Terex Corporation (TEX) Earnings Call Transcript & Summary

So let's begin here. We'll try to stay on time.So, Adam Seiden, machinery and construction .Thanks for joining us again here for this session, we are glad to have the folks here from Terex. So joining from Terex: CEO, John Garrison; CFO, Julie Beck, who you guys, I'm sure know pretty well. The format of this session here is we're going to pass it to John in a second here for just some opening comments around Terex, then we'll have our dialogue here. We'll move to audience response a bit later in the session. We appreciate your participation rather, and then we'll wrap up with your Q&A. So with that, good, Mr. Garrison -- good see you go.

Thank you. Great to see you again, Adam and for all of you. All of you out there. Thank you. Interest in Terex. We just got a couple of slides from our quarterly earnings call in our investor deck, and then we'll throw it open to your questions. We do have forward-looking statements, so I'd encourage you to read those. My [ player ] is now happy. We start every meeting at Terex with our Zero Harm safety culture and the performance against that and our Terex Way values. And we take it incredibly seriously at the company. And as you'll see over the last couple of years, when we started, we've done some dramatic improvement in our safety performance, but then you've seen it's plateaued in 2021 and 2022. And I think this -- not just with us, but also with machinery manufacturing averages. And so this is another example of the supply chain disruption that we're all experiencing in the multiple times that you have to work on machines to get them ready to ship to our end customers. And so we're not proud of the fact that we've gone backwards. We're going to work hard to get back on track, but I do think it's another good indicator of the level of disruption that we in the manufacturing world are experiencing and the Terex Way is incredibly happy, pleased with the team and their demonstration of Citizenship and their ability to demonstrate resiliency and adaptability in a very challenging global marketplace. So thrilled with the Terex team members and what they try to do day in and day out to meet the needs of our customers and our team members. So in 2022, just to look back very briefly our execute, innovate and grow strategy. On the execution side, I believe the team did demonstrate resiliency and adaptability on managing the supply chain. And we called what we thought we were going to be able to do and we delivered on what we said we were going to be able to do. And that's the team overcoming a lot of obstacles in a challenging environment and demonstrating some strong execution in that environment, continue to very aggressively manage our expenses. And then also during the course of the year, and I'm sure we'll talk more about this, is the start-up this year of our New Mexico facility. That team has been able to deliver that construction on schedule and on budget in this environment. And we're looking forward to the ramp-up of the new facility here starting early in the second quarter. On the Innovate side, we continue to invest in our product and service offering. We think that continues to help us drive that organic growth as we go forward. We like to be first in a lot of things. We were the first to bring an all-electric bucket truck to the utilities market, continue to invest in electrification and our product offerings, both for Genie and for our MP business, and range from anywhere from 60% to 70% of the offerings we provide are electric, and that helps our customers achieve their ESG objectives as they go forward. And then we continue to invest in digital, enhancing the interface between us and customers, us and dealers as we go forward. We made several acquisitions over the course of the year. Several of the acquisitions were in the technology space where we can take technology and apply it to our product and service offerings as we go forward, some capacity expansions in areas where we were tight. But again, we have a very strong balance sheet, and have the ability to grow now via M&A. You see the bottom line results, quite proud of that driving sales, but really, it's driving operating income and the EPS on a year-over-year basis. And I would call people's attention to north of 21% return on invested capital. That -- we're proud of that --That was one of the objectives that we set out for the team, and we've returned capital of shareholders. Over the course of the last 6 years or so, we've returned about $1.8 billion of capital to shareholders. So I think the team executed well in 2022, and we delivered on the commitments that we made. if we look forward, that's good yesterday, but where do we think we can go forward and we laid out some targets over the next 5 years. This first concept of capitalizing on the mega trends. We feel that we're in a really good position with our portfolio in terms of the circular economy, think about recycling, recycling industries, really started in Europe, but it's growing across the globe. We're well positioned there. All things electrification with our utilities business, we're well positioned there. and then infrastructure investments. I'm sure we'll talk here in the U.S. about what's going on. But the rest of the world has been investing in infrastructure. Now the U.S. is catching up in the fiscal stimulus of some of those bills for the next several years is frankly staggering in terms of what we've spent historically. Continue to grow our Materials Processing business. And this is the point you hear us talk about it a lot. Materials Processing is 60% of the operating earnings of Terex and is consistent through time is grown through time and consistent operating margin through time. And they do a great job of growing organically, moving into adjacent categories, geographic areas, good geographic distribution, customer distribution end market around the world and do a really good job there. 75% of that business goes through dealers. Most of those dealers are specialized dealers where we're a considerable part of their overall business. And it really gives us a competitive advantage around the world and continue to invest. We're market leaders in the categories where we compete in innovation. Next, and this is critical. It's right in the middle because it's fundamental to what we're going to do over the next 5 years is really drive optimized Genies through margin performance. We will accept our margin performance in the midst of the pandemic was not acceptable. We've been very aggressive at taking action to correct that. We've taken already $90 million of cost out of that business in that period of time. With the investments we're making in low-cost manufacturing Monterrey, we think that's going to add 200 basis points to our margin as we go forward. So really optimizing Genie. It's a great company, a great brand. We needed to do a better job through cycle margin and take the actions so that we could deliver that consistency through the cycle. And we believe we've got a plan, and the team is executing to that plan to do it. Then on the utilities, we made a sizable investment in our Watertown facility to increase capacity. It's been challenged by supply chain. We will acknowledge that. But if you look at the investments that are required for us to get anywhere close to what has been set out for the Net Zero and electrification goals, it's staggering. It's staggering on what needs to be done in terms of generation, transmission and distribution in order to achieve the -- and that's just in the United States. We think there's opportunity also for us globally in that space. And last, but certainly not least because this has been really important is we've been able to grow our parts and service business. That's critical to our customers. Every one of our products is a capital good. It has to function. It has to work and being able to ensure that, that product is always up and running -- it's critical to the customers, and it provides a constancy of revenue for us with good margin contribution to the business. And so we were able to grow that, and we think we're going to be able to continue to grow that going forward. So we think we're well positioned as we look forward here over the coming years. So why we talk about this mega trend? At the center of that is this thing called sustainability. And the world is changing and has to change the way in which we think about sustainability. A big part of that is infrastructure investment. And if you're inefficient and your infrastructure, you're going to adversely impact on the sustainability side. So huge investments around the world here in North America, in the U.S. for certain, and I'm sure we'll talk about that. Next, we talked about electrification. The investment required to achieve what we're trying to do from an electric vehicle standpoint, is staggering in order to have the capacity to do that. We like where we're positioned there. Digitization, and there's 2 things here. One, as you think about the CHIPS Act here in the U.S., the onshoring of chip manufacturing back to the states, those are multibillion dollar, multiyear projects. But also all things -- all this news here lately on AI, data centers and data centers in the building of data centers, again, multibillions of dollars of investment helps us in the construction phase, but also Genie products stay in those facilities longer term. And so all things digitization, we think helps. And then waste and recycling. A major global initiative, again, started in Europe, and it's the recognition that you just can't dump things into waste and recycling, you have to recycle products. And so we have products that take waste, construction demolition that you just go into landfill. Now you can process that create aggregates that could be reused in the construction cycle, things like that around the world. Regulation is changing and that's going to help us over the coming years as we go forward. So you kind of put all that together and where we are today to where we think we can go. We think we can get north of [ 6 ] and this is all organic, inorganic would add to this. All on the organic side, $6-plus billion in sales. I did say this at the conference. I know you all do your math, that's 7.5% CAGR during that period of time. I'm pretty confident in the starting point, ending point but it probably won't be exactly linear. I'm willing to guess on that. But the bottom line is strong background as we go forward. Significant margin expansion and our MP segment, incremental 100 basis points over that period of time because they're in a good place but substantial margin improvement through the cycle in our AWP and our Genie business at both utilities as well as Genie delivering $8 to $9 plus in EPS and also significant return on invested capital. We come back to that. It is a machinery manufacturer, it's equipment manufacturer. We do believe that return shareholders give us their capital to put the use, we think high return on invested capital is important. So we think we can drive north of 25% ROIC on our organic efforts. And then we said in Investor Day, we think we could add to this $1 to $3 a share type of thing in terms of inorganic growth. And why can we do that is because our balance sheet is probably in the best shape that it's ever been in the history of the company. Our current net debt is less than 1x. And so we do have the balance sheet capacity to grow. Well I call Julie my hammer, She'll make sure the CEO stays in line and that we achieve our financial objectives when it comes to the M&A work. But the good news is, is we have the cash flow generation. We've got the strong balance sheet. We're in good markets. We think we can deliver this organically, and then on top of that, add the inorganic growth. So we're excited about it's been a challenging couple of years, no doubt about it. But we like where we are, and we like the tailwinds that may now.I'm sure we're going to ask a lot of questions about the current macro and all the forces there. But if you take a step back, there's some secular macro trends that we think are in our favor as we look forward over the next couple of years. So Adam, with that, I'll open it up to you for questions.

Sounds good. That was a mic drop right there -- strategy. So actually, maybe we'll do a reverse order because we did talk about some of the long-term trends as a whole. Maybe going all the way backwards on the M&A side, so you mentioned the $1 to $3. How does that contemplate in an ideal world, of course, does that contemplate many deals that can give you $1 to $3. Is that ideally are you looking to add one big leg to a stool that could get you more?

Thanks, Adam. We would love to have another leg at Terex [indiscernible] growth. So it would be great. But most likely, it will probably be a series of smaller investments as we go through. But if we could get something large, that would be nice. And we're very interested in growing the company at the right metrics with discipline with our capital discipline.

Got it. And you guys would be willing to go over the 2.5x for that?

We would, but we also want to make sure that we can articulate and have a clear plan of how we get back down to 2.5x within a relatively short period of time.

Got it. And you guys have done a couple of smaller deals lately. Would you say there's any learnings that you've taken from there that as you start thinking about how you're going to deploy to get to that $1 to $3?

No, that's a great question because we were out of -- we were focused internally to driving the improvements and not doing M&A for a couple of years. We were returning capital to shareholders. We've got the business in a good place. And so we started small. We did a nice bolt-on acquisition in MDS is perfect. We can do lots of these, it would be great. It was a product line manufactured in Ireland, a product line that we didn't currently offer, we could use our operating system in MP, our strategic sourcing and then put that through our global distribution network, and it's been a home run. So that's an example of a tuck-in, a bolt-on into a product offering that we don't -- that we weren't currently in. We have made 3 technology investments. And let me be clear here. I understand our shareholders are not paying us to be venture capitalist, and we're clear about that. But what we can do with the investments that we've made is we can, the biotech investment that we made enabled us to influence their product development path, get some engineering services enabled us to bring the first all-electric bucket truck to the market. Without that investment in biotech, that doesn't happen. We made an investment in a company called Acculon. What are they really good at, electrification certification. It's great to have great ideas, but if it takes forever to certify it to get it to the marketplace, you haven't created value. So we have engineering services in terms of what we're doing and what we're putting on our product offering working through Acculon going forward. And then the last 1 we just made here is Apptronik, and I will acknowledge this is a little further out on the development curve. But what they are is really a robotics company. And if you think about utilities, you think about construction work sites with Genie equipment. Why do you need to put 2 or 3 human beings up in a basket? What if you could only put 1 up in a basket with a robot arm to assist in the application? We have the knowledge of Genie in the utility space. They have the knowledge of robotics. Can we work together to find a solution that addresses a real need, which is tight labor markets and construction space. So those are some of the types of investments we've made on the technology frontier. And then we'll -- if capacity needed, we'll make some investments there. So that's what we've done. But as Julie said, we're -- we have a funnel priority in and around the MP space, utility space. We'll look in the aerial space for the right asset, right market, right value. And we do think we can grow, but we think we can deliver that what I showed you earlier, that's the organic side. So we believe the M&A is upside to the organic side as we go forward.

Got it. And you sorry, -- so you guys had that nice chart off with the organic growth priorities and so forth. And John, you just referenced it here. I think you just but you just talked about the electric bucket truck. So when you think about electrification across the broader portfolio, I think you've given like a 60% number in MP, that's electrified. Just I'm curious when you think about broadly across AWP, Genie really, and then utility is where does that stand as a percentage?

So it's currently 60% of MP related products can be offered in electric or office. And then on the Genie side, it's about 70% of the products can either be hybrid and/or electric. And we think that's going to grow over time. What's -- it really, frankly, started in Europe in regulatory change. Now as we get down the cost curve and the electrical offerings come down in acquisition costs, provide life cycle cost savings, I think we're going to begin to see that accelerate as we go forward with electric costing. And we're very well positioned. We're first to market in several product categories. And so I think over time, the adoption is going to continue. And as we say on the ESG side, the biggest contribution -- one of the biggest, if not the biggest contribution Terex can make is providing our customers with the solutions they need to achieve their ESG objectives. So you can continue to see us bring those offerings to the marketplace.

Got it. And on parts and service, on your slide from your Investor Day, I believe MP was 2.5x the opportunity from probably a TAM perspective. So is that growth -- is that really based off of the dealers supporting the parts and service opportunity? And then ultimately, what type of buy-in have you found from your dealers in order to push that initiative?

Great question. And you're right. If we look at the 2 segments, just the nature of the work that the MP products do, engaging and wear products, the opportunity is a little bit greater than like in Genie, just in terms of how the application. So MP, we're focused across the enterprise of driving improvement in our parts and service offering. And MP has done some great things with that distribution organization. We call it CDI connected dealer inventory. So we've invested in some technology and we've piloted it with several dealers. And that was we basically controlled their inventory and have visibility to their inventory because what we're trying to do is improve the fill rate to that end customer, get that. And there was a little bit of resistance to start with sharing that information. But the pilots went so well that now we're spreading that across MP's portfolio, across the world because the dealers recognize optimizing that inventory, making sure they had the right inventory at the right place, and we can pull from other spot, they were increasing their sales. We were increasing our sales and the end customer was happy because their machine was up and operating. And so that's an example of where we've invested in some technology, work with our dealers and interface with the dealers, and it's been a good growth opportunity. We're also investing in some technology for pricing, the pricing dynamics being very dynamic in pricing on parts, being able to scrape the Internet to understand what pricing is out there. The technology there has improved dramatically in the last couple of years that we invested in and in our planning technology has helped. So we have had good growth in parts and service, and we anticipate further growth. And it's good for the consistency of the revenue, and it's also good from a margin standpoint. And it meets the needs of the customer to keep the machine running.

Got it. And maybe thinking about the operational improvements and the margin within the AWP segment, you brought up Watertown earlier on the utility side and then -- or sorry, and then Mexico as well when you think about Monterrey,now both of those capacity changes and new openings that ultimately are going to have a nice margin benefit. Just curious, is that running in line with your expectations from a timing standpoint from the amount of benefit standpoint versus where you guys had planned it?

Yes. Go ahead, Julie.

I guess I would start for the Monterrey facility, yes. It's on time, it's on budget. We're pleased with the progress. And as we talked about in our earnings call in 2023 and 2024 are big years as we move from other production facilities to Monterrey and get the Monterrey plant, setup. And we still continue a 200 basis point margin improvement for the Genie business when that is up and running at the end of 2024, early 2025. When we talk about Watertown, Watertown plant has really been impacted by chassis and body availability this year. And so the plant hasn't been as efficient and it hasn't been able to because of all of that disruption. And so once that clears, we're -- we expect to meet those targets as well in Watertown.

Got it. And because you're talking about some of those supply issues and so forth within Watertown. So when you look at the AWP backlog as a segment, it seemed like the over 12 months was starting to increase a bit there. Is that -- that's mostly geared towards utilities at this point?

No, it's a combination of all 3 businesses right now which is highly unique historically, we didn't talk about backlog delivered beyond 12 months because we don't have any -- now we have $700 million, and it really is split amongst Genie utilities for certain and as well as some MP products. So I think that speaks to the strength of the demand and the strength of the backlog and -- but again, we want to work to bring it out because in case of utilities, we're well booked out in 2024 and some models even into 2025. And so we need to work on that.

Connecting what you're saying earlier on parts, can you 25% of utilities, I think, comes from parts, revenues comes from parts. Can that number go higher?

So it's 25 parts and service and so utility is one of the business. We have 21 service centers around of the U.S., so that would be parts as well as labor. Yes, that business will continue to grow. We'll tell you one of the constraints on growth is service technics. It's one of the most difficult jobs to staff in the country, in the U.S., who service technicians. So we're staffing that. We've got a plan. But yes, that business will continue to grow, and we have invested in service centers because there are some contracts with the large independent publicly owned utilities that if you don't have a service center in their network, you can't bid. And so we've done that. And I will say that those service centers service not just utilities, I mean, they service Genie products. They service competitive products. So they're true service centers. And over time, we would like to continue to invest and grow that business as well.

Got it. And then the spirit of continuing to work our way backwards now getting even more short term on price. So in AWP, just cumulatively, how much price have you taken on the AWP business since COVID, would you say?

We really haven't disclosed that, Adam, but we've taken price, we've been price cost neutral for the year in 2022, and that's our plan for 2023 as well.

Got it. maybe let's go to the audience response questions really quickly here. So do you currently own the stock? Yes, overweight, market weight underweight or no? Timer going in the back half. There you go. If you can answer again, please.

Yes, I do on.

No. Okay. [indiscernible] exactly. Moving to the next question, please. What is your general bias towards the stock right now? Positive, negative, neutral? And just a public service announcement, once the timer comes up, if you can answer your answer. All right 50% positive. Next one up, in your opinion, through cycle EPS growth for Terex will be above peers in line or below? What's it going to be, John?

I don't know.

In line with peers, there you go. Next question, in your opinion, what should Terex [indiscernible] do with excess cash, bolt-on M&A, larger M&A, repos, Divis, debt pay down or internal investment?

You have all the above.

[indiscernible] All right, a little split but more towards bolt-ons. Moving to the next one, coming up here. In your opinion, on what multiple of '23 earnings should Terex trade at less than 10x and bands all the way up to higher than 20x. Once that timer goes [indiscernible]. Higher than 40x. Yes.

This is a good commentary.

Okay. All right. Moving to the next one here. What do you see as the most significant share price headwind facing Terex, core growth, margin performance, capital deployment or execution? And core growth, number one. That's the most popular answer for the conference.

Yes. That makes sense.

Number -- it's an industrial counter number moving to the next one. Does ESG play an active role in your investment decision relating to the company? Yes, ESG is positive. Yes, ESG is negative. No, ESG doesn't play a role or just no. Okay, resounding no.

Okay, with this audience interesting.

Yes,maybe a sample size issue there. But in any case, I will say that, that is fairly consistent so far with the conference where we've seen around, call it, 60% to 70% of responses are in that #3 category there. which I think is we're all going to do our introspective on the analyst side after this. So okay, again, going on some of the short-term stuff. So I think, look, the biggest question that you guys probably get is around sales and some of the short-term stuff around sales and you guys have a lot of backlog. So when you look at your guidance that's out there, how much of that is ultimately already kind of spoken for. It seems like a good chunk of it almost always. And does that change the way that you're planning for the full year?

The reality of it is, where we sit today, we're about 95% booked for the AWP segment, and we're 75-plus-percent, plus or minus on the MP segment, which is unheard of for us. So we're having very transparent conversations with customers in terms of where we are with the supply chain, what their needs are. And in most cases, customers are asking for more than we can deliver. We're being transparent. This is what we can commit to. If we can get more supply, we can then meet your needs. So that's the difference of the environment that we're in with constrained supply right now compared to other years at. It's pretty unique.

Yes. And with Mexico, when that's up and running, will you have the capacity to produce the $3.3 billion AWP sales by $0.20?

So from a capacity standpoint, we -- if you go back to 2018, we produced 25% more than we're producing today. And Monterrey, there's some incremental capacity that comes with that, but that really isn't the capacity play, it really is a cost play. We're reducing our cost. And so as we move to moderate, we've shut down the South Carolina factory, we've shut down Oklahoma factory. And then with Redmond where there's a shortage of direct labor, we're moving things from there, too. So it's not a capacity expansion. It's a cost. And yes, we have demonstrated that we've been able to produce at that level in the past, and we can do that now by adding shifts as needed when supply chain comes back.

That's right. So all in the total capacity. Fair enough. On the -- and then lastly, just -- well, hopefully retire this question after this year, but the hospital, currently, where do we sit on that and the point being is are we going to be able to make our way through it over the first half of '23?

So we ended Q3 at about $63 million, $64 million hospital inventory at cost. In Q4, we got it down the herculean effort by the team to about $36 million, $37 million. Unfortunately, in the month of January, it went back up to $45 million. So we're not assuming that the hospital inventory goes to 0. We're not assuming it gets worse. But with the level of disruption we're continuing to experience that our operating assumption is we're going to be still talking about the hospital. Now we want to retire that conversation. There's no doubt about it. But again, that's where we are today in terms of the supply chain that we're dealing with.

Excellent. All right. Well, thank you for the overview of the company, and I appreciate everybody for. Thank you.

Thanks for your interest in Terex.