Q3 2022 Terex Corp Earnings Call
The formal presentation.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host John Patterson, Vice President and Treasurer.
Good morning, and welcome to the <unk> third quarter 2022 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 would like to take this time to introduce <unk> Misra, who has joined <unk> as head of Investor Relations powerhouses looking forward to working with you as contact information can be found on the tariff Investor Relations website, and our Q3 earnings release.
We are joined by John Garrison, Chairman, and Chief Executive Officer, and Julie Beck, Senior Vice President and Chief Financial Officer, Theyre prepared remarks will be followed by Q&A. Please.
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.
In addition, we will be discussing non-GAAP information and performance measures. We believe are useful in evaluating the company's operating performance reconciliations for these non-GAAP performance measures can be found in the conference call materials. Please turn to slide three and I'll turn it over to John garrison.
Thank you John and good morning, I'd like to welcome everyone to our earnings call and appreciate your interest and tax.
I would like to begin by thanking all terex team members for their efforts in this challenging global operating environment with inflationary pressures production disruptions and Covid impacts.
Terex team members have worked tirelessly to improve our performance for our customers dealers and shareholders.
We are proud of all Terex team members, who are keeping themselves and others safe.
I'd like to thank our team members around the world.
Their continued commitment towards zero harm safety culture, and Terex way values.
Safety remains the top priority of the company driven by think safe workspace home safe.
Please turn to slide four to review our strong financial results.
The team delivered solid financial performance for the quarter.
Which Julie will cover later in her remarks.
As a result of the team's continued strong execution in the third quarter and our backlog.
We are raising full year EPS outlook to a range of $4 to $4 20.
On sales of approximately $4 3 billion.
Please turn to slide five.
Tariffs participate in attractive end markets that are supported by favorable macro trends and we have industry, leading brands and the capacity to support long term growth.
Our MP segment is a diversified and consistent high performing portfolio of businesses.
Mp's 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 a total backlog of $1 2 billion.
Up 14% year over year.
Environmental and recycling growth are driving demand for our ecotec and CVI products.
The MP team is taking existing product designs and modify them to service the fast growing environmental and waste recycling markets with a focus on construction and demolition waste.
The powertrain and <unk> brands are benefiting from strong global aggregate demand.
We have leading market positions with our mobile crushing and screening products and anticipate tailwind from increased spending on global infrastructure investments.
Mp's end market diversification is our strength.
Markets continue to grow and provide demand for our leading <unk> brands.
Can you repeat that markets are also strong demonstrate.
Demonstrated by a total backlog of $2 $7 billion.
Up 44% year over year.
Awp's experiencing healthy customer environment.
Fleet age and customers have high utilization rates.
Globally <unk>.
<unk> 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 for Genie products include data centers warehouses and manufacturing facilities.
Our utilities business will benefit from the electric grid multi year infrastructure spending ramping up in 2023.
The business has robust demand as customers look to reserve 2024 production slots.
Please turn to slide six.
Consolidated Q3 year to date bookings remain at healthy levels and were the second highest booking rate in recent history.
Elevator customer fleet ages, and historic lows dealer inventory levels continued to support robust demand.
Utilities bookings remains very strong.
Overall, our outlet to support it.
Total backlog position that is up 33% versus the prior year.
As we move into 2023, we continue to anticipate the supply chain will be the constrained and not customer demand.
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.
Company wide investments in new product development and continued deployment of digital customer and dealer solutions will help to deliver long term growth.
<unk> is a leader in electrification and recently shipped its first scissor lift with our new lithium ion battery option.
This example of electrifying our product offerings helps customers reduce their carbon footprint and lifecycle maintenance costs.
In the coming slides I will highlight our innovative products are being used to address societal challenges.
We continue to increase our pipeline for inorganic growth.
We are focused on specialized equipment.
In materials processing.
Utilities.
And service and investments in technology and it.
Vance our product offerings.
In the quarter.
We expanded the capabilities of our growing environmental business in the MP segment with the acquisition of Zen Robotics.
A company that designs and creates robots that pick sort and recycle waste material.
These robots that additional functionality and technology for Terex recycling systems offerings for more efficient at.
Aggregate and profitable recycling.
This investment advances our MPV strategy to make the circular economy our.
Reality by turning global waste into clean raw materials.
Turning to slide eight.
Material processing mobile screens of Perceval machines capable of screening and separating a wide variety of materials.
And this recent application power screen Warrior 200 screens is being used to clean various landfills in urban centers of India, enabling future land development here.
Historically waste in India was not segregated at the source and is comprised of the construction demolition and municipal solid waste.
A single screening can separate material into three streams, but processing five to 600 tons of waste per day.
More importantly.
Our mobile machine can work directly on site and eliminate the re handling and transportation of materials.
Thereby reducing the carbon footprint and operating costs.
Turning to slide nine at.
At Terex, we are proud to build the products that can support the relief and rebuilding efforts to restore communities and the lives of people impacted by unfortunate disasters.
Our thoughts are with those impacted by the devastation of hurricane and.
And other natural disasters.
<unk> is committed to providing equipment and supporting the uptime of our machines in the field.
Our utility trucks are operated day and night to restore the power grid.
MP environmental equipment processes biomass in sea and new ways to open infrastructure and provide cleanup.
And G&A equivalent supports the rebuilding and the inspection of civil commercial and residential infrastructure.
Our equipment inaction demonstrates.
Demonstrates our company purpose.
Help improve the lives of people around the world.
Please turn to slide 10.
Our environmental social and governance programs deliver stakeholder value.
We continue to progress on our ESG journey with 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 environmental stewardship, where.
We're proud to be uniquely positioned to positively impact the environment by innovating environmentally friendly product solutions.
Our customers want battery electric and fuel electric products.
Approximately 60% of empty and more than 70% of Genie products have electric or hybrid options.
Recent investments in biotech and <unk> or accelerating our delivery of efficient sustainable product solutions to our customers'.
Customers rely on our products to support the production development and maintenance of renewable energy solutions.
Our materials processing segment offers an extensive range of product solutions to help improve the environment and contribute to the circular economy.
Our business in an environmentally friendly way and are targeting a 15% reduction in both greenhouse gas and energy intensity by 2024.
Our environmental roadmap provides the structure for each tariff scheme members.
To reduce hazards exposures adhere to the law and proactively improve processes to benefit the environment.
Please turn to slide 11.
Geopolitical issues continue to cause disruption and significant cost increases.
We have taken and are in the process of implementing actions in the EU to mitigate the impact of natural gas shortage.
China Covid policies continued to create some disruption to the global supply chain that our teams have had to overcome.
The operations team continues to battle, our shortages in late part deliveries and are working with suppliers to reduce cost increase.
Finally, our commercial teams are communicating with customers the need for price increases as we seek to offset the inflation, we all face.
We recognize and thank our team members for their contributions.
In this dynamic environment. Our team members are demonstrating resiliency and flexibility to increase production deliveries for our customers to overcome these global challenges, but with that let me turn it over to Julie.
Thanks, John and good morning, everyone, let's take a look at our third quarter financial performance on slide 12.
We demonstrated solid execution in a dynamic environment, including significant supply chain challenges and continued inflation.
It was a $1 1 billion were up 13% year over year on higher volume and improved price realization necessary to mitigate rising car sales.
Sales in constant currency or up 21% as foreign currency translation negatively impacted sales by $78 million or approximately 8% in the quarter as the euro and British pound weakened against the dollar.
Gross margin increased by 320 basis points in the quarter as volume pricing favorable mix and cost out initiatives helped to offset cost increases and the negative impact of foreign exchange rate.
Year over year gross margin increase was in both our segments with steady sequential improvement in AWP and.
<unk> continued to effectively overcome cost increases with pricing actions.
SG&A was in line with expectations, but up over the prior year as a result of inflation and incremental spend due to acquisitions and prudent investments in technology and new product development.
SG&A was 10, 4% of sales and decreased by 10 basis points from the prior year with business investment offset by continued expense management.
Income from operations of $121 million was up 63% year over year.
We were pleased to report an operating margin of 10, 8% up 330 basis points compared to the prior year and up 120 basis points sequentially or.
Our incremental margins were 37% compared to the prior year and 39% from the second quarter.
Current quarter operating profit includes restructuring charges of $1 million in AWP associated with our Oklahoma City facility.
Interest and other expense of $13 million was comparable with Q3 of 2021.
The third quarter global effective tax rate was approximately 24%.
The higher tax rate is primarily due to increased pack and the geographic distribution of income.
Partially offset by lower U S tax on foreign income.
Third quarter earnings per share of $1 20.
Increased 79%, representing a 53% improvement over last year. This strong performance driven by volume price and disciplined cost control also reflects unfavorable earnings per share impact of 14%.
Foreign exchange translation.
Our return on invested capital of 19% significantly exceeding our cost of capital as we continue to invest in the business and return cash to shareholders through dividends and share repurchases.
Free cash flow for the quarter of $53 million demonstrated continued sequential quarterly improvement in results.
I will discuss free cash flow later in more detail.
Let's look at our segment results starting.
Starting with our materials processing segment on slide 13.
MP sales of $458 million increased 9% compared to the third quarter of 2021 with healthy demand for our products across multiple businesses.
On a foreign exchange neutral basis sales were up 20% the.
The business ended the quarter with a total backlog of $1 $2 billion up 14% from a year ago. This.
Our strong backlog levels supports our sales outlook and is approximately three times historical norms.
In these challenging market M.
<unk> increased our operating profit to 14, 6% and continued their excellent operational execution.
He has been able to demonstrate strong performance in this inflationary environment with a 25% incremental margin over the prior year.
On slide 14, Dr. Aerial work platforms segment financial results.
WP had an excellent quarter with sales of $663 million up 16% compared to the prior year on price realization and higher demand.
On a foreign exchange neutral basis sales increased 22%.
Total backlog at quarter end was $2 $7 billion up 44% from the prior year.
Both Jamie and utility I've 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 margin of nine 6% in the quarter up 350 basis points from last year and up 190 basis points sequentially from the second quarter of 2022.
This year over year and sequential improvement was the result of higher sales volume favorable mix.
Cost reduction initiatives strict expense management and disciplined pricing action.
Included in AWP earnings for the quarter was a reclassification from corporate and other of $5 2 million.
Related to prior period transactional foreign exchange losses.
Absent this charge Q3 operating margins were 10, 4%.
Please see slide 15 for an overview of our disciplined capital allocation strategy.
Free cash flow for the quarter was $53 million consistent with our sequential improvement goal, but below our expectations as inventory levels remain high in the third quarter.
Hospital inventory in the third quarter was $63 million consistent with the second quarter.
Now, let me detail our capital deployment in the quarter.
Continuing to invest in our business with capital expenditures acquisitions and technology investments of $74 million.
A large portion of our capital expenditure is related to our Monterrey, Mexico facility, which remains on schedule and budget we.
We had $42 million of investments primarily associated with profile and <unk> announced in August .
Returning cash to shareholders is an important element of our disciplined capital allocation strategy.
The company continued its quarterly dividend per share up 13%.
And eight 3% increase over the prior year.
We also repurchased $13 million of shares in the quarter, given our operating performance and long term growth prospects. We believe terex shares are an attractive investment we have $47 million remaining on our share repurchase program.
The company's strong balance sheet has allowed us to return approximately $120 million of cash to shareholders year to date.
We have significantly de lever over the past four years and strengthened our balance sheet.
Outstanding gross debt has been reduced by $349 million since the third quarter of 2019, a 30% decrease and $67 million since the third quarter of 2021 or seven 5% decrease we have no near term maturity until 2024 and <unk>.
72% of our debt is that a fixed rate of 5% until the end of the decade.
Our net leverage remains low at one four times, which is well below our two and a half times target through the cycle.
With ample liquidity of $658 million.
Company is in excellent position to run and grow the business.
Now turning to slide 16, and our full year outlook.
Okay.
Thanks to the strong execution of our team members and a robust backlog we are raising our 2022 outlet to the upper end of our prior range. We now expect earnings per share of $4 to $4 20.
This outlook incorporates an additional unfavorable by <unk> <unk> per share due to foreign exchange from our prior outlook.
Overall, we anticipate a full year negative FX impact of approximately <unk> 45 per share versus the prior year.
Supply chain challenges inflation pressures geopolitical uncertainty and volatile foreign currency markets continue and our team has successfully navigated. These challenges for three quarters of 2022, we expect continued strong execution for the remainder of the year.
Our strong backlog supports our sales outlook, which we have now increased to approximately $4 $3 billion.
Sales are not a function of demand, but rather the ability of the supply chain to deliver component.
Have the internal capacity to produce more which we have demonstrated in the past for the full year. Our sales growth is based on improved price execution of approximately 10%.
Volume growth of 7% par.
Partially offset by unfavorable foreign exchange of 6%.
SG&A cost management has been excellent and we maintain our full year outlook of 10, 6% of sales.
Our operating margin outlook has been updated to approximately nine 5%, which was at the upper end of our prior range.
We estimate a share count of approximately $69 5 million based on repurchase activities in the current year.
We are reaffirming our full year effective tax rate of 20%.
While we expect sequential free cash flow improvement in the fourth quarter. We now expect full year free cash flow of approximately $125 million. This is primarily a result of higher inventory levels due to the supply chain disruption and negative foreign exchange.
Corporate and other has been reduced to $73 million, we expect our incremental margins in the fourth quarter to be above our 25% target.
Turning to the segment outlook.
Based upon <unk> successful mitigation of persistent input costs supply chain challenges and strong performance to date, we expect net sales of approximately $1 9 billion with an operating margin range of 15 to 15, 3%.
Supply chain challenges continue to be disruptive in the AWP segment.
The team has made progress on deliveries and we expect net sales of approximately $2 $4 billion.
Incorporating the team's cost out and expense management initiatives, we are estimating our full year operating margin of approximately 8%.
This segment has been negatively impacted by the strengthening of the U S dollar to the euro and the British pound.
We continue to expect to be price cost neutral for the full year.
We are pleased to raise our earnings per share outlook to a range of $4 to $4 in 'twenty.
And with that I will turn it back to you John .
Turning to slide 17 to conclude my prepared remarks.
Terex is well positioned for growth to deliver long term value for our stakeholders because we.
We have great businesses.
<unk> brands and strong market positions upon which we can grow the company.
Participate in strong end markets supporting our growth, including infrastructure electrification and environmental.
We will continue to invest in new products and manufacturing capacity, along with strategic inorganic growth.
We will continue to execute our disciplined capital allocation strategy, and we have demonstrated resiliency and adaptability in an increasingly challenging environment.
I am confident this will result in tariffs being an even stronger company.
I would like to announce tariffs will be hosting an investor day. The morning of December 13 at the New York Stock Exchange.
This event will include presentations from the executive team and a question and answer session. We look forward to seeing you then and with that let me turn it back to Jon. Thanks, John Please refer to Paroxysm Investor Relations website for more information on our Investor day in the coming weeks as a reminder, during the question and answer session. We ask you to limit your questions.
To one and a follow up to ensure we answer as many questions as possible. This morning with that I would like to open it up for questions operator.
Thank you.
Like to ask a question. Please press star followed by the number one on your telephone keypad.
Could you please limit yourself to one question and one follow up thank you.
Our first question comes from Nicole <unk> from Deutsche Bank. Please go ahead. Your line is open.
Yeah. Thanks, good morning, guys.
Good morning, Michael.
Maybe we could just start with the AWP margin guidance, so sticking with the 8%.
Kind of in that I think like 100 basis points of margin degradation in the fourth quarter I know that typically margins do come down sequentially, but the revenue has obviously been different than seasonal pattern is that all FX or is there something else driving the step down.
Thanks, so much for the question Nicole.
AWP had a.
Terrific Q3, with a nine 6% operating margins they were up 350 basis points from last year and up 190 basis points sequentially from the second quarter.
So the year over year sequential improvement was the result of higher sales volume favorable mix.
Cost reduction activities and disciplined pricing actions.
Included in the AWP earnings for the quarter was a re class from corporate and other so it didn't impact tariffs overall at all of what $5 $2 million related to prior period transactional foreign exchange and if we exclude that charge their margins for the third quarter would have been 10, 4% when we.
Going to Q4 and look at this sequentially AWP business is impacted by lower sequential sales of about 10% in Q4 as a result of continued anticipated supply chain constraints.
We also have lower burden absorption on fewer production days and continued disruption and loss of productivity due to all of the supply chain issue, but they also have less favorable geographic and product mix in Q4 and also the utilities.
<unk> business also continues to be impacted by car body and chassis availability and that results in lower burden absorption and labor inefficiencies.
Overall, the incremental margins were 32% in Q3.
Our segment and we expect higher Incrementals in Q4, with our continued focus on achieving a price cost neutrality for the full year.
Got it thanks, Charlie that's very comprehensive.
And then maybe just a follow up if you and John could talk about what Youre seeing from a supply chain perspective, if there is any signs of green shoots or improvement out there or if it's all just really the same versus QQ.
Thanks for calling in I think it's more of the same we didnt see a pre school improvement nor do we see a preschool.
Generation.
Our revenue continues to be a function of the supply chain's ability to meet our forecasted demand we'd been in the billions of 1 billion one kind of revenue range for some time now and it's proven to be a reasonable assumption, we did see some slight improvement.
Really on some of the on time delivery, but not enough to overcome the day to day challenges that are there.
What we're seeing is.
Joey just said on the AWP side information from our suppliers, we are anticipating youre going to have a little bit.
More of a challenge than we had originally forecasted so modest decline in the revenues associated with the with the supply chain again from a component standpoint, I don't think it's any different than most industrial companies in terms of what youre seeing.
Electronic components engines had been a challenge for us on hydraulic components and again. The teams are really doing a great job overcoming this on a day to day basis for producing good products out there and I think the last indicator Nicole we keep talking about hospital inventory, which is relatively observed being a manufacturer.
But if we look at our hospital inventory.
The end of the second quarter, we were at about $63 million and at the end of the third quarter were about $63 million now it ebbs and flows from a timing standpoint, but net net I think that's a reasonable indication of it hasn't gotten appreciably worse, but it clearly has not gotten a principle be better as well and the teams continue on a day to day.
Basis to really battling to get product out the door for our customers.
Thanks, John I'll pass it on thank you.
Paul.
Our next question comes from Stanley Elliott from Stifel. Please go ahead. Your line is open.
Hey, good morning, everyone. Thank you for taking the question.
Quick question, you talked about 10% pricing this year.
Thinking about and a lot of pricing actions.
Over the course of the year within the backlog how should we think about pricing or how should we think about pricing.
On the businesses into next year as well.
And you're right, we do have significant backlog going forward frankly historical high backlog as we go into 2023.
Our backlog or anything that is for delivery in 2023 will be priced at 2023 pricing our pricing strategy and philosophy has not changed that that pricing strategy is to offset the inflationary pressures, we're seeing material freight.
And labor and in bad debt in our pricing for 2023. So we had significant orders into 2023, and where pricing goes orders at anticipated inflation rates that were we're expecting as we go forward. We do have the opportunity and obviously you don't we don't want to exercise this but we do have the opportunity.
To adjust that pricing if needed as we get into 2023, So again 2023 orders at 2023 pricing.
With the anticipated inflation levels that were expecting.
Go for it.
Perfect and switching gears on the MP business I mean, there's so many ways you guys can expand if he had a lot of the products are actually fairly similar.
Do you need additional capacity how are you seeing from a footprint standpoint, or maybe this is something you don't choose to expand more via M&A.
Thanks.
We have done both.
We've expanded our capacity organically, we've expanded our facility in <unk>.
In India, we've expanded our facilities in northern Ireland, So we have done.
Organic growth was also growing capacity in this business via acquisition, our first acquisition of job being in China, where we made an acquisition of a manufacturing facility that produce similar types of products for what we produce and so we were able to get the physical facilities as well as the labor force that gave us the opt.
Synergy to have production in China for the China market. So that was an example of where we expanded capacity.
Via M&A, we also did an acquisition of steel well, which was our vertical integration.
Key manufacturer for us that that was going to be on the market and that expanded our capacity for major fabrications that gives us the growth that we need to meet the growth aspects. So there's two examples there of where we used M&A to expand capacity and examples of where we've invested we have a new sizing can't see northern.
In Ireland, that's a that's an expansion as well so you'll see us do both organic expansion and inorganic growth and then finally, the protocol acquisition, which closed in the quarter.
<unk> gives us expands our market in cement mixture trucks, we have a leadership position in front discharge, we don't have a positioning and volumetric mixtures. There. We're a leader in that space and so that expanded our serviceable market with that product line expansion similar to what we had done.
At the end of last year sand with our MBS acquisition that was a product line extension as well that gave US a product line that we do.
Didn't have that we can put use their existing distribution for our existing products and expand use of our distribution channels, where pet products and we're seeing substantial growth in both of those platforms. As we go forward and then finally, we announced the acquisitions of smaller acquisition of Zen Robotics, and that's really a technology play it gives us the <unk>.
<unk> to expand some of our environmental services business, where we can take a comprehensive solution for our customers.
Put it together with some of our existing technology married it with Zen Robotics technology and offer a complete solution to customers in the recycling industry. So again it makes sense.
A move for us are smaller move for us on Zen robotics, but again.
On that theme of technology investments that enhance what we currently offer our offering or expand into other areas and I think you're going to see more of that as we expand our we've got the balance sheet. We've got the.
Cash flow and we're building our pipeline along those dimensions, we do think theres going to be an opportunity to grow our MP not just organically, but also through inorganic investments.
And.
That will always be disciplined in any M&A activity and we want to make sure that we have that the any acquisition is accretive after the first year of purchase accounting adjustments and also that all of our investments will be about cost of capital in the first several years of ownership and.
We will be disciplined and we think that there's a bright future and lots of opportunity in the MP segment going forward.
Perfect. Thanks, so much for the color congratulations and best of luck.
For example.
Our next question comes from David Raso from Evercore ISI. Please go ahead. Your line is open.
Hi, Thank you for the question.
My question regarding the organic growth in Europe .
Obviously, the backlog is looking very strong it seems like you have momentum into 'twenty three.
It seems like Youre, implying 23, alright.
Alright time viewed as an up year the stocks, obviously not fully believing that and I'm just curious when I think about what could change quickly as any cancellations in the backlog it doesn't sound like the North American market has much of an appetite for canceling anything anytime soon but I'm just curious when I think about where you could see it where do you think Europe .
And seeing Europe up 36% organic this quarter or 13 last quarter 26 in the first quarter.
Feels like such strength there that.
Just curious when I when you look at the backlog just kind of scaling the risk of where you might eventually get some cancellations to change the landscape a little bit about 23.
Your revenues are about 20% to 25% Europe .
Is the backlog, particularly skewed below that or above that just trying to scale a little bit on if we did see some of the orders and the backlog in Europe get cancelled what kind of risk profile is that good.
What's in the backlog.
Thanks for the question, David it's not appreciably different than than the revenue split with in terms of the backlog and as you indicated we have historically high backlog our company usually doesn't operate with the level of backlog that we have in terms of.
Overall level of backlog.
And if we look at the two respective businesses you know what I mean on.
On the MP side at $1 2 billion, that's three times the historical norms of backlog in that in that business. We are not seeing David we're not seeing cancellations or push outs anywhere right now in the backlog if we look at our crushing and screening business.
There is an example of why we posted our three quarters year to date bookings rate why did we do that because it was pretty lumpy quarter to quarter. We have the second highest rate that we've had.
In both segments going forward, our crushing and screening business, David we didn't have our order book open for several weeks in the quarter, because we were still slotting. The orders that we had previously come in and so we'll open that order book.
As we go forward.
In terms of Europe , you're correct, David as we look we see tremendous strength across both businesses in North America, good strength across Asia, we still have reasonable strength in booking activity in in in Europe .
We look at our material handling business and Fuchs business, we did see a slowdown in order activity and our Fuchs business, specifically in Germany, we'll see what that looks like now as we go into the fourth quarter, but we did see a slight deterioration there, but again it was made up with stronger activity in.
In North America on the environmental side within MP, because that's a new business, David our backlogs are up 50% year over year in that business and again that is more global we're seeing good strength everywhere.
<unk> Asia, when we look at our pick and carry business down in Australia.
To see strong growth there and then on our Rfps and tower business, David on the tower side.
We did see good order activity, but slower order activity in Europe , specifically in Germany, but again that was made up with strength.
In the in the North American market and then if we looked at a genius I'm sure. We'll talk more about this but tremendous strength in the north American market and in Western Europe , We'd say, it's stable backlog and healthy levels and again, despite the challenges that we're seeing.
In Europe and in terms of the other markets. That's the only market David that we've actually seen a year over year decline across the business.
Was our Genie business in China that was a result of the market activity in the market slowdown, but also because we we chose not to participate in a couple of bids because of the pricing activity. There. We didn't think it was conducive and so we took that product and we exported it to other markets around the world. So if we take a step back right now David.
We know there is economic uncertainty out there we've all been in this business for a long time.
But when you look at the level of backlog that we have and the fact that we're not seeing cancellations were not seeing push outs and frankly, the conversations we're having with customers are they need they need more equipment and they needed faster not less equipment later and so that's the dynamic that we're that we're in right now.
Around the world and you're right to highlight Europe is where we are closely watching Europe , but again, it's reasonably stable given the economic conditions that are going on there right now and I'd say, that's a pleasant surprise, but clearly we're watching it and.
Yes, no doubt.
Sorry, sorry Julien.
I'm going to say that you know well.
Begin to see them, we haven't seen yet.
Then from that the three major pillars passed in the U S. But none of that activity is coming through yet and we would anticipate that coming through in 2023, So very strong yes, yes.
I mean, you would think China next year year over year, given the way you approach the market. This year was obviously also struggling with Covid lockdowns.
Trying to being.
You would think as base case magnitude we can debate.
I don't think people are nervous about North America, its just that 20% to 25% Europe I mean, even if it's down 20% right. That's a 4% drag on the whole company.
The rest of the geographies should be able to make up for it but the idea that Europe is still running the strong organically is probably one of the more pleasant surprises so far in <unk>.
We're seeing new orders for 'twenty, three kind of the new take rate. So to speak is actually still fairly stable, it's not it's not.
Down materially.
It hasn't yet and that's I guess, that's the pleasant surprise right now, but again they indicate that across a couple of the businesses specifically in Germany, we did see some slowdown, but again made up in other areas.
So thank you very much.
Quite well.
I appreciate it okay. Thank you so much thank you.
Got it.
Our next question comes from Steven Fisher from UBS. Please go ahead. Your line is open.
Thanks, Good morning.
Just looking at the consensus for 2023, if your revenue run rate doesn't improve much from here. It looks like you might need around another 100 basis points of margin improvement to hit the consensus operating income estimates for next year I guess to what extent do you see a path to drive that 100 basis point.
So margin improvement is carryover pricing.
To deliver that can you get it from technology features cost management, how do you how do you think about that.
Yeah. Thank you.
Obviously early in the year.
But as we look to 2023, given the level of backlog that we have we are anticipating growth in both segments given that strength in the backlog now for 2023, we need to see improvement in the supply chain to capture that.
And I believe we will begin to see.
Modest improvement, we need to see slight to modest improvement in the supply chain to be able to capture the potential benefit we see there as I mentioned earlier in my comments, our 2023 backlog is priced at 2023.
Expected levels.
And so our pricing strategy remains we were going to price to offset material labor and cost inflation that we're seeing so that we're at least price cost neutral we were behind the price curve for the first half of this year, we've caught up in the second half of next year and we would anticipate.
The remaining at least price cost neutral as we as we progress into 2023. So that's that's.
And again with a strong backlog and anticipate growth, we do need to see supply chain improvement to capture that growth and with the backlog pricing. We have we think we can maintain that price cost neutrality going forward.
Okay. That's helpful.
How much is the FX headwind for 2023 looking like at this point, assuming there will be no changes from here.
And.
It sounds like you were a little hesitant to.
Right.
Give margin specifics for next year, but I guess, how do you see the prospects for achieving double digit margins in AWP next year at this point.
I would say that it's early for the outlook and we certainly have seen you know this year, we've absorbed 45 cents.
A negative.
Exchange rates from 2020.
From 2021, and so if it would continue we really are seeing we had 14 sensing.
Further deterioration from 2021 into 2022 in the third quarter and we're anticipating another five cents deterioration in Q4.
So we took our Q4.
You know that we would that we would use for our planning purposes at this point in time right.
Basically be consistent with the end of the Q4, so I guess that that that's the best I can answer that at this point.
Okay very helpful. Thank you.
Our next question comes from Seth Weber from Wells Fargo. Please go ahead. Your line is open.
Hey, guys good morning.
I guess, maybe just maybe just first a clarification truly does the just the fourth quarter. AWP margin include that does that reclassification will continue in the fourth quarter or was that just kind of a one time catch up situation that was just sort of entry that we made in Q3, it's a re class.
Some trends axonal foreign exchange from corporate and other to the AWP segment, and so that will not continue that foreign exchange environment, Though you know continues right.
And so there'll be impacted by current FX rate.
Okay, but just that was a one one time that was the one time.
Right Okay.
So Julie I was.
You made the comments about some.
Some adjustments and changes you're making in the European manufacturing.
You know foot environment, just to kind of react to the current situation from energy access to energy and.
Costs and things like that I was wondering if you could just expand on that a little bit how you're churches sort of trying to manage the inflationary.
Energy environment in Europe , and just sort of the more challenging manufacturing.
And in Europe in general Thanks.
Yeah. So overall, obviously energy costs have increased dramatically across the European economy, and the good news for US is the energy, although a component of our cost is not a significant component of our cost one of the actions and you mentioned in her prepared remarks was around natural gas.
Germany, So in Germany, we have a plan of foods plants in Germany. So there what we had to do with some salt propane tanks. So that we have the availability of propane if they limit natural gas supplies only to go to power generation and not to other industrial applications and so we need that for a well we need that for our.
Paint systems and the like so Theres. An example, where we had to put in place a backup system. If you will for us with the use of natural gas that was specific to Germany, it's not it's not unnecessarily.
And our U K facilities, nor in our facilities in.
Italy at least it's not indicated at this time. So that's just an example of a precaution that we took in the advanced natural gas was gonna be curtailed and only go to power.
Side and not for other industrial applications.
Okay. So are you are you anticipating kind of a just a very modest price increase manufacturing kind of cost of doing business in Europe , and so no nothing material it sounds like.
Cost perspective for tariffs, we're seeing now we're seeing high.
A high level, just like everybody, we're seeing high levels of inflation across.
With anticipated what we believe those inflationary aspects youre going to be across all of our our commodities and we've embedded that into our 2023.
Mrs.
Okay. No I was just talking about on the energy side, but yes, Okay, and then maybe just a little bit of clarity that the energy price.
<unk> is about 1% of our cost of goods sold.
So you know it is it's a.
Big number you know, but it's a small percentage relatively or of our overall cost okay got it.
That's helpful. Thanks, and then just.
Maybe back on North America, AWP can you just talk to.
The source of the orders you know anything unusual from a IRC versus national customer cadence or anything that you're that you'd call out there or just rohit.
Where the orders are coming from.
In North America. Thanks.
So again very strong backlog of $2 7 billion up 44% year over year in the AWP segment, principally a lot of that is driven by the north American market seeing continued strength in the north American market and across customer segments. So our backlog.
<unk> has not historically any significantly different than historical past backlogs of the market is quite strong as you've seen for the public companies that have reported you're seeing really strong time utilization on the equipment and on that front on the Ginnie side, we're in a replacement cycle in that replacement cycle has been.
Curtailed because of the industry's ability to meet.
Our customers need so we're going to have the tailwind of the replacement cycle.
And the Genie business and then as Julie said these.
Significant physical investments in infrastructure, the chip that the inflation adjustment at all of that is also providing a fairly strong tailwind for the next several years, we will begin to see that in 2023.
As we go forward. So the backlog is strong the underlying economic environment looks to be quite strong in North America, and we're seeing at historical patterns in terms of buyer season in national accounts and.
And again.
Customers are looking for more equipment and theyre looking for more equipment faster than those of the.
The dialogues that we're having and so we're right in the midst even with that backlog is at $2 7 billion. We're right in the midst of a large national account negotiations that are ongoing and so we'll begin to book some of that here in the fourth quarter. Some may extend a little bit into the into the first quarter.
But.
That's to come.
As we go forward so.
Pretty healthy activity and no appreciable change thus far in terms of what we're seeing between irc's in national accounts and strength across the across the segment.
Our next question comes from Jerry Revich from Goldman Sachs. Please go ahead. Your line is open.
Yes, hi, good morning Arun.
Our merger.
Oh, John I.
I'm wondering if you could talk about you folks have managed the supply chain pretty well this year, but you know as an industry price cost has moved in the wrong direction over the past two years, you know in the past that AWP at comparable sales levels.
Roche would be putting up 12% to 15% margins and I'm wondering as we think about the price increases that you have.
In 23, how much progress.
Yes can we make towards getting back to those levels and obviously not a terex issue an industry issue, but I'm wondering from turnkey.
W. P standpoint, how are you thinking about that.
Thanks, Gerry and as we think about that over the longer term.
Those margin percentages that you've talked about on the ginnie side to get back to those.
To those levels.
That's been required investments like our investment in our Monterrey, Mexico facility, that's an important investment for us that will help improve the global competitiveness of the business both from a cost and a capacity standpoint, and again that project is progressing so overtime Monterey will become a more important facility for us so as we look out over the next.
Couple of years into that 'twenty four 'twenty five timeframe, we think that will add about 200 basis points.
Margin to the business as we go forward. The team has done a really good job of being very aggressive in taking cost out of the business may be even more resilient over the last couple of years, we were stuck with it.
The structured if you will but took $90 million or so of cost out of the business. The team will continue to be focused on that and I guess the third piece as you go back in time.
Jerry when that when Genie delivered those types of margins. The other thing that was there was a very very different exchange rate environment than we have today.
Back when the Euro was at $1 35, 140 versus where it is today and we import a lot of GE product into into into.
Into Europe and.
These exchange rates, but that is a headwind for that business as we go forward.
So obviously, we'll continue to work that but I think the team is doing a good job driving margin improvement. We obviously recognize we have to continue to drive competitiveness and margin improvement in that business going forward.
Development efforts, our cost out initiatives or pricing discipline I'm confident the team will continue to drive margin improvement in that business.
Super.
Can we just shift gears Suez with the telematics fleets that you have now built out in North America, and Europe , you folks have.
Better real time market information then.
Recycles I'm wondering can you just talk about the trends that you've seen in operating hours on a year over year basis.
In both markets.
You don't mind.
Yeah, Hi utilization our data replicate what we're hearing from at.
At least the publicly traded rental companies I can say through the IRC as well as continued high utilization.
Both our utilization and time you.
And we're seeing that in.
In the North American market. So it tracks, what we're seeing and it tracks why customers are looking for more for more equipment, because they're operating in an incredibly high operating levels.
Given the shortage of equipment out there so utilization continues to be strong.
And in Europe John .
Similar year over year similar in Europe .
Super Thank you.
Our next question.
Our next question comes from Stephen Volkmann from Jefferies. Please go ahead. Your line is open.
Alright, Thanks, maybe just a couple of clean ups here I'm curious about.
What you're thinking around hospital inventory to exit the year or is it sort of stay at this level and what else is driving the increase in working capital Julie.
Yes, so Steve Thanks for the question and really the increase in working capital.
It is inventory that we had.
We had a distant hospital inventory as John mentioned.
$63 million for the second quarter to third quarter.
Inventory levels remain elevated due to all of that disruption and because we have a strong backlog. So we're still bringing in inventory to support that backlog and.
Inventories in transit or RMR are higher due to extended shipping time and changing shipment patterns. So as we talked earlier on the call, we're exporting from China into Europe and into Asia.
In America, and Asia, and so the lead times are longer and that's what's on the water.
We are seeing lower.
Our free cash flow and you know our forecast for the year and primarily because of inventory as well as Samsung.
Curation again from foreign exchange rates shifting again from where we were a quarter ago. So those are the that we had a sequential on free cash flow of $53 million.
In Q3 of them and we are.
So maybe in Q4 and positive free cash flow.
Okay, Great and then maybe more broadly I don't even know if you can even answer this John but I'm guessing there's been some probably fairly significant productivity penalties for operating in this kind of environment. So just in the spirit of trying to think about sort of what normal.
<unk> margins could be.
Is it possible to ballpark sort of the penalty on productivity that may go away as all the supply chain stuff eventually clears up.
I don't you're absolutely spot on.
I won't necessarily quantify it but because of the disruption.
We have manufacturing normally drive year over year productivity improvements, we have not had year over year productivity improvement even on the higher volume because of the disruption that we've experienced so as we go forward it gets a little bit more steady state less disruption.
The teams will deliver that year over year productivity improvement, but you're absolutely right that had been a headwind as a result of the disruption we have been facing in it.
Disruption wasn't there.
Would be driving the teams or discipline, we wouldn't be driving year over year productivity improvements and we're not giving this environment right now.
Okay, and maybe it's in the same vein I am guessing that utilities business margin is probably significantly below normal is it possible to.
Given any color on that.
Yeah. The utilities business has really been impacted by all of that supply chain disruption that you know the body and chassis and and so the productivity there has been it.
It has been very negatively impacted so that the utility of margins are lower in the quarter than in the overall AWP segment.
Right, Okay, alright, thank you.
And our last question will come from Jamie Cook from Credit Suisse. Please go ahead. Your line is open.
Hi, good morning, nice quarter I'm. Most most of my questions have been asked I guess, just you know as you're thinking about taking orders for.
Just because your backlogs extend isn't it in AWP can you just talk to what your assumptions are on HRC as you're as you're.
We are taking orders already well into next year.
Okay.
Jamie for the question and so we do have our hedging program and the hedging program. Paul is that it's sort of a certain cost certainty.
Hedging about 50% of our requirements for HRC steel in the U S and so we had our assumptions for the second half of the year is about 10 50 and for Q4 at 9%.
Okay. Thank you.
We're out of time for questions today, I would like to turn the call back over to John garrison for closing remarks.
Thank you operator, if you have any additional questions. Please follow up with the jewelry genre prior to us.
And then also thank you for your interest in tariffs and I will invite you again to our Investor day.
The morning of December 13th at the New York Stock Exchange, we have the opportunity to engage with management and see how we're going to drive this business going forward to deliver profitable growth profitable long term growth for the business.
And again stay safe stay healthy and thank you for your interest in Terex operator, please disconnect the call.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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