In the opening of Caterpillar's fourth quarter 2024 earnings conference call, the operator introduces Alex Kapper, Vice President-elect of Investor Relations, who welcomes participants and introduces key company leaders joining the call. The discussion will cover the recently released fourth-quarter earnings, with accompanying slides and details available on Caterpillar's investor website. The call's content is copyrighted, and any unauthorized use is prohibited. The discussion will include forward-looking statements subject to risks and uncertainties, with references to SEC filings for more details, and non-GAAP financial measures will be reconciled in the presentation's appendix.

In the second paragraph of the article, Jim Umpleby, Chairman and CEO, discusses the company's performance for the end of 2024 and the fourth quarter. Despite a decrease in overall sales and revenues, the company achieved record adjusted profit per share and an increase in services revenue, contributing to strong ME&T free cash flow. The year saw over $10 million returned to shareholders through share repurchases and dividends. The fourth quarter experienced a 5% sales and revenue drop compared to the previous year due to lower sales volume and delivery delays, although machine sales and services revenue did see some growth. The adjusted operating profit margin for the quarter was 18.3%, slightly below expectations, but the backlog increased by $1.3 billion, reaching $30 billion.

In 2024, total sales and revenues decreased by 3% to $64.8 billion compared to 2023. However, services revenues rose by 4% to $24 billion, and the adjusted operating profit margin improved to 20.7%. Record adjusted profit per share was achieved at $21.90, a 3% increase from 2023. The company generated $9.4 billion in ME&T free cash flow, with a total of approximately $40 billion since 2019, which helped reduce shares outstanding by 18%. In Q4, sales and revenues fell by 5% to $16.2 billion. Machine sales declined 3%, and energy and transportation grew by 2%. Sales decreased in construction industries by 3% but saw growth in residential construction. Regional performance varied, with declines in EAME and Asia Pacific but continued growth in Latin America. Resource industries sales fell by 3%, performing better than expected, particularly in mining.

The paragraph discusses the performance of various sectors, with heavy construction and coring aggregates meeting expectations. Energy and transportation sales increased, notably in power generation, despite a decline in oil and gas applications. Dealer inventory decreased by $1.3 billion, mainly due to better than expected sales in construction and resource industries. The backlog increased to $30 billion, indicating strong order activity, particularly in energy and transportation. For 2024, the company reported sales and revenues of $64.8 billion, a 3% decline from the previous year, although adjusted operating profit margin improved slightly, and adjusted profit per share was $21.90.

In 2024, services revenue increased by 4% to $24 billion, driven by digital tools and initiatives aimed at enhancing customer success. The company launched a generative AI tool, Prioritize Service Events (PSEs), to optimize service recommendations and reduce downtime. A significant portion of new equipment was sold with customer value agreements, contributing to services growth. The ecommerce platforms and Vision Link equipment management app saw record engagement. Despite a decline in overall revenues, services growth remains strong, with a goal of reaching $28 billion in revenue. The company generated $9.4 billion in ME&T free cash flow, returning $10.3 billion to shareholders through share repurchases and dividends, maintaining its status as a dividend aristocrat.

The paragraph outlines the company's expectations for 2025 sales and revenues, predicting a slight decrease compared to 2024 due to lower sales in construction and resource industries. However, energy and transportation strengths are expected to largely offset this decline, and services revenues are anticipated to grow across all segments. Machine dealer inventory levels are expected to remain stable compared to year-end 2024, with a lower adjusted operating profit margin that still falls in the top half of the target range. ME&T free cash flow is also expected to be in the higher end of the $5 billion to $10 billion range. Regarding key markets, North American construction sales are expected to decline slightly despite healthy spending on infrastructure projects. Asia Pacific (excluding China) is projected to continue experiencing soft economic conditions, while China remains weak in the excavator industry. Europe is expected to face continued weak economic conditions, with Africa and the Middle East displaying healthy construction activity, and a moderate decline in construction activity is expected in Latin America.

The paragraph discusses the projected trends in various industries for 2025. In construction, services initiatives are expected to have a positive impact. In resource industries, a decline in sales is anticipated, but higher services revenues, including rebuilds, will partially offset this. Despite a disciplined capital approach, demand for commodities remains strong, leading to high product utilization and low numbers of inactive trucks. The fleet's age is high, and autonomous solutions are well-received. The energy transition is expected to boost commodity demand, expanding market opportunities. In energy and transportation, strong demand is predicted for power generation, with growth in Cat reciprocating engines and solar turbines driven by data center expansion. Manufacturing efficiencies and investments in engine capacity are expected to support engine growth. Oil and gas are projected to see moderate growth in 2025 after a stagnant 2024, with solar turbines experiencing strong demand despite customer capital discipline and industry consolidation.

The paragraph discusses Caterpillar's market outlook and sustainability efforts. It predicts stable demand for industrial products and growth in transportation, particularly rail services. The company highlights its century-long commitment to sustainable innovation, showcasing advancements at CES 2025. Notably, they introduced a Cat 972 wheel loader as a hybrid electric demonstrator, capable of running on battery power with zero emissions and equipped with a generator for extended use. This innovation reflects Caterpillar's $30 billion investment in R&D over two decades. The paragraph concludes with Andrew Bonfield preparing to provide further financial details.

The paragraph outlines the company's financial performance for the fourth quarter, highlighting a 5% decrease in sales and revenues to $16.2 billion compared to the previous year. Despite lower than anticipated sales affecting margins, adjusted operating profit was $3 billion with an 18.3% margin. Profit per share rose to $5.78 from $5.28 last year, though adjusted profit per share decreased by 2% to $5.14. This adjustment excluded a $0.46 tax benefit, a $0.23 gain from pension re-measurement, and a $0.05 restructuring cost. Other income increased by $185 million primarily due to favorable currency impacts. A global tax rate of 22.2% was slightly lower than expected, benefiting the quarter by $0.09. Share repurchases led to a $0.24 favorable impact on adjusted profit per share compared to last year.

In the fourth quarter, sales and revenues dropped by 5% compared to the previous year, largely due to reduced sales volume influenced by changes in dealer inventories and a 2% decline in sales to users. Machine dealer inventory decreased by $1.6 billion, exceeding expectations. Service revenues rose, but overall sales decreased more than anticipated due to slower service growth and delivery delays in energy and transportation. Operating profit fell by 7% to $2.9 billion and adjusted operating profit decreased by 8% to $3 billion, with the adjusted operating profit margin declining by 60 basis points to 18.3%. Construction industry sales fell by 8% to $6 billion, primarily due to unfavorable pricing and decreased volume.

The paragraph discusses a decline in sales and profits in various industry segments for the fourth quarter. Construction industry sales decreased by 14% in North America, with an overall profit drop of 24% to $1.2 billion due to unfavorable price realization and lower volume. The resource industry saw a 9% sales decline to $3 billion, also attributed to reduced dealer inventories, leading to a 22% profit drop. The energy and transportation segment's sales remained flat at $7.6 billion. Both construction and resource segments experienced lower margins than expected due to unfavorable sales volume and manufacturing costs.

Sales were slightly below expectations due to slower services growth in oil and gas and delayed international locomotive deliveries. Sales were flat compared to the previous year as lower volumes were offset by favorable pricing. Power generation sales increased by 22%, while transportation, oil and gas, and industrial sales declined. Energy and transportation profits rose 3% to $1.5 billion due to favorable pricing, but margins were slightly below expectations. Financial product revenues increased by 4%, but segment profit fell 29% due to equity securities impact, lower margins, and higher credit loss provisions. Customer financial health is strong, with improved past dues and a low allowance rate. Business activity at Cat Financial is healthy, with retail credit applications and new business volume up 3%.

In 2024, the company saw strong sales through Cat Financial, maintained healthy demand for used equipment, and had high conversion rates of leased equipment into purchases. ME&T free cash flow was robust at $9.4 billion, close to the target range, despite higher incentive compensation and capital expenditures of about $2 billion. The company returned $10.3 billion to shareholders via share repurchases and dividends, maintaining a strong balance sheet with $6.9 billion in cash and $2 billion in marketable securities. For 2025, a slight decrease in sales is expected due to unfavorable volume and price impacts, with price realization contributing to a 1% sales decrease. Adjusted operating profit margins are anticipated to be in the top half of the target range, affected by high depreciation from investments but adjusted for lower sales.

In 2025, the company expects challenges in other income and expenses mainly due to lower interest rates and the absence of previous currency benefits. Restructuring costs are projected to be $150 million to $200 million, with an effective tax rate of 23% excluding discrete items. Despite a positive impact from share buybacks, ME&T free cash flow is expected to decrease, impacting profit per share negatively compared to 2024. Construction and resource industries are likely to experience lower sales, partly offset by growth in energy and transportation driven by higher volumes and favorable pricing. Services growth is expected in all segments, with no significant change in dealer inventory anticipated. ME&T free cash flow is projected to fall within the upper half of the $5 billion to $10 billion target, albeit with a $1.4 billion cash outflow in Q1 due to prior incentive compensation. CapEx is planned at around $2.5 billion, focusing on strategic investments to enhance OPACC.

The paragraph discusses the company's expectations for sales trends in 2025, specifically highlighting a projected decrease in first quarter sales due to dealer inventory movements and pricing impacts on machines. The first quarter is typically the lowest sales period, and this trend is expected to be more pronounced, with sales accounting for a lower percentage of annual sales by about 100 basis points. While dealer machine inventories remain high, they are expected to build less inventory compared to the first quarter of 2024. A tailwind to sales is anticipated in the fourth quarter when dealer inventories are projected to be flat by year-end. Additionally, unfavorable price realization for machines is expected in the first quarter due to post-sales merchandising programs. Energy and transportation sales are expected to follow normal seasonal growth.

In the first quarter of 2025, the company anticipates lower sales and margins across its segments. The construction industry faces reduced sales due to lower user purchases and dealer inventory changes, similar to the fourth quarter of 2024. In resource industries, lower sales volume and unfavorable pricing are expected. Energy and transportation sales should remain stable, with positive pricing gains. Overall, the first quarter's adjusted operating profit margin is expected to decline due to lower volume and unfavorable machine pricing, partially offset by stronger energy and transportation pricing. Typically stronger first-quarter margins will not occur in 2025, with the construction industry expected to experience notably lower margins compared to the previous year.

The paragraph discusses financial expectations and performance details for a company. In the fourth quarter, favorable volume and more neutral pricing are expected to offset some earlier challenges. However, in resource industries and energy and transportation sectors, lower margins are anticipated due to unfavorable prices and higher manufacturing costs. Despite these challenges, the company achieved record adjusted profit per share for the third consecutive year and an operating profit margin that exceeded targets. It also reported strong free cash flow. Looking ahead to 2025, the company expects a slight sales drop but plans to maintain high profit margins and cash flow, with anticipated services growth. The company remains focused on long-term profitable growth. The paragraph ends with the start of a Q&A session, where Steven Volkmann asks about the current state and future of the data center business, seeking insights into demand and capacity plans.

In the paragraph, Jim Umpleby discusses the strong demand for reciprocating engines and gas turbines, highlighting customer eagerness for increased production capacity and the introduction of a new product, the Titan 350, which is performing well, especially with data centers. The conversation shifts to Michael Feniger asking about dealer inventory levels, noting a 2023 inventory build of $700 million and anticipated changes in 2024. He inquires about the impact of the North American construction market and post-election views on inventory. Andrew Bonfield acknowledges the increased dealer inventory for machines in 2023.

The paragraph discusses trends in resource and construction industries, noting a decline in resource industries largely due to timing in commissioning. A stronger-than-expected fourth quarter in resource industries may positively impact early 2025, while construction industries do not anticipate significant inventory reduction. There is mention of improved sales in North America and potential benefits from merchandising programs, but uncertainties remain for 2025. The paragraph ends with a transition to a question about the oil and gas business, specifically gas compression, posed by Rob Wertheimer.

The paragraph discusses the outlook for oil and gas, with expectations of moderate growth in 2025. Jim Umpleby notes a slight decline in engine services driven by gas compression and well servicing, despite an increase in orders for gas compression in late 2024. The solar turbine segment shows a healthy backlog and order activity, particularly in gas transmission and compression in the U.S. David Raso raises a question about margins for 2025, highlighting concerns over negative price costs and increased manufacturing costs. Andrew Bonfield explains that there was negative absorption due to reduced inventory in the CI segment, contributing to higher manufacturing costs.

The paragraph discusses the situation in the E&T (energy and transportation) sector, highlighting the increased labor efforts in factories to meet high demand, especially for large engines. It mentions that while material costs are expected to decline by 2025, manufacturing costs may not offer the same cost savings due to volume and absorption factors. The discussion also notes depreciation within manufacturing costs. Jerry Revich from Goldman Sachs questions Andrew Bonfield and Jim Umpleby about solar turbine lead times and the potential for expanding capacity, given the strong customer interest and backlog, particularly for the Titan 350 model. Jim Umpleby confirms robust demand for solar products in power generation and gas compression.

The paragraph discusses the potential for increasing production capacity without constructing new factories by optimizing existing facilities, such as adding test cells or engine build pits. A significant challenge is ensuring an adequate supply of components from suppliers, which can be a limiting factor due to high demand. The speaker indicates that they do not currently foresee a need for new factory investments to meet upcoming demand. The conversation then shifts to a question from Chad Dillard about the 2025 operating profit guidance, specifically regarding maintaining guidance at the top end of the range and factors that might necessitate adjusting it, such as price-cost normalization, and when pressure is expected to ease. Jim Umpleby responds to the question before passing it to Andrew.

The paragraph discusses the company's expectations for 2025, aiming to be in the top half of the margin range and focusing on growing absolute OPACC dollars, which aligns with long-term shareholder value. Andrew Bonfield explains the impact of post-sales merchandising programs as demand normalizes and supply constraints lessen. These programs, which include buying down interest rates, offer margin benefits but also short-term margin pressure, especially in the first half of the year. They affect machine sales but are expected to normalize by the third quarter, allowing for a return to typical price-cost dynamics. The paragraph ends with a transition to the next question from Jamie Cook at Truist Securities.

The paragraph discusses a company's shipment delays and capacity issues, impacting their 2024 and 2025 outlooks. Jim Umpleby explains efforts to increase capacity for large reciprocating engines by 125%, which will take four years and won’t impact 2024. Andrew Bonfield clarifies that fourth-quarter impacts largely relate to service delays in the oil and gas sector, with some OE delays tied to international locomotives expected to resolve by early 2025. They anticipate E&T sales growth in 2025. Mig Dobre from Baird seeks clarification on Q1 pressures for the CI segment, asking about revenue and margin progression compared to Q4.

In the paragraph, Andrew Bonfield discusses the financial outlook for the first quarter, indicating that dealer inventory builds which typically benefit sales will be significantly less this year, along with recent inventory reductions. He notes that underlying sales to users are expected to remain steady throughout the year, with a slight decrease for the full year. Price impacts are anticipated to affect the first half, similar to a $300 million impact seen in the fourth quarter for CI, but these effects are expected to neutralize in the second half of the year. Overall, sales to users in both halves of the year should be similar, with no change in demand expected. Following this, Tami Zakaria from JP Morgan inquires about order growth in the construction and resources segments during the fourth quarter, noting that E&T was a significant driver, and Andrew acknowledges E&T's influence.

The paragraph discusses the outlook for inventory and manufacturing costs at Caterpillar (referred to as "Cat") in 2025. Tim Thein from Raymond James inquires about inventory absorption as a potential headwind for Cat, given current inventory levels. Andrew Bonfield responds that while manufacturing costs might be negatively impacted by reduced volume and absorption, inventory is complex due to varying lead times across products. He notes that long lead-time products, like solar and large engines, might continue to build inventory, while areas like CI and RI might see inventory reductions due to lower volumes.

The paragraph is a discussion between Angel Castillo from Morgan Stanley and Andrew Bonfield about the competitive environment and pricing strategy for the first quarter. Angel Castillo inquires about the potential impact of changing merchandise programs and policies, such as those enacted by former President Trump, on construction activity and demand in the U.S. Andrew Bonfield responds, noting that while they focus on growing OPACC dollars rather than product margin, the pricing reflects the value provided to customers. He mentions that merchandising programs are partially under their control and are expected to remain stable, though lower interest rates might lead to adjustments throughout the year.

In the paragraph, Jim Umpleby and Andrew Bonfield address questions about margin target guidance and the impact of market conditions on economic growth and profitability. Kristen Owen inquires whether the margin target range should be adjusted upward given the company's strong performance despite supply chain challenges. Jim Umpleby confirms that for 2025, the company aims to be in the upper half of the target range and emphasizes focusing on absolute OPACC dollars, which correlate with increased total shareholder return (TSR). They plan to reassess the range for 2026. Andrew Bonfield adds that the margin targets are progressive, with the top end requiring significant operating leverage due to much higher margins than the average gross margin across their products.

In the paragraph, Steven Fisher from UBS asks about contingency plans for managing tariffs on products imported from China into the U.S. Jim Umpleby responds by saying that while it is still uncertain how policies on tariffs will evolve, the company is well-positioned with a significant manufacturing presence in the U.S. and a net exporter status. He mentions their strategy of producing in the region for the region, although some products and components do move internationally. The company remains vigilant and adaptable, having navigated similar challenges over its 100-year history. The session concludes with Alex Kapper indicating time for one final question from Kyle Menges at Citi.

The paragraph discusses the current business environment and customer behavior in the resource industries (RI) sector. Jim Umpleby notes that while customers are showing capital discipline, key commodities remain above investment thresholds, leading to high product utilization and strong customer acceptance of autonomous solutions. He mentions positive trends like data center build-outs that benefit commodities like copper. Andrew Bonfield highlights expected marginal negative pricing impacts in the first quarter, particularly in areas like heavy construction, coring, and aggregates due to merchandising programs. Both express gratitude for strong performance and customer engagement.

The paragraph discusses a company's commitment to serving its customers as it celebrates its centennial year. Alex Kapper thanks attendees of a call, mentions the availability of a replay and transcript online, and provides details on where to find the company's fourth-quarter results and SEC filing. He expresses gratitude to Ryan for his support during a transition and provides contact information for further inquiries. The operator concludes the call, and participants are allowed to disconnect.

This summary was generated with AI and may contain some inaccuracies.