Caterpillar, Inc.

quarter of 2025 earnings call. I'm Alex Kapper, Vice President of Investor Relations. Joining me today are Jim Umpleby, Chairman and CEO, Joe Creed, Chief Operating Officer and incoming CEO, Andrew Bonfield, Chief Financial Officer, Kyle Epley, Senior Vice President of the Global Finance Services Division, and Rob Rangel, Senior Director of Investor Relations. During our call, we'll be discussing the first quarter earnings release we issued earlier today. You can find our slides, the news release, and a webcast replay 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 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 in the forward-looking statements reminder and 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 a 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 Chairman and CEO, Jim Ubley.

Thanks, Alex. Good morning, everyone. Thank you for joining us. Since the beginning of the year, we have been celebrating our centennial at facilities and trade shows around the world. Earlier this month, we commemorated Caterpillar's founding on April 15th by hosting events across the company. And I had the honor of bringing the opening bill at the New York Stock Exchange, surrounded by all living past CEOs of Caterpillar. It was a historic celebration. On the same day, we also announced that Joe Creed will succeed me as CEO tomorrow, May 1st. The announcement followed a multi-year succession planning process by Caterpillar's board of directors. I have great confidence in Joe and the rest of the executive office to lead Caterpillar going forward. It's been a great honor and privilege to serve as chairman and CEO for the past eight years, and I look forward to my new role as executive chairman. Now, moving to slide four, I want to thank our global team for another quarter of solid results, which reflect the benefit of the diversity of our end markets and the disciplined execution of our strategy for long-term profitable growth. Although sales were broadly in line with our expectations when excluding the negative impact from currency, We delivered adjusted operating profit and adjusted operating profit margin above our expectations. Very strong order rates resulted in backlog growth of $5 billion, an all-time record for organic backlog growth in a quarter. The backlog increased for all segments and was led by energy and transportation. Our strong balance sheet allowed us to deploy over $4 billion to shareholders through share repurchases and dividends during the quarter. As you know, the current environment is dynamic and we will discuss the potential impacts to 2025 in a moment. But to start, I'll share my perspectives about this quarter's performance. Joe will then discuss the second quarter outlook and our full year scenarios. Finally, Andrew will provide a detailed overview of results and key assumptions looking forward. For the first quarter, sales and revenues were down 10% versus last year. The sales decrease was primarily due to lower sales volume and an unfavorable price realization versus the first quarter of 2024. Lower sales volume was primarily driven by the impact from changes in dealer inventories. Total dealer inventory increased by about $100 million in the first quarter of 2025 compared to about $1.4 billion in the first quarter of 2024. Machine sales to users were stronger than we expected in the first quarter of resulting in flat machine dealer inventory versus our expectation for growth in dealer inventory during the quarter. First quarter adjusted operating profit margin was 18.3%, above our expectations primarily due to favorable manufacturing costs. We achieved quarterly adjusted profit per share of $4.25. Turning to slide five, as I mentioned earlier, sales and revenues declined 10% in the first quarter to $14.2 billion. compared to the first quarter of 2024, machine sales to users, which includes construction industries and resource industries, declined by 1%, but were better than our expectations. Energy and transportation continues to grow as sales to users increased 13%, driven primarily by power generation. Sales to users in construction industries were up 3% year over year. In North America, Sales to users were slightly higher than the prior year and better than we expected. Growth in sales to users for residential construction more than offset a slight decline in non-residential and lower rental fleet loading. Rental fleet loading was in line with our expectations, and dealers' rental revenue continued to grow in the quarter. Sales to users increased in the AME, driven by better-than-expected sales to users in Africa and the Middle East. In Asia Pacific, sales to users declined in line with their expectations. Sales to users in Latin America continue to grow and at a higher rate than anticipated. In resource industries, sales to users declined 10%, which was better than we expected. Mining as well as heavy construction and quarry and aggregates were both better than expected, primarily due to off-highway trucks placed into service sooner than anticipated. In energy and transportation, sales to users increased by 13%. Power generation sales to users grew significantly by 58%, primarily due to demand for reciprocating engines for data center applications. Turbines and turbine-related services for power generation also grew. Sales to users of reciprocating engines declined in oil and gas applications due to softness in well servicing. Turbines and turbine-related services for oil and gas declined due to a difficult comparison versus the first quarter of 2024, and some delay in timing of deliveries in the first quarter of 2025. Transportation sales to users increased, and industrial sales to users grew slightly from a relatively low level. Moving to dealer inventory and our backlog. In total, dealer inventory increased by approximately $100 million versus the fourth quarter of 2024. Machine dealer inventory was about flat and grew less than we had anticipated due to better-than-expected machine sales to users in construction industries and resource industries. As I mentioned, backlog increased versus year-end 2024 by $5 billion, or 17%, driven by strong order rates in all three of our primary segments. Our backlog of $35 billion is a record. Moving to slide six. we generated MENT pre-cash flow of $200 million in the first quarter. The decline versus last year is primarily due to lower profit. We deployed $4.3 billion to shareholders through nearly $3.7 billion of share repurchases and about $700 million 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 M, E, and T pre-cash flow to shareholders over time through dividends and share repurchases. Now, I'll turn it over to Joe.

All right. Thank you, Jim, and good morning, everyone. I'll start today with a discussion of our second quarter outlook and a range of scenarios for the full year before discussing our end markets. The first quarter ended with positive momentum after another quarter of better-than-expected sales to users and record organic growth in our backlog. However, the potential impact of tariffs has increased uncertainty and the situation remains fluid. I'll start with our expectations for the second quarter where we have the best visibility and then cover the full year. Based on our current view, we anticipate sales in the second quarter to be similar to prior year. Sales growth in energy and transportation will be offset by lower machine sales in both resource industries and construction industries, primarily driven by unfavorable price, while volume is expected to be about flat. We expect lower enterprise adjusted operating profit margins versus the prior year without the additional headwind of tariffs, primarily due to lower price realization. Additionally, for the second quarter, the tariffs which have been announced and implemented this year are currently estimated to be a cost headwind of about $250 million to $350 million. This estimate is net of our initial mitigation efforts and cost controls, which represent limited short-term actions that we were able to implement quickly. As you would expect, we are evaluating a broad range of longer-term mitigation actions. Many of these actions require more time to implement, are more difficult to reverse, and therefore require more clarity and certainty on the long-term environment around tariffs. As I mentioned, the situation remains fluid, and we will continue to monitor it closely. Throughout our history, we've demonstrated the ability to navigate many different environments. I'm confident we're well positioned to manage the impact of tariffs over time. Caterpillar is a global company, and we have manufacturing locations around the world. Our largest manufacturing base is in the United States, where we employ over 50,000 full-time employees, and we continue to be a net exporter. Caterpillar's business is resilient due to the diversity of our portfolio and the end markets we serve. Moving on to the full year. I remain cautiously optimistic based on how we finished the first quarter. As Jim mentioned, machine sales to users in the first quarter were better than expected, especially in construction industries. This is a continuation of the positive momentum we saw at the end of last year and evidence that the merchandising programs we put in place are yielding results. I'm also pleased with the continued growth in power generation, as well as the first quarter order intake in all three segments, which led to record organic growth in our backlog. As a result, in a pre-tariff scenario, which does not include any impact from tariffs, we would have expected full-year 2025 sales and revenues to be about flat versus 2024. This would represent a slight improvement since our outlook last quarter. In this scenario, we would also expect adjusted operating profit margins to be in the top half of the target margin range based on the corresponding level of sales and revenues. MENT free cash flow would also be in the top half of the $5 billion to $10 billion target range. Due to the tariff announcements and increasing economic uncertainty, we have evaluated a variety of scenarios to estimate the potential impact on our results for the remainder of the year. In the event we see negative economic growth in the second half of the year, we would expect full-year 2025 sales and revenues to only be down slightly versus 2024. This expectation is a reflection of the diversity of our end markets and the strength of our record backlog. especially for large engines and solar turbines, where we have line of sight to production for the remainder of 2025. Before considering additional mitigating actions we might take, and assuming the tariffs in place today remain for the duration of 2025, we would still expect to be in the target margin range for adjusted operating profit, as well as in the MENT-free cash flow target range for the year. Andrew will provide more details on key assumptions for the second quarter and full year in a moment. To further support our range of scenarios, I'll now share the latest view of our end markets based on current conditions, starting with construction industries. As I said earlier, we are encouraged by another quarter of better than expected sales to users and strong order rates across many of our regions as customers are responding to the attractive rates offered through CAP Financial. In North America, Overall construction spending remains at healthy levels, and infrastructure projects funded by the IIJA continue to be awarded. Sales to users in residential construction and dealer rental revenues continue to show growth. China has shown positive momentum in the 10-ton and above excavator industry, but from a very low level of activity. In Asia Pacific outside of China, economic conditions continue to be soft. In IEMI, weak economic conditions in Europe remain, while conditions are supportive of investment in Africa and the Middle East. Construction activity in Latin America is expected to decline moderately throughout the year. Moving on to resource industries. We are starting the year with strong order rates and backlog growth, particularly for large mining trucks. Rebuild activity is expected to remain healthy. Although most key commodities remain above investment thresholds, customers continue to display capital discipline. Customer product utilization remains high, and the age of the fleet remains elevated. We also continue to see growing customer acceptance of our autonomous solutions. We believe the evolving energy landscape will support increased commodity demand over time, providing further opportunities for long-term profitable growth. And finally, in energy and transportation, The growth in backlog was driven by robust order activity in both oil and gas and power generation. Demand remains strong in power generation for both CAT reciprocating engines and solar turbines. Our ongoing discussions with data center customers give us confidence in our long-term outlook. We are focused on operational improvements to deliver orders today while increasing our large engine output capabilities through the previously announced multi-year capacity investment. For oil and gas reciprocating engines and services, we expect continuing softness in well servicing due to ongoing capital discipline by our customers, industry consolidation, and efficiency improvements in our customers' operations. We do see positive momentum, however, in gas compression. As we've previously mentioned, we can leverage our large engine platforms across a variety of applications. Based on current market conditions and well servicing applications, we are able to serve additional power generation and gas compression demand while meeting customer needs. Solar turbines, oil, and gas backlog remain strong, and we continue to see healthy order and inquiry activity. Demand for products and industrial applications is expected to remain at a relatively low level, while transportation remains stable. With that, I'll turn it over to Andrew for a detailed overview of results and key assumptions looking forward.