“Reciprocating engine sales are anticipated to increase driven by strong demand in gas compression applications.”

In context

“Joseph Creed (Chairman and CEO): All right. Thanks, Alex, and good morning, everyone. Thanks for joining us today. In the second quarter, sales and revenues were better than expected at $20.5 billion, up 24% versus the prior year, driven by strong end market demand in all three of our primary segments. This is the first time in company history that we generated over $20 billion of sales and revenues in a single quarter. This milestone underscores both the essential work our customers do every day and the dedication of Caterpillar employees worldwide to solving our customers' toughest challenges. We delivered adjusted profit per share of $8.17, an increase of 73% versus last year. Our backlog grew sequentially by $9 billion to $72 billion. This is an increase of approximately $35 billion or 92% compared to second quarter last year. All three primary segments contributed to both the year-over-year and sequential backlog growth. Strong order rates and a growing backlog reflect broadening momentum across our business. In the quarter, we generated robust MP&E free cash flow of $5.1 billion and deployed $2.2 billion to shareholders through share repurchases and dividends. Now I'll discuss second quarter results in more detail. As I mentioned, sales and revenues were $20.5 billion, and the increase versus prior year was primarily driven by strong growth in sales volume from higher sales to users in all three primary segments and favorable price realization. Second quarter sales and revenues were better than expected due to strong sales volume growth in Construction Industries and Resource Industries, while Power & Energy was broadly in line with our expectations. Adjusted operating profit margin was 21.9%. Second quarter adjusted operating profit margin was better than we anticipated, primarily due to IEEPA tariff recoveries of $392 million and lower-than-expected tariff costs. The margin benefit from better-than-expected sales volume was mostly offset by higher SG&A and R&D expense. For tariffs introduced since the beginning of 2025, excluding IEEPA recoveries, costs were about $400 million in the quarter. This was lower than the estimate we provided in April due to favorable adjustments to the computation of tariffs previously incurred. Kyle will explain in more detail in a moment, including the impact to each segment. Now I'll review second quarter retail statistics. Sales to users grew in all three of our primary segments. In Power & Energy, sales to users grew a robust 33%. Power generation grew 72%, driven by very strong demand for large gensets and turbines used in data center applications. Sales to users in oil and gas increased 6% and were driven by reciprocating engines, turbines and turbine-related services sold into gas compression applications. Industrial sales to users were down due to a decline in engines sold in the marine application. Construction Industries total sales to users grew for the sixth consecutive quarter, up 22%. Increases in North America were better than we anticipated as the growth was driven by very strong rental fleet loading and equipment sold into nonresidential and residential construction. Dealers' rental revenue continues to grow in North America, requiring more investment in their equipment fleets. This quarter, rental loading was a positive contributor to sales-to-user growth as compared to second quarter last year when rental loading was a headwind. Sales to users increased in EAME due to strength in Europe and Africa, but were lower than we anticipated due to softness in the Middle East. In Asia Pacific, growth was driven by China, but softness outside of China kept the overall region below our expectations. Latin America grew as we anticipated. For Resource Industries, second quarter sales to users increased 17%, which was in line with our expectations. Sales to users were higher year-over-year in mining as well as heavy construction and quarry and aggregates. Rail growth was driven by international locomotive deliveries. Turning to Slide 4. I'll cover a few highlights since our last earnings call, starting with Power & Energy. To support the demand growth in power generation and oil and gas applications, we're excited to resume production of our 10-megawatt medium-speed gas reciprocating engine platform. This highly efficient platform is well suited for prime power generation and its power rating fits between our high-speed gas reciprocating engines and industrial gas turbines. In 2022, we stopped manufacturing this product and focused on supporting aftermarket sales and services given the limited industry opportunity at that time. And now, without significant investment, we're able to restart production by leveraging our existing supply base along with our internal capacity and capability. We plan to bring about 1.5 gigawatts of capacity back online, and shipments are expected to begin in the fourth quarter. This is a clear example of how our agility and diverse portfolio help us stay ahead of customer needs, respond quickly and turn opportunities into profitable growth. Moving on to Construction Industries. In the second quarter, we delivered our first units to Major Projects, which is a specialized fully Cat dealer-owned rental joint venture focused on supporting customers with multibillion-dollar projects across North America. Major Projects will serve customers developing large-scale infrastructure, including transportation, energy, manufacturing and data center builds. It's a supplemental national rental solution to help deliver larger size class construction equipment and capabilities where existing individual dealer rental fleets aren't sufficient to execute at scale. We believe Major Projects will expand our presence in the rental industry and make it easier for large contractors to do business with us and our dealers. And finally, Resource Industries completed the acquisition of Skycatch in July, further enhancing our capabilities following the recent acquisition of RPMGlobal. Skycatch's technology captures high-frequency, high-precision, large-scale spatial data and pairs it with a suite of AI capabilities. That allows customers to identify, measure and interact with the data, resulting in improved decision-making, reduced delays and greater confidence in daily operations. This is another example of investment in technology-enabled growth that will help our mining customers operate more efficiently and achieve better outcomes. Now on Slide 5, I'll provide an update on our outlook. We continue to see strong momentum in our end markets despite ongoing uncertainty due to geopolitical events. We are increasing our full year 2026 sales and revenues expectations to mid- to high-teens growth based on the healthy demand we are seeing across all three of our primary segments. We are also progressing on our capacity expansion plans, and we expect to increase our throughput in the second half of the year. As a result, we anticipate stronger full year growth across all three primary segments compared to the outlook we gave in April. Services revenues are also expected to grow at a higher rate for the full year compared to our previous outlook. The improved outlook is also supported by the breadth and duration of our record backlog. As I mentioned, all three of our primary segments contributed to backlog growth. Power & Energy customers continue planning with us by sharing their long-term forecasts, and some are placing orders as far out as 2030. Currently, 59% of our $72 billion backlog is expected to be delivered over the next 12 months. This percentage has been fairly stable over the past three quarters, which demonstrates the momentum in all three primary segments. Moving on to adjusted operating profit margin. We expect the full year adjusted operating profit margin to be higher than we expected during our last earnings call, reflecting the improved sales and revenues outlook. Excluding the favorable impact from our IEEPA tariff recoveries in the second quarter, we expect full year adjusted operating profit margin to be near the bottom of the target range. Our full year margin expectation reflects the strategic investments we are making to execute our growth strategy as well as the ongoing impact of tariffs. While the situation around tariffs remains fluid, we continue to execute our mitigation plans. Kyle will provide more detail on our revised full year estimate for tariffs in a moment. I'm confident that we'll manage the impact of tariffs over time as we aim to operate around the midpoint of our adjusted operating profit margin target range. We are also increasing our MP&E free cash flow expectations to be in the top half of our annual target range, reflecting our improved outlook. I'll now discuss our key end markets, starting with Power & Energy. Our positive outlook for 2026 continues to reflect strong demand in power generation and oil and gas. Strong second quarter performance has set a solid foundation for continued growth for the remainder of the year. We continue to anticipate full year growth in power generation for both Cat reciprocating engines and Solar Turbines driven by increasing energy demand to support data center build-out related to cloud computing and generative AI. Additionally, prime power demand continues to trend higher as customers look to Caterpillar's turbine and reciprocating engine products and services to support their need for power solutions. After a record year for sales in 2025, oil and gas is expected to grow moderately again this year. Reciprocating engine sales are anticipated to increase driven by strong demand in gas compression applications. We also see continued momentum in demand for reciprocating engine aftermarket parts. Solar Turbines oil and gas sales are expected to grow while the backlog remains healthy, as we continue to see solid order and inquiry activity. Demand for products in industrial applications is expected to grow moderately in 2026. For Construction Industries, we continue to expect full year sales-to-users growth, supported by strong order rates. Overall, the outlook for North America remains positive as sales-to-users are anticipated to grow versus last year. Construction spending remains at healthy levels, supported by the IIJA with the remaining funds to be spent over the next few years. Nonresidential investment in critical infrastructure programs, heavy construction and data centers is contributing to overall construction spending levels. We expect dealer rental fleet loading will continue to grow including additional fleet loading for Major Projects in the third quarter. In EAME, Europe is expected to remain stable, supported by nonresidential construction, and construction activity in Africa is projected to remain strong. While the Middle East continues to be challenged, we currently anticipate only a limited impact on EAME sales-to-users. In Asia Pacific outside of China, softer economic conditions are expected. In China, we anticipate moderate conditions with full year growth in the above 10-ton excavator industry off of low levels of activity. We expect full year growth in Latin America. We're seeing continued positive momentum in Resource Industries with robust order rates and strong backlog growth. For 2026, sales-to-users are expected to increase, primarily driven by rising demand for copper and gold and positive dynamics in heavy construction and quarry and aggregates. Most key commodities remain above investment thresholds. Customer product utilization is high and the age of the fleet remains elevated. While some commodity prices have increased recently, customers remain focused on the long term. We now expect rebuild activity to increase moderately compared to last year. Rail services and locomotive deliveries are both anticipated to grow for the year. Now let's turn to Slide 6 for a strategy highlight. Our refreshed enterprise strategy was built on our strong foundation of operational excellence, and we continue to operate under the discipline of the operating and execution model. As we invest in our capacity to meet customers' increasing needs, we're finding creative ways to reallocate resources and optimize our operations as we grow to record levels. Let me share an example. Last November, we announced an increase in our new turbine capacity of 2.5x 2024 levels. This capacity will serve oil and gas and power generation applications and be leveraged to provide rebuild and services for our growing installed base for decades to come. To help bring some of this capacity online sooner, we were able to repurpose an existing 250,000 square foot facility in Wamego, Kansas, which previously produced work tools for Cat construction equipment. We converted the facility in under 12 months or substantially less than building a new factory. From Wamego, we now package and ship our PGM130, a product that is popular for data center power generation. This is one of many examples of how we are continuing to manage our business with discipline and maximize the use of our existing footprint to serve our customers and grow profitably. With that, I'll turn it over to Kyle.”