Q2 2020 Terex Corp Earnings Call

Welcome to Terex Corporation second quarter 2020 results conference call.

At this time all participants are in listen only mode. A question and answer session will follow the formal presentation.

Please note this conference is being recorded.

I'll now turn the conference over to your host Randy Wilson Director of Investor Relations for Terex Corporation.

Thank you Mr. Wilson you may begin.

Good morning, and welcome to the Terex second quarter 2020, <unk> earnings Conference call.

Copy of the press release and presentation slides are posted on our Investor relations website and investors that Terex Dot com.

In addition, the replay in slide presentation will be available on our website.

I'm joined by John Garrison, Chairman, and Chief Executive Officer, and John Duffey, Sheehan, Senior Vice President and Chief Financial Officer.

There are prepared remarks will be followed by QNX.

Please turn to slide to 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'll be discussing non-GAAP information that I believe is useful in evaluating the companies operating performance.

Reconciliations for these non-GAAP measures can be found in the conference call materials.

Turning to slide three and I'll turn it over to John garrison.

Good morning, Thank you for joining us in for your interest in Terex.

Safety is and will remain the top priority of the company.

Globally very few of our team members have tested positive for the Kobin 19 virus.

This reflects our zero harm safety culture.

I think say.

Works a.

Home safe.

The vigilance of our team members, both inside and outside of work.

And the rigorous cobot, 19th safety protocols, we implemented early on.

I've made a real difference.

And it helped us to avoid any significant impact to our operations.

We will keep our garden as.

As we remain focused on protecting the health and safety.

Of our team members.

Their families.

In communities.

Turning to slide four.

After spending production in most of our facilities around the world in March.

We resumed manufacturing in all of our plants globally.

Beginning in late April and increasing in May and June.

This resumption, we've accomplished with a rigorous focus on safety protocols and production that has been calibrated to meet customer demand.

Our teams are continuing to work closely with our customers to understand their demand.

Proactively manage their production operations.

Close we partner with suppliers to control the incoming supplied materials and maintaining supply chain continuity.

Yeah, and utilize available government furlough programs.

These and other actions have enabled us to tightly manage our variable manufacturing expenses.

Which make up over 80% or cost of goods sold.

And dramatically reduce our cost base.

In addition, a rigorous cost control.

We have remained focus on having ample liquidity to operate the business.

As of June Thirtyth, we had approximately $1 billion of available liquidity.

We may not be able to control.

The macroeconomic factors.

Driving demand of our products.

Well, we are aggressively executing on the levers that are within our control.

Please turn to slide five.

Did you sell stabilized.

But were below pre cobot 19 levels.

As a result.

We continue to take Swift action in response to changing end market demand.

In addition.

We delivered strong overall decremental margin performance of approximately 20%.

During our last earnings call I'll discuss the actions that we were taking to rightsize our cost structure.

Highlighting that we were taking out at least $100 million of cost.

We implemented these and other actions during April.

And our decremental margins reflect these decisive actions.

To be specific.

In the second quarter, we took out over $40 million, a best United cost.

Which was down 30% year over year.

From furloughs.

Lay off.

Do you remember salary reductions and deferral of merit increases.

Finally.

We generated positive free cash flow of $71 million in the core.

We achieved this by reducing net working capital by $180 million or more than 20%.

Reflecting great teamwork.

Our supply chain commercial and financial teams.

We will execute.

And are focused on delivering positive free cash flow for the second half 2020.

Turning to slide six.

The first half of 2020, we transitioned our strategy to execute innovate and grow.

The natural evolution of our focus simplify and execute to win strategy.

The focus and simplify elements were essentially completed.

It was time to emphasize execution driving innovation and growth.

Specifically focused on profitable growth.

Tariffs has done a great job.

Innovating our products and technology.

Our innovation needs will include lowering our manufacturing costs.

I want to cost customers to operate our equipment.

Our assay compliant Jay Boom is an excellent example of this purposeful innovation.

Offering operators the essential performance they need to get work done at high.

We've been unrestricted platform capacity of 660 pounds.

It offers rental companies the opportunity to increase.

Their return on invested capital.

By mixing their fleet with a range of Genie booms.

Matching the right boom to the right application.

In addition.

Our innovation will improve our ease of doing business.

Through the lifecycle of the product.

By delivering industry, leading customer service.

In parts and service, we're providing our distribution partners.

Easy to use digital tools.

Which are highly integrated and consolidated.

Into a convenient and optimize digital portals, helping them serve our customers more efficiently.

Terex is well positioned for future growth.

We have clear objectives to deliver on our execute the innovate growth strategy.

Driving continuous improvement in execution.

Winning with more customers around the world driving profitability and shareholder returns and equipping the organization to win in the global marketplace.

This will result in.

In terex emerging as an even stronger company.

And with that let me turn Robert Jaffe.

Thanks, Sean.

Turning to slide seven.

Let me begin by reviewing our Q2 financial results.

I would call your attention to our financial reporting structure I.

As you will notice consistent with Q1, we did not report adjusted Q2 Twentytwenty financial results.

Instead, we are like densify, the specific financial impacts from covert 19, and certain other amount affecting our Q2 reported results.

We continue to provide information that will help the investment community more easily compare our year over year results going forward.

Looking at our second quarter financial results.

Revenue of $619 million was down 47% year over year.

As discussed during our last earnings call, we were operationally planning for a challenging quarter.

That's it.

The quarter, we did see the markets in which we operate stabilized and begin to recover.

For the quarter, we recorded an operating profit of $7 million.

Sure to adjusted operating profit of $132 million in the second quarter last year.

The lower operating profit resulted from revenues being only approximately half of Q2 2019.

Combined with significant Unabsorbed manufacturing costs.

These costs due to the combination.

<unk> costs associated with can't closures and production levels below customer demand to reduce finished goods inventories principally within a WP.

As John discussed a few minutes ago.

With the onset off the pandemic, we took aggressive steps in April to reduce our overall cost structure to align with the current level of customer demand.

Well lower revenue was impacted our gross margin he had increased S.G.N. Ed as a percent sales.

Aggressive cost reduction actions allows keryx to achieve had approximately 20% decremental operating margin for Q2.

More favorable than our targeted 25% decremental margin.

It's decremental margin was achieved despite $22 million a gross profit charges.

Primarily associated with fixed costs at our manufacturing facilities for that period they were closed.

In addition, catchy name was adversely impacted by $4 million, primarily due to employee severance and restructuring.

Excluding these charges heritage decremental margin would've been 16% in the quarter.

He's low operating income interest expense was $7 million lower than Q2, 2019, as a result of lower borrowings versus a year ago, principally related to our revolving credit facility being drawn from most of this.

Past quarter.

In addition, other income was positively impacted by $1 million related to the marking to market of a publicly traded holding.

For Q2, we recorded a tax benefit of 48%, which reflects the impact of adjusting our Q1 tax rate to our forecast tax rate.

In general when the pre tax earnings and out is low has what's the case in the first half of this year.

All changes to the tax benefit or expense can have a relatively large impact on a quarterly tax rate.

Finally, our reported EPS was five cents per share includes the Cobiz 19, and other impacts that I just discussed.

Amounting to pre tax charges of approximately $25 million or 25 cents per share.

Turning to slide eight and our second its financial results.

Starting with a WP.

Eight you T cells for $414 million contract.

52% compared to last year, driven by continued challenging global end markets.

The U.S. and Europe remains significantly below last years levels.

We continue to aggressively manage production levels to ensure we are not building excess inventory.

Our change from China facility ramped up production over the course of the second quarter, two pretty cold and 19 vessels.

Overall, the utilities markets stabilized in the quarter, but remained soft in certain customer segments.

He W.P. delivered strong decremental margin performance of 20% in the quarter by aggressively rightsizing production and cost to align with end market demand.

Backlog at quarter end was 510 $9 million Gal, 32% from the prior year.

Well second quarter bookings of $190 million were 63% lower than Q2 2019.

Your real products Q2 bookings and backlog at June 30, yet were impacted by customer booking administrative changes.

Which resulted in the cancellation up their orders.

And the push out of waters due to delays in availability of financing.

These customer booking changes reduced DWP Q2 bookings and backlog by approximately $100 million.

Most of these orders are expected to be re book and ship in the second half of Twentytwenty.

Excluding the impact of these customer waters Q2 bookings were down approximately 40% and backlog was down approximately 20%.

During the quarter. We also continued to experience a shifting of customer orders from the second quarter two the second half of Twentytwenty, although to a much lesser degree than we experienced this past March.

Now turning to materials processing.

And he had another solid quarter, achieving 90% operating margins despite challenging markets.

It is a testament to their operational strength to deliver relatively strong positive operating margins on significantly lower revenues.

Sales were $264 million down 39% from the second quarter 2019.

Driven by extremely cautious customer set it resulting into lane capital purchases.

You have p. team has been aggressively managing all elements of caught in a challenging market environment, resulting in decremental margin performance of 25%.

Backlog of $262 million was 36% lower than last year.

And down low single digits sequentially.

However, MP customer bookings trended up each month in the quarter.

With June higher year over year.

Which gives us optimism going into the second half of the year.

Customers in both segments continue to operate through the Coca Centene pandemic and existing equipment is being utilized but at lower levels.

Both our eight W.P., yet and p. businesses, our industry, leading and their respective segments with very strong brands.

They are well positioned to grow in their markets as conditions improve.

Turning to slide is not.

Now I would like to provide you with some perspective on how we currently anticipate the second half of 2022 developed financially.

It's important to realize that with Coke is 19, we are operating in an unprecedented period and customer demand could change negatively or positively very quickly depending upon developments with respect to the pandemic.

Well, we believe it is important to provide you with insight into our business expectations for the second half of 2020.

You must understand the potential for variability of results to our expectation is higher than normal.

With that said as for commercial demand, we have seen our markets stabilize although at a much lower level of demand in 2019.

Or we expected at the beginning of Twentytwenty.

We currently expect revenue over the second half 20 twond to be approximately the same as the first half of this year.

With the revenue generated being relatively evenly split between each of the remaining quarters.

From a segment perspective, we anticipate the year over year quarterly revenue declines will be greater in a WP versus MP.

We remain fully committed to aggressively managing our overall cost structure in line with reductions in customer demand such that we maintain our decremental margin target of 25% for the full year for the company as a whole yeah for each of our segments.

We also remain committed to these decremental margin target for the second half of Twentytwenty. Although that's a result this summer shutdown in many of our facilities.

We do expect our fourth quarter decremental margin will be better than the third quarter.

Finally, we expect the full year twentytwenty corporate and other cost structure will be incurred equally between that first and second half of 2020.

We are intensely focused on overall liquidity and free cash flow generation.

Based upon our current customer demand outlook and cost reductions, we expect to be free cash flow positive for calendar year Twentytwenty.

As is typical in our business, we were approximately $40 million free cash flow negative during the first half of 2020.

And would expect to generate more than this amount of free cash flow in the back half a year.

Net working capital reduction your primary source of second half 2020 free cash flow generation.

Finally.

You are at 600 million dollar revolving credit facility, which is fully available to us as an insurance policy for demonstrating the financial security gift terex to our customers suppliers team members and shareholders.

We anticipate had ample cash on our balance sheet for the remainder of 2020 have would not expect to utilize our revolving credit facility.

Please turn to page 10, and I'll review, our disciplined capital allocation strategy.

Despite the challenging environment the entire terex team drove positive free cash flow of approximately $71 billion in the quarter.

Our continuing operations pre cash flow benefited from our producing below detailed demand.

As a result, but the Covance 19 impact on commercial demand, we continue to aggressively manage production.

Especially within our a W.P. segment, which further benefited our Q2 free cash flow.

We continue to expect net working capital will be a source of liquidity for the remainder of 2020.

With the support of our revolving credit facility banks, we have sufficient liquidity available to be successful through this global pandemic, such that we won't be positioned to come out the other side, yeah, well with that.

Given the economic uncertainty, we have reduced our 20 twond in capital spending like 35%.

While we remain prudent in our capital spending we are investing for growth has demonstrated by our new utilities manufacturing facility and try to choke China facility expansion.

We continue to align our cost structure with commercial demand and have taken aggressive cost reduction actions.

Most importantly, we have aggressively reduced the supply of material into our manufacturing facilities.

To illustrate.

70% of our cost of goods sold our materials from suppliers that we are assembling into the machines.

These actions reduced the liquidity requirement, okay suppliers for that material.

We have been adjusting our cost structure very aggressively to the demand environment in which we are operating.

We continue to temporarily suspend our dividend and share repurchase activity.

In conclusion, we will continue to aggressively manage the business and generate strong free cash flow.

Well the shrink we have to write capital structure, a strong capital structure, which we do have today.

And with that I'll turn it back to China.

Thanks, Stephanie.

Turning to slide 11.

First.

Let me take a moment to acknowledge Matthew on.

Who is leaving the company after 25 years of service.

Matt is a dynamic leader.

Who has helped genie grow from a regional brand to global power House in the aerial work platform industry.

As announced.

I would assume responsibility as president available U P for the foreseeable future.

I'm excited to work, even more closely with the Genie and utilities teams.

To improve profitability and growth.

He'd ever you piece future success.

We will be driven by investing in new technology industry, leading products.

Investing in World class manufacturing and Watertown in changes.

And rigorously following our zero harm safety culture.

We like our global position global brands and long term prospects.

And we are investing to enable future growth.

But investment can only happen when you execute.

Which they W.P. team demonstrated by safely ramping up production and driving sequential and year over year revenue growth in China.

Proactively and swiftly taking significant SDMA reductions in response to lower demand.

And aggressively managing working capital.

Delivering strong inventory performance.

It is a competitive industry.

So we must be laser focused on.

On controlling what we can control.

Superior execution.

And aggressively reducing cost to improve margins and win in the global marketplace.

Turning to slide 12.

Materials processing demonstrated again this quarter.

But it continues to win in the marketplace.

It's MP continues to grow by finding product adjacent fees.

In new geographies.

What's leading products and brands.

All what demonstrating strong operational execution.

The MP team is integrated the cranes business into its portfolio, especially businesses.

As an example.

Our strong and based upon a business is growing globally.

Pictured here once upon a crane being deliberate in Mongolia.

And excellent example of how the M.P. team continues to find new geography for M.P. products.

This massive MPS environmental business.

Under the Terex Eco Tech brand.

To deliver environmental solutions is an example of the business finding logical product adjacent season for continued growth.

For example, the terror FICO Tech pictured here.

To further enhance and already significant range of shredding products.

The new machine will be manufactured in our newspaper the art manufacturing facility in dairy Northern Ireland.

Which supports the ongoing growth and development of Terex eco text expanding product portfolio.

The strong financial performance of MP relative to market conditions.

Achieving an operating margin of 9%.

Decremental margins of 25%.

Demonstrates the M.P. team is executing well.

Finally.

It would be booking stabilized and increase throughout the second quarter.

Resulting in bookings only being down 10% year over year at the end of the second quarter.

M.P. as a diversified in consistently strong performer.

Even in these challenging times.

Turning to slide 13.

To wrap up our remarks.

We are laser focused on our strategy.

Well, many things are difficult to predict today.

What do you certainly as.

Church team members around the world are focused on the right things.

Hello.

Safety.

Customers and improve productivity.

We will reduce complexity and cost.

And drive returns with a focus on improving margins.

Especially we've been able you Pete.

Our businesses have a strong future.

So we will continue to invest in innovative products and services to be prepared as market demand returns.

With that let me turn it back to Randy.

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'd like to opening up for questions operator.

At this time, if you'd like to ask a question. Please press Star then the number one on your telephone keypad.

Our first question comes from the line of make Dubray with Baird. Your line is now open.

Thank you good morning, gentlemen.

My first question is really sort of a clarification on the disclosure you have on slide seven.

I'm curious to learn more about a $22 million the fixed manufacturing charges.

Is this.

Are you essentially adjusting footprint and that's what that refers to or is there something else going on there that would need to be aware.

So I'll take that one or make this is duffy and Ah you know under us GAAP, which is what we're reporting U.S. GAAP results were not a adjusting anything out of the reported results. So I wonder if you ex cat when our menu.

Three facilities are closed and not producing the fixed costs as so which a lot of them, we're getting the especially during the month of April beginning of May.

Got it doesn't permit you to capitalize those costs into inventory. So there was $22 million a fixed costs, which were charged directly to.

The income statement or are the periods when those manufacturing facilities for close I hope that helps to explain.

It does thank you for that and then I guess my my follow up.

I I'm looking for you to put maybe a finer point on your cost savings you talked about that at $100 million.

But I'm curious as to how much of that was a was realized in the second quarter. What else is there is still to come in Q3 in Q4 and is there.

Maybe a view here in terms of.

What percentage of these costs could potentially resources, we look beyond 20 point. Thank you.

Thanks made this is John I'll take the first part and then it's Doug Duffy can add a follow up with right.

A clarification.

We have been decisive Megan and address adjusting our cost structure to the market demands that that we had and as we said and we're using all available opportunities to do so things like furloughs.

A great team members have had salary reductions and might be type of reduction. So some of the reductions our quarter them home temporary I will say the salary reductions and there might be a are temporary and those you know goes we'll continue we'll be reinstated as we move forward into into the 21 time period other or the cost reductions are permanent.

We had reductions in force center in or a W.P. businesses in or utility businesses as well. So make it is it is a combination we are committed to to exceeding frankly, the $100 million that we laid out and and as Duffy said in our outlook you know our target as a team.

As an organization is to drive through this 25% decremental margin level and a we will continue to adjust the cost structure of the organization.

So such that we can deliver on <unk> on that target. That's that's the focus that's the target and the team as we go through this a this down this down period.

Yeah. The only thing I would that make is is that that aggressive cost reduction of taking the actions to or reduce the cost structure really started at the beginning of Q2 end of March very beginning of Q2, and that's what allowed us to.

Achieved the better than 25% decremental margins in Q2.

And they will and those savings will continue through Q3 in Q4, which as John said, a moment ago allows us to I have to confidence or to be talking in our outlook about our commitment to the decremental margin targets.

Great. Thank you.

Thank you Meg.

Our next question comes from the line of Joe O'dea with vertical research. Your line is now open.

Hi, Good morning, everyone. Good morning, Joe.

First just it's if you will elaborate a little bit odd back half revenue expectations at the segment level and when there were looking at a narrower gap in trends between the two segments and.

Impede it might be down high teens, any WP down sort of low twentys or is it or is it a bit wider spreads than that just so just trying to understand kind of what what you're looking out for that for the different segment trends.

Duffy if you could take a shot at that and I can perhaps talk a little bit on the market commentary.

Sure. So when you look at a when you look at our stuck out of let me try to frame. Your your your question. What my response to your question from what occurred in Q2 as to what we see in the back half of the year. So right. So when you look at.

The second quarter, our eight W.P. segment revenue down 52%. The M. P segment revenue down very high Thirtys, So and Pete was knocked down as much as the a W.P. segment I think that as we move into Q3, ER and Q4 for that matter.

At or the trend that the M.T. segment will not be down as much as Ah Hey, WP will continue.

And then number two that are neither segment will be down as much or in the third or fourth quarters as they were in the.

Second quarter right, we're providing an outlook I don't want.

So I can't give you exact percentages here obviously the world is highly variable and volatiles at the moment, but I would just simply sell you sat there as we went through the course of second quarter, we saw it stabilization in the markets in which we operate a quarter's and increased especially.

The within the a W.P. segment excuse me, especially within the M.P. segment as we went through the course of the quarter and that will allow that Q3 Q4 revenues.

Q3, Q4 revenue change I'm going to be clear about that Q3, Q4 revenue change year over year will be not as negative as it was in Q2.

And.

Does the does the outlook for for flattish.

Embed that the the 100 million.

Sort of cancellations delays you saw in a WP is fully recovered in the back half for only a portion of it how are you thinking about that in a flattish back yes.

Again, I know, but yeah go ahead, sorry, <unk> I've just got it I'd say, we used the word most and so the answer is that you know is the outlook does contemplate that most of those waters.

Our both rebooked and machines delivered in the back half of the year, John you can expand sorry.

Yeah, and that and I think just that add on that Joe is again, it's an outlook, but as we look at the market now and our AAMC segment, we did see utilization improve as we as you went through the quarter.

Likewise in or MP segment around the world. So again, it's just an outlook is as we sit here today bat bats bats are outlook, it's not financial forecast is not financial guidance, but but looking at the businesses were seeing everything here today.

That's how we see the back half unfolding and obviously it could change as we said dramatically either way, depending how you know the cobot pandemic plays out but as we as we sit here today. That's that's the outlook that we see.

And then last one on a WP inventory.

Sure of attention in effort on on getting that too comfortable levels can you talk about where you are today the degree to which you've got you know any more work in the back half of the year your comfort level, which is.

During the year, you know and allowing you to produce to retail.

Thanks, I'll I'll take that that when Joe.

We would talk a lot over the course of time here about aligning our AWB inventories with with the market demand and we have been underproducing to retail demand for quite some time and we continue to do that.

In the in the second quarter, a you know our production sales were down but our production was down 66% than the quarter after being down 47% in Q1 as a result of that we are seeing our inventories and the teams did a great job.

We are seeing RMB inventories come in line, we saw a reduction in inventory.

Sequentially and year over year, which is helping to drive our cash flow performance. So this is one Joe wouldn't and now that I'm there as part of the business. It. It will continue with with the same degree of intensity, we're really close with the customers understanding their demand day by day and adjusting our production.

Schedule, such that we're continuing to under produce the retail demand. Yes. We do have finished goods inventory, but we're closely managing finished goods inventory by model by category around the world to ensure that were not over producing a two to two that retail demand. So we've had to take dramatic production reduction.

And this year to get the inventory in line and we will complete that is our strategy, we're not going to overproduce.

To retail demand such that we end up in in an adverse inventory position.

And as we move through the year, Joe what it is important to understand especially in the W.P. business and this is where we have to be close to our customers and understand what they're seeing what we're seeing is because the market will rebound and it can rebound sharply. So you know being on top of this consistently and constantly will be in a focus area for us is.

As a team as we go forward and again you know I'm pleased with the team's performance in terms of what they've been able to do to align our inventory with what our current outlook is for for the segment.

Got it thank you.

Thank you Joe.

Hi next question comes from the line of David Raso with Evercore ISI. Your line is now open.

Hi, Thank you John not now that you're even closer to the DWP business being out in Washington State of times and obviously, it's under your watch 100%.

For the stock to two to really work right. It's about a WP kind of having a having a real upcycle.

And just given the last couple of years to divergence between either VP margins versus your largest competitor. It's been it's been really stark. So just given you've gotten even little closer to the business can you explain kind of on the last couple of years kind of what happened in diverged was used to not be that's different than the competitor on the margins.

And what are you looking to give us comfort that you could get the margins back to where your competitor.

Even with there right now even in a down market.

Thanks, Thanks for that question, David and let me start by saying that set of my opening remarks, I really am excited to be working closely with our AWB team, both our genie team and our utilities team and and I can do this because I've got a great team at corporates that can cover a lot of our corporate.

Opportunities in workload and we've got a great team at at Genie in it Terex utilities, we also created new position in our Genie business or it KWB aerials business with Simon Meester as a COO.

Again to give us the focus that that we need so we're going to be in in the team and I will operate the business I'm, David with a laser focus on process efficiency an execution. So that we can significantly drive margin improvement, there's no doubt David our underproducing to retail demand.

For quite some time as contributed.

To to a margin.

Our margin challenges at eight W.P.. So as we begin to bring that in line that clearly will help but we're going to be looking at every aspect of the business redoing all opportunities that we have to be more efficient in all aspects of the business from SGN eight to two manufacturing and selling and you know one thing that won't change.

David is the Genie team has an intense focus on customer a customer satisfaction. So we'll build on that as we go forward but.

I am the GDP team I understand that we have to address underlying cost issues and challenges in the business such that we can and we will deliver a future margin performance improvement.

I I appreciate the comments, but can you tell us a little bit more understand visits.

Underproduction, obviously hurts, but.

When your competitors had similar say sales declines this year as you're saying and again the margin spreads really wide. So I was just curious if you've seen something being even closer to it.

That you know the expansion the Chinese facilities is a big cost save coming versus other facilities in the past something glaring within the business that maybe we don't see in the disclosure when it comes to you know SDMA or whatever it may be just because it's such a wide gap I think it's a question people are going to have how do I gain comfort in them.

Margin improvement this clear if you can go back to where you were or the margins.

The operating leverage is huge but is there something structural that you're seeing that you feel you can attack is as we know the competitions getting harder.

This decade scenarios, and we probably have ever seen over the roughly 25 year history of the product being a real scale.

Just curious where there's something you're saying.

The can explain the big margin gap, Hawaii can be.

Yeah, just gotten rid of.

Right.

Again, David that then under production to retail them and lowering inventories in a rapidly declining revenue environment is a big driver on on on the there will be P margin. So that's obviously something we as we move for we have to do a better job and making sure. Our science line do it with retail in production demand because we've actually had to cut.

Harder to bring inventories are in line. So that is clearly a process that we will continue to focus on a drive improvement, but David again, all I will say, it's we're going to look at every aspect we understand aspects of the business, we like our footprint as you mentioned in places like China. It is a good footprint for us not only for the group.

Both in China, but it is an opportunity for us to export out of China to the Asia Pacific market and into Europe, We think that will give us a good cost advantage as we as we move forward in time and those stones Gonna go in turn David as we look at every aspect of the business.

And it's not lost on the team that Theres, a margin differential and it's not lost on us that there's a margin differential between our margin performance and other participants in the industry and we will work to close that gap.

I appreciate that thank you John.

Thanks, David.

Our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is now open.

Yes, hi, good morning, everyone. Good morning Gerry.

John I I'm wondering if you could talk to us about what utilization levels, you're seeing for your equipment in the field you know based on.

Your customers reports it looks like they're running roughly.

10% down year over year in terms of fleet on rent and I'm wondering is it similar for your products can you just give us some context and can you talk about the cadence what you've seen.

Into July any areas.

Any let up in areas, where we see the Corona virus.

Back up.

Yes good.

Thanks, Jerry and.

There's really two avenues of information we gain one is being very close with our customers and trying to understand what our customers are seeing in terms of a better utilization. The next aspect and this is newer you know we have now little over 20000 machines with telematics information and the combination of our telematics.

The information or customers are sharing with us through the telematics.

Given is giving us better insights and over time, we think it's going to help us when it comes to forecasting in things like that so if I just go around the world quickly Jerry first and foremost China. China was was it was close to boost because we talked earlier in the first quarter, but we've seen the China market recovery.

For their utilizations and increased dramatically and we've actually seen sequential and year over year sales growth in China. So China is absolutely on the road to recovery in the in the China market.

In North America.

What what customers have told us and what a publicly traded companies have said is they saw utilization in our telematics. The beta confirmed that our should fare customers telematics data confirm that that the low point really was somewhere in that in that April timeframe, I will say, Jerry a did very slightly by region within United.

<unk> East was slower to start back up when it when when we saw the utilization.

Other other parts of the country and increased we have seen a significant decline in Texas not surprised based on both co bid, but also the oil and gas market area. So we did see a decline in utilization in Texas. So what's happened is it increased over the quarter.

And it's stabilized in most cases, gerry slightly less or.

Lower than pre Covance <unk> levels I don't want to give you a percentage, but we can say it it has not recovered fully to pretty cold with levels and then I would say in Europe.

Jerry a similar story with it would what customers are saying and then also what the telematics data is indicating similar story again buried in timing based on when the co bid crisis hit so southern Europe hit earlier utilization was was down and then recovered northern Europe.

Where the cold you hit a little bit later several weeks later you saw that ends the utilization data. So thats, how that's how we've seen the market's unfold. So the good news is what we've seen utilization increase.

Over the course of the second quarter, we have seen it stabilized over the course of the quarter and it. It it is below cobot levels, but in some cases, there they're getting close to pre tobin levels in certain markets like China in other parts in the U.S. and in a few markets. It in.

In Europe as well so.

It has improved is what we've seen and that's what customers are telling us and that's what our telematics data showing as well.

And Joe just to make sure runs on page that Oh pay some improvement it sounds like has continued into July is that correct.

I'm going to be careful Jerry not to go in quarter commentary. Some my comments were to the second quarter, So I'm going to I'm going to leave it there if that's okay, Jared I'm going to try to avoid in quarter commentary.

Okay Fair enough and then as we think about incremental margins in 21, obviously really nice decremental margin performance. This quarter anything we should keep in mind, because you know things like no travel will obviously.

Unwind or hopefully I should say will unwind so any of the steps that are driving attracted decremental margins you have to Q that we should think about that potentially don't follow through it to higher decrementals in 21, and hopefully price cost will be a tailwind.

Depending on how pricing sticks, but can you just talked to to those points. Please.

Duffy could you comment on that real quick and.

Sure sure I mean, I guess I would start Jerry if I'd say, our our product focus quite honestly right now is about the second half for Twentytwenty. So.

With respect to 2021 first of all I hope, we're talking to you about incremental margins as opposed to detrimental margins because they are with co is 19 becomes hopefully in the rear view mirror that where where the markets in which we operate or growing.

And as such our topline this growing obviously time will tell with respect to that I would say it relates to the margins would be 2021, we're going to can.

Continue to be vigilant on on our cost structure, and taking out well cost to match a with the demand commercial demand environment in which we're operating.

We are fully committed to 25% incremental or decremental margins are and the other thing I guess that I would.

Say investors should have on their radar screen is obviously, a incremental or decremental margins are eight factor of the year over year change the year over year changes revenue and a year over year change in operating income and so with the the low levels of operating income.

That we've been seeing here in Twentytwenty at least in the first half a year or as a result of or the Cobiz 19.

I say does portend, well for incremental net decremental margins in 2021.

Okay. Thank you.

Thank you Gerry.

Hi next question comes from the line of Jamie Cook with Credit Suisse.

Hi, good morning.

Hi, Good morning, Hey, So Duffy just to and I apologize because I'm I'm working through multiple earnings calls this morning, but to follow up on on Jerry's question. I mean said the view on 2021, if the volumes came back and who knows right but.

Just given your comps your incremental should be much better than the 25% that you guys target. That's my first question. My second question is I know, you're Underproducing retail and aerials what is the expectation when you start to produce and mine is it the fourth quarter or is it 2021, and then as we approach 2021.

And then my last question can you just give an update on sort of where we are in a strategic sourcing and <unk> potential cost savings associated with that maybe it's not 2020, maybe 2021, but any color you can provide there. Thank you.

Okay aren't that was one of the question SEC [laughter], Jamie Let me I'll try to I guess go ahead.

So why don't I just covered the the first one surrounding.

The question on incremental decremental margins in 2021, and only to say is that I understand.

The point you made I think I was effectively making the same please.

Hi, John sorry.

Yeah, and as it pertains to production levels, Jamie we're going to be laser focused on on ensuring we have the correct level of inventory as we felt that we had too much finished goods inventory. So we've been under producing the retail demand to bring that inventory level in place.

Again, where we end up at the end of this year, Jamie is a lot of that it's going to depend on what the forecast what we think about 2021, it's too early to call that as we are here right now, but again the strategy of ours will be to two to show the same discipline that our customers are showing which is not to overproduce, we're going to be.

Disciplined about what we produce so that and that we have a good price cost environment than we don't feel compelled to do anything on pricing because we're sitting on on.

Incremental slas excess inventory, so we're going to be very disciplined on our production schedules to match what's needed for retail demand, while recognizing that these markets do pick up and can pick up quickly and so that's where we've got to be in close contact with their customers from a production level standpoint, but that strategy.

I will not change and Jamie in terms of the strategic sourcing initiative in my prepared remarks, I I called out our sourcing teams I think they've really done a great job in an incredibly challenging environment, where we're asking suppliers to reduce the amount of product coming into our facilities. The Ron whip is or per.

Production levels have been cut while also simultaneously ensuring that we have continuity of supply was a significant amount of supply chain disruption around the world and so the teams have done a great job with that as a as it pertains to the savings Jamie I'll, just say that the savings rates the percentages that we're getting.

We are in line with what our expectations were obviously with the volumes being down so dramatically. The actual dollar savings are not or not there, but the rate savings are and so as volumes continue to pick up we would anticipate that that would be a tailwind for us as we go forward.

In terms of implementing this strategic sourcing process in the in the coated pandemic period, Jamie the teams can continue to move their sourcing activities. It has slowed in some cases, especially if we're in a in a position where we're thinking of changing of supplier and we need to do on site visits to check the quality.

Systems production system, so on and so forth. So cove. It has impacted the timing of of the strategic sourcing initiatives, but even with that said.

Seems to skewing to progressive and where we can go with existing suppliers and vendors, we're making those those types of awards as well, but we would anticipate it being a tailwind for us as we move forward into the future.

Okay. Thanks, I appreciate the color.

Thanks, Jamie.

Our next question comes from cardiac bonus with Morgan Stanley. Your line is now open.

Hi, good morning, guys.

Good morning.

Maybe first on cancellations. Appreciate you gave us some color on on utilization through the quarter, but I think last quarter, you kind of talked about taking up pretty heavy hand with the cancellations in the push outs get a continued this quarter. So I was just curious if that kind of something you know that was more you know at the early part of the quarter and has.

Has since stopped or did you see it kind of free accelerate as we've seen a you know some utilization trends you know maybe a filter bets in these areas where were the outbreaks of then just any color you can kind of give us and how cancellations are trending.

Yeah.

I'll take that one you know as it pertains. They W.P. that was earlier in the quarter and we have advanced purchase orders and when customers weren't either had an issue with financing or timing of financing.

Or were not able to give us shipped two types addresses we decided to administrated, we remove them and we anticipate as I said and that that they will be book back. So it was a court me more earlier in the quarter in AWB I can say as we've tracked through the through the second quarter, we track it daily.

The number of cancellations and delays decreased as as we went through the quarter.

In the case of MP, they scrub their backlog really hard at the end of the first quarter.

And really took out.

Orders were dealers will not willing to say when and where the product needed to be shipped and so they didnt have the same level of cancellation and or delays in the in the backlog in order books with the with RMP team and again, so that was pretty consistent throughout the quarter. So that's how it.

I'd quantify the changes in the in the backlog or as we progressed through the second quarter. Okay. Thanks. That's helpful. And then just what they need to be P. as well just on the utilities as I said and you mentioned that it's stabilized so soft and in certain customer segments anymore color you kinda give us there just.

You know quantify how much that market is down relative.

Aerials, a more broadly and just how you're thinking about that business in the second.

[noise] [noise]. Thanks, Gordon so overall the utilities business in this environment has been more stable than than the aerials business. So its way to sales decline was not was not ask the at the overall segment seven level. So that's how I would I'd say it there and.

Really there's kind of three principal customer segments in that group and they're all exhibiting different dynamics. One customer segment. You know it's been very steady is the investor owned utilities. The major integrated utilities. Their capex plans that have not changed we did have some delays caused me and deliveries because a lot.

These are customize vehicles in the customers couldn't come because of travel restrictions and the like to accept their vehicles, but that part of the market remains I would say remains buoyant.

The market that we have seen some contraction is there's especially utility contractor market.

And that that has softened a little bit as most rental channels have as we progress through the through the pandemic and we're looking to see that best stabilize and then finally, we have some specialty products in there like our tree three care type products, that's actually been buoyant as well because.

Electrical utilities have to spend money on the maintenance side and so we haven't really seen much of an impact there. So overall, yes, it's been impacted by cobot, but not nearly to the same level as our AWB PGT side of the business.

Okay. Thanks, and just any comment on the outlook for that business given you know opened.

Yeah the need.

Absolutely.

But the teams in the process here in the in the late second quarter and into the third quarter moving into the new facility. They're excited we do still believe coordinated that this business will <unk> is a good growth business for us given the Nymex of electrification.

Fiveg requirements that are ongoing and then we're also had the opportunity.

China's picked up.

Were reserves manufacturing space in our phase three changeover expansion for manufacturing of utilities product. So.

Utilities business within every piece of strong business for us and we anticipated.

Continued to grow as we move forward.

Okay. Thanks Gordon Inc. Thank you Gordon.

Hi, My question is from Seth Weber with RBC capital markets. Your line is now open.

Hey, guys. Good morning, good morning, everyone squeaking in here under under the wire appreciate it.

Yes, I wanted to go back to the to the 100 million canceling slash push out comment.

Can you just talked to are you seeing distress among some of your smaller customer rental customers you know the independents or whatnot and then I guess the follow up is.

If it's a <unk> if it's a financing issue for them.

Would you consider.

Getting more aggressive with Turks financial to step in and.

To help them there thanks.

Duffy could you take the.

Financing side of that were and I'll fall yeah, Yeah yeah.

Yeah, I'd I'd say is that the the financing were actually a series of these limited.

Set of situation.

And that in general I would say, our independent or customers has been operating very successfully through the endemic we're not seeing a ton of financial stress I think they have taken advantage of government programs where available to them.

And there were a limited set of situations, where as a result, a pandemic or the customers needed extra time to put the funding in place to for there at the waters that they wanted to make here in 2020 and so that's a result.

All such time as they had the funding in place we took the water out of the backlog and they we have seen progress with the that limited set of customers and expect that they will have to financing that we placed the order and we will shift the equipment here in the second half of the year.

Okay, you're you're not inclined to get more and more.

Aggressive Victor financial then on on your end users and.

You are leaving it up to the customers to get to finance.

No I look I think we we worked very closely with our customers too.

Provide a financing where appropriate recognizing that the it's a combination of third party funders as well as their own balance sheet and that I think we've been exercising it up an appropriate level of aggressiveness to support our customers through this.

The endemic.

Okay and have you seen any uptick in bad debt.

Oh, no we added a crisis.

No I mean, we didn't have an individual situation that we handle in Q1, and we talked about that during our Q you need to wonder is Paul but we've had no no additional situation stress or that are over the course of the.

Endemic.

Super I appreciate it guys. Thank you very much.

I think how badly.

[noise] there no further questions at this time I'll turn the call back over to Mr., John garrison for closing comments.

First and foremost thank you for your continued interest in Terex.

Please stay healthy I would encourage all of us to please continue to follow the Kobin 19 protocols. So that you can keep yourself your families and your community safe.

If you have any further or additional questions. Please do not hesitate to follow up with Duffy and Randy and operator that you can now disconnect the call have a great day.

This concludes today's conference call you may now disconnect.

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