Terex Corporation (TEX) Earnings Call Transcript & Summary

Good morning, and welcome to the Eighth Annual Credit Suisse Industrials Conference. My name is Jamie Cook, and I'm the machinery analyst -- machinery and engineering and construction analyst at Crédit Suisse. In terms of the format this morning, for today's fireside chat, I will be moderating the question-and-answer period with the management team. However, if you do have a question, please feel free to e-mail me at [email protected], and I will make sure I get that question asked for you. Today, I'm very pleased to introduce the management team of Terex. As you recall, Terex is a market leader in their core businesses, which is Aerial Work Platforms and Material Processing. And they've gone through an incredible journey under this management team of fine-tuning the portfolio, repairing the balance sheet, and we think the next leg of the story is the restructuring in the AWP business, ahead of the upcoming recovery and getting those margins back to where their peers are, while optimizing the SG&A structure or the G&A structure and free cash flow conversion. So with that, I am very pleased to introduce the management team of Terex: we have the Chairman, CEO and now President of Aerial Work Platforms, John Garrison; as well as Duufy Sheehan, who's the Vice President and Chief Financial Officer. So with that, a warm welcome to everyone. I hope everyone is okay this morning.

Good morning, Jamie.

Good morning. So why don't we just kick it off to Q&A because we're all morning people here. I guess the first thing I wanted to talk to you guys about is your top line opportunity. Obviously, you have great market share in the core businesses that you're in. However, do you see any opportunities to grow above the market or diversify into adjacent product lines, grow your aftermarket service or geographies? So just trying to find out if there's a story outside of the cycle on the top line?

Thanks, Jamie, and thank you for having us in the conference. And yes, and I think you -- your synopsis upfront was spot on. For the last couple of years, we've been focused on our Focus, Simplify and Execute to Win strategy and really focus the portfolio on industry-leading brands in businesses with significant market positions. As we came into this year, we were transitioning into our new theme for the next couple of years, which is Execute, Innovate and Grow. And what can we do to grow the business. Obviously, the pandemic has put a crimp on that in the near term. But with the stronger focused portfolio, we've got a strong portfolio of businesses, and we do believe we're going to be able to grow the top and bottom lines as we go forward. Within AWP, the dynamics are in the developed world is everything around the construction cycle, the industrial cycle, but also, we're going to have a significant replacement cycle that's coming. Difficult to predict, but given the age of the equipment in the mature markets, North America and Europe, there's a significant replacement cycle that is coming in the AWP segment. In AWP from a growth standpoint, we also have the opportunity to grow in the developing markets with things like adoption, and we're seeing that in China. Rapid acceleration of the use of this type of equipment in those markets. Markets like India, Jamie, haven't even started yet. So there is a secular trend of using AWP type of equipment work at height in emerging markets, which we think will lead to top line growth. And then on our MP business, a similar story, they've done a great job. It's a highly diversified, high-performing business. And the same underlying dynamics, the construction cycle, infrastructure growth, there's a lot of monetary policy in the world today. There's a lot of fiscal stimulus in the world today. So we think that's going to create a good backdrop for these types of -- for our types of businesses going forward. And similar in MP, Jamie, they have the adoption cycle as well in the emerging markets. A place like China doesn't really use mobile crushing and screening equipment at all. It's the world's largest aggregate market by orders of magnitude. And so we're entering into those markets. So we believe there's opportunity, our environmental business, clear opportunity for adoption of that around the world. So we do believe that there's opportunity to grow this business. And you also mentioned, we've been working hard on our Lifecycle Solutions or Parts & Service, and we think there's opportunity to grow that business as we go forward. So our strategy of execute, we have to drive continued improvement in execution. Driving purposeful innovation ultimately leads to growth, both top line and bottom line growth for the company going forward.

And I guess with that, you sort of touched on Lifecycle Solutions. But if we dive a little deeper into aftermarket, I think that's a trend you're hearing across technologies as companies utilize technology to have a better sense of where their aftermarket is. So can you help us understand where aftermarket is today? What's the potential? And/or at some point, can we lay out some targets there? And I guess, from your perspective, how important is technology in terms of collecting data for your equipment? And not only growing the aftermarket in parts, but I'm assuming that gives you a better sense of how the equipment is utilized in sort of life cycle replacement cycle, things of that nature?

Yes. Again, Jamie, you're correct. It is a focus of ours, the Parts & Service Lifecycle Solutions. Our equipment goes to work for a customer, 7, 8, 10, 15, 20 years. And so from a customer's perspective, the Lifecycle Solutions, the Parts & Services is every bit is critical because that's where they get the return on the equipment that they invest. We have been making investments in our Parts & Service business to improve our operational excellence and our commercial excellence, kind of the basics, if you will, fundamentals, running that part like a business historically, we really hadn't done that. And so we've made investments in there. We've also made substantial investments in our telematics and our digital connection. And so we'll put out now tens of thousands of machines now with our telematics solutions on machines with subscription services. And that's providing data to our customers and to us, as you say, how are the machines being utilized? An example of where it helps is we can see the utilization trends of our AWP equipment around the world. So yes, we talk to customers, but we also see the data of what is the utilization. And you can see it's a very high correlation in terms of what they're saying and what we're seeing in terms of the telematics. We have a moniker that we're now focused on how do we monetize that investment. Because it has been a cost increase to the equipment today, but now we're focused on, throughout our whole value chain, how do we take this data, monetize it, to create value for us and for the customers going forward. We've also made investments in our IT systems and our interface systems with the customers. We've made investments in our MP business to integrate our systems with our dealer systems so that we can see the dealers' level of [indiscernible] their transactions at their level. So again, it's trying to connect the digital thread through to the entire operation, and I do think that's important today, and it's going to be critically important as we go forward. So despite the pandemic, these are investments that we've continued to make to position the business for the years to come. But you're absolutely right, it is important to us. We do think we can continue to drive top line growth in our Parts & Service. We haven't -- I think it's competitively sensitive. So I'm a little careful about specifics. But yes, it's profitable. And I will say last year, we did grow our top line 9% in a relatively benign equipment market. We grew our top line in Parts & Service 9%. So we are seeing results of the investments we're making, our Parts & Service team members as well as the technology side of it.

Okay. Great. And then just shifting focus a little. I think the other thing that got attention on your last earnings call was talking about SG&A and the target to get SG&A to 12.5% of sales. So maybe, Duffy, it's more of an appropriate question for you, but just where are we on those initiatives? How do we think about SG&A as we look to 2021? And where sort of are we in terms of the actions that you've taken versus what needs to happen? What inning of the ballgame are we in terms of the actions that have been taken?

Sure, sure. So as we came into 2020, we were planning to make investments in our SG&A whether it be on the Parts & Services side of the business or in the commercial side of the business. And when the pandemic hit in the first quarter, we quickly refocused our initiatives and to reduce our overall cost structure, including SG&A. And over the course of this year, we have been taking substantial action to reduce our cost structure across the business, not just corporate but across the entire company. And you really have seen that progress being made. If you look at our SG&A in the -- both the second quarter and the third quarter, excluding restructuring and severance, we were in about the $100 million per quarter SG&A range. Yes, our SG&A as a percent of sales has been above the 12.5% target that we've had. But that's really as a result of the lower revenue that we've been experiencing. We do expect, as John said a little bit earlier, that we will see top line revenue growth in 2021. And we're firmly committed to our 12.5% SG&A to sales target on the 2021 revenue. As to the extent the world develops less than our current expectation, we will take out additional cost and get to that 12.5%. In terms of what inning we're in, quite honestly, I think we're in about the seventh or eighth inning. We've been [ taking ] the actions throughout this year. And our objective is to come into 2021 properly positioned to hit that 12.5% or better, to be honest, depending on how revenue develops.

Better? What -- why don't we think about it this way as you say better, can you talk to it like on a dollar basis, I think we were thinking not $400 million, not at the run rate of the second half, but maybe a little higher than that, but not necessarily above the $450 million range?

I can understand that, Jamie, right? The $100 million a quarter that we had in Q2 and Q3, that did -- does include the benefit of temporary cost reductions we took here in 2020 to reduce team member salaries, reduce incentive compensation opportunities, and those we will restore on January 1, 2021. We have to pay team members at market. We can't, over the long run, continue to pay below market. So as a result, there will be costs that will come back. That's why we've been driving hard to continue to take cost out. And I think it's fair to think about a number that's between the 2 bookends you just put out there.

Okay. Great. I guess in the other area that's been a positive story for Terex in 2020, despite COVID is, I guess, the free cash flow. The free cash flow has been positive this year. I think you guys have done a good job rightsizing your inventory. So can you talk about how to think about free cash flow in 2021 in a year when the top line potentially grows and where we are relative to your targets?

I'll continue with that one.

Yes, go ahead, Duffy.

But John can then add anything else. The reason we've been very -- that we've been successful with our free cash flow here in 2020 is the fact that we've been very focused on working capital and in particular, within our Genie business and reducing inventories in the Genie business. And as we -- year-to-date, through September 30, we were at $13 million of positive free cash flow. And as you know, and we talked about in our Q3 earnings call, the fourth quarter is our strongest free cash flow quarter of the year. So that we do expect that we'll have free cash flow for 2020 that is at least as great, at least as high as we were in 2019 on substantially lower revenue as a result of the aggressive management of net working capital. As we go into 2021, we intend to make sure that we have the right inventory levels to meet customer demand but also be ready to also grow -- to grow our production to be able to meet increased customer demand if, as we come out of the global pandemic, that demand increases. But at the same time, also not building excess inventories, excess net working capital, and so we do expect that -- I think it's reasonable to assume we will be free cash flow positive in 2021. We're certainly planning for that. And I think that the free cash flow in 2021, as our earnings grow and as we come out of the pandemic, will continue to be a positive story for Terex.

Okay. I guess and just shifting, John, I think we gave you enough of a break there. You've been pretty busy on the taking over leadership of the Access Equipment side. I'm assuming you're spending a lot more time on the West Coast relative to Connecticut. So can you talk about the biggest learnings you've had being, I think, the President there for maybe 5 months or so? And sort of what's going better, what's going worse since you officially took over in August?

Thanks, Jamie. And yes, I am spending time with the team [indiscernible]. Obviously, with the pandemic travel is restricted. But I am spending time in Redmond. So let me start by saying, Genie is a great brand, as you said. It's got a very strong market position. We have a strong team that's competitive, and they understand that our current position relative to other industry participants from a margin perspective is not acceptable. So the team is focused on continuing to improve on multiple aspects of the business. But clearly, driving margin improvement is the principal focus. Let me start by saying the team has done a great job in the COVID and the safety environment, ensuring that we're able to produce. Our Genie team around the world has really done a great job with that, and we can build on that going forward. Jamie, I have reorganized the management team over the last couple of months as I've got on the ground. We put in place a Chief Operating Officer, Simon Meester, who we brought in about a year ago, 1.5 years ago to run our Commercial operations, steeped in the industrial space. Been with some great companies throughout his career, so I installed him as the Chief Operating Officer. So reorganized the management team, really driving what I call knowing the score and accountability. One of the things that we have to have is we have to know the score in every aspect, adding a level of detail in the business, and we have to have accountability to delivering on those commitments. And so that's something from a management system that we've been stressing, but frankly, when I got there, it wasn't to the level that it needed to be. And Simon and I and the management team are absolutely aligned on driving that, knowing the score down to the individual so that we can hold individual team members and managers accountable for delivering to the results. So that is underway. As Duffy said, the team has done a great job, and we've improved our SIOP process over time. We installed, I would call it more analytical group in our commercial operations. Again, we've got a couple of new people in there. So really driving an improvement in the SIOP process, which has really helped us to drive the inventory levels down. And as Duffy said, I think we're in a very good position now from an inventory standpoint, where now we can produce -- we don't have to take inventories down anymore. We can produce to the retail demand, and we'll have the right inventory on the ground to meet the needs of the customers as we go forward. So I think we've made really good progress in our SIOP process. Can we improve it? Yes. Are we going to invest in a little bit more technology there to help us make it more responsive? Yes. But the team has done a good job there. I will also say the team has continued to develop new products, Jamie, as we've [indiscernible], which has been hard. We've launched our J-Series, a level of 2 booms to give a boom stratification in our Boom business. And we're also in the process of launching an e-drive scissor. And so which is a major product launch. E-drive is ASC compliant, and the team has been able to do that while we've been going through the pandemic. So I've been pleased with that. We are focused and the team is focused not just on margins, but also on market share. Our market share has been consistent. We cannot lose sight of market share as we go forward in the pursuit of driving improved margins. And so that's a balance that the team understands, and we'll continue to drive that. And as Duffy said, last but not least, the team has done a good job and that's why Terex has done a good job on cash flow generation this year. And we're not going to lose that focus as we go forward. And so there's some really great things about Genie that we're going to build on, and there are some things that we can improve on the underlying aspects of the business, the management systems to drive that clear level of accountability throughout the organization. And finally, Jamie, it's been difficult, but the team has done the appropriate things. We implemented a restructuring plan in Q3 and we followed it up with another restructuring plan in the fourth quarter that we're implementing. As Duffy said, we want to be at a run rate as we go into 2021 that we need to be at with -- to be successful. And we're going to continue to evaluate. We have to be globally cost competitive in every aspect of the business. And so we're going to continue with that lands. Are we globally cost competitive in every aspect of the business? And if we don't believe we are, we're going to make the changes necessary to ensure that we're globally cost competitive so that we can have the next 50-plus years of the Genie franchise going forward. So it's been a challenging time, but it has been an exciting time. And the team is definitely responding, Jamie.

Okay. I guess it's a good segue just in terms of what you're hearing from customers on the demand side for the Aerial Work Platform. We had one of your peers here yesterday, who's been a little -- maybe a little more cautious on 2021 for Aerials, but they have a different fiscal year than you. So that probably is part of it. But we've had a lot of good news in the past couple of weeks. We've had vaccines. We have a better sense of the political climate that we'll be in. So what are you hearing from customers? And can you share with us some of the data that you're receiving off of the machines in terms of utilization? What you're hearing on rental rates? And how we think about sort of the cadence of buying from the rental companies going forward in 2021?

Several questions in there. So first, from a utilization standpoint, we have seen utilizations improve off the March-April lows as we've gone through the year. We're entering into that season between...

Seasonal, yes.

Yes, Thanksgiving and Christmas, it's -- they call it the turkey drop. So we're -- I don't see anything unusual about that that's going on right now, Jamie, in the North American industry, especially and as well as Europe. So utilization has improved. Talking to customers, they're kind of plowing through this last surge in the COVID crisis. So that's, as you said, I think more of a near-term concern as we move towards vaccines being available. The major rental companies are right in the middle of their 2021 planning cycle. And I can tell you, we're right in the middle of those discussions and negotiations with the rental companies as we speak. I think it's a company are specific in terms of how they're looking at it. I can say, in general, and we're not going to give guidance at this point in time. We're going to know a lot more as we get to February. But in general, companies are looking for growth, growth CapEx. Now how much is the question, all right? But definitely growth off of this year's lows. They have been extending the life of their assets on the Aerial side. These assets have -- and they're very good at managing the cost to operate and the resale value of it. I can say the other positive, Jamie, is despite customers managing their fleets, not wholesale defleeting, but managing their fleets, we've seen used equipment values hold up quite strongly through this downturn, which I also think is a good signal for the rental companies and a good signal for us as well. And so what we're seeing is they're planning their year out. Some are saying, this is how I see the year playing out. I normally give you x advanced purchase orders. This year, I may hold back a little. In general, they're all trying to figure out the first quarter and what does the first quarter look like, and then how does the first quarter develop as we get into the primary selling and use season as you get into the April, May, June time frame, which in North America is obviously the big market. So I would just characterize it as the preliminary conversations are around growth. The question is how much and the timing. And that's what's a bit difficult right now to forecast. Let me also say, Jamie, they realize, as they're looking at their fleets, that they do have a significant replacement demand that is coming. Irrespective of growth, irrespective of utilization and rental rates, which have been good. They have done a heck of a job being disciplined about rates, very disciplined about utilization through this downturn. The replacement cycles out there, has it been shifted to the right? Yes. When is it going to start? Hard to predict, but it will come, and it is a significant replacement cycle based on the age of the equipment and the fleet. So in the intermediate term, feeling pretty good. In the short term, it's just quite difficult to predict. But in the intermediate term, we're going to see growth in that business. I think we're going to see growth in the short term. The question is how much. Intermediate term, I definitely think we're going to see growth as a result of the replacement cycle.

Okay. And I did get a question via e-mail from 1 of the clients. Their question was more on what are the conversations like with the rental companies on the price cost side, you guys have been investing in product innovation, which is a positive. At the same time, you're sort of balancing market share. Just -- is that a headwind that we have to overcome in 2021, but maybe volumes offset that?

So pricing is always a challenge, and I think pricing is always a challenge in a softer market. But so our pricing focus, specifically within AWP, it's a different dynamic within MP. But specifically within AWP, really, our pricing discussions are really around pricing for the cost increases associated with the standard changes that we've had to implement because when [ we implement ] the ANSI standards and those types of things, it does increase the cost of the equipment. So we've been trying to be very transparent with the customers of this is what we're experiencing as a result of implementing the standards, here's the cost increase. We're looking to cover the cost increase. So I'd say price cost neutrality in '21, Jamie, with the focus on really trying to offset the cost increases associated with the standard increases that we've experienced. Now in some markets, it's a little better than that, but in -- I think that's a good generalized statement of what we're trying to get done in 2021 for AWP pricing.

Okay. And then I guess, just shift -- staying on Aerial Work Platforms, I understand we only have a couple of minutes before we're done. But can you talk about the setup for incremental margins on the Aerial Work Platforms side? I mean I think you've been talking about that as a business that could probably generate above the 25% incremental margin, and if the volumes are there, but just your thoughts there? And what type of volume number based on restructuring would we need to sort of get back to prior peak margins for us -- for Aerials?

So I'll start, and John can add in. As John talked about a little bit earlier, we're not satisfied with the Aerial Work Platform margins that we've been delivering, especially here in 2020 as a result of the pandemic and as a result of the actions we've been taking to reduce our inventory levels that has reduced the production and really driven up our under absorption of our production costs. As we go into 2021, we're very focused on growing the top and bottom line the margins for the Aerial Work Platform business. And as we do that, as we increase the production as we'll be producing to customer demand levels, I would expect that we will at least achieve, if not overachieve, I think it's reasonable to assume that our incremental margins would be at least in the 25% range, if not greater than that. Because our focus -- while AWP's focus is definitely about 25% incremental margins. For 2021, it's also about the absolute amount of margin and increasing to become market competitive again.

I'll just add. Jamie, I'll be disappointed if we don't do better than that, 25%. I'll just say that.

Okay. And then recognizing we have 3 minutes, I don't want to miss Materials Processing because it's probably the business that's underappreciated. So 2 questions. Just an update on the demand side. And then again, Materials Processing is one of the more consistent margin return stories. Are there any learnings for -- understanding, it's a different business, but are there any learnings from Materials Processing that can be applied to the Aerial Work Platform business to sort of make it a more consistent return or margin performing business, understanding it's a little more -- it's more cyclical?

Right. So first of all, from the demand standpoint, we've continued to see improving demand globally and across our portfolio of businesses, really since June, in the MP business from a bookings and a backlog standpoint. And again, I think that speaks to -- and why is MP successful? First, they do a great job. But it's a diversified portfolio, both geography from a diversification standpoint but also a product and a business line diversification standpoint. And so whereas, for example, the business that's been under the most pressure this year is our Material Handling, our Fuchs business as a result of what happened to steel prices. But now as you see, steel prices increasing dramatically, we're seeing scrap metal increase dramatically. Now we're seeing that Fuchs business accelerate back up. And we're seeing good order flow that we hadn't seen, frankly, for the last 12 months in our aggregates business. That's been a consistent performer globally, especially, and I think with the macro environment that's setting up for monetary and physical policy stimulus, we're going to continue to see that. So it's been consistent because we're a low-cost manufacturer of high-quality, innovative products. We've got good broad geographical diversity, customer base diversity, which helps us to drive consistency in our top line and consistency in our bottom line. And I will say, Jamie, that, that culture, our MP culture has always been a scrappy, cost competitive culture, and that shows up more so, frankly, in these downturns than it does even in the up cycle. So it's a good business. It's a good collection of strong businesses with strong brands. The other thing I will say about that team is they grow the business in near adjacencies. We have grown our environmental business by taking technology from the aggregates business and putting it into Environmental, Construction & Demolition Waste type things. And so they do a good job of exploiting near adjacencies in their business that lead to, it starts as a couple of million dollar business in 3, 4, 5 years, now it's $100 million business. And so we've done that consistently over time, which helps them to drive the consistent performance. And you're right, we don't get a chance to talk enough about that business because they're just consistent. They consistently execute. They do a good job through multiple cycles. And it's a great foundation for us as we go forward.

Great. Well, with that, I think we're above the top of the hour. So John, Duffy, Randy, thank you so much for your time and your participation.

Thank you.

Great job, and I wish you and your families a very happy and healthy holiday. So thanks again.

Likewise, Jamie. Thank you.

Thank you. Take care.