Terex Corp
NYSE:TEX
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Terex Corp
Earnings Call Analysis
Q3-2024 Analysis
Terex Corp
Terex has been operating in a complex environment characterized by macroeconomic variables and geopolitical uncertainties. The company reported a 6% drop in net sales to $1.2 billion in Q3 2024, driven largely by lower volumes in its Material Processing (MP) segment, although this was somewhat mitigated by modest gains in the Aerial Work Platforms (AWP) segment. The leadership indicated that a cautionary outlook is prevalent due to interest rate concerns and local project deferrals. Nevertheless, Terex remains optimistic about long-term growth potential, particularly from megatrends and continued demand for infrastructure investments.
The MP segment experienced softening, with sales down to $444 million, attributed to European market weakness and delays in retail sales in the U.S. The AWP segment, while showing a year-over-year sales growth of 2.4%, underperformed against expectations due to delivery schedule adjustments by rental customers. However, both segments maintained healthy backlogs—with AWP at approximately $1.2 billion—indicating potential for recovery as seasonality returns to normal in Q4 and Q1 of 2025. Notably, MP's operating margin was impacted, falling to 13.3% due to volume reductions and unfavorable product mix; concerted cost reduction efforts are ongoing.
Terex's recent acquisition of ESG in the waste and recycling sector is a significant milestone, anticipated to enhance resilience against cyclicality. This acquisition is projected to contribute approximately $40 million in EBITDA for the fourth quarter, bolstering overall financial performance. Moreover, the integration of ESG is expected to yield operational synergies of at least $25 million by the end of 2026, greatly enriching Terex’s portfolio and offering opportunities in a non-cyclical market.
Looking ahead, Terex revised its full-year revenue guidance to between $5 billion and $5.2 billion, which includes around $200 million from ESG. The guidance also anticipates full-year EBITDA in the range of $635 million to $670 million. Earnings per share are projected between $5.85 and $6.25. Management emphasizes the importance of a strong balance sheet, with ample liquidity and a net leverage expected to be around 2.5 times by the end of 2024, allowing for investments in growth while maintaining shareholder returns.
Terex is actively managing costs and refining operations to adapt to changing market conditions. Cost reduction strategies have been effective, reducing corporate expenses to about $18 million per quarter compared to $20 million previously. The company is also focusing on significant capital expenditures of approximately $125 million for 2024, primarily directed towards enhancing the Monterrey facility, which has shown promising performance. Overall, management believes that these operational adjustments will aid in navigating troughs in demand and positioning Terex for sustained growth.
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Greetings, and welcome to the Terex Third Quarter 2024 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Derek Everett, Vice President, Investor Relations.
Good morning, and welcome to the Terex Third Quarter 2024 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. These risks are described in greater detail in the earnings material and in our reports filed with the SEC.
On this call, we will be discussing non-GAAP financial information including adjusted figures that we believe are 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.
Thanks, Derek, and good morning. I would like to welcome everyone to our earnings call and appreciate your interest in Terex. Emphasizing our commitment to our Zero-harm culture and the Terex Way values at the start of this call reflects what we do across the organization every day as part of our Terex operating system. As we continue to grow, our core values will continue to include keeping each other safe, treating each other with respect and dignity and being responsible stewards of our environment.
Let's turn to Slide 4. Before diving into our Q3 results, I'm very pleased to welcome the ESG team to the Terex family. ESG is a great strategic and cultural fit reduces our cyclicality and makes Terex a stronger company with a bright future. ESG is a leader in the growing waste and recycling industry where waste management and recycling solutions are critical for every jurisdiction, not only in America but around the world.
I want to thank the many team members, both on the Terex side and the Dover side that worked tirelessly over the past couple of months to complete the acquisition. In addition, our treasury team did an outstanding job raising funds at attractive rates and terms allowing us to complete the deal and maintain a strong and agile balance sheet. ESG is financially accretive from Day 1. It is expected to add approximately $40 million in EBITDA in the fourth quarter for the period following the [ 8th October ] close.
With the close behind us, our focus turns to integration, thanks to detailed advanced planning, our cross-functional, integration team hit the ground running. We fully expect to deliver at least $25 million in operational run rate synergies by the end of 2026 and realize additional commercial opportunities as we integrate ESG into Terex.
Turning to Slide 5. Our global team adapted quickly to in-quarter industry channel adjustments and continue to execute at a high level throughout the third quarter, delivering earnings per share of $1.46 on sales of $1.2 billion. Our MP and AWP teams continue to implement cost reduction actions and align production plans with demand in their respective channels. This is not the first time we've seen channels make abrupt adjustments. I'm confident that the work we did strengthening our portfolio, fortifying our core businesses and investing in lower cost operations will enable us to perform better throughout the cycle than we have done in the past.
We expect full year earnings per share to be between $5.85 and $6.25 and EBITDA of $635 million to $670 million on revenue of $5 billion to $5.2 billion. Turning to Slide 6. We increased the size and scope of our addressable markets by acquiring ESG, within the broader waste and recycling industry, waste collection, recycling and compaction are noncyclical markets that have resilient growth trajectories. Regardless of the macro environment, as a society, we will continue to generate waste and we'll continue to look for ways to use finite resources more effectively and more efficiently.
Looking at our legacy markets, we're seeing more challenging macro dynamics as the trajectory of future interest rate cuts and the upcoming U.S. election are casting a shadow of uncertainty leading to a more cautious decision-making. Although investments in infrastructure and manufacturing continue to grow, the rate of growth has somewhat slowed and we're seeing local projects being deferred until investors have more clarity on the macro environment.
Another important factor, particularly in aerials, is that lead times for new equipment have come down, largely back to pre-COVID levels. This allows our rental customers to align their equipment delivery schedules more precisely with their requirements. We expect a degree of caution in rental demand through the fourth quarter and into 2025 before returning to a more robust environment in 2026 and beyond.
In MP, we saw dealers rebalancing inventory levels as more of their customers are renting their machines longer. When the machine is on rent, it remains on the dealer's balance sheet and limits their ability to order new machines. We see this dynamic persisting but alleviating in the fourth quarter and starting to improve when the election is behind us and the future of interest rates become clearer.
The major European economies remain generally weak and geopolitical concerns continue to muddy the waters. I am hopeful that lower inflation and assertiveness on lowering interest rates will translate into a better outlook. That said, we have a strong position in Europe, which was solidified by a reassurance of a level playing field and aerials because of the EU antidumping decision. We fully expect our teams to continue to execute well and outperform the market regardless of the macro climate.
We also remain encouraged to see emerging markets such as India, Southeast Asia, the Middle East and Latin America increasingly adopt our products. Please turn to Slide 7. While shorter-term dynamics play out in some of our markets, we continue to be highly confident in our third term growth outlook. Our portfolio of strong businesses will continue to benefit from megatrends, onshoring, technology advancements and federal investments, including the infrastructure investment in Jobs Act, Inflation Reduction Act in the CHIPS Act.
This legislative environment is driving record levels of megaprojects in data centers, EV and battery manufacturing plants, semiconductor plans and others, with more projects expected to come online from 2025 through 2027. We anticipate increased activity from infrastructure investments from roads and bridges to airports, railways and the power grid. We believe these high investment levels will continue regardless of the outcome of the U.S. election.
Please turn to Slide 8. Our portfolio of businesses is very strong. Our businesses are market leaders, technology innovators and proven high performers. We've made great strides implementing our execute innovative growth strategy and have plenty of opportunities to continue to improve. Fixed cost management is an area where we have made some of those improvements. For example, shifting higher cost production to our new state-of-the-art facility in Monterrey. We will continue to reduce fixed cost by leveraging digital technology improving efficiency and rethinking operating norms where better approaches are available.
When it comes to innovation, we have a very exciting new product development pipeline focused on maximizing return on investment for our customers. We also continue to leverage technology internally, making investment in robotics, automation and digitizing work streams to make us more efficient and more flexible. This represents an important part of our road map to continuously become more competitive and more resilient, regardless of market dynamics.
Turning to growth. Completing the ESG acquisition earlier this month was a significant step forward. We fully expect organic growth in that business to continue in line with its demonstrated performance over the past decade. On the utilities front, we will unlock growth potential by improving productivity and expanding capacity as the long-term demand outlook continues to expand.
Our MP and Aerials businesses will manage through near-term channel adjustments before returning to growth as the replacement cycle and mega trends are expected to remain significant tailwinds.
Turning to Slide 9. I'm very proud when I witnessed some of the fantastic work our teams and our equipment accomplished around the world. Pictured on the left, our Terex power screen crushers deployed in [ Ladakh ] Northern India at one of the world's most challenging construction sites at 19,000 feet above sea level, these machines will support building the world's highest motorway. This new infrastructure will improve access to remote villages, making it easier for residents in travel for medical care, education and other essential services.
The middle picture is a brand-new joint ZenRobotics and Terex Recycling systems installation in Norway, the first of its kind anywhere in the world. The state-of-the-art waste recycling plant will be fully automated integrating AI-powered robotics with advanced sorting technology. This is all about offering solutions to customers that maximize recycling rates and minimize landfill usage.
Finally, the image on the right shows Terex utility vehicles supporting recovery efforts in the wake of Hurricane Helane, in the hours after the storm crews from across the United States arrived to help restore power to devastated areas. And I'm proud that our products play an important role in rebuilding and restoring hope to these communities. All great examples of tariffs at work.
And with that, I'll turn it over to Julie.
Thank you, Simon, and good morning, everyone. Let's look at our third quarter financial results on Slide 10. Net sales of $1.2 billion were down 6% compared to the third quarter of last year, resulting from lower volume at MP, which was partially offset by modestly higher year-over-year sales at AWP.
The growth at AWP was lower than we initially anticipated as rental customers adjusted delivery schedules during the third quarter to better align with their fleet requirements and shorter equipment lead times. Our MP segment continued to be impacted by softness in the European market and lower retail sales in the United States, impacting dealer restocking.
Gross profit of 20.5% reflects lower-than-expected volume and unfavorable mix, partially offset by cost reduction actions. SG&A expenses declined by $7 million compared to last year, as we executed cost reduction actions, which continued throughout the quarter and lowered incentive compensation. Income from operations was $127 million with an operating margin of 10.5%. Interest and other expense was consistent with the previous year.
The third quarter global effective tax rate was 12.5% compared to 20.4% in the third quarter of 2023. The lower rate was primarily due to a onetime increase in favorable discrete items, partially offset by higher tax related to geographic distribution of income. Our EPS for the quarter was $1.46 and our EBITDA was $141 million. Free cash flow for the third quarter was $88 million compared to $106 million in Q3 of 2023 due to lower operating income in the quarter.
Turning to bookings and backlog on Slide 11. Our current backlog of $1.6 billion remains elevated compared to historical norms. We saw bookings continue to trend back towards historical ordering patterns with Q3 being a seasonally lower bookings period. We expect our bookings and backlog to continue to transition to normal patterns with lower lead times and AWP customers returning to customary seasonality with bookings ramping up in Q4 and Q1.
Our AWP segment backlog remains relatively high at $1.2 billion, when compared to historical levels. While our MP backlog is broadly in line with pre-pandemic levels. Please turn to Slide 12 to review our segment results, starting with MP. Sales of $444 million were slightly lower than we previously expected, as macro factors continue to impact MP's primary channels. On the aggregate side, we continue to see machines on rent longer than usual. This reduces the dealer's capacity to order new machines. The European market remains weak and geopolitical concerns and the economic outlook for China as well as the U.S. election as uncertainty.
MP's 13.3% operating margin in the quarter was impacted by the lower volume and unfavorable product and geographic mix, partially offset by cost reduction actions. MP has proven its ability to manage its cost structure and achieve strong margins. The team is continuing to take actions, including factory and other layoffs, reduced work schedules and other cost reduction initiatives. MP ended the quarter with backlog of $371 million.
Please turn to Slide 13, which details our AWP performance. The AWP team grew sales by 2.4% compared to Q3 last year. However, that was lower than we had previously anticipated due to delivery adjustments from our U.S. rental customers. Margins were impacted by unfavorable product mix as well as higher freight costs than last year. Our Monterrey facility performed better year-over-year, but that benefit was offset by lower production volumes at other facilities. The team is taking aggressive action to align costs and production levels with demand but could that take cost out quickly enough to offset the volume reduction impact. AWP backlog of $1.2 billion remains relatively high compared with historical levels.
Please turn to Slide 14. We were able to complete the ESG acquisition and maintain a strong balance sheet. We secured funding for the deal at favorable rates and terms and maintained our corporate ratings. The $1.25 billion term loan is priced at Silver plus [ $200 million ], maturing in 2031 and the $750 million 8-year, 3-year, noncall notes are priced at 6.25% maturing in 2032.
We also upsized our revolver from $600 million to $800 million. Not only are we getting a better rate than the previous revolver, it offers greater flexibility, maturing 3-plus years later in October 2029. I really like this structure. It's the right mix of secured and unsecured and variable versus fixed rates. We can prepay or reprice a significant portion of the debt, and we do not have any maturities until 2029.
We continue to have ample liquidity with an expected net leverage of approximately 2.5x at the end of 2024. We plan to deleverage in future periods as we generate increased cash flow from operations and take advantage of cash tax benefits associated with the acquisition. We will also continue to invest in our businesses, fueling organic growth and profitability improvement. We're planning for 2024 capital expenditures of approximately $125 million with the largest investment related to our Monterrey facility.
We would expect CapEx in our legacy businesses to take a step down next year to the benefit of free cash flow conversion in 2025. We reported a return on invested capital of 23.7%, well above our cost of capital. Returning capital to shareholders remains a priority. Through September 30, 2024, Terex has returned $66 million to shareholders through share repurchases and dividends, more than offsetting equity compensation dilution. We have approximately $101 million remaining under our share repurchase authorization, and we will continue to buy back shares.
Terex remains in a very strong financial position to continue investing in our business and executing our strategic initiatives while returning capital to shareholders. Now turn to Slide 15 and our full year outlook. It is important to realize we are operating in a complex environment with many macroeconomic variables and geopolitical uncertainties and results could change negatively or positively. With that said, this outlook represents our best estimate as of today. Our outlook is largely consistent with the revised guidance we provided in mid-September, updated now to include the expected fourth quarter contribution of ESG.
Our sales forecast range has been updated to $5 billion to $5.2 billion, which includes approximately $200 million of fourth quarter revenue from ESG. We expect full year EBITDA of between $635 million and $670 million, which includes approximately $40 million of Q4 EBITDA from ESG or roughly 20% of ESG sales. Please remember that the expected ESG contribution is for the period following the October 8 close through year-end. It is great to see the financial performance accretion from ESG.
As I mentioned back in July, we reduced corporate and other expenses to about $18 million per quarter in the second half of the year from our previous run rate of approximately $20 million. We now expect full year interest expense of approximately $90 million, including $31 million associated with the ESG financing. We are lowering our full year tax rate to 19% as we reflect the benefit of several favorable discrete tax items, partially offset by unfavorable geographic mix.
We expect full year earnings per share of $5.85 to $6.25. Our free cash flow forecast for the full year is approximately $200 million, impacted by the lower operating income outlook and anticipated higher year-end inventories. Let's review our segment outlook. We expect MP sales to be approximately $1.9 million for the full year with nice margins in the range of 14.1% to 14.3%. This reflects continued pressure on volume due to adjustments we are seeing in the MP channels as well as the impact of actions management is taking to reduce costs and align production levels with demand.
For AWP, we expect our 2024 sales to total approximately $3 billion, with an operating margin between 11.5% and 11.8% for the full year. We expect to see a sequential volume decline in Q4, mostly reflecting seasonality and fewer working days. The lower volume will put pressure on AWP margins as we reduced production in the fourth quarter. This will be partially offset by the cost reduction actions and improved operating performance at our Monterrey Mexico facility.
With that, I will turn it back to Simon.
Thanks, Julie. I will now turn to Slide 16. The Terex is very well positioned to deliver long-term value to our shareholders. We have a strong portfolio of industry-leading businesses across a diverse landscape of industrial segments. The ESG acquisition increases our presence in the growing waste and recycling industry and reduces our overall cyclicality. Our AWP and MP businesses continued to drive operational improvements and deliver innovative new products that create value for our customers. We will manage through near-term market adjustments and then return to growth with the benefit of the replacement cycle and megatrends as tailwinds.
Finally, I want to thank our team members from around the world. We have made great strides together, and we will continue to grow our company together. I'm very excited about the road ahead for tariffs.
And with that, I'd like to open it up for questions. Operator?
[Operator Instructions] And your first question comes from the line of Jerry Revich from Goldman Sachs.
This is Clay on for Jerry. First off, congrats on completing the ESG acquisition. So first question, typically, the production kind of a downturn is the hardest and once production normalizes, we see decremental margins normalizing in around the low 20s range. Should we be at that level of decremental margins as we move into next year?
Thank you for your question. Yes, we will see the AWP margins in particular impacted in the fourth quarter due to lower production rates. And as we enter into 2025, we'll take in this adjustment in production and we'll be trending back toward normal decremental targets.
Yes. I'd just add that we've taken channel adjustments in both businesses in MP and AWP. MP probably more impacted in Q3, AWP more impacted in Q4 from an absorption standpoint. But then on top of that, we've taken the opportunity to take additional management actions as well. And then if you lump in what ESG brings to the portfolio, we're very, very comfortable with our typical 25% decremental incremental target for 2025. No matter what volumes will do for us next year.
and as a quick follow-up, can you update us on the moderate transition given the demand declines and just how that changes, if that eases the transition and how that impacts the magnitude of cost savings on the lower volumes?
So thanks for the question. Monterrey is performing really well. Monterrey performed great in the third quarter, and we're pleased with the supply chain that we set up. We're pleased with our team members and what we've been able to accomplish in Monterrey. And so we are -- we'll be transitioning in more products and taking advantage of the low-cost structure that we have and the cost competitive operation we have in Monterrey.
Unfortunately, for the next -- this quarter to Q3 and Q4, some of the favorableness in Monterrey is being offset by some unfavorableness in the other locations. But Overall, we're very pleased with this facility and believe it will be a competitive advantage for us going forward and provides us with a low-cost manufacturing.
Your next question comes from the line of Kyle Menges from Citi Group.
This is Randy up for Kyle. I was just hoping you guys could provide any color you have on the ESG backlog and how that's trending and how we should be thinking about backlog coverage for ESG exiting this year?
Yes. ESG backlog is very healthy, very strong. They typically run in a 6-month cycle. So they take their bookings 2 quarters before the desire to delivery. And actually, their backlog has continued to be very strong. Their book-to-bill has been over 100% for the last 4 or 5 quarters. And so we expect that to continue in the fourth quarter setting us up for a really nice year again in 2025.
So looking really good, strong backlog. But on top of that, the business has really shown to be a competitive differentiator on how quickly they turn their backlog for their customers. So their throughput is really strong and their lead times are really strong. So very pleased how that business is performing -- only 21 days since we officially closed. So...
Great. And just a quick follow-up on just wondering any visibility on the timing of the ESG synergies going in the next year?
Yes. So we're pleased that we've kicked off. We've lot of planning and a lot of good work is being done by the integration teams, and we're very excited about the start here. And we've said that we will expect a $25 million in run rate synergies by the end of 2026. And we expect to see some starting in 2025, and we'll talk about that later in our Q4 year-end call.
Your next question comes from the line of Angel Castillo from Morgan Stanley.
This is Brendan on for Angel. Just -- I wanted to touch on the revenue guidance quickly. So I understand the comments that things were perhaps softer than you had expected. I just want to clarify if specifically softer from the September pre-announcement the overall is $150 million, given though, however, ESG was $200 million sort of the total MP, AWP guidance for revenue was lowered by [ $50 million ]. So if you can just talk to what you're seeing by segment there relative to expectations back in September.
Yes. So we're within the margin of what we came out within our outlook for -- our updated outlook December, we're right in there at the rate as we expected and as we communicated in September.
Yes. Just trying to be prudent, so major, major deviations just within -- still within the margin of the outlook.
Okay. And then you noted local projects being deferred largely due to interest rate uncertainty. Just curious if customers have given you any indication of maybe how much lower rates would have to go before they gained sort of the needed optimism to move forward with the projects? Or just any other color you can provide from conversations with those local customers.
Yes, it's more timing than what the rates would need to be. Generally, the consensus that we get is that it will probably continue to be soft going into the first half of 2025 and that will start to pick up in the second half of 2025. But that's really for the local projects. The mega projects are expected to continue to be a tailwind going into 2025 and 2026. But that's -- we mostly pick up that 6 months timing issue.
Your next question comes from the line of Steve Barger from KeyBanc Capital Markets.
If I go back to the original ESG deck, you showed a 7% organic CAGR. And you said -- you just said the backlog visibility is strong. I'm not looking for specific guidance for next year, but what do you expect the organic growth rate in ESG will be for the next few years?
Yes. Obviously, a little too early for us to guide for Terex overall. But generally speaking, it's safe to assume that we think that Terex will be up next year just by the nature of the ESG integration. But ESG is a business will be up, utilities will be up, and then Aerials and MP expected to be down. And I would just -- in all those cases, we're hovering around the high single digits either down or up for all of those 4 businesses.
That's good help. And just going back to the more legacy product lines, what's going on with customer positioning for orders on the books relative to conditions on the ground? Is anyone trying to delay deliveries or even take things sooner?
Different answer for different businesses. In MP, it's mostly rate anxiety and customer the -- utilization of the equipment is still high, just rental conversions that are being delayed by end users. And then typically, our dealers only place a new order on the factory if a rented unit is converted into a purchase unit. So we expect that rate anxiety to eventually disappear and then normal activity to booking activity to pick up.
On the AWP side, it's really an adjustment that we've seen. All of our customers, especially our larger customers are reporting strong tailwinds from the mega projects and then the smaller customers are perhaps more dependent on the local projects. So not really anyone asking to pull anything in or mostly just rephasing towards what their fleet needs. It's mostly about turning over the fleet.
There are no more questions. I will now turn the conference back over to Simon Meester for closing remarks.
All right. Thank you, operator. If you have any additional questions, please follow up with Julie or Derek, and thank you for your interest in Terex. And with that, operator, please disconnect the call.
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.