Greetings everyone.

This is Tammy Zakaria, the head of US Machinery Engineering and

construction Equity Research at Morgan. It is my pleasure to host a virtual
headquarter visit with Caterpillars Chairman and CEO Jim Ampelby, followed by Group
President of Construction Industries Tony Fascino.

For anyone who needs an introduction, Caterpillar is a global leader in the dying
manufacturing and marketing of construction, mining and forestry machinery, along
with engines and other related parts. Before we begin, I believe we have to go over
some disclosures, so I'll pass it on to Ryan Fabler, head of investor relations at
Caterpillar. Ryan thanks Tammy.

Really appreciate it. And thanks again for hosting us here today. So during today's
meeting, we'll be making some forward looking statements which are subject to risks
and uncertainties.

We'll also make assumptions that could cause our actual results to differ from the
information we're sharing with you on this call. Please refer to our SEC filings
and the forwardlooking statements. Reminder in a release on details regarding
factors that, individually or an 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 as contained
in our SEC filings.

Today's meeting will also refer to non GAAP numbers. For a reconciliation of any
non GAAP numbers to the appropriate Us GAAP numbers, please see the appendix of our
earnings call slides. Additionally, please note that Caterpillar policy does not
allow for meetings to be recorded with smartphones or other devices unless specific
approvals have been sought and granted prior to the beginning of this meeting.

And then lastly, we'll post a transcript available on our website as soon as we
can, and with that, I'll turn it over to Tammy. Thanks, Ryan. And with that, let me
welcome Chairman and CEO of Caterpillar, Jim Ampuldi.

Hi Jim, welcome and thank you for spending time with us today. HoW are you? Thank
You, Tammy. And thank you for the inVitation.

Look forward to a good discussion. Of course. Before I start, let me ask you the
most important question that everybody wants to know.

How many cups of coffee do you have to drink a day to run a company like
Caterpillar? My wife has gotten me to cut back over the years. I have two very
large cups, so it's not too bad. Okay, lovely.

Okay, so on a more serious note, I wanted to start off on the heels of your third
quarter print. Very healthy sales and strong margin performance in the quarter, and
it's looking like an impressive year for Caterpillar so talk to me about what
you've seen and why the company seems to have elevated performance versus prior
periods. Well, thanks, Tammy.

And I certainly am very proud of our team, of what they've accomplished over the
last seven years as we've implemented our new, you know, recap for this year, our
adjusted profit per share and me t pre cash flow through the first three quarters
of the year will be higher than any other record year in our history. So again,
very proud of the team. We expect to finish the year slightly above our adjusted
operating profit margin range, and we expect to exceed our Met pre cash flow target
range of four to $8 billion.

We implemented that new strategy back in 2017 just really quickly to go through the
main elements. It's really the answer to your question. And so we're focused on
three key areas.

Operational excellence, which is safety, quality, lean, and a competitive and

flexible cost structure. Expanding offerings about new products and technologies
and services, which I'm sure we'll talk more about here. But we also implemented
what we call our operating and execution model, our O E model, and it used to be a
caterpillar, I think is the way it was in many legacy manufacturing companies.

If we had a division, let's say that had a dozen products in it, as long as that
division was performing acceptably, it would just kind of go along and get more
expense, a bit more capital the next year. What we've really done over the last few
years is we've peeled the layers off the onion. We've looked at all twelve of the
products in that division and understood by product, by model, by application,
where we're creating shareholder value and where we're not.

And that allowed us to shine a light on those underperforming products and

businesses and challenge our leaders to improve the performance of those
businesses. In a few cases, we concluded that it didn't make sense to stay in those
products, and we had some divestments. But even more importantly, the Oni model
leads us to invest more in those areas that represent the best opportunities for
future profitable growth.

And that's one of the reasons that it's led us to increase our services revenue.
Our investments in services, which has led to increased services revenue. We
started at 14 billion in 2016, 22 billion last year.

And again, it's services, it's done right. It has a win for the customer, a win for
the Cat dealer, and win for us. But again, couldn't be more pleased as to how the
team is performing this year.

That's wonderful. So I want to spend a little time on the services piece that you
mentioned, I believe you set a target to double services sales by 2026. Who were
your customers buying these parts from, if not you in the past? And what would
drive this growth? Would you be adding additional dealer locations or helping
dealers train technicians, or a combination of those? What would really drive this
growth? So we stopped to think about services.

At Caterpillar, we have our CAD branded products, and our cat branded products are
distributed and sales and service through an independent dealer network. And then
for some of our products, like solar gas turbines and rail, it's a direct model
where we do the service ourselves. But let's talk about the cat branded products
that are distributed through Caterpillar dealers to answer your questions.

In some cases, customers would buy from will fitters, they might buy from our
suppliers. That's the way a lot of that happened. And one of the things that we've
really focused on is working with our dealers to understand why are we losing a
certain amount of business.

And we've gone through this and been very purposeful by territory, identifying the
lost opportunity, identifying what the main reasons are for the lost sales, and
then, more importantly, what does the dealer need to do and Caterpillar need to do
to capture that business? One of the things that we've done is, and to answer your
question about dealer locations, dealers are independent businesses, so they make
those decisions. But one of the things we're really focused on, where we believe
there's a big opportunity, is what we call customers that don't use a cat dealer.
They buy parts, but they do the work themselves.

Oftentimes, those are smaller customers. And so generally, our dealers do a very
good job serving their largest customers, whether those customers be mining oil and
gas or large construction. But for our smaller customers, that's where we believe
there's opportunities everywhere.

But there's a real big opportunity there with those smaller customers. And that's
why ecommerce is so important in investing in those digital capabilities. An app on
a phone, and I can talk more about that later.

But again, we believe that's a big opportunity. So when you think about services
for Caterpillar, a lot of it is the parts that we sell to our cat dealers. Got it.

So let's stay on digital. You mentioned that. How do you think about the focus on
technology and digital innovation at Caterpillar? How does this transformation
position caterpillar for the future? Yeah, it's really important.

So I'll start with the technology on our machines, and then I'll switch to talk
more about digital and services. But one of the things that we're continually
striving to do is to add more value to our customers. So it's not just an issue of
cost or price, it's an issue of how much value we bring to our customers.

So we put technology into our products that allows Our customers now to do things
like use a less experienced operator, and they can dig a basement for a foundation.
They can then build a highway. Because of all the technology grade control, all the
things that are in our machines now, they're much easier to use, and they make our
customers much more productive.

We also have something called Cat Command, which allows customers to take operators
out of the equipment in hazardous situations, whether it's wildfires or maybe some
unpleasant areas like landfills, where in fact the machines can be controlled
remotely. So CAT Command allows one person to operate up to five machines remotely.
And some of those machines, many of them have semi autonomy, so you can kind of get
them going and they do their own thing and you can start the other one.

So again, that's an example of the way we add technology to our products to add
value to our customers. And then we have something like VisionLink, which monitors
machines, can lower cost, boost productivity, simplify maintenance, and improve job
safety as well. So again, we're doing a lot in terms of adding technology.

We have our next generation hex, which allows meaningful emissions reductions. So
we've upgraded to about 50 models. And so the new models have reduced fuel
consumption, which reduces emissions by up to 25% compared to the previous model.

Then, of course, I think most people are aware of our autonomous solution. The most
visible example of that is our large mining trucks. We have now about 600 mining
trucks around the world.

We have had customers state that they see up to a 30% productivity improvement. If
think about a mine that operates 24 hours day, seven days a week, that can produce
more product, that is a significant improvement. And again, we believe gives us a
competitive advantage.

And one of the things we've been doing is working hard to reduce the cost required
to make that autonomy investment by a customer viable. So it used to be you need
about 50 or 60 trucks for the autonomous investment to make sense. Now we're down
to ten to twelve trucks.

And that really does expand our total addressable market for autonomy and give us
an opportunity to serve a lot more customers then in energy and transportation. A
lot of technology going in there, allowing our oil and gas customers to produce oil
and gas with a lower carbon footprint. Whether it's our tier four DGB engines,
which allow about up to 85% of the diesel fuel to replace with natural gas.

We have a whole fract fleet optimizer, a whole variety of things that we're doing
there now on the digital end, again, investing in ecommerce capabilities. We have
1.4 million connected assets.

We're using AI to provide prioritized service events to give our dealers leads to
sell more parts and service. So I could fill up 2 hours talking about all the
technology that we're putting into our products and our services. But there's a few
highlights.

Okay, that's very interesting to know. So, Jim, historically we've seen Caterpillar
as more cycle dependent, with peak to trough sales ranging 40% or more. Given the
changes you've talked about so far and since you've become the CEO, do you expect
the top line to be less volatile than it was in the past? Well, we've done a number
of things.

Firstly, we have told our investors that we would perform at a higher level, both
adjusted operating profit margins and free cash flow at different sales levels.
Compared to what we picked a reference period of 2010 and 2016. So we do believe
that regardless of the sales level, and we've demonstrated this, we operate at a
higher level.

In 2020, we lost more than 20% of our top line due to COVID, the pandemic induced
downturn, and we still achieved our just at operating margin target. So, having
said that, to answer your question about the top line, one of the reasons to
increase services, of course, is services tend to be less cyclical than OE, than
new equipment. And we saw that in 2020 as well, where services didn't drop the same
percentage as OE did.

And so again, we also have a new Snop process where I would argue that the quality
of our backlog is quite good. We work hard to ensure that our dealers are
independent businesses. They can decide how much they order, but we can decide how
much we ship.

And so we, in fact spend a lot of time looking at what's happening in the
marketplace. And by ensuring that there isn't too much inventory out there, that
also helps dampen cyclicality as well. And we've worked very hard on that.

Got it. Understood. And so, going back to the free cash flow comment, your free
cash flow generation has been very strong.

Looks like it's going to be above your target range this year. How do you think
about your potential for cash generation going forward? Well, we're very excited
about it. Again, I mentioned we expect to exceed that target range we set for
ourselves of four to $8 billion this year, and in the first three quarters of the
year, we produced more free cash flow than we have in any other full year.

So, again, very good performance. You asked earlier about changes in the top line,
although if you look between 2017 and 2022, certainly we had strong cash flow
generation, I'd argue every year. So five to $6 billion between 2017 and 2022,
except for 2020, where we had that 20% downturn.

But even in 2020, when we had more than a 20% downturn in our top line, we still
produced $3 billion of free cash flow. So one of the things that I think, frankly,
is underappreciated about Caterpillar is how much cash we're able now to generate.
With the new disciplines we put into the business, we're continually looking at
ensuring that we get good return on every dollar of capital that we invest.
That's part of the on e model. And, of course, getting a return on invested capital
creates free cash flow. And our measure of profitable growth is what we call OPAC,
which is operating profit after capital charge.

And we believe that most closely aligns with TSR over time, which is why we picked
that as our measure. So our measure is not just top line growth. Our measure isn't
just higher margins.

Our measure of success of that profitable growth is, again, absolute OPAC. So,
again, very excited about the amount of cash we're generating. And, Tammy, if I
would have asked you four or five or six years ago, or even three years ago, if you
would expect us to produce more than $8 billion of free cash flow in 2023, you may
have laughed at me.

So, again, I think we're performing quite well from a cash flow perspective, for
sure. So, quick follow up on that. Given all the very strong cash generation that
we've seen, are there any gaps in your portfolio right now for which you would want
to turn to M A? And can you discuss your process for evaluating investments? Yes,
certainly.

We continually challenge our leaders to be looking for potential opportunities,

things that make sense. Having said that, we're not elephant hunting. One of the
things that's very exciting about our business is we believe that we have some
outstanding opportunities to organically grow our business profitably.

That includes services. That includes the energy transition, driving increased
demand for commodities, for example, commodities that are used for EVs and other
parts of the energy transition. Of course, our customers use our products to
produce the commodities that enable that energy transition.

So we think our total driftwall market is expanding that way. We also believe that
growing global energy demand and the fact that more renewables are being added to
the grid. That creates some grid instability issues.

That creates an opportunity for what we call distributed generation, which is

smaller increments of power distributed throughout the grid. And our gas turbines
and our generator sets, and our reciprocated engine generator sets burn a whole
variety of fuels, whether it's natural gas, biofuels, hydrogen blends and all the
rest. Which leads me to your question about M A.

So instead of just searching for M A to grow, what we're really doing is we're
looking at M A as an opportunity to help us accelerate those organic growth
opportunities which I described. So we've done things like bought a company called
Marble Robot to accelerate our progress in autonomy. We bought lithos.

We bought company called Tangent, which allows our customers that own generator
sets to monetize their investment in generator sets. Again, part of that theme of
growing global energy demand, and also the issue that exists around grid
instability. So again, we're always open to opportunities, but we don't have to
make a big acquisition to grow our company.

We have outstanding organic growth opportunities, which, in my view, is the best

way to profitably grow the business if you have those opportunities. We did buy,
and maybe a great example, is SPM. We're oil and gas acquisition.

It's an area that we knew we had a gap in our product line. We followed it for a
long time. It was on our radar screen, and then the downturn came in.
Oil and gas. After COVID hit the week we were negotiating that deal, I believe oil
prices actually went negative. So it's a great time to make that acquisition.

So again, we have a list that we follow, and we move at the right time when it
makes sense. But generally, we're looking for ways to enhance our technology to
accelerate our progress along those organic, organic growth areas that I described.
Fantastic.

So I wanted to switch to some near term trends we've been seeing. So, moving to
your recent third quarter results, we saw some softness in order growth versus the
prior quarters, and some reduction in the backlog, which seemed to be a big focus
among investors. So, could you comment on how you internally interpret a decrease
in backlog and any pattern of strength or weakness in the various buckets of your
portfolio that you can talk to? One of the things that we had mentioned in previous
earnings calls before this last one is that as our supply chain normalizes, we
expected to see our backlog come down, which is, again, in my view, a positive
thing.

It means that customers and dealers don't have to wait as long for equipment. It's
really backlog really is a function of demand and lead times. And so we are seeing
improvements in our supply chain in many areas, not 100%, but in many areas.

And so it's not surprising that our backlog came down. We also had some other
issues that went on where I think we mentioned in the call that we were making an
engine changeover to put a caterpillar engine in a BCP machine to displace a third
party engine. And that impacts us because we had to close the order board
temporarily, and we haven't opened the order board yet for the new product with the
new cat engine in it.

So that has some impact as well. But if you look at backlog based on historical
trends, it's not a great indicator of demand. Stews are more of a greater effect of
demand and they increase 13% in the quarter.

But if you look at our backlog again as a percentage based over the last five years
or so, you feel very comfortable with our backlog. So again, not too concerned
about that. If we think about our end markets, I think what's most helpful as we
think about our business is to look at the various end markets that we serve.

I mean, just starting running through our three primary segments in construction
industries, North American momentum continues. Everyone's aware of the different
government bills that pass, like the IAJA. So there's government related
infrastructure investments that are occurring, and there's a healthy pipeline of
projects.

Now, some of those projects take time to get permitted, but we are starting to see
some of that flow through residential construction. The growth rate has moderated,
but it's still growing. So we expect that to remain healthy as well.

China is typically five to 10% of our total enterprise sales. We told our investors
in our first quarter call that we expected it to be below that 5% to 10%. And then
it's come down since then.

But the good news is, even with China relatively weak for us, we're having a record
year. But again, at this point, we haven't seen any improvement in China and maybe
in Aame quickly some weakness in Europe, but that was offset by the drawn
construction demand in the Middle east, which we talked about before we started the
call. Resource industries, high level of coding activity.
There's some things that we look at in mining that kind of help us understand
what's happening in the market. One is because we have so many machines and
connected, we look at utilization, and the utilization of our products remains
high. The number of parked trucks remains low, and the age of the fleet is
relatively elevated.

So those are all three good points. Our autonomous solutions continue to grow. We
just announced on earnings Day a plan by one of our customers to put an autonomous
solution in a copper mine in North America.

That's a positive thing. Now our customers are both in mining and oil and gas. Our
mining customers are displaying capital discipline, and the business can be a bit
lumpy and have variation quarter to quarter.

So you can have some variation there. But you have to kind of make a decision if
you believe that some percentage of the energy transition will occur and there'll
be more EVs on the road. Regardless of what you think, that adoption rate is going
to be hard to imagine a situation where over time, more materials are required to
fuel that energy transition.

And of course, our products are used by our customers to produce those commodities.
And before I leave RI, heavy construction and core and aggregates remains at
healthy levels. And again, that's a lot of that's around the major infrastructure
and non vegetable projects.

Energy and transportation, strong demand and gas compression. Solar turbines doing
quite well in both oil and gas and power generation and power generation demand is
strong. A lot of that's been driven by data center growth.

And again, as we think about our business, not many would perceive that data
centers will slow down in the near term. So we're very bullish about that. And
that's one area we're still dealing with, supply chain.

So we've been able to increase production around our large engines for both power
generation, oil and gas. But the demand is going up faster than even our ability to
increase production. So we're very focused on that.

Great. That's very helpful. Color, if you don't mind me asking, about the backlog.

So can you comment on the risk of cancellations in your existing order? Backlog,
how does that pan out? Has that panned out historically in terms of cancellations?
And do you think this time could be different or because you've made process
improvements? Any color on that? Yes. So we certainly haven't seen any significant
cancellations. Cancellations aren't any different now than they were a year ago or
two years ago or three years ago.

I'd argue. Again, pretty consistent. It's what we normally see.

We feel good about the quality of our backlog. I mean, for energy and
transportation and resource industries, for the projects are in that backlog. Those
are typically tied to firm customer orders.

We've been much more disciplined about our SLP process, and I spent a lot of years
in my career working at solar, and there's advanced payments and cancellation
schedules tied to all of those projects. So it's very rare for someone to cancel
one of those orders. So again, feel good about the quality of the backlog, and
we're not experiencing anything significant at all in terms of order cancellations.
Got it. Perfect. And so, switching gears to a different topic, I think Caterpillar
has done an impressive job.

The team has done an impressive job trimming the manufacturing footprint
significantly while maintaining capacity. However, given sales momentum, we've seen
investors often ask if the current level of capex spend of one and a half billion
ish is sustainable. Meaning, can the existing capacity that you have meet a ten to
20% increase in demand from all the macro tailwinds? They talked about IAG.

So should there be an increase in demand from here, does Caterpillar have the
capacity to produce more? Yeah, we are comfortable with our capacity, and many of
the supply chain issues that we experienced over the post COVID, of course, were
mostly around our suppliers, not around our internal capacity. Having said that, we
continually evaluate our footprint, our demand, and I say the caterpillar of old
would probably use a shotgun approach as opposed to a rifle approach in terms of
making capital investments. And now we're getting very focused on absolute OPEC
dollars.

We're very careful about our capital investments, so we are certainly willing to
make, and have made capital investments if we need to improve internal capacity.
But it's more of a rifle shot approach in a small number of areas as opposed to
across the board. So generally we feel quite comfortable with our capacity.

There's always areas that we need to make a relatively minor investment in, and
we'll continue to do that. Understood. And so, going back to your profitability
target, which you shared, and then I think last year you had to tweak the margin
targets down a bit, citing inflationary pressures.

And so with inflation moderating again, and you've exceeded the expectations, at
least this year, you expect to be above the high end of that range. Would you
consider revisiting those targets in light of this moderating inflation trend we
are seeing? Yeah, as we said previously, we'll look at our ranges at the end of the
year when we have the full year, and we'll make an assessment as to what makes
sense moving forward, and I'm sure we'll talk about that in our next earnings call.
So again, we'll evaluate that.

I'm not going to make a prediction as to which way that's going to go. Again, as
you said, we're going to be slightly above the top end of that margin range this
year. In part due to favorable impact of leverage due to volume.

But yeah, we'll evaluate that at the end of the year. Perfect. So going back to
your last earnings call, I think we've heard you say that sales to end users, even
in this quarter, you expect that to remain healthy despite some slowdown in orders
because of some of the factors you mentioned against a steep interest rate
environment.

What do you think is sustaining this demand from end users? Well, I think it's
important to stop and think about what parts of our business are impacted by
interest rates. So I talked about earlier the bills that have passed, the
infrastructure bills that are government funded, that are fueling a lot of the non
residential construction in North America is an example that really is not that
sensitive to interest rates. Course, because it's money coming from the government.

In oil and gas generally, we don't see interest rates having an impact on
ExxonMobil's ability to buy equipment from us. So that's not a change there in
residential, in North America. Again, the growth rate is moderated, but that's an
area that you would think housing starts would have a big impact on.
But what's happening there, of course, is everyone knows there's a shortage of
houses and people are staying put because they've locked in low interest rates. So
that's there. We talked about the energy transition and our mining customers.

So again, they are not watching interest rates all the time. Obviously what they're
looking at is what do they think demand is going to be going forward taking into
account the energy transition? Obviously they think about things like, all right,
what's happening in the global economy that could impact demand for the commodities
they produce. So again, if you stop and think about interest rates and the various
end markets that we serve, interest rates are just one of many considerations that
can impact demand.

And I talked about, again, from a macro level, and many of them, I'd argue, are not
that sensitive to interest rates. Understood. And so let me switch to another hot
topic right now.

Within the industrial space, pricing, pricing for Caterpillar has been strong
double digit in the past few quarters we've seen, versus low single digit growth.
Historically, what is a realistic scenario looking forward, as again, inflation has
moderated? SO what should we expect going forward? Is it going to be somewhere
between the double digit and low single digit, or come back to the historical
range? Any comments? We look at a whole variety of factors when we make a pricing
decision. And of course we haven't made all our pricing decisions yet, but we look
at, certainly we look at input cost, we look at the competitive situation in the
various markets that we serve.

It typically is it one size fits all? What's happening in one product line is
different than another product line. So we really look at what's happening again
competitively and for input cost. We do expect this year, as we said earlier, that
our pricing will cover increase in manufacturing cost.

One of the questions sometimes I'm asked is, okay, what about negative pricing?
Does that happen a lot? How does that look? If you look at our history, that's
pretty unusual. And if it does happen, it's pretty minimal. So in 2020, when we had
that downturn I talked about, that was 20%.

I believe our price realization was unfavorable by about 1%. And part of that's
driven by geography as well. You may recall in 2020 that the US, obvious reasons
around COVID volume was down and volume in China was up.

It was a very strong year for us in 2020. And so that geographic mix can have an
impact on pricing as well. And so again, if you look at our history again, I
conclude that we'll be able to manage this and it's not going to have a major
impact.

Got it. So staying on the geographic mix outside of North America, it appears that
price competition is strong. And with the Japanese yen weak versus the dollar, the
rise of competition from Chinese manufacturers, for example, in Asia and other
developing countries, how do you ensure competitive advantage of the Caterpillar
portfolio of products? Yeah, a whole variety of varieties.

The first one is, one that I mentioned earlier, is that we continually strive to
add more value to our customers through putting more technology into our machines,
improving our services, putting money into digital, making customers more
successful. So it isn't just a price competition. Certainly price is important, and
we keep that in mind.

And we're continually working to lower our structural cost. Maybe just a couple of
comments about that. We have changed our cost structure.
We used to do a lot of things, a lot of back office activities in the Midwest,
things. Now we're doing know with partners in places like India. We're doing more
engineering in places like India as well, and doing more in Mexico.

And so again, I'd argue that we are changing our structural cost model as a way to
try to become more competitive. And we've really worked hard to make that a way of
life for all of our leaders. So they're continually looking for ways to reduce
cost.

Having said that, okay, back to your question. How do you remain competitive? We
certainly pay attention to our competitive situation for every product and every
geography that we participate in. We're working hard to put more technology.

I talked about how we're putting things like cat grade that helps operators hit
grading targets faster with fewer passes. With less experienced people, they can
have up to a 50% better in grading productivity. That's an example.

It's not just cost, not just a versus B. We believe that we have the best
technology. I've talked about autonomy and how important that was.

So we're continuing to put that technology in not around the new products, but also
in the services as well. Digital capabilities, helping customers avoid unplanned
downtime, maximizing availability. I talk about condition monitoring.

So again, technology has a lot to do with it, but it really comes down to adding
value to the customer. The customer gets value by certainly look at first cost, but
they also look at operating cost and other kinds of things as well. Got it.

Jim, any thoughts on China particularly do you think you've mentioned China usually
is 5% to 10% of your business, but it's been softer lately. Can China become a
growth area for caterpillar as we look into 2024? Well, again, not going to make a
prediction about 2024. We said that we expect for the remainder of this year to
China to be below that 5% to 10% of our typical range.

And the market in China is. Our market in China is mostly hydraulic excavators, ten
ton and above. And that market was quite strong in 2000 and 22,021, and we enjoyed
the benefits of that.

It declined to 2022. It further declined in 2023. So the market is down.

But the good news is, again, we're having a record year despite that fact. So
generally, as you know, economies move up, economies move down over time. But I'm
too early for me to make a prediction about 2024 in China.

No worries. Got it. And so in the past, you've talked about your operation and
execution model, and you've exited a few unprofitable businesses in the last
several years.

Like you mentioned at the start of the call. Can you offer some details on what
kind of benefits you've seen in the processes you use? Certainly. Again, we had a
review this morning, actually, we spent a couple of hours, our senior leadership
team spent a couple of hours on this, looking at some businesses and how we can
improve the performance.

So again, what it starts with is really having a good understanding of where we're
producing shareholder value and where we're not. So we look at OPAC or OPAC TV,
which includes the future value of part sales. And of course, one just can't look
at a single point in time.
We have to look at multiple years, because you can't make a decision just based on
one year. You have to look over a cycle. And we look at, again, the performance of
a business over time.

We look at its performance, and then we make a decision as to whether or not the
product is underperforming. Do we have a sustainable competitive advantage if we
change some things, if we invest a bit more? Oftentimes, the vast majority of the
times we've done this, we've been able to improve the performance of those
businesses and again, are very pleased with where it's gone. In some cases, We've
concluded, based on the market dynamics, maybe the market's declined and we don't
expect it to come back.

Maybe we have a competitive situation where competitor has a very long head start
in a certain market where we don't believe it makes sense just to keep slogging it
out. And this is one thing that I think has changed about Caterpillar. We're much
more willing to make those tough calls.

That's all part of the on e model, to exit certain products. And really the benefit
of that, to answer your question, is it allows us to devote our resources, whether
it's management attention, capital expense, to those areas that represent a better
opportunity and future profitable growth. So really it's a comparative process that
we go through.

Are we better off doing a or B? And it's one of the things that led us, again to
invest so much and focus so much management attention on services, because it's an
outstanding way for us to profitably grow our company. Perfect. So, Jim, I wanted
to spend a little time on the financing company that you have, the subsidiary.

The provision for credit losses in the Finco is near the lowest we've seen in many
years. Could you share? How do you mitigate the risk of default in that business?
Yeah, that's a great thing. We're really glad you pointed that out, because we
stopped and think about, people are worried about the markets that we serve and are
worried about our customers.

Well, as we sit here, our portfolio is performing very well. Past dues, less than
2%. I think it's 1.96%.

Write offs at a historic low level. So again, our customers remain in great shape.
So again, to me, that's one of the, the markers I also look at when I think about
what's happening in the marketplace moving forward.

So we manage, our team that manages cat financial manages it conservatively. They
maintain prudent underwriting standards, and they have, I'd argue, very good
portfolio management practices. They have a good understanding of the industries in
which our customers operate, and they actively monitor past due status are on top
of that very quickly.

So again, I feel good about that business. Oftentimes the units are connected.
Oftentimes.

And so if in fact there's a slow pay or a no pay issue, we can disable a machine or
slow it down and know where it is, do all those kind of things, that all helps as
well. But again, I'd argue, and we work with our customers, if a customer needs a
little extra help, we're willing to do that. But again, the fact that our portfolio
is performing so well, with really good performance and historically low levels of
write offs, makes me feel quite good about the health of our customers.

That's fantastic. On that note, interest rates have gone up a lot since the last
couple of years. From your perspective, if you were to compare demand for loans now
versus the start of the pandemic or before that, how would you characterize the
impact of high interest rates on demand for that specific segment of your business?
So demand for the loans as opposed to demand for the equipment, you mean the loans
themselves? Yeah, I think generally, and I'm not an expert at this, but I think
generally when interest rates go up, it makes it a little bit tougher for that
Finco to compete.

But having said that, again, why do we have a Finco? It's to help us sell
equipment. And importantly, one of the changes been made in the Finco that maybe to
answer a question you didn't ask, one of the things we've been successful doing
over the last couple of years is having Cat finance focus much more on supporting
the aftermarket. Previously, they were almost exclusively focused on helping
customers buy new equipment.

But if you stop and think about it, what a wonderful opportunity to help our
customers finance, rebuild part sales and all the rest. And they've done a
wonderful job. They have more direct touch points with customers than any parts of
Catapult.

Thousands a day, they're dealing with customers. So we've started to leverage the
power of cat finance to really come around and support services as well. Perfect.

So I wanted to ask another question on your mining business. It's one of the
important segments you have. What has your conversation or your conversations been
like with your mining customers? Given they usually probably five to ten year
projects, they look at what has been the conversation like in light of high
interest rates.

But as you pointed out, secular drivers of growth for the mining industry because
of energy transition. So help us understand how your outlook of the mining space,
not just near term, but over, let's say, five to ten years down the road. Yeah,
well, again, we're quite bullish five to ten years down the road around mining, and
for the reasons I mentioned earlier.

One, stop thinking about the energy transition. And much has been written about the
shortage that many believe will exist in copper and nickel and other kinds of
commodities. So if we think about that long term, five to ten years, if you believe
that some percentage of that energy transition will occur, which I do, again, not
as aggressively and quickly as some would like, but there'll be more.

I'm constantly putting more EVs on the road five to ten years from now than there
are now. That should be a positive thing for our mining business. And again, as I
said, our customers use our products to produce the commodities to drive that
energy transition.

So if I look five to ten years out, I feel quite good. Again, as I mentioned, our
customers just blank capital discipline. The business can be a bit lumpy.

There can be variations in order rates, because a lot of times you'll get an order
for a really big order, right? And then it'll be a bit slow, then it gets another
really big order. So again, it's a lumpy business, as we say. But hard to imagine
if you believe in any portion of the energy transition that won't be good for
mining businesses.

Perfect permitting takes time. That's there, too. We all understand that permitting
is an issue.

But again, either you believe in some part of the industry transition, or you.
Yeah, yeah, perfect. So, Jim, I think we are almost near the end of our time with
you today.

So one last question for you before we let you go. As the CEO of Caterpillar,
what's your vision five years out? How do you believe Caterpillar would be
different from what it is today? Well, I mentioned earlier how excited I am about
the organic growth opportunities that are in front of us, and I'm confident that
Caterpillar's best days lay ahead. When you stop and think about some of the things
I've already talked about, think about mining demand driven by the energy
transition, the ability to, the fact that the energy demand continues to increase,
traditionally, of course, as the developing world increases, standards of living,
of course, that always correlates with higher energy demands.

Our customers use our products to produce the commodities to fuel the energy
demand. Stop to think about the increase in AI and what that does around data
centers. We provide backup for data centers.

That's a very exciting part of our business. But those data centers don't just
increase our opportunity to sell backup generator sets, it also increases energy
demand. So in the developed world, data centers go in, that increases global energy
demand, and all that has to be energy has to be produced as well.

So that's a positive thing for us. Distributed generation, more renewables coming
on the grid, the ability to sell those gas turbines and gensens, distributed power
applications. I think five and ten years out, that's going to be a very exciting
business for us, which is relatively small now.

So I think about mining, I think about power generator distributed power

generation, I think about the ability to continue to grow services. We still have a
big opportunity there where I believe we can add more value to our customers,
profitably, grow our business. So what do I think it looked like in five years? I'd
like to think that we will have higher OPAC, we'll continue to return cash to
shareholders through dividends and repurchases.

We'll keep our dividend risk, credit status going, and we'll be a larger, more
profitable business because of those trends that I just talked about, higher mining
demand through the energy transition, growing global energy demand, distributed
generation and all the rest. And again, we're committed to keeping our technology
edge by continuing to invest in products that provide more value to our customers.
So I think look back over the last seven years, we've had a very good run.

And again, it's not just an issue of the market improving, it's been, a lot of it
is around running their business more efficiently, continuing to take out cost,
being more competitive, leveraging technology and services to profitably grow.
Fantastic. We are very excited to see where Caterpillar goes from here.

Thanks, Jim. It's always a pleasure to hear you speak, and we hope to have you back
again another time. Thank you, Tammy.

Happy holidays to you and everyone on the call. Thank you. Great.

So next up we have Caterpillars Group president of Construction Industries Tony

Fasino. But we will take a five minute break before that and come back, so stay
tuned. Sam Ram Dam jam jump.

Sam, Sarah, everyone, welcome back. For those who are just joining, this is Tammy
Zakaria, the head of US Machinery engineering and construction equity research at
Morgan. We are in conversation with Tony Ficino, group president of construction
Industries at Caterpillar.
Tony, welcome and thanks for joining us today. Thank you, Tammy. Very happy to be
here and be able to talk to you and your whole team.

Great. So first off, can you provide us with a breakdown of the construction
industry segment exposure in terms of road building versus heavy construction
versus general construction. I think that would be helpful.

Sure. When we think about, talk and interact on the construction industries, we
really keep at the non residential, say residential level. And that's usually like
a 75 25 spit split, generally speaking.

And the residential, of course, is single multifamily type housing traditionally.

And the non Resi includes sort of all the infrastructure, current aggregate, all
that is in that group. So that's generally how we think about splitting out the CI
perspective.

Great. Could you share your thoughts on Resi versus non ResI as you're seeing these
two end markets today? Yeah, sure. And we talked a bit there in the third quarter
and I think many of you have seen it.

If you start with residential first, and we talked about this investor, there's
obviously a very strong demand for residential housing around the world in many
markets now, is it the same in every market? Not necessarily. And if you kind of
jump and narrow down to, let's say, the US, everybody thought, and I talked to
contractors here just recently, all interest rates, everything's going to crash.
And if you talk to them, their work in the US kind of came off a touch and then it
sort of came back and sort of leveled out.

They've been pleasantly surprised by the durability of that housing demand, even
with the interest rates and where the interest rates have gone. And if you talk to
some of the bigger builders out there and folks who are developing sites, they
would tell you they've sort of tried to moderate that construction and not kind of
make that big swing like they had a bit in the past and sort of level that out. To
have a little bit more consistency just because of the start stop is so difficult
kind of across that industry.

So that's kind of residential. Look at, you know, non resi. All the attention wants
to jump right to the Jobs Infrastructure act here in the US.

And if you zero in on that, obviously that's been very positive from a US
perspective. You talk to contractors, it's strong, the demand is there, they're
doing the work, they have backlog. That said, there's been some limitations.

Know, when you sit through American Road and Transportation Builder association
meetings and talk to that association, they would tell you that some of the
permitting has been a little bit slower than they would have liked to see that come
out. So that caused that to sort of moderate, just slow it down just a little bit.
But it strings that a little bit longer is how they articulated it.

And then they also talked about, and if you talk to various dot representatives
across the US, they would tell you that the human resource power of getting the
work out to bid has been a bit of a challenge for them. They've done well and
there's quite a bit of work out there, but they could do more if they had more
people to just get it out. That said, the contractors have been relatively busy, so
in the end if you talk to them, it's worked out fairly well for the industry.

That's fantastic. So we've been hearing a lot about these infrastructure stimulus
driven projects in the US. From your perspective, how would you assess in what
inning we are in in that journey? Yeah, so I mean, from what inning we're in, I'd
hesitate to speculate on that.

That's really hard to say. For some of those reasons I mentioned just a second ago
there, it's probably better to talk about sort of how do we play into these and
when. And of course in some of the bigger projects, that initial site prep,
groundbreaking type of work, we're obviously right there.

A lot of people in fact associate us with just that work, but in fact we're right
there. From the site prep to the main construction and as that job matures, you're
all the way through that job to the landscaping, finish up, prep the ground for
grass feed, drop the trees in and after the concrete is poured you're ready to go.
But even then you can't just stop and sort of forget about the job because it
oftentimes transitions to some type of a maintenance item even.

And as you increase the number of distribution centers or you increase the number
of battery factories, whatever you want to make a list of, they still do a lot of
equipment rental to do maintenance on those. And that goes right back through the
cat dealers who of course buy that product from us to keep those facilities up and
running everywhere from aerial to other types of reach equipment, maintenance
equipment, skid steers, generators, all that maintenance product that our dealer
rental fleets do so well. And so that's for the US, the stimulus packages, but
outside North America, any infrastructure packages you believe could be similar
multi year tailwinds.

In other mean, we, we touched on a couple of those. If you hit just Europe, right,
while Europe had some challenges, of course, as everybody knows, I won't articulate
those, but there was a thought that, oh, it's going to stop everything. Energy
issues are going to stop everything.

As you look at that, it just didn't happen. There's still some economic stimulus
across Europe, specifically in the UK that they're doing even in the UK with the
pullback of the HS two project and descoping that, a lot of that money is still
going into infrastructure work. So that's been essentially a positive signal if you
drop yourself down to the Middle east and you're walking to Saudi.

I was there not too long ago and we sort of went from job to job in Riyadh, and
they're massive jobs. There's quite a bit of money going in there and it's
everything from energy with solar to water to public works, sort of, you name it.
And like I said, they're big jobs that they are just determined to go through.

And even if you walk through Dubai and others, Dubai being, I say, a little bit
more developed than what Saudi is doing today, there's still a lot of good general
construction work and demand taking place in that region. So we felt pretty good,
and I felt pretty good coming off of a lot of different customer visits in those
regions. Great.

So it seems like a lot of construction activity, not just here, but all around the
world. How does Caterpillar differentiate versus competitors for the construction
industries segment itself? If I were to ask you, what are the top two or three key
differentiators? Which ones would you pick and what? Sure, no, good question. When
we go into there to differentiate.

Of course, if you think about our high level strategy, of course profitable growth
is key for us and using that on E model, but that model doesn't work if you don't
think about that customer profitability first. So zeroing on that customer
profitability and ensuring their success of course requires fantastic product,
which a lot of our products are tailored to the customer economics and the job
being done, a deep level understanding of that, make sure the product development
is right and is focused exactly on what that customer needs to be most profitable.
But even then, once they get the product, it's really important to have a very
strong services strategy.

And Jim would have talked about the doubling services growth piece. But again, that
strategy will not work unless it zeros in on making that customer more successful.
So making it easier to own, making it easier to operate, easier to maintain.

When you do that over time, with our services strategy, with all the digital tools,
with all the, say, more iron based hard part tools and services we provide,
customers generally are more loyal when things are easy to own. It's like anybody
on the phone, when's the last time you bought something and said, boy, that was
kind of a miserable experience, very hard to deal with. I think I'll go buy it
again.

That doesn't play. So of course we're very focused on that. Customer experience and
have them say, that was fabulous, I'm going to buy it again.

So it's just your typical customer loyalty equation we're trying to work out and I
think we're doing very well at it. Absolutely. Within the construction industry
segment.

Piggybacking on the last answer, you gave the services opportunity. How do you plan
to grow services revenue for this segment? Do you expect it to be grow at par with
the company average? Or do you think there's more opportunity in construction
industry segment rather than the other two? How would you characterize that? Well,
I mean, construction industry has a very healthy opportunity to grow from a
services perspective. And if you talk specifically about services and break that
down a little bit, we focused in a few really key areas.

And of course, the first one is the customer value agreements, where we can offer
everything from, say, your typical maintenance parts to come automatically
subscribe based on machine hours through connectivity. Those parts show up with the
instructions on how to do it, just the parts you need to conduct the maintenance.
That's a fairly simple customer value agreement offering all the way up to, say,
the total maintenance and repair management of the entire fleet.

So we've got that sort of spectrum of customer value agreements that we've been
growing dramatically. 60 plus percent of all new products go now with customer
value agreements. Then of course, us focusing across that entire lifecycle of
product because don't remember, we've got roughly 2 million machines out in the
field.

We got over a million of those connected. So we've got connectivity over 50% of the
entire field population. We're adding 150,000 roughly new machines every year to
that population.

And that total population, average age is about roughly 1011 years. And so we've
got a really nice curve of product out there that we can go and service. So of
course those customer value agreements, and as they age, you've got rebuild
opportunities.

So the rebuild is another really big initiative that we've been working again to
give customers that option to rebuild, to give them that solution, to have it be a
lower cost and get full value out of the product. If you talk to contractors,
they'd tell you, hey, I want to just keep rebuilding this because I want to get all
the value I can out of that. That lowers their cost, that improves their
efficiency, increases their uptime, and they just zero in on that consistently with
us, which is why we serve them there.
Then the third one again was probably one that Jim probably mentioned, which is
that digital side, of course, the e commerce for ease of getting parts, the digital
tools that allow customers to manage their fleet, watch their fleet, understand
their fleet, and again, get that parts and service when needed. So you package all
that together, you've got a tremendous opportunity. A, the opportunity is there for
growth, B, the tools there are to go capture that growth, which is really what
we're focused on.

Got it. Understood. And so I want to ask a similar question I asked Jim a bit
earlier.

Where are you in the digitalization effort? Last couple of years we've heard
Caterpillar talk about how it's been building out, predictive, for example. Talk
about your progress there. Yeah.

So if you talk about progress on. Let me pick one specific example. Tammy and I
would use sort of the predictive diagnostics, or we call condition monitoring of an
asset or an entire fleet that a customer might have.

And those diagnostic tools in terms of prioritized service events, which are
simply, hey, the data that we have, we can present back out to the dealer and the
customer to say, indicates A, B or C, maybe it indicates A, maintenance is due,
maybe it indicates that there's an impending failure. Maybe it indicates that many
components are toward the end of their life. You should be looking at a more major
rebuild offering, and we can present that commercial offer at the time of that data
analysis.

So the tools to do that analytics work have accelerated dramatically. So our

ability to predict that has gotten much better. Of course, our data set, I would
argue, is better than anybody's in the world.

We have access and have analyzed essentially all the service work orders that take
place historically. We know all our major components and we understand the
metallurgy of all those major components in great detail. Therefore, our scheduled
oil sampling output is very detailed.

And as you start to string these things together, you get a very intelligent model
based on an extensive history that helps us understand, here's the most opportune
time for a customer to do it. Most beneficial. Again, customer profitability and
success being the number one driver.

Otherwise, you just don't come back. So we've got to have that at the forefront,
which we do. And we're definitely seeing results there because customers are
telling us, I can't believe how accurate is that kind of response from a customer
is very promising.

Great. Fantastic. So, Tony, I wanted to switch to some near term topics for a
second.

Some of the construction industry data reads we've been tracking, they've been
weaker in recent months, but caterpillar sales to end users for the construction
industry segment have remained quite robust. What do you think is causing this
disconnect? Yeah, and I guess the first thing I would say is we, of course, look at
a lot of the same numbers, and we probably see some of the ones you're referring to
specifically. And all it does with us is reinforce the fact that you really can't
boil it down to the one or two or three key metrics.

It just won't do it right. We've looked at every possible regression and analysis
to see if we can track it, and it's just a much more complex business than that.
Everything from the complexity of backlog to governmental spending to the rate of
release of bids from states and provinces and wherever you might be in the world,
combine that with the interest rates, yet great housing demand, the complexity gets
very high.

That said, again, like you've seen us in the third quarter articulate, there's
still some very strong parts of the economy and even areas where, oh, this is down,
or that is down. Remember, again, take a US number that I think we can all relate
to very easily. Housing starts.

Oh, they're off from where they were a year ago, or they're off where they were
from two years ago. You're still operating at very high levels in the 2018 2019
housing start level, which is very healthy from an industry perspective. And that's
only talking about residential not getting into all the major investments in
infrastructure.

And think about the future, the investments that are needed for future
infrastructure that the IIJA isn't even able to cover yet from a greater
infrastructure maintenance perspective. Got it. That's very helpful.

So I wanted to ask you about, from a capacity perspective, where are the
construction industries segment volumes now versus, let's say, pre COVID? And can
volumes grow over the next five years? Yeah, I won't necessarily say speculate on
the five years, but let me speak a little bit to CI specific capacity. And one
thing that I think it's important to highlight is it's really more about
flexibility and our ability to do that factory by factory and then between
factories, because we have what we call a flexibility capability or a flexibility
number at any given factory that can take us up to X levels, and we've improved
that dramatically over the last 36 to 48 months. So that gives us that extra
headroom we need in individual plants, and then we've increased the velocity and
our ability to move production from one to another.

Whatever it may be a capacity issue, whether it might be a currency issue, it could

be a logistics and shipping issue. Unfortunately, we've seen all of those the last
three or four years. So it's put us in a position to have to get much better at
each one of those elements.

Which really goes to another question I'm sure you've got in terms of what's the
impact of all those, say, negative conditions been on you? And I'd say we've been
able to minimize them, very much so because of that flexibility in a factory and
then factory to factory with our very healthy footprint worldwide. And that's been
a real strength. And essentially it's a strong execution of lean tools is really
what it's all about, which is really one of the things at the heart of the
operating execution model.

If you really boil it down, that's fantastic. Strong execution of lean tools. I
like that.

So let me ask you about your rental business. How do you expect to grow the rental
business within the construction industry segment? Well, the rental business first,
the rental stores are dealer owned and independent businesses. So of course they're
working in growing that.

Of course we do that together with them and help them. Of course they need a suite
of products to go do that. And as we help them do that, of course, profitable
rental revenue.

Profitable rental growth is of course a good thing for them. If they achieve that,
naturally they demand more product from us. So as we work and synchronize those two
efforts together with our distribution teams who work very closely through Bob
Delan's group with the dealer rental organizations, we can do that together like we
have, whether it has been work we've done on OE growth services growth.

Rental growth basically follows that very similar model, which definitely is one of
our key strengths worldwide. That relationship and synchronization we have with
Caterpillar dealer network that generally speaking is essentially unmatched
worldwide in the. So Tony, switching gears, how do you see the demand for autonomy
and let's say electrification or alternative propulsion playing out for your
segment over the five to ten years? Can autonomy be a software as a service
offering, for example, by Caterpillar in the future? Yeah.

So let's talk about autonomy separate from electrification, and then let's kind of
bring them together maybe in the second part of the second or third part of the
question. So let's just do electrification first. We're going to be launching the
301.9

full battery electric mini excavator here late this year. Have that order board
opening shortly. We also got a 906 compact wheel loader that is fully battery
Electric also here in the first quarter of next year, order board opening for
those.

And so that's going to be available through CAT, neither rental fleets for
customers to run and operate and us to learn, for them to learn how this is going
to work, that's going to be a teaching element for us. Of course, we've been
learning from, say, closed field follow in our engineering development programs,
but now it's going to move more toward a commercial. Get it out there and
understand.

Again, to your question, what is the potential for some type of service offering on
the batteries or the charging, whatever it might be? We won't know that until the
customers really get out and run it. If we know anything from 100 years of being in
business, we know that you've got to get it in the hands of the customer because
they'll do things you never thought and they'll ask questions you never considered.
And that's really important to get it in their hands.

So electrification is going to be just that and the adoption rate can't really
answer that yet. What we do find honestly in some of these field follow programs
with the early battery electric machines is the customer feedback is somewhat just
sort of boring and that doesn't excite an engineer more than anything possible
because it means there were no issues. It runs like it was supposed to and it
basically gets the job done.

So the customer is just pretty happy. The main thing they know is, boy, it's a lot
quieter and the ones who figured out the charging frequency don't talk about it
much. We still have things to learn with customers who haven't figured out the
charging location or the frequency because of location.

So job logistics and flow is something that we're looking at very close because you
have to understand that if you're going to design a proper piece of equipment, so
that's electric, set that aside for a minute and move to the autonomy automation.
It's a different discussion altogether because the autonomy automation is looking
to do a few things, and obviously mining has accomplished this, especially with
their trucks. That's alleviate the challenges within the labor shortages and the
labor capability shortages.

Pretty self explanatory labor capability. There's some nuances in labor capability.
Of course, there's only so many great operators in the world.
I'd love to be one. I'm not. That said, some of our autonomous semiautonomous
features make me literally a much better operator.

When I go out to our proving grounds and run our equipment, they'll have me run it
without and they'll put me right into it and flip the switch and run it with. And
it's a noticeable difference. I literally become a better operator within seconds
of turning the features on, whether it be auto dig some of the loading, some of the
tip off we've got in wheel loaders, there's a very long list of capabilities.

Now you've also got to talk about, what if you don't even have an operator? Well,
not having an operator, you have to ask yourself, why don't I? Do they just not
exist? Do they not exist where you need them to be? Well, when that happens, you've
got the cat command capabilities, which is remote control, essentially remote
controlling a piece of equipment from pretty much anywhere in the world. And we've
got customers today where the operator of the drill, as an example, or the operator
of the excavator and Dozer is in the office. They don't actually go to the mindset
anymore.

You want to run three wheel loaders, you do it from the office and you flip the
switch. Wheel loader, one wheel order, two wheel order, three. You do your work
because it's periodic.

And it really alleviates that labor challenge, both labor location and labor
quantity. As we continue to do that, again, it becomes a major problem solver from
a customer perspective. And I don't really go to a customer.

In fact, the last four weeks I've been with probably a half dozen of them in
detail, and I haven't been to a one that didn't talk to me about what benefit that
would provide them. And it's just a matter of them finding the job and the location
to make that work. So we're working very closely with them to make that happen.

Got it. That's very helpful. The construction industry segment margin is reaching
25% plus by the end of this year.

It seems like that's over 5% higher than the last peak. Can you help us understand
what drove this margin expansion for the segment? Yes, and it goes back to the
strategy. And one thing know I've been questioned on, I know Jim's been questioned
on, is the strategy and the consistency of that strategy, which Jim has been very
consistent for the last several years, right, launched it, defined it, communicated
it, started executing and just kept executing.

And that's been very important because as we work to this maximize the absolute
OPEC dollar strategy, which results in the profitable growth piece, it has created
a structure in the company that had never existed before. And in fact, we weren't
too sure how to get there until we launched that strategy. We're all trained on a
common methodology with common vocabulary and common goals.

So now you don't attend a meeting in construction industries, or ENT or RI for that
matter. In fact, we had a meeting this morning, where it was a set of charts that a
totally different group you don't work with that much pulls up a chart and you can
look at it and you know exactly what it means. It's formated the same way, it has
the same OPAC nomenclature, has the same measurements.

You could jump in there and run that meeting just as good as they could because
they're using all those same methodologies. That operating profit after capital
charge thought process and mentality is what has transformed the organization,
especially CI, in terms of our capital discipline. Utilizing the capital that we do
have in place, which again goes back to very strong execution of the lean
methodologies, which again is at the base of that operating execution model, I
believe.

So we get a question from investors quite often, which is how much of this margin
expansion is sustainable? If construction segment volumes for any reason turns
negative because of macro weakness or any other factors, how would you answer that
question? How much of it is really sustainable and you can preserve? Yeah, I think
the key thing to think about there is the sustainable piece. And that goes back to
the structure that I articulated a little bit earlier. One thing you would have
seen us behave with anybody who's been with us for a number of years and kind of
watching us and analyzing us knew that in the past we could see volumes come up
strong, not get a whole lot out of it.

And that doesn't happen anymore. Right. When those volumes come up, we get good
results.

You also could say that in the past, sometimes when things would go down, we would
retrench, we'd get isolationist, we would be more siloed. That behavior also really
isn't there anymore. So it's allowed us to focus on what's important, again, that
operating execution model.

Maximize absolute OPEC dollars regardless of the industry and where it's going, is
what ensures that good profitability margin, bringing the cash in. I think like Jim
said in the earlier session, so you don't get that nervousness in the organization.
When people think about and worry about things either going up rapidly or down
rapidly, people just know what to do.

And that sort of synergies within our organization. Again, I think it's what Jim
has really driven over the last several years. It's just created a real comfort
level for us to tolerate that and most importantly, generate good results, even
when some of those things happen in the industry.

Great. So Tony, talk about your pricing strategy for the segment. Are you seeing
competitors, domestic or overseas competitors, take advantage of better
availability or currency tailwinds? And how do you react to those competitive
forces.

When I talked to analysts when COVID was going strong and supply chain was
disrupted, and there were dozens of ships parked outside the Long beach port. And I
think you and your peers remember those days when I was talking then I told people,
I think our procurement and supply chain organization is a competitive advantage
for us. And fast forward.

I had a meeting with our supply chain and procurement organization about a week
ago, and I told them that I said thank you first, because they made that statement
come true, and I knew they would. So we've performed very well there. Have some
competitors done well in pockets here and pockets there, of course.

Right. You're not strong in everything all the time, but on average, we've done
very well in that area, and we've been able to pull out of some very dire
situations that everybody's familiar with again, over the last 24 months. So I feel
pretty good about that.

And that positions us very well globally. But again, remember, the earlier point is
important. Factories all over the world.

Take excavation division as an example. You got a problem in Japan or something

changes with the end, go ahead and build them at CXL. You got a problem there,
build them in Brazil.
Something's not quite in Brazil. Let's go ahead and build them in Victoria, Texas.
Hey, could you ramp up in Grenoble if you had to leverage Eastern Europe or
deleverage Eastern Europe to make sure you make Brazil more successful? Think of
the number of permutations on excavation division alone.

That creates an incredible amount of flexibility in the organization. Again, that

flexibility allows you to handle capacity challenges, procurement challenges,
logistics challenges, people, currency. Write a fairly long list and having people
who are good at that.

And again, I'll go back. Broken record operating execution model gives them the
guidelines on how to run that business so that you don't make a big mess of it,
which without the discipline, let's say 20 years ago, it wasn't that easy. But
again, with the discipline, it's a lot easier to manage that complexity.

Got it. So switching gears, can you provide us with a view on how caterpillars
construction industry segment could benefit from a boom in alternative energy and
renewable energy sources? Yeah, it's probably best to give you like job site
examples. I could give you the big picture numbers, the trillion dollars here and
the trillion dollars there of the infrastructure needs, energy transition mining.

But you got to take it down to the ground level. And a really good ground level
project as an example is, and I was on this job not too long ago, if you go out in
the western Us, what you'll see is big green energy projects. Let's say where we
have wind in Wyoming, a lot of good wind energy in Wyoming.

The problem is not a lot of people there in
they have to transmit that and move that to
essentially they're moving that hundreds of
region, getting that over to the California
line.
Wyoming to consume it. So of course
somewhere there are people. And
miles across that Utah and Nevada
population with a 500 KVA high power

And if you're not familiar with those high power lines, and we flew that with a
helicopter kind of site to site, you need a tower about every quarter mile, I'm
roughly speaking. So about every quarter mile. And if it's every quarter mile for
400 miles, that's a lot of towers, right? And each one of those towers needs a site
development.

It needs multiple holes, it needs concrete in each one of those needs a tower put
in place. It needs an access road for maintenance. It needs a maintenance contract
on those hall roads for essentially the life of the power line.

That's just one power line project. That's a green energy power line project that's
been done. And that project was essentially an all cap fleet, which is great to
see.

That's a benefit. It creates service opportunity and it creates sort of a perpetual

job again, because somebody needs the maintenance contract on the roadways and the
towers and they have to do that with some type of equipment that clears maintains,
et cetera. So that would be one.

And if you go across the IIJA and others, especially some of the sustainability
green energy projects, it's just littered with examples like that that have been
really good from a business perspective. Got it. So let's talk about China.

How do you compete in markets such as China where there is significant price
competition from local players against a weak economy right now? So do you see a
pathway to growth in China for Caterpillar? Yeah. Maybe the best way to think about
that is remember over 45 years in China, the economy today, the industry is much,
much lower than it was two years ago, but it's not as low as it's been in the past.
And we were there then too.

So we worked through that back then. We're in that again today. And we're using
many of the same methodologies and strategies we use then today, which of course is
being local with local leadership, local factories, local supply chain to
understand how to compete locally in the local market.

When you do all that, you're very much in touch with what's going on. You're there
all the time. You've got the people who are in it, live it.

They are the Chinese, they are the community, they are the industry, and those are
the best people. And the best way to do that is being local, being involved, and
being essentially a pillar of the earth moving industry. Right.

For nearly, you're pushing 50 years here before you know it. So that is the key.
Not to mention all the experience and lessons learned, what to do.

And of course, there's a couple of what not to do in terms of lessons learned over
history. And we've learned those very well and have executed on those this year,
last year, and the year before that. Because, remember, less than, what, 30 months
ago, roughly, you check the industry numbers that above ten ton excavator market,
which is a huge market for us, there was at 150,000, roughly, units.

And we were in that situation. You think a certain way, you behave a certain way.
Fast forward, not very much later, which is today, and you've dropped down into
that.

I think you're going to be in that 50, 60,000 range. So you're talking about a 60,
70% cut in the industry. And we're, of course, right there participating in
supporting customers.

Great. So let's stay on excavators. Are you halfway through, right, sizing the
excavator dealer inventory, or will the fourth quarter see the peak of this
headwind? Help us understand that? Yeah, I think third quarter results.

We had said that we would continue to work with the excavators throughout the
fourth quarter, which we're continuing to do, and we're continuing to do that as
planned. Both what we see in terms of these machines being sold to end users and
what we are continuing to produce from the factories so that a, the dealers can
manage the inventory. Technically, independently owned businesses, they manage
their own inventory.

We, of course, manage the production of those machines that they can order from us.
So with that very disciplined Snop process, that's totally new than what we've done
in the past, we're very much in tune with what they need, what their sales are, and
what their traditional orders have been, so that we can moderate that out and make
sure that we're balancing that inventory where it's needed and not shipping too
much to where it's not needed. And that has been the art here in the fourth
quarter.

And we're executing essentially exactly as we said that we would, Tammy. So I feel
pretty good about it. Okay.

The other topic you talked about in the last call was an engine changeover in the
BCP category. Can you help us understand how the engine change within BCP products
will help caterpillar in the medium to long know. When you put that cat engine in
that product it essentially moves us more toward that vertical integration piece.
And a lot of people have different thoughts about what exactly what vertical
integration means. I mean it can just be well you're selling the engine that's
yours and the machine that's yours. Yeah, that's vertical integration.

But there's much more important element to that is the fact that you know the
engine better than anybody, you know the machine better than anybody. And to
integrate and create continuity and controllability in that system of the power
unit, the hydraulic system and the controllability of the machine weaving that
together. We do that better than anybody.

When we have our engine, our system, our control system, our implements our
hydraulic designs. When we put all that together it creates a fantastic machine.
And I've tested these machines, driven them myself.

And the horsepower and torque curve on that engine is phenomenal and it's going to
be just a wonderful machine. In addition of course now with that fully connected
machine in our aftermarket and parts distribution system together with our dealers,
customer value agreements, rebuildability, CVAs, digitization, as you do all that
now you can take advantage of the whole machine. When you bring that offer, that
integrated customer offer out to them again, ultimately now it's even easier to own
because it's the full integrated caterpillar solution.

And that's really the key. A quick follow up on that, does that engine change over
help improve the margin profile from a financial perspective or Caterpillar? When
we integrate a comprehensive cat solution in the total machine, we maximize
absolute OPEC dollars to ensure profitable growth long term. So if you sat with the
NPI team, the new product introduction, the new product development team, if you
sat with them, that's how they think when they look at that component solution and
component integration into the machine.

So that's how they're working forward with it. So Tony, I have time for one last
question. As the group president, what is your five year vision for the
construction industry segment? How would it be different from the current state in
terms of sales, profit margin, mix of revenues? I think of it as everybody works
for something dramatically different and getting the best people to execute the
profitable growth strategy using the OE model is going to continue going forward.

What's different about that though is every day that we're learning how to do that
better creates an acceleration of that model. So as we compound the services growth
strategy we've put in place, as we compound some of these great product development
programs we're seeing 35% improvements in efficiency, 25% reduction in fuel
consumption, customer success again being compounded on and them coming to us for
those services and OEM solutions because we've made it so much easier with the
digital tools, with e commerce, with equipment management. When you sort of kind of
put a bow around that, you kind of create that curve that you love to be on where
you just keep distancing yourself out as a front runner and a solutions provider to
the customer.

Again, the only way to win being that number one solution provider to the customer.
Ultimately I want to be the easiest own of any option they've got out there and
that's what I'm driving towards. Perfect.

I think with that I want to thank everyone, especially Jim Ampleby and Tony Casino
for joining us today. We look forward to seeing you another time. Until then
everyone, take care.