Terex Corp Q4 FY2023 Earnings Call

Greetings, and welcome to the Terex Fourth Quarter and Full Year 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paretosh Misra, Head of Investor Relations. Please go ahead.

Good morning, and welcome to the Terex fourth quarter 2023 earnings conference call. A copy of the press release and presentation slides are posted on our Investor Relations website at investors.terex.com. In addition, the replay and slide presentation will be available on our website. We are joined by Simon Meester, President and Chief Executive Officer, and Julie Beck, Senior Vice President and Chief Financial Officer. Their prepared remarks will be followed by Q&A. Please turn to Slide 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 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 Simon Meester.

Thank you, Paretosh, and good morning. I would like to welcome everyone to our earnings call and appreciate your interest in Terex. As many of you know, I've been at Terex for a little over five years now, but this is my first earnings call as CEO of the company, and I'm honored and humbled to take over from John Garrison and very excited about the road ahead. We have a great company operating in attractive markets and are financially strong. We have global market-leading businesses and an exceptional team. So looking ahead, I would expect much of my focus to be on helping Terex accelerate its growth. And as we grow, we will continue our focus on Zero Harm safety and our Terex Way values, which are an important part of our culture and embedded in everything we do. Please turn to Slide 4. We're starting the year in a great position after making significant progress in 2023 on our strategic initiatives. The Terex team delivered a 17% increase in sales, over 300-basis-point improvement in gross margins, a 63% improvement in EPS, and our return on invested capital of 28.5% improved by 720 basis points. These outstanding results demonstrate the strength of Terex's operating model and the progress we've made over these last few years. Over the last seven years, our MP business has consistently grown near double digits per year, becoming a vital piece of the Terex success story, and closed the year as strong as ever at a 16.1% operating margin. The MP team continues to find creative ways to build on its strong and diverse portfolio, illustrated by the recent launch of Green-Tec, a new Terex brand that will provide a comprehensive product offering of tree care and vegetation management solutions. Our AWP business executed very well in 2023, grew sales by 18% year-over-year, and improved operating margins by 480 basis points to 12.7%. Our new state-of-the-art Monterrey facility continues to ramp up as planned, and it's the largest facility we've ever built in Terex, and we're very proud of the team for the progress they've made. This facility has been mostly built for competitive reasons and to improve Genie's through-cycle margin performance. During 2023, we continued to invest in new products and in our manufacturing facilities besides Monterrey. For example, 10 of our facilities are now operating with net-zero emissions. We invested in Apptronik to capitalize on the accelerating trend of adopting robotics, and we expanded our battery technology investment with Acculon and started building the first prototypes with both. I'm very proud of our team members' accomplishments in 2023. Terex is in a great position with a diverse portfolio designed to help our customers achieve their goals. In the next few slides, I'd like to share some examples. Please turn to Slide 5. Our market-leading brands received recognition for their focus on return on investment and competitive cost of ownership. Our goal is to maximize the return on investment for our customers while delivering environmentally friendly and safe products. In 2023, we received many awards across multiple products and geographies, highlighting our reputation in the marketplace. We are committed to continuing to develop exciting products and technologies that provide differentiated value to our customers. Please turn to Slide 6. Terex equipment is used in many different applications around the globe, from waste handling and recycling to grid expansion and data centers. Other examples are vertical farming, as illustrated here at a customer in Denmark, and airport and stadium projects. Our products are required in all stages of the project life cycle from foundation, building, repair, maintenance, and eventual recycling of materials for reuse. We're proud of the role our products play in the many development projects around the globe. Please turn to Slide 7. Sustainability is an essential part of our business strategy where we focus on product innovation to enable our customers and end users to operate in safe and sustainable ways, team member and community engagement essential to execute our strategy and achieve our goals, and responsible operations with sustainable practices that minimize our impact on the environment. We're proud to report that for a second consecutive year, Newsweek recognized our commitment to sustainability and named Terex one of America's Most Responsible Companies. Additionally, Terex has been awarded a perfect score in our first-ever Human Rights Council Equality Index Review in recognition of the important work our team is doing to ensure an inclusive work environment where all team members feel valued. Please turn to Slide 8. In addition to a diverse and market-leading portfolio, our company is positioned towards markets that clearly benefit from global megatrends. Investments around the world in infrastructure, digitalization, waste recycling, and electrification are favorably impacting our end markets. Federal spending and incentives will support demand for our products in the years ahead. Our product portfolio is well positioned to capitalize on these opportunities. For example, the MP Powerscreen and Finlay brands have leading positions in global crushing and screening markets that benefit from both the growth in infrastructure and the associated demand for aggregates and from the growing demolition and recycling projects. MP brands like Ecotec, CBI, and Terex Recycling Systems have grown 26% this year driven by new product development and growing demand for environmental and waste recycling solutions. Our utilities business is well positioned to capitalize on investment required to upgrade the US electrical grid to support the accelerating demand as the industrial world continues to move to the use of more electrical power. And our Genie products are benefiting from demand from infrastructure projects, data centers, manufacturing, and events and entertainment. These megatrends position us very well for 2024 and beyond. Please turn to Slide 9. Our Q4 backlog of $3.4 billion is still significantly above historical levels and is the second highest in recent history, providing healthy momentum going into 2024. Our team members continue to successfully navigate supply chain issues from last year and worked hard to continue to improve customer on-time deliveries and return to more normal lead times. In fact, Q4 consolidated bookings at $1.3 billion increased 44% sequentially, consistent with typical seasonal trends and a return to more normal order patterns. Demand is robust for the reasons I laid out on the previous slide. We still see, however, some disruptions in the supply chain, but it continues to improve. Our MP business has backlog that is above historical norms, and our AWP business logged strong bookings in the quarter with a book-to-bill ratio of 129%, with Genie having order activity above these levels and our utilities business taking orders for 2025. Overall, our backlog and booking trends are positive and give us a strong outlook for 2024. Let's turn to Slide 10. We continue to see positive trends in our main end markets, especially in North America and India, but have seen some softening in Europe, which reported a slight sales decline in the fourth quarter. The US government has announced more than 40,000 projects in transportation, climate, and broadband. Spending on manufacturing is up approximately 70% in the last 12-month period, driven by mega-projects related to semiconductor manufacturing, clean energy, and EV battery projects. These projects make up two-thirds of the non-residential market. These favorable end market trends, combined with replacement cycle tailwinds and high equipment utilization rates, are very beneficial for our Genie business. Additionally, the increasing adoption of our products in emerging markets, such as India, is another positive. The utilities market is expected to continue to grow, supported by investments in grid upgrades and grid expansion needed for zero carbon and electrification goals. In the US, power-related spending has been increasing at double-digit growth rates in recent months. Our utilities business will benefit from this growing demand while we expect to continue to be constrained by body and chassis shortages. Strength in US infrastructure and general construction end markets will benefit MP's crushing and screening, concrete, and crane businesses. We expect these tailwinds to offset some of the softness in the businesses with higher European exposure. We expect MP's environmental business to continue its growth driven by increasing demand for waste recycling. Our Fuchs business is focused on expanding into new geographies and products to offset the near-term demand softness. Overall, we're positive about our end markets. We had an exceptional 2023 and expect strength in most of our markets in 2024. And with that, let me turn it over to Julie.

Thanks, Simon, and good morning, everyone. Let's take a look at our fourth quarter financial performance found on Slide 11. Sales of $1.2 billion were consistent with our expectations and prior year, reflecting healthy demand for our products as strength in North America offset some softening in European markets and deliveries returned to a more normal seasonal pattern. Our 2022 fourth quarter sales were the strongest that year as supply chain constraints started to ease. Gross margins of 21.5% increased by 220 basis points over the prior year as pricing improvements, manufacturing efficiencies, and cost reduction initiatives helped to offset cost inflation and Monterrey start-up costs. Gross margins were 21.8% excluding a one-time product liability verdict of $4 million in MP. SG&A increased over the prior year due to wage inflation and incentive compensation expenses and included $13 million of one-time charges due to accelerated vesting and other expenses. Excluding these items, SG&A as a percent of sales was 11%. Income from operations was $116 million. Excluding $17 million in one-time charges, operating income was $133 million, with operating margin of 10.9%, a 100-basis-point improvement over the prior year. Interest and other expense of $10 million declined by $5 million from the prior year, as favorable mark-to-market adjustments more than offset higher interest rates. The fourth quarter global effective tax rate was a benefit of 21% due to the establishment of a deferred tax asset from the recognition of a tax attribute associated with our operations in Switzerland. Fourth quarter earnings per share of $1.88 included a net favorable impact of $0.47 from non-recurring items including: a $0.62 one-time tax benefit related to the company's operations in Switzerland, a $0.07 mark-to-market gain on third-party investments, a $0.17 charge related to accelerated vesting and other expenses, and a $0.05 charge related to a product liability verdict in MP. Excluding these non-recurring items, fourth quarter earnings per share was $1.41. Free cash flow for the quarter was $135 million, as increased operating profits were partially offset by inventories added to support production moves in 2024 as well as lingering supply chain disruptions. Let's take a look at our segment results, starting with our Materials Processing segment found on Slide 12. MP, once again, delivered excellent full-year performance in 2023 as sales were up 15% and operating margins expanded 80 basis points to 16.1%. MP's incremental margin of 21% demonstrates continued solid operational execution. For the fourth quarter, MP sales increased by 1% to $555 million compared to the exceptional fourth quarter of 2022, driven by strength in demand for aggregates and environmental products. MP's reported operating profit of $84 million was down $3 million, as improved manufacturing efficiencies and disciplined cost management were offset by an unfavorable product liability verdict. MP ended the quarter with backlog of $767 million, still above historical norms, while our bookings increased 22% sequentially. On Slide 13, you'll see our Aerial Work Platforms segment financial results. AWP delivered excellent performance in 2023 as full-year sales were up 18% and operating margins expanded by an impressive 480 basis points, with an incremental margin of 40%. The team did a great job on price/cost discipline, efficiency improvements, and cost reduction activities, all while ramping up the Monterrey facility. AWP had a solid fourth quarter with sales of $660 million, slightly down from the strong prior year due to softness in Europe and a return to seasonal delivery patterns for its customers. AWP reported quarterly operating profit of $61 million, an increase of 13% over the prior year. The increase was driven by cost reduction initiatives, partially offset by unfavorable product and regional mix, manufacturing efficiencies, and severance charges. AWP backlog is very strong at $2.6 billion, which is approximately 3 times the historical norm. Strong bookings of $850 million were up 59% sequentially, returning to seasonal order patterns. Turning to Slide 14 and full year 2023 financial highlights. Our performance in 2023 reflected significant improvement in the businesses and the extraordinary efforts of our team members. Earnings per share increased 75% from $4.32 to $7.56. Full-year earnings included a net favorable impact of $0.50 from non-recurring items that we discussed earlier in the call. Excluding these items, our earnings per share increased 63% year-over-year to $7.06. Sales of $5.15 billion were up 17% year-over-year. Our operating income was $652 million with operating margin of 12.7% excluding $15 million of non-recurring charges, which reflects a strong 320-basis-points expansion over the prior year, driven by prudent cost management as well as price realization. Incremental margins were 30%, 32% excluding non-recurring items. Full-year SG&A was 10.3% of sales, excluding non-recurring items, consistent with our expectations. The effective tax rate for the year was 10.9%, which is impacted by the establishment of a Swiss deferred tax asset as explained earlier. Excluding the impact, our effective tax rate would have been 18.2%. Please see Slide 15 for an overview of our capital allocation strategy. Free cash flow of $366 million increased $214 million over the prior year, resulting in a 71% conversion to net income. We continue to carry a higher level of inventory to support our production moves and navigate supply chain disruptions. Hospital inventory was $25 million, down $11 million from the prior year, but up $5 million sequentially from the third quarter. Capital expenditures and investments for the year were $151 million, with a large investment related to our Monterrey facility. We returned $104 million, representing 28% of our free cash flow, to our shareholders in share repurchases and dividends. We reduced our debt by $152 million, as we have paid down our revolver, and our bonds are at a fixed rate of 5% until the end of the decade. Our net leverage remains low at 0.4 times, below our 2.5 times target through the cycle. We have ample liquidity of $971 million, and we recorded a return on invested capital of 28.5%, up 720 basis points year-over-year. Terex is in an excellent position to continue to increase shareholder value and profitably grow the business. Now turning to Slide 16 and our full-year outlook. 2023 was an excellent year for Terex and our team members are committed to delivering another great year in 2024. It's important to realize we are operating in a complex environment with many macroeconomic variables and geopolitical uncertainties, so results could change negatively or positively. With that said, this outlook represents our best estimate as of today. We anticipate earnings per share of $6.85 to $7.25 based on sales of $5.1 billion to $5.3 billion, which reflects another year of solid consistent performance well ahead of our Investor Day targets. Our sales outlook incorporates healthy volumes supported by customer demand but also reflects caution around supply chain and labor constraints, as well as softening in Europe. We expect the first and second half sales to be comparable to each other, with the second and third quarter sales higher than the first and fourth quarters as we return to more seasonal customer delivery patterns. We anticipate improved full-year operating margins in a range of 12.8% to 13.1% as we aim to remain price/cost neutral for the year and use cost reduction activities to offset Monterrey start-up inefficiencies. We do want to emphasize the stronger first half in 2023 when making year-over-year comparisons. We expect corporate and other expenses to be evenly spread throughout the year. Based upon global tax laws, we expect a 2024 effective tax rate of approximately 22% versus our 2023 normalized rate of 18.2%. We estimate free cash flow of $325 million to $375 million, including capital expenditures of approximately $145 million, with the largest component being our Genie Mexico facility. Let's review our segment outlook. We anticipate MP sales of $2.2 billion to $2.3 billion, with continued strong margins in the range of 15.6% to 15.9% for the full year. Compared to the prior year, sales are anticipated to be lower in the first quarter to realign supply and demand in our Fuchs and Crane businesses. Q1 margins are anticipated to be approximately 200 basis points lower due to unfavorable product and regional mix. Sales and margins are expected to increase from Q1 levels and be relatively consistent for the remainder of the year. We expect AWP sales of $2.9 billion to $3 billion, with improved operating margins of 13.4% to 13.7% for the full year. We anticipate full-year operating margin expansion due to continued cost-out activity, favorable absorption at our mature plants, partially offset by inefficiencies due to the Monterrey start-up. We expect Q1 sales to be higher than the prior year and margins to be slightly lower as increased volumes are offset by unfavorable product and geographic mix and start-up inefficiencies. The Terex team is committed to delivering another strong year in 2024. And with that said, I will turn it back to you, Simon.

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

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

Thank you. Your first question comes from the line of Stanley Elliott with Stifel. Your line is open.

Good morning, Simon, Julie, and team. And Simon, welcome. Simon, I guess, starting off, the first thing you mentioned was helping accelerate growth. Could you kind of flesh that out a little bit more? How are you thinking about the organic component versus the M&A opportunities that you potentially have? Just curious how you're thinking about the business overall.

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

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

Thanks for the question, Stan. Good morning. AWP, they did a fantastic job in the year with sales up 18% and OP margin expansion of 480 basis points. The team successfully managed through all the disruptions in supply chain, inflation, and longer-term projects, and still delivered strong year-over-year performance. Our Monterrey facility is our largest facility. It's approximately 1 million square feet and the largest that we've ever built. And so, as that facility starts to come online, it's going to run unfavorable manufacturing efficiencies or unfavorable burden absorption until the product moves are completed. In Q4, manufacturing inefficiencies were about $4 million unfavorable to what we had put in our outlook, as we've had an in-quarter supply chain issue with one of our new suppliers. In addition, we took a $5 million charge, which was accelerated due to some of the product moves. It was a depreciation charge related to some assets not being moved to the Monterrey facility. In addition, there were some severance charges in AWP and some unfavorable FX. So, most of these charges are non-recurring, severance and depreciation, and manufacturing efficiencies will improve going forward as the plant comes online. The team did a great job in expanding margins by 480 basis points and we're confident in our margin improvement outlook for next year. We did see, in Q3 and Q4, about $21 million of charges related to manufacturing efficiencies related to the Monterrey facility. We would assume that the charges would be about $15 million to $20 million mostly in the first half of next year and the margins to improve as we go forward into Q3 and Q4. And from a utilities perspective, yes, we did have a supply chain issue that disrupted Q3 and that issue is behind us and utilities improved in the fourth quarter.

Perfect. Thanks so much, and best of luck.

Thanks, Dan.

Thanks, Dan.

Hi, good morning. Thanks for taking my question.

Good morning.

Good morning. I wanted to discuss the outlook for the MP margin a bit further. Julie, you mentioned a decline of 200 basis points year-over-year in the first quarter. I'm trying to understand how much of this decline is due to product and regional mix, and how much is related to the portfolio transitioning through some acquisitions, resulting in lower-margin products being prioritized currently. Will this 200 basis point year-over-year decline reverse quickly in the second quarter, or will it improve gradually over the coming year? Thank you.

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

I would just like to add that all of these businesses are operating at double-digit margins and performing strongly. We're really talking about minor details here. MP's progress has been impressive over the last seven to eight years. As I mentioned earlier, they have managed to grow nearly double digits annually during this time, and now all of these businesses are strong double-digit performers. So, this is really just a small detail for 2024.

Thank you. I'd like to ask a follow-up regarding AWP. Can you discuss the current backlog? Is it all designated for 2024? Also, are you experiencing any cancellations or delays from your customers in the AWP sector? Thank you.

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

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

Thanks, Seth.

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

You were correct in your initial assumption, with North America expected to go up and Europe likely to see a slight decline. As I mentioned, we have a strong backlog and solid bookings heading into the year, although there's some caution regarding Europe. The underlying demand in North America is exceptionally robust. There are still minor supply chain disruptions, but the situation has significantly improved since the start of 2023. Just one missing component can delay a shipment, so we are mindful of that. Our large customers in North America are optimistic, anticipating that 2024 will be another strong year, and it appears that 2025 will also be promising. We expect to see increased activity with our national accounts in 2024 due to their involvement in major projects. However, from a global perspective, this does not have a significant impact on our overall mix, as it balances out in terms of product and geographic distribution.

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

Yeah. Are you talking about AWP or Terex as a whole?

Yes, both would be good.

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

Okay. Thank you very much.

Hi. Thank you. Good morning. I'm trying to think about the straddling of demand and supply for 2024 and 2025 for AWP. Might be a hard question to answer initially, but if you had Mexico running the way you expect, no labor constraints in some of the more mature AWP plants, can you give us some idea of what would the guide have been? I'm just curious, are we talking a couple of hundred dollars of revenue that you could be shipping in '24 that at the current moment you're saying you can't? And then, the follow-up would be, do you see that simply getting pushed to '25, or has maybe some incremental capacity loosened up elsewhere in the industry that unfortunately that might be just simply a lost sale? So, I'm just trying to think about the tightness right now, the inability to ship, and what does that do to the arc of the AWP cycle for '24 and '25.

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

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

I can't provide a specific answer today, David. Our main focus for 2024 is meeting the commitments we make to our customers. That's our top priority. We aim to ensure that what we commit to does not carry over into 2025. We believe there could be potential for exceeding the upper end of our range, but I can't provide a specific figure for how that might look mid-year.

I appreciate it. Okay, thank you.

Great. Thank you, everyone. Good morning. I want to continue on this topic. Could you provide a rough estimate of how much capacity will be added in the AWP product when the Monterrey facility is fully operational, maybe in two years or so?

The main reason we built Monterrey is to enhance the overall competitiveness of the business, primarily to improve Genie's performance through economic cycles. The project is progressing well, and we're also expanding our supply base, focusing mainly on supporting North America. While I can't provide a specific number for capacity expansion at this time, this facility will help us retire some higher-cost facilities like Oklahoma City and Rock Hill. So, our focus is on cost-effectiveness and competitiveness, but the facility is designed for growth, allowing for future expansion. However, for now, it primarily serves to phase out higher-cost capacity.

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

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

Yeah, great. Thank you.

Thank you.

Your next question comes from the line of Tami Zakaria with JPMorgan. Your line is open.

Hi, good morning, Team Terex. Hope you're doing well.

Good morning.

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

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

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

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

Got it. Thank you so much.

Thanks for the question.

Yeah, thanks. Good morning, guys.

Good morning.

Just first question focusing on some of the dynamics around free cash flow. So, can you guys talk a little bit about your expectations for working capital for 2024? And then, as we roll into '25, where do you think CapEx normalizes post Monterrey investments?

Thanks, Nicole. We generated free cash flow of $366 million, which translates to a 71% conversion rate to net income. We are projecting around $350 million in free cash flow for the upcoming year. This year's performance benefited from the sale of our Oklahoma City facility, which contributed approximately $32 million. We anticipate capital expenditures will be between 1% to 3% of our sales, as indicated during our Investor Day. Last year, we were on the higher end of that range, and for 2024, this will continue due to the Monterrey facility. We do not expect any major new facilities of 1 million square feet coming in 2025, so we believe that capital expenditures will decrease in 2025, leading to a stronger free cash flow conversion percentage moving forward. Regarding net working capital, we project a slight improvement this year. However, due to production adjustments and ongoing disruptions in the supply chain, we will continue to maintain a higher inventory level. Additionally, I want to emphasize that part of our management team's incentive compensation is linked to net working capital performance and improvement, so the team is highly focused on enhancing net working capital.

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

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

Yes. Just to clarify, the question was about revenue, correct?

Yeah. So...

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

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

Thanks. Good morning.

Good morning.

Hi, Steve.

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

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

Can you frame magnitude at all?

No, I can't.

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

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

And when we think about it, Steve, we have strong years in 2023 and 2024. And as Simon indicated, customers are talking about 2025.

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

What are your thoughts on the effects of pricing and your expectations for 2024 in relation to costs, and how do you anticipate this compares to what you experienced in 2023?

Thank you, Tim. We anticipate inflation in 2024, although it will be at lower levels compared to 2023. Our approach remains unchanged, and we are maintaining close communication with our customers. We are committed to transparency while aiming to keep our pricing aligned with costs. We will continue our efforts to reduce costs to lessen the burden on our customers while also striving to enhance our operating margins. We do expect some inflation, albeit decreasing, particularly in areas such as steel, labor, integrated components, and logistics. We still see rising input costs for 2024, though at a reduced rate compared to 2023.

Okay. Was it a tailwind for Terex in 2023 or is that just...

So, Tim, we would say that we're price/cost neutral, and then the other margin improvement comes from cost-out and continuous improvement.

Understood. Regarding MP, I don't believe there were any comments about the largest business with aggregates. Can you provide some insights on the outlook for 2024? There may be fluctuations depending on whether dealers are expanding or reducing their rental fleets. I would appreciate any thoughts you have on the aggregates outlook, which I know is a global business, but how do you see it progressing in '24? Thank you.

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

All right. Thank you.

Thanks, Tim.

Yes. Hi, good morning, everyone. And Simon, congratulations again.

Thanks.

Simon, could you revisit your earlier comments regarding M&A parameters? You've been seeking additional bolt-on acquisitions within MP for a couple of years without finding a suitable opportunity that meets your value criteria. How is your approach to evaluating M&A different today compared to the last couple of years? It seems you mentioned the possibility of a few additional product lines. Can you elaborate on your previous comments regarding what you consider accretive and the criteria you are using to evaluate potential opportunities going forward?

I see our current portfolio as comprising market-leading businesses globally that are diverse and strengthening one another. We have strong operating margins, with most of our businesses now in double digits. Our solid balance sheet provides us with various options. We are open to opportunities that enhance our strength, create synergies, widen our competitive advantage, and accelerate our growth, but any potential actions will be opportunistic. They need to be actionable, affordable, and financially beneficial. Additionally, we still have numerous opportunities to expand organically since there's a significant addressable market available with our existing portfolio. We're considering both inorganic and organic growth strategies. As the incoming CEO, I feel encouraged by the operational momentum we have heading into 2024, having posted notable improvements in 2023 versus 2022, including a 300 basis point increase in operating margins and 17% growth overall. My top priority will be to maintain this operational momentum in 2024. While our strong balance sheet gives us flexibility, we will carefully evaluate all options available to us. Thanks for the question.