Terex Corporation (TEX) Earnings Call Transcript & Summary

All right. Great. Thanks, everyone, for joining us. My name is Adam Seiden, I'm the U.S. machinery and construction analyst at Barclays. Joining us for this session is Terex, and they'll be represented by their Chief Financial Officer, John Duffy Sheehan. Just some quick administrative things for this session. On the right side of your screen, you'll see we'll have our audience response questions. For those that are used to attending this conference live, it's the similar sorts of questions, and we appreciate if you could fill those out over the course of the next 30 minutes here. Also, if there are any questions for Terex specifically, I'm happy to ask them on your behalf. Please send me an email at adam.seiden@barclays.com, and there's a link on the left-hand side of your screen that you can click, and we'll make sure we get to that. So with that, Duffy, I really appreciate you being here with us, and welcome to the conference.

Thanks very much, Adam. And I -- we really appreciate the opportunity to talk with your investors today. Let me just take a minute or 2 and familiarize your investors with Terex. Under the leadership of our CEO, John Garrison, we've been working very strongly to make Terex a better, operationally, efficient and effective company. Now we have focused our portfolio on strong businesses that outearn their cost of capital through the cycle. We have strong global brands, whether it be our Genie brand, Terex Utilities, Powerscreen and Finlay mobile crushing and screening equipment, Fuchs material handlers, we have very strong brands with very strong market positions. From a markets perspective, in the developed markets, we're most involved in the nonresidential construction, infrastructure. And in the developing markets, the same nonresidential construction and infrastructure, but adoption of our products and the increased use of our products to make a job site more efficient has been a source of growth for our company. We are also very focused on Lifecycle Solutions and providing aftermarket parts for our -- all of our products and has been a big part of the John Garrison's operational strategy. From a balance sheet perspective, we have a strong balance sheet. We ended 2020 with $670 million of cash on our balance sheet. We have a strong liquidity profile with an undrawn $600 million revolver, so more than $1 billion, $1.1 billion of available liquidity. And so the company, going out of -- out of 2020 and into 2021 as we exit the COVID environment in which we operated in, the pandemic environment, we believe the company is really well positioned for future growth. And we believe that's demonstrated by the financial guidance that we provided last week, which we may get into in more detail during the course of these questions. So our -- we're driving execution of our strategy, driving value for our customers, for our team members, and most importantly, for our shareholders. So with that, Adam, I'd be happy to take your questions.

Thanks, Duffy, for that overview on the company. And congratulations on your performance in 2020 and what was a challenging time for everybody. To start off here, I wanted to talk about inventories a little bit. In 2020, there was -- in 2020, you had some underproduction, of course. You produced at 80% of sales. So could you help us think about on a quarter -- from a quarterly side, what -- where are the impacts going to be the most pronounced when you start thinking about 2021? And then secondary -- the secondary follow-up question to that would be, how are you guys thinking about, not only just producing in line with inventory, but then any potential restock that may come on the back of it, particularly, I'd say, on the AWP business?

Right, right. So correct, right. As you said at the end there, during the course of 2020, our Aerial Work Platform business, and in particular, our aerial products or Genie business did underproduce to the commercial demand environment in which it was operating. It did this because we came into 2020, irrespective of the pandemic, we came into 2020 with more inventories in our Genie business than was desirable. And obviously, the pandemic accentuated that issue. So that during the first 3 quarters of 2020, we did underproduce to demand. To your specific question about the quarters, when you look at 2020, in the first quarter, we produced at about 82% of demand, in the second quarter at 72% and then again in Q3 at 82% before coming up to 99% in Q4. So that's the quarterly split of -- and that's the sales value of production compared to the sales in the quarter. What I would say is that, that underproduction allowed us to take $180 million of inventories out of our Genie business over the course of 2020 compared to the end of 2019 and will allow us, in 2021, to produce in line with customer demand. So that means that even if we had no growth in our Genie business year-over-year, our production would be higher in order to meet customer demand because we were producing below customer demand. As you know, the financial guidance we provided was for 12% revenue growth in 2021 in our AWP segment. And therefore, our production will also be higher in order to be able to meet that increasing revenue customer demand environment in which we'll be operating. I would say that from a -- I think the second part of your question was surrounding the potential inventory impacts over the course of 2021, and what I would say to you is that we do intend to be producing in line with customer demand. If customer demand increases, we will increase our production. I wouldn't -- I'm not -- we're not envisioning a huge level of inventory growth, but I would also say is that the net working capital impact of the higher revenue that we have projected for 2021 is built into the free cash flow guidance that we provided last week for $100 million of positive free cash flow for 2021. So we're very sensitive to making sure that we do not overproduce in the Genie business in 2021, but while at the same time, making sure that we have the right inventory in the right places for meeting customer demand.

Got it. That's very helpful. So on the call, you spoke a bit about the dynamic of the independents coming back in the AWP market, and I think the public guys have been talking about meeting the healthy CapEx here. You talked a little bit just now about what's factored into your guidance. But I guess, first, qualitatively, what do you think is motivating the independents to come out here and buy today? Is it -- is underlying construction demand, fleet aids? Is it buying ahead for potential cost increases? What do you think is some of the drivers that are behind that?

So thanks for that question, and I would say is that we do see utilization of our equipment in the field as continuing to be strong, and I would take that as a demonstration of strong underlying construction demand. Remember that a Genie product, because we're really talking Genie here, mostly Genie here, but is not just simply for new construction, but the renovation and the changing of construction and the use of a particular piece of real estate also factors into the use of Genie equipment. Infrastructure factors into the use of Genie equipment. During the course of 2020, the customer demand was extremely muted, right? Our revenue was below the 2016, 2017 levels. So demand was really low. Fleets shrunk. And so as a result, whether it be as a result of increasing age of the fleet, growth in demand, both of those factors, we believe, are driving the demand across all of our customer base, maybe a little bit more pronounced right now among the independents.

Got it.

I guess last point I would make, Adam, I'm sorry, is that we have -- I don't believe that we see a buy ahead because of cost as being a factor within our Genie business. We are generally establishing prices once a year and very rarely have we changed those prices or added surcharges on them. And so I think that our customers do respect us for holding our prices. So I wouldn't call it a buy ahead of cost.

Got it. That's helpful. Switching a little bit to the margin side of the equation here within AWP. When you look at the AWP business relative to your peers, from what you see on your end, the way you go to market, the way you produce, the way you price, frankly, is there any structural reason why you believe that the broader AWP business or even just Genie should earn a different margin than your peers?

Absolutely not. Absolutely not, it is that when you look at our business and I will acknowledge that over the last several years, the overall profitability of our AWP segment driven by Genie, has suffered. It suffered because of really 2 factors. Factor number one was the fact that we over -- in the second half of 2018, we overproduced to customer demand dramatically. And we exited 2018 with $200 million more inventory, finished goods inventory, than we needed at the time. During the course of 2019 in a weakening customer -- already weakening customer demand environment, we had a very hard time eating into that excess inventory. We got about $100 million out in 2019, but didn't achieve the full $200 million. What I think -- and then number two, second factor, is that coming off of a very strong 2018, the business made too many investments, I'm admitting. We made too many investments or we were too focused on investing for the future in too many areas at the same time. And as a result, our cost structure bloated. Those 2 factors combined, then going into the pandemic, where the volumes fell off the floor, resulted in the lack of profitability that we saw in 2020. But if you look at the guidance that we've provided that we're absolutely committed to for 2021, right, is -- and you were to compare, in 2017, our AWP segment had $2.4 billion of revenue and an 8.5% operating margin. And if you look at the guidance we provided for 2021 compared to 2017, the decremental margin is 18%, better than our 25% targeted decremental margin. So we need volume to continue to come back. No doubt about it, volume is still low. Even though demand is stronger in 2021 than it was in 2020, it's still down significantly from 2019. And as volume comes back, we will continue to drive 25% incremental margin. On top of that, John Garrison has been doing a great job of taking cost out of the Genie -- AWP -- Genie business, the AWP segment. And so I do believe that this business has all the same earnings power of any of our peers. We need to operationally perform better. Our team understands that and is totally focused on it. But as we're going to -- we're executing on commercial, on manufacturing, on SG&A, so -- and being globally cost competitive, Adam.

Yes. Well, that's -- I mean that -- the fact that you're looking back and you're seeing where the business did well or where there was challenges and adjusting for that, I mean that's important for always for investors to here, which is great. And on your -- when you think about the business, the AWP business, you had talked about a large chunk of your raw material costs having been hedged in the AWP business. So I guess my question is, given that you guys are in a -- probably, I would assume, a more favorable position than the broader industry when it comes to raw materials, does that give you any opportunity to try and pursue additional market growth?

I guess what I would say is that this is a very competitive industry and one in which we are seeking to both to balance providing value to our customers at -- for a fair price. And when you look at our 2021 pricing, we're looking to offset the cost of the implementation of the ANSI standards and although we -- you are absolutely correct, we have hedged a nice portion of our North American hot-rolled coil, the predominant amount -- nice being the predominant amount of our North American hot-rolled coil exposure, we do have plate exposure and we do have global steel exposure. So I think we also have steel cost increases that we're having to offset. So I would say is that we believe that the Genie brand and the residual value, the quality of the product are the main selling features that we are looking to sell our product to our customers for. We're going to always seek to provide them the best price for the product that we can, and along the way, hopefully, gain some market share. But I wouldn't say that our strategy is to be discounting price, and therefore, being able to gain market share on discounted price.

Fair enough. One last one, maybe on AWP and then we'll switch over. Just if you think about actually on maybe more on the utility side within there, the business recently, you had consolidated facilities, you moved into the Watertown, South Dakota facility, how does it help your unit economics? And is it safe to assume that being up and running out in Watertown that that's already being reflected in your guidance?

I'll always say yes to that part of it. So I'm just kidding you. But what did we do in 2020? We took 11 buildings, better garages/sheds that the business was operating in, and we consolidated the business into one state-of-the-art manufacturing facility. We've talked historically or over the last couple of years that our utilities business is about a $400 million business with about 9% to 10% operating margins in the 11 sheds that they were operating in. In the -- in 2021, we see the business as being -- we've said, 10%-plus. So we're definitely accelerating the profitability of the business, not really on the back of revenue growth, the business is growing, it's part of the overall growth of the segment, but on the back of manufacturing efficiency because of the fact that they're operating in the one facility. And so we are -- we have improved the profitability of the business in 2021, and it will -- and we do expect it will improve further in 2022 as we continue to become more efficient, more proficient with the manufacturing processes in the new facility.

Got it. So shifting a little bit to MP. So the Fuchs business, it's a volatile business. But when things go well, it goes really well, right?

Yes, that's true.