Terex Corp Q1 FY2024 Earnings Call

Greetings and welcome to the Terex First Quarter 2024 Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Neil Frohnapple, Vice President of Investor Relations.

Good morning and welcome to the Terex First Quarter 2024 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. These risks are described in greater detail in the earnings materials and in our reports filed with the SEC. In addition, we will be discussing non-GAAP financial 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 4 and I'll turn it over to Simon Meester.

Thanks, Neil and good morning. I would like to welcome everyone to our earnings call and appreciate your interest in Terex. I'd like to begin by thanking all Terex team members for delivering outstanding performance in Q1. The team executed really well and delivered strong results to start the year with. We increased sales by 5% and expanded operating margins by 20 basis points from last year. The company also delivered earnings per share of $1.60 in the quarter and achieved a return on invested capital of more than 27%. These outstanding results demonstrate our ability to execute as the team continues to perform at a high level. Additionally, we are raising our 2024 sales and profit outlook and now expect earnings per share in the range of $6.95 to $7.35. During the quarter, we also continued to advance our strategic initiatives to drive long-term shareholder value. We launched several new products across the portfolio and continue to make good progress ramping up our new facility in Monterrey. This new facility continues to absorb more of Genie's global production mix and is expected to improve the segment's full cycle margin performance. Please turn to Slide 5. Customer demand remains healthy across most of our businesses, supported by favorable end market conditions. Our Q1 backlog of $3.1 billion is significantly above historical levels and gives us confidence in the sales outlook for the remainder of the year. As expected, backlog continues to moderate from peak levels, which reflects more normal lead times, improving supply chain and continued efforts by our team members to improve overall throughput. Consolidated bookings in Q1 of more than $1 billion were down from last year, which reflects the return to more normal seasonal order patterns combined with softer demand in Europe. In the MP segment, backlog is still above historical norms and bookings increased sequentially from the fourth and the third quarter. Additionally, our AWP backlog now covers the 2024 outlook with our utilities business actively taking orders for 2025. Overall, based on customer feedback, our backlog coverage, our bookings and leading indicators, we feel confident about raising our '24 outlook. Please turn to Slide 6. The overall market outlook remains strong for many of our primary end markets, especially in North America, which represents over 60% of total company sales. In fact, we saw double-digit sales growth in North America in Q1. Our businesses remain well positioned to benefit from higher U.S. government spending to modernize infrastructure over the coming years with an increasing number of projects continuing to be announced. Additionally, construction spending on manufacturing is up more than 30% year-over-year driven by onshoring and mega projects related to semiconductor manufacturing, clean energy and EV battery projects. These favorable end market trends, combined with replacement cycle tailwinds and high equipment utilization rates are beneficial for our aerial's 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 expansion required for zero carbon and amplified electrification needs like power generation for future AI applications. In the U.S., power related spending has been increasing at double-digit rates. Our Utilities business is benefiting from this growing demand and was up double digits in the first quarter as the team is working hard to overcome ongoing shortages in the supply chain. Strength in U.S. infrastructure, general construction and residential end markets will continue to benefit MP's aggregates and concrete businesses. We expect these tailwinds to offset softness in businesses with higher European exposure. We expect MP's environmental business to continue its growth, driven by increasing demand for waste recycling. And our Fuchs business is focused on expanding into new geographies and new products to help offset the near-term demand softness. Overall, we see continued strength in the infrastructure, utilities, manufacturing and recycling markets and remain positive on the 2024 market outlook for our portfolio. Please turn to Slide 7. I now want to take a step back and provide a few reasons on why I'm confident in Terex's growth trajectory over the coming years. First, Terex has a diverse product portfolio that provides differentiated value to our customers at all points of the project life cycle. Notably, our equipment is utilized for customers across various applications from foundation to building, repair, maintenance and the eventual recycling of materials for reuse. We also remain committed to developing new products to address our customers' evolving needs and maximize their return on investments. In fact, the innovation part of our strategy continues to generate incremental growth for the company. For example, approximately 20% of our annual sales are from new products introduced in the last 3 years. This is a testament to our team members' collaboration with our customers to provide innovative solutions to support developments across the globe. Please turn to Slide 8. Terex also remains well positioned to capitalize on megatrends and emerging technologies that will favorably impact our end markets over the coming years. In total, around 80% of our addressable market is aligned with stimulus from megatrends and from increasing government investment and incentives. Our market-leading businesses all benefit to varying degrees from more investments in infrastructure, digitalization, waste recycling and electrification. For example, the MP team has leading positions in global crushing and screening markets that benefit from the growth of on-site demolition and infrastructure projects in general and the associated demand for aggregates. Keep in mind that aggregates represent around 50% of segment sales and we also serve customers across all project life cycle phases including growing demand for environmental and waste recycling solutions. Our Utilities business is well positioned to capitalize on investments required to upgrade the U.S. electrical grid to support the accelerating demand as the industrial world continues to move to the use of more electrical power. And our Genie products are benefiting from demand from infrastructure projects, data centers, manufacturing onshoring and investments in the entertainment sector. Overall, Terex's diverse product portfolio positions us very well for 2024 and beyond. Let's turn to Slide 9. It has been an exciting first few months as CEO of Terex and I would like to provide a few more thoughts on our strategic priorities as we look ahead to the future. Our Execute, Innovate, Growth strategy has built strong momentum over the last several years. We now have a diversified portfolio of market-leading businesses that are generating higher levels of performance through the cycle. In fact, we're on track to achieve more than $7 of earnings per share and greater than $300 million of free cash flow for the second consecutive year. I'm confident that Terex has significant upside for many years to come. Looking ahead, I strongly believe we can create even more value for shareholders by accelerating the growth element of our strategy over the coming years and it starts with our strong balance sheet and cash flow generation, which provides plenty of firepower to pursue opportunities that will drive sustainable long-term value. With respect to organic growth, we're focused on increasing product vitality and targeting opportunities to drive incremental growth across the portfolio. The team is also moving with urgency to capitalize on the megatrends and emerging technologies that I highlighted earlier. And finally, we continue to grow the M&A pipeline, to identify opportunities that are financially attractive, broaden our market reach and strengthen our portfolio, keeping in mind, we continue to evaluate potential inorganic action against other alternative uses of capital, which is a good position to be in. Overall, I'm excited for the opportunities that lie ahead, and I'm confident we will elevate Terex to new levels of performance. And with that, let me turn it over to Julie.

Thanks, Simon and good morning, everyone. Let's take a look at our strong first quarter financial performance found on Slide 10. We posted sales of $1.3 billion, up about 5% from last year reflecting strong demand for our products across multiple businesses. Geographically, we delivered significant growth in North America, while Europe declined since last year's very strong first quarter. Gross margin of 23% increased by 40 basis points over prior year on improved manufacturing throughput and disciplined price cost management. SG&A expense increased over the prior year due primarily to higher compensation expense, although structural costs came in largely as expected. SG&A as a percent of sales was 10.8%, up slightly from last year. Note that SG&A includes $4 million of discrete financial callouts due to accelerated vesting and severance charges. Excluding these charges, SG&A came in at 10.4% of sales, better than last year. Income from operations was $158 million with an operating margin of 12.2%, a 20 basis point improvement over prior year. Operating income also includes a $4 million impact of vesting and severance charges. Interest expense was relatively consistent with the previous year, while other expense increased $7 million from the prior year, primarily due to unfavorable mark-to-market adjustments. The first quarter global effective tax rate was 20.5% compared to 17.5% in the first quarter of 2023. First quarter earnings per share of $1.60 was consistent with last year. As expected, with a return to more seasonal pattern, free cash flow for the first quarter was negative, as increasing operating profits were more than offset by working capital added to support the sales outlook. In Q1, we continue to carry a higher level of inventory to support increased Q2 and Q3 sales volumes as well as our Genie production move. Let's take a look at our segment results. Please turn to Slide 11. The MP team has gotten off to another good start in 2024 and is executing well despite more challenging macro conditions for a few of its businesses. Before I go into more details on the quarter, let me first provide more perspective on the segment from a high level. We have nearly doubled the size of the MP segment over the last 7 years and expanded operating margins by almost 700 basis points during this period. Today, MP consistently generates mid-teens operating margins and represents about half of our total annual operating profit. And this segment remains well on track to achieve the Investor Day targets we established for 2027. In fact, delivering on the long-term sales target of $2.7 billion represents an incremental dollar per share of earnings power for the total company relative to our 2024 outlook. For the first quarter, MP sales declined by 6% to $520 million compared to the exceptional first quarter of 2023 due primarily to softer demand in Europe, partially offset by growth for aggregates. MP's reported operating profit of $72 million was down $13 million due to the impact of lower sales volumes, unfavorable product mix and product liability reserves. Although MP's operating margins were down 150 basis points from last year, they were 50 basis points better than expected. MP ended the quarter with backlog of $712 million, still above historical norms, while our bookings increased 7% sequentially from the fourth quarter. Keep in mind that the MP business is shorter cycle and continues to transition back to more traditional book-to-bill dynamics, as supply chains continue to improve, which impacted the comparison for bookings relative to the prior year. Turning to Slide 12. AWP delivered excellent performance in the first quarter with sales of $773 million, up nearly 13% from last year, primarily reflecting higher demand as well as improved supply chain and manufacturing throughput. AWP reported quarterly operating profit of $107 million, an increase of 29% over the prior year. The increase was driven by strong operational execution on the higher volume, improved supply chain performance and disciplined price cost management. Operating margins expanded by 180 basis points with an incremental margin of 28%, reflecting strong performance overall by the team. And finally, I would note that AWP backlog is strong at $2.4 billion, which is more than 2x the historical norm. Please see Slide 13. Terex has a strong balance sheet with ample liquidity. Our net leverage remains low at 0.5x, well below our 2.5x target through the cycle, providing us plenty of flexibility as we look ahead. And our outstanding bonds are at an attractive fixed rate of 5% until the end of the decade. We are reaffirming our 2024 free cash flow outlook range of $325 million to $375 million. As you can see on this slide, Terex is on track to generate more than $1.1 billion of free cash flow over the 5-year period. This cash generation has allowed us to strengthen the balance sheet and invest for profitable growth, all while returning significant cash to shareholders. We're planning for capital expenditures this year of approximately $145 million or about 2.7% of sales at the expected midpoint with the largest investment related to our Monterrey facility. Note that we would expect CapEx to take a step down next year and to be a benefit to free cash flow conversion in 2025. We reported a return on invested capital of 27.6%, up 370 basis points year-over-year. Terex is in an excellent position to continue advancing our strategic growth initiatives while returning capital to shareholders. Now turning to Slide 14 and our full year outlook. It's important to realize we are operating in a complex environment and many macroeconomic variables and geopolitical uncertainties that results could change negatively or positively. With that said, this outlook represents our best estimates as of today. Following the strong start to the year, we are raising both our sales and earnings per share outlook for 2024. We are increasing our earnings per share outlook to the range of $6.95 to $7.35, up from the previous outlook of $6.85 to $7.25. We are also raising our sales outlook to a range of $5.2 billion to $5.4 billion, up $100 million compared to the prior outlook midpoint. Our sales outlook incorporates healthier customer demand and improved operational throughput. With that said, the outlook reflects strong demand in North America and plans for continued softness in Europe over the balance of the year. We expect the first half sales to be slightly higher than the second half, with the second and third quarter sales higher than the first and fourth quarter as we return to more seasonal customer delivery patterns. We anticipate full year operating margin in the range of 12.8% to 13.1%, consistent with our prior outlook and solidly above full year 2023 performance. Our margin expansion reflects strong operational execution and the impact from the higher sales outlook. We are also driving ongoing cost reduction activities to offset softer demand in Europe and continued inflation. At the midpoint of the outlook range, the implied incremental margin range for the full year is about 30%. From a modeling perspective, we do want to emphasize the strong second quarter performance in 2023 when making year-over-year comparisons for the remainder of the year. We expect corporate and other expenses to be around $25 million in the second quarter and then approximately $20 million per quarter in the second half of the year. We now expect interest and other expense of $65 million for the full year, higher than the prior outlook to primarily reflect the financial callouts in the first quarter. The outlook for the rest of the below line items are largely unchanged from our previous outlook. And as I highlighted earlier, we continue to estimate free cash flow in the range of $325 million to $375 million. Let's review our segment outlook. We expect MP sales to be $2.2 billion to $2.3 billion for the full year, with margins in the range of 15.6% to 15.9%, both consistent with the previous outlook. For the second quarter, sales and margins are expected to step up from Q1 levels. Profitability is expected to steadily increase through the balance of the year. For AWP, we now expect 2024 sales of $3 billion to $3.1 billion, up $100 million from our previous outlook. We are slightly raising our operating margin outlook to a range of 13.5% to 13.8% for the full year, representing upwards of 100 basis points of expansion over 2023. We expect Q2 sales to be up from the prior year, while margins are anticipated to be around 150 basis points lower compared to last year's very strong second quarter. Note that margins will be impacted by moderating efficiencies and unfavorable mix, partially offset by continued cost out activity. We anticipate the quarterly cadence of our AWP sales to be closer to historical patterns with the highest sales in Q2 and Q3, which will also drive higher profitability for those quarters. Overall, our increased full year outlook reflects our confidence that 2024 will be another outstanding year for Terex.

Thanks, Julie. Turning to Slide 15. In summary, the Terex team delivered excellent results to start the year and we now expect even stronger performance for 2024. We have a diversified portfolio of industry-leading businesses that are generating higher levels of performance through the cycle. We're also well positioned to continue to benefit from megatrends and emerging new technologies like electrification, digitalization and AI. The team remains focused on operational execution to drive greater efficiencies and higher returns on invested capital. We have a strong balance sheet and generate significant cash flow that will continue to fuel our profitable growth strategy and return capital to shareholders. 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 over the coming years. And with that, let me turn it back to Neil.

Thanks, Simon. I would like to open it up for questions. Operator?

Our first question comes from Jamie Cook from Truist Securities.

Congrats on a great quarter. Julie, my first question is about materials processing. You mentioned that margins were 50 basis points above expectations, yet you are not adjusting your margin guidance for the year. I'm also surprised that the sales guidance remains the same despite the weaker market conditions, particularly concerning European exposure in materials processing. Can you clarify the guidance for MP? Also, Simon, now that you're nearly five months in, could you share your insights on your strategy to accelerate growth? Specifically, what do you see regarding the M&A pipeline and the potential for deals in 2024? Additionally, what size of deals are you considering and what areas interest you?

Okay, Jamie, I'll begin with the outlook for the MP business. We had a stronger quarter than expected, with operating margins about 60 basis points higher than we anticipated. This was partly due to a favorable geographic mix, particularly with increased exposure in North America. However, we did see a negative impact of around 50 basis points from a product liability charge I mentioned earlier. Looking ahead, we expect some challenges in certain European markets, especially in our material handling sector, notably in Germany. Despite this, we see potential growth opportunities in our environmental and concrete businesses, and our aggregates division continues to perform well. Margin improvements are expected as the year progresses, and we anticipate sales will also rise from Q1 levels. Overall, we are looking forward to another solid year for the MP business.

Yes. Jamie, thanks for the question. Yes, so it's been 4 months. It's been very exciting so far. Obviously, looking back over the last couple of years, I don't think there's any denying that we have built very strong operational momentum with our Execute, Innovate and Grow strategy. We truly transformed the company. We have a strong portfolio that we feel very good about. So I would say, my first priority is to make sure we maintain that positive momentum that we're currently on. But there is no doubt that we now are in a position where we can also focus on now that we have that strong operational momentum and how we can accelerate growth and to your point, obviously, we look at inorganic options. We're also looking at organic options. We're a $5 billion business in a $34 billion addressable market. There's still a lot of white space to go after organically and with good return on invested capital, that is on the table for us, just as much as inorganic action. But when it comes to the inorganic action, for the reasons I just laid out, we're not really in a hurry. We didn't set ourselves a target. We didn't set ourselves a timeline because we are in such a strong place. And because we have strong demand for our existing businesses, for the next couple of years, we're going to take our time with this but we do have an active pipeline of opportunities. We're looking for anything inside and outside our current addressable markets that would be attractive, that would strengthen our portfolio, that will make us stronger, will widen our moat but obviously needs to be financially attractive and ultimately further strengthen our future earnings profile. But again, I can't emphasize this enough. It all needs to rank favorably versus all the other actions that we have available to us like share buybacks, like investing in our current businesses and dividends. And so that's how we force rank those opportunities. But anything is on the table.

Our next question comes from Stan Elliott from Stifel.

I guess piggybacking on that, with leverage, you guys have a kind of a 2.5% kind of net target through the cycle, you're probably going to be close to debt free by the end of the year. How large of a deal would you want to pursue if something were to pop up? And if that doesn't materialize this year, then maybe kind of help us again with new opportunities for buyback and things like that.

Yes, we are evaluating all sources and have a wide pipeline. We're considering both smaller and potentially larger opportunities. Our approach is flexible, as we aim to follow the criteria previously mentioned by Simon. Regarding share repurchases, we have bought back $1.6 billion in shares over the past seven to eight years. Last year, we returned over 28% of our free cash flow to shareholders and currently have $130 million left in our authorization for share repurchases. Therefore, we will continue to assess share repurchases and other opportunities as they arise, making decisions that offer the best returns.

And I guess, secondly, the comments, I mean, you had about 20% new products, your past 3 years. This comes at a time when you guys are generating very strong margins returned and making accelerated CapEx. That combination typically does not happen. What are you guys doing differently, is it voice of customer? Is it kind of moving into some kind of niche white space but it sounds like the new product piece is probably exceeding expectations.

Yes, absolutely. Ultimately, we are a product-driven company, which is what inspires us and motivates us each day to introduce new products to the market. Most of our products are aimed at businesses that seek a strong return on investment. Therefore, we focus on enhancing our customers' return on investment and ensuring their success. In terms of our offerings, we have been broadening our hybrid and alternative power solutions, including our partnership with Cummins to work on hydrogen power. Additionally, we’ve expanded our recycling and environmental solutions with offerings like Green-Tec and the new slow-speed shredder I mentioned earlier. We are exploring all possibilities, launching new products in current markets while also introducing existing items into new markets. There are ample opportunities to leverage our existing products in new areas and to bring new products into established markets.

Congrats and best of luck.

Our next question comes from Steven Fisher from UBS.

You mentioned, Julie, a benefit from price versus cost management. Can you maybe just give us some quantification of that in the quarter? How did it compare to your expectations? And what do you have embedded in there for the rest of the year on price versus cost?

Thank you for the question, Steve. In the first quarter, the team performed exceptionally well, especially in AWP. We observed improvements in the supply chain and successfully brought in the labor we needed in Washington State and Monterrey, which was fantastic. This allowed us to ship more than we anticipated, positively impacting the overall margin. When discussing pricing and cost, we maintain that our price-cost remains neutral. We're expecting pricing for the year to be in the low to mid-single digit range. We will continue to keep an eye on price-cost. As you know, the MP business has very dynamic pricing as they quote nearly every piece of equipment.

Yes, it has definitely increased for MP because it is returning to a typical book-to-bill cadence with about three to four months of forward visibility, and we are mostly covered for 2024. We could potentially take on more bookings in 2024 if we can find the necessary labor and materials. We expect to start discussions for 2025, as we usually do in the third and fourth quarters. Additionally, utilities are already actively placing orders for 2025 due to high demand. We are still facing some challenges with throughput because of staffing and chassis issues. However, this business has significant growth potential over the next couple of years, especially considering the mega projects and necessary grid upgrades and expansions. I mentioned AI, which is becoming a popular topic. The AI applications expected to enter the market will be very power-intensive, leading to further grid upgrades and expansions, which aligns perfectly with our capabilities. This is why we are very optimistic about the future of this business.

Our next question comes from David Raso from Evercore ISI.

Following up on the order conversation. I think clearly '24, people are going to try to figure out why can't we do maybe a little better on the margins given what's already on visibility with the backlog. Then you mentioned some of the manufacturing challenges that could arise, maybe parts of Europe within AWP. But can you help us understand sort of what's in the backlog today when it comes to mix, product type, which channel you're selling to, just so we can better understand particularly why the margins should be lower the rest of the year versus the first quarter. I know you said the second quarter, the number you provided will be better than the first quarter. But I'm talking for the rest of the year, the implied margins are below the first quarter which is a little surprising. So again, is there something in the mix or just conservatism on some manufacturing issues? And then on the '25 order conversation, anything you can help us with on mix. The end markets you just described, are those more big booms, midsized booms? Just trying to get a sense of teles versus aerials. Just trying to set up a little bit of why the margin is lower the rest of the year. And also any thoughts around '25 for mix?

So when we think about the operating margins for the year, we're expecting improvement from year-over-year and we're expecting a 30% incremental margin. So we see margins improving over last year and we see margins improving sequentially in Q2, Q3. And then of course, they come down in Q4 because we have the usual, well, the usual seasonal patterns and lower production days in the fourth quarter. But we're anticipating higher margins and 30% overall incremental through for the year.

Yes, I would say there aren't any significant changes in the backlog that need to be noted. We're returning to more typical seasonal trends where our second and third quarters are likely to be stronger than the fourth quarter due to fewer working days, which historically tends to be weaker. This will reflect in the bottom line as well. Additionally, in the second quarter, we will face some challenges as we ramp up in Monterrey. We do expect progressive improvement, except for the fourth quarter.

For AWP specifically, the rest of the year is implied at 13.6% margins. We just achieved 13.9%. I understand that the fourth quarter can be lower than the first quarter. However, I want to ensure we comprehend this situation fully. There are various risks, especially in Europe, but I am curious if we are missing any logical reasons why the margins for the rest of the year would be lower than in the first quarter, given that those are the implied numbers. I just want to confirm that we understand the base case here.

Yes, thank you. I mean what we would say, David, is that we would have Q2, as Simon mentioned, would be and we mentioned in our remarks would be impacted by more inefficiencies in Monterrey. But really, the first quarter would be a stronger quarter than the fourth quarter, I guess and that would be the only reason. There's nothing else other than some further startup inefficiencies and that's about it. But overall, again, for the AWP, they're going to have incremental margins approaching at 35% for the year.

Our next question comes from Steve Volkmann from Jefferies.

Just a couple of cleanups from me. Julie, have you changed at all your view of the sort of total start-up cost impact on 2024?

We guided to approximately $15 million to $20 million, and it came in slightly better than expected in the first quarter, with an impact of about $5 million. We anticipate this will increase and be higher in the second quarter, as previously mentioned, and then we expect it to decline through the rest of the year, with a greater impact in the first half than in the second half.

But for the full year, kind of that same range that you've been talking about.

Yes, exactly.

Okay. And then I had a question on the utilities business as well because if I remember correctly, that had some very kind of specific and I think significant margin headwinds through the COVID interruptions in supply chain and so forth. So I'm just curious if you can sort of bring us up to date. How are margins in that utility business now? Is there still sort of meaningful upside as we go forward? Just how to think about that?

Yes, we had a challenging third quarter last year. However, since we reorganized the teams, they have continued to make progress. We are actually very satisfied with the team's performance in the first quarter.

Yes. In the third quarter, as Simon pointed out, we faced a significant supplier quality issue that affected us, but we have since recovered. We anticipate some improvement in that business moving forward. However, there are still supply chain disruptions related to bodies and chassis, but we expect further progress. As Simon noted earlier, we believe this business holds great potential and we are optimistic about its portfolio.

It's still functional supply, but the challenge is that there are significant fluctuations with custom bodies and truck chassis. We believed we had resolved the issues with truck chassis, but they resurfaced. There are also uncontrollable factors at play.

Our next question comes from Nicole DeBlase from Deutsche Bank.

Maybe just first, you raised the EPS guidance for the full year but left free cash flow as is. Is it just early in the year to be raising the free cash commitment? Is it more working capital investment? Can we just discuss that?

Yes, I agree with you, Nicole. We maintained our ranges earlier in the year. We do anticipate that inventory levels will decrease throughout the year, which will enhance our working capital management. As we noted, we tend to carry more inventory in the first quarter to support the higher sales volumes expected in the second and third quarters. Right now, our inventory is higher due to production shifts. However, we expect inventory levels to decline, turning net working capital into a source of cash for us this year. We also foresee cash flow improving gradually throughout the year, aligning more with our traditional seasonality patterns, starting with the use of free cash flow in the first quarter and improving further as the year progresses.

Got it. And then I guess, can we just hear a little bit more about what you guys are seeing in Europe. This has been definitely a trend that we've heard from multiple companies. So it's not particularly surprising. But just would you say things are like getting worse, just kind of bouncing along the bottom, it would be really helpful if you could characterize what you're seeing there.

Yes. The bright spot for us in that region, when considering the broader area, is the Middle East. However, we are facing challenges in Germany, the U.K., and France. Both the U.K. and Germany appear to be edging toward what might be considered a technical recession. I haven't checked their latest GDP figures, but we believe the U.K. might recover a bit sooner than Germany since Germany heavily relies on exports. Our current outlook suggests that the situation in the U.K. and Germany won't deteriorate further. Those two markets are the ones that concern us the most.

Our next question comes from Tami Zakaria from JPMorgan.

So could you comment on the inventory in the channel for MP. I think I remember you expected some destocking in the first quarter. Is that largely done?

Thank you, Tami. Yes, that's largely done. Our dealer inventories are at appropriate levels. It's an interesting situation because, as backlogs have decreased, particularly with Fuchs where demand fell due to scrap prices, we needed to make some supply adjustments. Those adjustments are mostly completed now. From the perspective of dealer inventory and pipeline, we believe we are in a good position moving forward.

Our next question comes from Jerry Revich from Goldman Sachs.

Simon, in your prepared remarks, you spoke about the company's opportunity in leveraging digital and technology advancement. Can you just expand on that? What are the opportunities with your telematics offerings and elsewhere, what exactly, if you don't mind flushing out for us, what exactly you have in mind in terms of the most significant opportunities for you folks, given the existing installed base telematics and any other developments you're focused on?

Thank you. I see both external and internal opportunities for us. Externally, beyond what we currently incorporate into our products, I mentioned hybrid solutions and our first all-electric bucket truck. We've also made some long-term technology investments in Acculon and Apptronik, which we announced last year. We are particularly excited about the Acculon investment as it will allow us to control a key EV supply chain. Our enthusiasm for Apptronik stems from its potential to represent the next generation of robotics, which we can implement not only in aerials but also in other areas within Terex. These long-term technology investments are as promising as our current initiatives. Internally, we view AI as a significant opportunity to enhance efficiency, boost productivity, and facilitate real-time decision-making. By integrating AI, we can manage supply and demand in real time. We're eager to leverage these opportunities both externally and internally. Ultimately, we see them as significant prospects for our growth.

Okay. And then lastly, can I ask you to please comment on what you're seeing in terms of the telematics data for booms in North America in terms of where year-over-year utilization stands. It looks like used equipment inventories are rising off of a really low base but I'm wondering what the utilization data shows, if you'd be willing to share it, please?

Yes, there is a strong connection between our customers' feedback and the data we are observing. When I referred to leading indicators earlier, this is one of the crucial ones we monitor. We assess telematics to understand the fleet's utilization, and our customers are consistently reporting high utilization, which is supported by the telematics data. This is primarily relevant to North America, where we see higher usage levels. In Europe, however, the utilization is lower, which is also echoed by our customers' input. Thus, the telematics data aligns with the high usage we are experiencing in North America.

Our next question comes from Steve Barger from KeyBanc Capital Markets.

I just want to look forward a little bit to accelerating profitable growth on Slide 9. When the team modeled out opportunities in megatrends, emerging technologies and outgrowth initiatives, what's the range of organic growth you envision in the next 3 to 5 years?

Yes. So for now, we're still sticking to our Investors Day targets, Steve. So we have a commitment of $6 billion. We're ahead of that trajectory. We're comfortably ahead on both the top and the bottom on $6 billion and 13% to 14% operating margin is the commitment we made. We made that commitment 5 quarters ago. It's a 5-year commitment. We're 5 quarters in. We don't think that we should start talking about raising that kind of commitment because we would like to have a few more quarters under our belts before we reassess where we want to be in 2027 and beyond.

Yes. That was really the motivation for the question. You only need a 3.5% CAGR, if you hit the high end of your guidance range this year to get to $6 billion. So I guess if you have to frame it up from a growth perspective, is that what you expect? Or is $6 billion too low? Or when do you think you might update that?

Well, everything else equal, I mean, obviously, you could argue that we're probably in a comfortable place to beat that expectation. But there are more variables at play in. As I said, we would like to get a few more quarters under our belt before we start looking at changing our longer-term outlook.

Given that Terex is a product company, when considering large projects like semiconductor fabrication plants, electric vehicle manufacturing facilities, and renewable energy initiatives, is there potential to create a new machine tailored for specific markets, or is it primarily about enhancing existing machines? Additionally, I don't want to diminish its importance, but how critical are quality and delivery in gaining market share?

We are applying our existing products to new segments, such as the vegetation management business with our Green-Tec offering. This involves leveraging our existing portfolio in new markets. Additionally, we are expanding our recycling portfolio by integrating new technologies into our crushers and shredders, allowing us to reach broader areas in recycling. Our strength in the MP vertical lies in utilizing our existing portfolio effectively, as demonstrated by the double-digit growth margins the MP business has achieved consistently over the past seven to eight years. A significant factor in this success has been finding new use cases for our portfolio.

Our last question today will come from Angel Castillo from Morgan Stanley.

Going back to the first quarter performance, you mentioned stronger throughput. I wanted to get an update on hospital inventories and their current status. It seems like there may have been some improvement throughout the quarter. Could you provide more details about that and also touch on the supply chain? Additionally, with better throughput and stronger deliveries in the first quarter, it sounds like public rental companies are taking deliveries at a more normal pace. Was this trend more influenced by independent customers in the first quarter, or what are you observing regarding customer mix and the delivery of stronger throughput?

There's a lot to discuss. Our customer mix generally remains stable over time, although there can be fluctuations in any given quarter. However, I don't believe the customer mix affected the number of deliveries in the first quarter. We are returning to more typical seasonal patterns, where larger national accounts typically place orders in the second and third quarters. Previously, due to resource constraints, they would take equipment whenever we could produce it. Now, as the supply chain improves, we're going back to normal delivery patterns. Regarding margins in the first quarter, the improved supply chain allowed us to secure labor at our Washington state and Monterrey facilities, which increased manufacturing output and positively impacted margins. We still have some inventory challenges and product issues that vary, but the supply chain has significantly improved compared to a year ago.

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

Thank you, operator. If you have any additional questions, please follow up with Julie or Neil. And with that, thank you very much for your interest in Terex. Operator, please disconnect the call.

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