Terex Corporation (TEX) Earnings Call Transcript & Summary

Good morning, everybody. And we're live here. I wanted to welcome everybody this morning to our fireside chat with Terex, specifically with John Sheehan, the CFO of Terex; and also with Randy Wilson, Investor Relations, to help guide us through our Q&A this morning. John, I wanted to welcome you. And I thought it might be beneficial given that our audience may be more European-based, maybe to take a step back and talk us through who is Terex, where has Terex journey come from, where are we today. I look back in my model and sales at one point, we're about $7 billion. And here we are at just over $3 billion. So maybe in that context, I'll turn it over to you, John, and maybe start with the background who is Terex today, where has Terex come from, where are you on your path to self-help. And I would just remind anyone listening in that if you have questions, please e-mail them to me. I do have my e-mail open in front of me here. So if you have any questions that you'd like answered, please feel free to e-mail them to me during the course of this conversation. So with that in mind, John, I'll turn it over to you and maybe start out with who we are and where we've come from. Thank you.

Good deal. Thank you, Ann, and we really appreciate the opportunity to participate in your All Stars Conference and specifically with your European-based investors. So who is Terex? Terex is a globally diversified industrial company. We have 2 primary segments that we operate in today, Aerial Work Platforms, which includes our Genie brand of lifting equipment as well as our Terex utility truck business which services utility industry principally in the United States. The Aerial Work Platform business represents about 60% to 65% of our total company, in terms of revenue that is. And then our second segment is our Materials Processing segment. The Materials Processing segment has a number of different market brands or industrial brands that are included within the segment. About 60% of the total segment revenue is aggregate crushing and screening equipment. That business based in Northern Ireland has a #1 market position in mobile crushing and screening. So our equipment, which is used to take large aggregate rock and break it down into smaller composites that can be used in different industrial applications, is specifically for the mobile crushing and screening market, has tracked or wheeled -- tracks or wheels on them, which allows the equipment to be moved around either the job site or the mine. In addition to our crushing and screening, we have material handling equipment, our Fuchs material handlers based in Germany for scrap waste handling. We have our tower and rough terrain cranes businesses, which are based in Italy, our Franna rough terrain crane business, which is also down in Australia, serving the mining industry; advanced mixer, which is a front-discharge mixer business for the U.S. market. So as you can see, it's a diversified set of businesses. Common denominator is very strong brand presence, all of our businesses, #1, #2, #3, in their market categories and in their industries. And the Materials Processing segment represents the other 30% to 40% of our consolidated company. And the benefit of the Materials Processing segment is global diversification. They are relatively evenly split in their businesses across North America, Europe, Asia Pacific. Over the last 4 to 5 years, Terex has been undergoing a substantial transformation. As Ann noted in her opening comments, if you go back 4 years ago, Terex had revenue of about $7 billion across 4 to 5 industrial segments. Over the last 5 years, under the leadership of our new CEO, John Garrison, who came in at the end of 2015, very beginning of 2016, John has been transforming Terex from being a -- I'll call it a small private equity company where the principal focus of the company was to purchase industrial companies at the low of the cycle, operate them for a period of time and then seek to sell them at the high point of the cycle. And John has been driving an operational-excellence-first culture, that our focus is not on buying and selling companies but making them operationally excellent. In addition to that, our focus has been that our businesses need to outearn their cost of capital through the cycle. So over the last 2 to 3 years, we have disposed of our Material Handling and Port Solutions business, the remainder of our Construction business, the -- our Demag Mobile Cranes business as well as our North American small mobile cranes businesses. Each of those businesses, while strong brands, did not enjoy strong market positions. And as a result, we're not outearning their cost of capital through the cycle. And therefore, we disposed those businesses. Today, Terex has, as Ann indicated, about $3 billion of global revenue. About 60% of that is in the United States, principally from our Genie brand as well as our Terex Utilities brand, and then the remainder of the revenue relatively evenly split between Europe and rest of world. So I think, Ann, that's maybe a good summary of who Terex is today, and you can build on that if there were areas you wanted me to cover. You can build on something -- ask any question, that is, sorry.

Yes, yes. I think building on that, let's talk about the strategy going forward then in terms of operational targets, where are we versus the targets that have been laid out, what are the things that you are undertaking internally to help achieve those targets. And then what's in your control and what's not in your control and then we'll kind of segue into the end markets.

Sure. So what targets have we achieved? Both -- if I exclude 2020 in this COVID world we're operating in this year, both of our industry segments have been outearning their cost of capital through the cycle. With the substantial -- with COVID-19 in 2020 and a substantial reduction in demand especially in the first half of this year, 2020 is definitely going to -- it has been a tough year for us. We have taken substantial cost-reduction actions to match our cost structure to customer demand and -- but if I look at 2019 and quite honestly into the future, both of our industry segments outearn their cost of capital through the cycle, target #1 that we've achieved. Number two, Terex' net debt-to-EBITDA at the end of 2019 was below 2x, so our leverage, below 2x net debt. And our target would be for net leverage of about 2.5x through the cycle that -- maybe a little above, maybe a little low, but we entered 2020 with our net debt-to-EBITDA below our target. We have not made any acquisitions in the last 4 years. We've returned about 35% of the outstanding shares of the company back to the -- we've returned the capital associated with about 35% of the shares of the company back to shareholders. And having now achieved the profitability and the return on capital of our 2 business segments, I do believe that as the world returns to normal and Terex has access to growth capital that we would begin to think about the question of growing Terex again, building upon the 2 industry-leading segments in which we're currently operating. So where do we need to do better? I would say that when you look at our Genie brand, our -- within our Aerial Work Platform segment in particular in 2020 here, their cost structure has been challenged by the reduction in revenue, and the reduction in revenue is a reduction in customer demand as a result of the pandemic, has exposed the need for us to be more competitive in our cost structure to be able to flex our cost structure better when demand reduces. We're very focused on that right now. We have a significant cost-reduction initiative taking place both with respect to our manufacturing-related costs but also with respect to our selling, general and administrative costs. So I think that's how I would frame what we've done well, the targets we've hit in and where we need to continue to work for Terex.

Okay. Your target was for over 10% operating margins versus the peak 2018. You got to 9%. Prior to that, it was about 7%. Can we still get to the double-digit margins with that volume? Or do we need volume and all the cost reductions that you talked about? And should we kind of put those targets of double-digit margins aside for now until we see volume come back?

The industry-leading brands that Terex operates absolutely have the ability to be double-digit operating margin businesses and volume aside. Quite honestly, I give our Materials Processing segment a ton of credit. For 2019, their operating margins were 14% and they have been operating -- even with revenue being down about 30% to 35% in 2020, they're still operating at very high single -- have been operating in the first half of the year at very high single-digit operating margins. As I mentioned a few moments ago, the Aerial Work Platforms business, and as Ann indicated, had high single-digit operating margins in 2019. With the cost-reduction actions that we've been taking, the business absolutely has the opportunity to be a double-digit margin business. Not per se, indicating that that's where we will be for 2020 -- 2021, excuse me, but rather that the business absolutely has the ability to be a double-digit operating margin business.

Okay. Thank you. Let's segue into the Aerial Work Platform business or the access equipment business. Hugely cyclical business, if we go back to last cycle, estimates are that the market peaked at something like $8 billion in revenue, a trough of $2 billion. We know that in the U.S., roughly 90% of sales go through the rental industry. I guess my question of you is why couldn't 2021 be as bad as 2009? I know you weren't run back then, but I'm sure you've studied it and looked at what happened back then. But if we see a significant drop-off in nonresidential construction, rental companies have adequate fleet, if not excess fleet, and may step out of the market altogether on top of industry demand being down somewhere to your point, about 30%, 35%, maybe a little bit more this year. So speak to us about the cyclicality of the business and why things couldn't get better -- will get worse into 2021 before they get better.

So Ann, I totally acknowledge the cyclicality of the Aerial Work Platform or access business that's referred to by both terms -- the industry is referred to by both terms. I would say it's -- that we don't see the nonresidential construction being as falling off a cliff in 2021. Obviously, only time will tell. But while perhaps the projects that were previously planned, whether they be for office space and so forth, may not move forward, other projects in terms of the repurposing of buildings or the -- or infrastructure projects, we would expect to move forward. And so I don't think we expect to see a huge falloff in nonresidential construction. But obviously, that's not something we can control. Another benefit that the aerial work platform industry has coming at it is the replacement cycle. So in general, rental companies will replace their equipment, their machines after 8 years of their operating life. The rental companies have done a huge amount of analytical work that has demonstrated that after 8 years is the optimal time for minimizing the maintenance cost on the machine and maximizing the residual value on the machine and therefore maximizing the return on invested capital for that rental company. The 8 years is not a black and white on the 7 years and 364 days they're going to get rid of the machine. You can certainly sweat the asset for a somewhat longer period of time, but I wouldn't measure that longer period of time in years. I would measure it more in months. The reason that's important is that if you go back 8 years from 2021, 2022, 2023 into the 2013, '14, '15 period, those were very strong years for new equipment growth in the aerial work platform industry. And therefore, there is a substantial amount of equipment that is hitting 8 years even as we speak right now that rental companies will be turning over and replacing over the next 12, 24, 36 months. We believe that, that is a dynamic for this industry that will be positive for our Genie business. Lastly I would say is one of the reasons we're very focused on reducing our overall cost structure is the point that you made, Ann, about the cyclicality of the industry. When the -- when rental companies can turn on and turn off their CapEx very quickly as a data point in the month of March as the pandemic hit globally, we saw $175 million of customer orders that were canceled in about a 2-week period of time. And as a point of reference, that was 15% of the annual revenue of the -- machine revenue of the business, so a very substantial amount of revenue that was canceled. And so we need to be able to adjust our cost structure just as fast as a customer is able to adjust their capital expenditure purchases both to be able to increase our production and decrease our production to meet customer demand. And that's something that we're very focused on right now.

Okay. And before we move on from access equipment or Aerial Work Platforms, can you just talk a little bit about that business in terms of the mix of business? You've got telehandlers in there as well as lifting equipment. Can you just talk about the percent mix, telehandlers versus aerials? And then talk about maybe the different drivers of demand for bulk and where there may be opportunities in one versus the other? I know you talked about repurposing, which is probably better for aerial lifts versus telehandlers, maybe more data center, crane substitute, et cetera, et cetera. So just talk a little bit about the business mix in there and how the trends may be different for each one.

Sure. Thanks. So when you look at our Aerial Work Platforms or Genie brand business, there are really 3 types of equipment that make up the brand. First, are the booms. A boom is a -- has a telescoping arm that -- with a basket at the end that allows a worker to -- or workers, as the case may be, to work at height and to be able to extend as much as 180 feet into the air to be able to operate at height, whether that be with respect to a construction site for a building or for a bridge or an underpass to be able to work at height. So the first part of the business for working at height are the booms. Then there is also a scissor lift. A scissor lift is also a -- extends a worker or workers to be able to work at height by extending with 2 arms that cross each other -- or multiple arms that cross each other and bring the platform straight up. What is the difference between a -- a big difference between the boom and the scissor is that a boom is able to extend out vertically, whereas a -- or horizontally, I should say, while a scissor lift just moves up and down vertically. The -- our principal focus within the Genie brand is with respect to both boom and scissors that make up the -- booms and scissors make up the biggest part of the segment. The third product category then is telehandlers. Telehandler is similar to a forklift that is used more so on construction sites for moving materials and bringing materials up to work at height. Our focus, as I said, is really on booms and scissors. Telehandlers are a smaller portion of our overall revenue for the business. And also the focus of our telehandler sales is more in the United States than it is in the European market. So overall, I would say is that the booms and scissors are in excess of 80% of our revenue for the segment, which gives you a sense of the amount of focus that we have in the booms and scissors area. We manufacture on a global basis -- our products on a global basis. The North American market is served principally out of the state of Washington in the West Coast, whereas our European and rest of world is served principally from a state-of-the-art manufacturing facility in Changzhou, China, which we're currently in the process of expanding.

That's a good segue. I was going to ask -- my next question was going to be, talk about the trends in China for both booms and scissors. And we've seen this in other developing markets. When labor gets more expensive or governments intervene for the safety of labor, that's when we start to see the access equipment boom, excusing the pun, start to take place. Are we at that point in China? What's going on there? And I've been to the equivalent of CONEXPO over there for many, many, many years. And maybe 15 years ago, I took photographs of competitors already with access equipment in that region. So talk about the competition there and the opportunities for somebody like a Terex.

Right. So what is the primary benefit of access equipment or aerial work platforms? It is the efficiency and the ability to perform more work in a shorter period of time and therefore reduce labor costs and make the cost of the job more efficient for a contractor or for a construction firm. When you look at China, there is a tremendous amount of construction taking place in China, as every one of us knows. Yet when you look over the last years, the principal form of working at height was the use of scaffolding. So we have introduced our Genie brand into the Chinese market a good 10 years ago and both our booms and scissors lines. We produced the same machine -- machines for the Chinese market that we produce outside of China. We're not producing a stripped-down or lower quality, less cost machine. And our focus of -- in selling our equipment with our customers in China is on the same product quality and strength of the residual value and that the machine will -- is reliable. It will do what you need it to do for the full 8 years. And then at the end of the 8 years, you will recover 40% to 50% of the original equipment cost of that machine and therefore maximize your return on invested capital for that machine. The Chinese market has, as Ann was making the pun, boomed over the last years. We've seen, I'll call it, strong double-digit in growth in our business in China. Today, the Chinese market represents about 5% of total Terex revenue, and that's almost entirely from our Genie brand. The competition is certainly intense in the Chinese market. We're not trying to serve every rental customer in the Chinese market. It is certainly the case that there are rental companies that prefer lower quality, less expensive machines that will not last the same period of time. And so our focus is really with the larger rental companies similar to the United States. There are definitely national chain rental companies that have developed in the Chinese market. And our -- and the other thing is that our greatest market share is in the boom market, the technology associated with, the boom given the height at which it extends as what not just simply vertically but horizontally makes the technology much more difficult to make sure that the machine doesn't tip over and create a safety hazard for the operator or the workers that are in the basket. And so our focus really is more so on booms than it is on scissors as the scissor market, just straight vertical lift, has become much more price competitive than the boom market has been. The Chinese market is a significant market opportunity that we see continuing to grow into the future. As a result of that, we are currently expanding our Chinese manufacturing facility to assure that we have sufficient manufacturing capacity to serve the growth of the Chinese market but also then to be able to provide cost-competitive product for both the remainder of the Asian market and the European market.

So we were sitting here today at 5% of total revenues. That's roughly $150 million. How big could that business be in 5 years, do you think?

So we see -- depending upon the quarter, over the last couple of years, we've seen year-over-year revenue growth anywhere from 10% to 40% and 50%. So I -- not that I'm suggesting to you that we're going to see that kind of growth every quarter year-over-year for the next 5 years, but I do believe that the market will continue to grow at double-digit paces and that Terex and Genie will garner its appropriate share of the market. And so I would expect that we should be able to grow the business double digits in terms of top line revenue growth over the next 5 years.

And are margins similar to company average margins? Or would that growth be dilutive to margins or accretive?

It's actually accretive. I would say that at least, to date, the margins in our China business have been as good as any place in the globe. Now I will totally acknowledge, as I said a few moments ago, that the competition is intense but our cost -- we manufacture our machines for the Chinese market in China with Chinese-sourced components and Chinese labor. So we have the same cost structure as any competitor does in the Chinese market. And so we will be able to maintain our margins in line with our competition. And therefore, while maybe the market will become more intense over the next years, we'll be cost-competitive with our peers.