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

Good morning and welcome to the Terex fourth quarter and year-end 2021 earnings conference call. A copy of the press release and presentation slides are posted on our Investor Relations website at investors.terex.com. In addition, the replay and slide presentation will be available on our website. I'm joined by John Garrison, Chairman and Chief Executive Officer, and Julie Beck, Senior Vice President and Chief Financial Officer. Their prepared remarks will be followed by Q&A. Please turn to slide 2 of the presentation, which reflects our safe harbor statement. Today's conference call contains forward-looking statements, which are subject to risks that could cause actual results to be materially different from those expressed or implied. In addition, we'll be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures can be found in the conference call materials. Please turn to slide 3, and I'll turn it over to John Garrison.

Thank you, Randy. And good morning. I'd like to welcome everyone to our earnings call. And thank you for your interest in Terex. We're proud of all Terex team members who are keeping themselves and others safe, meeting the needs of customers and helping our communities. I would like to thank our team members around the world for their continued commitment towards a zero harm safety culture and Terex way values. Safety remains the top priority of the company, driven by think safe, work safe, home safe. Our strong commitment to zero harm is driving improvement of safety metrics, such as total recordable incident rates, which has significantly improved over the past five years. This is a testament to the hard work and dedication of our team members. Please turn to slide 4. Our strong environmental, social and governance foundation drives stakeholder value. A few highlights as we progress on our ESG journey. First, environmental. Terex products help our customers to meet their sustainability goals. Two-thirds of Genie scissors, one-third of Genie booms and 60% of Materials Processing products have an electric option. Turning to social. Diversity, equity and inclusion are being embraced and driven throughout the organization. Next, leading with strong governance. Our ESG efforts are led by senior management with oversight from our board of directors. We firmly believe in our actions matching our words, whether it's producing sustainable products, promoting diversity, equity and inclusion, or being good global citizens. The team recognizes there's more work to do around this important topic, and we will provide updates throughout the year. Please turn to slide 5 to review our Q4 2021 financial highlights. We had an excellent quarter. EPS of $0.82 nearly quadrupled year-over-year. Sales were up 26% year-over-year and we ended 2021 with a record backlog of $3 billion, up 122%, driven by strong global customer demand. Focused cost management continued, resulting in a 300 basis point operating margin improvement. Overall, the fourth quarter financial performance demonstrated strong execution by our team members in a dynamic and challenging operating environment. Please turn to slide 6. Our execute, innovate, and grow strategy has strengthened our business operations in 2021. On execution, the team proactively managed supply chain disruptions to deliver sales growth of 26% year-over-year, aggressively managed costs to deliver a 430 basis point improvement in SG&A as a percent of sales, and improved Genie's future cost competitiveness as our temporary Mexico facility is now producing telehandlers and continues to ramp up. Turning to innovation, we introduced new products, including environmental and recycling solutions in Materials Processing, new electric offerings in Genie, and electric grid products in utilities. We continue to invest in connected assets and digital capabilities, such as customer dealer integration and telematics across the enterprise to better serve customers. We invested in our business for future growth, both organically and inorganically. The team expanded production capabilities of mobile crushing and screening equipment in China and Northern Ireland, acquired MDS International, offering adjacent products for our MP customers, and continued expansion of service facilities, such as our new Houston, Texas location for utilities customers. Please turn to slide 7. Our Materials Processing segment is a consistent strong performer. It is a diversified, high performing portfolio of businesses that continues to invest for future growth. MP brands have leading positions in their respective markets with excellent end market product and geographic diversification. We have a great opportunity to grow organically through innovation, product and service development, and expanding into product adjacencies, including conveying, washing, environmental, and recycling. Parts and service remains a focus for the segment as it continues to develop digital offerings for dealers and customers. More than 8,000 of MP's machines are fitted with telematics hardware and the number of dealers using customer dealer integration, or CDI, has doubled in 2021. MP's end market diversification is a strength, whether it's aggregates, construction, recycling, or global infrastructure. All of these markets are growing. Please turn to slide 8 and I will review AWP offerings and end markets. Starting with our utilities business, it had excellent growth prospects. The need to maintain and grow the electric grid along with continued 5G rollout will drive multiyear demand. Some key product lines for Terex utilities include bucket trucks, digger derricks, and tree trimmers used for the maintenance and expansion of electrical grids. Also, we recently invested in Viatec's battery technologies for utility trucks, called Smart Power Takeoff or SmartPTO. This environmentally friendly solution allows our utility booms to operate without truck idling. As a result, our customers can reduce vehicle maintenance and carbon emissions. Turning to our Genie business. Genie is a globally recognized brand with great products. The 60-foot J boom was named the Contractors Top 50 new product. Hybrid power options on scissors and booms provide indoor and outdoor job site flexibility and quiet emission-free performance. And our new telehandler offers increased lift capacity and lower cost of ownership. These products demonstrate Genie's strength in listening to customers and responding with innovative, industry-leading products. Genie's end markets of construction, infrastructure, and industrial applications will drive demand. Further, we are at the beginning of a new multiyear replacement cycle in North America and European rental markets. Please turn to slide 9 and I will discuss the supply chain environment. Like most other industrial companies, we're facing shortages and cost pressures for materials, logistics, freight, and labor. These headwinds have constrained our growth in the short term. The significant increasing COVID cases in January and February around the world are impacting our production and supplier deliveries. However, we are aggressively managing these challenges. The team continues to mitigate cost pressures and minimize production disruption by staying close to our existing suppliers and expanding our supply base. Redesigning components to maximize availability of critical inputs to improve production, providing transparent communication of delivery and cost headwinds to our customers, and we have taken pricing actions, but they have not been sufficient to offset unprecedented material and logistics inflation, which accelerated in the back half of 2021. We anticipate these challenges to continue in the first half of 2022. However, for the full year, we anticipate material costs stabilizing and being price cost neutral as price realization improves throughout the year. Our production and supply chain team members are working tirelessly. They are demonstrating resilience and flexibility to increase customer deliveries. And with that, I'll turn it over to Julie for her first earnings call with Terex. Julie?

Thanks, John. And good morning to everyone. I am very excited to have joined Terex with its great brand, Terex way values, strong history and strong balance sheet. I look forward to working with the team to drive operational margin improvement, free cash flow generation, growth and enhancing value for all stakeholders. Now turning to slide 10. I want to congratulate the team on posting excellent fourth quarter results. Looking at the fourth quarter, sales of $990 million were up 26% year-over-year as year-end market demand remained strong. For the quarter, we recorded an operating profit of $70 million, more than double our operating profit of $32 million in the fourth quarter of last year. Operating profit increased due to strong sales and $3 million of positive financial callouts. Operating margins improved 300 basis points in the quarter, driven by actions to prudently manage and reduce costs. We achieved this positive operating result through disciplined cost control while adapting to a dynamic market environment. Interest and other expenses were approximately $8 million lower than the fourth quarter of 2020 due to a gain related to the relocation of our Genie administrative office and reduced debt levels. Our effective tax rate of approximately 15% benefited from discrete items, including the favorable resolution of a tax audit. Our fourth quarter earnings per share of $0.82 increased nearly four times, representing a $0.61 improvement over last year. The financial callout highlighted in this slide represents a $0.16 benefit in the quarter. Free cash flow for the quarter was below our expectations. First, we have not yet received an approved $39 million IRS refund, and second, inventories increased due to disruption and logistics delays. Turning to slide 11 and our Materials Processing segment financial results. MP continues to perform very well with sales of $454 million, up 24% compared to the fourth quarter of 2020 and the business ended the year with a backlog of $1 billion, which is nearly double that of a year ago. These results were driven by continued strong customer demand in all end markets and geographies. MP delivered 13.8% operating margins by driving sales growth while managing material costs and manufacturing headwinds. This is a testament to the team's operational execution. Turning to slide 12 and our Aerial Work Platforms segment financial results. AWP sales of $534 million increased by 30% compared to last year, driven by strong global and market demand. AWP fourth quarter bookings of $922 million were up 23% year-over-year, while backlog at quarter-end was nearly $2 billion, up 137% from the prior year. AWP delivered improved operating margin of 4.8% in the quarter, driven by strong customer demand and prudent expense management. Turning to slide 13 and full-year 2021 financial highlights. Our performance in 2021 reflected strong improvement in the business and the extraordinary efforts of our team members. Earnings per share increased significantly from $0.13 to $3.07 or a $2.94 improvement. Sales of $3.9 billion were up 26% year-over-year as end markets recovered. Operating margin of 8.4% expanded 620 basis points, driven by strict expense discipline. SG&A spending was $42 million lower year-over-year at 11% of sales, meeting our 12.5% target. We delivered a 32% incremental margin, exceeding our 25% target. And we repaid $0.5 billion of debt, reducing net leverage to 1.1 times. Turning to slide 14, this slide summarizes our 2021 financial results and callouts. Included in our operating profit were $5 million of positive callouts. Below the line, there were $29 million of non-cash charges associated with our debt refinancing and term loan repayment. This was partially offset by a $12 million cash gain related to our Genie administrative office relocation. Turning to slide 15, I want to reaffirm our disciplined capital allocation strategy, including a strong balance sheet and free cash flow generation to enable growth. Our team members remain vigilant and aggressively manage all costs, generating $125 million of free cash flow in the year. Our strong free cash flow generation and proceeds from the sale of our Terex financial services portfolio in February 2021 allowed us to repay $0.5 billion of debt this year, resulting in net leverage of 1.1 times. As a reminder, we have no near-term maturities. Our next maturity is in 2024. We continued to invest in the business in 2021 with $60 million of capital expenditures. Our strong balance sheet and free cash flow generation allowed our Board of Directors to reinstate and pay out a quarterly dividend for 2021. Just this week, the board has approved an increased dividend of $0.13 per share as we continue to return cash to our shareholders. We have ample liquidity, with $867 million available to us at year-end, so we can manage and grow the business. Now turning to slide 16 and our full-year 2022 outlook. I would like to update you on how we currently anticipate 2022 to develop financially. It is important to realize we are operating in an unprecedented supply chain environment and a pandemic. 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 $3.55 to $4.05 based on sales of approximately $4.1 billion to $4.3 billion. Traditional seasonality of sales is less applicable in 2022 as the supply chain environment has extended product deliveries. This sales outlook reflects the latest dialogue with our suppliers. Our 2022 sales are not a function of demand, rather the ability of the supply chain to deliver components. We have the internal capacity to produce more and have demonstrated such in the past. AWP sales of $2.3 billion to $2.4 billion and MP sales of $1.8 billion to $1.9 billion reflect strong customer demand, but with the constraints presented by the supply chain. Turning to operating margin, we expect operating margin for the year to be in the range of 8.8% to 9.5%. Operating margin is expected to be lower in the first half of 2022 and higher in the second half as supply chain headwinds abate and pricing actions taken are realized as backlog is shipped. To help frame the development of operating margin in 2022, the first quarter of 2022 will see increased cost pressures compared to the fourth quarter of 2021. MP's margins of 14% to 14.5% will be relatively balanced throughout 2022, but the first quarter will be challenged by supply chain constraints. AWP margins of 7.8% to 8.5% reflect significantly higher input costs, peaking in the first quarter, with price realization improving throughout the year as we work through the backlog. In the first quarter of 2022, we expect AWP operating margins in the low-single digits and meaningfully improving throughout the year. Based upon global tax laws, we expect a 2022 effective tax rate of approximately 20.5% due to higher U.S. income and lower discrete benefits, partially offset by lower local and U.S. tax on rest of world income. For 2022, we are estimating free cash flow of $175 million to $225 million, reflecting another year of positive cash generation. We also estimate capital expenditures net of asset disposition will be approximately $90 million, the largest component being our Genie Mexico facility. Corporate and other costs are planned to occur relatively evenly throughout the year. Overall, our 2022 guidance represents a continued improvement in operating performance when compared to 2021 despite the challenging supply chain environment. Turning to slide 17, our 2022 earnings per share outlook reflects the following assumptions. From an operational perspective, sales will increase as customer demand remains strong. Pricing actions, along with manufacturing efficiencies, will offset cost pressures. SG&A reflects prudent investment in the business, including our new product development, engineering and digital initiatives, and remains at 11% of sales. Further, non-operational impacts include unfavorable foreign exchange headwinds due to a lower euro exchange rate when compared to 2021. In addition, we have an unfavorable tax impact as our full-year effective tax rate is expected to normalize to approximately 20.5% as favorable discrete items from 2021 are not expected to repeat. These two items together amount to a $0.30 per share headwind. Next, favorable interest and other expense due to lower debt levels and interest rates. Finally, one-time items, both positive and negative, related to our bond refinancing and Genie administrative office relocation are not expected to reoccur. Taken together, these assumptions result in our 2022 earnings per share outlook of $3.55 to $4.05. This outlook is the best view at this time and can be impacted positively or negatively, depending on how the supply chain develops in 2022. Before I finish, I would like to thank John Sheehan for his support and teaching me all things Terex and leaving me such a strong finance team. Happy retirement, Duffy. And with that, I will turn it back over to you, John.

Thanks, Julie. Turning to slide 18. Looking ahead to 2022, let me provide you a few highlights from our execute, innovate, and grow strategy. Execution is the foundation to deliver on our commitments to our team members, customers, and shareholders. We must and will continue to drive operational improvements. Turning to innovation, we are investing in new product development, whether it's electrification of our products or new end market applications, such as recycling and environmental. We're also investing in digital in multiple facets of the business, improving our internal business processes and enhancing the ease of doing business with Terex. Growing Terex is a focus for all team members. We are investing in parts and service capabilities and expanding manufacturing capacity as we look to better serve our customers. We have a disciplined M&A process and are looking to grow from acquisitions. Turning to slide 19, to conclude my prepared remarks. Terex is well positioned to deliver increased shareholder value in 2022 because we have strong businesses, strong brands, and strong market positions upon which we can grow. We will continue to invest, including in new products, in manufacturing capacity where demand calls for, and we have demonstrated resiliency and adaptability in a challenging environment. I am confident this will result in Terex being an even stronger company. And with that, let me turn it back to Randy.

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

Your first question comes from Stephen Volkmann from Jefferies.

You mentioned increased demand in 2022 if you could enhance your output. My question is whether there has been any improvement in the supply chain in the fourth quarter, as we're hearing similar sentiments from other companies. Could you elaborate on your observations regarding the supply chain? Additionally, does your revenue guidance reflect solid commitments from suppliers, or is there a more cautious outlook for how this will progress through 2022?

If we just take a step back and look at the supply chain, we're not unique. Demand has outpaced production really across the supply chain. So, similar to other companies, we'll continue to see persistent disruptions in our plants due to component shortages and logistics related delays. The reality was, Stephen, in the fourth quarter, we actually didn't see an improvement. We saw a modest decrease, frankly, in key metrics, like supplier on-time deliveries, number of parts. And so, that did impact our output, and it continues to impact us going forward. Now, what are we doing about this, is, first, everybody in the organization is engaged. We have an escalation process, and frankly, all the way up to my level. I've spent more time over the last year on supply chain related issues than, frankly, I have dealing with customer-related issues because that's what we are. We've done a lot of engineering redesigns. And that's really helped, especially around our electronic components, working with our suppliers to make availability, or use what is available in the marketplace. As a result of our strategic sourcing initiatives, we did expand our supply base. So, we know where to go now for secondary and third suppliers for parts. So, we continue to execute that. And then, our teams are just really doing a heck of a job, being adaptable and modifying schedules. The number of schedule changes that we have to implement is frankly daily, and so the team has become pretty competent at modifying schedules to get as much out as it can for our customers. And so, we're staying very close with our suppliers. We're communicating with our customers in terms of where we are. Our outlook, Steve, is guided by supply chain constraints. I would say we are hedging, if you will, what suppliers are telling us because, based on their previous performance, we are hedging to some extent. The material plan that we have is higher than our current outlook, if you will, but we'll factor that into our outlook, Steve. So, this is our best look that we have as of today in terms of what we believe the supply chain is going to be able to deliver. And again, if the supply chain is able to deliver more, we will be able to deliver more for our customers because this is really – it's a supply chain driven situation. I think the other important comment around the supply chain and working with our supply chain teams and my interaction with CEOs is we're driving not just to drive improvement in our supply chain in 2022, we believe we're setting up for a pretty extended strong demand environment across our businesses. And so, it's not just 2022 that we need to increase the availability of supply. It's for 2023 and beyond. And so, this is an incredibly focused effort on the team. We believe we're going to see improvement as we go through the year. But we didn't see that improvement in Q4. So, we have to be prepared for it. And, again, the team has done a heck of a job being adaptable and resilient to the significant changes they've had to absorb on a day to day basis. So, that's how I'd describe the situation again. Stephen, I don't think it's that much different than most industrial manufacturing companies around the world today.

For the quick follow-up, I'm just curious on steel, specifically, how much of your 2022 steel is kind of protected as it were. And obviously, as steel prices kind of go down, I'm trying to get a sense of how long it would be until you see that benefit.

We have a steel hedging program, but, again, Stephen, it really is just for HRC, or hot rolled coil, for the US. Our AWP business, specifically Genie, uses about 60% of that. There's not a hedge market for plates. So, we have been hedged. We continue to hedge, but we hedge to have price visibility, not to speculate. And the good news is, is that steel was, especially in North America and Europe, in the middle of the year and into the fourth quarter was in an incredible high, $1,800 to $2,000. We are seeing the steel indices in markets come off of that high, thankfully. And we're anticipating that continues as we go into 2022.

Your next question comes from Mig Dobre with Baird.

My question is on slide 17. I appreciate that bridge and all the detail here. So, two things. $2.30 worth of cost pressure. I'm curious if there's any way to sort of delineate the major buckets in here in terms of what's raw materials versus freight. It would just be helpful for us to kind of – we can make our own assumptions in terms of where things go from here. And then, the second part of the question is, is we're thinking beyond 2022, the price and efficiency component that you have here, $2.55, do you think that it's something that you can hang on to beyond 2022? Or will you have to sort of give back some of those gains that you've got on this slide?

I'll try to take them in sequence. And if you don't, please jump back in. In terms of the cost elements, it is both – cost pressure is included both in materials, components and freight, and what seems substantial increases, especially in the back half of 2021. And that's what our current outlook reflects. And it does reflect looking at forward indices, which, again, we do believe, in that case, we are going to see some abatement of the rapid increase that we've seen in the material costs. And if you look to our pricing actions, and then – this pricing action continues. So, you just take a step back, our pricing actions have really been designed across our global businesses to offset our material and logistics cost increases. Mig, we have taken pricing actions throughout 2021. And now, obviously, taking pricing actions into 2022. These are not easy conversations with customers, but we've been very transparent with our customers and distribution partners about the level of inflation that we're seeing, basically showing all the way down and showing invoices. And so, that's the action we've taken. If you look at our respective businesses, Mig, on the AWP side, we've considered a combination of pricing and surcharges. If you look at the results in 2021, those pricing actions did not offset all the material, freight cost increases that we had and we saw an acceleration of inflation in the back half. In 2022, with further increased pricing, and we believe that price realization improves throughout the year as we shift some of the backlog that was at 2021, we were supposed to deliver in 2021, we didn't, and it was at 2021 pricing. So we believe that price realization will improve. You look at our MP business, they've really done a good job offsetting most of the material and logistics inflation that we're seeing globally. With the nature of their business, they've been able to be more dynamic, and updating their pricing on an ongoing basis. And if you look at their results, they were pretty close to price cost neutral in 2021, and we expect they will be price cost neutral in 2022. And with that said, they've got challenges of inflation spiking in the second half of the year. So, the first half of the year could be a little bit more of a challenge. And we think that improves in the back half of the year. Now, your other good question is, are these prices going to stick? And I think the answer is yes, Mig. And why do we believe that? Well, first, we're seeing broad-based inflation across multiple industries. So, our customers are not just seeing price increases from us. They're seeing price increases across the spectrum. And so, we've been very transparent. Our pricing actions, again, are designed to offset significant material cost increases that we're seeing and trading costs, the freight increases that we're seeing. Thus far, Mig, I would say, especially across the line of MP businesses, we've seen good pricing discipline in the industry. And I would say, in the AWP business, I would say we've seen reasonable pricing discipline, reflecting the dynamic environment in North America, a little less in Europe. Frankly, the only place we're not seeing strong price discipline is in China. Chinese competitors are very aggressive on price. But if we look around the world and across the business, I would say we're seeing good price discipline now. And given that everyone is seeing inflation, I do believe going forward that these prices are going to be able to stay.

Could you provide more insight into how you anticipate demand evolving? It seems that the orders have been somewhat softer this quarter. I'm curious about the factors influencing that and what the outlook is for the future.

I'm going to take some time on this one too because, yes, we did see a little softening on the orders, but that's really timing. We're seeing strong global markets and strong customer demand across our MP portfolio. Actually, we have record backlog. Frankly, our backlog is too high. We want to ship more products to our customers. If we look at our crushing and screening business, our backlog more than doubled versus the prior year, and we're seeing good growth around the world. In our concrete business, backlog is up tremendously. A year ago, we had several large orders that did not repeat at the end of the year. And so, that was a partial reason for the bookings falling off slightly. Our materials handling business, what's called Fuchs, you have heard me say this, the only benefit of high steel prices is scrap metal prices are up, and that backlog is up almost fourfold. And so, we're seeing great demand literally around the world for our Fuchs products. In our environmental business, the investments we've made there, we're seeing our backlog up significantly. We believe we're going to continue to be able to grow that business. And then, our lifting businesses, our pick and carry Franna business down in Australia has been strong throughout the pandemic. And we actually saw a rebound in our RTs and our tower businesses from an order rate and a backlog standpoint. So, overall, we're seeing strength. We did see some – and again, it's just timing, we believe, with the bookings that decline. The backlog is exceptionally strong. And we're not seeing any weakness, frankly, across any of those businesses around the world.

Your next question comes from Stan Elliott with Stifel.

Quick question for you. When we think about the two businesses performing from a margin perspective, it looks like the incremental margins are about the same for both the AWP and the Materials Processing business. Could you help us a little bit kind of understand what's happening and the dynamics between the two?

Just as we think about our incremental margins, obviously, we had some really strong performance in 2021 with 32% incremental margins, particularly strong in the AWP business. And the MP business has been strong in terms of absolute margin performance. So, I just want to emphasize that our target remains at 25% incremental margin. And what you saw in 2021 was higher incremental margins in the first half and then lower in the second half as we started to experience increased material costs. So, when you look at the year-over-year comparison, and we talk about going forward into 2022, and the framework is challenged in the first half of 2022 as accelerating inflation happens in the back half and it continues into the first half of 2022. So that's a summary of where we're at. If we look at AWP, we're looking for our AWP business in 2022 to improve by 110 basis points year-over-year. Again, as a result of a price collapse in the first half, we'll see incremental margin substantially below our target in the first half of 2022 and substantially above our targets in the second half of 2022. For the MP business, we're continuing to invest in new products, like conveying, environmental, and recycling, as well as manufacturing capacity, such as in places in Northern Ireland and China and India. We're pleased with MP's absolute level of performance at about 14% operating margin, and we're making growth investments in the business. This business has been offsetting inflationary pressures. It's done a really nice job. And they're maintaining strong operating margins. But again, they too will be a little bit pressed in the first half of the year. So, the team understands our 25% incremental margin framework. We're working hard to achieve those long-term goals. And as the new CFO, I fully support the target of 25% incremental margins going forward.

Thanks for hashing that out because I was really getting around the level of investment on the MP side, given the comments of it being more price cost favorable or neutral. And then, along those lines, there's lots of talk about growth kind of as we go into the next year. How do we balance kind of some of the growth investments you've got on the MP side? Could we look at a sizable sort of an M&A deal? Or what's the temperature there?

In terms of – on the first leg, so the good news is we have very strong cash flow generation, strong balance sheets. We have balance sheet capacity to do M&A related activities. Our focus is in and around the MP business. If you look at the structure of the different markets and different verticals that we compete in, there's still a pretty high degree of fragmentation. So, as we build out our pipeline, our pipeline looks to – in and around the MP space. We did two smaller acquisitions in 2021. The MDS International is a great example. It's nearer to our plants in Northern Ireland, which is good. It's in Southern Ireland. But it's also near adjacencies in terms of products. So, we're able to put that product line through our existing distribution and really get a substantial increase in the sales. So, we would look to do M&A. We're going to drive organic growth across both businesses, AWP and MP, and we're looking for inorganic growth. And right now, we're looking more around the pipeline associated with our MP business and perhaps our parts and service business because we think there may be some opportunities there.

Your next question comes from David Raso with Evercore ISI.

My question is related to how you're thinking about the AWP cycle. By my math, the North American AWP business ended 2021 still not even within 25%, 30% of where you were back in 2018. So when I think about inflation, obviously, where the backlog is versus your sales guide for this year, you seem relatively locked and loaded for 2022. It's just about execution on the factory floor and price cost. But when you're thinking of investing in Mexico, when you think of the capacity that you're going to need, it looks like it ended 2022, your North American business, which is not just Aerials, right, it's utilities as well, but you're still going to be almost 20% below where you were in 2018. So, I'm just curious, your confidence in the cycle beyond 2022, and not just qualitatively, but how are we thinking about the capacity exiting 2022 with these investments in Mexico? We're just trying to get a flavor for how much are you thinking about growth in 2023 and 2024 with some quantification and obviously your willingness to invest is actions, not just qualitative description.

I'll speak within AWP, both Genie and utilities. As you clearly indicated, we are substantially below our demonstrated capacity in those businesses based on – let's go back to 2018. As a result now, and we have increased our capacity, and since 2018, we've expanded our Changzhou, China facility, for example. Now, as you rightly call out, we're investing in Mexico. So, installed capacity, we believe we're going to be appropriately sized for installed capacity going forward. We're not anywhere near where we were in 2018. And we've added capacity since then. Why are we doing that? Because we do believe the AWP business, I'll talk specifically Genie and then I'll talk utilities, is going to grow. If you just look at the replacement cycle, David, for the AWP business and Genie business and think specifically US, North America, and Europe, the replacement cycle, frankly, was delayed by the pandemic. And now it's being delayed somewhat by constraints across the industry. If you look at the rental companies, they're growing, they need their fleets to grow, their fleets are aging, rental rates are doing great, used equipment values are doing great. And so, we believe that we're in the beginning of that replacement cycle. It's a seven, eight-year replacement cycle. It's always difficult, as you know, David, you've been doing this a long time, to predict exactly what quarter or what half of the year. But the economics in that industry are such that we are entering a pretty strong growth period in the replacement cycle coupled with growth in other markets in the Genie business. So, we do believe we're in a growth phase in that business. And the replacement cycle, with a little bit of growth, is going to give us a really strong tailwind for the next several years. That coupled with, David, the other investment we made was in our utilities business. We have a brand new facility there. We went from 11 buildings to 1. So we've increased our installed capacity there as well. Now, we've got the same supply chain issues. So we've got to break through those constraints. But if you look at the utilities business and the growth prospects of the utilities business, infrastructure bill, even without the infrastructure bill, there's significant investment required in the electrical grid, transmission, distribution and maintenance. And so, we think we're in a strong growth period as well in utilities business. So we've committed capital over the last three to five years to improve our manufacturing capability, improve our manufacturing capacity, because we do believe we're entering a good tailwind period of time for the next couple of years in that AWP segment. And I might add, we're also bullish on our MP business. We've made capacity expansions in Northern Ireland, we've made capacity expansions in India, and so we're investing in our MP business for growth because we also believe those macro trends are going to continue in a positive fashion for the MP business. And as a result, we have had a fairly substantial CapEx budget the last couple of years. It's going to expand into 2022 with our Mexico investment. And we're doing that because we believe there's good growth opportunities in both segments going forward.

And trying to quantify it a little bit, right? I know some of these moves were not just incremental capacity. There were more efficient, lower cost manufacturing. But can you help us with – if my numbers are right, and by the end of 2022, we're still almost 20% below where we were in 2018 on revenues, where's your capacity at the end of this year? Like, Watertown is already built, essentially it's up and running. Mexico, I assume up and running fully by the end of this year. Where's your capacity exiting 2022 versus 2018? Just kind of ballpark? Is it similar? Just more efficient? Is it 15%, 20%? I'm just getting a sense of how you must be viewing the cycle to be adding that capacity and where your revenues are exiting 2022 versus that last peak?

Right. So, again, David, near term and for the next 12 months or so, it's really supply chain. So, as you've said, we've got demonstrated capacity above – I don't want to necessarily say how much, right? But if you just look at Watertown, we've substantially increased the capacity there for that business. We said on the order of magnitude of 50% for our utilities business, and we believe that's achievable over a couple-year period of time. We expanded our Changzhou facility that gives us a good export for the China market and an export market. And the only thing, David, I want to be clear on, our Mexico facility will sit up our temporary facility right now. We've got our team in place, we're growing our team, we're producing telehandlers there. We are building a special purpose center that will take the next two to three years to complete in Mexico. So, we believe we've got plenty of capacity given the market needs, David. And that's why we're working so hard on supply chain, not just the immediate, but working with the CEOs of our suppliers to have them understand that we believe we're in a strong growth cycle and we need product not just for 2022, but 2023, 2024 and 2025.

Your next question comes from Jamie Cook with Credit Suisse.

I guess my question is, I'm just trying to square your top line guide for Aerial. I think it's like implied at the midpoint up 8% to 9%. So, sort of what are you assuming for price versus volume? I'm assuming little or – not a lot of volume in that forecast. And just trying to square it relative to your competitor who is, I think, implying double-digit growth. So, I guess that's my first question. And then, my second question, can you just provide a little more color on – I know the free cash flow was a little short of expectations. We talked about inventory build, sort of what's the strategy for inventory in 2022 and just happened during the quarter?

When we look at 2022, and compared to 2021, we're seeing far more price increase than we are volume increase. And again, the volume increase, again, is due to those supply chain constraints. They are holding back some of that production. So, again, far more on price than volumes. In terms of free cash flow, yes, we had a disappointment in shortfall for Q4. We had an approved IRS refund. We have an approval letter for $39 million and we still haven't yet to receive that. And then, we also had an increase in inventory for the quarter. And this, again, is due to those supply chain disruptions. We have a machine sitting in the hospital being ready to ship, waiting for parts that haven't shown up yet. It's causing production disruptions as well. And we have a lot more inventory on the water and in transit than we have had in the past. So, we did have an increase in inventory. When we look to 2022, we expect another strong free cash flow year. We're expecting, anticipating our fourth year in a row of strong free cash flow. And when we talk about it, we'll have – we talk about increased earnings. And in terms of working capital, if sales increase, that working capital and inventory level increase right along with that.

Just to follow up, though, on the top line guide, more price versus volume. John, just to be clear, this is more – or you as well, just to be clear, it's not you're assuming you're going to lose market share. It's more of a function of – or being conservative with the guide because of the challenges that are out there.

In terms of market share, we held market share in the Genie business throughout 2021. We're not assuming any significant market share or any market share erosion. And we actually think, in a couple product lines, we can gain some market share. For one product category, we did have some significant disruption. This was in telehandlers. And we're working with our supply base to improve that. So, no, we're not anticipating any significant changes in market share on a year-over-year basis. It's basically based on the current constrained supply chain environment and we've got to work to break those constraints.

Your next question comes from Steven Fisher with UBS.

Thanks, Julie, for the Q1 color and the first half/second half on incrementals. I guess with a low-single digit margin in AWP in Q1, it seems like you should have a double-digit margin somewhere in the year. Would you agree with that? And with the normal seasonality not as applicable this year, what do you think or what are you planning for as it is likely to be your highest margin quarter of the year in AWP?

You're exactly correct. In the first quarter, we expect AWP margins to be in the low single digits and meaningfully improve each quarter on a sequential basis throughout the year. So, it just improves as we go every quarter.

So, the fourth quarter should be the highest quarter of the year you think then.

Yes.

Your AWP backlog is almost 85% of your revenue target just because of that supply chain constraint on the revenues. I guess how much of that backlog is for 2023 at this point? And if very little is for 2023, are you expecting to be kind of fully booked on your revenue plan by the end of March? And I guess if the supply chain doesn't allow for any more upside, are you just going to sort of stop taking orders? Or are you going to take orders and just give a 2023 delivery date on them?

You're correct. Our coverage is at a historically high level due to certain constraints. We only report backlog for the next 12 months, even though we do have some backlog that goes beyond that. However, it's not included in our reported backlog because we focus on what we expect to deliver within the next year. We will implement price adjustments throughout 2022, with the aim of countering material and freight cost increases. Therefore, as we schedule deliveries for 2023, they will be priced according to 2023 rates, not 2022 rates.

Your next question comes from Nicole Deblase with Deutsche Bank.

So, you mentioned during the prepared remarks, Julie, that the quarterly cadence of revenue is going to look different this year, which makes sense. Is this kind of similar to what it feels like the margin progression is where you start off on a low point and each quarter gets better? Is it the same path for revenue?

The revenue strength to me is about half. The first half and second half are really relatively consistent. What really happens is that price/cost mix gets better throughout the year. So, the first quarter, again, is really challenged as we ship stuff that's still – we have some things in backlog at 2021 prices, and we're experiencing the higher costs in Q1. So, really, it improves throughout the year. But it's more because of the price cost as opposed to the revenue mix. They're relatively equal in the first half and the second half.

On the SG&A to sales, so you're guiding it a little bit below 11% in 2022. This is the second year in a row that the guidance looks well below like the original 12.5% target. How do we think about like the sustainability of 11% SG&A to sales beyond 2022?

It's an internal debate. And we actually would think that 11% to 11.5% range, given a growing revenue environment, is perhaps a more reasonable target. Yes, we were at 12.5%. That was in the past. We've gotten a lot more efficient in our systems and our processes. And so, I would say that 11% to 11.5% range is probably a more realistic range for us, subject to change. But as we look at our strategic plan now, I would say 11% to 11.5% is a better target for us than the 12.5%.

And just to add, the team has really done a great job of lowering SG&A cost here. It's down $100 million from where they were in 2019. And so, we're going to be very disciplined about anything that we add, and only add on those value creating projects. Very, very prudent in expense management always, going forward as well.

Your next question comes from Courtney Yakavonis with Morgan Stanley.

If we could just go back, John, to your comments that we're going to see an improvement in some of the cost pressures as we go through the year, I think you mentioned you didn't see that improvement in the fourth quarter. So, is the right way to understand that that if you were carrying forward the fourth quarter's cost pressures, that $2.30 that's in your outlook would be significantly higher, and you are baking an improvement or is that improvement mostly from lapping the tough or the easier compares that you're going to have in the third and fourth quarter of the year.

It reflects the cost increases that we're expecting in the year in 2022. Part of those cost increases were as a result of the inflationary increases that we saw on the back half of the year. You remember, in a lot of the contracts, steel, for example, it takes 120 days or so for it to flow through the P&L. And so, it reflects the higher cost basis that we saw in Q4 and it reflects some of the amelioration or their abatement in cost increases that we're anticipating based on certain key indices that we follow closely.

But to be clear, it is not the run rate from Q4, you are expecting the abatement. And is it primarily on the material side where you're baking in that improvement? Or are you also baking in an improvement in logistics? And I think Mig had asked earlier just the breakdown, if you could give us, of that $2.30, what's logistics versus materials, so we can put some of our own assumptions in?

I would say just looking at it really is the material – the underlying material. We're not necessarily assuming any significant improvement in the logistics world right now. It's still significantly constrained. So, it really is a material play, we'll see on the material side, but that's not our operating assumption.

And if we looked at the cost pressure and what's there for 2022, a vast majority of that is material costs, not in transportation.

And your last question for today comes from Jerry Revich with Goldman Sachs.

I'm wondering if you could talk about the implications of your growing electrification mix within the portfolio? Are there any incremental opportunities that are coming up for you folks in terms of helping with onsite charging or anything along those lines that's coming up as an opportunity as the electrification mix in the portfolio rises? And can you comment, now that you're scaling the business, what the margin profile is, if there's any difference between electrified power trains for you folks versus diesel?

Just longer term, our product portfolio across the businesses really looks at electrification, as we said. A lot of the Genie products are already electrified. What's changing there is going all-electric, electric drives, changing from deep-cycle batteries to lithium-ion batteries. And so, you're seeing the evolution of battery technology that's playing a role in the Genie business. As the evolution of that technology continues, you will see that be adopted even into more product lines – boom, scissors, and someday, I think, telehandlers will be the laggard in that, given their duty cycle. But we will see that as well in the future. So, as lithium-ion continues to be adopted across other industries, we'll see that adoption in our industries as well. In the MP business, it really depends on what specific products we're talking about. There is a lot of times we have an electric option if the electric – our Irish friends would say the mains are available or the electric distribution is available. If it's not, then you're going to remain with large diesel engines. But again, across the product portfolio, on every product line, we have an electrification product development plan for those products as the world continues to move towards electrification. I don't know if it's necessarily incremental or not. I think it's just how the market is moving. And then, in terms of the margin side and cost side, originally, lithium-ion was more expensive, frankly, and the battery solutions were more expensive. But as that cost is coming down the cost curve because it's being utilized in so many other industries, now you're getting to the point where that lithium-ion solution on a lifecycle cost basis is competitive to other alternatives, especially internal combustion engine alternatives. So, as you see that continue, I think that will also precipitate the greater move towards electrification as the lifecycle costs come down with it. So, that's how we're handling it. It's a key part of our product development efforts across our business lines, looking at what's going to happen in the next 3, 5, 10 years. And that's incorporated into our development plan. Incremental, I'm not sure. Jerry, I wouldn't say that. I think it's where the world is going.

Separately, on the supply chain side, can you talk about what are the critical components that you're concerned about today, if that's any different from three months ago? And you alluded to having supplied components on the water, to what extent is that driving the outlook for production to ramp up over the year because you have visibility in terms of what's at ports, et cetera?

Jerry, I think similar to what other manufacturers have talked about, electronic components, we've had to do a lot there to modify the chips, board circuits, and the like. So, electronic components continue to be a challenge. Tied to electronic components are engines, the ECUs, the ECMs, whichever manufacturer choice is used. So, engine availability is a near-term constraint that I think will work itself out. But right now, that's a near-term constraint. Hydraulic systems, there are several hydraulic systems that have been constraints for us. And that's caused a challenge. And then, our utility business, it's the only business where we use chassis. That was adversely impacted with the chassis supplier. So, those are the primary commodities that we're dealing with. There's the odds and ends that creep up as well. But those are the key ones that we're working on to improve the supply of, so that we can increase our production to meet the needs of our customers.

This is all the time that we have for today. Thank you for joining us. You may now disconnect.