Terex Corporation (TEX) Earnings Call Transcript & Summary

Good morning, and thanks for tuning in to day 2 of Deutsche Bank's Industrials Conference. For those of you who don't know me, I'm Nicole Deblase the lead analyst for both the multi-industry and machinery sectors here at DB. I'm very pleased to introduce Terex kicking off day 2 of our conference today. With us, we have John Garrison, CEO; John Duffy Sheehan, CFO; Julie Beck, soon to be CFO; and Randy Wilson, who heads up Investor Relations. So the format of today's presentation will be fireside chat, although John is going to kick us off with a few comments today. Before we get to that, for the audience, please feel free to enter any and all questions you have for Terex in the chat window. It's below our faces on the screen. I'll be monitoring that throughout the presentation and can ask management questions anonymously on your behalf. So with that, let's kick it off. And over to you, John.

Nicole, thank you, and thank you for having us, and we really look forward to speaking with you and investors over the course of this morning and today. Next slide, Randy. It's our safe harbor statement, which I'd encourage investors to review at your convenience. Next slide, Randy. The foundation for our ESG efforts at Terex really is our Zero Harm safety culture and our Terex Way values. Really proud of the team members following the Terex Way values, especially over the course of the last 2 years during the challenges that we've all experienced over the pandemic. These values really create a strong foundation, especially as we execute our ESG initiatives. Next slide, Randy. Now we continue to drive execution through our commercial and operational excellence initiatives to ensure we meet the needs of our customers and our shareholders. We have delivered sales and operating margin improvements off the lows from the pandemic. In the near term, our teams are working really hard to overcome supply chain disruptions while continuing to be focused on being globally cost competitive in all aspects of our operations. We were aggressive in 2020 to really adjust our SG&A by taking the appropriate cost actions to size the company to drive the margins needed for the business going forward. These actions have clearly helped our business performance over the course of the last year. And a clear example of focusing on global cost competitiveness, the Genie team continues to manage all elements of their cost structure. And really, just this last week announced the relocation of our headquarters from Redmond to Bothell, Washington, which is close to our current office location. But with this action, we're going to realize future cost savings in terms of rent savings as well as a onetime incentive payment in Q4 of 2021. And again, the team continues to focus on the things we can control as we navigate through this dynamic environment. Next slide, Randy. One area that we can control, and I'm proud of the team, is really continuing to execute on our product development road maps. Genie is a global leader in the development of fuel electric and battery electric products. Approximately 2/3 of our scissor products are offered with hybrid and/or electric technology, and approximately 1/3 of our boom products are offered with hybrid and electric technology. The Genie team really continues to be focused on purposeful innovation, and that's really around delivering electrification and other offering enhancements that provide value to our customers and also enable us to produce the equipment at a lower cost. Next slide, Randy. And our utilities business has really excellent growth prospects. With the need to maintain and expand the electrical grid, along with the continued rollout of 5G telecom, we're in a really good place with this business. This slide highlights the recent product introductions we've made by our utilities team, the Digger Derricks in the Hi-Ranger really used around the maintenance of electrical grid. There's a lot of money that has to go into maintenance. The next one, our Hypower SmartPTO solution, again, shows the technology development and really allows the boom to operate from a battery pack so the truck does not have to idle. This solution is environmentally friendly and frankly, electrical customers are demanding solutions like this. And on the lower right is what we call the Z-45 substation utility boom. Customer came to us with a challenge, and we were able to marry the capabilities of our Genie business with our utility business and really offer a solution that no other company could offer in the space to solve a customer's problem. So our Utilities business will benefit from the much-needed investment in the nation's electrical infrastructure if we're going to capitalize on electrification as part of the climate change initiatives. Next slide, Randy. Our MP business has consistently delivered strong results. The MP business enjoys really leading positions within their respective verticals of their respective markets. We also have good global geographical diversification. The business has positive long-term growth outlooks within -- with the growth of mobile equipment adoption, especially in developing markets like China and India, and in addition, the recent passage of the infrastructure bill will provide tailwinds for the MP's aggregates, concrete and even our environmental businesses within the United States. We have a great opportunity to grow organically through innovation, product and service development and expanding in product adjacencies. And the business has really done a good job here, expanding in the conveying business that we've created just over the last couple of years, our washing business, environmental and recycling. Finally, as we look to deploy capital, Nicole, the business really has attractive M&A opportunities, we believe, as we go forward. Next slide, Randy. So as we think about shareholder value creation, it really does start with our Zero Harm safety culture and the Terex Way values. The team is built on the strong existing foundation for long-term success because it is going to be long-term efforts around our ESG efforts. We continue to drive improvement in our safety results with our Zero Harm safety culture, and we're pleased with the efforts to date, whether it's the recent publication of our 2021 ESG report or the strong ISS Governance rating, but we also recognize there's more to do over a longer period of time to drive the execution of our ESG priorities. Next, around accountability and execution, really, our production and supply chain teams are doing, frankly, a remarkable job, demonstrating tremendous resilience and flexibility to maximize the number of machines that we can ship to our customers given the disruptions that we're experiencing day in and day out. And then finally, turning to our disciplined capital allocation. The great news is Terex has ample liquidity. At the end of the quarter, we had $1.2 billion available to us. So we can grow the business, and we are, we're investing heavily in CapEx in our business. But it also gives us the opportunity and the flexibility to grow not only through organic activity, but also inorganic growth plans. And so Nicole, just a high-level overview of what's going on in Terex, and we appreciate investors' interest in Terex. And I'll turn it over to you for questions.

Thanks, John. That was a really good overview. So I guess, maybe let's start with some questions on the current environment, and then we'll move to some of the longer-term factors. So it's been a few weeks since you guys reported 3Q results, this is clearly just a very dynamic environment, unprecedented time. Can you just give us a sense on what you're seeing with respect to supply chain? There have been a few companies over the course of the past 2 days that have commented that maybe things have started to stabilize a little bit. The first, maybe, positive sign here. So would love to see to hear what Terex is seeing?

And I think the words you used, they're being used a lot, and they're necessary, dynamic and unprecedented. And for us, it's been a challenge, really, since the second through the third quarter. For us, in October, we actually did see a slight deterioration in supply chain. What we measure is supplier on-time delivery, Nicole, and the number of components or parts that are late. And so actually, in the month of October, literally around the world, there was a couple of exceptions where we saw some improvement. But overall, we saw some slight deterioration in supplier on-time delivery performance in the month of October. Again, the team is continuing to work through this as best we can, but we are seeing disruption. And again, I think it's going to persist, Nicole. It's clearly going to persist through the remainder of the year and into 2022. And why do I say that? Because that's because what our -- that's what our suppliers are telling us as we're engaged in those conversations. But it's dynamic, everybody is working hard to overcome it, and it is good to see some potential relief but I think we've got some quarters to go before the disrupt -- we can call an end to the disruption.

Sure. Very fair. And I guess from a longer-term perspective, based on the experience you've had with this environment, do you feel like Terex needs to make any moves with respect to footprint or the way your supply chain is configured? Or are you happy with how it looks today?

Great question. As you know, Nicole, we've spent a lot of time over the last couple of years with our strategic sourcing initiative. And frankly, it really did help during the pandemic. We did consolidate spend with key suppliers. So the result was we became more important to them and when we ran into these difficulties, we had good access to senior management, ability to interact with the problem solve with those suppliers up to and including redesigning components, especially on the electronics side. It also enabled us to identify primary, secondary and growth suppliers. So when the market got tight, we knew where to go for alternative suppliers. With that said, Nicole, the world is very tight for supply, but at least we knew where to go. In terms of shortening the supply chain, I think we can -- we'll probably talk about AWP in Mexico. As we do more in Mexico, I think that will give us the opportunity to shorten some of our supply chain as we look around the world because we are levered to Asia, but it's not just China. We're Southeast Asia, Korea, and the logistics side of that has really been a challenge over the course of the last 6 months.

Got it. Okay. And one thing I wanted to follow up on in your presentation, which I think is kind of new, is the move in the AWP headquarters. So is it possible to size for us, like, the magnitude of the savings that you're getting from that? And you mentioned an impact to 4Q. How big is that? And should we be factoring that into our numbers? Or will it be adjusted out of your earnings?

Go ahead, Duffy.

Yes. Thanks, John. So as you know, Nicole, we only report U.S. GAAP financial information. So we won't adjust the benefit that we receive. Yes, I would say it is a fairly substantial payment that we are anticipating receiving. As John mentioned, we do have to vacate the current Genie headquarter offices before the end of the year and turn the space over to the subsequent tenant. But we're looking at a payment that could be in the $10 million or more range if we achieve what we're looking to achieve. The going forward for -- the benefit of the move then would be lower rent and occupancy costs in 2022 from the smaller footprint, and that's a couple of million dollar benefit a year for the Genie business. So it's a demonstration of the cost reduction actions that we're looking at in all aspects of our business.

Got it. Okay. Very clear. Thanks, Duffy. And then a couple more follow-ups from John's presentation. So I thought the electrification discussion, it's interesting. It's ongoing. John, how has the customer acceptance been of electric vehicles? And how -- have Terex's efforts so far have been more on the AWP side? Or is there also a big electrification opportunity within MP?

Great question. So really, from a customer sales -- not all customers are different because we have unique verticals that we serve, unique businesses. But let's just start with AWP, Nicole. Really, the drive early on really came from Europe in terms of electrification, with North America being a follower. What prevented customers from adopting earlier was the cost point of bringing on the electric technology. As there's more electrification around the world is we're able to capitalize on the growth of lithium-ion and other battery pack type solutions, the cost to produce in comparison to the internal combustion engine is now getting a lot closer with ongoing maintenance costs being lower. Right now, it's still higher but the ongoing maintenance costs bring it in line. So as the costs are being brought in line, I think you're going to see an increase in the customer demand or more pull for those types of products, especially around the booms. Like I say, scissors have been principally battery-powered for many, many years. So that's -- so -- and again, Europe kind of took the lead, North America following, but we're also seeing China develop quite rapidly on electrification as well within the aerial product lines. As it pertains to MP, it's actually quite different. MP does also have quite a broad portfolio of electrical products. And actually, we have products today, crushers and screens, that you can plug into the grid. The issue is, are you always available where the grid is. And so we have hybrid where we [ propul ] with diesel engines and then we use electricity to run the crusher, run the screens and vice versa. So they also have a portfolio of electric products, really across the product line. And again, that's being driven as much by the regulatory customer demand and what's available on the respective site where they're operating.

Got it. Okay. That makes total sense. And then one more follow-up from your presentation, and then I'll get into my actual list of questions. So the utility business. Makes sense to me that, that's a really interesting area for infrastructure benefit for electrification, grid hardening, all that good stuff. Are you already seeing that business pick up? And maybe as a reminder to the audience, how big is it for total Terex today?

Right. Roughly what we've said publicly, it's about $400 million, Nicole, in that range, and it's really a couple of segments. The vegetation management called the Tree segment, investor-owned utilities, so think about the larger power again, and then the specialty rental channel. And in the pandemic, the vegetation management didn't hardly decline at all. The IOU remained constant. What fell off was the specialty rental channel. That has come back strongly. And so we're seeing good growth perspectives in that business. And frankly, the lead times in some of the products are now extending into 2023. So we have work to do in that business. But the macro environment for all elements of that business are quite strong, and we think it's quite strong not just for a year, but quite strong for some period of time given the investment that's required in the electrical grid. And then I think there's $65 billion, in that range, in the infrastructure bill associated with the electrical grid. And that will also help us extend the duration, if you will, of the cycle in that business. So we feel like we're in a pretty good demand environment place. Obviously, in the near term, we're experiencing significant disruptions that we're overcoming. But from a demand standpoint, we like the position we're in. We're also -- it's quite small, Nicole, but it will be an opportunity for us as we go forward. We're actually now producing some of the insulated products in our Changzhou, China facility, and that will give us access to the China -- world's largest electric grid. And so again, it's very small right now. But over time, that could grow to be a meaningful part of our electric utilities business. So we actually like that space quite a lot right now, Nicole.

Yes, definitely, a lot of good growth drivers there right now. And then since you brought up the infrastructure bill, maybe I'll ask my infrastructure bill question. So I mean, it's hard to identify a piece of Terex that wouldn't benefit from infrastructure. To be quite honest, it's pretty broad across your portfolio. Is your view that this is more of like a 2023 event because it takes time for the funds to be allocated for shovel-ready projects to be identified. Is that the right way to think about when revenue might show up?

I think, yes, across all 3 of your questions. Nicole, one, the infrastructure bill really does help across the broad portfolio that Terex has. The overall environment is going to be strong. '22 -- one of the things -- I was engaged in this pretty heavily on my role at AEM. And one of the things that even the politicians learned about is they quit using the phrase, shovel-ready projects. There are no such thing as shovel-ready projects. And so you're right, it's not going to be a 2022 demand environment, there may be some things at the end of the year on the fringe. This is really '23, '24, '25 type time frame to really give some tailwinds to these businesses as a result of the infrastructure bill. Now I will say on the positive side, and I haven't seen the final text so I'm going out on the limb a little bit. But in the Senate version, there was actually some good language, Nicole, around permitting. Because if we don't change the permitting process, it's not only not 2022, it may not '23. And so the language that was in there around permitting was also a key part of the infrastructure bill. So hopefully, that will help accelerate the spend. But again, I would not anticipate a lot in 2022. But clearly, '23 and beyond, this should be a good tailwind for us across our portfolio.

Got it. Okay. Now shifting to just AWP. Supply chain constraints have obviously kind of pushed out the timing of the production recovery, could have been a lot more robust. Maybe that's a good thing, though, it's just spread over more years. Based on how you guys look at the replacement cycle and what you can see from your own historical unit sales, do you now see a path to continued growth within AWP from replacement out to 2023, maybe 2024? Just curious what your own replacement analysis is showing at this point?

Nicole, I think that's a reasonable assessment of what we're looking at right now. And if you just look at the -- and again, the replacement math is that they being the rental houses, replace this equipment plus or minus 8 years. Obviously, it can go around that, but that's the best time for them to maximize -- to reduce the ongoing operating costs, maximize residual value, and they manage it quite aggressively. Frankly, some of the replacements should have started in -- a little bit in 2020, but definitely in 2021. 2020 was clearly, they aged their fleets. As a result of tightness in the supply chain, the fleets are aging now again in -- this year. And so that's just going to push the bubble forward, if you will, and create that stronger demand environment. And so I think it's reasonable to assume right now, and again I say this, I'm not giving guidance, it's the world is. But it's absolutely, based on the math Nicole and customer behavior, to assume we've got a multiyear tailwind on the replacement cycle with Genie. And then you couple that with some growth, the infrastructure bill. And we're anticipating that we could have a good couple of years of growth. Now let me be clear, 2022 is going to be constrained by supply. It's not going to be a demand issue. 2022, and again, that's going to push things into 2023.

Yes, it makes total sense to me. I mean it's rare to have this much visibility into a multiyear recovery and replacement demand.

Right. And again, our crystal ball is quite plotless, to be honest, it's pretty tight, Nicole. But when you look at the dynamics, if you kind of look at the math, that's a plausible outlook for what the future could evolve.

Sure. Yes, it makes sense. And then I know you're in the midst of your usual annual process with the national rental customers. I guess when we think about 2022, are you guys now pretty much fully booked? I mean we've seen some of these CapEx numbers from the big national guys, and they're big. Like, is there still room for IRCs to come in and spend for next year?

So it is -- the demand environment is strong, and it's being constrained, Nicole, by the supply chain. And so we're going to work -- we're being transparent with customers of both the cost issues that we're experiencing as well as the supply chain constraints that we're experiencing. And we need to serve all of our customers as we go forward. And so 2022 is going to be a tight supply market, there's just no doubt about it, Nicole, given what we're seeing right now and given what suppliers are telling us at least through the first half of the year.

Yes. Got it. And how have the pricing conversations been with the national rental customers? I mean all of this has been very obvious in the market. Inflation is a problem, everyone knows. Have they been a bit more understanding when it comes to that pricing conversation. I know it's always a tough thing to talk about.

So we're being -- what we've tried to be and we've said all along is to be transparent, Nicole, with our customers, so really just providing the data, the specific information and saying, given this, this is what we need to see in pricing to at least get to price cost neutral because we're not price cost neutral this year. We're not anticipating being price cost neutral because of some of the backlog in the first half of next year. So we're being transparent. They're always difficult conversations, but they're seeing it everywhere. And so they recognize that normal price increases in this environment are not going to be acceptable.

Okay. Good to hear. And then I feel like we focus so much on the North America rental market, and I do get questions sometimes about, well, is there also this replacement dynamic in Europe and China, maybe not so China, China is a new market. But maybe, John, you could talk a little bit about Europe and whether that's also a dynamic that should help growth there.

Yes, Nicole. And so when you look, North America's a bit more pronounced, but the European market is an established market so it follows similar trends to the North American market in terms of replacement cycle, especially in the Western Europe countries, a little bit more adoption as you go further east. But in general, it follows similar replacement cycles as the North American market. And there has been some consolidation, so rental customer behavior there, similar to rental customer behavior in North America. China, totally different story. China is an adoption story and an explosion of rental companies. And so how that's going to shake out over time, we'll find out. But it's not a replacement market at all yet in China. It's an adoption market.

Clear. And as you've watched the China AWP market evolve, have there been major emerging competitors that could compete with a global player, a best-in-class player like Terex? Or has it still been kind of at the fringes more for little local companies?

No. The competitive intensity in China has increased because several of the large kind of I'd call brand name Chinese manufacturers have entered the space. So the competitive intensity within China has intensified significantly. We continue to enjoy good share in the boom business. Our share in the Scissor business has fallen. Now with that said, the market and the number has grown rapidly, and the number of reporters to the market industry information has gone rapidly. So on the ground, has our share declined quite as much as the reported? No. But with the new number of competitors, it clearly has been under pressure.

Got it. Okay. And I feel like we spent so much time talking about AWP replacement cycle, but there's not as much focus on MP, which I think is actually a very good business. From your perspective, we've got this exciting replacement cycle in AWP. What are the exciting growth drivers on the MP side of the business?

So that's a great question. And it starts with, first of all, it's globally diversified. So one of the things that the MP business has been enjoying is that the rest of the world has been investing in infrastructure, and we've been participating in that growth of infrastructure literally around the world. It's great that the U.S. is going to join the party here, but the rest of the world has been and continue to invest. So if we look at our Aggregates business, the infrastructure bill in U.S. is going to help. That's helped globally. The adoption of mobile crushing and screening equipment has helped grow that business. Concrete is a North American business, principally a U.S. business. That, we believe, will also have good growth. We've seen good growth as a result of the increase in the residential construction. But as infrastructure comes on board there, we think our concrete business in the U.S. is going to have some good growth tailwinds as well. Environmental, that really started, Nicole, in our -- in Europe, and now as Europeans needing to process waste streams, especially construction demolition waste. They just don't put things in landfill. They reuse. That trend now is coming over to the U.S. That trend is starting to show up in places like China. So our environmental business, especially around our CD&E business is, we think, going to have good tailwinds as we go forward. That was part of the reason we bought that factory in China this past year so that we can localize production of some of our products and it will be involved in some of the CD&E activity that will work in China. Next is our Material Handling business. And actually, of all the businesses we have in terms of hours used per year, Nicole, our material handlers have the highest hourly usage of any of our products around the world. That business has recovered nicely. If there's any positive about astronomy, steel prices in the stratosphere, is that scrap metal prices have gone up, and that has really helped that business. So we've seen really good growth, again globally in our Fuchs business. And what we've been doing is also expanding into other markets. A market that we're entering is called bulk port handling. When you talk about the seaports being bottlenecks, but also river ports are bottlenecks for bulk handling of material. So we've moved into a product line that's specific for that. So we're diversifying away from just metals. We actually brand our Fuchs machine Ecotec and we offer a complete solution on the recycling side for some customers. So we're encouraged about the growth prospects of our Fuchs Material Handling business. And last, our lifting business, really led by our Franna business down in Australia. Franna really weathered the pandemic quite well. Actually, Australia, red large did. So we're seeing some continued good growth there. And we brought the Franna product to India, the pick and carry crane, and we've localized it with our engineering team and our production team in India, and we're going to offer a de-specked version in India and the market is -- orders of magnitude larger there, obviously, not the same margin profile. So we think there's going to be some good growth opportunities for our Franna business not only in Australia, but also as we bring that product into India. And then we did see -- we finally saw some recovery in our RT, in our towers business, as well. So I think if you look at the MP business, infrastructure globally has helped some of the specific activities that we've done, branching into near adjacencies around conveyors, environmental. The team does a good job of looking at their environment and bringing solutions to customers where we can utilize our existing technology, our existing distribution channel to drive some organic growth. And they've really done a good job at that, and I expect them to continue to do that as we go forward.

Got it. Okay. Very good. And maybe we should shift to margins for the last few minutes of the presentation. I can't get through a presentation without talking about some costs.

I'm shocked, Nicole.

You knew it was coming. So I guess the question I would have -- there's a lot of moving pieces here, right? Like, you guys have your hedging programs, which have kind of helped a little bit this year. You've been putting through pricing, that kicks in more in calendar 2022. So I guess my question is, if we look at the impact of price costs that you're seeing in the back half of this year, do you think it gets more challenging in the first half of next year? Or does that pricing kick in and it helps to kind of offset what could be a worse inflation environment with hedges going on?

So I'll jump in and then Duffy. So as we've indicated, Nicole, in the AWP business now specifically, we've indicated or signaled, I should say, that we're going to be price cost negative in the first half of the year, offset by price cost improvement in the second half of the year to be neutral for the full year 2022. That's how we're kind of laying out and how we see things. So given that we're going to be not price cost negative in the first half of the year, there will be pressure on the incremental margin side in the first half of the year, especially also that we had a pretty good year-over-year comp, especially in the second quarter, if you look at our performance in the second quarter. So we will see pressure on incremental margins in the first half of the year. Incremental margins recover in the second half of the year. We have been very dogmatic, especially with the AWP team, that we've got to deliver 25% incremental margins in the business. And so we're not backing away from that, especially as we look on a full year basis and as we go forward. But over the way things are flowing, it's going to be challenged in the first half of the year, improved in the second half of the year. But from a managerial focus standpoint, that's the mindset that we have. We've got to drive that 25% on every incremental dollar of revenue we get. It isn't always going to happen. But as we look at the business, that's what we demand and expect of ourselves and of our teams to deliver on, especially in the AWP segment, given that there are other players in the industry that enjoy those types of margins. There's no reason we can't. MP is a bit different, Nicole. We're -- because we look at the starting point for MP and if you look at where they're consistently delivering their operating margin, we -- I won't say we're perhaps a little less dogmatic on the 25%. We push them. But given their starting point and given their ability to invest in businesses and see the growth in a subsequent period of time, we're really more about the absolute level of margin and growth in MP and not quite as dogmatic, if you will, on the 25%. Now they will say that we are just as dogmatic. The reality of it is, if you look at their starting point, it is different. And so Duffy, do you want to add anything to that?

No, you're just demonstrating why I can go and retire.

Your job here is done.

No, that was a fulsome answer. There's nothing more to add there.

Okay.

The last thing I want to hit on, we only have like 1.5 minutes left, is I have to compliment you guys on the free cash. I think free cash has been, it's clear that it's been an increasing focus. We've tried to make that part of our investment thesis with investors. When you think about the free cash path from here, is there still a lot to do on the net working capital side that Julie will take over or like talk about the drivers of continuing on improving on those.

Go ahead, Duffy.

Yes. So first of all, I would say, Nicole, that we really appreciate your recognition of what we've done on the free cash flow side, right? We'll generate more than $200 million of free cash flow in 2021. Now some of that is -- about $75 million of that is more or less onetime, whether it be refunds from the IRS or some back refunds we received in Europe, but still $125 million. And you're right, net working capital has been a big focus of how we've been able to maintain consistent positive free cash flow. I would say is that, quite honestly, with the supply chain disruption we're experiencing, our inventory levels are probably lower than we would like them to be and therefore, it's constraining our demand. So I think that as a percent, our focus really is continuing to reduce our net working capital as a percent of sales. And we're in the teens, and we just need to continue to push that down. So I think there is more opportunity, but we are going to have some pressure on net working capital as we seek to grow our production in 2022 as supply chain disruption wanes.

Got it. Okay. Well, we have to wrap there. We're all out of time. John, Randy, Duffy and Julie, thank you so much.

Thanks very much.

Congrats on your retirement, Duffy. And Julie, looking forward to working with you.

Same. Thank you.

Thank you, Nicole.

Bye now.