Terex Corporation (TEX) Earnings Call Transcript & Summary

Great. Good morning, everyone. Thank you very much for joining us. Once again, I'm Jerry Revich and delighted to have with us the Terex senior management team. Immediately to my left is John Garrison, President and Chief Executive Officer; Julie Beck at the end of the stage, Senior Vice President and CFO. And Paretosh Misra is joining us in the front row, Paretosh is Head of Investor Relations. John, Julie, Paretosh, thank you very much for joining us.

Great to be here with you. Looking forward to it.

John, I was just looking at the performance since you became CEO of Terex and you essentially inherited a 5-segment company with 5% margins. Now it's a very focused company with double-digit margins. Can you talk to us about your vision for Terex from here now that we've got really meaningful improvement in the business already underway?

Yes. Thanks, Jerry. I think just to take a step back and look, and you're right, the team has come a long way in terms of -- we started back, we had to focus simplify and execute to win. So we focus the portfolio. And I think that's really important for investors to understand is the businesses that we have in our portfolio now are businesses that are competitive in their respective market spaces, the verticals that we compete in, and we think this is critically important and have over time, delivered results and delivered a return on invested capital through cycles through that. And so the portfolio that we have that we simplified is now a strong performing portfolio. And as you said, we exited the businesses that were lower return, higher capital intensive. We simplified 5 segments to 2, reduced a lot of G&A costs. If you look at our SG&A as a percent of sales now, it was 17%, 18%, now it's 10.5%, 11% range. So that has helped. And then we put an execute and it [ translate ] execute because you have a great strategy in the world if you don't execute it, it doesn't lead to results. So that was the first 5 years. And then we said, execute, innovate and grow, and that's what we've set ourselves up for the future. So we laid out in Investor Day back in December that with the portfolio that we have, and we can talk about M&A activity, but with the portfolio that we have today, we think that's a $6-plus billion portfolio. We think the growth rate, 7%, 8%, 9% kind of CAGR over that period of time. We think it's EPS of $8 to $9.50 a share and ROIC of 25%. And I think that's the other thing that I want to emphasize for investors is with the portfolio reshaping -- we are now delivering 24% return on invested capital. Maybe I'm old school, Jerry, but I think that's relatively important for the type of businesses we are our shareholders give us capital and our job is to give it a return on that capital. And even in a rising cost of capital environment, there's a big spread between what we're returning on the cost of capital and what our cost of capital is. And I think that also speaks to the strength of the portfolio as we go forward. And then finally, not only did we improve the portfolio, but we dramatically improved the balance sheet. So our leverage this year is -- net debt to EBITDA is at 0.9. We don't do anything on the M&A side, and I'm sure we'll talk about that. We'll end the year at 0.3. So we've got an incredibly strong balance sheet that gives us optionality as we look forward. So I think the business is well-positioned for growth. We know there's near-term uncertainty, but we think we're well-positioned to grow within our MP segment, our AWP segment and there's a significant opportunity for us as we go forward.

And as you alluded to, John, I'd love to pull on M&A thread -- you folks have really delivered outstanding margins in MP. And can we just talk about what type of assets would fit well within the portfolio? And what are the financial parameters that we should be thinking about.

So first, let me say, our first priority is to grow organically. And so CapEx in our investment -- we're investing in a 24% return on that, we feel pretty good. So that we will never short the ability to drive organic growth as we go forward. We do now have the opportunity to look at the M&A, and I'm a little bit encouraged because with the financial dislocation out there, I think there may be opportunities for strategic like us to actually be in some transactions where over the last couple of years, those transactions went to financial sponsors with capital costing more, not being as readily available, inability to lever up, I think there may be opportunities for us as we go forward from a valuation standpoint. So what are we looking for? First and foremost is in around our MP businesses, specifically verticals. We have established a nice environmental recycling business. If you think about the mega trend of sustainability, that's going to be with us. That tailwind is going to be with us for decades. And so we can build out a portfolio in and around our environmental business, our recycling business that we think can help to grow. There's still fragmentation in that space around the world. So that's an area that we're looking in. In our aggregates business, we look for product line extensions where we don't offer current product line extensions that we can extend either product lines or geographic expansion into areas that were not because part of the strength of our MP business is global diversification, product diversification, customer diversification. And that's what led that resiliency through cycle because I remind investors in the middle -- Jerry, of the pandemic, they bottomed out at 11.4% operating margin. So that's a resilient set of businesses. And so that's why we're looking to expand those parts of business via M&A. Our utilities business, we're a North American utility player with the strength in the utilities business, again, another tailwind that we think is going to be there for quite some time. We think there'll be opportunities in and around utilities. And then there's specialized equipment in and around aerial space that we don't currently play that would offer potential opportunities. But again, from a prioritization standpoint, it really is around our MP and our utilities businesses. We think there's opportunity to build out there. There's still highly degree of fragmentation. I know, Jerry, you were at ConExpo, I believe, and there's still a lot of players out there. so we think there's opportunity. We'll be disciplined. My CFO is hammer, she won't let me get out of control, but we'll be disciplined. But we do think we have the balance sheet, we've got the cash flow generation and we think there'll be opportunities. But even if that -- what I just said about what we laid out for 2027, that's without M&A. M&A adds to that. So I think we're in a pretty good place.

And Jerry, we talk about that. We want to have no greater than 2.5x leverage through the cycle. John mentioned that we're at 0.9 now and expecting to generate some nice cash flows this year. And the businesses have to be accretive after the and we get through all the purchase accounting adjustments, and they also have to outearn their cost of capital. So the teams worked really hard to make sure that we do outearn our cost of capital with 24% return on invest capital. So we want to acquire businesses that can do that. And we'd also look at things in the technology space and services space as well. Technologies that might allow us to have more -- we've made some equity investments in some technology this year as well. So that helps us to bring products to market faster. So all of those things.

And in terms of the relative attractiveness of stock buyback versus M&A, can you talk about that? Or is it...

It's been -- our disciplined capital allocation drive, so organic investments. And then for the last 7 or 8 years, Jerry, we really did focus on returning capital to shareholders. So we've returned about $1.8 billion over time, about $1.6 million plus or minus in share repurchases, about $200 million in dividends. We did increase our dividend and then -- and we have an active share repurchase program. We're always looking -- #1, we don't believe we should dilute our share from equity and incentive compensation. So I always look for us to offset dilution. And then #2, with dislocation in the market, we will definitely look -- we've demonstrated that. We will definitely look at share repurchases we get a bias towards growth. But when you look at your 5-year plan, you look at the IRR that, that can generate a certain shareholder value. It's hard to buy something that can compete with that. And so that's something that Julie and I and the management team look at. We discussed with the Board every -- almost every board meeting. And so we will be active. We've got an active program out now on share repurchases. And to lever up to buy share repurchases, that would be a different conversation, to be honest, not to say never, but that wouldn't be our first approach given where we are right now.

And we did $97 million last year share repurchases. And so far to date, through April, we did $18 million. So it's been a part of our capital allocation strategy an important part.

And in terms of looking at M&A opportunities today, are you finding yourselves walking away from deals, saying, "You know what, I'd rather buyback [ Terex ] stock? Is that -- is the rubber hitting the road on that?

There's been a couple of things we've looked at and that necessarily come to that choice. It's really come to what was the valuation and we think the valuation was a little rich given what we thought we could bring from a synergy standpoint. That's been more of the issue here recently, Jerry. And so that's how I look at.

And let's come into that synergy point because your MP business has gone from 10% margins to 15% margins with a lot of structural improvement. Can we talk about what's enabled you folks drive margins higher? And then just it's my sense that you're looking to apply some of the same playbook to acquired businesses could you just dive into that?

Part of that to execute and now execute and innovate and grow, the thing that carried over was execution. And so kind of what does that mean? It means you have to be very rigorous in your business processes, around your commercial excellence program, your product development efforts, your operational efforts, your parts and service. And so the team has to have detailed implementable plans to drive the business forward. And that playbook, if you will, business system is what we apply with rigor across the company. And if you do that continuously over time, you get the better results. And so when we were to acquire a business, we would bring the playbook, if you will, the operating system and apply that and would look for what are the synergies that we can get. Obviously, revenue synergies are incredibly valuable to the extent they exist, especially in the MP side through our distribution channels. We have multivaried distribution channels. Then you've got the cost synergies that you have through your supply chain, your operations programs, engineering, we've got a wonderful engineering center in India that we leverage across the business. And so we do look at valuation and what synergies can we bring to get that to Julie's point to get the return on capital to the level it needs to be for us going forward. And so we do think, again, there's opportunities we do -- as we've been on this now journey for a couple of years, you have management team reason for buying the business to drive more value than that business could accrete by itself. And so that's how we think about it. We started with smaller deals. Good news is the smaller deals are paying off. The challenge was we lost out on a couple of deals that would have been very nice, but the valuation just wasn't there, Jerry. And we're going to be disciplined when it comes to that.

And John, can you talk about the performance on the smaller deals, just as a playbook for when we do see folks take larger deals? How much have you folks been able to improve margins?

It's basically what Joe just said is -- we got to be accretive after year 1 cost of capital in both instances greater than our cost of capital in year 2, and that occurred. And what we've saw with the smaller bolt-on acquisitions is substantial revenue growth because you added distribution channels that they didn't have. And so actually, what constrained the sales was now we need to add a little bit, which we've planned on more capital to the business to get the output. It's a great situation that's 20-plus percent return on invested capital when we're doing that.

[indiscernible] problem.

Yes. We like those [indiscernible].

And so if we see next week, tariffs acquiring business at 8x EBITDA pre synergies, should we think about as something along the lines of 6x post synergies. Is that the general idea.

I mean, that's the math that we would look at is as you look at it -- and that, unfortunately, Jerry, on some of the things we walked away, they were double-digit side, and we couldn't get down to -- in EBITDA covers that kind of made sense with the synergies that we had. So yes, what we look at pre and post and what do we think we can drive because the return on invested capital is incredibly important. You don't want to give me -- my shareholders talk and give us the capital for us to destroy value. They want us to create value, which means you have to outearn your cost of capital when you buy something -- over a period of time.

And given where rates are, have you seen financial buyers taking a step back?

Yes, a little bit. We were involved in a couple of situations here they pulled it off the market. And I think part of the reason they pulled it off the market is because the strategics provided what the real value was and the financial partners couldn't -- in the dislocation of capital markets right now, especially with debt capital, they couldn't do it. So I'm encouraged that maybe that trend helps over time and valuations come down to a more normal level, if you will, where strategics can go in, add value, drive synergies and get a return on capital. Curt, I think that's one of the positives of a dislocated market right now.

And within your MP business, just to continue down that path, it's a number of different products in there. Are there any products within that portfolio that are still earlier in the optimization journey where we can look for margin upside?

Absolutely. Our environmental business, which we think is going to be a big growth as we come forward. But right now, the environmental business within the MP does not enjoy the same level of operating margins that the overall MP segments that it does. So there are businesses within our MP segment that as we add to, as we continue to grow, we do think there is margin opportunity for those business. Environmentals really the best one because we're over investing in that right now given the growth opportunities. We think it's wise. But that would be one where we'd expect over time to see their margins accelerate closer to the segment average and not significantly below the segment.

And is that a global business as it stands today?

Yes, it is. And now on the recycling side, in the environmental side, a lot of it is being led by European and European regulation. And so that's the starting point. But there's regulatory and societal changes over time, that's moving around the world, and we think that's going to drive growth in that space as we go forward.

And as we think about where we are in the cycle for the collection of MP products, I know it's a simpler question in AWP, but can we have a similar conversation where we are versus trough versus prior cycle highs in MP?

Well, in terms -- we're significantly below previous -- or below production levels before. I think the thing in MP, and this is important and a bit unique is that we're really still in an allocation mode. So we're still allocating production. So if a dealer in the U.S. wants 10 pieces of equipment, he or she may not get 10 pieces because we need to only give them 6 and send 2 elsewhere. Otherwise, we cut those dealers off around the world. So we still think there's growth. Why is that? Is that dealer inventory levels. And on the MP side, 75% of the business goes through distribution. It's not yellow iron distribution where you have products lined up on a lot. Our dealers, for the most part, bring product in, it goes into their rental fleet because most of the contracts are rental purchase option type contracts. And what's happened, Jerry, is that it's come in. It's gone on into the rental fleet and it's converted to a retail sale, and we haven't been able to backfill that for dealers. So dealer inventories in general across the portfolio of MP are below what the dealers would like. I got an earful both in India when I was there and at CONEXPO about, hey, we need more inventory. And so if there's a headwind, you've got this tailwind of inventory replenishment to perhaps buffer the headwind if, in fact, we see this downturn. Again, we're not seeing it today. We're not naive, but we're not seeing it right.

And John, you and I spoke about this, the dynamic in yellow iron is that they're still at low level of dealer inventories, but they're rising -- it doesn't sound like they're rising.

No, we're not there yet. We haven't -- hopefully, by this year, we'll begin to replenish those dealer inventories and get them back to levels that they are more comfortable. But it's -- right now, it anticipated it's going to take through the year.

And can we have a similar conversation in AWP? So you folks have really long lead times there as well, which is different from a yellow iron. What would you attribute the disconnect to between aerials, the lead times we're seeing versus other construction equipment category?

I think part of it is the demand and the replacement cycle because those aerial products in North America and Europe they're on a 7- or 8-year replacement cycle. And the replacement cycle has been constrained by the ability of the industry, those of us producers to produce. And so I think that has caused the extension and the aging of their fleets. And we just haven't been able to ramp up production at the level they needed for that. And so I think over time, what I said on the call is that I do think -- and the other reality is that larger customers or all customers have been taking equipment kind of out of their normal sequence. They took equipment in the fourth quarter because it was available. They took equipment earlier in the first quarter because it was available and our lead times are too long. So as the supply chain continues to improve, all right, we'll improve as a supplier for on-time delivery. Our lead time should improve, and I think we'll return to more seasonality in order patterns and lead times. But right now, lead times are extended across almost all of the products in the aerial space. And that's -- and I think it's the demand that's driving that across the industry.

And you have really powerful analytics with telematics. Can you talk about what you're seeing because for the rental companies as they took these deliveries, their utilization rates were generally down year-over-year in the first quarter. I'm curious how do aerials look.

Yes. I mean aerials actually look good. And you're right, but part of the reason that they were down is because they took a year earlier than they would because they knew that's the other reality. If somebody pushes out an order, we'll sell to somebody else right now. That's the strength of the market. So I think utilization was on the margin -- was impacted, but it was principally because customers took product out of the sequence when they normally would, wasn't necessarily an indication of softening of the marketplace just [ seasonality ].