Caterpillar Inc Virtual HQ Visit with Bank of America Transcript

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

Question: Michael Fenninger - Bank of America - Analyst : Thanks Ryan. Thanks everyone for joining. Andrew. I love us if we could kick off this conversation really talking about Caterpillar relative to prior cycles. Your revenue this year based on estimates is again, you're in that fire peak revenue observed over a decade ago? Yes, unit volume gains are still below that period, suggesting strong price. Just to help provide context for everyone on the line, how far below are volume units now from that final peak, what areas of the portfolio have fully recovered? What areas of the portfolio are still operating below the prior peak levels? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 18, 2024 / 3:00PM, BAC.N - Caterpillar Inc Virtual HQ Visit with Bank of America

Question: Michael Fenninger - Bank of America - Analyst : Great. And Andrew, you alluded to this before, but no counterparty to the strongest pricing in its history. Investment, I believe most of the pricing is due to inflation, I mean, bigger picture. Is there a change going forward in terms of how can use pricing in some of its markets. For example, if we look at resources and energy, our market dynamics different now which may drive pricing stronger longer term. Do you see any inflection where your customers are paying off for fleets with certain features and technology it maybe was not there in years past.

Question: Michael Fenninger - Bank of America - Analyst : Thanks, Andrew. Just a follow up on the pricing conversation. I mean, pricing growth was inevitably going to moderate. What do you see in the relationship of price versus cost, pricing above your cost? I mean, remaining for the rest of the year, is your cost inflation falling faster than your pricing? Is there a scenario where price versus cost structure is higher for Caterpillar going forward?

Question: Michael Fenninger - Bank of America - Analyst : Fair enough. And Andrew since Cat last reported, the macro-environment is becoming more uncertain than ever we may see higher for longer rates. Are you sensing customers pausing or pushing out orders, right? You said or defense customers are still willing to really do best through this uncertainty following some years of underinvestment.

Question: Michael Fenninger - Bank of America - Analyst : And Andrew, just to follow-up with that last, I mean, I thought I mean, speaking of investing, maybe to uncertainty cap just raises CapEx for the first time in a while in spending $2 billion to $2.5 billion of CapEx, I think is your guide for '24. That's a big step-up since you've joined as a CFO. Can you just talk about that level of investment, expanding the engine production capacity. Why are you doing as well right now, how much capacity Andrew does exploring and provide Caterpillar in '25, '26? What market do these engines really serve?

Question: Michael Fenninger - Bank of America - Analyst : And Andrew, just to follow up with you guys, as you referenced, I mean data centers are certainly in the headlines, right now? Can you give any sense of the contribution of data centers to you about power-gen business today? Do you expect that vertical to grow in '24 and '25 based on the strength in your backlog and the order commitments you're seeing from your customers there?

Question: Michael Fenninger - Bank of America - Analyst : Andrew, thank you for that. That was helpful. Is there any rule of thumb when we think of how much Cat equipment is on a data center site? I mean, obviously varies construction side. You guys are leading in the construction manufacturer to help build these site and then there's the backup power side. Do you have any rule of thumb of how much kind of quickly either back up with instructions on one of these sites as these sites get bigger and more complex with backup power that could the fire on the world, we could see that kind of moving towards in the next few years.

Question: Michael Fenninger - Bank of America - Analyst : And Andrew, I don't think investors typically associate Caterpillar with gen sets . I'm curious what the competitive landscape is for backup power and how do you compete with any Cat dealer network advantage when it comes to supplying the backup power for these market forces hearing from contractors on the field, Andrew, that there's still a lot of tightness out there in terms of getting their hands on backup power. Does this provide some pricing power the Caterpillar in this high demand backdrop?

Question: Michael Fenninger - Bank of America - Analyst : Another portion of your E&T business. I know we spoke a lot about the power gen and backup side. Another big area of your E&T business is oil and gas and oil and gas prices have been pretty volatile this year. Cat (inaudible) pretty broad based in terms of how it serves the energy market. You still expect oil and gas business to be up in 2024. What areas of that portfolio in energies is driving that growth?

Question: Michael Fenninger - Bank of America - Analyst : And Andrew, can you just touch on a little bit flesh out a little bit more on solar. I think that's kind of a misunderstood business. What are you seeing in terms of the solid from a backlog when it comes to the oil and gas side and the PowerGen side ? What typically drives this business is high oil prices, low gas prices, pipeline growth. What do you monitor that you find drive that solar backlog?

Question: Michael Fenninger - Bank of America - Analyst : Probably, Andrew, just moving on maybe to construction. The construction market has been very strong despite the higher interest rate environment will be shoring mega-projects infrastructure. Do you have a sense of how much in North American construction exposure? It's tied to those heavy projects versus maybe the later projects that are more rate sensitive. Given some of the tailwinds and headwinds in construction, how are you seeing the North America construction market evolving going forward?

Question: Michael Fenninger - Bank of America - Analyst : Fair enough. Construction topic Andrew, inventories are always very topical at times the market on the deep inventories and binary, you're either in the restocking phase or destocking. As the CFO, how are you evaluating inventories at Caterpillar today, a dealer network in the second half. I'm in the fourth quarter last year, dealer took out about 1.4 billion of machine inventory and you actually expanded margins, that was incredibly impressive. Is that possible to take out 1 billion of machine inventory out this year without harming profitability again?

Question: Michael Fenninger - Bank of America - Analyst : Fair enough, Andrew, and just talking up resources. In April, one of your biggest dealers bidding publicly, you talked about booking 700 million of orders for copper mines and oil sands. Resources is actually the smallest contributor to group profit out of the three segments, but it was the biggest in 2012. Our copper iron ore and coal prices, are they high enough to drive replacement? Are you seeing customers pause? Have some of these projects? Any color there?

Question: Michael Fenninger - Bank of America - Analyst : Thank you, Andrew. And you know, in the beginning of this year, you raised your free cash flow generation target. Maybe you it unpack where it was and where you're raising it to now and what is really Andrew driving that better free cash flow generation? And how do we look at the capital allocation approach now with a higher baseline of free cash flow going forward?

Question: Michael Fenninger - Bank of America - Analyst : And Andrew, just to follow up with this, because it has been a key strategic focus for you. I'm clearly driving a higher baseline of free cash flow through repurchasing shares. You've announced your dividend increase. Can you see that adding another vertical or end market over time. Are there any markets cap is in today? It maybe wasn't a few years ago or other marks that you would like to expand into that we should keep our eyes out for ?

Question: Michael Fenninger - Bank of America - Analyst : Fair enough, Andrew. And for years, investors kind of look at Cat as a macro play just followed backlog. I'm curious, given the dynamics in recent years, is the backlog still the best barometer for us to follow for cash earnings profile going forward? Do you find that Cat is maybe more diversified within its segment construction resources in key then it was in past cycles ?

Question: Michael Fenninger - Bank of America - Analyst : Fair enough. And Andrew, with that consistency there's always a an economic sensitivity to some degree. There's always a fear of industrial downturn in the recession. Clearly, there was a great financial crisis in 2009 but since then, there's also been in our mining equipment downturn in oil and gas downturn, we saw COVID. So how could that net industrial downturn in that Cat cycle through any rule of thumb, we should think of our investors on the line. I think that concludes the earnings sensitivity for cat in that segment. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 18, 2024 / 3:00PM, BAC.N - Caterpillar Inc Virtual HQ Visit with Bank of America

Question: Michael Fenninger - Bank of America - Analyst : Helpful , Andrew, and just you referenced this a little earlier, but we're seeing cap deliver record earnings were China's been kind of in a slump. Can you just talk about Cat's China portfolio, how that's evolved in recent years? Any context of the percent of revenue it is today of how far it is below those peak years? And are you seeing any green shoots at all on the ground?

Question: Michael Fenninger - Bank of America - Analyst : Great. Andrew, just the last question, as we wrap up. Last quarter, you guys kind of flagged seemed like Middle East was strong, but there was some weakness you flagged in Europe. Just curious as you kind of unpack that what you kind of see in Europe is obviously geopolitical election. We also saw the ECB move to just curious with what you saw in the first quarter with Europe, how you're kind of thinking of Europe and the Middle East as we kind of moving forward. Thank you REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 18, 2024 / 3:00PM, BAC.N - Caterpillar Inc Virtual HQ Visit with Bank of America

Question: Michael Fenninger - Bank of America - Analyst : And Andrew, well, we're up at the end of the hour. I want to thank Andrew for his time today and Ryan and for making time available. And for everyone listening on the call, there will be replay for anyone that wants to go back and listen to the fireside chat and conversation. Everyone, thanks for joining us, and Andrew, really appreciate it. Thank you.