Terex Corporation

Greetings and welcome to the Terex fourth quarter and year-end 2022 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, Paritosh Mishra, Head of Investor Relations. Please go ahead.

Good morning and welcome to the Terex fourth quarter and year-end 2022 earnings conference call. A copy of the press release and presentation slides are posted on our investor relations website at investors.terix.com. The replay and slide presentation will also be available on our website. We are joined by John Garrison, Chairman and Chief Executive Officer, and Julie Beck, Senior Vice President and Chief Financial Officer. Their 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 will be discussing non-GAAP information and performance measures we believe are useful in evaluating the company's operating performance. Reconciliations for these non-GAAP and 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, Prakash, 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' performance that delivered strong results in 2022. It was another year of addressing a challenging global operating environment, including inflationary pressures, production disruptions, and COVID impacts. The Terex team members worldwide work tirelessly to improve our performance for our customers, dealers, and shareholders. I would like to thank our team members for their continued commitment to our 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 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, up 22% from prior year, driven by strong global customer demand. Operating margins of 9.9% improved 290 basis points from the prior year. An 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 grow strategy. We proactively managed supply chain disruptions and inflation to deliver a 28% increase in operating income, a 41% improvement in EPS, a 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. We expanded our concrete product offering with the acquisition of ProWall, 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 Viatech and Aculon, which accelerated our product electrification strategy. This week, we announced an equity investment in Uptronics and entered into a co-development agreement to create potential robotic applications for Terex 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 megatrends. which are driven by an increasing focus on sustainability. Our products are well positioned to benefit from electrification, waste recycling, and infrastructure investments. We'll continue to grow our materials processing segment through innovation and by expanding into adjacent markets and categories. We'll optimize GE's performance through the cycle in sales growth and margin improvement. We see attractive opportunities for growth in our utilities business, driven by electrification. And 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. This year, we'll continue to make progress on our strategic growth priorities, including Genie's focus on continuous margin improvement. The Genie 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 Monterey, Mexico. The new facility and 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 MP and 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. providing additional opportunities for Terex. The global demand for waste recycling solutions is increasing, driven by regulatory and societal changes. Our MP brands, including Ecotech, 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. Terrace 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 on-shoring 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' ESG objectives. Please turn to slide eight. Our innovative products are delivering sustainable solutions for our customers. Fuchs material handlers, part of our MP segment, are versatile machines capable of handling various materials. Importantly, Fuchs is diversifying into port applications. You can see a Fuchs material handler, which is powered by the ship's battery hybrid system unloading bulk materials. As a result of our products, these ships operations produce zero emissions and reduce noise levels in the harbor. Another example of Terex helping our customers in achieving their sustainability goals. Please turn to slide nine. We are proud to report that in 2022, Newsweek recognized our commitment to sustainability, naming Terex 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. Terex products help our customers meet their sustainability goals and reduce negative impacts to the environment. At the end of 2022, approximately 60% of MP and 70% of GE products offered electric or hybrid options. Terrace Utilities was the first to market and continues to offer the only all-electric utility bucket truck. And MP will continue to expand its waste and recycling offerings. Additionally, we commenced energy audits at our sites. enabling 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, diversity, 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 twofold. In summary, Terex remains highly active in 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 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 continue 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 found on slide 11. Tarek's team members continued 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. Growth 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 growth 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, incremental spend due to acquisitions, and prudent investments in new technology and new product development. SG&A was 9.4% 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 9.9% 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 Gini administrative office relocation. The fourth quarter global effective tax rate was approximately 13% due to one-time discrete items, including the reversal of a German valuation reserve. Fourth quarter earnings per share of $1.34 increased 63%, representing a 52-cent improvement over last year. This strong performance was driven by volume, price, and discipline cost control. Current quarter results reflect an unfavorable EPS impact of 12 cents per share from foreign currency, and the fourth quarter of 2021 results included a 14-cent gain due to the GENE 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. MP had yet another excellent quarter with strong operational execution resulting in sales of $550 million 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 drove an increased operating margin of 200 basis points to 15.8% while integrating several acquisitions. Again this quarter and before 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, see our aerial work platform 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 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 their operating profit and delivered operating margins of 8% in the quarter, up 320 basis points from last year. The improvement was a result of higher sales volumes, favorable mix, 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 $3.07 to $4.32, a $1.25 improvement, including a negative FX impact of 42 cents 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 9.5% 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 and including additional inventory as supply chain disruption continued. 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 ROIC 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 continued to invest in our business with capital expenditures of $110 million, and we deployed $50 million on acquisitions and investments. We have no debt maturities 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 time, which is well below our 2.5 times target through the cycle. We have ample liquidity of $727 million. Yesterday, we announced a 15% increase to our quarterly dividend to 15 cents 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 remaining authorization to purchase shares. Tarix is in 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. Elevated customer fleet ages and historic low dealer inventory levels continue to support robust demand. We had minimal cancellations and push-ups. Our total backlog position is up 22% versus the prior year, demonstrating the strength of our end markets and giving us visibility into 2023. 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 $4.6 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 expectations. 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 35 cent per share unfavorable impact. We estimate free cash flow of $225 to $275 million, including capital expenditures of approximately $135 million with the largest component being our Genie Mexico facility. Let's review our segment outlook. MP sales of $2 to $2.1 billion and AWP sales of $2.6 to $2.7 billion reflect strong customer demand with continued supply chain constraints. MP 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 AWP segment continues to be impacted by supply shortages. AWP segment operating margins of approximately 9% are expected to be comparable in the first half and the second half with the second and third quarters being slightly higher. Operating margin expansion is 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, Julie. Turning to slide 18 to conclude our prepared remarks. Terrace is well positioned for growth to deliver long-term value for our stakeholders in 2023 because we participate in strong end markets, including infrastructure, electrification, and environmental. We'll continue to execute our discipline capital allocation strategy, while investing in new products and manufacturing capability, along with strategic and inorganic growth. We have demonstrated resiliency and adaptability in an increasingly challenging environment, and we have great team members, businesses, strong brands, and strong market positions. And with that, let me turn it back to Paritas.

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 would like to open the show.

Thank you. If you would 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. Our first question comes from Michael Feniger from Bank of America. Please go ahead. Your line is open.

Hey guys, thanks for taking my questions. Just like to ask actually about materials processing. It keeps outperforming, delivered a record high operating margin in the fourth quarter. Just what is underpinning that strength? Can that continue in 2023? And 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. MP continues to deliver consistent, outstanding performance. As Julie indicated in her opening comments, represents more than 60% of our overall Terex operating margin. The strength really comes from the global presence of the businesses. If we look at it, we've seen strong sales. healthy bookings elevated backlogs we've got almost three times the normal level of backlog in this business as we look forward into 2023 so you know healthy backlog healthy bookings and then if we look at our respective verticals that we compete in uh in our aggregates business the largest portion of the of the mp segment again similar story the global healthy bookings and backlog i think it's important for investors to understand that this business caters not just to 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. In our concrete business, Advanced Mixer, we did see a good order activity, good backlog. We watched that very closely because that one's tied a little bit closer here in the States. It's a U.S.-based business. It's a residential 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. ProLaw, 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 FOOX. FOOX, we did see that soften somewhat as we talked about in our last earnings call. That principally was driven by conditions in Europe. And, you know, the decline in scrap metal prices because they are leveraged to scrap metal. They're diversifying, as we indicated, into 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 in our Fuchs business. Environmental continues to grow, substantial increase year-over-year globally, both in bookings and backlog associated with our environmental business. And then our RTs and tower businesses, again, more lever 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 lever to Europe there, so we did see some modest slowdown in our bookings in that segment of the business. And then finally, our pick and carry business down in Australia continued to show strong strength. I was in India. Last week at the ConExpo Obama show and Indian market customers were strong. We just launched our product there, 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'll 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 pushouts. That's the first sign for us if we begin to see the backlog begin to move around with cancellations and pushouts, and we're just not seeing that at this time. So that would be the first indication. We acknowledge there's macroeconomic uncertainty out there, but despite that, we're seeing strong bookings, great backlog, great visibility as we look into 2023 in the MP segment.

And Michael, just to add on, MP represents 60% of our operating income, and they had a terrific year 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 are operating in a disruptive environment, too. They have all of the supply chain disruptions, and they've still been able to deliver strong OP margins. We 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. People are traveling again and trade shows and things like that. There's going to be some marketing expenses in this business as well. They also will have some unfavorable foreign exchange from the British pound to the US dollar in 2023. They've just done, and they also will absorb some additional SG&A through the acquisitions that we did in 2022. So we're expecting continued strong financial performance from MP and expanded margins.

Thank you. And just to follow up on that, I mean, when you look at the material processing comps in the public market, Territory is trading at a notable discount. Is there anything structurally disadvantaged 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. Some broad questions. You know, I think part of our job is to better explain the great portfolio of businesses that we have in MP. You know, we started doing that during our Invest Today. We'll continue. Because if you look at that portfolio, it's consistently performed throughout time in terms of driving revenue growth and margin expansion. In terms of our discipline 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 of 15% increase in dividend. So we'll continue to do that. We have the ability to invest for M&A activities, so we'll look there. That's 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 the focus right there for now. But we're always looking at ways to enhance stakeholder and shareholder value in the corporation, and we'll continue to do so. Mike?

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 same time, you guys are mentioning low dealer inventories and MPH fleet and 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 or bringing down the fleet age

in the coming year and i guess it's kind of a you know a way to say you know maybe some of that could spill over into 24. so thanks for the question stan we do have historically high backlogs as we go into the year if you just look at our coverage for for 2023 in our backlog standards is already 700 million dollars for delivery in 2024 a lot of that is associated with with supply chain So, I do believe, and again, on the MP side, dealer replenishment, dealer inventories are low. I think this is going to help, but they're seeing strong growth. And so, as soon as products come in, they're, you know, in 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 the rent to ownership. And so we're having a hard time replenishing the dealer inventory. So I think that's 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 meetings and needs of the rental customers, The fleet replacement has been delayed, and one of the benefits of 2023, and we think even beyond 2023, is that fleet age has increased, which is going to increase the replacement cycle as we go forward. That comment is specific to the Genie business staff.

Perfect. I apologize if you all touched on it at 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 you think this will end up playing out from this co-investment that you've put together?

Yeah, thanks, Dan, and I hope everybody had the opportunity to see that. It wasn't an equity investment in Amtronic that we made, but the biggest part for us is co-development of robotic technology, and really it's to provide our customers with solutions to help safely and efficiently conduct work. If you think about job sites, labor constraints, skilled labor trade constraints, there's an opportunity to enhance job site productivity and safety through robotic technology. Adtronic 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. That's 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, you know, 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 of this going forward.

Yeah, it sounds like there'd be a lot of opportunities, I guess, on the MP side from a sorting perspective. But thanks very much for the color, and congratulations. Best of luck.

Thanks, Jeff. 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 Monterey move and the disruption to, I guess, productivity and margin that you expect for 2023. I guess the first question is, did that impact fourth quarter AWP margin? And just sort of how should we think about that know flowing through the year does that do you exit 2023 at a you know fully operational level and then 24 you know should reflect all these benefits or does this continue to bleed into 2024 thanks

Yeah, thank you. I'll start, Julie, and then you can jump in on that longer-term margin side. So, you know, the disruption, it really doesn't start until first quarter. We begin to move into the permanent facility, Seth, in the first quarter. And we have a significant number of product line moves. You know, first, GE has done this. They've got a detailed process for doing this. But in the environment we're in now, both sides of the transaction, i.e., the sending plant is going to have some disruption associated with the supply chain and the receiving plant. In this case, Monterey is going to have some 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 and as we spoke during Investor Day. It ultimately is going to add about 200 basis points of operating margin improvement when we're up fully and running as we really get 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. The construction's gone well. It's on time. It's on budget. And now it's time to start, you know, moving the product lines in there and reaping the benefits of the investment that we're making.

And Seth, just to follow up on some of the Q4 margin commentary, you know, the AWP, you know, their margins were up 320 basis points from last year. So, you know, really nice results in higher sales volumes. They had strict expense management, cost reduction, and they had disciplined pricing. And when we look at Q4, the 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. And our utilities business continues to experience the supply disruptions due to chassis and bodies, and so they had unfavorable manufacturing efficiencies. Some things that were maybe newer, I guess, that we, you know, we had some weather-related shutdowns and product liability expenses in the utility business, as well as the Changzhou facility was temporarily shut down due to COVID cases. But, you know, the team did a really great job to more than double their operating profit and increase their margins by 320 points in the fourth quarter. So, you know, pretty much we had some nice performance by the team.

Yep. Okay. That's great. Helpful color. Thank you. And then just a quick follow-up, you know, John, I think you called out some softness in Europe and the Fuchs business and the crane business, the tower business. Is that, are you seeing, you know, the pausing on European orders on the access business as well, or is it really just the ones you called out?

We did see a modest slowdown in orders on the AWP side in the quarter. With that said, we still have strong, you know, historically strong backlog. So a little bit of moderation on the booking level, but strong backlog as we go into 2023.

And that's just to clarify, that's out of your comments around Europe? Yes. Okay, super. Okay, thank you very much. I appreciate it, guys. Thank you.

Our next question comes from David Razzo from Evercore ISI. Please go ahead. Your line is open.

Hi. Thank you for the time. With AWP for 23, right, you've got 94% of the sales guide in the backlog that ships this year. So clearly this is a year about, I mean, supply chain inefficiency, supply chain broadly as the gating factory, the gating factory, factory, I should say. The question I have, though, is the order books for 24, how are we handling the out year of maybe differently than the past. And I want to go back to the Mexico risk of that transition. I know it's justified 200 basis points of margin improvements worthwhile, but I'm just trying to make sure we don't look up in a couple quarters in Mexico in 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 that it's not the easiest time to be transitioning production?

Thanks, David. So in terms of the order book, as we indicated, we've got about $700 million total company tariffs-wide of backlog into 2024. And, you know, it's more of that actually is utilities than the genie business. Especially some of our highly customized units are booked well out into 24 in that business. And then in terms of the Monterey, Mexico, again, we just thought it was appropriate, given the level of change, to highlight it as part of the GENIE program. plan for this year. Again, David has done this numerous times. The supply chain remains the gating factor. We will closely manage this and ensure we've got the appropriate level of material on the sending 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 highlight it. And that explains some of the margin or why it's taking time Why aren't you just getting 200 basis points of margin immediately? That's the why. It takes time to bring the plant up, to get the plant up and operating, 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 the genie business.

Can you touch on the order books, how you're handling 24, or let's call it the out year, differently than the past?

So in terms of the... How early to order?

I mean, open the window up earlier? You don't usually start the year with 94% of your guys.

Yeah, we don't. You're right, David. We don't usually 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 ADMP segment right now, the customers are asking for more than we can currently deliver. So we're working... We're in constant dialogue with our customers. If we see some improvement in the 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 are looking for it in 2024, but that's when we're able to deliver the product is in 2024. All right.

Thank you for the time.

Thank you, David.

Our next question comes from Nicole de Blasio from Deutsche Bank. Please go ahead. Your line is open. Yeah, thanks. Good morning, guys.

Morning, Nicole.

Good morning. Hi, Julie. Just maybe to continue the conversation that David just started, one more question on this backlog that extends to 2024. How are you guys handling the pricing aspect of that, given all of the uncertainty around inflation?

So, Nicole, we're making our best estimate of what that is going to look like. And, you know, that's the answer. You know, we just make a best estimate.

Okay. There is a pricing – there's a list price associated with that. It's not like the customer has to wait until pricing is confirmed at some point in the future. Yes, that's correct. Okay. Okay. Okay, understood. And then to 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 question. Thanks, Nicole. So we are expecting our free cash flow to improve in 2023. It improves 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 in an absolute dollars term in 2023, but a much less lower inventory build in 2023 than we had in 2022. So we'll be more working capital efficient going into 2023 than we experienced in 2022.

Thank you. I'll pass it on.

Thank you. Thank you, Nicole.

Our next question comes from Steve Barger from KeyBank Capital Markets. Please go ahead. Your line is open.

Thanks. With 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, Steven. If you look at our revenue guide for the year, and you think about 2022, you know, we were between a billion, just at the macro level across Terex. We were between a billion and a billion one, and then stepped it up in the back half of the year to, you know, a billion 50 to, you know, a billion two type of range. We're anticipating modest supply chain improvement, but not anywhere near historical performance. So if you kind of look at our fourth quarter, you know, runway, We've kind of extended that into 2023. And again, that's based on the current estimates from suppliers and managing to the current constraint. The challenge is this constraint continues to move around. And so we, you know, our guide is predicated, as you can see, based on, you know, our backlog and the coverage rates. The guide really is predicated on the supply chain. It's our best estimate in current conversations with suppliers in terms of what they can deliver to, and that's what we've built our 23 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, the constraint is the supply chain, and that's the governor for 2023 as of today. Julie?

Yeah, I just was going to add that, you know, we had been, you know, running at a billion to a billion one for consistently. And in fourth quarter, we were able to, you know, go up to a billion two. And so our guidance for this next year is a billion one to a billion two, which is consistent with what our supply chain's been able to, you know, been able to deliver.

Yeah, no, totally understandable. I guess what I'm trying to get to is, could you run comfortably above $5 billion in an unconstrained environment, given the how you're thinking about capacity and the footprint shifts you've made?

In the future, yes. Again, we, you know, and I think it's important, you know, Monterey, Mexico does add some incremental capacity, but what it fundamentally does is alter our competitive position for being globally cost competitive as we go forward. So, again, if you go back in time, We've definitely produced, especially in AWP segments, but as well in the MP segment, we've produced at higher levels. We would have that opportunity if the supply chain could support. There are some labor constraints in certain markets that would have to navigate. The biggest labor constraint that we have is in our Redmond area. We're leaving that with our move into Monterey, 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 chain now, not just on the continuity of supply, i.e., on-time delivery, but also what the supplier is 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're working on with the supply base as well as quantity. But the constraint in 2023 is the supply chain.

And just to add on to that, you know, Steve, as we move from Redmond, you know, some moves from Redmond, there will still be production facilities in Redmond going forward. It's just a partial several lines moving down to help with some of the labor shortage we've experienced in Redmond.

Got it. And then just one quick one. I watch the Apptronic videos. It seems like interesting technology. And, John, I hear you on enhancing safety and productivity, but can you be more specific about how you're imagining that? embedded in the TerraX projects.

Yeah, so, you know, Stan mentioned we did the Zen Robotics, so that was picking and sorting. So there may be some overlap in terms of the two there. In terms of Apptronic, think about work enhancing an operator, a skilled trade on a scissor lift or on a boom lift or in a bucket truck. Is there the opportunity to enhance that, reduce the amount of labor instead of two, you know, two skilled tradesmen or women in a... And a boom lift, can you cut that 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 advancement into that construction center. And the EPC contractors will tell you it's desperately needed because one of their biggest constraints is labor. So we're trying to provide labor productivity improvements and safety improvements. And we're excited. We'll see where it goes, but we think there's going to be some real opportunity there.

our next question comes from stephen fisher from ubs please go ahead your line is open thanks good morning i'm just trying to get a sense of the uh the volume growth that you have embedded in your guidance for the materials processing segment for 2023 i know you mentioned john a lot about the strength of the bookings and the backlog but the revenues and the guidance are only up mid single digits so i guess presuming you do have some pricing it doesn't seem like the volumes are are up much unless there's a big FX drag on the revenue guide. So I don't know if it's maybe you're just taking orders that the supply chain won't allow you to deliver, but just have a think about the volumes embedded there for 23.

So, as Steve makes the question, I would say that, you know, the MT business has been dynamic throughout the year, and they've been priced across neutral throughout 2022. And so, you know, they've done a really nice job of managing that, and we expect that to continue into 2023. We would expect them to have, you know, more volume than price and being offset by, you know, a couple percentage points of foreign exchange in 2023.

Okay, that's helpful. And then on the AWP bookings year over year, I'm just curious, are we comparing apples to oranges there in the fourth quarter? Meaning, I guess, to what extent are you restricting orders now versus maybe you weren't doing that a year ago? Or is it a fair comparison that there's really no restriction on the bookings timeframe at this point?

That's a good question, Steve. Really in both segments, because of the extended backlog, booking patterns have been disrupted. And so we have continuing ongoing discussions with our Genie customers. our utilities customers and our MP distributors as well. And so in the case of MP, some of the order books weren't open and they'll open up. In the case of AWP, it's the ability to take the orders, be very clear with customers what we can commit to, what we can't commit to, and the timing. And so it's a fair assessment. that the historical booking patterns have been disrupted in both businesses as a result of the strong water activity, strong backlog. It has disrupted the traditional flow. And in the case of Jeanne, continuing ongoing discussions with our national accounts as we speak.

Okay. Thanks, Sean.

Thank you. Thank you.

Our next question comes from Tammy Zakaria from J.P. Morgan. Please go ahead. Your line is open.

Hi. Good morning. 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?

So, Tammy, I thank you for the question. I think we've done a really 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 the AWP business, has taken out significant costs in SG&A. So we have, you know, we at this time feel that it's appropriate to invest in the business in terms of new product development, in terms of digitalization, in terms of those types of initiatives. There will be some increases, as I mentioned, just things like trade shows. We have three of them this first quarter, and people are traveling some expenses that we didn't have in 2022 due to COVID. So we're making prudent investments, and we'll 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, It seems like you have some pricing embedded in your top line, but raw material costs have come down, notably from last year. So why wouldn't you be price-cost positive in 2023?

So 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 increases. So even though there are certain things like an HRC steel that 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 cost going into 2023 at this point in time. So we don't see prices coming down. We will offset. Our goal is to be price-cost neutral for the year, and we're pricing our products according to that, and we're very transparent with our customers.

Got it. Thank you so much.

Thank you. Thank you, Tammy.

Our next question comes from Jamie Cook from Credit Suisse. Please go ahead. Your line is open. Hi, good morning, a nice quarter.

Two questions. 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 costs throughout the quarter's first half versus second half? Thank you. Okay, thanks, Jamie.

First of all, yes, the utilities business was especially impacted by supply chain shortages this year. The bodies and chassis were really difficult. And so, as we said, the utilities margins have been below the segment average in 2022. Going into 2023, we expect the utilities margins to improve along with the Gini margins. So we expect the overall segment margins to improve. In terms of price, cost, et cetera, we're at this point in time. at first half, second half, pretty much the same. The first half will have some pricing increases that we took later in the second quarter that will come through. It's Q1, but from a cost perspective, we expect that to be relatively balanced throughout the year.

Thank you. Thank you, Janice.

Our last question will come from Steven Gochman from Jefferies. Please go ahead. 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 Genie 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 it's an improvement in the electrical options across the business, especially as we bring out the new products in both those categories. In the case of MP, it really is predicated on what application it's going into and is there a grid or what they call mains power available as to whether or not the machine goes out with an ICE engine or goes out electric. But again, a lot of customer interest. As we bring out new products, as the industry brings out new products, I think you'll continue to see a transition to the electrical side, and that was part of the investments that we made last year in VITAC and Aculon were designed to help accelerate our electric offering as we go forward. So I think over time, I 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 to follow on, over the next few years, presumably there'll be some transition. Do you think that's a margin accretive event for Terex, or is it more a margin headwind because of sort of startup and development costs?

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 that's in there. One of the things that is occurring over time, and it's part of the reason why the uptick hasn't been as strong, is that the electrical options are more costly than the internal combustion engine or our hybrid models. As we continue to move down that cost curve, as more and more industries adopt the electrical technology, specifically around battery and battery technology, that it'll come down the cost curve, and we believe it'll be more affordable. And from a margin standpoint, pretty much right now, our... Long-term assessment is margin neutral. But again, that does, you know, we are assuming that over time, which is happening, that you see the cost of those units come down as the cost of the battery technology comes down the cost curve, you know, globally for those types of products. All right. Great. 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 Julie, John, or Paritosh. Again, thank you for your interest in Terex. Please stay safe and stay healthy. And again, thank you for your interest in Terex, 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.