Caterpillar Inc. Q3 FY2025 earnings call

• Quarterly sales and revenues were up 10% to $17.6 billion, an all-time single quarter record. Backlog grew by about $2.4 billion, reaching an all-time high of $39.8 billion. ME&T free cash flow was $3.2 billion, and $1.1 billion was deployed to shareholders through dividends and share repurchases.
• Energy & Transportation drove sales growth with a 25% increase in sales to users. Construction Industries saw a 7% year-over-year increase in sales to users, and Resource Industries had a 6% year-over-year increase. Backlog was boosted by robust order activity in power generation and oil and gas.
• In end markets, Construction Industries showed growth in North America and EAME, while Asia Pacific was flat and Latin America was flat. Resource Industries had lower sales but strong orders for large mining trucks. Energy & Transportation experienced strong growth in power generation and oil & gas.

Construction Industries: Sales increased 7% to $6.8 billion in the third quarter. Profit decreased 7% to $1.4 billion, with a segment margin of 20.4% (a decrease of 300 basis points versus the prior year). Resource Industries: Sales increased 2% to $3.1 billion. Profit decreased 19% to $499 million, with a segment margin of 16% (a decrease of 430 basis points versus the prior year). Energy & Transportation: Sales of $8.4 billion increased by 17% versus the prior year. Profit increased 17% to $1.7 billion, with a segment margin of 20% (an increase of 10 basis points versus the prior year). Financial Products: Revenues were approximately $1.1 billion in the quarter, a 4% increase versus the prior year, while segment profit decreased by 2% to $241 million.

• Fourth quarter sales growth is expected, with price realization year-over-year expected to be about flat. Excluding the net impact of incremental tariffs, the fourth quarter adjusted operating profit margin is expected to be higher versus the prior year.
• Full year 2025 sales and revenues are expected to be higher than the prior year. ME&T free cash flow is expected to be above the midpoint of the $5 billion to $10 billion target range.
• The net impact from incremental tariffs for 2025 is expected to be between $1.6 billion and $1.75 billion.

• Tariffs had a net impact of near the top end of the estimated range of $500 million to $600 million for the third quarter, affecting manufacturing costs and pricing.
• Fluctuations in end markets, such as softness in some subregions of Asia Pacific and ongoing weaker construction activity in Latin America, can impact sales.
• Supply chain complexities and potential disruptions related to global trade and tariffs.

Q: It sounds like backlog growth was driven by power gen, and you alluded to orders for data center prime power applications as well. Could you just talk to the emerging data center prime power opportunity? How much latent capacity you think you have at Solar to meet this demand? And what you think you could actually deliver in the next year, given we've heard some big numbers getting thrown around by some of your customers? And then also just curious what that data center prime power backlog is looking like today.

A: Joe Creed: We're really excited about the prime power opportunity with data centers. Prime Power is a great opportunity as it creates services opportunities. We saw the Joule announcement. At Solar, we're seeing healthy ordering activity. Lead times are starting to get a little more extended at Solar, but we feel we're able to meet the orders coming in right now. The backlog for larger turbines like Titan 250, Titan 350 have longer lead times than smaller ones.

Q: Congrats on the strong quarter here. Just kind of following up on that E&T conversation. Obviously, growth here remains quite robust. I wanted to touch a little bit more on the kind of price realization and margins for the segment. Those have remained a little bit more stable, and I think you talked about 140 basis point kind of headwind from tariffs. And maybe just to kind of expand on that topic a little bit more, just two quick questions. One, is there anything else kind of capping prices and margins for E&T as a whole? I don't know if it's mix first-fit versus services or anything else that you would note? And then related to that, for Power Gen in particular, should we be assuming something kind of greater than the 30% type of incremental margins you typically see in E&T given the strong pricing and volume trends there for the next 2 years? Or how would you kind of characterize that contribution to margins from power gen.

A: Joe Creed: E&T is in a different position in the cycle. Pricing across businesses takes many factors into account. E&T is in a better position given demand and outlook. Andrew R. Bonfield: E&T managed flat margins despite tariffs and would have grown substantially without them. Our focus is on absolute OPACC dollars, and margin targets require pull-through over 30% across the range.