Terex Corporation (TEX) Earnings Call Transcript & Summary

Good morning, everyone. This is Jamie Cook from Credit Suisse. I cover the machinery as well as the engineering and professional services space. And this morning, we are going to kick it off with Terex Corporation. We're thrilled to have with us today Chairman and CEO, John Garrison; Senior Vice President and Chief Financial Officer, Duffy Sheehan; Julie Beck, who's new to Terex, Senior Vice President of Finance, and she will become CFO when Duffy decides to retire next year. And then we also have Randy Wilson, who's Director of Corporate Treasury and Investor Relations. So this is a very special conference for us because Duffy -- is this your last conference, Duffy?

This will be. And I assure you, I have decided to retire. Julie will take over as CFO on July 1 -- January 1, January 1.

January 1.

Seems we're [ hitting it off ] already. And Julie, welcome.

Thank you.

It's a pleasure to work with you, and it's great to have you on board. And you've got some big shoes to fill with Duffy retiring. But...

I realize I do, yes.

But Duffy, before I forget, thank you for all your help over the years.

Thank you.

But with that, I guess we'll just kick it off, John, maybe I'll turn it over to you. I know investors are going to be interested in what you're sort of seeing in terms of near-term trends across product line, across geography, whether we've seen any change since the third quarter and then what you're seeing on the supply chain side.

Sure. Thanks, Jamie. It's great to be with you again. If we look at the demand side, Jamie, we're seeing strong global demand and momentum across -- literally across the world. If we look at our AWP segment, which is our Genie business and utilities in North America, our order activity remains robust across all customer segments. Bookings at the end of the quarter were up 182%, and backlog is up over 600% over prior year levels. And even when compared to pre-pandemic levels, they're up. We've been engaged in program discussions with our customers a little earlier this year, as customers look to secure their slots in the order book under the assumption, which I think is a valid assumption that there's going to be supply constraints in 2022, and we can talk about that. If we look in Western Europe, similar story, Jamie. Orders were up 140% over the prior year. Backlog is up almost 300%. So very similar dynamics in Western Europe as in North America. China, APAC, same story. APAC continues to grow. China slowed a little bit, but that was after a very strong year prior and really some timing of some larger customer orders. And so again, continued strong growth. And then on the utility side, same situation, orders up about 120%. Backlog up almost 400%. And so the utility side of the business from a demand standpoint remains extremely strong. And then if we look at our Materials Processing business, it's really performed incredibly well throughout the course of the pandemic. We're seeing good growth around the world. One of the things, Jamie, as governments around the world have been investing in infrastructure, I'm sure we'll talk about the infrastructure bill and the impact on tariffs, but it's going to be positive for all of our business, but especially our MP business as we go forward. We've seen really good strong growth in our aggregates business. Again, globally, that's what we're encouraged by, is it's not one region of the world we're seeing good strength globally. And I think that's a result of our leading position in our mobile crushing and screening business. Environmental business, Jamie, which is a business that we really created over the last couple of years with new product introductions into our -- some of our existing distribution channels. We think we like the long-term trends there. Construction demolition waste is going to be good. Our [ CDI ] business around biomass has been strong. And so again, seeing really good growth in our environmental business. And then on our material handling, I guess one of the only positive benefits of high steel prices is that scrap metal prices have gone up significantly, which has really increased the demand environment for our Fuchs material handling business. On that business, we're expanding out into other segments. So we're not so totally dependent on the steel side, and that's helping us. For example, we're cross-branding our Fuchs machining as part of our environmental offering to handle environmental waste, and we're seeing growth in a segment there that we had not previously participated in. So material handling is looking strong. And last but not least is our lifting business, our Pick & Carry business is a great business down in Australia. It really weathered the pandemic quite strong. We've continued to see good growth. And even in our [ RT ] and towers business, specifically in the European market, some improvement in the Middle East. We have started to see a recovery in there. So overall, Jamie, we're seeing very strong global demand. And really, to be straightforward, demand is not the issue. The issue is going to be supply chain and suppliers' ability to meet the demand that we're seeing both in the fourth quarter, but as well into 2022.

So on the supply chain side, if you could just elaborate a little more. It doesn't sound like you're seeing any improvement. Is that the right way to characterize it? Or at least is it getting less bad, could we say? Or is it stable -- bad at the same level, I guess, I would say?

That's a good way to look at it, Jamie. But similar to other industrial equipment manufacturers all over the world and suppliers, what we're seeing is persistent disruption in our factories, and it's really due to component shortages and really compounded by the logistics and logistics-related delays. We actually did see a [ slight ] deterioration in supply, our on-time delivery performance and the number of supplier parts late in the month of October. Now the silver lining, it was not a precipitous deterioration. But nonetheless, we didn't see it improve and perhaps you could use the word starting to stabilize, but we did not see that improvement in the month of October. And it's -- the challenge right now, Jamie, is it's pretty broad based across multiple components. We've all heard about all the electronic-related activities with chips. So that impacts our controllers, our screens, our engines. We've seen hydraulic issues. And then last but not least is the logistics issues. We do have a global supply chain. We're a global manufacturer, and logistics delays have really impacted us. And what's happening, Jamie, is that any slight disruption in the logistics channel or a supplier issue because there's no inventory in the system, we can't absorb that variation. So you feel it immediately on the shop floor, which causes us then to make decisions that we continue to produce, stop produce, our choice, Jamie, for the most part, really across our business lines around the world is we've been continuing to produce to the level we can. And if we have to, we'll take it off the line, put it into what we call the hospital and continue to produce. And then when the components show up, we'll bring it back in, complete the unit and then ship it to the customer. Clearly not efficient, but we believe it's the best way to meet the needs of our customers and to get product to our customers. Because if we shut down hard, we're never going to make up for that time. So I would say, Jamie, from -- in the most important conversations we're having, and this is what's unique, is the demand environment is incredibly strong. We're going to have great visibility going into 2022. And I think we can talk about what we think it's going to do going longer because I think we're in a strong demand, multiyear demand environment, whether it's AWP replacement cycle, infrastructure strength of the MP. But for 2022, it really is about what can the supply chain, what can suppliers deliver to us so that we can produce and meet the needs of our customers. And so it's a constant battle. I think the team has done a really good job demonstrating adaptability, flexibility and resiliency. But every single day is a new challenge, a new surprise, and we have to overcome it to meet the needs of our customers. But it is a challenge on the supply chain [ side ]. That's not news to anybody. But every single day, our purchasing teams, our supplier management teams, strategic sourcing teams, they're working incredibly hard to overcome the challenges. And I have a little quote, I took on a new job here in the last 6, 12 months. I'm the Chief Expediting Officer as well because [ we've been ] engaged. And that's what I'm spending time with, Jamie. And what's really interesting about it is for the first time in my career, I'm spending time with CEOs of Tier 2, Tier 3, Tier 4 suppliers to our Tier 1 suppliers to ensure they understand the ramifications and implications of their continuing misses, what it means to us and working it out. Now on the positive, we've got to be optimistic. We're all motivated by the same thing. There isn't anybody in that chain that wants to disappoint the next customer down the line. So it will work itself out, but it's going to take time, Jamie.

Okay. That's helpful. And then can you just remind us of the pricing actions you've taken so far and whether you still think there's the ability to be price-neutral in 2022? And are you seeing any of your customers balk at the price increases? Or is it just -- and I guess, how sticky do you think that will be once material costs start to moderate?

In typical Jamie fashion, there's about 3 or 4 questions there. So if I don't get them all...

I only got a half hour, John, come on.

So we've taken multiple price actions. So if we look at our AWP business, we took price actions during the course of the year, but a lot of that was in backlog. We have been taking price actions, Jamie, with the exception of in the October time frame, we did institute a surcharge on our AWP Genie business, specifically around logistics surcharge to try to offset some of the dramatic increases in logistics costs that we're seeing. So our strategy has been these have been price increases, not surcharges with the exception of a surcharge in our Genie business, really principally for the North American market and the European market. In the case of -- and we are not price cost neutral. We have not been in 2021 in the Genie business. We haven't provided margin guidance for 2022. But what we have said, Jamie, is we believe that we'll be price cost negative for the first half of the year in our Genie business, and that's a result of what's in the backlog, what's carrying over that we were not able to deliver in 2021. And then the second half of the year, we get to price cost positive. So that for the full year, we anticipate being price cost neutral for the full year in our Genie business. Now MP, different story there. We've been pricing dynamically. And so we've taken multiple price actions in our MP business, and I think that's shown up in their margin performance. And we will continue to take those pricing actions such that we believe we'll be close to price cost neutral in the MP business principally as we go through the year, which is different than our AWP business, where we don't believe we're going to be price cost neutral in the first half of the year given the backlog, the carryover, the pricing, the timing of the pricing actions going forward. So -- and then in terms -- I think you asked about stickiness, Jamie.

Yes.

I think prices are going to stick, Jamie. These are real cost increases that we're seeing. Part of the reason we did pricing and not surcharge other than that logistics surcharge is these costs are real. Our customers are seeing these cost increases across their businesses, across the vendors that are supplying to them. And I think they're going to stick because they need to stick, Jamie. There is inflation in the marketplace like we haven't seen in quite some time. And so we're anticipating and our position will be these pricing actions will stick specifically when you look at -- frankly, we haven't covered price costs, especially in our AWP segment this year, our approach is the prices will stick even if we see some amelioration and hopefully, we will because we can't continue to see the material cost increase rate that we're seeing and saw again in the third quarter.

And then can you remind us your assumptions on hot-rolled steel in the first half of the year versus the second half of the year? And then do you think it's possible to hold it for the full year, 25% incremental margin? To what degree can you speak to that or around that?

Yes. Duffy, you want to take that, a little commentary?

Yes. So in terms of the first part of it on hot-rolled coil, we do -- we use both hot-rolled coil and plate steel, although we use more hot-rolled coil than plate. And when we look -- as we think about our 2022 planning assumptions as well -- both for our own budgeting purposes as well as pricing, we've assumed that hot-rolled coil would be in the $1,800 per ton range for the first half of the year, $1,200 per ton for the second half of the year, which is generally in line with where the forward curve was earlier this fall. And we would acknowledge it has come down somewhat, but it's obviously a very dynamic environment right now. As you know, we -- on the second part of your question in terms of incremental margins, we, as you know, target all of our businesses to have 25% incremental decremental margins. And on the AWP segment, we're very much committed to those for 2022. I would say that with respect to our MP segment, while we still are focused on and targeting the 25% incremental decremental margins, given the segment's overall operating margin in the, say, 14% range. We're probably a little less dogmatic about holding them directly to that 25% and more focused on the absolute amount of operating margin and continuing to grow the operating margin.

Okay. And I guess, Julie, welcome, and I'm happy that you're here with us today. Could you just provide some sort of initial observations? I understand it's early days at Terex, sort of what attracted you? And I guess, I believe under your leadership, your prior company acquisitions were a larger part of the strategy. I'm just wondering if that's -- if M&A -- if that implies M&A is a bigger opportunity for Terex going forward?

Okay. Well, thanks, Jamie, and I'm happy to be here and happy to meet you and happy to be part of the Terex team. Terex has great brands, great products. I've spent my career in manufacturing companies. And they have great people, I'm finding out through my orientation as well. I've had the privilege of going to Watertown, South Dakota in our utilities business in the last couple of days. I was at Northern Ireland and went to one of our facilities in our MP business and also visited our global business services locations. And all of the people are excited, engaged and their enthusiasm is contagious. So it's really fun to be out traveling again and seeing the products, the great products that Terex makes. So Duffy has done just an outstanding job of developing a great finance team, and I'm excited to get to work with that team and excited to work with Duffy and close out the year, and I thank him for leaving a strong balance sheet as well. And so he's just done a really nice job. And in terms of acquisitions and M&A, I wouldn't say I do have that experience, but I wouldn't say that there's any big change in M&A. We'll continue to be very, very, very disciplined with M&A going forward.

Okay. And then I guess, John, shifting back to you. You talked a little bit about the infrastructure bill. But I'm just wondering since the infrastructure bill has passed, sort of conversations with your company and what do you think that means for the -- what it implies for the cycle or Terex' growth trajectory over the longer term?

Yes. Thanks, Jamie. First of all, we're excited about it. This is something that the industry has been working on for a long time in my role at AEM in the Policy Committee. And so the infrastructure bill is, first and foremost, is absolutely needed in the United States. Those of us that travel the world, we realize we're lagging from an infrastructure standpoint compared to other countries. So in terms of the infrastructure bill, first, Jamie, I think the politicians have learned there's no such thing as shovel-ready projects, all right? But with that said, there is permitting language in the bill that should facilitate and accelerate the permitting process for these new projects. So I think that's also important to understand. Now we'll see if it really plays out, but at least the language is contained in the bill to facilitate the permitting process. So I don't think in 2022, it's going to be a demand driver. With the exception of it's a positive market backdrop for all of our customers to know that this is coming. So I think if you think about long-term demand trends for the next couple of years for Terex, I think the infrastructure bill is clearly going to be a good tailwind for us and it should be a good multiyear tailwind for Terex. And again, that's our AWP business. Clearly, our MP business, when you think about the aggregate side of the business, clearly, will be a beneficiary of the infrastructure bill. So we think that multiyear trend is going to be favorable. We think we're in an up cycle. And frankly, we're planning on this up cycle to be a multiyear up cycle. And then you put on top of that, Jamie, the natural replacement cycle in the Genie business. And the replacement was delayed in last year as a result of the pandemic. It has been delayed somewhat this year as a result of supply constraints. I think it's going to be constrained again based on what suppliers are telling us for 2022. So the replacement cycle is there, but I frankly think it's going to be delayed not because of demand, but because of the supply constraints that are there. So you put those factors together, and then you look at our utilities business, we think there's going to be ample growth there. There's, I think, $60 billion plus or minus in the infrastructure bill for electrical infrastructure in the U.S. And so we're positive about the intermediate term from a demand environment standpoint, again, the challenge is getting the supply chain, getting suppliers to get us supplies so that we can build to the demand levels that our customers are requiring. So from a demand environment, infrastructure bill, it is a net positive for us. It's a good tailwind, and we think it will be a good multiyear tailwind as we navigate through the near-term challenges of the supply chain.

And then as you think about the infrastructure bill and what it could mean for your business, is there any sort of incremental investment that is required by Terex in terms of capacity and are there M&A opportunities that could better position the portfolio to benefit from the tailwinds associated with the infrastructure bill?

Well, so in terms of -- we have had a pretty -- if you look, I mean, I'm proud of our -- and Duffy deserves a hell of a lot of credit for this, the improvement in our balance sheet and the improvement in our free cash flow generation. And that's on top of sizable CapEx investments in the business, Jamie. So if we look at like take our Genie business, in the third quarter of this year, we only produced like 60% of what we did in the third quarter of 2018. And we have our Mexico facility starting up. So we produced our first unit in our temporary facility. We're building a special purpose-built facility in Mexico. So we are making that capital investment to have that available. We've made the capital investment to see expansion in growth in our utilities business as well as we've been investing amounts to expand capacity in our MP businesses, around our aggregates business, our Materials Handling business. We've made some investments for expansion in our India plant. We made investments in our plant for -- in China. So we're still investing at a high level, Jamie, on the CapEx. I think that's going to continue for the next couple of years and for no other reason than our Mexico plant. So that is part of our plan. So we feel pretty good about our capacity and the capacity that we're bringing on in shifting some of our manufacturing base to other locations that we'll be able to participate in the upside. Again, right now, it's really getting the supply base up. And then there are some tightness in labor. But again, we think our strategy over time is going to help alleviate some of the tightness in labor that we're seeing specifically in the U.S.

Okay. And then Materials Processing is probably an underappreciated unit when you just think about the margin profile of that business and the consistency there. Are there any opportunities to -- you've done some small acquisitions in Materials Processing, I'm just wondering if there's more there. And at some point, is there an opportunity for -- to break out one of those product lines and potentially make it a third leg over time, a bigger -- just a bigger part of Terex's overall earnings stream?

Yes. And you're right, Jim, we did get back into the M&A side and the acquisition side with 2 smaller acquisitions in the MP space. We do like the MP space. First of all, it's a high-performing business. And when you look at the dynamics within the business, Jamie, there's still a high degree of fragmentation. And so we think there is the opportunity to build out our businesses within our MP space via acquisitions. And so we're building a pipeline. We are active in that pipeline. We do think there will be opportunities. As Julie said, we're going to be disciplined. Valuations are...

Probably high.

And so we need to remain disciplined. But we do believe that there would be opportunities in that space. And ultimately, I think what you said is kind of where we would like to go is that ultimately, there should be enough opportunity there where we could create multiple segments within the MP segment going forward. So as we look, it really is around our MP and utility spaces where we do think that there will be some good M&A activity for us as we go forward. And again, the great news is we've got the balance sheet for it now. We're generating the cash flow. We've got a portfolio now that has demonstrated its ability to outearn its cost of capital, dramatic improvement on return on invested capital than the portfolio that we had. So we think we'll be in a position. We'll be disciplined, but we do believe we can grow the business for -- via M&A activity, especially in and around the MP segments.

And then I guess on the ESG front, can you just speak to your customers like their changing priorities in terms of greener projects or as you help them meet their energy transition goals. And as you think about what's required from tariffs, is there incremental investment or R&D to sort of help your customers meet their longer-term energy transition goals?

Well, great. And first of all, at a macro level, Jamie, where we are from an ESG standpoint. We've had an incredibly strong platform with our zero harm safety and environmental culture, the Terex Way values to build off of. Specific to product and product development, if you just look at our Genie business, 2/3 of our [ scissors ] are already battery-powered. 1/3 of the booms were either battery or hybrid-powered. So we've had a long history of bringing electrical products to the marketplace. Likewise on the MP side, if there's mains power -- or main grid power available, we have the ability to have complete electric systems for our MP business. We have been investing in electrification. And what's driving it, it started in Europe, and that was the driving force to more electrical solutions. What's really driving it now, Jamie, is the cost of the electrical systems is coming down because we're fast follower, fast adopter and the cost is coming down now to where you can make the life cycle cost of the electrical product is comparable or better than the life cycle cost of the internal combustion engine product. When you get to that point, and we're very close to that point, if not there, in some models. Now it's not only a good thing from a green standpoint, it's also a good economic solution. And so that's the point that we're getting to in multiple product lines, especially around our AWP segment. And that crossover point is going to lead to further and continued electrification of the product lines as we go forward.

Okay. And then the last question, I'll give it to Duffy because this might be the last time I see you virtually or see you, Duffy. So kudos on free cash flow, it's been a positive story for Terex. Just big picture, how do we think about the story in 2022? And given sort of supply chain challenges, do we need to build working capital? And are there any structural opportunities to improve cash flow?

Yes. So when you look at our cash flow here in 2021, we expect to be in about the $200 million range for free cash flow. Now that amount does include about $75 million of what I'll call onetime reimbursements for taxes from the IRS and in Europe for debt refunds. I think that Terex at this point is, with the type of CapEx that we've been expending in the $90 million range, is a company that can generate free cash flow in excess of $100 million a year. While we don't have any guidance out there for 2022, I'm just on the -- dimensionalizing what the capacity of the business to throw off cash is. And so I think that, that type of a $100 million plus for 2022 is fully capable for the company.

Okay. And then I guess, we have 2 more minutes, Duffy. So I'm not letting you go. SG&A, you've also done a good job. I'm just wondering if we can hold. I know you targeted, I think, 12.5% or lower. But given the volumes that you're seeing, I'm wondering if there's more of a sort of scale benefit there than the market appreciates.

So we -- when the pandemic hit in 2020 we worked really hard to rightsize our SG&A to the size -- the reduced size of the company as a result of the reduction in revenues that we experienced. And what we've done here in 2021 is to be extremely dogmatic about not adding cost, SG&A cost, back into the business and recognizing that we're in a very competitive industry, a very cyclical industry, and we've got to be very competitive with respect to our SG&A spending. A great example of that is here in the fourth quarter, we're relocating our Genie headquarters work building outside of the Redmond area and which will generate in excess -- close to $2 million a year of SG&A savings for the business. So we're going to continue to be dogmatic in maintaining our SG&A spending. And I think it'd be fairly -- even though I won't be with the company in 2022, I think it's fairly -- I'm fairly confident in saying we'll be below our 12.5% SG&A to sales in 2022. They will be.

Okay. All right. Well, with that, I think our time is up at 8:00. Duffy, thank you again, and I wish you the best. Congratulations.

Thank you. Thank you.

John, thank you for your support. And Julie, welcome. And thank you to Randy. So thank you, everyone. I hope you have a great holiday if I don't talk to you beforehand. Best of luck.

Thanks, Jamie.

Thanks guys.

Thank you very much.