Caterpillar Inc. ($CAT)

[Audio gap] Impressions that we're able to leverage that same capacity for engines and turbines for as well. So lots of diversity that we're able to take advantage of, and we're putting them in place for all and for the services that we need. So think about gas compression, think about primary power. Those units run 24/7. They run for a very long time. We need lots of parts to keep them up and running them a service and do rebuilds and overhauls and so the capacity helps us there as well and supports our ability to do that over time.

And Jason, a question we get on capacity expansion is why is it on the lips incremental expansion in the recent and not the turbines? Are you finding data centers preferring recent engines for prime power over turbines? What are the advantages for Recips when it comes to that prime power.

Yes. We're truly seeing both. And so just to baseline back to our plans, we are increasing turbine capacity by 2.5x and Recipes now by 3. So major capacity increases on both that we have underway -- we're seeing opportunities with both in the primary power segment. Recips more in the standby segment. But what we're seeing is a lot of our customers are actually mixing the technologies together in order to meet their needs as well. So data center loads can be pretty challenging with transient and then other parts of how they operate. And we're seeing our ability to provide complete solutions with engines, turbines, switch gear, controls and inverters, really full engineered solutions to customers to be a real advantage in the marketplace right now.

And [indiscernible] and CAT mentioned several times with the capacity expansion announcement on recent gas. They talked about gas, and how we're going to move a lot of gas in this country. I'm curious if you can talk about how CAT engines and turbines or most of the gas through the pipeline in this country. Can you give us some context of this? How much gastritis engines or turbines are on pipeline on compressor stations, how big of an opportunity is this?

Yes. It's a significant business we're really successful at -- and just maybe take a step back from that, and I talked about this in our Investor Day presentation, we have great products and really a great ability to serve across the full value stream anywhere from when you drill the first well, you find a lot of CAT power making that happen when you prepare a well, CAT engines, transmissions, pumps flow iron are there. Gas thurst to move down pipelines. Our engines are out in the oilfield initially gathering the gas. So think about pulling it into the initial pipelines. And then as the pipelines get larger and larger, it moves to turbine solutions. So our similar turbines are there to compress down the large pipeline and move that gas across the country to where it's needed. And then on the other side of that, whether it be assisting in the LNG plant, even burning that gas to make like electricity, we're there as well. So a really unique ability and perspective across that value chain. Certainly, gas compression is, and we anticipate we'll continue to be a great growth area. We talked about all this power gen so far. We've talked about how much electricity needs to be made. A lot of that is going to be made with natural gas. And so you put that on top of the LNG and other opportunities that are there, it's going to drive gas compression opportunity that we're really well positioned to take advantage of.

Yes, Jason. What we hear from investors is this worry around the risk of overcapacity down the road. You're raising capacity other turbine players are raising capacity. Other recent players are getting into the game, how are you balancing the strong demand outlook, but making sure CAT doesn't have too much capacity if the data center boom slows? Is there anything you're doing in contracts with terms and conditions or working with specific customers that you feel like protects your risk? And is the risk profile a little different when we think of resets first turbines.

Yes, it's a really good question. So it's one we think about as well and really how we're running our business. We want to be disciplined. We want to take advantage of the opportunity, but be disciplined as we do that. And that's one of the reasons you've seen us set and then raise a couple of times our targets, particularly in the Recip space. We've done that because we've gotten clear visibility from our customers to what they're going to need. Our backlog has grown. We've been able to put more in place with what we call frame agreements or longer-term agreements with customers that include at sometimes cancellation penalties, sometimes prepayments, things that help us build confidence. That it's a good long-term opportunity that we can take advantage of. I think Joe mentioned this in the recent call we had, but our cash payback for the investment will be for the Recip side the full investments by the end of the decade. So we're excited to be able to make those investments. It's a profitable part of our business. And 1 other thing that we've done that helps give a continent is we just looked at ourselves. Our technology strategy as we implement AI and use technology more broadly across our business and on our machines moving forward, what technology growth we expect to see by the end of the decade. And and whether that would support the kinds of investments that others are seeing and backstop the investments we're making. And we see it, we have very significant multi-times data usage targets on our side, too. So that helped give us some confidence as well.

And Jason, you touched earlier on the aftermarket portion. We keep hearing these large turbine OEMs that are very excited about the service opportunity this long tail of the aftermarket stream. Are there any changes in terms of the long term service agreement that's set up solar turbines for a bigger ramp in service profitability. Curious on your view if you could kind of help us quantify that opportunity? When you think of turbines prime Recip and backup when you're looking at that aftermarket portion with a bigger installed base down the road.

Yes. We're excited about it, too. It's a great opportunity as we put more product out into these 24/7 operations that have super high reliability needs, our ability to take care of it, either solar directly with our services team or on the CAT brand on the Recips with our CAT dealers, we're really well positioned. We're really good at taking care of the product it operates through multiple life cycles, multiple rebuilds. Our service agreements, they really haven't changed a lot. I think we have a lot of history. We're really well positioned to do this kind of business with customers and it provides a lot of opportunity. So maybe to frame it a little bit. If a turbine goes out, in a primary power or a gas compression opportunity. It's going to run for decades, generally, if you look over the life cycle. So lots of services opportunity goes with that. The other stat that I like to use that helps on the reset side is if you compare a standby diesel genset, and you look at the lifetime services opportunity and compare that to a gas genset that's running primary power, 24/7, there's 40x more services opportunity over the lifetime for that gas genset over that. So that kind of helps scale why we're excited about that and really why we're leaning into that primary power opportunity.

Great. And Jason, investor look at oil and gas portion of the Power and Energy segment, they'll see revenues of $7 billion, which is at a record high. This is at a time when traditional oil and gas indicators are pretty weak. When you look at the rig count and some offshore projects. So how much of this oil and gas revenue is going to that pipeline compression stations, midstream area? How should investors think about that oil and gas exposure in terms of product mix with Recip and turbines, but just also the customer side of midstream and upstream and offshore, and if oil prices stay elevated, can you see these other areas this oil and gas portfolio start to pick up? Are you hearing anything there yet for 2027?

Yes, good question. So if you look at our first quarter oil and gas sales to users up 16%. So definitely seeing growth. That growth has been strongest in gas compression. We're seeing it both on the turbine and the Recip engine side from a gas compression standpoint. As I mentioned before, we do serve the full value chain in oil and gas all the way from drilling the well to moving the gas to burning the gas on the other side. So we're well positioned for any and all growth that we see there. There's a lot that gets talked about around capital discipline in that marketplace right now. We do see that with our customers. A lot of the work that we do in that space is to help those customers be efficient right now. So new solutions, new products to help them drill more wells, do more well servicing, help them improve that efficiency. That's a lot of our technology and focus there, and that drives growth in sales for us, kind of cross gas compression and otherwise across the value stream. In terms of the future, we're very positive about gas compression for the reasons that I mentioned. You have the LNG dynamic. You have a lot more electricity is going to be made with natural gas. So we do think the fundamentals are strong moving forward. And again, we're positioned across the value chain to take advantage of that.

And just on this topic, Jason, obviously, the Iran war. I'm just curious what we should be thinking about potential implications here. We have energy infrastructure, energy security, potentially higher LNG prices and oil prices. What could be some of the implications? I mean how direct is the Middle East to your business? Could we see more FIDs in the Gulf Coast for LNG, what that could mean for you? Is there a threshold you think your customers are looking at in terms of incentive price if it settles there, that they would increase investments in areas like offshore or the rig count?

Yes. Good question. There's a little bit of greenness and fuzziness to all of that right now because of the recency of what's happening in that space. we've been focused on the safety of our employees, given the dynamics and then staying really close to that customer base and helping them ensure that they can keep their assets up and running. I mean we have our oil and gas business is truly global. We do business across the world in that space. So we do have customers. We have team members, dealers on site, helping them ensure that the in the Middle East, but their assets are up and running, and we'll continue to do that. If prices stay high, certainly, that could drive investment, and we're well positioned to help customers with that. We really value both in the engine and the turbine space, those long-term relationships we have with those customers, and we work closely with them, again, with a multiyear view to ensure that we have the right products available for them to face see growth. We're there to serve them over time.

Fair enough. And Jason, we're seeing robust growth in power and energy, particularly on the top line. The margin expansion hasn't really been there yet. How much of that is related to tariffs, how much is the cost to ramp up this capacity. We keep reading about strong pricing from other peers in areas like turbines and generators. Is this more of a waiting game as it converts from backlog to P&L? Just any rule of thumb for investors to think about in terms of those incremental margins in Power and Energy as we move through the next 2 years?

Yes. Good questions. The -- I think we start from a position of strength. But if you look at our margins compared to our industry peers, we have really good margins in this business today. So something we're definitely proud of and want to continue. We faced a couple of headwinds right now. So we have tariffs as a headwind. You look at our first quarter results, our sales were up 22%, profit up 13%, but was down 170 basis points. Tariffs were part of that manufacturing costs were part of that, but also the investments that we're making in order to increase capacity and some of the depreciation that we're starting to see come along with that. So we will have that headwind. Certainly, we will gain operational leverage over time. Certainly, our agreements allow us to take further price over time in the way that we work those with our customers. And at the end of the day, OPAC dollars is our goal. So growing absolutely OPAC dollars. That's how we set our goals for our business and very, very confident we'll do that through the capacity investments and growing the business over time.

And Jason, we touched on the power gen side, the oil and gas vertical. Industrial is a $6 billion revenue business. It doesn't give the same level of attention. Can you just unpack what the end markets are there, the customers inside industrial. Is this business operating close to a peak, or is there still runway if we do get broader economic recovery.

Yes. I appreciate you asking a question about industrial. We don't get any questions about part of that business, so thanks for asking about it. Great engines are a priority for us. You think about broader Caterpillar and our machines. Part of our success with those machines is having great engines. And in our industrial business that we use those engines, and we help other people solve their problems and challenges with those same engines. Lots of variations in the industrial engine space. So our marine customers are in that part of the business. We have other construction customers, equipment that we don't do think a wood chipper as an example, powered by a CAT engine or a snow groomer, powered by a CAT engine, just tons of variations when you walk around somewhere like a [indiscernible] we have CAT engines and lots of different machines. So really cool business, lots of diversity, definitely room for growth there as well. As I said, we're committed to having great engines. We have room to grow. We have capacity to grow in that part of the business. And we were up slightly in sales to users in the first quarter. We're seeing projecting modest growth in 2026, but definitely part of the business we remain focused on, and we have growth plans for through the end of the decade.

Great. And Jason, when we talk about the Power and Energy, we really focused a lot on North America, that's where this energy infrastructure build up happening on the gas side and this power boom in the data center. What are you seeing outside of North America in terms of power, energy and even data center demand?

Yes. We see growth very broadly in the space. Same drivers or driving the business going on. The need for more and more energy, the desire for reliable power and energy, backup power for data centers. Those are the big drivers. And we see growth in Europe, we see growth in the Middle East, we're seeing growth in Asia. So definitely points that we're going to grow. And we think that could grow even more over time. We've seen some recent things like discussions in the EU and the U.K. around data sovereignty and people really starting to think about the implications of AI and having the data and the data centers in their own company -- in their own countries in a way to drive a very secure future for themselves, and we think that will be a great business driver in the data center space for us as well.

Great. And Jason, just we keep hearing from customers that CAT is in every power conversation. You've got the backup prime, the turbines. Just from your vantage point, what might be missing in this portfolio? Is there any white space develop a new product or partner with other players or engage in M&A to kind of have a more complete offering.

We're really fortunate with the capabilities we have for the customer needs and the market environment. We have great engines that go all the way up to 10 megawatts. We have a turbine portfolio that goes up to 38 megawatts. We're able to wrap lots of equipment around those engines and turbines to help customers apply them anything from an after-treatment system to switch gear to enclosures to house the equipment, even integrating things like batteries into the system in order to make sure that we meet customer needs. So a lot that we can do in that space. We certainly are looking for adjacencies. We have an ear open to things that customers need from us more and more -- one of the things that I'll mention is Vertiv partnership. It's a great example. They are very close to us in data center applications. Their products sit right next to our products. So the opportunity to work together to make us quicker to implement on customer sites, but more efficient as well from a system design perspective, we're really excited about. So we're very open to that, looking for opportunities in that space. even on top of how well positioned we are currently.

Jason, we typically hear the solar turbines historically had a 70% to 80% of revenue exposure to that oil and gas side. Do you think that percentage evolves over time? Is there anything differently that solar turbines is doing to expand on the power gen side for those customers compared to the oil and gas, and how are you evaluating these emerging customers that might not have the same credit profile or legacy that we see on the oil and gas side entering the power gen space.

Yes. We've had a long history with oil and gas in our solar turbine business, and we have some great customers, and long-standing relationships there, and they're signaling growth, as we've talked about a couple of times on the call, particularly in the gas compression space. That said, Power gen has been growing rapidly within solar. It's one of the drivers along with that oil and gas business that's giving us the confidence to make a 2.5x capacity investment in the turbine business right now. A lot of what we're doing is with customers we know or have known for a long time. And even some of our traditional oil and gas customers, both in turbines and Recips are now becoming power customers for us. So there have been a few examples we talked about, Pro Power is one that we've talked about recently in the last results call. Framework agreement with them 2.1 gigawatts of power over the next 5 years. So they -- that organizations historically had a relationship with us in oil and gas and now expanding that to power oil and gas, but now industrial and data center opportunities moving forward. So a lot of existing customers. There are some new customers for us in that space, contractually using some of the same things we've always done in order to be certain in that space, particularly in the turbine space, advanced payments, milestone payments through the process are an important part of how the business gets done. And we're leveraging our CAT financial organization with customers as well, another tool we have in our toolbox to help them be successful as they're trying to grow.

And Jason, just because we're on the turbines topic. Can you just talk about ramping up the capacity, the difference of the supply chain for Recips versus the supply chain for turbines and there's obviously larger turbines. Is there any issue scaling at this capacity when you come to Recips or even the small turbine side?

Yes. The supply chain is really, really important to both plants. We need lots of support. We're doing lots of work with the supply chain, both in engines and turbines. Most of the suppliers are different. But a lot of the suppliers are different. There's some overlap, but a reciprocating engine is pretty different than a turbine at its core. We've been engaged really specific capacity plans in that supply base. So we get into lots of detail with them, understand, can they grow with us? Are they willing to grow with us? And it's a big part of what we're doing, and how we'll support success moving forward. Not easy every day, but we've seen good success, and we've seen a supply base that's very willing to lean in with us in order to support our growth, and they see the opportunity that's at hand pretty clearly as well.

That's great, Jason. And just when we think of the competitive landscape, when you think backup power, brine power, or small turbines. Just we're seeing other players try to expand capacity, try to get involved. This is a growth market. I was just kind of curious if you could touch on the competitive landscape. Is it different between these types of power sources and markets of the project? Are you seeing that out there? And what is CAT's competitive advantage when we start talking about these other competitors entering space?

Yes. If you take it back to the customer and what the customer is thinking about, there's a speed to power element in a lot of the discussions that we're having. So that's the primary driver, how quickly can you get powered from my side. High reliability, once it's installed, is a key element to the discussions we're having and then cost. How efficient is the solution, how efficient will it be over time? All those things factor heavily into the discussion. Our priority is to be the best option across those priorities. Engines and turbines are great solutions. We have a lot of new products in that space that have high efficiency that helps with the cost side. We have a lot of products we can mobilize quickly that helps with the speed side. We have a long history with both CAT and our dealers are taking really good care of our products and delivering high reliability. So we're very well positioned in that space. And we stay very focused on the customers, say, solving those problems for them in ways that other people can't or better than other people can, and that has led to growth so far.

Helpful. And Jason, you touched on this earlier when we talked about the aftermarket. And then we also talked about it with capacity expansion. Can you just flesh that out? You talked about the capacity expansion is going to help service the aftermarket. It's on a common platform. As we talked about, there's a lot of fears of overcapacity on the OE units. Just talk about how you're able to flex and be able to service that aftermarket with these capacity expansions?

Yes. If you think about the life cycle of an engine or a turbine, we'll deliver the product, we'll get it up and running for the customer, there'll be a period of, I think, kind of normal maintenance, then there'll be some heavier maintenance, we call it a top end overhaul, then there'll be some really serious major overhaul, remanufacturing type activity that happens over time. And those things happen through the cycle, through the product's life cycle. The aftermarket comes along with that, the more heavier the service, the full overhaul of the engine, it's going to drive a lot more parts and services opportunities. So you see that come in cycles over the time period. The units run for a very long time. They're built to be rebuilt. And it takes a lot of parked capacity when we build that supply base in order to service those customers in that opportunity. So it gives us an opportunity to use. It's the same part the same component facilities, the same manufacturing facilities that are making our parts for -- our new units are also sending them to the aftermarket. So it gives us that diversity, and we have to plan for both and make sure that we're set up to to take care of the volume of new units we're going to see, but also this growing aftermarket. And I kind of go back to that 40x gas genset running all the time versus the Recip standby, it's a tremendous opportunity for us.

And Jason, that's helpful when we think of the aftermarket opportunity from prime first back up. Can you just talk a little bit on the aftermarket side for the turbines? Because I believe you guys capture all go through the dealer network. So what is the -- what are some of the nuances when we should think about the service opportunity when it comes to turbines, the overhaul, we've heard a lot about this one exchange fleet program you guys have that customers really like. Can you talk about what that is, why customers prefer that, one that really means for you guys in capturing some of that service and aftermarket.

Yes. On the solar turbine space, we really pride ourselves on our services capability with customers. As we talked about, our history is in the oil and gas space, a lot of powering gas compression down pipeline. Those customers, they they need high, high reliability and really excellent service. And so that's how we're wired. That's how we think. The exchange program is a great asset for us. So what we do there is we have turbine engines ready to go. And when a customer needs an overhaul, we'll swap them out quickly, which greatly decreases their downtime, and then we'll bring that other turbine engine back, we'll bring it through an overall rebuild process, bring it up to a great condition again and then use that again with either that customer or another customer in the future. It allows us to, again, minimize downtime, keep customers up and running, help them control their other costs and really have the outcomes that they want to have. And our service business in solar is direct. So our technicians are out doing the work. We serve customers direct in our turbine business. This is a little different than our CAT brand engines where we have our dealer partners that are doing that work with our customers as well.

And Jason, it's been kind of unique to see CAT announce these 6 over 1 gigawatt agreements with customers. It's something we don't normally see from CAT historically. Can you kind of talk about these agreements? I know there's one recently with Atlas Energy for 1.4 gigawatts of power equipment. It was mostly in the Recip with some of that going actually behind the meter, just what are these agreements provide you? Do you get a higher capture rate on the services? Why are we seeing these agreements be announced with Catapult over the last 12 to 24 months, something that we just never saw for.

Yes. Good question. So one of the things I'm excited about is we've built a lot of capability to work more directly with our customers over the last few years. And we've done that and power and energy, both in oil and gas and the power gen parts of the business. Our dealers are still very, very important for local execution. But a lot of these big customers, they value an OEM relationship, and we've leaned in to support that. They come to us because a couple of reasons. One, they really want to be able to plan for and have certainty on the equipment that they need to get in order to provide power to their customers. And so by signing these framework agreements with us, it gives them that clarity and certainty for execution on their side. It gives us the clarity that we need in order to make the investments to support it. And oftentimes, it's a services element as well. So again, they're not looking just for the product, but they want to make sure that we're there to support them to take care of that product over time, ensure it stays reliable, ensure that they get the outcomes that they need with their customers as well. So lots of benefits for -- I think we're frankly up and our customers, and how we're putting those together. And we're really excited to now have the 6 large agreements that we've been able to talk about and several other smaller ones that we haven't announced as well. So exciting time in the business.

And Jason, do you think the conversation around the grid and connectivity. Can We see this bring your own power outside of data centers? We talked before about hospitals manufacturing sites. These mega projects are getting bigger and bigger. I'm just kind of curious if you're seeing a pickup in power gen, not just with backup and prime for data centers, but be in other areas, manufacturing, trucking sites, commercial building. What are you kind of seeing there as these conversations evolve?

Yes. I absolutely see an opportunity in that. [indiscernible] utility grid will continue to be challenged. It's going to need lots of support. Our customers are going to need lots of support with speed and reliability as well. Some of the customers we've worked with, even some of the frame agreements that we've signed are not just for data centers. They're also supporting industrial opportunities in the marketplace. And I continue to be excited about supporting the utility grid as well. So I mentioned things like peak shaving, where a unit runs not all the time, but when it's needed to support the utility grid that will continue to be important. I think that's going to grow in importance, the grid is more strained. And utilities are our customers as well. So when they need to add quick capacity, or resiliency to their network. We work with them to do that again either through engines or turbines as well. So lots of opportunity all around that space for us moving forward.

And they're leveraging, Jason, the engine and the turbines to help with that peak shaving?

Yes, yes. We see opportunities for both of those technologies to support the grid and support the shaving.

Interesting. And just late last year, Solar Turbines and Veritiv made an announcement. Can you -- I know you touched on it briefly, but can you expand on this opportunity? And what it really means at the end of the day, can we see at other announcements around reliable power and cooling, and it is pull, Jason, coming from the developers, the hyperscalers, suppliers, who is pulling and asking for this when you guys are making these partnerships?

Yes, as I mentioned, with Veritiv, it's a great example. So if you think about where we sit in a data center and then what they do, their UPS systems, their cooling technologies, they're right around our genset turbines at the data center. But we're on the same site. We're working together to provide outcomes for the customer, but we have been doing that separately. By working together, what we plan to achieve is, one, help standardized offerings so that we can be faster to power for the customers, right? With speed to power being such an objective or primary objective now it's a really strong way to serve customers by being faster. The other thing we can do is be more efficient. Look at the system holistically provide power and the cooling together in a more integrated way and efficiencies and outcomes for customers over time, which again, say that primary power data center as an example, more competitive, lowers the cost and again, helps our customers with outcome. So lots that we're excited about in that space with a Veritiv, certainly looking for other ways to do that with other companies that make sense. And we're really focused on customers, right? So it's the customer back point of view, how can we help them be successful. And when we can do that with all of our own technology and equipment grade, when we can partner with others to help them even more, we're open to that as well as evidenced by that announcement.

Great. And Jason, just last question, and I'm getting it from the audience. We talked a lot about turbines and Recips and gas and diesel. How much of an advantage is having this portfolio. But when you're going into these conversations, are you seeing an advantage of being able to make the solution of diesel gas reset but also the turbine side as well compared to other players that maybe can just offer one of those solutions. I'm just curious if that's coming up in conversations as an advantage when you have some single source players out there that you compete against?

Yes. I really think it is. Our customers tell us that they appreciate that from us, not only the the engines and fuel types with the engines plus the turbines, but our ability to provide switchgear, controls, inverters, battery integration, really provide a full system for them of technologies to solve their need and have a menu of technologies that we can put forward depending on what their primary focus is. And it depends on how quickly they need the power, what reliability levels they're looking for, what kind of loads that they're trying to support, all of those things factor in, and we're able to bring different technology solutions together to serve those needs. And every one, you mentioned those six agreements and some of the primary power sites that we're doing, a lot of them look pretty different because we mix those technologies together in a way that best meets the customers' needs based on those criteria that I mentioned.

Super helpful. All right. I want to thank Jason for joining us today. Thank you, everyone. I know we didn't get to everyone's questions that are coming in. If you have any more questions, please feel free to reach out to the CAT IR team. I'm sure we'll be able to help you. Jason, thanks again today for talking about the Power and Energy side. I appreciate it.

Yes. Thank you, Michael. It was a pleasure. Appreciate it.