Q3 2020 Terex Corp Earnings Call
Welcome to Cambrex Corporation third quarter Twentytwenty results conference call at.
This time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation. Please note. This conference is being recorded I will now turn the call over to your host Randy Wilson Director of Investor Relations for Q2.
Rex Corp.
Good morning, and welcome to the Terex third quarter 2020 earnings conference call a copy of the press release and presentation slides are posted on our Investor Relations website at investors Dot Terex dotcom.
In addition, the replay and 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.
Their prepared remarks will be followed by Q1 <unk>.
Please turn to slide two of the presentation, which reflects our safe Harbor statement.
Today's conference call contains forward looking statements, which are subject to risks that could cause actual results to be materially different from those expressed or implied.
In addition, we'll be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance.
Reconciliations for these non-GAAP measures can be found in the conference call materials.
Please turn to slide three and I'll turn it over to John garrison.
Good morning, and thank.
Thank you for joining us and for your interest in Terex. Most importantly, I hope you and your families are remaining safe and healthy.
Throughout this challenging times, we're proud of all of our church team members or keeping themselves and now they're safe.
Meeting the needs of our customers and helping our community I would like to recognize and thank our team members around the world for their continued commitment towards zero harm safety culture, and George way values.
Safety is and will remain the top priority of the company driven.
Driven by think safe work safe home safe.
Our team members remain vigilant by carefully following the COVID-19 safety protocols and continuing to keep their garden Bob.
Our crisis response teams remain active.
In our facilities continue refining their preparedness and response plans to ensure they can respond swiftly as local pandemic conditions change.
I'm proud of our team members' commitment to safety.
I'm equally proud or their dedication to the terrorists way value of citizenship. This.
Despite the challenges presented by COVID-19.
Our team members continue to give back to the local communities.
Whether it's the H.W.P.T. members continuing to produce masking face shield.
Or M. P team members don't NPP equipment.
Our team members are living our values.
Our dedicated team members are delivering value for our stakeholders and shareholders.
On slide four.
Despite the challenging markets the team is meeting customer demand.
Tightly managing all cost.
Aggressively reducing net working capital, especially HW p. inventories.
And delivering positive free cash flow.
Q3 revenue, which was in line with our outlook from the beginning of the quarter.
Improve sequentially almost 11%.
Its end markets continue to recover from the lows in the second quarter.
Hey, W.P. revenue improved sequentially by almost 8% in Q3 well.
Well M.P. revenues improved approximately 18%.
Customer bookings in Q3 represented a dramatic improvement from Q2.
Unlike the first half of the year, we did not experience any material customer booking cancellations are pushing out the borders.
Sequentially.
W.P. bookings were up almost 100% compared to Q2.
In MP bookings were up 36%.
In addition to sequential strength in bookings.
All segments saw improvement on a year over year basis.
Demonstrating the strength of our Q3 bookings.
<unk> backlog was consistent with backlog at the end of Q2 and down year over year by only 5%.
Although revenue was consistent with our outlook.
As a result of our laser focus on cost control and only producing in line with customer demand.
Profitability for the quarter outperformed our outlook from the beginning of the quarter.
Importantly.
Approximately 5% operating margin was achieved with both segments generating positive operating margins.
RMP segment achieved outstanding financial results Rick.
Reporting a 13% operating margin, while revenues were down 19% year over year.
Both segments and Terex overall achieved our targeted 25% decremental margins or better.
We're not satisfied with VW piece operating margins.
We must drive significant improvement.
To restore the segment the industry competitive margins and we will continue to take the actions necessary to deliver on bad improvement.
Throughout 2020, we right sized our inventory levels to the customer demand environment, especially in our aerogel products business.
Their inventory levels are now at a level consistent with 2016.
Which was the last time, there was an industrial downturn.
Going forward.
We're now at a level, where aerial products can manufacturer to customer demand.
Our focus on net working capital management drove $54 million, a free cash flow in the third quarter delivering positive year to date free cash flow.
Overall are.
Our financial performance strengthened significantly in Q3.
I assure you.
We will remain laser focused on consistently improving these results in 2021.
Please turn to slide five.
Our strategic priorities will continue to strengthen our business operations.
So we can succeed through all market cycles.
Including these uncertain times.
We are taking action.
And we're implementing steps to improve.
Strengthen and grow terex.
Through operational excellence, we're strengthening accountability.
With each team member doing what he or she said they would do.
To win in the marketplace requires more than just knowing the score we must understand the score and had the process discipline to.
To drive continuous improvement in the business.
On the cost side Weve been looking at every aspect of the business to ensure we can maximize our ability to be globally cost competitive.
We are laser focused on maximizing revenue.
Aggressively taking out cost.
Not just manufacturing cost.
But also as DNA cost.
Terex targets as you know as a percent of sales to be 12.5%.
Which we achieved in 2019.
However, as sales have declined or.
Our 2020 S. You, an 8% to sales has increased to over 14%.
We are executing on an S. unit cost reduction initiative.
With a target of SDN a percent to sales for 2021 of 12.5%.
This initiative is replacing temporary 2020 cost savings with permanent cost reductions.
We are evolving into a leaner organization.
With fewer organizational levels.
Also as we rightsize the organization, we've been reevaluating and reducing our related company wide footprint.
We recognize that to win in the marketplace, we must have globally cost competitive company wide footprint.
We have been and will continue to take the actions necessary to achieve this objective.
Turning to innovation.
We're listening to customers to ensure our products and services.
Oh for the features and benefits that provide value.
We will provide the right features at the right price to meet customer demand.
Purposeful innovation drives.
Drives improvement in returns on invested capital for our customers.
Allowing us to support their growth.
Finally, Ted.
Turkey is well positioned for future growth because we have strong businesses.
Strong brands and strong market positions upon which we can grow.
We will continue to invest in.
And grow our high performing businesses, including.
Including investing in new products and manufacturing capacity, where demand calls for it.
And we are more focused organization.
I am confident this.
This will result in terex emerging from these uncertain times as an even stronger company with that let me turn it over to Doug.
Thanks, John.
Turning to slide six.
Let me begin by reviewing our Q3 financial results.
I'd like to call your attention to our financial reporting structure as you will notice consistent with Q1 in Q2.
We did not record adjusted Q3 2020 financial results. Instead, we are identifying specific financial called out which impacted our Q3 reported results.
We continue to provide information.
I hope the investment community more easily compare our year over year results.
Looking at our third quarter financial results, we achieved net sales in line with our outlook from the beginning of the quarter.
Overall revenue of $766 million was down 25% year over year.
That's it.
For the quarter, we did see the markets in which we operate continue to stabilize and improve.
For the quarter, we recorded an operating profit of $37 million compared to adjusted operating profit of $90 million in the third quarter last year.
The lower operating profit resulted from revenues being down from Q3 2019.
Combined with adverse impacts from a private flight ability judgment.
Severance and restructuring charges.
We achieved this positive operating results show very disciplined cost control and adapting to the market environment.
Well lower revenues impacted our gross margin and resulted in elevated SG and <unk> as a percent of sales our aggressive cost reduction actions allow terrorists to achieve an approximately 19% decremental operating margin for Q3.
More favorable than our targeted 25% decremental margin.
This decremental margin was achieved despite a $5 million gross profit charges, primarily due to a product liability judgment.
In addition, SGN eight was adversely impacted by $8 million due to team member severance and restructuring.
Neither of these impacts were considered in our outlook going into the quarter.
Excluding these charges operating profit would have improved by $13 million and Terex is detrimental margin would've been approximately 14% in the quarter.
Below operating income interest and other expense was $3 million lower than Q3 2019.
Because of lower borrowings versus a year ago.
Sensibly related to our revolving credit facility being undrawn this past quarter.
In addition, other income was reduced by $1 million due to marking to market, although its third party investment.
We now estimate our 2020 full year global effective tax rate benefit to be approximately 52% compared to our previous estimate of 17%.
During the third quarter, the U.S. treasury revise the regulations that permit a U.S. taxpayer under certain circumstances to exclude from U.S. taxable income not U.S. income subject to a high rate of foreign tax this.
This regulatory change significantly benefits correct in 2020 by increasing our U.S. net operating loss.
Most importantly, we expect that in connection with our Twentytwenty U.S. Federal tax return that we will be able to carry back our 2020 net operating loss to 2015 and expect to receive a cash refund in 2020 one of approximately 30.
<unk> million dollars.
Finally, our reported EPS of 31 cents per share includes the adverse operating impacts to cost of goods sold in SG universe, which were more than offset by the tax benefits that I just discussed.
Turning to slide seven and our segments financial results.
He W.P. sales of $445 million contracted by 29% compared to last year.
Driven by end markets in North America, and Europe being lower.
The aerial products market and our sales in China remained robust.
Utilities market stabilized in the quarter, but remained soft in certain customer segments.
We continue to aggressively manage aerial products production levels to ensure we are not building excess inventory.
During Q3, our aerial products production was 47% lower than Q3 2019.
This continued aggressive production control producing below customer demand allowed us to achieve almost a 290 million dollar reduction in aerial product inventory levels since the beginning of 2019.
As John mentioned area.
Burial product inventory at the end of the third quarter were consistent with 2016 levels.
He W.P. delivered a positive operating margin in the quarter of approximately 3%.
Didn't buy aggressively rightsizing production and costs to align with end market demand.
The W.P. team achieved strong decremental margin performance up 18% in the quarter.
Which includes almost $7 million of charges for a product liability judgment severance and restructuring.
Excluding the impact of these charges ADW teams decremental margin performance would have been 14%.
As expected ADW piece decremental margins were adversely impacted by the opening of our new Watertown, South Dakota facility.
Well it doesn't production buildings were consolidated into one new state of the art facility.
Q3 was challenging for utility team from a production and product output standpoint, as they work through the move into the new facility.
However throughout the quarter the team improved their production output.
H.W.P. third quarter bookings of $404 million or 10% higher than Q3 2019, well.
Backlog at quarter end was $478 million down 3% from the prior year.
At the end of this quarter, a higher proportion of our backlog in E.W.P. was scheduled for product delivery in the subsequent year as compared to the end of the third quarter 2019.
Now turning to materials processing.
M.T. had another solid quarter, achieving 13% operating margin.
Challenging markets.
Is a testament to the M P teens operational strength to deliver these strong.
Positive operating margins on revenues down almost 20%.
Sales were lower at $311 million driven by cautious customer said.
Yeah, <unk> team has been aggressively managing all elements of costs in a challenging market environment, resulting in decremental margin performance up 25%.
Backlog of $289 billion was 8% lower than last year, but up 10% sequentially.
M.P. Swyft business is strengthening through the quarter with bookings up 24% year over year and up 36% sequentially.
Customers in both segments continue to operate through this uncertain time and existing equipment is being utilized but at lower levels.
Turning to slide eight.
Now I'd like to provide you with some perspective on how we currently anticipate the remainder of 2022 develops financially.
It is important to realize we are operating in an unprecedented period and results could change negatively or positively very quickly.
With that said.
As for commercial demand, we have seen our markets stabilized in the quarter, although at a much lower level of demand in 2019.
Consistent with what we said during our Q2 earnings call. We continue to expect revenue for the second half of 2020 to be similar to the first half of this year.
From a segment perspective, we continue to anticipate that year over year Q4 revenue declines will be greater in a WP versus empty.
However, we expect the year over year revenue declines in Q4 to be smaller than Q3 for both segments.
As a result of actions taken principally by a real products during the month of October.
We are planning for at least $15 million of severance and restructuring charges in Q4.
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 and the final quarter of the year for.
For the company as a whole and for each of our segments, including the Q4 charges that I just mentioned.
Finally, as previously communicated we.
We expect the full year 2020, corporate and other cost structure will be incurred equally between the first and second halves of 2020.
We are intensely focused on overall liquidity and free cash flow generation.
Year to date, we are already free cash flow positive and traditionally the fourth quarter of the year is our strongest from a free cash flow perspective.
Based upon current customer demand outlook and cost reductions, we expect our full year 2020 free cash flow generation to be approximately the same as in 2019 on significantly lower revenue and earnings.
Net working capital reductions will continue to be a primary source of Q4 free cash flow generation.
Because of our strong liquidity position, we have significantly reduced and expect to continue to reduce our sales of receivables as a low cost source of financing.
Finally, we anticipate having ample cash on our balance sheet during the remainder of 2020 and would not expect to utilize our revolving credit facility.
Turning to page nine and I will review, our disciplined capital allocation strategy.
Despite the challenging environment, the terex team drove positive free cash flow of approximately $54 million in the quarter.
Resulting in terrorists being approximately $13 million free cash flow positive on a year to date basis.
This accomplishment is ahead of our outlook communicated in Q2.
However, our team members remain vigilant and we'll continue to aggressively manage production.
Especially within our A.W.P. segment and scrutinize every expenditure so terex continues to generate positive free cash flow.
We have ample liquidity with $1 billion available to us and the right capital structure with no near term debt maturities. So we can manage and grow that business.
Turning to gross we may have reduced our expected 2020 capital spending by 35%.
But our reduced level of capital expenditures is still approximately $65 million.
This demonstrates our commitment to investing in the business.
The completion of the new utilities manufacturing facility. It's one of the largest capital expenditures in Terex is recent history.
Also we're taking strong and swift actions to rightsize the business. So Terry can profitably grow in the future.
As John discussed earlier, we remain resolute in tightly managing production and SG and that.
We will continue to aggressively manage the business and generate strong free cash flow, while ensuring we have the right capital structure to manage and grow terex.
And with that I'll turn it back to you John.
Thanks Duffy.
Turning to slide 10.
I continue to lead a W.P. a segment president with a laser focus on improving profitability and growth.
The leadership teams execution of our improvement plans is yielding results.
As demonstrated by the positive operating margin this quarter, but we clearly understand that we have more work to do.
ER Erol's team has always been customer focused.
So we listen and acted on our customers' feedback.
We reorganized our teams and are putting the processes and tools in place to increase the ease of doing business with AAMC.
We are investing in the expansion of our world class manufacturing facility and change or China.
They W.P. team is well positioned with our strong brand and product offerings to participate in this market growth.
From an operational perspective.
They had ever U P team executed in Q3 by.
Driving sequential and year over year revenue growth in China.
Aggressively taking cost out of the business to improve margins.
And swiftly, bringing online the new utilities facility.
It is a competitive industry.
So we are controlling what we can control.
Superior execution.
And aggressively reducing costs to improve margins in wind in the global marketplace.
Turning to slide 11.
Material processing demonstrated once again strong operating performance in challenging market conditions.
M.P. continues to develop product adjacencies and new geographies for its we didnt products and brands, all what demonstrating strong operational execution.
The financial performance of MP relative to market conditions by achieving an operating margin of 13%.
Demonstrates the MP teams strong execution.
NPS bookings stabilize and increase throughout the third quarter.
Resulting in bookings being up 24% year over year.
M. P is a diversified and consistently strong performer.
Turning to slide 12.
To wrap up our remarks.
Terex team members around the world are focused on the right things.
Safety.
Well.
Customers and improve productivity.
We are reducing cost to improve margins, especially within a W.P.
We are driving positive free cash flow by reducing working capital.
Our businesses have a strong features so we are continuing to invest.
<unk> innovative products and services are 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 can sure we answer as many questions as possible. This morning Whit.
With that I'd like to open up for questions operator.
Thank you we will now begin the question and answer session.
To ask a question. Please press star one on your telephone keypad again that is star one on your telephone keypad.
Our first question will.
Will come from.
Steven.
Bill Clinton.
Great. Good morning, guys can you hear me okay yeah.
Wasn't totally clear if that was a done deal but anyway. Thanks for taking the question I guess, if I could just kick it off John or would you you've been out and are managing a W.P. now for a while I think you probably have got your hands around some of the key issues and you're certainly talking.
Strongly about the margin.
Sort of a efforts there so I'm wondering if there's a time when you can sort of lay out some detail here is this going to take a sort of a significant restructuring program that will be announced at some point or is volume kind of the key to getting margins, where you want them to be.
Is there you know some of the tool boxes that you've used in the past as it sourcing is it headcount is it you know facilities reduction yeah.
Skew reduction just any details you can give us because as you pointed out you still have a fair amount of work to do thanks.
Thanks, Thanks, Steve first let me say that or eight W.P. team as his focus.
On driving margin improvement, we're also doing that by maintaining our focus on a customer or this business has a long history of being customer focused and we're going to continue to.
To be customer focus as we drive the margin improvement that's required.
Steve I have been out there for a couple of months working with the team and first and foremost number one safety as I said, it's the most important thing we do and the team has really done a great job on Covance safety and industrial safety on a year over year basis. So we can build off of that as we go forward. The second area is around margin improvement there is near term.
Term actions in intermediate term actions that we're taking on the near term actions, we've taken restructuring actions that we implemented in Q3.
We also implemented some additional restructuring actions here in Q4 that Duffy referenced in his opening comment those restructuring actions are looking at all cost throughout the business.
Both S. unit cost as well as manufacturing cost your comment around you know inventory. The team has significantly improved our site management process and we now believe we're in a position that we can produce the end market demand we've dramatically reduced our inventory during the course of this pan.
Demick in in our eight of U.P. business and I think the good news is as we go forward will be much closer to producing to retail demand.
I might also say, Steve the third thing that team is focused on his market share we can't lose sight of of driving revenue and all environment.
That will be a combination of using the tools that we have implemented around our commercial excellence initiative I think our sales team is doing a great job in these challenging times staying close to the customer maintaining price discipline in a challenging marketplace and so you know you're going to continue to see us execute on our commercial excellence side or the other.
Thing, that's going to help market share as we move forward and revenue as our product development efforts. The team has implemented an aggressive product development plan over the last couple of years we.
We will continue with that as we go forward, our new products that have come into the marketplace J series boom is going to help.
Our EFI booms, our XC line of blooms now that the ANSI standards are in effect. We think all of that is going to help us in the marketplace and we are releasing a Nancy a complete line of scissors and again from a product positioning standpoint, we think we're well positioned as market conditions improve and as as we move.
Ford and then finally, Steve This you know that the other being very clear what the team is cash flow generation just like we do throughout a terex and that really is tightly managing all expenses every single dollar of expense in the enterprise has to be tightly manage while continuing to still invest because we are investing in capital we are investing in our IP.
Systems as we move forward and then aggressively manage working capital and I got it I got it. Thank the global team and eight W.P. team because they've done a great job, reducing inventories in a challenging time, but we've also done a great job.
On our strategic sourcing initiative, which also will help us drive margins as we go forward, but also on our payables and finally working very closely with customers on receivable side, So safety margin improvement market share and cash flow generation is what we're focused on and Steve from a timing standpoint, it's always a challenge.
It won't happen as fast as I want it, but we're pushing it as fast as we as we can.
As we move forward because this business will return to you know the industry competitive margins. That's that's what we're focused on and we're going to get it done.
Okay, Great and just as a quick follow up I mean, what can one of you guys maybe quantify the restructuring benefits you're expecting in 2021 and I'll pass it on thanks.
Duffy would you like to comment more on the benefits I think it will be in terms of our decremental and as we move forward incremental margins you want to comment on that yeah.
No thanks for that to Steve and.
Obviously, we will provide a 2021 financial guidance during our Q4 earnings call and I think that the way to think about 2021 is is that.
We will be fully committed to our 25% or better decremental or incremental margins and quite honestly, we look forward to returning to revenue growth in 2021.
And.
Are the other metric that we utilize are absolutely committed to is the 12.5% SG nature revenue that I referenced in my comments John referenced in his comments and we are absolutely committed to driving the teams. They are so I.
Rather than.
I, it's hard to say a specific or restructuring benefit at this point in time or all the restructuring we are doing today will allow us to be successful with those incremental margins at 25% or better in 2021.
Great. Thank you guys.
Absolutely.
Your next question comes from.
Joe Okay.
Your line is open.
Hey, Joe Hey, good morning, Good morning, John.
A question on it.
He W.P. in managing some of the volatility John and you know it sounds like there's a very clear focus on you had to get a bunch of inventory out you don't want that coming back into the system, but as you think about some of the uncertainty heading into next year and the steep capex cuts across the.
The rental companies this year.
How how do you anticipate managing a move off of the bottom and you know scenarios, where it could be sharp move how do you do that without inventory how are you going to manage this differently from how the company's done it in the past.
[noise] show so first it really goes back to that commercial excellence process and staying close to our customers and really working with the customers to understand the range of outcomes customers are looking at so we can then plan based on those ranges incorporate that into our site plan, it's not that we're not going.
I have inventory, we will have the inventory will manage inventory very closely based on days on hand, Bye Bye bye now by model and by region ensure that we have a competitive lead times are going into the marketplace.
The Genie team historically has demonstrated the ability to flex up pretty dramatically and that's a competency that's been built over years, Oh that competency will remain as we move forward I can assure you Joe after what the team has been through [laughter] to 18 months, taking inventory out we would love the opportunity to.
To respond to a to an increase in market demand as we go forward and I would say the Genie team historically has demonstrated very strong competency in doing that so it's really managing the sale process with our commercial excellence and our sales team staying close to the customer understanding what their demand profiles look like having the appropriate level of.
Inventory to meet those needs and then ramping our our supply chain up and again with the strategic sourcing initiatives that weve implemented working with fewer suppliers. We feel confident we have the ability to do that and again that would be a challenge that the team would truly welcome is to figure out how to ramp.
But significantly versus the challenges that the team has been facing here over the course of about about the last 18 months. So that's how we'll do it and again its process disciplines process tools.
Implementing and executing those will drive our ability to meet customer demand and I'm not we're not against inventory. We just want to make sure. We have the right level of inventory and we will manage going forward. The good news is is now we can ebb and flow in inventory up and down based on the retail demand. So our inventory levels may increase based on.
On customer demand, so we'll manage that aggressively as we move forward and the team's doing a better job of that.
I appreciate that color and then just a second one on on price cost, how you're thinking about inflationary pressures into next year your comfort level with the ability to offset what you have line of sight to.
Thanks, Joe overall, I think the word that we use across the entire business is being disciplined on pricing, but not over producing inventory that I think our customers are being very disciplined in their capex and their rate pricing. So we're being disciplined as well within a W.P.
Going forward, we were going to offset the increases related to to answer you Nancy standards implementation, we've been very transparent with customers on what those cost increases are again disciplined SAP process that we talked about to make sure that we have the right inventory at the right place at the right time and then on the other.
On pricing is part of our commercial excellence initiatives is really pricing waterfall management and again the process and tools in place to do that and to prevent leakage of of what price you're able to obtain and so I think the team is doing a better obviously room for improvement across everything but the team has been doing good job and on pricing waterfall management, if we look at the.
M.P. you know given that 70, 80% of that business is through a dealer channel. We do believe that we will have the ability to offset input cost increases as we go through the year and again the MP business has done a good job managing their inventory.
Throughout and so we haven't had the significant adjustments in inventory on the M. P side as we go forward. So we're going to be disciplined on pricing, we provide tremendous value for our customers and that's how we're looking at pricing as we move forward into a into the fourth quarter and into 2021.
Thanks very much.
Your next question comes from.
Make guilt free.
With Baird.
Good morning, everyone can you hear me, Okay. We can hear you fine.
All right great. So I.
I want to go back to two this comment that you made about 50 and as a percentage of sales being 12, and a half you know I am I'm wondering kind of how you're thinking.
How you're essentially you came up with this with this figure and.
How we should be thinking about actual dollars spent on a go forward basis. I mean is the idea here that you're going to keep SGN, a flattened get leverage of that or can we actually see maybe a further decline and that's just a dollar spent next year. If you could elaborate on that I think it would be really helpful.
Yeah, Thanks, Mike I'm going to have Duffy comment on that he is leading the charge for us as we look at S. unit as a percent of sales soon.
Throughout the entire company. So Duffy would you comment on that please.
Sure Thanks, very much John and.
So make our our focus is really on the 12.5% as gene a sale or you look looking here at Q3, and Q2 Q2 and Q3, we had a run rate of about $100 million or ESG DNA in both its course now that's up here in 2000.
20, that's above 12.5% to sales because of the low level of revenue that we've been experiencing.
Experiencing and here in Q3, we also had about $70 million of restructuring charges that were included so hundred million dollar run rate.
$800 million run rate does include the benefit of the temporary cost reductions that we took in the beginning of the second quarter.
Reductions in compensation no merit increases reduced in bonus opportunity for 2020, all of those costs. They will return to 2021. So what our program has been focused on is not just bringing down the absolute level of SGN aid for sure we're doing.
That but also being in a position that when we get to 2021, we have replaced the temporary cost reductions that were benefiting from here in 2020 with permanent cost reductions and they are.
Theres no silver bullet here. It every single day, absolutely questioning every expenditure and making the business more efficient and both within the businesses themselves and in our corporate cost structure.
I also don't want to make sure that you understand that we are balancing between cost reduction and making investments where warranted such that we're in a position to continue to drive growth in the business parts and services engineering and new product development are examples of that so.
I would say is that as you think about your 2021 model or our objective would be to set up our.
Our SG and 8% to sales will be 12.5% or less so to sale to sale.
Each quarter through 2021 [noise].
Oh, okay.
And then I guess my follow up John going back to a W.P. It's.
It's very clear that you know the inventory situation is well in hand at this point.
And you Youve made quite a few changes to the business. So I guess.
My question is looking beyond the fourth quarter and recognizing that you've got additional restructuring and things are you going to do there.
Do you think that most of the changes that you had to implement structurally to that to that business through that segment are in the rear view mirror and now we're just kind of looking at hopefully getting some better volume and traction on that where is this still more structural work that you are.
I need to do and 2021 thanks.
Thanks for the question Mig we continue to look at all aspects of cost as we move forward to ensure that we're globally cost competitive and so maybe we're going to continue to do that.
Again to ensure that we're globally cost competitive.
As we move forward. So we'll continue to look at all elements of our cost structure as we move forward and make the appropriate decisions to ensure that we're globally cost competitive and we return this business to more of its historical operating margin performance.
Okay. Thank you.
Your next question comes from.
And Dynagas with J.P. Morgan.
Hi, good morning, everybody.
Yeah.
Hi, I appreciate the discussion that as Shane is trying to <unk> percent of sales but.
That's not much value to us and that's we know what the satisfaction level is going to be so can you talk about what you're hearing out there from your customers and large customers small customers.
You know what what.
What do you think sales might look like after both segments as you head into that 2021, I know you don't want to give the guidance, obviously, but just directionally what are you hearing.
So I'll talk and thank you for the question and I know all of US are looking for what does it look like as we move forward. So I'll give a little kind of market commentary and then I'll ask duffy to kind of speak to what we.
Look like from a revenue development standpoint.
For 2021, so as we look at the AWB business and you know we have seen equipment utilization improve as we move through the quarter, it's not up to 2019 levels, but we have seen utilization improved within North America, I think that was indicative of seeing our bookings level imply.
Prove in the quarter we.
We do believe that the replacement cycle is going to be strong it's not absolutely clear when it starts but if you just look at the age of the of the aerial equipment. There is going to be a strong tailwind associated with the replacement cycle in the future.
I would say similar story in Europe, but a little bit more of a mixed story in Europe more based on on country specific southern Europe, it's been slower to recover than frankly, northern Europe, but again, we did see orders improve we saw substantial improvement and in in China as that market continues to accelerate now.
Just as the economy recovering from the cold it situation, but also with the adoption of aerial products in that marketplace. So that that that market is continuing to grow very significantly and then our utilities business. We saw a little slower demand this year and in the rental specialty rental comp a custom.
Were channel, but thats, beginning to pick up and it really relative stability with the regulated utilities and the co ops in that market. So we would anticipate the rental channel within the utility segment to show improvement on a year over year basis if.
If we then look at our across the RMP and I won't necessarily go through each and every one of the businesses, but if we look at our crushing and screening side of the business. We did see improvement as we move through the quarter orders were up significantly in that part of the business I think that you know I think there's going to be some tailwinds there.
In that business as customers respond to that to the market conditions to government stimulus around the world. One of our businesses are within MPC that has been challenged this year was our material handling books business and that was really two factors number.
Number one steel pricing being down pretty substantially drove scrap metal prices down we're starting to see that recover and recover pretty quickly as well as that was one business within our MP segment that did have some dealer inventory at higher levels coming into the year. So the dealers have had to bleed off that inventory.
As we've moved through and we think that will improve as we move into 21, continuing to see growth in our environmental business. It's a smaller business within MP, but we've seen some really substantial growth in that business again smaller, but we've seen really like our CBR business has performed extremely well here. This year I think that's right.
I don't have a lot of the storms and then you know the concrete businesses. This is an interesting one on the concrete side. It was it was very weak in Q1, but would be began to see an improvement in Q2 and into Q3 orders are actually above significantly above prior year, and I think and that's that's speaking to the south.
Turning to the residential construction market in multifamily housing, which is very strong that business serves that market segment.
Continue to see the other businesses performed quite well.
They are picking carry business down in Australia, and we think that will continue into next year and then our cranes business grains has been a bit of a challenge our tower Crane business saw order recovery in Q3 on the power side I do not.
Not necessarily on our tea business. The RT business are rough terrain Crane businesses is challenged we are rebuilding the commercial team there and that's been more of a challenge and then finally in India. It's been a good growth market for us within the MP segment. The coded crisis has impacted India, a fairly substantially and so we would anticipate as.
Is that a media rates through the course of the fourth quarter and into next year that would begin to see India returned to to a strong market for us. So that's just have a quick around the world look and what we're anticipating what we're seeing now and what we're anticipating is what we've all said it really it really does depend on the pace of recovery on that.
On the pandemic and how that that changes overtime and were going to adapt and respond to that to that market. So that's a bit of an around the world by company look.
Look at how we're seeing seeing the markets develop and Duffy would you like to talk about the 2021.
Revenue outlook.
Yes, sure just building on what John said, a moment ago about the degree of uncertainty that we're experiencing.
I'll I'll refrain from providing an absolute level of expected revenue for 2021, but recognizing that you'll be building models over the next months, what I would say that.
I'd say is that what we're currently anticipating in terms of revenue development over the course of the year is that our total company revenue for 2020 will be similar to.
The development that we saw here in 2020 to 2021 development will be similar to what we saw here in 2020 with revenue being relatively evenly split between the first and the second half of the year.
Is as is normal for our business, we are expecting that the second quarter revenue will be the highest of the year end.
And that we will return to growth in the second quarter of the year and we are currently anticipating that we'll continue to sustain that revenue growth year over year. During the second half of 2021, and you know quite quite frankly, and we're looking forward to being able to return to growth to revenue growth.
In 2021, so those are a few thoughts and bill will provide more absolute.
Absolute amounts of 2021 financial guidance during our Q4 earnings call.
I appreciate that and just one quick follow up and you know you talked about the progression and potentially revenue.
Third 2021 could you just.
Distinguish between a WPS variances and P. it ever you expect similar across both I think it's similar across both in terms of the comments I just made.
Yeah.
Okay, I appreciate that and the interest of time I'll get back in line. Thank you. Thank you and.
Your next question comes from.
Jamie Cook with credit Suisse.
Hi, good morning, and morning, Nice quarter I guess, just two questions. Most have been answered I'm. One can you just talk to what you saw in sort of demand trends in October and understanding what you said about 2021 revenue and how to think about the progression.
Our customer, saying anything differently about how to think about what our trends whether you know we're hearing potentially there's risk they could make decision sort of later in the year as lead times are short so I'm wondering how you're thinking about that and whether that's changed since last quarter and then my second question, John I think you alluded to opportunities.
You know Tim to improve your market share in certain markets, just sort of where you're targeting and how you balance sort of you know returns margins versus pricing as you think about gaining market share. Thank you.
Thanks, Jamie in terms of the progression in conversation with customers. We haven't seen we continue to see the improvement is as we've moved through the quarter, obviously its subject to what what occurs with the with coated but we have we have seen it improve through the through the quarter.
In terms of customers on the on the E.W.P. side.
Jamie there, they're basically sticking to their what I'd call their standard.
Annual operating plan process, and so thats continuing as we move through the third excuse me the fourth quarter. So we would anticipate as we get to the end of the fourth quarter and into the early first quarter to have much better clarity in terms of the what customers are looking for and I would say, that's that's North America in Europe and like.
I was in China. So right now we're seeing customers plan their business on their normal planning schedules and that's what we're anticipating as we move forward and again, we'll have you know much greater clarity at the end of Q4 and into early Q1 in terms of what the customer demand.
Opportunity is and in terms of Jim you're absolutely right in the way you phrased the marketshare side in in market share is a balance its a balance we're driving improvements in our product and product offering listening to the voice of the customer to ensure that we bring products to marketplace with the.
Right feature and benefit fit at the right price and it's a balance of having inventory in lead times that are competitive in the marketplace not too much not too little and as I say the from a process improvement standpoint, the team has really.
Improved our processes of looking at that to ensure that we have the appropriate level of inventory to ensure that we are maintaining indoor growing in our expectations is when we bring new market new products to the marketplace that we should expect an increase in <unk> <unk> and.
And Mark and I would say overall, Jamie our market share has been relatively consistent.
With the exception being in China, and we have seen market share declined, but we've seen dramatic revenue increase in China, It's really the increase in the market as well as the increase in the number of reporters in the market, but we are we have to be focused on market share you've got to balance market share and margin to be successful and competitive and it's in it is about.
And we will continue to find the right balance between those two elements as we move forward.
Thank you I'll get back in queue.
Operator.
I'm sorry, David.
Your next question comes from David Raso from Evercore.
Hi, Thank you for taking the question Mark.
Good morning, David just good morning can you just clarify when you speak to 12 and a half a percent of sales will be s. DNA and let's just keep the revenues as they are right now for 2020.
It equates to roughly 80 85 million of savings year over year are we saying that's a similar amount of cost that come back in the end. It shows up in Cogs I'm, just sort of make sure. We all understand when you say 12, and a half is that before costs come back and they come back and you know they don't and May come.
Back in M&A or can you just help us understand exactly.
Is it a 12.5% number even after cost return.
It is that you want to go ahead Doug.
Yeah sure so David I will confirm to you it is a 12.5% SGN a for sale.
After the temporary cost reductions compensation to reduction is lack of merit increases lack of bonuses that we.
Imposed on our team members and Twentytwenty come back effective January Onest, Twentytwenty, one and I do want to also say that the 12.5%.
As she needs to revenue that's.
That's our Oh, we spend our long term target and so today. It is our objective and our target to be at 12.5% SG Nate to revenue in 2021 [noise].
You know we're in a very uncertain time and.
So that.
You know if revenue Doesnt increase where we'll have work to do but we will we will always rightsize, our SGN eight to the size of the business that we're operating it at any point in time.
Okay, so just to be clear them.
That's a number even after accounting for costs that would come back.
Yes, Sir.
Yes, and and just to be clear to the tax rates moving around what kind of base tax rate should we be thinking about inlets and don't worry about biden potentially higher rates just as we know the world today right. Now is there's a 30% tax rate to use I'm just trying to get a sense of the P.S. impact yet from anybody.
You're asking about 2021, I presume yeah, I mean, if you give me the fourth quarter might be interesting given <unk> [laughter], well I talked I talked in my prepared remarks about an expectation of a 52% annualized tax benefit for a.
2020 so.
That carries through a through the year for the full year and as it relates to 2021, we'll provide more specific financial guidance. During our Q4 earnings call, but I would say is that if you look back over the last to come.
A couple of years, we spend are operating in a about a.
Uh huh.
Mid mid Twentys tax rate, so yeah, I guess for modeling right now you could do something like that.
Yeah, I'm just trying to if that's the case then we're talking about and I know you said if revenues don't grow it might be a little more challenging but the target is 12 and a half that is about 85 to 90 cents a share of year over year earnings growth simply from that.
You know cost down that path.
So on a revenue decline NSG and I just want make sure were level a level set and that's what we're.
Right.
And and what you just said is absolutely a that is absolutely correct, which is that to the extent there's no revenue growth. It will make that target more challenging for us, perhaps takes a little longer to get to it but we're absolutely committed to 12 and a half irrespective of the revenue.
[music] level, it's only a question of.
How long it takes to get there.
And lastly, do you expect to be E. P. S positive in the fourth quarter. The 15 cents of costs that flow and made it makes it a little more challenging there's always a little bit of fourth quarter kind of accrual accounting catch up and the margins are a little lower but given the revenues aren't terribly different between Threeq and Fourq you.
Just trying to make sure I appreciate.
How were thinking about profitability in the fourth quarter.
I think that the fourth quarter in terms of the profitability or otherwise it with the fit with the $15 million.
Or restructuring that we took is yeah.
Yeah, right around the breakeven level and I think thats whats implied by the guidance that we provided today.
Definitely yes.
At Cps break even not EBIT breakeven, let's just Oh of course, yes. Thanks, just showing that for me I really really appreciate the time. Thank you. So much. Thank you David.
Yes.
Your final question comes from Ross Good morning, Thanks Erica.
Hi, Good morning, guys. Thanks for squeezing me in at the end components right absolutely now I just wanted to I was just curious in terms of free cash flow I mean, clearly you guys are trying to.
We've been trying to address that for long time, and we are seeing some improvement over the last several quarters at least year to date.
Is there some type of like free cash conversion ratio, we could think of do you think of it all as cash flow from ops as a percentage of sales or free cash flow as a percentage of EBITDA I'm just wondering for modeling purposes, just directionally, how do we think about it I get that your intention is to have that number be positive.
For the next.
A couple of years, but anything else can help with their.
You want to take that.
Sure sure. So Ross what I would say is that we are absolutely focused on.
Driving free cash flow generation and.
If I take you back to 2016.
Hi, John.
Score card.
At the time was that we were seeking to have our free cash flow be 100% of net income.
Now I will acknowledge that we've been showing that the record report card hasn't been quite what we would want to bring home to mom and dad are over the last couple of years. That's a lot to do with the level of Capex investment that we've made it's a lot to do with the aerial work platforms.
Inventory challenges that weve been working through but in general the metric. We're focused on is free cash flow equal to 100% of net income and.
The team I assure you that the team is very focused on net working capital management.
You see what we've been able to do now with the aerial product inventory levels are at 2016 levels $54 million of free cash flow in the third quarter. So we're we're intensely focused on continuing to drive positive free cash flow to generate shareholder value.
And is that is it a 100% of GAAP net income or adjusted net income because obviously, there's been a big difference one versus the other.
So I would say, it's that especially here in the 2020, where were not we don't have any adjusted result, its GAAP net income.
Okay.
And then just my follow up was on the HW P. Ordering the 10% order increase year on year can you give any color as to where that's coming from is it coming from the national.
Rental companies or more from the utility business more from China or kind of all the above.
Yes, Ross I would say, it's a bit of all of the above clearly in China. We saw we saw good year over year growth in China on the order side.
We also saw in the backlog, we have a higher percentage of national accounts in in in the backlog. So we saw the national accounts as they adjusted from Q2 into Q3 and Q4 that was also.
An important part of the booking increase as a as we ended the quarter. So it's pretty much all the above.
And that would go with what you were saying you know a higher percentage of the backlog is for the subsequent year would that be true for the national accounts as well as magid, they they're not looking to take on additional fleet at this this time of the year.
I would say the national accounts.
Our taking some incremental fleet and that that has been planned and they have been executing to that plan. So there is deliveries in Q4, but some of it will across the board both independents and national accounts cross over into 2021 this year.
Thanks, guys.
Thank you Ross.
Gentlemen, do you have any closing remarks, yes.
Yes, thank you operator.
Thank you for your interest in Terex, Most importantly, I hope to you and your families remain safe and healthy by phone the appropriate COVID-19 protocols I think it behooves us all to do that.
Thank you for your interest in Terex and as we'll discuss the Terex team members I want to thank them, we are executing well, we're improving our execution in these very challenging times and we believe we're positioning this business for 2021 and beyond so that we can have success in a challenging and in all markets to include challenging markets. So thank you for your answer.
Just to end Terex, if you have any further questions. Please don't hesitate to reach out to Duffy and Randy Wilson have a great day. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].