Caterpillar Inc. (CAT) Earnings Call Transcript & Summary

Welcome, everyone, to today's Bank of America Virtual Investor event with Denise Johnson, Group President of Resource Industries here at Caterpillar. I'm Ryan Fiedler, Head of Investor Relations. I have a couple of items to cover quickly before we get started. First, we may make forward-looking statements today, and those are subject to risks and uncertainties. For a full list of risks and uncertainties that could cause our actual results to vary materially from any forward-looking statements we make today, please refer to our most recent SEC filings, our 10-K for 2021 and our 10-Q for the first quarter. Second, we'll post the slides online at investors.caterpillar.com. With that, I'll turn it over to our host, Mike.

Thank you, Ryan. Good afternoon. I'm Michael Feniger, Senior Analyst of the Machinery, Engineering and Construction team at Bank of America. I am obligated to say, if you are voting in the II survey, our Bank of America team, including me and formerly Ross Gilardi, would love your support if you found our team helpful this year. I am pleased to welcome Denise Johnson, Group President of Caterpillar. She joined Caterpillar in 2011 and is responsible for Resource Industries, one of Caterpillar's most important business segments. We believe this is a perfect time to host Denise, following Caterpillar's Investor Day, Bank of America's Global Mining Conference in Miami, elevated commodity prices, and how Caterpillar's equipment is really in the middle of the intersection between technology, resource extraction and ESG. So I'm going to hand it over to Denise, who will provide an overview and some opening comments for the next 10 minutes. She'll turn it back to me to conduct a Q&A. Over to you, Denise.

Okay. Well, thank you, Mike. Appreciate the opportunity to be with all of you today. And what I thought I would do is to provide a little bit of background and some subset of information that was provided at our recent Investor Day just to bring everyone up to speed. So if you've seen our Investor Day and certainly, my presentation added, some of this will sound very familiar. I would, from a backdrop perspective, I have 4 key takeaways for you today. First and foremost, conditions continue to be favorable from Caterpillar's perspective for continued growth of minor CapEx. And as we look at all of the signs, including our personal one-on-one discussions with mining companies, they are gearing up for some investment in the future. Secondly, we are very well positioned, and we've been very focused on services growth as a company. Resource Industries, in particular, is very well positioned, as part of services growth, primarily due to the fact that our products are leveraged in a mine site setting 24 hours a day, 7 days a week in some of the most rugged conditions. So maintaining equipment and servicing equipment is something that all miners need to do to keep the assets running well and the life long. The third thing that I would provide feedback on our key message is that increasingly, we're having conversations with miners around automation and autonomy. And without a doubt, it's beginning to be a differentiator in mining and for us specifically as a leader in autonomy. And so we'll talk a little bit about that and how we see that being even more prevalent as we move into an electrified environment. And then finally, electrification and ESG sustainability really presents a significant opportunity for Caterpillar, and we think that we're positioned very well to provide integrated solutions. And those solutions would be across the RI portfolio. But uniquely, we also have the E&T portfolio and the combination of the 2 of them together really put us in a unique position to help miners as they begin their transition. So let's move on to the next slide. Just to remind you on what I have responsibility for within Resource Industries, it is mining both surface and underground as well as products that feed into the heavy construction, quarry and aggregate markets. So as I indicated, services growth has been a big focus for us, and we are uniquely positioned within Resource Industries, as I indicated. And if you think about the 24 hour a day, 7 day a week, as well as the trend towards rebuilds, we have a definite -- we are seeing definite trends towards extending the life of machines. And some of our machines can be rebuilt 2 or 3 lives. And if you think about the amount of part sales that are consumed in those lifetimes, we have up to about 2.5x the original price of the equipment that can be tied up in parts sales just in one life. And so as you think about that as a model, and certainly, there's a lot of variation depending upon the mine site and the use, services growth is something with the Caterpillar rebuild advantage that we see mining companies taking advantage of. Another thing that I would say is if you look at asset, the length of the fleets, the mining fleets. I'm talking trucks, but beyond trucks, all mining assets. The Caterpillar average age is about almost 13 years, 12.6 years. And so when you think about replacement cycle and you start to look at the age of equipment, you start to see that replacement will be coming on in a fairly short order, if you think of that as the average. And then more and more now, all of our assets are connected, and so connected assets and leveraging technology is something that we're seeing many more mining and heavy construction companies leveraging that data for asset health to provide additional safety advantages and then also for productivity. And so connecting the assets and leveraging technology is something that we are definitely seeing a trend towards. And then in addition to having the parts, the service and the technology, we've recently moved towards customer value agreements where we're kind of tying that together. We're providing guarantees for some of our component life but also tying that into a service agreement, which allows us then to maximize the value for the customer and then also to Caterpillar. Let's go on to the next slide. So I want to move on to the issue around automation. We get a lot of questions with regard to our autonomy. And certainly, it's something we've invested in for quite some time, but more recently, have seen adoption significantly increase. We currently have over 525 trucks out in the field, and that is every month increasing. We've moved about 4 billion tons, which is a lot of material movement. We have 11 customers, 20 sites. And I think what's really powerful here and the reason that we're starting to see more of an intake -- an uptake with the adoption of autonomy is that we continue to have 0 injuries, and productivity that our customers have experienced has been up to 30% or more. And so when you think about the value prop for mining customers, it is clearly there. We've expanded beyond initially being in iron ore into the oil sands, copper, gold, coal and most recently, in lithium. So let's move on to the next slide and talk a little bit about the adoption curve for autonomy. So this is actual data, cumulative data of our active and in-process large mining truck autonomy adoption. And you see that the field population, we first really got our field population out there in the 2013 time frame, but it was pretty slow in the first few years, and now, what we're projecting through 2023 based on contracts that have been received. We are seeing -- in addition to a lot of adoption, we're seeing a shift. Initially, we had a lot of mines out there with fairly young assets, and so initially, a lot of retrofit of the existing equipment. And now, it's moving into factory installed autonomy. And so while we still see some retrofit, we definitely are seeing a trend towards new machines that are being ordered with capability to be connected autonomously. In addition to that, I would say we're very proud of the fact that we are an industry leader in autonomy. And I would say, since 2019, 7 out of the last 8 greenfield autonomy sites were awarded to Caterpillar. So we do feel very, very pleased with the progress that we've made and certainly the momentum that that's driving. So let's move on to the next slide. I think another trend that we're seeing, and I think one that really opens up the opportunity for a much larger overall population, is the fact that autonomy overall is moving from large sites. In our first site in 2013, if you hit click there, was for the largest mine site. So this graph really shows large mining truck fleet size by number of mine sites. And you see the smallest number of mine sites have the largest number of trucks, and you see a lot of fairly small truck sizes with a very large number of mine sites. And so what we've noticed as a trend is that as time has gone on, we've seen more and more autonomy deployed at smaller and smaller sites. And the economics have changed to allow that to be a viable alternative. And so certainly, it's something that opens up the opportunity to have more autonomy at more sites globally. The other thing that I would say that it also does is open up not only to smaller mines, but also into the core in aggregate sector, which, traditionally, can have 10 trucks, but it can oftentimes, you only have 5 or 6. And so you're really opening up a much wider population with the technology adoption. So let's move on and talk a little bit about why Caterpillar autonomy has been chosen most often, why we feel it's a differentiator. I would say, first and foremost, we've recognized that Caterpillar needs to be there with the mining customer at the site, and so we're leading the implementation. We're at the mine site with the mining company, and we're working side by side to improve the productivity of the site and the effectiveness of the autonomy solution on a day-by-day basis. And so we are leaving once that gets installed over there to continue to optimize the solution. The basic business model, as I've mentioned before, is hardware, software and an annual license fee. But I think what's more powerful than that is really that whole site approach where it's the machines, you're getting the service as well as the technology. And so you're able to leverage that in a way that allows you to win the site and really optimize the solution for the customer. From an advantage perspective, as far as, what is unique to our solution versus competitors, I would say it's a number of things. First of all, there's a lot of autonomy solutions that just can't run at max speed. And one of the things with our technology is that we can run our trucks at max speed in pretty rigorous conditions. So if it's foggy or if it's a light rain and there's no slip incidents, you can run the trucks at max speeds. And you're able to optimize the flow of those assets across the site. In addition to that, we can scale, and there's no limit to the number of trucks that we can connect with our solution. And so those biggest, those largest mine sites that have 150 trucks, we can still provide an autonomy solution for. In addition to that, we're doing a lot of updates from a software perspective. So deep machine integration with a lot of software updates that are provided to customers more than twice a year. So we're continually renewing and evolving our solution to optimize it. And I would say, as we've done that, we really -- it really has allowed us to expand the solution across mining and into our construction portfolio. So I mentioned the heavy construction quarry and ag, but we're leveraging a lot of the M&A that we recently have done with CAT Robotics and with Peck Tech and Minetec to enable that solution to be scaled. So I want to switch gears a little bit and just briefly talk about electrification, because miners clearly have set some pretty aggressive goals for when they want to be net 0 and are asking for our help in converting fleets as that's one of the biggest emitters from a Scope 1 perspective on a mine site are the trucks first and foremost, because they're the most plentiful on the site. And so diesel emissions is a big focus for them. One of the things that we're doing as a company is looking at the solution set that Caterpillar can offer. And we think we're uniquely positioned and that we have not only the assets themselves that can be electrified and will be electrified, but also the site infrastructure that can help to assist from a power generation and storage perspective. In addition to that, we're going to be collaborating with customers and doing that in a very deep way. We're going to learn a lot as we begin this journey. But it is something that, with our engineering expertise, will be there and partner with the customers on their sites. And certainly, from an autonomy perspective, we see that being a real key to managing not only the productivity of an electrified site, but also the energy consumption and electric consumption on the machine itself from a battery usage perspective. So trying to optimize where are you in that battery charge, you're going to need some sort of automation in order to do that to maximize the productivity and the cost overall. So one of the things that I wanted to briefly mention is kind of what is our development strategy? Because it is a little different than what we would traditionally do. It's an agile development strategy where we're actually starting by building some units in mine sites, yet -- or I'm sorry, in our proving grounds yet this year. So we're starting with prototypes in our proving grounds, and we're going to take those and learn a lot from a technical perspective. But earlier than we ever have before, we're going to begin to put early learners on customer mine sites. So in the 2024 time frame, with the agreements that we have recently completed with a number of large mining companies, we will be placing early learner units on their site, and we're going to learn a lot as a part of that process from a technology and process perspective. And then by the 2025 time frame, we're beginning to put small fleets in so that we can learn with multiple assets working together with the infrastructure, because there is that new infrastructure requirement. So we'll be putting pilot fleets in with autonomy in various sites to be able to learn even more so that by the 2027 time frame, we're ready with those particular customers to move into full production. And so it is a very accelerated time line when you think about the amount of development that needs to take place in a way that we've never done it before. So a super exciting process, and we're looking forward to partnering with customers to do that. Next slide. So this just gives you a pictorial of what's different on a mine site. And I won't drain this slide because there's a lot of things I could talk about, but there's a few observations. The first thing I would say is that in the mine site of the future, you're going to have a lot higher power requirements than you have today. And if you think about power coming into a mine site today, it's generally running a processing plant. You may have an electric rope shovel that it needs to power and then some of the facilities that are on the mine site, but all the mobile equipment is powered by diesel. So think about now, you have to connect all the assets and have an ability to be able to either plug them in or power them in some way through electricity and/or potentially hydrogen as well as a storage mechanism, but you have a variety of mechanisms in order to do that. So as I indicated, higher power requirements, they're going to be much more distributed across the site, and it is going to have a varied level of power that's going to be needed. Some may be renewable, but you're going to need backup power, you're going to need other sources. And that's -- that's definitely something that we're seeing as a trend overall that's going to be required for the future. And as I indicated, this is going to be a real learning journey both from an infrastructure perspective as well as an asset perspective in these sites in the future. So I'll just wrap it up with that. That's kind of a high-level summary of where we're headed and what we're working on. Certainly, we're very focused on services, but we also recognize technology, sustainability is something we need to invest in, and we are investing on for the future. So with that, Mike, why don't we open it up to questions?

Perfect. I think it may be helpful to start with looking in the past to kind of frame how we should think about the future. So when we look at 2012, that was the peak of the last cycle. I think Resources revenue was $21 billion compared to around $10 billion to $11 billion today. CAT has really restructured the business over the last decade. So what is different today about resource industries compared to last cycle in terms of product lines, commodity exposure, maybe percent of service or aftermarket? How should we think about that relative to last cycle?

Yes, it's a really good question. I would say, first and foremost, Resource Industries is leaner. It's a more a integrated organization than it was in 2012. And as part of our enterprise process, we're consistently reviewing the portfolio and we're exiting or restructuring any product lines that are underperforming. And so we focused on investing in the products and services, which provide the greatest value for customers and also for the Caterpillar enterprise. . So that is something that we're constantly doing, but we have had the opportunity to take some of the underperforming units off the table and move forward in a more healthy way. And that really allows us to hone in that investment. From a commodity exposure perspective, I think the business today is better positioned to capitalize on the opportunities presented by electrification than we ever would have been in 2012. We've seen growth in demand for our products in commodities like copper, nickel, cobalt, lithium. We're also seeing demand for other hard rock commodities increase. But as a result of these factors, along with the restructuring actions, I would say the one area that we're seeing a little bit smaller piece of the total picture clearly is coal. And I guess it just goes without saying, and I mentioned it earlier, we're very focused on services and aftermarket growth. And I think as you look at the total percentage of sales that's attributed 2 parts in 2012, that was smaller than it is today. 2012 was a huge OE year, and so any given year, the percentage of parts versus OE can change. But over time, we are seeing growth in the aftermarket and we are seeing growth as well in OE, but it can vary quite a bit from year-to-year. Our products are built to be rebuilt, and so the trend to extend product lives we see as an advantage for our customers and gives them options. So finally, I'd circle back to the point that I made a moment ago, and that is that being able to continue to invest over the past 10 years at the same time that we restructured the business has been really important. And a great example of that investment is in autonomy, and we continue to invest in that even in the 2016 time frame. And I think we're very well positioned as a result. And so being able to pick and choose how you prioritize becomes very important, and I think it's created a competitive advantage for us today.

Yes, that makes sense. And about investing through the cycle, I think in the first quarter, Jim highlighted increased quoting and investments in mining equipment. Clearly, since the first quarter, Denise, there's been more volatility in the macro backdrop. We've seen metal prices have gone a little lower, there's rising fears of recession. So are you seeing any change in tone or order rates with your customers since this volatility has picked up?

Yes. Q1 order rates have been really strong for Resource Industries, and let me take you a moment and comment on some of our key commodities where we really play the strongest, iron ore. And you look at pricing, they -- that improved both for the fourth quarter and in the first quarter. And while it's still lower than in prior year peaks, the prices are well above investable levels and strong relative to 5 and 10-year averages, so pretty strong there. Similar story, I would say, for copper and gold, which are another 2 of our very strong mining company pulls. Fourth quarter and first quarter improved and prices are, again, above -- well above investable levels. And even coal, thermal and met coal, improved in the first quarter. So while there's still volatility, we believe that commodity prices remain supportive of continued investment. And -- but as I've discussed several times in the past, our customers continue to remain very disciplined. They are cautious, but they're talking a lot about investment for the future. And so although it's an uncertain environment, we do feel pretty good about where they're headed.

And in terms of your customers really investing in the future, obviously, ESG is a big focus with miners. You've kind of highlighted, with your presentation, how CAT is really helping customers reach that zero emission target. Do you think miners are leaning more into rebuilds and potentially waiting for more clarity on the zero-emission product before maybe more aggressively replacing this older and aging fleet?

Yes. Regarding the decision to either replace a machine or rebuild it or wait depends on so many factors, and I would say it certainly isn't the same for every miner. It depends on the life of the mine, the age of the condition of the equipment, their capital budgets, and which mines are going to be transitioned to zero emissions first. Because as miners are starting to plan out their transition, they're picking where they're going to transition first. And so in those cases, where they're going to transition first, they may wait, but in other mines, it's going to be later down the pipe. So they're looking at various timings that are associated with that. So as we've worked with miners, we just really are trying to meet their needs. And if they want to rebuild, we're there to support them with a rebuild. If they want a new piece of equipment, we're there to support that. And certainly, these agreements that we've signed with Newmont, with NMG with BHP, Rio Tinto and Tech are really important for our future as we really look at these partnerships and collaborations that we're doing as a way to really understand voice of customer at a much deeper level. And so we'll be prepared as they want to transition in the time frame that they do.

And at our mining conference, Newmont went out of its way to really talk about the success of its partnership with CAT. Can you talk about some of the results of that partnership? What are some of the savings? And how does CAT really capture value from this technology relative to the minor and the dealer? And is that business model starting to evolve over the next few years?

Yes, I mean that's a big question. I would say, first and foremost, we have a long-standing and highly valued relationship with Newmont. It's open, it's challenging, it's transparent. And I especially enjoy it, I think, because the trust that we've developed working with senior executives like Tom Palmer and Rob Atkinson, it goes from the top all the way down to the operations teams in the mines. And while we collaborate together, we hold each other accountable to deliver results. And Newmont has been very clear to say they're dedicated to be the highest performing, lowest cost mining company in the world. And so when they want to collaborate, they are looking to leverage technology not at just one site that they want to invest in, but they want to leverage technology, including data analytics, including autonomy, and to partner on adoption of some of the first electrified machines. They want to do it in a way that makes a big bang across all of their sites. And so as we approach partnering with them, they're helping us and working with us in ways that we've never done with mining companies before. Voice of customers is much higher, getting feedback on what kind of services they want to be given and provided, and how we connect all the sites so that they can be more efficient and effective is what we're focused on. And we've got KPIs we're tracking with them to ensure that we're delivering. And so it's that kind of model where you can be mutually accountable to one another that really makes the partnership special. I guess I also would say that as you start to think about the business model changing, the technology end of things is an opportunity for us and our dealers to work with customers in ways that we haven't before. Instead of just providing a piece of equipment and let us know if you need help with service and/or you have a maintenance interval that's coming up, it's day-by-day, how do I improve productivity at the site. So when you think about that, whether it be with autonomy or whether it be with other fleet options, and/or how do I make sure I'm as efficient with an asset -- of the asset health as I can be, it's all of those things that provide another opportunity to partner differently than we ever had before. And it's making a big difference, and we appreciate that partnership with Newmont.

And actually, just continuing the conversation on Newmont. They were talking about how they visited your facility in Arizona, and they discussed at the conference exploring opportunities with you at an underground facility. Now for most investors, CAT is really known for surface open-pit mining. So how big is underground mining for you today? Is there an opportunity there for CAT to penetrate that market further? And just lastly on that, do you see any secular changes in CapEx spending from miners looking at underground versus surface longer term?

Yes. First of all, I would say, we don't break out our sales between surface and underground, but the mix clearly favors surface. I think we see opportunities over time growing for underground mining products and services. We've invested significantly in the transformation of our portfolio underground, including technology for products in underground, semi-autonomy and autonomy. And you think about underground mines and being able -- a lot of people don't want to go underground, and so autonomy, automation becomes super important. One thing that we recently did is acquired a company called Minetec, and that gives us the capability for precision location detection underground, which is the first in the industry for underground. GPS works and you know where you are on the surface, but when you go underground, none of that works. And so this Minetec product provides precision capability for us to know where every asset is underground. So as you think about the transition for underground, hard rock being more significant in the mix for the long term, we do see that in conversations that we have with miners. But the timing really depends on so many factors, including the mine deposit, the specific ore demand, and it certainly isn't something that's going to be a step function change overnight. We're continuing to invest in our underground portfolio. We recently launched our underground product that's battery electric zero emissions. It's the first one in the portfolio, so it's our 1,700 loader, and we're really excited because it's performing very well. And we're delighted that we're able to expand the underground portfolio across the loader and the truck product line. And that whole electrification underground is even more important because of the ventilation costs for a mine site are very substantial. And so if you can take the emissions out of the underground, not only the people out but also just the ventilation requirements out, you can really lower the cost of the mine. So that's one of the reasons we're seeing underground move faster to the electrification portfolio. So long answer short, yes, we're investing, and we do see that as a longer-term trend.

Interesting. And with some of these investments, I mean, CAT is clearly the leader, it feels like it with technology. You highlighted winning 7 out of 8 greenfield autonomy sites. When we look at 2021, price growth was 1% to 2%. It did accelerate in the first quarter to 8%. But a general question we get from investors is with all this technology, should we be seeing higher pricing at Caterpillar's Resources segment given this tech leadership and the investments you guys have made?

Yes. Absolutely. We are definitely seeing the trend, from a price perspective, move in the right direction. And while full year '21 was low single digits, the fourth quarter of '21 was a big improvement from the first quarter '21, and it continued to improve in the first quarter of '22. So I think there's a couple of things to keep in mind as you look at Resource Industries and our pricing. The first thing is that, generally, our sales are lumpy. Price realization can vary when we have large deals, and some of those large deals have varying contractual terms that impact us. Some of them are price protected, some aren't. Some may have price escalators and some don't. So overall, we believe that Caterpillar as a whole is taking the right pricing actions and our price will more than offset manufacturing costs for the full year of 2022.

That was helpful, Denise. And when we're talking about the portfolio compared to 2012, you mentioned how there's now new metals that you guys are servicing, a bigger part of it. Part of the decarbonization efforts globally. What are some of these metals that maybe you weren't really servicing a decade ago? And are lithium mines, cobalt, are they as machinery intensive? How should investors kind of view that these new metals that are part of the decarbonization effort into Caterpillar's Resources demand?

Yes. No, it's a really good question. And I think you can look at a lot of data which would indicate a need for more mines, commodities. And even things like copper, which are used in electrification, but are also used in homebuilding, definitely expecting those to continue to increase in demand. And at the same time, you have lower ore grades. So that means that more tonnage needs to be moved to get the same amount of copper out. And so that's working, I guess, you'd say, in the right direction for us. It certainly is a challenge for copper miners. We are seeing nickel, lithium, cobalt demand increasing, and we are tendering for a number of contracts in that arena. And so as you think about how that all balances out -- and at the same time, the world is not going to turn electrified overnight, and so you still have some of the more traditional items like coal that are definitely being leveraged as well. And so it's going to be a mix that's going to change over time. But net, overall, as we look at what -- how much material needs to be moved to -- for not only a growing population, but a growing EV population in an electrified world, we see an increase overall. That will positively impact us from a machine and hopefully also from an energy and transportation perspective as well.

And just a follow-up with that, yesterday at a conference, CEO Jim Umpleby said that coal was anywhere between 3% to 5% of total sales. So that implies that coal could be nearly 20% of resources. Coal prices have surged this year as the world has clearly been short energy. Are you seeing mining equipment demand for coal sites actually pick up above normal trend? Is the age of equipment at these coal sites a little older versus the rest of the rest of the fleet? And how are you thinking customers are navigating the short-term demand with those longer-term ESG concerns around coal?

Yes. I mean that's a lot of questions. So if I miss one, you can remind me. But I would say, first and foremost, from a coal demand perspective, coal is one of the top 4, 5 commodities that -- in an end market perspective that we do support. I wouldn't say we've had a large increase in overall OE orders, but we have continued to see robust aftermarket and utilization rates in those particular mines. And so a lot of those -- most coal mines that are out there, there's not a lot of greenfields going in right now, but there are quite a few in the brownfield arena that already have existing assets in, and they're obviously leveraging those. And you recall the last super cycle, coal was in a different position at that time. And so a lot of the assets that went in globally, and I'm not just speaking from a Caterpillar perspective, but globally, in that time frame were put in for coal. And so I would say they're relatively not long in the tooth from an age perspective in comparison to some of the others. But it would be dependent upon the mine and where it would be located. So as you start to talk to miners, certainly, you're still seeing a lot of demand for coal in the longer run from places like India. And certainly, China is still adding coal mines in their portfolio as well. And so I think they're going to be strategically located where the coal flows will go. And then certainly, with everything that's happening in the world, it's hard to say exactly when that starts to wind down. But we're there to support our customers however that time line plays out. And certainly, we see any declines on the coal side being more than offset with other commodities.

That's helpful. And how does the higher for longer inflationary environment impact capital spending outlook for your customers? So on one hand, inflation is driving up metal prices, yet also creates a little bit of uncertainty around the cost of managing a project. So are you seeing hurdle rates a little bit higher now to greenlight certain projects for miners? Are miners leaning more towards brownfield over greenfield? Or does it even push towards autonomy adoption because of some of this inflationary pressure?

Yes. It's a really good question. I would say, first and foremost, there isn't -- I would say, you're seeing both. Certainly, the length of time that it takes to plan for a new greenfield mine is extensive. And so inflation -- the shorter-term inflationary pressures that we're seeing right now, relatively speaking, shorter term, are not something that would have been in the preview for any of those greenfield mines going in as it's a long permitting process and planning process, and Boards need to approve greenfields as they move forward. So we haven't seen any delays in any greenfields that have been approved so far. And certainly, from a brownfield, that's the most economic way to continue to mine. And so if you can expand and extend the brownfield that's generally what miners would prefer to do. The advantage, however, when you think about things like autonomy from being in a greenfield is that you can go into a mine site and you can plan how you're going to mine that site very differently with autonomy. So your bench heights will change. Your road widths will change. And so how you leverage the advantage of autonomy where you can have trucks that pass very close to one another, where you have to have a huge safety factor when you have a manned online with trucks, you can plan it differently so that you can be more productive, you can get more ore out of the ground and you're overall being more profitable. And so as miners are approaching that, in addition to safety of their site and manpower as well in a greenfield, you're not having to hire people and then displace them later. And you don't have to have barracks and location for them to be housed online. So you start to get -- see the value proposition multiply as a result of some of those benefits that come in. And so it takes more planning to do an autonomous mine, certainly, but it is something that we see as being a longer term, I should say, short and long term, it's going to be the trend for miners as we move forward.

That makes sense. And you touched on a little earlier, aggregates and quarry. It's still a sizable portion of resource segment. It doesn't get as much, I think, of the spotlight as some of the mining stuff. So how is that business trending today? Where is it relative to that last cycle? And are there different drivers that we should be aware of for that aggregates and quarry and heavy construction portion of the resource industries relative to mining?

Yes. I mean, I'll go back and say, generally, we see in Resource Industries over time, about 2/3 of Resource Industries is mining-based and 1/3 is heavy construction quarry and ag, but it can shift any given year. But it's probably a good rule of thumb. The markets include non-residential construction, including any of the infrastructure projects. So road building uses a lot of the products in that portfolio, quarry mining, just general heavy construction. And so we expect continued growth in end-user demand. We are seeing a strong pull. Certainly, we noted in our first quarter conference call that the sales to users increased versus the prior year for the fourth straight quarter, so we're seeing that improvement happen. And an infrastructure bill could really positively impact that portion of the RI portfolio, and we're hoping for that to happen here late in '22, with probably the bigger impact being in 2023.

That makes sense. And what do you think is missing in CAT's resources portfolio? Obviously, CAT has a very strong balance sheet. Is there anything upstream or downstream when we look at the mining equipment space, anything tech-driven that could really help drive growth as we think about resources going forward?

Yes. We're definitely laser focused to expand service offerings, technology and electrification. So -- and when you think about those as the 3 areas for our investment and where we're looking from a portfolio perspective, on the services front, it's investing in additional Reman offerings. And that -- while it's not upstream or downstream of the portfolio, it's right in the core, but it really helps us to have a multitude of offerings, and there's different ways that we can leverage that to meet customer needs. We're also, I would say, continuing to grow our mining performance solutions, and we previously called it job site solutions, but it's really where we're managing, and in some case, owning customer machines. So those are kind of upstream, downstream positions that we can take to help customers be successful that allow us to continue to meet their needs. I would say, related to technology and autonomy, we are continuing to build out our offerings there. A few more recent examples are that we've expanded our first autonomous water truck. We have some bolt-on acquisitions. And I mentioned Minetec previously, but we have Peck Tech and Marble Robotics. Those kind of things are things that we'll continue to flush out as we see a need that a customer has not be met, and we can always develop our own solution. But often times, the better thing to do from a speed as well as effectiveness perspective is to do some bolt-on acquisitions. And then you saw at Investor Day, we're heavily focused on electrification. And certainly, that is another area where we feel not only are we in a position to grow the portfolio, because we will continue to have our traditional portfolio expand to an electrified portfolio and be able to hopefully grow from that perspective as well.

And just following up on your comments on electrification. You provided your time line. I mean, what are the biggest hurdles for us to get there sooner? What could accelerate those time lines? And you have partnerships with all the major miners, it looks like -- specifically BHP and Rio Tinto. How do these partnerships exactly work when it comes to these electrification agreements?

Yes. I mean that's a great question. I think we are moving fast, and I think we're moving faster than we ever have before. And certainly, for underground, as I mentioned, already producing zero emissions, battery electric loaders. And we're going to expand the underground battery electric portfolio, including trucks and loaders over time. From a surface equipment perspective, I would say we're focused first on trucks, and we're targeting to begin production in 2027. And so those customers that we mentioned earlier, Newmont and BHP and Rio and Tech and NMG as well, we're -- these collaboration agreements are really getting the units that I talked about into their mine sites earlier than ever before. And so it is about getting those machines there so that we can learn, but it's not learning about just the truck. It's how it interfaces with the infrastructure on the mine site and getting that transformation to take place, too. So the electric power requirements for some of these mines could more than double as a result of them being electrified. And so how does that whole ecosystem work together is what we're focused on with these particular development agreements to understand. And then these customers that we signed these agreements with will get the first units of production in the 2027 time frame. And so it's an agile product development process, we're going to learn as we go, and we're really excited to be in a position to partner with some of the best and the biggest mining companies in the world.

And maybe just following up on rebuilds, because services is such an important part of Resources and Caterpillar overall. Like, what is the optimal age of the fleet? You had a great chart showing the extended age and Caterpillar equipments even further along. But what is that optimal age, you think, of the fleet? Can the miners continue to extend the age of the fleet even further at this point?

Yes. Well, it's a good question, and I think it totally depends on certainly the mine site itself, the condition of the mine, the age of the -- or the condition of the equipment, how well it's been maintained. And so is it possible? Yes. We have some customers that have rebuilt equipment, even up to 4x if you can believe it. And when you think about it, what originally was on that piece of equipment that's still there by the fourth time you've rebuilt it, probably not a lot. And so you're certainly reusing as much as possible. Some of that could be remanned, manufactured, but there's a lot of opportunity there to leverage that. I think, too, as you think about rebuild and you think about new, one of the things that we do see a limitation around is the implementation of technology. So if you want to be able to monitor asset health, you want sensors on the machine, you want to be able to monitor that equipment in a deep way that takes an electrical architecture with the bandwidth that's much faster, it's pretty tough to do that. And changing the electrical architecture and all of that is not something that we traditionally do on a rebuild. And so when you think about the movement as you move forward to a connected mine site where you have all of that integration that's occurring, that's one of the things that's going to drive, I think, miners to want to replace equipment. In addition to that, of course, with electrification, that's something that's going to drive it as well. So a combination of those things, but I think what I love about the model is that it doesn't have to be the same. Some mine sites, if they only are going to be around for 3 or 4 more years, you're probably going to want to rebuild them. Where if you have another opportunity for another 4 years, you make a different decision. And so that's why I say that it's going to be an and, not an or in that case.

And with those future mine sites, some close, they'll open some in the future. I'm curious, are you seeing any changes regionally or geographically? We're hearing South America and Chile, there's been some political upheaval. It's a little tougher to get permits to be able to greenlight. Are you seeing any changes there in terms of where people are willing to open minds, either in some western countries with the new minerals and metals that people are looking for decarbonization efforts, do you think there'll be a big change there over the next cycle?

I would say besides Russia, regionally, I haven't seen any significant changes in exposure. We are seeing quite a bit of investment actually going into South America and Peru and Chile. And I would say we're also seeing some of our customers experience a trend towards lower ore grades, as I indicated. So again, as you start to really look at it globally, it's -- they're really looking at where is the specific highest grade ore that makes economic sense to move forward with, and I don't see any big change in where traditionally miners have gone.

Helpful. And over time, you mentioned teaming up a little bit more with E&T to really help make those zero-emission mine sites. Can CAT gain more of the minor wallet over time? Is the contact, that selling that mining truck at dealer, can you also -- in storage solutions, gas gen sets, how do you see that developing over the next cycle?

Yes, I do see that there are opportunities for the E&T segment to expand further into mine sites. And honestly, they're actually already there in some cases. But I see it even being more powerful as we start to bring some of our electric power expertise in as we're moving into an electrified mine. An example of this would be Barrick's mine in the DRC, the Kibali gold mine. Right now, they leverage hydropower for their primary power, but they have a CAT micro grid there. They have 36 CAT -- 3512 gen sets and 7.5 megawatts of CAT energy storage. So it has controls. It has bidirectional inverters, everything is connected. It's all monitored. And so it's that kind of solution which is an and solution. It may not be the only -- E&T may not be the only power source on the site, but it can provide a pretty broad range of options depending upon where the mine site is located and what the needs are based on their power system and where they're tied in.

And do miners look for that one-stop shop supplier still? Or do you see mixed fleets? I'm curious if that has kind of evolved over time, and how you think that might be playing out? And how you guys had to adjust maybe technologically-wise for that?

Yes. Yes, I would say it's also an and, but there are many sites where they actually want to tender and have a total site. Because they want -- they really want, from a service and maintenance perspective to deal with a consistent provider, and they want to kind of standardize on that. And so we often will see the entire site go to one vendor or the other. In other cases, they have a very different philosophy. They want support equipment from one supplier and they'll do trucks from another, and they'll lose shovels from yet another. And so it depends on the miner what their preference is. But I would say, in general, we are definitely seeing, especially with the element of autonomy being as a part of it and tying it all together much more of a, you win the site or you lose the site.

That makes sense. And I believe Vale has a mine that's completely conveyor belts with limited trucks, but I haven't heard of many others like that. So I'm curious, just when you look underneath the hood, are there any changes going on in terms of product mix in the next few cycles that we could kind of see that secular change that maybe fits in well with Caterpillar's portfolio?

Yes, Vale does have S11D, which is the site with conveyors. It is also supplemented by CAT trucks as well. But I'm not aware of any other mine site that's leveraging conveyors in the way that Vale has. And so I don't see the trend going forward at least at this point in time, and I'm not aware of it. So certainly is something that has worked for Vale, but I think in general, it's -- there's certain limitations to how that conveyor can be assembled and disassembled and moved as the mine progresses that make it more difficult to put in place in other locations. So secularly, to answer your question, I'm not seeing any trends that would move us away from what we've traditionally seen from a size class perspective or an option perspective from mining.

Fair enough. And Denise, if we could ask -- obviously, we talked a lot about the Newmont partnership. But maybe you could give us some stats, like, what are you seeing in terms of actual savings as we now have a much bigger sample size now from some of your autonomous products right now? What are we actually seeing there in terms of labor savings, pick up of productivity? Anything there you'd like to highlight?

Yes. I mean, the 30% productivity is really -- that and the safety, the no safety incidents are really the -- I would say, the crown jewels, if you will, and what you're able to get out. And I would say as you're looking to optimize the site, you're thinking about how do I -- I don't -- the last thing you want to do is you don't want your assets to bunch up together and then they're sitting there and idling. So there's fuel savings that you get, and we've seen up to 10% improvement in fuel savings at a site as a result of implementing autonomy because you're not just sitting and waiting for something to happen. You're actually productively moving equipment. The productivity, if you look at the cost curve, productivity drives lower cost. And so if you're never stopping for a lunch break, a bathroom break, if you're never parking the truck because it's broken down. You're avoiding a rut or you're not hitting anything from a damage perspective because you're consistently driving that truck and you're not falling asleep, et cetera, all of those things add up to cost savings for customers. And so while I can't give you dollar values, I will just tell you that it is significant. However, the change management to install autonomy is another thing that is significant, and it does take time to optimize every site. And so as you're thinking about autonomy going in, it's not like, oh, I bought an autonomous truck and I'm going to put it in a mine with a fleet of autonomous trucks. And tomorrow, it's going to run 30% improvement. No, it's going to take time to work through. And again, a lot of software, a lot of programming, a lot of optimization that's done with the team on board to make that work. And so it is something that is definitely -- you have to work through the time frame that it takes to ramp it up.

And how do we think about...

Mike, we only have about 4 minutes left here, just as a quick reminder.

Okay. So -- Thanks, Ryan. So maybe we'll -- I'll throw one more question, Denise, is just obviously, 2012 was the big cycle. Like, as you said before, it was OE-driven. A lot of those trucks are older, they got to be replaced or rebuilt. What is kind of the cycle for mining equipment? How many years until you do your first rebuild? How many rebuilds can you do? Just trying to think about the value that CAT can get off that installed base?

Yes. And I would say a lot of it will depend on how the trucks are maintained and again, the conditions that they're in. There are some deep pit applications that are at high altitude that are really, really rigorous and tough on a truck. And if you have a straight long haul for another truck of the same make, the life may be a little bit different in one versus the other. And so it's not necessarily -- and you have to be very specific on the conditions to say how long can a truck last. We've seen trucks last up to 20 years. So if you think about being at 12.6 years from an overall asset perspective in 20 years, could you have it go out to another 8 years or so? Potentially. Again, depends on the site, depends on how you maintain them, and certainly depends on what you're trying to do at the particular site. And so there are component rebuilds that are done through the life of the first life, if you will. So you do an engine rebuild at about 30,000 hours. So you're kind of continuing, depending upon what the component is, there are different hour milestones where you're looking to do a rebuild. There is a time when you're taking the truck in and you're putting it down for an extensive period of time where you're doing a major, major rebuild, which would be your first life rebuild, where you're doing a much more extensive component replacement at that point in time. But it varies. It vary on the truck, and it will vary on the conditions. So sorry to ramble there, but it's not an easy answer, and it does depend upon the assets that you have there.

Makes sense. And look, we're coming up on the hour. I want to thank Rob, Ryan and obviously, Denise, for the presentation and their time today to really go through not just the near-term demand implications for resources, but really, long term how to kind of think about this business going forward in the long term. So I want to thank everybody for joining. I want to thank Denise. And if you have any questions whatsoever, anything to follow up, please reach out to me, and I'll happily forward you on and put you in contact with Rob, Ryan and the team.

Very good. Thank you.

Great. Thank you very much, Mike, really appreciate you hosting us here today and for the great questions. I wanted to personally thank everyone for joining us here today and for your continued interest in Caterpillar. We will also be sending out a survey and would appreciate any feedback that you may have on today's session. I do hope that everyone has a great day, and thank you very much.