Caterpillar Inc. (CAT) Earnings Call Transcript & Summary

Good morning, everyone. I'm Michael Feniger. I'm the Bank of America machinery, engineering and construction analyst. It's my privilege to be able to host a virtual headquarter visit with Caterpillar today. And I'm going to pass it off to Alex to do some disclaimers, which will then get passed back to me to really jump into the meat of today, which is hosting Tony Fassino, the Group President of Construction Industries. So over to you, Alex.

Thank you, everyone, for joining us today. During today's meeting, we will be making some forward-looking statements, which are subject to risks and uncertainties. We may also make assumptions that could cause our actual results to be different from the information we're sharing with you today. Please refer to our recent SEC filings and the forward-looking statements reminder in our 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 that we believe may have a material effect on our business on an ongoing basis is contained within 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 this meeting. Lastly, we'll post the video and a transcript on our website, investors.caterpillar.com. Now back to our host of the event.

Great. Tony, thank you so much for joining us today. I'm very excited to host you for this virtual headquarter event.

And I think the best place for us to kick this off, Tony, is just to get your background, how long you've been at Caterpillar, the positions and really the experiences that have prepared you to be the Group President of Construction Industries.

Yes. Good morning, Michael. I appreciate it. Thank you for hosting us today and allowing us to talk a little bit this morning. That's going to be great. A little bit of background about me. So yes, Construction Industries Group President with Cat, just a little less than 30 years, so been around a little bit. Had everything from field experience working with customers for several years in our field offices across the U.S., Canada; had the chance to cover the Pacific Northwest in the U.S., Alaska. So I became the cold weather specialist for a while, covering Canada and Alaska for a while there. And had a chance to be in everything from product development to Six Sigma, working with our dealers across various parts of the world, leading our business, our Building Construction Products division. They are out of Cary, North Carolina; and now this role, leading the construction industry of Caterpillar. So really, it's been a fantastic career and I've loved every minute of it.

Wow, 30 years. So Tony, maybe just to start the conversation, if we could focus on the top line. I mean Construction Industries finished 2024 at $25 billion of sales. It was down a little bit versus 2023, which was a record high, and it might be down a little bit in 2025. Can you just give us a sense when we think of where we are on the top line in terms of units? Are we back at those record levels?

Yes. Michael, when I think about that, I think about -- obviously, '23 was very high. That said, I mean, we're right there, right? So we're just really essentially at that second highest level right there toward the top. So still a very healthy level from that perspective. And when I think about units volume, industry, I think about kind of where we are. You can kind of start -- let's say, just start in the U.S. as an example. You still got a very strong push from the IIJA. There's still money to go out. If you talk to contractors, you look at the total industry, you still got a lot of health momentum and strength there, actually, surprisingly durable relative to some of the uncertainty that's in the world. And so that's just kind of one piece of the broader puzzle. But again, we've had pretty strong performance from the industry; strong order, you just saw our backlog numbers there in the first quarter. So again, we've felt pretty good about it overall.

And Tony, do you feel like it's more reflective of market share gains and pricing versus maybe growing that addressable market demand for those actual units?

I mean Mike, when I think about pricing and addressable market and the SKU numbers, things that we're putting out there, I really think about -- it always kind of goes back to that operating execution model and the work that we've done on that because our real measure is maximizing absolute OpEx dollars. So that operating profit after the capital charge, we really have the teams rooted in that, and that's really kind of how they run their business. They don't necessarily -- of course, a lot of other metrics are important, as we all know. But that's kind of their guiding-light metric to understand how to do that. And so that takes them to the maximization approach in each region that they serve across the products, the factories think about that, our field teams think about that, and that's really how we drive the industry forward. Of course, you've heard Jim talk about, Joe has already talked about it as he leads the company in terms of how we -- price is a decision -- many factors go into that, right? It's never kind of this one liner. And at the same time, you've got to remain competitive. But ultimately, I mean ultimately, we've got to provide those customers with the absolute lowest total owning and operating cost and ideally be the easiest to do business with because when you do that, obviously, they come back. When that happens, then you get the market share, then you can get the pricing, then you can get the growth, and that's really what we're focused on.

And Tony, you touched on the U.S. being durable. I'm just curious if you can maybe touch on the other regions, where you think you are versus peak or versus prior cycles when we think of those units.

Yes. Sure. If you kind of just kind of do a quick run around the globe, obviously, kind of that U.S., Canada, kind of just throw it in all of North America, right, pretty decent there in terms of if you look at like total industry, not Caterpillar but total industry, you've seen some reasonable strength and durability there. You got pockets and things like that, but we kind of have puts and takes in some of those areas. You come across Europe, we've seen obviously some weakness there and a little bit of uncertainty. That said, you got some positive signals out of Germany and other places like that. So we felt pretty good there as that kind of comes around. And as you run across China, Greater China was at some pretty low levels if you took that total machine industry, which really kind of like a little more of the above, 10-ton excavator industry, but it had been at some lower levels. But it's seen increases over the last, say, 1 year, 1.5 years or so, and has been even pretty decent here just recently on a percentage basis. But again, still positive, which is nice. And so we feel pretty good there as that kind of continues to come around. Other parts of the world, obviously, the developing markets like some of the Middle Eastern parts where there are some major projects going on. You go across the African continent, you got to kind of drop down country by country. But I was just in South Africa a little bit earlier, spent some time in Zambia. And you've got, I mean, decent infrastructure, many kilometers of road going in, you've got bridge work going on. In one sense on the ground there in South Africa, it honestly felt kind of like just your motherhood apple pie type of town in the U.S. in terms of road work, curb work, crosswalks, that type of thing. This is barring some of the energy issues that they're challenged with there, but it's still sort of just good solid infrastructure work going on, which I found quite comforting when I was there.

And Tony, just on the discussion of cycle over cycle, maybe we could kind of touch now on the margins and the profitability. I mean the margins had a great run under your watch. I mean it fell a little bit in 2024, the margin. But when you look at 2024 versus 2014, the margins have more than doubled. So what would you attribute that margin expansion over the last decade to?

Yes. I mean two things. One, obviously, the operating execution model, I got to keep that in mind. I'll expand on that a little bit. And of course, we're trying to keep things in a range, right? We're never going to be able to kind of hold things right at that number, but we want to keep that in a range, which I think we've been pretty successful at doing. But again, what do we attribute that to, which is I think at the root of your question, and that goes back a ways. Obviously, putting the operating execution model in place has taught us a lot. We've gotten a lot better at a lot of things. I'll just kind of throw some examples out there. I mean look at our S&OP process, so process, process efficiency, process control, process understanding, that helps a lot so we can understand demand, the signal that's coming in. At the same time, those process is important from a manufacturing process perspective, where we're efficient, where we're inefficient, where we should flex to, where we should flex away from. That same analogy goes into industries. You saw us in that purpose-built forestry product a number of years ago. I had the pleasure of leading that for a time. And as we look more closely at the purpose-built product, it wasn't necessarily fitting into that very efficient O&E model that we're so enamored with. And ultimately, we provided and we've kind of passed out of that into more of that core part where we're, as an example, using our core excavators for those FM machines, our core wheel loaders for forestry arrangements as opposed to more of that purpose-built product. Again, that was all the product of the operating execution model to help us do that. You've also seen our footprint change in some areas. Those and some of your peers who would be involved in watching us closely a number of years ago, well before, say, 2017 time frame, you would have seen a little bit more of an expand, expand, expand from a manufacturing footprint perspective. Got that under control, refined that, made that much more efficient, much more targeted. We've got about the same or fewer facilities, still a lot worldwide but very efficient with headrooms that we could be much more flexible in each one of those facilities; cost-effective, again, providing customers with lowest total owning and operating costs, but focusing internally so we've got our own cost efficiency points in line again right back to that O&E model.

And just on services, it seems like that's a key area of focus where I believe the opportunity is significant for Construction Industries. Can you kind of talk about the key initiatives that you're focusing on to really drive that?

Yes. I mean the key initiatives we're driving from a services perspective in Construction Industries really comes down to our core strengths. And this is one of the things I probably enjoy talking about the most because my early years at Cat was as service -- we call it a service rep. The service rep is in the field calling on customers and dealers only on service, product support and services that we provide. So those key initiatives are everything from the rebuilds, right? We've got machines that are built to be rebuilt. It's not a one-and-done from a Cat product perspective, right? You run that out to the 8,000-, 10,000-, 12,000-hour mark. Do your rebuild, you get another 8,000, 10,000, 12,000 hours out of that product again. Sometimes you'll do it again. So a lot of these products are seeing 3 lives and more. In addition, we've got a lot of work on Prioritized Service Events. This is where we can start to talk a lot more about technology, the technology on the machines. Don't forget, right, a couple of million machines in the field running, 1.2 million, 1.5 million machines that are connected, getting information from those. Those connected machines allow us to have Prioritized Service Event indicators, what we know is going to happen, predictive failures so we can get that out to dealers and customers before something happens. And any time you're able to do that, you reduce downtime. Reduced downtime is reduced cost. Reduced cost and reduced downtime is easier to do business with. Back to my earlier comment, that, of course, creates customer loyalty. Customer loyalty ultimately takes us back to that increased sales volume that you were asking questions about one of the earlier points. So those are two of the key areas. But of course, we've also got a lot of, say, more of a retail. Those customers are owning that, just a few machines up to maybe a dozen-or-more machines, that kind of retail customer who, again, they're trying to run the whole show. They're not just the construction department. They are the HR department, the accounting department, the billing department, the collections department. That's kind of a different customer mentality. We've got to be the easiest for them because they don't have an extra minute in the day. When we help them on services and make their product easier to own and operate, lower their total cost of service, and again, predictive, limit downtime, make it easy to get parts, make it easy to get the service, make it easy to use the technology, a lot of that comes through online tools and services, they tend to choose us versus some of their other alternatives in the marketplace.

And Tony, just to pull on this thread, what is the typical parts intensity for a piece of Construction Industries equipment? So if we take just like a typical excavator, what's that lifetime value in terms of parts over the next few years?

That's kind of a hard question to answer, Michael. Again, my service experience in the past is something that I was deep into. And some people on the line or those associated with us would be familiar with what they call the Cat Performance Handbook. It's something we've been publishing pretty much our entire history. It's become something of an industry standard. Academia uses it, customers use it. I know our competitors take a look at it once in a while, but it really talks about the cost per hour. But that comes down to the operating environment and the conditions that the customer is running the machine in, amount of fuel consumed, the soil conditions, moisture content in the soil, on and on in terms of what the consumption is going to be from a parts perspective. And it lays all of that out. In fact, we give customers a pretty clear spreadsheet that's basically blank and let them put their own numbers in and let them kind of take a look at what their total owning and operating cost is, what their parts consumption is going to be on those machines. Everything from the parts, which we think of typically the iron-type parts to the lubes, the filters, everything you need from a maintenance perspective, too. Again, though, that entire thing is all targeting lowering, lowering, lowering that so we can make it the most efficient owning and operating cost for that customer base. And really, that's what the service strategy is about because we add that value to the customer, lower cost. Of course, we expand the market and get a bigger addressable market for ourselves because, again, we ideally would be the best choice for them.

Makes sense. And Tony, we're 15 minutes in and we haven't talked about tariffs. So I think this might be a record that we're on right now. So it's kind of impossible for us to have a conversation without talking about tariffs. I mean maybe just as Group President, what are the biggest challenges today managing the division with a tariff regime? Is it those imports into the U.S.? How do we kind of think about this?

That takes a deep breath before you dive into it. You know and anybody on the phone knows that the uncertainty that we're all dealing with, all parts of the industry dealing with that uncertainty. So it's hard to say, "Here's exactly what we're doing now and then second and then third and then fourth." That's hard to say. The important thing is that we're looking at a variety of scenarios. That's where our teams and in fact just talked to the team about this, this morning. The variety of scenario planning, that's really important so that you're ready when you do get kind of that solid approach and know exactly where you're going to need to go. But the beauty of that scenario planning for us is we've got quite a bit of flexibility from a company perspective. So talk just about kind of our manufacturing footprint, right? You're looking at essentially, we're a net exporter from the U.S., dozens and dozens and dozens of facilities in the U.S., right? Nearly half our employment, 50,000-plus people fully employed in the U.S. In fact, we've got examples of facilities that only export. In fact, there's zero consumption in the U.S. by some of those factories. So again, that whole net exporter message is very strong for us. It's something we're obviously very proud of. We've done that for basically a century, and we're a key part of the U.S. infrastructure that does that. That said, again, the tariff question, it really comes back to being able to play out the scenarios, having the flexibility and options once things are solidified. And our manufacturing footprint gives us a lot of strength in terms of dealing with whether the tariffs come through because, again, our general in-country for country, but a pretty heavy manufacturing footprint in the United States gives us quite a bit of flexibility. And maybe just one more item on that, Michael, that I would expand on, something I've talked about in the past with some investors pretty openly is about -- take an example of an excavator or a BCP product. And this doesn't have to be a tariff discussion. Take this more generically. This can just be about how flexible when things change. It could be natural disaster, it could be tariffs, it could be labor issues, it could be all kinds of things. If it's not working across Victoria, Texas for excavator, you get help out of Akashi, Japan. If that's not working, you come out of our Grenoble, France. You can always rely on Brazil. If that's not working so good, you've got options out of China and you've got options out of India. Now while most of those are in-country for country, it does give you flexibility when you need it to supplement, right, and help other parts of the world, especially when it comes down to that highly variable political environment that we're in.

And Tony, just to pull on that thread a little bit, I mean, how are you right now planning to do some mitigation? I mean there's maybe bringing production back to the U.S. as surcharges, components from different areas. I'm just kind of thinking of what's on the table here that you guys are kind of approaching this evolving situation.

Yes. I mean manufacturing footprint is something that we, of course, looked at. That said, those are kind of some longer-term stuff. You don't just say, "Boom, changed source today." It's not quite that quick. I may make it out to be very optimistic. But while we are highly flexible, we take it very seriously. So you don't just jump into some of these decisions. But we're ready to do that when we get some certainty. That said, short term is something I think we can talk about. And of course, short term, it's about cost, right, making sure we're tight on everything from travel and entertainment to some of the various spending that we're doing to keep that in control because you have to agonize over pennies in this industry. People don't think that, but you do. You have to be very, very, very penny-wise in this industry to be successful. And we do that across everything from product cost to operations costs in our facilities in terms of how of our field teams, whether they travel and have meetings. You name it, we have to keep a pretty tight line on that to ensure our short term, and for that matter, our long-term success because that really drives a bit of the culture in the enterprise, which has to be very cost-conscious.

That makes sense, Tony. If we could just touch on maybe the competitive environment. Do you have a sense either you produce more in the U.S. for some of your competitors or maybe import less equipment and componentry than maybe some of your European and Asian competitors? Do you have any sense out there what that looks like?

Yes. I won't comment directly on the competitors. I think the important -- the comment I make on competitors every time is you have to have respect for them. We absolutely do. From a competitive environment, we do. So I won't comment on them directly. But I will comment, and I'll go back to a couple of my comments earlier, right, a century plus of manufacturing in the United States, heavy presence in the U.S., net exporter U.S. right? We've got facilities that export only from the U.S., no consumption in the U.S. Those are important points worth mentioning probably again during our conversation because I think that's something that's very important to remember, whether you're talking about the tariffs, whether you're talking about our competitive nature, whether you're talking about our ability to serve our customers quick, efficiently and cost effectively, especially in the U.S. Again, those facilities and all these people we've got, right, 50,000 plus in the U.S. working on these factories and building tractors for us is a key, key strength for us. And I'm really happy about it.

And Tony, how are your dealers and your customers reacting and positioning for this evolving tariff backdrop right now?

Yes. I mean I have the pleasure of serving on the American Road and Transportation Builders Association Board, and they call it -- for short, they call it ARTBA, A-R-T-B-A. And we happened to have a meeting just about a month ago, and there were probably maybe 100 contractors in the room, and we had some of these conversations and some of the side conversations. It's kind of the same line we've talked about. I think it's that uncertainty and nervousness. It's kind of odd though. It's almost like people are a little more comfortable with it. I know that's kind of hard to say because nobody likes that uncertainty. But we all agonized over interest rates. "Oh, it's so high." They're not that high. And people have kind of learned to live and work around that in many parts of the country. So that obviously surprised some folks. And honestly, in that conversation I have with many of those contractors, they weren't talking about interest rates as much. They were a little more kind of asking questions about tariff, but they weren't really talking about acting based on the tariffs. They were more kind of curious what our view was and some of those types of things. You didn't necessarily see them dramatically changing their behaviors. And ultimately, they really haven't so much. So I felt pretty good about that. And I think that speaks a little bit to the fact that, again, that IIJA money, that's still not all out there. There's quite a bit of money that's still needed to be put out, and those contractors still see that coming. So infrastructure has still been really a positive signal from a U.S. perspective.

That's helpful. And can you touch on pricing? I mean Construction Industries reported robust pricing the last few years. The last 2 quarters, we saw this $300 million to $350 million headwind on price, and you guys have guided to a similar headwind in the second quarter. But maybe just for the audience, what is this merchandising program and this plan to help give us some understanding there?

Sure. Yes. I mean we've talked about merchandising and our merchandising plans before. I mean ultimately, it comes back to, again, the most important thing in the entire equation is the customer, what the customer needs, what the market supports and where we are from a competitive perspective. That is really unique depending on where you travel. State to state in the U.S., country to country in North America, and of course, as you go globally, things are very dynamic. So again, that pricing strategy, we alone could write a textbook on it because of all the inputs that are required to make that determination. And ultimately, that's about what you have to do. So you have to be a dynamic. Back to that cost-consciousness piece that we're so, so absorbed in, that gives you the flexibility when you can't take price, helps protect your margins, right? And then that competitive product that you're putting out there, the extended services and the high potential and high performance we have from a digital service capability justifies additional price, depending on where you are in the world and whether or not you can take that. So I won't necessarily speak exactly to your price question, Michael, but those are some of the elements of it and kind of how we feel about it in general. It's all about being competitive, being the best choice, being the lowest total owning and operating cost and being the easiest to do business with, and ultimately, the easiest to own. Because I'll ask you the question, when is the last time you bought something again that wasn't easy to own the first time? Most of us don't, right? So you've got to make sure that you're the easiest to own the first time.

And Tony, just on this, just what are you looking for that would make you feel comfortable to see that pricing headwind start to ease as we get to that fourth quarter end of the year?

Yes. I mean for those types of things to ease, certainty, folks like to know what's going to happen in the tariffs like we talked about. So they love to see that settle somewhere. I'm not going to say folks don't care where it settles. Obviously, it has to be within some reasonable range, but they'd like to see it settle. Because one thing about contractors -- and I think I can say this about contractors kind of across the globe because I've met them in about every country of the world, is once you give certainty and know what to do, they're going to work to be successful in that environment. I'm not saying they can deal with anything. Obviously, there's some very detrimental stuff that could happen. But when you give them certainty, they can go. Kind of like in one sense, the interest rates in the U.S. have been somewhat stable now for a while. There's been some conditioning on that. You've seen folks kind of marching through that and allowing that stabilization to help them because now they know what they're dealing with. When there's this, "Oh, it might go up. Oh, it might go down," that's one thing they're just not big fans of. So that -- again, that stability really helps us when you're talking about a fourth quarter, whether it be pricing, whether it be volume, whether it be optimism or pessimism, that stability is a good thing. They love stability.

Fair enough. And on stability, Tony, I mean, a big surprise last quarter was that your retail sales for construction inflected positive. In North America, it was a plus 1% after being negative for 3 quarters. Is that the merchandising program taking effect? Or is it just strong demand that's really driving that inflection in retail sales? Just kind of curious what you thought you saw out there that drove that inflection.

Yes. It would be a combination, Michael. I mean merchandising programs, of course, are targeting the customer, customer needs, where we are in the competitive environment. So let's assume that we're, of course, trying to do the right thing there. But again, you got to also got to look at while we've got that infrastructure piece, the IIJA money that continues to come out still supports a pretty healthy infrastructure perspective. You've also had a little better than you thought from a residential perspective. So that resi, non-resi has been decent. And again, people kind of, "Oh, resi this and resi that because of interest rates and that, that, that," still a shortage, right? Go to a lot of these bigger markets, you've seen it, I've seen it. As you run around, prices are still strong. There's still opportunities to build. Obviously, they wanted stability too, like anybody else. Should I build, should I not build? Should I put the pad in, should I not put the pad in? But, right, we've seen a little better resi than we thought. So that kind of has shored that up, and that was really nice to see, not to mention, like I mentioned, some positive sentiment in Germany and other parts of the world. Obviously, China bringing that back up. So again, that kind of positive signal has been nice to see.

Oh, hold on. Sorry.

No problem.

Can you hear me, Tony?

Yes, you're good. Can you hear me?

Perfect. Right. Yes. So I'd love to actually talk on inventories because at times, the market only views inventories as binary. You're either restocking or destocking. And as Group President, how are you evaluating inventories at Construction Industries today and how you're thinking about that dealer network as we head into the second half?

Yes. I mean dealer inventories, our inventories, you got to talk about dealer inventories first, right? Dealers are independent businesses. They make their own inventory decisions. That said, inventory is a range. Inventory is not a number. So we got to think you're going to be in that range. Things are going to kind of flex and flow as you go throughout the year, as you kind of see buying season, construction season, winter, et cetera, depending where you are in the world. And so that's important to understand. That said, we've been kind of right in that 3.5 months where we'd like to be right between that 3 and 4 months of sales piece. And think about that also and take that comment, lay that back on some of the earlier questions when you're in an uncertain period. The beauty of that 3 to 4 months is it gives you 3 to 4 months of sales in that inventory piece. So they've got that on the ground and they've got a buffer in there that they can do something with. So it helps from a tariff uncertainty, interest rate uncertainty, any kind of construction uncertainty you might get in some part of the world. So again, I think of inventory as a range. I think of our S&OP process that's been better than ever and revamped to understand what those orders are coming in, what our manufacturing capabilities are to respond to those orders and how we can plan that out a little bit further out and be more responsive when you get kind of in those tighter windows. That is important in terms of, again, back to that kind of flexibility theme I touched on a little bit earlier.

And just if we look at the fourth quarter last year, I mean, dealers took out, I believe, $1.6 billion of machine inventory. It was a big number. Do you think Cat needs to take another destock of that level if we see the retail sales stay at this flattish to plus 1 environment right now?

I wouldn't necessarily go to that, Michael. I would probably reflect on fourth quarter of last year a little bit because I've dissected that with some folks, not just customers but dealers kind of as I've traveled around the world here the last 6 months. And it's interesting. Again, U.S. is kind of an easy one in one sense. So the way they'd say, "Hey, it was heading up the election, uncertainty." People were kind of wringing their hands, didn't know what was going to happen. And that is one of those -- as you come up to those elections, you see this with contractors. They start to kind of sort of tighten up for, "Let's wait and see what happens." Usually, nothing huge happens. Like they could usually just power right through it. And some bigger contractors don't even pay attention to it, just kind of go right through the deal, but others sort of squeeze in a little bit. There was a little more uncertainty and they hadn't been as conditioned on interest rates. And as the dealer network and as they looked at that, right, a little uncertainty kind of pulled back a little bit. That's part of, not the exclusive reason, part of what created some of that destocking that they did. Not to mention, I mean, it was a pretty decent very end of year because we got past the election, saw some stability, kind of other things happened. And then all of a sudden, "Oh, wait, not as bad as we thought. Hurry," right? And so then the contractors kind of rushed back in. That's kind of how they worked. It was pretty unique last year. We know the political environment in the U.S. last year was an interesting one. And here we are today with it's still interesting and fun. But again, it's that certainty, uncertainty battle that we kind of struggle with every day.

And Tony, you touched on this earlier, but when we think of North America, your most important market, when we think of the Construction Industries, I mean there's infrastructure, there's nonresidential manufacturing construction, there's light commercial construction. You mentioned resi a little bit. Is there a way for us to understand the different verticals that are really driving that Construction Industries business? What you're kind of seeing out there that gives you this confidence?

Yes, yes. I mean if you talk about what's driving the confidence, I think, again -- and this is when I sit down with contractors and talk to them. And for that matter, we talk to DOT officials and others and kind of really understand what's going on. The IIJA is an interesting one to jump into. So the infrastructure work that we've done, the money that's put out there, there has been labor constraints for, let's say, machine operators for some time at the customer level. There's been also labor constraints in everything from the skilled trades on those jobs to various others. And you hear a lot of contractors tell you, "I would do more work if I could get more people." That's a pretty common message. And that message has been very consistent. It's gone right through to, again, that meeting I was at a couple of weeks ago with the contractor. So that labor constraint piece, that's a good and a bad point, right, because the work is there, they would do more. At the same time, if you talk, say, state-level DOTs, they would tell you that they've got their own set of challenges from a labor perspective. And they would be able to get more work out to the contractors if they had a little bit more capacity to get that out there. And sometimes they're putting work out and because the contractors can't get the labor, they can only accept so much, they only get so many bidders, and it creates kind of an interesting dynamic. That said, it's at a high level. Remember, '24 was very healthy, like we said earlier. You know what the first quarter '25 numbers are. Again, that IIJA piece still sends a fairly positive signal. I think what would surprise, again, you, my peers, others would be, "Hey, it's held on a little bit longer than planned." Plus -- and this is another -- a bit of a unique dynamic is, generally speaking, there is some positive signals coming from D.C. on the next major infrastructure bill. A positive signal like that, that, again, the industry usually doesn't get at the contractor level because there's usually like a maybe or it's going to be kind of pushed down the road. They've been getting a little bit more of a signal, positive, from the current administration. No guarantees. Nobody knows for sure. But even, again, at American Road and Transportation Builders Association, which I participate on, they put out a blueprint for American infrastructure that they provided guidelines to help the administration understand, how can we work and be more efficient from a cost perspective? How can we work on our safety elements? How can we be faster in delivering projects? And then how can we be more in line with whether regulations are in place or streamline those regulations, again, to improve cost, improve velocity, both of which oftentimes, the industry gets a bit of a black eye on that I don't think is fully deserving because, again, they're developing and executing some of the most complex projects in the world, yet they get them done, they get them done generally efficiently and safely. So again, generally a positive signal coming for the future. And that helps, I think, contractors just feel better about what they're doing and the investments they're making.

That's good to hear, Tony, since there is some concern out there on reauthorization in '26. So it's good to hear that there is some positive signals out there. Another area I'd love to ask you about, Tony, is the mega project theme. That's been another key theme out there where we've been dealing with maybe higher rates to see these bigger projects in data centers, semiconductors, LNG facilities, manufacturing facilities. Are you hearing any pause in the pipeline from tariff uncertainty or the higher rates weighing on that pipeline for those big projects? How many pieces of Caterpillar equipment would be at a site like this?

Yes. So the question on pauses and then equipment on site, probably the best thing to do is, again, reflect back on what I heard from contractors. In general, in any kind of big way, pauses, no, not really. Are there examples? There's always examples. But when you dig into those examples of pauses, it's always way more complicated than the one-line answer. Regulatory issues that they ran into are a compounding factor. Occasionally, there's a funding hangup, environmental assessments that have delayed some things. And sometimes folks will throw a label on those that, "Oh, inflation caused this to stop." That isn't -- it's usually not that simple. These are big complex jobs that were in planning phases for a very long period of time. So we have to be careful we don't -- we've got to dig in. I guess that would be my point, always dig in and ask questions. But if you talk to contractors, it's not this, "Oh, my gosh, all these projects are being delayed." I didn't hear that. Equipment on a job. Again, these jobs are pretty different. So a big data center or a big factory/facility type of job, right, a big flat-grading job with a lot of concrete, that's a whole different equipment set in terms of, say, usually, scrapers, excavators, trucks to get the major dirt out, depending on how many cubic meters you're going to move to determine the number of machines. And then, of course, you've got all that concrete that has to go in there. That has to draw on a lot of aggregates and cement plants and everything else. So it kind of cascades it well all the way back to our quarry and aggregate partners who are out there supplying these industries. But probably a more interesting infrastructure project is think about some of the energy work that's been going on. I think it's -- I think they call it the Grain Belt, but it's the 800-mile high-power transmission line that's going to go across the Midwest. And folks need to think about that for a minute. Think about 800 miles of high-power transmission lines and then think about how many towers you need in 800 miles. Like if you look at high-power towers, you can usually see from one to the other. They're, let's call it -- I'm probably wrong, but let's call it 0.25 mile apart. If you're going 800 miles, that's a lot of towers. Every tower needs a footprint, every tower footprint needs anywhere from 1 to 4 pylons, maybe 3 depending on the type of construction that has to be cleared. There's an access road. Usually, that goes from every tower to tower. There's maintenance on every tower, tower base, multiply that out across 800 miles, that is a massive job: excavators, dozers, scrapers, I mean all kinds of work. And those types of jobs are really heavy on technology. Cat-grade, all the GPS tools that we've got, and all those become very important because they've got to really move on these things when you're running something across such a huge distance, and they've got to have it fast. And I've been on those jobs. We've kind of flown a chopper from tower to tower before they've got the lines in and looked at the job and the kind of equipment that they needed. It's a remarkable string of equipment to get these done. And the companies doing these are pretty amazing. I mean they are efficient and they are fast. So it's a really great job. If you ever have a chance to go to one, I suggest you do it.

Check it out. And Tony, how has the rental story kind of evolved at Cat over the years? What do you think Construction Industries needs to do going forward to position better for rental? How do you kind of think of rental as a strategy in the next few years compared to where the strategy is today?

Yes. Rental, first, I think it's a great opportunity. I think it's a growth opportunity. So those two things are very important. It's a great opportunity and a growth opportunity because it's a key part of the customer business. You'd be very hard-pressed to find a customer who doesn't rent tools or has never rented. That would be very hard to do. The fact that, that is true means they need it today and they're going to need it tomorrow. Again, the beauty of the Cat dealer network that runs the Cat rental store in their territories is they provide a variety of equipment that does a variety of jobs. It's not just the Cat yellow stuff, right? They run Cat yellow and they run the allied equipment on the jobs because again, a job doesn't just move dirt, right? There's a whole lot of other things. And again, that variety of equipment in the Cat rental store that the dealers operate is really, really important to customer success. They're becoming a little bit more dependent on rental than they had in the past. So there's, again, good growth there. That's nice to see. But the important thing is we've got a lot of options. You got that rental option, you got the lease options, you got the buy option, right? You've got all kinds of things out there. And again, if we've got that covered better than anybody else, it goes back to that easiest to do business with and lowest total owning and operating cost. But again, the rental story is good, the rental story is strong. There continues to be good demand for that and growing demand for that. And the Cat dealer network is very well positioned for that growth, along with us working together with them for that product supply.

And Tony, we spent a lot of time on North America. Just on the rest of the world, you mentioned Germany with the infrastructure headlines. Curious if you're seeing anything there. In China, you mentioned a little bit of a pickup. I know it's been beaten up. Just are you seeing green shoots there in China? I'm just trying to get a sense of the rest of the world portfolio and exposure.

Yes. Let's start with Far East there and move our way back. If you kind of start in China there, that -- obviously, they had the real estate issues as many of you, I'm sure, stayed close to and the challenge that they had there, that had to settle out. It's better now. Obviously, it's not perfection, but it's obviously better now. And that, again, goes back to a certainty question. They were -- folks got really conservative and kind of pulled back there. And as you can imagine, as serious as that issue was, a lot of those contractors involved in that were really hesitant to buy new products. And that's what I think took that industry down so far. But now central government and contractors have built some confidence. That money is more coming out. Folks are more willing to take the jobs because even if you put the money out and people are afraid to take it because of uncertainty, it can kind of stop that up a little bit. It's come out and it's starting to filter in, and that's why you're seeing some of that gain. So that I would consider momentum. Momentum in these types of industries, as everybody knows, is really important. Once it gets going, it tends to kind of run a little bit. And again, that's, I think, the dynamic that we've essentially seen in the China market and why you're seeing some of these 10%, 15%, 18% increases in the industry numbers. If you kind of come back and, say, just pick Germany as an example, we were over there for the bauma show in March, the largest equipment show pretty much anywhere and spent some time there with the teams on the ground talking to our Cat dealer there, the Zeppelin team who does such a great job. Again, a lot of contractors come through that show. That show, I think, saw several hundreds of thousands of folks came through there. I won't quote the exact numbers. But when you're on the floor there, folks weren't too sure. The first day, "Okay, are we going to see big crowds? Are we not," because it tends to be a little bit of a gauge. I think it was pretty much record attendance. That was good. They call that show a buying show. Most of the manufacturers were there. Their dealers, distributors are generally selling at the show, and it was also very positive. Probably half of the attendees are from Germany and the other half come from international locations. And that spoke very highly of the show and optimism in terms of the sales and things that were taking place there. So we saw optimism. We saw positive sales from the contractors there. So again, it was kind of nice to see what's going on there. Now Germany has its own political situation that you've got to look at. There's been some changes there. That said, there's need. Remember, if you go back to our Investor Day here, what, it's been a couple of years now, time flies, but we talked about housing shortage, we talked about energy shortage, we talked about infrastructure challenges. That's true in so many countries of the world, and those shortages are such a big number that it speaks very highly to these industries that we're in, not just in Construction Industries, but of course, our mining team for all the materials that are going to be needed for this and our Energy & Transportation team, right? Energy, energy, energy, right? 800-mile high-power transmission line, they're moving energy around. While they're doing that, right, you need temp power, you need backup power, you need prime power, the data centers, the list goes on and on. So again, it's a very positive message in the future, I think.

And Tony, that was great. And really, it's been a pleasure speaking to you today. What is your vision as we wrap up for the Construction Industries segment going forward? What are the key building blocks needed to really achieve that vision that you're going to lay out?

Michael, good question. I always start with the customer, right, customer, customer, customer. We got to understand them, be close to them and know what they need, where their pain points are, where their gaps are so that we're there filling those and taking those roadblocks out of their way. When you do that, you win. And you've got to do that best and better than anybody else. You got to be very, very, very competitive. One of the key ways to do that, one of the big ways to do that is the technology piece. The technology and tools on the machines, semiautonomous, autonomous, remote control, you name it, right, that building that portfolio is really important. Labor shortages, improved safety, it just checks all the boxes. And when you sit down and talk to contractors, that's the language they like to speak, so we bring that in. But you can't stop at the machine. I've got to build that more broadly also. So all of our off-machine tools, whether it be our VisionLink, one of -- basically, the leading software package for running the equipment fleet and the job site, Cat productivity, maximizing productivity, parts online for parts.cat.com. We've got the greatest service information system in the industry to help our technicians get machines up and running faster. I could go through all those list of technology solutions, how we package those, make those easy to use with the customer, while you overlay and integrate some of this artificial intelligence work that we're doing to make that even easier to use and faster from a contractor perspective, those are the building blocks of the future. Those are going to make us successful long term and really position us -- again, that next 100 years is what we like to talk about. First 100 was great, set a great foundation. The next 100 is really what it's about from a success perspective, and that technology is going to be a key piece of that.

Great. Well, Tony, thank you for joining us today. This was a great conversation. Anyone on the line, if you have any questions, feel free to reach out to me or Alex at Caterpillar to follow up. Thanks, everybody. Thanks again, Tony.

Thanks, Michael.