All right. Thank you. Thank you. Good afternoon. Welcome to Caterpillar's Investor Day. We're excited to have you here with us, including those of you here in the room in Clayton, North Carolina, and everyone listening to us via webcast. We've provided slides to accompany the presentation. You can find the slides along with this morning's news release on our website, the investor relations section of the website under caterpillar.com. Click on investors, then events and presentations. A transcript of the session, as soon as it's available, will be posted in the same area of our website. I'll start with the usual reminders you see here. We plan to make forward-looking statements today. They're subject to risk and uncertainties, and then the list of the factors that could cause our actual results to be different than the information discussed, are described in our SEC filings.
For the list of the factors that individually or in aggregate could cause actual results to vary materially from our projections, please refer to our most recent SEC filings and the forward-looking statements in today's presentation materials. Please keep in mind that this event is copyrighted by the company. Any use of any portion of the event without our express written consent is strictly prohibited. Here's our agenda for you today. We have four main speakers. First, Jim will provide his perspective on our progress since our last Investor Day in 2017, where we're headed next, and our new margin targets. Bob will share how we intend to grow services within Caterpillar. Denise will walk you through our progress and our vision for operational excellence and expanded offerings.
Andrew will wrap up our Investor Day with our recent performance, the outlook, and our refreshed capital deployment strategy. Some of these topics were highlighted in this morning's news release, which is available on our website. When our formal remarks conclude, we plan to conduct a Q&A session with the entire management team, including our speakers and the rest of the team, and I'll come back up at that point to give you some further instructions. Okay, that's it. With that, we'll turn it over to Jim.
Well, thanks, Jennifer. I'd like to add my welcome to our investors and analysts who are with us today. For those of you that are attending in person, I hope you enjoyed spending time with our Building Construction Products employees. They are part of our diverse, skilled workforce that designs and manufactures products that have made Caterpillar among the world's most widely recognized and respected brands for almost 100 years. Along with our 1,000 plus colleagues around the world, they are dedicated to our customer success. It's our customers that use our solutions to build a better world through projects that give people access to electricity, transportation, hospitals, schools, clean water, and so much more. As Jennifer mentioned, we're going to update you on our progress since we implemented our enterprise strategy in 2017.
We have met or exceeded the targets we shared with you during our 2017 Investor Day, and we've profitably grown our company. This afternoon, we will share new targets as we continue to execute our strategy for profitable growth and enhanced shareholder return. As a reminder, Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. Our three primary segments and financial products segment are shown on the slide, along with our services, distribution, and digital organization that supports and enables all of these segments and our customers. Last year's sales and revenues were approximately $55 billion. We have a well-earned reputation for the best product line with the most productive equipment and superior product quality. Our competitive advantages include our independent Caterpillar dealer network.
With 168 dealers and about 2,000 branches in 193 countries around the world, it's the most extensive sales and service network in our industries. When customers buy our products, they know they will be supported by the most capable and reliable global service network. As a result of our products and our dealers, we are a leader in almost all of our product classes in the markets in which we participate. Caterpillar is well-positioned for the future as our customers invest in infrastructure, energy, and mining to meet the needs of a growing global population, an emerging middle class in the developing world, and an increasingly urbanized society. We have a clear strategy for profitable growth, which were introduced in 2017. Next, let me introduce our talented senior leadership team.
My colleagues in Caterpillar's executive office are an experienced group of executives dedicated to executing our strategy for profitable growth throughout the enterprise. It's a values-based team. Some of my colleagues have had long, successful tenures at Caterpillar, and some have deep and valuable experiences from other organizations. Before we discuss our plans for continued profitable growth, I'll remind everyone of the different components of our strategy. The core of our strategy is the overriding objective to grow profitably, and the core is supported by three main pillars: operational excellence, expanded offerings, and services. These are enabled by data and insights using the Operating & Execution Model, or O&E Model. Most importantly, all of this is underpinned by our long-standing code of conduct, our values in action, which define what we do everywhere we do business.
They reflect how we behave with our customers, our partners, and one another. We expect every employee to live our values every day in everything we do. I'll review each strategic pillar, starting with operational excellence, which includes a safety first culture, product quality, reliability and durability, lean operations, and a competitive and flexible cost structure. Caterpillar has made great progress improving safety during the last 15 years, but even one injury is one too many. We want everyone to return home safely every day. The same goes for quality. Our enterprise quality metrics don't mean a thing to a customer who experiences downtime because of a defect. We are striving for perfection in safety and quality in a continuous, never-ending journey. The same is true for lean.
We are committed to continuing our lean manufacturing journey by synchronizing across our value chains, reducing lead times, optimizing working capital, and increasing availability. Our team has made incredible strides in lowering our cost structure in recent years and maintaining our cost discipline as we ramped up production during the last two years. We are firmly committed to maintaining a competitive and flexible cost structure. The next component of our strategy is expanded offerings. It's based on having the right products and solutions for various types of customers at the right value point to ensure an acceptable return for Caterpillar and our dealers, while always ensuring our customers are more successful using Cat products than they would be with the competition. We've introduced several lifecycle value products that have been well received by our customers.
Our new product strategy aligns investments and technologies across business units to ensure we are leveraging product enhancements across the enterprise. We also continue to focus on our entire product line. During the last two years, we've invested about $3.5 billion in R&D, resulting in a wide variety of new products across all of our segments. We have introduced hundreds of new products since the beginning of 2017. Last month, I attended Bauma, the construction industry's largest trade show, held in Munich, Germany every three years. At Bauma, we unveiled a host of new expanded offerings. We showcased the entire line of new next generation mini hydraulic excavators, designed to provide the best performance and versatility in the smallest possible package. Also on the floor was the 988K XE, the company's first diesel electric drive wheel loader, which improves fuel efficiency and productivity.
In addition, visitors had a chance to see our concept compact wheel loader, the 906, which provides customers a zero emissions battery, powered electric drivetrain. I used the opportunity at Bauma to talk with customers as they toured new products at our exhibit. They conveyed a great deal of excitement about what they saw and experienced at the show. Turning to services. Services includes all the ways we help our customers succeed after they buy a piece of equipment. Services was part of our enterprise strategy that we introduced in 2017. We are increasing our investments to enable services growth. We are enhancing our digital capabilities by tapping into a talent pool in downtown Chicago, where our newly formed Cat Digital division has established a presence. We are also investing to upgrade our digital platform architecture.
During the last two years, we've increased the number of connected machines and engines by 70% to approximately 850,000 connected assets. We've made it easier for customers to buy parts online. We are striving to continually provide more value to our customers. This includes allowing our customers to minimize downtime and maximize equipment availability through Customer Value Agreements. The Operating & Execution Model, or O&E Model, is the methodology we use to provide the facts, data, and insights to guide our strategic decision-making around profitable growth. We are using the O&E Model across the enterprise, and we have strengthened its governance. We're fixing areas of the business that are not producing acceptable returns and prioritizing to invest more resources in areas with the best opportunities for future profitable growth.
By creating value for our customers, each business should deliver a return above its cost of capital and generate the cash flow needed to continue to reinvest for profitable growth. Prioritization and reinvestment in those areas where we have or can develop a competitive advantage are keys to the continued success of Caterpillar and our dealers. We've chosen to withdraw from some products where we did not have a line of sight to either a competitive advantage or acceptable returns. Examples include vocational trucks, some on-underground mining products, and specialized forestry products. We'll continue to be disciplined in our capital allocation throughout the cycles and laser-focused on getting a return on our investments.
We will use the O&E Model to guide how we allocate resources and prioritize investments in areas like services and expanded offerings that represent the best opportunity for future profitable growth and shareholder return. To summarize, we have made a great deal of progress since rolling out our enterprise strategy at our Investor Day in 2017. We've improved our operational performance, the pursuit of operational performance is a continuous, never-ending journey. We've introduced expanded offerings in response to customers and market needs and are investing to enable services growth. Through the execution of our enterprise strategy, we've improved our financial performance. We established various margin targets at our 2017 Investor Day for our three primary segments. Each target was specific to the segment based on a recent historical sales level.
For each of the segments, we targeted a segment margin percentage point improvement that ranged from a 5-7 percentage point improvement for Construction Industries, to a 2-6 percentage point improvement for Resource Industries, and a 1-3 percentage point improvement for Energy & Transportation. We met or exceeded our performance targets across every segment. We finished at the top of the range for Resource Industries and were slightly above the range for Construction Industries, but at a higher sales level. Energy & Transportation was in the middle of the target range. This stronger operating margin performance continued in our 2019 results, first quarter 2019 results, which was another record first quarter profit per share after a record first quarter in 2018. We set out similar targets for the company as a whole and also met or exceeded those targets.
On $55 billion of sales, our historical adjusted operating margin performance, as presented at our 2017 Investor Day, was about 12%, and we targeted an improvement for the company of 2-5 percentage points. Putting it all together, our adjusted operating profit margin improved by about 4 percentage points compared to our historical demonstrated performance at $55 billion sales and revenue level, which was at the high end of our target range. We achieved these targets by executing the elements of our enterprise strategy for profitable growth. We view these results as evidence that our strategy is working, and we still have plenty of future opportunities to continue to profitably grow our company. It also helps to put our recent performance in context by reviewing our results through the cycles of 2010-2016.
We've had a sales range from $39 billion- $66 billion. Our adjusted operating margins at lower levels of sales during these times has been as low as 7%, while our adjusted operating margins at higher levels of sales during this period have been in the low teens. During the last two years, we delivered much stronger financial performance. Our sales and revenues were approximately the same in 2014 and 2018, but we produced an operating margin of 16% in 2018 compared to 11% in 2014. In fact, margins last year were higher than they were in 2011 and 2012, despite the fact we had lower sales and revenue in 2018. With that historical and recent performance in mind, I'd now like to share with you some new targets for adjusted operating margin performance as part of our profitable growth journey.
First, let's review our historical sales and adjusted operating margin performance from 2010 to 2016. During that time, we delivered an adjusted operating margin within a range of 7%-15%, with sales and revenues from $39 billion- $66 billion. Our best margin was 15% at the highest level of sales and revenues in 2018. Today, we are updating our company's adjusted operating margin targets. During our last Investor Day, we established margin targets based on a specific level of sales and revenue that we experienced in the recent past, $55 billion. We are now targeting to be 3 to 6 percentage points above our historical performance through a range of sales and revenues. We are illustrating the improvement using our actual performance from 2010 to 2016. This elevates our future expected adjusted operating margin range from 10%-21%.
This target further raises the bar for our global team as we continue to execute our strategy and drive better long-term performance for our shareholders. I'd also like to speak this morning about our plans for capital deployment. The enterprise strategy we developed, we introduced in 2017 has resulted in stronger profit performance, higher margins, and improved free cash flow. The fact that we are managing the business differently gives us the confidence to continue targeting a mid-A credit rating and project even stronger operating margins and free cash flow throughout the cycles. As a result of our improved performance and philosophy of returning capital to shareholders on a more consistent basis, this morning we announced a significant dividend increase.
We are raising the dividend 20% to $4.12 per share on an annualized basis, effective with the dividends that will be paid in the third quarter. During the next four years, we anticipate increasing the dividend annually by at least a high single-digit percentage. For many years, we've been consistently growing the dividend. We were recently added to the S&P 500 Dividend Aristocrats Index for 25 years of consecutive dividend growth. In a few minutes, Bob will provide an update on services, one of the key elements of our enterprise strategy. After two years of executing our strategy utilizing the O&E Model, we've gained valuable insights with a more granular understanding of the various elements of our business and our end markets. We validated the importance of growing services and intend to increase investment for services growth.
Executed correctly, services create value for Caterpillar, our dealers, and most importantly, our customers. Services increase value by minimizing downtime, maximizing the product availability, improving efficiency and asset utilization. By enhancing customer value, Caterpillar and our dealers create the opportunity to profitably grow our businesses while dampening the impact of market cycles. In 2016, the year before we launched our new enterprise strategy, services sales for Machinery, Energy & Transportation, or ME&T, was approximately $14 billion. This included all aftermarket parts sales and other Caterpillar services provided by all Cat divisions under our various brand names. The $14 billion does not include Cat Financial or discontinued products. The percentage of sales represented by service varies at different points in the cycle. When market demand is high for new equipment, services tend to be roughly 30% of ME&T sales.
During a market low, services is close, closer to 40%. We believe tremendous opportunities exist to continue to grow services revenue by working with our dealers to find new ways to increase the value we provide to customers. Today, we are announcing an aspirational target to double our ME&T service sales to $28 billion in 10 years, from $14 billion in 2016, the year prior to the introduction of our new enterprise strategy. As a reminder, the $28 billion services target for 2026 includes all aftermarket parts sales and other Caterpillar services provided by all Caterpillar divisions under our various brand names. The $28 billion does not include Cat Financial. As you know, Cat Financial helps our customers purchase Caterpillar products. We do intend to increase the participation of Cat Financial as an enabler for Customer Value Agreements to help grow services sales.
As you can see from the slide, we increased services sales from $14 billion in 2016 to $18 billion in 2018. As we strive to reach $28 billion in 2026, we don't anticipate service sales will grow in a straight line. There are a few primary reasons. During 2017 and 2018, we supported an influx of delayed rebuilds and maintenance in mining and oil and gas as these markets recovered. We also need to continue to invest in our service capabilities. This includes connecting more machines and engines, improving our digital capabilities, and designing our components, machines and engines to provide increased customer value through enhanced service offerings. We also intend to enhance our analytical capabilities and develop new service offerings that leverage our deep engineering knowledge of our products.
We anticipate these investments will accelerate services growth as we near the end of the 10 year period in 2026. Again, our services strategy is based upon finding new ways to add value to our customers to ensure they're more successful using Caterpillar products than using our competitors' products. With that, I'd like to welcome Bob to the stage to provide additional detail on our strategy to grow services and why we believe it is ours to win. Thank you.
Thank you, Jim. Another big thank you to all of you. We really appreciate the time you're spending with us today. Thank you very much. As Jim already mentioned, why do we focus on services? In the end, it really all starts with our customers and our goal to make sure our customers can be more successful utilizing our products and our services than they could with any of our competitors. That means being very easy to do business with, also beyond the point of sale, making sure we continue to add value throughout the life cycle of the equipment, helping our customers, lowering their total owning and operating costs, reduce downtime, helping them ultimately improve asset utilization. How are we gonna do that?
A number of things we have done traditionally in the past, but also leveraging new capabilities like connectivity, utilizing our suite of new digital tools, and making sure we package our offerings in such a way it helps our customers better manage their equipment fleets. Second, growing services will help us reduce cyclicality. Yes, that will depend to some extent by segment. Because you can imagine if you have a large gas turbine or a large engine, even in a downturn, chances are that utilization will remain pretty high, even in a downturn, meaning the asset will continue to require the same level of services. Whereas on the other hand, if you think of mining applications, yes, we will see some applications, whereas in a downturn, asset utilization will come down. Overall, for Caterpillar, it's clear. Growing services will help us reduce cyclicality. Thirdly, profitability.
Services have an attractive margin contribution for each of our three segments, there's plenty of opportunity for us to drive profitable growth. You could say, "Bob, that is true for you, but it might be true for a lot of other companies too." What makes Caterpillar special? Why do you believe Caterpillar is well-positioned to deliver those services to our customers? Here's where I listed some of the reasons. It starts with our brand, a very strong brand, a legacy that is built over 90+ years. Our customers don't just buy Caterpillar because we have robust products. They also buy Caterpillar that when they need parts, when they need services, they know they can count on Caterpillar and on our dealer network. Secondly, we have a very large installed base, over 2 million active assets in the field.
All customers we know already. We sold them the prime product, so a great opportunity to now also increasingly offer them more services, an opportunity that continues to grow every day on top of it. We also have best-in-class field technology, whether it is to inspect, troubleshoot, or repair equipment. Services that are delivered by our worldwide network of Caterpillar dealers. Local entrepreneurs you can find in pretty much all countries around the world who have many years of customer relationships, know how to do business in their territory, a network that we believe has always been and will continue to be one of our strongest competitive differentiators. Just keep in mind that for certain businesses, like Solar Turbines or Progress Rail, we also have direct service capabilities. On the right, more recently, connectivity.
We are on track to have close to 1 million connected assets by the end of this year, which is close to double the number of connected assets we had at the end of 2016 when we started our new strategy. Significant investment, significant in progress in just three years. Here as well, you could say, well, there's a lot of companies that can, if they have the willingness to make the financial investment, to invest in collecting data and do data analytics, predictive analytics. Really what makes a difference is not just having the data, but making sure you combine it with the domain expertise. Decades of experience our engineers have in our products, in service, in our applications, so that they combine that data with the domain expertise and then apply data analytics to generate those useful insights.
Lastly, our customer tells us that they are now, more than ever, excited about the breadth and the depth of our product range. In summary, this is why we are excited to grow services. This is why we believe Caterpillar is uniquely positioned to be the leading provider of services to our customers. Why do we focus on services? Why do we believe we are well-positioned? I guess the next logical question is how, what is our strategy to grow services? I've shown here a number of the elements. It's really a comprehensive, multifaceted strategy. It starts with what we call customer-focused design, which is very much upstream. It's well before we deliver services. It's even well before we deliver the prime product.
It's all the way upstream when our engineers make the right design choices in developing our next generation of equipment. A good example of that is our sensor strategy. Yes, if you think, for example, of maintenance elements or a filter, yes, you can try and find filters with a longer service interval. The real key is also to build in sensors that tell us when the maintenance element need to be replaced, so we can really maximize that service interval, help customers reduce downtime, reduce their operating costs, improve asset utilization. You can think of something similar, too, in a drivetrain, where we have sensors that gives us indications when a repair or an overhaul might be imminent.
The only thing you have to keep in mind here is that some of the decisions we're making here today and the investments in design will take a number of years to be at full production and then to help us enable those services, which comes back to the point Jim made earlier that our services growth trajectory in the next years will not be linear. Other areas we're investing in, digital enablers, and I will cover this, more, in more detail in a minute, together with, how we're transforming our go-to-market strategy for services, and I'll cover that, right next. A very close link to that is Cat Financial. Yes, we know Cat Financial as the provider of financial services for our customers. In reality, Cat Financial is much more than that.
It is actually one of the greatest marketing tools we have as well. 'Cause you have to keep in mind, in our industry, where unit volumes are relatively low, Cat Financial has over 11,000 direct customer contacts per day with our customers. Phone calls, can be face-to-face contact, can be via email, can be online interaction. You can very easily imagine how that makes Cat Financial the perfect marketing tool we have to build that relationship with our customers, to identify opportunities for services, to offer services, to do the follow-up of services, to really build that loyalty with our customer base over time. Yet another area we're investing in is our parts distribution network. Here you could think, for example, about a customer in Australia just bought a new articulated truck, and it needs the first set of maintenance elements.
It can be a customer in Norway who has a 30 year-old track-type tractor that he wants to overhaul. Both those customers did not just buy Caterpillar because we have great products, but because they know when they need parts, they will be there and quickly. We're continuing to invest in our parts distribution network to make it even more lean, cost-effective, but also further improve parts availability so that we can minimize customer downtime, help them improve asset utilization. We're also continuing to work with our dealers, make them even more efficient in delivery of the services, a number of projects to improve capability and capacity with our dealers.
Lastly, even though it's not the primary driver of our growth, we do keep an open mind and an eye on adjacent services opportunities that we can invest in as another source of services growth. With that, let's now dig a little bit deeper. First in our services go-to-market strategy. Here there's two elements I would like to highlight. First one comes back to our customers and having a deep understanding of what our customers value, what the services opportunity is, and not just at the point of sale, but throughout the life cycle of the equipment. The picture I'm showing here is, I would say, representative of Construction Industries type machines.
We can see that, yes, there is initial opportunity at the point of sale, but actually the vast majority of a services opportunity, 95%, is after the machine has already accumulated 5,000 hours, which can be a few years. Which then translates into our approach that is twofold. Number one, at point of sale, making sure we build that relationship to do business with, and get connected to the customer, add value. Also secondarily, making sure we have a range of solutions, a range of services all throughout the life cycle of the equipment. Which also, if you think back of the customer in Norway with a 30 year-old piece of equipment, he might very well be not even the second, but even the third owner.
You can imagine how investments like connectivity will help us throughout that long life cycle, make sure we keep track of the equipment and the customer that owns it. Secondly is the transformation of how we package our services and how we go to market. Changing from service, our traditional approach, with Customer Service Agreements or CSAs, to services, what we will call Customer Value Agreements or CVAs. It's really more than a change, just one change of a letter.
It really is a different approach in being more customer-centric, more customer-focused than ever before, making sure we think of value offers that we can bring to the customer, being more creative, innovative, and making sure we also leverage our new capabilities like connectivity, like our suite of digital tools, and really bring it all together in such way that it'll help our customers manage their fleet. Might be a little bit theoretical, let me show you a few examples of what that could mean in practice. First one here on the left is to build a relationship at the point of sale, relatively simple or straightforward. The example here could be an electric power, a standby genset. Standby genset, very low hour accumulation, but that can vary pretty substantially.
It can also be a mobile unit that's in different places, different points in time. Customer here is not as much interested in a power generation. The important part is that when he does or she does need the genset, that it starts and that is operating. This customer is going to be looking for peace of mind. At point of sale, customer might tell us, "Well, we will do our own maintenance," but where we can help with the CVA is it's fine with us, but let us assemble for you a kit with all the required maintenance elements. We will include the instructions on how to do the maintenance. Most importantly, we will utilize connectivity so that we can track the hour accumulation. We will know when the service is due. We know where the genset is located.
Two weeks before, we will deliver to where the genset is the maintenance kit ready to go, so you have the peace of mind. Another example, in terms of extending the relationship, the one I've shown here is for Cat Certified Used. Actually, a very interesting value alternative for our customers that don't require a new piece of equipment. Maybe they'll need that ultimate productivity, but do want that guarantee from Caterpillar and are interested in Cat Certified Used. Here, CVA, because it is not new, customers are looking for confidence, and to help us manage their risk. Might be interested in a CVA that is included in the monthly payment through Cat Financial. That includes health and asset management. That includes maintenance when and where it is required.
Because it's a Cat Certified Used, we will also provide component protection for key components on that machine and develop a value offer that way. Last example I show you on the right, is really a relationship all throughout the life cycle. Think here, for example, about the mining industry, where we will work with large mines or mining contractors, to really develop an end-to-end comprehensive solution where we take care of everything and help the customer manage their total cost of operation and of ownership, help them manage their cost per ton or cost per hour, make sure we also provide assurances in terms of availability, machine asset utilization. Just a few examples. With that, let's now switch gears and talk about digital for a minute.
For us, when it comes to digital, the key message is that digital is not a business in itself. For us, digital is an enabler to help us grow services. I'll try to explain, we call it in a simplified digital model, which starts with connectivity, which is the investments we have made first in the optimized electronic architecture of the equipment. All of the electronic backbone, the Ethernet that is built into a machine so that we can collect data from all the components around the asset. Having Product Link and telecommunications to bring that data on board. As I mentioned before, we are on track to have 1 million connected assets by the end of this year. Also for all new equipment, pretty much all of our machines come now ex factory, fully connected, ready to go.
Second layer is platform, our digital platform, which really you can see as the data architecture, the underlying architecture of how we collect data. This is where our digital team really gets excited, because this is where they get to combine all the data we collect from our equipment in the field, together with all other data sources we have from all around Caterpillar, bring it in all into one location, manage data security, manage data integrity, and start applying data analytics and machine learning so that we can provide useful insights and make sure it also becomes exciting for our customers, so that we can provide those services, provide digital applications. Maybe to help bring it to life, let me show you a few examples, first for our customers. I'll also talk about our dealers soon.
First, for our customers. The one I show here on the left, the Cat App, is a brand-new app that we just launched last month at the Bauma trade show in Germany, which is really one application that allows customers to do a lot of different things. From that app, manage their fleet, see the location of the equipment, see the hours of the equipment, do health management of the equipment, request parts and services, interact with their local Caterpillar dealer. Also for some of our newer equipment, like the next gen excavators, this app can also be used as an electronic key.
Customers can use this to unlock the machine, to remotely start the machine, or if the customer has multiple operators, he can program in there saying, "This operator can use out of my fleet of five machines, these two pieces of equipment. Those he cannot use between these hours of the day. My service technician is also allowed to start the equipment in the weekend or late at night." All of that power in the palm of the customer's hand. In the middle, I've shown a number of equipment management applications that we're developing.
It starts simple, like I've shown here on the top, Cat Inspect, which is really an application to be able to do equipment inspections in the field in a modern way, do inspections, report them, include visuals, the ability to highlight areas that need immediate attention, and then be able to electronically upload it to the back office. To our applications like VisionLink, which is really targeted at the construction industry segment, which again allows customers a lot of possibilities, whether it is to track the equipment, idle time, fuel consumption, productivity in a number of cases, location of the equipment as well. Customer can also install geo-fences. If you think, for example, of theft risk, inside this geo-fence, the machine will operate. If somebody would transport the machine outside of that geo-fence, the equipment will no longer operate.
A lot of possibilities, continuously growing. Below that, a number of segment-specific applications. MineStar for the mining industry, a lot of focus on productivity there as well. Solar InSight and Progress Rail PR Uptime specifically for those industries too. Third area where we're investing for our customers was shown on the right, e-commerce. Here as well, we have a segmented approach. For our corporate accounts, we go as far as integrating our e-commerce capability into the ERP system of our customers. They don't need to use our system. We'll make it so that they can use their own ERP system to directly order services, order parts from us. We have another application for customers who are used to working with their Caterpillar dealer, they have a login experience and they can order parts.
They can now also order equipment like the BCP equipment you saw this morning. Thirdly, we also now develop an application for customers who don't have an experience at working with Caterpillar or with the dealer. Very easy, guest checkout, very convenient, and easy to do business with. That you have to imagine in a number of countries around the world with their specific requirements, with their language, with their payment methods. A growing suite of applications for our customers. In parallel to that, we're also investing in applications for our dealers to make them even more efficient, more effective in delivering those services.
First example, the top right Service Information System, which is really aimed at the dealer service technician in the field, making sure that in a modern way, at the tip of their fingers, they have all the instructions to troubleshoot the machine or when a repair is required, step-by-step repair instructions for that very wide range of equipment that we have, both current and non-current. Second one in the middle, parts inventory optimization tool, which comes back to maximizing parts availability, where we analyze end-to-end parts inventories between us and our dealers, use data analytics and digital tools to optimize parts availability, making sure the repair gets done as quick as possible to help customers maximize their asset utilization. Third one, remote flash and troubleshoot.
Another new one that we launched at the Bauma, in Germany last month, which allows an expert technician from a dealer who receives through connectivity a health alert from a certain asset to already in the back office, start doing remote troubleshooting on that asset from the back office. If needed, they can also upload new machine software to the asset, or in case a field visit of a technician would be required because they have done the troubleshooting, this can help make sure that when the technician goes out, he has the right tooling with him or with her and the right parts, so we can do the repair right the first time, again, minimizing uptime, helping our customers maximize asset utilization.
The last one, again, this is where our digital team gets excited, Equipment Care Advisor, which is where we combine all that data together with our domain expertise and data analytics, machine learning to help our dealers make the best maintenance and repair recommendations so that the customer can best manage their fleet. Those were just a few examples of how our strategy is coming to life. In summary, I would say it is three points. First of all, our primary focus of services is to help our customers succeed. Number two, we believe Caterpillar is uniquely positioned to be that provider of services to our customers. Number three, we have a comprehensive strategy, and we are investing in growth. All of that in support of the goal that Jim laid out to double our services revenue by 2026. Again, thank you.
With that, I will turn it over to Denise to talk about expanded offerings and operational excellence. Thank you.
Thank you, De Lange. Okay. Well, good afternoon. It's a pleasure to see all of you here in North Carolina. Today, I'm going to review two strategic areas of focus, operational excellence and expanded offerings. I'll also talk a bit about our products and technology and share a few examples with you. First, let me start with operational excellence. To be profitable and operate most efficiently through the cycles, we continue to leverage our foundational strengths, a competitive and flexible cost discipline, lean processes, a safety-first culture, and quality, including product reliability and durability. These things collectively will help us build and maintain a competitive advantage. Let me share with you some of the ways that we've made sustainable improvement with our cost discipline. All of you know that we have completed roughly $1.8 billion in structural cost reductions since 2014.
We've also reduced our fixed assets by more than $3 billion. We've achieved these results by taking an enterprise view to cost management and announced closures and consolidations of 57 facilities. This reduced our manufacturing footprint by 25 million sq ft, eliminating 29% of our manufacturing space. We also streamlined our manufacturing approach to become more agile and flexible and to better utilize existing floor space and assets. Even with the reduced footprint, our capacity utilization at the enterprise level is at approximately 70%. We are confident that we have sufficient capacity now and through the cycles. Let me repeat that. We are confident that we have sufficient capacity now and through the cycles. A great example of the operational excellence that we've demonstrated can be shown right here in Clayton, North Carolina.
If you were to go across the street and walk through the assembly plant on the small wheel loader line, the number of small wheel loaders that are coming off the line in one day, assembled on one shift, would have required two shifts of workers just four years ago. It's a great example of our operational excellence focus. Another key area of focus for operational excellence is ensuring that we have a strong foundation and use lean principles to achieve results. Caterpillar has a strong foundation of lean. It's rooted in Six Sigma and the Caterpillar Production System. Lean is a customer back approach, focused on understanding customer requirements, and it spans our entire value chain, from supply chain to customer delivery. It's a culture of continuous improvement through which the entire enterprise and our value chain partners are aligned to stop defects, improve processes and eliminate waste.
Caterpillar's leveraged lean methodologies on operations for decades. We're extending the implementation through the value chain beyond operations into processes like product development, financial and HR, go to market and others. This optimizes our business end to end. two leading indicators of successful lean implementation are safety and quality. We've seen significant improvement in safety, already achieving our 2020 goals. In fact, we've seen more than a 90% reduction in recordable injuries since 2003. In the past 10 years, we've delivered more than 1,800 new or refreshed models. We've reduced defects found in the first 12 months of service by over 46%. Ensuring lean benefits are achieved end to end means that we also must work with our supply base to optimize the value chain.
Our enterprise strategy clearly articulates that our suppliers, who we also consider as partners, are key to our success. We've been working with suppliers to increase flexibility through the cycles. By together working with our suppliers to increase demand visibility and improve our sales and order planning processes, we are intentionally designing our value chains collaboratively. In the past year, we've taken a very focused approach to accelerating our production for both aftermarket parts and machines to meet the increased demand. We have had challenges with constraints, specifically with our North America supply of iron castings, machining and fabrication. We've made significant improvements to our product production output by utilizing an end-to-end approach. We are positioning our supply side to respond with greater agility through the business cycles.
Parts availability to our dealers and end customers has continued to show strong gains across all segments over the past six months, now reaching optimal levels in almost all component classes. Caterpillar continues to leverage lean principles to accelerate these results while in parallel improving our inventory turns and our distribution network efficiencies. As we work the engineered value chain, the goal is to increase response time along with product and parts availability to our customers while running our value chain at optimal inventory levels and total costs through the cycle. Next, I'd like to discuss how we're pursuing expanded offerings to fuel profitable growth, both by better serving existing customers as well as reaching new ones. We need to ensure that we have the right products and services to create greater customer value and drive profitable growth.
We wanna grow our current business, but we also wanna expand that business to customers we've not previously reached. At the last Investor Day, we described our expanded offering approach. Today, I'm gonna cover the key elements of the progress we've made. I'm also gonna broaden the discussion to how we are thinking about the Cat product portfolio and how we're integrating technology to drive value for our customers. Let me step you through how we segment our customers based on their application needs and value criteria to offer them solutions that are designed for their business in mind. This chart represents how we match our product offerings to the various customer business and economic requirements. The top right side of the chart in the dark yellow represents the lifecycle performance customer segment where we traditionally have competed, heavy and medium duty applications.
When you think of Caterpillar, you think of iconic machines. Products in this segment see heavy utilization and can run as much as 24 hours a day, seven days a week in some applications. This is where customers value the total cost of ownership and measure success by cost per work done, like cost per ton. There are two lifecycle performance models that are shown on this chart. The models with the highest levels of technology and expanded features are designated as XE. In addition to our core performance products, we are now offering specific solutions for customers where the value proposition is different. The lifecycle value segment is for customers who have lighter duty applications or work in less extreme conditions. They value simple, tough machines that perform and provide Caterpillar quality and product support.
Historically, we have either discounted our lifecycle performance products or sold older models to attract these customers. This had limited success and put us in a position where in some cases we were uncompetitive. Many customers perceived that we were too expensive. Our current approach is to specifically design machines for the market needs and economics. The lifecycle value segment, which is shown in the light yellow, is a Cat branded product with a GC designation. An example of a product in this category is the 950 GC medium wheel loader. This machine delivers solid performance with the reliability and durability that Cat machines are known for. The utility segment, which is shown in gray, is targeted at customers who most value acquisition costs, i.e., price and cost per hour. These customers operate primarily in emerging markets.
These utility products carry our SEM brand and are supported by our SEM and/or Caterpillar dealers. They are straightforward machines with fewer features for light duty applications. Between 2016 and 2021, we will have introduced 24 new or refreshed models under the GC brand. In that same timeframe, we will have introduced 27 new or refreshed models under the SEM brand. An example of how we are executing this strategy is with our wheel loader offerings. We believe this specific approach to meeting customer needs by segment is a winning and profitable strategy. While expanding our product offerings, we use a modular design in order to leverage some common components across multiple models. This is lean in action.
Another key focus for Caterpillar is the use of technology to help our customers succeed. Caterpillar has invested $5.5 billion in R&D since the beginning of 2016. I'd like to introduce a few examples of how we're leveraging these investments in technology to deliver customer value. We're using technology to improve safety, efficiency, and productivity to drive lower maintenance costs and environmental impact and to address labor constraints. We're expanding our portfolio of electrified machines from a standard mechanical drive to a hybrid to even battery applications. On the left-hand side of the screen, you'll see one example of our electrified products with the D6 track type tractor. This product will be available in both a fully automatic powertrain, as shown on the D6, and with a switched reluctance electric drive technology, as shown with the D6 XE.
The base D6 transmission provides up to 20% better fuel efficiency, and the D6 XE delivers up to 35% better fuel efficiency over conventional three speed transmissions. Both models feature the Caterpillar high drive design. Depending on the application and the performance required, the technology can provide the solution that the customer needs. The next example demonstrates how we are leveraging technology directly on our core components. On the right-hand side of the screen, you see the type two air filter. It is designed to have double the service life of the standard round radial seal style air cleaner to optimize customer total cost of ownership and reduce maintenance. The air cleaner body is equipped with temperature and pressure sensors to provide the operator with an accurate measurement of the remaining useful life of the filter element, and it does this in real time.
These sensors are just launching and will be available in full force on our next generation machines in 2020. Another example of how we create sustainable customer value is in the well services business. Oil and gas is an important end market to Caterpillar, we're well positioned to compete. When you think of a well site, you may think of the reciprocating engine side of our business. While this is true, there are many other pieces of Caterpillar equipment that are used to support the site, both upstream and downstream. We use construction products to clear and prep the site and to install pipelines. Recip engines are used for drilling, well servicing, and gas gathering. Our Solar Turbines are being utilized in midstream applications for interstate pipeline compression. Let's talk a little more in detail on the well servicing site itself.
We offer 65%-70% of the value of the well stimulation trailer and utilize technology in a number of ways. We have a pump electronic monitoring system to improve pump life and uptime. We offer an engine idle reduction system, reducing non-value-added runtime. New engine technologies like Dynamic Gas Blending to allow the substitution of field gas in place of diesel fuel. Interestingly, Caterpillar is the only engine manufacturer with dual fuel options for well servicing that also meets EPA Tier 4 Final emission standards for this application. The key message that I'd like for you to take away is that we're focused. We're focused on delivering the right product. The right product for the right job by specifically designing offerings and leveraging technology to meet customer needs. We're also investing in onboard technology to enable growth.
I have three short videos to show you, some examples of what we already offer today. The first is remote control. This video shows one of our skid steer loaders, but we have similar systems available for our excavators, track-type tractors, and a number of other products. This helps our customers succeed by keeping operators out of harsh environments while maintaining the same levels of efficiency and accuracy. The second is semi-autonomy. This video shows Cat Grade Assist on our next-generation excavators. We have similar systems available for our motor graders, track-type tractors, and a number of other products. Cat Grade Assist will help inexperienced operators become efficient more quickly. In this application, the Cat Grade Assist automates boom and bucket movements and helps the operator maintain grade. It also helps operators avoid digging too deep, hitting overhead objects, or swinging into hazardous areas.
The third technology that I'd like to demonstrate for you is autonomy. Caterpillar mining equipment leads the industry in mining automation, with the world's largest autonomous fleet of haul trucks and proven solutions for drills, dozers, underground loaders, and longwall systems. In fact, we have more than 200 autonomous trucks that have accumulated more than 47 million km of autonomous driving, which interestingly, is two times the experience in autonomous operations of any car manufacturer. Autonomy will help our customers enhance safety and productivity. In fact, customers have experienced more than 30% improvement in productivity with our autonomous solutions. Implementation of these technologies allow efficiencies not only at the product level, but also at the full site level, and customer pull continues to expand. To wrap things up, we've demonstrated our strategic focus on operational excellence and expanded offerings is paying off.
The foundation is set to consistently deliver strong results now and into the future. We are growing our customer base with machines and solutions, including technology for the right job, the right application, and the right customer value. Thank you for your time and attention today, and I'll turn it over to Andrew.
Thank you, Denise, and just add my welcome to everybody else, for coming here, down here today, to see us. Now I'll walk you through our financial framework, starting with our most recent results and outlook, moving on to how we think about, sorry, our resource allocation, before finally talking about how we intend to deploy our capital going forward. One of the reasons I joined Caterpillar in 2018 was that I love the focus on profitable growth at the heart of the strategy. Many companies chase growth while others concentrate on profits. Focusing on profitable growth is much more challenging and the only sustainable way to build shareholder value. That is exactly what we're doing. Notwithstanding favorable economics, we're now in a stronger, much more profitable company than we were two years ago.
Our focus on profitable growth is clearly illustrated by the improved margin performance over the past two years. As you know, operating margins fluctuate with revenues as operating leverage takes effect. It is clear in the last two years that more of the gain from operating leverage has gone through to the bottom line against our relative performance in previous periods. Let me remind you of that track record. As we reported in January, sales and revenues in 2018 were $54.7 billion, up 20%, with gains across all three primary segments. We reported profit per share of $10.26 and adjusted profit per share of $11.22, a record for Caterpillar. As Jim mentioned earlier, margins met or exceeded the 2017 Investor Day targets. We continue to see strong first quarter results.
As we reported last week, sales and revenues totaled $13.5 billion, up 5%. Profit per share was $3.25, up 19%, another new record for the first quarter on top of a record in the quarter the previous year. We believe we are delivering benefits by executing our strategy and using the Operating & Execution Model or O&E Model to allocate resources to the greatest profitable growth opportunities. As we said last week, we expect profit per share for 2019 of $12.06-$13.06, including $0.31 from a discrete tax benefit in the first quarter. This guidance assumes modest sales growth, pricing that offsets manufacturing cost increases, and the benefit of lower incentive compensation expense. That gives 18%-27% growth in profit per share for this year.
As I mentioned a moment ago, Caterpillar is now a stronger and much more profitable company. What can you expect our margins to look like going forward? Our new target is to improve adjusted operating margins by 300 to 600 basis points from the cycle, from 2010 to 2016, being the base years against which we'll measure this improvement. Let's take a step back and see how this improvement could have impacted Caterpillar's historical performance. This chart shows how adjusted operating margin performance through the 2010, 2016 cycle. It overlays the additional 300 to 600 basis points target on a historical performance at any point in that time.
At our Investor Day in 2017, we set a target to improve overall margins by 200 to 500 basis points. In 2018, we achieved margins of 16% towards the high end of this range, based on performance at a similar level of sales and revenues as in 2013, 2014. This performance gives us confidence in the new target. Our new margin target of 300 to 600 basis points is 1 percentage point improvement at both ends of the range. As I said, we aim to deliver this at all points in the cycle. This will give a targeted margin range of 10%-21% over a cycle.
You could think of this as 10%-13% at lower levels of sales, such as in 2016, and 16%-21% at higher levels of sales, such as in 2011 and 2012. To be clear, this goal of 300-600 basis points margin improvement is versus the 2010 and 2016 baseline improvement before we started to execute the new strategy. In other words, we're not projecting to allow the 300-600 basis points improvement to adjusted operating margins for 2017 and 2018. How are we delivering this? First, by the cost actions the company has taken to reduce the cost base, and secondly, by not adding cost or capacity back into the business as we increase sales.
This means that the improvement in the cost base we've already made leaves us with less cost to take out as sales decline. Our lower cost structure means that we still expect absolute margins to be better than they would have been otherwise. By being more disciplined in spending on CapEx, having added less new structural costs, and by reducing future restructuring costs, we expect to deliver stronger cash flows in that environment. Facts that I think are underappreciated. Our recent operational performance has been a big driver around improved financial results. Through significant restructuring, we've reduced our period cost significantly to the tune of about $1.8 billion over the last five years. We've also been disciplined by not adding structural costs back as we move up the cycle, keeping a tight yet flexible cost structure.
Since 2014, we've reduced our manufacturing footprint by approximately 25 million sq ft or 29%. Using lean manufacturing techniques, as Denise described, we have sufficient capacity to meet increased demand at higher sales levels than we're currently experiencing. This means that even with this reduced footprint, we won't be adding to our capital expenditures. We therefore expect CapEx to remain below current depreciation and amortization levels. Our normalized capital CapEx estimate is $1.3 billion-$1.5 billion compared to depreciation and amortization of $1.8 billion per annum. This is positive for cash flow conversion. We're still investing in R&D, as spend is consistently around $1.8 billion per year. We believe this is a sufficient level of spend to drive our strategy and to continue to deliver long-term profitable growth.
We have maintained a strong balance sheet. Targeted debt to EBITDA range for Machinery, Energy & Transportation, or ME&T, is 0.5-1.7x to support an A credit rating. In 2018, the actual result was at the lower end of that range. Finally, improved operating margins and lower CapEx have been driving our improved free cash flow. Companies that allocate their resources more effectively achieve higher returns for shareholders. The primary metric we use for resource allocation in the O&E Model is operating profit after capital charge, or OPACC. We calculate this metric quite literally as adjusted operating profit less capital charge. The capital charge is calculated as the average quarterly ME&T net assets multiplied by a pre-tax capital charge of 13%. As disclosed in our proxy statement, OPACC is one of the performance measures we use in compensation calculations.
This metric means we can incentivize our leaders to properly balance our desire to grow with our desire to increase profits. It reminds us that we have to achieve a minimum level of return to justify any investment in the business, and that capital has a cost. As you know, achieving returns above the cost of capital is the roadmap to create shareholder value. Our reliance on OPACC is not just as a metric we refer to, but a measurement we use to help run the business. We calculate and monitor OPACC for the company, the segments, by region, by division, all the way down to the product level. We begin with facts and data. We include this data in business strategy reviews, which feed into our business and industry assessments.
These insights guide us on where to invest and how to allocate our resources, in particular R&D and capital, which are critical to increasing OPACC. This is a dynamic process which takes into account changes in the external marketplace, so we are not just making decisions based on a single point in time. We're seeing tremendous benefits. Our OPACC dollars in 2018 were about three times which we saw in 2014 on a similar sales and revenues level. We incorporate OPACC into our thinking, our action plans, our core processes, and our decisions. However, we still have opportunities to deliver more benefits. Last year, we evaluated the OPACC of about 40 product lines. It was an interesting exercise as six product lines individually achieved an OPACC contribution that was greater than the total of the bottom 13 in aggregate.
At the same time, these businesses in the bottom third consumed a disproportionate amount of our financial resources. We're now focusing on how to drive the more profitable product lines and allocate fewer resources to the lower performing parts of our business. Application of this metric at the product level has been driving decisions such as selling less profitable businesses. For example, we recently agreed to divest our purpose-built forestry business to Weiler Forestry Inc. Another example would be where we want to take positive OPACC actions to improve the financial performance of a challenged business. We also applied our OPACC analysis to collections of businesses such as hydraulic excavators when we invested to launch the next-gen excavator. Investments in new services is another example. The next step is shifting resources amongst the segments, aligning resources to the highest value creating businesses, in turn creating even more value.
We're early in this stage, and we would expect our decisions and outcomes to be more apparent in future years. This approach has been very effective for us, and we will continue to use the O&E Model as a guide for resource allocation and investments going forward. If we look at the company's ME&T free cash flow history, which is defined as ME&T operating cash flow, less capital expenditure and discretionary pension or OPACC contributions, we've seen significant fluctuations based on working capital changes, capacity expansions, and restructuring expenses. We've improved our ME&T free cash flow in 2017 and 2018 on increased sales and revenues due to our improved operational performance, commitment to a flexible and competitive cost structure, and disciplined capital spending. Today, we're introducing a new target for ME&T free cash flow as another part of our profitable growth journey.
Let's briefly go back to our historical free cash flow performance. Looking at the years 2010 through 2016, we've delivered a range of $3 billion-$6 billion. I've excluded 2012 when free cash flow was just $1 billion, which is when we let working capital and CapEx creep up at the time of high demand. Given our confidence in our strategy and using the O&E Model to allocate resources to fund profitable growth, we're targeting ME&T free cash flow of an incremental $1 billion-$2 billion above our actual performance in 2010 through 2016. This brings our expected ME&T free cash flow range to between $4 billion and $8 billion per year. Strong free cash flow leads us to the very good question of how best to deploy our capital, excess capital.
In the last nine years, the company has returned on average 65% of ME&T's free cash to shareholders. We've consistently increased our dividend, and over the last 25 years, leading to the recognition as a new member of the Dividend Aristocrat Index. The compound annual growth rate of our dividend in this period has been about seven percent. While that's been steady, our dividend payout ratio is at the lower end of where we think it should be. In addition, in recent years, we've not had a sustained share buyback program. Free cash flow paid out to shareholders has been inconsistent primarily because of the share buyback pattern. We paid out substantially all of our ME&T free cash flow only four times in the last nine years. Like our dividend payments, our deployment of free cash flow to shareholders has generally been lower than it could be.
We now have much more flexibility from a cash perspective as we are now able to repatriate a greater proportion of our international earnings more cost effectively. This change, along with a more disciplined approach to CapEx, higher margins, and an expectation of lower restructuring costs in the future, give us the opportunity to reconsider our dividend level, which I'll discuss in a moment. We expect to retain a mid-A credit rating. We also expect to continue investing in appropriate levels of R&D and SG&A to support our strategy. Examples include investments in services, digital, or projects that enhance operational excellence. We closely monitor performance of these investments against using our OPACC goals with an eye towards profitable growth. I mentioned earlier that we expect to invest about $1.3 billion-$1.5 billion per year in CapEx.
We would characterize these investments typically being about 20% for growth and about 80% for running and maintaining the business. However, with the strong balance sheet position I referenced earlier, we will still have significant free cash which we can deploy. We therefore intend to return substantially all of our ME&T free cash flow to shareholders. We believe that a balanced approach with dividend growth and more consistent buybacks will create the most value for our shareholders. As Jim announced, we are increasing our dividend by 20% to $1.03 per share per quarter from $0.86 previously.
This is a result of our execution against the O&E Model because of our confidence in our ability to perform well across all cycles. We also expect to increase the dividend in each of the following four years by at least high single digits percent regardless of where we are in the cycle. This new five year plan to grow our quarterly dividend reflects our confidence in the structural improvements we've made in free cash flow. After the increases over the next five years, we would expect to pay out about 60% of ME&T free cash flow as dividends in a low sales period. With higher revenues, the dividend payout ratio will be less. We also expect a sustained program of share buybacks based on residual free cash flow after paying the dividend.
At a minimum, we're committed to repurchasing shares sufficient to offset dilution from equity-based compensation. Except for periods of very low sales, we would expect the share repurchases will result in a reduction in the average annual share count. We will execute this in a disciplined way and be governed by our own assessment of the intrinsic value of our common shares. While funding the dividend and more consistent buybacks, we will also expect to have sufficient resources to continue to invest in services and expanded offerings and to pursue M&A. We expect that we can fund any additional growth initiatives and M&A using our existing balance sheet capacity. Before finishing, let me touch on our M&A framework. Our criteria naturally begins with OPACC as our primary financial metric.
It tends to favor bolt-on acquisitions over more transformational transactions due to the way OPACC is calculated. Therefore, our focus has been on those sorts of bolt-on acquisitions in adjacent areas that enhance our growth profile. Whilst we'll continue to consider these and more transformational transactions, we're also focused on other growth areas such as services, digital, and other opportunities that enhance our core business and take advantage of our size, scale, and dealer network. We believe we can pursue inorganic growth through our strong balance sheet. To that end, we continue to build our pipeline of potential M&A projects. However, we intend to remain disciplined in this pursuit, again, with OPACC at the center of our decision-making as it is at the center of the decision-making of our business.
Lastly, we do reserve the right, naturally, to suspend buybacks in the event of a substantial inorganic growth opportunity which requires the use of free cash flow to fund it. Let me leave you with two key points. First, thanks to the execution of the strategy, we're a much stronger company than we were two years ago. Second, by using OPACC at the heart of our decision-making, we are targeting more consistent and more effective capital deployment as part of our focus on driving long-term profitable growth. Let me hand it back to Jim.
Well, thank you, Andrew. Now, to conclude, I'll share my thoughts on why you should be investing in Caterpillar. The strategy we introduced in 2017 is working. We've achieved or exceeded the margin targets we shared with you during our 2017 Investor Day. We're a financially stronger company, as evidenced by our recent results, recent record results and our 3 to 6 percentage point improvements we are targeting in adjusted operating margins through the cycle. We're improving the operational performance of our company by accelerating our lean journey, striving to achieve world-class safety and quality standards, while continuously working to establish a more flexible and competitive cost structure. We're investing significant amounts of resources to grow services, and we've established an aggressive but achievable target to do that by 2026.
We've also explained to you a more disciplined approach to more consistently return capital to shareholders, both through dividend increases and more consistent share repurchases. With that, I'll turn it back over to Jennifer to facilitate our question and answer session.
Let the fun begin, your favorite part, Q&A. Thanks to everybody who's presented so far. We're really proud of the things we've outlined here for you today, and we're excited to continue with you deeper into our journey of O&E Model, delivering higher margins and increased level of cash flows, allowing us to return more value to shareholders. I'm seeing some hands come up while these chairs are brought up. We will be fielding questions only from the live audience here in the room. If you'd like to ask a question, raise your hand. Rob and Trent, my team, are gonna be passing around mics. We would like you to announce your name and affiliation before asking your question for the benefit of those who are listening.
Up on stage, we're welcoming the presenters you already heard from today, along with two others, Group Presidents, Ramin Younessi of Construction Industries and Billy Ainsworth from Energy & Transportation. Okay, I think we're ready to go. Rob, have you got our first question?
Andrew Casey, Wells Fargo Securities. I thank you for the presentation. I was wondering if you could clarify whether the 300 to 600 basis points through the cycle margin improvement is based on what you have done up to this point, or does that include future endeavors such as the aspirational doubling of service?
Yes. That 300 to 600 basis point improvement is based again over and above what we accomplished in 2016, between 2010 and 2016. We're obviously gonna continue to invest, and within that framework gives us the ability to invest in services, to invest in organic growth opportunities, and also provides opportunities for us to inorganically grow as well. Again, it's meant to be above and beyond 2010 to 2016.
I appreciate that. I'm just trying to probe as to whether that includes activities that you have not yet done or if it's what you've done to this point.
Let me try and take that. I think what you're asking, Andy, if I correctly, is whether you think there could be some incremental growth in the future as a result of services strategy.
Yes, sir.
If you look at where we looked at the margin targets, that was on a range of certain revenues between $39 billion-$66 billion. Obviously, that's depending on services sales, also, prime product sales as well. Again, it depends a little bit about what that mix will be, and it depends where you are in the cycle. In that period of time, from between $39 billion-$66 billion, we would expect margin ranges between 10%-21%. I think, if you look today where we are today, last year was just under 16%. First quarter this year, just over 16%. That gives us quite a lot of headroom to grow into, even with revenue growth on top of that.
Thank you.
There's a question in the third row near the middle.
Yes. Hi, Jerry Revich, Goldman Sachs. Good afternoon.
Afternoon.
Can you talk about the building blocks for the $10 billion of incremental service sales? Just give us a little bit more bite-sized, you know, how much of a contribution can we expect from predictive analytics, from doing some of guaranteed buybacks, things like that. Just a little bit more meat on the bone in terms of how you get to that $28 billion from the $18 billion today.
It's really a combination of things. It includes increased parts sales. It includes digitally enabled solutions. It includes a number of things that we're doing. We haven't broken down, and we're not gonna be communicating specifically within that $10 billion, the different components that make up the total. That is, again, we'll be driving from a whole variety of perspectives, but we're not breaking it down further than that.
Then, maybe from a timing standpoint, you're very clear it's not gonna be over the next one or two years. How back-end loaded is that? Or is a big chunk of that gonna come from the last three years? And recognize what you said about rebuild earlier, so clearly not a '19 or '20 event. '21, '22, are we gonna get a meaningful down payment?
Yeah, some of it depends on what happens to the market cycle between now and then. It does require investments in our digital capabilities, as I mentioned. We also talked about the fact that we have to invest in technology and our components and our machines to actually provide some of that service capability. Stop and think about our NPI process. When we invest in a product, that takes a certain amount of time. The product has to get delivered. Oftentimes it has to accumulate a certain number of hours before, in fact, we'll see some of that parts opportunity. It is a process there. As I mentioned in my prepared remarks, we expect it will not be a straight line. It'll tend to increase, accelerate towards the end of that 10 year period, which ends in 2026.
Thank you.
Thanks, Jerry. Jamie?
Hi, Jamie Cook, Credit Suisse. Andrew, the commentary you made on OPACC in terms of, I think you said, like, six product lines which generated greater than the bottom quartile or whatever you said, that commentary was interesting to me. In terms of the product lines that are generating above average OPACC, is there anything common within those product lines? Is it specific to a certain segment, geography? Then with the product lines that are underperforming, is the intention to fix all these, or is there a certain percentage of the portfolio that could be up for, you know, conversation that it's not core to Cat? Then my other question, just as you think about returns, you talk about OPACC in dollars.
Is there any consideration think about returns sort of as a percent and targeting a certain return sort of based on where you are in the cycle and sort of improving that over time? Thank you.
Jamie, hi. I'll pick that one on. There's three questions there, so I'll do the first two, and if I forget the last one, you can remind me.
Okay.
In the first one, there really isn't any kind of criteria or characteristic that we would use to explain why a product line is underperforming. There's a whole variety of reasons for that, and this isn't just about divestment. One of the things that we've shown over the last couple of years is by really using the O&E Model to shine a light on our performance, we've been able to focus our teams on fixing businesses. We have a number of products and a number of businesses that have not been acceptably returning, giving us an acceptable return, and we'd be able to fix those businesses. Obviously, our primary desire is to fix and not divest.
As we mentioned earlier, if in fact we don't see a clear line of sight to either an acceptable return or a competitive advantage, we are willing to divest in businesses. Again, there's no real characteristics, single characteristic that I would apply to those that are underperforming. Sometimes it's a change in footprint. Right? Sometimes it's a change in technology. In some cases, we just had the wrong structural cost in that product line or that supporting that business that we had to right-size.
Okay.
Yeah. On the other part of your questions regarding resource allocation, I mean, the interesting thing that often happens as we know with businesses is you look at the characteristics of them. Obviously, large scale helps. Obviously, our larger businesses obviously produce more OPACC. You would tend to expect that. That obviously is one advantage they have. Obviously, some of the more smaller businesses have a little bit more challenge from that perspective, and that obviously is always the norm you would expect. Actually trying then to make sure though that you allocate your resource dollars across them all in a relatively balanced way to make sure that you do make the right investments to protect that OPACC pool is also important. That's part of that process of resource allocation we're gonna talk through.
With regards to the sense target, actually, I mean, if you grow OPACC dollars effectively, that actually is actually excess return effectively over and above the cost of capital. I think for people as we manage the organization, rather than setting percent targets, actually it's a very clear, easy way for people to understand. They have their operating profit performance, they have their capital charge, they know what the asset base is, they know they have to manage that. That gives them a simpler way of managing it, and it's actually more measurable across the whole of the organization. For most sort of capital-intensive type businesses, I think it does work pretty well rather than actually setting a particular hurdle rate.
Problem with hurdle rates, as we all know, is once you set a hurdle rate, that becomes the norm for everything you get from an investment level rather than actually a real level of return that you're gonna be able to achieve.
Okay. Thank you.
Maybe one more follow-up answer there. We've certainly demonstrated the ability over the last few years to improve underperforming businesses. We had some businesses that had not been acceptably profitable for many, many years. By really using the O&E Model and focusing on it, and actually telling our teams, "Here's the goal. We need to get to this point, or we may, in fact, elect to divest this business," it really has provided clarity and the initiative in our teams to really go after it and make it happen. I think that's one of the differences, as opposed to just looking for incremental improvements every year, to actually, again, shining a light on those businesses that aren't performing acceptably, saying, "This is the minimum if we're gonna stay in this business." We've seen that have a major impact on the performance of our teams.
Thank you very much.
You're welcome.
Thanks, Jamie. Question over here.
Hi, it's Rob Wertheimer, Melius Research. Question for Bob. I mean, the services disclosure is great. It's obviously far higher than a lot of other companies in the industrial world. It should provide some stability. Last cycle, there was a bit more volatility on the downside than maybe some of us expected. My question is whether the next 5 and 10 years look a little bit more, if there's more factors of stability embedded within the services stream that you can point to.
Thank you for the question, Rob. I think it comes back to the point I listed as to why we focus on services growth. Definitely and clearly it'll help us reduce cyclicality over the cycles. That does not mean it will eliminate all cyclicality. I gave some examples of different segments. We will continue to see some cyclicality, which is also why Jim mentioned is one of the factors that our growth trajectory will not be fully linear. By focusing on services, clearly throughout the cycle, we will bring in that cyclicality down to lower levels. In any case, it'll be a positive trend, I would say. I don't know whether there's anything-
That's a good answer.
Our next question is in the front row on the left here.
Yes. Thank you. Mig Dobre with Baird. My question, I think, I think I heard this stat from you, Bob. You were talking about the service business being between 30% and 40% of overall revenue, depending on where you are in the cycle. Obviously, you have a target to double this business. I'm wondering, as you approach that target, do you see this business eventually being, you know, closer to 50% of the overall mix? Is that the goal? What are the long-term implications for margin and investment as a result?
Maybe I think it was my comments where I said that it tends to vary, depends on the market cycle, 30%-40%. Our goal here is to drive absolute services sales increase in Machinery, Energy & Transportation. That is the goal. Again, that percentage will vary at different points in the market cycle. As Bob mentioned earlier, by doing that, we will in fact dampen cyclicality somewhat in terms of the impact on our bottom line. Again, what we're really focused on is just growing that absolute services sale.
You're not thinking of it in terms of a percent of revenue target, it's just an absolute dollar goal?
Yeah. I think that percentage of revenue target really will be determined primarily by the market cycle, frankly, in terms of as opposed to anything that we do. What we wanna do is increase the absolute sales number.
Yeah.
Again, in periods of low market demand, that percentage tend to be higher.
Right.
When the market's very hot and we're selling lots of new equipment, the percentage will be lower just by definition. Rather than worry about the percentage, what we're really focused on is increasing absolute services dollar. Kind of like OPACC. We've got our teams focused on increasing absolute OPACC dollar as our measure of profitable growth. It's really the same kind of philosophy.
Got it. My follow-up, you raised your margin range, if you would, by 100 basis points. You know, as I was looking through your 2017 presentation, it seems to me that the starting point is a little bit different than it was in 2017. I'm wondering if you could talk a little bit about this adjustment and if it's truly an apples to apples comparison, and then maybe give us a sense for exactly where this 100 basis points of improvement is coming from. Thanks.
I'll start with the change. Actually, there's an accounting change. There's a post retirement and OPEB, effectively, which went, actually we have an adjustment at the beginning of 2018. The operating margin on a like-to-like basis to what we reported in 2018 was 11% at that time period of time. That was the adjustment which caused the change. Actually, it is on a comparable basis. The baseline for 2017 should have been adjusted down from 12%-11%.
The comparison we gave you between actual 2018 performance and 2011 was an apples to apples comparison on the chart. Because of an accounting methodology change, again, the earlier number was restated, but it is an apples to apples on our charts.
Where will it come from? Obviously, factors such as operating leverage will still obviously play a part, making sure that we drop as much of our profitability as sales revenues, sales and revenues rise through to the bottom line. Continue to focus on operational excellence, just making sure we continue to drive costs out of the business, and discipline. That's all part of those factors where we expect the additional margin improvement.
Okay, our next question here in the third row.
Hi, thanks. Ross Gilardi from Bank of America Merrill Lynch. You guys gave some color on how the dealers are gonna be involved with selling these services, but I'm wondering if you can go into that a little bit more in depth, 'cause it would seem they're just a critical partner in driving all this. How do you really establish, you know, accountability and motivate to hit that number, that $28 billion number? Is it gonna be something that goes on the scorecard that you review frequently along with all the other key metrics?
Thank you, Ross. That's a really good question. One, of course, we discuss a lot with our dealers as well. I think it comes back to the point I made earlier, that one thing that our focus on services does not change is the fact that our worldwide network of Caterpillar dealers has been and will continue to be one of our strong competitive advantages. One of the main reasons that is because together with our dealers, we share that focus, that passion for our customers. Services will help our customers be more successful, similar for the dealers. As for us, it'll help build loyalty over a long time. Services provide for each of the three segments, an attractive margin contribution, so does it for our dealers.
In terms of strategy and the objectives that we want to achieve, we are very well aligned with our dealer network. We have a separate discussion on about some of the businesses I mentioned, like Progress Rail or Solar Turbines, where we have direct service capabilities as well, but specific to our dealers. The alignment is very natural, which makes focusing on services, very obvious area that we can work on together to grow. Meaning that, yes, we want to, on our end, continue to invest in a number of projects we outlined. One of them was also working with our dealers to make them even more efficient, rate their capability and capacity. I think it's very close to the core of the dealership relationships we had for many, many decades, and I don't really see that changing with this strategy. If anything, it'll reinforce that focus.
Both services are very important to our dealers, and so it's, there's a natural alignment there, but it's good for them and it's good for us, and it's good for our customers.
Okay, I just wanted to ask you an unrelated question. That you didn't really discuss so much today, but it was really about China, and certainly under your predecessor, Jim, Doug Oberhelman, you know, winning in China was always one of the key strategies for Caterpillar. I'm wondering how you define winning in China over the next five years, how you would measure that, and how you balance that with your effort to drive profitable growth.
China has been important to Caterpillar for many decades. We're very fortunate that our predecessors invested in China. We have over 20 manufacturing facilities, more than 10,000 employees. Our market share over the last few years has improved year- to- year, it's an important market that we've been successful in. We intend to continue to successfully, to profitably grow in China. We continue to develop and our dealer network. We continue to invest in new products that are appropriate for that market. We have vertically integrated our value chain in China to ensure our competitiveness. Again, it continues to be an important market that we're confident that we'll be successful in.
I think I have the mic. Steve Volkmann with Jefferies. Just a couple of quick follow-ups, if I could, somewhat unrelated, but back to the sort of services drive here. I'm guessing probably 80% of the $18 billion that you're showing us now has to be kind of parts. I'm wondering as we grow, feel free to disagree with that. But I'm wondering as we grow, you know, toward 2026, do you see this as a way to capture more of the parts stream through the life cycle of the different Cat equipment? Or do you actually think we're gonna add a significant amount of sort of non-parts revenue there? The reason I'm asking is because it sounds like so far, most of the services costs that you have talked about are fairly small.
You know, some small monthly fee that somebody pays for monitoring. Seems like that's gonna be a real stretch to grow that super aggressively. I'm trying to figure out if this is mostly a focus on growing parts penetration or whether there's a lot of other opportunities there as well.
We won't comment on the percentage, but thank you for offering that up.
It's worth a try.
Certainly what we're doing is looking at growing services across the spectrum. Certainly, parts is an important part of that, but there are other elements as well. You know, we're investing in our, in our digital capability, as we mentioned. We're investing in serviceability in our components, our engines, our machines to help facilitate services growth while always providing more customer value. It'll, it'll come from a variety of areas. Parts are certainly an important one. One of the things that we did when we laid out that goal is we looked at what we perceive the opportunity at a fairly granular level, and we are confident that if we are aggressive here and invest in the right way, that we can, in fact, grow and double that from 2016 to 2026. We have actually evaluated what we view as the pools of opportunity in various areas to go after.
Okay, fair enough. Somewhat unrelated, Andrew, we talked about sort of more share repurchase over the next few years, and it sounded for a while like we were talking about kind of doing that regardless of sort of where we are in the cycle. You kind of added on subject to kind of intrinsic value calculations. I guess I'm trying to figure out whether the message is we're gonna kinda do this regularly regardless, or whether we're gonna sort of maybe more time the market.
No, we're not gonna try and time the market. I think we're gonna be doing it more regularly. I think the point that we were trying to make is obviously intrinsic value has to be part of the discipline we look at. If we believe that we're in a situation where we would be destroying value by buying back shares at that point in time in the market cycle, we would obviously look at a halt at that point. We're not at that stage at the moment.
You should expect us, again, in normal circumstances, to be in the market on a more regular basis. That's our intent.
I think we have a question.
Including at the again, at during lower levels of the cycle, making sure that we at a minimum offset dilution.
We have a question.
Which we haven't always done in the past.
Hi, Ivan Feinseth, Tigress Financial Partners. Thank you for having another great presentation. Do you feel there's some opportunity to be able to mine your service data or your in the field feedback to help, you know, shave off a credit default, for example? If you see a machine dropping off in serviceability or a customer dropping off in maintenance, that obviously could predict a default. Conversely, using that data to extend better credit because your ability to extend credit to your customers could enable them to pursue more business and make them a better customer.
Yeah. One of the benefits of connectivity for Cat Finance is actually the ability to shut off a machine and actually stop it. Which is, you know, if you are in default, that is one of the advantages. From an overall perspective, yes, connectivity is key for that as well. Obviously it does enable us to take, not necessarily a little bit more risk, but actually have that ability to have the collateral of the machine in all cases, which is important.
My second question is, you know, it's being talked about that the U.S. is very close to a trade deal with China, and how much do you think that that headwind will turn into a tailwind? It's being proposed that both Trump and Pelosi are discussing that any infrastructure bill should be a minimum of $2 trillion, which should also be a significant tailwind as well.
Caterpillar for many, many years has been an advocate of free trade. We think that it's not a zero-sum game. We think that, you know, free trade between countries helps everyone. That's a positive thing. You know, I think the thing that's most important is if in fact there was a free trade agreement, and in fact that helped increase global economic growth, that's a very good thing for us. You know, probably the most important thing in terms of our performance is that global economic growth, that's good for our business. In terms of infrastructure, we have seen a certain amount of spending at the state and local level, which has certainly helped. If we had a national infrastructure bill, I think that would be, obviously, a positive thing for Caterpillar, and we would very much welcome and support that kind of a bill.
Thank you.
We believe, you know, the nation's infrastructure needs it. I think you all would agree.
Absolutely.
Yeah.
Dan Fischler.
Cliff Ransom of Ransom Research. I'm a little confused, as I often am. When you talk about these beefing up the service offerings, whose revenue is that? The dealers or yours?
Both.
Okay. How is there a general way we should think about how to split that revenue between the two of you?
The targets ours.
Yeah. I wouldn't really give you a %. Again, we showed you on the chart our Caterpillar's services sales growth over the last two years. We've demonstrated the fact, and that's not dealers, that's Caterpillar sales. Again, we're not gonna split it out, and it varies by application, it varies by dealer, it varies by segment. Again, growing services sales is a good thing for the dealer, it's a good thing for us. Again, it's always rooted in providing more customer value. It's a win-win.
Are all those services billed through the dealer or some billed directly from you?
The services target is the Caterpillar Inc. services number.
Got it.
To be clear, that is the services revenue we recognize within our books.
Thank you.
I understand your question. The majority of services revenue for Cat branded products is in fact, goes through the dealer. We also have some direct distribution business as well.
I got that.
Solar and Progress Rail, and those are invoiced by Caterpillar directly.
Denise, I have a question for you. We've heard, Caterpillar helped me 10 years ago to understand that the first lean measurement should be safety, and I commend you on making that the highest priority both times it was discussed. What we heard today was two different metrics. One started with safety, went to, I think, quality, and I can't remember the third one, the second one was safety and went to velocity, which is different, I would say, than those others. In any event, is that just a difference of attitude about how to define them? My bigger question is, to me, the number two metric ought to be employee engagement. Now where does that fit in, and how do you measure it?
You want me to start and I'll give it to you?
Go ahead.
I think what we defined is operational excellence for us. Operational excellence means four primary things: safety, quality, lean, and competitive and flexible cost structure. If you got confused about the definitions, we're using those, and we did that in our 2017 Investor Day as well. Those are the main criteria we use to describe operational excellence. Within lean, there's a whole variety of other measures, and I'll kick it over to Denise.
Right. You know, within lean, we're also looking at things like velocity. Inventory turns obviously is key to us, making sure that we're efficiently and effectively synchronizing the value chain. Really looking at where we're holding inventory, making sure that we're most able to meet customer demand. You know, safety, without a doubt, is up there as well as quality. I would say from an employee engagement perspective, that is something we track very carefully and closely, and it is something that's on all of our scorecards. It is something that we take very seriously, as, you know, the people in the factories and in our in our workplace are really the key to our success overall.
Ensuring that they're actively engaged and also being as productive as they can be is something that we take very seriously and measure also on our scorecard. I would say those are the key metrics that we track. Certainly, there's a lot of other metrics within the operational scorecard, just, you know, specifically that we're tracking on an ongoing basis.
Thank you for the clarification.
Thank you. We have a question in the back.
Thanks. Good afternoon. Noah Kaye with Oppenheimer. A lot of good discussion about how you work with the dealers to grow the services revenue. My question is really about the role of the digital platform in that. You know, I think the idea that the dealers can benefit from real-time customer data, you know, communicating with each other, offering more consistent e-commerce, that all makes sense. How long does it take, do you think, for the dealers to kind of get that digital modernization, if you will, to build up that digital platform? What is sort of your plan for that, and how does that factor into the timing for a back-end-weighted revenue growth?
Yeah. I think it comes back to, the average tenure age of our dealers is well over 50 years. It's not like, we got to know them yesterday and had to start working with them. This strategy we started at the end of 2016, and we've started heavily investing in it. We do so on a daily basis together with our dealers. As we mentioned before, we believe our objective to grow services is very well naturally aligned with our dealers. Just as we are investing in new services capabilities and new digital capabilities, our dealers equally see the opportunity, so they're equally investing in that area. Of course, one of the elements I've shown in our strategy was to work with the dealers, to work with them on capability and capacity.
We also give them a helping hand, where we can, to make sure that we can have simultaneous lift and we progress at the same speed. As I said, it's really rooted in these longstanding partnerships we have with our dealers, which makes alignment of investments very easy.
I guess I could follow that up with just trying to understand some more specific timetables or milestones, how we should be judging the pace of your rollout here, you know, with the digital platform to the dealers.
Yeah. I mean, digital platform is one of our investments that we are currently making. One of the things we wanna be careful of is making sure we don't measure progress by the enablers. As Jim laid out, our ultimate goal is to double services revenue by 2026, and that will be the ultimate performance metric that we have for our dealers, for us. All the enabling projects we have will be measured by that single measure. In the meantime, we can assure you that both us and the dealers are making significant short-term investments in digital in the platform. Jim also mentioned that, as one example, we have established a digital head office in Chicago. We've recruited quite a bit of new digital talent. It is all happening as we speak.
Thank you.
Okay, we have a question in the fourth row.
Yeah. Jairam Nathan with Daiwa. I understand your point about giving 100% of your ME&T cash flow back to shareholders. Given that you're expecting $1 billion-$2 billion in additional free cash flow going forward, shouldn't that increase your debt capacity? Can we argue that you can do more than that in terms of returning?
What we've tried to do, and this is one of the things that, you know, one of the things if when you go back to the history, and part of the reason why we went back to the history, we showed only 65% payout of free cash flow over the past, over the past, you know, period, nine decade or so. You look at that, only four times over that period of time has Caterpillar even paid close to its full cash flow. You look at what one of the things we could have done was we could have said, "Okay, we'll pay out a percentage of free cash flow, but obviously keep M&A as always a criteria and so forth." What we're saying is M&A is not a reason.
We're paying out substantially all of our free cash flow after dividends. It's not including M&A transactions. Basically, what that means is the balance sheet and the balance sheet capacity is being kept for that. Actually from a measurement perspective, and for you guys actually to be able to model it and actually see where the real return is, actually, we try to simplify it in that way, and use the balance sheet capacity as sort of lever for M&A transactions and so forth and other growth opportunities. Yes, we do have, you know, significant balance sheet capacity, as we showed. I mean, if you look at it, we're at the low end of the debt to EBITDA range.
Obviously, if EBITDA rises, obviously you could grow that debt capacity. We do think it's important to keep that strength in the balance sheet because one of the things as well that we wanted to be able to do is take our opportunity of an inorganic growth opportunity. You don't always know when those are gonna be at the time. Giving you cash back now and then finding later on that we would have to come back or cut back share buybacks at some point in time because we have an M&A opportunity just creates more uncertainty. We're trying to give a very simple framework, but one you can actually measure against on a consistent basis.
On the services side, the 30%-40% of revenue, does that differ significantly between regions and businesses? If you could, where's the biggest opportunity?
Yeah, there is a certain amount of variation, but I'd say that the biggest differentiator just in estimating is really where we are in the market cycle. That's probably a bigger determinant. Yes, are there differences between, let's say, think about a product line, a skid steer and a mining truck? Certainly. There's more service opportunities in that mining truck, or that gas turbine, or that locomotive than there would be a skid steer that you might hopefully purchase today for your backyard.
Okay, back here in the corner.
Hi, it's Joe O'Dea with Vertical Research.
Thanks, Joe.
First, Andrew, I just wanted to revisit, I think, a comment you made about the dividend is on top of the 20% increase, the plan over the next four years for at least high single-digit increases, and that you have that in place regardless of what we may see from a cycle perspective. Depending on, you know, whatever the cycle has in store for us, if we were to see some challenges nearer term rather than later, that could potentially push the dividend as a percent of free cash flow above that 60% you talked about. I just wanted to kind of understand your, you know, your comfort level with that, our comfort level with the idea that we are firmly set in this high single-digit dividend growth over the next several years.
Yes, absolutely. There's four years after this year's 20% growth, our aim is to grow the dividend by high single digits for the four years that follow that. At that time, even if they're in what we think in a low sales environment, as we said, we estimate our free cash flow to be between $4 billion and $8 billion through the cycle. We think that actually will only be 60% of free cash flow at that point in time in the cycle. Even at the end of that five year period.
If we're facing some kind of draconian situation in a year, and you're looking at 65% of free cash flow, that's not going to change.
That's not gonna change our policy, no.
Second question, just related to the framework. I think you've kind of reiterated that framework of $55 billion of revenue and 14%-17% margins. You know, this year seems like it's on track for the high end of that margin range. What's happened since the 2017 Investor Day is tariffs and materials inflation and all the supply chain challenges. You're doing that and still delivering the margins that you're delivering, which seems like if we get some relief from that and some of the mitigating actions you've discussed, there's upside to this margin range, but you haven't actually given that to us today. You know, maybe the offsets to that, or you've talked a lot about investments, should we be thinking about R&D has a nice step up coming?
Yeah. I mean, at the moment, obviously, we are facing tariffs, and tariffs are, we estimate for this year between $250 million and $300 million, $350 million. Obviously, in the event that that's direct tariffs, obviously, in the event that those are reversed, obviously, that would be an opportunity. Obviously, at this stage, it's far too early. Also, the other thing which you also have to think about is it often takes quite a long time for those to come back through the system. The timing of that we can't be certain of in the event they were reversed, if they are reversed.
Secondly, also on top of that, because we put through price increases, partly because obviously of increased costs, one of the things we may get pressure back is from a revenue perspective from, you know, customers, which is should they get a further discount. Can't be certain that that actually naturally feeds through into the bottom line.
We would welcome lifting of the tariffs. Bottom line, it'd be a positive thing for Caterpillar. There's no question. Net, net, Andrew's points are very valid, but net, net, it'd be a positive thing for us. There's no question.
Okay.
Over here. Ben Cherniavsky with Raymond James right over here. I'm wondering if you guys would be willing to talk a little more about your decision to divest to the forestry line, just as an example of an area where, you know, you went down that pathway. You know, to me, it seemed like that was a market, a product where you had, you know, you had deep roots, pardon the pun. You had a lot of large machinery in the resource sector, not terribly crowded, good parts consumption. What was it in that market that made it so difficult for you to compete and where you set up, it felt like you couldn't fix it?
We are still very involved in serving forestry customers, so just to be clear. It's an important market for us, which we continue to participate. What we did is divest a limited number of specialized forestry products. We're again going back to our strategy, the O&E Model. We evaluate our competitive position, we evaluate the return on our given investment, and most importantly, we evaluate looking forward, what are the best areas for us to invest for future profitable growth. Based on all of those factors, we made a decision to divest some products in forestry. We are still very involved in the forestry business and to a large extent, but we did divest some products.
Those products just.
For those reasons.
As part of the whole product catalog for forestry, it wasn't strategically important to have them in the group?
Our forestry customers are very important to us. We continue to support them. Yes, we did conclude that it was appropriate for us for the reasons I outlined to divest some of those products.
Okay. If I could just have one quick follow-up. A number of years ago, you guys also talked about the Across the Table initiative with your dealers. Where are you with that strategy right now? Are you still sort of going through that process of to having those kind of discussions with the dealers and looking at their performance that way.
We definitely work with our dealers on an ongoing basis to help them continuously improve performance. That is not changed. Overall, our discussions with the dealers are very much aligned with the strategic framework that Jim outlined, where we work together with our dealers on operational excellence, on expanded offerings and on growing services. That is the primary focus in line with our new strategy in terms of our discussions with our dealers.
Hi, Courtney Yakavonis from Morgan Stanley. Earlier today, you guys gave us some good examples of the expanded offerings that you have from the retail customers, you know, customers that typically have 1-3 units in their fleet. Can you just address, you know, the opportunity within that customer base really for services or if, you know, you're typically just going after some of those more traditional Caterpillar customers? Secondly, if you can just address, you know, if there's any reason why we didn't get updated segment targets under the new framework, or should we just assume that all of those targets kind of grew up by 1%?
Yeah, to the first question, we're after services for all of our products. As I mentioned earlier, there's arguably more opportunity with a mining truck, a gas turbine, or a locomotive than there is a skid steer, but there are still service opportunities for that skid steer. You know, we have a dealer in Europe that has a very high percentage of what we're now calling Customer Value Agreements for every piece of equipment they sell, including the smallest skid steer, and that includes our expanded offerings in the GC product line. Again, there are opportunities everywhere. The opportunity does vary based on application and on product, but we're after all of it, services on all of it.
You know, on your last question, we've decided really to focus on profitably growing the company, and we've decided to focus on the margin improvement for total Caterpillar. We decided not to go back and give it by segment, unless you want to elaborate.
Yeah, no, just because partly because obviously segments go through different cycles at different parts of different parts of the cycle at different points in time. We're spending all our time updating. This is the target through the whole cycle, so that gives you a broader base to work with, and therefore it does reflect the fact that different businesses will be at different places at different times.
We had a question on the left side, fourth row.
Hi, Ashish Gupta from Stephens. Just trying to get a sense from where you are on lean in terms of, you know, ultimate margin opportunity. Made significant progress over the last several years, obviously, but where, you know, what ending or however you want to describe it, and then I have a quick follow-up.
Sure. You know, we have been very focused and have had a long journey in really getting lean implemented. I think the big change that we've had, that I really tried to speak to is probably didn't do as good of a job in aligning with our supply base from an end-to-end perspective. As we went through a down cycle and had a lot of opportunity to pull costs out, and as our supply base actually got constricted, there were a number of those suppliers, especially in North America, that went out of business.
I would say as we've gone back through the upturn, it's really saying, let's first of all look at our strategic supply base as part of, as an extension of us and make sure that we're really synchronizing how we think of capacity with our supply base as we go through those cycles and set up very strategic supply agreements with them, and really rationalize our supply base such that we're able to be more responsive. Part of that is giving them more visibility to our demand. You know, in the past, we had fairly short signals of what we would give them for our demand. It's giving them a longer signal that they can plan better for that.
Aligning that with the dealer process, because a lot of the whipsaw of the cycle came from dealers anticipating they couldn't get our equipment and then ordering it in advance of that, obviously, them being stuck with it when the cycle turns. It's being able to have shorter cycles so you can respond faster, so you don't have to hold as much inventory and be more responsive end to end. It's at every range of that. I would say there are definitely, from an operational excellence perspective, more opportunity as we move forward to get even leaner in our factories, and we're working to do that you know, we're still in the early recovery days of the upcycle and we're working to become even more lean.
If you were to think about it from the perspective of a segment, I mean, I think in the 2017 meeting, you'd focused on BCP being pretty far along. Would you say that RI and E&T are sort of at that similar level as BCP was back then?
From what perspective? From a lean perspective?
Yeah.
I would say, you know, I think, you know, as we've looked at the consolidation across the segments, I wouldn't say there's any segment that's specifically ahead of any others. I think certainly where we've been more constrained has been in the larger, more complex products. Some of the E&T and mining products have had more of a challenge in ramping up just because of the sheer complexity and size, where there is a much more standardization in the construction area and perhaps because of the global footprint was a little broader. Ramin, why don't you speak to that in a little more detail?
I'll just give you one example on CI's perspective, now versus a couple of years ago. From like an inventory perspective, as a measure of lean performance, we used to hold a whole bunch of finished machines as finished goods in the PDC or at our plants. It costs a lot of money. It doesn't help cash flow turns, et cetera. Now, we work with our partners, like the engine group or the transmission group. They hold inventory for us. They can quickly respond to us. Sometimes we have to ship engines or machines across the world. It really helps to hold the inventory where the amount, the dollar value is the least. We do a lot of that today, and it's really helped us in a big way from a responsive perspective, so.
It's a never-ending journey. If the question is, do we have room for improvement across Caterpillar? Absolutely, right. I won't give you an ending on that one, but it's a never-ending journey, and we have room to get better. There's no question.
Thanks for that. Just a really quick, unrelated follow-up. In terms of the expanded offerings, GC, mini excavators, et cetera, SEM, how do you think about the opportunity there? I mean, I know I've heard you guys say it's large or significant, but could you provide any other context? Thanks.
As Denise showed, very nicely earlier today, when you think about our construction products, we have this four tier product range, if you would. The kind of the standard model is what we were traditionally known for. Now we're going up from that. With the XE model, we go below that with the GC model. In some offerings, in some cases, in some regions, depending on market requirements and such, we have the SEM brand. In the case we looked at the wheel loader. We're doing that regionally or across the board, depending on what the market requirements are. We basically have a long range harmonized product line across the world, and we're basically executing against that.
Joel Tiss from Bank of Montreal. I wonder if you can share with us a characterization of what percent of businesses are in the bottom end of that 80/20, as you look through that are never really gonna get to the return levels that you guys are targeting.
It's very tough to determine or disclose that. We've had some surprises. As an example, in our small engine business, for many, many years, that business was not adequately profitable, and we brought in some new leadership. We had, you know, the courage to do the right thing from a footprint perspective, from a cost perspective, and now that business is very effectively profitable. It's tough for us to judge until we actually again shine a light on it, get the right leadership, get the right focus, to say a certain percentage will or won't make it.
I think the other thing you should always remember is this is the home of the O&E Model, BCP. BCP was one of the most troubled divisions in Cat many years ago when they used O&E and OPACC as a starting point. That actually has driven and actually has become one of the best performing divisions within the company. Anybody can turn around.
I just wonder in sort of the bigger framework of margin improvement, can you give us a sense of what percent is from the existing businesses and what percent is from the incremental services add?
Yeah. I mean, I think as, you know, we manage the businesses by segment. Segment includes services as part of that, so it's all integrated. I think as we look across the businesses as a whole, it's about making sure we manage as much of the operating leverage as revenues rise and pull that through to the bottom line as we can. That is where we can do a good job as far as actually avoiding, and avoiding building structural costs. If you would've asked me, obviously, SG&A, R&D were very flat year-over-year, and avoiding those increases as much as we can, reallocate resources rather than pop up. Actually that's the best way of making sure we actually deliver that margin improvement.
No one's taken the mic from me. Is there a larger acquisition?
We'll work on .
Is there a larger acquisition that could really accelerate your services strategy? That's not the preferred way to go about it.
Everything's on the table. We're looking at organic growth opportunities, inorganic. I won't say something's likely or not likely, everything's on the table and we're evaluating all of our options to accelerate services growth.
Hi, this is Chad Dillard from Deutsche Bank. With the $28 billion target for services, how should we think about the mid-cycle sales potential for Caterpillar? Secondly, if you can, you know, think about what the mid-cycle sales power is for the individual segments that are, you know, 85%, you know, below, for mining, 105% for construction, any framework would be very helpful. Thank you.
I mean, obviously, we did update you at the end of the first quarter to give you an indication where we thought the different end markets were. Obviously, construction in North America is strong, still continues to grow. That's been a key market for us. China obviously is still another opportunity for us in construction. Lat Am is very slow. Actually, when we look at where we are today, the $55 billion last year, construction industry probably was reasonably strong overall. In Energy & Transportation, we still have businesses like the rail business, which are still obviously got a lot of opportunity. Offshore oil and gas, still hasn't grown yet. Marine, still got an opportunity.
Onshore oil and gas was very strong, obviously there is still further opportunity when the Permian takeaway issues are resolved. Looking obviously at mining, we're fairly early on in the mining cycle, and there's a lot of replacement that's gonna happen. Overall, you know, we sort of sit there and we go, actually, there's, you know, we're only two years, as we keep having to remind people, we're only two years into a recovery. Still, actually it's hard, you know, we try to avoid characterizing whether we're mid-cycle or so forth. The key for us is actually to focus on continuing to grow profitably. That's what we're trying to do. Obviously, we have to manage the cycles. We have to look around and see what's happening outside. Generally, we do actually see more demand opportunities than, you know, negatives out there at the moment.
Thank you.
Steve Fisher, UBS. I'm just following up first on the services. Jim, you mentioned that you've looked at the revenue opportunity and what you have with some degree of granularity. I'm wondering if you could just give us some general sense of how many revenue-generating streams you actually have today, then how that number will look when you get to that $28 billion. I mean, is it 20 today and it becomes 40 different streams, or just some general magnitude?
Yeah. The way we really look at it, we don't categorize it by revenue stream. We really look at the total opportunity and much of the opportunity, frankly, that we see is with our existing revenue streams. We think even with just the revenue streams that we have today, there's plenty of opportunity for us to grow services. When we look at other opportunities as well, we will, but even with those existing avenues today, there's good opportunity.
Okay. Just as a follow-up, didn't hear much today about the increasing demand for rental services, 'cause it does seem like that is increasingly important to your dealers and customers. Curious how the expansion of the rental demand plays into, number one, your margin opportunity, and number two, the services opportunity.
Yeah. I think
No, I'll start. Rental is very important to us. We have 1,500 rental stores around the world, especially in North America and Europe is a big deal. Last year, we grew that by about 5%, we're gonna continue to invest in rental. Rental is a huge enabler for us for not only getting our products out there, but also growing our services.
Yeah, you think about it from a utilization perspective, one of the things that's very positive for us is that there's more equipment utilization. Rental gives an opportunity for customers to in fact, for there to be more utilization of our products in the field, and that's a positive thing, obviously, for services. It's an important element of our business. We are working with our dealers. We have some dealers that are very good in rental, some that are not as good, but is a big area of focus for us, and it's an area that we're excited about. Again, think about it from an equipment utilization perspective, it is important.
Here.
Hey, Jim, Chuck Harris from ClearBridge. You mentioned earlier about, you know, fixing some businesses, and you feel you've been pretty successful at that. If you look at the older businesses on a on a distribution for relative to OPACC, I assume it's not an even distribution across a curve, and that it's not just 25, 25 evenly distributed. If you're able to bring up the bottom 25 by some amount, whatever that number is, what do you think that translates into either in terms of OPACC dollars or margin or something along those lines, considering that this is something you guys have, you know, said out loud that you're pretty focused on?
Yeah, we're not gonna quantify it, but certainly there is an opportunity there, right. We've seen it, and then we've mentioned the examples already here today. We've had a number of businesses like our BCP business, like our small engine business, our IPSD business, whereby shining the spotlight using the right kind of measures, right leaders, the willingness to make tough cost structure and footprint decisions, we've been able to turn businesses around. At the same time, again, there are some where we decide just based on the reality of where we are, where the market is, where the competitors are, that it makes sense to divest. One additional comment about OPACC. You know, we talk about looking at the OPACC performance of our businesses using the O&E Model today.
Part of what goes into our thinking, of course, is not just looking at today, but we're always making an assessment of where the market's going, where the competitors are going.
Sure.
You know, that's key as well. We're not just doing this by a spreadsheet. You know, we really do look at, really do evaluate where the market's going, and we wanna skate to where the puck is going to be, to use a hockey analogy, not just look at how things are today.
No, I would assume that you're not gonna look at rail today and say, "Oh, it's low OPACC, but we gotta get rid of it because it's a low business." If I look at that analysis relative to the improvement in overall margin that you guys have given us, what do you think, how would it translate sort of what you've done in terms of lower OPACC businesses that you've brought up to some level translating into that, you know, improved margin expectation? Can you guys give us a bridge there a little bit?
If you looked at Lisa's charts, and when I talked about OPACC, I said if you looked at it between 2014 and 2018, it had trebled.
Yeah.
There's two elements to that. One, which is the margin improvement, so the $1.8 billion of structural costs taken out.
Right.
A big chunk of it. The other thing is $3 billion of assets we've reduced the asset base by. You're shrinking the asset base at the same time as growing absolute margins. Basically, that grows your OPACC because your capital charge is lower. It's a, it's a bit of both. It's asset utilization, which is a key part of that as well. It can't just always feed through into margins. Back to your point about, one of the things I would say is, you know, we go through a process where we are doing what we call OPACC improvement agendas for our businesses, which we actually set out each year for them to actually go and deliver against. That's part of the planning process of how this gets integrated into the day-to-day operations of the business.
We have a question here in the second row.
Yeah. Thanks. Tim Thein from Citigroup. First one for Ramin. I'm curious as you've grown and continue to grow the number of connected machines, have you seen and the dealers therefore have more and better visibility just in terms of the usage and the status of the machines. Have you seen a commensurate improvement in terms of their ability, the dealer's ability to order, just in terms of, you know, as they think about stocking levels? Has it resulted in maybe greater accuracy in terms of them knowing how many machines and when?
I'll start that and maybe Bob. The answer is yes. Let me also say one thing here. Not only the new machines that are leaving the plants are leaving the plants connected, and the dealers are helping us with that, but also if you were at Bauma here two weeks ago, we launched a new product, we called it PL161. It's a standalone piece of electronics that allows us to go back and activate machines or attachments that did not leave the plant in the past connected. There are many units out there today, maybe we estimated at, I don't know how many, 800,000 units or so, that were not connected. We're gonna go back and try and connect as many of those units also and kinda be tethered back to the machines.
The answer to your question is yes. The machines that are connected, we definitely see a service benefits to that.
In the fourth row here.
Okay.
This is [Matthew] from Lazard Asset Management. You mentioned that you're only running at 70% capacity utilization. You said that 20% of your CapEx is for growth. Can you talk about where you're constrained and how much of that 20% is for other things like digitization, et cetera?
Yeah. A chunk of that will be for things like digital, because obviously it'll be things like IT assets which are capitalized on the balance sheet, so they'll be part of it. There will be individual businesses, and that 70% is as an aggregate, but as a whole. There will always be individual plants which may be actually constrained, which are running at three shifts, seven days a week, and therefore actually running at capacity. There will be odd times you will be adding capacity on an individual plant level where you just make those decisions. Then there's also some of the factory reconfiguration that we're doing as well as part of that process.
I think we have time for one more question.
Just slid it in. It's almost 3:30, and I wanna hear what Billy's voice sounds like.
Thank you. We appreciate that.
I'm wondering if you can just give us a sense, we don't get to talk about rail too much. You know, where do you think we are in the cycle? What are you seeing over the next couple of years? I know there's some regulatory changes. There's been some changes in some of your big competitors' ownership structure. You know, how are you feeling about rail over the next few years, and kinda what are you looking at?
We like the market segment long term. If you look at North America, Precision Scheduled Railroading, all the railroads are implementing it now, which is really asset utilization. It's like our O&E Model. They've Most of them except one have parked a lot of locomotives. You can look at that as a negative, and probably new locomotive sales won't be too robust the next few years, but they're doing a lot of modernizations to up the utilization on their existing locomotives, so that's creating good business for us. Utilization is really what service is all about. You know, the more they utilize the locomotives, the more they want the product, the more services you get to sell to them. We view that as a positive. I would say, you know, another thing when you think about rail, we're not just locomotives.
The Progress Rail, the original business that was acquired by Caterpillar is a very robust service business serving the railroad in a broad way. International, there's a lot of activity on new locomotive quotes. If you look at the sector, we like it. It's the most sustainable way to move people and goods over land, we think it's a good market to be in.
Thanks.
How about a round of applause for the management team? Okay. At this time, I'll turn it over to Jim for closing remarks.
Yeah, just a few comments. I wanna thank everyone again for taking the time to travel to be here or participating by telephone. You know, I hope you came away feeling the sense of excitement that we have for the opportunity to profitably grow our business. We communicated some, what at the time reviewed as quite challenging targets to you all in our 2017 Investor Day. There was a bit of skepticism, and of course, we have met or exceeded all of those targets. We are very confident in our ability to continue to grow our business. We talked about our investment in services and the opportunity that represents.
We've also shared with you our intent to be much more consistent in terms of returning capital to shareholders, both through dividends and share repurchases, again, having the right balance, as Andrew mentioned, to ensure that we have the balance sheet capacity to go after opportunities that will help us profitably grow. We very much appreciate the faith you have in our business, and I'm absolutely convinced that Caterpillar's best days lie ahead. Travel safe. Thank you.
Thank you. Thanks, Jim. Thanks, everyone. Okay. Hey, everyone. I just wanna mention briefly, management will be sticking around for a few minutes. We are gonna have the bus depart from outside in about 5 to 10 minutes.