Caterpillar Inc. (CAT) Earnings Call Transcript & Summary

Thank you for joining us today. I am Michael Feniger, Bank of America's machinery, engineering and construction analyst. We are really excited today to host Caterpillar's management for a 2-part series. This is a great time to check in with Caterpillar, a global bellwether of the industrial economy. The first part of the event will include a Q&A with Chairman and CEO, Jim Umpleby. The second part of the event will include a Q&A with Group President, Denise Johnson, who runs the Resource Industries division, so please stick around after the first session. I'm going to hand it off to Ryan to provide some disclosures. He will then hand it back to me, where then we can then venture to Q&A with Jim. Over to you, Ryan.

Great. Thanks a lot there, Mike. During today's meeting, we'll make forward-looking statements, which are subject to risks and uncertainties. We'll also make assumptions that could cause our actual results to be different from the information we share with you on this call. Please refer to our recent SEC filings and the forward-looking statements reminder and are releases for details on factors that individually or in aggregate could cause our actual results to vary materially from our forecast. A detailed discussion of the many factors we believe may have material effect on our business on an ongoing basis is contained in our SEC filings. In today's meeting, we'll also refer to non-GAAP numbers. For a reconciliation of any non-GAAP numbers to the appropriate U.S. GAAP numbers, please see the appendix of our earnings call slides. Additionally, please note that Caterpillar policy does not allow for meetings to be recorded with smartphones or other devices unless specific approvals have been sought and granted prior to the beginning of the meeting. Lastly, we'll post a transcript on our website as soon as we can. With that, I'll turn it over to Mike.

Thanks, Ryan. So Jim, maybe you could just start over a little bit. You did join Caterpillar in the 1980s as an engineer. You have served as CEO since January 2017. So maybe let's just start off there, Jim. How has Caterpillar changed under your leadership compared to prior cycles?

Well, thanks, Michael. It's great to be with you today. And I really am proud of our team. I believe they've done a lot of great work over the last 6.5, 7 years or so. We did introduce a strategy -- a new strategy for profitable growth back in 2017, and we laid out some targets that we said we would achieve. We laid out higher margins -- operating margins and free cash flow compared to different -- compared to our reference period. And we chose, at that time, a reference period of between 2010 and 2016. And we said that different levels of revenue will achieve higher operating margins and higher and more consistent free cash flow. And that strategy was based on a few key elements. One is operational excellence, which is safety, quality lead and a competitive and flexible cost structure. The other is services, everything we do to support our customers after the initial sale; expanded offerings, having the right product at the right price point to meet our customer needs; and then more recently, we've added sustainability, which I'm sure we'll talk about here later during our time, which represents an outstanding opportunity for future profitable growth. And I must admit, we met with some skepticism when we put out those initial margin and free cash flow targets. And we did achieve them in 2017, 2018 and 2019. And then even in 2020 when COVID hit and we had a 22% decrease in our top line, we still achieved our margin target and produced $3 billion of free cash flow that year. Between 2017 and 2022, except for that 1 year I mentioned, 2020, when we achieved $3 billion of cash flow, we've achieved $5 billion to $6 billion of free cash flow, which, again, very proud of the team. So I would argue that our strategy has paid off, and it showed up in our results in terms of both higher margins and higher free cash flow. And if you like, I can talk about each of the elements of the strategy a bit if you'd like me to or let you ask your next question.

Well, Jim, maybe just a follow-up there. Caterpillar revenue this year based on consensus estimates is closing in on a prior peak revenue observed in the last decade, yet unit volumes are clearly below that period. Just to help provide context, how far below are unit volumes from that prior peak? What areas of the portfolio have fully recovered? What areas of the portfolio you still have room to really recover that are still below those peak levels a decade ago?

I think the best way to look at it is really look at each of the markets that we serve, and we're a fairly diverse business, so you can't just look at construction, you really have to look at everything. But let me just quickly run through the various markets that we serve. I'll start with construction. That's the most well-known and the one that most people focus on. About 25% of Construction Industries' sales and revenues is based on nonresidential. Nonresidential...

Residential is 25%.

What did I say? Excuse me, sorry. 25% is residential, 75% is nonresidential. That 25% that is residential, as we said during our first quarter results, is still improving. The growth rate moderated a bit, but it's still getting better. The 75% that's nonresidential is quite strong. We -- there's a lot of things happening there. A lot of strength in North America with the various pieces of legislation that have passed, the IRA, the IJA and the CHIPS Act. We're seeing a lot of strong construction in the Middle East, places like Saudi Arabia are very strong. So construction, again, a lot of things to be positive about there. The one negative on construction has been China, and we have talked about the fact that we expected China to be weaker this year. It's been a bit weaker than we expected. What we typically said in the past is that China represents 5% to 10% of our total sales and revenues, making sure it will be below that in 2023. Moving on to Energy & Transportation, a lot of strength there, starting with power generation. As you probably know, we sell a lot of generator sets for data centers, and data centers are very, very strong, being driven by everything moving to the cloud, AI and all the rest. So a lot of strength there still, and we haven't seen any sign of that slowing down. Oil & Gas is still strong also both for our CAT-branded products that are used in recip gas compression. Well servicing, a lot of things we can talk about there, things we're doing to help our customers reduce their carbon footprint as they produce oil and gas. And solar gas turbines, quite strong as well. Caterpillar plays across a large portion of the natural gas value chain, engines used for drilling, our recip engines, drivers of compressors for gas gathering, big player in well servicing. And, of course, solar. And if you stop and think about the fact that all those LNG plants that are being constructed need to be fed with natural gas, we're a big player in that as well. And then our industrial engine business, that's the loose engines that we sell, that business is quite healthy as well. And in resource industries, what we've been talking about for quite some time, is a gradual increase in mining activity, and that's certainly the way it's played out. If we think about the energy transition, it creates tremendous opportunities for us. The average electric vehicle takes 6x as many minerals as an internal combustion engine car. And everybody has a different opinion as to how quickly the energy transition will occur, but pick your timeframe. It really doesn't matter. There's no way around the energy transition not requiring a significant increase in commodities. And of course, our mining customers use our products to produce those commodities. So if we look at the individual markets that we serve, most of them are quite strong.

Fair enough, Jim. And just, on the cycle-to-cycle discussion, when investors look at consensus, your revenue is approaching that prior peak a decade ago like we were discussing. But your EPS is going to be 80% to 90% higher than that period on a similar revenue number. So what specifically would you attribute to that cycle-over-cycle improvement in terms of cost savings, maybe divesting some lower-margin business lines, pricing power? How does that position Caterpillar going into that next cycle?

It really is -- there isn't one reason. We've worked on a whole variety of things, and our team has been very focused on, as I mentioned earlier, operational excellence, which is -- again, includes that competitive and flexible cost structure. So we've worked very hard to remove structural costs from the business, and that certainly has been a contributor to our financial performance. We also utilize what's called the operation, it's an execution model, our O&E model, which has allowed us to really have a better understanding at a much more granular level by product, by market, by application, where we were creating shareholder value in where we weren't. And by having that more granular understanding, it's allowed us to shine a light on those underperforming products and businesses and challenge our leaders to improve those -- the profitability of those products. And in most cases, that occurred. In some cases, we concluded that it would make more sense to exit those products, and we've done some of that as well. So it's really a combination of those things. But even more importantly, the O&E model allows us to invest more resources in those areas that represent the best opportunities for future profitable growth, and a great example of that is services. We've invested a lot in services. And as you know, we -- probably know we have a goal to double services by 2026, and we're very pleased with our progress there. We've gone from $14 billion in 2016 to $22 billion last year, and we've told investors that we're increasingly confident in our ability to meet that goal. Services done right. It's good for the customer, it's good for the -- for our Caterpillar dealer and it's good for us. Always try and find ways to add more value to prevent unplanned downtime, to increase productivity and all the rest. So to answer your question, there wasn't one silver bullet. There's a lot of great hard work by the Caterpillar team around the world to improve our financial results.

Makes sense, Jim. And Cat is reporting some of the strongest pricing in its history. Investors believe that most of that pricing is due to inflation, yet is there a change going forward in terms of how Cat views pricing in some of its markets? For example, if we look at resources and energy, are barriers to entry higher there that could underpin stronger pricing? Do you see any inflection point where customers are paying up to replace their fleet with certain features or technology?

So we've made pricing decisions based on a whole variety of factors. Obviously, we look at input costs. That's one factor, but we also look very closely at the competitive situation that exists in each of the diverse markets that we serve. Certainly, we're investing very heavily in technology, and the goal is to provide more value to our customers. So if, in fact, we can make our customers more productive, they can produce more material in a certain period of time. They can reduce their carbon footprint. It's a whole variety of things that we do to add more value. And if we do add more value, oftentimes we can get price for that. But again, it all starts with a win for the customer.

And just to follow up with that, Jim. I mean pricing will inevitably moderate. There's a view that inflation is coming down yet can remain sticky. Just do you see that relationship of price versus cost, Cat's ability to price above its cost, is that potentially structurally higher going forward, especially in a world that is under invested in infrastructure, metals and energy?

I mean as we said in our first quarter call, we do expect price to continue to be favorable although the absolute -- throughout the year, although the absolute dollar value of the year-on-year price increase will moderate as we lap the price increases that we put through in 2022. Having said that, again, certainly, cost is one element that goes into price, but we also look at the competitive situation. We look at value. We're investing in technology. And so there isn't a one-size-fits-all answer to that question. It really comes down to product by product, market by market, investing in technology, and again, most importantly, making our customers more successful and providing more value to them.

Fair enough, Jim. And since Cat reported, I mean, macro environment is becoming as uncertain as ever. Rates are higher. Copper and oil are lower. Are you sensing customers pausing? Or do you sense customers are still willing to really invest through some of this uncertainty following years of that underinvestment?

Well, again, we have a diverse set of customers around the world, so certainly many of our customers are continuing to buy product. And we're still in a situation where we are supply chain-constrained for some products, from our large engines that serve both data centers and oil and gas, that certainly is a -- continues to be a challenge. Many of our customers wish they can get more of our building construction products out of us. That's part of the construction industries. And so again -- earthmoving is another one where we wish we could meet higher demand. So it all depends on, again, the customer and the segment. You mentioned some commodities like copper and iron ore and oil. Most of those prices -- certainly, those prices are supportive of the reinvestment. And if you look at mining, there are some positives there in terms of the age of the fleet is relatively high, the number of parked trucks is relatively low, and those are positive things. And utilization is quite high as well. So those are some of the things that we look at to try to determine what's happening in the marketplace. And again, you layer on top of that the energy transition, which I mentioned before. There's no way around if we believe 50% of the EV projections from the automobile companies, then a lot more commodities will need to be produced. So again, every customer is different. They'll make a decision based on their individual situation. They'll look at where they're investing capital, what their plans are for that year, all the choices they have, and they'll make their own decisions. But again, as I said, as we look at our end markets, we feel good about most of them, and business is quite strong.

And following up on that, I mean inventory is very topical right now. At times, the market only views inventories as binary. You're either in restocking mode or destocking mode. As a CEO, how are you evaluating inventories at Caterpillar today and at its dealer network? Is there a middle path between restocking and destocking where Cat in the channel can manage to take out some inventories in certain areas without observing a big impact to profitability?

I'll start with by talking about dealer inventory. And certainly, dealers are independent businesses and they make their own decisions about their inventory. We can make suggestions to them. We have conversations with them. We have a new S&OP process, where we really work hard to have good conversations. But at the end of the day, dealers are independent businesses that make their own decisions. As we sit here today, there are certain cases where I know there are products where our dealers wish they had more inventory. And I mentioned a couple of those earlier. Some of our building construction products and in earthmoving as well. There's just not enough. In certain areas, there is enough, and one of those would be excavators, and part of that is due to the downturn that we talked about in China. So again, there's enough excavator inventory, there's not enough of other products. So I do believe -- again, it's not binary, all or nothing. This is a situation where product by product, dealer by dealer, they'll make a decision based on what they see coming from their customers. And we do -- again, we are more involved than we have in the process. One of the positive things is that we -- our units are connected, so we have a sense of utilization rates. We have a sense of what's happening. We also, of course, have direct conversations with our customers and have a sense what's going on globally. So we take that information and have conversations with the dealers. In terms of Caterpillar inventory, we're not running as lean as I would like us to run, quite frankly, and a lot of that is due to supply chain challenges we have. We are -- although there has been some improvement in the macro level and supply chains, there are areas that are still quite challenging. And we still deal with chip shortages in some places. We deal with a number of -- I've already talked about our large engines, and that's mostly not a function of our capacity but our ability to get components from our suppliers. So again, it's a mixed bag here. I know with some products, dealers wish they had more inventory. With some, they have enough.

And Jim, I'm just curious, like going forward, after we've gone through this pandemic and supply constraints, to your point on inventories, I mean, do you see the channel running with a little bit more inventory than it did pre-COVID because of the supply constraints that we had? Maybe it's a lesson learned after the pandemic. Curious just how you think that channel looks going forward now.

Well, in terms of Cat inventory, as I mentioned, we're not as lean as we would like to be. And of course, if you go back before 2020, before the pandemic, we could count on with a high degree of certainty that when a supplier committed, they would have the part on a certain day that it would be there. And we all learned a new word during COVID, the decommit word, where a supplier would call us and say, I'm sorry. I know we promised to get you that component 2 weeks from today, but our supplier just decommitted to us for a whole -- or that -- and mainly that's because their supplier decommitted to them. So I would like to think that over time, it will be able to reduce Cat inventory for the amount of product that we're producing, to improve our churns, to get back to a situation that we were pre-COVID. We're not there yet, and we have more inventory than we would like. It's not sitting in finished goods typically. It's work in process. And we made a decision that -- one of the examples we've given before is you build a machine, you don't have mirrors. Let's say, there was a mirror shortage at one time. So what do you do about that? Well, we built the machines. We put them in the parking lot. The mirrors came in, we put the mirrors on and we shipped the product. So that creates in a situation more inventory than you would like. It's not exactly classic lean. But again, we're looking forward to getting back to being leaner over time as the supply chain conditions continue to improve. But we're not out of the woods yet, it's still an issue. It's even still an issue with chips. I think on the higher end, people talk a lot about a glut of chips. But on the chips that we use, which are very similar to the chips that automobile manufacturers use, it's still an issue for us.

Interesting. And Jim, you formally ran Solar Turbines. This is one of the highest margin business units, yet I see the lack of investor awareness around this business. How should investors think of solar within the E&T segment in Caterpillar today? How is this business different from those other business products in terms of services, distribution and resiliency? And what are really the drivers there for solar?

All right, and I won't comment on the margins in that business so that -- those are your statements, not mine, but I will talk about the business as well. It is a direct end-to-end business. And Solar designs their own products, builds their own products, distributes it in services through their own network. So it is a direct business. And it's low volume, highly engineered machine products. So instead of building thousands or tens of thousands of something, this is 100, 150, 200. It's a much lower volume. And Solar has a highly developed services business. So we work very hard to build that up over the years. And because turbine machinery tends to run 24 hours a day, 7 days a week and because customers put so much value on uptime, minimizing unplanned downtimes, it's really created an opportunity for us to, again, make our customers more successful. And also, it's been good for Solar. Just about all the turbine machinery that we've shipped in the last 20 years or so are connected, and we use AI to help prevent failures. It's gotten quite sophisticated. And we also have things like fleet managers, who actually will go and sit within a customer's operation to help them maximize availability, minimize downtime. And oftentimes, you go into some of our customer facilities, you can't tell who works for Solar and who works with the customer because they're all working together as a team. But it's not a birthright. Solar has to create more value for their customers every single day. That's what they have to do, but they work very hard to do that. But it's a great business, one that we're very glad we're in. And again, as we think about the dynamics today, particularly around natural gas, business is quite strong. A lot of natural gas compression going on in the U.S. But also, we've seen a pickup -- Solar has seen a pickup in international business and even offshore platforms, again, offshore facilities. So Oil & Gas has been strong, and their business is doing well.

And Jim, there is a big theme in the U.S. right now with these mega projects being announced, infrastructure, restoring manufacturing. As the CEO, how do you view these mega projects and these themes, LNG, EV plants, semiconductor facilities driving your portfolio? Do you see it adding a step function to your growth profile longer term?

Well, it's certainly a positive for us. I talked earlier about nonresidential construction representing 75% of construction industries. Whether it's the CHIPS Act, the IJA, the IRA, excuse me, the CHIPS Act, those all create opportunities for us. I've already seen some of that manifest itself into the money that's being spent by the states in infrastructure. But as you know, a lot of those projects, the permitting takes a long time. So we expect that to play out over time. Certainly, the investment in LNG facilities -- and again, not just the facility itself, but the pipeline and all the work that has to happen in -- particularly in onshore oil and gas in the U.S. to feed those LNG facilities is, I believe, a long-term positive for us as well. There's construction activity associated again with the energy transition, all the high tension lines that had to be built, the wind turbines, the charging stations. And also, if you think about some of these projects, like a big battery plant as an example. If you go to one of those big battery plants or one -- a big chip plant, you'll see hundred -- literally hundreds of pieces of construction equipment at that -- those big mega sites putting that together. So that's a positive thing for us. So again, as I mentioned earlier, nonresidential is quite strong, and we're quite bullish about what we see coming. A lot of it is, in fact, underpinned by some of the legislation in the U.S. But as I mentioned as well, a place like Saudi Arabia, a lot of infrastructure work going on there as well. So construction is quite strong.

And Jim, just because of the concerns around higher rates tightening lending standards, the headlines on commercial real estate offices, just help us kind of understand how we should think about maybe some of those headwinds, yet you also talked a lot about the strength you're seeing on nonres with the infrastructure and some of these mega projects. How should we think of sizing up that -- those headwinds that are starting to creep up that we're seeing in the headlines?

Yes. Commercial real estate is quite small. We said in our -- one of our investor calls that it represents less than 1% of construction industries in North America. So that's 1% of one geography in one segment. So a lot -- there's a lot of headlines written about commercial real estate as it relates to Caterpillar. And in reality, it doesn't move the needle for us. Certainly, as we think about tighter lending standards, stop and think about the customers that we serve. So firstly, oil and gas. Oil and gas customers, I mean, Chevron, ExxonMobil, ConocoPhillips, they certainly have capital to buy our equipment. It's -- obviously, it's not a problem. There are our power generation customers, Microsoft, AWS, all the rest, not an issue for them. The construction customers that are underpinned by the projects that we have going on, again, is quite positive as well. Smaller customers could potentially be impacted by some of the pullbacks in the commercial banks. But one of the positive things there is we have Cat Financial. I mean Cat Financial is very conservatively run. We -- they match duration risk. They aren't -- unlike a bank, aren't dependent upon deposits for funding, and we use the equipment as collateral for the loans that we make. And so what we're able to do then is -- and everything is connected so we know where the units are. So we don't see it as a major issue in our business for the reasons that I've outlined.

All right, Jim. And look, the majority of the engines that drive Caterpillar machines are diesel. You've made some investments and launched products that are alternatives, and your customers have very ambitious zero emission goals. What are the areas of the portfolio that you see the most pull for those alternatives? How do you see this playing out over time? Does this change the parts and service stream for Caterpillar? Or how Cat will price these type of future technologies?

It was a lot of technologies going in. So let me just talk a bit about autonomy, and then I'll talk a bit about alternative drivetrains. One of the things that we're quite excited about, and I'm -- you're probably going to ask Denise about is our autonomous solution, and I'll let her do most of the talking there. But we are very, very excited about that solution. We've had customers say that we get up to -- they get up to 30% more productivity than the best manned site. And of course -- so think about a mining customer operating 24 hours a day, 7 days a week, producing product. If they can get 30% more productivity, and obviously, they need to do it safely and environmentally responsibly, that is a real game changer. And I'd argue that we're -- our customers are in fact, voting with their dollars, and we believe that we're doing very well in the autonomy space. In terms of alternate drivetrains, let's say, batteries and machines, most of the interest right now is from our large mining customers. A lot of those big mining customers are really working hard to reduce their Scope 1 and Scope 2 emissions, and we're very committed to help them with that. And we had a demonstration last November that -- where we demonstrated a fully loaded mining truck operating in diesel performance, up a grade on the flat. So it's a prototype, and we have a ways to go, but we're quite excited about that. But one of the things that requires is not just changes to the product itself, the truck itself, but the actual mine site. And one of the things that we believe gives us a competitive advantage is our Energy & Transportation portfolio. A fully loaded mining truck, the battery will degrade in about 90 minutes, so we have to find a way to dynamically charge that mining truck as it moves around the mine. And through our Energy & Transportation portfolio, we make reciprocating engines with big gas turbines, and those recip engines and gas turbines can burn a whole variety of fuels, whether it's natural gas or hydrogen blends or biofuels and all the rest. So we believe that gives us a great opportunity, not just to sell a truck, but also to help our customers through this energy transition. And we're turning our Tucson-proven grounds outside of -- in Arizona, we plan to turn it into kind of a mine site of the future to show customers how it's going to be done. So that's where most of the interest is. There is also some interest in Northern Europe, places like Norway and a few other government-funded projects, places like Holland, where they're interested in battery-powered machines. And we are investing in battery-powered machines. We had 4 prototypes that we showed to customers in March, I believe it was, in Las Vegas at CONEXPO. So our strategy is to continue to invest in our diesel-powered fleet and our battery-powered fleet, and our customers will decide which one they want to buy. My sense is it's going to take quite some time before there's a significant percentage of battery-powered machines that our customers decide to purchase, and part of it is just being realistic about the applications. It's one thing that it's in a city center, let's say in New York or, let's say, the city of New York were to outlaw all diesel engines and automobiles and construction equipment and everything else. You could very much see a situation where a battery-powered piece of construction equipment that's working in the city can be charged overnight, and that's very feasible. For nonresidential or big infrastructure projects in remote areas, it's pretty tough. Think about building a highway or a dam or some other place, and there's no grid. So you've got the situation of, all right, you've got battery-powered machines and the machine goes down, 2 o'clock in the afternoon, what do you do? Do you fire up another diesel gen set to do a fast charge, which doesn't make any sense if you had -- the reason you put batteries in is to avoid the diesel engine. Do you have an extra machine which doubles the customer's capital cost? Do you try to change batteries, which is not so easy to do in a big, heavy piece of machinery? Do you try to transport the product to some central location for charter? It's not easy. So my sense -- and plus, think about the geographic diversity of the markets that we serve. I think that the rate of adoption of batteries will vary not only by application but also by geographic area. And what happens, let's say, in Norway and what happens in other parts of the world or even in remote areas, like what happens in New York, what happens in the middle of Nebraska in the middle of nowhere, it's probably going to be different. So again, we believe that this is going to take time to manifest itself. But either way, the way we look at it, we're in good shape to win. One of the things that we -- the way that we service opportunities around things like batteries because customers probably won't want to deal with batteries, that's a service opportunity. And unlike automobiles, we still have things that wear out, think about machines that dig in the dirt. Well, things wear out. We have hydraulics. So it's a bit of a different animal than it is an automobile, in a whole variety of perspectives, including that one.

And Jim, just to follow up, you mentioned on the service opportunity. I mean in 2022, Cat reported $22 billion of services. It was nearly 40% of your machinery into revenue. I believe you have a target of $26 billion, which you launched that target. How do you feel you're trending towards that target? Where is still some low-hanging fruit here for Cat on the parts and services opportunity?

Well, certainly, as I mentioned earlier, we're increasingly confident in our ability to make that target. I wouldn't call the fruit low hanging, but it's still there. You have to climb up a bit higher to get it. But we think there's a great organic opportunity to continue to grow services. We know that there's still a number of customers that choose not to buy their parts and service from a Cat dealer, and a lot of those are smaller customers. Our dealers do an outstanding job servicing our big customers, big construction customers, big oil and gas customers, big mining customers. But oftentimes, small customers, let's say a small contractor that has a dozen or so machines don't get the same kind of attention as a large customer would be. So we're investing heavily in our digital capabilities. E-commerce sales are increasing quite rapidly. We're pleased with that. We've developed what's called Cat Central, an app that goes on your phone, where, again, a unit -- a machine ships out of the factory. It's got a QR -- serialized QR code. A customer can scan that QR code. We know who they are. They know, using their phone, exactly what part they need to buy. So it's very easy for them to do business with us as a dealer. Maybe they push a button and they get -- they can do it themselves, get the part delivered. Or they can push a button and get the dealer to come in and put the part in for them. So we're investing a lot to help those small customers to do business with us and our dealers, and we believe that represents a substantial opportunity still to grow services. And at the same time, we're looking at new services all the time as well. So again, I use my Solar example. We've been at it for a long time at Solar, maybe 20 years, and we're still finding new ways to increase services to our customers to make them more successful. Now the value proposition for a large mining truck or a gas turbine and a small skid steer certainly are different. But there are things that -- again, there's a continuum there of different kinds of products and services that we can sell to make our customers more successful.

Thanks, Jim. And in the first quarter, you generated $1.4 billion of free cash flow. Your balance sheet is very secure. So I'm going to argue it's underlevered to a point. The free cash flow is strong. Do you see Cat potentially adding another vertical to its end markets over time? Are there any markets or services Cat is in today that it wasn't a few years ago that you really like to expand and grow?

Well, firstly, we -- as I mentioned earlier, we do believe we have some outstanding opportunities to grow organically, whether it's through services, whether it's through the energy transition and the additional products that we'll need to sell to satisfy commodity demand. One of the things I haven't talked about is distributed generation. As more renewables are added to the grid, that creates grid instability issues, which creates a need for smaller increments of power generation, whether they be gas turbine-driven or reciprocating engine-driven to be added throughout the grid. And we're already starting to see some of that play out, and we think that will be a bigger issue over time. And of course, as I mentioned earlier, our engines and gas turbines can burn a whole variety of fuels, whether it's a hydrogen blend, natural gas or all the rest. So we think that's a big organic growth opportunity because again, we have the basic products. We're still -- we're always tweaking our ability to burn different kinds of fuels, and we're tweaking the product, but the product is basically there. So it's not a new vertical, if you will, but it represents, we think, an outstanding growth opportunity. Having said that, we're always open to new ideas. We're always open to M&A. We're not elephant hunting by any means, but we're open. We've made a number of smaller acquisitions, whether it be to fill out our product line or to add technology, which have been very helpful. We purchased SPM Oil & Gas a couple of -- 2, 3 years ago. And our timing was good on that one. I believe -- if I remember correctly, while we were negotiating the deal, oil prices went negative. So the timing of that deal was pretty good. And again, we're very glad we have it. That's added a whole new level of capability to our ability to help our well-servicing customers. So again, plenty of organic opportunities, but we're open to other things as well. I mean I'd argue I'm really glad that we had a conservative balance sheet. When COVID hit, a lot of other CEOs I know, some industrial companies were not making payroll, and I slept very well. I didn't know what was going to happen, but I know we could make payroll. So having a strong balance sheet is not always a bad thing.

And Jim, maybe just to continue on the balance sheet discussion. You recently raised your dividend 8%. Your CapEx actually remains below its levels a decade ago, below the peak. How do you feel about Cat's reinvestment needs in terms of CapEx and R&D? Where is most of this free cash flow that Cat is generating now and in the coming years likely to go?

Well, it's going to go in a whole variety of areas. One of the things that we talked about at our Investor Day is a higher level of investment, what we call ACE, which is autonomy, automation, electrification, digital. So again, we're investing in ACE, and we told the message we're going to invest a higher amount of that. We're also certainly very willing and making rifle-shot investments in capacity where we need to. If we feel we have a constrained capacity, we'll invest in that. But it's very different than what we did in the past where it's kind of a wide -- very broad shotgun approach to investing a lot of money and capital in new facilities. We -- for the most part, we think we have enough bricks and mortar to still grow quite a bit. But where we need to make rifle-shot investments, we'll continue to do that. And then some of that has to do with the supply chain as well as we think about resiliency of supply chain, so that will require some investments. But where else we're investing? We're investing in our digital capabilities. We're investing in ways to increase services. We're investing in all the things that we need -- we feel we need to do to take advantage of those organic growth opportunities. And having said that, we're committed that we're going to return essentially all free cash flow over time to shareholders through a combination of dividends and share repurchases. We just had the 8% increase. And so again, we did pause there during the COVID year. But again, we're very committed to rewarding our shareholders.

Makes sense, Jim. And the dealer network, as you touched on, is independent, yet how has that relationship between Cat and its dealer network really evolved in recent years? Are you seeing a more open to dealer consolidation? Are you seeing any changes really in terms of like lead times compared to where we were a few years ago?

Certainly. We believe that our dealer network is a major competitive advantage for Caterpillar. We work very closely with our dealers. I won't predict consolidation. So much depends upon individual dealer decisions and a lot of other factors. But I'd argue in many ways, we're working more closely with our dealers than we ever have in terms of servicing our customers. I mentioned autonomy. Cat played a big direct role on that. We deal now with our power generation customers or our Cat Oil & Gas customers with many of the big customers that cut across multiple dealer territories, we are very much there with our dealers at the table, helping satisfy customer needs. And so again, we've invested in a lot of tools like -- we call it PIC, which is parts inventory collaboration, which allows us to use AI to make targeted recommendations for dealers for what kind of parts inventory they need to hold at different points in time, what parts, when and where to help service our customers. Because, again, we now have connected assets. So in many ways, we're working more closely than we ever had before. And if you think about, again, servicing those small customers, thinking about all the things we want to do to capture those incremental parts sales, that does require a new way of working together. But I think we're very -- the good news is that our economic interest with our dealers are very much aligned. If we grow service, because it's, again, done right, it's good for the customer, it's good for the Cat dealer, and it's good for Caterpillar.

And Jim, maybe just a follow-up with the dealer network. We hear a lot about rental penetration in the U.S. I'm just curious what is Cat's view on rental? How do you equip your dealers to serve maybe that growing area? Does rental story need to change the way Cat kind of services that market?

So we do believe that rental represents a very good opportunity for growth. And in recognition of that, we established a new division, January 1 of this year, led by one of our very experienced executives to lead rental. And of course, Caterpillar is not a rental business. Our dealers have a rental business. And we have some dealers that are very sophisticated and have been very good at rental for a long period of time, and we have some dealers that have not been quite as focused on it and aren't quite as good. So our role in this process is to work with our dealers to help them get better at rental, develop new processes, practices and all the rest. So if you look at North America as an example, the Caterpillar dealer rental stores combined, it's quite significant, the level of those -- some of those businesses -- those dealer businesses. So again, we're excited about that opportunity, and we're putting more resources into that.

Fair enough, Jim. And how should investors on the line view Cat's ability to manage a recession whenever that may play out? I mean there was a great financial crisis in 2009. But really since then, there was a mining downturn, an oil and gas downturn. Obviously, we had COVID. So is there any rule of thumb that investors should be thinking about in terms of Cat sensitivity going to the next recession whenever that may play out?

I mentioned a couple of things. One is, keep in mind, 2020 when we lost 22% of our top line and still produced $3 billion of free cash flow, which many would have not had viewed possible until we did it. So I'll start with that. And secondly, I think it's important to think about, as we started the call, Michael, I talked about the strength of our end markets. I talked about the infrastructure bills that have passed, the strength of oil and gas, the strength of the power generation at data centers, the energy transition, the commodity that we produced. So as I look at the strength of our end markets, I feel very good about what we're heading into. So I won't -- I didn't use the R word, you did. But if there is a recession, that can, in fact, manifest itself in very many different ways. Is it a consumer recession? How does it affect us? But as we look at our specific markets that we serve, as we sit here today, we feel quite good. And when we told investors in our first quarter call based on the strength of our first quarter results and what we see in our end markets, we expect 2023 to be an even better year than we had previously anticipated, both on the top and the bottom line.

Perfect, Jim. And I'd just like to finish...

Michael, We've got probably time for one more point or question.

Yes. Jim, maybe just to wrap up, since you've been at Caterpillar since 1980s. I'm curious, if you look at your 3 segments, do you see barriers to entry higher? Do you see consolidation needed in Construction? Many view your Resource business to you having a high market share and higher barriers to entry. I'm just curious, when you look at those 3 segments, if you feel like barriers to entry are now higher than where they were even a few years ago.

So I won't talk about barriers to entry, but I will talk about competitive advantages. And so we invest in technologies and other areas to try to pull away from the competition, to maintain our competitive advantage by providing more value to our customers. So we believe -- and certainly our dealer network is a competitive advantage, and that takes -- that's taken us decades to build. I look at our technology like our autonomous solutions. I look at our -- the ability to -- the fact that we have an Energy & Transportation portfolio to support our mining customers as they go through the energy transition, the fact that we have both gas turbines and recip engines that convert a whole variety of fuels. Our product portfolio, I would argue, provides us, the depth of that product portfolio, competitive advantages as well. So I think it's pretty tough for somebody to match all the capabilities that we have. And this -- my predecessor used to say, I much rather be [ less than ] the competition, and I really do believe that.

Perfect. Jim, maybe that's the best way to wrap it up. Everyone on the line, please stick around. In another 5 minutes, we'll be having another Q&A with Denise Johnson. Appreciate it. Thank you, Jim.

Thank you, Michael. Take care. [Break]

[Presentation] Welcome back, everyone. I'm Michael Feniger, Bank of America's analyst covering machinery, engineering and construction. For our second session of the day, we are lucky to have with us Group President, Denise Johnson, who runs Caterpillar's Resource Industries segment. For those that are not aware, Resource Industries is a segment that includes Caterpillar's famous mining trucks, among other product lines and customers. This is a great time to check in with Denise, given trends around mining, commodities, CapEx, electrification, technology and inflation.

So I think, Denise, the best way for us to start is maybe to look in the past, to frame how should we think about the future. When we look at 2012, the peak of the last cycle, Resources revenue was around $20 billion compared to $12 billion in 2022. Cat has restructured that business over the decade. What is different today about Resource Industries compared to that last cycle in terms of product lines, commodity exposure, percent of services and aftermarket?

Yes, Michael, I appreciate the opportunity to be with you today. I would start by saying Resource Industries is a leaner, probably more integrated organization than it was in 2012. We've had a very big focus on leaning our operations, consolidating our footprint, and we focus using the O&E model to really improve the overall health of the portfolio. So as a result of that, we've exited and restructured underperforming product lines, things like longwall and room and pillar mining, which is primarily an underground coal asset. We've also exited other areas like material handlers and track drills. So really looking at the portfolio, looking at where we have competitive advantage, where there are pools to be able to take advantage of and really focusing in on our investments. We've also taken the opportunity to grow and invest in such areas like autonomy, and Jim talked quite a bit about that. It's been a great opportunity to invest in those products and services that really provide the greatest value for customers. I would say from a commodity exposure, I think the business today is really better positioned to capitalize on the opportunities that are presented by electrification, more now so than in 2012. We certainly have seen big growth in demand for our products in commodities like copper and nickel, cobalt and lithium. We've also taken that opportunity to invest in applications that really play well in those commodities. We also have invested in our quarry and aggregates and heavy construction product lines, and those are some of the most robust and highest-performing assets that are leveraged in construction. So a lot of work there. In addition to that, from a technology perspective, we've invested in things like fleet management, asset health, safety technology and then broadly, as I indicated, the automation portfolio. I would say, though, the biggest thing that is different from 2012 to today is our heavy focus on services and aftermarket growth. And while we were focused on it in the past, because our machines operate in some of the most challenging and rugged environments, 24 hours a day, 7 days a week, we've really taken the opportunity to expand our service offerings and solutions for customers. So things like ensuring that we have we have solutions with life guarantees that can be leveraged. We have taken the opportunity to make sure that we have inventory that's located at a customer site so they immediately can replace a component. And we've leveraged technology and all of that to make that very seamless for our customers. So from a competitive advantage perspective, I would say we're very well positioned for the future and much healthier than we have been in the past, and we're very proud of the turnaround in the portfolio.

And Denise, just a follow-up on the question. When we think revenue still 30%, 35% below that 2012 peak, how far are units down versus that last peak?

I would say it depends on the particular product line because every product line has a different life cycle timeline as well as there was a lot of investment in overcapacity in the 2012 time frame. So I would say there certainly is a lot of room to still grow. We are not nearly at the cycle from a volume perspective that we were in 2012. We have aging fleets, and so those fleets need to be replaced. The assets are being run very high. We watch the utilization rates, how many parked assets we have. And so all of those indicators would indicate that we're going to be getting some additional demand. And I would say on top of that, as Jim indicated, there's total upside with the total addressable market increasing. The energy transition driving additional commodity requirements, the infrastructure growth that's required as well as what I talked about for replacement demand. And then the technology that we provide, really allowing customers to perform at higher levels. And I think from a competitive perspective, we can get more share of what's out there as well. So huge opportunities for us for the future.

And Denise, when we look at Q1 results, your division reported a 22% operating margin on about $3.4 billion of revenue. When we look over a decade ago, your division was reporting basically the same margin, 22%, 23%, yet needed $5.1 billion of revenue to get there. So Cat is clearly more profitable on a lower revenue number. What are some of the factors kind of driving that? And as revenues recover over the next few years, where can operating margin really go?

Yes. I mean I would say, first of all, I spoke to what we have done to really get the portfolio within Resource Industries leaner, more flexible and certainly investing in the right parts of the portfolio. So that has allowed us to take our cost structure down considerably, and at the same time, focus our investments in the areas where the best opportunity is. And so that divesting of some of the underperforming businesses, the opportunity to lean up our operations and be more effective and more efficient, and then the investment that we've made in technology also provides additional opportunity for us. Because now instead of selling a piece of equipment, we're able to sell an entire site solution, and that makes a win so much more powerful. A lot of mining companies now are actually tendering out for a complete site. Because the technology is so integrated and because the assets work together in unison, almost like a factory, they're awarding sites and entire sites to mining -- or to OEMs. And so that if you have a competitive advantage on top of that and you have the full line of portfolio available, it puts you in a unique position. And then as we talk about electrification, and I'm sure we'll go into that, that whole idea that our Energy & Transportation sector even allows us to be even more effective with a site solution, whether it be a standby gen set, whether that be a battery storage solution, whether that be a micro grid, that really provides an even bigger opportunity for the future. So we're super excited about that. I guess I would use one example of a recent win where exactly that happened. We -- last year, Escondida, which is BHP's copper mine in Chile, was awarded to us. And that was over 10 years, over 160 trucks, and then there's support equipment also with that. That's autonomy that is introduction of the traditional diesel electric truck. And then in addition to that, there's dynamic trolley charging. And then finally, as the evolution goes at the end of that 10-year timeframe, it's the introduction of battery electric mining equipment. So really being able to capture not only the 10 years of transition that's taking place, but all of the assets, the services and then the technology that goes with that has been a big win. So it's really a game changer when you think about how we operate and really work with customers today versus the more transactional way we worked in the past.

And Denise, maybe just to follow up on that. Your business unit is reporting some of the strongest pricing in Caterpillar today. How much of this pricing strength is just passing along those higher input costs? And how much of the pricing strength is coming to the competitive advantage that you outlined? What is the normal pricing range investors should kind of expect for resources on a through cycle basis?

Yes. I mean that's a tough question to answer because clearly, as Jim indicated, we always want to take advantage of any competitive advantage that we have that -- where it's offering value for the customer. It's tough to predict what's going to happen with inflation and input costs and clearly, we price for that. But at the same time, we're really focused on outcomes for customers, helping them to be successful. And so if we can do that in a way that if they have to pay a little bit more for an equipment or service from Caterpillar, but that combined equipment and service offering lowers their costs or increase their productivity greatly, it more than pays for itself. So it's all about really delivering on the customers' needs and where their pain points are and helping them to find solutions that really makes the pricing that comes along with it. But if you focus on that, the rest is obviously a positive upside.

Makes sense, Denise. And since you guys reported Q1, the volatility in the macro backdrop has only intensified. We've seen some lower iron ore, lower copper prices. Just are you seeing any change in tone in order rates with customers? Are you seeing customers willing to kind of invest after maybe going to bare-bones CapEx levels over recent years?

It's interesting. And Jim has said this consistently. We see our mining customers being very capital disciplined. And there's a lot of things happening in the mining industry today. There's a lot of consolidation, M&A. We have very high quoting activity that's going on right now. And certainly, we are expecting a very, very strong 2023. So business is lumpy. There are some quarters where orders are down and other times, they're very high. So we're seeing a pretty steady improvement overall in what we would consider both short- and long-term outlook for mining. It certainly isn't a big inflection point by any means, but we see the demand just continuing to go.

And Denise, we are observing, to what you alluded to, some M&A discussions or headlines in the mining space. Does this have any impact on capital allocation or CapEx for the miners?

It can. I think a lot of it depends on what they're doing and what assets they're acquiring and what the state of those assets are. I think it's really just more of a distraction of really wanting to see what is -- what they need to do with those new assets and making decisions that take time to be very thorough about. And so I don't see it as anything where it's a diversion necessarily as much as it is they want to study and make sure they're making the right investments at the right time.

Fair enough. And Denise, there's a big focus right now in the market on inventories. We discussed this with Jim in our earlier session, but can you specifically discuss inventory management within Resources? How does it typically work from the OEM to the dealer to the customer in terms of order allocation? Is there any access in the channel that you're picking up? What are lead times now versus a typical cycle?

Yes. I think, first of all, as a reminder, our dealers are independent businesses. They do make their own decisions about and control their own inventory. But we do have a very robust collaboration process with them. And I would say, in general, you think about mining customers, big mining assets, dealers don't want to hold big assets on their books for any longer than they need to. So they have to be very confident and you either have a sale in hand or be very confident it's coming before they're going to order this large equipment. And so as part of that collaboration, we do work closely with dealers. We look at what the trends are, what we think the win rate is going to be, how far it needs to travel, when the customer requires it. And remember, some of the inventory in Resource Industries is actually just transit inventory. So it's held in dealer inventory once that leaves our dock or in some cases it's halfway across the ocean, but then it goes into dealer inventory and they need to commission, they need to assemble it and get it running before it leaves their books. So some of it is just the process of working through the delivery, which creates inventory for Caterpillar or the dealer. On the heavy construction and quarry and aggregate side, there is some dealer stocking, but they're very closely looking at the demand at the end of the line. And I would say much more disciplined today than ever before, ensuring they're not going to hold too much inventory. But be ready for a sale if it comes. So it is definitely a balance.

Fair enough. And just going back to the commodity discussion. Iron ore and coal were really big drivers in that last peak in 2012. What's the most important commodity for Caterpillar today and going forward? How do some of these other metals that are part of decarbonization efforts impact the outlook for machinery demand? For example, are lithium mines machinery intensive and a growth opportunity going forward?

Well, I would say to the last question, absolutely. It depends. There's a number of forms of lithium mining. We've just signed a number of contracts with lithium miners that are starting up some greenfields. So I would say, absolutely, it's opportunity. If you look at it on a volume basis, the biggest outlook for growth is in copper. And copper mines are usually deep pit, not always, but require a lot of assets. And some of our recent big wins have been in copper. And so that certainly is upside. But we see nickel and platinum, palladium, all of the, I would say, more rare metals seeing a lot of growth. And then even in coal, and I know we don't talk a lot about coal and the outlook for coal for the long term, perhaps, as a mix of energy is going to be down, but it's not going away anytime soon, and we have opportunity there as well. So we want to serve all customer end groups and take advantage of this growth that the industry is seeing, and we do see it continuing.

And Denise, our mining analysts flagged to us that Newmont has gone out of its way to talk about the success of its partnership with Caterpillar. Can you first talk about some of the results of that partnership? What are some of the savings achieved at the mine? More broadly, what is automation driving for Caterpillar? And what's it driving for its customers in terms of productivity?

Yes. Newmont is a customer that has been a long loyal customer to Caterpillar. And back in 2021, we developed a strategic alliance with Newmont, and it was really to deliver more from the perspective of automation, connectivity in addition to helping them through the energy transition and improving their end-to-end mining system. It really is about creating and working with them, like we do other customers as well, to improve their outcomes and do it in a way that leverages technology more holistically across all of Newmont. Newmont has a lot of underground and surface mines. They just are going through an acquisition of another mining company based primarily out of Australia, but it's global. And so they're also increasing their scope as well. And so we're looking forward to continuing that alliance and moving that forward. As far as the results, we're seeing -- it's mine site by mine site. One of the things that we've talked to them about is setting strategic targets by mine site. What is the KPI that's success for them? What improvement are we trying to drive? And let's all collectively, our dealers, Caterpillar as well as Newmont, go after hitting those targets, and that really has allowed us to align around targets and really see some good results. There's -- but there's a lot in motion and a lot of technology being installed in many of Newmont's mines. They are also one of our early learner of battery electric sites for both underground and for surface. So we're excited about that collaboration as well.

With some of these technology features, are you seeing other mines adopt? Is it just the larger mines? Are you seeing other smaller and medium-sized mines being able to adopt and change their fleet to drive some of these features? And just following up on the Newmont discussion, I mean I've always thought of Caterpillar as more surface open pit mining, yet you mention underground. Is that somewhere we could see more market share for Caterpillar over time?

Yes. I mean I would say, to answer the last question first, absolutely, there's opportunities. Certainly, a lot of mines that from a surface perspective are starting to go underground because ore grades are declining. And some of those richer assets, if you will, are in underground space. One of the things that we're doing with our underground portfolio because underground mining has a unique value prop to go completely zero emissions, right, because of the ventilation requirements, the cost for that, we see our portfolio in that space being both a diesel, either electric or mechanical or an underground battery electric. And we see big opportunity there for that. As far as the beginning of your question, I would say, I think the value that we can drive with customers around helping them solve their biggest issues is really the biggest focus, and it has allowed us to have the biggest competitive advantage. And many other mining OEMs are working on the same kinds of technology, but we have a breadth that allows you to go from a very, very small mine, and even our autonomy solution now can be scaled down to something like 12 trucks and still make sense financially. And we're taking that solution into heavy construction and quarry with Luck Stone, is who our development partner is, they have a mine in -- a quarry, rather, in Virginia. And so we're going to scale a lot of that technology solutions so that we can start to begin to cover autonomously in a mine that only has 4 or 5 assets. Now you have to look at different sensors. You have to look at a different infrastructure from a technology perspective, but it really allows that whole addressable market from a technology outcome perspective to grow immensely. And that's a really exciting opportunity to be able to do, and I do think it's something that we are uniquely positioned to do as well.

And just on this topic, I know we discussed Newmont in detail, but just more broadly, how is Cat helping customers with those zero emission targets? Do you think miners are leaning more into rebuild and potentially waiting for those products before more aggressively replacing those fleets?

I think it depends on the mine site, the age of the assets and how far they are from a mine closure. So there's some that, yes, they are extending life, kind of waiting to see if the technology is going to develop and be ready in time. And certainly, that's one thing that I really appreciate about Caterpillar products is our products are built to be rebuilt. And many of them rebuilt 2 or 3 or 4x. So whether they buy a new asset, which we love them to do, or they extend the life of the existing asset, we win, and we are helping our customers make the right choice for themselves. And so it very much depends on the mine site, where they're at and whether they want to wait or whether they want to dip their toe in early. We have a lot of mining companies, especially some of the big ones that want to be the leaders in energy. There's others that want to wait and see how it develops. And certainly, it's more than just the mining equipment, right? So you're talking about the whole infrastructure of the mine site. The energy required now that you have electrified machines can double or triple versus a non -- a mine site that doesn't have electrified assets. So you've got to think about how much more energy you need to bring in. And if you're going zero emissions and you're going into renewables, if you're -- you want to be completely with Scope 1 and Scope 2 net zero. So you've got -- there's a lot of investment that's required, and it takes time for that to develop. So one of the unique things we're doing is we've got this early learner program. And with that, we have agreements with 7 mining companies. And we're putting -- starting to put machines into those -- into various mines, and all of them are different kind of coverage. So some are high altitude, others are deep pit, some are long haul and cold and hot so that we can validate our solutions. And that gives us a unique opportunity to be agile. We'll learn as we go. But it is something that the mining customers are really liking because they're learning not only about the assets and the technology and potentially all the infrastructure that's going to be required, but they're going to get some practice early on so that it's not wait until it's available in production and then you have to be ready. So it's really an exciting place for development and change over the next few years.

And Denise, just on the electrification timeline, I know you had some of your biggest customers to Arizona. Just can you refresh us when we should expect some of these launches over the coming years? What's kind of the timeline we should be looking for, for some of this product rollout?

Yes. So we're doing early learners, as I indicated. So those will be the first in those 7 sites in 2024. And then in -- between 2025 and 2026, there'll be pilots. So we really need to understand the interaction of the assets with one another. And one of the things that we're learning is as you deploy energy -- this broad new energy, requiring things to charge, you're going to charge them dynamically, you're going to charge them statically. And how they interact together is going to be very important, which is why that layer of autonomy becomes so important. So we'll put the pilots in, in that '25 timeframe. And we'll also put a layer of automation on that so that we can really validate our solution in advance of our official launch. In the '27, '28 timeframe is when you'll start to see the first production units roll out. We are focusing on 4 truck models in addition to underground solutions. So we'll have both surface and underground solutions for truck models starting in 2027 with the first truck model. The underground, we actually already have launched, and it's in production for the R1700 and shortly to follow with the 50-ton truck as well.

And Denise, with some of these automation features, when I think of Caterpillar and its dealer, does it change how you price and value these technologies with customers? Could we be looking at an annuity stream at some point? Or is it really just making sure we price it accordingly at the price of sale -- at the point of sale?

Yes. No, I think -- as we think about technology, we really think about technology as an enabler, and I go back to the whole point of winning the site. And whether -- depending on how you divide up how that site is going to operate, it gives you more levers from the perspective of being able to win that deal. And so from -- I think about service, I think about the product, the services and the technology altogether, we do have hardware and software, and there is an annual reoccurring revenue model as well, and that's really required because of the investment that we're continuing to make in the technology. There's a lot of R&D that goes into the software that's developed, and we do about 2 updates per year with automation. They're always bringing in new features, trying to find ways to reduce the cycle time. So there's site-specific work there, and then there's an overall software layer that goes more broadly. So that reinvestment is really required. But I would say, absolutely, it's an opportunity. But the way we look at it is it's a way for us to solve customer issues in a way that's holistic and it's very differentiated from piecemealing or having the mining company or construction company having to do that on the integration themselves. It's a lot of technical knowledge that is required in order to do that.

And maybe, Denise, if we could just shift to the aggregates and quarry side. I believe it's a sizable portion of the Resource segment. How is that business trending today? Where is it relative to last cycle? And are there different drivers there to focus on relative to mining? And can some of these autonomous features in mining at some point be applied to these business lines as well?

So I would say that the heavy construction, quarry and aggregate sector is it's not the major, it's not the predominant side of the portfolio, but it is significant. And I would say from a growth perspective, we are seeing great growth. This is -- these are things like articulated trucks, large wheel loaders, the small end of the tractor portfolio within the RI portfolio. It's even some of our smaller drills. So it's holistic, and it provides infrastructure to be built around the world. So when you think about some of the comments that Jim made with regard to infrastructure investment that's taking place in developed markets, but also in developing markets, there's a big potential for future growth. And then if you scale some of the technology solutions using perhaps a -- using a fundamental software that allows you to do that holistically and affordability -- affordably, then you've got an opportunity to really take that market to the next level as far as performance. And that is what we're doing today.

Great. And you talked a lot about the fleet age. What is the optimal age for a mining fleet? Can miners continue just extending their fleet with rebuilds and keeping it at this old age? And is it better longer term for Cat to just keep harvesting this large install base with parts and services, creating a more steady earnings stream for the business over time?

No, it's a great question. And I think we're continuing to be -- we continue to watch it very closely because we -- if you would have asked me even 5 years ago, what is the usable life of our assets, for instance, trucks, I would say 10 to 11 years. We have some of our trucks today that almost are approaching 20 years, and they're running 24/7. So when you think about how many rebuild cycles that is, it's really, really impressive. And we want to solve our customers' problems with new assets, and we'd love to continue to see them do rebuilds. I think the thing that's going to change for the future is going to be the integration of technology. When you think about an asset that's 20 years old and you think about the core operating system, if you will, the brains that are in that asset, they're not easy to update. It would be like taking your old computer and having to rewire all the circuit boards that are inside. It doesn't really make economic sense, and it certainly isn't very feasible. And so as you start to want to have more capability with the existing assets and be able to have more features, then that really drives you to buying something new. We certainly look forward to the opportunity to help -- with help with any transition that's taking place. So a lot of -- we see a lot of customers rebuilding some assets, bringing in new, learning on that and deciding how they want to transition those fleets. Sometimes in the past, you would have seen the whole fleet begin to transition with one decision and not have that mix. We're starting to see a little bit more of an and strategy versus it's flip it all out at the same time.

And Denise, when we think of last year, a lot of projects got hit with big inflationary cost drivers. I'm just curious how you're seeing your customers adapt to this inflationary environment. We're starting to see some inflation easing in some areas. Do you think that could help greenlight some projects? How do you kind of see the greenfield versus brownfield trend going forward?

Yes. We have many of our customers that are really looking at the long term because when you think about a greenfield, that's not a -- it's not a quick decision to make. You have to have permitting. You have to have a lot of investigation on that ore and understanding that ore body. And so these are usually long. Long in the -- planned long. It usually takes Board approval because these are significant investments that they're making. So I would say the short-term inflationary decisions, if they're planning to do all this, and they have made plans to open a new mine, a little bit of inflation isn't going to change their minds. They're making those decisions for the long-term growth of their business. What I find interesting are assets that previously had been retired or mine life that is assumed to be shorter and watching miners go in and reassess that based on not only commodity price but also on the efficiency at which they're able to recover the minerals, and they actually have extended those. So where they thought they only had 5 years, now it's 15. And so we see a lot of that activity actually extending the life, which makes decision well, should I buy new, should I continue to rebuild, even more difficult or challenging. But everyone is trying to get the most they can out of the assets they have, be very disciplined in their approach and balance fleet replacements and investments in technology with investments in their fixed plans and other needs. And so we have other -- we actually have some -- especially with our quarry customers, which I think is really interesting, some business models where we can help them with that with what they call a job site solution or a mining performance solution model, where we're kind of managing -- helping to manage the life of those assets for them. And so there's a lot of new services that we're providing in that space, which also can help them make decisions that are most beneficial for themselves.

Thanks, Denise. And I'm just curious, what is missing in your view, in Cat's resource industry portfolio? Is there anything upstream or downstream or even tech-driven that could really help the portfolio grow even further? How are you kind of looking at the overall portfolio, upstream and downstream, surface or underground, where maybe you see there's opportunities to either do it organically or M&A?

Yes. We are looking for opportunities for M&A. We've done some in the technology space. We brought -- we recently purchased an underground mine technology, which allows -- since you can't have GPS underground and you'd be able to see where the assets are at all times. And so that was one acquisition that we did to really help expand our underground portfolio and make us more competitive. And so that's -- it's a small M&A example, but it's an M&A example. We've done quite a bit in the area of automation. We've done some work with drills and really drill technology so that we can sense the ore and automate those drills much more effectively. So most of the investments we've done recently have been bolt-on technology that allow us to serve the customer in a way that adds value, upstream and downstream. So I think we'll continue to explore that. Certainly, we see opportunity for growth with that technology but in the way that it provides additional solutions for customers that they can't integrate themselves. As far as the iron portfolio itself, we have been very, very careful to look at the portfolio and ensure that we have the right assets that we think are going to be leveraged for the future. So I don't see any big holes in the hard iron portfolio that we have today. It's really the technology space that I think we can continue to explore.

And Denise, maybe just last question as we wrap this up. I've always thought that mines wanted to have mixed fleets. Are you starting to see a pivot? And you kind of touched on this a little earlier, where they want a one-stop shop solution. Is that the potential trend we could see in the coming years?

Yes. Think about having a mixed fleet and what that requires. If you think about having service parts, I have to have the knowledge and I have to have the right technicians that understand all the nuances of what it takes to service and maintain that equipment. In addition to that, you have to deal with different companies because you have a dealer on one side and an OEM on the other, and you're having to constantly navigate the different personalities of that. And then how do you layer technology on top of that, that isn't always interoperable? And so I think it's a combination of having one provider that is one company, and companies when you're talking about dealer, that's accountable to help you deliver your results and -- in a holistic way. And again, it's going back to operating not at a unit level of a machine. But if you have some really great performing assets and some nonperforming assets, that site is not going to run well. So it really adds complexity to a miner when they have mixed fleets, and it adds cost, in my opinion. Oftentimes, they don't have choices, right? When you think about 2011, 2012, everyone was -- the delivery times were way outpacing what OEMs could deliver, and so they really basically had to take what they got. And that's, I think, really the advent of what happened with -- when demand really outpaced supply, you've got mixed fleets as a result. And now that we are in a position to deliver us a complete site, I think you're going to see more of that happen over time.

Perfect. Thank you, Denise. I want to thank Caterpillar. I want to thank Jim and Denise for their time today. Anyone on the line that wants replay information or the transcript, please reach out to me and Ryan at Caterpillar, and we'll be sure to provide you the details. Thanks, everyone, for joining us. And thanks again, Denise, for your time.

Thank you.