Q4 2024 Earnings Call Transcript

Welcome to the fourth quarter 2024 Caterpillar earnings conference call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Alex Kapper. Thank you, and please go ahead.

Thank you Audra. Good morning everyone and welcome to Caterpillar’s fourth quarter 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 Robert 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 2, 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 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 3 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 continued 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 ME&T free cash flow near the top of the target range.

Our robust ME&T 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 due to 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 ME&T free cash flow.

Since 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 ME&T free cash flow, which was near the top of our target range, as we expected. Since 2019, we have generated approximately $40 billion of ME&T free cash flow, including $10.3 billion in 2024. Our strong and consistent ME&T free cash flow has allowed us to reduce the average number of shares outstanding by approximately 18% since the beginning of 2019. Turning to Slide 4, as I mentioned earlier, sales and revenues declined 5% 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% 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 EAME and 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 coring 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 and power generation. Turning to Slide 5, 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 revenue increased to $24 billion in 2024, a 4% increase over 2023. Services continued 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 Cat digital tools allow customers to more efficiently improve uptime, manage their fleets, and transact on our ecommerce platforms. For example, this year we launched an internal generative AI solution designed to optimize the creation of intelligent leads, which we call Prioritize 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 ecommerce platforms and have focused on improving our customer on-boarding to include key digital products. Also in 2024, we saw record usage of Vision Link, our equipment management application, on-boarding and activating thousands of new customers throughout the year. Services growth remains resilient despite the decline in our overall top line.

We continued to execute our various services initiatives as we strive towards our aspirational target of $28 billion in services revenues. Moving to Slide 6, we generated robust ME&T 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 ME&T 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 ME&T 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 EAME, 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 our products in 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 8, I’ll now 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 was a 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 on-board generator and charger that enables full day uptime without requiring an 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 of pension and other post-employment plans was also excluded, in addition to restructuring costs of $0.05 in the quarter. Other income expense was $185 million favorable versus the prior year, mostly driven by a positive currency impact related to ME&T balance sheet translation, which compared to a negative impact in the fourth quarter last year. As I have mentioned previously, we do not anticipate currency translation movements, so the positive impact on the fourth quarter of 2024 helped to 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 onto 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 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 EAME region decreased by 1%, and Asia Pacific sales decreased by 2%.

Fourth quarter profit for construction industries was $1.2 billion, a 24% decrease versus the prior year. This was 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 in 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 compare 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 was 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 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 lower 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 equities securities in addition to lower margin and a higher provision for credit losses. Our customers’ financial health remains 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 Cat 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 proportionately more of our sales financed through Cat Financial; in addition, demand for used equipment remains healthy and inventories remain at low levels. Conversion rates were above historical averages as customers choose to buy equipment at the end of their lease term. Moving onto Slide 16, we continue to generate strong ME&T 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 repurchased 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 realization should account for about a 1% decrease in sales for the full year.

On margins, the impact of price together with high 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 with 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 million 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 ME&T 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 dealer inventory in machines by the end of 2025. Moving onto ME&T free cash flow, we expect to be in the top half of our target range of $5 billion 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 OPACC [ph] 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 year. 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 to 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 decrease is 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 in construction industries being towards the middle of the range at the beginning of 2024. As a result, we expect them to build correspondingly less inventory during the first quarter than the $1.1 billion that they built in the first quarter of 2024. As we expect 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. To pull together the impact by segment, we anticipate lower sales in 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 in 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 with the remaining quarters of the year, we do not expect this seasonal 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 favorable 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 full 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. 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. ME&T free cash flow of $9.4 billion was near the top of the target range of $5 billion 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 ME&T 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.

Thank you. We will now begin the question and answer session. [Operator instructions] Your first question comes from the line of Steven Volkmann with Jefferies.

Hello, good morning everybody. I guess I’ll dive in, if I could since its timely, just Jim, how are you seeing the data center business now? There’s obviously some concern about what that’s going to look like longer term. I know you’re adding some capacity. Can you just discuss any changes in your view relative to data center demand?

Yes, we continue to see strong demand for both our reciprocating engines and our gas turbines, just in conversations with customers. It’s really all about how quickly can you increase capacity for your reciprocating engines and how quickly can you get us our large gas turbines, so we’re very encouraged by what we see happening in the marketplace. Many customers are planning orders with us over multiple years to ensure that we can meet their needs, and as a reminder, we said that with the investments we’re making in our large reciprocating engines, we are expanding capacity by about 125% over 2023 - that will happen over the next several years, and with solar, we have a new product, the Titan 350. We’re very encouraged by the acceptance in the market that we’re seeing for that product, and of course a lot of it is being driven by data centers, so again still very, very positive from our perspective.

Thank you.

We’ll go next to Michael Feniger at Bank of America.

Hi Michael.

Morning guys. Thanks for taking my question. For dealers, to see the inventory, I think in 2023 machines built $700 million for the full year, ’24 inventory is down $700 million. I know you guys are thinking North America construction end user is down a little bit on ’25, so how do you get comfortable with where those dealer inventories are going to stay the same on the machine side, and did anything changed post election in terms of the views around inventories, because I think there were some comments that the retail sales end users was a little bit better than expected in terms of how it’s informing your view on ’25. Thanks everyone.

Yes, so as you correctly point out, we did see a dealer inventory build for machines in 2023. Most of that, actually, was in resource industries rather than construction industries, and in fact most of the decline this year, year-over-year actually, is in resource industries rather than construction industries, so that’s part of the balance. As we know with resource industries, a lot of that is around timing of commissioning. We did see better than we expected commissioning in the fourth quarter which will have some impact on the first quarter of 2025, but that was a positive as dealers were able to deliver more machines to customers, particularly on the RI side.

Overall on the CI side, based on our conversations--obviously we engage in conversations with dealers, dealers are independent businesses, they determine what level of inventory they hold, they base that on their expectations for the outlook for the markets. Obviously our expectation, based on what we’re seeing today is, as you know, that not all of our end markets are exactly in sync as we think about from a CI perspective, and based on our conversations, we don’t expect a material reduction in dealer inventory as we go through the year. Yes, we did see [indiscernible] were slightly better in North America than we expected in the fourth quarter - that is probably one of the first times we’ve actually seen that trend, and there may be some benefit from some of our post-sales merchandising programs, but we’re not calling that for 2025 yet.

We still think that’s somewhere we need a lot of work still to be seen to make sure that we’re actually seeing that continue to flow through.

We’ll move next to Rob Wertheimer at Melius Research.

Hi, good morning and thank you. My question is on you have a large and diverse oil and gas business, and I’m wondering if you could characterize, especially if you will on gas compression, kind of where you think you are in the cycle. Obviously we’ve had Europe, we’ve had Russia, we’ve had lots of different demand shifting around, and there may be other growth areas - [indiscernible], etc. I just wonder if you could give a little bit of an outlook on oil and gas.

Thank you.

Yes, certainly. We are expecting moderate growth in 2025 for oil and gas in total. For recip, we expect engine services to be slightly down for the year, really driven by gas compression and well servicing. We did see some order pick-up in recip gas compression in late 2024. On the solar turbine side, very healthy backlog, healthy order intake and inquiry activity.

We do expect growth in oil and gas in the year. We are seeing, to your specific question about gas compression, solar does have a--there’s a lot of activity around gas transmission, gas compression particularly in the United States - many pipeline customers are adding compression to existing pipelines, so again that business is quite strong, and a lot of quotation activity as well.

Thank you.

We’ll go next to David Raso at Evercore ISI.

Hi David.

Hi everybody, thanks for the time. I’m curious - obviously trying to think about margins for ’25 for the segments, and I was a little surprised by price cost being negative. The manufacturing cost had been a positive year-over-year, all of a sudden the comp gets harder, right - that’s why the fourth quarter wasn’t going to be as easy, but to see the cost up, I noticed you called out E&T, but does that imply CI and RI manufacturing costs were still a benefit year-over-year, and all the cost is in E&T? Maybe if you can just provide that kind of framework from the fourth quarter to how to think about full year ’25 price cost.

Yes David, if you recall, actually in my comments I did call out within CI negative absorption in the fourth quarter as we did reduce CI inventory, so manufacturing costs were also negative in CI. In E&T, most of that was a function, actually, of putting more labor in the factories to get more machines out the door, or more engines out the door at the end of the year, and that obviously reflects the demand we’re seeing. Obviously, remember that we are--you know, we are still trying to build up capacity particularly on the large engine side, and that really is what’s driving that in particular. On material costs, our expectations are that material costs will decline in 2025; however, there are some offsets within manufacturing costs which go the other way.

Some of that relates to volume and absorption as a result of that, which means we don’t get the cost price offset that we’ve had in previous years. Most of that is the reason and the rationale by segment for that. So yes, material costs will be favorable but manufacturing costs will be broadly in line with our expectations. Remember also, other things come in, mix and so forth as well, and finally just one thing to remember, the depreciation I called out, actually most of that is within manufacturing costs as well.

We’ll go next to Jerry Revich at Goldman Sachs.

Yes, hi. Good morning everyone.

Morning Jerry.

Jim, Andrew, I’m wondering if you could just talk about your solar turbine lead times, and how are you thinking about potentially adding additional roofline capacity for turbines specifically? We’re hearing optimism on the Titan 350 from the customer base, and assuming what we saw earlier this week is a blip on the radar, I’m just wondering how are you thinking about capacity for that range of product.

Yes, as I mentioned earlier, we’re seeing strong backlog and strong inquiry and order activity for solar, for both power generation and gas compression. We can increase capacity without building new factories, since you used the roofline--mentioned the roofline in your question, so certainly there are things that we can do within our facilities. One is just increasingly manufacture, and you can do things like add an additional test cell to an existing facility, maybe add an engine build pit - things like that. One of the big issues, of course, is working with suppliers to ensure that we get enough components from suppliers, and of course just given the strength in the business, there’s a lot of companies out there working with those same suppliers, so that is--that can be a bit of a limiting factor.

But in terms of actual investments required to increase capacity, based on what we see coming, we don’t see a need to build a brand-new factory or anything like that.

We’ll move next to Chad Dillard at Bernstein.

Hey, good morning guys. Thanks for taking my question.

Hi Chad.

Hey, how are you? My question is on the ’25 operating profit guide. You’re guiding to the top end of the range for a given level of revenue for the full year. You’ve been guiding that way, I think for the last year and actually have been hitting it, so I guess what would give you--what do you think would drive you to bring that guide back to the midpoint - is it price cost normalizing, and in that same vein, how are you thinking about the evolution of price cost to ’25?

When does that pressure peak and comps get easier?

Maybe I’ll start and then I’ll kick it over to Andrew. Firstly, I believe what we said is we expect to be in that top half of the range for margins for 2025, and of course our key measure here for our team is to grow absolute OPACC dollars because we believe that mostly closely aligns with TS over time - of course, OPACC being operating capital after capital charge, so given the return on the capital that we invest, and so again a reminder, what we expect for 2025 is to be in the top half of the range. With that, I’ll turn it over to Andrew.

Yes, and so on the price realization point, this really is relating to the post sales merchandising programs that we discussed a little bit in the third quarter. I’d remind you just that, as I explained in the third quarter, that will take about a year to flow through, and that relates to the fact that obviously in a world where demand is normalizing and supply is less constrained, obviously we make--we have merchandising programs to offer customers particularly things like buying down interest rates. As we’ve said before, that’s also an attractive option for us because obviously we get some margin benefit from that within Cat Financial over the term of the financing deal.

What that does mean, though, and as you saw from the Cat Financial numbers, new business volume is very high - actually, their share is up, so effectively over time we’ll recover a little bit through Cat Financial but we will have some margin pressure in the short term from those, as those programs normalize. That mostly impacts machines, mostly impacts the first quarter--first and second quarters, first half of the year. Once we get past Q3, we’ll be past that, and actually then return probably much more to the normal evolution of price cost, which obviously we always try and work to make sure we can offset the two.

We’ll move to our next question from Jamie Cook at Truist Securities.

Hi, good morning. My question relates to E&T. I guess first, you called out delays in shipments, I think in the fourth quarter. Can you just give us color on that - you know, how big that was and when that hits in terms of 2025?

Then I was also surprised just your top line growth wasn’t better in 2024, so how do we think about top line growth in 2025, any incremental capacity coming online and how that helps your top line? Just any color there on how much your, I guess, top line and E&T was constrained in 2025 because of lack of capacity. Thank you.

I’ll answer the second part of the question first, and I’ll kick it to Andrew for the first part. As we’ve mentioned, we’re making that investment to increase our capacity in large reciprocating engines by 125% - that takes some time. I think we’ve talked about a four-year period to increase that capacity, so it does take time. We did not expect that to be complete and to have an impact on 2024, and that’s the case.

We could in fact ship more if we could build more, but we’re working hard to increase that capacity.

Yes, and as regards the fourth quarter, most of the impact, as I indicated in my comments, was relating to services, particularly in oil and gas. We’ll need to see how that pans out as we go through the first quarter. With regards to the OE side, most of that was international locomotives, and that should hit early in the first half of 2025; and overall, just to remind you, we do expect E&T sales growth in 2025.

We’ll go next to Mig Dobre at Baird.

Thank you, good morning. Andrew, just a very quick clarification on your comments for CI. At least as I heard it, as I understood it, the relative pressure that we’ll see in Q1 might be associated with this segment, so can you give us a sense for how you see this segment revenue and margin progressing sequentially, so relative to what you had in the fourth quarter? Thank you.

Yes, so obviously normally what you would see in CI is a first quarter benefit on sales and revenues, mainly due to dealer inventory builds. The last couple of years, that’s been around a billion dollars. We expect that to be significantly less in the first quarter of this year. Correspondingly, we’ve actually seen quite a significant dealer inventory reduction in the fourth quarter - that will be a little bit less, so this is really just a non-operating--actually as we look at underlying sales to users, they will be pretty much in line throughout the whole of the year and will be down slightly for the full year, so that is the underlying characteristics on the top line.

The other overlay is really around price. Price will impact the first half. Impact from price, as you saw in the--for CI in the fourth quarter was around $300 million. That will be the impact, the estimated impact on the first quarter; and obviously as we go through the rest of the year and particularly in the second half, the comps become easier and that will actually neutralize as we get into the second half.

It’s really just--overall, just really a timing issue related to dealer inventory mostly and the timing of price. When you take those two things out, effectively sales to users should actually be broadly much the same, first half to second half. There is no demand change we’re expecting as we go through the year.

Next we’ll move to Tami Zakaria at JP Morgan.

Hi, good morning. The order growth in the fourth quarter, I’m curious, how did construction and resources orders do sequentially in the quarter versus the third quarter? It seems like E&T was strong, but would love any directional commentary on the other two segments, if you’re able to provide.

Yes, so Tami, overall E&T was the major driver. We did see some improvement in orders in resource industries particularly related to some large contracts that we’ve announced previously; and then in CI, it was broadly flat for the quarter year-over-year.

We’ll go next to Tim Thein at Raymond James.

Thank you, good morning. Maybe Andrew, just back to the--you had mentioned within the commentary around CI, the issue of inventory absorption or the headwind from it. As you think about Cat more broadly, should we in an environment where the top line is slightly lower, should we think about that as a headwind more broadly for Cat as a whole in ’25, just given where inventory levels are for the company? Is that something we should be factoring in, in terms of that discussion around material cost, or is it less of a headwind as you think about the margin outlook?

Thank you.

Yes Tim, thanks. I think, as I tried to indicate to David, there are other factors within manufacturing costs which go the other way - absorption will be one of them, slightly going against, obviously, because our intention would be effectively to reduce volume next year, which will impact our rate of absorption and potentially inventory as well. Inventory is a little bit of a more difficult subject. Just to remind you, we are a very large complex company, we have hundreds of products that we hold inventory for, and not all those products have exactly the same lead time.

Some of the longer lead time projects are where we are strongest at the moment, things like solar and also large engines, and so some of those may actually continue to build inventory, where we may see some inventory trimming with CI, for example, with slightly lower volumes and also RI as we go through the year. It’s going to be a little bit of a mixed bag, but there may be some impact on absorption and that was built into the fact that obviously we’re not going to see favorability from material costs coming through, manufacturing cost added to the depreciation I talked about a moment ago as well.

Our next question comes from Angel Castillo at Morgan Stanley.

Hi, good morning. Thanks for taking my question. Just wanted to maybe go into the competitive environment a little bit more as you think about the first quarter, continuing to see some of the flow through of the merchandise programs that you mentioned. I guess as we evolve into the second half, I get the comps getting easier.

I guess maybe what gives you confidence, though, that the pricing and competitive environment doesn’t worsen, and maybe if you could overlay on that just any views on Trump policies and implications on construction activity in the U.S., and whether--you know, how you see that impacting demand overall.

Yes, so on the merchandising programs, some of that is actually within our control. It’s not just--but obviously our focus is actually growing absolute OPACC dollars, remind you, so we don’t necessarily focus on margin per product. But obviously we’ll take that into account, and pricing takes into account the value we provide customers and a lot of other things. Obviously this is relating to--the price we’re talking about is relating to the merchandising programs, and we don’t expect those to change much from where we have them today.

In fact, actually in a lower interest rate environment, actually they will become less of the total, so it may actually be the opposite if interest rates do start to fall as we go through the year, based on that buying down of interest rates.

Yes, and just in terms of the administration, certainly if the push for deregulation and other kinds of changes from a regulatory perspective helps increase economic growth, particularly in the United States, that should be a positive again. We’ll have to see how that all plays out, but that certainly has the potential to be positive for us.

Next we’ll move to Kristen Owen at Oppenheimer.

Morning, thank you for the question. I wanted to come back to the margin target guidance coming in at the upper half of the range. You did make some adjustments to that margin target when we were at the height of the supply chain dislocation. Just given the strong performance since then, the outlook even inclusive of that negative price impact, I’m wondering how we should think about this range?

Is it still valid, or should we be actually thinking about an upward shift in that range over time? Thank you.

Yes, again as we think about 2025, we’re talking about being in the top half of that range, and so certainly for this year, we’re not anticipating changing it. Again, just as a reminder, as I mentioned earlier, our driver here is really absolute OPACC dollars, because that most closely, we believe, corresponds to increased TSR over time, and so what we try to do is give investors that guide to give you a sense of where we’ll be, and we make various investments to grow our business profitably for ’25. You know, we said we’ll be in the top half of the range, and as we always do, a year from now we’ll reassess and let you know what we think for 2026.

Yes, and Kristen, just the other point to always remember is our margin targets are very progressive at the top end of the range. Margins have to--effectively margin is round about 40% at the top end of that target range, which is well above our average gross margin for our products across the whole, so it does require a lot of operating leverage. That is one of the reasons again why we took into account the fact that, while performance has been strong, we’re back in the range now and we still think that actually is a valid range to work with.

We’ll go next to Steven Fisher at UBS.

Thanks, good morning. I know it’s still very early to really understand exactly all the policies coming out of the administration, but wanted to ask a little bit about tariffs, if it hasn’t been asked already. Curious about how you’re thinking about contingency plans and strategies for managing tariffs on the products that you import from China into the U.S. I know generally you have a strategy of producing for local, but I think there’s maybe some products coming in from China.

Just curious how you’re thinking about the contingency plans and strategies for that. Thank you.

Yes, I’ll give that a shot. Certainly it’s going to take time to see how this plays out, there’s certainly a lot of discussions going on around tariffs, and we’ll have to see what actually gets put into place in the end. We are a global manufacturer but our largest manufacturing presence is in the United States, and we are a net exporter outside of the U.S., and that positions us pretty well versus many other companies out there. Having said that, as you say, we do tend to try to produce in region for region, but yes, some products and components particularly move around.

But as you can imagine, it’s something we keep a close eye on and we’ll deal with it. We’ve been around 100 years and we’ve seen many different administrations with different attitudes on these issues, and we’ll deal with it. But again, the fact that we have such a large U.S. manufacturing presence, I think positions us pretty well.

Audra, we have time for one more question.

Today’s final question comes from the line of Kyle Menges from Citi.

Thanks for taking the question. I was hoping if you could provide a little bit more color on what you’re seeing in RI. You talked about some order improvement in 4Q. How are customer conversations progressing and orders so far in 1Q, and maybe just talk a little bit about some of the pricing actions you’re taking in RI - I think you said it would be negative in 1Q, so would just love to hear some color on those items.

Thanks.

You know certainly, as I mentioned earlier, our customers continue to display capital discipline, but we are encouraged by the fact that the key commodities that our products help our customers produce remain above investment thresholds, and some of the things we look at to get a gauge of what’s happening in the industry, we look at product utilization, the hours that are being put on our machines, and those are high. The number of parked trucks is relatively flow, and the age of the fleet is relatively elevated as well. Again, we’re continuing to invest in our autonomous solutions and we continue to see strong customer acceptance of that.

If you stop and think about some of the things that are happening, we talked about data center build-outs and all the rest - I mean, again you think about commodities like copper, that should be a positive for that over time. Having said that, again our customers are displaying capital discipline in terms of price.

We do expect some marginally negative impact in the first quarter, as we said, and that would be mostly due to the fact that obviously we are also putting merchandising programs particularly where we think about things like heavy construction, coring and aggregates are the major areas that will be affected there.

Okay, great. Well, I just want to thank everyone again for joining us. We always appreciate your questions. I’d like to once again thank our team for their strong performance in 2024, delivering record adjusted profit per share and strong ME&T free cash flow.

We’ve been around 100 years, and so as we kick off our centennial year this year, we certainly remain committed to serving our customers. We’ll continue to execute our strategy and invest for long term profitable growth. With that, I’ll turn it over to Alex.

Thank you Jim, Andrew and everyone who joined us today. A replay of our call will be available online later this morning. We’ll also post a transcript on our Investor Relations website as soon as it’s available. You’ll also find our fourth quarter results video with our CFO and the SEC filing with our sales to users data.

Click on investors.caterpillar.com and then click on Financials to vie those materials. Finally, I’d like to thank Ryan for his support through our transition, and I wish him the best as he moves onto another role in Caterpillar. If you have any questions, please reach out to me or Rob Rengel. The Investor Relations general phone number is 309-675-4549. Now let’s turn it back to Audra to conclude our call.

That concludes today’s call. Thank you for joining. You may all disconnect.