Terex Corporation

Greetings and welcome to the Terex fourth quarter and full year 2023 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 Misra, Head of Investor Relations. Please go ahead.

Good morning and welcome to the Terex fourth quarter 2023 earnings conference call. A copy of the press release and presentation slides are posted on our Investor Relations website at investors.tarex.com. In addition, the replay and slide presentation will be available on our website. We are joined by Simon Meester, President 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 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 Simon Meester.

Thank you, Paritosh, and good morning. I would like to welcome everyone to our earnings call and appreciate your interest in Terex. As many of you know, I've been at Terex for a little over five years now, but this is my first earnings call as CEO of the company, and I'm honored and humbled to take over from John Garrison and very excited about the road ahead. We have a great company operating in attractive markets and are financially strong. We have global market leading businesses and an exceptional team. So looking ahead, I would expect much of my focus to be on helping Terex accelerate its growth. And as we grow, we will continue our focus on zero harm safety and our territory values, which are an important part of our culture and embedded in everything we do. Please turn to slide four. We're starting the year in a great position after making significant progress in 2023 on our strategic initiatives. The Terex team delivered a 17% increase in sales, over 300 basis points improvement in gross margins, a 63% improvement in EPS, and our return on invested capital of 28.5% improved by 720 basis points. These outstanding results demonstrate the strength of the Terex operating model and the progress we've made over these last few years. Over the last seven years, our MP business has consistently grown near double digits per year, becoming a vital piece of the Terex success story, and closed the year as strong as ever at 16.1% operating margins. The MP team continues to find creative ways to build on its strong and diverse portfolio, illustrated by the recent launch of Green Tech, a new Terex brand that will provide a comprehensive product offering of tree care and vegetation management solutions. Our AWP business executed very well in 2023, grew sales by 18% year-over-year, and improved operating margins by 480 basis points to 12.7%. Our new state-of-the-art Monterey facility continues to ramp up as planned, and it's the largest facility we've ever built in Terex, and we're very proud of the team of the progress they've made. This facility has been mostly built for competitive reasons and to improve Genie's through-cycle margin performance. During 2023, We continue to invest in new products and in our manufacturing facilities besides Monterey. As an example, 10 of our facilities are now operating with net zero emissions. We invested in Apptronic to capitalize on the accelerating trend of adopting robotics, and we expanded our battery technology investment with Aculon and started building the first prototypes with both. I'm very proud of our team members' accomplishments in 2023. Carex is in a great position with a diverse portfolio designed to help our customers achieve their goals. In the next few slides, I'd like to share some examples. Please turn to slide five. Our market-leading brands receive recognition for their focus on return on investment and competitive cost of ownership. Our goal is to maximize the return on investment for our customers while delivering environmentally friendly and safe products. In 2023, we received many awards across multiple products and geographies, highlighting our reputation in the marketplace. We are committed to continuing to develop exciting products and technologies that provide differentiated value to our customers. Please turn to slide six. DEREC's equipment is used in many different applications around the globe, from waste handling and recycling to grid expansion and data centers. Other examples are vertical farming, as illustrated here at a customer in Denmark, and airport and stadium projects. Our products are required in all stages of the project lifecycle, from foundation, building, repair, maintenance, and eventual recycling of materials for reuse. We're proud of the role our products play in the many development projects around the globe. Please turn to slide seven. Sustainability is an essential part of our business strategy, where we focus on product innovation to enable our customers and end users to operate in safe and sustainable ways, team member and community engagement, essential to execute our strategy and achieve our goals, and responsible operations with sustainable practices that minimize our impact on the environment. We're proud to report that for a second consecutive year, Newsweek recognized our commitment to sustainability and naming Terex one of America's most responsible companies. Additionally, Terex has been awarded a perfect score in our first ever Human Rights Council Equality Index Review in a recognition of the important work our team is doing. to ensure an inclusive work environment and where all team members feel valued. Please turn to slide eight. In addition to a diverse and market-leading portfolio, our company is positioned towards markets that clearly benefit from global megatrends. Investments around the world in infrastructure, digitalization, waste recycling, and electrification are favorably impacting our end markets. Federal spending and incentives will support demand for our products in the years ahead. Our product portfolio is well positioned to capitalize on these opportunities. For example, the MP PowerScreen and Finlay brands have leading positions in global crushing and screening markets that benefit from both the growth in infrastructure and the associated demand for aggregates and from the growing demolition and recycling projects. MP brands like Ecotech, TBI, and Terex Recycling Systems have grown 26% this year driven by new product development and growing demand for environmental and waste recycling solutions. Our utilities business is well positioned to capitalize on investment required to upgrade the U.S. electrical grid to support the accelerating demand as the industrial world continues to move to the use of more electrical power. And our Genie products are benefiting from demand from infrastructure projects, data centers, manufacturing, and events and entertainment. These megatrends position us very well for 2024 and beyond. Please turn to slide nine. Our Q4 backlog of $3.4 billion is still significantly above historical levels and is the second highest in recent history, providing healthy momentum going into 2024. Our team members continue to successfully navigate supply chain issues last year and work hard to continue to improve customer on-time deliveries and return to more normal lead times. In fact, Q4 consolidated bookings at $1.3 billion increased 44% sequentially, consistent with typical seasonal trends and a return to more normal order patterns. Demand is robust for the reasons I laid out on the previous slide. We still see, however, some disruptions in the supply chain, but it continues to improve. Our MP business, has backlog that is above historical norms, and our AWP business logs strong bookings in the quarter with a book-to-bill ratio of 129%, with Genie having order activity above these levels and our utilities business taking orders for 2025. Overall, our backlog and booking trends are positive and give us a strong outlook for 2024. Let's turn to slide 10. We continue to see positive trends in our main end markets, especially in North America and India, but have seen some softening in Europe, which reported a slight sales decline in the fourth quarter. The U.S. government has announced more than 40,000 projects in transportation, climate, and broadband. Spending on manufacturing is up approximately 70% in the last 12-month period. driven by mega projects related to semiconductor manufacturing, clean energy, and EV battery projects. These projects make up two thirds of the non-residential market. These favorable end market trends combined with replacement cycle tailwinds and high equipment utilization rates are very beneficial for our Genie business. Additionally, The increasing adoption of our products in emerging markets such as India is another positive. The utilities market is expected to continue to grow, supported by investment in grid upgrades and grid expansion needed for zero carbon and electrification goals. In the U.S., power-related spending has been increasing at double-digit growth rates in recent months. Our utilities business will benefit from this growing demand while we expect to continue to be constrained by body and chassis shortages. Strength in U.S. infrastructure and general construction end markets will benefit empty crushing and screening concrete and crane businesses. We expect these tailwinds to offset some of the softness in the businesses with higher European exposure. We expect NP's environmental business to continue its growth driven by increasing demand for waste recycling. Our Fuchs business is focused on expanding into new geographies and products to offset the near-term demand softness. Overall, we're positive about our end markets. We had an exceptional 2023 and expect strength in most of our markets in 2024. With that, let me turn it over to Julie.

Thanks, Simon, and good morning, everyone. Let's take a look at our fourth quarter financial performance found on slide 11. Sales of $1.2 billion were consistent with our expectations and prior year, reflecting healthy demand for our products as strength in North America offset some softening in European markets and deliveries returned to a more normal seasonal pattern. Our 2022 fourth quarter sales were the strongest that year as supply chain constraints started to ease. The growth margins of 21.5% increased by 220 basis points over the prior year as pricing improved manufacturing efficiencies and cost reduction initiatives helped to offset cost inflation and moderate startup costs. Growth margins were 21.8%, excluding a one-time product liability verdict of $4 million in MP. SG&A increased over the prior year due to wage inflation and incentive compensation expenses and included $13 million of one-time charges due to accelerated vesting and other expenses. Excluding these items, SG&A as a percent of sales was 11%. Income from operations was $116 million. excluding $17 million in one-time charges, operating income was $133 million, with operating margin of 10.9%, 100 basis points improvement over the prior year. Interest and other expense of $10 million declined $5 million from the prior year, as favorable mark-to-market adjustments more than offset higher interest rates. The fourth quarter global effective tax rate was a benefit of 21%, due to the establishment of a deferred tax asset from the recognition of a tax attribute associated with our operations in Switzerland. Fourth quarter earnings per share of $1.88 included a net favorable impact of 47 cents from non-recurring items, including a 62-cent one-time tax benefit related to the company's operations in Switzerland, a $0.07 mark-to-market gain on third-party investments, a $0.17 charge related to accelerated investing and other expenses, and a $0.05 charge related to a product liability verdict in MP. Excluding these non-recurring items, fourth quarter earnings per share was $1.41. Free cash flow for the quarter was $135 million, as increased operating profits were partially offset by inventories added to support production moves in 2024, as well as lingering supply chain disruption. Let's take a look at our segment results, starting with our materials processing segment found on slide 12. MP once again delivered excellent full-year performance in 2023, as sales were up 15%, and operating margins expanded 80 basis points to 16.1%. MP's incremental margin of 21% demonstrates continued, solid operational execution. For the fourth quarter, MP sales increased by 1% to $555 million compared to the exceptional fourth quarter of 2022, driven by strength in demand for aggregates and environmental products. MP's reported operating profit of $84 million was down $3 million as improved manufacturing efficiencies and discipline cost management was offset by an unfavorable product liability verdict. MP ended the quarter with backlog of $767 million, still above historical norms, while our bookings increased 22% sequentially. On slide 13, see our Arrow Work Platform segment financial results. AWP delivered excellent performance in 2023, as full-year sales were up 18% and operating margins expanded by an impressive 480 basis points with an incremental margin of 40%. The team did a great job on price-cost discipline, efficiency improvements, cost reduction activities, all while ramping up the monitoring facility. AWP had a solid fourth quarter with sales of $660 million, slightly down from the strong prior year due to softness in Europe, and a return to seasonal delivery patterns for its customers. AWP reported quarterly operating profit of $61 million, an increase of 13% over the prior year. The increase was driven by cost reduction initiatives, partially offset by unfavorable products and regional mix, manufacturing inefficiencies, and severance charges. AWP backlog is very strong at $2.6 billion, which is approximately three times the historical norm. Strong bookings of $850 million were up 59% sequentially, returning to seasonal order patterns. Turning to slide 14 and full year 2023 financial highlights. Our performance in 2023 reflected significant improvement in the businesses and the extraordinary efforts of our team members. Earnings per share increased 75% from $4.32 to $7.56. Full-year earnings included a net favorable impact of 50 cents from non-recurring items that we discussed earlier on the call. Excluding these items, our earnings per share increased 63% year-over-year to $7.06. Sales of $5.15 billion were up 17% year-over-year. Our operating income was $652 million with operating margin of 12.7%, excluding $15 million of non-recurring charges, which reflects a strong 320 basis points expansion over the prior year driven by prudent cost management as well as price realization. Incremental margins were 30%, 32% excluding non-recurring items. Full year SG&A was 10.3% of sales, excluding non-recurring items, consistent with our expectations. The effective tax rate for the year was 10.9%, which is impacted by the establishment of a Swiss deferred tax asset, as explained earlier. Excluding impact, our effective tax rate would have been 18.2%. Please see slide 15 for an overview of our capital allocation strategy. Free cash flow of $366 million increased $214 million over the prior year, resulting in a 71% conversion to net income. We continue to carry a higher level of inventory to support our production moves and navigate supply chain disruptions. Hospital inventory was $25 million, down $11 million from the prior year, but up $5 million sequentially from the third quarter. Capital expenditures and investments for the year were $151 million with a large investment related to our Monterey facility. We returned $104 million representing 28% of our free cash flow to our shareholders in share repurchases and dividends. We reduced our debt $152 million as we have paid down our revolver and our bonds are at a fixed rate of 5% until the end of the decade. Our net leverage remains low at 0.4 times below our 2.5 times target through the cycle. We have ample liquidity of $971 million, and we reported a return on invested capital of 28.5%, up 720 basis points year over year. Tarex is in an excellent position to continue to increase shareholder value and profitably grow the business. Now turning to slide 16 in our full year outlook. 2023 was an excellent year for TARICS, and our team members are committed to delivering another great year in 2024. It's important to realize we are operating in a complex environment with many macroeconomic variables 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 $6.85 to $7.25 based on sales of $5.1 to $5.3 billion, which reflects another year of solid, consistent performance well ahead of our investor day target. Our sales outlook incorporates healthy volumes supported by customer demand, but also reflects caution around supply chain and labor constraints, as well as softening in Europe. We expect the first and second half sales to be comparable to each other, with the second and third quarter sales higher than the first and fourth quarter as we return to more seasonal customer delivery patterns. We anticipate improved full-year operating margins in a range of 12.8% to 13.1% as we aim to remain price-cost neutral for the year and use cost reduction activities to offset moderate startup inefficiencies. We do want to emphasize the stronger first half in 2023 when making year-over-year comparisons. We expect corporate and other expenses to be evenly spread throughout the year. Based upon global tax laws, we expect a 2024 effective tax rate of approximately 22% versus our 2023 normalized rate of 18.2%. We estimate free cash flow of $325 million to $375 million including capital expenditures of approximately $145 million with the largest component being our Genie Mexico facility. Let's review our segment outlook. We anticipate MP sales of $2.2 to $2.3 billion with continued strong margins in the range of 15.6 to 15.9% for the full year. Compared to the prior year, sales are anticipated to be lower in the first quarter to realign supply and demand in our hoops and crane businesses. Q1 margins are anticipated to be approximately 200 basis points lower due to unfavorable product and regional mix. Sales and margins are expected to increase from Q1 levels and be relatively consistent for the remainder of the year. We expect AWP sales of $2.9 to $3 billion, with improved operating margins of 13.4 to 13.7% for the full year. We anticipate full-year operating margin expansion due to continued cost-out activity, favorable absorption at our mature plants, partially offset by inefficiencies due to the monitoring startup. We expect Q1 sales to be higher than the prior year and margins to be slightly lower, as increased volumes are offset by unfavorable product and geographic mix and startup inefficiencies. We anticipate the quarterly cadence of our AWP sales to be closer to historical patterns with the highest sales in Q2 and Q3, which will also drive higher profitability for those quarters. The Terex team is committed to delivering another strong year in 2024. And with that said, I will turn it back to you, Simon.

Thanks, Julie. Turning to slide 17, we expect to deliver strong 2024 results driven by continued focus on execution, continued focus on efficiency, leveraging our diverse portfolio, and the favorable end markets. We have industry-leading businesses and brands with competitive skill. We have a strong balance sheet to support our growth. And we have a global, experienced, diverse, and highly engaged team that is committed to continue to create value for our customers and our shareholders. I'm very excited about Tarek's future and look forward to the years to come. And with that, let me turn it back to Paritaj.

Thanks, Simon. As a reminder, during the question and answer session, we ask you to limit your questions to one and a follow-up to ensure we answer as many questions as possible this morning. With that, I would like to open it up for questions. Operator?

Thank you. If you have a question, please press star 1 on your telephone keypad. We ask that you please limit yourself to one question and one follow-up question. Your first question comes from the line of Stanley Elliott with Stifel. Your line is open.

Good morning, Simon, Julie, and team, and Simon, welcome. Um, so I'm going to get started off, you know, you, the first thing you mentioned was helping accelerate growth. Could you kind of flesh that out a little bit more? How are you thinking about the organic component versus, you know, the M and a opportunities that you potentially have? Uh, just, just curious how you're thinking about the business overall.

Yeah. Thanks for the question, Stan. Um, yeah, obviously I'm in my, my fifth week on the job, so I hope you can appreciate I'm still very much in, in listening and learning mode, but, um, You know, we've built a great company over the past several years, and we truly transformed the portfolio and significantly improved our ability to execute. We have a portfolio of market-leading businesses with strong operating margins, strong values, and now with a strong balance sheet, so obviously a lot to play with as an incoming CEO. So that's why I said that I expect my focus to be you know, mostly on the building out and accelerate our growth, but obviously making sure that we maintain our operational discipline and remain focused on our efficiency and our agility. We see many opportunities for organic growth, you know, and we're demonstrating strong return on invested capital. And, you know, we are ballpark, a $5 billion business in a $34 billion addressable market. So there's just a lot of opportunity for organic growth. But, you know, we're also looking at inorganic opportunities, anything that could expand our addressable markets or strengthen the portfolio, but obviously or widen our moat. But obviously it needs to be actionable, needs to be affordable, and it needs to be financially accretive. And everything that we have on the table, we will force rank versus, you know, things like dividends or share buybacks. And then obviously pick whatever provides best shareholder value. But I think that the good news at least for me as incoming CEO, is that we have strong optionality versus perhaps where we were three to five years ago.

Yep. And could you also flesh out maybe a little bit more, I guess, that question on the aerials, 100 basis points of margin, kind of the flattish volumes. When should we expect kind of the Mexico piece to roll off? How is the utilities market? Is that kind of supply chain easing up? Any more color there would be very helpful. Thanks.

Thanks for the question, Stan. Good morning. You know, AWP, you know, they did a fantastic job in the year with, you know, sales up 18% and OP margin expansion of 480 basis points. The team successfully managed through all the disruptions in supply chain, inflation, and longer-term footprint projects and still delivered strong year-over-year performance. Our Monterey facility is our largest facility. It's approximately a million square feet and the largest that we've ever built. And so as that facility starts to come online, it's going to run unfavorable manufacturing efficiencies or unfavorable burden absorption until the product moves are completed. In Q4, manufacturing inefficiencies were about $4 million unfavorable to what we had put in our outlook as we've had an in-quarter supply chain issue with one of our new suppliers. In addition, we took a $5 million charge, which was accelerated due to some of the product moves. It was a depreciation charge related to some assets not being moved to the Monterey facility. In addition, there were some severance charges in AWP and some unfavorable effects. So most of these charges are non-recurring, severance and depreciation, and manufacturing efficiencies will improve going forward as the plan comes online. The team did a great job in expanding margins by 480 basis points, and we're confident in our margin improvement outlook for next year. We did see in Q3 and Q4 about $21 million of charges related, manufacturing efficiencies related to the Monterey facility. We would assume that the charges would be about $15 to $20 million, mostly in the first half. of next year and the margins to improve as we go forward into Q3 and Q4. And from a utilities perspective, yes, we did have a supply chain issue that disrupted Q3, and that issue is behind us, and utilities improved in the fourth quarter.

Perfect. Thanks so much, and best of luck.

Thanks. Thanks, Dan. Thanks, Dan.

Your next question comes from the line of Seth Weber with Wells Fargo. Your line is open.

Hi. Good morning. Thanks for taking the question. Good morning. I wanted to maybe dig into the MP margin outlook a little bit. Julie, I think you said down 200 bps year-over-year in the first quarter. Is that – I guess I'm just trying to understand that. How much of that is, you know, product slash regional mix how much of it is is it just you know the portfolio is transitioning through some acquisitions that you did and you're just buying lower margin you know stuff that's lower margin right now and is that you know will that 200 biffs year over year just suddenly flip as we get into the second quarter or is that going to be more of a gradual uh kind of a gradual you know year-over-year compare get better thanks

Thanks for the question, Seth. MP is forecasted to have an OP margin in the 15.6% to 15.9% in the year. It's just a slight year-over-year decline in our operating margin due to product mix. Our highest growth business is our environmental sales, and they're a little bit lower than the segment margin. And so that's how the full year margin goes down just a bit. When we look at Q1, Q1 is going to be a bit lower on sales and volume due to some rebalancing of supply and demand in our Foogst and Tower cranes business, basically. And so our margins are expected to be 200 basis points lower in Q1, but then they're expected to increase from Q2, Q3, and Q4 and be relatively consistent for the remainder of the year.

And I would just add that all these businesses are operating at double-digit margins. They're all strong, performing businesses. So these are really nuances that we're talking about. MP's journey has been really remarkable over the last seven, eight years. And as I mentioned in my opening remarks on how they've been able to grow near double digits per year over the last seven, eight years. And now all of these businesses are strong double-digit businesses. So this is really nuanced for 2024.

Got it. Thank you. Maybe just a follow-up on AWP. I guess, can you just talk to the backlog that you have? Is all of that for 2024? And are you seeing any cancellations or push-outs from your customers in the AWP business? Thank you.

Yeah, thanks for the question. Obviously, you know, strong sequential bookings in AWP up 59%, still record high backlog, 3x historical levels. I would say for AWP, you know, it's not really a demand issue, very strong underlying demand. Not all the negotiations with the nationals were booked in the fourth quarter. Some of that will drop in the first quarter, so we expect some more strong bookings to come in the first quarter. Utilities within AWP is taking bookings for 2025. I would definitely say we have a strong order book. It's sticky. We don't see cancellations. This is a lot of confidence going into 2024.

Great. Okay. Thank you, guys. I appreciate the comments.

Thanks, Seth.

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

Great. Thanks. Good morning, and congrats, Simon. Just trying to get a sense of your North American AWP volume expectations for 2024. I guess with overall sales flat, I assume you have some positive pricing, some growth in parts and utility. I assume Europe is down a few percent. Are we thinking North American volumes are expected to be kind of up mid-single digits? And I'm just curious kind of what the sentiment from the broad rental channel is. Are they telling you that their fleet spending is up, down, or flat this year, and how they're framing that in the broader cyclical context?

Yeah, you got it right on your first assumption, North America up, Europe probably a little down. Overall, as I said, strong backlog going into the year, strong bookings, but, you know, some caution about Europe, North America, demand, underlying demand, very, very strong. There's still a little bit of a supply chain disruption, even though it has greatly improved versus the beginning of 2023. Still, it only needs, you know, it only takes one part for us to stop the shipment that we can't complete a product. But, yeah, in terms of activity with... With our nationals, our large customers in North America, they're all very bullish. They all feel that 2024 is another strong year. As a matter of fact, 2025 seems to be strong as well. So it seems to carry forward. And I would say overall, we do see probably a little bit more activity with our nationals going into 2024 just because of their exposure to the mega project. But overall, as a global business, it doesn't really impact us from a mixed standpoint because it just kind of washes out globally in terms of product and geographic mix.

Okay. That's very helpful. And then just a follow-up on Europe. Excuse me. Did it get worse in the quarter? Is it stabilizing? You know, how localized to any particular part of Europe is it? And, you know, how is competition a factor there?

Yeah. Are you talking about AWP or?

AWP, yes. Yeah, both would be good.

Okay. Yeah. So I'll start with AWP. So it's, and actually for both businesses, it's mostly Germany and the UK. It's a little bit Scandinavia. Germany and the UK, it's mostly non-RES related. Scandinavia is mostly RESI, where it starts to slow down and it's mostly impacting AWP and NP for that matter. In terms of MP, it's mostly tied to the businesses that have a little bit more of European exposure. So think Fuchs, for example, is also tied, obviously, to the scrap market, but also our cranes business, specifically our tower cranes business, with their exposure to the European market that are facing some headwinds. So that's what I would call out in terms of European exposure.

Okay. Thank you very much.

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

Thank you. Good morning. I'm trying to think about the straddling of demand and supply for 24 and 25 for AWP. It might be a hard question to answer initially, but if you had Mexico running the way you expect, no labor constraints and some of the more mature AWP plants, Can you give us some idea of what would the guide have been? I'm just curious. Are we talking a couple hundred dollars of revenue that you could be shipping in 24 that at the current moment you're saying you can't? And then the follow-up would be, do you see that simply getting pushed to 25 or has maybe some incremental capacity loosened up elsewhere in the industry that, you know, unfortunately that might be just simply a lost sale? So I'm just trying to think about the tightness right now, the inability to ship. And what does that do to the arc of the AWP cycle for 24 and 25?

Yeah, thanks for the question, David. So first of all, for everyone's math, there's about 300 million in the AWP backlog that's already carried over to 2025. So the backlog numbers that we're reporting is not all for 2024. There's about 300 million of that already allocated to 2025. So we have about nine to 10 months coverage currently in the backlog for 2024. In the case of Monterey, I would say we're obviously ramping up a very large facility, as Julie mentioned, a large facility we've ever built, and we're very happy with the progress we're making. We're still very much on track to deliver on the 200 basis points commitment that we made for 2025 in terms of operating margin improvement. And I would say that if supply chain continues to improve, In the current trend, there's definitely upside to our guidance, to our sales outlook, and we would be towards the upper end of that range. You know, and it's too early in the year to speculate what else we could see for the remainder of the year. But I still, I believe, and as I said in my opening remarks, that, you know, 2023 was a strong year, 2024 is a strong year, and by what we're seeing today, we think 2025 will be a strong year.

and maybe you don't want to answer it, fine, but just so I can ask it again, though, is there a number you can give us a sense of what your customers are asking for in 24 relative to your guy? Just so we know the torque and, hey, if things do loosen up, as you said, the second half of the year, let's say, you know, third quarter in particular, we can get that upside. Then what's the conversation like on, look, if I can't get it from you, I'm going somewhere else and I can get it for 24 or, Or does it inherently push it into 25? I'm just curious about those kind of dynamics, thinking about the two years of AWP, not just 24.

Yeah, and I don't think I can give you an answer today, David. What is important for us in 2024 is that what we're committing to our customers is what we're actually delivering on. And so that's our first priority. And how much of that eventually will end up spilling over in 2025? What we're currently committing to, we don't want to spill over into 2025, and so that's what we're committing to. That's what we want to build, and that's what we want to ship. Currently, we think that we could have upside to the upper end of the range, but I can't give you a number of what that eventually could look like when we hit the middle of the year, for example.

I appreciate it. Okay, thank you.

Your next question comes from the line of Steve Bulkman with Jefferies. Your line is open.

Great. Thank you, guys. Good morning, everybody. I'm going to stay with this theme a little bit. Can you sort of ballpark for us in, I don't know, two years or whenever this Monterey facility is up and running in full steam, how much capacity are you adding in the AWP product, roughly?

So the main reason we built Monterey, we are building Monterey, was because we wanted to improve the overall competitiveness of the business. So it was mostly to improve Genie's through-cycle margin performance. And as I mentioned, the project goes really well. We're also expanding our supply base, and it's mostly a facility that will be focused on supporting North America. You know, what it will actually mean in terms of capacity expansion, I can't give you a hard number, to be very honest with you. You know, it's a facility that's mostly that helps us to kind of bring some higher cost facilities offline, like Oklahoma City and Rock Hill. So, for us, it was mostly a cost and a competitiveness play. But, yeah, obviously the facility is built to grow, and so, you know, we can expand going forward. But for now, it's mostly to bring high-cost capacity offline.

Okay. Thank you. And I think, Julie, you said that you expected $15 million to $20 million of kind of startup costs down there for the full year, 24. Please correct me if I'm wrong. Okay. Are there any other kind of headwinds we should be aware of in margin in AWP in 2024? And I'm just kind of thinking about bridging the gap with sort of your biggest competitor.

When you think about the inefficiencies, I guess, related to Monterey, we're saying 15 to 20 million in 2024, but that's primarily more centered to the first half of the year. And so we expect margins to improve in Q3 and Q4 as more production is going through that facility. It becomes more efficient and the inefficiencies go down. So that's the primary difference. And I guess I just take this time to talk about, you know, as you look at our comparisons year over year, you know, we started up our Monterey facility in Q3 and Q4 of 2023. So it impacted the second half of the margins. They're not in the first half of 2023 when you compare. And so we'll have those inefficiencies running through the first half of the year. And then in the fourth quarter, margins will improve. And those inefficiencies that were in the second half of 2023 won't be as much in the second half of 2024. Does that help in your count?

Yep. Great. Thank you.

Thank you.

Your next question comes from the line of Tammy Zakaria with JP Morgan. Your line is open.

Hi, good morning, Team Terex. Hope you're doing well. Hi, how are you? So my first question is on the Monterey facility again. Just trying to understand the 200 basis points improvement in operating margin in 2025 when it ramps, how volume dependent is that a margin improvement target. So let's say 2025 volumes, for assumption, let's say it was down, would you still see a margin improvement given it's a big facility, capacity utilization is probably needed to get that 200 basis points number. So just trying to think about the capacity utilization versus volume dependency of that 200 basis points target.

Well, Tammy, there's always a lot of variables that happen. But all things being the same, we would expect to have a 200 basis point improvement. And we would expect, as Simon said, that we're seeing a strong demand in the marketplace. So we wouldn't anticipate that being an issue at this point in time. And so we would plan on the 200 basis point margin improvement in 2025.

Got it, got it. Okay, that's very helpful. And then I wanted to go back to Europe. Europe has been weak for some quarters now. Sitting here today, how are you thinking about a potential timeline for recovery in that market? And with that market down, are you going to be more opportunistic with some acquisitions maybe if – you know, it lends well to some of your growth ambitions. So any color on Europe and thoughts on Europe?

Yeah, well, it certainly seems like, you know, you can talk about soft landing, hard landing, no landing. It certainly seems like Europe is a little bit further behind in terms of managing their landing, so to speak, especially Germany and the UK, as I mentioned earlier. Actually, You say a couple of quarters. We have seen it mostly hit us for the first time in the fourth quarter, and we see it spill over in the first and the second quarter of this year. What's going to happen in terms of recovery? I wouldn't want to speculate, but obviously, I think the European Commission is eager to at least get some sort of soft landing for most of their economies. In terms of inorganic action, I wouldn't be able to be specific, Tammy, other than we have an active pipeline of opportunities. As I mentioned, we look at anything that could make us stronger, widen our moat, or help us grow faster. But we will rank everything as we should, versus all the other options we have to increase shareholder value. And again, we're posting very strong return on invested capital on just investing in our own current activity. So we have a lot of optionality. And of course, we're also looking at Europe. But we will always force rank it versus all the other options that we have. So nothing specific to call out there.

Got it. Thank you so much.

Thanks for the question.

Your next question comes from the line of Nicole DeBlaise with Deutsche Bank. Your line is open.

Yeah, thanks. Good morning, guys. Good morning. Just first question focusing on some of the dynamics around free cash flow. So can you guys talk a little bit about your expectations for working capital for 2024? And then as we roll into 2025, where do you think CapEx normalizes post-Monterey investments?

Thanks, Nicole. You know, we had, you know, free cash flow of $366 million, which was a conversion of 71% to net income. And, you know, we're forecasting, you know, $350 million or so of free cash flow for next year. This year benefited from a sale of our Oklahoma City facility, which was $32 million. We expect that, you know, we've guided to 1 to 3% of our sales in our investor day for capital expenditures. We've been on the higher end of that, you know, this last year and in 2024 due to the Monterey facility. And we don't have any major new Monterey million dollar or million square foot facilities, you know, coming in into 2025. So we would expect that to come down in 2025. and to have a stronger free cash flow conversion percentage going forward into 2025. And so in terms of net working capital, we have a slight improvement in net working capital forecasted in the year, but essentially just because of all of the production moves and still some of the disruption we're seeing in the supply chain will continue to carry a bit higher inventories going forward. And just really to make sure that everyone understands that our management team, part of our incentive compensation is networking capital performance and improvement. So the team is very focused on improving networking capital.

But I would definitely say we have upside on cash conversion going into 2025 because of the third and last year of the Monterey investment.

Got it. Thanks, guys. And then if I could just ask a nitpicky one. Julie, when you spoke about MP revenues being down in the first quarter, any sense of the magnitude there, just trying to understand the underlying dynamics behind the 200 basis points as you're on your margin contraction? Thank you.

Yeah, in terms of... Sorry, the question was on revenue, right? Yeah, so I think the first thing I would add is it's important to remember that the fourth quarter of 2022... was our strongest quarter in 2022 because that was the first quarter when the supply chain really started to improve and we started to catch up on a lot of our shipments. So that makes the year-over-year comps a little off. But then the fourth quarter of 2023, especially in our MP businesses, as I mentioned earlier, is where we really started to see the slowdown in Europe come in and that kind of impacted MP a little bit.

Nicole, we would expect roughly a 7% decline in sales in the first quarter due to that rebalancing in Fulton Towers in the first quarter.

Thank you very much. I'll pass it on. Thank you.

Your next question comes from the line of Steve Barger with KeyBank. Your line is open.

Thanks. Good morning. Good morning, Steve. I think all the capacity questions are just trying to understand if we're near peak in terms of revenue dollars. So I'll try it another way. After you swap out the high cost footprint for low cost and everything is up and running, do you expect to have more capacity in units or dollars in 2025 following what will be two flattish revenue years in 23 and 24?

We do expect to have upside in our capacity, yes.

Can you frame magnitude at all?

No, I can't.

I mean, we think about it, Steve, you know, that we have the ability to add shifts, et cetera, so capacity can go in step functions as well. So it's not always easy to review that.

Yeah, I mean, we're running single shifts in most, if not all, of our facilities. But I can't give you a hard number now.

And when we think about it, Steve, you know, we have, you know,

strong years in 2023 and 2024 and as simon indicated you know you know customers are talking about 2025. right okay and if we step back from near-term margin issues that you talked about if revenue runs in this low to mid 5 billion dollar range what kind of margin expansion can you drive from efficiency programs um you know and again i understand the near-term issues but Do you think there's 50 basis points of productivity or 10 or 100? What's achievable from continuous improvement?

Steve, as part of a manufacturing company, continuous improvement needs to be part of our DNA. We gave out some pretty nice investor targets of where our margins improve from 2022. And we're, you know, at this point, as we said in our prepared remarks, you know, we're slightly ahead of our investor day target. So we, at this point in time, so we continue to think that we can have a sequential margin improvement as we grow.

Understood. Thank you. Thank you.

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

on the impact from pricing and what you expect in 24, you know, I guess relative to cost and what that, how you expect that affairs relative to what you experienced in 23.

Yeah, thanks, Tim. Yeah, so we still see inflation in 2024, although lower inflation levels than in 2023. Our position is still the same, and obviously we're staying very close to our customers on this. We stay very transparent, but our goal is to stay price-cost neutral, to keep pushing ourselves on continuous cost out to ease the impact on our customers, but also to continue to improve our operating margins. and so we do see uh some inflation uh although although lowering but especially in you know actually across the board steel labor integrated components um but also logistics we definitely still see uh inflating uh input costs for 2024 although although at a lower level than in 2023. okay buddy okay presumably it was it was a was it a tailwind for terex in in 23 or

Is that just?

So, you know, Tim, we would say that, you know, your price cost neutral. And then, you know, the other margin improvement comes from cost and continuous improvement.

Okay. Understood. And then maybe just on MP, I don't think we, there were any comments just on the largest business with aggregates. Just what the outlook you have in terms of, you know, what's assumed in 24. There's always or can be some movement there in terms of whether the dealers are adding or shrinking their rental fleets. So maybe just a comment or two in terms of the outlook for aggregates, which I know is more of a global business, but how you see that shaping up in 24. Thanks.

Yeah, thanks for the question. Definitely strong tailwinds in North America for our aggregates business. A little bit of headwinds in Europe. But, you know, with the spending and infrastructure, with the construction going on in North America, definitely benefits our aggregates business in North America. But, you know, a little bit of slowdown in Germany and UK is working against it.

All right. Thank you. Thanks, Jim.

Your next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open.

Yes, hi. Good morning, everyone. And Simon, congratulations again. Thanks. Simon, I'm wondering if we could just go back to your comments earlier on the call around M&A parameters. You know, you folks have been looking for additional bolt-ons within MP for a couple of years and haven't been able to find anything that matches the value proposition for you folks. How's the approach for evaluating M&A today compared to what we've been looking at over the past couple of years? It sounded like you alluded to potentially a few additional product lines. I'm wondering, can you just expand on your prior comments in terms of how do you view what's accretive and the parameters of what you folks are evaluating going forward?

Yeah, I mean, if I look at our portfolio today, we have a portfolio of market-leading businesses around the globe, diverse, definitely strengthen each other, strong operating margins. All of our businesses pretty much run into double digits now. Strong balance sheet, so obviously that gives us the optionality. You know, we're looking at anything that would make us stronger, would, you know, as I mentioned earlier, would make us more synergistic, would widen our moat, would help us grow faster. But it's going to be opportunistic in nature. It needs to be actionable, needs to be affordable, needs to be financially creative. And then again, I want to reemphasize, we also still have a lot of opportunities to look just organically at expanding our businesses because we still have a lot of addressable market that we can go after with our existing portfolio. So, you know, obviously we look at our pipeline of inorganic opportunities, but we're also very much looking at what we can do organically. So everything is on the table is what I would say. And what makes my job a lot easier, quite frankly, as incoming CEO is we have a lot of operational momentum. going into 2024, we have posted very strong improvements, 2023 versus 2022, up 300 basis points on operating margin as Terex overall, growing 17%, a lot of strong operational momentum. And I would say my first priority should be and will have to be to make sure we keep our operational momentum going forward into 2024. But to your point, with the strong balance sheet that we have, we do have optionality. but we'll hold it against everything else that we have on the table.

Super. I appreciate it, Simon. And can I ask, in terms of in Europe, there's an anti-dumping investigation on China product for AWP. Can you just talk about your position in that investigation and the opportunities and potential risks that you see for yourself and others and the timeline that you expect the decision?

Thanks for the question. We learned about the petition in Europe. We support the petition overall against illegal dumping of equipment in Europe or in any market for that matter. Our position is that we support fair competition in any market. We believe that a level playing field is essential. and is in the best interest of all stakeholders, you know, team members, jobs, customers, suppliers, shareholders. And so, yeah, we were made aware of the petition that was filed in December. We're working with the European Commission and are responding to their request as required. We're eager, we're monitoring the case and we're awaiting you know, whatever the outcome may be. And, you know, our strength is that, you know, we have a global footprint. We are pretty flexible. We have leverage. We have optionality in our footprint. So whatever the outcome will be, you know, we're looking forward to it and we'll be able to respond.

Thank you, Sam.

Thank you.

That is all the time we have for questions. I will turn back to Simon for closing remarks.

All right. Thank you, operator. I want to thank everyone for the questions. I'm looking forward to working with you. I want to thank you for your interest in Terex. If you have any additional questions going forward, please follow up with Julie, John, or Paritosh. And with that, operator, please disconnect the call.

Thank you. This concludes today's call. We thank you for joining. You may now disconnect your lines.