Caterpillar, Inc.

We'll also make assumptions that could cause our actual results to be different than the information we're sharing with you on this call. Please refer to our recent SEC filings in the forward-looking statements reminder in the news release for details on factors that, individually or in aggregate, could cause our actual results to vary materially from our forecast. A detailed discussion of the many factors we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. On today's call, we'll also refer to non-GAAP numbers. For reconciliation of any non-GAAP numbers to the appropriate U.S. GAAP numbers, please see the appendix of the earnings call slides.

Now, let's turn to slide three and turn to the earnings call slides. quarter, we achieved higher adjusted operating profit margins, record adjusted profit per share, and generated a perspective about our performance in the quarter. We'll provide an update on our full year expect this increased in the quarter our adjusted profit margin was better than we expected Move to 22. Move to 22. First step results.

year in part due to our latest assumptions for dealer inventory principally resource industries overall sales to users and construction industries are running slightly lower than we anticipated partially offset by stronger than expected sales in energy and transportation service revenues continue to grow although sales and revenues have been marginally below our expectations adjusted operating profit margins have been stronger than we anticipated. Earlier in the year, we expected our adjusted operating profit margin to be in the top half of the target range at the core of sales. operating profit margins to be better than we previously anticipated, or about flat to the second half of 2023, which Andrew will describe. The strength of our performance to date and our improved second half adjusted operating profit margin expectations give us confidence to guide above our target range. Overall, our expectations for a full year adjusted operating profit and adjusted profit per share are now higher than it was during our last earnings call. We also anticipate that MENT free cash flow will remain in the top half of the free cash flow target range. Turning to slide four and our second quarter results. In the second quarter of 2024, sales and revenues declined 4% to $16.7 billion. Sales volume declined slightly more than we expected, while price realization, including geographic mix, was better than we anticipated.

Compared to the second quarter of 2023, overall sales Sales to users decreased 3%, slightly lower than anticipated.

Energy and transportation continued to show strength, as sales to users in construction industries were down 5%. In North America, sales to users were slightly lower than anticipated, primarily due to weaker-than-expected rental fleet loading. Government-related infrastructure projects remain healthy. Residential sales to users in North America were up as demand for new housing remained resilient. Sales to users declined in the AME primarily due to weakness in Europe relating to residential construction and economic conditions.

Sales to users in the AME were very strong in the second quarter in 2023. Great. as well as mainly due to softness, as we previously discussed for two products, articulated trucks.

Despite the ongoing weakness in industrial, sales to users increased by 10% as we continue to see strength across most applications. Oil and gas sales to users benefited from strong sales of turbines and turbine-related services. We also saw increased sales of reciprocating engines into gas compression, while well-servicing oil and gas applications were lower. Power generation sales to users grew as marketing conditions remained favorable, including strong

up $700 million versus the first quarter of 2024.

Energy and transportation drove the increase as we continue to see strong demand for solar turbines and reciprocating engines for power generation. Adjusted operating profit margin increased to 22.4% in the second quarter, a 110 basis point increase over last year, which was better than we anticipated.

And slightly better than expected price, $2.5 billion in the second quarter. evidence in the second quarter. In 2019, when we communicated our intention to reduce the cost substantially like all MENT precash loaded shareholders over time, our net share count hit is decreased by approximately 18%.

In addition, we increased our dividend by 18% in the second quarter, which is our fourth straight year of a high single-digit quarterly increase.

We remain proud of our dividend aristocrat status and expect to substantially slightly versus last year. In North America,

slightly lower construction industry sales to users for full year 2024 than we did previously, primarily due to weaker than expected rental fleet loading. Government-related infrastructure projects are expected to remain healthy. In Asia Pacific, outside of China, we still expect soft economic conditions to continue. We anticipate demand in China will remain at a relatively low level for the above 10-ton excavator industry. In the AME, we anticipate that weak economic conditions in Europe will continue. somewhat offset by continued healthy construction demand in the Middle East. Construction activity in Latin America remains mixed, but overall, we are expecting modest growth. In addition, we are expecting the ongoing benefit of our services initiatives will positively impact construction industries.

Next, I'll discuss resources. After strong performance in 2021, anticipate lower machine volume versus last year, primarily due to off-highway and articulated trucks.

We currently anticipate a decrease in resource industry's dealer inventories in 2024 versus a slight increase last year. We expect to see higher services revenues, including robust rebuild activity. Customer product utilization remains high, the number of parked trucks remains low, and the age of the fleet remains elevated. and our autonomous solutions continue to see strong customer acceptance. Customers continue to display capital discipline, however. We continue to believe the energy transition will support increased commodity demand over time, expanding our total addressable market and providing further opportunities for long-term profitable growth.

Moving to energy and transportation. We'll expect gas compression to be up for the full year.

However, we expect it to soften in the second half. For solar turbines, we continue to expect volume growth in the second half as our oil and gas. Cat reciprocating engine and solar turbine demand for power generation is expected to remain strong, largely due to continued data center growth relating to cloud computing and generative AI.

Industrial demand is expected to remain at a relatively low level compared to 2023 in the second half.

In transportation, we anticipate growth as the year progresses in both high-speed marine and rail services.

Moving to slides, I'll provide an update on the new initiatives. agreement to test battery electric large mining trucks, as well as to conduct studies on ethanol-powered trucks.

Progress has been made in both initiatives since the agreement was signed, including conducting a joint study on a dual-fuel solution for haul trucks operating on ethanol and diesel fuel. We are supporting Bali's sustainability objectives. In June, we added CAT CG260 gas generator sets to our portfolio of commercially available power solutions capable of running on hydrogen fuel. Previously, our portfolio with this capability ranged from 400 kW to 2,500 kW. The addition of the CG260 now provides up to 4,500 kW of electric power for continuous, prime, and load management requirements and is approved to operate on gas containing up to 25% hydrogen by volume. Caterpillar offers retrofit kits to upgrade CG-260 generator sets already installed with these same hydrogen capabilities. In addition to our hydrogen capabilities in reciprocating engines, Solar Turbines has been a leader with its ability to burn a wide variety of fuels, including hydrogen, natural gas, and biofuels. Today, Caterpillar has a large and growing lineup of technologies to support customers in their sustainability journey. These two examples highlight how we are helping our customers build a better, more sustainable world.

With that, I'll turn it over to Andrew. Thank you, Jim, and good morning, everyone. I'll begin with a high-level summary of the quarter. Then I'll provide more detailed comments on our second quarter results, including the performance of the segments.

Next, I'll discuss the balance sheet and free cash flow, and then continue with comments on our summary of the quarter.

Sales and revenues of $16.7 billion decreased by about 4% compared to the prior year. Adjusted operating profit increased by 2% to $3.7 billion, and the adjusted operating profit margin was 22.4%, an increase of 110 basis points versus the prior year. Profit per share was $5.48 in the second quarter compared to $5.67 in the second quarter of last year. Adjusted profit per share increased by 8% to $5.99 in the quarter, compared to $5.55 last year. Adjusted profit per share excluded restructuring costs of $0.51 per share, mainly due to a loss on the divestiture of two non-US entities. This compares to restructuring costs of $0.05 per share and a discrete deferred tax benefit of $0.17 per share, which were both excluded in the second quarter of 2023. Other income of $155 million for the quarter was a $28 million benefit versus the prior year and was primarily driven by favorable impacts from commodity hedges. The provision for income taxes in the second quarter, excluding discrete items, reflected a global annual effective tax rate of 22.5% compared with 23% in the second quarter of 2023. Finally, the year-over-year impact from a reduction in the average number of shares outstanding, primarily due to share repurchases over the past year, had a favorable impact on adjusted profit per share of approximately $0.29. Moving on to slide 9, I'll discuss our top line results in the second quarter. Sales and revenues decreased by 4% compared to the prior year, as lower volume was partially offset by favorable price realization. Lower volume was mainly driven by the impact from changes in dealer inventories. As you may recall, we anticipated a sales decline this quarter versus last year as an atypical dealer inventory increase in the second quarter of 2023 made for a challenging comparison. To explain, dealer inventory decreased by about $200 million in the second quarter. In comparison, we saw an increase of $600 million in the second quarter of last year. For machines only, dealer inventory followed the typical seasonal trend this quarter with a decrease of $400 million as compared to a $200 million increase in the second quarter of last year. Sales were slightly below our expectations due to lower than expected volume being partially offset by better than expected price realization

including geographic mix. Moving to operating profit on slide 10.

Operating profit in the second quarter decreased by 5% to $3.5 billion. This included a $227 million unfavorable impact from higher restructuring costs. Adjusted operating profit increased by 2% to $3.7 billion. price realization benefits of the quarter, or the profit impact of lower sales volume acted as a partial offset.

The adjusted operating profit margin of 22.4% better than we anticipated, driven by energy and transportation.

On slide 11, constructed was about flat in the second quarter of 2024 versus an increase in the second quarter of last year. Lower sales to users also impacted volume. Sales in local construction industries were lower than we had anticipated due to lower than expected rental fleet loading in North America and continued weakness in Europe. By region, sales in North America were about flat.

In Latin America, sales increased by 20%.

Second quarter profit for construction industries was $1.7 billion. a 3% decrease versus the prior year.

This is mainly due to lower sales volume lower material costs.

The segments margin of 26.1% was an increase of 90 basis points versus last year. Margin was better than we had expected, primarily due to favorable product mix and the timing of planned SG&A and R&D spend. price was in line with our expectations. Turning to slide 12, resource industry sales decreased by 10% in the second quarter to $3.2 billion, which was about in line with our expectations. The decline was primarily due to lower sales volume, partially offset by favorable price realization. Sales volume was impacted by changes in dealer inventories, as dealers' inventory decreased more during the second quarter of 2024 than during the second quarter of last year. In addition, we saw lower sales to users in the segment as anticipated, given a challenging comparison. Second quarter profit for resource industries decreased by 3% versus the prior year to $718 million. This is mainly due to lower sales volume, partially offset by federal impacts on price realization and manufacturing costs, including lower freight. The segment's margin of 22.4% was an increase of 160 basis points versus last year. Margin was better than we had expected, mainly driven by the timing of planned SG&A and R&D spend and a favorable product mix. Now on slide 13. Energy and transportation sales increased by 2% in the second quarter to $7.3 billion. The increase was due to favorable price realization which was partially offset by lower sales volume driven by industrial, which declined in line with our expectations.

The segment sales were slightly better than anticipated, primarily driven by price, by application, power generation,

Second quarter profit for energy and transportation increased by 20% versus the prior year to $1.5 billion. The increase was primarily due to favorable price. The segment's margin of 20.8% was an increase of 320 basis points versus the prior year. Margin was significantly stronger than we had anticipated due to better price and lower than expected manufacturing costs. which largely reflected favorable inventory absorption, lower freight, and lower material costs. Moving to slide 14, financial products revenues increased by 9% to about $1 billion, primarily due to higher average financing rates across all regions and higher average earning assets due to higher provision for credit losses which largely reflected the absence of a non-recurring reserve release from the prior year. The portfolio remains healthy as past yields of 1.74% are near historic lows and reflect a 41 basis point improvement compared to the prior year. In addition, the allowance rate was 0.89%, our lowest rate on record. Business activity remains healthy as new business volume increased versus the prior year, primarily driven by North America. We also continue to see healthy demand for used equipment, where inventories remain close to historical low levels. Moving on to slide 15. We generated $2.5 billion in ME&T free cash flow in the second quarter, and we expect our full year free cash flow to be in the top half of our annual target range, or between $7.5 to $10 billion. Our expectations for CapEx remain between $2 and $2.5 billion for the year. On share repurchases, the more than $1.8 billion deployed in the second quarter included a billion-dollar accelerated share repurchase agreement. Approximately 75% of those shares were delivered to the company upfront and with a balance to be delivered when the agreement is terminated prior to year end. Note that we also had an MENT bond maturity of $1 billion in the second quarter. And given our healthy liquidity position, we did not issue new bonds. Our balance sheet remains strong with an enterprise cash balance of $4.3 billion.

In addition, we hold $1.8 billion in slightly liquid market for the remainder of the year.

As Jim mentioned, we now anticipate sales and revenues to be slightly lower this year versus the record 2023 level. This compares to our previous expectation for broadly similar sales. This change reflects an updated assumption of a slight reduction in machine dealer inventory, primarily in resource industries, and lower than expected sales to users in construction industries, mainly due to lower rental fleet loading in North America. now specific to our second half assumptions. We typically see higher sales in the second half as compared to the first, and we expect sales to follow that normal, seasonable trend this year. As compared to the prior year, we now anticipate slightly lower sales in the second half, driven by lower machine sales to users. Changes in dealer inventories and machines are expected to have a nominal impact, as the decrease in the second half of this year should be similar to the decrease observed in the second half of 2023, which was about $1 billion. However, note that machine dealer inventory changes will impact the quarters differently as we expect a sales headwind in the third quarter as dealers build their inventories in the third quarter of 2023 and a sales tailwind in the fourth quarter due to a smaller inventory decline than the prior year. Finally, we continue to anticipate services growth in the second half of the year as we strive to achieve our 2026 target of $28 billion dollars and the strength of our first half performance combined with the more favorable expectations for the second half mean that we now anticipate overall adjusted operating profit margin to be above the top end of the target range for the full year.

Specific to second half margins, despite higher sales, we do expect lower margins versus the first half decline may be slightly larger than is typical.

As compared to the prior year, we expect our adjusted operating profit margin in the second half will be similar to the prior year level. While we anticipate some favorability in manufacturing costs on improved operational efficiencies, we do expect slightly lower volumes and a slight headwind from prices. the increases taken in the second half of 2023 means that the benefit in the second half of this year will be significantly lower. In addition, we expect that improved availability across the industry will result in the normalization of the pricing environment.

To assist you with and that are including discrete items, remains at 22.5%.

I'll provide a few comments on the third quarter, starting on the top line. We expect slightly lower sales and revenues in the third quarter compared to the prior year, as we anticipate a dealer inventory headwind for machines, which will impact volumes. We expect dealer inventory machines to be flattish to slightly lower in the third quarter, as is typical, which compares to the atypical $400 million increase in the prior year. We also anticipate lower machine sales to users versus a strong comparison. We expect flattish price realization in the third quarter versus the prior year due to the normalization that I mentioned a moment ago. We also anticipate that the ongoing benefit of our service initiatives will . We anticipate lower sales in construction industries primarily due to a headwind from changes in dealer inventories. In resource industries, we expect lower sales, as sales to users are impacted by a challenging comparison, similar to that which we observed in the first two quarters of this year.

In energy and transportation, we anticipate higher sales versus the prior year, supporting lower sales than industrials, which should act as a partial offset.

For enterprise margins in the third quarter, we expect a similar adjusted operating profit margin compared to the prior year, as we anticipate lower volume will be offset primarily by favorable manufacturing costs. By segment in the third quarter, in construction industries, we anticipate lower margin compared to the prior year on lower volume and slightly unfavorable price realize.

compared to the prior year due to unfavorable volume and high SG&A and R&D spend.

In energy and transportation, we expect a higher margin versus the prior year and stronger volumes and favorable price realization. So turning to slide 19, let me summarize. Strong execution and operating performance continued in the second quarter. higher adjusted operating profit margin of 22.4% offset the decrease in sales and revenues and led to a record adjusted profit per share of $5.99. We now expect overall adjusted operating profit margin to be above the top end of the target range for the full year based on our expected sales levels, which should now be slightly lower than levels in 2023. The net of these factors leads to our current expectation for higher adjusted operating profit and adjusted profit per share as compared to what we contemplated at the beginning of the year. MENT free cash flow generation was $2.5 billion in the quarter. We continue to expect to be in the top half of our target range for the full year. We have deployed $7.6 billion to shareholders through share repurchases and dividends in the first half of 2024. We continue to execute our strategy for long-term profitable growth. And with that, we'll take your questions.

Thank you. As a reminder, please press star 1 to place yourself in the queue. Please note, we are only allowing one question per analyst. Your first question comes from the line of Chad Dillard from Bernstein. Your line is open.

Hi, good morning, everyone. Morning, Chad. So I was hoping you could unpack that and, you know, could it fully or at least for the second half, do you think price costs will be positive?

Yeah, so overall, so let me start, obviously, for the full year, price will exceed increases in manufacturing costs. As we look out in the second half of the year, We do expect price to moderate, as we've consistently said. However, we are seeing some favorability in manufacturing costs, as we saw in the second quarter, and we expect that to continue. There will be a continued normalization, particularly in construction of the pricing environment, as availability improves across the industry as a whole. We expect price to be positive in energy and transportation. construction industries. So, overall, as I just pointed out in my comments, we do expect favorability manufacturing costs, and that will offset actually the volume decline that we expect or impact on margins in the third quarter.

We'll move next to Jamie Cook at Truist Securities.

Hi. Good morning, and congrats on a nice quarter. Thank you. My question pertains to E&T and the E&T margin strength in the quarter. You know, can you help, I mean, given, again, Jim, the capacity investments you're making in that business, how we think about the E&T margin potential over the long term relative to construction and resource, given you're adding capacity there, and sort of where should we be, Jim, as we're exiting the year? How do we think about the incremental capacity that's online?

build both large engines and program.

It lasts longer than that. It takes some time. Having said that, the demand for large engines and for solar turbines for both oil and gas and power generation continues to be quite strong. So, you know, the margin increase that you saw is a reflection of higher volume, better price, and also better mix as well, quite frankly. So, again, is there potential for margin expansion over time in energy and transportation? There certainly is that possibility. Again, a lot of it will depend upon mix and, again, our ability to increase our capacity in large engines, which we're working very hard to do. But, again, the good news is that, again, back to that power generation market is quite strong. And one of the things we're also bullish about that the

opportunity for distributed generation.

As more renewables are added to the grid, as there's more grid instability issues, it creates an opportunity for us, we believe, to sell both reciprocating engines and gas turbines and distributed power generation applications distributed throughout the grid. And we're very excited about that opportunity. One of the things also to keep in mind is, you know, we have a strong backlog and the backlog increase that we reported today, of course, ENT was a big part of that. And that includes both solar turbines and our large engines.

We'll move next to Steve Volkman at Jefferies.

Great. Good morning, guys. Thanks for taking the question. Pivoting maybe to construction industries, I think you both mentioned lower than expected rental fleet loading in the quarter as one of the trends that you called out. And I'm curious if that is if you view that as sort of a timing issue and maybe you can give us a sense of where you think the rental fleets are and how much kind of update and refleeting needs to be done there.

Certainly. What we'll need to start with is dealer rental income was actually up for the quarter. And, you know, dealers are independent businesses and, of course, make their own decisions about what kind of machines and how many machines they put into their their rental fleets, and there's a whole variety of things they look at there. They think about interest rates, obviously, and they think about other aspects. But we are continuing to be bullish on what we see as an opportunity around rental, and we're working closely with our dealers to help them increase their rental business over time.

Our next question comes from Robert Wertheimer at Melius Research.

Hi, good morning, everybody. I also wanted to circle around to ENT where, you know, as you see the rise of data centers, I guess the critical nature of that power backup is, you know, rising in importance. The question is going to be around mix and margin in the ENT segment. You know, oil and gas, obviously, you're running into great business. There's high margin, high mix as well. Is there any anticipated mix impact if PowerGen kind of replaces some of the strength we've seen in oil and gas? And then more broadly, Jim, I think you mentioned kind of solar turbines in PowerGen. I think you've had historical strength in, like, combined heat and power and things like that. Is that market for solar turbines expanding visibly already in PowerGen to more and more applications? And I'll stop there. Thanks.

Well, thank you, Rob. So to answer the last part of your question first, so in solar we have seen some pretty interesting applications for solar. But as an example, you know, we relatively recently sold some solar gas turbines in a power generation application for continuous duty for a data center in Ireland. And that's something that, again, we wouldn't have seen 20 years ago. So there are some more opportunities. And as I mentioned earlier, you know, as we think about distributed generation for both RECIP and gas turbines, and again, our engines and turbines burn a whole variety of fuels, natural gas, biofuels, hydrogen blends, and all the rest, we do see an increased opportunity for those distributed power generation opportunities over time. And we think that's a secular growth trend, again, that we're very excited about. You know, as you think about energy and transportation, there's a lot of components there. So when you ask the question about kind of NICs, oil and gas versus power generation. Generally, we do quite well margin-wise in our large engines. That's something that we're quite excited about, the opportunities that we see moving forward. Of course, solar is a very good business as well. So again, there's a lot of things there to think about, not just power generation, oil and gas, but as we think about energy and transportation moving forward and our ability to, again, to grow that business and achieve strong margins, we feel quite good.

We'll move next to David Rasso at Evercore ISI.

Hi, thank you for the time. I was curious, the retail sales of machines, it sounds like you're expecting to be down again in the second half of the year. But anything you're hearing from dealers to try to be thoughtful about when you would expect retail machines, you know, retail sales to pick back up? Is there any indication from the order book or backlog within CI and RI? And with that, also, where do you expect the dealer inventory to end the year on machines? Thank you.

Yeah, so let me start and try and help that, unpack that a little bit. So on the retail sales, two factors, obviously, retail sales in the quarter. One, which was in North America, and most of that was actually rental fleet. That does go into retail sales, but it actually is rental fleet loading by... Our expectation now, part of the reason why we've reduced our estimates for retail sales for the year is mostly due to that rental fleet loading. Our expectations are that although, as Jim said, dealer rental revenue is still growing nicely, they will not load their fleets as much as we had originally expected at the beginning of the year, and that's relatively moderate. Overall on dealer inventory, as I said, at the beginning of the year, As you know, deal inventory is very complex, David. It's multiple segments, multiple business units, multiple dealers, and dealers are independent businesses. We expected the deal inventory to be about flat for the year. We now expect a small reduction of machine deal inventory. Almost all of that will be in resource industries, which, as you know, is more a function of commissioning. rather than anything else. And overall, we expect to end the year with deal inventory on the CI side at about flattish and comfortably within the typical range that we talk about of three to four months.

We'll go next to Michael Finnegar at Bank of America.

Thank you for taking my question. I'm curious when you look at your different segments, If we're entering a lower interest rate environment, a Fed-easing cycle, where do you see what segments kind of reacting to a lower rate environment first? And just basically following up on that with the construction side, with your response to David, just is the assumption with your comfortability on the inventories, is that assuming that dealer retail sales gets better by the end of the year, or is it assuming where we are today? Thank you.

Maybe I'll start and then I'll take it over to Andrew just to talk about interest rates a bit. So if you stop and think about our business, there are certain aspects that are not as sensitive to interest rates movements and think about the build-out and data centers around power generation, oil and gas generally, and government infrastructure as well. We've talked a lot about in our previous calls the regulatory environment that has been supporting build-outs in North America, and we still feel good about that, and obviously that is less interest rate sensitive. The parts of our business that are more interested in rents sensitive. Think about someone building possibly a warehouse in North America and needs construction equipment for that. Those kinds of activities do tend to be more interest rate sensitive. So if interest rates come down, that certainly has the possibility to improve that business.

And then I'll let Andrew. Yeah, just on the dealer inventory thing, just a reminder, obviously from today to the end of the year, we expect a reduction in machine deal inventory, as I talked about, which is in line with our normal seasonal trend. Overall, effectively, our assumption of flattish deal inventory in CI and remaining within the typical range implies it's based on our expectations of retail sales and is always a forward-looking retail sales expectation rather than a backward-looking retail sales expectation.

We'll take our next question from Jerry Revich at Goldman Sachs.

Yes, hi. Good morning, everyone.

Hi, Jerry.

Hi, Jim Andrew. I'm wondering if you could just talk about what your prospect list looks like in resource industries based on industry and your competitor data. It looks like we've hit an air pocket in terms of orders, and obviously deliveries have been weaker, and we've seen destock. Based on what you're seeing from your customers, when do you expect bookings to re-accelerate for mining trucks and other equipment?

Thanks for your question, Jerry. As I mentioned earlier, there's a lot of positives in mining. Certainly, the utilization of our equipment is high. The number of parked trucks is relatively low. We expect robust service activities. Having said that, our customers are displaying capital discipline. But at the same time, one thing to keep in mind is one of the reasons that we saw lower sales is that we had a kind of a backlog of a couple of products that we talked about in our prepared remarks, articulated trucks and off-highway trucks. And as we worked our way through that, that created a relative comp issue that you're seeing today. But having said that, certainly there's a lot of interest in commodities such as copper. And we've seen areas of strength in things like large mining trucks and that activity as well. And that's positive. And we remain bullish about mining, just thinking about the energy transition and all of the the commodities that our customers will use our products to produce. So again, we're not too concerned about just a quarterly deviation. What we're really focused on is more the medium and long-term over time, and we remain quite bullish on the business.

Thank you so much. So my question is more longer-term focused rather than this quarter or year. So, can you help us frame how to think about Caterpillar's current portfolio of products that play into the data center market aside from backup generators? Are there any other products maybe related to microgrids or anything else to call out where you see an opportunity? And related to that, besides ENT as a segment, do data centers provide opportunities for any products or services? within CI or RI as well over the medium to long term?

Yeah, we do believe, thank you for your question, we do believe that the data center buildup creates opportunities in many areas across our business. So you mentioned backup generators, that's obviously, that's an opportunity which is here today that we're dealing with. In addition, I mentioned earlier the fact that data centers is increasing power generation requirements. So in the United States, I have the stats right, Electricity demand was flat between, I think, between 2007 and 2022, and now it's starting to increase. And, of course, our customers use our products to produce the commodities to satisfy that increase in electricity demand. In addition to that, I talked about the fact that both our reciprocated engines and our gas turbines, we believe, have the opportunity to be used in what we call distributed power generation applications. And a lot of that, again, is tied back to that data center build-out as electricity demand in the developed world continues to increase. And, of course, in the developing world, the standards of living increase. Power generation demands go up as well. And, again, that's an opportunity for us as our customers use our products to produce the commodities to satisfy the increasing demand. In addition to that, yes, we do provide microgrids in our power generation organization. We work with customers to set up microgrids. That's one of the things that we do have the ability to do. And we're pretty uniquely positioned as given our portfolio of products to help our customers do that. Also, you know, as you think about data center build-out, well, of course, that requires construction machinery as well, and that helps our construction equipment business. And then, of course, thinking about copper and the other commodities that need to be produced to also support what's happening with increased power generation requirements, that helps our eye. So I believe that the data center build-out helps a whole variety of products across our portfolio.

We'll move next to Mig Dobre at Baird.

Thank you. Good morning, everyone. Just a quick follow-up on construction pricing. I guess it sounds like you expect a little bit of erosion here, but maybe we can get some insight in terms of the magnitude. You know, I'm looking back at 2016. That's the last year where I think we saw two, three percentage points. Is that kind of a fair expectation to have going forward? And how do you think about used prices in this market and the potential impact that that might have as we think about 2025 even? Thank you.

Yeah, Mick. Absolutely will not be that sort of level of magnitude. We obviously see a normal element of competitive positioning, which obviously impacts pricing. Obviously, we don't expect list price changes. This will be really about customer by customer discussions. On the impact of used market, the used market obviously has had some impact, has seen some erosion of price. Actually, quite interestingly, where that impacts us more is around cap financial. And actually, although used prices are coming down, they are still relatively high compared to historic levels and inventories are very low. So we are not expecting that to impact us. The other area obviously does impact used prices would be around rental fleet. And obviously, you know, that and higher interest rates are having some impact on rental fleet loading, as we talked about already in the call.

We'll go next to Kyle Menges of Citi. Thank you, and good morning, guys.

It'd be helpful just to hear a little bit more about the rental fleet loading, kind of changing your expectations there for the second half of the year. I am curious just to parse out just what is kind of demand-related, like softening demand in the second half versus... you trying to manage the rental fleets versus kind of dealers trying to, you know, pushing back a little bit about taking fleet. Just would love to hear kind of what's driving that. Thank you.

Yeah. So obviously, you know, as Jim mentioned, dealer rental revenue is actually increasing positively as we expected for the year. And that's driven by the level of activity. Our assumption when we started the planning year was that dealer fleet loading would be a certain number. It is slightly less than that and that's why we have taken it down. It is more around the fact that they are not loading their fleets quite as quickly and they're managing their fleet. That's what they do. They're independent businesses. They make decisions around how much fleet, how they move the fleet out into the market as well. And remember, also, when you talk about rental fleet, particularly around things like heavy rents, heavy rents are effectively a long actually almost rent to buy. And often that market is dependent on the customer choice as well as well. So it's not just the dealer here. You also have the customer at the other end of that equation as well as to when the timing when they make that final purchase. So a lot of those things. So it's a little bit complex, and therefore it's not one size fits all. But generally, we're still very comfortable, as Jim said, with the opportunity in front of our dealers on the rental side, and we're very positive about the long-term outlook.

And maybe just to add in, we want our dealers to have a profitable, growing rental business, and utilization is an important part of that. So it's not a situation where we're encouraging them to take more equipment than they need. We don't want them to take more equipment from us than they need. We want them to have a growing profitable rental business, and we believe that's a growing opportunity for them and for us over time. And again, there'll be quarterly deviations in terms of how much equipment they decide to take into their rental fleets. The point is it's a growing growth opportunity for both us and our dealers, and we're very supportive, and they are helping them with a whole variety of tools, whether it's digital tools and also other methodologies to help them grow their rental business.

Yeah, just again, just contextualizing sort of from a size perspective, because I think sometimes things seem a little bit bigger. Just remind you that in terms of CI, you know, this is still a relatively small number, but it is what is driving some of that change in our outlook, which again is relatively modest. So just before people start worrying that it's a bigger element and a bigger number. than it really is. Remember, OEM sales, about 40% of our revenues come from services across the business. Only about 60% is original equipment. And again, that does vary by segment, and North America is not 100% of CI sales either.

We'll move next to Stephen Fisher at UBS.

Thanks. Good morning. You mentioned, Jim, that gas compression is starting to soften a little bit. Curious just kind of where you are in the backlog there. Do you expect your sales in gas compression to actually be down year over year in the second half? And maybe what visibility do you have to rebuilding the backlog there and what it might take? Is it, you know, a next round of big LNG projects or how do we think about that? Thank you.

Yeah, so we do expect for the year, I believe I said that we expect gas compression year over year to be higher, so higher in 2024 than 2023. We did say we expected a bit of softening in the second half, but still, again, our gas compression higher in 2024 total than in 2023. You asked about backlog. Again, we do have quite a strong backlog in our large engines across and our gas turbines around ENT, so again, we feel good about that as well. And the comment we made about gas compression that was really re-sip oil and gas, we expected to soften in the second half of the year, but didn't it? Solar turbines also serves oil and gas, and our comment was about re-sip engines and oil and gas.

And again, a lot of strength in ENT overall.

We'll go next to Angel Castillo at Morgan Stanley.

Hi, good morning. Thanks for taking my question. Just wanted to maybe unpack the backlog dynamic around CI, if you could give us a little bit more color. So kind of a three-part question. One, what were the orders in the second quarter for CI? Two, kind of on the backlog, what's kind of the coverage that you have at this point versus your historical level, just given that we've had a pretty strong demand over a number of years? And then kind of lastly, just can you talk about kind of the price margin mix within that backlog? as we kind of have visibility now looking forward versus maybe what was in there before?

Yeah, so, Angel, we obviously do not break down backlog by segment, so that's just a point. I would say to you, though, we did have a higher level of orders in the second quarter in CI of 2023. Part of that was, if you remember, we did see a dealer inventory build in the third quarter. Some of that was ahead of an engine switchover. So it's not a, you know, it is down quarter year over year. But that is partly because of the comparison. And we actually, you know, as a result of that change in the MPI last year, the new product introduction. Again, similarly, you know, mix varies across the businesses. And obviously there are different parts of our business which are more profitable than others. And you did see, we do see favorable product mix in CI. And obviously that does remain, you know, that is a function of what products are being sold and in what proportion. With regards to the backlog, I mean the backlog for CI reflects availability. And as you know, availability now is pretty good. And that lies in about a 13-week time period, which we would consider to be about the norm of three months.

We'll take our next question from Tim Thane at Raymond James.

Great. Thank you. Good morning. Jim, maybe a question for you just on another CI-related one, just on the balance between market share and pricing, and just thinking, you know, obviously over the long term, PIN's a very important concept for CAT, and just thinking about how you, and tied in with that, the ambition to grow services, just thinking as to, you know, as the market, you know, first time in some time now we're dealing with kind of free-flowing supply and maybe a little bit more competition, and capital directed at North America. Just how you balance, how you and the dealers balance that, again, motivation to grow PINs while also, you know, kind of balancing that price equation. Thank you.

Yeah, so certainly PINs are very important to us, and we make pricing decisions based on a whole variety of inputs. Obviously, we look at our input costs, we look at our competitive situation, and we're continually working to add more value to our customers so it's not just a, a price situation. Price is important and we need to remain competitive. But again, we have some real advantages, we believe. One is our dealer network. Again, one of our most significant competitive advantages. We have a distribution network that none of our competitors have. In addition to that, we continue to invest significantly in technology to help our customers be more successful. All the tools that we're putting into our machines to, for example, allow a customer to hire a relatively inexperienced operator to and have them operate a machine like a pro who's been at it for many years. So, again, there's a lot that goes into that, a lot of investments in services capabilities, a lot of investments in technology as well. But certainly, yes, we recognize pins are important, and it helps seed the market for future services growth, and it's something we're very focused on.

Hey, Audra, we have time for one more question.

Thank you. Today's final question comes from the line of Nicole DeBlaise from Deutsche Bank.

Yeah, thanks. Good morning, guys.

Hi, Nicole.

Good morning, Nicole. Just a couple of follow-ups on CI. I guess I was kind of surprised by the strength in Latin America this quarter, a big year on your growth. Can you just talk a little bit about, you know, the drivers there and also what you're seeing in me? And is there any signs of life in Europe or are things just kind of bouncing along the bottom there? Thank you.

Yeah, so Nicole, in Latin America, actually Brazil was strong, which is an important market for us. And that was part of the reason for the strength. So that was good. And obviously, we'll keep an eye out and hope that that continues as we go through the remainder of the year and looking forward. Europe, as we indicated, has been a problem. It's been a problem, I think, most of our competitors have made similar comments as well. It does seem to be a little bit on the bottom. Obviously, it's depending what happens there. Obviously, you've seen the ECB cut rates. There is, for example, today in the UK, they talk about construction, actually growth in construction this last month. So hopefully, it is starting to pick up. but our assumption really is that it doesn't pick up that quickly for the remainder of the year.

All right. Well, thank you all for your questions. We greatly appreciate it. I want to just close by thanking our global team for their strong execution in the first half of the year and achieved higher adjusted operating profit margin, record adjusted profit per share, and strong MENT-free cash flow. And our results continue to reflect the benefit of the diversity of our end markets, as well as our disciplined execution of our strategy for long-term profitable growth. With that, I'll turn it back to Ryan.

Thanks, Jim, Andrew, and everyone who joined us today. A replay of our call will be available online later this morning. We'll also post a transcript on our investor relations website as soon as it's available. You'll also find a second quarter results video with our CFO, and an SEC filing with our sales to users data. Click on investors.caterpillar.com and then click on financials to view those materials. If you have any questions, just please reach out to Rob or me. The investor relations general phone number is 309-675-4549. Now let's turn the call back to Audra to conclude our call.

Thank you. That concludes our call for today. Thank you for joining. You may now all disconnect.