Thank you, Emma. Good morning, everyone, and welcome to Caterpillar's Second Quarter of 2022 Earnings Call. I'm Ryan Fiedler, Vice President of Investor Relations. Joining me today are Jim Umpleby, Chairman and CEO; Andrew Bonfield, Chief Financial Officer; Kyle Epley, Senior Vice President of the Global Finance Services Division; and Rob Rengel, Senior IR Manager. During our call today, we'll be discussing the second quarter earnings release we issued earlier today. You can find our slides, the news release and a webcast recap at investors.caterpillar.com under Events and Presentations. The content of this call is protected by U.S. and international copyright law. Any rebroadcast, retransmission, reproduction or distribution of all or part of this content without Caterpillar's prior written permission is prohibited. Moving to Slide 2. During our call today, we'll make forward-looking statements, which are subject to risks and uncertainties. We'll also make assumptions that could cause our actual results to be different than the information we're sharing with on this call. Please refer to our recent SEC filings and the forward-looking statements reminder in the news release for details on factors that individually or in aggregate could cause our actual results to vary materially from our forecast. On today's call, we'll also refer to non-GAAP numbers. For a reconciliation of any non-GAAP numbers to the appropriate U.S. GAAP numbers, please see the appendix of the earnings call slides. Today, we reported profit per share of $3.13 for the second quarter of 2022 compared with $2.56 of profit per share in the second quarter of 2021. We're including adjusted profit per share in addition to our U.S. GAAP results. Our adjusted profit per share was $3.18 for the second quarter of 2022 compared with adjusted profit per share of $2.60 for the second quarter of 2021. Adjusted profit per share for both quarters excludes restructuring costs. Now let's turn to Slide 3 and turn the call over to our Chairman and CEO, Jim Umpleby.

Thanks, Ryan. Good morning, everyone. Thank you for joining us. As we close out the first half of 2022, I want to thank our global team for delivering another good quarter with double-digit top line and adjusted profit per share growth despite ongoing supply chain challenges. Our second quarter results reflect healthy demand across most of our end markets. We remain focused on executing our strategy for long-term profitable growth. In today's call, I'll begin with my perspectives on our performance in the quarter and then I'll provide some insights on our end markets. Lastly, I'll provide an update on our sustainability journey. For the quarter, sales were broadly in line with our expectations as we generated better-than-expected price and strong services revenue, which were offset by lower-than-expected sales to users. Similar to previous quarters, our top line would have been even stronger if not for supply chain constraints. We remain focused on executing creative solutions to help mitigate our supply chain challenges. Overall, we remain encouraged by the strong demand in our end markets for our products and services. We're seeing strong momentum in services due to our service initiatives and investments. As I mentioned at our Investor Day in May, our confidence is increasing that we'll achieve our goal to double services to $28 billion by 2026. Operating profit margins came in slightly lower than our expectations, mostly due to lower-than-expected volume and unfavorable mix. Price realization more than offset manufacturing cost increases, which occurred earlier in the year than we had anticipated. However, this only partially offset the impact of volume and mix. Dealer inventory remains at the low end of the typical range and rental fleets continue to age as dealers prioritize trying to meet the demand from retail customers. Orders remained solid and our backlog grew by approximately $2 billion in the quarter. We expect volume and price realization to improve in the second half of the year, which should lead to sales growth in the remaining quarters of the year, both sequentially and year-over-year. We also expect adjusted operating profit margins will improve both sequentially and year-over-year in the second half of 2022 as our price realization will more than offset manufacturing cost increases. Despite ongoing inflation and supply chain challenges, we continue to expect to achieve our Investor Day adjusted operating profit margin and ME&T free cash flow targets for the full year. Moving to Slide 4. Sales and revenues increased by 11%, broadly in line with our expectations. The increase was primarily driven by strengthening price realization and higher sales volume. Second quarter sales and revenues increased across our three primary segments versus the prior year, with sales higher in all regions, except EAME. Sales in North America rose by 18%, with double-digit growth in the three primary segments. Strength in Latin America continued as 27% sales growth was supported by strong construction activity. In EAME, sales decreased by 3%, primarily due to currency impacts. Asia Pacific sales increased by 3% as lower sales in China were more than offset by stronger sales elsewhere within the region. Compared to the second quarter of 2021, sales to users declined 3%. For machines, including Construction Industries and Resource Industries, sales to users decreased by 4%, while Energy & Transportation was flat overall. Sales to users were below our expectations largely due to the impact of supply chain constraints. These constraints were mostly due to component shortages, which resulted in production delays and shortfalls against our schedules. For example, engine control modules have continued to be one of the most significant bottlenecks mostly due to the shortage of semiconductors. We were unable to completely satisfy strong customer demand for our machines and engines and continue to incur additional costs due to factory inefficiencies and freight expenses. Sales to users in Construction Industries decreased 4%, primarily due to weakness in China and continued supply chain constraints. North America sales to users declined slightly, mainly due to supply chain challenges. Latin America saw higher sales to end users, while EAME declined slightly. Asia Pacific sales to users were down in the quarter. However, excluding China, the Asia Pacific region, sales to users increased. The same holds true for Construction Industries overall. In Resource Industries, sales to users decreased 2% due to supply chain challenges and one-off disruptions, including commissioning delays. Orders remained strong, although slightly lower than recent high levels. We continue to see high equipment utilization and parked trucks remain at low levels, both supporting continued demand for our equipment and services. In Energy & Transportation, sales to users were flat versus the prior year. Oil and gas sales to users were down in the second quarter due to lower turbine and turbine-related services, which were partially offset by continued improvement in reciprocating engines. As we mentioned during our last earnings call, we expected solar turbines' new equipment shipments to be lower in the first half. Power generation and industrial sales to users remained strong due to favorable market conditions. Transportation decreased slightly. Now I'll spend a moment on dealer inventory. Dealer inventory declined by about $400 million in the second quarter, reflecting typical seasonality similar to the second quarter of last year. Dealer inventories remain near the low end of the typical range and we continue to work closely with our global dealer network to satisfy customer demand. As a reminder, dealers are independently owned businesses. Operating profit increased 9% in the quarter to $1.9 billion. The increase was driven by higher sales across our three primary segments, which largely reflected favorable price realization and volume and was partially offset by higher manufacturing costs and SG&A and R&D expenses. High manufacturing costs in the quarter reflected increased material and freight costs. As I mentioned, favorable price realization more than offset manufacturing cost increases. Operating profit margins were 13.6% in the second quarter of 2022 compared to 13.9% in the second quarter of last year. Although our adjusted operating profit margins improved sequentially in the quarter, they were slightly lower than our expectations, mostly due to lower-than-expected volumes and unfavorable mix. Andrew will discuss the consolidated and segment level margins in a few minutes. Our profit per share was $3.13 versus $2.56 in the second quarter of 2021. The adjusted profit per share was $3.18 versus $2.60 in the second quarter of last year. Now to Slide 5. We generated $1.1 billion of ME&T free cash flow in the quarter. We continue to expect to be within our $4 billion to $8 billion ME&T free cash flow range for the full year 2022. Andrew will discuss this in more detail. Regarding capital deployment. In the quarter, we repurchased $1.1 billion of stock and returned $600 million in dividends to shareholders. In May, our Board approved a new authorization to repurchase an additional $15 billion of common stock, which was effective on August 1. We also announced we're increasing our quarterly cash dividend by 8% to $1.20 per share. We remain proud of our dividend aristocrat status. We continue to expect to return substantially all of our ME&T free cash flow to shareholders over time through dividends and share repurchases. Now on Slide 6, I'll share some high-level assumptions on our expectations for the full year.

Thank you, Jim, and good morning, everyone. I'll start by walking you through our second quarter results, including the performance of our segments. Then I'll comment on the balance sheet and free cash flow before concluding with our expectations for the third quarter and remainder of the year. Beginning on Slide 8. Sales and revenues for the second quarter increased by 11% or $1.4 billion to $14.2 billion. The increase was due to price and volume, partially offset by currency. Operating profit increased by 9% or $155 million to $1.9 billion as price realization and volume growth were partially offset by higher manufacturing and SG&A and R&D costs. Our adjusted operating profit margin of 13.8% was slightly below the year-ago level despite the underlying inflationary and supply chain pressures. Adjusted profit per share was $3.18 in the second quarter compared to $2.60 last year. Adjusted profit per share for both quarters excluded restructuring costs, which had a similar impact in both quarters. Taxes included discrete tax impacts, which benefited the quarter by about $0.10. Now on Slide 9. As Jim mentioned, the top line was generally in line with our expectations on strong price and service revenues with a bit of currency as a headwind as the U.S. dollar continued to strengthen. Machine sales to users were impacted by supply chain challenges a bit worse than we had anticipated. Overall, we are not seeing signs of slowing demand as order levels and backlog remain healthy. Our retail statistics, or sales to users, are normally strongly correlated to demand in a typical environment. However, the ongoing supply chain constraints continue to impact our ability to ship equipment. Dealer inventory changes had a minimal impact on the top line as a $400 million decrease versus the first quarter was similar to the reduction seen in the prior year. Services remain strong as we benefit from the impact of our services growth initiatives. Moving to Slide 10. As I mentioned, second quarter operating profit increased by 9% on favorable price and volume. Price realization was better than we had anticipated due to the strong demand for machines. Manufacturing costs were also slightly higher than expected, primarily due to continued material and freight cost pressures as well as the impact of supply chain on our factory performance. Overall, price exceeded manufacturing costs for the quarter, which reverses the trend we had seen for most of the past year. SG&A and R&D costs increased partly due to investments aligned with our strategy for profitable growth, in addition to higher short-term incentive compensation. Our second quarter adjusted operating profit margin of 13.8%, a 30 basis point decrease versus the prior year. This was slightly lower than we had anticipated in April, principally as equipment volume lagged our expectations. We also saw some negative mix within our segments. The net impact of higher price and increased manufacturing costs was about neutral. Before I discuss segment results, I want to address the impact of high inflation and inventory build had on our segment margins in the quarter. For background, in periods with rapidly rising input costs and inventory growth, a portion of these rising costs will be appropriately included in Caterpillar's ending inventory. In order to promote effective management decision-making within our segment results, we recognize material and freight cost changes as soon as they impact our input costs. For enterprise reporting, this negative impact on segment results is offset by a favorable impact at the corporate level. In a nutshell, inflationary cost pressures were elevated negatively impacting margins at the segment level, while enterprise margins performed much closer to our expectations. This dynamic is timing related, meaning we'll see things balance out as the inventory starts to decline and inflationary costs subside. Moving to Slide 11. Let's review segment performance, starting with Construction Industries. Sales increased by 7% in the second quarter to $6 billion, driven by favorable price realization. Volume decreased slightly as lower sales of equipment to end users were mostly offset by higher sales of aftermarket parts. North America had the highest growth in sales dollars, a 20% increase due to strong pricing, a favorable change in dealer inventory and continued strength in services. Sales of equipment to end users lagged the prior year slightly, driven by supply chain challenges. Residential and nonresidential demand remained healthy, although we saw some moderation in residential. Sales in Latin America increased by 48% as robust construction activity supported higher sales of equipment to end users. In EAME, sales decreased by 7%, primarily driven by the changes in inventories and currency while price was a partial offset. Asia Pacific sales decreased by 17% due in part to lower sales of equipment to end users, primarily in China, which had a strong quarter a year ago. Second quarter profit for Construction Industries decreased by 4% versus the prior year to $989 million. Price realization more than offset manufacturing costs. The profit decreased due to the impact of lower sales volume and mix. Unfavorable manufacturing costs largely reflected higher material and freight. The segment's operating margin decreased by 180 basis points versus last year to 16.4% as inflationary cost pressures impacted the segment margins, as I mentioned a moment ago. Turning to Slide 12. Resource Industries sales increased by 16% in the second quarter to $3 billion. The improvement was primarily due to favorable price realization and higher sales volume. Volume increase on sales of aftermarket parts. Second quarter profit for Resource Industries increased by 2% to $355 million as price and volume more than offset unfavorable manufacturing costs, which largely reflected higher material and freight costs. The segment's operating profit margin decreased by 170 basis points versus last year to 12% as inflationary cost pressures impacted the segment margins similar to Construction Industries. Now on Slide 13. Energy & Transportation sales increased by 15% to approximately $5.7 billion with sales up across all applications. This included an 8% sales increase in oil and gas as sales of aftermarket parts, reciprocating engines and engines used for well servicing and gas compression increased. Solar turbine sales and oil and gas applications lagged the prior year. Power generation sales increased by 13% on stronger sales volume in small reciprocating engines and aftermarket parts. Sales of solar turbines increased in power generation. Industrial sales rose by 24% with strength across all regions. Finally, transportation sales increased by 7% on reciprocating engine aftermarket part sales and strength in rail services. Second quarter profit for Energy & Transportation decreased by 11% to $659 million. Higher manufacturing costs reflected continued headwinds from inflationary cost pressures in freight and material, which were partially offset by favorable price realization and higher sales volume. As a reminder, Energy & Transportation took price increases later in the year in 2021, given the different market dynamics compared to the other primary segments. In addition, SG&A and R&D expenses increased due to investments aligned with our strategic initiatives, including electrification and services growth, coupled with higher short-term incentive compensation. The segment's operating margin decreased by 320 basis points versus last year to 11.6%, impacted by the same inflationary cost pressures as our other primary segments. Moving to Slide 14. Financial Products revenue increased by 3% to $798 million. Segment profit decreased by 11% to $217 million. The profit decrease was mainly due to an unfavorable impact from movements in equity securities and insurance services. Our higher provision for credit losses at Cat Financial primarily relating to reserves associated with Russia and Ukraine also weighed on profit. A favorable impact from return to repossessed equipment served as a partial offset. Moving to our credit portfolio. Customers and dealers continue to perform well as our leading indicators remain strong. Past dues, which are a good proxy for the financial health of our customers, were 2.19% compared to 2.58% at the end of the second quarter 2021. That's down 39 basis points year-over-year. As is typical, retail new business volume improved sequentially versus the first quarter. And while we did see a 12% decrease versus the prior year, nearly half of that decline was attributable to China, where we saw COVID restrictions reinstated. In addition, although our match funding strategy serves to mitigate our risks from interest rate changes, rising rates typically do benefit banks from a competitive financing perspective. We saw this play out in the second quarter as our share of machines financed declined slightly. We continue to benefit from robust demand for used machines from both a volume and price perspective. This reflects the underlying demand trends we are seeing for equipment. Now on Slide 15. We generated about $1.1 billion in ME&T free cash flow during the quarter, a decrease of about $600 million versus the second quarter 2021. We continue to build production inventory to help manage through supply chain challenges. Looking ahead, we expect stronger free cash flow in the second half due to the absence of the payment of incentive compensation. We also do not anticipate our working capital to rise as it did in the first half of the year. Therefore, we continue to expect to achieve our Investor Day ME&T free cash flow target of between $4 billion and $8 billion for the full year. As Jim mentioned, we paid around $600 million in dividends, in addition to repurchasing about $1.1 billion worth of common stock, supporting our objective to be in the market on a more consistent basis. Enterprise cash was $6 billion, a $500 million decrease compared to the first quarter of 2022. The decrease was primarily driven by the $1.7 billion in shareholder return, net of ME&T free cash flow generation. We also continue to hold some of our cash balances and slightly longer dated liquid marketable securities in order to improve the yield on that cash. Our liquidity remains strong. Now on Slide 16. In light of the current environment, including supply chain constraints, we continue to refrain from providing annual profit per share guidance. However, I will share some thoughts on our third quarter and full year. As a reminder, the second quarter played out about as we had anticipated on the top line, although the inputs varied somewhat. Pricing was better than expected, while sales of equipment to end users lagged our expectations due to supply chain challenges and additional weakness in China. Looking at the third quarter, we currently anticipate the top line will increase compared to the prior year on higher sales to users and favorable price realization. Strong demand should support higher sales across the three primary segments, subject to our ability to navigate through the ongoing supply chain changes. For the second half of the year, we expect revenues to be higher compared to the first half. To reiterate Jim's comment, we remain encouraged by the strong demand in our end markets for our equipment and services. Order levels and backlogs remain strong. Dealer inventory levels remain at the low end of the typical range and rental fleets are aging. Finally, infrastructure investment later in the year should be supportive. On margins in the third quarter, we anticipate gains across our three primary segments as compared to the prior year and first half. Construction Industries and Resource Industries margins should improve as price realization continues to flow through and more than offset manufacturing cost inflation. In Energy & Transportation, we expect pricing to continue to gain momentum and offset manufacturing costs. For the second half of the year, both the enterprise and segment levels, we anticipate adjusted operating profit margin improvement compared to both the first half and the comparable periods of 2021. The impact of price actions should accelerate and though we anticipate continued increases in manufacturing costs, we are starting to let the significant increases, particularly in freight and material costs, that we saw in the second half of last year. Finally, to assist you with year modeling, we currently expect our accrual for short-term incentive compensation to be around $1.6 billion this year. We continue to anticipate a global effective tax rate of around 24% and restructuring spend of approximately $600 million for the full year. Turning to Slide 17. In summary, we performed well in the quarter where demand generally remains strong, but our ability to satisfy that demand was constrained by supply chain challenges. Despite this backdrop, we realized $1.4 billion more in sales and revenue, supported by strong price realization and services. Looking ahead, comparisons should ease in the second half of the year, and despite the challenging environment, we continue to expect to achieve our Investor Day targets for adjusted operating profit margin and ME&T free cash flow for the full year. And with that, we'll now take your questions.

Your first question comes from the line of Jamie Cook with Credit Suisse.

I would like some clarification regarding the second quarter, which fell short of expectations, though we are increasing our short-term incentive compensation. Additionally, can you share your confidence level regarding improving sales to users in the second half of the year? Are there any signs of improvement in the supply chain, and how should we approach this?

Jamie, to answer your first question. So we accrue for incentive compensation based on our expectation for full-year results. And as you know from our proxy, primarily our incentive compensation is based on operating profit, OPEC, and services revenues. So again, the increase in the quarter was not due to the quarter, but it was due to our expectations for the full year. Your second question, we have not seen a significant improvement in supply chain. It's still hand-to-hand combat. Our teams are working their way through those issues. Again, I'm very proud of the team that they're able to turn in double-digit sales growth despite those supply chain challenges, but we have not seen them ease. It changes from component to component. One day, it's one issue, one day, it's another issue. But at the macro level, we have not yet seen an improvement.

One thing to note is that we typically experience stronger production in the first half of the year, especially in Construction Industries. Generally, we would expect revenues to decline in the second half, but we don’t anticipate that this time as we believe we can utilize some of that production capacity to satisfy end-user demand. In Resource Industries, we've faced some commissioning delays, but we expect those to ease, which should benefit us in the second half from a market perspective. This isn’t related to supply chain issues. Lastly, in Energy & Transportation, we consistently expect a stronger second half of the year. Overall, this gives us confidence that we will see improvement in the second half, even without changes in the supply chain.

Your next question comes from the line of Tami Zakaria with JPMorgan.

Could you share what your volume expectation is for the back half? It seems like your volume growth in the first half was in the 3% to 4% range. Do you expect that volume to improve sequentially in both 3Q and 4Q? And what about pricing for the back half, should we expect similar 8% to 9% pricing as well like you saw in the second quarter?

To answer your first question, we do expect volume to grow and price to improve sequentially and year-over-year in the third and fourth quarters.

Yes. Regarding the percentage, in the second half, the volume incorporates both services revenues and SKUs, so it will depend on the performance of both. As we've consistently mentioned, we anticipate an improvement in pricing during the second half of the year, which should enhance overall performance as the year progresses. It's worth noting that we implemented some price increases in the latter half of 2021 as well.

Your next question comes from the line of Nicole DeBlase with Deutsche Bank.

Maybe just digging into that last question from Tami a little bit. On the outlook for volume, is that improvement that you're expecting in the second half fall, or predominantly a function of end-user demand? Or what are your expectations for dealer inventories as well?

Yes. Our expectation for the full year is that we do not anticipate a significant change in dealer inventory. We have seen a slight build year-to-date, but this will depend on demand for each product for the rest of the year. Additionally, part of the inventory build is happening in Resource Industries because we are experiencing some commissioning delays, which we expect to resolve as the year progresses. Ultimately, it is primarily driven by end-user demand. Currently, our challenge is meeting that end-user demand from a supply chain perspective.

And as it typically is the case, Energy & Transportation will be stronger at the end of the year than they were in the first half of the year, particularly solar turbines.

Your next question comes from the line of David Raso with Evercore.

Your backlog has surprisingly increased sequentially and currently appears to cover most of your second half of the year. However, historically, not all backlog ships quickly. I'm curious about the order flow you're experiencing for 2023. While you have a substantial backlog and ongoing supply chain challenges, costs are improving, so I'm trying to understand the demand outlook for next year. You have some programs that allow early orders for 2023. Can you share your insights on the demand for equipment for the upcoming year?

Yes, I have a few comments. Our backlog increased by $2 billion, mainly due to Energy & Transportation. We've noticed a rise in orders from solar turbines' oil and gas customers that will begin to influence our results in late 2022 and throughout 2023. The backlog in Resource Industries is strong and would have grown even more if not for some cancellations related to Russia. Looking ahead, we are not providing predictions for 2023, but we are encouraged by the solid backlog. Additionally, in Construction Industries, we expect the infrastructure bill to start affecting us in late 2022 and into 2023. I'm sharing this context while reiterating that we are not making any predictions for 2023 at this time.

Your next question comes from the line of Jerry Revich with Goldman Sachs.

Jim, I'm wondering if you could just weigh in with your views on how your mining customers will respond given the commodity price volatility. We've seen over the past months, how different is this environment versus 2018 where for a brief period of time and the correction we saw slowing replacement demand as miners hit the pause button. Just wondering if you could compare and contrast based on your conversations with mining customers on prospective orders today?

Our mining customers are demonstrating a strong commitment to capital discipline. That said, we are encouraged by our discussions with them, as they are making decisions with a long-term perspective. The energy transition is expected to drive additional demand for various commodities, particularly in areas like electric vehicles and other minerals needed to support this transition. While we have experienced some cancellations in Russia, we remain optimistic about the medium to long-term outlook for mining based on our ongoing conversations with customers.

Your next question comes from the line of Chad Dillard with Bernstein.

I have a question regarding manufacturing costs. There was a significant increase of about $966 million year-on-year. Is this the peak for the year? Additionally, could you provide insight on the inventory impact on corporate expenses for the quarter and how to assess it for the year?

Yes, Chad. As we began the year, we anticipated a slowdown in supply chain and manufacturing cost increases. We're now starting to compare against significant cost rises from the previous year, and we still face inflation in material and freight costs. We've implemented the necessary pricing changes, so we are hopeful about our ability to offset these costs. I won't forecast for Q3 and Q4, but we expect the gap between prices and manufacturing costs to widen, which will help us address some of the shortfalls from previous quarters, positively impacting our margins. Regarding corporate expenses, it's important to note that corporate items and eliminations include several elements related to the business units but are accounted for separately. The inventory impact is considerable, about $100 million last quarter and a similar figure this quarter. Other factors include warranty costs and inventory profits, all of which affect margins within the segment. It may be challenging for you to model this, but we're trying to provide as much clarity as possible.

Your next question comes from the line of Michael Feniger with Bank of America.

North America retail sales and construction are down 3%. You mentioned the supply constraints. I'm interested in the rental branches and companies that are reporting another quarter of double-digit growth. Do you think there are any competitive dynamics at play, perhaps losing market share, especially in smaller construction equipment due to these supply constraints? How does Caterpillar address this issue with rentals while it seems to be gaining market share in this tight market? I would like to hear your thoughts on this.

Well, thanks for your question, Michael. And of course, we have a rental business as well that our dealers are very focused on. And again, we are in a supply chain constrained environment. So dealer has to make a decision between putting something in the rental fleet or selling it to a retail customer who wants that equipment. And so our retail fleet is aging. Having said that, we're not concerned about share. We're holding our own. It's really an issue of still strong demand and just our ability to completely meet that strong demand. Again, we did turn in a total company level, double-digit sales growth.

Yes. And fundamentally, I mean, obviously, rental is a financing decision and obviously has cost implications. And so for a lot of our customers who are using the machine on a more frequent basis, rental is not necessarily the best option because of the cost implications. That's why we do believe over time, as the supply chain eases, they will be buying machines, and we know they do want those machines. But obviously, in a short-term basis, they may use rental as a stop-gap until they are able to get their machine from us.

Your next question comes from the line of Stephen Volkmann with Jefferies.

My question is on the cost side. We've seen decreases in some of the metals and energy and freight indices that are sort of big and broad. And I'm wondering if you're starting to see any moderation in those costs yet or if there's perhaps another quarter or 2 before that would start to kind of flow through?

Yes, we're still dealing with an inflationary environment, and we have not seen a decrease from our suppliers as a result of commodity price reductions. As you know, it takes a while for those kind of changes to work their way through the supply chain. And of course, there's volatility there as well. So no. The short answer to the question is no, we haven't seen any moderation in those costs.

Your next question comes from the line of Mig Dobre with Baird.

Just going back to the pricing discussion. You've done a little better than 9% in the quarter. But I'm sort of curious if we're sort of thinking about the order intake that you had this quarter relative to what actually flowed through the P&L, can you give us a sense for how the pricing is looking for the most recent orders that you had here? And I'm also thinking about your competitors, right? We saw some of your Japanese competitors report much lower price increases. So I'm curious how you think about competitive dynamics globally around that?

Yes. As we review the situation, it's clear that we have some price protection on orders in the backlog, which we always consider in our decision-making process. Regarding the competitive landscape, I haven't observed any loss of market share due to the price increases we've implemented. We will continue to monitor this closely. Overall, we actually experienced slightly better pricing than we anticipated in the quarter, which is a positive outcome for us. Additionally, demand for machines remains strong, contributing positively to the pricing environment.

And as you know, we've been very focused on services in the last few years and one of the main elements of that is to increase the value that we provide to our customers. So it's not simply always a price discussion. We know we must be competitive, that's very important, but we also strive to deliver increased value to our customers, minimizing downtime, maximizing availability, great product support. Dealers do a great job supporting them. So again, it's more than just price. We're really focused on through our services initiatives, increasing the value that we provide to our customers. And that's all part of their purchasing decision.

Your next question comes from the line of Kristen Owen with Oppenheimer.

I wanted to follow up actually on the services and aftermarket strength that you reported in the quarter. And just if you could offer some context around how much of that is owing to some of the service alert capabilities and the agreements that you've been signing over the last several years versus just what you're seeing from a utilization perspective, how much of the aftermarket parts is related to just equipment that's being used more frequently?

Yes. It's a whole variety of issues. And certainly, utilization is up, which we feel good about, but we're also gaining traction on our service initiatives, everything from the investments that we've made to increase parts availability using a system that we call Pick, which allows us to work with our dealers to ensure that we have the right parts and anticipate what customers will need. We now have 1.2 million connected assets. So that gives us much better visibility for everything from getting the right parts to the right dealer so that the customers get them when they need it to allowing us to help customers avoid downtime, maximizing availability, and maximize production. We've also invested significantly in our e-commerce capability, and we're seeing good progress there. Again, a whole range of digital investments that we're making are really starting to produce results, and we're very bullish on that. So it's really a combination of both. Certainly, utilization is up, but also we're seeing positive results from all the hard work of our teams over the last few years.

Your next question comes from the line of Steven Fisher with UBS.

I have a regional question regarding the construction segment. Regarding Europe, can you provide more details about the end-user demand and the feedback from dealers in light of the softer market conditions? Do you believe this is just a temporary situation ahead of upcoming stimulus, or are we looking at a potentially longer period of weakness? Additionally, in China, do you sense that the recent stimulus announcements could positively impact the market there?

Starting with Europe, revenues decreased in the quarter primarily due to the strengthening dollar, making it primarily a currency issue. General business activity in the EU has slowed, which we will monitor closely. However, there has been an EU infrastructure package that passed, and we are keeping an eye on it as it could have a positive impact on us in the future. There are both positive and negative aspects to consider, and we will see how things develop. In China, we have noticed a market decline. After experiencing strong growth in 2020 and especially in 2021, it is still too early to predict future trends there. To your specific question, we will continue to support our customers in that market. Currently, the 10-ton and above excavator market is weaker than before.

Your next question comes from the line of Matt Elkott with Cowen.

Good to see the continued strong net growth in the backlog. I was hoping you can tell us if you've had any backlog cancellations not related to Russia, as you discussed, but ones that can be attributable to directly or indirectly to higher interest rates, lower commodity prices or the cooling in the housing market? And since the answer to this question may be short, on the locomotive side, I was hoping if you can comment on, I think, your competitor just received a $1 billion order from a Class 1 on locomotive mods. I was hoping you can talk about your outlook for locomotive upgrades going forward and do local upgrades go into your service revenue?

No, we haven't seen cancellations outside of Russia. The demand remains strong across most of our end markets, and our backlog is up. In rail, we are always working to maximize our service revenue in locomotives. The upgrades we perform do contribute to service revenue if we do service work on those locomotives. The number of stored locomotives is still high, but it's below the 2020 peak. We continue to support our customers, which creates service opportunities for us in rail.

Your next question comes from the line of Tim Thein with Citi Group.

I wanted to revisit the earlier discussion about rental, focusing on the potential opportunity for Cat in 2023. You mentioned the aging of the fleet, and we're hearing from U.S. dealers that the rental fleet size is smaller than they would prefer. I'm curious if there is a way to think about a range of outcomes regarding the reinvestment in rental assets for 2023 by the dealer base and what that could mean for Cat as they replenish their rental yards.

Right. And certainly, dealer inventory and dealer rental fleets are lower than most dealers would like at the moment due to a combination of strong demand and the supply chain constraints we have. So I do believe that when supply chain constraints start to ease, both of those represent an opportunity for us to get our dealer inventory back more towards what would be typical for them to expect and also give them an opportunity to increase their rental fleets as well. So I do believe, again, not time-bounding that, but certainly, when supply chain conditions ease, that does create an opportunity for us.

Your next question comes from the line of Dillon Cumming with Morgan Stanley.

Just wondering if you could kind of expand on your prepared remarks in terms of what you're seeing on the resi side of the construction portfolio versus the non-res side. I think you mentioned resi, in particular has been pretty strong for you guys for almost the past two years, I imagine dealer inventories are probably pretty lean at this point. But I guess, do you feel like that part of the portfolio might start to become a drag on back half of the year just into next year, just given some of the softening that you're seeing in the housing-related data points?

Residential demand today remains healthy for us. Certainly, it could moderate somewhat due to interest rates and inflation. However, nonresidential demand is stable outside of China. And again, as I mentioned, due to the infrastructure bill, we are bullish that nonresidential construction in North America, especially the U.S., will improve due to the bill in late 2022 and into 2023.

And just a reminder to everybody, when we see demand softening in certain areas, it doesn't necessarily mean anything negative. Because we are in a supply chain constrained environment, especially with items like engine control modules, those can be redirected to areas with stronger demand. Overall, this shouldn't have any impact on us.

Operator, we have time for one more question.

Your final question today comes from the line of Rob Wertheimer with Melius Research.

My question is really on kind of production and manufacturing. The segment discussion that you gave was interesting, sort of maybe a leading indicator given the current cost accounting on the segments. And so one question is, does price alone get you to your margin expectations for the back half? Or do you have to improve anything on supply chain manufacturing to get there given the segments look lower than the total? And then more fundamentally, Jim, I don't know if you can address how you feel the production system is working, how other metrics you look at, whether it's quality or safety or flow are doing? Are we seeing just cost inflation in a mismatch with price versus cost? Or are we seeing any tangles in the production systems that are more fundamental?

Yes. So obviously, yes, I mean, Rob, we are still seeing issues in the factories, which are causing some impacts on variable labor and burdens across that. Obviously, our assumption in the second half is that those will be slightly better, but not necessarily flowing through as efficiently as possible. We're continually working through as best as we can to make sure that. But price is the biggest driver because obviously, as you know, we put through those increases in order to try and offset some of that material cost inflation that's gone through. But yes, there is inefficiency, but we're hoping that some of that will ease as we go through the remainder of the year.

And Rob, I want to add that we've put a lot of effort into our lean manufacturing processes in recent years. It has been challenging due to supply chain issues, and we've encountered a new term, decommit, when a supplier or their supplier pulls back unexpectedly. As a result, we are not running our factories as efficiently as we'd like, especially compared to before the pandemic. Nevertheless, we are actively addressing these challenges, and despite the inefficiencies that have led to additional costs, we achieved double-digit top line growth in the quarter.

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

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