Terex Corporation (NYSE:TEX) Q1 2023 Earnings Call Transcript

Terex Corporation (NYSE:TEX) Q1 2023 Earnings Call Transcript May 2, 2023

Terex Corporation beats earnings expectations. Reported EPS is $1.64, expectations were $1.04.

Operator: Greetings, and welcome to the Terex First Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paretosh Misra, Head of Investor Relations. Please go ahead.

Paretosh Misra: Good morning, and welcome to the Terex first quarter 2023 earnings conference call. A copy of the press release and presentation slides are posted on our Investor Relations Web site at investors.terex.com. In addition the replay and slide presentation will be available on our Web site. We are joined by John Garrison, Chairman and Chief Executive Officer; and Julie Beck, Senior Vice President and Chief Financial Officer. Their prepared remarks will be followed by Q&A. Please turn to slide two of the presentation, which reflects our Safe Harbor statement. Today’s conference call contains forward-looking statements, which are subject to risks that could cause actual results to be materially different from those expressed or implied.

In addition, we will be discussing non-GAAP information we believe is useful in evaluating the company’s operating performance. Reconciliations for these non-GAAP measures can be found in the conference call materials. Please turn to slide three. And I’ll turn it over to John Garrison.

John Garrison: Thank you, Paretosh, and good morning. I would like to welcome everyone to our earnings call, and appreciate your interest in Terex. I would like to begin by thanking all Terex’s team members for their exceptional efforts in this challenging global macroeconomic environment, and for their continued commitment to our Zero Harm Safety culture and Terex Way Values. Safety remains a top priority of the company, driven by think safe, work safe, home safe. Terex team members continue to work tirelessly to improve our performance for our customers, dealers, and shareholders, while maintaining a safe working environment. Please turn to slide four to review our strong financial results. The team delivered excellent financial performance for the quarter.

Sales of $1.2 billion were up 23% from last year, and up 27% on FX neutral basis. Operating margins at 12% expanded 450 basis points from the prior-year, and earnings per share of $1.60 more than doubled year-over-year. As a result of our team members continued strong execution in the first quarter, and our strong backlog, we are raising full-year earnings per share outlook to a range of $5.60 to $6. Please turn to slide five. I’m excited about the future of Terex and the opportunities in front of us. Our MP and AWP segments participate in global diverse end markets, and are well-positioned for profitable growth. Infrastructure investments are increasing throughout the world, but in particular, in the United States. In fact, the Infrastructure Investment and Jobs Act alone is expected to drive $1.2 trillion of spending over 10 years.

In addition, the CHIPS Act and Inflation Reduction Act are going to be supportive of additional spending in construction and infrastructure that should drive growth for our businesses. Our Powerscreen assembly brands had leading positions in global mobile crushing and screening markets that will benefit from growth in aggregate. Our Genie products are needed for general maintenance, infrastructure, and construction projects, and will benefit from increased government-sponsored spending throughout the globe. Another important growth driver are initiatives that support Circular Economy goals. The global demand for waste recycling solutions is increasing, driven by regulatory and societal changes. Our MP brands, including Ecotec, CBI, Terex Washing Systems, and our recycling systems are at the forefront of meeting demand for sustainability initiatives.

The increasing reliance on electrification to reduce greenhouse gas emissions requires grid capacity expansion. Terex utilities have a wide portfolio of products well positioned to capitalize on the investments needed to enhance the electrical grid. And our Genie business, in particular, will benefit from increasing digitization, including data warehouses and chip manufacturing onshoring projects in the United States. Despite the near-term macroeconomic issues, we continue to be optimistic and excited about the opportunities for Terex growth. Please turn to slide six to review our backlog. Our Q1 backlog remains strong at $4.1 billion, up 2% from year-end. In fact, our backlog has remained relatively consistent for the last five quarters, and we’ve had minimal customer and dealer push outs and cancellations.

Our current level of backlog is consistent with Q1 of 2022, the highest backlog for Q1 in our recent history. Our backlog demonstrates the strength of our end markets, and supports their outlook for the remainder of the year, and gives us visibility into early 2024. Elevated customer fleet ages and historic low dealer inventory levels continue to support robust demand. Consolidated Q1 bookings remain healthy at $1.3 billion, resulting in a book-to-bill ratio of 105%. Turning to slide seven for an update on our strategic operational priorities; we continue to make progress on our Execute, Innovate, and Grow strategic initiatives that continue to strengthen our company. Our operations team had excellent execution in the first quarter, demonstrating adaptability and flexibility to overcome the dynamic supply chain environment.

Our (ph) Mexico facility is on time and on budget. The new facility is an important element of our strategy to improve Genie’s through cycle performance. Starting in March, Genie began to transfer product lines from our temporary facility in Monterrey to our new permanent facility. Moving some other factories in our network will take place over the next 12 to 18 months. While these moves will have significant long-term benefits, this process will result in short-term manufacturing inefficiencies, which the Genie team is working hard to overcome. The company continues to make capital investments in our facilities around the world. These investments are paying off, and we are proud of a return on invested capital of 24%, which remains significantly above our cost of capital.

We showcased 20 new innovative products at CONEXPO, ARA, World of Concrete, and Bauma India. Our investments in the development are environmentally-friendly new products with superior performance will help to deliver growth. Our parts and service teams are investing in digital offerings for dealers and customers, including My.Terex and Liveconnect. We now have more than 70,000 machines fitted with our Telematics technology. Execution of our EIG strategy enabled our strong organic sales growth for the quarter. In addition, we continue to supplement organic growth with inorganic investments. We recently acquired MARCO, a manufacturer of bulk material handling conveyors for the growing MP segments offerings with products that complement the existing portfolio.

In February, we completed an equity investment in Apptronik, a robotics company, reaffirming our commitment to invest in technologies that enhance our product and solution offerings. Turning to slide eight, during the quarter, our team members were active in tradeshows. We saw high attendance and interest in our products. In fact, attendance set a new record at two of the biggest tradeshows, CONEXPO and Bauma India. The attitude of our customers was upbeat. The MP team displayed the Powerscreen Gladiator product at CONEXPO, a fully-electric, wheeled crushing and screening machine. After significant success with this product in North America, we recently launched the Gladiator World Series this year for sales around the world. The Genie team introduced our highest capacity Telehandler at the Show, the 12,000 pound Telehandler is engineered to offer superior productivity and low total cost of ownership.

We also introduced our first all-electric Mini Mixer at CONEXPO expanding MP’s concrete offering similar to our all-electric utility truck, the Mini Mixer leverages our investment in biotech to develop zero-emission products. If you had the opportunity to visit our booths at these tradeshows, I hope you took away from your visit that Terex team members are engaged with our customers. And our products and services offer the features and benefits that provided value. Turning to slide nine, at Terex, we are intensely focused on developing and delivering sustainable solutions for our customers. In this example, Terex recycling systems saw the first all-electric powered waste separation solution to a customer site in the U.K. The installation combines our waste heater conveyors, screened sorters and separators.

The system efficiently recovers products of higher value, including metals, aggregates, plastics in cardboard from waste, thus diverting more material from the landfill. This is another example of Terex products, making the circular economy a reality. Please turn to slide 10. Our environmental, social and governance programs deliver stakeholder value. We continue to progress on our ESG journey, and recently completed our materiality assessment. We heard from our stakeholders that product development, stewardship, and innovation are core business differentiators. Stakeholders regarded product quality and safety as critical for meeting regulatory requirements and customer expectations. Team member health, safety, and wellbeing are important. We know that Zero Harm is possible.

It’s not just an aspiration. We designated April as safety month for teams across the globe and scheduled a variety of events to reinforce and rededicate ourselves to Zero Harm. I want to thank our stakeholders who participated in our materiality assessment has provided us valuable insights. Please turn to slide 11. We continue to operate in a challenging macroeconomic environment with inflationary pressures and supply chain constraints. We did see slight supply chain improvements. However, our hospital inventories increased in the first quarter after declining in the fourth quarter of last year is a clear indication of the level of disruption our teams continue to face and overcome. Overall, our market demand remains strong. And I am confident in the team’s ability to continue to adapt and overcome the macroeconomic challenges that we have been facing.

And with that, let me turn it over to Julie.

Julie Beck: Thanks, John, and good morning, everyone. Let’s take a look at our first quarter financial performance found on slide 12. Terex is in a strong financial position. We demonstrated excellent execution in a dynamic environment. Sales of $1.2 billion were up 23% year-over-year on higher volume and improved price realization necessary to mitigate rising costs. Sales in constant currency were up 27% as foreign currency translation negatively impacted sales by $42 million, or approximately 4% in the quarter as the Euro and British Pound weakened against the dollar. Gross margins increased by 410 basis points in the quarter as volume, pricing, favorable product mix, improved manufacturing efficiencies and strict expense discipline helped to offset costs increases and the negative impact of foreign exchange rates.

Both segments recorded a year-over-year increase in gross margin. SG&A was 10.6% of sales and decreased by 50 basis points from the prior-year as business investment and marketing costs were coupled with continued expense management. SG&A increased over the prior-year year due to inflation, unfavorable foreign exchange, incremental spend on new acquisition, and increased marketing expenses, and tradeshows. Income from operations of $148 million was up 98% year-over-year. Operating margin of 12% was up 460 basis points compared to the prior year. Our incremental margin was 31% compared to the last year. Interest and other expense of $15 million increased $4 million from the prior year due to increased interest rates. The first quarter global effective tax rate was 17.5%.

First quarter earnings per share of $1.60 more than doubled representing a $0.86 improvement over last year. This strong performance was driven by increased volume, disciplined pricing, and continued cost management. This quarter includes an unfavorable earnings per share impact of $0.10 from foreign exchange translation. Free cash flow for the quarter was negative $11 million, representing a significant improvement over the prior year. I will discuss free cash flow later in more detail. Let’s look at our segment results, starting with our Materials Processing segment found on slide 13. MP had yet another excellent quarter with consistently strong operational execution. Sales of $554 million increased 22% compared to the first quarter of 2022 with healthy demand for our product across multiple businesses.

On foreign exchange neutral basis, sales were up 28%. Bookings were up 6% sequentially. MP ended the quarter with backlog of $1.2 billion. The backlog remains robust and is approximately three times historical norms. MP delivered operating profit of 15.4%, up 120 basis points over the prior year driven by higher sales volume, favorable product mix, and disciplined cost management, resulting in an incremental margin of 21%. On slide 14, see our aerial work platform segment financial results. AWP had an excellent quarter with sales of $686 million, up 24% compared to the prior year on higher demand. On a foreign exchange neutral basis, sales increased 27%. Backlog at quarter end was $2 billion, up 4% from the prior year. Bookings remained strong with a book-to-bill ratio of 112%.

AWP more than doubled their operating profit and delivered operating margins of 12.1% in the quarter, up 620 basis points from last year with an incremental margin of 38%. The improvement was a result of higher sales volume, favorable mix, cost reduction initiatives, manufacturing efficiencies, and disciplined pricing actions to offset martial supplier cost. Please see slide 15 for an overview of our disciplined capital allocation strategy. The company’s strong balance sheet provides us the financial flexibility for the future. As a reminder, although Terex does provide customer financing solutions through our banking partners, in February of 2021, we sold our TFS asset. And no longer carry this exposure on our balance sheet. We remain diligent in managing counterparty exposure and risk as well as regional customer and supplier risk.

Today, we have not seen a negative impact due to current market conditions. Free cash flow for the quarter was negative $11 million compared to negative $72 million a year ago. This $61 million year-over-year improvement in free cash flow was due to increased operating profit. Hospital inventory at the end of the first quarter was $48 million. An increase of $12 million from the fourth quarter of last year and down slightly from a year ago reflecting continued supply chain disruption. We continue to invest in our business with capital expenditures and investments of $30 million. We increased our quarterly dividend per share to $0.15. A 15% increase over the prior year. We repurchased $3 million of shares in the first quarter. In April, we have continued our share repurchase program, and purchased 14 million of shares partially offsetting the dilution from our compensation programs in March.

Through April, we have returned $28 million to shareholders, and have $175 million remaining on our share repurchase program. We will offset dilution, and take advantage of market dislocation in these volatile times. We have no debt maturities until 2026, and 77% of our debt is at a fixed rate of 5% until the end of the decade. Our net leverage remains low at one-time, which is well below our 2.5 times target through the cycle. We had ample liquidity of $677 million. The company is in an excellent position to run and grow the business. Now, turning to slide 16, and our updated full-year outlook, it is important to realize we are operating in a challenging macro environment with many variables and geopolitical uncertainties. So, these all could change negatively or positively.

With that said, this updated outlook represents our best estimate as of today. Thanks to the strong execution of our team members and our robust backlog, we are pleased to raise our 2023 outlook. We now expect earnings per share of $5.60 to $6. Our increased sales outlook of $4.8 billion to $5 billion incorporates the latest dialog with our customers and our suppliers. We anticipate higher volume as customer demand remains strong. Our sales are expected to be relatively consistent in Q2 and Q3, and down slightly in Q4, due to lower production days. Our operating margin outlook has increased to a range of 11.4% 11.8%. This reflects our excellent performance in the first quarter, continued strong customer demand, the latest information from our supply chain, cost benefits, and continued strict expense management.

We expect to improve free cash flow in the next three quarters, and we are raising our outlook to $300 million to $350 million, primarily due to higher earnings. Let’s take a look at our updated segment outlook. Based upon MP’s continued strong execution, which include continued mitigation of cost pressures and supply chain challenges, we are increasing our sales outlook to range of $2.1 billion to $2.2 billion, with an increased operating margin of approximately 15.8%. We expect MP sales and margins to be relatively consistent for the remainder of the year. The AWP team has increased their factory output. And as a result, we are increasing our sales outlook to range of $2.7 billion to $2.8 billion. Incorporating the increased volumes, the team’s cost reduction activities, pricing actions, and improved manufacturing efficiencies, we are raising our full-year operating margin outlook to approximately 11.5%.

We anticipate AWP sales to be relatively consistent in Q2 and Q3, and down slightly in Q4 due to normal seasonality and lower production days. AWP margins are expected to be negatively impacted by manufacturing inefficiencies due to scheduled production moves to our Monterrey facility, which will have a greater impact in the second-half of the year. And with that, I will turn it back to you, John.

John Garrison: Thanks, Julie. Turning to slide 17 to conclude my prepared remarks, Terex is well-positioned for growth to deliver value for our stakeholders in 2023 and beyond. Because we participate in strong end markets, including infrastructure, electrification, and environmental, we will continue to execute our disciplined capital allocation, while investing in new products and manufacturing capability along with strategic inorganic growth. We have demonstrated resiliency and adaptability in a challenging environment. And most importantly, we have great team members, businesses, strong brands, and strong market positions. And with that, let me turn it back to Paretosh.

Paretosh Misra: Thanks, John. As a reminder, during the question-and-answer session, we ask you to limit your questions to one and a follow-up to ensure we answer as many questions as possible this morning. With that, I would like to open it up for questions. Operator?

Q&A Session

Operator: Thank you. We will take our first question from Stanley Elliott at Stifel.

Stanley Elliott: Good morning, everyone. Thank you for the question, and congratulations.

Julie Beck: Good morning, Stanley.

Stanley Elliott: Can you talk about the (ph) increase for the AWP? How much of that is price? How much of that is throughput? And to what extent is the Mexico shift going to be a negative detractor there?

Julie Beck: Thanks so much for the question, Stan, and good morning. The AWP team just did a great job in executing this quarter. They were able to get higher sales volumes, coupled with disciplined pricing actions. They had favorable regional product mix. And then, they really worked hard on cost reduction initiatives between the supply chain and engineering team, and evaluated engineering efforts getting dual supply, and those types of things. And then with the increased volume, they also had favorable manufacturing efficiencies. So, they had strong execution, successful (ph) actions. And so, that led to an incremental margin of 38%. So, the Genie team had very strong volume in the quarter as we mentioned. And so, we were able to (ph), in terms of the Genie impact on the Monterrey move, we started that move from the permanent to the new facility in March.

More moves are going to happen over the coming quarters, and we expect the second-half of the year to be impacted by manufacturing inefficiencies due to all of those product moves. So, just a really great job of execution by the AWP team this quarter.

Stanley Elliott: And switching gears, on the MP business, on one hand you are talking about inventories at your channel partners being exceptionally low. Looking at your backlog, it’s three times what normal would end up being. When do we think that will it get right-sized within that channel? I’m assuming that most of those orders still are for retail use, as opposed to any sort of just stocking, but it just sounds like there is a lot of visibility for that part of the business going forward.

John Garrison: Stan, you are right. There is a significant visibility with MP’s backlog being at about 1.2 billion, which is similar to prior year. And it’s also important to note, given the fact that we have about three times the normal backlog that is changing our world policies within the business. For example, in our aggregates business in the quarter, our order book wasn’t open for the whole quarter to fill Q3 and Q4, because we are still in the position of slotting orders that we have received. And the reality over here in this business and it’s not just similar in AWP business we really are in an allocation mode. So, as the orders come in, we have to allocate to ensure that all dealers have the opportunity to take product, and we don’t cut off a dealer in certain part of the world with no product.

So, demand remains strong. Dealer inventories are low. Remember about 75% of the MP business goes to a dealer channel. Their inventories are not — stocking dealers in the sense they are not putting equipment on the line. Most of the equipment here goes into their specialized rental fleets and turns into rather purchase type contracts, or the (ph) contracts. And again, the challenge for them is those contracts then converting to sales, and we haven’t been able to get the product back to them that they need. So, they are seeing that depletion in their network in their rental fleets, and so, that’s helping to sustain. And again, it’s global strength. Little way across the globe we are seeing strength in the MP segment, did see strength in North America, which we would expect, given the strength in the overall North American market.

So, if we continue to see improvement in the supply chain, supply output continues to improve, we’ll see that return to more normal, but right now, quite strong backlog, extended visibility, historic level of visibility going forward. And I think it’s also important to understand what’s really important in both business and the backlog, and we comment on this, what happens within the backlog in terms of order push outs and order cancellations? And we are just not seeing that at this time. So, good robust backlog, we know that book-to-bill overall company with a 105% was down a little bit in MP. That’s coming off an exceptionally high Q1 of last year, really in both businesses. So, overall, demand remains robust. We are not seeing cancellations and push outs.

And frankly, we are still in the allocation mode, and we will be continuing open up the order book as we progress through the remainder of the year.

Stanley Elliott: Perfect. Thanks so much for the time, and best of luck.

Operator: We will move next to Steve Volkmann at Jefferies.

Steve Volkmann: Great. Good morning, everybody. Thanks for taking the question. John, I just want to pull on that throw a little bit, because I feel like if we are going to see any signs of weakness or push outs as you just noted, it would be in the AWP, and probably specifically with the smaller customers. So, I guess I just wanted to hear your comments around what you are seeing from sort of the small independents on AWP orders?

John Garrison: Thanks, Steve. Similar market dynamics both in nationals and the independent customers continue to see strong market fundamentals and growth across both segments. Continue to see strong utilization. And again, similar dynamic, industry constraints that led to the increase in fleet ages. And we have talked about the replacement cycle on numerous times, and the fact that replacement cycle has been delayed. I think that shows up in relatively strong used equipment values. Right now, customers are still requesting more than we can deliver due to the supply constraints. So, we will talk with our customers if supply constraints alleviate, there may be an opportunity to get more supply, and that’s both with the nationals and the independents.

Again here, if you look at the AWP segment, again against the very tough comp in 2022, our book-to-bill ratio was 112% in this segment. So, good backlog, and (ph) coverage. And again, the reality here is that we are still in an allocation mode. And so, I know this is going to sound strange, but we are in a position where we are trying to keep customers equally unhappy with the distributions as we are getting. And so, we are trying to keep things relatively consistent against historical patterns for the nationals and the independents. And again, I think that speaks to the relative tightness that we had in the market. So, still constrained, and the team is working to reduce the constraint, but again, backlog, market environment continues to appear robust across the customer base not just in the large national accounts.

Steve Volkmann: Understood, thank you so much. And then, just a follow-up there on AWP, I was a little surprised to see the hospital inventory actually up, but also of course the margin much stronger than what we are looking for, I usually sort of assume hospital inventory means headwinds to margin. So, maybe you can square that with us, and specifically I am trying to think about as those hospital inventories normalizes their margin upside that might be sort in our back pocket here?

John Garrison: As Julie started with her comments, the team really did execute well, and you are right, Steve, we did see a modest increase on our hospital inventory to about $48 million, up from $36 million at the end of Q4. So, I think that speaks the level of disruption the team is seeing, but they are continuing work to improve the continuity of supply. And we are seeing improvement, a modest improvement in the supply base in terms of on-time delivery. We are seeing modest improvements in the quantity or the level of supply. Our teams are driving that. There was a tremendous amount of work going on in our supply chain teams around the world to really increase the number of suppliers that we are working with, dual sourcing, modifying design, and so, all of that work is occurring despite that because we are in the business where you need a 100% of the parts to ship a product.

Despite that, we still saw a slight increase in the hospital inventory in the quarter. That does create disruption. But as Julie said in her comments, they had good efficiency on the higher output that we were able to get. That we were able to take — the team was able to take to bottom line. So, we are continuing to work hard around the globe and in both segments to drive continuity, reduce the disruption, and increase the quantity of supply. Lot of hard work, but again, the disruptions we are seeing are evident in that hospital inventory. And again, it just takes one part for us not to be able to ship to a customer.

Steve Volkmann: Got it. Thank you.

Operator: We will move to our next question from Steve Barger at KeyBanc.

Steve Barger: Hi, good morning. Sorry, I missed your prepared comments. But with you already guiding this year above FY’24 consensus, people are going to be wondering around long-term thoughts on your ability to drive growth. So, to the extent that you can, what are your general thoughts on cycle longevity, and just how you are positioning Terex for the next few years?

John Garrison: Yes, thanks, good question. And again, it’s early to talk about 2024, but again, if you look at our strong backlog coverage that we are seeing is pretty much consistent in the last five quarters. Governments around the world are pointing to infrastructure as a stimulation, and we are seeing this as a robust major around the world, and then when you put that on top of what’s transpiring in the U.S., and I mentioned this, Steve, in my opening comments about the Infrastructure Act, the Inflation Reduction Act, the CHIPS Act, those are massive sums of money that — our tailwinds against the current headwind of the macroeconomic environment rising interest rate environment. And so, if you look at the mega trends that we are dealing with in that area, if you look at the consistent performance of our MP business, and then the increase in sustainability, what we are doing in some of our environmental, you know, as we highlighted, one of the solutions this time, and so, the mega trends provide some degree of tailwind for us, to potentially offset the headwinds the we have in normal rising interest rate environments.

So, if I’m looking at MP, again, consistent performance around the globe, multiple verticals that we compete in, and we believe in that environment we are going to be able to drive growth. AWP, you know, that has been constrained. Replacement cycle, both in North America and in Europe has been constrained by overall market supply. Again, the backdrop of those major infrastructure bills provides a tailwind against the headwind, to the rising interest rate environment. And so, as we look at the replacement cycle, rental companies continuing to win, the industry continuing to grow, yes, we do believe as we laid out in December that we can be a growth company over the coming period of time. Now, we all know, and as I said in December, it’s not always linear, but as we set the company up, we believe we are set up to take advantage of the mega trends that are ahead of us, to drive growth into the future.

Obviously it’s too early to talk about 2024 from a financial standpoint, but we have $1.1 billion of backlog for 2024. That is unheard of for us, for our business. And so, we know there is a lot of cross currents out there, and not the least, which is this rising interest rate environment tightening credit conditions. But there is also some pretty significant tailwinds, and we think we have positioned the business, and we will do the right course of action irrespective of what that macroeconomic condition is. But right now, it looks pretty sharp for 2023, and again, we are not going to give guidance for 2024, an outlook, but we also never have $1.1 billion booked for the subsequent years. And so, I think that also indicates there is an opportunity to potentially grow, despite the macroeconomic conditions and the rising interest rate environment.

Steve Barger: Yes, that’s really great context. And to your point about the interest rate environment, I know this will be hard to answer, but there is a lot of concerns around commercial real estate, and specifically office. Have you ever tried to quantify your end market exposure by project type, or do you have a guess how much of your fleet has been allocated in the past to office construction? And I’m just wondering new challenges in that specific area creates a fleet overhang for your customers, or is that relatively small.

John Garrison: First of all, we don’t have precise information, so I can’t give you a percentage. I do there are — well, especially on the AWP side, our larger customers report out where they believe their products were going IV our products. And if you look at that macro environment, and non-ready constructions, clearly office and retail is going to have a headwind in a rising interest rate environment. And that part of the business will be impacted. However, if you look at non-resi in totality, 40 plus percent of that is public. That’s not going to be impacted in the rising interest rate environment. If you look at CHIPS Act and the onshoring of chip manufacturing, the onshoring of battery manufacturing, those are being done for geopolitical reasons to improve the share of the supply.

A rising interest rate environment is not going to adversely impact those projects. They’re going to go forward. And so, that’s why I say there is clearly cross currents out there, there is the headwind of a rising interest rate environment, and it definitely will impact things like commercial real estate, office; no doubt, but the other parts of the business are large, and that’s the macro tailwind. And that’s the headwind tailwinds that we have, and will continue to position the business to be able to take advantage of that. But overall non-resi construction especially in North America, we think is going to be strong for the next couple of years as a result of these mega investments. My predecessors, John Oliver talks about the Infrastructure Bill, because I talked about it for 20 years, and it never happened.

This is the first time, we’ve actually added and so that’s increased uncertainty, we understand that, we will position the business, we will take the appropriate actions, irrespective of the environment, but we believe will position the business to take advantage of some positive headwinds – tailwinds, if they don’t materialize, we’ll take the appropriate action. But right now $1.1 billion going into 2024 is highly unusual for us. We think that speaks to the overall strength of the non-resi market.

Steve Barger: That’s great. Appreciate the time.

Operator: We’ll go next to Timothy Thein at Citigroup.

Timothy Thein: Great, thank you. Good morning. So, John, the first one just is on AWP and totally again it’s very early to talk anything about ’24. But I’m just curious how the team at Genie’s planning with respect to that fourth quarter production levels, if you look into ’24, there’s a lot of moving pieces with what’s going on in Mexico, but just curious your initial thoughts, you have to be informed to some degree by what you’ve seen in terms of order intake and backlog. So, I’m just curious how the plan is currently kind of laid out in terms of expectations as to how you’re exiting the year. And that’s the inventory position going into ’24.

John Garrison: Thanks, Tim. So, as Julie said in her opening comments, we are anticipating lower volume in the fourth quarter due to production days in the AWP segments, specifically, the Genie business. As the supply chain begins to improve, and we’re able to improve our lead times, because that’s the other issue going on, we have excessive lead times right now, across the industry. And as those begin to improve, I think you’ll receive return to some normalcy in customer order patterns, because customers, especially the larger customers, they were taking gear ahead of what they normally do, because that’s when we in the industry could deliver that equipment to them. So, they took things in the fourth quarter that they otherwise wouldn’t, they took things in early in the first quarter that perhaps they otherwise wouldn’t.

So, I think as the supply chain improves, demand stays strong, I think you’ll see some more return to some degree of normalcy in production in rental companies in terms of in the Northern Hemisphere, where they take their products. So, we’re planning on in the fourth quarter for now, I mean that could change, lower production volumes in Q4. If for no other reason, then lower number of production days due to the holidays, but we’re assuming a reduction in production in Q4, positioning us to improve or increase production in Q1 to meet the needs of the customers.

Timothy Thein: Got it. Okay. And then just on MP, a lot of different product segments there, and none of which have the same margin profile. I’m just curious, as you mentioned, how you’ve reconfigured that, or change the order policy, is that resulting in any, should we think about any from a mix standpoint, is there any major differences as we move to the balance of the year in terms of what you expect to deliver out of that backlog?

John Garrison: No, not anything fundamentally different, as Julie said, we did have some favorable mix in the quarter in the Aggregate segment. And we’re anticipating that continues through the year but no substantive change, I would say in the makeup, we did see some favorability of aggregates.

Timothy Thein: All right, thank you. Thanks, John.

Operator: We’ll go next to Steven Fisher at UBS.

Steven Fisher: Thanks. Good morning. I’m wondering if you can comment on the price versus cost gap for the rest of the year. Are you expecting that to be wider, narrower or steady? And I guess to maybe make it meaningful, how would that look excluding any of the Monterrey costs that you’re going to be incurring?

Julie Beck: Thanks for the question, Steve. So, when you think about us for in 2022, we were as a total company, we were priced cost negative in the first six months and then we became price cost neutral for the year of 2022. And so in particular, so our objective is to continue to be priced cost neutral for the year, we talked about offsetting material and freight and logistics costs. So, we continue to see a dynamic inflationary environment. And we’ve seen container freight decline. And while we’ve seen row increasing, so we’ve taken multiple pricing actions throughout 2022, we took further pricing actions in 2023 across the company. And so we’re being transparent with our customers and distribution partners regarding that level of inflation we’re seeing and why we need to take pricing actions.

If I look at it by business, the MP group is that they do dynamic pricing. And so they’ve been priced cost neutral in 2022. And they continue to be price cost neutral for 2023. For AWP, they were price cost negative in the first six months of last year, and were able to turn it to be neutral for the year. So, we see higher pricing in the first six months of this year, but look the objective of being price cost neutral for the whole year. So, again we’re being transparent, and we expect to be price cost neutral for the year.

Steven Fisher: Okay, and then, John, you mentioned the study backlog added, when you look at the picture on slide 20, it really shows that well kind of a general leveling off, what’s your expectation for how this is going to trend from here? I know you said there’s going to be some more normalization of ordering. So, does that mean just generally, kind of a continued steady backlog or if it were to break out from here, what would be the most likely driver of that?

John Garrison: Great question, and let me answer it this way, right now, we’re not as reliable supplier as we’d like to be for our customer, because a lot of what we’re continuing to deliver is linked to our original customer promise. And as the supply chain improves, we will get back to our historic ability to when we say we’re going to deliver, we deliver it versus being late. So, I would not be surprised over time, if backlog would come down and we’d get back to more historical levels of backlog. I don’t think that implies anything necessarily about the market. I think it implies we’re getting our lead times back to more normal levels, because right now really across the business, our lead times are extended. So over time, I think as the supply chain improves, we’ll get to more normal ability to deliver on our delivery commitments, our lead times will come into more normal levels.

And as a result, I think it’s clearly possible backlog does decline to more historic levels, while the overall market remains buoyant. So, that would not surprise me. If that we’re continuing, because it’s showing that we’re — supply chain is finally coming back in balance, we’re finally getting out of the disruption mode, and getting back to what we normally do, which is to deliver on our commitment to our customers. And I think improving supply chain is going to help us do that.

Steven Fisher: Terrific, thank you.

Operator: We’ll go to our next question from David Raso at Evercore ISI.

David Raso: Yes, hi. Thank you. Picking up on the order thoughts, just curious, are you starting to see enough normalization of what you can promise on lead times or for whatever reason customers are a little skittish about ’24 that, are they having conversations now that said, “Hey, look, if that’s now the situation on lead time or whatever may be, let’s push that conversation to September,” just trying to get a read here and level expectations about book-to-bill particularly in AWP, of course the backlog is abnormally high and people liked the visibility on ’23 even starting ’24. But just so we understand that are we starting to get what you’re hearing around the sector broadly with supply chains normalizing, you’re going to see orders come down as people kind of rethink how early they need to order for ’24 or have you not seen any change in behavior from your customers because the punch line, I think people try to figure out how much is book-to-bill go below one.

And are you seeing that already for 2Q, just trying to level set those expectations?

John Garrison: Thanks, David, and you are right, in the AWP segment in the quarter, our book-to-bill was 112% and so we saw those strong book-to-bill in the quarter over time, I think that probably does come down as supply chain continues to improve, right now customers are taking because there’s still a percentage of what we are delivering, which is in line to our original delivery commitments. It’s improving, but not anywhere near the levels of our historical performance. So, as supply chain improves, lead times right now, David, still remains extended. And it’s going to take time to get those lead times, again, we will be transparent with customers in terms of what our lead times are. And so, as lead times improve, that will translate to customer buying behavior, getting back to the more seasonal patterns that we are seeing historically.

And so, I think as things improve I think we will see a more return to more seasonal normal discussions with customers. Now, we’ll say we do have customer specialty larger ones that we are looking out beyond the year. We are not signing contract beyond the year, but we are engaged in what does your demand look like for a multiyear period of time, and having those dialogs. So, let me be clear. We are not signing contracts that haven’t made any best at, but the dialog about what their needs are across the multiyear environment, yes, those dialogs are absolutely taking place. And I do think the book-to-bill probably come down with the backlog as supply chain continues to improve. But again, I don’t think — David, you need to read in, but that’s a significant reduction in demand in the marketplace.

I think that’s returning to a more normal environment. I don’t see that in the next quarter, but I do see improvement in supply chain. We are anticipating that in out outlook. We are seeing supply chain improvement over the course of the year. That’s our assumption today.

David Raso: Yes, that’s all logical. These backlogs are so big, the order comps are hard, it makes sense they’re down, but how much, is it really a reflection of ’24 demand, or is it just normalizing behavior, because supply chains are normalizing a bit? So, theoretically…

John Garrison: It’s a normalizing behavior. I mean, we are not…

David Raso: We are not hearing that per se, like people pushing out conversations to think about…

John Garrison: In the AWP segment, we are pretty much booked out for 2023 with potential conversations, if we are able to get a little bit better production, customers would actually take more than we have committed to that, but the current environment we are in right now within AWP segment.

David Raso: All right, thank you, appreciate it.

Operator: We will go next to Michael Feniger of Bank of America.

Michael Feniger: Hey, guys. Thanks for taking my questions. And apologies if you already kind of hit on this, but with your address revenue now approaching $2.8 billion for the year, they’re kind of almost back in that ’18-’19 period, obviously it’s been a lot more priced field like this year in that revenue number. I’m just curios if production units are still below that ’18-’19 level? And going forward with Monterrey, your strategy there, does that give you any ability to add incremental capacity above those ’18-’19 levels?

John Garrison: Thank you, Michael. We are currently producing below the ’18-’19 levels within the Genie business, and with the investments we’ve made in our Watertown facility, and within improved supply chain we should be able to get increased production out of the Watertown facility. So, right now we are producing at lower levels than we produced in 2018 and 2019. On the Monterrey facility, I think this is very important; the Monterrey facility for Terex and Genie specifically was to improve our global competitiveness and diversify our global footprint. Yes, it will provide some incremental capacity, but that’s not why we made the investment. We made the investment to improve our global cost competitiveness, and then to utilize our Mexico supply chain as well, and we think that will put us in a strong position, not for supplying on moderate facility, but also supplying our U.S-based manufacturing.

So, Monterrey was to diversify our global footprint to improve our global cost competitiveness to compete globally around the world, from a cost competitiveness standpoint, and modest incremental capacity. We have the capacity we need to support the growth that we have. We will look to add other regions of the world to be local followers, in some instances, but again, that’s our strategic rational for Monterrey was not to add capacity, yes, we get some incremental, it was to significantly improve our global cost competitiveness, diversify our footprint on a challenging global economic environment. And that’s why we made the investment in Monterrey, and it’s going to be a major source over the next 10 years, and beyond for Genie from a source of production for not just North America, but ultimately potentially global export as well.

But that’s again, we invested to be globally cost competitive for the next decade, not from a capacity. We are not at the 2018 and 2019 levels within the Genie footprint as we are today. We have opportunity to expand.

Michael Feniger: Very helpful. And just on to material processing, you highlighted how inventories you are dealing is still low, just curious how that should finish the year for 2023, is ’24 about replenishing those inventories? Any metrics you kind of help us with how low these inventories are for MP dealers compared to where they normal should be?

John Garrison: They’re lower than normal. I think we will progress as we move through 2023. We are necessarily assuming we get all the way back to historical levels, known at this time, but we will improve the situation. And again, the order book for the MP business in our aggregates business was not open for the entire quarter, because we were still slotting orders, and again, there happen to ensure that we don’t cutoff any dealer, so that there is equal allocation, if you will, around the world, as production improves, we would expect for that to improve for us as we going forward, and lead to allocation. We are still on an allocating mode today.

Michael Feniger: Very helpful, thank you.

Operator: We will go next to Tami Zakaria at JPMorgan.

Tami Zakaria: Hi, good morning. Thank you so much for taking my questions. So, just to clarify, and I’m sorry if you have already mentioned this, but price cost in the first quarter was positive. So, my understanding was that the first-half would see price cost sort of positive, but then it tapers in the back-half to get you to the neutral level for the year. Is that the right way to think about it?

Julie Beck: I think if you think about the — as we go through the year, what you see is that we took pricing actions throughout 2022, and that pricing comes through into 2023. So, there is a greater impact in the first-half to the second-half when you’re thinking about incremental pricing for the AWP. For MP, they’ve been dynamically pricing all along. So, they have kept up with price cost throughout.

Tami Zakaria: So, price costs will be neutral for the rest of the year for AWP?

Julie Beck: Yes. So, remember, definitely this is the offset material for logistics class.

Tami Zakaria: Got it. And so, you raised the full-year guidance by, call it about $200 million. How much of that is a better volume outlook versus incremental pricing?

Julie Beck: So, from our original outlook, almost all of that are increases integrated to volume in that price.

Tami Zakaria: Got it. Okay, thank you so much.

Operator: We will move next to Seth Weber at Wells Fargo.

Larry Stavitski: Hi, good morning, guys. This is Larry Stavitski on for Seth this morning. Just wanted to ask about the utility business, what are some of the dynamics there in terms of what you are seeing with demand and supply chain, and order trends?

John Garrison: So, utilities business remains quite strong, and in terms of backlog we are pretty much covered up for 2023 and booking well into 2024 in the utilities business, especially in our highly-customized units. We are really seeing strength across the segments that we serve. The transmission network continues to be strong. The independent utilities and public power utilities, their demand remains robust. The rolling contractor segment remains strong, and trickier, given the unit transpired in California. So, really across all four segments, we are continuing to see strong growth in tailwinds. Supply chain has started to improve there. We were significantly impacted in that business, especially around chassis and bodies, and the sequencing of receiving chassis, bodies, and then the booms that we put on there.

We are beginning to see improvement in chassis availability. Body availability has improved as well. And we are beginning to see the hydraulics supply to improve. So, we are beginning to see slowly, but surely some increased output as supply chain improves in that business. And just very strong market demand across the segments that we compete in. And that makes sense as we talk about the electrification and the need in North America is quite expensive. The investments are significant, and we anticipate that to be a strong market, a multi-year strong market given the investments required in the electrical grid network just in the United States alone but Canada and Mexico also had to do. And we also have some growth in China associated with that business.

So, all in all, we think that’s going to be a multi-year tailwind given the need of the electrical grid in that business. And we see that in our backlog.

Larry Stavitski: Okay, great. That’s great color. Appreciate it. And just switching gears a little bit, just in terms of your expectations for price cost neutrality for the year, what are your expectations for steel prices that are embedded in your guide? And if you could remind us how you manage the movement in steel prices?

Julie Beck: Thanks for the question. So, we do have hedging program. And so, we hedge 50% of our North American HRC steel requirement for our Genie business. And so — and it’s a rolling program, so we are hedging out. And so, we are averaging the cost. And so for remainder of the year, we are anticipating about a $950 per ton assumption for remainder of the year.

Larry Stavitski: Okay, great. Thanks so much. I appreciate the color.

Operator: We will go next to Jamie Cook at Credit Suisse.

Jamie Cook: Hi, good morning. Congrats on a nice quarter. I mean most of the questions have been answered. I guess one — Julie, just on the guidance, if you look your guidance, it implies the first quarter was probably the high EPS quarter, while generally it’s the lowest in earnings generally, improves sort of sequentially. So, outside of Monterrey, I am just trying to understand why the first quarter would be one of the highest quarters versus normal seasonality for your business? Thanks.

Julie Beck: Thanks for your question, Jamie. We increased our sales outlook to $4.8 million to $5 million, which includes all of these dialogs with our customers and suppliers. We anticipate a high volume because customer demand remained strong and we saw some slight improvement in supply chain. So, our sales are expected to be relatively consistent in Q2 and Q3, and down slightly in Q4 due to lower production days. So, we expect our MP sales and margins to be relatively consistent for remainder of the year. We anticipate AWP sales to be relatively consistent in Q2 and Q3, and down slightly in Q4 due to normal seasonality and lower production days. The AWP margins are expected to be negatively impacted primarily due to the manufacturing inefficiencies due to those scheduled production moves to our Monterrey facility.

And that will have a greater impact in the second half of the year than it does in the second quarter. So, relatively — so, that’s what we are thinking, and that’s where we at. So, overall, we are pleased that we were able to increase the outlook and the team executed really well.

Jamie Cook: Okay, great. Thank you.

Operator: And that does conclude our question-and-answer session. At this time, I would like to turn the conference back over to John Garrison for closing remarks.

John Garrison: Thank you, Operator. And please, if there are additional questions — we know you have to go up and get on a couple of more calls here this morning. If you have additional questions, please follow-up Julie and John or Paretosh. And, stay safe, stay healthy, and thank you for your interest in Terex. Operator, please disconnect the call.

Operator: Thank you and that does conclude today’s conference. Again, thank you for your participation. You may now disconnect.