Caterpillar, Inc.

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 third 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 from 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 US 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. Solid performance from our team generated strong results this quarter, driven by resilient demand and focused execution across our three primary segments. And as a result, sales growth and adjusted operating profit margin were both slightly above our expectations. Sales and revenues increased 10% to $17.6 billion, an all-time record for a single quarter. Backlog grew by about $2.4 billion, driven by strong orders in energy and transportation. The backlog is now $39.8 billion, which is also an all-time record and positions us for sustained momentum and long-term profitable growth. We also generated $3.2 billion of MENT free cash flow. And we deployed about $1.1 billion to shareholders through dividends and share repurchases during the quarter. 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 finally, Andrew will provide a detailed overview of results and key assumptions. Turning to slide four. Sales and revenues were up 10% versus last year. The increase was primarily due to higher sales volume, partially offset by unfavorable price realization for machines. Higher sales volume was driven by higher sales of equipment and users across our three primary segments. Third quarter adjusted operating profit margin was 17.5%. For the quarter, the net impact of incremental tariffs was near the top end of our estimated range of $500 to $600 million. Despite the tariff headwind, adjusted operating profit margin was slightly above our expectation, primarily due to better-than-expected sales volume in energy and transportation. We achieved quarterly adjusted profit per share of $4.95. Compared to the third quarter of 2024, sales to users increased 12%, led by 25% growth in energy and transportation, while machine sales to users increased 6%. For construction industries, sales to users were up 7% year-over-year, broadly in line with our expectations. Let me take a minute to walk through the sales to users by region. North America increased 11% over the prior year and was better than we anticipated due to growth in both residential and non-residential construction. While rental fleet loading was down slightly, dealers' rental revenue continued to grow in the quarter. An increase in IAMI was primarily due to growth in Africa and the Middle East. We saw a decline in Asia Pacific, which was below our expectations, resulting from softness in a few key sub-regions. Latin America increased, but slightly lower than we anticipated. In resource industries, sales to users increased 6% year-over-year, which was slightly above our expectations. Mining was better than expected due to the timing of deliveries to end customers for large mining trucks and off-highway trucks. Heavy construction and quarry and aggregates were in line with our expectations. In energy and transportation, sales to users increased by 25% year-over-year with double-digit growth across all applications. The largest growth came from power generation with a 33% increase, primarily due to demand for reciprocating engines for data center applications. Turbines and turbine-related services also contributed to power generation growth. Sales to users in oil and gas, industrial, and transportation all increased about 20%. The increase in oil and gas was primarily driven by higher demand for turbines and turbine-related services. Industrial grew from a relatively low level and was driven by sales into electric power applications. Transportation increased due to international locomotive deliveries. Moving to dealer inventory and our backlog. In total, dealer inventory increased by approximately $600 million versus the second quarter of 2025. Machine dealer inventory increased approximately $300 million, about in line with our expectations. As I mentioned, backlog increased sequentially by $2.4 billion, driven by robust order activity in power generation and oil and gas. Since the third quarter of 2024, our backlog has increased 39% with growth across all three primary segments. Moving to slide five, I'll now discuss our outlook. I'm pleased with the continued positive momentum in our business. With a record backlog, strong order rates, and continued growth in sales to users, our outlook has improved since last quarter. For the fourth quarter, we anticipate strong sales growth versus the prior year. Sales growth is expected to be driven by higher volumes in all three segments. We also expect the year-over-year impact of price realization to be about flat in the fourth quarter. Excluding the net impact of incremental tariffs, fourth quarter adjusted operating profit margin is expected to be higher versus the prior year. When taking into account the net impact from incremental tariffs, we expect fourth quarter enterprise adjusted operating profit margin to be lower versus the prior year. Given the strength across our three primary segments, we now expect full-year 2025 sales and revenues to be higher than we previously anticipated, resulting in modest growth versus 2024. We continue to expect full-year services revenues to be about flat versus 2024. Based on the incremental tariffs announced in 2025 and expected to be in place by November 1st, we expect the full-year net impact from tariffs to be between 1.6 and $1.75 billion. Tariff and trade negotiations remain fluid. Our team is continuously evaluating options to further reduce the impact of tariffs going forward, and we fully intend to implement longer-term actions once there is sufficient certainty. I remain confident that we'll manage the impact of tariffs over time. Excluding the net 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 near the bottom of the target range corresponding to our current expectation for full-year sales and revenues. This margin 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 above the midpoint of the $5 billion to $10 billion target range. Andrew will provide more details on key assumptions for the fourth 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 growth in sales to users and strong order rates across many of our regions Customers continue to be responsive to the attractive rates we're offering through CAP Financial. We continue to 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 continue to expect full-year growth for sales to users. Full-year dealer rental revenues are also expected to grow and we anticipate dealer rental fleet loading will increase in the fourth quarter compared to the prior year. In Asia Pacific, we anticipate full year sales to users to be about flat. China has shown positive momentum to start the year and 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 Iemi, We expect growth for the year driven by healthy construction activity in Africa and the Middle East and improving economic conditions in Europe. With ongoing weaker construction activity in Latin America, we now expect to be about flat for the full year. Moving to resource industries. We anticipate lower sales to users in 2025 compared to last year as customers continue to display capital discipline. However, we see positive momentum with healthy orders for large mining trucks, articulated trucks, and large track-type tractors. 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 continue to expect slightly lower rebuild activity compared to last 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 solutions. And finally, in energy and transportation, we expect strong growth in full-year sales for power generation compared to last year. Demand remains robust, driven by data center growth related to cloud computing and generative AI. We are also pleased by healthy orders for the prime power applications, as evidenced by recent announcements with Juul Capital Partners and Hunt Energy Company. We continue to stay close to our largest data center customers and receive regular feedback on their long-term demand expectations. In oil and gas, we expect moderate growth in 2025. For reciprocating engines and services, we continue to expect softness in well servicing due to ongoing capital discipline, 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 remains strong, and we see healthy order and inquiry activity. With our ongoing investment to increase large reciprocating engine capacity, we're continually improving manufacturing throughput to meet customer needs across a broad range of applications. Demand for products and industrial applications is improving from previous lows with order growth being driven by engines sold into electric power applications. Transportation is expected to remain stable. The strong momentum we achieved in the third quarter, combined with the anticipated growth through year-end, sets the stage for exciting opportunities ahead. As a result, I look forward to sharing more about our long-term outlook at our 2025 Investor Day on November 4th. And 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. As usual, I will start with a brief overview of our third quarter results, followed by a segment performance. Then I'll discuss the balance sheet and free cash flow before concluding with our current assumptions for the full year and the fourth quarter. Beginning on slide six, sales and revenues were $17.6 billion, a 10% increase versus the prior year. This was slightly better than we had expected on stronger volume. Adjusted operating profit was $3.1 billion and our adjusted operating profit margin was 17.5%. Both were slightly better than we had expected. Profit per share was $4.88 in the third quarter compared to $5.06 in the third quarter of last year. Adjusted profit per share was $4.95 in the quarter compared to $5.17 last year. Adjusted profit per share excluded restructuring costs of $0.07 in the quarter compared to $0.11 in the third quarter of 2024. Other income and expense was favorable by $132 million, primarily due to the absence of an unfavorable MENT balance sheet translation impact, which occurred in the prior year. Excluding discrete items, the global annual effective tax rate was 24%, an increase versus our prior expectation of 23%. The higher rates had an unfavorable impact on our performance in the quarter by about 18 cents. This is due to changes in recently enacted US tax legislation. While the changes have a negative impact on the tax rate in 2025, they benefit 2025 cash flow. In 2026 and beyond, we would expect a positive benefit to the tax rate versus the previous estimated tax rate for 2025, subject to a consistent mix of profits. 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 $0.17. Moving to slide 7. I'll discuss our top line results for the third quarter. Sales and revenues increased by 10% compared to the prior year, driven by higher volume, which was primarily due to stronger sales of equipment to end users. Changes in dealer inventory acted as a slight tailwind to sales, while price realisation was a slight headwind. As I mentioned, sales were slightly better than we had expected in August. Moving to operating profit on slide 8. Operating profit in the third quarter increased by 3% to $3.1 billion compared to the prior year. Adjusted operating profit increased by 4% versus the prior year to $3.1 billion. Stronger volumes, stronger sales volume and favorability in other operating income and expenses was more than offset by unfavorable manufacturing costs, unfavorable price realization, and higher SG&A and R&D expenses. The unfavorable manufacturing costs largely reflected the impact of tariffs. You'll note that there was a headwind of $127 million in corporate items and eliminations this quarter compared to the prior year. The unfavorable impact was driven by higher short-term incentive compensation expense and an accrual for incremental tariffs and corporate items, which I will discuss in a moment. This is partially offset by the proceeds from an insurance claim. The adjusted operating profit margin was 17.5%, a decrease of 250 basis points compared to the prior year. The margin was slightly higher than we had anticipated, mainly due to better than expected sales volume in energy and transportation. As Joe mentioned, the net impact from incremental tariffs was near the top end of our estimated $500 to $600 million range for the third quarter. excluding tariffs, adjusted operating profit margin was slightly higher versus the prior year. This compares favorably to our expectations of a similar margin to the prior year, excluding tariffs. Tariffs impacted all three primary segments, and as I mentioned, part of the charge was recorded in corporate items, similar to what we saw in the second quarter. This timing impact reflects the additional tariffs that were announced within the quarter which we noted in the 8K filing on August 28th. Moving to slide 9, I'll review the performance of the segments. Starting with construction industries, sales increased by 7% in the third quarter to $6.8 billion. The sales increase was about in line with our expectations. The 7% sales increase was primarily due to higher sales volume and favorable currency impacts partially offset by unfavorable price realization. By region, construction industry sales in North America increased by 8% versus the prior year. Sales in the AME region increased by 6%. In Asia Pacific, sales increased by 3%. And in Latin America, sales decreased by 1%. Third quarter profit for construction industries was $1.4 billion, a 7% decrease versus the prior year. The segments margin of 20.4% was a decrease of 300 basis points versus the prior year. The decrease was mainly due to unfavorable price realization and increased manufacturing costs largely due to tariffs, while the profit impact of higher sales volume provided a partial offset. The net impact of incremental tariffs in construction industries had a negative impact on the segments margin of around 340 basis points. Excluding this impact from tariffs, the margin was slightly higher than the prior year and about in line with our expectations. Turning to slide 10, resource industry sales increased by 2% in the third quarter to $3.1 billion. Sales were about in line with our expectations. Note that sales to users were slightly stronger than we had expected due to timing, as shipments originally expected to occur in the fourth quarter were delivered to customers early. This resulted in a decrease in dealer inventory. Compared to the prior year, the 2% sales increase was primarily due to higher sales volume partially offset by unfavorable price realization. Third quarter profit for resource industries decreased by 19% versus the prior year to $499 million. The segment's margin of 16% was a decrease of 430 basis points versus the prior year. The decrease was primarily due to unfavorable manufacturing costs from tariffs and unfavorable price realization. This was partially offset by the profit impact of higher sales volume. The net impact of incremental tariffs on resource industries margin was approximately 260 basis points. Excluding the impact from tariffs, the margin was lower versus the prior year and about in line with their expectations. Now on slide 11. Energy and transportation sales of $8.4 billion increased by 17% versus the prior year. Sales were stronger than we had expected due to higher sales volume. The 17% sales increase versus the prior year was mainly due to higher sales volume, including higher intersegment sales. Also, price realization was favorable. By application, power generation sales increased by 31%, Oil and gas sales increased by 20%. Sales in industrial and transportation each increased by 5%. Third quarter profit for the energy and transportation increased by 17% versus the prior year to $1.7 billion. The increase was primarily due to the profit impact of higher sales volume and favorable price realization, partially offset by higher manufacturing costs, primarily due to tariffs. the segment's margin of 20% was an increase of 10 basis points versus the prior. The net impact of incremental tariffs on energy and transportation's margin was approximately 140 basis points. Excluding this impact from tariffs, the margin was higher versus the prior and slightly stronger than we had expected. Moving to slide 12, financial products revenues were approximately $1.1 billion in the quarter, a 4% increase versus the prior year due to a favorable impact from higher average earning assets in North America. This was partially offset by an unfavorable impact from lower average financing rates across all regions except Latin America. Segment profit decreased by 2% to $241 million. The decrease was mainly due to a higher provision for credit losses at Cap Financial, higher SG&A expenses, and an unfavorable impact from equity securities at insurance services. This was partially offset by a favorable impact from higher average earning assets. Our customers' financial health remained strong. Past dues were 1.47% in the quarter, down 27 basis points versus the prior year, the lowest third quarter in over 25 years. The allowance rate was 0.89%, remaining near historic lows. Business activity at CAP Financial remains healthy. Retail credit applications increased by 16% and retail new business volume grew by 7% versus the prior year. In addition, used equipment levels remain low and conversion rates remain above historical averages as customers choose to buy equipment at the end of their lease term. Moving to side 13, MENT free cash flow was about $3.2 billion in the third quarter, approximately $500 million higher than the prior year, as stronger operating cash more than offset higher capex spend. We continue to anticipate capex spend of around $2.5 billion this year. Moving to capital deployment, we deployed about $1.1 billion to shareholders in the third quarter. Our quarterly dividend payment was about $700 million, with the remainder reflecting share repurchases in the quarter. Our average balance sheet and liquidity positions remain strong. We ended the third quarter with an enterprise cash balance of $7.5 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 from the full year. Based on what we see today, we are optimistic about our top line momentum supported by healthy demand signals, including a robust backlog and growth in sales to users. Against this supported backdrop, we now expect full year 2025 sales and revenues to increase modestly versus 2024, a slight improvement compared to our expectations last quarter. Now moving on to margins. Excluding the net impact from incremental tariffs, the full year adjusted operating profit margin is expected to be in the top half of our margin target range. Including the net impact from incremental tariffs, we expect full year adjusted operating profit margin to remain near the bottom of the target range. Given our improved sales and revenue expectations, adjusted operating profit margin should be slightly higher than we anticipated when we filed the 8K on August the 28th. Based on the tariffs announced in 2025 and expected to be in place on November 1st, we expect the impact from incremental tariffs for 2025 to be around $1.6 to $1.75 billion, net of some mitigating actions and cost controls. This assumes that the net incremental impact of tariffs will be greater in the fourth quarter than in the third, primarily due to the timing of tariff rate changes. As Joe mentioned, we expect NENT free cash flow will be above the midpoint of the $5 to $10 billion target range. We continue to expect restructuring costs of approximately $300 to $350 million a share. On taxes, as I mentioned, we now anticipate our 2025 global annual effective tax rate to be 24%, excluding discrete items. Turning to slide 15, to assist you with your modeling, I'll provide our fourth quarter assumptions. Based on what we see today, we anticipate strong sales growth versus the prior year with higher sales volume across all three primary segments. We expect machine dealer inventory to decline slightly in the quarter compared to a $1.6 billion decrease in the prior year, which should result in a sales tailwind for the fourth quarter. we expect price to be roughly flat for the enterprise. By segment in construction industries, we expect a strong sales increase in the fourth quarter versus the prior year on volume growth driven mainly by the dealer inventory tailwind previously mentioned. Higher sales to users should benefit volume as well, while we anticipate the year-over-year price impact to be about neutral. In resource industries in the fourth quarter, we expect stronger sales versus the prior year, primarily due to higher volume driven by changes in dealer inventory. Note that we anticipate unfavorable sales to users in the fourth quarter in resource industries due to the timing impact that I mentioned a moment ago. The impact of price in resource industries is expected to remain unfavorable, but to a slightly less extent compared to what we saw in the third quarter versus the prior year. In energy and transportation in the fourth quarter, we anticipate strong 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. Let me provide some perspective on our expectations for energy and transportation. While we expect sales to increase sequentially in the fourth quarter, the increase will likely be different than the typical seasonal pattern. This reflects the impact from robust third quarter sales, which have tempered the usual fourth quarter uplift. As a result, the sequential sales growth rate between the third and fourth quarters is projected to be slightly lower than last year's level. Now I'll provide some color on our fourth quarter margin expectations. Excluding the net impact from incremental tariffs, we expect the fourth quarter enterprise adjusted operating profit margin will be higher versus the prior year. We anticipate stronger sales volume will be partially offset by higher manufacturing costs. As I mentioned, price realization for the enterprise should be roughly flat in the fourth quarter. Including the net impact from incremental tariffs, we anticipate a lower enterprise adjusted operating profit margin in the fourth quarter versus the prior year. As I mentioned, the tariff headwind should be larger than it was in the third quarter. We anticipate a net cost headwind of about $650 to $800 million in the fourth quarter. At this point, we expect tariffs to have a minimal impact to corporate items in the fourth quarter, as our current assumptions are based on tariffs announced and expected to be in place on November the 1st. Now I'll make a few comments regarding our segment margin expectations for the fourth quarter. In construction industries, excluding the net impact from incremental tariffs, we expect a higher margin compared to the prior year. This is driven primarily by the profit impact from higher sales volume, though the benefit within volume is lessened by unfavorable product mix compared to the prior year. Now, including the net impact from incremental tariffs, we anticipate a lower margin in construction industries versus the prior year. we expect about 55% of the fourth quarter net incremental tariff impact will be incurred in construction industries. In resource industries, excluding the net impact from incremental tariffs, we anticipate a higher margin versus the prior year, many due to higher sales volume, partially offset by unfavorable price realization. Including the net impact from incremental tariffs, we anticipate a lower margin in resource industries versus the prior year. we expect about 20% of the fourth quarter net incremental tariff impact will be incurred in resource industries. In energy and transportation, excluding the net impact from incremental tariffs, we anticipate a higher margin versus the prior year, mainly due to a higher sales volume and favorable price realization. Higher manufacturing costs should act as a partial offset. Including the net impact from incremental tariffs, we anticipate a slightly lower margin compared to the prior year. We expect about 25% of the fourth quarter net incremental tariff impact will be incurred in energy and transportation. So turning to slide 16, let me summarize. We remain optimistic about our underlying business and now anticipate modestly higher sales for the full year, including a strong fourth quarter. Business activity and customer financial health remain strong as do our balance sheet and liquidity positions. Including the net impact from incremental tariffs, we expect to remain near the bottom of our target range for adjusted operating profit margins, and we expect to be above the midpoint 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.