Terex Corporation (NYSE:TEX) Q4 2023 Earnings Call Transcript

Terex Corporation (NYSE:TEX) Q4 2023 Earnings Call Transcript February 9, 2024

Terex Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Terex Fourth Quarter and Full Year 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 fourth quarter 2023 earnings conference call. A copy of the press release and presentation slides are posted on our Investor Relations website at investors.terex.com. In addition, the replay and slide presentation will be available on our website. We are joined by Simon Meester, President 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 2 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 3, and I’ll turn it over to Simon Meester.

Simon Meester: Thank you, Paretosh, and good morning. I would like to welcome everyone to our earnings call and appreciate your interest in Terex. As many of you know, I’ve been at Terex for a little over five years now, but this is my first earnings call as CEO of the company and I’m honored and humbled to take over from John Garrison and very excited about the road ahead. We have a great company operating in attractive markets and are financially strong. We have global market-leading businesses and an exceptional team. So looking ahead, I would expect much of my focus to be on helping Terex accelerate its growth. And as we grow, we will continue our focus on Zero Harm safety and our Terex Way values, which are an important part of our culture and embedded in everything we do.

Please turn to Slide 4. We’re starting the year in a great position after making significant progress in 2023 on our strategic initiatives. The Terex team delivered a 17% increase in sales, over 300-basis-points improvement in gross margins, a 63% improvement in EPS, and our return on invested capital of 28.5% improved by 720 basis points. These outstanding results demonstrate the strength of Terex operating model and the progress we’ve made over these last few years. Over the last seven years, our MP business has consistently grown near double digits per year, becoming a vital piece of the Terex success story, and closed the year as strong as ever at 16.1% operating margin. The MP team continues to find creative ways to build on its strong and diverse portfolio, illustrated by the recent launch of Green-Tec, a new Terex brand that will provide a comprehensive product offering of tree care and vegetation management solutions.

Our AWP business executed very well in 2023, grew sales by 18% year-over-year and improved operating margins by 480 basis points to 12.7%. Our new state-of-the-art Monterrey facility continues to ramp up as planned, and it’s the largest facility we’ve ever built in Terex, and we’re very proud of the team of the progress they’ve made. This facility has been mostly built for competitive reasons and to improve Genie’s through cycle margin performance. During 2023, we continued to invest in new products and in our manufacturing facilities besides Monterrey. As an example, 10 of our facilities are now operating with net zero emissions. We invested in Apptronik to capitalize on the accelerating trend of adopting robotics, and we expanded our battery technology investment with Acculon and started building the first prototypes with both.

I’m very proud of our team members’ accomplishments in 2023. Terex is in a great position with a diverse portfolio designed to help our customers achieve their goals. In the next few slides, I’d like to share some examples. Please turn to Slide 5. Our market-leading brands received recognition for their focus on return on investment and competitive cost of ownership. Our goal is to maximize the return on investment for our customers while delivering environmentally-friendly and safe products. In 2023, we received many awards across multiple products and geographies, highlighting our reputation in the marketplace. We are committed to continuing to develop exciting products and technologies that provide differentiated value to our customers. Please turn to Slide 6.

Terex equipment is used in many different applications around the globe, from waste handling and recycling to grid expansion and data centers. Other examples are vertical farming, as illustrated here at a customer in Denmark, and airport and stadium projects. Our products are required in all stages of the project life cycle from foundation, building, repair, maintenance and eventual recycling of materials for reuse. We’re proud of the role our products play in the many development projects around the globe. Please turn to Slide 7. Sustainability is an essential part of our business strategy where we focus on product innovation to enable our customers and end users to operate in safe and sustainable ways, team member and community engagement essential to execute our strategy and achieve our goals, and responsible operations with sustainable practices that minimize our impact on the environment.

We’re proud to report that for a second consecutive year, Newsweek recognized our commitment to sustainability and naming Terex one of America’s Most Responsible Companies. Additionally, Terex has been awarded a perfect score in our first-ever Human Rights Council Equality Index Review in recognition of the important work our team is doing to ensure an inclusive work environment and where all team members feel valued. Please turn to Slide 8. In addition to a diverse and market-leading portfolio, our company is positioned towards markets that clearly benefit from global megatrends. Investments around the world in infrastructure, digitalization, waste recycling and electrification are favorably impacting our end markets. Federal spending and incentives will support demand for our products in the years ahead.

Our product portfolio is well positioned to capitalize on these opportunities. For example, the MP Powerscreen and Finlay brands have leading positions in global crushing and screening markets that benefit from both the growth in infrastructure and the associated demand for aggregates and from the growing demolition and recycling projects. MP brands like Ecotec, CBI and Terex Recycling Systems have grown 26% this year driven by new product development and growing demand for environmental and waste recycling solutions. Our utilities business is well positioned to capitalize on investment required to upgrade the US electrical grid to support the accelerating demand as the industrial world continues to move to the use of more electrical power.

And our Genie products are benefiting from demand from infrastructure projects, data centers, manufacturing and events and entertainment. These megatrends position us very well for 2024 and beyond. Please turn to Slide 9. Our Q4 backlog of $3.4 billion is still significantly above historical levels and is the second highest in recent history, providing healthy momentum going into 2024. Our team members continue to successfully navigate supply chain issues last year and worked hard to continue to improve customer on-time deliveries and return to more normal lead times. In fact, Q4 consolidated bookings at $1.3 billion increased 44% sequentially, consistent with typical seasonal trends and a return to more normal order patterns. Demand is robust for the reasons I laid out on the previous slide.

We still see, however, some disruptions in the supply chain, but it continues to improve. Our MP business has backlog that is above historical norms, and our AWP business logged strong bookings in the quarter with a book-to-bill ratio of 129%, with Genie having order activity above these levels and our utilities business taking orders for 2025. Overall, our backlog and booking trends are positive and give us a strong outlook for 2024. Let’s turn to Slide 10. We continue to see positive trends in our main end markets, especially in North America and India, but has seen some softening in Europe, which reported a slight sales decline in the fourth quarter. The US government has announced more than 40,000 projects in transportation, climate and broadband.

Spending on manufacturing is up approximately 70% in the last 12-month period, driven by mega projects related to semiconductor manufacturing, clean energy and EV battery projects. These projects make up two-thirds of the non-residential market. These favorable end market trends, combined with replacement cycle tailwinds and high equipment utilization rates, are very beneficial for our Genie business. Additionally, the increasing adoption of our products in emerging markets, such as India, is another positive. The utilities market is expected to continue to grow, supported by investments in grid upgrades and grid expansion needed for zero carbon and electrification goals. In the US, power-related spending has been increasing at double-digit growth rates in recent months.

Our utilities business will benefit from this growing demand, while we expect to continue to be constrained by body and chassis shortages. Strength in US infrastructure and general construction end markets will benefit MP’s crushing and screening, concrete and crane businesses. We expect these tailwinds to offset some of the softness in the businesses with higher European exposure. We expect MP’s environmental business to continue its growth driven by increasing demand for waste recycling. Our Fuchs business is focused on expanding into new geographies and products to offset the near-term demand softness. Overall, we’re positive about our end markets. We had an exceptional 2023 and expect strength in most of our markets in 2024. And with that, let me turn it over to Julie.

Julie Beck: Thanks, Simon, and good morning, everyone. Let’s take a look at our fourth quarter financial performance found on Slide 11. Sales of $1.2 billion were consistent with our expectations and prior year, reflecting healthy demand for our products as strength in North America offset some softening in European markets and deliveries returned to a more normal seasonal pattern. Our 2022 fourth quarter sales were the strongest that year as supply chain constraints started to ease. Gross margins of 21.5% increased by 220 basis points over the prior year as pricing — improved manufacturing efficiencies and cost reduction initiatives helped to offset cost inflation and Monterrey start-up costs. Gross margins were 21.8% excluding a one-time product liability verdict of $4 million in MP.

SG&A increased over the prior year due to wage inflation and incentive compensation expenses and included $13 million of one-time charges due to accelerated vesting and other expenses. Excluding these items, SG&A as a percent of sales was 11%. Income from operations was $116 million. Excluding $17 million in one-time charges, operating income was $133 million, with operating margin of 10.9%, 100-basis-points improvement over the prior year. Interest and other expense of $10 million declined $5 million from the prior year, as favorable mark-to-market adjustments more than offset higher interest rates. The fourth quarter global effective tax rate was a benefit of 21% due to the establishment of a deferred tax asset from the recognition of a tax attribute associated with our operations in Switzerland.

Fourth quarter earnings per share of $1.88 included a net favorable impact of $0.47 from non-recurring items including: a $0.62 one-time tax benefit related to the company’s operations in Switzerland, a $0.07 mark-to-market gain on third-party investments, a $0.17 charge related to accelerated vesting and other expenses, and a $0.05 charge related to a product liability verdict in MP. Excluding these non-recurring items, fourth quarter earnings per share was $1.41. Free cash flow for the quarter was $135 million, as increased operating profits were partially offset by inventories added to support production moves in 2024 as well as lingering supply chain disruptions. Let’s take a look at our segment results, starting with our Materials Processing segment found on Slide 12.

MP, once again, delivered excellent full year performance in 2023 as sales were up 15% and operating margins expanded 80 basis points to 16.1%. MP’s incremental margin of 21% demonstrates continued solid operational execution. For the fourth quarter, MP sales increased by 1% to $555 million compared to the exceptional fourth quarter of 2022, driven by strength in demand for aggregates and environmental products. MP’s reported operating profit of $84 million was down $3 million, as improved manufacturing efficiencies and disciplined cost management was offset by an unfavorable product liability verdict. MP ended the quarter with backlog of $767 million, still above historical norms, while our bookings increased 22% sequentially. On Slide 13, you’ll see our Aerial Work Platforms segment financial results.

AWP delivered excellent performance in 2023 as full year sales were up 18% and operating margins expanded by an impressive 480 basis points, with an incremental margin of 40%. The team did a great job on price/cost discipline, efficiency improvements, cost reduction activities, all while ramping up the Monterrey facility. AWP had a solid fourth quarter with sales of $660 million, slightly down from the strong prior year due to softness in Europe and a return to seasonal delivery patterns for its customers. AWP reported quarterly operating profit of $61 million, an increase of 13% over the prior year. The increase was driven by cost reduction initiatives, partially offset by unfavorable product and regional mix, manufacturing efficiencies and severance charges.

AWP backlog is very strong at $2.6 billion, which is approximately 3 times the historical norm. Strong bookings of $850 million were up 59% sequentially, returning to seasonal order patterns. Turning to Slide 14 and full year 2023 financial highlights. Our performance in 2023 reflected significant improvement in the businesses and the extraordinary efforts of our team members. Earnings per share increased 75% from $4.32 to $7.56. Full year earnings included a net favorable impact of $0.50 from non-recurring items that we discussed earlier in the call. Excluding these items, our earnings per share increased 63% year-over-year to $7.06. Sales of $5.15 billion were up 17% year-over-year. Our operating income was $652 million with operating margin of 12.7% excluding $15 million of non-recurring charges, which reflects a strong 320-basis-points expansion over the prior year, driven by prudent cost management as well as price realization.

Incremental margins were 30%, 32% excluding non-recurring items. Full year SG&A was 10.3% of sales, excluding non-recurring items, consistent with our expectations. The effective tax rate for the year was 10.9%, which is impacted by the establishment of a Swiss-deferred tax asset as explained earlier. Excluding the impact, our effective tax rate would have been 18.2%. Please see Slide 15 for an overview of our capital allocation strategy. Free cash flow of $366 million increased $214 million over the prior year, resulting in a 71% conversion to net income. We continue to carry a higher level of inventory to support our production moves and navigate supply chain disruptions. Hospital inventory was $25 million, down $11 million from the prior year, but up $5 million sequentially from the third quarter.

Capital expenditures and investments for the year were $151 million, with a large investment related to our Monterrey facility. We returned $104 million, representing 28% of our free cash flow, to our shareholders in share repurchases and dividends. We reduced our debt $152 million, as we have paid down our revolver, and our bonds are at a fixed rate of 5% until the end of the decade. Our net leverage remains low at 0.4 times, below our 2.5 times target through the cycle. We have ample liquidity of $971 million, and we recorded a return on invested capital of 28.5%, up 720 basis points year-over-year. Terex is in an excellent position to continue to increase shareholder value and profitably grow the business. Now turning to Slide 16 and our full year outlook.

2023 was an excellent year for Terex and our team members are committed to delivering another great year in 2024. It’s important to realize we are operating in a complex environment with many macroeconomic variables and geopolitical uncertainties, so results could change negatively or positively. With that said, this outlook represents our best estimate as of today. We anticipate earnings per share of $6.85 to $7.25 based on sales of $5.1 billion to $5.3 billion, which reflects another year of solid consistent performance well ahead of our Investor Day targets. Our sales outlook incorporates healthy volumes supported by customer demand, but also reflects caution around supply chain and labor constraints, as well as softening in Europe. We expect the first and second half sales to be comparable to each other, with the second and third quarter sales higher than the first and fourth quarter as we return to more seasonal customer delivery patterns.

We anticipate improved full year operating margins in a range of 12.8% to 13.1% as we aim to remain price/cost neutral for the year and use cost reduction activities to offset Monterrey start-up inefficiencies. We do want to emphasize the stronger first half in 2023 when making year-over-year comparisons. We expect corporate and other expenses to be evenly spread throughout the year. Based upon global tax laws, we expect a 2024 effective tax of approximately 22% versus our 2023 normalized rate of 18.2%. We estimate free cash flow of $325 million to $375 million, including capital expenditures of approximately $145 million, with the largest component being our Genie Mexico facility. Let’s review our segment outlook. We anticipate MP sales of $2.2 billion to $2.3 billion, with continued strong margins in the range of 15.6% to 15.9% for the full year.

Compared to the prior year, sales are anticipated to be lower in the first quarter to realign supply and demand in our Fuchs and Crane businesses. Q1 margins are anticipated to be approximately 200 basis points lower due to unfavorable product and regional mix. Sales and margins are expected to increase from Q1 levels and be relatively consistent for the remainder of the year. We expect AWP sales of $2.9 billion to $3 billion, with improved operating margins of 13.4% to 13.7% for the full year. We anticipate full year operating margin expansion due to continued cost-out activity, favorable absorption at our mature plants, partially offset by inefficiencies due to the Monterrey start-up. We expect Q1 sales to be higher than the prior year and margins to be slightly lower as increased volumes are offset by unfavorable product and geographic mix and start-up inefficiencies.

We anticipate the quarterly cadence of our AWP sales to be closer to historical patterns with the highest sales in Q2 and Q3, which will also drive higher profitability for those quarters. The Terex team is committed to delivering another strong year in 2024. And with that said, I will turn it back to you, Simon.

Simon Meester: Thanks, Julie. Turning to Slide 17, we expect to deliver strong 2024 results, driven by continued focus on execution, continued focus on efficiency, leveraging our diverse portfolio and the favorable end markets. We have industry-leading businesses and brands with competitive scale. We have a strong balance sheet to support our growth, and we have a global, experienced, diverse and highly-engaged team that is committed to continue to create value for our customers and our shareholders. I’m very excited about Terex future and look forward to the years to come. And with that, let me turn it back to Paretosh.

Paretosh Misra: Thanks, Simon. 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?

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Stanley Elliott with Stifel. Your line is open.

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Q&A Session

Stanley Elliott: Good morning, Simon, Julie and team. And Simon, welcome. Simon, I guess, starting off, the first thing you mentioned was helping accelerate growth. Could you kind of flush that out a little bit more? How are you thinking about the organic component versus the M&A opportunities that you potentially have? Just curious how you’re thinking about the business overall.

Simon Meester: Yeah, thanks for the questions, Stan. Yeah, obviously, I’m in my fifth week on the job. So, I hope you can appreciate I’m still very much in listening-and-learning mode. We’ve built a great company over the past several years and we truly transformed the portfolio and significantly improved our ability to execute. We have a portfolio of market-leading businesses with strong operating margins, strong values and now with a strong balance sheet. So, obviously, a lot to play with as an incoming CEO. So that’s why I said that I expect my focus to be mostly on the building out and accelerate our growth, but obviously, making sure that we maintain our operational discipline and remain focused on our efficiency and our agility.

We see many opportunities for organic growth, and we’re demonstrating strong return on invested capital. And we are ballpark of $5 million business in a $34 billion addressable market. So, there is just a lot of opportunity for organic growth. But we’re also looking at inorganic opportunities, anything that could expand our addressable markets or strengthen the portfolio, but obviously — or widen our moat, but obviously, it needs to be actionable, it needs to be affordable and it needs to be financially accretive. And everything that we have on the table, we will force rank versus things like dividends or share buybacks, and then obviously, pick whatever provides best shareholder value. But I think that the good news, at least for me as incoming CEO, is that we have strong optionality versus perhaps where we were three to five years ago.

Stanley Elliott: Yeah. And could you also flesh out maybe a little bit more, I guess, the question on the Aerials, 100 basis points of margin, kind of the flattish volumes. When should we expect kind of the Mexico piece to roll off? How is the utilities market? Is that kind of supply chain easing up? Any more color there would be very helpful. Thanks.

Julie Beck: Thanks for the question, Stan. Good morning. AWP, they did a fantastic job in the year with sales up 18% and OP margin expansion of 480 basis points. The team successfully managed through all the disruptions in supply chain, inflation and longer-term [indiscernible] projects, and still delivered strong year-over-year performance. Our Monterrey facility is our largest facility. It’s approximately 1 million square feet and the largest that we’ve ever built. And so, as that facility starts to come online, it’s going to run unfavorable manufacturing efficiencies or unfavorable burden absorption until the product moves are completed. In Q4, manufacturing inefficiencies were about $4 million unfavorable to what we had put in our outlook, as we’ve had an in-quarter supply chain issue with one of our new suppliers.

In addition, we took a $5 million charge, which was accelerated due to some of the product moves. It was a depreciation expense — depreciation charge related to some assets not being moved to the Monterrey facility. In addition, there were some severance charges in AWP and some unfavorable FX. So, most of these charges are non-recurring, severance and depreciation, and manufacturing efficiencies will improve going forward as the plant comes online. The team did a great job in expanding margins by 480 basis points and we’re confident in our margin improvement outlook for next year. We did see, in Q3 and Q4, about $21 million of charges related — manufacturing efficiencies related to the Monterrey facility. We would assume that the charges would be about $15 million to $20 million mostly in the first half of next year and the margins to improve as we go forward into Q3 and Q4.

And from a utilities perspective, yes, we did have a supply chain issue that disrupted Q3 and that issue is behind us and utilities improved in the fourth quarter.

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

Simon Meester: Thanks, Dan.

Julie Beck: Thanks, Dan.

Operator: Your next question comes from the line of Seth Weber with Wells Fargo. Your line is open.

Seth Weber: Hi, good morning. Thanks for taking my question.

Julie Beck: Good morning.

Seth Weber: Good morning. I wanted to maybe dig into the MP margin outlook a little bit. Julie, I think you said down 200 bps year-over-year in the first quarter. Is that — I guess I’m just trying to understand that, how much of that is product/regional mix, how much of it is just the portfolio is transitioning through some acquisitions that you did and you’re just buying lower-margin stuff that’s lower margin right now? And is that — will that 200 bps year-over-year just suddenly flip as we get into the second quarter, or is that going to be more of a gradual kind of a gradual year-over-year compare get better? Thanks.

Julie Beck: Thanks for the question, Seth. MP is forecast to have an OP margin in the 15.6% to 15.9% in the year. It’s just a slight year-over-year decline in our operating margin due to product mix. Our highest growth business is our environmental sales and they’re a little bit lower than the segment margin. And so that’s how the full year margin goes down just a bit. When we look at Q1, Q1 is going to be a bit lower on sales and volume due to some rebalancing of supply and demand in our Fuchs and Tower Cranes business basically. And so, our margins are expected to be 200 basis points lower in Q1, but then they are expected to increase in Q2, Q3 and Q4, and be relatively consistent for the remainder of the year.

Simon Meester: Yeah. And I would just add that all these — Seth, all these businesses are operating at double digit margins. They’re all strong performing businesses. So these are really nuances that we’re talking about. MP’s journey has been really remarkable over the last seven, eight years. And as I mentioned in my opening remarks on how they’ve been able to grow near double digits per year over the last seven, eight years, and now all of these businesses are strong double-digit businesses. So, this is really nuance for 2024.