Caterpillar Inc Virtual HQ Visit Hosted by Goldman Sachs Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Jerry Revich - Goldman Sachs - Analyst : Jim, looking back, it's been about eight years since you became the CEO, the company's earnings power has tripled over that time frame. Sales are up 50%, incremental margins of 40%. Looking back from your vantage point, what have been the two or three most significant drivers of delivering the sharply higher margins on that profitable growth trajectory?

Question: Jerry Revich - Goldman Sachs - Analyst : And Jim, in terms of the levers that you folks as an organization have pulled for those product lines that you just mentioned that weren't getting there. Can you talk about some of them? I remember building construction products. You folks made it essentially a logistics business instead of heavily vertically integrated given the velocity, other areas you push pricing. Can you just give us a flavor of any other ranges of actions that you've most commonly seen as you've taken businesses from not earning their return to generating the appropriate return?

Question: Jerry Revich - Goldman Sachs - Analyst : And Jim, you alluded to this, the OPACC process, you're continuing to apply it today. Are you finding the same magnitude of improvement opportunities today that you are uncovering three, four, five years ago? It sounds like in terms of investing towards the highest ROE opportunities, yes, but what about some of the lower-hanging fruit? Can you talk about those factors?

Question: Jerry Revich - Goldman Sachs - Analyst : And what's interesting about the company's historical performance and for the industry as well, unpacking the volume disclosures that you and your finance team lay out for us in your annual reporting, the past seven years have not been great from an end demand standpoint, volumes have grown 2% to 3% sort of CAGR, but the profit for every unit company sales has doubled over that time frame. As we look forward with rising labor costs, economy, data availability, how do you think about for your equipment to continue to be more valuable to your customers over time? And to drive a higher profit pool for your business? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 19, 2024 / 7:00PM, GS.N - Caterpillar Inc Virtual HQ Visit Hosted by Goldman Sachs

Question: Jerry Revich - Goldman Sachs - Analyst : I think we're going to need Cat Insurance to sponsor me for that [big, Jim]. In terms of the downside of posting the performance and margins as strong as they have just mathematically, you're just well ahead of the high end of your margin framework this year. And so the debate that investors have is whether that means the company is over earning and could see a price caused drive the business down within the range. That feels unlikely considering the decisions are made under the OPACC framework. But can I ask you to please weigh in on that topic?

Question: Jerry Revich - Goldman Sachs - Analyst : Super. And Jim, earlier, you spoke about bolt-on M&A, the weird US acquisition, particularly well-timed as well as other bolt-ons. Under what scenario could you envision a higher allocation of capital for acquisitions based on your strategic planning for the next five years?

Question: Jerry Revich - Goldman Sachs - Analyst : And Jim, if we could just transition and talk about parts and service in 2019, you folks laid out the path to $28 billion in revenue by 2026. That's up from $14 billion in 2016, and you're essentially as of 2023, you're at $23 billion. So really good progress so far. Can you talk about which initiatives had an outsized contribution to building out that business so far?

Question: Jerry Revich - Goldman Sachs - Analyst : And Jim, in our past conversations with [AGI], what was really interesting is that a couple of years after new digital initiatives have been rolled out, the growth rate in terms of adoption really hasn't slowed. So for some of the tools that are consecutive years of 50% user growth. Has that trajectory continued? Can you give us an update on how the end user and dealer uptake of Cat Digital offerings has trended?

Question: Jerry Revich - Goldman Sachs - Analyst : Yes, I need a QR code for my printer that -- more than I expected. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 19, 2024 / 7:00PM, GS.N - Caterpillar Inc Virtual HQ Visit Hosted by Goldman Sachs

Question: Jerry Revich - Goldman Sachs - Analyst : And in terms of -- the interesting thing about all the data that you're gathering as part of Cat Digital is it sounds like there's additional opportunities that are being uncovered just by virtue of getting data and finding correlation between fault codes and subsequent breakdowns. Any areas of unanticipated benefits that have escalated to your level, Jim, that you're coming across just by virtue of the big data that you're gathering?

Question: Jerry Revich - Goldman Sachs - Analyst : Very interesting. And Jim, earlier in our conversation, you mentioned designing machines with services in mind in terms of higher number of proprietary parts or Cat IP parts. Can you talk about how that looks in the field population? That sounds like the sort of initiative that grows exponentially years five plus as opposed to during the first five years, if I --

Question: Jerry Revich - Goldman Sachs - Analyst : And in terms of the proportion of parts going forward that are Cat proprietary IP versus prior? Is it possible to get just a frame of reference at all, Jim?

Question: Jerry Revich - Goldman Sachs - Analyst : And the path to the 2026 parts service target, roughly $5 billion off of 2023 levels. Jim, can you talk about any significant stepping or building blocks that stand out to you that provide visibility on that path?

Question: Jerry Revich - Goldman Sachs - Analyst : Very interesting. The democratization of service. And the buy-in, Jim, from dealers, I know it varies a lot but what proportion of network has a passing grade in this area?

Question: Jerry Revich - Goldman Sachs - Analyst : And on the topic of dealers, Jim, any other changes in dealer incentives that you folks are managing the business to? Or anything else that you're focused on from a distribution standpoint? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 19, 2024 / 7:00PM, GS.N - Caterpillar Inc Virtual HQ Visit Hosted by Goldman Sachs

Question: Jerry Revich - Goldman Sachs - Analyst : Got it. And earlier in the conversation, Jim, you spoke to a longer-term opportunity to grow the business beyond the $28 billion in terms of parts and service. I think you've grown at roughly a 7% growth rate in parts and service over the past number of years. Is that how we should be thinking about the long-term trajectory? Can you expand on what you had in mind when you said longer-term growing beyond that?

Question: Jerry Revich - Goldman Sachs - Analyst : And the growth that you see in the parts business has gone with pretty -- really strong revenue growth in the new machine and engine business as well. Over time, would you expect parts and service as a percent of total to move higher? And obviously, that will vary based on where we are in the cycle. But is the momentum on the part of the service side is strong enough where we could see it rising as a percent of total?

Question: Jerry Revich - Goldman Sachs - Analyst : Super. Can we talk about energy and transportation? So on the last earnings call, you brought up the Titan 350, Jim. To frame the conversation for our audience, we think the incumbent generates about $2 billion in annual sales in the power range that Titan 350 would address. And so Jim, I'm wondering if you can just talk about the types of applications that your product will be a good fit for, compared to, an aeroderivative turbine as I understand that the industrial frame turbine has a different maintenance versus upfront CapEx profile for the customer. So there should be a natural application fit where the product is better, I think.

Question: Jerry Revich - Goldman Sachs - Analyst : And Jim, in terms of the product rollout plan, when did the first commercial unit come off the line and when do you expect to get the full production rate for the 350? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 19, 2024 / 7:00PM, GS.N - Caterpillar Inc Virtual HQ Visit Hosted by Goldman Sachs

Question: Jerry Revich - Goldman Sachs - Analyst : And in terms of the use of the trailerized units for data centers, can you expand on that comment? Is that the next set of data centers that are being designed? Or are you starting to see data centers are coming online coming equipped with these trailerized units?

Question: Jerry Revich - Goldman Sachs - Analyst : Very interesting.

Question: Jerry Revich - Goldman Sachs - Analyst : And the fuel economy and overall total cost of ownership of running a turbine versus paying for electricity from what we hear, it's within the (inaudible) through pretty comparable? Is that right? Or what are you hearing from your customers?

Question: Jerry Revich - Goldman Sachs - Analyst : Very interesting. And to go back to the last earnings call, you and the team spoke about energy and transportation backlog was up sequentially despite lead time, shortening for gas compression. It sounds like a significant part of the backlog growth was data centers. Can you talk about how far out lead times extend now for customers as to you, I want to recip engine for data center. I want turbine -- how far out until they get a delivery at this point? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 19, 2024 / 7:00PM, GS.N - Caterpillar Inc Virtual HQ Visit Hosted by Goldman Sachs

Question: Jerry Revich - Goldman Sachs - Analyst : And Jim, what's interesting about your Energy & Transportation business is because you're in all of these different markets, you have the ability to produce different products at a different point in the cycle and upstream or well service demand for the industry has been pretty weak. How seamless is it for you when you're selling large reciprocating engines into power generation applications versus oil and gas applications? How easy or hard is that (inaudible) in the field as opposed to the spreadsheet?

Question: Jerry Revich - Goldman Sachs - Analyst : And it's interesting that lead times are 18 to 24 months while the well servicing market is at a trough and mining truck demand, certainly not an elevated level either. How much capability would your team have to grow capacity beyond the 125% that you outlined on the last call if you decide to pull the trigger? We at a point where we need significant new roof line? Or could we find -- if we decide to pull the trigger on additional capacity, that number can continue to move higher?

Question: Jerry Revich - Goldman Sachs - Analyst : And Jim, can we switch gears to talk about resources and autonomy. So you folks have been focused on making autonomy economics work for small mines. Can you update us on your efforts? What size fleets are economic today? And any significant milestones that we should keep in mind just as you continue down that journey?

Question: Jerry Revich - Goldman Sachs - Analyst : Super. And then from a production standpoint, in resources, you mentioned that essentially supply has caught up with demand post COVID. Customers got their deliveries. And so we had a production adjustment for the industry this year. Can you talk about where your lead times today for large trucks? And how would you characterize in demand based on customer inquiry levels?

Question: Jerry Revich - Goldman Sachs - Analyst : And the elevated backlog that you mentioned due to supply chain constraints, is it now at normalized levels in your view?

Question: Jerry Revich - Goldman Sachs - Analyst : Got it. And excellent profitability in resources. When looking at industry data, so Parker Bay, it looks like your truck unit share has declined. I think it's a function of just the move towards smaller units, given geographic mix of demand, but would love your perspective, Jim, on what the industry data shows? And how do you feel about your market share here?

Question: Jerry Revich - Goldman Sachs - Analyst : Jim, if we could just shift gears and talk about Construction Industries. Earlier in our conversation, you mentioned the focus on free cash generation and the really strong and improve free cash flow targets that you folks laid out within the past year. I think part of it has been you folks have cut production and construction equipment earlier in this cycle than what we've seen in the past. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 19, 2024 / 7:00PM, GS.N - Caterpillar Inc Virtual HQ Visit Hosted by Goldman Sachs Can you talk about how you've taken that approach to making sure we don't have as much of a [bullwhip] effect that we've seen in the past in this industry?

Question: Jerry Revich - Goldman Sachs - Analyst : Got it. And for CI, customer value agreements have been a key focus for you folks. I'm wondering if you could just update us on how performance has tracked since you gave us an update at the Analyst Day? Have we seen a step move higher in terms of the cross-selling?

Question: Jerry Revich - Goldman Sachs - Analyst : Jim, the topic of tariffs is one that comes up. Obviously, Cat's stated view is a proponent of global trade. When we had tariffs last implemented on steel, you folks were able to pass through higher steel costs seamlessly in a scenario that whole good tariffs are implemented. Can you talk about just your level of confidence that higher cost would be passed through to end customers since obviously, Caterpillar doesn't control tariffs? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 19, 2024 / 7:00PM, GS.N - Caterpillar Inc Virtual HQ Visit Hosted by Goldman Sachs

Question: Jerry Revich - Goldman Sachs - Analyst : Fair enough. So last question given the time constraints here, Jim. In our discussion, we focused on how Cat has really transformed over the past seven, eight years and growing earnings power, free cash flow and performance. Can you just spend a few minutes to wrap up and talk about your vision for Cat going forward?

Question: Jerry Revich - Goldman Sachs - Analyst : Super. Jim, thank you very much for your time and insights. Jim, Ryan, thank you both for making time for our group. Have a great day, everyone.