Welcome, everybody, to the Caterpillar Fireside Chat.
One second. Completely. Give it a tap out. Okay.
Welcome, everyone, to the Caterpillar Fireside Chat at the Barclays Industrial Select Conference. I'm Alex Kapper, Vice President of Investor Relations for Caterpillar. We just wanna make a few quick reminders before we get started. Today, we may make forward-looking statements which are subject to risks and uncertainties. For a full list of the risks which may cause our actual results to vary materially, please see our SEC filings, including our 10-K, which was filed just last week. We may refer to non-GAAP numbers as well, so any reconciliation to U.S. GAAP numbers, please see the appendix of our earnings presentation. With that, I'll hand it over to our host, Adam Seiden.
Great. Thanks so much, Alex, and thank you to the Caterpillar team for being here, both Alex, Rob, and of course, star of the show today, Andrew Bonfield. So, the format of this session here is gonna be a hybrid between a little bit of remarks from Andrew, as well as some questions from myself. Like most of the presentations here and sessions here, we do invite your participation through the gadgets that are sitting on your table when we get to the audience response questions. So with that, Andrew, good to have you back in Miami here.
Yeah. Thanks, Adam, and good morning, everybody. Let me just start quickly just to recap a little bit about our strategy. So just to remind you, definition of winning is to grow absolute OPACC dollars. The reason why we call OPACC is operating profit after capital charge. It's the center of our strategy. The purpose there actually is we believe that's got the highest correlation to free cash flow, which actually then creates total shareholder return. And if you look at our performance over the last since 2020, Caterpillar has generated top quartile total shareholder return, and at the same time, grown OPACC dollars by 4.1 times. So that is strategy is working. That's the benefit and the effect that shareholders are seeing through that.
As you know, in November, many of you know, we set out our new Investor Day targets. There's a couple of new ones which were there, which hadn't been previously, particularly around sales and revenues, which is to grow sales and revenues between 5% and 7%, on average, between now and 2030. Last year, we achieved 4%, slightly underneath that goal. If you remember at the beginning of the year, we actually expected sales to be about flattish or down slightly. So actually, it was a pretty good performance and reflects the benefit of some of the merchandising programs, particularly we've been doing in our construction business. Last year, construction industry sales grew by underlying sales to users, grew by around 5% in a down market, so a strong performance there.
Continue to deliver on operating margin within our operating margin target ranges, which I'll talk about in a moment. Last year, it was towards the bottom end, impacted. That impacted us in 2025. Without tariffs, would have been towards the top end of the range. Again, continue to focus on growing services. Services did grow modestly last year, just over $24 billion, and on track to deliver our target of $30 billion by 2030. Free cash flow continues to be strong. We'll talk a bit, little bit more about that in a moment. Delivered returned about 84% of free cash flow to shareholders through a mixture of dividends and buybacks and grew the dividend by 7% last year.
These are some of our additional targets we've given outside, below, into our segments. The top three relate to sales targets, which relate to obviously help underpin the 5%-7% growth. The balance really relate to our technology and digital activities, which is where a significant amount of our investment dollars are going as we move forward through the strategy and into 2030. Operating margin target range has been changed. It used to be 10%-22%. It's now 15%-25%. We've upped the top end of the range from $72 billion now up to $100 billion.
The pull-through at the top half of the range is exactly the same as the pull-through was at the bottom point, part of the range, around 31%, on average. Obviously, one of the things that if you think about where we are going at the moment, we are expanding CapEx and capacity, so part, but you won't get as quite as much operating leverage, as you would have done historically at lower levels of sales and revenue. So that's part of the reason why we stuck, to that range. We've always said you cannot grow margins to infinity and beyond.
It is one of those things where obviously you balance out, and that's why our real target, although the margin ranges are there for guidance, is absolute OPACC dollars, because that's, again, what we believe has the strongest correlation to total shareholder return. We continue to invest for profitable growth. CapEx this year will be around $3.5 billion, still less than 5% of revenues. You know, we are doubling CapEx over the next five years versus the previous five years, but still very affordable within the strength, both of the balance sheet and the cash flow generation that we have. So although we are expanding capacity, this is not a significant investment in the context of Caterpillar as a whole.
We continue to invest behind digital and technology, things like automation, connectivity. All of those things are important as part of our strategy, and we'll increase our investment by 2.5 times between now and 2030. This is the chart, which actually is the one which I think is the real, is the money chart. It's the free cash flow chart, but it's one which actually shows the differentiation of Caterpillar versus many of our peers. Our free cash generation is really, really strong. Over the last 3 years, we've generated in excess of $9 billion of free cash flow. It's the highest average of free cash flow generation in the S&P 500 industrials.
We are a strong generator of cash, and that occurs even in times where, even if you look in 2020, during COVID, we still maintained positive free cash flow that year. It is one of the strengths of the company. It is one of the things, the benefits of OPAC, which has helped obviously drive, that, correlation to shareholder return. At the same time, we've grown the dividend, for 32 consecutive years. We're a proud dividend aristocrat. Since 2019, we've grown the dividend on average by 7.5 times, 7.5%. At the same time, we've also talked about the fact that we expect that to grow a high single-digit increases between now and 2030. And share repurchases have been very strong.
So we've bought back since 2019. Part of the strategy was to be in the market more consistently with share buybacks. We've actually, until last year, returned 99% of free cash flow, 84% last year. We'll do a slightly bigger ASR, accelerated share repurchase in the first quarter than we did last year. That's a bit of a way to cover that up, but effectively reduce the share count by 21% over that time period. We don't try and market time. We're not looking to beat the market on average. We look at it against a VWAP, the volume-weighted average price. But actually, just to give you context, the average price we bought those shares back is actually $226. So again, that's helped shareholder return as we go forward.
Key takeaways, strong financial performance. We continue to invest for profitable growth, which supports our shareholder value creation as we move forward. With that, Adam, over to you for questions.
Thanks, Andrew. Appreciate that, that overview of the company a bit and the strategy. So maybe to start off here, lots of folks in the room here, lots of folks talking about, you know, data center, power gen, and certainly, I think folks appreciate what, what you guys bring to the table there. But maybe for those folks that are a bit newer, to the Cat story and are looking at that angle, can you talk a little bit more about some of the other legs of the stool here?
Yeah. So it's, you know, the point being is actually, we're actually a broad-based business, and a very diverse business, which is one of the things that people sometimes don't appreciate. You know, and obviously, the three segments, Construction Industries, Resource Industries, and Power and Energy now. Within Power and Energy, it's not just a data center play. There's obviously, particularly around oil and gas. If you think about the demand for increased energy, that is gonna require more gas. So we use recip engines, which the same recip engines you can use for data center backup generation, can be used in wellhead gas compression, and they can also be used in well servicing for actual oil exploration.
Also, we have Solar Turbines, which you can use in, again, powered applications, but also principally actually used in gas compression for pipelines. So if you think about the fact that obviously, if we do need more electricity and electricity growth is gonna demand—demand is gonna grow, most of that in the short to medium term is gonna come from gas. If it doesn't come from gas, coal may be another option. As you've seen, the administration here has talked about, again, coal benefits our mining business, our Resource Industries business. Resource Industries, if you think about what's happening in the world today, there's two parts of that business. There's mining, and then there's heavy construction, quarry and aggregates. Again, a lot of infrastructure spend still going on.
A lot of the IIJA money is still being spent, as we move out. And if you think about, again, infrastructure spend around data centers, again, that requires heavy construction. And then on the mining side, if you think about copper, gold, all of those commodities are very strong. Iron ore and so forth are all required to build out infrastructure. And we are in a point of time where if you look at the average age of the fleet, it continues to age. Some of that reflects the fact that obviously sort of depends where the life of the mines are, but obviously, at some stage, there will be a replacement cycle. It's been happening, but it's very, very slow, much slower than people anticipated.
That's not necessarily a bad thing, because what that does mean is you actually see a more steady progression rather than the boom bust that we have seen in the mining cycle before. And then on the construction side, again, you know, if you look around the world, North American construction remains strong. Non-residential construction has been very strong. We've actually gained, we've been doing particularly well, actually, on the smaller side of equipment, BCP, which tends to be used in residential construction.
There's been some changes, and again, some of the merchandising programs we put back in place this year have helped that, particularly where we buy down interest rates for customers, which obviously is an attractive if you're a small landscape gardener, and you want to buy a skid steer, a lower interest rate at a fixed payment is a, is an attractive option. And that's a good way of spending our merchandising dollars because we get a lot of that back through Cat Financial, later on. But also, again, still infrastructure growth. But around the world, actually, that's been a bit mixed. So Middle East has been strong, Latin America has been growing, Asia Pac has been sort of mixed, China, very weak, and we expect some improvement this year, in 2026.
And Europe's been pretty weak, although we expect some improvement as we look through 2026 as well. So again, it's a broad-based business. And then we haven't even talked in Power and Energy, things like transportation, which obviously is moving over to rail, moving over to Resource Industries, this year now as well. So there's quite a lot of activity. And, you know, again, that breadth of the portfolio helps, and also obviously the drive towards services helps reduce the amount of volatility you would see in a normal cycle.
Great. That's a great rundown. So, you spoke a little earlier about some of the investments that Cat's been making. So how broad-based is that investment spent across Cat's portfolio these days, or is it concentrated in one area?
Yeah, it's, I mean, obviously, from a CapEx perspective, a lot of the CapEx is obviously going today, a lot of the increases relating to the capacity increases we've announced for both electric power, large engines, and also for solar. Effectively, within large engines, we're increasing our capacity by 1.25 times. Large engines can be used in a number of different applications. They're not just for electric power. They can also be used for oil and gas applications, and actually are used in large mining trucks as well. So they are multipurpose engines which we're driving.
And then in Solar Turbines, with the now with the launch, effectively, of the Titan 350, which is a thirty, thirty-eight, around 38 megawatt turbine, we are seeing a lot of interest for that, and we are doubling capacity for Solar Turbines. That capacity will come in over a number of years. We started seeing a little bit last year, a little bit more towards the end of 2026, particularly on the large engine sides. Most of it in 2027 on the large engine side, and then Solar, probably 2028 onwards.
Got it. And you were talking about the different parts of the portfolio, a minute ago. So just, does CI and RI get the same level of investment today versus when you first started as CFO at Cat?
Yeah, they do. I mean, it's, you know, for example, you know, a lot of our digital investment is going on in CI. So not only do we have... And also a lot of our technology investment is going into both, CI and RI. For example, looking at the tech stack, for our autonomous applications, within RI is part of what we're doing to reconfigure that. We, you know, for those people who don't know, you know, Caterpillar has moved over seven billion tons of dirt autonomously over the years. We have over 700 mining trucks out there today, you know, operating autonomously. So again, that has been a strong part of the portfolio.
But obviously, we're looking to make that even more efficient and then move that more into construction applications, which are different, much more challenging in many ways. Some of those are remote. We already have that, but obviously continue to invest to find ways because one of the biggest pain points for many of our customers is labor, and that skilled labor is a challenge. So looking at, again, we did a lot at the CES around technology, around some of the things we're working on. And then connectivity is really important. So connectivity is really about making sure we know what the machine's doing, where it is. We can actually help customers maintain or increase their uptime. That is really important for our customer base.
Remember, in construction, if you think about it, a lot of the activity works in parallel. It's a series, not in parallel. So you have to have your piece of equipment ready, available at that point in time when you're ready to do, for example, soil compaction. You may have moved dirt, but now you want to do soil compaction. If the machine doesn't work at that point in time, you actually lose time on your construction job. So it's really important to be able to have machine uptime. Connectivity helps that by actually enabling us to help people with things like fault codes and then AI as well, applications on top of that, to actually help customers maintain or improve their uptime, maintain the serviceability of their equipment.
Great. So when we think through the backlog a bit, right, you guys talked through, I guess AEP, actually. It's one of the largest power gen orders, ever for Cat, and that seems to come on top of what was already, what, about $10 billion+ in backlog growth this quarter. So, could you talk a little bit about the size of AEP, and then maybe for, like, compare and contrast, if not dollars, but, like, size-wise, like, how does it compare versus the Joule and Hunt announcements earlier?
Yeah. Yeah, I think it's, it's about 1 GW of power that's been applied there, obviously. And so it is slightly smaller than the Joule size. But again, it's just a reflection of the fact that these are significant opportunities for us. If you're a data center today, and you're looking for a grid connection, you know, often that is now under scrutiny. You know, all the reports going on about how data centers are struggling, particularly given the pressure it's putting on customer bills. Having worked in a utility before, I know how much fun it is trying to go to the regulator to get a bill increase, and to build out infrastructure. It's not easy, and so there's a cost to doing that for a data center.
There's also a time issue. Either getting grid connection can take many years, and/or also, you may be in a situation where you're waiting for a, a newer power station, and you're waiting for a GE Vernova turbine for 2029, 2030, before you can see one. So it means that the people are looking for other options. And one of the benefits of, both, you know, smaller turbines and recip engines is availability compared to, other options that are out there. So that's really been a driver, and AEP is exactly that sort of where you- you're sitting there-...
As a data center provider, and you're gonna be told it's three years before you can start generating revenue, or there's an option to use other options from a time value of money perspective, that may actually drive you to look at, say, Cat as a way of actually closing the gap.
With AIP and some of the other order momentum that you've seen in the business, I guess, is there a good way to think about how backlogs grow in 2026 or maybe Q1 just given the size of that? I'm curious.
Yeah, I mean, what I would say to you is that, obviously, normally within that business, you would see, in CI and RI, an increase in backlog normally in the fourth quarter. That would be normal because ahead of the summer selling season, those are shorter lead times, so that tends to work through. So you will see some of that work through, a little bit in the first quarter, for CI. So that would be a normal seasonal pattern. Obviously, normally in power and energy, a lot of particularly things like solar tend to be orders which tend to get delivered towards the end of the year, given the packaging required around the turbine.
So again, that tends to mean, particularly in solar, tend to build up a backlog as you go through the year. Obviously, it's really around what orders can we take, what slots can we fill? If you saw, historically, we've normally been able to provide around 70%+ of orders within one year. Currently, we're running at 62%. So, you know, again, slots are becoming more difficult to get. And so there may be people putting out backlog orders later this, you know, quarter. AA, AIP will be one which potentially will flow through into the first quarter.
On those orders in the backlog that you spoke to, how are those set up in terms of, like, are there framework agreements, you know, inflationary indices that they're, you know, set to? And, you know, what are those prices benchmarked to?
Yeah. So, I mean, we have... In a low number of the longer-term contracts, you have an escalator in there, which may be an index, or may be related to future price increases. Again, it's a contract-by-contract basis that it's negotiated. Obviously, for you know—and so, you know, most of the backlog has some form of price protection in it, because obviously, that's really important, particularly as you get to longer lead time items.
Great. You mentioned merchandising programs as well that, you know, paid off certainly for Cat, you know, quite significantly. So, now sitting here in, you know, the first couple of months here in 2026, what has been some of the feedback, you know, from dealers on that program from last year and how that's played out, and what's the expectation set for this year?
Yeah, I mean, you know, again, as I mentioned, one of the great things last year was, we actually saw, end-user sales grow by 5% in the market, in an industry that was, was generally flat to down, last year. And part of that is the success of those merchandising programs. If I look in Cat Financial, for example, what proportion of the custom machines we financed actually went up quite significantly last year. And part of that, again, also reflects the fact that, the merchandising programs were seen as a success. Obviously, for large customers, they have their own sources of finance. They don't necessarily always come to us. Some of them do, because of the optionality.
But obviously, for a small retail customer, it's a really good option, particularly if you give a low single-digit interest rate for a five-year. And that obviously helps their cash flows. And that's why, particularly within the small equipment, we actually saw a significant pickup of merchandising from that, so which is good. And it's you know the aim is to continue to put those programs, to keep those programs in place. You know, if you think about what happened during the post-COVID era, we probably took them down a little bit, which helped price, because obviously that fed through into better price. Obviously, you know, for the last 18 months, we've been taking that down, price down in order to put that back.
But it gives us a better balance and a better competitive situation. Remember, always from a Cat perspective, our brand promise is, you know, is around the lowest total cost of ownership. That might not have a price premium, maybe high upfront, but it's about quality, productivity, and actually the length of, you know, built to be rebuilt, is part of our mantra as well, which means the machine life tends to be longer, and so that actually reduces your total cost of ownership. So again, having those things all are important, and then obviously, offering finance, particularly the smaller customers would rather have a Cat skid steer, than another brand.
And I know a lot of folks in the audience tend to have questions on inventory. So maybe just thinking that the business, if you think over the last couple of years, the business does feel a bit more comfortable, you know, running a bit higher than historical average dealer inventories. I don't know if you'd push back on that or not. Is that fair? And then I guess more the bigger question that I'm after is, does that change the destock, restock dynamic that we've seen in prior cycles?
Yeah, I mean, I would push back a little bit because I think we still tend to, dealers tend to think about the average of three to four months as their sort of level of inventory, and we're still within that sort of normal range. There may be areas where we actually look within, you know, but again, that's a machine, and, you know, we have a large portfolio of machines, and not every machine's the same. And one of the areas where we might want to actually build inventory over time is, say, having some more small equipment on the yard, rather than just always having large excavators and big bulldozers, because then that's a higher, faster-moving piece of equipment. You know, so there's things we tend to look at.
Again, you know, we talk to the market about it as if it's one number. And it's, you know, 150 dealers around the world. You know, probably they have 90 pieces of different type of equipment that they may be stocking in the yard. It's complex. So, you know, but I think the, you know, what we are trying to do is work closer with our dealers to make sure we never get into an excess inventory position. I think that would be the way I would frame it. Because obviously, excess inventory does create an issue where we then end up having, you know, it causes us production issues, because you're having to slow down the factories.
And then it also causes them to have issues on their end as well, on clearing their inventory out. So it's better for us to actually help work with them and try to manage, you know, they're independent businesses. They make their own decisions, but try to work with them to make sure we don't end up in a situation where we have been in the past. I mean, that was back in the 2012 era. Yes, we're not. We're trying to avoid those sorts of issues.
Well, I appreciate you took the inventory number from being one number to two numbers. So at least we get a little bit of a balance there. On the, you know, thinking through other topical stuff like tariffs, right? So, what country-specific relationship should we be paying attention to? It feels like, you know, every day or week or so, we see another country potential in the headlines about a potential deal or not, India being one of them most recently. And then thinking about the other side of that, what, you know, how large is that basket of mitigation measures available to Cat on some of this stuff?
Yeah. So, I mean, obviously, you know, what we always remember is Cat is a net exporter out of the U.S.. So, you know, we are people, the administration is trying to encourage to manufacture more in the U.S. than it produces elsewhere. But obviously, you know, we are a relatively low-volume producer. So there are places where we have centers of excellence for individual products. The tariff actually, I think there's two parts to the tariffs. Obviously, there's the 232s-
Sure
... which relate to steel and aluminum, which are very different from, say, the IEEPA tariffs, which are a little bit more broad-based, country-specific.
Yep.
And, you know, the some of the challenge around some of the IEEPA tariffs, we have seen those fluctuate, and we'll continue to see those fluctuate. I'm not gonna go country-specific, about which ones are bigger, but obviously, we keep a very close eye on, on things. Obviously, India, as you say, has reduced the tariff. And obviously, we'll update what we think that impact of that will be, when we report our first quarter results in, in April, at the end of April. But, you know, if it was material enough, we would obviously come out, as we did last August, with a statement about what we would, update the impact if it became material. But at that stage, it's not. India is not that material in the context of the, the total.
On the mitigation side, it's around looking at sourcing changes. It's looking about making sure you maximize the use of where there are exemptions or there are duty drawbacks and things like that that you can use. Obviously, we've been trying to avoid doing too many sourcing changes straight away, because obviously, that is one thing which obviously-
... you don't want to do something and then find out, you know, six months later, the tariff has gone down, and then you regret the action. So we've been very mindful about doing that. But overall, we'll, you know, as we say, over time, our intent is to mitigate the impact of tariffs and to be around the midpoint of the margin target range. So that's really, obviously, this year, we've still got a little bit of a way to go.
Got it. And just a really quick one first, before we get to audience response, is gonna be just on the capacity ramp. I think you gave a little bit of a progression earlier to tell us, you know, how you think things should be through. So just what's assumed in your guidance for, you know, for 2026 for the capacity ramp in power gen?
Yeah, we actually haven't built—we've got some growth. And obviously, in power and energy, we haven't specifically gone by capacity from that perspective, but we should see some capacity come online. Obviously, working really hard to see if we can bring it on a little bit faster. That will always be part of it. This year is probably gonna be our peak CapEx number. 2026 and 2027 are probably gonna be the peak years for CapEx. $3.5 this year, somewhere around that, maybe slightly lower next year as we get into 2027, but that was sort of our expectation. 2026 and 2027 will be peak years.
Fantastic. If we could just switch to the audience response questions here first. All right, when the timer goes on, that's when to respond. Do you currently own this stock? Yes, overweight, market weight, underweight, or no? Timer, please. I think I know the answer here. Oh, okay. Lots of dry powder. About half the room just says no. Next question: What is your general bias towards the stock right now? Positive, negative, or neutral? All right, about half the room, a little over half the room says positive. Next question, please. In your opinion, through cycle EPS for Cat will be above peers, in line, or below peers? All right, about two-thirds of the room above peers. Next question, please. In your opinion, what should Cat do with excess cash? Bolt-on M&A, large M&A, repos, divvies, debt paydown, or internal investment?
It looks like we touched on a bunch of these already to a degree. Buy back shares, Andrew.
Yep.
Next, next question. And the last one, and this one's not gonna be a good one for this room. In your opinion, on what multiple of 2026 earnings should Cat trade? Less than 10x, all the way above, higher than 21x. You guys can mess with us here. All right, I'm gonna throw that one out, but it's, I led the witness. All right. So maybe just, Andrew, just to pass it back to you. Anything you'd want to wrap up with here?
No, just, obviously, this is an incredibly exciting time to be at Caterpillar. There's lots of opportunity. You know, our focus is, again, still continuing to drive strong total shareholder return. We're very pleased with the returns we've been able to drive for shareholders. But that is obviously part of the strategy, is to continue to do that going forward. That's the most important thing.
Excellent. Well, please join me in thanking Andrew, Rob, and Alex for coming here.