Terex Corporation (TEX) Earnings Call Transcript & Summary

Hi, everyone. I am not going to bother to introduce myself again to those who's in the room. But next up on today's presentation schedule is Terex. Very pleased to introduce both John Garrison, who's CEO; and Julie Beck, CFO; and we also have Paretosh in the audience in Investor Relations. So I think John has a few slides to start us off with, and then we will dive into fireside chat. I will open to the audience for questions towards the end of the fireside chat, so get ready. And with that said, go ahead, John.

Well, first, let me say thank you, Nicole, for having us back. Good to see you again. And investors out there. Thank you for your interest in Terex. I've got a couple of slides, and then Julie and I will throw it open to your questions. We have a forward-looking statement, so I'd encourage you to read that. My lawyers would be upset if I didn't say that, so please do that. We start every meeting with what's our safety performance and our Terex Way values. These are core elements of who we are as a company on a Zero Harm safety culture, it's a fundamental belief that we have to create an environment where our team members and our customers can come to work safe and sound and go home to their loved ones every single day. And when I highlighted on this chart, you saw prior to the pandemic, some dramatic improvement in our lagging indicators recordable injury and some plateauing and actually an increase for the first time in 6 or 7 years. And that also speaks to the disruption that we're seeing in the plants associated with the supply chain and a lot of new team members in certain regions that are not used to working in manufacturing environments. And so our objective or our goal now as leaders is to get back on that path that we need to be on. But there's just another example of disruption that we see, and it shows up here in our safety statistics, no excuse, we have to overcome that as we go forward. So as we look at -- could you advance it, it's stuck.

[indiscernible] the fire alarm.

There we go.

Just delayed.

It's just delayed, fire alarm is delayed. So overall, for Q1, I'm sure we'll talk a little about this is, we have extensive backlogs, historically high levels of backlog at $4.1 billion and $1.1 billion of that extends into 2024, which is, again, you've followed us for a long time, Nicole, that's incredibly unusual. Good book-to-bill ratio. So order rates still coming in, in that Q1. Sales up 27% on an FX-neutral basis that -- and then the thing that we were pleased with, we were able to take that revenue and drive some gross margin improvements, a lot of hard work in the company going on. But gross margin, disciplined cost management, cost out activities that are occurring and that fell to the bottom line in terms of operating margin and operating profit. And then EPS more than doubled and I put -- I'll put this in the [ cohort ] as well. We talk about -- we just talked about quality earnings a long time ago. And we actually don't have adjustments what we post our GAAP earnings. And so we're kind of proud of that. That start to the year and as we look out for the rest of the year, enable us to do something we haven't done which was to beat and raise and raised by more than the beat for the full year, which I think just speaks to the visibility that we have thus far in 2023. Okay. And this is a slide we used from our Investor Day, and we think this is important, thinking beyond this quarter, next quarter, next year is one of those big trends. Well, the big trend that's out there in the world is sustainability. And as we look out in New York City today, and we can't see anything. Air pollution and air quality becomes very important. But in what's transpiring especially here in the United States, infrastructure investments, digitization, electrification, waste and recycling. Those are major trends and there's money being applied to those. And I'm sure we can talk about that in terms of the infrastructure build, the CHIPS Act. Those are all driving our business and we think will be a tailwind for the business for the foreseeable future, independent of which we recognize a rising interest rate potential recessionary environment. And we know that's a collision course. But these megatrends and the actual dollars, especially here in North America that are being spent, we think provide some tailwinds for us to potentially overcome the headwinds of a rising interest rate environment. So as we look out over the next 3 to 5 years, what are we trying to do to growth? First of all, we think we can grow this company organically and we can talk about M&A growth as well. But capitalizing on these mega trends that we talk about, they're real, they're out there and they're global. A lot of money being spent in North America. But part of the reason we've been consistent in our MP business is around the world, they've been a lot more consistent about investing in infrastructure than we have here in the United States, continue to grow our MP segment, consistent strong performer, good growth, good operating margin. We're continuing to invest in that business. They do a great job growing regionally near adjacencies. And so we'll continue to do that. Right there in the middle is very important for us. We understand that, which is really driving improvement of Genie's through margin performance. We know it's a cyclical business. We'll try to reduce the cyclicality, but we absolutely can improve the through margin performance. And I think we've done a lot and we can do more on that. And we think that really strengthens Terex overall. Because, again, remember, our MP businesses, it's 60% of our operating earnings, all right? And Genie is incredibly important to us, and we've taken the steps, we think, to improve the margin performance through cycle of Genie, a very important initiative. Next to it is our utilities. It's in the AWP segment. That's the segment with the needs in North America for the electric grid irrespective of the environment, the macroeconomic environment, that business is going to grow. The investment is being made, it has to be made to just catch up, not advance on the grid side. So that's a good space to be in. We have that reported underneath our AWP segment, we think there's real opportunity. And last but certainly not least is we're investing in our personal service. We have either service centers or digital applications, how we connect digitally, telematics to our customers that parts and service part is every bit as important as anything else that we do for them. And it's also a very profitable part of our business. So that will always be at the forefront of what we do. So we think there's some great growth opportunities for this business as we go forward. And then we think we can augment that growth with M&A activity. And so overall, what do we say, Terex, it's not necessarily the Terex of 10 or 15 years ago. This is a different portfolio of business, businesses that have been in Terex's portfolio, but basically were perhaps overshadowed by other elements of the portfolio. These are strong brands. Our brands are globally recognized in the markets that we -- the average consumer may not recognize Powerscreen or Finlay. But if you're in the aggregates business, you know Powerscreen or Finlay. If you're in a material handling business, you know Fuchs. It's been around for 125 years. So we've got very strong brands. We'll continue to -- we're never satisfied with our execution. We can always drive improvement, but we had some good execution in a very challenging environment, and we'll continue to do that. We don't talk enough about our balance sheet. If you look at our balance sheet, our balance sheet has dramatically improved, our liquidity has dramatically improved over previous cycles. So even if we are heading into a cycle, given where we are from a balance sheet standpoint, we're in a great place from a balance sheet. We'll continue to drive innovation. I always expect the word purposeful innovation in front because we don't need to be at the leading edge of things. We need to make sure that what we're doing has purpose to helping our customers solve their problems and/or innovation that helps us produce those solutions for our customers in a more efficient and effective manner. And so that's why we talk about purposeful innovation and then continue to invest. We've been investing substantially. We're investing $135 million in CapEx this year. We'll continue to invest, hopefully not quite at that level. But if you take a step back, the other thing that we talked about at Investor Day and in the first quarter, we're delivering 25% return on invested capital. There's a big gap between 25% and our cost of capital. I'd like to be there in an uncertain environment. So we're going to continue to invest for the long term and the investments we've been making have been generating significant economic return for our shareholders. So you can count on us to continue to do that, perhaps ameliorate a little bit. But we like the organic growth opportunities and the return we're getting on that within the business. So just a couple of comments. I think that's the last one. And we can throw it open to you for your questions.

Excellent. Thanks, John. Good overview. So maybe just starting with the market environment. I think there's a lot of debate over to what extent infrastructure can overcome potential weakness in non-resi. So maybe first question is, are you seeing any pockets of weakness across like nonresi verticals? And second would be, where are we in the process of infrastructure spend coming through and showing up in your order book?

Right. So let me say specifically to North America, we're not seeing any substantial weakness yet. I mean if you saw the nonresi numbers that came out in May, they're super strong. And really, the investments, the Infrastructure Investment Act, the CHIPS act and the Inflation Reduction Act, really that activity is just starting. We're just starting to see the contracts be led. And so our customers are seeing things like chip plants, for example. They're seeing those start up. And so you're beginning to see that activity hit, but that's a tailwind that's going to occur as we go through time. And I think several of our large customers are doing a really good job of trying to breakdown what the financial impact of that is to their business, which is really a good proxy for us to how we sell through those types of customers going forward. And if you just look at it in nonresi construction and you say, hey, it's $900 billion, plus or minus. In the commercial part, which clearly will be under pressure is about 20%. What is that? That's -- it's retail, it's office towers. Absolutely, that's going to come under pressure in a rising interest rate environment. But 60% of nonresi is the public spend, it's the power spend. That is going to be growing. So they've done some pretty compelling math that says even if you have a pretty substantial reduction in the commercial side, these other factors, frankly, overwhelm that from an absolute construction dollar spend. So we understand. And again, we're always looking out. We're always vigilant. But -- and [indiscernible] investors always a red flag, this cycle is going to be different. But if you look at the math on some of these things, especially in North America, this cycle could be different. There's a very compelling math argument that could be different.

Yes. To where potentially even if we go through a mild classic recession with nonresi -- private nonresi down, you could still grow your business.

Yes. Right now -- again, we're not providing an outlook for 2024...

But it's possible.

It is -- we definitely think it's possible.

Right. Okay. Okay. Got it. And then anything on demand trends outside the U.S., what you're seeing in Europe? I know China is pretty small for you guys, but if you have any color there, we'd be happy to hear it.

Yes. So China is less than 5%, substantially less than 5% of our business now in China. We have a large manufacturing facility there for Genie. And we made the decision. The China market was soft, When the China market softens, pricing gets let's just say, less than stellar, I'd use another word. And so we could sell all of that product elsewhere. And so our sales have fallen here one, because of the market; and two, because we decided to do that. So China definitely soft. It's not impacting our business as you can see. Europe. Europe, I continue to be surprised, frankly, at the resiliency of the European market. We called out, we did see some softness in our tower cranes business out there. We did see some order activity in aggregates being a little slow, but that was a combination also of our order book not being opened. And so that had an impact. So Europe has been resilient with everything in that economy that region has gone through with a war, the energy, higher level of inflation. We'll continue to watch that because it's been a pleasant surprise at how well it's held up.

Right. Okay. Okay. Got it. And supply chain. How would you characterize where we stand today and the process of normalization?

It's definitely improved. We continue to see continuous improvement in our supply chain. The challenge for us is, even with that improvement, we still had $46 million of hospital inventory, so -- which was up from the end of Q4. So we still have that dynamic. But it is improving. It's nowhere near the levels that it was pre-pandemic. But we're seeing constant improvement. And the challenge, and I know everybody gets frustrated, trust me, our teams get frustrated is, we're 100% solution. you need 100% of the parts of this year. And so the other thing I'd say about people say, when is it going to get better? I say keep focusing on because there's kind of a hierarchy, if you will, focus on the big auto companies, focus on the big truck companies. When you see them consistently delivering back to normal, then it will begin to work its way down into the machinery sector.

That makes sense. That's kind of how it was on the other side. Right. Okay. You guys have modeled a return to normal seasonality in AWP revenues, when -- I don't like this question. Okay. I guess thinking about the rest of the year in supply chain, is there a potential that the revenue guidance could prove conservative? Like have you embedded any improvement in supply chain? And could there be upside if the improvement in supply chain does come through?

Sure. So Nicole, when you think about the supply chain for 2021 and the first 3 quarters of 2022, we were doing between $1 billion and $1.1 billion every quarter. In Q4, we did $1.2 billion and in Q1, we did $1.2 billion. And because we had 2 quarters in a row and that slight improvement in the supply chain, it enabled us to increase our outlook. So that outlook is now plus or minus $1.2 billion for the rest of the year. And so we still have increased demand from our customers. And if that supply chain would improve, we -- you could see a scenario where we could ship a bit more.

Okay. Okay. Makes sense. If you guys were to look at your own replacement model for AWPs, which I'm sure you have, does it suggest that demand can continue to step up from here just replacement alone without this infrastructure overlay?

So if you look at our production volumes in 2018 and 2019 in North America, as an industry, we are under -- our production rates today are lower than they were in 2018 and 2019. So if you think about that equipment that was built and put in service in 2018, 2019, that's coming as of age. And so if you look at the extended longer life, the life is 9 to 12 months older for the rental companies, plus you know that we haven't -- we're not able to replenish that in 2018 and 2019, replacement demand alone should be strong. And then you should have an impact of these megatrends that we talked about, too, as an additional tailwind.

And again, it's too early to provide a forecast. But if you just look at the big picture, that replacement cycle has been delayed, as Julie said, because of the supply chain constraints. It's the industry supply chain. So that needs to be replaced. And if you have any growth on top of that replacement, it still says we could still potentially grow or not fall dramatically even with the macro headwinds.

Right. Okay. Okay. Great.

You'll see.

Yes, we'll see. Okay. So you talked about how some of your backlog now extends 2024, which is obviously a very rare dynamic. In which businesses is that the case? Like are equipment rental companies coming to you and already booking orders for '24 and AWP?

We have orders for -- so it's about $1.1 billion. It's about $850 million in AWP, which is a combination of Genie and our utilities business and about $250 million in our MP business, which is highly unusual. In that $850 million in the AWP segment, there is rental company demand because the reality of where we are today is we're still allocating. They would take more if we could deliver more to them. So yes, there is backlog in 2024 for the rental company.

Okay. Okay. Got it. Are we seeing a return to a more normal pricing environment in the 2 businesses? At this point, I know you have the benefit of carryover pricing from 2022. But thinking about this year's list price increases and how pricing will trend throughout the rest of 2023? Are we returning to something that's more normal?

Do you want to go ahead, Julie?

Yes. So the MP business is -- our objective has always been to be price cost neutral. And we define price -- the cost as being our direct material cost, our logistics and our transportation costs. And so when you think about the MP business, they're dynamically pricing with through that dealer network, virtually every order, virtually every piece of equipment. So they've been price cost neutral all along. When you think about the AWP business, both the Genie businesses and the utilities business were negative in price cost for the first 6 months of last year, the first half. And then the second half, we were positive, getting to price cost neutrality. So our goal again for 2023 is to be price cost neutral. So what you do see is that we saw really -- the reason why we fell behind is because inflation was so high, and we weren't dynamically pricing in those businesses. So we had to go and increase prices in the spring of last year, which was unusual. And then -- and what we do see is we see the rate of inflation lowering, so you see lower price increases at this point in time.

Okay. Okay. That makes sense. All right. And then I guess maybe thinking about the second piece of this question, which is price cost. I think there's this perception among the whole machinery space that the price cost benefits were massive in the first quarter because of the dynamics of carryover pricing and kind of how that timing works. And that price cost is less of a tailwind to margins as we progress through the year relative to 1Q. Is that true for you guys?

No. So again, the objective is price cost neutrality and so we don't see changing that.

We had dramatic incremental margins in Q1, as you do relative to the past because our pricing wasn't as strong a year ago. And so our incremental margins may not be as high in the back half. But no, we're not seeing that pricing yet.

Okay. Okay. That makes sense. All right. And then AWP margins were pretty strong in the first quarter. Is it reasonable to assume that 1Q and 2Q margins look more similar this year than they have been in the past because of the price cost dynamics because of how strong 1Q was?

So we talked about the AWP business, the first half of the year being relatively consistent and the second half being impacted by some of the disruption that's going to happen as we establish our Monterrey facility. So we expect the first half to be really consistent. And then again, that impact in the second half.

Okay. Okay. Got it. And then just thinking from a longer-term perspective, is there any reason why AWP margins can't return to your like prior peak of mid-teens this cycle?

So our -- as we had our Investor Day in December, we talked about returning to that mid double-digit margin range. And so we are -- the Genie team has done just a tremendous job of taking cost reductions. We took $90 million of cost out. They're moving to a more variable cost structure. They're doing a lot of value-added engineering cost-out programs, and you saw the impact of that in Q1. And of course, then the Monterrey facility also when it's completed and up and running, which is at the end of 2024, we expect to see an another 200 basis point margin improvement. So that's what we talked about at Investor Day. And you saw the performance in Q1, and we'll continue on that path.

Excellent. Okay. Shifting to MP for a bit. So this is a really diverse business. Where are you guys seeing the most robust growth at this point? And would you say that growth is also pretty broad-based across the portfolio?

Yes. So the good news is, we're seeing good growth other than when I spoke about the tower cranes. Tower crane is definitely under some pressure. But our aggregates business, we saw good growth globally. That's what we like about that business. Strong in North America, but good growth around the world. Fastest-growing part of that portfolio, it's our least profitable because we're investing heavily with the environmental side of the business. So we saw good -- led by Europe, believe it or not, but also now we're starting to see some growth there in the United States. Mentioned the lifting side, kind of tale of 2 worlds there. Tower cranes under pressure, but our business down, our front of business, our Pick & Carry crane business down in Australia, good business and good backlog, good profitability, we like that. And our Fuchs business, our handling business. We're really pleased to see that when we saw metal prices come down, especially scrap metal come down, usually we'd see a pretty precipitous decline in Fuchs orders, but we didn't necessarily see that -- and that scrap metal did come back up, so that helped, but also they've diversified their portfolio a little bit. So we're not totally dependent on scrap. So now we'll sell [ Fuchs, ] we'll call it, Ecotec, and we'll sell a solution as part of our environmental side. That's the segment that we weren't in their adjacencies. We can provide application-specific tool to that market, a complete system. So that's helping both our Ecotec sales, our environmental sales and help in Fuchs. We've gone into some different timber applications that we weren't in before and some river port applications, bulk handling. And so that -- again, the team does a really good job of looking about where can we take the products we have, the technology makes the modifications and go to a near adjacency to drive growth. And I think Fuchs is a good example of that. And management team there, I think when you're at and saw us in Vegas, they've taken that business from, let's just say, significantly below the operating margin of the segment to the average to the operating margin of the segment over a couple of years. So really pleased with what they've been able to do. And last but certainly not least, our concrete business. That's one where we did see a little bit of order softness in our concrete business. That's tied a little bit more to residential construction, one of our business that's tied a little bit, but we've seen -- it's also lumpy with some of our customers. So we've seen some -- a little bit of headwinds there, but we're also seeing some recovery as well in that. So overall, good growth, good balanced global consistent growth across all 5 of our verticals. And again, we're vigilant. We're going to continue to watch, continue to be surprised at how well Europe is holding up. And so we're watching that closely. But again, the other thing that we usually get asked is, when we say given that $4.1 billion of backlog across the company, the things we're not seeing, we're not seeing any significant dealers or rental customers pushing out orders. We're not seeing the order cancellations beyond the normal noise. And so that speaks to the, I guess, the strength of the backlog, which speaks to the -- even though there's uncertainty out there speaks to the relative strength of the markets our dealers and customers are serving.

Right. Absolutely. And talking about Fuchs, you reminded me of a question that I should have asked before, which is just costs. This is probably a question for Julie. But are there aspects of your input costs that have started to decline, maybe like freight or?

So when you look at the supply chain, we would still say that we see overall inflation and where you really are seeing the inflation, as you think about the general inflation we see in the economy and the wage increases that are happening. So we're an OEM. So there are various tiers of the supply chain. It takes time for those wage increases to make it up through the supply chain. So we're still seeing overall inflation. So we have seen some of the transportation costs come down. We certainly have seen the time it takes to transport things go down, which is really good, and that's helped with velocity. It helps with part of the supply chain improvement. So we have seen some of that. But overall, we continue to see cost increases in our...

The good news is not at the rate we were seeing but we're still seeing inflation.

Okay. Okay. Understood. Back to MP. What about current dealer inventory levels? And is that an opportunity for some restocking if they're presumably still too low?

Yes, our dealer inventories and in the MP, 75% of the business goes through distribution. And a lot of it goes -- we call it their inventory, but a lot of it goes into their rental fleets because they do a lot of rental purchase options, rent-to-own type contracts. And their fleets have been depleted because they put them out to the rental contracts that they turn to a retail sale, and we haven't been able to backfill. So in general, across the portfolio, dealer inventories are lower than what they would like to. It varies by product, and it varies by region. But the general statement of inventory levels being lower is true, which, again, if you think about it, Nicole, you've been doing this a long time, too, is that if you're looking in this uncertain macroeconomic environment headwind, normally, we head into that with what too much inventory. We don't have -- the channel doesn't have too much inventory. The manufacturer, we don't have any finished goods other than hospital inventory. We normally have too much finished goods, which then requires us to dramatically reduce our production schedules. This leads to a lot of inefficiencies and costs. Those first 2 don't exist. So even if we have some headwinds, the level of "manufacturing reduction" may not look like what it does in past. I mean we'll adjust it to what the market is. But there's a case that says it may not be like it has been historically.

Totally fair. Just going to see if there's any questions from the audience [ Adam? ]

There's been some chatter about some of your Asian competitors that are trying to build more capacity in the U.S. So I'd be curious how much excess capacity you think you have in your own factories and how much the industry, you think, like what -- where the industry is in terms of capacity?

Yes. So -- if we -- and I guess, specific to the Genie business areas there, yes. So specific to Genie. We're right now producing at about 20% unit volume less than we were in '18 or '19. And so from a capacity standpoint, we have the capacity we believe we need. Now we're adding Monterrey, which is standing up. But Monterrey was not just a capacity add. Monterrey was fundamentally done to be globally cost competitive. So we took 2 factories offline, and we'll move products from China, move products from the U.S. and a couple of products from Italy as well to our Monterrey plant. So we think that gives us a global cost competitive advantage. We are seeing Chinese manufacturers when the China market slows, they go elsewhere. Their pricing is super aggressive. I could use other words. It doesn't impact the U.S. market because the industry was able to demonstrate to the government that it was dumping behavior. Let me just say, we've been in China for 25 years. Our entire Chinese team is the Chinese team, we have no expats. We know what it cost with labor costs. We know material costs, we know what it costs to ship it. So we know what it costs to produce product in China. And the tariffs that came through on the tariff side reflected the level of dumping that was ongoing. If they exempt that behavior in other regions of the world, you may anticipate we, as part of the participant in the other industries, we'll take similar actions to preclude the dumping of the Chinese product into the market. And the other thing that we talk about with our customers and our customers get this is the total value of the life cycle of the piece of equipment. Because for a customer in that space, there's 3 things that they're concerned about. What's the acquisition cost? What's the total cost of ownership? And what's the residual value when you sell that product into the used equipment somewhere around 8 to 9 years, plus or minus. And we can clearly demonstrate, all right, what total cost of ownership is? And there's a huge element of the brands that we have in that secondary market. So even with a very low initial acquisition price, it still may not make sense for customers to take that low, low price. So then they lower the price to obscene levels and customers may take some of that as they go forward. So it is something we're watching very closely on a global basis. And if they want to bring factories and compete here, bring it on. I'm more than happy to do it. On a like-for-like basis, let's go.

Any other questions? Okay. Back to MP, margins have been really impressive over the past several years and kind of as long as I can remember. I guess, can you continue to expand margins? Is there further room there?

And so I mean, this business, just a consistent strong performer. That's why we like MP, and we like to talk, it's just a great business. And so that business over the last -- from like 2015 or so improved its operating profit by 575 basis points, and they continue to improve. And so when we've laid out targets at our Investor Day, we have a margin improvement in that business as well. We talked about an incremental margin target in the low 20s for that business because we want to continue to invest and grow that business. And so we will make prudent investments in engineering, technology, digitalization, those types of investment in that business to accelerate its growth going forward. It will continue to remain extremely strong, steady performer.

Okay. Great. Moving on to -- you talked about how strong the balance sheet is, which is a big departure of the old tariff. So congratulations on really making the balance sheet super strong. I guess first question is on the topic of free cash flow before I get to capital allocation. You guys have elevated CapEx right now because of the Monterrey move. Where does CapEx kind of shake out on a normalized basis?

So we would say that when we had our Investor Day, we talked about 1% to 3% of sales, and we would talk about the $50 million or so amount that would be like a normal maintenance CapEx for our company. So that's about where it shakes out. Now we do like organic growth. When we talk to capital allocation. We're generating that 24% return on invested capital. But it's elevated this year. It will be a bit elevated next year as the Monterrey project continues.

Okay. Okay. Understood. And then the topic of capital allocation, probably the last thing we're going to hit on. You've talked about increased interest in M&A. How is the pipeline looking, areas of focus, anything you'd highlight there?

So we are building -- we've done several transactions, some technology investments and some outright acquisitions, we acknowledge on the smaller scale. And we're building a pipeline out. Where are the areas that we're looking at. You go back to that megatrend chart. And there's -- especially in and around the verticals that we compete with MP. We think there's opportunity. There's fragmentation to add product lines, add regions that we're not in. So more aligned with bolt-on acquisitions. Now if something larger was present, and it made sense, and Julie can talk about some of the financial criteria. But from a strategic standpoint, we want good businesses. I don't want turnarounds. We want good operating businesses where we can -- we're a good owner of that business where we can bring some synergies of the 2 businesses together, whether it's revenue synergies or cost synergies or both, those are the types of things we're looking at that expand our product offering and geographic reach is an area we're looking. We're a little bit more optimistic on -- I always try to find you don't want to be pollyannish, but a little bit more optimistic with the rising interest rate environment and a little bit less access to debt capital. We've lost out on a couple of good transactions to private equity, and we had synergies and yet we still got outbid. And so in that environment, perhaps maybe strategics or other strategics like us, will be a bit more successful in some of the potential properties that come on the market. So we're active building out a pipeline. And Julie, if you want to talk about.

Yes. I mean it's got to be accretive after the first year and we get through all the purchase accounting. It's got to outearn cost of capital. So we talked about our strong balance sheet. There was a big effort to make sure that all of the businesses that we own outearn cost of capital and we're there. So we want to continue that. So after the -- about the year 3, it's got outearn its cost of capital as well. And we've talked about leverage and maintaining a reasonable leverage at 2.5x, and we want to remain disciplined and not be overlevered either.

Excellent. Well, we're out of time, so we'll go ahead and around there. But John, Julie, thank you so much for your time today.

Thank you, Nicole. Enjoyed it. And again, investors, thank you for your interest in Terex.