Terex Corporation (TEX) Earnings Call Transcript & Summary

Great. Thanks, and good morning, everyone. Thanks for attending Day 3 of Citi's Global Industrials Conference. We're happy to again have the team from Terex with us today. They've been very good, long-time supporters of our conference, and we appreciate that. Supporting or representing rather the company is John Sheehan, the company's CFO; as well as Randy Wilson, who heads up Investor Relations as well as a number of other responsibilities with the company. I am Tim Thein, of course, here from Citi, the U.S. machinery analyst. If anyone has any questions as we go along, just e-mail me at timothy.thein@citigroup.com, and I'll make sure to get that question asked. Why don't we hand it over to you, Duffy, for some opening remarks, and we'll just go from there into Q&A. So thanks, again, and welcome.

Yes. Thanks, Tim, and we really appreciate the opportunity to talk to you and your investors today. And let me just, for a few moments, lay out what we've been trying to do at Terex over the last years under the leadership of John Garrison, our CEO. And John's focus really has been on driving Terex as a more operationally excellent set of companies or brands that can outearn their cost of capital through the cycle. And so when John came in, Terex was a larger, more diversified company, but there was a number of companies that couldn't outearn their cost of capital. And so we have trimmed the portfolio back today, 2 segments, Aerial Work Platforms and Materials Processing, versus the 5 segments that we were when John came into the company. Our Material Handling & Port Solutions business, our Construction segment, our Cranes segment have all been disposed because they couldn't outearn their cost of capital through the cycle. Today, our AWP and MP teams -- companies have strong brands and strong market positions. Our Genie brand, our Terex Utilities brand, our Finlay and Powerscreen crushing and screening brands, our Fuchs Material Handling brands have all very strong market positions. In addition to that, our businesses are very well positioned as we go into 2021, whether it be the replacement cycle for our aerial products or whether it be the additions, the renovations, the upgrades that need to take place to the electrical grid here in the United States for our Terex Utilities business or the infrastructure that is associated with our crushing and screening equipment. So we believe that the markets in which we serve are in a very good position as we go into 2021. We have the strongest balance sheet that the company has had in its history. With -- our leverage is low. We have $670 million of cash on the balance sheet. We repaid $200 million of debt last week. So we have the liquidity to continue to invest in this company and then to grow the company, both organically and potentially inorganically. And that's what our team members across the globe are doing is driving value for customers and for our shareholders. So look, Tim, I look forward to answering your questions -- your detailed questions about the company.

Good. Good. Well, we'll start with one less detailed one to start. Just around the kind of the supply chain. And I think certainly, COVID has led more companies to kind of take a closer look at the reliability of their supply chains, probably exacerbated by all the port disruption and other issues going on today. But Terex has been doing a lot of work for some time in terms of trying to simplify sourcing and just improve your supply chain efficiency. So can you just kind of update us how those 2 have kind of intersected in terms of the work that's been underway for some time, combined with clearly a world that's changed from just -- presumably just a little bit tougher to operate? So kind of update us on that, that would be great.

Sure. Sure. No, look, you're absolutely correct that one of the strategic initiatives that John Garrison has been driving for Terex is our strategic sourcing, which is certainly at its core about improving the pricing for the components that we're purchasing for our products, but it's also about having stronger customer relationships, knowing our -- sorry, stronger supplier relationships and knowing our suppliers, so that we make sure that we have a stronger supply chain, a more reliable supply chain for bringing components into our manufacturing facilities and being able to produce more efficiently. As we hear in 2021 with the COVID pandemic, there certainly is a degree of uncertainty in all of production around the globe, right? All companies are having to deal with the disruptions associated with their team members being afflicted with the COVID virus and, as a result, their production being uneven. If you had our -- my colleague on the strategic sourcing side here with us today, he would certainly go on for 30 minutes about the fires that they're fighting every day. And I don't minimize it in the slightest. We absolutely find challenges each day with respect to our suppliers. Being disrupted and challenged to get us components in accordance with the time frame in which we agreed or to be able to have the availability of logistics to move components. I would say right at the moment in our outlook is that our supply chain will meet -- is meeting the demands we have with respect to the purchases of components from them. We have also built into our guidance that we provided last Friday a reasonable level of friction, call it that, with respect to the ability of the supply chain to meet the commitments they've made to us. And that there would be some degree of inefficiency on our manufacturing as a result of the challenges in the supply chain. So it's a fight every day, Tim. Our supply -- strategic sourcing team is doing a great job of making sure that there are components in our factories in order for our facilities to operate in order for us to meet customer demand through our production. But it's a challenge, no doubt about it. I would hope that as the COVID vaccines take hold across the globe, and we see rates of COVID reduce, that factory efficiency will stabilize, I'll use that word, and that degree of friction that we've built into our guidance would not be necessary.

Got it. I got it. Okay. Maybe we can -- we'll dig in a bit into AWP. And I wanted to start with just inventory swings. And last year was obviously a headwind and then maybe this year is a tailwind. But as you think through a cycle, what tools would you say that has Terex or Genie team, I guess, put in place to kind of try and better forecast demand? And I guess the spirit of the question is, as you think about one of the challenges with that business is you don't have a deal or intermediary. You've got some large customers that can turn the dial off pretty quickly, up or down. And the industry at times has struggled with that because you kind of have to make a bit of a bet on demand at the beginning of the year. So I'm just thinking about, again, high level, what tools have you put in place to try and improve on that -- improvise inventories?

Yes. Tim, your question is a very fair one, right? Because over the last 2 years, our Genie business has struggled with having to bleed down or reduce the excess inventory that was built in the second half of 2018. The excess inventory that was built as a result of our overestimating or not reacting fast enough to the change in customer order patterns, not recognizing that and cutting and shutting off our production fast enough. So over the -- as a result of that situation over the last 2 years, we have put into place a much stronger sales and inventory operations planning system or SIOP process. And that SIOP process begins with having a greater degree of connectivity with our customers as to what their demand requirements are going to be and for then translating that customer demand into a production plan. Quite honestly, if I go back to 2018, and we looked at it retrospectively, we didn't have enough of a connection between what our sales team was hearing from customers and then building that into what we were doing on the production side. And in general, the sales team wanting to make sure that there was inventory available to sell was being more conservative on what they were hearing from customers. And as a result, the production team didn't necessarily follow what they were hearing from the sales teams. And so it was not a -- really a process that was built upon trust. It was not a process that was built on empirical data, but it was built more on a -- okay, this is what I've seen them do in the past. So the sales guys are saying this, I'll do that. And that's not really a good place to be. Today, we have a very disciplined sales and inventory operations planning or SIOP process that starts with real data from the customers with respect to what their demand requirements are going to be, both in terms of real purchase orders they provided to us but also real feedback on what they are expecting their more further -- longer-term purchasing requirements or purchasing plans to be. And then translating that into a real production plan that is overseen by the senior leadership team of the company by -- of Genie. And that there's regular feedback sessions that involve both the commercial and the production teams to make sure that the process is right and overseen by the finance team. And I would say the process was a little bit too much on autopilot in the past. We're benefiting significantly right now from John Garrison's leading our Genie business, our AWP segment, in addition to being CEO of the company. John brings a lot of strong operational experience from his years, whether it be it Case or Bell Helicopter in terms of SIOP operations. And so all of those things, I bring them together and say is that the -- if you will, sins of the past, and I don't blame anybody, but we are much more disciplined today. We have an outlook for the full year 2021 that's grounded in the financial plan that we laid out for the investment community last Friday. And we're going to make sure that we don't overproduce in 2021. Net working capital will be a use of cash in 2021 as the business grows again off of the low 2020 levels. That use of cash is built in -- for net working capital is built into the guidance that we provided last week for free cash flow of $100 million in 2021.

Got it. Maybe talk about the -- just the operating conditions in the markets, and I think you have a good lens of this, just given your own telematics data, probably not super informative from the standpoint of utilization levels in February. But I'm more interested in the -- as you look at kind of accumulated hours, engine hours, there's certainly -- if you look at a lot of the age data that's being reported by your one big customer yesterday, another one today, you're seeing that average age in years push up. What are you seeing or what can you kind of glean from your own telematics data with respect to accumulated hours and how that could kind of translate into fleet replacement?

Yes. I think there's -- so today, we have 36,000 machines that we have connected through telematics that we can get on a daily basis information with respect to their -- the operations, engine hours and other information to help us. And so telematics is a very significant innovation that's been in place on every machine we sell since the middle of 2019. What that data says to us is that machines are being utilized, quite honestly, at pre-COVID levels. The fleet of machines that is out in the market is quite smaller today than it was in 2019 as a result of the shrinking that occurred last week -- last year, not last week, last year. And so that smaller fleet is being utilized. And when the fleet is utilized, that also means that it ages, to your exact point. We believe the replacement cycle is alive and well that, to a certain extent, it got extended through the lower utilization of equipment, say, in the first half of last year. But that as we move into the latter part of 2021 and into '22 and '23, that we will continue to see increasing replacement demand from our customers as the fleet ages to that optimal area for replacement of about 8 years. The last point I would make, Tim, where telematics is a real benefit to us is, not just simply with respect to information about the machines and their age and replacement, but it's also with respect to being proactive with the customer about parts and services that we can offer them to make sure that the equipment is being properly serviced. Today, when we see that engine in the machine approaching a regular service interval, we proactively reach out to the customer to sell them an engine service kit with the replacement parts that are necessary for that servicing of the machine at that interval. So there are benefits that we receive from the telematics data with respect to being able to predict when machines will be replaced to talk to customers about replacement machines, but it's also about the benefits on the parts and services side of the business also.

Got it. Got it. Maybe just as you think about the conversations with rental customers, and I think often, sometimes in the investment community, we kind of focus on the handful of public companies, but obviously, there's a whole community of independent companies, dealer -- OEM dealers, et cetera, that you're selling to. So how is the discussions with some -- again, some of those smaller customers that don't always flex up and down the same way that the big NRCs do in terms of maybe there's a little bit more or less rigorous management of the fleet, a little bit more of a kind of a gut feel that they follow? So how do you think -- or how would you kind of characterize, again, the tone of that, again, the non-public companies that we all track?

Yes. I think the tone of the discussions with all of our customers, national, but also independents, is positive here in 2021. I would say the equipment utilization trends that we're seeing are not significantly different between the national or independent rental companies. I would then say that the -- if anything, quite honestly, the independents pulled back hard last year and so probably have a greater level of purchase orders in the backlog at December 31, 2020, than the national accounts do because of -- then or they would traditionally have because of the need to replace fleet that they didn't replace in 2020 as a result of the pandemic. I would also say that when you look at is -- because our backlog is obviously global, our business is global, that we are also seeing a stronger independent trend for -- in the backlog for our European region for 2021. So I think that's a positive sign because the national rental companies -- they tend to have a more disciplined purchasing process, whereas the independents will be a little bit more of a gut feel. So the strength in the independence in our backlog can also be viewed as a sign of the strength of the industry as we come into 2021.

Yes. Interesting. Okay. You mentioned Europe. Maybe we can switch to some of the international markets. And it's interesting, when I looked at the decline in Europe from '19, and there's probably some currency effect in here as well, but down a lot more than North America from '19 levels. And again, not the most meaningful part of your business, but still important nonetheless. And I think there's been a fair amount of consolidation amongst the large rental houses there over the past couple of years. Presumably, that's played some role. But maybe talk to that -- again, what has happened there and then maybe the outlook for recovery in Europe?

Yes. I would say is that you're correct that there has been consolidation of the customer base in Europe. We still enjoy a very nice market share, stable and market share with customers in Europe. The European business -- our European business -- our European bookings were up in the fourth quarter, in particular the month of December. But I would also say is that I would acknowledge that the North American market has been stronger, has been recovering more strongly than the European market has. And we will continue to press forward with the European market and would expect that over the course of the year as the COVID vaccines rolled out -- roll out that the European market will continue to improve.

Got it. Got it. And then China, obviously, it's grown to become a more relevant and important market for Genie. Maybe you can talk there in terms of your expectations. They've obviously had some bigger growth year, so the comps are more difficult. But the outlook there as well as there's -- given all the factory expansions that have gone on, just where and how Genie competes from a product line perspective in China versus, say, 3 years -- 3, 5 years ago?

Sure. So number one is, is that when you look at the China market for us today, it represents about 5% of total Terex revenue. So it is an important market for us, no doubt about it. We have a state-of-the-art manufacturing facility in Changzhou, China that produces for the Chinese market and is sourcing from the Chinese market with Chinese labor. So is globally and is cost competitive with the Chinese cost structure -- with a Chinese cost structure. The market is growing significantly in China. But I would also say, Tim, that it's a -- I'll call it a bifurcated market. There is the -- there are plenty of lower quality, less durable pieces of aerial equipment that are produced, probably more scissors than booms, to be very honest with you, because they're -- the boom has a higher degree of technology and risk associated with it for the operator. But -- and our focus is not on serving the entire Chinese market. We're not seeking to compete with the lower quality, less durable pieces of equipment. We produce the same specifications for our Genie machine for the China market that we produce for the U.S. market or the European market. And as a result, we're selling our -- the Chinese customer that we're serving on the basis of the quality of the machine, the reliability of the machine, and, really importantly, the residual value of that machine. And we're demonstrating to that Chinese customer just like we're demonstrating to URI or to Herc the return on -- the maximization of their return on invested capital on the machine. And so our Chinese business is growing probably more -- not probably, more on the boom than scissor side of the business, quite honestly, where technology is stronger and, quite honestly, the margins are better. And -- but it is a very fast-growing market. We have a very strong customer base. And we are producing from our Changzhou manufacturing facility. We're expanding that facility in order to meet customer demand. And China will continue to be a very good market for our Genie brand in years to come.