Caterpillar (CAT) Q4 2024 Earnings Call Transcript

Caterpillar (NYSE: CAT)

Q4 2024 Earnings Call

Jan 30, 2025, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the fourth quarter 2024 Caterpillarearnings 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.

Alex Kapper -- Vice President, Investor Relations

Thank you, Audra. Good morning, everyone, and welcome to Caterpillar's fourth quarter 2024earnings 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 Rob Rengel, senior director of IR.

During our call, we'll be discussing the fourth quarter earnings release we issued earlier today. You can find our slides, the news release and a webcast recap at investors.caterpillar.com under Events & Presentations. The content of this call is protected by U.S. and international copyright law.

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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 theearnings callslides. Now, let's advance to Slide 3 and turn the call over to our chairman and CEO, Jim Umpleby.

Donald James Umpleby -- Chairman and Chief Executive Officer

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 continue 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 billion 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, of which we have returned substantially all to shareholders through share repurchases and dividends, 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 & 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 nonresidential was down slightly.

Rental fleet loading was down, but in line with expectations, as we described during our lastearnings 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 quarry and aggregates were in line with expectations. In Energy & 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 & 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 revenues increased to $24 billion in 2024, a 4% increase over 2023.

Services continue 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 e-commerce platforms. For example, this year, we launched an internal generative AI solution designed to optimize the creation of intelligent leads, which we call prioritized 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 e-commerce platforms and have focused on improving our customer onboarding to include key digital products. Also, in 2024, we saw record uses of VisionLink, our equipment management application, onboarding and activating thousands of new customers throughout the year.

Services growth remains resilient despite the decline in our overall top line. We continue to execute our various services initiatives as we strive toward 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 & 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 multiyear projects and government-related infrastructure investments supported by funding from the IIJA. Although we anticipate the combined nonresidential 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 the 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 & 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 servic