more gas just to feed all this additional power generation that's coming online.

And Joe, the big investor concern on power and energy is that there's a lot of capacity coming to market, 100 gigawatts or so, both reciprocating and turbines. And the concern is we could ultimately see discounting and also concerns about slower pace of permitting. Obviously, you folks have a history of operating and navigating cyclical markets. What's your perspective on the supply/demand risk? And can you talk about how CA would respond whenever we get to the point where supply outpaces demand?

Yes. I think there's definitely a lot of news out there. We -- I've been with customers last week, I was on the West Coast with customers. We had a big power gen customer come in talking to us about future projects. Yesterday, I stopped to visit them. We're not seeing customers slow down right now in their need for power generation. I think -- we'll see how this all shakes out over time, but there's a lot more of bring your own power, which I think favors us actually in the industry from equipment supply at large. So from a demand standpoint, we're not really seeing customers change their behaviors right now. So we continue to talk to them. We'll definitely keep an eye on it as we move forward. As far as everyone and competitors and ourselves bringing capacity online, I think that's true. We've been very, I would say, measured about how we brought this capacity online. And as you know, we -- in our Analyst Day, we said 2x, and that was based on customer discussions. You saw how the hyperscalers and everybody increased their CapEx forecast. We are talking to them. So that's when we moved to 3x. We brought the turbine investment online. We continue to stay really close to our customers. For us, one of the advantages, I would say, is we didn't just look at data center demand, which is definitely driving a lot of demand for us. But we looked at our oil and gas, talked to our oil and gas customers. We look at these engines are used in mining applications, they're used in marine and tugboat applications. So they're used for diesel standby or natural gas prime. So the capacity is pretty fungible across the industries that we serve, which are pretty broad. And then don't forget a lot of the investment goes into the supply base and internal component capacity, which will serve our aftermarket needs moving forward. So -- and we have services growth planned and initiatives. It's an important part of our strategy. So we've been pretty measured, I think, in how we've done this. We don't need to be at that full capacity we're installing to get the return. We expect a cash payback before the end of the decade. So -- and we have a really strong backlog into the next 2 years of line of sight, starting to take orders into 2029, even our first order into 2030 on turbines. Having said all that, what you said, I think, is true. At some point, I think the industry wants and probably needs to be in free supply. And that's a standard mode for us. We've been very measured and we have industry-leading margins in Power and Energy. We've been very measured and taking what I think are appropriate price action given the supply-demand situation. But also we've been pretty measured about it. We have long-term customers that we want to serve for the next few decades that have been with us a long time. And I think we've generally proven we're a premium brand. We're close to our customers. We have a great value prop. And in a free supply market, we can be very competitive and maybe even grow share. So I think at some point, we'll get there. That's sort of, in my view, I consider that almost normal operating mode. This is what we're in now is sort of unusual times.

And Joe, maybe just to double-click on that last comment. So for Power and Energy as a segment, you folks have consistently pushed pricing over extended periods of time. And Caterpillar is obviously focused on service, and you mentioned that we're not taking outsized price increases. Is it fair to expect whenever supply outpaces demand, we'll still hold the line on price because you folks are obviously the market leader in a range of product lines that we're talking about here.

Yes. I mean I think it's tough to predict what the industry will be like. We need to be competitive. and we'll always be competitive. But our pricing really is based on the value prop that we bring to our customers. And so there's a lot of things that go into the pricing discussion, not just cost, not just supply/demand, but the value we add and the life cycle total cost of ownership for customers. We are the premium brand, the reliability and durability that comes with our products in these heavy demand, high-demand applications are highly sought after. So I think as you've said, we've seen downturns and I wouldn't expect to be a downturn, but maybe we enter free supply situations. We'll be as disciplined as we can be in the pricing action. And I don't think from a pricing standpoint, what you would have seen historically is probably similar to what you would see moving forward. So I don't think it's a huge change.

I appreciate the color. And can we just pull on the thread that you mentioned a couple of moments ago. The way you folks manage backlog is unique in that you have framework customer agreements. And so you hold customer slots for those that you have customer agreements with. Can you just -- for those on this call that are less familiar with your approach, can you talk about what proportion of your turbines and high horsepower engines are typically purchased by framework customers? And just spend a minute, if you don't mind, around converting those slots into orders, how do you folks run that?

Yes. I mean this has been something that we really started 4 or 5 years ago when we saw data center demand really picking up for us, and that was really driven by cloud compute. And so data center business was driving great growth in Power and Energy before really this sort of onset of AI, which just really accelerated it. So our processes have been in place, which is great. The largest hyperscalers and large colos and data center customers and not just only data center customers and others that want to provide power. We're starting to see oil and gas customers move into providing power for various applications because they understand the equipment and know how to run the fleets, and it's great growth for them. We have framework agreements with a lot of these customers. And you rewind prior to 5 years and how a lot of our business works is dealers will secure business and place orders on us and we transact through them. And a framework agreement on the reciprocating engine side, still transacted through the dealer network, but we have relationships with these large data center builders and operators who will operate in many territories and geographically diverse. That allows us to do a few different things. One, make it easier for them to do business with us from a contracting standpoint. Two, we can coordinate support on site with our local dealer wherever their site is, which our local dealers bring a ton of value with their expertise, local knowledge, local contacts. And from our standpoint, it allows us to really get in front of demand planning in a constrained environment. And so each one of these framework agreements is a little different. They're tailored to what the customer needs, but we are definitely looking 3 years, sometimes 3 to 5 years out on a rolling demand planning exercise, and we sit down with these customers monthly and continue to look at that and adjust the forecast. And then sort of on a rolling basis, there are commitments depending on how far out you are on the level of volume. And then those are sort of in the pipeline, not necessarily when you get further out in the backlog. So when we get close enough that they're like ready to make them a firm order, and then we convert them into the backlog, and that happens on a rolling basis. So it's not super smooth. I think particularly now moving out, we've had 3 really strong quarters of backlog growth. I think that backlog growth, I worry about just getting super used to having that big number of backlog growth every time. There's a lot more we're looking at. And I think given where we're at and how far out we're planning, some of that will be lumpy in how we convert to firm orders. But it's been a great process and allowed us to really have a lot more confidence in how much capacity to put in, when do we need to have it in and then really allowed us to serve our customers a lot better on making sure they get the units when they need them. And so you start to see extended lead times. I mean we're pretty full for 2027 on large engines and turbines. But customers will -- this also allows us to adjust our schedule if they need -- if they want to delay by a few months, and we can move the schedule around in the factory and allows us potentially to bring in last-minute orders if we see them. And we also reserve slots and are trying to plan a lot further out with our oil and gas customers who don't typically plan on that level of horizon. So we've engaged them a lot more. And so we're able to be pretty flexible, as flexible as we can to try to accommodate as many of our long-term customers as possible and meet all their demand.

And Joe, the interesting dynamic is with you holding slots before they become firm orders, the lead times that we're hearing for your customers are a lot longer than the length of backlog would suggest like you mentioned, 2030 for turbines and '29, '30 is what we're hearing for larger supercating engines as well. So the way you report backlog unlike others, you're essentially underestimating the visibility that you have in terms of we just look at the backlog, the underlying demand, it feels like it is higher than backlog as those commitments convert into orders. Is that right?

Yes. I mean I don't know if we're underestimating. I mean by the process, but I think that's the right way for us to think about it. But we have line of sight past the backlog is what I would say and farther than what we have in the backlog that we continue to plan with customers. And on a rolling basis, we kind of bring them in when we think it's, hey, we need to start thinking about firming up that factory slot and delivery date and start ordering material that allows maximum flexibility for us and our customers. But yes, we have line of sight past what we have out there. If there are any customers dialing in as well, who happen to listen to this or watch afterwards. I mean that doesn't mean we can't take orders if we say we're taking orders that far out. We still, like I said, have some flexibility, schedules move around. And for oil and gas customers, we kind of do a level of allocation, and then we'll release those over time if, in fact, we don't need them. So it's a complicated process, but I think a very involved one that allows us to serve as many possible customers as we can, particularly in this constrained environment.

And Joe, this dynamic of moving schedules around, is that any more intense than usual given the power grab in the industry? Or is it pretty similar to what we would have seen 4 or 5 years ago?

It's been pretty consistent. I mean, in how we do it, just given the fact that we're full, it requires a little more intensity, right, of just truly understanding what we can, what level of flexibility we have and still be able to meet everyone's demands. But we're not seeing major changes in how we would typically schedule our factory or do those types of things.

And Joe, earlier in our conversation, you mentioned rising mix of behind the meter with all of the power solutions that you have for backup for front of meter and behind the meter, you're in a really good spot to see where data center architectures are headed. Can you just talk about what you think the mix will be for behind the meter based on work that you're looking at? And then within that, what do you think will be the mix between reciprocating engines and turbines, if you're willing to share?

Yes. I mean I don't think I can really say the exact mix. What I can say is we're seeing a lot more interest in natural gas sort of prime power behind the meter. And we'll see how that plays out. It doesn't mean that we're seeing less demand for standby diesel backup. I think it's going to depend really project by project, region by region, what type of power access is available for the data center as it's being constructed and it's going to be operated. I think you're seeing a lot more push towards even if there is utility grid power available, we want to make sure that we're not -- the data centers aren't causing electricity rates to increase on the communities around them, make sure we're not increasing the risk of power failures or brownouts. And so that alone, I think, is going to drive a different level of discussion of if you're going to pay for the power, do you want to just go behind the meter and do prime gas? Or do you want to have diesel standby and back up? I think more and more, you'll see -- and we're starting to see some regions where even if you're grid connected and you have diesel backup, don't need to -- you hear a lot more discussion around curtailment. So if, in fact, like in Texas, if we're having a hot day and the grid is feeling like it's starting to get to its capacity, can they curtail and go off the grid and run on their local gen for a while just to get through whatever peak of demand we're starting to see. If all those get kind of weighed into the best design for the site, what's available, how much gas is available. But I think all that also tends to put us in a great position because of the diversity of our portfolio and between turbines up to 38 megawatts all the way down through our recent offerings now as big as 10 megawatt and you get to our 2.5, 3-megawatt offerings which are very strong. So we can mix and match, and we can also have modular solutions that allow data center to start at a certain power range and then grow over time. We can offer a lot of redundancy in the solutions that we have, given the flexibility we have, which they like. So we're seeing a lot more discussions around what is the best option. And even yesterday, we had a customer in getting us in even early in how they design the site that way they can take advantage of the various offerings that we have. So I think it's something that's still evolving, but you're going to see -- what the trend we're seeing right now is a lot more requests to engage on behind-the-meter offerings.

And in terms of -- in those conversations, Joe, what are customers telling you is the long-term plan for these assets? What do you think will be the mix of perpetual behind the meter versus peaker plants? How do you think that all shakes out if we're having this conversation in 10 years?

I mean most of what we're seeing, and I don't want to say all, I mean we have units that will go in and then I think eventually a grid connect and then they become peaker units or they become curtailment or they'll get run more than standby, but maybe not prime forever. But the great majority of the sites that we're talking to, the plan is they're the prime power. It's the power plant that's going to be there to provide the power for the future. And I think when you look at the economics of the investment that gets put in, we can be pretty competitive with the grid in some areas depending on rates. And so I wouldn't say it's the majority that are temporary. Majority of what we're talking about, at least with customers right now, will get installed and get run for prime power into the future. And that's part of our also capacity planning for the supply base and components. We'll hit overhaul cycles in the future. We need to be ready with our dealers to be able to handle that type of demand, which we really haven't seen in the past. That many units coming up for maintenance at one time, and it's a great opportunity for us. We want to make sure our customers stay running and get the most value out of the asset. So I think a lot of it will come down to availability of grid, will it really get upgraded? And then not just once it's available, there'll still be economics behind it. And if you've made the investment and it's working well, I think we'll see those units continue to run. But I think there'll be a mix.