Terex Corporation

Greetings and welcome to the Terex Corporation first quarter 2021 results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Randy Wilson, Director of Investor Relations for Terex Corporation. Thank you, sir. You may begin.

Good morning and welcome to the Terex first quarter 2021 earnings conference call. Copy the press release and presentation slides are posted on our investor relations website at investors.terex.com. In addition, the replay and slide presentation will be available on our website. I'm joined by John Garrison, Chairman and Chief Executive Officer, and John Duffy Sheehan, Senior Vice President and Chief Financial Officer. They're prepared remarks will be followed by Q&A. Please turn to slide two of the presentation, which reflects our safe harbor statement. Today's conference call contains forward-looking statements, which are subject to risk that could cause actual results to be materially different from those expressed or implied. In addition, we'll be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures can be found in the conference call materials. Please turn to slide three, and I'll turn it over to John Garrison.

Good morning, and thank you for joining us and for your interest in Terex. Most importantly, I hope you and your families are remaining safe and healthy. Throughout these challenging times, we are proud of all Terex team members who are keeping themselves and others safe, meeting the needs of customers, and helping our communities. I would like to recognize and thank our team members around the world for their continued commitment to our zero harm safety culture and Terex Way values. Safety remains the top priority in the company, driven by think safe, work safe, home safe. All Terex team members have contributed to our effort to continue to produce for our customers while following the protocols and maintaining a safe working environment. Please turn to slide four. Before I discuss our Q1 results, I would like to review our commitment to ESG. Environment, social, and governance is not a new concept at Terex. It has been front and center for many years through our Zero Harm Safety Program and our commitment to maintaining a vibrant and supportive working environment. ESG is foundational to the Terex culture. Our company purpose is to help improve people's lives. Through our Territory Way values, we are focused on strong governance, a commitment to diversity, equity, and inclusion at every level, and supporting the communities where we live and work, including being responsible environmental stewards. First, strong governance and leadership. Our independent and engaged board with diverse backgrounds, perspectives, and experience adds value for all stakeholders. Second, we've enhanced our DEI governance, and we are energized by the engagement of our team members. And third, electrification, by introducing sustainable products such as our new GE electric drive scissors. We've made good progress in our sustainability program, including publishing our first annual ESG report, which enhances our ESG communications. We are working on standard reporting frameworks which a group of company senior leaders are charged with implementing. We will keep stakeholders apprised through our investor conferences and quarterly earnings calls. We believe companies that recognize the importance of ESG are better able to identify strategic opportunities and meet competitive challenges. Turning to slide five. We're off to a very strong start to 2021. Customer demand continued to increase during the quarter. resulting in revenues exceeding our expectations. We increased operating margins and backlog in AWP and MP year over year. We significantly improved our first quarter earnings per share compared to last year. And we are increasing our full year sales, operating profit, cash flow, and EPS outlook. Despite having to address supply chain challenges, AWP delivered improved margins in Q1. Materials processing continued its strong execution by overcoming supply disruptions and delivering increased sales and profitability. As a result of the improved execution in both segments, year-over-year operating margin for the company improved by 800 basis points. Our intense focus on networking capital management and improved profitability drove $40 million of positive free cash flow in the quarter. which is an excellent start to the year. During the first quarter, our team continued to meet increased customer demand, tightly managed all costs, and delivered outstanding positive free cash flow. Overall, our Q1 financial performance demonstrated strong execution by our global team in the face of increasing supply chain challenges. Please turn to slide six. We continue to improve Terex's global cost competitiveness. Our SG&A cost reduction initiative with a target of full year 2021 of approximately 12.5% or better SG&A to sales remains on track. We are maintaining strict cost discipline. In addition, during the quarter we announced the planned move of our Oklahoma City telehandler production to Monterey, Mexico. This action will position us with cost-competitive telehandler products for the North American market. The team is addressing increasing supply chain disruptions. Our operations team are demonstrating adaptability and flexibility to overcome the dynamic supply chain environment. Turning to innovation, we continue to listen to our customers, ensuring our products and services offer the features and benefits that provide value. We'll also invest in our connected assets and digital capabilities to better serve customers. For example, our new Genie eDrive scissors are designed to offer significant performance improvement and reduce maintenance costs by 35% over the life of the machine. Customer and dealer integration, or CDI, is a global initiative spearheaded by our parts and service organization. Dealers are sharing their data which allows the team to better serve customers. Finally, we continue to invest for future growth. Our MP team is in the process of executing our localization plans in China to meet growing demand for industry-leading crushing and screening products, as it is the world's largest aggregate market. Terrace is well positioned for growth in 2021 and beyond because we have strong businesses, strong brands, and strong market positions. We continue to invest, including in new products, digital capabilities, and manufacturing capacity. Turning to slide seven, I'll provide some comments about our end markets and what we are seeing today. In our genie business, in North America, fleet utilization continues to improve, rental rates are improving, used equipment pricing is strong, which are all positive signs of a recovering and growing rental industry. In Europe, the market continues to demonstrate improvement. And in China, adoption of working safely at height with Genie equipment is driving significant growth. Globally, the secular trend towards rental continues. Turning to our utilities business, demand is strong across its end markets of tree care, rental, and investor-owned utilities. Next in materials processing, We expect global demand for crushing and screening equipment to continue to grow. Broad-based economic growth, construction activity, and aggregate consumption are the primary market drivers. We're seeing continued improvement in our cement mixer, material handler, and environmental businesses. Overall, we're seeing improved market conditions around the world for industry-leading products and solutions. And with that, let me turn it over to Debbie.

Thanks, John. Turning to slide eight, looking at the first quarter, we achieved net sales higher than our expectations. Throughout the quarter, we saw our end market continue to strengthen. Overall, revenues of $864 million were up 4% year-over-year. Notably, our materials processing segment revenues were up almost 20% year-over-year. For the quarter, we recorded an operating profit of $62 million compared to an operating loss of $7 million in the first quarter of last year. We achieved an operating margin of over 7% through disciplined cost control and meeting strengthening customer demand. The first quarter operating profit includes severance and charges associated with the closure of our Oklahoma City manufacturing facility, which were offset by the gain on the sale of our TFS on-book financing portfolio. Improved gross margins and lower SG&A as a percent of sales allows Terex to expand operating margins by 800 basis points. year-over-year. Interest and other expense was approximately $4 million lower than Q1 of last year because of several factors, including lower interest expense and a $3 million mark-to-market gain recognized in other income. Our first quarter 2021 global effective tax rate was approximately 16%. driven by two favorable discrete items in the quarter. Our tax rate estimate for the remainder of the year remains 19%, consistent with our previous outlook. Finally, our reported EPS of $0.56 per share includes the nearly offsetting operating impacts and the favorable benefits in other income that I just discussed. Turning to slide nine and our AWP segment financial results. AWP sales of $477 million were down 7% compared to last year, driven by a decline in North America offset by improvement in Europe and Asia Pacific. The utilities market improved significantly evidenced by strong customer bookings. AWP delivered significantly improved operating margins in the quarter, driven by increased production and aggressively managing all costs. AWP delivered 680 basis points improvement in operating margins, which includes $3 million of severance and charges for the closure of our Oklahoma City facility. First quarter bookings of $961 million were up dramatically compared to Q1 2020, while backlog at quarter end was $1.3 billion, up 82% from the prior year. Now turning to slide 10 and material processing's Q1 financial results. MP had another strong quarter, achieving 13% operating margin as end markets are strengthening. It is a testament to the MP team's operational strength to deliver these consistent, positive operating margins. Sales were higher at $378 million driven by improving customer sentiment across all end markets and geographies. The MP team has been aggressively managing all elements of cost as end markets improve, resulting in incremental margin performance of 38%. Backlog. of $713 million more than doubled from last year and was up 36% sequentially. MP saw its businesses strengthen through the quarter with bookings up more than 100% year-over-year. Customer sentiment in both segments continues to dramatically improve as equipment is being utilized and ordered as end market demand strengthens. Turning to slide 11, I'd like to update you on how we currently anticipate the full year to develop financially. It is important to realize that while the end market demand environment has improved significantly, increasing supply chain headwinds are impacting results. we have taken these factors into consideration in the outlook we're providing today. As for commercial demand, we have seen our end markets improve dramatically over the course of the first quarter. All other things being equal, we do expect continued end market improvement in both segments and increasing levels of AWP customers' fleet replenishment. From a quarterly perspective, we expect revenues for the full year to be slightly higher in the first half than the second half of the year, with the second quarter being the strongest of the year. Operationally, the absolute amounts of operating profit and operating margins are expected to increase each quarter year over year with operating profit relatively evenly split between the first half of the year versus the second half of the year. We continue to plan for incremental margins which meet or exceed our 25% target for the full year 2021. Corporate and other costs will occur relatively evenly throughout the remainder of the year. On April 1st, we completed the refinancing of our revolving credit facility and own secured bond. These transactions will result in Q2 charges of $25 million, which were not previously included in our 2021 financial outlook. Including 30 cents per share of costs for refinancing of our capital structure, our EPS outlook is increased to $2.35 to $2.55 per share, based on sales of approximately $3.7 billion. Quarterly earnings per share are expected to be generally consistent with the development of operating profits during the year. For the full year 2021, we are estimating free cash flow of approximately $150 million, reflecting another year of positive cash generation. We continue to plan for capital expenditures, net of asset dispositions of approximately $90 million. The largest project included in capital expenditures is for the Genie Mexico manufacturing facility John referenced earlier. Turning to slide 12, and I'll summarize our updated 2021 EPS outlook. We expect the strong customer sentiment demonstrated in Q1 by our AWP and MP customers to continue throughout 2021. Our 2021 full-year EPS outlook comprehends, first, our Q1 outperformance. Second, the operating profit contribution on additional revenue for Q2 through Q4. Third, price and manufacturing efficiency, which is only partially offsetting increasing supply chain headwinds. And finally, reduced interest expense and one-time capital structure charges of approximately $27 million, representing 30 cents per share. Overall, our 2021 outlook represents a significant improvement in operating performance when compared to 2020. We will continue to aggressively manage costs while positioning the business for growth. Turning to page 13, and I'll review our disciplined capital allocation strategy. Our team members remain vigilant and will continue to aggressively manage production, especially within our AWP segment, and scrutinize every expenditure. The strong, positive free cash flow of $40 million in the quarter demonstrates the hard work of our team members to tightly manage networking capital. Carex has ample liquidity of approximately $1.2 billion available to us with no near-term debt maturities. So we can manage and grow the business. As discussed during the Q1 earnings call, The proceeds from the sale of the TFS on-book portfolio and our strong liquidity position allowed us to prepay $196 million of term loans in early February. This prepayment resulted in reducing outstanding debt, lowering leverage, and saving annual cash interest expense of approximately $7 million. This deleveraging action resulted in a rating agency upgrading Terex's outlook and providing positive momentum for refinancing our capital structure. Our refinancing included successfully renewing our $600 million revolving credit facility and placing $600 million of new bonds with a 5% coupon. These new bonds replace our 5 and 5.8% bonds due to mature in 2025 and reduce annual cash interest expense by approximately $4 million. Importantly, TAREX obtained lower cost unsecured funding for the remainder of this decade. This strong action demonstrates our commitment to improving Terex's balance sheet while maintaining flexibility to execute on our organic and inorganic growth plans. Finally, we would like to thank our bank group, which supported Terex during this successful refinancing. And with that, I'll turn it back to you, John.

Thanks, Duffy. Turning to slide 14, to wrap up our remarks, Terrax team members around the world are focused on the right things, safety, health, customers, and improved productivity. And markets are strong, and the team is managing the increasing supply chain headwinds. We're driving positive free cash flow. We're continuing to invest in innovative products to meet increased customer demand. We are focused on both organic and inorganic growth. As a result of these actions, Terex is well positioned to deliver strong 2021 results. And with that, let me turn it back to Randy.

Thanks, John. 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'd like to open it up for questions. Operator?

Thank you. To ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from Stephen Volkman with Jefferies. Your line is open.

Great. Good morning, everybody. Good morning, Stephen. Gosh, at the risk of sounding ungrateful, I wanted to just look into your kind of guidance in AWP a little bit. So your revised revenue guidance is still only up 20% year-over-year, if my math is right. And it just seems like the demand side of the equation is much stronger than that. Maybe the difference is concerns around supply chain. Maybe the question is to sort of dig a little bit deeper into that topic. And I guess I'm just trying to figure out what's holding those revenues back relative to some of the CapEx budgets we're seeing from your customers.

Thanks, Steve. And first let me say, you know, we did significantly increase our bookings and backlog literally around the world in AWP. So we were pleased with that. If you look at our outlook for the rest of the year, Q2 through Q4, you're talking about a 30% year-over-year growth in our AWP segment. So we are seeing substantial growth in the segment. The team continues to work. We, like many, Manufacturers are seeing supply chain constraints, so we're working through those supply chain constraints. But, you know, right now we are seeing strong growth around the world for the remainder of the year, and we're executing on our supply chain, but we are seeing disruptions in the supply chain that's impacting our production levels. But overall, really pleased with the backlog, the bookings, and what we're seeing, the strength that we're seeing in that marketplace.

Okay, right. Yeah, demand doesn't seem to be the factor here, the gating factor. Maybe a little bit longer term or broader, John, and then I'll pass it on. How are you feeling about margins in that business? I know that's kind of been your focus over the past several quarters, couple of years. And, you know, 7% is not bad, but it's obviously still a ways to go to get back to kind of where you were a couple of years ago. So what does that trajectory look like in your mind?

Thanks, Steve. Well, first of all, we've got a great management team, you know, at Genie and in our utilities business. and they are intensely focused on driving margin improvement. As you saw, we draw, you know, we're at a 680 basis point improvement on a year-over-year basis on lower sales in the first quarter. We anticipate, as we've indicated, sales to be improving. So the team is focused on driving margin improvement. We are seeing headwinds, like most manufacturers, on material costs. We're offsetting that action with pricing. We're continuing to be resolute in our SG&A costs. The team's done a great job managing our SG&A, and we're continuing to address our global cost competitiveness with the announcement like we made in our Oklahoma City plant. So the team understands that we need to be globally cost competitive. We've made great progress, but unequivocally, there's more progress to be made there, Steve.

But your conviction that you can get back to those double-digit levels is unchanged, I assume?

The team is focused on getting us back to those double-digit levels, absolutely. It will take time, but unequivocally, we believe that that is absolutely an achievable target for us and the team. Super. Thank you. Thank you.

Our next question comes from the line of McDowbray with Baird. Your line is open.

Thank you. Good morning. Maybe I'm just going to pick up on this line of questioning here as well. If I'm looking at your guidance, a little over $2 billion of revenue in AWP. You know, just a couple years ago, this business was generating more than $2.7 billion of revenue. So I guess I'm wondering how you sort of see the path going forward in In terms of the recovery, getting back to those kinds of revenue levels, is that feasible? Do you think you can actually do better than this in this upcoming cycle? And to ask this question once more, given that you're already guiding margin at 7%, which is basically where you were in 2019 on a much higher revenue base, if we were to get back to those kind of prior peak levels, what would be the right sort of margin framework for us to kind of consider?

Thanks. Thanks, Meg. So let me just take a step back. We, you know, we're encouraged by the AWP business. I mean, if you take a step back and if you look at just, as I said in my opening comments, the secular trends in the rental industry, is definitely going to be a tailwind. We think the replacement cycle is definitely starting and coming for the next couple of years. So from a volume standpoint, we're encouraged by what we're seeing, and we think we can significantly increase the volumes over time as that replacement cycle and growth continues. As we see that growth in volume, then we need to convert that at more historical levels of operating margin. And that's what the team is focused on is driving that margin improvement. So as the volume returns, as we've taken the aggressive cost actions that we've taken, we should expect to see over time continued margin improvement in that business as we move forward. So that's what the team's focused on every single day, and we're going to continue to drive execution and improvement. No doubt in the current environment, Meg, we are seeing significant material cost increases. We've had to offset some of those material cost increases with pricing activities, so that's obviously a factor. But we're going to continue to work with our customers and offset material increases with pricing. Right now, in this environment, as you saw in our outlook, we weren't able to do that. Longer term, we're going to strive to offset material cost increases with pricing, so that will also help as we go forward. So, again, the Genie business has historically been a great business. It's got an incredibly strong brand. The management team is absolutely focused on meeting the needs of the customer and driving margin improvement, and I can assure you every single day that's the focus of the team.

You know, Nick, if I was just to answer John's comments and to build on the second part of your question, as you pointed out, in 2018, our AWP business, Our AWP segment is about $2.9 billion of revenue and double-digit margins. And our guidance here today is 2.1 billion, 7% margin. If you just look at that additional, say, $800 million of revenue, and you know that we target a 25% incremental margin, I think you would find that to get to a double-digit margin again, wouldn't require the 25% incremental margin on that $800 million of revenue. So, you know, we definitely see that the Genie brand, the Genie business, the AWP segment is a double-digit margin business. That's great, Collier. Thank you for that. And then my follow-up is on MP and the You know, I'm going to want to talk about margin there as well. The implied incremental margin here is a little bit lower. I think it's something like 20% in the guidance this year. I'm just looking for a little more context on this. You know, does this particular segment see more pressure on a cost side, or is this factor mixed pricing? What are all the moving pieces here? Thank you.

So on the MP side, I think if you take a step back and you look at just continued strong execution with the margin generation, with the top-line sales growth, and they aggressively manage costs throughout their business through the multiple businesses that we have. Again, we target the 25% incremental margin. The team's done a good job of delivering on that as we go forward. They also are seeing material cost headwinds that we're having to offset with pricing as well. And again, not necessarily offsetting all material cost headwinds associated with the pricing. But over time, they will be able to do that as well. So, again, if I just take a step back and look at the MP business and the execution across the businesses across the globe, they've done a fantastic job delivering margin improvement on the growth. And I'm absolutely confident, and the team will deliver on the volume that's there in the marketplace. Thanks, Mike. Thank you.

Your next question comes from the line of Stephen Fisher with UBS. Your line is open.

Thanks. Good morning. Good morning. Just in terms of execution, Q1 looked very good. Looking out to the next couple of years, John, you mentioned you're going to drive execution. If your revenues in the AWP segment, were to get back to that prior peak, what would you need to do to handle that kind of revenue? Is your business peak ready today? Just kind of trying to make sure we don't run into any execution challenges.

Thanks. Yes, I mean, we have the global footprint around the globe for the Genie business. You know, in China, in North America, in Europe, our capacity actually will expand. We did close our Oklahoma City facility. Let me say that we will be closing it in the first quarter of 2022 and moving that operation to Monterey, Mexico. That will also give us incremental capacity, but we'll produce in both locations. over the transition period of time. So the G&E team, you know, in their history, if you look at their ability to ramp up and to ramp down, they've been quite successful in doing that. And so we have the capacity to meet the needs of a growing market. And again, that's a great opportunity for us as we move forward. And frankly, we're excited about that opportunity to meet the higher demand as the market improves. Great.

And So you mentioned inorganic growth plans. Can you just talk about what you're thinking about on M&A and anything inorganic these days?

Yeah, thank you. Well, first it starts with, you know, the ability of our discipline capital allocation strategy. And the team's done a really nice job driving free cash flow improvement. As Duffy indicated in our opening comments, really done a great job strengthening our balance sheet. So now we believe we have the opportunity to look at inorganic growth. And our principal focus really is in and around our MP businesses, specialized equipment markets. We have leadership positions in those markets. And it still remains relatively fragmented in the segments that we compete within MP. And so our initial focus is we're building our M&A pipeline, is in and around our MP business and our lifecycle businesses, and we're building that pipeline. And we do believe that inorganic growth can now be part of our overall growth strategy for Tarek. So the team is working on that, and we're excited about the potential and the opportunities that we're seeing for M&A activities. But, again, we'll be very disciplined in our approach to M&A, but we absolutely are looking at M&A opportunities for us going forward.

Your next question comes from the line of Ann Dinan with JP Morgan. Your line is open. Yeah, thank you. Good morning.

Good morning. When we were sitting here at the end of Q4, you had talked about a hedging program that was in place for almost all of G&E's, North America, steel needs. And so what's happened there? Has demand come in stronger than expected and any incremental demand is not hedged and subject to higher costs? Or a little bit more color on actually what's happened in the quarter in terms of input costs and or is it just raw materials or is it other things? Just a little more quantification of actually what's happened during the quarter.

Sure, maybe John, I'll start on the steel side and then you can add. So as you pointed out, Anne, we did talk about our steel hedging program and that we had hedged the predominant amount of our steel hot-rope coil steel needs for the North American market for 2021. We have not entered into additional hedges for steel for 2021 during the course of the first quarter. As you certainly know, deal prices, including in the futures market, have increased significantly, and therefore utilizing our hedging program would not have been a financially beneficial transaction for us. The additional volume over and above, say, our initial guidance this year, we procure that as part of our normal steel purchasing program from our steel suppliers. John, in terms of input costs, I'll just say it's obviously not just simply steel, but other materials such as resins, logistics costs, et cetera, have definitely increased over the course of the quarter, and those cost increases are built into the updated output that we're providing here today.

Okay, thank you. I appreciate the color on that. That's what I suspected. And then on MP, can you give us a little bit more color in terms of the regional demand? I know you said demand improved through the quarter across all regions and all segments, but You know, any favorable product mix this quarter or in the outlook, and any favorable regional or not favorable. I think last quarter, again, you talked about favorable product mix as well as favorable regional mix. So an update there will be great. Thank you. I'll leave it there.

Thanks, Anne. And, again, very encouraged about the broad-based demand picture that we're seeing across our businesses, and, Anne, really across multiple regions. If we look at our crushing and screening business, we saw end market strength in Europe, North America, in the APAC, across our product line. If we look at concrete, our mixture truck business, specific in North America, saw substantial growth in orders in that business. Really, and we think that's associated as much with the residential construction market, but again, substantial increases in Terex Advance. We were just talking about materials. If there's one positive of high steel costs, it's scrap metal prices are going up, and that is really helping our material handling business, our Fuchs business. And again, Ann, we're seeing that really around the globe, Europe, North America, substantially up for our Fuchs business. Our environmental business is a relatively new business within MP, so we're seeing good market demand, but it's also a great example of product line extensions growing that business for us. And, again, a similar story. We're seeing that growth both in North America and in Europe and beginning to see some growth in that area in APAC. One business that we don't talk a lot about is our pick-and-carry business down in Australia. Australia weathered the pandemic reasonably well, and we're seeing strength in orders in that business, you know, both from the mining sector as well as – infrastructure down there. So that business, we saw some good year-over-year growth in strength as well. And, Ann, we did see some improvement, not to the same level that we've seen in the other parts of the business, but we actually saw some recovery in our tower cranes in our key business And finally, India. We were seeing, we saw order strength in India. Obviously, we're all concerned about the current COVID situation in India. Our team members are doing a great job navigating that, following the protocols, and keeping production running safely in India. But again, just encouraged by the broad level of demand across the globe, across our product offerings within our RMP segment. And, again, the team continues to do a great job in a challenging market executing on that demand. Thanks, Dan.

Your next question comes from the line of David Rosso with Evercore ISI. Your line is open.

Hi. Good morning. Thank you for your time. Good morning, David. I was going to look at the the relationship of your AWP backlog at the end of the first quarter to the full year. I mean, historically, that backlog is 30% to 40% of the full-year REVs. More recently, let's call it close to the 40%. If that relationship held, I mean, it would imply revenue should be north of $3 billion this year in AWP, not 2.1 and change. So can you help us bucket why the weaker conversion of backlog to revenue at that magnitude? I mean, it's not even close. I mean, is it the backlog is starting to have orders extending into the following year more than normal? Is it, you know, your customers ordered that much earlier, so then naturally we'll see a little less, you know, sequential orders than normal? How much is it the logistical shipping issues? And I guess fourth, the question would be, how conservative is that guy, just given the starting point with that backlog?

So thanks, David. And, again, encouraged by the increase in customer demand after last year. So there were a lot of orders placed early this year from early, obviously, in Q1, as you see the backlog go up significantly. And, again, we saw that, David, around the globe. In terms of the ability to increase production, we are limited right now by the supply chain. We're working with our supply chain to ensure that we can meet the customer demand. But the limiting factor in the near term, so call that Q2, Q3, is the supply base and the supply base's ability to ramp to the levels that we're at. So the supply base is unequivocally a limiting factor in the demand that we can deliver to for our AWP segment, and to some extent, not to the same extent, but to some extent the same thing in MP. So in the current environment, David, ramping up the supply chain is the limiting factor in our ability to meet the increased demand. The good news is the demand's there. and the team's working hard to secure the materials to be able to achieve the higher production rates. So that's basically what's driving this year thus far is material supply, material constraints, and the team's doing a heck of a job overcoming those so that we can meet the needs of our customers.

David, I would just say that when you think about the guidance, when we brought about the guidance, we took that into consideration, and again, to the extent that it's early in the year right now, and as we work through the supply chain and the opportunity to increase production, we would factor that into our guidance also.

And, David, the second part of your question was in terms of is the backlog for beyond 20. A very small percentage of the backlog is for 22 deliveries, and that's really more in our utilities business than the custom truck side. And so some of that backlog has moved into 22, but there's not a significant portion of our 2021 backlog that we're showing that's for delivery in 22. There is some, but it's not a significant portion, David.

I appreciate that. I'm not going to say it's a positive to have that much backlog. I'm just trying to level set. If the gatekeeper is the ability to ramp up, the orders that would normally show up in 2Q, 3Q, because of the early ordering, maybe the inability to serve new demand, I suspect that would suggest the orders sequentially drop, you know, a little more than normal. And I'm curious, given the seasonality of taking iron, and, you know, usually right before September, August, even earlier, How do we, I'm just trying to level set the idea the orders could look a little weak going forward. Or do you think your customers, given the supply constraints, might start putting orders in for 22 earlier, meaning not worrying about, hey, if you can't get it to me this year, I know I'm going to need it in the spring. I'm just trying to level set how we interpret the orders going forward. I think, David, that conversation on 22, already I'm saying we'll start putting orders in for 22 earlier.

I will say this, David. There is an awareness that, in general, the supply chain is tight, and obviously not just for us and not just for the aerial equipment for rental companies. So they're cognizant that the supply environment is tight. We're having conversations. But I can't tell you at this time, David, this early in the year, that it's going to fundamentally alter how they think about order and order placement as we go forward. So I think we're going to have to be responsive and react to the situation. I can't tell you right now at this point in time of the year, though, that we're going to see a significant change in terms of order pattern and order flow, although backlogs are up across the industry, and that may lead to behavior change, and we'll be prepared for that. Thanks, David.

Your next question comes from Jamie Cook with Credit Suisse. Your line is open.

Hi, good morning. A nice quarter. I guess two questions. The first one, can you just help us understand your approach to pricing when you put in incremental price increases? I think your peers talked about putting in a 3% in March and just wondering if yours is comparable, and is it a surcharge or an actual list price increase, and have orders changed since that price increase? And then my second question, Duffy, Everyone's sort of asking questions around this, but is there any way for 2021 holistically we can think about the incremental costs associated with whether it's supply chain inefficiencies, COVID, that cost? I'm just trying to understand what costs could be sort of incremental in 2021 that aren't necessarily there in 2022 and set Terex up for, you know, a potentially good incremental margin in 2022 if the volumes are still there. Thanks.

I'll take the first part, Duffy, and if you'll take the second part. So on the pricing and price-cost strategy, what we're doing is being very transparent with our customers and being very clear in terms of the cost increases that we're seeing. Our normal pattern is that we have a price increase for the upcoming year, so that would have been in Q4 of last year, for 2021 deliveries. when we saw the substantial increase in material costs, especially around steel, we did implement an incremental price increase in March. that went into effect for orders that were placed after, for the most part, it varied by business, but for the most part, orders placed after the end of March that incurred the higher price that we're seeing. The range of price that you indicated is relevant. It was in that ballpark, low single digits. It does vary. across businesses, the level of increase that we're asking for, again, being transparent with customers on the cost increases that we're seeing. In terms of the price-cost relationship, as you saw in our outlook guide, This year, because we had so much in backlog, we chose not to, in general, we chose not to reprice the backlog. There are some specific situations where we had to, and so the price cost is a negative this year as a result of that backlog, but the pricing did go into effect right at the end of the first quarter, and the orders and equipment that we deliver that's not in backlog going forward will be at the higher price level. And we'll continue to monitor this and continue to adjust price based on the material cost inputs that we're seeing. And, again, being very transparent with the customers. Duffy, you want to follow up on the second piece of the question?

Yeah. So, Jamie, we included the EPS walk from our previous guide to our updated outlook in the earnings presentation today. And where you see there is that we included a line for $0.55 of EPS reduction from the previous guide as a result of cost pressure. And I think that's probably a good marker for you of what the impact has been from our, you know, from the start of the year in terms of the impact to us, in terms of the increases, whether it be steel, resin, logistics, et cetera, and that we, with the reason why we increased prices and, you know, we're only partially offsetting it as John, offsetting those flux increases as John said. But I think $0.55 would be a good number to pick up.

Thank you.

Thanks, Jamie. Thanks, Jamie.

Your next question comes from the line of Tim Fine with Citigroup. Your line is open.

Great. Thanks. Just I wanted to circle back on the earlier theme on order timing. but specifically on NP and obviously very strong bookings for the segment as a whole. But I'm curious within that on crushing and screening, typically the order growth tends to start out the year strong based on ahead of the construction season and dealers and customers want to have delivery ahead of that.

But I'm curious if you think that there may have been within that 1Q bookings number, there may have been some kind of you know pre-ordering given concerns about longer lead times so you know effectively some pull ahead of orders um you know that that may have come in subsequent orders that may have come later in the year did they get potentially pulled into the first quarter

Well, thanks. And, again, on the MP side, Tim, we actually saw order activity begin to improve really in the fourth quarter of last year. So this is the continued momentum on orders within the MP segment. Again, across all the businesses within MP, we have seen significant order activity increase. We have got a very rigorous process of looking at the dealer orders. Is there some ordering activity as a result of seeing lead times extend? Yes, that's a natural reaction that a distribution channel would have. About 70% of the business in MP goes through a distribution channel. So there may be some of that, but I think the biggest driver in the order activity is what our dealers are seeing in their end markets. Based on our telematics data, we're seeing increased utilization. We've seen significant conversion from rent to own. There's a lot of that in that channel that's enabled the dealers to order back. So when we look at our dealer inventory levels, even with the increased sales, dealer inventory levels are down. All in all, you know, we feel very strong about where we are in that business. And, yes, there may be some preordering because they want to get slots, but they're only doing it because they see the demand in front of them. And we're seeing, especially in all of our businesses, that this whole concept of infrastructure that's driving demand around the world, and it's not even in place yet. But it's the attitude, it's the expectation, and globally we have seen infrastructure investment, and that clearly has helped our business around the world. So there may be some, but the market demand, the underlying fundamentals are strong, and, frankly, we believe they're going to continue to be strong and, frankly, increase as we go around the world. So, you know, MPT has done a great job, and that business is performing. It performed in a down cycle, and I think it's going to perform incredibly well in the up cycle. Okay, got it. Thank you.

Thanks, Tim.

Your next question comes from the line of Ross Gilardi with Bank of America. Your line is open.

Thanks. Good morning, guys. Good morning. Hey, Ross. Hey, could you guys just talk about some of the things you did and are still doing with your global sourcing strategy and how some of the critical elements of – those things just sort of enable Terex or should enable Terex to cope better in this environment where we've got widespread shortages and more localization and just, you know, everything that's going on right now with supply chain tightness. What have you done to better equip the company for the next cycle?

Great. Well, one of the major initiatives that we've had over the last couple of years, and I'm very thankful that we did, with our strategic sourcing initiative. And what that enabled us to do is really strengthen our relationships with our supply base. And when things get challenged, those relationships become very important. And there's much more engagement at senior executive levels. We're a more important customer to our suppliers. And so the hard work that the team has put on our strategic sourcing initiative has really positioned us well with our primary suppliers, also setting up secondary and alternate suppliers has helped overcome the challenges that we've had. So the strategic sourcing initiative, the discipline, the process that we put in place is really helping us in this environment. and I think it will continue to assist us as we go forward. And I do want to, you know, hats off to all of our operations team, but especially our strategic sourcing teams and our logistics teams. It has been a challenging environment, like all industrial companies right now, and they're doing a great job managing our supply chain. Focusing on continuity and the strategic sourcing initiatives that were implemented over the last couple of years have really served us well in this challenging environment and are going to serve us well as we move forward. John, just a quick one to follow up on that.

So would you say that you've – have you moved more towards single sourcing of critical components to enhance those relationships, or have you moved more towards dual, triple, quadruple sourcing? in general?

Yeah, so it's hard to say in general because it really depends on which specific commodity that you're looking at. From a general statement, we look to reduce our single source. if it made economic sense to do that. So we have increased the number of alternative sources. We have absolutely had to go to those alternative sources in this environment. And so I don't want to make a general statement because it truly does matter in what type of component, what type of commodity that we're dealing with. But I will say it's a strategic decision by commodity what is our strategy for that respective commodity as we go forward. about it. Thanks so much. Thanks, Rob.

Your next question comes from the line of Brett Lindsey with Vertical Research Partners. Your line is open.

Hi. Good morning, everyone. Morning, Brett. Hey, wanted to come back to some of the cost initiatives and really thinking outside SG&A. You had pointed to the manufacturer example in telehandlers, you know, localization of production in China. Are you able to quantify what the savings you think those actions are yielding, you know, outside some of the SG&A stuff? And then, you know, have you identified additional, you know, repositioning opportunities on the footprint?

Thank you. A lot of the activity was in our AWP segment, specifically Jeanne. The team's done a great job, as we mentioned, on the SCNA side, as you acknowledged, and that focus and discipline will continue. On the manufacturing footprint, we've taken action. We closed our Rock Hill facility. We're moving our telehandler production from Oklahoma City to Mexico, which is going to give us a cost advantage as well. And then also within our manufacturing facilities, our teams have done a great job really driving productivity and leverage with indirect manufacturing spend. And as the volumes come back, we would anticipate that that leverage on the indirect side of the manufacturing spend will also be helpful to drive margin improvement as volumes return. So it's been a multi-pronged approach by the team, looking at every element of the cost structure and ensuring that we're globally cost competitive in every activity. And I might also add that's every activity within the company. So it's also functional activities. Where can that be done in the most cost-effective area around the world? So the team has a comprehensive plan. We're implementing the comprehensive plan to drive the margin improvement. And over time, we are going to drive the Genie business back to, you know, double-digit historical levels of margin activity, and the team is committed to doing that.

And, Brett, while I don't think we can put a specific dollar number on the cost savings and what they've contributed, When you look at just some metrics, right, is the AWP segment Q1 improved 680 basis points year over year. The incremental margin for the full year, 44% on the outlook we provided today, and a 7% operating margin. So I think those are some of the metrics that demonstrate the cost – the hard work on cost improvement that the AWP team has executed on.

Yeah, no doubt, very strong start. I wanted to come back to the order book. Is the uptake you're seeing driven by, you know, existing customers replacing equipment, or are you seeing, you know, new customer engagements driven by products or, you know, some of the front-end, you know, commercial processes?

Thanks. It's a combination, new customer acquisition, but also the replacement cycle, especially in the AWP segment. You know, there was a defleeting last year. Utilization is improving. They're beginning to build back their fleets. And we think if you just look at the replacement cycle for the Genie business and what's coming forward, there's a strong run ahead for that business. We're going to have to end it at this time so we can stop right at the top of the hour. We know you all have other calls this afternoon. So I just want to say thank you for your interest in Terex and a public announcement. COVID-19 safety remains a priority for us here at Terex. We're continuing to follow the safety protocols and I would strongly encourage all of us to be vaccinated when the opportunity presents itself. We no longer have a supply issue. We have a demand issue with the vaccine. So we're working hard to convince our team members to receive the vaccine so we can move to the other side of this pandemic. Operator, please end the call.

This concludes today's conference call. Thank you for participating.