Q2 2022 Terex Corp Earnings Call
We are raising full year EPS outlook to $3 80 to $4 in 'twenty.
Please turn to slide five.
Tariffs participate in attractive end markets that are supported by favorable trends and we have strong brands and the capacity to support long term growth.
Our MP segment is a diversified and consistent high performing portfolio of businesses.
And these brands have leading market positions with excellent end market product and geographic diversification.
Importantly, these businesses are less cyclical in nature.
The overall business continues to benefit from strong equipment utilization rates and dealers looking to replenish their inventory and rental fleet.
Mp's global demand remains strong demonstrated by backlog of $1 $1 billion.
Up 32% year over year, when the additional 100 million scheduled to be delivered beyond 12 months.
Environmental and recycling solutions for driving demand for our Ecotec and CPI products.
The MP team are taking existing product design and modified them to service the fast growing environmental and waste recycling market.
The power statements every brands are benefiting from strong global aggregate demand, we have leading market position with our mobile crushing and screening products and anticipate tailwind from increased spending on global infrastructure investments.
M presented market diversification and the strength.
They are growing and provide strong demand for our leading and key brands.
Every piece and markets are also strong demonstrate.
Demonstrated by our record backlog of $2 $3 billion up 62% year over year.
An additional $500 million of backlog with deliveries scheduled beyond 12 months demonstrates a healthy customer environment.
Fleet age and customers have strong utilization rates.
Globally increased adoption of aerial work platforms continues to improve labor efficiency and job site safety.
Construction infrastructure and industrial applications are driving demand for <unk> solutions applications.
Applications for Jamie products includes data centers warehouses and manufacturing facilities.
Our utilities business will benefit.
Great multi year infrastructure spending ramping up in 2023.
The business is robust demand as customers look to reserve production slots.
Please turn to slide six.
Consolidated Q2 bookings of $1 billion.
With the second highest in recent history.
Customer demand remained very strong.
Elevated customer fleet ages, and historic low dealer inventory levels continued to support robust demand.
Utilities bookings remained very strong.
Overall, our future outlook is supported by strong backlog position that is up 70% versus the prior year when including orders that are scheduled to be delivered beyond 12 months.
Turning to slide seven for an update on our strategic operational priorities.
Our execute innovate and growth strategy will continue to strengthen our operations and allow the company to capitalize on strong demand in our end markets.
Companywide investments and new product development.
Continued deployment of digital customer and dealer solutions will help to deliver long term growth.
In the coming slides I'll highlight two examples of purposeful innovation.
And our empty and utilities businesses.
We continue to be active in the M&A growth element of our strategy.
The strength of construction and infrastructure spending supports our advance mixture and bidwell concrete products.
This week, we announced the acquisition of profile.
Which expands our concrete product offering in the E&P segment.
For all of the industry leader in.
In the mobile volumetric concrete mixers.
That made concrete specifications on site.
As an alternative to central batches.
Jeannie recently made an investment in <unk> energy and.
In engineering and connectivity company focused on battery technology and electrification.
Today, 30% of Genie booms.
66% of our centers have electric options.
By partnering with <unk> genius, reinforcing its leadership role by accelerating the industry's move towards electrification.
With the delivery of next generation battery technology.
This acquisition and the investment demonstrates our commitment to executing attractive growth priorities that support our strategy.
Turning to slide eight.
<unk> systems is a growing piece of materials processing portfolio that delivers complete end to end solution.
That integrate our crushing.
Screen and Washington products.
Whilst recycling is the process of producing recycled span in aggregate from various waste streams that would have traditionally gone to landscape.
This application in Switzerland converts construction and demolition waste into two sands and three aggregate products for use in the production of basketball.
All of this is completed water recycling up to 95% of the water for reuse.
Turning to slide nine.
An important part of tariffs organic growth is sustained investment in new product innovation.
Our utilities team has led the market delivering our first ever all electric bucket trucks on a class six seven medium duty chassis.
This solution combines biotech smart Pgi technology.
A tariff investments made in February of 2022, with Navistar International Electric chassis.
This product is responsive to electric utilities sustainability goals by eliminating engine emissions.
And it's created a strong customer demand.
Please turn to slide 10.
Our environmental social and governance programs deliver stakeholder value.
We continued to progress on our ESG journey with <unk>.
Leadership from our board of directors and executive leadership team.
During each quarterly Investor call, we will feature one of the pillars of our ESG strategy.
This quarter, we are highlighting governance.
We are proud of the index global experience and diversity of our board.
Our engaged board of directors.
One at the top.
And overseas ESG, including risks opportunities and our company strategy.
Our reputation.
Is among our most important assets and.
And every terex team members as a guardian of our company's reputation.
We protect our reputation by making decisions and taking actions that are aligned with our terex way values.
By our framework outlined in the code of ethics and conduct.
Responsible.
Ethical leadership is in our DNA and part of our Terex way values. Please turn to slide 11.
Geopolitical issues continue to cause disruption and significant cost increases.
Although these headwinds have constrained our growth we are aggressively managing these challenges.
In the quarter, China, Covid policies caused temporary shutdowns and significant disruption.
Store chain, Joe and Jonathan facilities.
These policies also impacted many of our China based suppliers.
Further increasing disruption in our global supply chain and logistics.
The team has successfully battling headwinds every day.
By mitigating cost pressures and minimizing production disruption by engaging with suppliers and expanding our supply base.
We design our components to maximize availability critical inputs to improve production.
Riding transparent communication of delivery and cost to our customers.
<unk>.
Implementing price increases in response to inflationary cost pressures.
To recognize and thank our team members for all of their contributions.
We recently announced an off cycle global compensation increase.
In this dynamic environment. Our team members are demonstrating resiliency and flexibility to increase production deliveries for our customers to overcome these global challenges.
And with that I'll turn it over to Julie.
Thanks, John and good morning, everyone, let's take a look at our second quarter financial performance found on slide 12.
We demonstrated solid execution in a dynamic environment, including significant supply chain challenges and continued inflation with reported sales of $1 1 billion up 4% year over year, primarily due to increased price.
Currency translation negatively impacted sales by $51 million or approximately 5% in the quarter as the euro and British pound weakened against the dollar.
Gross margins declined by 250 basis points in the quarter as pricing actions, partially offset cost increases.
Year over year gross margin decline within our AWP business.
However margins in this business did improve sequentially.
He was able to effectively overcome cost increases with pricing actions.
Although the inflationary environment continued SG&A was flat prior year SG&A percentage of sales at 10, 1% decreased by 40 basis points from the prior year as business investment was offset by continued expense management and favorable foreign exchange translation.
Operating margin of nine 6% was down 220 basis points compared to the prior year and up 220 basis points sequentially from increased pricing and disciplined cost control.
We are pleased with achieving a 39% incremental margin improvement from the first quarter.
The price cost dynamics have improved sequentially from the first quarter operating profit in the second quarter of $104 million decreased $19 million from the prior year as price realization was offset by continued cost increases manufacturing inefficiencies caused by supply chain.
Disruption.
And the negative impact of changes in foreign exchange rates.
Current quarter operating profit includes $1 million of targets in corporate and other associated with the litigation settlement in our former product line.
Interest and other expense was approximately $21 million lower than Q2 of 2021, as we recorded a $26 million loss on early extinguishment of debt related to refinancing a significant portion of our capital structure and prepayment of term loan in the prior year.
We also had an unfavorable year over year foreign exchange rate of <unk>.
$4 million.
Our second quarter global effective tax rate was approximately 17% to.
The slightly higher tax rate is primarily due to lower favorable discrete benefit in the current quarter, largely offset by reduced tax and the geographic distribution of income.
Second quarter earnings per share of $1 seven increased 5% over last year and reflects an unfavorable EPS impact of <unk>.
From foreign exchange translation.
Also in the prior year, we had 26 cents of unfavorable financial call outs, primarily in connection with the refinancing of a significant portion of the capital structure.
Our return on invested capital remained strong at 17, 3% as we continue to invest in the business and return cash to shareholders through share repurchases and dividends.
Free cash flow for the quarter of $44 million was consistent with our expectations for the second quarter I will discuss free cash flow in more detail later in my prepared remarks.
Let's look at our segment results starting with our materials processing segment found on slide 13.
<unk> had an excellent quarter with sales of $481 million up 9% compared to the second quarter of 2021 with growth across all product lines.
On a foreign exchange neutral basis sales were up 16%.
<unk> ended the quarter with a backlog of $1 1 billion up 32% a year ago.
Our strong backlog supports our sales outlook and is approximately three times historical norms.
We also have $100 million of additional backlog delivered beyond 12 months.
In these challenging markets N P increase their operating profit to 16, 5% and increase their margins 230 basis points from the first quarter and he has been able to demonstrate strong performance even in this inflationary environment with approximately 20% incremental margin.
On a reported and operational basis, excluding FX.
The team continued their excellent operational execution.
On slide 14.
Our aerial work platforms segment financial results.
AWP sales of $598 million were slightly higher compared to the prior year, increasing 4% on an FX neutral basis.
Backlog at quarter end was a record $2 $3 billion up 62% from the prior year.
Both Jamie and utilities have taken multiple price actions over the course of 2021 and 2022 to address inflationary cost pressures.
In addition, both businesses have been battling part shortages constraining their growth.
AWP delivered operating margins of seven 7% this quarter down from last year by 330 basis points, but up sequentially from the first quarter of 2022 by 180 basis points. This.
This sequential improvement was the result of strong execution and strict expense management and disciplined pricing actions.
Please see slide 15 for an overview of our disciplined capital allocation strategy.
Free cash flow for the quarter was $44 million and consistent with our expectations.
Free cash flow includes $38 million of IRS refunds, but was negatively impacted by $63 million of hospital inventory as well as unfavorable foreign exchange.
Now, let me detail some usage of our cash in the quarter.
We continue to reinvest in our business with capital expenditures acquisitions and technology investments of $32 million.
A large portion of our capital expenditures is related to our Monterrey, Mexico facility, which remains on schedule.
In addition, we prepaid $23 million of our term loan reducing the outstanding balance to $55 million.
Returning cash to shareholders is an important element of our disciplined capital allocation strategy the company.
Continued its quarterly dividend per share of <unk> 13.
At eight 3% increase over the prior year.
We also repurchased $61 million of shares in the quarter and we believe a tariff shares are an attractive investment.
We have $61 million remaining on our share repurchase program the.
The company's strong balance sheet has allowed us to return approximately $100 million attached to shareholders year to date.
The company has significantly de levered over the past four years and strengthened its balance sheet out.
Outstanding gross debt has been reduced by $524 million since the second quarter of 2019, a 39% decrease.
$66 million since the second quarter of 2021.
7%.
We have no near term maturities until 2024, and 72% of our debt is at a fixed rate of 5% until the end of the decade.
Our net leverage remains low at 1.56 times, which is well below our two five times target through the cycle, we have ample liquidity of $678 million. The company is in an excellent position to run and grow the business.
Now turning to slide 16, and our full year outlook.
Thanks to the strong execution of our team members and our robust backlog, we are raising our 2022 outlook that we shared with you in February and April .
We expect earnings per share of $3 80.
$4 from 'twenty on.
Sales of four one and $4 $3 billion.
This outlook incorporates an additional unfavorable <unk> 25 per share due to foreign exchange from our initial outlook.
Supply chain challenges inflation pressures geopolitical uncertainty and highly restrictive China COVID-19 policies continue but the team has successfully navigated. These challenges in the first half of 2022, and we expect continued improvement in price cost dynamics.
We're out of the year.
Our strong backlog supports our sales outlook, which in total remains unchanged and reflects the ongoing dialogue with our suppliers.
Sales are not a function of demand.
But rather the ability of the supply chain to deliver component.
We have the internal capacity to produce more which we have demonstrated in the past.
The full year, our sales growth is based upon improved price execution of approximately 9%.
<unk> growth of 6%, partially offset by unfavorable FX of 6%.
SG&A cost management has been excellent and we have reduced our full year outlook to 10, 6% of sales.
Interest and other expense increased $5 million on higher interest rates and unfavorable FX.
Our global effective tax rate for the year has been reduced to 20% based on a more favorable full year geographic mix.
We estimate a share count of approximately $70 million based on repurchase activities in the current year.
We continue to expect sequential free cash flow improvement in the second half, but have lowered our full year outlook to $150 million to $200 million as a result of negative foreign exchange.
Corporate and other loss has been increased to $80 million.
Operating expenses are in line with our initial outlook.
Our results have been adversely impacted by unfavorable foreign exchange and $7 million a year to date I answer call outs associated with restructuring severance and litigation settlement expenses and former product lines.
We expect our incremental margins in the second half to be above our 25% target.
Turning to the segment outlook.
Based upon <unk> successful mitigation of persistent input costs supply chain challenges and first half performance. We are increasing the operating margin range to 14, 8% to 15, 3% with relatively balanced margin throughout the second half of 2022.
For AWP.
Supply chain challenges continue to be more disruptive in this segment with the majority of our total hospital inventory.
This segment has been performing well and we expect sequential quarterly margin improvement to continue through the balance of 2022.
Therefore, we have increased the bottom end of the margin range to 8% and maintained the top end of eight 5%.
We are extremely pleased to be in a position to raise our earnings per share outlook to $3 80 to.
$4 20.
And with that I will turn it back to you John .
Thanks Sheila.
Going to slide 17 to conclude my prepared remarks.
Terrace is well positioned and has a strong foundation to deliver long term value for all stakeholders, because we have great businesses strong brands and strong market positions upon which we can grow the company.
We will continue to invest in new products and manufacturing capacity, along with strategic inorganic growth.
We'll continue to execute our disciplined capital allocation strategy.
And we have demonstrated resiliency and adaptability in an increasingly challenging environment.
I'm confident this will result in terex being an even stronger company and with that let me turn it back to John Thanks, John .
Minder during the question and answer session. We ask you to limit your questions to one and a follow up to ensure we answer as many questions as possible. This morning with that I would like to open it up for questions operator.
Thank you if you'd like to ask a question. Please press star followed by the number one on your telephone keypad, well pause for just a moment to compile the Q&A roster.
Our first question comes from Stephen Volkmann from Jefferies. Please go ahead. Your line is open.
Hi, good morning, everybody. Thanks for taking the question.
Good morning, Lindsay maybe slightly.
Slightly less field.
I'm curious if you can just comment around sort of the ramp up in Monterey Youre plans for that sort of how that progresses and I guess, what I'm really trying to think about is what's the margin impact of that over the next.
Medium term as that ramps up.
Thanks for the question Stephen.
<unk> always said.
Mexico is one of our major capital investments for the year.
<unk> to us.
The team is doing a really good job in a challenging environment. The project is on time.
And budget, we completed the culinary remove.
From our Oklahoma City facility.
Tough to tell of animal production in Oklahoma City can move back to Mexico, Mexico.
Alright, and just the temporary facilities through the primary facility in permanent facilities under construction and doing well at the same time, we're moving other product lines in the Mexico as well those are products that were originally scheduled to be manufactured in China, but we moved into Mexico and some of the products in the Redmond facility, where labor is tight we're moving into.
The Mexico facility and again that is on time and on schedule.
Commensurate with that Steve will also developing our Mexico supply chain and we think that's also going to provide a competitive advantage for us as you go towards what was said there Steve in terms of the.
Margin improvement of Mexico is over the next couple of years 'twenty four five time frame when it is complete and the transition and movement of product lines. In there we anticipate about a 200 basis point overall margin improvement in our <unk> business as a result.
Of the <unk>.
Completely utilization if you will of the Monterey.
Facility. So again, we think this is going to help improve our global cost competitiveness positioning us to be affected in the north American market and again the team is doing a really good job in a challenging environment not just challenging to build things manufacturing it sounds like build things and the projects on schedule and on budget.
And the other thing we're excited about Steve is our ability to attract incredible talent, both managerial talent and direct labor talent in Monterrey, Mexico area, So projects going really well and like I say over the Mexico. Several years, we anticipate it's going to drive 200 basis points of margin improvement in the Genie business.
Super I appreciate it and then my.
I follow on just on hospital inventory John can you just sort of comment on the trends that you're seeing there.
<unk> changed in terms of what is missing or anything and then how you see that progressing towards the end of the year and I'll pass it on.
Right, Thanks, Steve, but yes, we're still talking about hospital inventory.
And we like many manufacturing companies are continuing to experience a disruption in terms of the components I don't think we're unique in the sense that we're dealing with electronic components. You know a lot of work there engine driven by electronic componentry recruiting challenges and then hydraulic systems are really good.
Three principal areas.
We're dealing with with teams aggressively managing it we've got a escalation process up to and including me. So I've spent a lot of time.
During the week of dealing with the supply chain issues, while we saw Steve is that we saw the.
Inventory costs, we saw hospital inventory declines really in the first week of June they were up to about over $100 million.
The team did a good job over the last three weeks of the quarter brought it down into that $60 million to $62 million range. So it's up about $12 million quarter over quarter, but it did peak at over 100 million during the quarter. So that describes the disruption that the teams are dealing with and what we're having to overcome to deliver for our.
And again I want to congratulate our teams is it's an incredibly challenging environment, but they are demonstrating resiliency and adaptability and finding ways to deliver products for our customers, but we are still experiencing disruption and in terms of what we're anticipating Steve for the rest of the year. If you look at our outlook, we're kind of in that $1 $1 billion.
Range of revenues, so we're not assuming any significant improvement in the supply chain over there over the next over the back half of the year. We are assuming that the hospital lender inventory comes down a little bit from where we are and that helped drive some improvement in free cash flow, but we're not assuming that the hospital in inventory goes dramatically better than where we are right now.
Result of the disruptions, we're continuing to see.
Thanks, John I appreciate it.
Thanks, Steve.
Our next question comes from Nicole <unk> from Deutsche Bank. Please go ahead. Your line is open.
Good morning.
During the call.
And maybe just first starting with you guys provided some good color on how you're thinking about the cadence of margins in the back half of the year for both segments, but can you just give us a sense of what youre thinking with respect to the revenue cadence between <unk> and <unk>.
During the call.
As we think about our operating close enough in our revenue.
Yeah, we've been doing consistently with the supply chain remember our sales forecast as it is a function of our supply chain now that the customer demand.
Think about our supply chain being in that one.
$1 billion to 1 billion one is what we've been doing for the last six or seven quarters.
We're forecasting a slight increase in Q3 and Q4, but relatively.
With what we've done the slight uptick in Q3 Q4.
Got it thanks, Julie and then I guess, maybe on the MP side. The margin was up really strong during the quarter or was there anything kind of unique going on or onetime in nature, just trying to think about how <unk> performing balances against a step down in magazines in the back half.
So overall for tariffs are our operating margins are expected to steadily increase throughout the year and for Q2.
He had.
Outstanding second quarter margins of 16, 5%.
Their performance.
We've increased the margin outlook for that business from $14 eight eight.
Eight 3%.
The remainder of the year and we would anticipate relatively balanced margins in the second half of the year and with continued year over year improvement.
Quarter benefited significantly from favorable geographic and product mix.
And the second half of the year. It is expected to be impacted by typical holiday in summer factory shut down maybe not as favorable product and regional mix.
And then we'll have some increasing investments that we think are important for that fitness and technology engineering, R&D and digital customer solutions as well.
Thanks, Charlie I'll pass it on.
Our next question comes from Stanley Elliott from Stifel. Please go ahead. Your line is open.
Hey, good morning, John Julie Thank you guys for taking the question.
John can you just go back and talk a little bit about the <unk> investment you mentioned, a third of the Ginnie boom two thirds on the scissors.
Quickly can you accelerate the electrical offering within kind of the AWP segment, and then how fast the basket you take that technology and put into other products that you have.
Right.
And you're right, we just announced investments.
And we think it really does help accelerating our first genie starting from a position of leadership and electrification within within the industry <unk> brings a.
13, plus years of experience at operating at the forefront of.
Battery solutions not just.
Lithium ion, but advanced battery solutions, and and what what the investment Gus for US It brings that technology and knowledge with our existing knowledge, but it also would ask you on does span.
<unk> is there also very good at certified technology and so that's the competency that's important because you can have a greater technology in the world, where you can't certify it cost effectively and timely you can't get it into the market. So theyre going to help with that they also bring some artificial.
Intelligence capabilities that we think we're going to be able to use and some cloud based technology that we think we're going to be able to use. So we think this will help accelerate our offering in the marketplace and the good news is we're starting from a position of strength and again, we think this will accelerate and to your second question as we work with <unk>.
And our technology centers will also look for how can we utilize that technology in other areas of our business throughout utilities and an M. P. As well so it's starting with Genie, but very quickly. We will we will we will leverage that across the portfolio and then last but not least it's an investment. So we also captured the benefit of.
As this company grows and expands we get the service providing that we need but we also will benefit from the financial reward of this company growing and we think it's going to have substantial growth.
Over the coming years.
That's great and then you mentioned 600 million of of kind of empty in AWP revenues or I guess.
Looking out beyond 12 months, how do you think about pricing for these longer dated.
It's a deliberate items kind of given the volatility that we've seen here in the marketplace recently.
Thanks.
You're right. We are taking orders we have backlog that goes into 2023 and again, that's a function of strong customer demand across the portfolio of businesses now if we look at our how are we doing it in an M. P. M. P lead times now are significantly longer than our historical averages.
Given the strong backlog that we've had MP has done a really good job through the course of this time of dynamically adjusting price.
Especially as we get closer to delivery. So both of those units that are in the 2023 are priced what we anticipate 2023 pricing to be but we will adjust that pricing is required given the inflationary environment that we have and that we're facing and if we look at Genie, yes, they've got 23 backlog and again customer demands.
<unk> it gives us some confidence in the longer term outlook based on the replacement cycle.
And Jamie from a pricing standpoint, and we've had the team has been executing on the pricing discipline, we implemented price increases in April and any 2023 orders that we have we will have 2023 pricing and we'll continue to make the adjustments as necessary based on the inflationary pressures that we see so in those call.
<unk> are ongoing and I would say very similar story.
Utilities business. So now the good news is the demand strong our total backlog about 70%, which gives us some confidence about the future outlook and we'll continue to address pricing as required given the inflationary pressures that we're seeing.
Great. Thanks, so much.
Got you.
Our next question comes from David Raso from Evercore ISI. Please go ahead. Your line is open.
Hi, good morning, Thanks for the time, what's your stock in the low thirties, obviously the stocks on fully believe in the $4, but it's definitely not believing you can grow next year. So I'm just trying to think about <unk> 23 in the context of for example in AWP.
Your backlogs over $2 8 billion. If you include backlog beyond 12 months.
So I mean, you could get zero water as the rest of the year zero.
And so it's still your revenue guide for this year for AWP and.
And still end the year with a backlog of over 1 billion six right, 70% of our full year sales.
So I think what people are going to be curious about.
For 'twenty three.
That backlog.
Can you give us any sense of.
Are you, adding any incremental stickiness to those those orders anything about a more challenging cancellation penalty or anything that we can get comfort that we can believe in that backlog is obviously that backlog alone will tell you I mean.
You can get the next six quarters get orders only half of what you just got in the first half of this year and you would still grow revenues next year in AWP. So I think it's just about the believability of the backlog with the stock must be questioning at these levels at a minimum can you look I know you can't go into the big rental companies, if they want to cancel it.
It's a challenge to say hey, you've got to take the machine I get the relationship but can you help us understand the stickiness of some of the aspects of this backlog we should be comfortable with thank you yeah yeah.
Thanks, David and we share your enthusiasm for the backlog and the potential outlook. Obviously, it's too early David we're going to learn a lot.
August so we're not going to provide 2023, our guidance at this time, but youre absolutely right, we have an incredibly strong backlog.
And we have significant coverage that's going in to 2023, and so we are anticipating growth in both segments based on this backlog.
In 2023 based on the backlog that we have now let me be clear, David we're going to need to see improvement in our supply chain to capitalize and to drive growth as we move into next year and if you look specific to the AWP the.
The market is incredibly strong the rental companies in North America, and Europe for that matter are seeing very robust business, we're seeing record levels of utilization, we're seeing very strong rental rates.
Being very strong used equipment values, they're being very disciplined in their business and they're executing incredibly well, it's actually growing their business into other areas and so the underlying secular rental trends are quite strong.
Backlog is in there and I can tell you David every customer conversation I have it's not about hey, we're worried about canceling orders. It's about can you get us each year sooner and quicker and so if you look at the replacement cycle and where we are in the AWP area segment, it's been built.
Hey, David because the industry has struggled to meet.
The need with the industry. So you've got the natural replacement cycle, you've got the underlying infrastructure and infrastructure builds if you're just looking in North America. There is no money currently being released or spend on the infrastructure build that's going to come in 2023 and beyond and so there is a strong foundation.
The rental companies going forward and they are quite confident in their outlook and that's been relayed to us in terms of their expectations for.
For equipment going forward and so.
You know I think the demand is there they need the gear, they're going into the cycle.
With an aging fleet and that creates a stronger.
Demand environment and their scarcity right now.
Because of our production challenges and so I think those things all go to youre, creating a good demand environment for us going forward Youre right. What do we know what we know is we've got historically high backlogs.
In that business at this time and and the rental companies are doing well, they're there they're looking at their markets and their robust about there.
Their outlooks and that usually you know David when rates are our utilization rates are going up rental rates are going up used equipment values are going up those are all great.
Things for the demand within the area of business, So where we've got the backlog customers, telling us they're canceling the backlog all the questions about can you get it sooner because we need it now.
Sure I mean look there's two things to do off of that show. Some increased features that make it stickier than normal to let investors feel more confident that demand will be there <unk> yes.
Everybody's confidence in the backlog is what it is obviously the response for capital allocations.
No more share repurchase rate, so I know you're balancing building the portfolio, but I mean, that's the crux of the story at the stock do we believe the backlog will be there in 'twenty three right.
Obviously, I'm, suggesting growth for 'twenty three so I appreciate the commentary, though okay. Thank you so much I appreciate the time.
Your question on the capital allocation, David we bought back a significant amount of shares in the quarter, because we believe that these prices, but that's an incredible IRR.
Want to grow the business, we have a bias towards growing the business, but at these share prices of <unk>, it's hard not to be active in the market or repurchasing shares.
Thank you.
Our next question comes from Michael Feniger from Bank of America. Please go ahead. Your line is open.
Yeah. Thanks for taking my question just.
Kind of following up actually on.
David question, I mean materials processing is now expected to reach a new margin high that's a new milestone we saw one of your peers in Europe , just acquire screening crushing business for.
10 times EBITDA, just a few months ago, So John just where your where your leverage is right now which is below your target how do we unlock that value in materials processing, but the market is putting on other other companies that Jimmy.
Michelle's, possibly unit is it <unk>.
Share repurchases, how do we view M&A really going forward in an effort to build out materials processing, how do you kind of think about that going forward.
Well thanks for the question Michael first of all <unk>.
Clearly demonstrated incredibly strong performance through the cycle.
Highly diversified and consistent.
And it drives significant margin improvement as we go forward what are we what do we like about it and you're absolutely right. It contributes more than 60% of our operating earnings and it's consistent as we go through time and so our job is to help the market understand the strength the diversity the capabilities of beds.
<unk>.
As we go forward part of the reason it's been so successful regional diversification, we're not bound to one region. It is truly a global segment second with product and customer diversification around aggregates lifting concrete are handling in Nebraska mental business and then end market diversification. It is construction, yes, but its waste waste handling recycling.
Market. So we serve many markets. We also think from an M&A activity that is still highly fragmented within the verticals that we compete in and so you've seen much of our M&A activities and most recently the acquisition of prolonged is in that space. So near Adjacencies, where we believe we can build out the MP segment and over time.
Actually create multiple segments, if we're successful.
Within the <unk> space Youre also right that we've got the strong balance sheet.
Our debt to equity is at 1.5, we've talked about two five times net debt to EBITDA through cycle and so we have the balance sheet, we're going to be disciplined we've made some acquisitions and we continue to look in this area because it is an area. That's underappreciated and it's an area that we've got to do a better job of explaining to our investors.
The power of this segment and the difference in the terrorists portfolio as a result of M. P being 60% of our operating earnings and we're going to we're going to work hard to get that message out and when you see our M&A activity you can expect to see more M&A activity again will make technology investment, but you can expect to see more.
M&A activity in and around the empty space as well because we like the dynamics in that space and we'd like to build that out and ultimately over time create at.
At least multiple segments within the MP segment.
And thanks, Thanks for that response and on the <unk> side, obviously, the guidance implies a strong margin second half and Q4 potentially 10% higher so it's a good starting point obviously.
Next year, I guess, just bigger picture investors always wonder if you can drive cycle over cycle margin improvement in AWP I mean, how different is the ADP business today.
Your last peak in 2018.
Great Great question.
Hats off to our GT team, because they've really been focused on improving the global competitiveness of our of our Genie business.
That team completed a significant restructuring in 2020, it took out over $90 million of cost Cigna.
Significantly improving the profitability, but also improving the resiliency and breakeven point, if we were to face my downturn I spoke about the market activities and the strength that we're seeing in the market, but on the operational excellence initiatives. The team's really done a good job. The last couple of years driving pricing discipline in pricing improvement driving.
Process efficiency and effectiveness and even driving some cost productivity, we've called flex productivity improvements. Despite the significant disruption that we've been seeing you talked about okay see Mexico, that's going to help that's different we're going to continue to leverage China for China, but also is a cost effective basis.
Exports to other regions of the world.
Julie mentioned in her comments and the team there has done a.
Fantastic job.
Aggressively managing SG&A, while investing in product development, but the team realizes that we have to be disciplined on our SG&A spend and not allow us to grow.
As revenue grows and they've done a heck of a job there and then our strategic sourcing team it's been tough in the market for strategic sourcing and our purchasing teams, but despite that they are still out there working to expand our supply base. There are out there working on cost out of it.
They are working to develop our Mexico supply base all of that didn't exist back in 2018, Likewise, new product and new product development and he's doing a really good job of purposeful innovation, bringing things to market that features and benefits, but also our lower cost of manufacturers so design for manufacture ability.
Designed for assembly of <unk>, and our product development team is doing a great job. There we're investing in technology and systems in that business that didn't exist for one for us to be easier to do business with with our customers, but also to do the digital thread within our own operations. So we can improve the speed of decision making.
And improve decision, making process with systems and processes within the business. So we've got a major initiative underway and then B I forgot the last part is our parts and service team in that business over over the last three or four years, it's been a wonderful job growing the business expanding the business and that is also counter cyclical for us.
As we go forward. So that team is working hard in an incredibly challenging environment and I think they've done a really good job restructuring that business to ensure it's adaptable and resilient to respond to whatever market conditions that did.
That team basis. So you know they've got a heck of a job and a lot of hard work over the last couple of years.
Yeah.
Thank you.
Our next.
Comes from <unk> <unk> from J P. Morgan. Please go ahead your line is open.
Hi, Good morning, Thank you for taking my question.
Our next question is.
How are you. So my first question is and I'm I'm, sorry, if I missed it so you're you're expecting 9% pricing for the year and 6% volume.
Can you give us some color on what price and volume expectation and by segment, where they are.
[laughter] Tammy.
Tammy you know in in general.
That thing that again.
Gary you said that the 9% increase in pricing overall for the year, 6% volume.
So the businesses are having increasing in prices as we go throughout the year. So each of them has implemented various pricing action, starting backing and in last year and they've been adding them throughout the year and as we deal with the increasing costs of both businesses are seeing increased price. This is a part of it.
Does the price increases across segments have been similar can be has been bad.
Yes.
Yeah.
Got it got it and I have one quick follow up too.
To what John just mentioned earlier about an inventory influx in June . So when you began the quarter are you expecting topline to grow only modestly quarter over quarter and you expected that to be driven mostly by the MP segment.
Top line came in well above expectations for both segment, excluding FX. So what really drove that was June and exceptionally strong <unk> that drove the upside or did you have better than expected sales sort of throughout the quarter.
It's a good.
Good question you remember early in the quarter, we were dealing with the Covid disruptions in locked down in China, and so the quarter started off pretty slow as a result of those locked out not just disruption to our existing facilities, but also through the supply chain and who just sticks and so as the as the Lockdowns in China eased in the.
Our teams did a great job literally sleeping in the plants to produce.
Product.
<unk> east that improve the supply chain and so that helps to reduce some of that hospital inventory. So I would say we saw an improvement as we went into it and into June as the Covid.
Policies were relaxed in China.
Got it thank you so much.
Our next question. Our next question comes from Seth Weber from Wells Fargo. Please go ahead. Your line is open.
Oh, Hey, guys good morning, and thanks.
Good morning, another maybe Julien another pricing question for you Doug.
Implied kind of high single low double digit margins for ADP in the back half of the year does that reflect.
You're on the positive side of price costs by the end of the year.
Can you just give us any indication of an ADP AWP, how much is structural pricing versus surcharges. Thanks.
Yeah. So thanks to the classroom. So overall terex operating margins are expected to steadily increase throughout the year as price cost dynamics and crew and for the year, we expect to be price cost neutral AWP delivered operating margins of seven 7% in the quarter up sequentially.
By 180 basis points from the first quarter and then we expect that this sequential improvement was a result of strong execution in that.
First management and disciplined pricing action and.
We anticipate continued sequential improvements through the second half and disciplined cost management, and we expect our incremental part of it.
The margins are it could be above our target in the second half of the year.
Okay is there any is there any flu.
Flavor for how much of that is structural versus surcharge.
And so the the Genie businesses in AWP that both businesses have taken price increases so in our utilities, it's been a combination of price increases and surcharges and the same is true for the Genie business both of them have a combination of increases in price and.
Surcharges.
Okay and then.
Maybe just following up on the MP segment.
And the strength in the margins there is there anything with the acquisitions that you've done or investments that you're making that would prevent.
20% to 25% incremental margin for next year as we're thinking about it.
So yeah overall as we we're not giving 2023 guidance at this point in time, but you know the where we're pleased that that and he had 20% incremental margins in Q2, and we expect strong incremental margin performance for the for the rest of the year and so this business.
We're pleased with the absolute overall profitability.
But our overall target for Terex remains at 25% incremental margin.
Okay. Thank you guys.
Thank you.
Our next question comes from Steven Fisher from UBS. Please go ahead. Your line is open.
Great. Thanks, good morning.
John You mentioned good morning, you mentioned before John that the key thing for next year is just to be able to deliver your backlog and I imagine youre going to be doing to near 2023 planning in the next few months. So I guess with a clean slate on the year and so maybe five months away from the start of the year can you put better.
See plans in place to kind.
Better manage supply chain risk for 2023 like to what extent are you kind of now thinking multiple moves ahead.
To be able to manage the next year, a little bit better if possible.
Yeah, Great Great question, and I spend a lot of time on that and so you know from the actions and the response you know first our strategic sourcing initiatives did help identify multiple suppliers for key commodities and so that initiative has provided at least the list of suppliers to go to so even in this environment.
We have expanded the supply base and that's helped now but that said, it's obviously still highly.
Constrained the engineering Redesigns the team's done a really good job of redesigning some of the components for what's available part of those redesigns or for what's available not just now but also into the future and so we think that will help potentially mitigate.
Some of the electronic challenges at Microchip challenges that we've had.
As a team.
Continued engagement at senior levels with the key suppliers up to and including at the CEO level and so those engagements are going to continue we've been very transparent in terms of what our needs are.
As we go forward and the relative performance of the key suppliers now.
With that said I don't want to be totally negative on the supply chain because they're also highly motivated.
To deliver for us so that we can deliver for our customers. So you know these.
These are challenging times, they're difficult conversations.
At times like this.
Slide basis motivated so we're expanding the supply base, making engineering design changes.
As we can and then looking to re short in some cases for example building up the Mexico supply chain over time, we think that's going to provide a greater degree of resiliency for us.
As we go forward. So it's a multitude of steps across both businesses AWP and <unk>.
And our our MP business as we go forward and then the other piece I think that we'll see some improvement on as our utility business has been significantly impacted by chassis and body I think chassis supply as we move into 2023 is we will begin to see some improvement there because that that has adversely impacted that.
Part of our business. So just a couple of things that the teams are doing we're continuing to do to provide that resiliency.
We're going to need to.
They have the opportunity for growth in 2023.
Terrific, Thanks very much.
Our last question will come from Jamie Cook from Credit Suisse. Please go ahead. Your line is open hi, good morning, Congratulations on a nice quarter I guess my thought just two follow up questions. One can you just comment on what you saw for order trends in Europe versus the U S versus China.
And whether the trends continued into July so.
So I guess, that's that's that's my first question.
And then your assumptions on sorry, My I'll just put in my other question now to either you know price cost in the back half of the year I think before you were assuming hot rolled coil was 1800 in the first half I Wanna say 1400 in the second half what your expectations are now or what's embedded in your guide. Thank you.
Thanks, Jamie you know the good news is is similar to North America on the jeans side. The multi year replacement cycle is going to help so we're actually seeing stable backlog and order rates. Despite the challenges.
And in Western Europe similar story.
We've certainly seen backlog increased sales increase and those mark clearly those are the markets that we're currently watching.
All the markets, but obviously very focused on what's transpiring in western Europe , but right now I think what's the word I would use is stable in terms of demand and bookings and an outlook standpoint, but are growing actually growing backlog.
And Jamie you know where are our second half.
I see.
In the U S North America.
Okay.
Okay. Thank you.
Okay.
We are all out of time for questions today, I would like to turn the call back over to John garrison for closing remarks.
Thank you operator, and please if you have any additional questions. Please follow up with Julia John again, please stay safe and healthy and thank you for your continued interest in Terex operator, please disconnect the call.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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