Caterpillar, Inc.

Welcome to the fourth quarter 2025 Caterpillar earnings conference call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our speaker today, Alex Capper. Thank you. Please go ahead.

Thank you, Audra. Good morning, everyone, and welcome to Caterpillar's fourth quarter 2025 earnings call. I'm Alex Capper, Vice President of Investor Relations. Joining me today are Joe Creed, CEO, Andrew Bonfield, Chief Financial Officer, Kyle Epley, Senior Vice President of the Global Finance Services Division, 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 FCC filings and 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 reconciliation of any non-GAAP numbers to the appropriate U.S. GAAP numbers, please see the appendix of the earnings call slide. For today's agenda, Joe will begin by sharing his perspectives about our results and provide an update on our performance toward achieving our investor day targets. Then he'll share our full year outlook and insights about our end markets, followed by an update on our strategy. Finally, Andrew will provide a detailed overview of results and key assumptions looking forward. We'll conclude the call by taking your questions.

Now let's advance to slide three and turn the call over to our CEO, Joe Creighton. All right, well, thank you, Alex, and good morning, everyone. Thanks for joining us today. Our centennial year marked a significant milestone, and we achieved full-year sales and revenues of $67.6 billion, the highest in Caterpillar's history. In a dynamic environment with net incremental tariff headwinds of $1.7 billion, we delivered full-year adjusted operating profit margin within the target range at 17.2%, and adjusted profit per share of $19.06. We also generated robust MP&E free cash flow of $9.5 billion in 2025, allowing us to deploy $7.9 billion to shareholders through share repurchases and dividends during the year. Our backlog grew to a record level of $51 billion, an increase of $21 billion or 71% compared to last year. All-time high sales and revenues along with record backlog are evidence of the strength in our end markets and strong execution by our team. Now let me take a minute to walk you through our fourth quarter results. Sales and revenues were $19.1 billion, an all-time record for a single quarter. The increase of 18% versus the previous year was better than we expected and reflects higher volumes in all three of our primary segments, while price realization was about neutral. In particular, volume growth was better than expected in power and energy because we were able to ship more product than anticipated at year end. Adjusted operating profit margin was 15.6% and adjusted profit per share was $5.16. Fourth quarter adjusted operating profit margin and adjusted profit per share were better than we anticipated due to stronger than expected volume growth in power and energy. In the quarter, the net incremental cost from tariffs was near the top end of our estimated range. Robust ordering activity across all three primary segments contributed to the very strong backlog growth. Now I'll review fourth quarter retail statistics for each of our three primary segments, starting with construction industries. Construction industries total sales to users grew for the fourth consecutive quarter, rising 11%, which exceeded our expectations. Increases in North America were better than expected due to strong growth in non-residential and residential construction. Rental fleet loading and our dealers' rental revenue also grew in the quarter. Sales to users declined slightly in Miami and Asia Pacific, in line with our expectations, and we saw growth in Latin America, which was better than anticipated. For resource industries, fourth quarter sales to users declined 7%, consistent with our expectations. Mining sales to users were lower year over year as customers exercised capital discipline in response to weaker coal prices. In power and energy, our largest and fastest growing segment, sales to users grew a robust 37%, with another quarter of double-digit growth across all applications. Power generation grew 44%, driven by strong demand for large gensets and turbines used in data center applications. Strong sales to users in oil and gas were driven primarily by turbines and turbine-related services. Industrial grew from relatively low levels, with the increase driven by sales to users in electric power applications. And finally, transportation increased primarily due to international locomotive deliveries. Moving to slide four. Our full year 2025 results showed meaningful progress towards achieving the 2030 targets we outlined at our recent Investor Day. As I mentioned, we delivered record sales and revenues of $67.6 billion, resulting in 4% year-over-year growth. This increase was led by record sales in power and energy. Notably, in addition to record sales in power generation, we also achieved record sales in oil and gas due to strength in demand for gas compression. Despite tariff headwinds, full-year adjusted operating profit margin of 17.2% was within the target range for our level of sales and revenues. Full-year services revenues totaled $24 billion in 2025. We continued to connect more assets, growing the fleet to over 1.6 million, and made great progress in other initiatives like condition monitoring, prioritized service events, e-commerce sales, and tech-enabled machines. Our digital and technology initiatives, along with a growing installed base, position us well to increase services revenues towards our goal of $30 billion by 2030. Robust MP&E free cash flow allowed us to deploy $7.9 billion to shareholders through $5.2 billion of share repurchases and $2.7 billion of dividends paid. We're proud of our continued dividend aristocrat status, paying higher dividends for 32 consecutive years and remain committed to returning substantially all MP&E free cash flow over time. Andrew will share more about our cash deployment plans for 2026 in a moment. Turning to slide five. I'll highlight the advancements we made towards our 2030 targets in our three primary segments. In 2025, construction industry's growth outpaced the global industry, supported by the success of our merchandising programs. As a result, full-year total sales to users growth was 5%, advancing our progress towards the 2030 goal of growing 1.25 times the 2024 baseline. In resource industries, customer interest in our autonomous hauling solution remains strong, and we're making steady progress towards our 2030 goal to triple the number of CAD autonomous haul trucks in operation compared to 2024. We ended the year with 827 autonomous haul trucks in operation, up from 690 at the end of 2024. Adoption is expected to accelerate given our proven solution, our expansion into quarries, and our ability to support mixed fleets. For example, last month, Caterpillar and Sotrac, our dealer in Brazil, announced an agreement to provide Vale an autonomy solution for a mixed fleet of more than 90 trucks. Power and energy delivered meaningful progress towards our 2030 goal to more than double power generation sales compared to 2024. In 2025, power generation sales exceeded $10 billion, which is year-over-year growth of more than 30%. We're also on track in our multi-year effort to double our large engine capacity and more than double our industrial gas turbine capacity. As we've discussed, the additional capacity will serve a broad range of applications, and the phasing will occur between now and the end of 2030. Now on slide six, I'll provide our 2026 outlook. Overall, we anticipate full-year sales and revenues to grow around the top of the 5% to 7% long-term compound annual growth rate target. As I mentioned earlier, our record backlog of $51 billion provides strong momentum to start the year. We're also starting to get multi-year visibility in power and energy as we work closely with our customers to schedule factory orders in line with their project timelines. As a result, approximately 62% of our backlog is expected to deliver in the next 12 months, which is lower than our historical average. A strong backlog coupled with healthy end markets supports our expectation for volume growth in all three primary segments. We also expect all three segments to benefit from positive price realization, about 2% of total sales and revenues, and continued growth in services revenues. Full-year adjusted operating profit margins should exceed 2025 levels, but remain near the bottom of the target range for our expected sales and revenues. Our adjusted operating profit margin expectation reflects the ongoing impact of tariffs as well as investments we are making to execute our growth strategy. I remain confident that we will manage the impact of tariffs over time as we aim to operate around the midpoint of our adjusted operating profit margin target range. Capital expenditures are expected to be around $3.5 billion, driven primarily by our capacity expansion plans. And finally, MP&E free cash flow is expected to be slightly lower than 2025, reflecting the increase in capital expenditures. Now I'll discuss our outlook for key end markets, starting with construction industries. Another year of sales to users growth is expected in 2026, supported by elevated order rates and a robust backlog. Overall, the outlook for North America remains positive, as sales to users grow moderately versus last year, with construction spending remaining healthy due to IIJA funding and other critical infrastructure programs. We also anticipate accelerated investment in data centers, which will further bolster overall construction spending. Dealer rental fleet loading and rental revenue are both projected to increase compared to 2025. In IAMI, economic conditions in Europe are expected to strengthen, and construction activity in Africa and the Middle East is projected to remain strong. In Asia Pacific outside of China, moderate economic conditions are expected in 2026. We anticipate positive momentum in China off of low levels with full-year growth in the above 10-ton excavator industry. Growth in Latin America is expected to continue at a similar rate to 2025. Resource industries had positive momentum in the fourth quarter with growing backlogs supported by healthy orders across a broad range of products. For 2026, sales users are expected to increase, primarily driven by rising demand for copper and gold, and positive dynamics in heavy construction and quarry and aggregates. Most key commodities remain above investment thresholds, and customer product utilization is high, while the age of the fleet remains elevated. With modest increases in commodity prices projected in 2026, we expect rebuild activity to increase slightly compared to last year. And finally, for power and energy, the 2026 outlook is positive. Robust backlog growth in the fourth quarter was driven by continued momentum in both power generation and oil and gas. We anticipate growth in power generation for both CAT reciprocating engines and solar turbines, driven by increasing energy demand to support data center build-out related to cloud computing and generative AI. Additionally, we're starting to see orders for prime power trend higher as data center customers look for alternative power solutions to keep pace with their growth. For example, yesterday we announced an order for two gigawatts of reciprocating generator sets for a prime power application from American Intelligence and Power Corporation. Generators will be used to support the initial development phase of the Monarch compute campus, which has a total potential of about eight gigawatts of power generation. This represents one of our largest single orders for complete power solutions. The value of the order will be reflected in our first quarter 2026 backlog, and we expect to deliver the generators starting in late 2026 through 2027. This exciting announcement is one of four orders we've booked with at least one gigawatt of Caterpillar equipment for data center prime power. After reaching record levels in 2025, oil and gas is expected to see moderate growth in 2026. Reciprocating engine sales are expected to increase, driven by strong demand in gas compression applications. Solar turbines oil and gas backlog remains healthy with continued solid order and inquiry activity. And as a result, we expect another year of strong turbine sales comparable to our record 2025 performance. Demand for products and industrial applications is expected to grow moderately in 2026 because we see continued recovery from previous lows. And in transportation, we anticipate full year growth in rail services and locomotive deliveries. I'll close on slide seven with an update on our strategy. Since our investor day in November, the executive leadership team and I have engaged our employees and dealers around the globe to launch our refreshed enterprise strategy for profitable growth. Our mission statement, solving our customers' toughest challenges, is creating strong alignment around keeping customer needs at the center of everything we do. The strategy is centered on three pillars for profitable growth, commercial excellence, being the advanced technology leader, and transforming how we work, all built upon a foundation of continued operational excellence. I look forward to advancing the strategy with regional leaders and dealers throughout 2026. And finally, we were excited to kick off the year with a showcase and keynote at CES 2026 in Las Vegas, where we unveiled the next era of industrial AI and autonomy. This was an important opportunity to demonstrate our advanced technology leadership by highlighting Caterpillar's significant role in creating the invisible layer of the tech stack. the critical minerals, reliable power, and physical infrastructure that the digital world relies on to function. We made exciting announcements, including the launch of our new CAT AI Assistant, which will allow customers to more easily buy, maintain, manage, and operate their equipment. We also announced a commitment to the most important part of the invisible layer, people. Caterpillar pledged $25 million to ensure the future workforce has the tools they need to make advanced technology possible. With that, I'll turn it over to Andrew for a detailed overview of results and key assumptions looking forward.