Q2 2021 Terex Corp Earnings Call
2021 results conference call.
At this time all participants are in a listen only mode a brief.
A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Randy Wilson Director of Investor Relations for Terex Corporation. Thank you Sir you may begin.
Good morning, and welcome to the Terex second quarter 2021 earnings Conference call a copy of the press release and presentation slides are posted on our Investor Relations website at investors Terex Dot com.
In addition, the replay and slide presentation will be available on our website.
I'm joined by.
Chairman and Chief Executive Officer, and John Duffy, Sheehan, Senior Vice President and Chief Financial Officer.
The prepared remarks will be followed by Q&A.
Please turn to slide 2 of the presentation, which reflects our safe Harbor statement.
Today's conference call contains forward looking statements, which are subject to.
Non-GAAP 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.
The risks and I'll turn it over to John garrison.
Good morning, and thank you for joining us and for your interest in Terex.
Take a moment and emphasize once again that terex vaccines are always guided by our values.
We consistently act with integrity operating with excellence and care for our team members.
Customers and communities.
That is true every quarter, but it has been especially important in the past 18 months.
The World has dealt with unprecedented challenges brought on by the COVID-19 pandemic, while risks remain many of the world's economies are moving forward.
I would now.
<unk>, Inc. Our team members around the world for their continued commitment to.
Towards <unk> harm safety culture, and Terex way values.
Safety remains the top priority in the company driven by think safe.
Workspace home safe.
Terex team members have contributed to our effort.
We continued to produce in surface equipment for our customers.
While following the protocols and maintaining a safe working environment.
I would like to offer my gratitude to our team members and distributors work through so many unique circumstances over the last year.
We owe our results.
To be incredible efforts of our operations in parts team members, who kept our facilities are running.
Our sales and service team members along with our distributors have also gone above and beyond to meet the needs of our customers.
Finally, we are proud to be a values based company with prop.
<unk> leadership and environmental.
Social and governance practices.
This past quarter, we spent time speaking to some of our investors regarding ESG.
You'd like to learn more about our initiatives. Please see our investor Relations website.
Welcome the opportunity to speak with you regard.
Our ESG program.
Please turn to slide 4 now let me recap some of our results, which Duffy will describe in greater detail. We continued to deliver positive results as customer demand remained strong during the quarter.
While revenues were below our expectations due to.
Supply chain challenges.
Limiting production output, we increased operating margins and bookings in both AWP and MP dramatically year over year.
We significantly improved our second quarter earnings per share compared to last year, and we are increasing our earnings and free cash.
Flow outlook for full year 2021.
AWP and MP continued to effectively manage supply chain disruptions.
As a result of a strong execution in both segments.
Quarter 2021 operating margins improved dramatically.
So 11.8.
8% for the company.
With both segments delivering double digit operating margins.
This represents a 170 basis point adjusted operating margin improvement on revenues, 20% lower than the second quarter of 2019.
Our intense focus on net working capital management and improved profitability drove $101 million of positive free cash flow in the quarter.
And more than $140 million of free cash flow year to date.
During the second quarter, our team continued to respond to increased.
Increased customer demand.
Effectively manage supply chain and logistics disruptions.
<unk> manage all costs.
And delivered improved margins and outstanding positive free cash flow.
Our financial results demonstrate that our strategic priorities are working to improve.
Tony and deliver positive financial results for shareholders.
Please turn to slide 5.
We delivered strong financial results as our strategic operational priorities of execute.
Innovate and grow continued to make excellent progress.
Fair.
Because we continued to improve characters global cost competitiveness.
We expect our SG&A as a percentage of sales to be below our target of 12, 5% for the full year 2021.
We are maintaining strict cost discipline, while recognizing that growth in the.
<unk> will necessitate investment spending.
In the first quarter, we announced the planned move of our Oklahoma City <unk> handler production to Monterrey, Mexico.
This action is on track and will reduce the cost of manufacturing our <unk> products from the North American market.
Business.
Tim is addressing continued supply chain disruptions across various supply inputs and product lines.
Pliers and logistics providers are currently working hard to ramp up and meet our production requirements.
And we are committed to meeting customer demand.
Our team.
Members in both segments have worked hard to adapt and maintain production schedules.
Turning to innovation we.
We continue to listen to our customers, ensuring our products and services and the features and benefit that provides value.
We have also invested in our connected assets and.
Digital capabilities to better serve customers.
<unk> for example.
Our new Genie Microscissors increases from the job productivity.
Terex utilities recently introduced a new bigger Derrick for construction and maintenance of the electric grid.
And MP continues to develop.
Implement and rollout of digital solutions.
Such as connected dealer inventory.
<unk> and e-commerce.
Finally, we are investing in inorganic opportunities for future growth.
We recently completed 2 actions.
We acquired a facility in China.
<unk> production to meet increasing demand for our industry, leading mobile crushing and screening products and we are excited about the growth prospects in China.
Second.
We completed a bolt on acquisition.
Purchasing MBS international.
Which is a well established business.
So let me do the aggregate dramas that broadens our product offerings.
This is not a financially significant investment it demonstrates our progress with inorganic growth via bolt on acquisitions as we previously communicated.
Terex is well positioned for growth in 2021.
Hey, John because we have strong businesses.
Strong brands and strong market positions.
We continued to invest including a new innovative products.
Digital capabilities and manufacturing capacity.
Turning to slide 6.
Hi.
<unk> and MP segments continued to perform well allow.
Allowing us to capture the benefits from the positive market fundamentals that we are seeing.
First in June the.
The current market dynamics.
To a multi year replacement cycle for access equipment.
The average age of fleet globally is.
And leasing and customers need to replenish their fleets. So the replacement cycle is kicking in.
We are beginning to see positive indicators for non residential investment as well as continued strong order activity.
Before wrapping up my comments regarding gene I am pleased that we announced.
Announced earlier this week that Simon Easter was named President of <unk>.
I thoroughly enjoyed working with Simon and the Genie team over the past year Simon is the right leader from the Genie business.
Turning to our utility business day.
NAND is strong across its end markets.
Increased tree care rental and investor owned utilities and.
In addition, we are experiencing strong growth in our utilities parts and service business.
Next in materials processing, we expect global demand for crushing and screening equipment to continue to grow.
Economic growth construction activity and aggregates consumption are the primary market drivers.
We're seeing strong markets from the cement mixer material handling and environmental businesses.
In addition.
Global monetary and fiscal stimulus program.
Broadband supported stronger demand in our end markets.
Overall, we are seeing robust market conditions.
Round the world for our industry, leading products and solutions with that let me turn it over to Doug.
Thanks, John.
Turning to slide 7 let's look at our second quarter results.
Overall revenues of $1 billion were up 50% year over year.
Both of our operating segment revenue was up significantly.
For the quarter, we recorded an operating profit of $123 million.
Compared to only $7 million.
In the second quarter of last year.
We achieved an operating margin of approximately 12% from disciplined cost control and fulfilling as much customer demand as possible given the realities of the global supply chain during the quarter.
The second quarter operating profit does.
Does include $4 million of benefit from the release of our financing receivable reserve and we're recording about that receivable related to prior years.
Offset by a $1 million charge for a business impairment and restructuring.
Improved gross.
Margin and lower SG&A as a percentage of sales allowed <unk> to expand operating margin significantly year over year.
Interest and other expense was approximately $22 million.
Higher than Q2 of last year drew.
Driven by 26 million.
<unk> of cost in connection with the refinancing of a significant portion of our capital structure.
Offset by $4 million and interest savings.
Our second quarter 2021, global effective tax rate was approximately 17%.
Burdened by a mix of discrete items in the quarter.
Our tax rate estimate for the full year remains 19% consistent with our previous outlook.
Finally, our reported EPS of $1 <unk> per share includes <unk>.
$23 million of interest charges and other called out debt I just discussed at.
Net amounted to a 26 per share reduction in EPS in the quarter.
Turning to slide 8 in our AWP segment financial results.
AWP sales of $595 million.
We're up 44% compared to last year, driven by a dramatic improvement in all our global markets.
The utilities market improved significantly as evidenced by strong.
Customer bookings.
AWP delivered double digit operating margins in the quarter, driven by increased production and aggressively managing our costs.
Second quarter bookings of $747 million were up dramatically compared.
To Q2.2020, while backlog at quarter end was $1.4 billion close to 3 times the prior year.
Now turning to slide 9 and material processing Q2 financial results.
<unk> had another great.
Water.
Sales of $441 million were up 67% compared to last year.
Driven by strong customer sentiment across all end markets and geographies.
The MP team has been aggressively managing all.
Great Vincent cost as end markets improve.
<unk> net operating margin above 16%.
It is a testament to the MP team operational strength to deliver these robust operating margins.
Backlog of 868 million.
<unk> more than tripled from last year and was up 22% sequentially.
And so our business as strength in through the quarter with bookings up approximately 160% year over year.
Customer demand in both segments and very.
Positive equipment is being ordered utilized and service.
As end market demand continues to remain strong.
Turning to slide 10.
I will now review, our updated financial outlook for the full year.
This outlook takes into consider.
<unk> the current end market demand environment.
As well as the supply chain headwinds that we have discussed today.
As for commercial demand, we have seen our end markets remain robust over the course of the second quarter.
All other.
Other things being equal.
We expect continued end market strength in both segments over the remainder of the year.
And increasing levels of AWP customer fleet replenishment.
Our full year revenue outlook is limited, though as a result of the <unk>.
The ability of components from our supply chain.
From a quarterly perspective, we now expect revenues for the full year to be slightly higher in the second half than the first half of the year with the third quarter being the strongest of the year.
We.
We continue to expect both our operating profit and margins to increase each quarter year over year in 2021.
However, as a result of commodity cost increases outpacing customer price increases the absolute amount of operating profit in.
In the second half of 2021 is expected to be lower than the actual operating profit achieved in the first half 2021.
We continue to plan for total company incremental margin for the full year 2021, which meet Oregon.
Or exceed our 25% target.
As a result of positive first half callouts corporate and other costs are expected to be slightly higher in the second half versus the first half of the year.
Including <unk> 26 per share of costs.
Cost per refinancing of our capital structure and the other call outs in Q2.
Our full year EPS outlook is increased to $2.85.
$3.5 per share.
Based on sales of approximately $3.9 billion.
Quarterly earnings per share are expected to be generally consistent with the development of operating profit during the year.
For the full year 2021, we are estimating free cash flow of approximately $200 million.
Reflecting our strong year on positive.
It is cash generation.
Full year free cash flow includes approximately $75 million.
From income and bad tax refunds, which are not expected to reoccur.
During the first half of 2021, we received approximately $35 million.
Of these refunds.
We continue to plan for capital expenditures net of asset dispositions of approximately $90 million.
The largest project included in capital expenditures as from the <unk>, Mexico manufacturing facility.
Turning to slide 11, and I'll summarize our updated 2021 EPS outlook.
We expect this strong customer sentiment demonstrated in Q2 by our AWP and MP customers to continue throughout 2021.
Our 2021 full year EPS outlook reflects first.
Our outperformance over the first half of the year.
Second the operating profit contribution on additional revenue for Q3 and Q4.
And third net.
Net cost pressures from material cost headwinds.
Overall, our 2021 outlook represents a significant improvement in operating performance when compared to 2020.
We will continue to aggressively manage costs, while positioning our businesses.
<unk> for growth.
Turning to slide 12, and I'll review, our disciplined capital allocation strategy.
Our team members remain vigilant and we will continue to efficiently manage production and scrutinize every expenditure.
The strong positive free cash flow of $101 million.
In the quarter demonstrates the focus and discipline our team members continue to demonstrate to tightly manage net working capital.
Terex has ample liquidity we have over 1.
With $1 billion available to us with no near term debt maturities. So we can manage and grow the business.
Our strong liquidity position and cash generation allowed us to prepay $83 million of term loans during Q2.
<unk>.
Which is in addition to the $196 million of term loans prepaid in early February.
In addition, we continue to pay our quarterly dividend.
We are committed to strength in terex is balance sheet, while maintaining flexibility to.
Too cute on our organic and inorganic growth plans.
And with that John I'll turn it back to you. Thanks.
Thanks, Pat turning to slide 13 to wrap up our remarks Terex team members around the world are focused on the right things.
Safety health customer.
Customers and improved productivity.
End markets are strong and the team is managing supply chain headwinds.
We are driving positive free cash flow we have.
<unk> to invest in innovative products to meet increased customer demand, we are focused on both organic and inorganic growth.
As a result of these actions.
Terex is well positioned to deliver strong 2021 results with that let me turn it back ordering.
Thanks, John as a reminder, during the question and answer session. We ask you to limit your questions to 1 and a follow up to Charlie answer as many questions as possible. This morning.
With that I'd like to open up for questions operator.
Your first question comes from Mig <unk>.
No Brian <unk> with Baird.
Thank you. Thanks for taking my question good morning.
Good morning, Ed.
So I guess, where I'd like to start.
AWP.
Very good order intake you got a bump.
1.4 billion of backlog, but obviously based on your updated guidance here as sales in the back half expected to be only about $1.1 billion.
You talked.
But the supply chain being challenging obviously in having some some issues with parts availability, we heard back from 1 of your competitors as well.
I guess I'm wondering.
How much of this discrepancy backlog versus second half revenue is driven by this element as opposed to.
About our customer deliveries being scheduled into 'twenty, 2 and shown up in our backlog at this point.
Yes, Thanks Mig.
Thanks for the question I would say almost all of the <unk>.
Deliveries for in the AWP.
Our group announced specifically gain really are a result from the supply chain.
Just lessons are that we're seeing in production schedules sliding.
As a result of the disruptions.
We are seeing our teams staying in very close contact from we can talk more about that with Thomas.
The supply side and with customers, but I would say most of that is a result of the supply chain disruptions and sliding a production schedules.
As it pertains specifically to the <unk> business.
Okay.
And then looking at slide 11, you detail Tim.
Cost pressure there.
By my math.
Call it $8.9 million.
Price.
Price sharing to me at least that seems like a relatively low number given your revenue base.
All the things that are happening out there.
Can you give us a sense for whats behind us in terms of how you came up with this figure.
And.
Is this sort of a number that we can carry into next year.
Or are there things that could mitigate this debt.
Cost pressure as we think about 'twenty 2 thank you.
I'll start there Mig.
Buffy and.
We certainly have.
Non seeing inflationary material cost.
ASP pressures.
Over the course of this year. If you go back to Q1 and our updated outlook at the end of Q1, we had included.
About 55.
Cost pressure at that time and.
Since then and that was really mostly.
Police deal related, but we've seen them face deflationary cost pressure expand.
2 other products such as resin based products right.
Other commodities and so.
As a as a team we are.
We're working hard to mitigate those.
<unk>.
Price increases by suppliers and so the 10 cents a share that you'd see outlined on chart 11 represents sour.
Our best estimate at this point in time the.
The amount that would be.
<unk>.
Need to be absorbed in order to.
Production in the second half of the year too.
The second part of your question about.
And 2022.
Certainly we talked in Q1, and certainly continues to be true here at the end of Q2 is that debt.
We are.
Our price cost for 2021 is not.
<unk> is negative.
We didn't re price the backlog.
When we increased prices in the first quarter of the year and debt.
So as we go into 2022, it certainly wouldnt be.
Our objective to be price cost neutral and no debt.
Net.
Well of course, it depends upon what develops with respect to material costs during the second half of 2021.
Thanks, Mike Operator next question.
Yes.
Our <unk> comes from the line of Nicole <unk> with Deutsche Bank.
Yes, Thanks, good morning, guys Hi.
Hi morning, Nicole.
And can you talk a little bit about a little more about the supply chain constraint. So what I'm curious about is how does this actually caused production stoppages, whether it's rolling.
Dave are you have to send people home or how do you guys been able to predict and maybe similar question like you have excess equipment kind of depending on the line in sort of <unk>.
Finished metal relating from like a few components to come through before it can be shipped.
Thank you Michael and a great question.
So the supply chain disruption that we're experiencing and again, we're not unique.
As a global manufacturer.
<unk>.
As demand has dramatically increased.
Although we were staring at her the best in our.
Get some questions about the market that the market demand has been quite strong.
What.
What has happened is.
Global integrated supply chain, there's been disruptions rolling in that supply chain as a result of COVID-19 that coupled with disruptions in global logistics, both see range air freight and ground freight have created deliveries are challenges for.
For us so what our teams have to do is they have to decide what parts are going to be available.
And then made the schedule.
Many cases exactly as you indicated Nicole we will build a unit.
And put it out what we call into the hospital.
Then bring the unit back in.
When the parts arrive in terms of absolute plant shutdowns, we have not experienced that the team has done a great job managing this but we have had to shut value streams down for a couple of days awaiting parts.
A lot of overtime as you can imagine on the rework.
And it impacts our productivity, but the team is focused on meeting the needs of the customer overcoming this disruption and the supply chain will continue to improve but as we look forward over the next.
2 quarters quarter 2.
We are seeing this level of disruption.
Year to day basis, but our team is doing a masterful job of overcoming but it does impact our ability to ship and it doesn't impact our cost position in terms of our labor productivity. So yes, we are doing that literally around the globe, Tim can figure out what we can build rebuild it and sometimes we build it partially.
On if they bring it back into the shop backing from alive.
Put on the parts and then and then ship it and again the team did a great job in the second quarter.
Over time, we think this is going to improve but that is from world that we're operating in today from a supplier disruption in our supplier uncertainty standpoint.
Yeah.
Got it thanks, John that was very helpful.
Maybe just as a follow up on the SG&A guidance, taking it down to 11, 5% I guess what is the biggest driver of that is that anything to do with.
The temporary cost cuts not coming back as quickly or maybe just returned to work happening slower just trying to get a sense.
And if we should be expecting a return to that 12, 5% target as we move into 2022.
So thanks, Nicole and.
I think there's 2 factors that go into the SG&A I'll say movement versus our guidance at the beginning of the year.
First is.
Obviously, the topline revenue that is.
The denominator in the calculation has increased.
Which brings the percentage down that said.
As we went into the year the incentive compensation.
Was <unk>.
Planned at.
At 100% of achievement to our let's call it argued and with the <unk>.
Increasing our outlook for the year, we are accruing incentive compensation for the team had above target levels, which increases the amount of SG&A.
In fact, the absolute.
Absolute increase in SG&A is.
Virtually 100% attributable to increased incentive compensation and I think that's important.
To note because we're really treating SG&A.
Year as a fixed cost.
And irrespective of the revenue increasing other than the <unk>.
Incentive compensation, which we would owe under the plan.
We're not.
The team is maintaining really strict cost.
<unk>.
Out in future periods to your point about in the future.
In future periods.
I do believe that there will be investments that will be required to grow our business and to maintain.
The debt.
Customer relationships to investing.
For the system, but.
Our objective is to continue to be at 12, 5% SG&A or lower.
And I would expect debt.
If we're looking at debt.
A positive commercial environment demand environment again in 2022.
That we would be.
Tim.
On the lower end of our target.
Thanks, Nicole operator next question net.
Question comes from the line of David Raso with Evercore ISI.
Hi, Thank you for taking the time John.
John for you to pass the baton onto assignment.
AWP obviously.
Second quarter margins pretty strong you obviously had gains come from his time for you to sort of.
Back away from that role and obviously confidence and Simon to move forward, but I'm curious given how big the backlog is right now.
Extending into 22 more than.
And then we would see right now.
You had to frame how you think about what you know from visibility, but also how you left the business the conditional wood than if we had to think about incremental margins for AWP next year.
How should we think about that.
Thanks, David well first.
The entire Jamie.
And we know them.
Yep.
Actually across Terex team has done an incredible job.
Dealing with.
The uncertainty and the challenges associated with the with the with the pandemic and so Simon is the right leader as I said in my prepared comments has got a great team at Janney.
Teams they've got.
Strategy in place to drive improved operating performance in our <unk> business.
Macro level, the secular trends David as you know in the rental industry are positive and we can talk about the positive nature of the replacement cycle.
So we think there is a.
And then the market environment coming forward with the AWP team Simon and the team are implementing a strategy to continue to drive improvement so that we're globally cost competitive.
We compete in a global marketplace for the Aero business and we're going to continue to drive margin.
Margin improvement.
Strong.
In our operations and our sales and marketing and our product developing offerings all driving towards David we're not going to back away from at least 25% incremental margin improvement in the business and it's a business that can continue to drive over time can continue to drive margin.
Improvements so that we consistently deliver double digit.
Operating margins in the business, we're not there right now as you look through the quarter, but seasonality is not going to change but over time. That's what we're focused on as a team is to drive the margin of that business consistently to the double digit range.
And regarding.
Margin increased visibility on 'twenty 2.
Just trying to quantify that a bit and of course, if you can give us any insights on the mix geographically.
Pricing on the new equipment the product type.
The backlog is huge I mean normally this time of year the backlog for AWS.
Anywhere from 40% to 60% of the second half AWP revenue right now its a 130% of what you are guiding so obviously, that's a huge incremental visibility for the following year. So again, hoping hoping to you any any color you can give us.
On that extra visibility of what it looks like.
Thanks, David and Youre right I mean the.
Absolutely encouraged by the strength that we're seeing across.
Our gaming business utilities for that matter as well, David but if you look at North America.
You asked about customer mix, we're seeing strength across our independents and the national accounts.
Our product mix, we're not seeing any fundamental change in the product mix and growth that we've seen in terms of our backlog and orders in North America Likewise, David in Western Europe.
We're seeing a nice strong recovery there from an order standpoint, again, nothing substantially different in terms of customer or.
<unk> product mix, we're seeing growth in China, China didn't dip like the western part of the world.
So we continue to experience growth in China, and China for US, it's primarily a boom market. So that's what we're what we're seeing there and in terms of the visibility David Yes, the backlog is great.
As we go into 2022, and we're having those conversations now I think customers are buoyant, they're seeing strong utilization theyre seeing improving rates, they're seeing strong used equipment values and we're engaging in conversations for 2022 and <unk>.
We're starting to have the pricing conversation.
<unk> indicated earlier, our price cost ratio this year hasn't been what we would like to have and we're going to need.
Need to get an improved price cost ratio given the material increases that we're seeing is moving forward.
In 2022, now with David the backlog moving swiftly because we couldn't produce.
That will be at 20.
1 pricing they commit.
But to deliver 2022 products will be at 2022 pricing and that work is underway.
Operator next question.
Your next question comes from the line of Stephen Volkmann with Jefferies.
Alright.
Okay.
Good day.
Can you hear me okay.
Yes, we can hear you fine.
Okay, I'm, sorry from spam Brian.
So question on M P.
Actually.
Can you just provide a little more color.
On sort of specifically, which of your MP product lines are kind of a strong interest.
And.
Where the demand growth.
Fair enough I have a quick follow up on margin.
Sure I'll take the demand and Duffy you can comment on the on the margin side as we go but Steve.
The good news.
As we are seeing strong global momentum really across our businesses or product lines within the MP business and really across the globe.
The core crushing and screening business.
Significant growth in orders dealers or our inventory levels are low.
Utilization on their rental fleets and their order and back and again across our product portfolio in aggregate I didn't get across the globe, we're seeing strong orders and our concrete business, which is our terex advanced.
Concrete trucks very strong growth in that segment associated with the residential construction.
Function that we're seeing in the U S. So that business has rebounded quite quite strongly our materials handling business. Our fuchs business. So 1 of the only positive from high steel prices that we're seeing high scrap steel prices, a big part of that businesses services that market and we're seeing that globally.
And the way recover in terms of orders.
And backlog, we're also investing in new products from capacity expansion to branch out into other segments, but again, the fuchs business has recovered quite nicely.
Our environmental business within MP, that's a newer business for us and again, we're seeing really strong.
Growth there again, Western Europe, North America Asia Pacific, we're seeing growth across that business.
<unk> taken carry business down in Australia, and Australia, it really whether the pandemic pretty well.
And we're seeing strong order activity and consistent order activity through the pandemic.
Taken.
Business and last but not least our rfps and tower business, especially.
Especially in the European area, we saw some some good recovery and strength.
With with orders and last but not least despite the significant COVID-19 challenges in India.
<unk> strong orders and strong bookings in <unk>.
<unk> care.
They come out of the depths of the pandemic. So as we look at the MP business, Steve and we see strong growth.
Across the product portfolio and literally across the globe. So.
Sure.
We're pleased at what we're seeing.
India on the demand side for the MPW.
Question about the margin margins.
Go ahead.
So obviously very good margin in the second quarter.
But then it's the step down it gets from the second half just what's the right way longer term consistent double digit.
On that emerging business moving forward or was there something.
Or.
No I think debt if you look back over the last 4 quarters, where materials processing segment.
Steve.
They demonstrated.
Maybe maybe not full mid double mid teens margins, but.
Certainly let's call it in.
<unk>.
The 15% range I think debt.
As you noted the second half of the year does reflect.
The.
<unk> surrounding supply chain disruption and material costs.
Debt.
Bringing it slightly down below the 13 number I just referenced but but still there.
They are a consistent double digit margin consistent in the teens.
The.
Reformer and we would expect that to continue.
In 2022 and beyond.
Alright, thank you.
Thanks, Dave Thanks, Steve operator.
Operator next question.
Your next question comes from the line of managing $1 billion Bank.
Yes.
Good morning, everyone.
Good afternoon.
Thanks, John and no debt.
Tom around.
AWP.
Please could you just talk about your strategic priorities.
From here and if the answers capital deployment towards M&A, maybe just give us a bit more on the parameters that you're looking at.
And the pipeline.
If that's the biggest focus from here.
Yeah.
Thanks Terry.
The team we have work to be done at the junior business and I'm confident in our team to continue to execute the strategy that we have going forward, but to your broader question is.
They are really good 1 and so we look at our.
Disciplined capital allocation that we've been focused on in the last several years, 1 was to improve the cash flow.
Abilities in the business and we've done that a second was to improve our balance sheet, we paid and further pay down debt.
This quarter after paying down debt in the first quarter as well so our balance sheet is in really good shape and free cash flow generation.
So now we're looking at how do we grow the business day.
Inorganic activities, we do believe that there will be opportunity in that area to deploy capital to grow specifically, we're looking in and around our MP businesses.
If you look at the market verticals that we compete in there is still a pretty high degree of.
Penetration in those specialized equipment and specialized markets around the MP segment. So we're building a pipeline there we believe in the utility area given what's needed around the world for electrification that there's opportunities in the utility space and then also on lifecycle salute.
Solutions so we.
We are building a pipeline as again, we did 2 transactions here in the in the second quarter. So we're spending up the pipeline too.
To deploy capital for inorganic growth, we think the business is positioned now for us to be able to.
Do that and we're actively pursuing things in those 3 areas that I just I just broke and I will say, we're going to be very disciplined about it but we absolutely believe there's going to be opportunities for growth.
Organic.
Okay.
Separately in the last steel inflation cycle, 1 steel inflation.
Slowed you folks so essentially wound up getting pricing that make you whole on.
On the cycle can you talk about the plan here. So as we think about what 22 pricing actions will look like will you look to fully recap.
Price cost headwinds from this year in your initial 22 pricing or anything.
That has changed in that industry structure and otherwise.
Prevent you from doing what you think from last cycle.
Across the across all the businesses, we're being transparent with our customers and our distributors about the input cost. We are seeing we did as Duffy said take some pricing actions continue to take pricing action, we will work.
Anything to add from material cost increases that we're seeing from crude steel.
Our 2022 pricing.
And at least seek price cost neutrality, whereas this year.
As we said, we're a bit upside down on price cost. So as we go forward, we will look to offset those cost increases.
With pricing actions.
It will vary Jerry by business by region around the world, but the strategy is we provide value added products.
It provides significant value over a duration of a lifetime for our customers and we do have to pass on the cost that we cannot absorb and that's what we're going to be working on very difficult conversations.
And again as I know that but thats, what we need to do going forward, because we're having those same difficult conversations with our suppliers and we're pushing back hard on there.
Cost increases that they were trying to pass on to US some of them that we're going to have to accept and we're going to have to pass that through to our customers and theyre going to have to pass it to their customers.
<unk>, that's just the nature of the cycle I think that we're in right now.
And it's not going to be easy, but that's what we need to that's what we need to do.
Thanks, Terry Operator next question.
Next question comes from Steven Fisher with UBS.
Great. Thanks, Good afternoon, just on the chain.
Hey, guys I know there is a real high degree of uncertainty here on the supply chain, but John do you have any thoughts on when is really the kind of peak pain point for this and when we could start to see some improvements there I couldn't tell from your earlier comments, if you're already seeing signs that it is getting better or if it's just.
An expectation that at some point it will get better.
So.
Question I'm Chuckling prepaying, it just depends on what day, and what product and what the supplier.
No.
He is going to get better.
The system gets back in sync the logistics system has created.
<unk> have a big disruption right now and that's going to work itself out we ended up with containers in the wrong place shifts in the wrong place no ability to airfreight that starting to improve so the logistics side, it's going to take some time to get everything back in balance.
That is going to improve every supplier in the chain is doing the same thing we're trying to do which is.
They are highly motivated.
Good to meet our needs. So that we can meet our customer needs I've been personally engaged with Ceos in the supply chain tier 1 down to tier 4 we're all working on the same thing our teams are working hard to mitigate the disruption to.
Produce what we can produce and get back to what I would call normal.
Operations in terms of when that exactly happens I think we're going to be in this challenging period of time for the next couple of quarters.
Because the other thing is we're a manufacturer we need 100% at 1 part missing we can't ship and so even though it improved to 99.
I need that final part before I can chip in.
And that's what we're focused on as a team. So it is going to get better everybody in the system is highly motivated to continue to drive the improvement is just going to take time.
As this global integrated supply chain. It was like a Swiss watch it got stopped and now it's starting.
And and were experiencing disruptions our suppliers are working hard our teams are doing incredible work.
To build what we can build as efficiently as we can build it and it is going to get better what when exactly I don't know, but I'm, absolutely confident that we will get better over the next couple of quarters.
Steve If I was to just give you a couple of data points.
Yes.
The supply chain is getting better.
And if you just measure it in terms of the production for example at our <unk> business.
The production in Q2 of this year was.
More than double Q2 of last year and increased every quarter between Q2 of last year in Q2 of 'twenty, 1, but when you look at the production we had in the second quarter. It was still only 60% of the production.
In 2 quarter in Corp.
The mid quarter, so but.
Call. It Q2, Q3 of 2018, and our backlog is higher than we had in 2018, so demand increased extra.
Exponentially overnight and.
And our ability to ramp up production from components from suppliers to be able to ramp up our production.
To meet that overnight demand has been what the challenges.
Very helpful. And then just a follow up in terms of the size of acquisitions you guys have done.
We have a job with cash flow and the balance sheet and you'll have flexibility on doing some bigger deals. If he wanted to so can you maybe just give us any color on the range of sizes of deals you consider or.
Are the things available in your sights more just smaller bolt ons.
Yes.
Great. Thanks for the question and given the given our improved balance sheet and our low leverage, especially as we continue to drive free cash flow and debt down.
We will look at transactions and really look at our orders our endpoint leverage.
<unk>.
So we.
We haven't changed were consistent at 2.5 times net debt to EBITDA.
Kind of through the cycle, so that that would be the gauge that could give an indication of what we would be willing to or comfortable.
Taking on more debt for the size of this transaction. So it does.
From some flexibility in terms of size.
And we will again, we're going to be very disciplined, but I feel good about our capabilities or balance sheet capabilities cash flow capabilities to do things larger than the true small transactions that we've done but debt.
Think about the 2.5 times net debt to EBITDA through the cycle.
Give us and that will give you a range to think about it that's how we're thinking about it.
Thanks, Steve.
Operator next question.
Your next question comes from Jamie Cook with Credit Suisse.
Hi, Good morning, most of my questions have been answered just 1.
Can you just talk to within the aerial work platform side just with.
<unk>.
Material costs.
Pricing that we're trying to get through can you talk to the competitive environment and whether youre seeing everyone sort of act rationally.
Are we trying to go for.
Potentially market share and then just 1 quick follow up on the backlog for AWP, what is the dollar amount associated with backlog.
Going into 2022.
Yeah. Thanks, Jamie so the pricing dynamics in the industry, especially in the western part of North America and Europe.
The pricing dynamics I believe a rational and that we are all experiencing material cost inflation.
And we're all having those challenging conversations with customers about the need to seek price at the only potential exception to that Jamie, but I will say the pricing dynamics inside of China are quite aggressive and sometimes there is some some pricing dynamics there that frankly, we just won't participate in.
And so I.
A rational reasonable competition is what we're experiencing in the western part of the World North America and Europe.
<unk> is well within the confines of China, we're seeing some pricing at times that you would have to say that's not rational.
And so that's that's the pricing dynamics as of.
I would say in terms of AWP backlog at the end of Q2.
Total segment backlog was about 1.4 billion.
<unk>.
I would say that $2 million to $300 million of that represents amounts that.
Would be for delivery.
Now based upon the second half outlook that we provided with the deliveries in 2022.
And I would say most of that represents carryover from 2021, we would certainly be seeking to increase our production.
Throughout the second half of this year and accelerate.
The delivery for customers into 2021, if at all possible. The only other thing I'd add on that Jamie is that does include our utilities business from some of the utility business is actually quartered out in 2022, but that.
That would be at 2022 pricing, that's not unnatural for the utilities business there are some longer lead.
Vehicles in that segment within AWP.
Okay. Thank you.
Okay.
Thanks, Operator next question.
Your next question comes from the line of Ross Gilardi with Bank of America.
Hey, good morning, guys. Good afternoon. Thanks Ross.
What do you guys have done a great job of turnaround the free cash flow I mean, it looks like.
Your conversion this year from EBITDA.
At your midpoint of the guide is going to be a little bit a bit above 50% do you think that.
A reasonable way to look at it going forward or is there another sort of conversion metric that you think might be appropriate more appropriate.
Yes, thanks for recognizing.
Yeah.
Net free cash flow generation, Ross and Ewen.
Particular has.
<unk> been a proponent for us.
Getting better in that area.
Quite honestly make the better.
I think it's important when you.
In the comments I provided prepared remarks had provided right up to $200 million there is.
Free cash.
Cash flow outlook for the year, there is $75 million debt represents our recovery of amounts.
<unk> amounts from prior years.
That amount that we had hit from Europe that had been outstanding for some time as well as.
Income tax refunds that carry backs in the United States as a result of.
Tax losses in the U S last year that we were able to carry back those 2 combined are about $75 million within 200.
We're going to continue to.
<unk>.
<unk> free cash flow every single year and.
So.
Ostensibly our free cash flow target for the business is over over the cycle is 100% of net income and debt in.
In some years we've done.
1 better than that late last year for example.
Sure.
We are absolutely I assure you we're focused on free cash flow generation, which allows US then to use that free cash flow to grow the business organically and inorganically.
Okay.
Okay. Thanks that helps.
Hum.
And then can you talk a little bit more about the utilities.
In our business and the drivers there and.
You've had you've been in that business for a while.
It's done well by you, but can you give us a sense of how big it is within within AWP and.
Just how sustainable.
Drivers are again, you talk about EV.
EV infrastructure, and so forth, but just really more like that.
Every day drivers of the business more like utility maintenance type activity or for.
Because of price.
So thanks.
<unk> is about $400 million and we think it's a business that can grow.
Part of the reason, we made a substantial investment in Watertown was to have the capacity to grow.
Underlying fundamentals and dynamics, especially in North America, but it really expands beyond North America or the utility sector are strong.
It is there needs to be investment in the electric grid.
To accomplish any of the electrification that we're talking about and that electric grid as distribution to the house as well as transmission.
And so there is substantial investment required.
Sure.
1 maintaining the electric grid into.
Building out the electric grid and the other thing that sales towards the unfortunate situation out in California is that.
What we call the maintenance side tree care vegetation management that has really caused utilities and regulators to ensure.
Sure, they're making the appropriate investment in vegetation management and the appropriate investment in the grid. So that you don't end up with a situation like it had in <unk>.
So the underlying fundamentals of the utility business, we think are quite strong.
Tom and I'm going to be quite strong for some period of time that also coupled with the <unk> investment level.
If you put a <unk> repeating tower and especially in Rural America.
That's going to have to go most likely on top of electrical polls. If it has to go on top of an electric.
Ill pull it has to be an insulated system, that's what we specialize in.
Terex utilities. So we think that gives us an opportunity for growth and then we also are we've been in China. We've had some success with.
China grid, we're localizing some of our production from the China market. So do.
The utilities area. We think is a strong area that we can grow organically, but we also think there's going to be some opportunities, especially as we look globally.
Around the world because theres not dissimilar in other parts of the world as it is in North America.
Bad debt. This was a segment that we want to be in that can provide excellent growth in.
Total returns going forward. So again, we've made a sizable investment in our utilities business.
And the team's working hard to ensure we get a get a return and get the capacity out that we need.
Going forward in that business. So it's a business we like it's a business, we've invested in and and if opportunity presents itself.
It will be a business that we continue to investing.
Thanks, Ross operator last question.
Will be from Steve Barger with Keybanc capital markets.
Hey, Thanks, guys for squeezing me in debt.
With <unk> being the strongest revenue quarter should we think that both segments will.
We'll see.
Increases from <unk> ore will regional shutdowns or anything else cause that not to happen from 1 segment.
Sequential increases in revenue right.
Right yes.
Yes, yes.
The answer to that question is generally yes.
Probably more so.
In the AWP segment in the MP segment.
Got it and and the outlook suggest the margin steps down in both segments in the back half or the supply chain impacts or parts availability issues evenly distributed across the 2 segments or is 1 more affected than the other.
I would say.
More evenly but genie businesses.
Faster.
Cycle time business higher volume and so if we do have a disruption there. It does it does impact us but across the globe that are empty business. They are experiencing disruption as well and again doing a great job overcoming it.
Moving slower tack time on those so they have the APA.
To make it up a little bit better than <unk>, just given the tax time of the 2 assembly operations.
Got it thanks for the time.
Absolutely Thanks, Steve.
Thank you if you have any further questions. Please don't hesitate to reach out to Randy. Thank you for your <unk>.
Interest income.
In Terex.
Non off with all my team members safe.
Safe and stay healthy thank you.
Ladies and gentlemen, thank you for participating you may now disconnect.
Yeah.
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