Q4 2022 Terex Corp Earnings Call
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Greetings and welcome to the Terex fourth quarter and year end 2022 results conference call.
At this time, all participants are not listen only mode.
A brief question and answer session will follow the formal presentation.
As a reminder, this conference is being recorded it.
It is now my pleasure to introduce your host Portage Michele <unk> head of Investor Relations. Please go ahead.
Good morning, and welcome to the <unk> fourth quarter and year end 2022 earnings conference call.
Copy of the press release and presentation slides are posted on our Investor Relations website.
Investors, Scott Terex Dot com.
A replay and slide presentation will also be available on our website.
Right.
We are joined by John Garrison, Chairman, and Chief Executive Officer and Julian.
Senior Vice President and Chief Financial Officer.
We have prepared remarks will be followed by Q&A.
Please turn to slide two of the presentation, which reflects what our safe Harbor statement.
Today's conference call contains forward looking statements.
These are subject to risks that could cause.
Actual results to be materially different from those expressed or implied.
In addition, we will be discussing non-GAAP information and performance measures.
We've 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 Barry and good morning, I would like to welcome everyone to our earnings call and appreciate your interest in Terex.
We are proud of our team members.
<unk> delivered strong results in 2022, it was another year of addressing a challenging global operating environment, including inflationary pressures.
<unk> disruptions and Covid impacts.
The Terex team members worldwide, who worked tirelessly to improve our performance for.
For our customers dealers and shareholders.
I'd like to thank our team members for their continued commitment.
Zero harm safety culture, and Terex way values.
Safety remains the top priority of the company driven by think safe work safe home safe. Please.
Please turn to slide four to review our financial results.
The team delivered an excellent quarter.
Sales of $1 2 billion were up 23% from last year and up 31% on an FX neutral basis.
We ended 2022 with a backlog of $4 1 billion.
Of 22% from prior year, driven by strong global customer demand.
Operating margins of nine 9% improved 290 basis points from the prior year.
And EPS of $1 34 increased 63% reflecting.
Strong execution by our team members.
Please turn to slide five.
We significantly strengthened our business in 2022 through our execute innovate and growth strategy.
We proactively manage supply chain disruptions and inflation to deliver a 20% increase in operating income.
41% improvement in EPS.
Our return on invested capital of 21, 3% and we achieved price cost neutrality for the year.
We introduced the first and only all electric utility bucket truck okay.
We expanded our concrete product offering with the acquisition of protocol.
We prioritized our focus on the circular economy by introducing new system solutions to our environmental and recycling customers.
And through the acquisition of Zen Robotics.
We invested in biotech and <unk>, which accelerated our product electrification strategy.
This week, we announced an equity investment in Optronics and entered into a co development agreement to create potential robotic applications for <unk> X products.
And we continued our investment in technology, new product development, and our Mexico facility, which continues to progress on time and on budget.
I am proud of our team members accomplishments.
Turning to slide six.
In our recent Investor day, we presented five key themes to our strategy that will drive our growth for the next several years.
The first is capitalizing on Mega trends.
Which are driven by an increasing focus on sustainability.
Our products are well positioned to benefit from electrification.
Waste recycling and infrastructure investments.
We will continue to grow our materials processing segment through innovation and by expanding into adjacent markets and categories.
We will optimize ges performance through the cycle and.
And sales growth and margin improvement.
We see attractive opportunities for growth in our utilities business driven by electrification.
We have a strong and growing parts and service business, which not only offers us countercyclical growth. It also provides critical value to our customers.
Sure.
This year, we'll continue to make progress on our strategic growth priorities, including <unk> genius focus on continuous margin improvement.
<unk> team is going to have a busy year.
We anticipate moving multiple production lines throughout our global footprint and opening our new permanent facility in Monterrey, Mexico.
The new facility in local Mexico supply chain are expected to improve our operating margins by 200 basis points when fully up and running in late 2024.
But these moves will negatively impact production volumes and manufacturing efficiencies in 2023.
And our outlook reflects this.
Please turn to slide seven.
Our MTA in AWP segments participate in diverse end markets globally, which is a strength providing many growth opportunities.
We believe our growth will be further accelerated by global Megatrends.
At the center of these Megatrends is sustainability.
The increasing global focus on sustainability is driving a fundamental shift in how the world operates.
Regarding additional opportunities for terex.
The global demand for waste recycling solutions is increasing driven.
Driven by regulatory and societal changes.
RMP brands, including Ecotec, CBI and Terex washing systems are at the forefront of meeting demand for circular economy initiatives.
The increasing reliance on electrification to reduce greenhouse gas emissions requires grid capacity expansion.
Terex utilities is well positioned to capitalize on the investments needed to enhance electrical grid infrastructure.
Our Genie business will benefit from new products, driving Digitization and onshoring in the United States.
All of our businesses will benefit from increased government sponsored infrastructure spending throughout the globe.
As we discussed at our Investor day, we see many growth opportunities by providing solutions that support our customers' DSG objectives.
Please turn to slide eight.
Our innovative products are delivering sustainable solutions for our customers.
Fuchs material handlers part of our MTS segment, our virtual machines capable of handling various materials.
Importantly, folks is diversified into port applications.
You can see our fuchs material handler, which is powered by the shifts battery hybrid system unloading bulk materials.
As a result of our products. These shifts operations produced zero admissions and reduced noise levels in the harbor.
Another example of terex, helping our customers and achieving their sustainability goals.
Please turn to slide nine.
We are proud to report that in 2022, Newsweek recognize our commitment to sustainability.
<unk> one of America's most responsible companies.
We recently published our 2022 ESG report, where we highlighted the results of our first ESG materiality assessment.
Our products and our people were identified as among the most essential to our sustainability journey.
<unk> products help our customers meet their sustainability goals and reduce negative impacts to the environment.
At the end of 2022, approximately 60% of empty.
And 70% of Genie products offered electric or hybrid options.
Terex utilities was the first to market and continues to offer the only all electric utility bucket trucks and.
<unk> will continue to expand its waste and recycling offerings.
Additionally, we commenced energy audits at our sites.
Tabling us to identify and implement actions that are important for achieving our goal of a 15% reduction in both greenhouse gas and energy intensity by 2024.
With respect to our team members.
<unk> equity and inclusion continues to be embraced and driven throughout the organization.
Our affinity groups further expanded in 2022 from eight to nine and participation rose two fold.
In summary, Terex remains highly active and ESG activities, and we will provide updates throughout the year.
Turning to slide 10 to review our current macroeconomic environment.
Our 2023 growth will continue to be constrained by supply chain issues.
Supplier on time delivery has improved sequentially.
But it remains well below historical norms.
The team was able to reduce but not eliminate the hospital inventory in the fourth quarter, which is a clear indication of the level of disruptions our teams continued to face.
Although selective costs have improved in some markets. We continue to see overall cost increases from our suppliers as inflation works its way through the various tiers of the supply chain.
I am confident in the team's ability to continue to adapt and overcome the macroeconomic challenges that we have been facing and with that let me turn it over to Julie.
Thanks, John and good morning, everyone, let's take a look at our fourth quarter financial performance on slide 11.
Terex team members continue their solid execution in a dynamic environment sales of $1 2 billion were up 23% year over year on higher volume and improved price realization necessary to mitigate rising costs.
Sales in constant currency were up 31% as foreign currency translation negatively impacted sales by $82 million or approximately 8% in the quarter as the euro and British pound weakened against the dollar.
Gross margins in the quarter increased by 190 basis points over the prior year as volume pricing favorable mix and cost out initiatives offset cost increases and the negative impact of foreign exchange rates.
Both of our segments increased their gross margins from last year, and we were price cost neutral for the year.
SG&A was in line with expectations, but up over the prior year as a result of inflation and incremental spend due to acquisition and prudent investments in new technology and new product development.
SG&A was nine 4% of sales and decreased by 90 basis points from the prior year as business investment was coupled with continued expense management.
Income from operations of $121 million was up 73% year over year operating margin of nine 9% was up 290 basis points compared to the prior year.
Interest and other expense of $15 million was higher than the fourth quarter of 2021 due to increased interest rates. The fourth quarter of 2021 benefited from a one time $12 million gain associated with the Genie administrative office relocation.
The fourth quarter global effective tax rate was approximately 13% due to onetime discrete items, including the reversal of a German valuation reserve.
Fourth quarter earnings per share of a one off.
34 increased 63%, representing a 52 step improvement over last year.
This strong performance was driven by volume price and disciplined cost control.
Current quarter results reflect an unfavorable EPS impact of <unk> 12 per share from foreign currency in the fourth quarter of 2021 results included a 14th gain due to the Genie administrative office relocation.
Free cash flow for the quarter was $126 million I will discuss free cash flow later in more detail.
Let's look at our segment results starting with our materials processing segment found on slide 12.
<unk> had yet another excellent quarter with strong operational execution, resulting in sales of $550 million up 21% compared to the fourth quarter of 2021 with robust customer demand for our products across multiple businesses.
On a foreign exchange neutral basis sales were up 32%.
The business ended the quarter with a total backlog of $1 2 billion.
Up 12% from a year ago.
The strong backlog is approximately three times historical norms and supports our 2023 sales outlook.
MP benefited from favorable regional and product mix and effectively overcame cost increases, resulting in price cost neutrality. This Jonathan and increased operating margin of 200 basis points to 15, 8%, while integrating several acquisitions.
Again, this quarter and for the full year MP represents approximately 60% of the overall terex operating income and continued its strong and consistent revenue and operating margin performance.
On slide 13, Seer aerial work platforms segment financial results.
AWP delivered sales of $672 million up 26% compared to the prior year on higher demand and pricing on a foreign exchange neutral basis sales increased 32%.
Total backlog at quarter end was $2 9 billion a record up.
Up 27% from the prior year.
Customer demand continues to be strong due to high utilization rates aging fleets and electrification projects.
AWP more than doubled our operating profit and delivered operating margins of 8% in the quarter up 320 basis points from last year.
Proven that was a result of higher sales volumes favorable mix and cost reduction initiatives strict expense management and disciplined pricing actions, partially offset by product liability expenses in our utilities business.
Turning to slide 14, and full year 2022 financial highlights.
Our performance in 2022 reflected strong improvement in the business and the extraordinary efforts of our team members.
Earnings per share increased 41% from $3 70.
To $4 32.
Dollar 25 improvement, including a negative FX impact of <unk> 42 per share.
Sales of $4 $4 billion were up 14% year over year, 20% on an FX neutral basis as end markets remained strong.
Operating margin of nine 5% expanded 110 basis points, driven by prudent cost management as well as price realization.
SG&A was 10, 2% of sales and decreased by 80 basis points from the prior year, reflecting focused cost management.
Free cash flow of $152 million was up 21% year over year, including additional inventory and supply chain disruption continue.
Please see slide 15 for an overview of our disciplined capital allocation strategy.
Our financial performance. This year continued to strengthen our balance sheet and provide financial flexibility.
Our IRR of 21, 3% significantly exceeded our cost of capital.
We returned $132 million to our shareholders in share repurchases and dividends.
We prepaid the remaining $78 million of our term loan we continue to invest in our business with capital expenditures of $110 million and we deployed $50 million on acquisitions and investments.
We have no debt maturity until 2026, and 77% of our debt is at a fixed rate of 5% until the end of the decade.
Our net leverage remains low at one times, which is well below our two five times target through the cycle.
Ample liquidity of $727 million.
Yesterday, we announced a 15% increase to our quarterly dividend to <unk> 15 per share.
The increase reflects our continued confidence in the company's strong financial position and future prospects in December our board expanded the size of our share repurchase program by $150 million, leaving us with approximately $193 million of.
Our remaining authorization to purchase shares.
Tariff is an excellent position to run and grow the business.
Please turn to slide 16 to review our backlog.
Consolidated 2022 bookings remained at healthy levels and were the second highest booking rate in recent history.
Related customer fleet ages, and historic low dealer inventory levels continue to support robust demand, we had minimal cancellations and push outs. Our total backlog position is up 22% versus the prior year, demonstrating the strength of our end markets and giving us visibility into 2020.
Hi.
Now turning to slide 17 to review our full year outlook.
As we move into 2023. It is important to realize we are operating in a challenging supply chain environment with many variables such as high inflation volatile exchange rates and geopolitical uncertainties, so results could change negatively or positively.
With that said this outlook represents our best estimate as of today.
We anticipate earnings per share of $4 60 to $5 based on sales of four six to $4 8 billion.
Which reflects progression towards our five year financial targets, we reviewed with you at our Investor Day in December .
Our sales outlook incorporates the latest dialogue with our suppliers and our current supply chain expectation.
We anticipate higher volumes as customer demand remains strong and expect pricing actions to offset cost pressures.
We expect the first half and the second half sales to be comparable with the second and third quarter sales modestly higher.
SG&A of approximately 10, 5% of sales reflects prudent investment in the business, including our team members new product development engineering and digital initiatives and the full year impact of 2022 acquisitions.
We expect corporate and other to be evenly spread throughout the year, we anticipate operating margin for the year to be in the range of 10% to 10, 4% as we remain price cost neutral for the year.
Based upon global tax laws, we expect a 2023 effective tax rate of approximately 21%.
This is an increase from 2022 as discrete items are not expected to repeat.
Unfavorable foreign exchange rates higher interest and other expenses and the normalization of our income tax rate combined amount to a <unk> 35 per share unfavorable impact, we estimate free cash flow of $225 million to $275 million, including capital expenditures.
Richard of approximately $135 million with the largest component being our Genie Mexico facility.
Let's review our segment outlook MP sales of <unk> $2 1 billion.
In AWP sales of two six to $2 7 billion reflects strong customer demand with continued supply chain constraints.
Mp's strong segment margins are expected to continue to increase to approximately 15, 5% for the full year and are anticipated to be lower in the first quarter due to slightly reduced volumes and higher marketing costs and relatively balanced for the remainder of the year.
The AWS CP segment continues to be impacted by supply shortages AWP segment operating margin of approximately 9% are expected to be comparable in the first half in the second half with the second and third quarters being slightly higher.
Operating margin expansion as expected due to price realization increased volume continued strict expense management, partially offset by unfavorable manufacturing efficiencies as mentioned earlier, our scheduled production line moves are expected to impact manufacturing efficiencies throughout the year.
The Terex team will continue to demonstrate resiliency to deliver sales growth operating margin expansion increased free cash flow and higher earnings per share in 2023.
And with that I will turn it back to you John .
Thanks Julien.
Slide 18 to conclude our prepared remarks, <unk> is well positioned for growth to deliver long term value for our stakeholders in 2023, because we.
We participate in strong end markets, including infrastructure electrification and environmental work.
We will continue to execute our disciplined capital allocation strategy, while investing in new products and manufacturing capability, along with strategic inorganic growth.
We have demonstrated resiliency and adaptability and increasingly challenging environment.
We have a great team members.
<unk> strong brands and strong market positions and with that let me turn it back to paradox.
Thanks, Sean.
Binder 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 highlight.
Operator.
Thank you if you'd like to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press star one again.
First question comes from Michael Feniger from Bank of America. Please go ahead. Your line is open.
Hey, guys. Thanks for taking my questions.
Wanted to ask actually about materials.
Yes.
Keeps outperforming delivered a record high operating margins in the fourth quarter.
What is underpinning that strength can that continue in 2023.
Maybe just why only 20 bps margin expansion in the guide for next year.
Thanks, Michael and also thank you for recognizing the MP performance.
<unk> continues to deliver consistent outstanding performance.
We indicated in her opening comments represents more than 60% of our overall <unk> operating margin of the strength really comes from our global presence of the businesses. If we look at it we've seen strong sales.
<unk> bookings elevated backlogs.
Got almost three times the normal level of backlog in this business as we look forward into 2023, so healthy backlog.
<unk> bookings.
And then if we look at our respective verticals that we compete in.
In our aggregates business the largest portion of the BNP segment again, similar story to a global healthy bookings and backlog I think it's important for investors to understand that this business caters not just a virgin aggregates, but it also caters to the recycling side and when you see construction demolition waste when you see.
Changes in practices around the world that creates opportunities for our aggregates business. So we're seeing good strength globally in our aggregates business and our concrete business advanced mixture.
And we did see a good order activity.
Backlog, we watch that very closely because that one tied a little bit closer here in the states. It's a U S based business.
Eventual construction, but the team just came back from world of concrete they had a good showing and they're anticipating good continued strong order growth and backlog there on the concrete side for a while the acquisition that we made in the middle of last year continues to see strength, that's more tied to infrastructure investment and continues to see strength in their bookings.
And backlog as well.
In my comments I mentioned Fuchs of folks we did see that soften somewhat as we talked about last.
In our last earnings call, our best principally was driven by conditions in Europe .
The decline in scrap metal prices, because they are leveraged to scrap metal theyre diversifying as we indicated in the ports and other applications and again historically pretty decent position from a backlog standpoint, but we did see a modest slowdown in bookings.
Around Europe , and our Fuchs business.
Higher metal continues to grow a substantial increase year over year globally.
And bookings and backlog associated with our environmental business and then our <unk> and power businesses again more levered to Europe , we did see some weakness or slowdown in orders, but overall backlog against history still remains in a healthy position, but again more levered to Europe . There. So we did see some modest slowdown in our bookings.
That segment of the business and then finally, our pick and carry business down in Australia continued to show strong strength.
In India.
Last week at the Con Expo.
Obama show and.
Indian market customers were strong we just launched our <unk> product, there and met with several customers and dealers that had taken delivery of the product. So.
Again, our pick and carry business remains strong. So overall, Michael we're just seeing strong healthy bookings. The other important factor that we will continue to report on because I think it's important given the level of backlog that we're experiencing is we're not seeing cancellations and push outs. That's the first sign for us as we begin to see.
The backlog begin to move around with cancellations and push outs and we're just not seeing that at this time, so that will be the first indication. We acknowledge there is macroeconomic uncertainty out there, but despite that we're seeing strong bookings greater backlog great visibility as we look into 2023 in the E&P segment.
And Michael just add empty represents 60% of our operating income and they had a terrific year in.
In 2022, and we expect margin expansion to continue in 2023, and we expect them to continue to be price cost neutral for the year.
They operating in a disrupted environment to they have all of the supply chain disruptions and they still have been able to deliver a strong margins and so we would expect them to expand but we're also going to invest in this business, we're going to invest in new product development, we're going to invest in digitalization.
And we're going to invest in and people are traveling again and trade shows and things like that and so there's going to be some marketing expenses in this business as well and they also have some unfavourable foreign exchange from the British pound to the U S dollar.
In 2023.
Pages and they also will absorb some additional SG&A due to the acquisitions that we did.
In 2022, so we're expecting continued strong financial performance from MP and.
And expanded margin.
Thank you and just to follow up on that I mean, when you look at the material processing costs in the public market Cherokee is trading at a notable discount is there anything structurally disadvantage with your materials processing unit compared to those peers, how do you try to close that valuation discount.
Could you use your balance sheet to repurchase shares just any thoughts on that would be helpful. Thanks.
Thanks, Mike and broad questions I think part of our job is to better explain the great portfolio of businesses that we have an empty.
<unk> started doing that during our Investor day, we will continue because if you look at that portfolio. It's consistently performed throughout the time.
In terms of driving revenue growth and margin expansion in terms of our disciplined capital allocation strategy.
We're going to continue to invest in organic growth first and foremost we're going to invest in dividend. We increased the dividend I hope everybody saw that announcement, a 15% increase in dividend.
So we will continue to do that we have the ability to invest for M&A activity. So we will look there thats a focus area and then we did increase our share repurchase authorization and you can anticipate that being definitely to offset dilution associated with incentive comp is more of a focus right. There for now, but we're always looking at ways.
To enhance stakeholder and shareholder value in the corporation and will continue to do somewhat.
Our next question comes from Stanley Elliott from Stifel. Please go ahead. Your line is open.
Hey, good morning, everyone. Thank you for the question.
And congratulations.
Quick question on the backlog.
Up 22% at the.
The same time, you guys were mentioning low dealer inventories in MP age fleet.
Across the channel really.
Do you think kind of what's in your backlog will have much of an impact on either replenishing dealer inventories were bringing down the fleet age in the coming year and I guess it is kind of a.
A way to say, maybe some of that could spill over into 'twenty four.
So thanks for the questions that we do have the historically high backlogs as we go into the year. If you just look at our coverage for 2023, and our backlog is already $700 million for delivery in 2020 for a lot of that is associated with supply chain. So.
Do believe and again on the MP side dealer replenishment dealer inventories are low I think this is going to help but they are seeing strong growth and so as soon as products come in there and that business about 70% goes to the distribution channel, especially rental they do a lot of rental purchase agreement type contracts. So it's being heavily utilized.
The customers are converting it from a rental to ownership and so we're having.
We're punishing the dealer inventories I think thats part of the strength there and then on the AWP side, we can talk more about that but clearly with the constraints on the industry.
In terms of meeting the needs of the rental customers.
Fleet replacement has been delayed and one of the benefits of 2023, and we think even beyond 2023 is that fleet age has increase which is going to increase the replacement cycle. As we go forward specific that comment specific to the Genie business staff.
Perfect and I apologize if you all touched on it the first part of the call but.
The robotics announcement from earlier this week I thought was very interesting could you kind of talk high level. How do you think this will end up playing out from this co investment that you've put together.
Yes, Thanks, Dan.
Everybody had the opportunity to see that it wasn't an equity investor investment in that product that we make.
The biggest part for US is co development of robotic technology, and really is to provide our customers with solutions to help them safely and efficiently conduct work. If you think about job sites labor constraints skilled labor trade and strength there the opportunity to enhance job site productivity and safety through robotic technology.
That product is on the forefront of that so if you take their capabilities with our capabilities of our existing machines marry the two together you have the opportunity to potentially provide solutions to the end market customers to enhance again their productivity and safety.
And Thats.
The reason we made the investment we view this as an investment in technology that enhances the solution offering that we provide our customers going forward and so we're excited about the investment we've made very excited about the co development agreement and we're excited about what the potential opportunity is.
This going forward.
Yes, it sounds like there would be a lot of opportunities I guess on the MP side from a sourcing perspective, but thank you very much for the color and congratulations best of luck. Thank you.
Thanks, Dan.
Our next question comes from Seth Weber from Wells Fargo. Please go ahead. Your line is open.
Hey, good morning, everybody.
Hey, John I, just wanted to get a little bit more clarity around your comments around the.
The Monterrey me when the disruption.
Productivity and margin that you expect for 2023.
I guess first question is did that impact fourth quarter March AWP margin and just sort of how should we think about that.
Blowing through the year does that you exit 2023.
Fully operational level, and then 24 ship reflects.
All of these benefits or does this continue to bleed into 2024.
Yes. Thanks.
I'll start Julien and then you can add in on that longer term margin side. So the disruption it really doesn't start until first quarter, we begin to move into the permanent facility.
In the first quarter and we have a significant number of product line moves first D has done this they have got a detailed process for doing this but in the environment. We're in now both sides of the other transaction I E. The spending plan is going to have some disruption associated with the supply chain in the receiving plant in this case Monterey is going to.
Awesome disruption, which impacts manufacturing efficiencies and so we've factored that into our outlook. It will take place during 2023 and will continue into 2024 as we indicated in our prepared remarks.
We spoke during.
<unk> Investor day, and ultimately is going to add about 200 basis points of operating margin improvement when we're up and.
We're running as we really get it closer to the back half of 2024, So that's our current.
Outlook and again, it's going to be a busy year for the team they're excited or a construction has gone well. It's on time, it's on budget and now it's time to start.
Moving the product lines in there and reaping the benefits of the investments that we're making and.
And Seth just to follow up on some of the Q4 margin commentary.
AWP.
Margins were up 320 basis points from last year. So.
Really nice, resulting in higher sales volumes and they had strict expense management and cost reduction and disciplined pricing.
And when we look at Q4 the <unk>.
Margins were really as expected we had talked about last time.
Fewer production days less favorable geographic and product mix and unfavorable foreign exchange impacting AWP.
Our utility business continues to experience this life.
Supply disruptions due to chassis and body.
Unfavorable manufacturing.
Efficiencies and some things that were maybe newer yes.
<unk> had some weather related shutdowns and product liability expenses in the utility business.
Does the change out facility was temporarily shut down due to COVID-19 cases, but it is a tariff the team did a really great job.
More than double their operating profit and increase their margins by 320 points in the fourth quarter. So.
Pretty much we had some nice performance.
Yes.
Yes, okay.
Helpful color. Thank you and then just a quick follow up.
John I think you called out some softness in.
In Europe , and our Fuchs business.
The tower business is that are you seeing.
Sure.
Pausing on European orders on the access business as well or is that really just.
As long as you called out.
We did see a modest slow down in orders on the on the on the.
The AWP side.
In the quarter with that said, we still have strong historically strong backlog so little bit of moderation on the on the booking level with strong backlog as we go into 2023.
And that's just to clarify that's out of Europe .
That's around Europe , Yes Super.
Thank you very much I appreciate it guys. Thank you.
Our next question comes from David Raso from Evercore ISI. Please go ahead. Your line is open.
Hi, Thank you for the time with AWP for 'twenty three right, you've got 94% of the sales guide and the backlog that ships. This year. So clearly this is a year about supply.
Supply chain efficiency supply chain broadly is the gating factory.
The gating factory factor I should say the question I have though is the order books for 24, how are we handling the out year, maybe differently than the past.
And I wanted to go back to the Mexico risk of that transition I know it's <unk>.
Adjusted by 200 basis points of margin improvements worthwhile, but I'm just trying to make sure. We don't look up on a couple of quarters in Mexico, and this challenging supply environment becomes more of a risk more of a drag on that transition. So again two questions. There 24, AWP how are we handling the order books versus history.
And again, just how do we get more comfort.
It's not the easiest time to.
Transitioning production.
Thanks, David So in terms of the order book as we indicated we've got about $700 million of total company Terex.
Slide of backlog into 2024.
It's more of that actually utilities, and then the Genie business.
Especially some of our highly customized units are booked well out into 'twenty four.
In that business.
Then in terms of the Monterrey, Mexico is again, we just thought it was appropriate given the level of change.
To highlight it as part of the Genie.
Genie.
Planned for this year again, David <unk> done this numerous times.
Supply chain is remains a gating factor.
We'll closely manage this and ensure we've got the appropriate level of material understanding plant as well as the receiving plant to mitigate the disruption to the maximum extent possible, but given the level of magnitude of change we thought it was important for us to at least highlighted and that explains some of the margin and why it is taking time why are introduced.
The 200 basis points of margin immediately that's why it takes time to bring the plant up to get the plant up and operating and get the supply chain up and operating and stabilized and then over time quite confident it's going to deliver that level of margin improvement.
For for the Genie business.
And can you touch on the order books, how youre handling 24, let's call it the out year differently than the past.
So in terms of the early the order I mean opening the window up earlier.
Great.
Usually start the year with 94% of your yes, we do.
Sure Youre right David.
Always start the year with 90 plus percent booked for the year. So yes, we are and again, we're working with our customers frankly in the AWP segment right now the customers are asking more than for more than we can currently deliver so working we're in constant dialogue with our customers. If we see some improvement in supply chain by specific models, we let them know.
And so we are taking orders into 2024 again most of that David is because of the supply chain not that the customers necessarily we're looking forward in 2024, but that's one we're able to deliver the product is is in 2024.
Alright, Thank you for the time.
Thank you David.
Our next question comes from Nicole the Blase from Deutsche Bank. Please go ahead. Your line is open.
Thanks, Good morning, guys morning, Nicole good morning.
Just maybe to continue that conversation that David just sorry, one more question on this backlog that it senses when each baseline how are you guys handling the pricing aspect of that given all of the uncertainty around inflation.
It's in the call we were making our best estimate of what that that is going to look like and.
Yes.
That's the answer.
And we're just making that assessment.
Pricing.
Yes, there is a pricing there's a price associated with that it is not like the customer has to wait until pricing is confirmed at some point in the future.
Yes, okay.
Okay understood and then just a follow up just with respect to what you guys are embedding for free cash in 2023 can you talk a little bit about the expectation for working capital.
Great Great question, Thanks, Nicole and so we are expecting our free cash flow to improve in.
<unk>.
In 2023.
Improve for two reasons number one.
Improved earnings and net income and then second we had a significant investment in inventory.
In 2022, we expect additional working capital to support the additional volumes and in absolute dollar terms in 2023, but are much less a lower inventory build in 2023 that we had in 2022. So it will be more working capital efficient going into 2023.
We experienced in 2022.
Thank you I'll pass it on.
Thank you Nicole.
Our next question comes from Steve Barger from Keybanc Capital markets. Please go ahead. Your line is open.
Thanks.
Our supply chain being the limiting factor how much revenue did you deduct from the 2023 range you provided and can you just tell us what revenue level each segment could ship to unconstrained.
So I'll take it Steve and if you look at our revenue guidance for the year and you think about 2022, we were between 1 billion and just at the macro level.
Across Terex, we were between 1 billion and 1 billion won.
And then stepped it up in the back half of the year to <unk> 52 billion to divert range, we're anticipating modest supply chain improvement, but not anywhere near historical performance. So if you kind of look at our fourth quarter run rate, we've kind of extended that into 2023 and again that's based on the current estimate.
It's from suppliers and managing to the current constraints. The challenges. This constrained continues to move around and so we our guide is predicated as you can see based on our backlog and the coverage rates. The guide really is predicated on the supply chain, it's our best estimate and current conversations with suppliers in terms of.
What they can deliver to and Thats what were built our 'twenty three outlook on in terms of what could happen you can go back years before and we were significantly above those levels.
Especially in the AWP segment, but again, it's really the constraint is the supply chain and that's that's the governor for 2023 as of as of today June Yes, It's just going to add that we had been running at a $1 billion to $1 billion one for consistently.
Fourth quarter, we were able to go out $10 billion and so our guidance for this next year is a $1 billion under 1 billion, which is consistent with what our supply chain has been able to.
<unk> been able to deliver.
Yeah totally understandable I guess, what I'm trying to get to is could you run comfortably above 5 billion.
Strained environment, given how youre thinking about capacity and the footprint shifts you made.
But in the future yes.
Again, we.
And I think it's important Monterey, Mexico does add some incremental capacity, but what it fundamentally does this alter our competitive position.
We're being globally cost competitive as we go forward. So again, if you go back in time.
Definitely produce specialty in AWP segment, but as well in the MP segment with produced at higher levels, we would have that opportunity if the supply chain could support there are some labor constraints in certain markets. They would have to that would have to navigate.
The biggest labor constraint that we have has been a regimen area, we're leaving that with our move in the Monterrey, Mexico. So yes, there is opportunity in the future to produce more given our footprint. It really is getting the supply chain to deliver consistently both continuity and quantity and I might add there's a lot of work that we're doing with our supply.
Kaine now not just on the continuity of supply I E on time delivery, but also with the suppliers about in terms of what we need in the future as we think about the future growth opportunities for the business, giving them those indications. So it's both continuity of supply we are working with the supply base as well as quantity, but the constraint in 2023 is the supply.
And just to add to that.
As we move from Redmond.
Some moves from Redmond totally production facilities in London going forward, it's just a partial several lines moving down to help with some of the labor shortage.
Experienced amendment, yes.
Got it and then just one quick one I watched the optronics videos that seems like interesting technology and John I hear you on enhancing safety and productivity, but can you be more specific about how you are imagining that embedded into <unk> projects.
Yes, so stan.
Stan mentioned, we did the Zen robotics, so that was taking in sorting. So there may be some overlap in terms of the two there.
Terms of trying to think about work enhancing an operator of skilled trade.
On a scissor lift corrado boom lift.
A bucket trucks.
The opportunity to enhance that reduce the amount of labor instead of two two skilled trade men or women.
Right.
And boom lift can you come back to one and so we've got some ideas. We've got some concepts. They have some ideas and concepts. We put the two together and there may be a real opportunity to bring some technological advancements into that construction center and the EPC contractors would tell you it's desperately needed because one of the biggest constraint is labor.
So we're trying to provide labor productivity improvement and safety improvements and we're excited we'll see where it goes but we think theres going to be some real opportunity there.
Our next question comes from Steven Fisher from UBS. Please go ahead. Your line is open.
Thanks, Good morning.
Just trying to get a sense of the volume growth that you have embedded in your guidance for the materials processing segment for 2023, I know you mentioned, Jon a lot about the strength of the bookings in the backlog but.
Revenues in the guidance certainly up mid single digits.
Presuming you do have some pricing it doesn't seem like the volumes are up much unless theres, a big FX drag on the revenue guide. So I don't know if maybe youre, just taking orders that the supply chain long awaited to deliver but just think about the volumes embedded there for 'twenty three.
So.
So a question I would say the MP business has been dynamic throughout the year and Nathan price.
<unk> neutral throughout 2022.
And so they've done a really nice job of managing that and we expect that to continue into 2023, and we would expect them to have.
More volume than price and being offset by a couple percentage points of foreign exchange in 2023.
Okay. That's helpful and then on the AWP bookings year over year I'm.
I'm just curious are we comparing apples to oranges there in.
In the fourth quarter meeting.
I guess to what extent are you restricting orders now versus maybe you werent doing a year ago.
Or is it a fair comparison that there's really no restriction on the books.
Bookings timeframe at this point.
It's a good question, Steve really in both segments because of the extended backlog.
Booking patterns have been disrupted.
So.
We have continuing ongoing discussions with our genie customers are utilities customers and RMP distributors as well and so in the case of MP some of the the order books weren't open.
They'll open up in the case of AWP has the ability to take the orders to be very clear with customers, what we can commit to what.
What we can't commit to and the timing and so it's a fair.
Assessment.
The historical booking patterns have been disrupted in both businesses as a result of the strong strong order activity is strong backlog. It has disrupted the traditional flow and in the case of Genie continuing ongoing discussions with our national accounts as we speak.
Okay. Thanks, Sean Thank you. Thank you.
Our next question comes from Tami Zakaria from Jpmorgan. Please go ahead. Your line is open.
Hi, good morning.
Yes.
Hi, how are you.
So my first question is can you remind us how much of your SG&A is fixed versus variable.
Should you see some unexpected slowdown in demand, let's say sometime in the near future. How quickly can you dial back on SG&A.
Okay.
Thank you for the question I think we've done a really good.
Nice job of managing SG&A, and we will continue to manage SG&A going forward and.
As you know historically the business over the last several years, particularly on the AWP business has taken out significant costs and SG&A.
So we have.
We at this time feel that it's appropriate to invest in the business in terms of.
Product new product development in terms of digitalization in terms of those types of initiatives.
There will be some increases as I mentioned things like trade shows we have three of them.
First quarter.
People are traveling some expenses that we didn't have in 2022 due to COVID-19.
We're making prudent investments and we will continue to prudently manage SG&A going forward.
Got it that's very helpful and then going back to your price cost neutral assumption for the year.
Seems like you have some pricing embedded in your top line, but but raw material costs have come down notably from last year.
So why wouldn't you be price cost positive in 2022.
So.
Let's let's talk about first of all thanks for the question, let's talk about costs. So first of all we are still seeing overall inflation in the supply chain. So our suppliers are still coming with with increases so even though there are certain things like an HRC deal.
May be coming down overall, it takes a while for the inflation to work through the various tiers of the supply chain. We're still seeing increased increased cost going into 2023 at this point in time. So we don't see prices coming down and we will set our goal is to is to be price.
Cost neutral for the year and we're pricing our products. According to that and we were very transparent with our customers.
Got it thank you so much.
Thank you Dan.
Our next question comes from Jamie Cook from Credit Suisse. Please go ahead. Your line is open hi, good morning, a nice quarter.
Thanks Rajiv.
One on the utility side understanding utility was a drag on your AWP margins in 2022 can you quantify that and then does that continue to be a drag on margins in 2023, and then I guess my second question understanding what you just said about price cost for the year.
But is there anything to be cognizant of when we're thinking about the cadence of price cost throughout the quarters first half versus second half. Thank you.
Okay.
Thanks, Jamie.
First of all yes, the utilities business was especially impacted by for plate supply chain shortages. This year.
The body of the chassis were really difficult and so as we said that the utilities the margins had been.
It had been below the segment average in 2022.
Going into 2023, and we expect to end the utilities margin to improve.
One with the margin.
Margin. So we expect this overall segment margin to improve.
In terms of price cost et.
Et cetera.
We are at this point in time.
First half second half pretty much the same we will have the first half will have.
Yes.
Pricing increases.
We check later.
The second quarter that will come through.
In its Q1, but from a cost perspective, we expect that to be relatively balanced throughout the year.
Thank you.
Thank you Jamie.
Our last question will come from Stephen Volkmann from Jefferies. Please go ahead. Your line of your line is open.
Great. Thanks, guys most of my questions have been.
Answered, but John I think you mentioned that 60% of MP and 70% of GE product has sort of an electrical option I'm curious what you're seeing in your backlog given how long. It goes are you seeing meaningful uptake of those electric units and then I have a quick follow up.
In terms of the backlog, yes, we are seeing an improvement meaningful I would say is an improvement in the electrical options across the business, especially as we bring out new products.
In both those categories in the case of empty. It really is predicated on what application that's going into and is there a greater or were they all mains power available as to whether or not the machine goes out.
With ice engine or goes out electric but again.
A lot of customer interest and.
As we bring out new products as the industry brings out new products I think youll continue to see a transition the electrical side and that was part of the investments that we made.
Last year in biotech and <unk> were designed to help accelerate our electric.
Electric offering as we go forward, so I think over time.
Think we're going to see more of it in the current backlog not substantially different than historical but an increase in the electrical products.
And I guess the follow on over the next few years, presumably there'll be some transition do you think thats a margin accretive does that for <unk> or is it more a margin headwind because thats sort of startup and development cost.
So in terms of the startup and development costs. Those are really captured in our ongoing SG&A, we capture our R&D and development in our SG&A. So so that's in there one of the things that is occurring over time and as part of the reason why the uptick hasnt been as strong is that the electrical options are more costly than than the <unk>.
<unk> combustion engine or hybrid models as we continue to move down that cost curve as more and more industries adopt.
Electrical technology, specifically around battery and battery technology.
It'll come down the cost curve and we believe it will be more affordable and from a margin standpoint pretty much right now our long term assessment is margin neutral.
But again that does we are assuming that over time, which is happening that youll see the cost of those units come down as the cost of the battery technology comes down the cost curve globally for those types of products.
Alright, great I appreciate it thank you.
We are 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 jewelry John are paired to US again and thank you for your interest in Terex, Please stay safe and stay healthy and again. Thank you for your interest in tariffs and we look forward to seeing you.
On the shows in the upcoming quarter. Thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
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