Caterpillar Inc (CAT) — Q1 2026 Earnings Call Transcript

Thank you, Adria. Good morning, everyone, and welcome to Caterpillar's First Quarter of 2026 Earnings Call. I'm Alex Kapper, Vice President of Investor Relations. Joining me today are Joe Creed, Chairman and CEO; Andrew Bonfield, Chief Financial Officer; Kyle Epley, Senior Vice President of the Global Finance Services Division and incoming CFO; and Rob Rengel, Senior Director of Investor Relations. In our call, we'll be discussing the first quarter earnings release we issued earlier today. You can find our slides, the news release and the webcast recap at investors.caterpillar.com/eventsandpresentation. The content of this call is protected by U.S. and international copyright law. Any rebroadcast, retransmission, reproduction or distribution of all or part of this content without Caterpillar's prior written permission is prohibited. Moving to Slide 2. During our call today, we'll make forward-looking statements, which are subject to risks and uncertainties. We also make certain statements that could cause our actual results to be different than the information we're sharing with you on this call. Please refer to our recent SEC filings and the forward-looking statements reminder in the news release for details on factors that individually or in aggregate could cause our actual results to vary materially from our forecast. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. On today's call, we also refer to non-GAAP numbers. For a reconciliation of any non-GAAP numbers to the appropriate U.S. GAAP numbers, please see the appendix of the earnings call slides. For today's agenda, Joe will begin by sharing perspectives about our results and strategic initiatives across our segments. Then he'll discuss our full year outlook and insights about our end markets followed by a stats update. Andrew will provide a detailed overview of results and Kyle will share key assumptions looking forward. We'll conclude by taking your questions. Now let's advance to Slide 3 and turn the call over to Joe.

All right. Well, thanks, Alex, and good morning, everybody. Thanks for joining us. Our team delivered a strong start to the year driven by resilient end markets and disciplined execution in the operating environment. Sales and revenues were $17.4 billion, up 22%, and we delivered adjusted profit per share of $5.54, an increase of 30% versus last year. Backlog grew to a record level of $63 billion, an increase of $28 billion or 79% compared to the first quarter last year. All three primary segments contributed to both the year-over-year and sequential backlog growth. Also, total first quarter orders were an all-time record, providing a solid foundation and positive momentum. Our strong balance sheet and MP&E free cash flow allowed us to deploy $5.7 billion to shareholders through share repurchases and dividends in the quarter. Solid sales and revenues growth combined with robust order activity demonstrate the strength of our business and our focus on solving our customers' toughest challenges. Now I'll discuss first quarter results in more detail. Sales and revenues were $17.4 billion, an increase of 22% versus the prior year and in line with our expectations. Adjusted operating profit margin was 18%. First quarter adjusted operating profit margin and adjusted profit per share of $5.54 were better than we anticipated, mainly due to favorable manufacturing costs, including lower-than-anticipated tariff costs. Costs related to tariffs introduced since the beginning of 2025 were approximately $600 million in the quarter. This was favorable to the estimate we provided in January, primarily due to an adjustment to the computation of those in 2025. Andrew will provide a little more detail in a moment. Now I'll review first quarter retail statistics. Sales to users grew in all three of our primary segments. In Power and Energy, sales to users grew a robust 32% with growth across all applications. Power generation grew 48%, driven by strong demand for large gensets and turbines used in data center applications with an increasing mix towards prime power. Sales to users in oil and gas increased 16% and were driven by reciprocating engines, turbines and turbine-related services sold in gas compression applications. Industrial growth was driven by engines sold into multiple applications. Construction Industries total sales to users grew for the fifth consecutive quarter, up 7%. Increases in North America were slightly better than we anticipated, mostly due to nonresidential construction. Rental fleet loading increased and our dealers' rental revenue continued to grow in the quarter. Sales to users declined slightly in EAME and were below our expectations due to timing in key projects. Middle East was slightly lower, but was partially offset by better-than-expected activity in Africa. Asia/Pacific was about flat and below our expectations due to timing of customer deliveries, while growth in Latin America was slightly better than anticipated. For Resource Industries, first quarter sales to users increased 6%, which is below our expectations, primarily due to timing of customer deliveries. Mining sales to users were higher year-over-year with growth across most product lines. Heavy construction and quarry and aggregates were about flat. Rail remained at relatively low levels. Turning to Slide 4. I'll cover a few highlights since our last earnings call from each of the segments, starting with Power and Energy. Yesterday, we announced another exciting opportunity to provide pro power up to 2.1 gigawatts of large gas generator sets for prime power generation in support of data center, oil and gas and industrial applications. The orders will enter the backlog on a rolling basis. We expect to deliver generator sets over the next five years and anticipate long-term services growth opportunities in the future. This represents the sixth agreement with at least one gigawatt of Caterpillar equipment for prime power applications. Moving on to Construction Industries. Last month at CONEXPO, we launched CAT Compact, a streamlined customer experience designed for small contractors and growing businesses that value simplicity and speed. It brings everything together in one destination, enabling customers to buy, rent and service compact equipment with ease. We believe this will expand our relevance in the compact equipment industry and make it easier for our customers to do business with us and our dealers, fitting to our 2030 target for CI of 1.25x sales to users growth. And finally, Resource Industries completed the acquisition of RPMGlobal in February, bringing a leader in mining software technology into our portfolio. As we highlighted at our Investor Day, RPMGlobal's capabilities complement our existing technology, strengthening our ability to deliver integrated solutions that help customers improve safety and productivity across their operations. We see this as a long-term investment in technology-enabled growth that will help solve our mining customers' toughest challenges. Now on Slide 5, I'll provide an update on our outlook. While there is increased uncertainty due to geopolitical events and elevated energy prices, our end markets have been resilient. We are closely monitoring the environment, and we are not forecasting material impact to our 2026 outlook at this time. We now anticipate low double-digit growth for full year 2026 sales and revenues. The increased outlook is driven by resilient end markets and solid execution by our team. Notably, we're tracking ahead of our lending capacity expansion plans for the year. Order rates are very strong across a wide range of products, driving backlog growth in all three primary segments. We also expect growth in services revenues for the full year. As a result, we anticipate stronger growth across all three primary segments compared to the outlook we gave during our last earnings call. With the improved sales and revenues outlook, full year adjusted operating profit margin will be higher than we expected in January. As a reminder, our operating profit margin target range is progressive with sales and revenues. Adjusted operating profit margin is estimated to remain near the bottom of the target range corresponding to the now higher top line expectations. Our full year margin expectation reflects the strategic investments we're making to execute our growth strategy as well as the ongoing impact of tariffs. The situation around tariffs remains fluid, while we continue to execute our mitigation plans. Kyle will discuss our revised estimate for tariffs in more detail. I remain 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're also increasing our MP&E free cash flow expectations to be higher than 2025, reflecting our improved outlook and strong top line growth. To further support our outlook, I'll discuss our key end markets starting in Energy. The 2026 outlook remains positive. Robust backlog was driven by continued momentum in both power generation and oil and gas. We anticipate growth in power generation for both reciprocating engines and turbines, driven by increasing energy demand to support data center build-out related to cloud computing and generative AI. We continue to see demand for prime power trend higher as data center customers look for alternative power solutions to keep pace with their growth. Oil and gas expect moderate growth for the year. Reciprocating engine sales are expected to increase, driven by strong demand in gas compression applications. Solar turbines oil and gas backlog remains healthy with continued solid order and inquiry activity. As a result, we anticipate another year of strong turbine sales. Services revenues in oil and gas are also expected to increase in the year. Demand for products in industrial applications is projected to grow modestly 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 Infrastructure Investment and Jobs Act with the remaining funds to be spent over the next few years. Also, investment in critical infrastructure programs and data centers is contributing to overall construction spending levels. Dealer rental fleet loading and rental revenue are both projected to increase compared to 2025. In EAME, Europe is expected to remain stable, supported by nonresidential construction and construction activity in Africa is projected to remain strong. While softening in the Middle East is anticipated, as of now, we expect the impact on EAME sales to users to be limited. In Asia/Pacific, outside of China, softer 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. Growth in Latin America is expected to continue. We're seeing continued positive momentum in Resource Industries with strong backlog growth. Robust order rates across most products drove the highest quarter for order intake since 2012. 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 threshold. 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 continue to expect rebuild activity to increase slightly 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 an update on our strategy. Over the past year and even since our Investor Day last November, our largest customers in the broader data center industry have significantly increased their expectations for capital spending. That has translated to accelerated order rates for us. In fact, since we first announced our initial capacity expansion plans in January of 2024, our large reciprocating engine backlog has grown by more than 3.5x. Customers are committing to longer-term orders with some orders well into 2028. In addition to order growth for backup power, we're also seeing higher demand for prime power applications, which will lead to long-term service opportunities and higher demand for aftermarket components. As we've discussed, our large reciprocating engine capacity also serves a wide range of applications in addition to power generation, including oil and gas and mining, which are all expected to benefit from long-term secular growth trends. As a result of these trends, I'm excited to announce that we are increasing our large reciprocating engine capacity from 2x 2024 levels to nearly 3x 2024 levels. Over the last two years, we've maintained a disciplined strategy of scaling capacity in direct alignment with our growing backlog and long-term order visibility. By working closely with our customers to forecast their future requests, we ensure that our capacity expansions are additive to our OPACC growth. Today's announcement reflects the continuation of this disciplined and measured approach. The additional investment will begin as soon as possible but primarily occur from 2027 through 2029. As a result, MP&E capital expenditures are expected to average between 4% and 5% of MP&E sales through 2030. Based on our record backlog and customer forecast, we estimate a positive cash payback on the entire reciprocating engine investment, including what was previously announced by the end of this decade. As a result of the additional capacity, we're increasing our 2030 growth targets. We now expect the compound annual growth rate for total enterprise sales and revenues to be between 6% and 9% between 2024 to 2030. The target for power generation sales has increased to more than 3x sales by 2030 from a 2024 baseline. We continue to see attractive growth opportunities across all our segments due to our role in providing the invisible layer of the tech stack, the critical minerals, the reliable power and physical infrastructure that the modern world depends on. We believe we are well positioned to deliver long-term profitable growth. And finally, earlier this month, we announced that Kyle Epley will succeed Andrew Bonfield as CFO effective tomorrow. It's been a privilege to work with Andrew. His leadership has been instrumental to Caterpillar's success, and he's brought exceptional financial expertise and relentless focus on disciplined decision making and a deep commitment to our customers and shareholders. He's made our global finance organization a strategic advantage and has impacted the company long after his retirement. I've worked closely with Kyle for over 20 years and have great confidence in his ability to build on Andrew's legacy. He's an outstanding leader with deep institutional knowledge and a proven track record of partnering with the business to deliver results. Kyle is also deeply involved in developing our refreshed strategy and will help drive achievement of our 2030 growth ambitions. With that, I'll turn it over to Andrew and Kyle.

Thank you, Joe, and good morning, everyone. I'll begin with a...

Sorry, I'll start again. Thank you, Joe, and good morning, everyone. I'll be doing the summary of the first quarter and then provide more detailed comments, including performance of the segments. I'll then discuss the balance sheet and free cash flow. Kyle will conclude with remarks on our expectations for the second quarter and our current full year assumptions. Beginning on Slide 7. Sales and revenues was $17.4 billion, up 22% to the prior year, which was in line with our expectations. Adjusted operating profit was $3.1 billion, and our adjusted operating profit margin was 18.0%, both were stronger than we had anticipated. Moving to Slide 8. The 22% increase in sales and revenues compared to the first quarter of 2025 was primarily driven by strong growth in sales volume and favorable price realization. The stronger volume was mainly driven by the impact from changes in dealer inventories and higher sales of equipment to end users. As we expected, dealers recorded a seasonable inventory build in Construction Industries compared to the slight decrease in the first quarter of 2025. The build was slightly higher than we originally anticipated, supported by the expectation of stronger sales to users for the rest of the year. Sales were in line with our expectations with favorability in Power and Energy and Construction Industries, offset by lower-than-anticipated sales in Resource Industries. One note before I move forward. We will now report changes in dealer inventories in total and for Construction Industries needs, removing the total machines analysis. Remember that typically over 70% of dealer inventory in Power and Energy and Resource Industries is backed by firm customer orders. So dealer inventory changes in these segments are mainly a function of timing within the commissioning pipeline and less indicative of changes in demand or demand planning. Construction Industries products are generally more reflective of dealer inventory available on the lot. And this level of transparency along with sales to users should help you more accurately model this segment. Moving to operating profit on Slide 9. Both operating profit and adjusted operating profit in the first quarter of 2026 increased by 20% to $3.1 billion mainly due to the profit impact of higher sales volume and favorable price realization, partially offset by unfavorable manufacturing costs and higher SG&A and R&D expenses. The adjusted operating profit margin was 18.0%, which was only a 30 basis point increase compared to the prior year despite higher tariff costs. Margin was stronger than we had expected. This was mainly due to favorable manufacturing costs, including lower tariff costs and beneficial cost absorption and lower freight. Excluding the impact from tariffs, our first quarter margin was significantly higher than the prior year reflecting the higher sales volume and favorable price. For the tariffs introduced since the beginning of 2025, the first quarter costs were approximately $600 million. This was favorable compared to the $800 million estimate provided in January, primarily due to an adjustment related to the computation of tariffs incurred in 2025. This adjustment is reflected in operating profit within corporate items and only impacts the first quarter. Segment margins are not impacted. Moving to Slide 10. Profit per share was $5.47 in the quarter. Adjusted profit per share was higher than we had anticipated at $5.54, excluding restructuring costs of $0.07 versus $0.05 last year. Data center profit per share included a discrete tax benefit of $0.15 in the quarter. The favorable adjustment to our tariff costs benefited the quarter by about $0.31. Excluding discrete items, the provision for income taxes in the first quarter of 2026 reflected a global estimated annual effective tax rate of 23.0%. Finally, the year-over-year impact from the reduction in the average number of shares outstanding, primarily due to share repurchases resulted in a favorable impact on adjusted profit per share of approximately $0.13 compared to the first quarter of 2025. On Slide 11, I'll review the performance of the segments, starting with Power and Energy. Keep in mind that our comments now reflect the realignment of the rail division moving from Power and Energy to Resource Industries. For Power and Energy, sales of $7.0 billion increased by 22% versus the prior year. Sales exceeded our expectations driven by strength in power generation. The sales increase versus the prior year was mainly due to higher sales volume. First quarter profit for Power and Energy increased by 13% versus the prior year to $1.5 billion. The segment profit margin of 20.6% was a decrease of 170 basis points versus the prior year, mainly driven by tariffs, which had about a 270 basis point impact on the segment's margin. As we expected, higher manufacturing costs were also impacted by spend relating to our capacity expansion including depreciation. Favorable volume and price were partially offset by the manufacturing cost increase. The margin was stronger than we had anticipated primarily due to the benefits of some litigation efforts to reduce tariff costs. Sales volume also supported the stronger-than-expected margin. Now moving to Slide 12. Construction Industries sales increased by 30% in the first quarter to $7.2 billion. This was higher than we expected mainly due to stronger-than-anticipated volume from higher dealer inventory build supported by continued momentum in our end markets. The 30% sales increase was primarily due to the very strong sales volume growth and favorable price realization, which included the benefit from geographic mix. Higher sales volume was mainly driven by changes in dealer inventories with a more typical $1.5 billion increase in the first quarter as compared to a slight decrease in the prior year. As Joe noted, sales to users growth was healthy with a 7% increase this quarter. First quarter profit for Construction Industries was $1.5 billion, a 50% increase versus the prior year. The segment's margin of 21.4% was an increase of 160 basis points versus the prior year, mainly driven by the favorable price realization and the profit impact of higher sales volume. This was partially offset by tariff costs, which had an impact of about 550 basis points on the segment's margin. Margin was stronger than we had expected, mainly due to the lower-than-anticipated manufacturing costs, including cost absorption and the impact of stronger sales volumes. Turning to Slide 13. Resource Industries sales increased by 4% in the first quarter to $3.8 billion, driven by higher sales volume and favorable currency impact. The year began a bit slower than we had anticipated, primarily due to timing as volume was affected by some short-term production delays. First quarter profit for Resource Industries decreased by 39% versus the prior year to $378 million. The segment's margin of 10.0% was a decrease of 700 basis points versus the prior year driven mainly by tariff costs and an impact of about 500 basis points on the segment's margin. The margin was lower than we had anticipated, primarily due to the lower-than-expected sales volume and the timing of discounts, which impacted price realization within the segment on a short-term basis. Moving to Slide 14. Financial Products revenues increased by 9% versus the prior year to $1.1 billion, mainly due to higher average earning assets across OEMs. Segment profit increased by 14% to $245 million. The increase was primarily due to higher average earning assets and margins at Insurance Services, partially offset by higher SG&A expenses. Our customers' financial health remains strong. Past dues were 1.39% in the quarter, down 19 basis points versus the prior year. The allowance rate was 0.86%, matching the fourth quarter of 2025 for our lowest ever level reported in any quarter. Business activity at Cat Financial remains healthy. Retail credit applications were roughly flat, while retail new business volume grew by 8% versus the prior year, our highest first quarter in over 15 years. In addition, used equipment inventory levels continue to remain low and conversion rates remain above historical averages as customers choose to buy equipment at the end of their lease term. Moving to Slide 15, MP&E free cash flow was nearly $600 million in the first quarter, which was higher than we had expected and about a $350 million increase versus the prior year, impacted by stronger profit. The quarter included our annual payment of 2025 short-term incentive compensation. CapEx spend was about $700 million. Moving to capital deployment. We deployed $5.7 billion to shareholders in the first quarter. After the dividend payment, $5 billion was for share repurchases, which included a $4.5 billion accelerated share repurchase, or ASR, that may last for up to nine months. Our balance sheet remains strong. We have ample liquidity with an enterprise cash balance of $4.1 billion in addition to $1.3 billion in slightly longer-dated liquid marketable securities to employ our cash. So after more than 90 quarterly or biannual calls, it is finally time for me to retire. I could not have scripted a better set of results to be my final call. It has been an honor and privilege to serve alongside the Caterpillar team and to work with Joe and Jim, the Board, our executive officers and our employees and dealers around the world as we've delivered on our strategy through a wide range of environments. I'm extremely proud of what this team has accomplished, and I am confident in the foundation we built together and the growth opportunities ahead. I also want to thank the investment community for the thoughtful engagement here at Caterpillar. Finally, Kyle has worked closely with me since our beginning at Caterpillar, and I have watched his development as a key member of Caterpillar's leadership team. His knowledge of the business and involvement in the development of the strategy was an invaluable help to me as CFO, and I could not have been more pleased that the Board elected him as my successor. As I step away, I am confident that Caterpillar is well positioned for the future and that the finance organization is in very capable hands with Kyle Epley as CFO. With that, thank you again.

Thank you, Andrew. And I'm honored to be the next CFO of Caterpillar, and Andrew, I am very grateful for you and all the guidance you provided to me over your years at Caterpillar. So now let's go through our outlook assumptions. Turning to Slide 16. I will start with the second quarter. We maintain a watchful eye on the environment as the geopolitical landscape remains complex. Our assumptions are based on what we see today and what we believe is most likely. Keep in mind that our assumptions reflect the realignment of the rail division into Resource Industries. We filed an 8-K in late March to recast historical periods and establish a baseline for you to evaluate segment-level performance and expectations. Based on what we see today, for the second quarter, we anticipate another quarter of strong sales growth versus the prior year. We expect volume increases and favorable price realization in each of our three primary segments. We anticipate volume will be driven by a higher growth rate in sales to users compared to the first quarter, with a minimal change in Construction Industries dealer inventory. If we look at the second quarter by segment, we anticipate strong sales growth in Power and Energy in the second quarter versus the prior year, driven by continued strength in power generation and in oil and gas and favorable price realization. We expect strong sales growth in Construction Industries in the second quarter versus the prior year, mainly due to strong sales to users supported by the backlog and favorable price realization. We anticipate a more typical sequential sales increase in the second quarter as compared to the first. In contrast to the sizable sales increase we saw a year ago, following a lighter first quarter, which was impacted by the lack of dealer inventory build. In Resource Industries, we also expect strong sales growth versus the prior year primarily due to higher sales to users. We also anticipate favorable price realization with the primary driver being geographic mix. Now I'll provide some color on our second quarter margin expectations versus the prior year. Excluding tariff costs, we expect higher margins at the enterprise level, primarily due to price realization and higher volumes. But partially offset by higher manufacturing costs and SG&A and R&D expenses. The higher manufacturing costs assume unfavorable cost absorption and investments to support higher volume and capacity investments, including depreciation. SG&A and R&D expenses will reflect investments and higher compensation expense. Despite the ongoing impact of tariffs, we also expect higher margins in the second quarter versus the prior year. We anticipate tariff costs of around $700 million. This remains a headwind compared to the impact last year, which was around $400 million. We expect about 50% of the tariff cost to be incurred in Construction Industries and 25% in both Power and Energy and Resource Industries. Now on to the second quarter margins by segment. In Power and Energy, including tariffs, we anticipate a slightly higher margin percentage compared to the prior year on stronger volume and favorable price realization. This is partially offset by higher manufacturing costs including tariff costs and expenses related to our capacity expansion projects. In Construction Industries, including tariffs, we anticipate a higher margin percentage compared to the prior year as stronger volume and price particularly offset by higher manufacturing costs, primarily driven by tariffs and SG&A and R&D expense. In Resource Industries, including and excluding tariff costs, we expect a lower margin percentage compared to the prior year due to higher manufacturing 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. Favorable price realization and higher volume are expected to be partially offset. Note that for Resource Industries, we anticipate the benefit from price realization to improve as we move through the 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 low double digits for the full year of 2026. This is versus our expectations from last quarter. The increase in our full year sales and revenue expectation is supported by solid sales to users growth amid resilient end markets, the fact that Power and Energy is tracking ahead of our 2026 capacity growth plan and continued robust fundamentals and industry growth in North America. We've had strong sales growth across each of our primary segments, driven mainly by volume and price. Now on to margins for the full year. Excluding tariff costs, we expect to be in the top half of the adjusted operating profit margin target range. Compared to the prior year, favorable price realization and volume are partially offset by higher manufacturing costs related to capacity and higher SG&A and R&D related to increased incentive compensation and strategic investment spend. Including tariffs, we continue to anticipate that the adjusted operating profit margin will be near the bottom of the target range. However, with the improved sales and revenues outlook, full year adjusted operating profit margin will be higher than we expected in January. As I mentioned, the situation is fluid, but we now anticipate full year 2026 tariff costs in the range of $2.2 billion to $2.4 billion based on our current volume assumptions. This figure reflects adjusted 2026 full year impact of tariffs implemented since the beginning of 2025 and in place over the course of this year. This compares to the $2.6 billion estimate we provided last quarter. Let me provide some additional context on our tariff assumptions. The bottom line is our expectation for tariff cost in the second through fourth quarters has not changed significantly since January. Based on the recent ruling on IEEPA tariffs by the U.S. Supreme Court, we removed these tariffs from our estimate and added Section 122 tariffs. We expect to ramp up our actions to mitigate our tariff costs in the back half of the year. The recent updates to Section 232 guidance have a roughly neutral effect, and we are not currently in any IEEPA-related refunds as a result of the Supreme Court's decision. Moving on. We continue to expect restructuring costs of approximately $300 million to $350 million in 2026. And our anticipated global estimated annual effective tax rate remains approximately 23% for 2026, excluding discrete items. We now anticipate MP&E free cash flow will be higher than the $9.5 billion last year, an improvement versus our expectations last quarter, reflecting our improved outlook. While our CapEx forecast for 2026 remains approximately $3.5 billion. As Joe discussed, we are increasing our large reciprocating engine capacity from 2x to nearly 3x 2024 levels with additional CapEx spend occurring primarily from 2027 to 2029. We now anticipate MP&E CapEx spend to average approximately 4% to 5% of MP&E sales through 2030. Capital spend for our large engine capacity expansion is supported by strong demand signals and confidence in a positive cash payback by the end of the decade. We believe these investments will support future absolute OPACC dollar growth, which is our definition of winning. So now turning to Slide 18. Let me summarize. We delivered a strong start to the year with better than expected earnings. In this dynamic operating environment, we now anticipate higher sales and revenues growth in 2026 compared to a quarter ago. We will remain disciplined and measured in our strategic investments while maintaining our 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. Finally, we will continue to execute our strategy for profitable growth. With that, we will take your questions.

Congratulations to Andrew and Kyle. It's been a pleasure getting to know you both. My question is on large engine capacity expansion. It sounds like most end markets for big engines are pretty good. But is there any one that kind of predominated in the additional capacity expansion decision, whether prime or backup, oil and gas, whatever? Do we think about the timing as being kind of linear or lump sum at the end of the expansion period in 2029?

It's Joe. When you think of the size of those industries right now and where the growth is really happening, we are seeing — one of the things I'm really happy about is it's not just power and energy; we've had really good oil and gas quarters as well over the past few quarters from an order standpoint and health of the business. But just the pure size of it is really driven by power generation and that's where we're putting the capacity. Even over the last six months, the last two quarters, we've seen the orders go up pretty consistently. And if you go back to the industry with data centers and just the amount of CapEx announced in that industry since a year ago is quite significant. So that's the main driver of why we feel comfortable putting this capacity in place. We have the benefit that it does serve multiple industries, and we do think — I do think we're going to move a lot of natural gas, and I'm excited about the oil and gas business and what its outlook is over the next few years. It's still a lot of prime power. So we still see a lot of cloud. It's not just AI. When we move into more use of AI, we're going to use a lot more data. So the backup power opportunity provides a good base for us. But it is fungible capacity. We're seeing a lot more mix towards prime. And then also that drives aftermarket, because when it's gas compression or prime power it drives a lot of aftermarket, which this capacity will also allow us to serve, which I think gives us great services growth opportunity beyond 2030. From a timing standpoint, for the second part of your question, we're going to try to put this capacity in as soon as we can. The data centers are trying to move quickly. We've been talking to customers. So we're going to start right away. I think you should see heavy investment in 2027, but we'll be investing still in 2028 and 2029. Our expectation is to get incremental units out of this latest capacity announcement as early as 2027. So it will happen fast.

Congratulations, Andrew and Kyle. Joe, I'm wondering if we could just go back to your prepared remarks. You mentioned you booked prime power large recips for now six data center projects. Considering the full scope of products that you have for behind-the-meter offerings, can you talk about what you're seeing in architecture plans? We're hearing about increasing use of recips plus turbines in series for projects going forward. If that happens, you folks would be in a pretty good position. Could you outline if that is what you're seeing and, if possible, give us the number of gigawatts booked for recip prime power?

I don't have the number of gigawatts on prime power in my head, but from a trend perspective, what you're saying is exactly what we're seeing from our customers. Each site is a little bit different. It depends on the site, the size of the facility, their access to gas, the footprint and power demand. Our teams are in early with customers. You're right that having both turbines and recips is an advantage for us when customers need multiple products; we can configure a mix of both. Much depends on timing and how fast we can get product delivered. Each project is a little different, but it does present an opportunity for us. We're seeing as a trend more data center sites asking for behind-the-meter power. That's translated into, as I said in prepared remarks, six announcements over one gigawatt, plus multiple projects under one gigawatt where we're supporting customers with prime power.

I just want to thank Andrew, obviously, one of the best CFO runs I've seen in my career. So congrats, enjoy your retirement. And obviously, congratulations, Kyle. I want to talk long-term targets. The change from a 6% CAGR to now a midpoint around 7.5%, you can account for that almost entirely from the increase in your target today for power generation sales going from double to triple over that same time frame. Given the ecosystem around power when it's that strong — oil and gas, construction, mining — I'm curious why you left every other part of the business with the same view. Wouldn't you expect some ecosystem benefit if you're raising your power generation targets that dramatically?

When you do the math, you're right that a lot of the change comes from increased power generation. That's what's different today from our Investor Day. The amount of CapEx by the data center industry, particularly as it relates to power, requires us to add capacity. That's the incremental opportunity. Keep in mind, we have healthy growth ambitions across all three segments; the other two segments were already projected to grow from our Investor Day. So it's not that the other segments don't grow; power generation is the incremental driver that allowed us to raise the enterprise target to 6%–9%. We're comfortable with this updated range and glad to be able to raise it so soon after setting the prior targets in November.

With an improved top line outlook for the long term that you just updated this morning, I'm wondering what keeps your view on the margin opportunity unchanged versus Investor Day. Wouldn't you expect better fixed cost absorption? Maybe D&A steps up, but I would expect pricing could also be better given surging demand. Trying to understand what underpins this high incremental margin view versus historically where you've seen higher margin expansion.

Tami, when we set the targets, remember they are progressive margin targets tied to sales. We had progressive targets that imply around a 31% level over time, which is consistent with previous targets and fair and reasonable. The aim always is to do better, and we'll continue to focus on that. Today we face headwinds, for example, caused by tariffs. Our target is to get back to the middle of the range over time and to mitigate the impact of tariffs. Also, when we add capacity, depreciation increases, which drags on margins, particularly in Power and Energy over the next few years as we bring that capacity on. So you don't get the same amount of incremental margin leverage as you might otherwise, given the capital intensity and tariff headwinds.

That's an important point Andrew made. The progressive targets are aimed at maintaining or improving our position in the margin range as sales grow. We're currently near the bottom of the range and our goal is to work toward the middle. We're also investing to support the growth, which puts some pressure on near-term margins. Historically we've not needed significant capital to grow because volumes fit within existing footprint. Now we're moving to higher sales levels and will need to invest, so there is a deliberate tradeoff between growth investments and margin expansion as we scale.

I want to spend a little bit of time on the capacity addition. Can you talk about the decision to add more capacity in large engines as opposed to increasing investments on the gas turbine side? I'm trying to understand if this is any kind of read-through on how you view demand for either product. Also, you said the capacity is fungible between prime and backup, but can you talk more specifically about the backup supply/demand backdrop? There's rising concern that as we move to more behind-the-meter, backup could be designed out. What are you hearing from customers on that backup opportunity?

A large part of the base increase in capacity is backup power, which has been a long-standing focus for us in data centers and continues to grow. Backup demand is driven by expanding cloud and data needs; more data and more processing leads to more power use. For prime power projects we're not seeing customers forego backup; they want multiple options. Not every data center will go behind the meter, and many that do still require backup. So we expect backup power to remain. The capacity investment is driven by significant demand and a strong line of sight to returns. We've seen good supplier performance and are confident in the ramp. While nothing is guaranteed, this investment has a clearer path to returns than many past capacity investments, and we don't need the entire capacity to grow OPACC. That gives us confidence to proceed.

Andrew, congratulations. Just on 2030, the 50 gigawatt number you laid out at Investor Day, is there any update on that given the announcement today? And Joe, regarding pricing in Power and Energy, it's still around 2%. Should we expect that number to gradually rise through this year and into 2027 as some of the backlog gets delivered?

On pricing, remember that the 2% figure is across the entire Power and Energy segment, which includes many smaller products where competition is stronger. Where we're capacity constrained we do see better pricing, and orders taken years out often have price escalators tied to agreements. So delivered pricing will reflect those agreed escalators at the time of delivery. Regarding capacity, the step from 2x to nearly 3x is a factory output view in units. From a gigawatt standpoint, the mix differs, so you can't directly equate the two. We estimate this capacity expansion will add roughly 15 gigawatts of annual capacity when completed.

Congrats on another great quarter, and thank you, Andrew, for all your help throughout the year. Congrats on a fantastic career and look forward to working with you, Kyle. My question is on Power and Energy margins. Should we assume the variability of margins narrows relative to the historical 400 basis point swing through a cycle as service and aftermarket becomes a larger percentage of the business? Also, with the capacity increases and the top-line revision, is there anything structurally going on from a market share perspective for Caterpillar that we might be underappreciating?

Regarding margins, we're happy with Power and Energy operating margins. The reorganization, including the rail realignment, gives clearer visibility. Compared to peers, our margins are strong and the business is healthy and growing. We don't intend to narrow the operating margin range at this time. We're focused on growing all three segments. Backlog growth this quarter showed healthy orders across segments. There's nothing here that changes our intent to grow across the portfolio.

And just to remind you, Jamie, our definition of winning is absolute OPACC dollar growth, not necessarily margins alone. Margins provide flexibility to enable investment. We're centrally investing dollars to reach growth targets, which we see as positive even with higher costs from tariffs in the near term.

How is Caterpillar helping Tier 1 and Tier 2 suppliers ramp power generation capacity along with Caterpillar? Curious to get your perspective on where you see the biggest bottlenecks. And by 2030, what share of the expanded large engine production do you expect to be prime versus backup?

I can't give an exact 2030 split between prime and backup, but the trend is towards more prime while backup continues to grow. More prime sales, gas compression and oil and gas will boost aftermarket demand and services. A big part of the investment is working with our supply base to ramp. We're providing forecast visibility and working closely with suppliers. Their strong performance has helped us run ahead of schedule on capacity installs, increasing our confidence and supporting a stronger outlook for the year.

Congrats to Andrew and Kyle. I wanted to follow up on some of the Resource Industries commentary. It sounds like RI backlog is growing nicely with a significant quarter of order intake. What's driving that — new mines versus existing mines replacing fleet? I'd love to hear more about what's driving the strength in the RI backlog.

Most of the strength is not new mines; the age of the fleet is elevated and customers are updating fleets. Strong mining demand, particularly for copper and gold, is driving backlog growth. North American construction resilience also feeds into heavy construction demand that contributes to Resource Industries. New equipment plus technology adoption also supports fleet turnover.

Adria, we have time for one more question.

Andrew, thank you, and enjoy your retirement. Maybe we can continue the conversation on mining. Your comments on orders being the strongest since 2012 really stood out. It's a bit at odds with negative pricing still and margins impacted by tariffs near term. As this demand cycle manifests, how do you think about the segment operationally — manufacturing footprint, pricing — and can mining get back to the kind of margins experienced around 2012?

We saw slightly negative pricing in the first quarter, partly due to timing, and mining delivery cycles are long, so delivered product today reflects orders from some time ago. Resource Industries now includes the rail group, so comparisons to 2012 are not apples-to-apples. We'll continue to invest in the business and remain competitive in tenders. Autonomy and technology investments are priority areas; those investments can have an outsized margin impact on a smaller segment in the near term, but as we grow the segment and achieve operating leverage, we expect margins to improve. We believe they will get better this year compared to the first quarter, and as the segment scales, our goal is to raise operating margins over time. Thank you for your questions and engagement today. I want to reiterate congratulations to Kyle, and heartfelt thanks to Andrew for his outstanding service. Andrew, you've been an amazing CFO and you're leaving us in a great place. Thank you all for joining us. I'm very proud of the Caterpillar team's strong performance in the first quarter. Our results demonstrate the resilience of our end markets and our disciplined execution. With a record backlog and a focus on delivering for our customers, we're well positioned to continue creating long-term value for our shareholders. With that, I'll turn it back over to Alex.

Thank you, Joe, Andrew, Kyle, and everyone who joined us today. A replay of our call will be available online later this morning. We'll also post a transcript on our Investor Relations website as soon as it's available. You'll also find a first quarter results video with our CFO and an SEC filing with our sales to users data. Click on investors.caterpillar.com and then click on Financials to view those materials. If you have any questions, please reach out to me or Rob. The Investor Relations general phone number is (309) 675-4549. Now let's turn it back to Adria to conclude our call.