David Raso

David Raso inquired about the large ag order book color, questioning why the guide remained unchanged despite improved visibility. He asked if orders were simply coming in earlier or if line rates were increasing beyond seasonality, and how this trend reconciled with current corn prices.

Answer

Director of Investor Relations Josh Beal detailed that while the overall industry guide remains down 15-20%, combines will be down less (10-15%) and tractors closer to down 15% due to recent order velocity pickup. He attributed this to market stability, China's return, and an aging fleet needing replacement, supported by an improving used inventory market. CFO Josh Jepsen confirmed increased build rates for tractors in the back half of the year based on actual orders, aiding the trade ladder as used inventory gets healthier.

David Raso inquired about the large ag order book color, specifically whether it indicates earlier-than-expected orders or actual increases in production rates, and how this aligns with corn prices not reacting positively to constructive USDA news.

Answer

Josh Beal, Director of Investor Relations, clarified that while the North American large ag industry is still expected to be down 15-20%, there's been a pickup in tractor order velocity and combines will be down less than that range. He attributed this to market stability, China's return to the market, and an aging fleet needing replacement, supported by an improving used inventory market. Josh Jepsen, Chief Financial Officer, confirmed increased build rates for tractors in the back half of the year based on actual orders and healthier used inventory facilitating trade.

David Raso asked for clarification on the Production and Precision Ag (PPA) segment's sales and margin cadence for the remainder of 2026 after a flat Q1, specifically if sales are expected to decline every quarter and the pricing cadence.

Answer

Josh Beal, Director of Investor Relations, explained that PPA's seasonality will differ due to a lean Q1 start, with a typical ramp-up in Q2 and a strong Q4. He confirmed year-over-year declines in all quarters but noted margins would improve significantly from Q2 onwards, staying above 14%. Josh Jepsen, CFO, added that Q2 through Q4 would return to more normal seasonality with higher net sales and margins.

David Raso asked for clarification on the implied cadence of Production & Precision Ag (PPA) sales and margins for the remainder of fiscal year 2026 after the first quarter, specifically if sales are expected to be down every quarter, and how the 1.5% full-year pricing will impact price-cost dynamics later in the year without growth in large ag.

Answer

Josh Beal, Director of Investor Relations, explained that while seasonality will differ due to a leaner Q1 start, a typical ramp-up is expected in Q2, with a strong Q4 due to shipment timing. He confirmed expectations for year-over-year sales declines in all quarters, but margins are projected to improve significantly from Q2 onwards, staying above 14% for the balance of the year, contrasting with the Q1 impact from lean production. Josh Jepsen, CFO, reiterated the return to more normal seasonality after Q1, with Q2 having the highest net sales and margin.

David Raso asked if the typical seasonal revenue patterns for the large ag business would hold into 2026, given the contrast between a challenged U.S. market and more positive international trends.

Answer

Josh Beal, Director of Investor Relations, noted that a shift in seasonality is already evident in the Q4 2025 forecast, which implies a sequential sales increase for large ag. This is driven by stronger shipments to South America, which is altering the typical pattern. He stated it was too early to provide clarity on 2026 seasonality.

David Raso pressed for more details on the weak implied second-half large ag margins, suggesting the guidance seemed conservative and asking for clarification on the primary drivers beyond what was initially stated.

Answer

CFO Josh Jepsen provided a more detailed breakdown, quantifying the tariff impact as a 2 to 2.5 percentage point headwind to margins in the second half of the year. He reiterated that the small year-over-year sales change makes the decremental math appear outsized. He also added that material cost favorability, while still positive, will be less pronounced in the second half compared to the first.

David Raso sought clarification on the plan for North American new equipment inventory, asking if the goal to end the year 'unchanged' meant no further reductions were planned, especially for row-crop tractors.

Answer

Executive Josh Beal confirmed the plan is to produce in line with retail demand, resulting in year-end inventory levels being relatively unchanged from the prior year. CFO Josh Jepsen clarified that the elevated inventory is concentrated in mid-sized tractors (e.g., 6000 series), not high-horsepower row-crop tractors, and that the company is actively underproducing those mid-sized models to correct the imbalance.

David Raso asked two questions: first, about the quarterly earnings cadence for 2025, implying a return to year-over-year growth by Q3, and second, about the potential impacts of the new U.S. administration on tariffs and farmer sentiment.

Answer

An executive confirmed a significant Q1 decline, with sales down 15-20% sequentially and margins 300-400 bps below the full-year guide, followed by improving comps that could lead to 'flattish, if not up a little bit' results by Q3/Q4. On the new administration, CEO John May stated that Deere is well-positioned, highlighting that over 75% of products sold in the U.S. are assembled domestically and that the Ag & Turf division is a net exporter, mitigating potential tariff impacts.

David Raso sought clarification on CNH's Q1 Ag profitability being around breakeven and inquired about the expected cadence of margin improvement and sales for the remainder of 2026, given the full-year guidance.

Answer

CFO Jim Nickolas confirmed that Q1 Ag segment EBIT is expected to be around breakeven. He stated that margin improvement would begin in Q3, or generally in the second half of the year. Nickolas added that Q2 is expected to be much better sequentially than Q1 but not quite as strong as Q2 2025.

David Raso sought clarification on the first quarter agriculture profitability, specifically if it would be around breakeven, and inquired about the expected cadence of margin improvement and sales for the remainder of 2026.

Answer

Jim Nickolas, CFO, confirmed that Q1 agriculture segment EBIT is expected to be around breakeven. He stated that margin improvement would begin in Q3, or generally in the second half of 2026, with better overall profits. Q2 is expected to be much better sequentially than Q1 but slightly lower than Q2 2025.

David Raso from Evercore ISI asked for the full-year outlook on price versus cost for the agriculture segment and sought clarification on where tariff impacts would be categorized in the financial reporting.

Answer

CFO Jim Nicholas confirmed that the price-cost spread is expected to be positive for the full year. CEO Gerrit Marx added that the positive cost performance in Q2 was partly aided by FIFO accounting on materials purchased before tariffs hit, an effect that will not repeat. He confirmed tariff impacts are included within the 'production cost' line item in their financial waterfalls.

David Raso asked about the mid-single-digit decline in ITS organic orders in EMEA during Q4, seeking clarification on whether this was temporary or indicative of broader trends, and inquired about current organic sales performance in Q1 2026.

Answer

CFO Vik Kini attributed the Q4 EMEA ITS organic orders decline to project timing, noting that the full-year EMEA business still achieved positive order growth. He mentioned that Mediterranean countries are currently growing faster than Central European ones. Kini also stated that January orders are playing out as expected, aligning with the flat to slightly down Q1 organic sales guidance, with nothing atypical from seasonality.

David Raso expressed interest in the ITS organic orders in Q4, noting that EMEA was down mid-single digits, and asked if this was a temporary comp issue or a unique dynamic, given generally more constructive reports from Europe. He also asked if organic sales are currently running flat to slightly down in Q1, or if the guidance is a projection, given a seemingly more positive start to the year than the Q1 organic outlook.

Answer

CFO Vik Kini clarified that the EMEA decline in Q4 ITS organic orders was due to project timing and nothing to read into, as the full-year EMEA business still drove positive order growth. He noted that some Mediterranean countries are growing faster than Central European ones. Regarding Q1 organic sales, Vik Kini stated that January orders are playing out as expected, with nothing atypical from seasonality or the 2026 guidance commentary.

David Raso questioned why the company's pricing contribution to organic growth is expected to accelerate in the second half of 2025, as implied by the full-year guidance.

Answer

CFO Vik Kini confirmed this observation, attributing the expected acceleration to the timing of planned mid-year pricing actions across various businesses. He noted that this phasing, with a healthier price contribution in the back half of the year, is a consistent expectation for both the ITS and PST segments.

David Raso asked for an organic breakdown of ITS orders to better understand the impact of a potential bottoming in China and specifically requested the ITS organic order growth rate excluding China.

Answer

CFO Vik Kini provided a regional breakdown, identifying Asia (specifically China) and Power Tools as the primary detractors from organic growth, while the Americas was the strongest region. When pressed, he confirmed that ITS organic order growth ex-China would be in the "low single-digit realm," implying a positive number.

David Raso asked for clarification on the currency impact within the 2026 guidance and the implied total sales growth, assuming approximately 2% currency benefit. He also questioned the conservatism in the top-line guidance, noting that 100-150 basis points of pricing implies only 1% volume growth, despite personal mobility being up 30% and only one market (energy and resources) being projected down on Slide 13.

Answer

Rich Kwas, VP of Investor Relations and Strategy, clarified that the full-year currency translation benefit is approximately 125 basis points, heavily weighted to the first half. CEO Ivo Jurek acknowledged the correct framing of conservatism, citing past 'head fakes' in 2024 and 2025. He emphasized that while signs are positive, the outlook remains pragmatic, anticipating a rolling recovery across markets rather than an immediate rebound. Kwas also reminded that 2026 has one less shipping day than 2025.

David Raso sought clarification on the currency impact included in the 2026 guidance, specifically the total sales growth implied. He also questioned the conservatism in the top-line guidance, given the 100-150 basis points pricing assumption implying only 1% volume growth, especially with personal mobility growing 30% and only one market (Energy and Resources) projected to be down.

Answer

Rich Kwas (VP of Investor Relations) clarified that the full-year currency translation benefit was about 125 basis points, weighted more heavily in the first half. CEO Ivo Jurek acknowledged David's framing, reiterating the pragmatic and cautious outlook due to past 'head fakes' in 2024 and 2025. He noted positive signs from industrial orders and PMIs, and strong performance in personal mobility, but emphasized that recovery would be rolling across markets, leading to a conservative initial guidance. He also reminded that 2026 has one less shipping day than 2025.

David Raso of Evercore ISI asked about the expected organic growth cadence between the Power Transmission and Fluid Power segments for the remainder of the year. He also inquired about the carryover of savings from restructuring actions into 2026 and any potential offsets.

Answer

CEO Ivo Jurek stated that he expects the Power Transmission segment to continue outperforming Fluid Power, largely due to strong growth in personal mobility. CFO Brooks Mallard added that while some restructuring savings are included in 2025 guidance, the full run-rate benefit of these actions will be delayed until 2026 due to complexities related to tariffs and trade negotiations.

David Raso from Evercore ISI asked about the expected organic growth cadence between the Power Transmission (PT) and Fluid Power (FP) segments for the remainder of the year. He also inquired about the carryover of cost savings from 2025 to 2026 and any potential offsetting investments.

Answer

CEO Ivo Jurek stated that he expects the Power Transmission segment to continue outperforming Fluid Power, largely due to strong growth in personal mobility. CFO Brooks Mallard added that while there will be a slight carryover of savings into 2026, the full benefit of current restructuring activities has been delayed by tariff volatility and will not be fully realized until 2026.

David Raso of Evercore ISI inquired about the expected organic growth cadence between the Power Transmission (PT) and Fluid Power (FP) segments for the rest of the year. He also asked about any cost savings from factory activities that might carry over into 2026.

Answer

CEO Ivo Jurek suggested that the Power Transmission segment will likely continue to outperform Fluid Power for the remainder of the year, largely due to strength in personal mobility. CFO Brooks Mallard added that while some restructuring savings are in 2025 guidance, the full impact of these activities has been delayed and will not be realized until 2026.

David Raso from Evercore ISI asked about the expected organic growth cadence between the Power Transmission and Fluid Power segments for the rest of the year. He also inquired about the timing of cost savings from restructuring activities rolling into 2026.

Answer

CEO Ivo Jurek indicated that the Power Transmission segment would likely continue to outperform Fluid Power, driven by strength in personal mobility. CFO Brooks Mallard explained that while some restructuring savings are included in 2025 guidance, the full run-rate benefit of these actions will not be realized until 2026 due to project timing.

David Raso from Evercore ISI inquired about the expected organic growth cadence between the Power Transmission and Fluid Power segments for the remainder of the year, and asked about the timing of savings from restructuring activities rolling into 2026.

Answer

CEO Ivo Jurek indicated that the Power Transmission segment would likely continue to outgrow Fluid Power due to strength in personal mobility. CFO Brooks Mallard noted that while some restructuring savings are included in 2025 guidance, the full run-rate benefit of these actions will not be realized until 2026 due to project timing.

David Raso from Evercore ISI asked for clarification on management's comment about a "widened capital deployment aperture," inquiring about leverage targets, the company's post-Blackstone strategy, and the current M&A landscape.

Answer

CEO Ivo Jurek explained that with a stronger balance sheet, the company has greater flexibility. He noted that while Gates has strong cash flow for deleveraging, the stock is considered significantly undervalued, making buybacks and high-return internal organic investments attractive uses of capital. While the company is open to M&A for highly accretive businesses at reasonable multiples, the current focus remains on these internal and shareholder return opportunities.

David Raso of Evercore ISI questioned if there were signs of a bottom in the soft ag, construction, and personal mobility markets, and asked about the possibility of accelerating facility closures to realize savings sooner.

Answer

CEO Ivo Jurek confirmed that personal mobility is stabilizing and is expected to return to growth in 2025. However, he sees continued weakness in ag and construction, with a bottom not likely until the latter part of next year. Regarding closures, Jurek noted they have already accelerated actions, with three closures announced in the second half of the year to be completed by year-end. CFO L. Mallard reiterated the plan to achieve a $40 million savings run rate by the end of 2026.

David Raso asked for clarification on the lower-than-expected EPS dilution, specifically regarding the 111 million share count and whether it included any share repurchases, and the lower interest expense. He also inquired about the company's current thinking on the use of proceeds from a potential Aerials sale, given the completed REV Group merger and recent RV business divestiture.

Answer

Jennifer Kong, Senior Vice President and Chief Financial Officer, clarified that the 111 million share count is a weighted average for the full year, as shares were issued in February, with the full year actual shares being around 115 million. She explained the dilution is a net single-digit EPS impact, primarily from the higher share count (3%) and a higher tax rate (2%). Regarding Aerials sale proceeds, she reiterated that the immediate priority is to strengthen the balance sheet, and options include returning value to shareholders, early debt paydown, or reinvesting in the business, but it's too early to specify. Simon Meester, President and Chief Executive Officer, emphasized the focus on integrating REV and executing on earnings and cash conversion, appreciating the optionality ahead.

David Raso questioned the lower-than-expected EPS dilution from the REV merger, asking about the 111 million share count and interest expense. He then asked for more clarity on how the proceeds from a potential Aerials sale would be used, given the completed REV merger and recent RV divestiture.

Answer

Jennifer Kong (SVP and CFO) clarified the 111 million share count is a weighted average for the full year, with the full year share count being 115 million, and explained the 3% EPS dilution from higher share count and 2% from a higher tax rate. Regarding Aerials sale proceeds, she stated the immediate priority is strengthening the balance sheet, with options including buybacks, debt paydown, or reinvestment, but it's too early to commit. Simon Meester (President and CEO) emphasized focus on REV integration and execution.

David Raso questioned the timing and tone of 2026 order conversations for the MP and Aerials segments, particularly regarding replacement demand and the impact of bonus depreciation, and sought clarification on the second-half EPS cadence.

Answer

President & CEO Simon A. Meester noted that discussions with larger customers follow a normal Q3/Q4 cadence, while smaller customers remain cautious. He highlighted that MP fleets are aging, creating a need for replacement. SVP & CFO Jennifer Kong-Picarello confirmed that Q4 EPS is expected to be 10-20% higher than Q3, driven by the timing of tariff mitigation actions.

David Raso sought clarity on the Aerials segment's margin progression from Q1 to Q2, asking about the implied sequential revenue growth and the timing of tariff impacts needed to reach a 10% operating margin.

Answer

CEO Simon Meester indicated a "normal seasonal jump up" in Q2 revenue. CFO Jennifer Kong-Picarello added that the 550 basis point margin impact from Q1's production cuts will not repeat, which, combined with higher volume, will drive the return to double-digit margins. Meester clarified the $0.40 tariff impact is mostly a Q3 story for Aerials, allowing time to mitigate.

David Raso presented a detailed calculation suggesting legacy business decremental margins were closer to 39%, challenging the company's 25% target. He asked for the assumed 2025 stand-alone EBIT margin for the acquired ESG business to clarify the math.

Answer

Management confirmed the 2025 EBIT margin assumption for the stand-alone ESG business is comparable to the 21.9% achieved in the Q4 stub period. Executive Julie Beck addressed the decremental margin discrepancy by explaining that the AWP segment will experience significant margin pressure in Q1 due to production cuts, but is expected to perform within the 25% decremental target for the remainder of the year (Q2-Q4).

David Raso sought clarification on the cadence and net impact of tariffs, specifically the 50 basis point drag on 2026 EBITDA, and how pricing strategies are evolving to offset these costs.

Answer

CFO Mark Smith and Chair and CEO Jennifer Rumsey clarified that the 50 basis points represents the net full-year drag on EBITDA percentage for 2026, not a dollar loss, due to inflated revenues and COGS. Mark stated that significant net pricing (excluding tariffs) is not a major feature for 2026, as the focus is on existing products and preparing for new product launches in 2027.

David Rasso asked for clarification on the cadence of tariff impact, specifically the 50 basis points drag for 2026, and how much of it is a net number. He also sought details on the price offset for tariffs and the overall pricing strategy for 2026.

Answer

Mark Smith, CFO, clarified that the 50 basis points represents the net full-year dilutive impact on EBITDA percentage for 2026, not a dollar loss, due to inflated revenues and COGS. He stated that the year-over-year revenue increase from annualized tariff recovery is less than 2%. Mark also noted that 2026 is not expected to be a significant year for net pricing (excluding tariffs), as the focus is on existing products and preparing for new product transitions. Jennifer Rumsey, Chair and CEO, reiterated Cummins' strategy to recover actual costs at a dollar level.

David Raso asked about the percentage of losses attributable to the electrolyzer business within Accelera and how the recent non-cash charges might impact the size of losses from 2025 to 2026, specifically regarding potential cost reduction actions.

Answer

CFO Mark Smith stated that the non-cash impairment charges for the electrolyzer business do not significantly change the loss trajectory, noting that electrolyzer losses are less than half of total Accelera segment losses. CEO Jennifer Rumsey added that the company is strategically reviewing the Accelera portfolio to reduce losses in areas with weaker prospects, similar to actions taken in the fuel cell business.

David Raso questioned the percentage of Accelera's losses attributable to the electrolyzer business and how recent actions, including non-cash impairment charges, are expected to improve the segment's losses from 2025 to 2026. Raso also asked if these loss-reduction actions would yield benefits in 2026 or over a longer timeframe.

Answer

Mark Smith, Chief Financial Officer, clarified that the recorded non-cash impairment charges for the electrolyzer business do not significantly alter the loss trajectory, and the electrolyzer segment accounts for less than half of Accelera's total losses. Smith indicated that further actions to reduce losses are under review. Jennifer Rumsey, Chair and Chief Executive Officer, added that Cummins is strategically reviewing the Accelera portfolio to focus investments on promising technologies and reduce losses in other areas, similar to actions taken in the fuel cell business in late 2024.

David Raso of Evercore ISI pressed for quantification on the outlook for Engine segment EBITDA margins in the second half of the year, given the sharp expected decline in truck volumes, and asked about expected decremental margins.

Answer

CFO Mark Smith stated that while he could not provide specific guidance, Engine margins will be under significant pressure and decline in the second half due to the severe drop in volumes. He emphasized the decline is cyclical, not structural, and that full-year decremental margins should be in line with prior cycles. He noted that orders are at multi-year lows but expects performance to rebound quickly when volumes recover.

David Raso of Evercore ISI pressed for a quantitative outlook on Engine segment EBITDA margins for the second half of the year, given the sharp decline in truck volumes.

Answer

CFO Mark Smith declined to provide specific guidance but acknowledged that margins will face significant pressure due to historically weak order levels. He emphasized the decline is cyclical, not structural, and expects margins to rebound with volumes. He also noted that engineering spending remains elevated due to a lack of regulatory clarity, which prevents cost reductions in that area.

David Raso questioned whether concerns about demand destruction were based on specific customer feedback or a general macro view, and asked for quantification of tariff exposure.

Answer

CEO Jennifer Rumsey clarified that the concern stems from broad uncertainty, citing direct conversations with OEM and fleet customers who are pausing orders to await clarity. CFO Mark Smith declined to quantify specific country exposure but highlighted that Cummins' U.S. on-highway engine plants are USMCA compliant and that tariff impacts would be detailed in future quarterly results.

David Raso sought to understand the margin expansion in the Engine and Components segments by asking for a breakdown of the increased D&A between them. He also questioned the drivers of the underlying operational margin improvement in Engines to better assess earnings power.

Answer

CFO Mark Smith confirmed that the majority of the incremental D&A increase would be in the Engine and Components segments, reflecting recent capital investments. For the Engine segment's near-term operating margin improvement, Smith pointed to continued strength and pricing opportunities in the aftermarket, as well as general cost control.

David Raso of Evercore ISI asked about the timing of the 2027-compliant engine launch, the strategy for an early introduction, and the potential impact of the election. He also inquired about the cost implications for customers buying the new engine in 2026.

Answer

CEO Jennifer Rumsey stated that Cummins does not expect the election to alter the 2027 regulations. She announced the company's intention to launch the diesel version of its 15-liter helm platform in 2026, ahead of the mandate, to deliver a 7% fuel efficiency improvement. She clarified that while the new engine will have added content and technology, the longer emissions warranty requirement does not take effect until 2027, meaning customers buying in 2026 will not incur that specific cost.

David Raso sought clarification on whether Timken expects positive volume growth in Q1 2026. He also questioned the implications of the 80/20 strategy, particularly the comment that it 'could take some time' for benefits, and whether 2026 would be a year of costs weighing on margins, asking for multi-year targets at the upcoming Investor Day.

Answer

Lucian Boldea, President and CEO, stated that Q1 2026 organic sales are expected to be flattish year-over-year, implying slightly lower volumes due to a strong Q1 2025 comp. He explained that the 80/20 initiative, expanding beyond portfolio to enterprise-wide operations, involves upfront investment (a couple of quarters of cost) before benefits materialize, with 2026 not having significant costs or benefits baked in yet. More details, including a 0-36 month transformation roadmap with growth algorithms and financial targets, will be shared at Investor Day in May. He confirmed plans to share multi-year targets and a vision for the company's future transformation.

David Raso sought clarification on whether Timken expects volumes to turn positive in Q1 2026, given they were slightly down in Q4 2025. He also questioned the 80/20 strategy, specifically the 'take some time' comment, asking if 2026 would be a year of costs with benefits only seen in 2027, given the implied mid-20% incrementals on the organic piece.

Answer

Lucian Boldea (President and CEO) clarified that Q1 2026 organic sales are expected to be flattish year-over-year, meaning volumes would be slightly lower due to a strong Q1 2025 comparison. He explained that the 80/20 discipline, initially focused on portfolio, is now expanding to the entire enterprise (operations, supply chain, asset footprint simplification). This broader effort involves upfront investment costs for a couple of quarters before benefits flow, but no significant cost or benefit is baked into the current 2026 guidance. More details, including a 0-36 month transformation roadmap with financial targets, will be shared at Investor Day in May, with the goal of growth, not shrinkage.

David Raso asked for color on the mix of the Q4 organic decline between divisions, trends in the industrial distribution business, and the renewable energy sector. He also inquired which segment (Engineered Bearings or Industrial Motion) is expected to see organic growth turn positive first in 2026, and about distribution inventory levels.

Answer

CFO Mike Discenza indicated that organic sales are expected to be down in both segments for Q4, with a slightly larger decline in Industrial Motion due to a non-repeating military marine project. He noted that industrial distribution remained within its guided range, and renewable energy strength, particularly in China wind, was a positive surprise. President and CEO Lucian Boldea added that distribution inventories are stable, with sales in and sales out reasonably matched, showing no immediate signs of a significant change. Both executives stated it's too early to pinpoint which segment would turn positive first in 2026.

David Raso asked for color on the mix of the fourth-quarter organic decline between the Engineered Bearings and Industrial Motion divisions, and trends in the industrial distribution business. He also noted the maintained guide for industrial distribution versus the bumped-up outlook for renewable energy, seeking clarification on the implications for 2026. He then asked which segment, Engineered Bearings or Industrial Motion, is expected to see organic growth turn positive first in 2026.

Answer

CFO Mike DiSenza indicated that organic sales are expected to be down in both segments for Q4, with a slightly larger decline in Industrial Motion due to a non-repeating military marine project from the prior year. He stated that the industrial distribution guide was maintained as it's moving within the expected range. Mr. DiSenza explained that the strength in renewables, particularly China wind, was a positive surprise in Q3 and is expected to continue as a growth opportunity. Regarding which segment would see organic growth turn positive first in 2026, Mr. DiSenza said it's too early to pinpoint, as market conditions will drive this. CEO Lucian Boldea added that distribution inventory levels are stable, with sales in and sales out reasonably matched, providing no clear indication of an imminent significant change.

David Raso inquired about the fourth-quarter book-to-bill ratio, the backlog size, and the expected cadence of the organic sales decline in the first half of 2025. He also asked about the potential for future cost actions beyond the current plan.

Answer

CFO Philip Fracassa noted the order book is down year-over-year but supports the full-year guide, with the first-half organic decline expected to be similar to Q4. CEO Tarak Mehta indicated that plans for any additional actions beyond the announced $75 million in savings for 2025 would be detailed later in the year.

David Raso questioned the implied Q4 organic growth decline, asking for customer feedback on early 2025 and whether the focus will be on growth or cost control. He also sought clarification on the roughly 100 basis points of one-time costs in Q3 and the drivers for the sequential margin decline into Q4.

Answer

President and CEO Tarak Mehta explained that while a Q4 to Q1 sequential increase is typical, it's too early to call 2025 due to mixed signals. CFO Philip Fracassa clarified the Q4 organic outlook is weaker due to tougher comps in aerospace and rail. He confirmed about 100 bps of margin headwinds in Q3 from logistics, currency, and a customer accrual. The Q4 margin decline is driven by lower volume and a cautious outlook on costs associated with production slowdowns.

David Raso from Evercore ISI sought insights into January's organic growth performance relative to the 1%-3% full-year guide, noting strong cyclical trends exiting Q4 in areas like filler metals and semis. He also questioned the sequential decrease in company inventory, wondering if it signals lower growth expectations or if it's a typical cadence.

Answer

CFO Michael Larsen stated that January is 'right on track' with expectations, with Q1 organic growth being positive but slightly lower than subsequent quarters due to typical seasonality, while currency provides more tailwind early in the year. He clarified that the inventory decrease is a typical year-end cadence and not indicative of lower growth expectations; in fact, inventory was added in some segments earlier in 2025 to mitigate supply chain risks. Regarding the semi-related business, Michael Larsen confirmed that while it's 15% of Test and Measurement (3% of ITW), its higher profitability and above-average incremental margins during upturns make it a significant contributor to margin improvement when cycles pick up, as seen with the +5% growth in Q4.

David Raso sought to reconcile Caterpillar's 2026 sales growth guidance of roughly 7% with the strong backlog growth (44% for next 12 months) and positive retail outlook. He also requested clarification on whether the $800 million tariff impact includes expected pricing actions for 2026.

Answer

CFO Andrew Bonfield clarified that the $800 million incremental tariff cost does not account for pricing actions, which are separate. Regarding the sales guide, he noted that an unusual lack of dealer inventory increase in Construction Industries in Q1 2025 impacts year-over-year comparisons, and capacity constraints in Power and Energy limit overall sales growth despite strong backlog.

David Raso sought to reconcile Caterpillar's 2026 sales growth guidance of approximately 7% with the strong backlog growth (44% for the next 12 months), robust order momentum (36% for the next 12 months), and a positive retail outlook. He also requested clarification on whether the stated $800 million incremental tariff impact for 2026 already accounts for expected pricing actions.

Answer

CFO Andrew Bonfield clarified that the $800 million incremental tariff cost does not include any pricing actions, which are separate (2% pricing action mentioned). Regarding the sales guide, Bonfield noted that the prior year's unusual lack of dealer inventory increase in Construction Industries in Q1 impacts the comparison. He also reminded that Power and Energy remains capacity-constrained, with estimates based on current capacity, suggesting potential upside if capacity comes online earlier.

David Raso of Evercore ISI asked if Caterpillar could reprice its substantial backlog to offset tariff headwinds and drive margin growth into 2026, given the strong demand profile.

Answer

CEO Joe Creed stated that while there is flexibility on backlog pricing, the primary goal is dollar operating profit (OPAC), not just margin percentage. He noted a preference to mitigate tariffs through other means before using pricing. CFO Andrew Bonfield added that operating leverage from volume is the most optimal way to manage margins for Caterpillar.

David Raso questioned if the strong order growth was a 'prebuy' ahead of tariff-related price hikes and asked critically whether the current backlog is price-protected. He also inquired if mitigation efforts, like shifting production from China to Brazil, were already factored into guidance.

Answer

Joe Creed, COO and incoming CEO, stated there is 'no evidence of widespread pre-buying,' arguing that customers are unlikely to purchase equipment without having work for it. He clarified that while some long-term contracts are fixed, Caterpillar generally retains pricing flexibility in its backlog. He also noted that the company's downside scenario was calculated before any mitigating actions, implying that such production shifts are not yet fully factored in.

David Raso of Evercore ISI questioned the drivers of 2025 segment margins, focusing on why price/cost was expected to be negative and whether rising manufacturing costs were concentrated in the Energy & Transportation segment.

Answer

Executive Andrew R. Bonfield clarified that manufacturing cost headwinds existed in both Construction Industries (due to negative absorption) and Energy & Transportation (due to increased labor for higher output). For 2025, he expects declining material costs to be offset by absorption headwinds and higher depreciation costs.

David Raso asked for more clarity on 2025, seeking to understand when the pricing discount headwind in Construction Industries would be most acute and requesting a quantifiable measure of the large engine throughput increase for E&T.

Answer

Chairman and CEO Jim Umpleby stated the large engine capacity increase is a multi-year plan and did not provide a specific 2025 output figure. CFO Andrew Bonfield explained the pricing reserve accrual is based on a 12-month historical basis, meaning the headwind could impact results for several quarters, with more detail to be provided in January.

David Raso inquired about the expected margin improvement from Q4 to Q1 despite flat deliveries, the translation of strong orders into production schedules, and the price-cost dynamic, including benefits from Section 232 tariffs.

Answer

CEO Preston Feight explained that Q4 margins were impacted by higher tariffs for one month and manufacturing adjustments for local-for-local production. He anticipates Q1 margins to benefit from a full quarter of Section 232 tariffs, clarity on NOx 27, and improved order intake. President Kevin Baney added that higher Q4 overtime, due to year-end deliveries, is not expected to recur in Q1, further aiding margin improvement.

David Raso inquired about the expected margin improvement from Q4 to Q1 despite flat deliveries, the translation of strong orders into production timelines, and the specific price-cost dynamics, including the benefits from Section 232 tariffs, between the two quarters.

Answer

CEO Preston Feight explained that Q4 margins were impacted by Section 232 tariffs (effective Nov 1) and manufacturing adjustments for local-for-local production. Q1 benefits from a full quarter of 232 tariffs, NOx 27 clarity, and strong order intake. He noted that end-of-year orders are often spread deliveries, building backlog for later quarters. President Kevin Baney added that higher Q4 overtime, due to getting trucks out, would not recur in Q1, contributing to margin improvement.

David Raso asked about the underlying factors for PACCAR's North American growth outlook, specifically customer feedback on bonus depreciation orders and the timing for orders to reflect 2026 growth. He also questioned the EPA's deadline for communicating 2027 NOx standard changes and the impact on the supply chain. Finally, Mr. Raso sought clarification on the geographical cadence of Q4 deliveries.

Answer

Brice Poplawski, CFO, noted expected growth from tariffs and bonus depreciation incentives. Preston Feight, CEO, added that customer feedback is mixed, with vocational and LTL segments leveraging incentives, while the truckload sector faces challenges. He emphasized that PACCAR is prepared for the 35 mg NOx standard, which is the current law, but also capable of supporting a 200 mg standard if it changes. Mr. Feight clarified that Q4 deliveries would see a shift, with North America having more holidays and Europe fewer, leading to similar overall delivery quantities, with the order book 60-70% full.

David Raso inquired about the underlying factors supporting PACCAR's North American growth outlook, including bonus depreciation and customer sentiment, and the timing for orders to reflect 2026 growth. He also asked about the EPA's NOx standard deadline for 2027 and the geographical cadence of Q4 deliveries.

Answer

CFO Brice Poplawski noted expected growth from tariffs and pricing competitiveness, with bonus depreciation incentives spurring Q4 demand. CEO R. Preston Feight added that customer sentiment is mixed but a growing sense of momentum exists due to the impending 35 mg NOx standard and tariff clarity. Feight stated PACCAR is prepared for the 35 mg NOx standard, emphasizing that the law stands until changed, and acknowledged the burden on the supply base if changes occur. For Q4 deliveries, Feight indicated a shift towards European volume due to North American holidays.

David Raso asked for the geographic composition of the Q4 delivery forecast to better understand margin implications. He also inquired about the status of bottlenecks with vocational body builders and a potential pre-buy related to a key engine supplier.

Answer

President and CFO Harrie Schippers indicated that with more production days, European deliveries would be up by a couple of thousand units, implying a sequential decline in North America. CEO Preston Feight added that the vocational market has stabilized at a high level and body builders are catching up. He also affirmed PACCAR's strong position regarding engine supply and readiness for future emissions standards.

David Raso asked about the relationship between production and retail sales for Q2 and the full year. He also sought to confirm if the challenging sequential decremental margin in Q2 was due to a timing mismatch between the full impact of tariffs and the partial benefit of pricing actions.

Answer

CEO Preston Feight indicated that production and retail are in a good position relative to each other for Q2 and generally for the full year. He confirmed Raso's assessment that the sequential margin change is primarily due to the full-quarter impact of tariffs without the ability to fully pass that into price yet.

David Raso questioned how the strengthening market outlook is influencing pricing for upcoming models and asked for PACCAR's reaction to recent White House executive orders regarding potential pre-buy activity.

Answer

CEO Preston Feight stated that PACCAR is prepared for current regulations and can adapt to any changes. He anticipates a strengthening price position as 2025 progresses and beyond, driven by market conditions and the performance of PACCAR's trucks. He also clarified that the notion of a '26 model year shipping in April did not resonate with PACCAR's plans.

David Raso with Evercore ISI asked for a breakdown of the organic guide raise, specifically how much was attributable to volume versus a change in price, and similarly, how the 50 basis points margin improvement related to volume versus price/cost expectations.

Answer

Chairman and CEO Jennifer Parmentier stated that the company does not disclose pricing but emphasized their ability to expand margins in any climate. She noted that after two years of negative industrial growth, the Q1 positive industrial organic growth reflects the impact of slightly stronger volume.

David Raso of Evercore ISI sought clarification on the Q3/Q4 aerospace organic growth cadence and asked about the specific drivers of the expected Q4 industrial recovery. He also inquired about the potential margin mix impact as the recovery unfolds, particularly regarding the high-margin distribution channel.

Answer

CEO Jenny Parmentier clarified the aerospace growth outlook is 9.5% for Q3 and 5% for Q4, with the Q4 figure impacted by a difficult prior-year comparison of +19%. She noted the industrial recovery is expected based on positive distributor sentiment and historical cycle lengths, but confirmed the distribution recovery is 'still on the come.' CFO Todd Leombruno added that Q4 aerospace shipments are projected to be a record in absolute dollars.

David Raso asked about the resilience of North American margins despite lower organic sales, seeking to understand the health of the distribution channel versus OEM weakness. He also requested an update on the M&A pipeline, including valuation multiples and deal timing.

Answer

CEO Jenny Parmentier clarified that destocking is occurring at the OEM level, not in the distribution channel, where sentiment remains positive despite project delays. On M&A, she stated the pipeline is active, but the company is disciplined, seeking accretive deals where it is the 'best owner,' noting that timing is a significant factor. CFO Todd Leombruno added the pending divestiture has a favorable 40 basis point impact on North American margins.

David Raso sought clarification on the announced tariff impact, asking if the estimated 3% of COGS is an annualized run-rate for fiscal 2026 or if it will ramp up. He also asked how much of that impact is hitting in the current quarter (Q4).

Answer

Executive Todd Leombruno confirmed the $375 million tariff impact, or 3% of COGS, is an annualized number based on current run rates and is not expected to increase unless new tariffs are announced. He stated that this is the current run rate with no ramp-up, and that mitigation actions are already in place to offset the costs within the quarter.

David Raso asked for clarification on the $200 million defense revenue cut, specifically how much was attributed to the postal truck program. He also pressed for more clarity on the NGDV ramp-up challenges, whether they affect BEV or ICE trucks, and when Oshkosh expects to achieve higher quarterly revenues for the program.

Answer

CFO Matt Field confirmed the entire $200 million defense revenue cut was on the delivery side (postal truck). CEO John Pfeifer clarified that NGDV ramp-up challenges are unrelated to BEV vs. ICE, as both are produced on the same line, but rather stem from dialing in the highly automated manufacturing plant. He affirmed that David Raso's expectation for quarterly delivery revenue is in line with Oshkosh's.

David Raso asked for clarification on the $200 million defense revenue cut, specifically how much was attributed to the postal truck, whether ramp-up struggles were related to BEV or ICE trucks, and when the company expects to achieve higher quarterly revenues for the postal truck program.

Answer

Matt Field, EVP and CFO, and John Pfeifer, President and CEO, confirmed the entire $200 million cut was from the delivery side (postal truck). John Pfeifer clarified that ramp-up challenges were unrelated to ICE/BEV, as both are on the same line, but rather due to dialing in the new plant's autonomous functionality. John Pfeifer affirmed that David Raso's expectation for quarterly delivery revenue (close to $300 million) aligns with the company's plans. Matt Field also noted the OI cut included a $13 million warranty charge.

David Raso of Evercore ISI questioned the confidence in the Access segment's second-half margin guidance, focusing on the timing of pricing actions versus tariff cost impacts. He also inquired about the drivers for the projected margin improvement in the Vocational segment and whether that strength is already reflected in the current backlog.

Answer

CFO Matthew Field explained that for the Access segment, tariff cost impacts are expected primarily in Q4, with mitigation actions underway. For the Vocational segment, he attributed the second-half margin improvement to increased production capacity and volume growth. CEO John Pfeifer added that modest pricing benefits from the Vocational backlog will continue to be realized over the next two to three years.

David Raso sought to confirm that segment guidance is unchanged aside from the net tariff impact, which is mostly allocated to Access. He also asked about the strategic thinking behind moving AWP assembly to Italy to mitigate EU tariffs.

Answer

CFO Matthew Field agreed this was a fair characterization. CEO John Pfeifer explained the move to Italy was decisive because the EU tariff situation was stable and clear. In contrast, the current U.S. tariff environment is more dynamic with rates for various countries still under negotiation, warranting a more cautious approach before making other major structural changes to the supply chain.

David Raso from Evercore ISI questioned why the implied incremental margin for the Vocational segment in 2025 wasn't stronger than 25%. He also asked for a breakdown of which categories within the segment were expected to grow above or below the segment's average revenue growth rate, specifically asking if Pierce was the fastest growing.

Answer

CFO Matt Field explained that the Vocational segment's margin guidance reflects ongoing investments in capacity and growth initiatives. He highlighted strong performance and growth opportunities across Pierce, McNeilus (refuse), and AeroTech but declined to provide specific growth rates for each. CEO John Pfeifer added that all businesses within the Vocational segment are growing and that the segment complements the Access business well.

Inquired about the outlook for Europe and the impact of stimulus, the potential for large-scale M&A in the Gas Control segment, and the organic growth breakdown between equipment and consumables.

Answer

Europe is stable with flattish growth expected, as major stimulus has not yet fully materialized; its margins are very strong. The M&A pipeline for Gas Control includes potential large, EWM-sized deals. Equipment sales were down organically due to automation order delays in the Americas, which are expected to reverse.

David Raso inquired about the outlook for Europe, the tangible impact of EU stimulus, and the region's margin profile. He also asked about the potential for larger acquisitions in the Gas Control business and requested a breakdown of organic growth between equipment and consumables.

Answer

President & CEO Shyam Kambeyanda described Europe as stable, with early benefits from energy and defense spending, but noted the larger stimulus impact has not yet materialized. He confirmed European margins are very strong. He also affirmed that larger, proprietary deals in Gas Control are possible. The Q2 equipment revenue weakness was attributed to delayed automation orders in the Americas.

David Raso of Evercore ISI asked for specifics on the "EU stimulus measures already in motion" and the outlook for Europe. He also inquired about the potential for larger acquisitions in Gas Control and asked for the organic growth split between equipment and consumables.

Answer

President & CEO Shyam Kambeyanda clarified that initial stimulus spending on energy and defense has begun, but larger programs have not fully kicked in, keeping Europe stable. He confirmed larger deals in Gas Control are possible, especially through proprietary processes, and noted that equipment revenue was impacted by automation delays in the Americas. CFO Kevin Johnson added that the outlook for Europe is for flattish growth.

Sought clarity on the timing of Americas volume recovery, the organic growth outlook for Europe, currency translation effects, and the rationale for the conservative 2025 pricing guidance in the Americas.

Answer

Americas volumes are guided to turn positive in Q4 2025. Europe is expected to have muted volumes in H1 and slight growth in H2. The conservative pricing outlook is tied to assumptions about stable steel prices, and contracts allow for pass-through of cost increases if necessary.

David Raso from Evercore ISI sought clarification on the Q4 organic growth guidance and the drivers of expected negative volumes in the Americas. He also asked about the growth outlook and M&A potential for the gas control business heading into 2025.

Answer

CFO Kevin Johnson confirmed the guidance math and reiterated expectations for slightly negative volumes in the Americas for Q4. CEO Shyam Kambeyanda explained that Q3 Americas softness was partly due to weather and a slow DIY channel but the market is not worsening. For 2025, he expects the gas control business to grow at the 'higher side of low single digits' with a premier margin profile and noted the M&A funnel for accretive deals is the 'strongest it's ever been'.

David Raso of Evercore ISI asked United Rentals about its second-half margin outlook, focusing on the price-cost spread, the impact of faster-growing ancillary revenue, and the company's visibility into 2026 given its increasing exposure to large projects.

Answer

President & CEO Matthew Flannery explained that the margin drag from ancillary revenue, particularly delivery costs from the Yak acquisition, should lessen as it is lapped. EVP & CFO William Grace added that while price-cost management is effective, costs for repositioning fleet remain, and the primary driver for improved incrementals will be ancillary growth normalizing closer to core rental growth. Regarding 2026, Flannery noted that while visibility is limited outside of large projects, key tailwinds from mega-projects and infrastructure are expected to continue.

David Raso inquired about the implied revenue growth for the remainder of the year, questioning if the guidance suggests minimal contribution from fleet productivity. He also asked how potential tariffs on new equipment could impact customer decisions, possibly favoring rental, and influence pricing conversations.

Answer

Executive Matthew Flannery stated that 2025 CapEx is largely negotiated and unaffected by tariffs. He noted that future tariff-driven price increases from OEMs would likely be passed on and could be managed by sourcing from non-tariff-impacted partners. Executive William Grace added that uncertainty generally favors rental over ownership and clarified that the revenue outlook incorporates inflation, with fleet productivity expected to remain steady and positive, consistent with the first quarter's performance.

David Raso inquired about the qualitative outlook for 2025, asking for the expected contributors to growth between Specialty and General Rental, and between fleet productivity and fleet growth. He also asked for commentary on the attractiveness of the mobile modular space and the broader M&A landscape.

Answer

Executive Matthew Flannery provided a qualitative outlook, anticipating another year of growth in 2025 driven by a strong project pipeline and continued momentum in the Specialty business, which he noted has a history of over 20% annual growth. For M&A, Flannery expressed satisfaction with the General Finance acquisition and stated that while the company is actively exploring opportunities, the strategic, cultural, and financial bar for acquisitions remains high.

David Raso asked for a breakdown of the expected 35-50 bps of operating margin expansion by business segment for the full year. He also inquired about the profitability and long-term growth outlook for the dispenser business, noting surprise that EFS margin expansion wasn't guided higher given its top-line strength.

Answer

CFO Anshooman Aga detailed that the largest margin expansion in 2025 will come from Mobility Technologies (over 100 bps), with EFS up slightly and Repair Solutions flat to slightly up. Regarding dispensers, Aga noted that while it's an attractive business, margins are impacted by geographic and product mix, with aftermarket and environmental solutions being higher. CEO Mark Morelli added that significant long-term margin runway exists in EFS due to simplification opportunities and pricing power.

David Raso of Evercore ISI requested quantification of the new capacity being added in the Electrical business and asked if the 2025 organic growth rate could be structurally sustainable for multiple years.

Answer

Craig Arnold, Chairman & CEO, reiterated that the company is making significant multiyear investments to ensure capacity is not a bottleneck but did not provide a specific percentage increase. Paulo Sternadt, President & COO, deferred the question on the long-term sustainable growth rate to the company's upcoming Investor Day in March, where 2030 targets will be outlined.