Caterpillar, Inc.

Good morning, everyone, and welcome to Caterpillar's fourth quarter of 2024 earnings call. I'm Alex Kapper, Vice President-Elect of Investor Relations. Joining me today are Jim Umpleby, Chairman and CEO, Andrew Bonfield, Chief Financial Officer, Kyle Epley, Senior Vice President of Global Finance Services Division, Ryan Fiedler, Vice President of IR, and Rob Rengel, Senior Director of IR. During our call, we'll be discussing the fourth quarter earnings release we issued earlier today. You can find our slides, the news release, and a webcast recap at investors.caterpillar.com under Events and Presentations. The content of this call is protected by U.S. and international copyright law. Any rebroadcast, retransmission, reproduction, or distribution of all or part of this content without Caterpillar's prior written permission is prohibited. Moving to slide two. During our call today, we'll make forward-looking statements which are subject to risks and uncertainties. We'll also make assumptions that could cause our actual results to be different than the information we're sharing with you on this call. Please refer to our recent SEC filings and 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 that 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 advance to slide three and turn the call over to our chairman and CEO, Jim Umpleby.

Thanks, Alex. Good morning, everyone. Thank you for joining us. As we close out 2024, I want to thank our global team for their strong execution in delivering another good year. Our results continue to reflect the benefit of the diversity of our end markets and the disciplined execution of our strategy for long-term profitable growth. For the year, we delivered record adjusted profit per share and higher adjusted operating profit margin that exceeded the top of our target range. Although our top line decreased in the year, services revenue grew to a record level. We also generated MENT pre-cash flow near the top of the target range. Our robust MENT-free cash flow, along with our strong balance sheet, allowed us to deploy over $10 million to shareholders through share repurchases and dividends during the year. I'll begin with my perspectives about our performance in the quarter and for the full year. I'll then provide some insights about our end markets, followed by an update on our sustainability journey. For the fourth quarter, sales and revenues were down 5% versus last year, primarily to the lower sales volume. This was slightly below our expectations, mainly due to services growing at a slightly slower rate than we expected and some delivery delays in energy and transportation. Services revenues did increase in the quarter compared to 2023. Stronger than expected machine sales to users drove a higher than anticipated dealer inventory reduction, which offset each other, resulting in a minimal impact to sales. Fourth quarter adjusted operating profit margin was below our expectations at 18.3%, primarily due to lower volume and an unfavorable mix of products. We achieved quarterly adjusted profit per share of $5.14 and generated $3 billion of MENT free cash flow. Since the last quarter end, our backlog increased by $1.3 billion to $30 billion. For the full year, total sales and revenues were $64.8 billion, a decrease of 3% compared to 2023. Services revenues increased 4% to $24 billion. Adjusted operating profit margin of 20.7% exceeded the top end of the target range as we expected and represents a slight improvement from 2023. We achieved record adjusted profit per share in 2024 of $21.90, a 3% increase over 2023. In addition, we generated $9.4 billion of MENT free cash flow, which was near the top of our target range, as we expected. Since 2019, we have generated approximately $40 billion of MENT free cash flow, of which we have returned substantially all to shareholders through share repurchases and dividends, including $10.3 billion in 2024. Our strong and consistent MENT free cash flow has allowed us to reduce the average number of shares outstanding by approximately 18 percent since the beginning of 2019. Turning to slide four, as I mentioned earlier, sales and revenues declined 5 percent in the fourth quarter to $16.2 billion. Compared to the fourth quarter of 2023, machine sales to users, which includes construction industries and resource industries, declined by 3 percent, but was better than our expectations. Energy and transportation continued to grow as sales to users increased 2%. Sales to users in construction industries were down 3% year over year. In North America, sales to users were slightly lower, but better than we expected. Sales to users grew in residential construction, while non-residential was down slightly. Rental fleet loading was down, but in line with expectations, as we described during our last earnings call. Dealers' rental revenue continued to grow in the quarter. Sales to users declined in IAMI in Asia Pacific in line with our expectations. Sales to users in Latin America continued to grow, but at a lower rate than we expected. In resource industries, sales to users declined 3%, which was better than we expected. Mining was better than expected due to large mining and off-highway trucks being placed into service earlier than we anticipated. Heavy construction and quarrying aggregates were in line with expectations. In energy and transportation, sales to users increased by 2%. Power generation sales to users grew 27% as conditions remained favorable for both reciprocating engines and turbines and turbine-related services. Sales to users for reciprocating engines used in oil and gas applications declined primarily due to a challenging comparative to the fourth quarter of 2023. For solar turbines and turbine-related services, fourth quarter sales were down in oil and gas compared to strong shipments in the fourth quarter of 2023. Most of solar's fourth quarter decline in oil and gas was offset by growth in power generation. Transportation sales to users increased while industrial declined. Moving to dealer inventory and backlog. In total, dealer inventory decreased by $1.3 billion versus the third quarter of 2024. For machines, dealer inventory decreased by $1.6 billion. The decrease was more than we had anticipated due to better than expected sales to users particularly for construction industries in North America and resource industries. As I mentioned, backlog increased versus the third quarter to $30 billion, led by energy and transportation. This is a $2.5 billion increase versus 2023 year-end. Our backlog remains elevated as a percentage of revenues compared to historical levels. We continue to see strong order activity for both reciprocating engines and power generation and turbines and turbine-related services in both oil and gas in power generation. Turning to slide five, I'll now provide full year highlights. In 2024, we generated sales and revenues of $64.8 billion, down 3% versus last year. This was due to lower sales volume, partially offset by favorable price realization. Our adjusted operating profit margin was 20.7%, a 20 basis point increase over 2023, despite lower sales and revenues. Adjusted profit per share in 2024 was $21.90. As I mentioned, services revenues increased to $24 billion in 2024, a 4% increase over 2023. Services continue to grow as we focus on making our customers successful. Working with our dealers, we are leveraging over 1.5 million connected reporting assets and digital tools. Our CAD digital tools allow customers to more efficiently improve uptime, manage their fleets, and transact on our e-commerce platforms. For example, this year we launched an internal generative AI solution designed to optimize the creation of intelligent leads, which we call prioritized service events, or PSEs. This tool significantly reduces the time and effort required for service recommendations, helping customers avoid unplanned downtime by clearly identifying the recommended repair options and timing for customers. In 2024, we delivered more than two-thirds of new equipment with a customer value agreement, which remains an important part of our services growth initiatives. We also experienced better-than-expected growth in our e-commerce platforms and have focused on improving our customer onboarding to include key digital products. Also in 2024, we saw record uses of VisionLink, our equipment management application, onboarding and activating thousands of new customers throughout the year. Services growth remains resilient despite the decline in our overall top line. We continue to execute our various services initiatives as we strive towards our aspirational target of $28 billion in services revenues. Moving to slide six, we generated robust MENT free cash flow of $9.4 billion for the full year. We deployed $10.3 billion to shareholders through $7.7 billion of share repurchases and $2.6 billion of dividends paid. We remain proud of our dividend aristocrat status as we have paid higher annual dividends for 31 consecutive years. We continue to expect to return substantially all MENT-free cash flow to shareholders over time through dividends and share repurchases. Now on slide 7, I'll describe our expectations moving forward. Overall, we currently anticipate 2025 sales and revenues to be slightly lower compared to 2024. In 2025, we expect continued strength in energy and transportation. to mostly offset lower sales in construction industries and resource industries. We also expect services revenues to grow in 2025, including growth across all three primary segments. We currently expect machine dealer inventory to end 2025 at similar levels to year-end 2024. Full year adjusted operating profit margin is expected to be lower than 2024, but it is anticipated to be in the top half of the target range based on the corresponding level of sales and revenues. Finally, we expect MENT-free cash flow to be in the top half of our target range of $5 billion to $10 billion. Now I'll discuss our outlook for key end markets, starting with construction industries. In North America, we expect moderately lower sales to users in 2025 versus last year. Construction spend in North America remains healthy, primarily driven by large multi-year projects and government-related infrastructure investments supported by funding from the IIJA. Although we anticipate the combined non-residential and residential construction spend to remain similar to 2024 levels, our current planning assumptions reflect lower demand for new equipment. We also expect lower dealer rental fleet loading compared to 2024, although dealer revenue is expected to grow. Overall, we remain positive about the medium and longer-term outlook in North America. In Asia Pacific, outside of China, we expect soft economic conditions to continue into 2025. We anticipate China to remain at relatively low levels for the above 10-ton excavator industry. In the AME, we anticipate weak economic conditions in Europe will continue and a healthy level of construction activity in Africa and the Middle East. Construction activity in Latin America is expected to decline moderately. We also anticipate the ongoing benefit of our services initiatives will positively impact construction industries in 2025. Moving to resource industries. We anticipate lower sales to users in 2025 compared to last year, partially offset by higher services revenues, including robust rebuild activity. Customers continue to display capital discipline, although key commodities remain above investment thresholds. Customer product utilization remains high, the number of parked trucks remains relatively low, the age of the fleet remains elevated, and our autonomous solutions continue to see strong customer acceptance. 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, demand is expected to remain strong in power generation, and we expect growth for both CAT reciprocating engines and solar turbines. Overall strength in power generation for both prime and backup power applications continues to be driven by increasing energy demand to support data center growth related to cloud computing and generative AI. Through continued focus on improving manufacturing efficiencies, along with initial stages of our investment to increase large engine output capacity, we expect growth in reciprocating engines for power generation in 2025. We also expect growth in solar turbines for power generation driven by increased customer demand. For oil and gas, after a flat year in 2024, we expect moderate growth in 2025. We expect reciprocating engines and services to be slightly down in 2025 due to continuing capital discipline by our customers, industry consolidation, and efficiency improvements in our customers' operations. Solar turbines oil and gas backlog remains strong, and we see continued healthy order and inquiry activity. We expect growth for turbines and turbine-related services in oil and gas. Demand for products and industrial applications is expected to remain at a relatively low level, similar to 2024. In transportation, we anticipate full year growth driven by rail services. Moving to slide eight, I'll provide an update on our sustainability journey. Caterpillar's legacy of sustainable innovation spans nearly a century. Throughout that time, we have provided products and services that improve the quality of life and the environment while helping customers fulfill society's need for infrastructure in a sustainable way. Earlier this month, Caterpillar kicked off its year-long centennial celebration at CES 2025 with the theme, The Next Hundred Years, Experience What's Possible. We showcased our continuous investment in the core technologies of autonomy, alternative fuels, connectivity and digital, and electrification. Our ability to provide these solutions reflects investments of more than $30 billion in R&D over the past 20 years to deliver best-in-class innovation. Taking center stage at the Caterpillar CES exhibit with the CAT 972 wheel loader retrofitted to be an extended range electrified machine hybrid technical demonstrator. The demonstrator can run fully battery electric with zero exhaust emissions for several hours. It has an onboard generator and charger that enables full day uptime without requiring investment in direct current or DC charging infrastructure. In initial testing, the demonstrator maintains or exceeds the performance of a CAT 972 internal combustion machine while providing customers with the benefits of a hybrid system. With that, I'll turn it over to Andrew.

Thank you, Jim, and good morning, everyone. I'll begin with a summary of the fourth quarter and then provide more detailed comments, including some on the performance of the segments. Next, I'll discuss the balance sheet and free cash flow before concluding with comments on our high-level assumptions for 2025, as well as expectations for the first quarter. Beginning on slide 9, sales and revenues were $16.2 billion, a 5% decrease versus the prior year. As Jim mentioned, sales were slightly lower than we had anticipated, which together with unfavorable mix resulted in lower than expected margins for the quarter. Adjusted operating profit was $3 billion, and our adjusted operating profit margin was 18.3%. Profit per share was $5.78 in the fourth quarter compared to $5.28 in the fourth quarter of last year. Adjusted profit per share was $5.14 in the quarter, a 2% decrease compared to $5.23 last year. Adjusted profit per share excluded a discrete tax benefit of $0.46 for a tax law change related to currency translation. Mark-to-market gains of $0.23 for the re-measurement but pension and other post-employment plans was also excluded in addition to restructuring costs of $0.05 in the quarter. Other income and expense was $185 million favorable versus the prior year, mostly driven by a positive currency impact related to MENT balance sheet translation, which compared to a negative impact in the fourth quarter last year. As I mentioned previously, we do not anticipate currency translation movements so the positive impact on the fourth quarter of 2024 helped offset the impact of operating profit being lower than expected. Excluding discrete items, the provision for income taxes in the fourth quarter of 2024 reflected a global annual effective tax rate of 22.2%. This was slightly lower than we had expected a quarter ago and benefited the quarter by $0.09. Finally, the year-over-year impact from the reduction in the average number of shares outstanding, primarily due to share repurchases, resulted in a favorable impact on adjusted profit per share of approximately $0.24 as compared to the fourth quarter of 2023. Moving on to slide 10, I'll discuss the top line results for the fourth quarter. Sales and revenues decreased by 5% compared to the prior year, primarily impacted by lower sales volume. Price was unfavorable year over year and about in line with what we had expected. Lower volume was driven by the impact from changes in dealer inventories and a 2% year-over-year decrease in total sales to users. Total machine dealer inventory decreased by $1.6 billion in the quarter compared to $1.4 billion in the decrease in the prior year. The decrease in machine dealer inventory was larger than we had expected, and it's mostly a function of higher-than-anticipated sales to users across both construction industries in North America and resource industries. Service revenues increased in the quarter compared to 2023. As I mentioned, the sales decrease in the quarter was slightly larger than we had anticipated. This was mostly due to services growing at a slightly slower rate than we had expected and some delivery delays in energy and transportation. Moving to operating profit on slide 11. Operating profit in the fourth quarter decreased by 7% to $2.9 billion. Adjusted operating profit decreased by 8% to $3 billion, mainly due to the profit impact of lower than expected sales volume. As I mentioned, for the fourth quarter, the adjusted operating profit margin was 18.3%, a 60 basis point decrease compared to the prior year. This was lower than we had anticipated, mainly due to a lower than expected sales volume and the impact of unfavorable mix. On slide 12, construction industry sales decreased by 8% in the fourth quarter to $6 billion. This was slightly below our expectations on lower than anticipated volume. Compared to the prior year, the 8% sales decrease was primarily due to unfavorable price realization and lower sales volume. The decrease in sales volume was mainly driven by lower sales of equipment to end users and dealers reducing their inventory by slightly more than they did during the fourth quarter of 2023. By region, construction industry sales in North America decreased by 14%. In Latin America, sales increased by 6%. Sales in the AMU region decreased by 1%. In Asia Pacific, sales decreased by 2%. Fourth quarter profit for construction industries was $1.2 billion, a 24% decrease versus the prior year. This is primarily due to unfavorable price realization as a result of the impact of the post-sales merchandising programs that we discussed with you in October. The segment's margin of 19.6% was a decrease of 390 basis points versus the prior year. The margin was lower than we had anticipated, primarily impacted by lower volume and unfavorable mix. Manufacturing costs were also unfavorable versus our expectations, principally due to a headwind from cost absorption as our inventory and construction industries declined. Turning to slide 13. Resource industry sales decreased by 9% in the fourth quarter to $3 billion. This was below our expectations, mainly due to services growing at a slightly lower rate than we had anticipated. As we compared to the prior year, the 9% sales decrease was primarily due to lower sales volume, mainly driven by the impact from changes in dealer inventories. Dealer inventory decreased more in the fourth quarter of 2024 than it did in the fourth quarter of 2023. Fourth quarter profit for resource industries decreased by 22% versus the prior year to $466 million. This is mainly due to the profit impact of lower sales volume. The segment's margin of 15.7% was a decrease of 280 basis points versus the prior year. This was lower than we had anticipated, primarily due to lower volume. Now on slide 14. Energy and transportation sales of $7.6 billion were about flat versus the prior year. Sales were slightly below our expectations due to a lower-than-expected services growth rate, largely in oil and gas, and the timing of deliveries of international locomotives. Compared to the prior year, sales were roughly flat as the impact of lower sales volume was mostly offset by favorable price realization. By application, power generation sales increased by 22%, transportation sales were lowered by 1%, oil and gas sales decreased by 14%, and industrial sales decreased by 14%. Fourth quarter profit for energy and transportation increased by 3% versus the prior year to $1.5 billion. The increase was primarily due to favorable price realization, partially offset by the profit impact of lower sales volume. The segment's margin of 19.3% was an increase of 70 basis points versus the prior year. This was lower than we had anticipated, primarily due to lower than expected volume and an unfavorable mix of products. Moving to slide 15. Financial products revenues increased by 4% versus the prior year to about $1 billion, primarily due to higher average earning assets in North America and higher average financing rates across all regions except North America. Segment profit decreased by 29% to $166 million. This was mainly due to an unfavorable impact from equity securities, in addition to lower margin and a higher provision for credit losses. A customer's financial health remained strong, Past dues were 1.56% in the quarter, down 23 basis points versus the prior year, and our lowest level since 2005. The allowance rate was 0.91%, remaining near historic lows. Business activity at CAP Financial remains healthy. Retail credit applications increased, and our retail new business volume grew by 3% versus the prior year. This was our highest level since 2012, supported by attractive finance packages for customers, choosing to buy Caterpillar equipment. We continue to see proportionally more of ourselves financed through Cat Financial. In addition, demand for used equipment remains healthy and inventories remain at low levels. Conversion rates are above historical averages as customers choose to buy equipment at the end of their lease term. Moving on to slide 16, we continue to generate strong MENT free cash flow. The $9.4 billion in 2024 was near the top end of our target range and just slightly lower than the prior year, despite a larger payment for short-term incentive compensation and higher capital expenditure. CapEx for the year was about $2 billion, which was in line with our expectations. Moving to capital deployment, in 2024, we returned $10.3 billion to shareholders through repurchase stock and dividends. On share repurchases, we deployed $7.7 billion as we continue to fulfill our objective to be in the market on a more consistent basis. Our balance sheet remains strong with an enterprise cash balance of $6.9 billion. In addition, we hold $2 billion in slightly longer-dated liquid marketable securities to improve yields on that cash. Now on slide 17, let me start with a high-level overview of our expectations for the full year. We expect a slight decrease in sales for 2025 with an unfavorable impact from both volume and price. Due to the impact of post-sales merchandising programs, price realisation should account for about a 1% decrease in sales for the full year. On margins, the impact of price together with higher depreciation costs due to the investments we are making should result in adjusted operating profit margins being in the top half of the target range at the expected level of sales rather than being above the top end of the range as occurred in 2024. Our margin targets are progressive, so while we would expect volume to have an impact on absolute margins, our target is adjusted for lower sales. We expect a slight headwind in other income and expense in 2025, primarily due to lower interest income, mostly due to lower interest rates, as well as the absence of the positive currency benefit from ME&T balance sheet translation that occurred in 2024. As I mentioned, we do not anticipate translation movements in our expectations. We expect restructuring costs of approximately $150 to $200 million in 2025. We anticipate a global annual effective tax rate of 23% for 2025, excluding discrete items. While the impact of the share buyback should be positive, we expect to have less MENT-free cash flow to deploy in 2025. This implies a less favorable impact to profit per share in 2025 as compared to 2024. By segment, lower sales in construction industries and resource industries will be partially offset by sales growth in energy and transportation. For construction industries, we expect lower sales in 2025, based on the outlook Jim described and unfavorable price realization. In resource industries, we anticipate slightly lower sales versus 2024 driven by unfavorable price realization and slightly lower volume. Higher volumes and favorable price in energy and transportation should drive sales growth, though sales remain constrained until the benefits of the investments we are making in large engines begin to flow through beyond 2025. We also anticipate another year of services growth in each of our primary segments. Currently, we do not anticipate a significant change in delivery machines by the end of 2025. Moving on to ME&T free cash flow, we expect to be in the top half of our target range of $5 to $10 billion. The first quarter of 2025 will be impacted by a $1.4 billion cash outflow related to the payout of last year's incentive compensation. We anticipate CapEx of about $2.5 billion in 2025 as we continue to make disciplined investments that are right for our business, governed by a focus on growing absolute OPEC dollars. This includes the multi-year capital investment to expand our large engine volume output capability that we mentioned last year. Turning to slide 18, to assist with your modeling, I'll provide some color on the first quarter. Starting with the top line, we expect lower sales versus the prior. For perspective, In a typical year, we see our lowest sales in the first quarter of the year. In 2025, we anticipate that trend to continue, but be more pronounced as sales in the first quarter should account for a lower percentage of full-year sales than is typical by about 100 basis points. This decreases mainly due to our expectations for dealer inventory movements and price, which primarily impacts machines. Energy and transportation is expected to show normal seasonality with sales growing throughout the year. Let me explain. Although dealers did reduce machine inventory significantly in the fourth quarter, they remain around the top end of the range as we enter 2025. This compares with dealer inventories and construction industries being towards the middle of the range at the beginning of 2024. As a result, we expect them to build correspondingly less machine inventory during the first quarter than the $1.1 billion that they built in the first quarter of 2024. As we expect machine dealer inventory to be about flat by year end, we should see a tailwind to sales in the fourth quarter as we don't expect a similar machine dealer inventory change as we have seen in the last two years. We also expect unfavorable price realization for machines in the first quarter due to the impact of post-sales merchandising programs. We would expect these price impacts to be greater for machines in the first half of the year as the noticeable impact of post-sales merchandising programs started in the third quarter of 2024 making for an easier comparison in the second half so to pull together the impact by segment we anticipate lower sales and construction industries in the first quarter impacted by lower sales to users the headwind from changes in dealer inventory and price the impact of which should be similar to what we saw in the fourth quarter of 2024 in resource industries in the first quarter we expect lower sales volume versus the prior year impacted by lower volume and unfavorable price realization. In energy and transportation, we anticipate similar sales in the first quarter versus the prior year, as continued strength and power generation is about offset by lower oil and gas and transportation sales. Price should be positive for energy and transportation. Now I'll provide some color on first quarter margin expectations. Though enterprise margins are typically stronger in the first quarter compared to the remaining quarters of the year, we do not expect the seasonable trend to occur in 2025. Compared to the prior year, we anticipate a lower enterprise adjusted operating profit margin in the first quarter due primarily to lower than usual volume and price. Volume is impacted by the lower build of machine dealer inventory and slightly lower sales to users for machines. Unfavorable price realization for machines is principally due to the factors I've discussed previously. which will be partially offset by federal price in energy and transportation. We expect there will be improvement in first quarter margins, offsetting the volume impact in the first quarter due to stronger volume in the fourth quarter than is typical. By segment in the first quarter in construction industries, we anticipate lower margins compared to the prior year due primarily to lower volume and price. We do not expect to see the margin benefit we typically see in the first quarter of the year as compared to the fourth quarter of the prior year, which is generally in the range of 100 to 200 basis points. Again, some of this will be offset in the fourth quarter as volume is favorable and price more neutral. In resource industries, we anticipate lower margin in the first quarter compared to the prior year, mainly due to lower volume and unfavorable price realization. In energy and transportation, we expect slightly lower margin versus the prior year as favorable price realization is more than offset by higher manufacturing costs and unfavorable mix impacts. Again, as a reminder, this detail is provided to help you model the first quarter and does not impact our expectations for the fall year that I set out earlier, which is a slight decrease in sales and revenues for the year and margins in the top half of the target range. So turning to slide 19, let me summarize. Adjusted profit per share of $21.90 exceeded last year's record by 3%. This was our third straight year with record adjusted profit per share. adjusted operating profit margin of 20.7% exceeded the top of our target range. MENT free cash flow of $9.4 billion was near the top of the target range of $5 to $10 billion. For 2025, while we expect a slight drop in sales, we expect to be in the top half of the adjusted operating profit margin range and the top half of the MENT free cash flow target range, and we anticipate another year of services growth. We continue to execute our strategy for long-term profitable growth. And with that, we'll take your questions.