Caterpillar, Inc.

Good morning, everyone, and welcome to Caterpillar's second quarter of 2025 earnings call. I'm Alex Kapper, Vice President of Investor Relations. Joining me today are Joe Creed, Chief Executive Officer, Andrew Bonfield, Chief Financial Officer, Kyle Epley, Senior Vice President of the Global Finance Services Division, and Rob Rengel, Senior Director of Investor Relations. During our call, we'll be discussing the second 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 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 CEO, Joe Creed.

Thank you, Alex, and good morning, everyone. Thanks for joining us today. The Caterpillar team demonstrated solid operational performance in a fluid environment this quarter. Sales were in line with our expectations. we delivered adjusted operating profit and adjusted operating profit margin above our expectations we continue to see strong orders across our segments as demand remains resilient supported by infrastructure spending and growing energy needs as a result backlog grew by two and a half billion dollars with increases across all three primary segments our strong me and t free cash flow allowed us to deploy about one and a half billion dollars to shareholders through share repurchases and dividends during the quarter. As you know, the environment continues to be dynamic. The net impact of tariffs was around the top end of our estimated range for the quarter and is likely to be a more significant headwind to profitability in the second half of 2025. We'll provide more details in a moment. I'll start with my perspectives about this quarter's performance. Then I'll discuss our outlook, along with insights about our end markets. And then finally, Andrew will provide a detailed overview of results and key assumptions, including the net impact of incremental tariffs looking forward. Turning to slide four. Sales and revenues were down 1% versus last year. The decrease was primarily due to unfavorable price realization, partially offset by higher sales volume and higher financial products revenues. Second quarter adjusted operating profit margin was 17.6%. Although the net impact from incremental tariffs was around the top end of our estimated range, Lower than expected manufacturing costs resulted in adjusted operating profit margin above our expectations. We achieved quarterly adjusted profit per share of $4.72. Compared to the second quarter of 2024, machine sales to users were about flat. Energy and transportation continued to grow as sales to users increased 9%, driven primarily by power generation and industrial applications. For construction industries, Sales to users were up 2% year-over-year, in line with our expectations. In North America, sales to users were 3% higher than the prior year and better than we anticipated due to growth in both residential and non-residential construction, partially offset by lower rental fleet loading. However, despite lower rental fleet loading, dealers' rental revenue continued to grow in the quarter. Sales to users increased in IAMI primarily due to growth in Africa and the Middle East. However, overall growth in EME was below our expectations due to weakness in Europe. In Asia Pacific, sales to users declined slightly. Although China was about flat versus the prior year, the second quarter was below our expectations due to lower activity following a stronger than expected first quarter. Sales to users in Latin America declined, but were slightly better than we anticipated. In resource industries, sales to users declined 3%. which was in line with our expectations. While mining was slightly worse, primarily due to the timing of off-highway truck deliveries, sales to users in heavy construction and quarry and aggregates were slightly better than we anticipated. In energy and transportation, sales to users increased by 9%. Power generation grew by 19%, primarily due to demand for reciprocating engines for data center applications. Turbines and turbine-related services for power generation were down slightly due to timing. Oil and gas sales to users increased overall with the increase in turbines and turbine-related services partially offset by a decrease in reciprocating engines due to the timing in gas compression. Industrial sales to users grew from relatively low level and were driven by sales into electric power applications. Transportation decreased due to lower marine sales to users and the timing of international locomotive deliveries. Moving to dealer inventory and our backlog. In total, dealer inventory increased by approximately $100 million versus the first quarter of 2025. Machine dealer inventory was down approximately $400 million in line with our expectations. As I mentioned, backlog increased sequentially by $2.5 billion, driven by strong order rates in all three of our primary segments. Our backlog is at a record level of $37.5 billion. Moving to slide five, I'll now discuss our outlook. Looking ahead to the second half of 2025, I'm increasingly optimistic about the top line expectations. I'm pleased with another quarter of increased ordering activity and backlog growth, continued sales to users growth in construction industries, and strong demand in power generation. As I mentioned, the incremental tariffs announced in 2025 and expected to be in place by August 7th will be a headwind to profitability during the remainder of the year. While we have taken initial mitigating actions to reduce the impact, tariff and trade negotiations continue to be fluid. We will remain flexible when we intend to implement longer-term actions once there is sufficient certainty. We are considering all options to further reduce the impact of tariffs going forward. For the third quarter, we anticipate sales to grow moderately versus the prior year. Sales growth is expected to be driven by higher volumes in all three segments. Excluding the impact of incremental tariffs, third quarter adjusting operating profit margin is expected to be similar to the prior year. Including the net impact from incremental tariffs, we expect third quarter enterprise adjusted operating profit margin to be lower versus the prior year. Given the strength of our record backlog, we expect full year 2025 sales and revenues to increase slightly versus 2024. This represents an improvement since our outlook last quarter and our full year outlook from the beginning of the year. Full year services revenues are expected to be about flat versus 2024. This is slightly lower than our previous expectations due to lower than anticipated machine rebuild activity throughout the year. Excluding the impact of incremental tariffs, full-year adjusted operating profit margin is expected to be in the top half of our target margin range. Including the net impact from incremental tariffs, we expect full-year adjusted operating profit margin to be in the bottom half of the target margin range. This estimate includes the initial mitigating actions already implemented and currently planned throughout the rest of the year. We also expect ME&T free cash flow to be around the middle of the $5 billion to $10 billion target range. Angie will provide more details on key assumptions for the third quarter and full year in a moment. To further support our sales outlook, I'll now share the latest view of our end markets. Starting with construction industries, as I mentioned earlier, we're encouraged by another quarter of Sales Caesar's growth, strong order rates across many of our regions, and backlog growth. Customers continue to be responsive to the attractive rates we're offering through CAP Financial. And as a result, we anticipate full year growth in construction industry sales to users, despite softness in the global industry. In North America, overall construction spending remains at healthy levels and infrastructure projects funded by the IIJA continue to be awarded. We now expect full year growth for sales to users, which is an improvement from the outlook we provided in January. Full-year dealer rental revenues are also expected to grow as dealer rental fleet loading is expected to increase in the second half of the year. In Asia Pacific, we anticipate full-year sales to users growth. China has shown positive momentum to start the year. We expect full-year growth in the above 10-ton excavator industry, but from a very low level of activity. In Asia Pacific, outside of China, we expect economic conditions to be soft. In IAMI, we expect moderate sales to users growth for the year, driven by healthy construction activity in Africa and the Middle East and improving economic conditions in Europe. Despite weaker construction activity in Latin America, we expect sales to users growth for the year. Moving to resource industries. We currently anticipate lower sales to users in 2025 compared to last year as customers continue to display capital disciplines. However, we see positive momentum with strong water rates and backlog growth, particularly for large mining and articulated trucks. Although most key commodities remain above investment thresholds, declining coal prices have caused an increase in the number of parked trucks. As a result, we expect slightly lower rebuild activity throughout the second half of the year. Overall, customer product utilization remains high and the age of the fleet remains elevated. We also continue to see growing demand and customer acceptance of our autonomous solution. 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 backlog growth was driven by robust order activity in power generation, oil and gas, and transportation. We expect full year growth for power generation as demand remains strong for both prime and backup power applications, driven by increasing energy demands to support data center growth related to cloud computing and generative AI. We continue to stay close to our largest data center customers and receive regular feedback on their long-term demand. In oil and gas, we expect moderate growth in 2025. For reciprocating engines and services, we continue to expect softness and well-servicing due to ongoing capital discipline by our customers, industry consolidation, and efficiency improvements in our customers' operations. We do see positive momentum in demand for reciprocating engines used in gas compression applications. Solar turbines, oil, and gas backlog remain strong, and we see healthy order and inquiry activity. With our investment to increase large engine capacity and process, we're continuously improving manufacturing throughput to meet customer needs across a broad range of applications. Demand for products and industrial applications is expected to improve from previous lows, and transportation is expected to remain stable. Before turning the call over to Andrew, I want to briefly reflect as I approach my first 100 days as CEO. I'm optimistic and excited about the possibilities ahead. As I visit with customers, employees, dealers, and investors around the world, I'm proud to see our global impact and the Caterpillar team's relentless commitment to customer success. I'm also pleased that Christy Pambianchi joined the Executive Office on May 1st as Chief Human Resources Officer to focus on recruiting and developing the best talent to deliver our strategy for long-term profitable growth. I look forward to sharing more about our strategic priorities and the incredible growth opportunities that lie ahead during our upcoming Investor Day in November. Now I'll turn it over to Andrew for a detailed overview of results and key assumptions looking forward.

Thank you, Joe, and good morning, everyone. I'll begin with a summary of the second 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 current assumptions for the remainder of the year, and in particular, the third quarter. Beginning on slide six, Sales and revenues were $16.6 billion, a 1% decrease versus the prior year. This was in line with our expectations. Adjusted operating profit was $2.9 billion and our adjusted operating profit margin was 17.6%. Both were better than we expected. Profit per share was $4.62 in the second quarter compared to $5.48 in the second quarter of last year. Adjusted profit per share was $4.72 in the quarter compared to $5.99 last year. Adjusted profit per share excluded restructuring costs of $0.10 in the quarter. Other income and expense was unfavorable by $71 million versus the prior year, primarily driven by an unfavorable foreign currency impact of $122 million from MENT balance sheet translation in the quarter. compared to a favorable impact of $20 million last year. Excluding discrete items, the estimated annual effective global tax rate was 23.0%. 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 17 cents. Moving to slide seven, I'll discuss our top line results for the second quarter. Sales and revenues decreased by 1% compared to the prior year, primarily due to unfavorable price realization, which was partially offset by higher sales volume and financial products revenue growth. As I mentioned, sales were in line with our expectations. Moving to operating profit on slide eight, Operating profit in the second quarter decreased by 18% to $2.9 billion. Adjusted operating profit decreased by 22% versus the prior year to $2.9 billion, mainly due to unfavorable manufacturing costs that largely reflected the impact of higher tariffs and the impact of unfavorable price. Deferred compensation expense also negatively impacted operating profit in the quarter due to strength in the equity markets. This is an item we do not forecast, as it is offset by the total return swaps, which were reported as income in other income and expense. The adjusted operating profit margin was 17.6%, a decrease of 480 basis points compared to the prior year. Margins exceeded our expectations, primarily due to favorable manufacturing costs driven by cost absorption. As Joe mentioned, the net incremental impact from tariffs was around the top end of our estimated $250 to $350 million range for the quarter. With the decrease in certain tariff rates during the quarter, we lifted some holds on inbound shipments, such that the high inbound shipment volumes more than offset the lower tariff rates. Tariffs impacted all three primary segments, and part of the charge was not allocated to the segments recorded in corporate items. Also, please keep in mind the impact as net of mitigating actions in the quarter, which were of the no regrets type, mainly short-term actions around cost controls. Moving to slide nine, I'll review the performance of the segments, starting with construction industries, sales decreased by 7% in the second quarter to $6.2 billion, primarily due to unfavorable price realization. Sales were about in line with our expectations as favorable currency impacts roughly offset unfavorable price realization. Despite sales to users growth, volume was slightly negative due to dealer inventory headwind. Price was more unfavorable than we had anticipated as our attractive merchandising programs stimulated higher than expected sales to users in North America. By region, construction industry sales in North America decreased by 15% versus the prior year. In Latin America, sales decreased by 20%. Sales in the Miami region increased by 13%. In Asia Pacific, sales increased by 6%. Second quarter profit for construction industries was $1.2 billion, a 29% decrease versus the prior year. The segment's margin of 20.1% was a decrease of 600 basis points versus the prior year. The decrease was mainly due to unfavorable price realization. In addition, the net impact of incremental tariffs in construction industries had a negative impact of around 170 basis points. Excluding this impact from tariffs, the margin was slightly lower than we had anticipated, primarily due to the headwind from price realization, which I mentioned a moment ago. Turning to slide 10, resource industry sales decreased by 4% in the second quarter to $3.1 billion. Sales were about in line with our expectations. The 4% sales decrease was primarily due to unfavorable price realization. Second quarter profit for resource industries decreased by 25% versus the prior year to $537 million. The segment's margin of 17.4% was a decrease of 500 basis points versus the prior year. This was mainly due to unfavorable price realization, the net impact of incremental tariffs, and the profit impact of lower sales volume, including unfavorable product mix. The net impact of incremental tariffs in resource industries was approximately 230 basis points. Excluding this impact from tariffs, the margin was slightly higher than we had anticipated due to favorable manufacturing costs, including freight and material. Now on slide 11, energy and transportation sales of $7.8 billion increased by 7% versus the prior year. Sales were in line with our expectations. The sales increase versus the prior year was mainly due to higher sales volume and favorable price realization. By application, power generation sales increased by 28%, oil and gas sales increased by 2%, industrial sales increased by 1%, and transportation sales were lowered by 7%. Second quarter profit for energy and transportation increased by 4% versus the prior year to $1.6 billion. The increase was primarily due to favorable price realization and the profit impact of higher sales volumes. partially offset by unfavorable manufacturing costs, largely due to tariffs. The segment's margin of 20.2% was a decrease of 60 basis points versus the prior year. The net impact of incremental tariffs in energy and transportation was approximately 110 basis points. Excluding this impact from tariffs, the margin was slightly higher than we had anticipated due to favorable price realization and manufacturing costs. Moving to slide 12, financial products revenues were approximately $1.0 billion in the quarter, a 4% increase versus the prior year, primarily due to favorable impact from higher average earning assets in North America. These are partially offset by an unfavorable impact from lower average financing rates, mainly in North America. Segment profit increased by 9% to $248 million, The increase was mainly due to a favorable impact from equity securities and a favorable impact from higher average earning assets, partially offset by higher provisions for credit losses and an unfavorable impact from lower net yield on average earning assets. The increase in the provision primarily reflected the absence of a non-recurring reserve release, which was a benefit in the prior year. Our customers' financial health remains strong. Past dues were 1.62% in the quarter, down 12 basis points versus the prior year. This is the lowest second quarter in over 25 years. The allowance rate was 0.94%, remaining near historic lows. Business activity at Cat Financial remains healthy. Retail credit applications and retail new business volume both grew by 5% versus the prior year. Retail new business volume is at its highest level for a second quarter in over 10 years, reflecting the attractiveness of our sales merchandising programs. In addition, used equipment inventory levels remain low and conversion rates remain above historical averages as customers choose to buy equipment at the end of their lease term. Moving on to slide 13. MENT free cash flow was about $2.4 billion in the second quarter, approximately $100 million lower than the prior year, as stronger operating cash was more than offset by higher capex spend. We continue to anticipate capex spend of around $2.5 billion for the year. Moving to capital deployment, we deployed about $1.5 billion to shareholders in the second quarter. Share repurchase spend accounted for about $800 million, with the remainder reflecting our quarterly dividend payment. In June, we announced a 7% dividend increase, our fifth consecutive year with a high single-digit quarterly increase. Our balance sheet and liquidity positions remain strong. During the quarter, we issued bonds totaling $2 billion at attractive financing rates, and net debt in MENT was $5.2 billion. We ended the quarter with an enterprise cash balance of $5.4 billion. In addition, we held $1.2 billion in slightly longer dated liquid marketable securities to improve yields on that cash. Now on slide 14, let me start with a few comments on the full year. We are increasingly optimistic about our top line expectations based on what we see today. As Joe mentioned, demand signals have remained healthy, including backlog growth across our three primary segments. Against this supportive backdrop, we now anticipate slightly higher sales this year with a stronger second half than is typical. This represents an improvement since our outlook last quarter. To explain, we anticipate higher machine volume, including sales to users growth in the second half versus the prior year. Also, we continue to expect machine deal inventories will be about flat for the full year, which implies some net build in the second half versus a decrease in the corresponding time period in 2024. Energy and transportation sales should grow in the second half as well, driven by the strength of our backlog and robust order activity. We expect some adverse price realisation in the second half versus the prior year, although this will be at a lower level than in the first half. Now moving on to margins. Excluding the impact of incremental tariffs, the full year adjusted operating profit margin is expected to be in the top half of our margin target range. However, including the net impact from incremental tariffs, we now expect full year margins will be in the bottom half of the target range on slightly higher sales and revenues versus 2024. Excluding this tariff impact, a second half margins are expected to be stronger than the prior year. However, we anticipate there will be lower when incorporating the net impact of incremental tariffs. Based on the incremental tariffs announced in 2025 and expected to be placed on August the 7th, we expect the net impact from incremental tariffs for 2025 will be around $1.3 to $1.5 billion net of some mitigating actions and cost controls. This assumes higher net incremental tariff impacts in both the third and fourth quarters compared to the second quarter level. Due to the timing of recent rate changes, the headwind is likely to be larger in the fourth quarter when compared to the third quarter. As Joe mentioned, we expect MENT free cash flow will be around the middle of the $5 to $10 billion target range, or around $7.5 billion. We now expect restructuring costs of approximately $300 to $350 million in 2025. This is higher than we previously expected due to the timing of an anticipated loss on the divestiture of non-U.S. entities. On taxes, we are evaluating the impact of recently enacted U.S. legislation and do not currently expect this change to have a material impact on our 2025 effective global tax rate. which we had previously estimated to be 23.0% by 2025, excluding discrete items. Turning to slide 15, to assist you with your modeling, I'll provide our third quarter assumptions. Based on what we see today, we anticipate third quarter sales will grow moderately versus the prior year, with higher volumes across all three primary segments. By segment, in construction industries, we expect sales increase in the third quarter versus the prior year on volume growth driven by strong sales to users. The year over price comparison begins to ease this quarter. We expect our sales merchandising programs will continue yielding results, supporting strong sales to users, but a headwind to our price realization in the quarter, with the unfavorable impact roughly half the size we saw in the second quarter of 2025. This headwind should continue to diminish in the fourth quarter. In resource industries in the third quarter, we expect slightly higher sales versus the prior year, primarily due to higher volume, partially offset by unfavorable price realisation. The impact of price is expected to be similar to what we saw in the second quarter versus the prior year. In energy and transportation in the third quarter, we anticipate sales growth versus the prior year driven by continued strength in power generation, We also expect higher sales in oil and gas driven by solar turbines and turbine related services. Price realisation should remain favourable as well. Now I'll provide some colour on our third quarter margin expectations. Excluding the net impact from incremental tariffs, we expect the third quarter enterprise adjusted operating profit margin will be similar to the prior year with higher sales volume about offset by unfavourable price realisation and higher SG&A and R&D costs. Including the net impact from incremental tariffs, we anticipate a lower enterprise adjusted operating profit margin in the third quarter versus the prior year. As I mentioned, the tariff headwind should be larger than the second quarter, which reflected just a partial quarter's impact. We anticipate a net cost headwind of about $400 to $500 million in the third quarter. Now I'll make a few comments regarding our segment margin expectations for the third quarter. In construction industries, excluding the impact from incremental tariffs, we expect a similar margin compared to the prior year, with higher sales volume about offset by unfavorable price realization. Including the net impact from incremental tariffs, we anticipate lower margins in construction industries versus the prior year. We expect about 55% of the third quarter tariff impact will be incurred in construction industries. In resource industries, excluding the impact from incremental tariffs, we anticipate a lower margin versus the prior year, mainly due to lower price realisation and higher SG&A and R&D costs. The net impact from incremental tariffs will reduce it further. We expect about 20% of the third quarter tariff impact will be incurred in resource industries. In energy and transportation, excluding the impact from incremental tariffs, we anticipate slightly higher margin versus the prior year, mainly due to higher volume and favorable price realization, partially offset by higher manufacturing costs. Including the net impact from incremental tariffs, we anticipate similar margins compared to the prior year. We expect about 25% of the third quarter tariff impact will be incurred in energy and transportation. So turning to sales at 16, let me summarize. We are increasingly optimistic about our underlying business and now anticipate slightly higher sales for the full year, including a stronger second half. Business activity and customer financial health remain strong, as do our balance sheet and liquidity positions. With the net impact from incremental tariffs, we expect to be within the bottom half of our target range for adjusted operating profit margins, and around the middle of the target range for ME&T free cash flow. We continue to execute our strategy for long-term profitable growth. And with that, we'll take your questions.