Q3 2021 Terex Corp Earnings Call
Greetings and welcome to Terex Corporation third quarter 2021 results conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
As a reminder, this conference is being recorded.
It's 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 <unk> third quarter 2021 earnings conference call a copy of the press release and presentation slides are posted on our Investor Relations website at investors <unk> Dot com.
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 Duffy, Sheehan, Senior Vice President and Chief Financial Officer.
Their prepared remarks, we followed by Q&A.
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, well 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 you for joining us and for your interest in Terex.
I want to take a moment and emphasize once again.
<unk> actions are always guided by our values, we consistently act with integrity operate with excellence.
Care for our team members customers and communities I would like to thank our team around the world for their continued commitment towards zero harm safety culture, and Terex way values.
Safety remains the top priority in the company.
Bye, Thanks safe work safe home safe.
The Terex team members have contributed to our effort to continue to produce in surface equipment for our customers, while maintaining a safe working environment. Please turn to slide four.
The team is built on the existing strong foundation for long term success with our environmental social and governance or ESG efforts, a few key points that I would like to highlight as we progress on this journey.
Leading with strong governance.
Our ESG efforts are led by senior management with oversight from our board of directors.
Turning to social.
Diversity equity and inclusion is being embraced and driven by our senior leaders as we increase the dialogue and training around this important topic.
On the environmental front.
You'll hear more later about how our teams continued to deliver.
Favorable and innovative products, which our customers are demanding.
Finally.
We continue to communicate with stakeholders about our ESG journey.
We recently released our second ESG report, which can be found in our Investor Relations website.
The team looks forward to continuing to engage with investors about ESG matters.
I am pleased with our efforts to date.
But the team recognizes there is more work to do around this important topics and we will drive execution of our ESG priorities.
Please turn to slide five now.
Now, let me highlight some of our third quarter results, which stephane will describe in greater detail.
During the quarter, we continued to deliver strong year over year top line revenue growth.
We were impacted by supply chain challenges limiting our production output, especially within our AWP segment.
As a result of the supply chain challenges.
Revenues were approximately 9% below our expectations from the beginning of the quarter.
Global end market demand remains very robust.
Demonstrated by our quarterly bookings in Q3 be double the prior year.
Even when compared to historically good end market demand environments, such as Q3 2019, our bookings were up approximately 140%.
We do expect end market demand to remain strong through the remainder of this year and into 2022.
Our operating margins and earnings per share in the quarter improved significantly versus the third quarter of last year, but were lower than our prior expectations because of the revenue shortfall.
Supply chain challenges impacting the efficiency of our manufacturing operations and inflationary cost pressures, which.
Which were only partially offset by our pricing actions.
We expect the supply chain environment, we experienced in Q3 to continue through the fourth quarter and into 2022.
Today's updated financial outlook for 2021 reflects this expectation.
I am extremely proud of our team's management of working capital and free cash flow generation.
With $43 million of positive free cash flow in the quarter, we posted our sixth consecutive quarter of positive free cash flow.
Year to date, we have now generated more than $180 million of free cash flow.
This strong performance allowed us to use available cash to prepay another $150 million of debt in October.
Today <unk>.
Terex enjoys one of the strongest balance sheets it has ever had.
During the third quarter, our team worked tirelessly to manage supply chain and logistics disruptions, while delivering for our customers tightly manage all costs and delivered improved margins and positive free cash flow.
Our financial results demonstrate that our strategic priorities are working to improve the company and to deliver positive financial results for shareholders.
Please turn to slide six.
We continued to improve ericsson's global cost competitiveness.
For the full year 2021.
Our SG&A as a percentage of sales will be substantially below our target of 12, 5%. During 2021, we have been trading nearly all SG&A cost is fixed.
Taking advantage of higher revenue to leverage the cost structure.
We will continue to maintain strict cost discipline.
Recognizing that growth in the business will necessitate some investment spending.
In the third quarter, we started production of our <unk> handlers in Monterrey, Mexico.
This action is on track and will reduce the cost of manufacturing are telling have their products for the north American market.
Turning to innovation.
We remain focused on purposeful innovation.
Delivering electrification digital and other operating enhancements that provide value to our customers.
And the agility, we've rolled out our high power solution, which operates the boom electrically and eliminates noise and emissions.
And Genie is producing E drive visitors, which addresses the need for hybrid and fuel electric product offerings.
Proximately, two thirds of Genie scissors, and one third of Genie booms are offered with hybrid and electric technology.
<unk> launched 28, new products in 2021.
This segment also continues to develop and deploy digital offerings for dealers and customers.
More than 7000 units in the installed base are now fitted with telematics hardware that is enabling these offerings.
MP is also implementing digital dealer solutions, including.
Including connected dealer inventory or CDI and.
The number of active dealers using CDI doubled in 2021 and more growth is anticipated.
Finally, we are investing for growth.
In China, we're increasing production in both segments, we produced our first Genie Jabil and our recently expanded <unk> facility and our MP production is progressing according to plan.
We launched a new product line in waste and recycling.
Called tariffs recycling systems, our Trs.
The new product line will add modular offerings for stationary systems.
The Trs offering complements our ecotec and CVI businesses, which offer mobile waste and recycling equipment.
Turning to slide seven.
Our AWP and MP segments continued to demonstrate resiliency and flexibility to capture the benefits from the positive market fundamentals that we're seeing.
First in Genie.
The current market dynamics point to a multi year replacement cycle for Genie equipment.
The average age of fleet globally is increasing and customers need to replenish their fleets. So the replacement cycle is here.
<unk> is taking place in emerging markets such as China.
Nonresidential investment indicators are positive.
These factors are leading to strong quarter activity.
Materials processing.
We expect global demand for crushing and screening equipment to continue to grow.
Broad based economic growth construction.
Activity in aggregates consumption are the primary market drivers, we're seeing strong markets for our concrete mixer truck.
Material handling and environmental businesses.
Overall, we are seeing robust market conditions around the world for our industry, leading products and solutions.
However, while demand remains strong we anticipate ongoing supply chain disruptions to persist throughout the fourth quarter and into 2022.
It is a dynamic situation, which is constantly changing and we're not expecting significant improvement in the near term.
Freight and logistics have also been a growing issue with delays and increased costs.
The availability of containers ships and increasing off load times are impacting our production and delivery schedules.
Our production and supply chain team members are doing a remarkable job demonstrating resilience and flexibility to maximize the number of machines. We can ship to our customers. Our strategic sourcing initiative has produced stronger relationships with suppliers, resulting in more insight transparency and communication.
This has helped our teams work with suppliers to ensure we are receiving a higher allocation of components.
Our engineering teams have worked with suppliers to redesign components to maximize availability of critical electronic subsystems.
These are dynamic times and I am confident that terex loyal deliver continued operational progress due to the tireless efforts of our team members with that I'll turn it over to Debbie.
Thanks, John.
Turning to slide eight let's look at our third quarter results overall revenues of almost $1 billion were up nearly 30% year over year with both of our operating segments revenues up more than 25% as John mentioned earlier revenues were lower than our expectations.
Going into the quarter as a result of the higher revenues, our absolute amount of gross profit in the quarter increased 22%. The current global supply chain dynamics materially increase the cost of our operations for both segments through reduced efficiency in our manufacturing.
Factoring facilities and higher material logistics and labor costs in the short run given previously committed customer purchase orders, especially in our AWP segment, we have been unable to pass all of these increased costs onto our customers as a result.
<unk> gross margins contracted year over year in the third quarter.
To mitigate the negative impacts of the operating environment. Our teams have been maintaining strict discipline in our SG&A spending.
Despite this quarter's revenue being 30% higher than the same quarter last year, SG&A was $6 million lower than the prior year.
For the quarter, we recorded an operating profit of $74 million.
Compared to $37 million in the third quarter of last year, achieving an operating margin of seven 5%.
Interest and other expense was approximately $3 million lower than Q3 of last year, resulting from lower outstanding borrowings combined with reduced rates on the debt we refinanced earlier this year.
Our third quarter 2021, global effective tax rate was approximately 23% driven.
Driven 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 <unk> 67 per share more than doubled year over year.
Turning to slide nine and our AWP segment financial results.
<unk> of $573 million.
We're up 29% compared to last year.
Driven by continued strong demand in all global markets.
<unk> delivered improved operating margins in the quarter, driven by increased production and aggressively managing all costs.
Third quarter bookings of $981 million were up dramatically compared to Q3 2020.
While backlog at quarter end was $1 7 billion almost four times the prior year.
Approximately 70% of Awp's September 30 backlog is scheduled for delivery in 2022.
A portion of this backlog represents orders with 2021 pricing that were scheduled for delivery in 2021 that have now carried over into 2022.
As a result, we expect the first half of next year to be price cost negative.
However, we do expect AWP to be price cost neutral for the full year 2022.
Now turning to slide 10, and material processing Q3 financial results.
<unk> had another excellent quarter sales.
Sales of $419 million were up 35% compared to last year driven.
Driven by strong customer demand across all end markets and geographies.
<unk> team has been aggressively managing all elements of cost as end markets improve resulting in an operating margin of almost 14%.
It is a testament to the MP teams operational strength to deliver these robust operating margins.
MP slides business has strengthened through the quarter with bookings up approximately 62% year over year.
Backlog of $1 billion is more than three five times higher than last year and was up 18% sequentially turning to slide 11, and I will now review our updated financial outlook for the full year.
This outlook takes into consideration the current end market demand environment as well as the increased supply chain and input cost headwinds that we have discussed today.
As for commercial demand, we have seen our end markets remain robust over the course of the third quarter.
We expect continued global end market strength over the remainder of the year and into 2022.
Our full year revenue outlook for the company as a whole and both segments is limited due to the availability of components from our supply chain.
We now expect our AWP segment revenues for the full year to be slightly lower than our previous sales outlook communicated in July.
In addition, we are expecting our operations to be impacted over the remainder of this year and into 2022 by accelerating cost increases.
As we have already contracted with customers for nearly all of our remaining 2021 revenue.
Most of the benefit of price increases, which we have been implementing to offset inflationary pressures will not be realized until 2022, especially in our AWP segment.
We have slightly lowered our total company outlook for operating margins as a result of lower AWP margins, partially offset by improving MP margins.
As a result of positive first half callouts corporate and other costs continued to be expected to be slightly higher in the second half versus the first half of the year.
Finally, we continue to plan for total company incremental margins for the full year, 2021, which exceed our 25% target.
Our full year EPS outlook, including charges of 27 per share for the refinancing of our capital structure and other year to date call outs has been revised to $2 75.
To $2 85 per share.
Just on sales of approximately $3 85 billion.
For the full year 2021, we are estimating free cash flow in excess of $200 million.
Reflecting our strong year of positive cash generation.
Full year free cash flow continues to include approximately $75 million.
From income and that tax refunds, which are not expected to reoccur.
We now plan for capital expenditures of approximately $80 million.
The largest project included in capital expenditures is for the Genie, Mexico manufacturing facility.
Turning to slide 12.
Our updated 2021 full year EPS outlook takes into consideration.
The small reduction in our full year outlook for AWP segment revenues.
The inflationary cost pressures, we are experiencing in most areas of our businesses.
Third the benefit of price increases we have been implementing which currently is only partially offsetting these cost increases.
And finally, the operational efficiency and SG&A cost mitigation actions, we've been taking to improve the business.
Overall, our 2021 outlook continues to represent a significant improvement in operating performance when compared to 2020.
We will continue to aggressively manage costs, while positioning our businesses for growth.
Turning to slide 13, 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 positive free cash flow of $43 million in the quarter demonstrates the focus and discipline of our team members, who have tightly managed networking capital.
Terex has ample liquidity.
At the end of the quarter, we had approximately $1 $2 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 $150 million of term loans in October which is in addition to the $279 million pre.
Prepaid earlier this year.
All of this while the company continues to pay our quarterly dividend.
We are committed to continuing to strengthen <unk> balance sheet, while maintaining flexibility to execute our growth plans.
And with that back to you John Thanks.
Thanks, Duffy before we go to your questions I would like to acknowledge that this will be done these last conference call with Terex as.
As announced a few weeks ago. The entire team is excited to welcome Julie back it will be joining us next week and you'll meet Julie at our upcoming conferences in November and December.
On behalf of the board of directors.
The executive leadership team and all Terex team members, we want to thank Duffy.
He will be retiring after five years of exceptional service and leadership at Terex.
He has been a great leader mentor and teammates and he has created tremendous value for our company.
It is five years with CFO <unk> guidance has been especially important to me as he has helped lead our transformation journey and position Terex for a strong future.
Thanks for that John.
I'd like to take a moment to thank each terex team member for their support.
No you will continue to do the same for Julie.
I also wanted to thank you the analysts and the investment community, who may have interacted with on these calls and at conferences Youre, pushing and prodding made me a better CFO for <unk>.
And most importantly to you John for giving me this opportunity.
We are a great team and good friends.
And with that let me turn it back to you Randy Thanks Duffy as a reminder, during the question and answer session. We ask you to limit your questions to one and a follow up to ensure we enter as many questions as possible. This morning with that I'd like to open up for questions operator.
Thank you. Your first question comes David Anderson.
With Evercore ISI. Please go ahead.
Hi, good morning, Congrats stuffy.
Good morning, guys. Tim is on the first half margins for AWP I know you don't want to give exact guidance.
But just trying to think through I mean to be fair that your third quarter <unk>.
AWP margins held up pretty well, you're you're implying the fourth quarter AWP still solidly profitable at $3 seven.
Obviously, we heard from our main competitor where their.
Their margins are under a little more pressure than that so I'll leave. It open ended can you just help us how you're thinking about first half year over year margins for AWP. When you think through what's in the backlog what you already have lined up you're still causal.
From accounting, you're more FIFO theyre more LIFO just help us I think that's kind of the key when people are just trying to figure out how much of a hole.
In the first half in AWP earnings and how much the second half where it will make sense at the price cost is better.
But maybe you are still cost depending how you purchased are up or down year over year as well in the second half. So a lot in that question and I'll, let you answer it as you will.
Thanks, Thanks for the question David.
I'll start with first let's start at the top which is we are in a strong demand environment across the business, but especially within the AWP segment as you'll see the rental companies are doing well their capex needs are increasing we're entering into we are in the replacement cycle. We think that's going to be an extended cycle as we go forward.
So the good news in the aerial business and I would say globally is that we are in a strong demand environment. So that that is the good news. The challenge is like most manufacturers, we're experiencing input cost increases we have been taking price actions.
Throughout 2021, but those those price actions where were overtaken by material cost increase we've had so in 2021, we've been price cost negative in our AWP segment.
As we look to go into 2022, and we're in discussions with customers right now, we're being very transparent with customers in terms of what we're seeing in terms of our input costs. The fact that we have not covered our input cost in our business. In 2021. So we are taking price actions and what we believe.
David is from a price cost neutral standpoint.
Through the first half of the year, we're still going to be underwater from a price cost standpoint, and that's given the backlog that we have we've had backlog that was priced at 2021 was supposed to deliver in 2021 did not moved into 2022 now so that backlog is it 2021 pricing all other backlog will be 2022.
So as we move through the year, we believe that we're going to be price cost negative in the first half of the year, making progress, but in the second half of the year and for the full year of 2022, and our AWP segment that includes both Genie in our utilities business. We believe we can get the price cost neutral for the full year in that segment.
And so that's what the team's focused on and.
And that's what we need to do to drive continued to meet the needs of our customers and drive the margin improvement that you as investors expect us to deliver.
I guess I would also just.
Add David that.
<unk>.
I do I think John would agree with me that we do expect our AWP segment to be solidly profitable in the first half of next year for sure.
We're also going to continue to be very disciplined in the SG&A area.
You've seen us be here through the course of 2021 and.
So that.
The AWP segment to our leadership team there is extremely focused on continuing to bring this segment back to double digit margins I'm not saying in the first half of next year just in general they are very focused on restoring the business back to historical.
Margin levels.
Yes, I think we're just trying to figure if you could maybe give us a sense of should we expect sales up year over year, but margins down because when you look at the fourth quarter, even if you add back from fourth quarter of 'twenty, the $11 million of one time cost.
You still have margins at our 150 bps higher year over year implied for fourth quarter year over year and I think people are just trying to understand should we think of the first half is at least pay the price cost is challenging enough.
And you don't have maybe the same year over year cost structure savings just as <unk> comes back in a variety of things come back that should we just think of it as is.
Probably down margins on a margin, but offset answering I can answer to that as you wish.
Thanks, David There is a lot in there and we're right in the middle obviously, the planning cycle for 2022, and we don't want to give guidance for 2022, but again, we believe the demand environment is going to be strong.
And so it's not a demand issue at all the ability to meet the demand will be a supply chain related and supply chain constraint related activity.
We're going to have to manage too so that if you will will be the governor.
For 2022, and the team continues to focus on all aspects of cost to continue to drive margin improvement in all environments and so the team is as I can assure you. They are laser focused on how do we drive margin improvement in that business going forward and I am confident that.
We can do that.
In a challenging market environment like we saw this year.
Yeah.
Great Operator next question please.
Our next question comes from Stephen Volkmann from Jefferies. Please go ahead.
Great. Good morning, everybody Duffy I'm tearing up a little bit here, so all the best.
Thanks for putting up with us over the years here.
And just to end.
No and I'm going to sort of pile on to David's question see if I can ask it a different way.
It feels like the major kind of swing factors for the first half.
<unk> are going to be how much of the deliveries have 'twenty one versus 'twenty two pricing on one side and on the other side sort of how much have you been able to lock in.
Costs like you did early in 'twenty one so.
Maybe maybe one way to ask this is sequentially I would assume some portion of first quarter deliveries have 22 pricing in them. So sequentially is it reasonable to think that you would have some modest amount of margin improvement <unk> over <unk>.
In AWP.
So.
Yeah.
Thanks for that Steve and.
As John was explaining a few moments ago.
The supply chain is a very dynamic situation right at the moment.
And so.
Is that why you feel a reluctance to be really out with a.
And outlook or our guidance with respect to Q1 of 2022 were really living.
Quarter to quarter right at the moment with the supply chain John would tell you quite honestly, where we live and week to week or day to day with with suppliers.
I do think that the.
That when you look at Q4 to Q1.
That.
We expect as the business, our AWP segment, which is where your focus is to remain solidly profitable and.
That.
Wood.
Drive.
To seek to drive margin improvement.
Exactly where the revenue will be to be able to say, whether it will be higher or lower in terms of the margin in Q1 of next year I think it's premature to say that.
Again, Steve.
It's just a challenge right now, but the great news is the demand environment. There it will really be driven by supply chain supply chain availability and as we continue to navigate through that there is an opportunity for good growth as we go into 2022 and I would encourage you not to be just focused on one quarter to be very <unk>.
With you we're playing for the long game here at <unk> and what we have said today and we're absolutely committed to not just John and.
And I, but the entire leadership team is being on being price cost neutral for the full year 2021, 2022, excuse me 2022, and I think thats what the important thing is it's not about Q1, it's about the full year.
Yes totally understood.
As you know we're fans of the long game, but you sort of have to figure out where the inflection is.
To get people comfortable with the longer game, so understood around the supplier issues and we'll stay tuned there just a quick follow up though on SG&A. John It felt like you were sort of saying something there about continued investments.
Do we continue to target that below 12, 5% is there some trend there that we should be aware of.
Yes, no I think that.
This company will continue to take advantage of the growth in the top line, while maintaining discipline in SG&A.
We're very proud of being meaningfully below 12, 5% SG&A to sales this year and.
Im fairly confident that that will be the case, maybe more than fairly I am confident that we will be the case in 2022 also.
Great Operator next question please.
Your next question comes from Ann Duignan from Jpmorgan. Please go ahead.
Hi, good morning, everyone.
Switching gears, a little bit if we could just compare and contrast, what.
Going on in materials processing impressions, Awp's and you didn't have to take down your guidance for revenue.
Youre not talking about price cost in that segment.
Is that primarily because of where that business is geographically located or are there is there something more structural going on with the components of supply or aerials versus material processing. If you could help just breakdown.
Great.
Business is down and whether it's geographic or structural that'd be helpful.
Thanks, Thanks, Ann in our MP segment as we indicated in our prepared remarks really had another strong quarter.
And they are very close to being price cost neutral in 2021, and we anticipate them remaining price cost neutral for 2022.
Really driven by a couple of factors I think the biggest factor is that about 75% of our MP business and again <unk> is a collection of specialized equipment businesses goes through distribution channels and so from a price cost standpoint.
With distribution, we've been able to be more price dynamic if you will given the cost inputs that we've seen through the distribution channel and so that has clearly helped.
That business.
In 2021 and will continue to help that business in 2022.
I'd also say and one of the great things about DMT business. This gives us the diversification geographically we've got a good geographical split in our MP segment, and we've got a good diversification of businesses within the <unk> segment, and we're seeing some real strength in some of those businesses our aggregates business has been quite.
Strong again globally, our material handling business.
And one of the good things about high steel prices frankly, the only thing as scrap steel prices are up which has really helped our our material handling fuchs business. So it is a diversified portfolio geographically by business line, 75% going through the distribution channel and so thats a very different dynamic.
Especially through the distribution channel when ads as compared to way our AWP segment.
Okay. Thank you I appreciate that and then just to pile on.
Back up the other questions may be the question, Steve didn't get answered with what percent of your backlog for Awp's hands 2021 pricing.
So yes.
We talked about.
The overall percentage of.
Backlog that was in that is at the end of September for AWP, 70% of that backlog will.
We will be for delivery in 2022, but we have not broken out how much of that is with 20 of that 70% how much of it has 2021 pricing associated with it.
Great. Thanks, Dan Operator next question.
Your next question comes from Mig <unk> from Baird. Please go ahead.
Good morning, Congrats Duffy I'm pretty sure you're going to Miss these calls so.
<unk>.
The way I would ask the same sort of questions that you've been asked thus far as if I just look at the orders that you've taken in in the third quarter in awp's of $981 million.
Clearly these are not for delivery in 2021, so is it fair to assume that would be great.
<unk> 2022 pricing.
Yes, maybe it's fair to assume that the majority of that backlog will series 2022 pricing.
At this time with the backlog.
I'm asking about the orders that you've taken in just to be clear.
Yes, yes, that's a fair relationship yes, that's fair.
Okay, and then my recollection is that.
Last quarter, you had $300 million.
Backlog backlog that you had in <unk>.
In the second quarter that was going to get converted and delivered into the first quarter of 'twenty two it looks like that number went up maybe another $50 million.
How should we think about the sort of cost pressures that have developed here over the past few months for this portion of a portion of deliveries is it that we should be thinking that these deliveries are essentially approaching breakeven type margins.
We're framing Q1 or.
Is it maybe a little bit better than that.
And there sorry for being up.
At this time.
Yeah. The only thing I guess I would say Mig is when you look at our AWP segment.
Here in the third quarter or even the implied guidance for the fourth quarter. The business is solidly the segment is.
Solidly profitable and so.
At the current level of <unk>.
Yeah.
Cost inputs.
That especially like fourth quarter, if you look at the fourth quarter that the business is solidly profitable.
So we're going to continue to be solidly profitable I don't think were prepared to take today to say whether that solidly profitable means 3%, 5%, 9% segment margin, but what I can tell you is the segment is going to continue to be solidly profitable and over the long.
Run over the entire year, we're going to be price cost neutral and so.
Our leadership team is driving hard for.
Improving the price in the business to offset the inflationary cost inputs that we're experiencing.
Thank you operator next question.
Your next question comes from Stanley Elliott from Stifel. Please go ahead.
Hey, good morning, everyone and thank you for taking the question.
Duffy, congratulations and best wishes.
Thank you.
So when youre thinking about the MP business <unk> done a nice job of driving that is still an incredibly highly fragmented industry. You are there larger chunkier deals out there where you could pursue.
Or would it be more of a bolt on sort of focus as youre looking to expand that business.
Yes, as we look if you look at the structure of our of our MP businesses and the businesses within MP. It still remains fragmented and so as we look to grow the business and the good news is with our free cash flow generation strengthening of the balance sheet, we continue to.
Best organically in our MP business.
And our Campsie facility, we did a small two small acquisitions in the quarter.
We do believe that there are opportunities in the businesses within our MP segment that we can do some M&A activity.
Bolt on near Adjacencies. The funnel does have companies that are larger than the first two that we've done and so as we look to grow the business. We believe we can grow it inorganically and our initial focus really is in and around our MP businesses, given the fragmentation in the businesses and given the opportunity.
These we believe to grow that business.
Especially around near Adjacencies that we can utilize some of our existing distribution manufacturing to get some real operational synergies in that business and so.
The two acquisitions are small the MBS acquisition small, but we're already seeing the benefits of being able to put that product line through our global distribution channel. So we're excited about the growth opportunities that we have would we like for larger ones. So that we can see some more meaningful growth absolutely and.
We're looking in our funnel.
In terms of where we can invest that's an ongoing process as we go forward. So you could look for us to do some more things in and around that.
Space when it comes to M&A and the good news is we've got that we've got.
Cash flow, we've got the balance sheet now to.
To do that.
That's right I mean, you guys have done such a nice job of improving the return on invested capital how do you balance kind of the M&A piece versus maybe buying shares back.
Just curious how you're thinking about that high level.
So just from a from a macro level, obviously will strengthen the balance sheet pay down another $150 million of debt here in October.
<unk> continued to invest in capital.
We are investing organically in our business and we still believe we have the opportunities to invest.
M&A activity. So we're deemphasizing share repurchases over the last five six years.
Significantly reduced the amount of float outstanding so from a share repurchase standpoint, with deemphasize that looking more to the M&A, but let me be clear, we're going to be very disciplined in the M&A environment.
We are in right now and valuations are to some extent elevated and so we will be disciplined there share repurchase we will look to offset any incentive comp dilution with that and take advantage of market dislocations that occur.
Hi.
Again, the good news is <unk> got a strong balance sheet strong cash flow. It gives us optionality now on capital allocation and we instituted the dividend which for our investors is also important.
Thanks, Dan Operator next question.
Your next question comes from Nicole <unk> from Deutsche Bank. Please go ahead.
Yes, thanks, good morning, and congrats Duffy.
Thank you Nicole.
And then maybe just starting with free cash flow kind of piggybacking off. The last question that was something I was really impressed with this quarter, especially.
Number of your machinery peers have had weaker free cash flow as they've been holding excess inventory in response to the supply chain situation. So can you talk a little bit about the inventory position.
To the extent what to what extent are you guys holding a lot of wip inventory and facilities, that's missing a couple of components and waiting to go out to customers.
Yes, thanks, Nicole for recognizing the free cash flow as John mentioned in our remarks, we've been pre cash flow positive now six quarters in a row and.
We expect to be free cash flow positive in the fourth quarter. So.
Our teams are really focused on disciplined management of networking capital.
I probably to be honest, we'd say that they would want.
More inventory available to them to be able to produce more products.
We have been managing.
The inventories the accounts receivables.
Quite honestly, our past dues have never been lower than they are.
Over the last five years, they've never been lower and.
So we're.
We're pleased with the net working capital.
Management that we've had we've also looked to make sure we're.
Monetizing opportunities on our balance sheet and that's included for example, the liquidation of our TFS portfolio and working with a third party service provider. There. So we have also collected.
A substantial amount of the tax receivables that were outstanding. So team has just done a really good job of making sure that we're.
On monetizing our balance sheet and to the last question.
<unk> what that does is it drives up our return on invested capital and that's what we're really focused on and then just on the inventory side as Duffy said, given the demand environment would frankly once they have more inventory.
Raw and whipped inventory has increased in finished goods inventory has gone down Nicole just as you've indicated we called the hospital units and those are the units that we partially complete we have to move off the line wait for the components door arrive bring him back on the line.
And then shipped to our customers and so that's part of the adaptability and the flexibility now that our supply chain teams are happening to exhibit given the dynamic environment that we're in when it comes to the supply chain. So it's definitely said frankly right now we would we would enjoy more raw whip and finished goods the mix right now is a little bit too.
Hi, Ron with because of the hospital inventory.
And we'd really like the finished goods that we could shift immediately to customers. We don't have a lot of finished goods awaiting FERC customers.
When we completed it.
It's being shipped as soon as we can.
Arrange the shipment and the logistics.
Got it okay. Thanks that was really helpful and just from a demand perspective, I think we all know that the environment in North America for AWP is Super Super strong.
The capex forecast that your customers have but can you talk a little bit about what youre seeing from Europe and China.
Yes.
Great question.
Europe standpoint, I would say, it's very similar to the North American market, we're seeing really good order activity.
We're seeing backlog increase so the European market is very similar to the North American market in terms of what we're seeing China, we had dramatic growth last year in China, So China I would say, it's a little bit flat year over year again adoption continues but it had a pretty difficult comp compared to.
Last year, because that was the one market last year that we did see substantial year over year growth. So it's continuing in China, but we have seen the growth slow again against a pretty difficult comp.
In China, and then the Asia Pacific Region, we saw good growth, we're seeing growth pick up there as well so really nicole it as strong global growth, it's just not north American growth and really that's across the portfolio is not just AWP, but it's also EMP and thats whats encouraging is the demand environment is quite strong and as we.
Work through the supply chain issues, it's going to be a good environment. The challenges, it's dynamic right now as it pertains to their supply chain.
Great operator, Thank you next question.
Your next question comes from Steven Fisher from UBS. Please go ahead.
Thanks. Good morning, So you guys talked about the pricing contribution for the second half of 'twenty two.
<unk>, there and the price cost equation, what do you assume for the cost side in the second half there mainly steel prices I presume are you assuming that that there'll be coming down or is just sort of going to be staying at a steady level based on sort of your accounting treatment and you just get the price to cover it.
Yes. So we're we're obviously cognizant at the moment.
Steel prices.
<unk> started to decline some I'd say that.
As we go through the fourth quarter here, we will.
Finalized our plans but.
At the moment, where.
Assuming steel prices.
We're really in the <unk>.
Hot rolled coil in the $800 range, which is where the where it was during the course of Q3.
And then.
Coming down somewhat in the second half of 2022.
Okay. That's very helpful and I guess, you've done a lot of work on the supply chain already over the last few years I'm wondering to what extent you think you need to redouble. Your efforts there expand the number of suppliers and if you are.
Do you think theres going to be any sort of quality issues coming out of the combination of new suppliers rushing production to get units out are we going to need to be aware of higher warranty reserves you might be taking over the next few quarters.
So as of now we're not seeing that obviously, we have as part of our strategic sourcing initiative, we have been changing suppliers and actually.
Throughout the course of this year, our supply chain teams have implemented some.
Apply our changeovers and new suppliers, which frankly has helped mitigate some of the significant increase in material costs that we're seeing we're going to continue to do that as I mentioned in my earlier comments, our engineering teams are working with suppliers around electronic components.
We're adjusting production schedules, but in no way, we have the same quality standards.
So it does not ship until it meets our quality standards. If you look at our Genie quality by design, that's key to the brand and so theres no shortcuts on quality standards now if their quality issues does it create further disruption to your operations, yes. It does with no inventory in the channel if we end up with a quality.
Issue on the line from a supplier.
That does impact us and we have to it.
Correct, it but in terms of shipping out.
Theres no way.
Have a rigorous quality process throughout the businesses and it has to meet our quality standards before we ship to our customers.
Thanks, Steve Operator next question.
Your next question comes from Tim Thein with Citigroup. Please go ahead.
Great. Thank you and good morning, all the best Duffy.
Nice of you to hand over the keys to jewelry with the balance sheet like it is today versus what you inherited.
Thank you.
Thank you.
Just first question is on on the footprint moves that have been made in AWP in terms of the tell handler production moving to Monterrey.
Closure of rock Hill, and maybe leaving others out there.
Should we think about that is I mean are those savings.
Meaningful as we think about kind of a run rate into 'twenty two or is this is it is that not the case.
Maybe help us in terms of potential savings.
Yes, so from a timing standpoint really we're in a temporary facility now as I indicated the team has done a good job built our first tell a handler, we're actually in the construction phase of the plant and so from a phasing limited limited impact frankly in 2022.
The operations will get some benefit but it really begins to kick in in 'twenty three 'twenty four as we ramp up full production. If you will of the facility in Monterrey, and then continues.
As we go forward so.
That's how I would think about it in terms of the flow of margin improvement not a lot in 'twenty, two but begin to pick up in 'twenty, three and definitely into 'twenty. Four you want to comment I just think that the.
<unk>.
One of the things that John has really John garrison has really.
Emphasize is the importance of our being globally cost competitive and that's what the Mexico facility is going to provide for us is a very competitive global.
Cost footprint and.
So as that facility ramps up 'twenty, three 'twenty four and beyond.
We do believe that it will substantially it will be a contributor a substantial contributor to the continued improvement in our AWP segment margins.
Got it Okay, and then sticking with AWP I'm curious as you think about that.
Business in a given year maybe.
Maybe you have 123% pricing and a big year.
If you look at kind of the cumulative pricing actions from you and some of your peers.
We may be approaching double digits in some cases in some products I'm curious have you encountered any.
What has been the feedback as you think about customer reactions.
Not so much demand destruction per se, but maybe.
Do you anticipate maybe some downscaling or maybe maybe some of the features that you would have.
Expected in the past maybe.
The economics, just don't work given the severity of the magnitude of these price increases.
Maybe it's early days on that but I'm just curious.
Should we be thinking about the potential mix impact.
In 2002, thank you.
Thanks.
Broadest level, we talk about purposeful innovation and purposeful innovation is really defined at reducing the lifecycle cost for our customers and reducing the cost for us to a manufacturer and service the equipment through that lifecycle. So as we look and bring new products to marketplace, we try to bring more value.
You add for the customers. There is no doubt it is difficult right now engaging in conversations with customers, but we're being very transparent with customers in terms of the actual cost increases we're seeing in the need for pricing actions to offset that it's never easy but in this environment I think most.
People understand that for the first time in many many years, we are in an inflationary environment and we can't be the shock absorber between input.
Material input cost increases and Nbn customer, we all have to pass that on through the channel our job is to get efficient to be effective to negotiate effectively with our suppliers, but doing all of those things in this environment still leads the input cost and we have to share those input costs with with our customers difficult.
Conversations, but we are being transparent.
With our customers.
Thanks, Tim Operator next question.
Your next question comes from Jamie Cook from Credit Suisse. Please go ahead.
Hi, good morning.
Congrats Duffy so Duffy I'll ask you. Another question on access you can really missed that's when the App and tire.
Just one.
Yes, I understand what you said about the full year and being price cost neutral in the first half second half.
If volumes are up next year do you think for the full year, we can hold at least to 25% incremental margin and then my second question is.
Back to the mix sort of a backlog can you help us understand what's in the backlog is it bigger booms is it Callahan Larry is a pretty broad base I'm. Just wondering if we have a positive negative or neutral mix issue for next year. Thanks.
Jamie I'll answer the first question I'll, let <unk> answer the second question Duffy to answer the first question in terms of our mix, both a product mix customer mix.
Right now, we're not seeing any significant difference in product mix <unk> customer mix.
The first part, yes, so I'm going to use a term that John uses quite often and that is is that the team is laser focused on achieving 25% incremental margins next year and.
While we're not providing an outlook or guidance today.
I can tell you our team is absolutely committed to it.
And yes, I expect we would achieve those.
Okay. Thank you and congrats again, thanks for all your house, yes.
Yes.
Thanks, Jami operator next question.
Your next question comes from Ross Gilardi from Bank of America. Please go ahead.
Oh, great. Thanks for squeezing me in and talk to you all the best to you.
Your next steps.
Absolutely. Thank you Russ.
All my questions have been answered really at this point, but.
Just had a couple of ones ill try to squeeze in so in terms of NP adjacencies the might look to acquired do they generally sell at a meaningful multiple premium to your own stock pricing and what's the Max you would take leverage too and I just had a quick follow up on spare parts.
So great some great questions. There. So as you look at some of the transactions within the empty space I would say there are more.
Normalized valuation levels and multiples, perhaps not as elevated as other areas.
At this point in time and we also believe there is real opportunities for synergies so that you can.
And you can actually capture some value through the synergies that we can create.
Given the types of businesses, we're in operationally distribution channels and so we do think there are good value opportunities, where we can be disciplined about valuation while at the same time, creating shareholder value, especially as we look around return on invested capital.
And from that perspective, so that and again time will tell valuations in this in this world right now are elevated but we're going to be disciplined.
I just would add on Ross.
We'll end 2021 with our <unk>.
Net leverage.
At below one time, so we have plenty of capacity to.
Two our MP portfolio and two to drive inorganic growth for that segment to the specific question surrounding what would we be willing to take leverage to we've talked about.
Targeting a.
Net debt to EBITDA leverage through cycle of two five times.
Yes.
I think you've seen John and I being somewhat on the more conservative side of that two five.
So.
Not to say that for the absolute right transaction that John wouldn't take the leverage above two five but I think we're generally trying to be on the lower side or it take the under on the two five.
Alright, thanks, so much Randy can I, just squeeze one more last one.
Yeah go ahead.
What portion of what portion of revenue. These days comes from spare parts and I know the spare parts intensity in AWP isn't as large as it is in a lot of other businesses, but I would think spare parts demand right now would be booming with all the constraints on new equipment production I'm wondering if that's actually the case.
Meaningful.
Yes, yes.
Yes, so our parts and service team lifecycle solutions team has really done a nice job and you are right. We have seen good growth in that business. You are also correct the intensity of repair parts around booms and scissors isn't what it is in MP or are on the tail of handler side, but the team has done a good job.
Growing that business, good strong margin support and roughly where in the 15% range plus or minus in any given quarter. We think there's opportunity to continue to grow that as we go forward and again the team has done a nice job in that space, we are investing in that area, especially around technology to improve our.
Operating in our interface to customers and again, we think there's opportunity to continue to grow the parts and service and clearly it helps with our cyclicality and.
And so we like the countercyclical nature of the parts and service business.
Thanks, Ross operator last question please.
And your next question comes from Jami Rubin with Goldman Sachs. Please go ahead.
Okay.
We still have you Jerry.
Operator, let's let the record show, we tried to get Jerry.
Can you hear me now.
Alright, alright.
Thanks, Duffy congratulations we'll miss working with you.
I just wanted to ask.
You folks obviously, you've made the smart move to lock in the cost structure early heading into 'twenty, one how does that impact the way you think about structurally setting up the business will you be in a position to lock in cost structures early.
<unk> basis than any other differences in terms of how you are managing the supply chain going forward.
So we.
We do.
We utilize a fuel hedging program in order to provide us with certainty with respect to our cost structure as we head into a following year so where.
R R.
And the reason for it our objective with it is such that when we're having discussions with customers.
About price for the following year, we have greater insight into what our cost structure would be.
We did enter into some steel hedges in 2024 two.
2022.
Much less volume.
Volume than we had for 2021.
And we've done some limited amount of steel hedging here in 2021, but quite honestly given the.
The elevated level of the forward contracts, we have not done.
As much of it as we did in the prior year.
And.
Yes.
Very focused on being and committed to being price cost neutral for 2022, so to the extent that.
Mentioned earlier.
Planting levels with respect to steel prices and we.
We will be price cost neutral.
Bye.
Making sure that.
At those elevated steel levels and other component cost increases that we're able to.
Pass those on to our customers.
Okay, Great and then lastly, what's your telematics your great insights on where utilization levels are can you talk about North America and Europe in the third quarter was utilization for your customers all the way back to prior cycle highs or is there room for utilization to tad higher versus.
Very good third quarter historically.
Yes, I would say utilization.
Prove time <unk> improved for the customers.
Aries by country in terms of where it was back to 2019 levels, but broad based comments utilization across our portfolio of businesses continued to improve as we went through the quarter.
Thanks Jerry.
Sure.
We will talk to you soon Jerry.
So thanks, everyone for your questions and now I'd like to talk turn it back to John garrison for his closing remarks.
Thank you everyone for your time. This morning, we went over a little bit.
And your questions. Let me just conclude with a few takeaways. We are focused on execution as I think you heard today team members around the world are focused on the right things safety health customers and improved productivity. Our end markets are strong our supply chain team are working tirelessly to mitigate the supply chain headwinds that we're facing.
We are driving positive free cash flow and the team continues to invest in innovative products. We are focused on growth.
Thank you for your interest and time with Terex operator, please disconnect the call.
This concludes today's conference call you may now disconnect.
Yes.
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