“In Construction Industries, we expect strong sales growth in the third quarter versus the prior year mainly due to higher sales volume on strong sales to users and favorable price realization.”

In context

“Kyle Epley (Chief Financial Officer): Thank you, Joe. Good morning, everyone. I'm going to take a few minutes to walk you through our overall second quarter results, including details about segment performance as well as the balance sheet and cash flow. I will then conclude with remarks on our expectations for the remainder of the year, including third quarter and current full year assumptions. Beginning on Slide 7. Sales and revenues were $20.5 billion, up 24% versus the prior year, which was better than our expectations. Adjusted operating profit was $4.5 billion, and our adjusted operating profit margin was 21.9%, both better than we anticipated. Moving to Slide 8. The 24% increase in sales and revenues compared to the second quarter of 2025 was primarily driven by strong growth in sales volume and favorable price realization. The stronger sales volume was mainly driven by higher sales of equipment to end users across all three primary segments. Dealer inventory increased by $400 million in Construction Industries compared to a decrease in the second quarter of 2025. The increase was higher than we originally anticipated, supported by our expectation of stronger sales to users for the rest of the year, which reflects strong end market demand. Sales and revenues were above our expectations, mainly driven by stronger-than-expected sales volume in Construction Industries and Resource Industries. Power & Energy was generally in line with expectations. Moving to operating profit on Slide 9. Operating profit in the second quarter increased by 50% to $4.3 billion. Adjusted operating profit of $4.5 billion increased by 54% versus the prior year, mainly due to the profit impact of higher sales volume. The adjusted operating profit margin was 21.9%, which was a 430 basis point increase compared to the prior year. Margin was better than we anticipated, primarily due to expected IEEPA tariff recoveries 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. In the quarter, we recognized $392 million in expected IEEPA tariff recoveries with the majority of this amount reflected in corporate items. For the tariffs introduced since the beginning of 2025, excluding IEEPA recoveries, the second quarter tariff costs were approximately $400 million. And this was favorable compared to the $700 million estimate we provided in April. This favorability was primarily driven by adjustments to the computation of tariffs previously incurred. The $400 million of tariff costs were recognized within the segments and corporate items. Segment margins were impacted by 90 basis points in Power & Energy, 340 basis points within Construction Industries and 260 basis points in Resource Industries. Within corporate items, there was a favorable adjustment for tariffs. Moving to Slide 10. Profit per share was $7.77 in the quarter. Adjusted profit per share was higher than we had anticipated at $8.17. Restructuring costs in the quarter were $0.40 versus $0.10 last year. Excluding discrete items, the provision for income tax in the second quarter of 2026 reflected a global estimated annual effective tax rate of 23%. Finally, the year-over-year impact from the reduction in the average number of shares outstanding due to share repurchases resulted in a favorable impact on adjusted profit per share of approximately $0.15 compared to the second quarter of 2025. On Slide 11, I will now review the second quarter performance of the segments, starting with Power & Energy. For Power & Energy, sales of $8.2 billion increased by 17% versus the prior year, which was generally in line with our expectations. The sales increase versus the prior year was mainly due to higher sales volume and favorable price realization. Second quarter profit for Power & Energy increased by 30% versus the prior year to $2 billion. The segment's margin of 24.6% was an increase of 250 basis points versus the prior year. The increase was mainly due to the profit impact of higher sales volume and favorable price realization, which was partially offset by unfavorable manufacturing costs. Higher manufacturing costs were impacted by spend related to our capacity expansion, including a higher depreciation. Segment margin was higher than anticipated, primarily due to lower-than-expected manufacturing costs, including tariffs. Now moving to Slide 12. Construction Industries sales increased by 35% in the second quarter to $8.3 billion, primarily due to higher sales volume and favorable price realization. Higher sales volume was mainly driven by higher sales of equipment to end users. The $400 million of dealer inventory increase and services revenue growth resulted in sales volume to be better than we expected. Second quarter profit for Construction Industries was $1.9 billion, a 57% increase versus the prior year. The segment's margin of 23.3% was an increase of 320 basis points versus the prior year, mainly driven by the profit of higher sales volume. Price was also favorable in the quarter. Segment margin was higher than anticipated, primarily due to the profit impact of stronger sales volume, partially offset by higher manufacturing costs, including freight. Turning to Slide 13. Resource Industries sales increased by 20% in the second quarter to $4.6 billion, primarily driven by higher sales volume. Price was also favorable versus the prior year. Sales were better than we anticipated due to higher sales volume, driven by favorable services revenues growth. Second quarter profit for Resource Industries increased by 23% versus the prior year to $693 million. The segment's margin of 14.9% was an increase of 40 basis points versus the prior year. This was mainly driven by the profit impact of higher sales volume, partially offset by unfavorable manufacturing costs. Segment margin was higher than anticipated, primarily due to the higher sales volume. Moving to Slide 14. Financial Products revenues increased by 10% versus the prior year to $1.1 billion, mainly due to higher average earning assets across all regions. Segment profit increased by 32% to $328 million. The increase was primarily due to higher average earning assets and favorable impacts from equity securities and margins at insurance services partially offset by a higher provision for credit losses at Cat Financial. Our customers' financial health remains strong. Past dues were 1.31% in the quarter, down 31 basis points versus the prior year, the lowest we have recorded since 1998. The allowance rate of 0.84% surpassing the first quarter of 2026 as our lowest level ever reported in any quarter. Business activity at Cat Financial remains healthy. Retail new business volume grew by 9% versus the prior year. In addition, used equipment inventory levels continue to remain low and conversion rates remain above historical averages as customers choose to convert their leases into buying the equipment at the end of their lease term. Moving to Slide 15. MP&E free cash flow was a record at $5.1 billion in the second quarter. This was about $2.8 billion increase versus the prior year, mainly driven by stronger profit. CapEx spend was about $600 million in the quarter. Moving to capital deployment. We deployed $2.2 billion to shareholders in the second quarter. Share repurchases accounted for about $1.5 billion, with the remainder reflecting our quarterly dividend payment. In June, we announced an 8% dividend increase, our sixth consecutive year with a high single-digit quarterly increase. Our balance sheet remains strong. We have ample liquidity with an enterprise cash balance of $6.7 billion. In addition, there is $1.5 billion in slightly longer-dated liquid marketable securities to improve yields on that cash. Now let's go through our outlook assumptions. Turning to Slide 16. I will start with the third quarter. We are continuing to monitor the environment as geopolitical conditions remain fluid and complex. Based on what we see today for the third quarter, we anticipate another strong quarter of sales growth versus the prior year. We expect volume increases and favorable price realization in each of our three primary segments. We anticipate volume growth will be driven by higher sales to users across all three primary segments versus the prior year. If we look at the segments, we anticipate strong sales growth in Power & Energy in the third quarter versus the prior year, driven by continued strength in power generation and in oil and gas, modest growth in industrial applications as it continues to recover and favorable price realization. In Construction Industries, we expect strong sales growth in the third quarter versus the prior year mainly due to higher sales volume on strong sales to users and favorable price realization. We expect a slight increase in dealer inventory in the third quarter, but modestly lower than last year. As a result, the year-over-year impact from dealer inventory is expected to be a modest headwind to sales volume in the quarter. In Resource Industries, we also expect strong sales growth in the third quarter versus the prior year primarily due to higher sales to users and services growth. We also anticipate favorable price realization, but to a lesser extent than the second quarter. Now I will provide some color on our third quarter margin expectations versus the prior year. We expect higher adjusted operating profit margin at the enterprise level versus prior year, primarily due to favorable price realization and higher sales volume, partially offset by unfavorable manufacturing cost including depreciation expense and freight, along with higher SG&A and R&D expenses due to the continued investment in strategic investments aligned with our 2030 goals that we rolled out at our last year's Investor Day. We anticipate tariff costs of around $600 million, which is similar to what we incurred in the third quarter of 2025. We expect about 50% of the tariffs to be incurred in Construction Industries and 25% in both Power & Energy and Resource Industries. Now on the third quarter margin by segment. In Power & Energy, we anticipate a higher margin percentage compared to the prior year on stronger volume and favorable price realization. This is partially offset by higher manufacturing costs including depreciation and expenses related to our capacity expansion projects. SG&A and R&D expenses are also expected to be higher. In Construction Industries, we anticipate a higher margin percentage compared to the prior year, primarily due to favorable price realization and higher sales volume. This is partially offset by higher manufacturing costs, including tariff and freight costs. Strategic investments related to technology are expected to increase SG&A and R&D expenses versus prior year. In Resource Industries, we anticipate a similar margin percentage compared to the prior year due to higher sales volume and favorable price realization, partially offset by higher manufacturing costs, including tariff costs and SG&A and R&D expenses. Higher compensation expense and strategic investments related to technology, including autonomy, are driving the higher SG&A and R&D expenses versus prior year. Now on Slide 17. Let me provide a few comments on the full year. As Joe mentioned, we now anticipate sales and revenues growth in the mid- to high-teens for the full year of 2026. This is an increase versus our expectations from last quarter. The increase in our full year sales and revenue expectations is supported by strong sales to users growth across all three primary segments driven by healthy end markets, strong order rates across all three primary segments driving backlog growth and increased throughput from our capacity expansion plans in the second half. We expect strong sales growth across each of our primary segments, mainly driven by volume and price. For the enterprise, we typically see higher sales and revenues in the second half as compared to the first, and we expect to follow that trend this year. We also expect a more typical reduction in Construction Industries dealer inventory of over $1 billion in the fourth quarter. We plan to end the year higher than last year in anticipation of future end market growth. As a result, the year-over-year impact from dealer inventory is expected to be a headwind to Construction Industries sales volume in the second half of the year. Now on to adjusted operating profit margin for the full year. Due to the increased sales and revenues outlook, full year adjusted operating profit margin will be higher than we expected in April. Excluding the expected IEEPA tariff recoveries, our full year adjusted operating margin would be near the bottom of the range at the higher sales level. Compared to last year, higher adjusted operating profit margin will reflect favorable price realization, higher sales volume, partially offset by higher manufacturing costs, including tariffs, depreciation expense and freight and higher SG&A and R&D, driven by compensation expense and strategic investments spend. Excluding the expected IEEPA tariff recoveries of approximately $400 million reported in the second quarter, we now expect full year 2026 tariff costs of around $2.2 billion or at the low end of the range we previously provided. Our outlook does not include any additional IEEPA tariff recoveries in the second half of the year. As we lap incremental tariff costs, the tariff impact to the second half adjusted operating profit and margins is not expected to be significant. Moving on. We continue to expect restructuring costs of approximately $300 million to $350 million in 2026. Our estimated global annual effective tax rate remains approximately 23% for 2026 excluding discrete items. With the improved sales and revenues and adjusted operating margin outlook, we now expect MP&E free cash flow to be in the top half of our annual target range of $6 billion to $15 billion. We expect second half MP&E free cash flow to be slightly higher than the first half despite higher CapEx spend. Our CapEx spend for 2026 is anticipated to be approximately $3.5 billion similar to our previous expectations. Now turning to Slide 18. To summarize. We delivered a strong first half with better-than-expected sales and revenues and earnings. In this dynamic operating environment, we now anticipate mid- to high-teens sales and revenues growth in 2026 and anticipate adjusted operating profit margin and MP&E free cash flow to be better than we had previously expected. We remain disciplined and committed to operational excellence and the O&E model. We will continue to look for ways to optimize our footprint and invest efficiently. We are maintaining a strong balance sheet, and we will continue to return substantially all of our MP&E free cash flow to our shareholders through dividends and share repurchases over time. Finally, we will continue to execute our strategy for profitable growth. With that, we will take your questions.”