Caterpillar Inc. (CAT) Earnings Call Transcript & Summary

Good afternoon, everyone. Thanks so much for attending our virtual headquarters visit with Caterpillar today. I'm Nicole DeBlase, I'm Deutsche Bank's multi-industry electrical equipment and machinery analyst, and very pleased to introduce Jim Umpleby, CEO of Caterpillar. We're going to take a 5-minute break after spending 45 minutes with Jim, and then we're going to have another conversation with Joe Creed who's Group President of Energy & Transportation. But before we kick it off, Ryan is going to go through a few remarks from Cat. So Ryan, over to you.

Great. Thanks a lot, Nicole. And we're certainly excited to be here today. So during today's meeting, we'll be making 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've shared with you on this call. Please refer to our recent SEC filings and the forward-looking statements reminder in our release for details on factors that individually or in aggregate could cause our actual results to vary materially from our forecast. Any detailed discussion of the manufacturers we believe may have a 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 our meetings to be recorded with smartphones or other devices unless specific approvals have been sought and granted prior to the meeting -- at the beginning of this meeting. Lastly, we'll post the transcript on our website as soon as we can. So with that, Nicole, I'll turn it over to you.

Thanks, Ryan. So we're going to just dive right into the fireside chat here, Jim, and thanks again for participating today. So you can -- of course. So you've been CEO of Cat for over 6 years now. What are you most proud of in your tenure so far? And what are you most excited about for the future?

Well, Nicole, I'm most proud of the way our team has been executing our strategy for profitable growth that we introduced 6.5 years ago. And I'm very excited about what we view as a very bright future, and I'll explain that in just a moment. But just as a reminder, our strategy that we introduced is really based -- everything is focused on long-term profitable growth. We had some key focus areas operational excellence, which is safety, quality, Lean and the competitive and flexible cost structure; services, which is everything we do for our customer's initial sale and done right. It adds value to customers. It's good for our dealers, and it's good for Caterpillar. Expanded offerings, ensure we have the right products at different value points for customers. And then we added sustainability a year in 2022 at our Investor Day, and we think there's some tremendous opportunities with the energy transition. One of the things we told our investors when we introduced the strategy is that we would achieve higher margins based against the reference period between 2012 and 2016. So different levels of revenue, different levels of adjusted operating margin. And we also said that we would produce higher, more consistent free cash flows at different levels of revenue. And really pleased that between 2017 and 2022, we produced between $5 billion and $6 billion of free cash flow every year except for 2020 when, due to COVID, we had more than a 20% decline in our top line. And even that year, we still produced $3 billion of free cash flow. And just at our Investor Day last week, we told investors that this year, we expect to be around the top of the range for free cash flow, which is about $8 billion. We also said it would be close to the top of our adjusted operating margin range as well. So again, I couldn't be more pleased with how the company is performing, embraced a new strategy and really focusing on performing in the short term while also investing for the medium and long term. And just the second part of your question, what I'm most excited about in the company's future. As we look at the areas that we serve, and most of our markets are quite healthy at the moment, and we look at what's coming, we're very excited about the way we're positioned. We think about the energy transition and all of the commodities that need to be produced to support that energy transition, the average EV takes 6x as many minerals and internal combustion engine car. Think about the copper and all the other materials that have to be produced. Of course, our customers use our products to produce those commodities. So you can decide how many EVs will be added. There's a lot of projections. Pick what you believe in terms of how quickly this will happen. I don't think there's any way around the fact that more commodities will need to get produced. And of course, that's a good thing for our Resource Industries business over time. Data centers are a very strong part of our business with AI. We sell backup generator sets for data centers. And we're -- that business is quite strong. It's hard to imagine that slowing down in the short term, just given all the macro-level issues that are driving that market. Oil and gas. Gas compression is quite strong with all the LNG facilities that are being built and commissioned. Of course, all that gas has to be both produced and compressed down to the LNG facilities in the Gulf Coast of the U.S. and Caterpillar plays across a wide portion of that natural gas value chain from drilling to well servicing to gas gathering near the wellhead with our recip engines and solar gas turbines and solar compressors compressing the gas pipelines. So this is a whole -- and then, of course, infrastructure. With the Infrastructure builds that have passed in the last year or so and the energy transition that creates tremendous opportunities for construction industries. And one more is growing global energy demand. And our customers use our products to produce the commodities that help satisfy global energy demand. So again, there's a lot of macro-level trends in the markets that we're very excited about that we believe will drive profitable growth for us.

Great. That's a great answer, Jim. You really touched on a lot of themes that I want to dig into today. So good intro. Maybe let's start with some of the key initiatives that you guys laid out at the most recent Analyst Day and start with service. So where are you on that journey to get to $28 billion of service revenue by 2026? And can you also refresh us on some of the key enablers that are going to drive you there?

You bet. So we said we would double our services to $28 billion by 2026 from a starting point of -- in 2016, one of the things that we said is it would not be a straight line, it'd be a bit back-end loaded. But I'm really pleased that we grow -- we grew $22 billion last year, and that was up 17% compared to 2021. So we're really starting to get traction. And again, services is everything we do to make our customers successful after the new equipment sale. And we invested a whole variety of things to make that happen. We have now have 1.4 million connected assets, significantly higher than when we started this journey. We've invested a lot in e-commerce as well. One of the things that we know is a big opportunity for us is those smaller customers that own, let's say, 5 to 20 machines. Our dealers do a very good job of focusing on the larger customers, big mining, big oil and gas, big construction, but we really need to find ways to reach and make it easier for those smaller customers to do business with us. And our e-commerce sales are growing quite rapidly, and we're really pleased at how that's going as well. We're starting to use AI, utilizing things that we call prioritized service events, which is really helping provide leads to our dealers and also information to our customers as well that they need service. And that's creating an opportunity as well. Working very hard to sign more CVAs, customer value agreements. Over 60% of the new equipment we sell now is sold with the customer value equipment. So again, there's a whole variety of things we're doing. We're putting QR codes on machines and engines that are leaving our factory. So the vision here is you have an app called Cat Connect, you're a small customer, you take your phone, you scan a QR code. It's serialized so that when you do buy a part, you can easily do it on your phone. If you don't have time to install it yourself, you can click a button, have a dealer do it, if you're in the right country, use a Cat card, use financing. So again, a lot of those capabilities are being built as we speak, and some have already started, but they're ramping up. But we're just really -- and we're pleased, again, at the track record that we have, again, $22 billion last year against that $20 billion target. So we've made good progress.

Yes, absolutely. And what has the customer's response been to that technology? Like are they adopting the technology? Or are they excited about it as well?

I think the proof of that is if we look at our e-commerce sales, they are increasing quite rapidly. So we're really, really pleased with that.

Okay. And when you think about the service initiative and the different businesses that Cat has, are all of these businesses going to be part of the effort to get to $28 billion? Or are there certain businesses where you see more service potential than others?

Well, we're driving it across the company and certainly, the value proposition for a customer for, let's say, a very expensive gas turbine that runs 24 hours a day, 7 days a week, or a large mining truck that runs 24 hours a day, 7 days a week and a small skid steer that runs 2 hours a day. The value proposition is different and the way that the services look is different, and there's really a continuum between those 2 examples. But all parts of the business have been successful in growing services. The biggest opportunity, we believe, is with those smaller customers that I mentioned, those small customers that, again, 5 to 20 machines, sometimes we call them do-it-myself customers. But there's a big opportunity there, a big organic growth opportunity that we can go after. And one of the things I failed to mention in your first question, when you asked me, what are you most excited about. The thing I'm most excited about for the reasons I've articulated and there are some others as we have significant organic growth opportunities ahead of us. I talked to some other CEOs and other industries. They're a bit worried that the way the market is going, their market is declining. Ours is actually increasing. So I believe we have the opportunity to profitably grow our company organically, which again, and we're very well positioned competitively to do that, and we can talk about that some more. But again, that's really exciting for us.

Absolutely. Okay. Thanks for adding that. And then just going back to the technology conversation for a second. I think investors struggle to understand the monetization aspect of technology. So how is Cat monetizing the technology offerings today? And how do you envision that evolving over the future?

Well, I'll start with services. I'd argue that the technology that we're putting into e-commerce, artificial intelligence, connected assets, other things that we're doing to make it easier for us to do business with, has been a big part of the fact that we've increased services up to $22 billion last year from our starting point. So that's clear evidence that we can monetize it, and that's working. And of course, when we, in fact, invest in product features that allow our customers to be more successful, that's a good thing for us. And autonomy's probably one of the best examples there. It really, in my view, has created a competitive advantage for us. I feel quite strongly that we have the best mousetrap out there in terms of autonomy. And so we're -- we've had customers tell us that their productivity has increased up to 30%. I was in Australia about a month ago and had the opportunity to visit a large customer of ours that has more than 60 trucks at an autonomous site. Just meeting with that customer and hearing their positive feedback of what that's done for them is really important. And again, what does that do for us then? Well, it certainly puts us in the driver's seat when it's time for a new truck purchase. The fact that with our autonomous solution, there are Caterpillar people there full time, helping make the customer successful, makes us more of a partner than a supplier in their business. It also creates the opportunity for us to sell more aftermarket services as well because we're right there. And so again, there's a lot of positive advantages of doing that.

Okay. Got it. And we will definitely come back to autonomous mining later. I definitely want to dig into that. But maybe before, while we're on the topic of technology and big-picture changes, I thought it might be interesting to spend some time on alternative powertrains. And I'm going to ask you a very broad question. What is Cat doing to help customers reduce emissions and decarbonize?

We're doing a whole variety of things, and we're certainly very committed to helping our customers reduce their carbon footprint. And we feel strongly that we are contributing to a lower carbon future. And there's a whole variety of things that we're doing there. Firstly, obviously, we are working hard to reduce our own greenhouse gas emissions, more operations. We've had Scope 1 and Scope 2 objectives for a long period of time, and you can read about those in our sustainability report. We're pleased on how that's going. In terms of what we're doing to help our customers. So this is really a structure of things we're doing. People oftentimes go to batteries and machines, and I'll talk about that in a minute, but there's other things along that road that can help our customers as well. So we introduced our newest next-gen X model, that's like our excavator model. We've upgraded more than 50 of those models. And those new models reduce fuel consumption and obviously, then emissions by up to 25% compared to the previous model. So lower emissions burns less fuel and again, a payback for customers in terms of technology. So that's one example. We're -- and I'll jump over to energy and transportation. We're doing a whole variety of things there. We have gas turbines that can burn high hydrogen fuel. So we have reciprocated generator sets that can burn hydrogen blend as well. We can burn biodiesels, renewables, a whole variety of things. One of the things that we are investing heavily and that we're really starting to see good pull from customers is things that help our oil and gas customers to reduce their greenhouse gas emissions while they produce oil and gas. I think most people now have concluded that probably oil and gas will be around past next Thursday. And so what customers are really focused on doing now is reducing their carbon footprint as they produce oil and gas. There's a whole variety of things that we're doing there from our DGB engines that are using well servicing, that's dynamic gas blending, but a lot of customers to substitute up to 85% of the diesel with natural gas. Things like e-Frac with our acquisition of where -- SPM that gave us some great e-Frac capabilities. And so now what customers can do as opposed to having a bunch of diesel gen sets, and frac trailers, they can burn natural gas in a generator set and then use electric motor driving a frac pump, which again reduces their carbon intensity. We bought carbon points, an acquisition we made that helps -- that really -- the vision there is to help customers with carbon sequestration over time. And one of the things we're also continually doing on the energy and transportation side is expanding our ability to burn different kinds of fuel. We can burn renewable diesel today to drop in all of our machines. That's something that can happen today without a capital investment by a customer and no modifications by us. But we're also always working to try to burn more kinds of fuels. Where the most pull from customers is right now for alternative, drivetrain is our big mining customer. They're under pressure, frankly, from a lot of their stakeholders to reduce their Scope 1 and Scope 2 emissions. So we're very committed to helping them to do that. And we demonstrated last November a fully loaded or a large mining truck operating on batteries. Now it's prototype, but we are working that very hard with our customers, and it requires a really different way of thinking. It's not just about building the product and selling a truck because the whole site then has to be modified to be able to do that a fully loaded mining truck, the battery was down in about 90 minutes. So what customers have to do, and we'll help them do this is figure out a way to dynamically charge those trucks as they move around the job site. There's a lot of thinking. We have some customers -- the biggest mining customers in the world that signed on with us in our program to move forward to do that. I believe that the adoption of these alternative drivetrains will occur at different rates by geography, by application and by customer. Again, most of the vast majority of the pull right now is with those mining customers. We aren't seeing a lot of it with construction customers yet for a whole variety of reasons. And my sense is that will be driven by legislation. And when that finally happens, you stop to think about a city setting. One can very much imagine, let's say, in Manhattan where you had batteries and machines, let's say that there was a regulation that said, all right, Manhattan no more diesel engines and I do want to be able to do construction or anything else. In that city setting, you could certainly find a way to charge the machines overnight, have them operate during the day, and you could find a way to make that work. When you think about an infrastructure project. Just looking at some photos this week of some high-tension lines that are being built by Cat equipment, moving power that was produced by wind turbines from Utah into California. And you look at that remote -- mountainous remote side or you think about building a highway in the middle of nowhere or do you plug in a machine, how do you charge it again? The machine goes dead at 2:00 in the afternoon, what do you do? You fire up a diesel gen set for a fast charge, which negates the reason of having it battery in the first place. if you have an extra machine, which doubles the customer's capital cost. Do you try to change batteries and a big piece of equipment that's not easy to try to move the machine? Well, how do you do that? So I think in construction, quite frankly, this journey is going to take some time. But our strategy is, we're developing the products, we have them ready. We also have our diesel products. And so the customers will choose how quickly this adoption occurred and we're there either way depending on how the market goes.

Makes total sense. And I mean you talked that was a really helpful commentary by business of what's going on from an alternative powertrain standpoint and where the customer pool is. The follow-up question that I would have is, when you think about all of the different types of alternative powertrains that exist today, are you seeing a gravitation towards any of those? Or is it still pretty broad?

Yes. As we sit here today, the vast, vast majority of our business is traditional business, either diesel power, which, again, those diesel engines converted to renewable diesel without modification, if, in fact, that renewable diesel is available. We certainly sell a lot of generator sets, gas turbines, other products that convert natural gas as well, convert biofuels. But today, there hasn't been a big shift, quite frankly, with the exception of natural gas. We sell a lot of engines that burn natural gas, and of course, a lot burns diesel. But again, the battery adoption which I believe will be the first -- so people talk about hydrogen, and we're working on hydrogen, but I think that's a ways off for infrastructure, safety and whole bunch of other reasons. I think it will be batteries first, but it's going to take time. And one of the beauties of our business is that we produce engines and then we're able to use those engines in a whole variety of applications in market. So an engine can go into a piece of construction machinery, a mining truck. That same engine can be used -- or a generator set. That same engine can be used in the oil and gas application. That same engine can be used for a marine application. So that's one of the beauties of our businesses. We have the ability to leverage the engines that we produce across a whole variety of products and applications. And the alternative drivetrains, I believe, will be the same story when we get there. But it's -- again, we'll see how quickly the market moves.

Got it. Okay. And I mean, it strikes me and kind of I felt this way after being at CONEXPO and seeing the whole product line, which was really impressive at that show. But would you say that having a power-gen business puts you in a unique position to win in the alternative powertrain space?

Very strong if that's the case with our mining customers. So again, as I mentioned earlier, it's not just about selling a truck. We're the only company that cannot only sell that truck, but then because we provide microgrids, we have gas turbine generator sets, we have reciprocating generator sets in those gas turbines and recip gensets convert a whole variety of fuels. We can help our customers electrify the mine site. And we're uniquely positioned to do that. And one of the things that also I think it's good to keep in mind is we believe that it's very difficult to separate autonomy from alternative drivetrains because you start to think about the complexity of charging that truck as it moves dynamically and thinking about how you can get that all programmed in into our autonomous system to maximize the ability to charge the truck as it moves around and all of that coordination. We do think that we're uniquely positioned, that it does give us a competitive advantage in the mining space, certainly.

Okay. Got it. Perfect. So why don't we move on to another aspect of the key initiatives that you set forth at the Investor Day, which is the margin expansion bit. So cats already shown really impressive margin expansion under that plan. But I guess when you think about the future, what are the main drivers of margin expansion from here?

Yes. Well, certainly, when we first introduced those margin targets, there was a bit of -- back in '17, there was a bit of skepticism among the investment community. So I'm very proud of the team that we're able to do what we said we were going to do, both on margins and on free cash flow. And so one of the things that -- well, first of all, let's start with the second quarter, was a record from adjusted profit margin of 20.3%. I believe that was the margin for the first half as well and adjusted EPS of $5.55 for [indiscernible] [ $5. ] So again, very proud of the team here. And all that happened when the China market relatively weak. So again, pleased with that as well. But as we think about our margin targets. We did adjust those about a year or so ago. And one of the reasons for that was inflation quite frankly. Because the way our margin targets are set up is that higher levels of revenue, we expect to get higher margins, and that's really driven by the incremental operating leverage we get at higher volumes. But a higher percentage of the sales are due to just price because of inflation, then you don't get the operating leverage, which is why we modified it a bit. We'll have to -- I'm not going to make an announcement today on the call, but what we'll do, of course, is we'll evaluate where we are at the end of the year and it's going to a make sense to modify those targets. But one of the things to keep in mind is what we're really driving to do is to increase what we call absolute OPACC dollars. So OPACC is, again, our measure of profitable growth, it's operating profit after capital will charge. We charge our businesses, cost of capital and then you need to provide a return against that. When we set our new strategy in 2017, we spent a lot of time looking at industrial companies that what really drives long-term total shareholder return. And we concluded that the EPA kind of measure really. But driving absolute OPACC dollars over time and growing the top line and doing that in a profitable way will really drive TSR. And so yes, we want to have higher margins, but we're not just trying to squeeze higher margins out an ever-shrinking business. We're investing for the future. We're investing to grow the top line in a profitable way. And if we continue to increase absolute OPACC dollars over time, we're confident that we'll drive TSR. And we more than doubled our OPACC over the -- since 2017.

Got it. It makes total sense. To maybe wrap up the strategy discussion, you also set forth the target for $4 billion to $8 billion of machinery energy transportation free cash flow. So I guess, and you said that you expect to return most of that to shareholders. So the question that I have is, our acquisitions off the table? And if so, why?

Yes. Certainly, acquisitions aren't off the table, but I'll go back to the fact that we see just a significant number of opportunities to organically grow our business. So I'll start with that. And those are areas where, in my view, we have a competitive advantage. We're very well positioned from both a distribution and a technology and a product perspective. And so again, the best way, in my view, the best way -- if you have an excellent organic growth opportunity and you're well positioned competitively and from a product perspective and from a cost perspective, that's a great way to grow the business. So we're very focused on that. But we are hoping certainly the M&A as well. One of the reasons that we maintain a strong balance sheet is for M&A that may come along, and we ask our leaders to continually search for opportunities. But we're not in a situation where we have to buy something, and we're not out there elephant hunting. Obviously, if the right opportunity came along at the right price, where we're confident we can get both cost and sales synergies, we'd certainly go for it. And when we've made a number of small bolt-on acquisitions to help us with technology. And there's been a number of those Marble Robot Carbon Point and Tangent is really exciting. That's one that we believe will tie into another opportunity, which I failed to mention. As more renewables are added to the grid, that creates great stability issues due to the intermittent nature of those power sources. So that really does provide an opportunity. This is more of a medium long-term opportunity, although we're starting to see some of it already for us to sell both reset gen sets and turbine gen sets in what we call distributed power applications. So that's -- traditionally, the way the grid has worked, there have been very large power plants, coal, nuclear, natural gas, and that power has been distributed on high tension lines. Well, now that you're putting in more renewables, the whole grid is changing, and we believe it's a great opportunity for us to sell those recipes and gas turbines in those distributed power applications. And those engines determines convert a whole variety of fuels. Natural gas, hydrogen blends, biofuels and all the rest. So we think it's just a great long-term play. Now in terms of acquisitions, we did buy Weir Oil & Gas and SPM. I mentioned that one earlier. And that was a business that we had our eye on for a long time. And we moved when the time was right. I think when we were negotiating that deal literally where we were still talking about oil prices were negative. So our timing was good. So again, what we try to do is follow businesses that are interesting to us and then do it at the right time. But again, we had some outstanding opportunities to grow the company organically, which is, again, -- you have this work, you make an acquisition, you have to be improving, then you have to get a return on that premium. If we have an outstanding opportunity to grow our business organically, why not do that, which is we're really focused on those opportunities.

Understood. Makes sense to me. So maybe we can shift the conversation to your view on some of the exogenous factors that you've brought up to these exciting growth drivers for Cat. And the first thing I want to touch on is infrastructure stimulus. We get a lot of questions from investors around this. And I think the big debate is with the amount of infrastructure stimulus that's coming in, does this elongate the cycle? Does this offset some of the impact of rising interest rates on commercial construction? What's your stance on that, Jim?

Yes. Well, certainly, I don't use that C-Y-C-L-E word because I think oftentimes people will use that word as it applies to Caterpillar. And what I look at is the diverse end markets that we serve. So it's not one-size-fits-all. Oftentimes when people think about Caterpillar, they just think about construction because that's kind of what they know because they see it when they drive down the street. But the reality is that we serve a variety of relatively diverse end markets that are strong and weak at different times. And so you mentioned commercial real estate, but just to calibrate you. So North American commercial real estate is usually about 1% of total construction industry sales. And construction industries, of course, is just 1 of our 3 segments. So it's not large. People tend to focus on that a lot, and really, it's a nonstarter. About 75% of construction industry globally is what we call nonresidential and 25% is residential. At the moment, residential, the growth rate has moderated, but it's still growing. And of course, one of the things people often think about is, well, if interest rates go up, housing people can't afford expensive mortgages or housing is going to slow down. Well, I think that started to happen a bit. But in my view, what's happening now is that people have realized there's a housing shortage. And so houses would be available because people are willing to buy them. And so I feel good about residential. Nonresidential, I feel really good about because of again, you talked about some of the legislation that's passed. The CHIPS Act, the IRA, and we're starting to see some benefit of that coming, but much of it, of course, will take time because permitting takes time, something like $1.2 trillion of spending over the next 5 years. So I do believe that positions us very well. And even if customers have some projects now and they're -- they feel that there's a pipeline of business coming, they're much more willing to pull the trigger on that capital investment and buy a piece of equipment because they're confident they'll have work down the road. And so a number of our contractors are quite busy. I talked to some contractors who said, you know what, I can't take any more business because I can't execute. People, I don't -- there's not enough out there. So again, we feel good about that. But it's not just the U.S. I mean, I'm sure you're aware of what's going on in Saudi Arabia. I mean it's just unbelievable, something like $1 trillion is being spent, huge mega projects, and that's very good for construction as well. We're also seeing CapEx support in places like India. There's over 20% growth in infrastructure. The government-funded infrastructure, expected over the next 12 months or so. So again, a lot happening there. CHIPS Act, IRA. So at the moment, we just certainly don't deal will slow down. That market is quite robust.

Excellent. Okay. Got it. And why don't we go ahead and shift to mining? So what are you hearing from your customers right now on the mining side, about their multiyear spending plans?

So certainly, we talked a lot in our earnings calls about the fact that our mining customers remained capital disciplined, and that's true. And what we said is that what we expect is more of a moderate increase over time in mining, and that's exactly how it's played out over the last 5 or 6 years or so, which is a positive thing in my view, for both us and our customers. I'm not sure they have that in the wild swings up and down, which we saw previously, a big peak in 2012 that I'm crashing down. A lot of that was driven by what was going on in China at the time. Having said that, we -- certain factors are very positive for our business. Utilization of our equipment is high. The number of parked trucks is low. The age of the equipment is high. All 3 of those factors certainly play in our favor when we think about mining business going forward. And it was exactly the opposite back in 2012, 2013, 2014, high number of parked trucks, low number of hours, low utilization. So all 3 of those indicators are green. That's good news. We talked earlier about the fact that, again, with the energy transition, if you believe any portion of that, there's no -- in my view, there's no way around the fact that, that will involve the increased production of commodities and at many companies in the world have big mining trucks. And so we think that we're well positioned there to help our customers produce those commodities. Having said that, again, there is capital discipline. And it can take some time for mines to get approved. It's not that you go out and you put it in an application and 3 weeks later, you get approval. So it takes time. And so that's an issue there. But again, while those mines are manifesting themselves over time, business, at the moment, is strong. So again, we feel really good about the mining business. And one interesting point is you stop and think about where we were in 2012. Our sales and revenue was about $66 billion, and that was at a high point there. And Resource Industries was about $20 billion. And my friends, Ryan, and Rob, will jump in if my numbers are wrong here, but my memory serves us is that was $20 billion back in 2012. And what it was last year. And you know what it is the first 6 months of this year. So there is a big opportunity there. And so we are -- if you look at where we are this year and think about where we'll probably wind up, we'll probably -- I'm not going to make a prediction here, but as you can imagine, one could predict that we'll be kind of close to that 2012 number at a time when Resource Industries is still significantly less than it was back in 2012 and think about the opportunities presented by the energy transition for our mining business. So again, if you add that up with the opportunities that we have in distributed generation, the opportunities on construction, I feel really good about the opportunity we have moving forward.

All really exciting stuff. So I wanted to come back to autonomous mining. I said that I would, and I think it's time that we delve into that. So where do you think we are on the adoption curve for autonomous mining globally? And can you talk a little bit about Cat's market position there versus competitors?

As mentioned earlier, I feel really strongly that we have the best mile traveled in terms of the autonomous solution. And you say, well, why is that? What makes it better? Well, our trucks move faster. The way our system is designed. Our system knows where everything is on the mine side. And so what that allows them to do it, also knows in 5 minutes and 10 minutes and 2 minutes and 20 minutes, where everything will be and what that allows trucks to do is move more quickly. So they don't have to slow down as much when they get near each other, they can move. And it's all about productivity for our mining customers. So in fact, the equipment moves faster, you produce more, and it makes a huge difference on their economics. So we feel really positive about that. Clearly, in my view, we have reached a tipping point in autonomous. I mean we have around 600 mining trucks in operation, and that number continues to grow. We've got lending trucks in iron ore, copper, gold, oil sands, coal, lithium. And so -- and when we first started deploying autonomous solutions, we're really focused on large sites. And for it to pencil out, you had to have something like 70 or more trucks on a site. Since that time, we've worked really hard to get the cost down and the economics have improved. So now we're deploying at sites with as few as 12 to 14 trucks. And that opens up a whole -- a much larger number of mines that can put an autonomy. So almost every conversation we have with customers when they talk about either expanding in an existing mine or opening a new mine, there's autonomy as part of that solution. And so some of the people that were waiting, I think about a customer or 2 that we're waiting to see how it played out. People are starting to get on board. But it's not just mining customers. You may have seen that we made an announcement recently with a company called Luck Stone, which is a family-owned [indiscernible] customer in the United States. And so we're -- they're going to put -- that's our first autonomous solution in [indiscernible] application. And so again, by continuing to bring costs down, there's more and more opportunities for us to provide that autonomous solution. And again, what that really does for us is it provides us a competitive advantage. That means more trucks out there, more equipment, that means more services after that. So it's all very positive.

Yes, absolutely. All good news there. Okay. And then I mean, I'm hearing a lot of really exciting things here on exogenous growth drivers, technology, Cat's market position, I guess, alternative powertrains. When you think about all of these things, does Cat need to take up investment spending to address all of these opportunities? Or do you feel like you're already in the right zone?

Well, one of the things we told investors at our May '22 Investor Day is that we were going to invest more in what we call ACE, which is automation, alternative fuels, connectivity, digital electrification. And we think that's a really key area. And we are investing more there. We believe that we have some of the best products there, but we need to continue to get better. And we'll continue to make targeted acquisitions to help -- and investments as well to vertically integrate and enhance our technology. Again, I talked about some of the acquisitions we made previously like Marble Robot and Lithos, and we'll continue to do those, and we're going to work on the mine side of the future. So certainly, we're investing more. But again, we certainly have the capacity to do that. If you look at our financial performance, the amount of cash we're throwing off, again, we feel good about that.

Okay. Got it. Perfect. And taking a step back, the backlog is obviously very extended. It has been for some time. And we even saw backlog step up another $300 million with earnings a couple of weeks ago. So I guess how far are you now booking orders into the future? And within which businesses do you have the most and least visibility?

Yes. So it does change by -- it's different for different areas of the business. Typically, over many years, some of the products that have the longest lead time, so things like, let's say, solar turbines as an example. So when someone buys a gas turbine, solar, typically, the lead time is something like 7 to 10 or 12 months because oftentimes after the order is placed, the customer is still deciding what it is exactly they want to buy because each product is customized a bit. So those products -- and the solar business is quite robust. They're doing quite well. And so again, they've got -- their order book is -- it looks very healthy. Also in areas like gas compression, business is quite strong. So our larger engines, whether it's data centers or whether it's gas compression, that all looks quite positive. And also, of course, there's RI as well. If we -- one of the things about the backlog is, honestly, we're working hard to get our availability up. And if we improve the availability of our equipment, meaning that customers don't need to wait as long, our backlog, I would hope, would maybe go down a bit at some point because, again, customers don't have to wait as long. So a bit of a decline in the backlog isn't necessarily a bad thing if it's driven by our ability to shorten lead times. And we're still dealing with some supply chain issues, particularly around large engines, and a bit even still with chips that are impacting things like displays and some other things. But again, as we sit here today, most of our end markets are healthy. Our dealer inventory, we believe, is -- we're quite comfortable where it is. But some products -- our customers wish -- excuse me, our dealers wish they had more inventory with some that they have, like excavators, and that's due to the downturn in China. But again, we have a healthy backlog. And as I mentioned, most of our end markets are quite robust.

Perfect. Got it. On the topic of pricing, so obviously has been very robust for many years now. You guys have done a good job of passing along the rampant inflation that we've seen. I've heard some concern among investors that if we start to see inflation moderate at some point, deflationary environment, is there a risk that some of those price increases could go the other way and perhaps Cat could decrease price, what would be your approach in that kind of an environment?

We make -- we look at a whole variety of factors when we make a price decision. Certainly, we look at input costs, but we also look at our competitive position. And this isn't one-size-fits-all. We look at by product, by market, by application that we make we make a decision based on what we see. In the second quarter of this year, prices was favorable by $1.4 billion. It was above the line what we expected. Certainly, because we put in some significant price increases in the second half of last year, that will start to lap in the second half of this year. So there will still be some positive benefit of price. But of course, it will moderate just because we're lapping those significant increases that we took last year. But again, one of the reasons we're -- we continue to invest in technology, we continue to invest in finding ways to provide more value to our customers, it is not just about competing on price. It's about providing value to them. Yes, we have to be competitive. There's no question. And with some products, it's easier to demonstrate their value with others to continue them. But again, I feel quite comfortable that we'll be able to remain competitive in the market -- at various markets that we serve and still meet the shareholder commitments that we've made.

Understood. Fair. So shifting to China. So what is your view on the potential for a rebound driven by stimulus or otherwise in China? And can you give us a refresher on Cat's competitive position versus some of the local players in that market?

Yes. We had a couple of very strong years, in 2020 and 2021 in China, and we saw a decline in 2023. We expected a further decline in 2023. And it was more of a decline than we had anticipated. And we talked in our first quarter earnings call about the fact that sales in China typically are 5% to 10% of our total sales. We told investors in that first quarter call that it would be less than 5%. And just last week, we said it's going to be even lower than we thought before. So keep in mind, our market in China is primarily hydraulic excavators, 10 tons and above. So when we talk about the China market, that's mostly what we're talking about. And that market does tend to move up and down. So at this point, we haven't seen an improvement. I'm not kind of trying to call one of those. Obviously, a lot depends on the actions that government takes in China. The really good news is that even with China relatively weak, as I mentioned earlier, we just produced record results. So again, that's the beauty of the fact that we serve a variety of diverse end markets, and we're not just dependent upon, let's say, construction in China. We're not just dependent on another -- one particular market. We're pretty diverse. In terms of competitiveness, I'm confident in our ability to continue to compete in the markets that we serve. Certainly, there are some local Chinese manufacturers, particularly on the smaller end, particularly that are really focused on being #1 in terms of market share. And certainly, our strategy is to be competitive to make money. And I feel well. I feel good about the way we're positioned. We've been in China for more than 45 years. We've got about 20 facilities, about 11,000 employees. We introduced products at different value points. What we try to do is take a premium product, meaning the product that moves the most in a 24-hour period, and try to sell it to a customer that didn't need or couldn't afford it. And by being in China, it's made us better quite frankly. We've got to -- we first introduced the GC product on the GX product, which targets a different customer segment, and we start with a clean piece of paper and learned how to design lower-cost products. So again, there's a whole variety of reasons to be -- to remain in China and be competitive, and we're pleased with how it's going.

Excellent. Great answer. Thanks, Jim. So final question for you today, cognizant of time, what keeps you up at night? And then please feel free to leave us with any messages that I didn't address today.

One of the things that keep me up at night is why investors -- why our multiple wasn't higher, just given the amount of cash that we're providing in the way our markets look moving forward. So I don't know if you can help me with that later, but I scratch my head and I look at our results and I look at the fact that we've been consistently able to produce higher cash flows and higher gross margins and the fact that we had the big downturn in 2020. And it's not the Caterpillar, it really isn't. Your grand [indiscernible] Caterpillar, the fact that we were able to produce $3 billion of free cash flow that year without a bunch of inventory. We were positioned for that upturn in 2021. So what keeps me up at night is why everybody on this call doesn't give us a higher multiple. So that's that one. And then, again, as I think about our markets, as I think about the way we're positioned -- I think I talked about the energy transition, driving, mining, growing global energy demand, driving the generation opportunity and the fact that all these infrastructure builds driving CI business, one of the things that keeps me up at night is, all right, are we positioned from a supply chain perspective to meet potential future increases in demand. But again, that's a wonderful thing to keep me up at night as opposed to a declining market. So again, it's a great -- I've never been more confident about our future. And I'm not just saying that, I really do believe that for the reasons I've described.

Excellent. Thanks so much, Jim. Well, I think we're going to wrap it up there. But thanks to everyone for joining, and thank you, Jim, so much for your time. I really enjoyed the conversation today.

That's great. I'm on the go, I'm running to the airport to go in around the world [indiscernible], so I will sign off now. Thank you.

Safe travels.

Take care. Bye-bye.

You, too. [Break]

Welcome back, everyone. Very happy to introduce Joe Creed who is Group President of Cat's Energy and Transportation business. Joe, thank you so much for spending some time with us today.

Great to be here. Nice to see you.

Likewise. So you've led the E&T segment since January of 2021, a little over 2 years now. What have you changed since you've held the role? And what are you most excited about for the future of business?

Well, I mean, you heard Jim, as far as what we're excited about, I'm excited about a lot of the same things. So the opportunity that we have in front of us now and well into the future. The energy transition, as Jim mentioned, he's talked about many times before, presents a great opportunity for us as far as just total energy demand, more and more renewables and the admittance that we're starting to see into grids in the developed world, not just in the developing, all which will increase opportunities for distributed generation. In oil and gas, all of the energy sources, just with the increase in energy demand, are going to be needed in the future, and we're investing in all of the technology to really help our oil and gas customers be more efficient as they move forward. I lowered the carbon intensity of operations out in the oil patch. And so we're really excited about the near-term and the long-term opportunities. Our traditional customers today are asking us to continue investing in diesel, and that's what they're buying. And we're doing that as well. We introduced some new diesel engines for our industrial customers. It's going to be in our Cat machines as well at CONEXPO. And so it's more fuel efficient, more power dense. So we're making investments across our portfolio to really take advantage of the new things that are going on in the industries that we serve that Jim mentioned as well. What I've changed, I inherited a terrific business taking this role, my predecessors, our #1 position us well and so I'm grateful for that. And I was part of the business before moving into this role. We're really leaning in with our dealers, to help our dealers, particularly around larger customers, you think about the big data center customers and oil and gas customers. They cross territories particularly in this environment, longer and longer lead times as to as much as they can give us insight into their volumes. Really on the commercial side, we've also stood up an electrification division to really focus on the things you and Jim talked about earlier, how we're preparing ourselves for electrification. And I think it's a long road when it comes to adoption, but we want to be there with our customers and take that journey with them. And mining is kind of out in the front right now. So we're working closely with Denise and her team, not just on electrifying the equipment, which is wonderful. We demonstrate the mining truck for customers in February, and that was a great demonstration, but also leveraging what we think is a competitive advantage, having a captive distributed power group inside the same company as the OEM and bring a full solution -- site solution to our customers. And we also created remanufacturing. Reman is its own division. It's a great sustainability story. It prompts us for services. It's great for our customers, our dealers, even to us. So put a lot of emphasis on Reman as well and helping get more competitive machine builds for customers using Reman. We think it's a great opportunity for us. So I haven't made wholesale changes. We made some of the small acquisitions that Jim mentioned as well in his section to really bolt onto our portfolio, but we're really just trying to remain -- and take advantage of the great trends we're seeing in the industries.

Understood. Great answer. So E&T is comprised of 4 applications. And from my experience, it seems like investors, I think, have the least deep knowledge about the E&T business. So I'd kind of like to spend time with you digging into each of those 4, maybe starting with oil and gas. So oil and gas price per barrel has kind of been in the $65 to $75 range for a while now. I guess what are you hearing from your customers when it comes to the level of investment that they expect to be putting in for the next few years? And maybe you could speak to like solar versus reciprocating engines versus well servicing as well?

Yes, the oil prices have been kind of in that range. They've actually been up here recently in the last few days. And as Jim and Andrew both mentioned on the call as well, sort of what we're hearing from customers right now, and you hear their earnings calls, on the well-servicing side and drilling side in the near term, I think we might see a slight slowdown. On the compression side, we're seeing no slowdown at all. And Jim mentioned the LNG facilities coming online, and we're going to need to move a lot more gas -- natural gas in the next few years. And then solar plays a heavy piece in gas transmission as well as our reciprocating business in gas Cat or in gas compression. So those orders are robust. And a lot of those are longer lead times. When you talked about solar turbines, so those orders are starting to come in, and we're seeing that backlog remain really healthy. So the compression side, really, really strong. When it comes to drilling and well servicing, maybe a little bit of a slowdown in the second half, but I don't see this -- there's an elongated trend. Customers have been very disciplined in this cycle, which I think is a great trend compared to some of the past cycles in oil and gas. So I don't think this is something that we expect to last very long, and I think it's more of a slowdown than a stop or a hard pause. So we think long term, these are great -- it's a great market and industry for us. And as we mentioned, we made some investments to really help have the most high-tech fleet out there and equipment options for our customers to lower their carbon intensity in oil and gas. And we continue to talk to our customers, just stay close to them. But this is a great business, a healthy business for us and one that we think has great medium and long-term potential.

Got it. Okay. And you brought up how you're helping customers reduce carbon emissions. Can we talk a little bit about some of the Cat technologies that you're excited about that enable that?

Sure. And it kind of goes across the spectrum as we participate in powering drill rigs, on the frac side as well as in moving gas. Maybe if I just start with drill rigs, drilling typically has been done in the past with 4 diesel generator sets on a drill rig that powers the drill. We've been able to almost -- new to what we call a hybrid drill rig setup. But we can use 3 natural gas generators, energy storage or a battery. And then our Smart microgrid controller to seamlessly shift between power sources. That allows typically those generator sets and diesel would have idle before we can use the battery on sort of when they're not pulling a lot of power. We can use the battery when they're actually drilling and need that excess power. We can shut down 1 or 2 of the generators. And the ability of natural gas and other fuels, as Jim mentioned, is really important as well. You can burn conditioned field gas, which can help customers reduce flaring, using the gas that would have been flattered in condition and we can run the generators. So it's really a microgrid type of setup. We can tie in -- we could substitute one diesel and you have natural gas and batteries. You can high line power in any substitute. So it's a really neat solution that -- and the drilling has not been a huge demand for us just because of the amount of equipment that's out there. But we feel like we're ready when that does pick up with the most advanced solutions. On the well-servicing side, if you move to a frac site, that's where really the acquisition of SPM was really important for us. It helps us really create a solution and traditional frac-ing fleet but we can have an integrated solution. No one else has the engine, a transmission, a frac pump and flow arm. So we can integrate the whole system from trailer to wellhead, monitor all of it and we have what we call a frac fleet optimizer, which is a digital solution that really sits on top of that. And we'll run every trailer and engine at the optimal gear and speed to really optimize that whole side and it helps drive a lot of fuel efficiency for customers. We put our DGB engine in there, we can displace up to 85% of diesel or natural gas. And then SPM also brought us higher horsepower frac pumps. Jim mentioned the 5,000 horsepower pump with our Gas 35/20 generator set for an e-frac application that's become very popular with a number of our customers as well. So we're really having this. That was sort of the missing piece to really put an integrated solution together. We're really the only supplier that -- to the industry that has the engine transmission in the frac pump. And if you think about what we do, we, E&T, and we, Caterpillar, that's what we do. We integrate our pieces of equipment and optimize for new industries that's there. And that's what we do with our Cat machines, right? We take an engine and transmission and optimize it for the applications. So we have a ton of experience and really how to do that integration. And we've taken that knowledge and really applied it into our well servicing and oil and gas business. So I'm proud of the team for doing that. And then on the gas compression side, we can earn a variety of fuels. And we mentioned Carbon Point Solutions. A small acquisition, but it's carbon-capture technology that's not large-scale. Carbon capture, like, has been out there for a while, but more tailored to our applications on our turbines and our engines and compression. So really excited about all the investments the team has made and really positions us, I think, as you move forward. And you think about -- not just -- try to think past the next 6 months and whatever might be happening there that as customers continue to update their fleets and want to have more sustainable solutions moving forward, we're trying to get in front of that with the right technology so.

Okay. Great. Good overview of oil and gas and what's happening there. So maybe let's go ahead and move on to power gen. The business has been growing really strongly. So 15% growth in 2022, followed by 33% growth year-to-date. What is driving this strength? And how much of it is all about data centers versus what's going on in other verticals?

It's pretty strong across the board. It has been. So we -- data center is a huge piece of it. I mean, I would say, if you looked kind of under the hood and distributed generation and electric power has been strong, both on the small end. Our generator sets can go behind a number of industrial buildings, a number of commercial buildings. That business, we call it sort of the retail side for us. Their smaller generator sets has been robust. But on the large side, data centers has been probably the fastest growing when you think about just what's the biggest growth rate that you see in -- and that's really all the connecting all the digital connections that are going on and they have to drive demand for data centers. You guys can read about that. Do your research. And what we're hearing from customers now is with the onset of AI, the potential for that to continue to grow or even accelerate more for the next 2 years, we don't -- based on what we're hearing, that's a great opportunity for us. Some data centers are why that's such an important deal for us there, huge consumers of power if we do your research around, and they can't have -- they want uptime. They want quick response in a power event to make sure they're continuing to run, and we don't lose connectivity and personal lines. So what we do for them is backup power, and it's critical. I mean, it requires -- it's not just one unit behind the data center, the amount of power that it consumes, it's many units every time you build a data center. And so if you think about the growth that's coming there, it's really exciting for our business. And then the medium to longer-term trend as well with all the -- onset of all the renewables that are supporting the grid and retiring of some traditional coal plants and other traditional generation, we think -- and we're starting to see great instability and more intermittency issues or peak load concerns just because renewables are very sustainable, but they're not consistent. The traditional forms of power and power plants [indiscernible] natural gas are very consistent. It's very -- they're very reliable and you know what level of power the utility has to distribute. When you put renewables in there, it changes the mix. You have more and more demand on power. EV is coming along. And at the same time, you have intermittency being introduced to the supply side of that. And that's what we really believe, and this is more of, as Jim mentioned, a medium term to long-term opportunity, distributed generation, filling that gap and helping to support some of that intermittency or peak load because you don't have to put all the transition in and you can put it in closer to source. And so having the right set of products, both in our turbines and generator sets is a great mix for us. Burning all kinds of fuels is great for that. And Tangent, and that's why the acquisition of Tangent is so important for us. It gives us what we call it as an Energy-as-a-Service company. But really, it's a proprietary digital software solution that we can help with customers that really can monitor and dispatch a distributed generation asset to help monetize that at the right time for customers who buy a distributed generation asset. Also can help utilities when needed during peak loads and intermittent issues to help fill up the grid. So it's something we wanted to get in front of, again, trying to be ahead of maybe when we see huge demand, starting -- we've had a few orders. We're talking much more utilities than we would in the past, those would have been typical customers of ours, mostly would have been commercial, industrial customers. We're still great customers. But now you add utilities to the mix as many of them even here in the U.S. are starting programs out for distributed generation to help with intermittency issues. So the power generation is probably the fastest-growing segment that we have [indiscernible] at the moment.

Okay. Okay. Got it. Thanks for that. And if I could ask a very primary level question, please forgive me. But there is a ton of interest from investors in data center exposure right now and how all of this works. And I think that it's a bit of an underappreciated part of Cat's story, to be honest. So can you just explain a little bit like very layman's terms, what you're providing to a data center? And I guess, does -- theoretically, would every data center needs some sort of Cat-like backup power unit?

Yes. I mean almost every data center that goes in will have backup power and redundant power, enough to power the entire data center. So maybe if I try to equate it to a lot of time the commercial building, [indiscernible], you're in an apartment building, these are homes, right? We'll have backup generators in the event of a power outage. Many times in those, we will only put enough power in to run -- will load shed some things and run the essential parts of the house that you need or the building that you need, but not 100% of the power. Data centers want to be able to run the entire operation. They want quick response time so that when we're on our phones or you're consuming data, that there's really no interruption. So every data center has a backup power. And like I said, they vary in size that you can have data centers that are 50 megawatts, 100 megawatts. So it's not one unit that goes behind the data center, it's many, many units when they build a data center to provide that backup power. And having the redundancy of having multiple units is also a good thing. So really kind of getting to that sweet spot of our large engine portfolio is right where data center customers are coming to us. And we're really, really willing to help them. So it's -- as data centers continue to grow and the build-out happens, it's an opportunity for us. And like I said, that's one of the reasons why we're really trying to help our dealers, and we're talking more and more to the big hyperscalers, especially just so that we're getting a view of what we see coming in to supply them what they need.

Okay. Okay. Perfect. That's very clear. Thanks for that. So just on the subject of grid investment in the U.S., you did bring some of this up earlier. Are you starting to see the impact of some of these infrastructure stimulus bills within power gen. And I guess, have you thought about like what the potential impact could be to Cat's business over time quantifying it?

Yes. On the Infrastructure Bills, I would say you're not -- it takes time for those to roll out, like Jim said. We watch that a lot closer on the construction side of the business internally. As it relates to an impact to us, we haven't really quantified it. I think the bigger one for us really is, as I mentioned before, one that's a little further out and harder to quantify because it's really emerging right now is just the instability and intermittency issues that you see with the grids. When we talked to a couple of utilities -- there's a couple in the Southeast and the Northeast where they're contemplating what type of programs and how does distribute generation play a role in helping them. And the way I look at it is distributed generation is really the enabler of renewables because renewables, just by their nature, as we talk, as we mentioned, are intermittent. And sort to put more renewables on, you need to be able to deal with that intermittency potential people concerns. So we're -- I'm not really in a position to quantify it today. Other than I can tell you, it's not a huge piece of what we've been seeing as far as growth right now. That's an emerging opportunity that will really just accelerate on top of the things that we're already seeing in that business because it's early days, but I think it's pretty evident even here in the U.S., utilities that didn't struggle in the past are dealing with intermittency issues and keep concerns. And I think that trend will continue.

Okay. Okay. Got it. Perfect. Shifting to transportation, the recovery here has clearly been a lot more muted than it has been in other areas. What are you seeing globally, like U.S. versus international? OE versus aftermarket? And could there be a recovery coming at some point in the near future?

There's 2 real sort of segments under the transportation, what we call transportation. There's marine and then there's our rail business. And I think I would handle those 2 maybe separately because we're seeing slightly different things. On the marine side, it's sort of been depressed, but it's -- we're starting to see a little bit of demand come back. Ports are being built out. We're really strong in tug fleets. You think about offshore supply vessels and offshore wind and a little bit of offshore oil starting to come back. So we believe, there's some opportunity there, and we've seen our business better this year than it was last year. So that part of the business, we think, has modest growth. I don't -- I think it's not the size of business, probably not the opportunity of power generation, but it's a nice business for us. And one that I see -- we're seeing some positive trends right now. On the rail side, it's a little bit of a mixed story. On rail services, we're seeing growth and strength, and that business is doing very well. It's a locomotive business that has been pretty depressed, particularly in North America. Not a lot of new locomotives being purchased in the industry in the last few years. And it doesn't appear if there's anything imminent there as far as a huge comeback. Internationally, there are deals out there, and we've been participating in those. But a significant amount of volume and that industry relies on the freight side, on the North America. So we have the products available if or when our customers decide to replenish fleets. Our Tier 4 offering is available. We'll continue to talk to those customers to see if we -- to make sure we're ready to meet their needs when the time is on. That one, I think, is the one area for us, it's still pretty slow.

Okay. Okay. Got it. Just maybe taking a step back and talking about alternative powertrains and electrification. If you look across E&T, what technologies is Cat bringing to market to kind of drive us through that transition?

Yes, and that's the fun part about this and the challenge at the same time, in our side, is the diversity of the businesses that we have. So it isn't going to be one solution for us when it comes to the energy transition. We're investing in many different solutions alongside our customers to really -- because each industry has a little a little bit different field. On the electrification front, obviously, we're leading with mining. Mining customers have made some commitments and have earlier in our program. We're looking at holistic solutions. As Jim mentioned, it's not just powering the equipment with batteries, but also site solutions to charge and make sure they have enough power and infrastructure on site to actually operate and charge the machines. We see the full spectrum through alternative fuels. We have the quest on hydrogen, and hydrogen blends, biodiesel, biogas, ethanol, methanol. So burning a variety of alternative fuel is really important, and our team is really good at development. And so we're having all of those ready where we have -- we can run 20% off-the-shelf, hydrogen blends with natural gas in our generator sets today. And our turbines, we're pushing that even higher. We did even release -- it's around a 1-megawatt unit reciprocating generator set that can burn 100% hydrogen. It's a design-to-order product. Not a lot of demand for it, but customers are asking about it. And what that does is really instill confidence in our customers because they know -- the answer isn't really known as far as timing. And in many industries, what technology is actually going the way now for us to be a good partner and for them to have confidence we're going to be there with them. It's important that we can show capability in all of these different solutions. And I think my personal opinion is there will be opportunities for all these technologies, depending on the market, and I don't see one that wins across the whole diverse set of industries that we serve just because of the challenges and different requirements of our customers so.

Okay. Okay. That makes sense. Shifting to pricing. So pricing in E&T has been a little bit less robust than what we've seen in Cat's other 2 businesses. Why is this? And do you think there's maybe scope for a bit of a longer tail of price increases in E&T as you seek to kind of recoup the inflation that we've had for several years?

Yes, we were a little later in being able to sort of take some of the pricing action and you think about [indiscernible] sort of tick off a couple of years ago. And the reason for that is, you heard Jim mentioned a little bit before our engines, we sell into many different end markets. That's a great advantage for us as it gives us scale and it gives us all the opportunity that comes along with that. And one challenge with that was we saw strength in some of our end markets and some of the others weren't quite robust enough yet. So that's why if I sell the same engine in the multiple areas, we didn't see the market as strong to take pricing as early as the other ones did. And as sort of oil and gas started to come back and other in the industry started to recover at the same time and inflation started to pile up, we -- our costs, we needed to take some actions. So we did. And I feel like we're in a much better position today and had been able to make up a lot of that. And we continue to monitor that. I think we feel good about our pricing right now, and we're in a healthy position, and we're talking to our customers. And our margins have sort of gotten back in line with where we were at the higher end of our prior ranges. So it took a little bit longer. We'll continue to assess the situation, and it depends on the industry that we have, and we'll continue to look at pricing and price appropriately. But we've done a pretty decent job in the last 12 months getting back from a lot of those inflationary costs for sure.

Okay. Okay. Understood. And maybe shifting to supply chain. Where would you say we are on the path to recovery in supply chain? And maybe you could talk a little bit about some of the constraints you're still seeing and maybe where things have kind of cleared up?

Yes, things are much better for us on what we would call our medium and small engine business. So probably 18 liter and below, actually probably 32 liter and below. We've been able to kind of come over time some of the supply challenges where we're really still struggling a bit is in the large engine business. And there's 2 things going on there. There are constraints and they have their constraints. But at the same time, our orders were going up faster than we could ramp up. So we've been able to increase our production every quarter, just not at the pace that the orders were coming in. So we're making progress, I would say, there, and you look at the number of suppliers that were causing us some challenges. We put teams on it. We work closely with those suppliers. It's getting significantly better. The challenge is I need every component on time in order to build it and get it out. So I would say you're making great progress there. There's still pockets, maybe some specialized components here and there. And then occasionally, things pop up because we are -- one of the things when you get in this situation is your supply chain can't really absorb things that will normally happen in a normal situation where you could kind of absorb that shock and keep going and recover. So we kind of feel every little pickup that can happen in that business. So it's getting better. We're continuing to ramp as fast as we can to take care of our customers, and we're making some progress. So it's kind of a mixed bag depending on the business for [indiscernible].

Okay. Okay. Got it. And another broad question for you is across the 4 applications, where are lead times most extended? And maybe this is just a total E&T question, but how is backlog coverage looking relative to where it would normally be?

Our backlog is healthy. It's really healthy. And lead times are pretty extended, particularly in our large engine business. So when you talk about -- and that really is at the hard kind of oil and gas and data center business and now it's electric power. And so our lead times are pretty extended, and our backlog is really healthy. And that's where -- as long as demand is there and our sales to users are continuing to be strong, personally, I would like to see our backlog come down and come in a little bit as long as the unusual demand is there, and that means we're able to get product out faster and get better availability for our customers to combat some of that. That's, again, why we're really leaning in on the commercial side with our dealers to kind of try to communicate with customers and get us long of a window or a picture as to what I think is happening so that we can -- we really, really take care of them as best we can and this period has extended lead times. But that's one of the reasons we're really working hard on the supply side. We want to bring those lead times in. And when we do that, part of that may be a bit of contraction in the backlog, and that's not a bad thing. Customers, when they have more confidence that they can get the product in a short amount of time, will place the orders a little bit later, then that's okay, that's healthy.

Okay. Okay. Yes, that makes sense to me. And maybe just on the topic of profitability. So your margins have been recovering quite a bit year-to-date, which is good to see, but I think we have a little ways to go before we get to prior peak. So any reason why we couldn't see E&T margins return to prior peak? And maybe you could talk about some of the margin expansion initiatives that you're working on today.

Yes. I mean we -- I think we could get to our prior segment peak margins. And we're pretty close now. If you look at trailing 12 months, we've been around 17 and that's with even still ramping, less than 16 in the third quarter of last year. And I feel good trailing 12 months worth. We're definitely declining. Pricing has been a big piece of that. We work on cost reduction as well. There are certain parts of the portfolio where we can always continue to strive to get better and being efficient. As lead times come in, what we just talked about, really, there's efficiency in the factory that I expect we would see -- but overall, I'm pretty happy and comfortable with where our margins are trending at the moment. And keep in mind, when we talk about increasing in ACE, as Jim mentioned, really the alternative fuels piece of that, the electrification piece of ACE, E&T sort of has the bulk of those investments on the front end because that's where a lot of that development work gets done. So we are spending more money on investing in the future, which I think is a great thing for us to be really healthy. Even some of the digital spend, we have -- we're trying to connect our assets as well and really day out and push some of those 2. So when you couple all of it together, we've been able to kind of get back where we want to be on pricing. We will continue to work on efficiencies and as the supply chain gets better. But we will spend a little bit more money just because of the diversity, the technology is going to invest in. If you put all those together, I'm pretty comfortable at the trend that we're on, why we always love to get better. But we also want to make sure we're making the right investments for the future.

Absolutely. And there's a lot of growth to come, right? Okay. So I'm down to my last question for you, Joe. So I'll ask you the same thing that I asked, Jim, hopefully, you've been thinking about the answer when you watched Jim's segment. But what keeps you up at night? And please feel free to mention anything that I didn't ask about that you think we should talk about today.

Well, no, I appreciate the time today and the questions and the interest in Caterpillar. Andy is the -- I sleep pretty well at night, but we always worry about how can we be better and in the future and a couple of things. In the short term, really laser-focused on kind of increasing our throughput and getting products to our customers quickly. I want to bring availability in because I think that's healthy. I want our supply chain to get healthy. And it's not just the factory, we need to support our dealers and our customers in the aftermarket. I mean so we have some work to do to get ourselves where I would feel comfortable and like to see us. So that's in the short term. And then in the long term, it's really balancing all of these investments that we need to make and all the different technologies around the pace. The energy transition is an exciting time, but it's an uncertainty. And unlike an emissions tier change or some sort of investment that's a big investment that you make, that has a due date and known sort of technology outcome. And here, it's a lot of different technologies. As Jim mentioned, depending on -- even in the same industry, depending on the region of the world and regulation, the pace of adoption on some of these technologies will be different. And so I want to be ready. I want to be ahead in the technologies and [indiscernible] to our discussion today [indiscernible] the investments to think ahead. But at the same time, we want healthy margins, and we want to pace that investment. And I think we're finding the right balance now. But it's -- the pace is uncertain, and we have a diverse set of industries that we serve, and I want to make sure we're more in lockstep with our customers, and we're making the right investments to be ready when they are, to really fuel some of this growth. I mean, it's an exciting time to be in the energy space. Total demand for energy is growing. I believe we're in some really great industries and have great momentum and the right products and have made the right investments to capitalize on that growth. So it's really all about executing that and keeping that right balance.

Got it. Well, thanks so much, Joe. Joe, thank you so much for your time today. This was a really interesting conversation. With that, we're going to wrap up our virtual headquarter visit. So thanks again to all the attendees for listening in as well.

Nice to see you.

Likewise.