Terex Corp Q4 FY2022 Earnings Call

Greetings, and welcome to the Terex Fourth Quarter and Year End 2022 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paretosh Misra, Head of Investor Relations. Please go ahead.

Good morning, and welcome to the Terex fourth quarter and year-end 2022 earnings conference call. A copy of the press release and presentation slides are posted on our Investor Relations website at investors.terex.com. The replay and slide presentation will also be available on our website. We are joined by John Garrison, Chairman and Chief Executive Officer, and Julie Beck, Senior Vice President and Chief Financial Officer. Their prepared remarks will be followed by Q&A. Please turn to Slide 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 will be discussing non-GAAP information and performance measures we believe are useful in evaluating the company's operating performance. Reconciliations for these non-GAAP and performance measures can be found in the conference call materials. Please turn to Slide 3, and I'll turn it over to John Garrison.

Thank you, Paretosh, and good morning. I would like to welcome everyone to our earnings call and appreciate your interest in Terex. We are proud of our team members' performance that delivered strong results in 2022. It was another year of addressing a challenging global operating environment, including inflationary pressures, production disruptions, and COVID impacts. The Terex team members worldwide work tirelessly to improve our performance for our customers, dealers, and shareholders. I would like to thank our team members for their continued commitment to our Zero Harm safety culture and Terex Way Values. Safety remains the top priority of the company, driven by think safe, work safe, home safe. Please turn to Slide 4 to review our financial results. The team delivered an excellent quarter. Sales of $1.2 billion were up 23% from last year and up 31% on an FX neutral basis. We ended 2022 with a backlog of $4.1 billion, up 22% from the prior year, driven by strong global customer demand. Operating margins of 9.9% improved 290 basis points from the prior year, and EPS of $1.34 increased 63%, reflecting strong execution by our team members. Please turn to Slide 5. We significantly strengthened our business in 2022 through our execute, innovate and grow strategy. We proactively managed supply chain disruptions and inflation to deliver a 28% increase in operating income, a 41% improvement in EPS, and a return on invested capital of 21.3%, and we achieved price cost neutrality for the year. We introduced the first and only all electric utility bucket truck. We expanded our concrete product offering with the acquisition of ProAll. We prioritized our focus on the circular economy by introducing new system solutions to our environmental and recycling customers and through the acquisition of ZenRobotics. We invested in biotech and Acculon, which accelerated our product electrification strategy. This week, we announced an equity investment in electronics and entered into a co-development agreement to create potential robotic applications for Terex products. And we continued our investment in technology, new product development, and our Mexico facility, which continues to progress on time and on budget. I am proud of our team members' accomplishments. Turning to Slide 6. In our recent Investor Day, we presented five key themes to our strategy that will drive our growth for the next several years. The first is capitalizing on mega trends, which are driven by an increasing focus on sustainability. Our products are well positioned to benefit from electrification, waste recycling, and infrastructure investments. We'll continue to grow our Materials Processing segment through innovation and by expanding into adjacent markets and categories. We will optimize Genie's performance through the cycle in sales growth and margin improvement. We see attractive opportunities for growth in our utilities business driven by electrification. And we have a strong and growing parts and service business, which not only offers us countercyclical growth, but also provides critical value to our customers. This year, we'll continue to make progress on our strategic growth priorities, including Genie's focus on continuous margin improvement. The Genie team is going to have a busy year. We anticipate moving multiple production lines throughout our global footprint and opening our new permanent facility in Monterrey, Mexico. The new facility and local Mexico supply chain are expected to improve our operating margins by 200 basis points when fully up and running in late 2024. But these moves will negatively impact production volumes and manufacturing efficiencies in 2023 and our outlook reflects this. Please turn to Slide 7. Our MP and AWP segments participate in diverse end markets globally, which is a strength providing many growth opportunities. We believe our growth will be further accelerated by global megatrends. At the center of these megatrends is sustainability. The increasing global focus on sustainability is driving a fundamental shift in how the world operates, providing additional opportunities for Terex. The global demand for waste recycling solutions is increasing, driven by regulatory and societal changes. Our MP brands, including Ecotec, CBI, and Terex washing systems, were at the forefront of meeting demand for circular economy initiatives. The increase in reliance on electrification to reduce greenhouse gas emissions requires great capacity expansion. Terex utilities is well positioned to capitalize on the investments needed to enhance electrical grid infrastructure. Our Genie business will benefit from new product driving digitization and onshoring in the United States. All of our businesses will benefit from increased government-sponsored infrastructure spending throughout the globe. As we discussed at our Investor Day, we see many growth opportunities by providing solutions that support our customers' ESG objectives. Please turn to Slide 8. Our innovative products are delivering sustainable solutions for our customers. Fuchs material handlers, part of our MP segment, are versatile machines capable of handling various materials. Importantly, Fuchs is diversifying into port applications. You can see a Fuchs material handler, which is powered by the shift to battery hybrid system unloading bulk materials. As a result of our products, these ships' operations produced zero emissions and reduced noise levels in the harbor. Another example of Terex helping our customers achieve their sustainability goals. Please turn to Slide 9. We are proud to report that in 2022, Newsweek recognized our commitment to sustainability, naming Terex one of America's most responsible companies. We recently published our 2022 ESG report, where we highlighted the results of our first ESG materiality assessment. Our products and our people were identified as among the most essential to our sustainability journey. Terex products help our customers meet their sustainability goals and reduce negative impacts on the environment. At the end of 2022, approximately 60% of MP and 70% of Genie products offered electric or hybrid options. Terex Utilities was the first to market and continues to offer the only all-electric utility bucket truck, and MP will continue to expand its waste and recycling offerings. Additionally, we commenced energy audits at our sites, enabling us to identify and implement actions that are important for achieving our goal of a 15% reduction in both greenhouse gas and energy intensity by 2024. With respect to our team members, diversity, equity, and inclusion continue to be embraced and driven throughout the organization. Our Affinity Groups further expanded in 2022 from eight to nine and participation rose twofold. In summary, Terex remains highly active in ESG activities and we will provide updates throughout the year. Turning to Slide 10 to review our current macroeconomic environment. Our 2023 growth will continue to be constrained by supply chain issues. Supply on-time delivery has improved sequentially, but remains well below historical norms. The team was able to reduce, but not eliminate the hospital inventory in the fourth quarter, which is a clear indication of the level of disruptions our teams continue to face. Although selected costs have improved in some markets, we continue to see overall cost increases from our suppliers as inflation works its way through the various tiers of the supply chain. I'm confident in the team's ability to continue to adapt and overcome the macroeconomic challenges that we have been facing. And with that, let me turn it over to Julie.

Thanks, John, and good morning, everyone. Let us take a look at our fourth quarter financial performance found on Slide 11. Terex team members continued their solid execution in a dynamic environment. Sales of $1.2 billion were up 23% year-over-year on higher volume and improved price realization necessary to mitigate rising costs. Sales in constant currency were up 31% as foreign currency translation negatively impacted sales by $82 million or approximately 8% in the quarter as the euro and British pound weakened against the dollar. Gross margins in the quarter increased by 190 basis points over the prior year as volume, pricing, favorable mix, and cost-out initiatives offset cost increases and the negative impact of foreign exchange rates. Both of our segments increased our gross margins from last year and we were price cost neutral for the year. SG&A was in line with expectations, but up over the prior year as a result of inflation, incremental spend due to acquisitions, and prudent investments in new technology and new product development. SG&A was 9.4% of sales and decreased by 90 basis points from the prior year as business investment was coupled with continued expense management. Income from operations of $121 million was up 73% year-over-year. Operating margin of 9.9% was up 290 basis points compared to the prior year. Interest and other expense of $15 million was higher than the fourth quarter of 2021 due to increased interest rates. The fourth quarter of 2021 benefited from a one-time $12 million gain associated with the Genie administrative office relocation. The fourth quarter global effective tax rate was approximately 13% due to one-time discrete items, including the reversal of a German valuation reserve. Fourth quarter earnings per share of $1.34 increased 63%, representing a $0.52 improvement over last year. This strong performance was driven by volume, price, and disciplined cost control. Current quarter results reflect an unfavorable EPS impact of $0.12 per share from foreign currency, and the fourth quarter of 2021 results included a $0.14 gain due to the Genie administrative office relocation. Free cash flow for the quarter was $126 million. I will discuss free cash flow later in more detail. Let's look at our segment results, starting with our Materials Processing segment found on Slide 12. MP had yet another excellent quarter with strong operational execution resulting in sales of $550 million, up 21% compared to the fourth quarter of 2021 with robust customer demand for our products across multiple businesses. On a foreign exchange neutral basis, sales were up 32%. The business ended the quarter with a total backlog of $1.2 billion, up 12% from a year ago. The strong backlog is approximately three times historical norms and supports our 2023 sales outlook. MP benefited from favorable regional and product mix and effectively overcame cost increases resulting in price cost neutrality. This drove an increased operating margin of 200 basis points to 15.8%, while integrating several acquisitions. Again this quarter and for the full year, MP represents approximately 60% of the overall Terex operating income and continued its strong and consistent revenue and operating margin performance. On Slide 13, see our aerial work platform segment financial results. AWP delivered sales of $672 million, up 26% compared to the prior year on higher demand and pricing. On a foreign exchange neutral basis, sales increased 32%. Total backlog at quarter end was $2.9 billion, a record, up 27% from the prior year. Customer demand continues to be strong due to high utilization rates, aging fleets, and electrification projects. AWP more than doubled their operating profit and delivered operating margins of 8% in the quarter, up 320 basis points from last year. The improvement was a result of higher sales volume, favorable mix, cost reduction initiatives, strict expense management, and disciplined pricing actions, partially offset by product liability expenses in our utilities business. Turning to Slide 14 and full year 2022 financial highlights. Our performance in 2022 reflected strong improvement in the business and the extraordinary efforts of our team members. Earnings per share increased 41% from $3.07 to $4.32, a $1.25 improvement, including a negative FX impact of $0.42 per share. Sales of $4.4 billion were up 14% year-over-year, 20% on an FX neutral basis as end markets remained strong. Operating margin of 9.5% expanded 110 basis points, driven by prudent cost management as well as price realization. SG&A was 10.2% of sales and decreased by 80 basis points from the prior year, reflecting focused cost management. Free cash flow of $152 million was up 21% year-over-year, including additional inventory as supply chain disruptions continue. Please see Slide 15 for an overview of our disciplined capital allocation strategy. Our financial performance this year continued to strengthen our balance sheet and provides financial flexibility. Our ROIC of 21.3% significantly exceeded our cost of capital. We returned $132 million to our shareholders in share repurchases and dividends. We prepaid the remaining $78 million of our term loan. We continue to invest in our business with capital expenditures of $110 million, and we deployed $50 million on acquisitions and investments. We have no debt maturities until 2026, and 77% of our debt is at a fixed rate of 5% until the end of the decade. Our net leverage remains low at 1 time, which is well below our 2.5 times target through the cycle. We have ample liquidity of $727 million. Yesterday, we announced a 15% increase to our quarterly dividend to $0.15 per share. The increase reflects our continued confidence in the company's strong financial position and future prospects. In December, our Board expanded the size of our share repurchase program by $150 million, leaving us with approximately $193 million of remaining authorization to purchase shares. Terex is in an excellent position to run and grow the business. Please turn to Slide 16 to review our backlog. Consolidated 2022 bookings remained at healthy levels and were the second highest booking rate in recent history. Elevating customer fleet ages and historic loan dealer inventory levels continue to support robust demand. We had minimal cancellations and push outs. Our total backlog position is up 22% versus the prior year, demonstrating the strength of our end markets and giving us visibility into 2023. Now turning to Slide 17 to review our full year outlook. As we move into 2023, it is important to realize we are operating in a challenging supply chain environment with many variables such as high inflation, volatile exchange rates, and geopolitical uncertainties, so results could change negatively or positively. With that said, this outlook represents our best estimate as of today. We anticipate earnings per share of $4.60 to $5 based on sales of $4.6 billion to $4.8 billion, which reflects progression towards our five-year financial targets we reviewed with you at our Investor Day in December. Our sales outlook incorporates the latest dialogue with our suppliers and our current supply chain expectations. We anticipate higher volumes as customer demand remains strong and expect pricing actions to offset cost pressures. We expect the first half and the second half sales to be comparable with the second and third quarter sales modestly higher. SG&A of approximately 10.5% of sales reflects prudent investment in the business, including our team members, new product development, engineering, and digital initiatives, and the full-year impact of 2022 acquisitions. We expect Corporate and Other to be evenly spread throughout the year. We anticipate operating margin for the year to be in the range of 10% to 10.4% as we remain price cost neutral for the year. Based upon global tax laws, we expect a 2023 effective tax rate of approximately 21%. This is an increase from 2022 as discrete items are not expected to repeat. Unfavorable foreign exchange rates, higher interest and other expenses, and the normalization of our income tax rate combined amount to a $0.35 per share unfavorable impact. We estimate free cash flow of $225 million to $275 million, including capital expenditures of approximately $135 million, with the largest component being our Genie Mexico facility. Let's review our segment outlook. MP sales of $2 billion to $2.1 billion and AWP sales of $2.6 billion to $2.7 billion reflect strong customer demand with continued supply chain constraints. MP's strong segment margins are expected to continue to increase to approximately 15.5% for the full year and are anticipated to be lower in the first quarter due to slightly reduced volumes and higher marketing costs and relatively balanced for the remainder of the year. The AWP segment continues to be impacted by supply shortages, AWP segment operating margins of approximately 9% are expected to be comparable in the first half and the second half with the second and third quarters being slightly higher. Operating margin expansion is expected due to price realization, increased volume, continued strict expense management, partially offset by unfavorable manufacturing efficiencies. As I mentioned earlier, our scheduled production line moves are expected to impact manufacturing efficiencies throughout the year. The Terex team will continue to demonstrate resiliency to deliver sales growth, operating margin expansion, increased free cash flow, and higher earnings per share in 2023. And with that, I will turn it back to you, John.

Thanks, Julie. Turning to Slide 18 to conclude our prepared remarks. Terex is well positioned for growth to deliver long-term value for our stakeholders in 2023 because we participate in strong end markets, including infrastructure, electrification, and environmental. We'll continue to execute our disciplined capital allocation strategy while investing in new products and manufacturing capability, along with strategic inorganic growth. We have demonstrated resiliency and adaptability in an increasingly challenging environment, and we have great team members, businesses, strong brands, and strong market positions. And with that, let me turn it back to Paretosh.

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

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

Hi, guys. Thanks for taking my questions. Just like to ask actually about materials processing. It keeps out the forming delivered a record high operating margin in the fourth quarter. Just what is underpinning that strength? Can that continue in 2023? And maybe just why only 20 basis points margin expansion in the guidance for next year?

Thank you, Michael, for acknowledging the performance of MP. MP continues to show consistent exceptional performance, contributing over 60% to our overall operating margin. This strength is largely due to our global business presence. We have observed strong sales, healthy bookings, and significantly elevated backlogs, with nearly three times the typical backlog projected for 2023. Our aggregates business, which is the largest part of the MP segment, showcases similar robust bookings and backlog. It’s crucial for investors to know that this sector addresses both virgin aggregates and recycling. Changes in construction and demolition practices worldwide are creating opportunities for growth in our aggregates business. In concrete, our advanced mixer has experienced good order activity and strong backlog, which we monitor closely as it is closely linked to residential construction in the U.S. After a successful appearance at the World of Concrete, the team anticipates continued strong growth in orders and backlog in this area. ProAll, an acquisition from last year, is also performing well, benefiting from infrastructure investments. While Fuchs has shown some softness, due to European market conditions and declining scrap metal prices, they are diversifying into ports and other applications. Historically, the backlog has been solid, but there has been a minor slowdown in bookings for our Fuchs business in Europe. On the environmental side, we have recorded significant year-over-year growth in both bookings and backlog. Our RTs and tower businesses, more reliant on Europe, faced a slight decline in orders but still maintain a healthy backlog. In Australia, our Pick & Carry business continues to perform strongly. I was recently in India at the CONEXPO bauma show, where the market showed solid customer engagement, and we launched a new product to positive reception. Overall, we are witnessing robust and healthy bookings. Importantly, we are not experiencing cancellations or pushouts, which is a critical indicator for us. While we recognize the macroeconomic uncertainties, we are still seeing strong bookings and excellent visibility for 2023 in the MP segment.

And Michael, to add to that, MP accounts for 60% of our operating income, and they had an excellent year in 2022. We anticipate margin expansion to continue in 2023, and we expect them to maintain price cost neutrality throughout the year. They are navigating a disruptive environment with various supply chain issues, yet they have still managed to achieve strong operating margins. We foresee further expansion, but we will also invest in this business, including new product development, digitalization, and in people attending trade shows. Therefore, we will incur some marketing expenses in this area, along with some unfavorable foreign exchange impacts from the British pound to the U.S. dollar in 2023. Additionally, they will take on extra selling, general, and administrative costs due to acquisitions made in 2022. Overall, we expect MP to continue delivering strong financial performance and expanding margins.

Thank you. And just a follow-up on that. I mean, when you look at the material processing comps in the public market, Terex is trading at a notable discount. Is there anything structurally disadvantaged with your materials process unit compared to those peers? How do you try to close that valuation discount? Could you use your balance sheet to repurchase shares? Just any thoughts on that would be helpful. Thanks.

Thanks, Mike. Some broad questions. I think part of our job is to better explain the great portfolio of businesses that we have in MP. We started doing that during our Investor Day, and we'll continue because if you look at that portfolio, it’s consistently performed throughout time in terms of driving revenue growth and margin expansion. In terms of our disciplined capital allocation strategy, we're going to continue to invest in organic growth first and foremost, we're going to invest in dividends. We increased the dividend. I hope everybody saw that announcement of a 15% increase in dividend. So we'll continue to do that. We have the ability to invest for M&A activity. So we'll look there, that's a focus area. And then we did increase our share repurchase authorization, and you can anticipate that being definitely to offset dilution associated with incentive comp being more of the focus right there for now. But we're always looking at ways to enhance stakeholder and shareholder value in the corporation, and we'll continue to do so, Mike.

Our next question comes from Stanley Elliott from Stifel. Please go ahead. Your line is open.

Hi. Good morning, everyone. Thank you for the question and congratulations. Quick question on the backlog, up 22%, at the same time, you guys are mentioning low dealer inventories in MP aged fleet and across the channel. Really, do you think kind of what's in your backlog will have much of an impact on either replenishing dealer inventories or bringing down the fleet age in the coming year? And I guess it's kind of a way to say maybe some of that could spill over into 2024.

Thanks for your question, Stan. We are entering the year with historically high backlogs, and our current backlog stands at $700 million for delivery in 2024. A significant portion of this is linked to supply chain issues. On the MP side, dealer replenishment and low dealer inventories are helping us as they experience strong growth. When products arrive, about 70% goes to the distribution channel, particularly rentals, with many opting for rental purchase agreements. This utilization is high, and customers are transitioning from renting to owning, which makes it difficult to restock dealer inventory. This reflects some of the strength in that area. Regarding the AWP side, we can discuss that further, but there are industry constraints in meeting rental customer needs, and fleet replacement has been delayed. One advantage of 2023, and potentially beyond, is that fleet age has increased, which is likely to boost the replacement cycle moving forward; this comment specifically pertains to the GE business, Stan.

Perfect. I apologize if you touched on it at the first part of the call. But the robotics announcement from earlier this week, I thought was very interesting. Could you kind of talk high level how you think this will end up playing out from this co-investment that you've put together?

Yes. Thanks, Stan, and I hope everybody had the opportunity to see that. It wasn't an equity investment in electronics that we made. But the biggest part for us is co-development of robotic technology and really is to provide our customers with solutions to help safely and efficiently conduct work. If you think about job sites, labor constraints, skilled labor trade constraints, there's an opportunity to enhance the outside productivity and safety through robotic technology. Electronics is on the forefront of that. So if you take their capabilities with our capabilities of our existing machines married the two together, you have the opportunity to potentially provide solutions to the end market customers to enhance, again, their productivity and safety. And that's the reason we made the investment. We view this as an investment in technology that enhances the solution offering that we provide our customers going forward. And so, we're excited about the investment we've made, very excited about the co-development agreement. And we're excited about what the potential opportunity of this going forward.

Yes. It sounds like there will be a lot of opportunity I guess on the MP side from a sorting perspective. But thanks very much for the color. And congratulations and best of luck.

Thank you, Stan.

Thanks, Stan.

Our next question comes from Seth Weber from Wells Fargo. Please go ahead. Your line is open.

Hi, good morning, everyone. John, I would like to get some clarity on your comments regarding the Monterrey move and the expected disruption to productivity and margin for 2023. Did this affect the AWP margin in the fourth quarter of March? How should we anticipate this impacting the year ahead? Will you exit 2023 at full operational capacity, with 2024 reflecting the benefits, or will this situation extend into 2024? Thank you.

Yes. Thank you. I'll start Julie and then you can jump in on that longer-term margin side. So the disruption, it really doesn't start until the first quarter. We began to move into the permanent facility, Seth, in the first quarter. And we had a significant number of product line moves. First GE has done this. They've got a detailed process for doing this. But in the environment we're in now, both sides of the transaction, i.e., the sending plant is going to have some disruption associated with the supply chain in the receiving plant. And in this case, Monterrey is going to have some disruption, which impacts manufacturing efficiencies. And so, we've factored that into our outlook. It will take place during 2023 and will continue into 2024. As we indicated in our remarks and as we spoke during Investor Day, it ultimately is going to add about 200 basis points of operating margin improvement when we're fully up and running as we really get closer to the back half of 2024. So that's our current outlook. And again, it's going to be a busy year for the team. They're excited. The construction has gone well. It's on time, it's on budget and now it's time to start moving the product lines in there and reaping the benefits of the investment that we're making.

And Seth, just to follow-up on some of the Q4 margin commentary. The AWP, their margins were up 320 basis points from last year. So really nice results in higher sales volumes, and they had strict expense management and cost reduction initiatives and disciplined pricing. And when we look at Q4, the margins were really as expected. We had talked about last time we had some fewer production days, less favorable geographic and product mix, and unfavorable foreign exchange impacting AWP. And our utilities business continues to experience the supply disruptions due to chassis and bodies. And so they had unfavorable manufacturing efficiencies and some things that were maybe newer, I guess, that we had some weather-related shutdowns and product liability expenses in the utility business, as well as the change of facility with temporary shutdown due to COVID cases. But the Terex, the team did a really great job to more than double their operating profit and increase their margins by 320 points in the fourth quarter. So pretty much, we had some nice performance by the team.

Yes, that's helpful information. Thank you. I have a quick follow-up. John, you mentioned some softness in Europe regarding the Fuchs business and the crane and tower segments. Are you also noticing a slowdown in European orders for the access business, or is it limited to the areas you mentioned?

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

And to clarify, that's your comments around Europe.

Yes.

Okay. Super helpful. Okay. Thank you very much. I appreciate it guys.

Thank you.

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

Hi. Thank you for the time. With AWP for 2023, right? You've got 94% of the sales guide in the backlog that ships this year. So clearly, this is a year about, I mean, supply chain inefficiency, supply chain broadly as a gating factor. The question I have though is, the order books for 2024, how are we handling the out-year maybe differently than the past? And I want to go back to the Mexico risk of that transition. I know it's justified 200 basis points of margin improvements worthwhile. But I'm just trying to make sure we don't look up in a couple of quarters in Mexico in this challenging supply environment becomes more of a risk, more of a drag on that transition. So again, two questions there: 2024 AWP, how are we handling the order books versus history? And again, just how do we get more comfort that it's not the easiest time to be transitioning production?

Thanks, David. Regarding the order book, we have approximately $700 million in total backlog across the company for 2024. A larger portion of this backlog comes from utilities than from the Genie business, particularly with some of our highly customized units booked well into 2024. Additionally, in Monterrey, Mexico, we felt it was important to highlight the significant changes as part of the Genie plan for this year. The team has successfully navigated similar situations multiple times. The supply chain remains a critical challenge, and we will manage it closely to ensure we have the right materials at both the sending and receiving plants to minimize disruptions as much as possible. Given the extent of these changes, we thought it was essential to mention this, which explains some of the margin concerns and the delays in achieving an immediate 200 basis points margin improvement. It will take time to get the plant and the supply chain up and running and stabilized, but I am confident it will ultimately deliver that level of margin enhancement for the Genie business.

And can you touch on the order books, how you're handling 2024 or let's call it the out year differently than the past?

So in terms of the…

How early the order, opening the window up earlier, you don't usually start the year with 94% of your guidance.

You're right, David. We don’t typically start the year with over 90 percent of our bookings for the entire year. So yes, we are working closely with our customers. In the AWP segment, right now, our customers are asking for more than we can currently deliver. Therefore, we are in constant communication with our customers. If we observe any improvements in the supply chain for specific models, we inform them accordingly. We are accepting orders for 2024, but primarily due to supply chain constraints. This doesn't necessarily mean that customers are looking ahead to 2024; it's simply when we are able to deliver the products.

Thank you for the time.

Thank you, David.

Our next question comes from Nicole DeBlase from Deutsche Bank. Please go ahead. Your line is open.

Yeah. Thanks. Good morning, guys.

Good morning, Nicole.

Good morning.

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

In the call, we’re providing our best estimate of what that will look like, and that's the response. We are simply making our best estimate.

There is a lot of pricing involved in that. The customer doesn't have to wait for pricing to be confirmed at a future date.

Yes, that's correct.

Okay. Understood. And then, to follow up, just with respect to what you guys are embedding for free cash in 2023. Can you talk a little bit about the expectation for working capital?

Great question. Thanks, Nicole. So we are expecting our free cash flow to improve in 2023; it improves for two reasons: number one, improved earnings and net income. And then second, we had a significant investment in inventory in 2022. We expect additional working capital to support the additional volumes in an absolute dollar term in 2023 for the much less lower inventory build in 2023 than we had in 2022. So we'll be more working capital efficient going into 2023 than we experienced in 2022.

Thank you. I’ll pass it on.

Thank you.

Thank you, Nicole.

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

Thanks. With supply chain being the limiting factor, how much revenue did you deduct from the 2023 range you provided? And can you just tell us what revenue level each segment could ship to unconstrained?

If you examine our revenue guidance for this year and consider 2022, we were in the range of $1 billion to $1.1 billion at the macro level across Terex, before increasing to around $1.5 billion to $1.2 billion in the second half of the year. We expect some slight improvements in the supply chain, but not close to historical levels. Looking at our fourth quarter run rate, we've projected that into 2023 based on current estimates from suppliers and existing constraints. The challenge is that these constraints are still fluctuating. Our guidance is based on our backlog and coverage rates. It fundamentally relies on the supply chain and reflects our best estimates from discussions with suppliers about their delivery capabilities. Historically, we have been well above these levels, particularly in the AWP segment, but the supply chain constraints will govern our performance in 2023 as of now.

Yes. I just going to add that we have been running at $1 billion to $1.1 billion for continuously. And in the fourth quarter, we were able to go up to $1.2 billion. And so our guidance for this next year is $1.1 billion to $1.2 billion, which is consistent with what our supply chain has been able to deliver.

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

In the future, we believe we can enhance our competitive position globally. Monterrey, Mexico adds some capacity, but it is crucial for our competitiveness moving forward. Historically, we have produced at high levels in both our specialty AWP and MP segments, and there remains an opportunity to increase production if the supply chain allows. However, we face some labor constraints in certain areas, particularly in Redman, which we are addressing with our expansion in Monterrey. Therefore, there is potential to produce more in the future, provided our supply chain can deliver consistently in terms of both continuity and quantity. We are actively working with our supply chain to ensure on-time delivery and to communicate our future growth needs. The main limitation we are facing in 2023 is the supply chain itself.

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

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

Yes. As Stan mentioned, we engaged with ZenRobotics, focusing on sorting. There might be some overlap between the two. Regarding Optronic, we are considering ways to enhance operator skills on scissor lifts, boom lifts, or bucket trucks, aiming to reduce labor. For instance, instead of having two skilled operators in a boom lift, can we streamline that to one? We have some ideas and concepts, and by collaborating with their input, we might uncover significant opportunities to introduce technological advancements in the construction sector. EPC contractors have indicated that this is urgently needed due to labor constraints. Our goal is to improve labor productivity and safety, and we are optimistic about the potential there.

Our next question comes from Steven Fisher from UBS. Please go ahead. Your line is open.

Thanks. Good morning. I'm just trying to get a sense of the volume growth that you have embedded in your guidance for the Materials Processing segment for 2023. I know you mentioned, John, a lot about the strength of the bookings and the backlog. But revenues in the guidance are only up mid-single digits. So I guess presuming you do have some pricing, it doesn't seem like the volumes are up much unless there's a big FX drag on the revenue guide. So I don't know if it's maybe you're just taking orders that the supply chain won't allow it to deliver, but just how to think about the volumes embedded there for 2023?

The MP business has been dynamic this year, maintaining price neutrality throughout 2022. They've managed this well and we anticipate this trend will continue into 2023. We expect an increase in volume rather than price, although this may be slightly impacted by a few percentage points due to foreign exchange in 2023.

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

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

Okay. Thanks, John.

Thank you.

Thank you.

Our next question comes from Tami Zakaria from JPMorgan. Please go ahead. Your line is open.

Hi. Good morning.

Hi, Tami.

Hi. How are you? So my first question is, can you remind us how much of your SG&A is fixed versus variable? Should you see some unexpected slowdown in demand, let's say, sometime in the near future? How quickly can you dial back on SG&A?

Thank you for the question, Tami. I believe we have effectively managed SG&A, and we plan to continue this approach in the future. Historically, especially within the AWP business, we have successfully reduced significant costs in SG&A over the past several years. At this point, we feel it is the right time to invest in the business, particularly in new product development and digitalization initiatives. There will be some increases, such as expenses related to trade shows; we have three scheduled for this first quarter, and there are travel costs we did not incur in 2022 due to COVID. Therefore, we are making careful investments, while also ensuring we manage SG&A responsibly moving forward.

Got it. That's very helpful. And then going back to your price cost neutral assumption for the year, it seems like you have some pricing embedded in your top line, but raw material costs have come down notably from last year. So why wouldn't you be price-cost positive in 2023?

Thank you for the question. Let's discuss costs. We are still experiencing overall inflation in the supply chain, and our suppliers continue to implement price increases. While some materials, like HRC, may be decreasing, it takes time for inflation to filter through the different levels of the supply chain. Consequently, we expect to see continued increased costs into 2023. As a result, we do not anticipate prices decreasing. Our objective is to maintain a price-cost neutral position for the year, and we are adjusting our product pricing accordingly while being transparent with our customers.

Got it. Thank you so much.

Thank you.

Thank you, Tami.

Our next question comes from Jamie Cook from Credit Suisse. Please go ahead. Your line is open.

Hi. Good morning and nice quarter. On the utility side, I understand it affected your AWP margins in 2022. Can you provide a specific figure for that? Also, is it still impacting margins in 2023? Additionally, given what you've said about pricing and costs for the year, should we be aware of anything regarding the timing of price changes throughout the quarters, particularly between the first half and the second half? Thank you.

Thanks, Jamie. First, the utilities business faced significant challenges due to supply chain shortages this year, particularly with bodies and chassis. Consequently, the margins for utilities were lower than the segment average in 2022. Looking ahead to 2023, we anticipate an improvement in both utilities margins and Genie margins, which should enhance overall segment margins. Regarding price and cost, for the first and second halves of the year, we expect them to remain fairly consistent. In the first half, we will implement some pricing increases that were decided in the second quarter and will take effect in Q1. However, from a cost standpoint, we expect things to remain fairly balanced throughout the year.

Thank you.

Thank you, Jamie.

Our last question will come from Stephen Volkmann from Jefferies. Please go ahead. Your line is open.

Hi. Thanks, guys. Most of my questions have been answered. But John, I think you mentioned that 60% of MP and 70% of Genie product has sort of an electrical option. I'm curious what you're seeing in your backlog, given how long it goes. Are you seeing meaningful uptake of those electric units? And then I have a quick follow-up.

In terms of the backlog, yes, we are seeing an improvement meaningful. I would say it's an improvement in the electrical options across the business, especially as we bring out some new products in both those categories. In the case of MP, it really is predicated on what application it's going into and is their grid or what they call main power available as to whether or not the machine goes out with an ICE engine or goes out electric. But again, a lot of customer interest as we bring out new products, as the industry brings out new product, I think you'll continue to see a transition to electrical side. That was part of the investments that we made last year in biotech and Acculon were designed to help accelerate our electric offering as we go forward. So I think over time, we're going to see more of it in the current backlog, not substantially different than historical, but an increase in the electrical products.

And I guess to follow on, over the next few years, presumably, there will be some transition. Do you think that's a margin accretive event for Terex or is it more a margin headwind because of sort of startup and development costs?

In terms of the start-up and development costs, these are included in our ongoing SG&A, along with our R&D and development expenses. One factor affecting the pace of growth is that electric options tend to be more expensive than internal combustion engine or hybrid models. As we progress down that cost curve and more industries embrace electric technology, particularly in batteries, we expect costs to decrease and become more affordable. Currently, our long-term assessment indicates that margins will remain neutral. However, we anticipate that over time, the costs of these units will decline as battery technology becomes less expensive on a global scale.

All right. Great. Appreciate it.

Thank you.

We are out of time for questions today. I would like to turn the call back over to John Garrison for closing remarks.

Thank you, operator. If you have any additional questions, please follow up with Julie, John, or Paretosh. Again, thank you for your interest in Terex. Please stay safe and stay healthy. And again, thank you for your interest in Terex, and we look forward to seeing you at the shows in the upcoming quarter. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.