Operator
Greetings and welcome to the Carex First Quarter 2025 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. And it is now my pleasure to introduce your host, Derek Everett, Vice President, Investor Relations. Please go ahead.
Good morning, and welcome to the Tarex First Quarter 2025 Earnings Conference Call. A copy of the press release and presentation slides are posted on our investor relations website at investors.tarex.com. In addition, the replay and slide presentation will be available on our website. We are joined today by Simon Meester, President and Chief Executive Officer, and Jennifer Kahn, Senior Vice President and Chief Financial Officer. Their prepared remarks will be followed by a Q&A. Please turn to slide two of the presentation, which reflects our safe harbor statement. Today's conference call contains forward-looking statements which are subject to 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 inner reports filed with the SEC. On this call, we will be discussing non-GAAP financial information, including adjusted figures that we believe are useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures can be found in the conference call materials. Please turn to slide three, and I'll turn it over to Simon Mieser.
Thanks, Derek, and good morning. I would like to welcome everyone to our earnings call and appreciate your interest in Terex. A fundamental part of our journey to becoming a world-class operating company is achieving world-class safety performance. I want to thank our global team members for their ongoing commitment to safety and our character's values. As we grow and transform our company, our values will continue to include keeping each other safe, treating each other with respect and dignity, and being stewards of our environment and our community. Turning to slide slide four. Our overall Q1 financial performance exceeded our initial outlook. We delivered earnings per share of 83 cents on sales of $1.2 billion and return on invested capital of 15%. Aerials and MP operating margins were impacted by production cuts in the past two quarters that exceeded the decline in sales for that period. Those actions were necessary to manage inventory and rebalance supply with demand. The impact is largely behind us, and we expect to see margins improve in Q2. Environmental solutions, which includes ESG and Terix utilities, accounted for one-third of our global sales in the quarter and earned 19.4% operating margin, strong execution by our ES team. looking ahead in the current environment it's difficult to predict where we're going to land in terms of tariffs is that we have been proactive in terms of forward placing inventory and are like everyone else working around the clock to mitigate what is currently right in front of us we are maintaining our full year eps outlook of four dollars and seventy cents to five dollars and ten sense including the assumed impact of the recently announced tariffs fully realizing that things can change fast for our full year sales outlook we continue to expect lower year-over-year sales in aerials and mp in line with our previous 2025 outlook and slightly better growth in environmental solutions moving to slide five adding esg makes tariffs a more u.s-centric company which is obviously helping in the current environment. Approximately 75% of our 2025 U.S. machines are to be generated by products that we produce in at least one of our 11 U.S. manufacturing facilities. Environmental Solutions' full line of refuse collection vehicles, utility vehicles, compactors, and digital solutions are all designed and made in America. Gini manufactures the vast majority of the boons and scissors sold in the U.S. in Washington State, representing about 70% of its U.S. sales. Cell handlers and other products manufactured in Monterrey, Mexico, totaling approximately 20% of its U.S. sales, qualify on the U.S. MCA trade agreement and are currently exempted from the recently announced tariffs. Materials processing has our most globally diverse footprint. Approximately 40% of the segment's 2025 U.S. sales, including cement mixers and certain environmental and aggregate products, are made in the United States. It is important to note that our primary aggregate product lines are produced in Northern Ireland, which is part of the United Kingdom, and not expected to be the target of long-term trade action. In total, about 85% of MPs' 2025 U.S. sales are generated by products made in the U.S. or the U.K. Cranes and material handlers manufactured in the European Union represent less than 10% of MPs' U.S. sales. Like other industrial companies, we have a global supply base and exposed to tariffs on imported material. a key element of our tariff mitigation plan was working closely with our global suppliers to absorb the added cost and forward-place inventory to buffer the impact we are leveraging our global sourcing capabilities to rebalance supply to more favorable sources among other actions we will work to mitigate as much cost inflation as we can to limit the burden on our customers. That said, the cornerstone of our pricing strategy will continue to be maintaining price costs, continuing to pay six. Our portfolio of businesses compete across an attractive and diverse set of end markets. Waste and recycling, which represents approximately 25% of our global revenue, is characterized by low cyclicality and steady growth. About 20% of our business is related to infrastructure, where significant investment continues to be put in place in the United States and around the world. Utilities is about 10% and growing due to the need to expand and strengthen the power grid. These three markets, representing more than half of our revenue, are highly resilient and less exposed for geopolitical dynamics than any other area. General construction, which in the past had represented the majority of our end markets, is now less than a third. Mega projects and publicly funded demand remains healthy while private sector demand is cautious. In Europe, we continue to see a generally weak economic environment in the near term, with a more encouraging outlook for infrastructure and related spending growth in the medium to longer term. We also remain encouraged by increasing adoption of our products in emerging markets such as India, Southeast Asia, the Middle East, and Latin America. Please turn to slide seven. We continue to implement our updated execute, innovate, and grow strategy. Integrating ESG into Terex is on track and we fully expect to deliver more than 25 million in operational run rate synergies by the end of 2020. We are leveraging ESG's expertise to improve throughput and increase capacity for certain utilities product lines that have backlogs stretching into 2027, a clear demonstration of synergy within our ES segment. We continue to evaluate our global footprint, focusing on opportunities to reduce fixed costs while improving operational performance, efficiency, and flexibility. When it comes to innovation, we have an exciting new product development pipeline focused on maximizing return on investment for our customers, and we are expanding our suite of digital solutions. We are investing in robotics, automation, and digitizing work streams for the benefit of our customers and to make our operations more flexible and efficient at the same time. Turning to growth, completing the ESG acquisition was a significant step forward. We fully expect organic growth in that business to continue, driven by demographics, product technology adoption, share gains, and further penetration of our digital solutions. our aerials and mp businesses continue to execute their growth strategy by accelerating adoption and exploring new channels and markets overall we have a 40 billion dollar addressable market with significant upside for our businesses going to slide eight at the core of our product development process is working with our customers to develop solutions that address their challenges and capitalize on their opportunities. A great example is ESG's Third Eye digital suite of onboard applications for waste collection vehicles. In addition to revenue generation and operating efficiency applications, Third Eye helps our customers improve. The middle picture is a great shot from atop a Genie Superboom at a recent PGA event. We see growth in sports and entertainment applications as Genie products provide safe, stable, and flexible solutions. The image on the right is our new CBI wood chipper. The CBI team worked with their customers to design a machine with exceptional performance and industry-leading ease of maintenance. CBI is part of our MP environmental vertical, providing solutions to the growing biomass, wood processing, and vegetation management sectors. Each of these examples demonstrate the strength and leverage of the TRX portfolio to maximize ROI for our customers. And with that, I'll turn it over to Jen.
Thank you, Simon, and good morning, everyone. Let's look at our Q1 financial results on slide 9. Protonet sales of 1.2 billion were 4.9% lower than prior year, or negative 3.6% at constant exchange rates. Excluding ESG, our organic sales declined by 25% year-over-year in line with our expectations, driven by continued channel adjustments coupled with timing of our backlog conversion. Our book-to-build was 124%, demonstrating a second consecutive quarter of book-to-build above 100%, and our backlog remains strong at $2.6 billion, up 13% sequentially. ES delivered a strong quarter, representing one-third of Tyrex sales, confirming Simon's point that we are becoming a more resilient and less cyclical company. Our operating margin was at 9.1%, 350 basis points lower than prior year. This was slightly better than anticipated due to strong performance in ES. I do want to mention that while our Q1 operating margin was lower than prior year, it was 130 basis points sequential improvement versus Q424 on similar volume. Excluding ESG, our organic operating margin declined by 760 basis points. Approximately 75% of the organic margin declined is driven by volume, with the remaining 25% margin declined driven by unfavorable absorption, partially offset by $20 million of SG&A reduction and cost productivity. Interests and other expenses were $41 million, $26 million higher than last year due to interest on ESG acquisition financing. The first quarter effective tax rate was 21%, slightly higher than prior year. EPS for the quarter was $0.83 and EBITDA was $128 million. It is important to note the impact of factory underabsorption associated with the production rate takedowns in areas and MPs was approximately $0.31 per share in T1. Pre-cash flow improved compared to Q1 last year due to better working capital performance despite lower earnings. Please turn to slide 10 to review our second results, starting with Arians. Sales of $415 million were consistent with our expectations. Approximately half of the sales were generated in March, as our rental customers began to ramp up their delivery, heading into the seasonally higher construction period. That pattern is continuing into Q2. Operating margin of 3% was down from last year, but slightly higher sequentially. Half of the margin deterioration was driven by lower sales, while the remaining was due to under-absorption from the production cuts that are largely behind us. We expect areas to return to double-digit operating margins in the second quarter as we ramp up production in line with seasonal demand. Turning to Spike 11, MP sales of $382 million were in line with our 2025 planning. We continue to see a high fleet utilization rate in the United States. Quotation activity across our Delaware network is positive, with Delaware stock levels declining, However, MAC-1 certainty and higher interest rates remain a hitwind for rent-to-own conversions, and the European market remains weak. Our concrete business delivered a solid Q1 with improved margins driven by new customers. Despite lower volume and unfavorable absorption in the quarter, MP was able to maintain double-digit margins due to cost reduction actions, including reducing SG&A by 12% of $6 million as compared to last year. We expect Q1 to be the lowest margin quarter for MP as we anticipate sequential improvements over the course of the year. Please turn to slide 12 to review environmental solutions. Our ES segment had an actual encoder, generating approximately $400 million in bills, which represents a third of our total tarot bills in Q1. As Simon mentioned, ESG achieved record throughput resulting in record bills. Q1 shipments from HUD were certainly higher than prior. year. Operating margin for ES was 19.4%, which included consistent year-over-year margin performance in PARCC utilities and meaningful improvements at ESG. On a pro forma basis, this translates to a year-over-year 420 basis point margin improvement when we include ESG in Q1 2024 baseline. We expect margins to remain strong going forward but slightly moderating from their Q1 level. I look forward to consistent strong performance from this segment. Please turn to slide 13. We continue to maintain strong liquidity and a flexible capital structure with the right mix of secure and unsecured debt and variable versus fixed rates. As stated previously we can prepay or reprise a certain portion of the debt and we do not have any maturities until 2029. we ended q1 2025 with 1.1 billion of liquidity consistent with our outlook we plan to deliver it in second half of the year as we generate increased cash flow from operations we will also continue to invest in our businesses fueling organic growth and and profitability improvements. In Q1, we reported a return on invested capital of 15%, well above our cost of capital. Returning capital to shareholders remain a priority. In the first quarter, we repurchased 32 million of carrot stocks and paid 11 million dividends. We will continue to take advantage of market conditions to repurchase shares at favorable price levels. Parix is in a strong financial position to continue investing in our business and executing our strategic initiatives, while returning capital to shareholders. Turning to bookings and backlogs on slide 14. Our bookings and backlog trends have returned to seasonal patterns supported by strong bookings in ARIS in the first quarter. Our current backlog of $2.6 billion is up $300 million, or 13% higher than prior quarter, as you can see in the backlog chart in the appendix. It is consistent with seasonal historical levels and supportive of our outlook. We continue to see strong errors booked to build of 144% in the quarter, predominantly driven by replacement demand. MP's backlog increased 33% sequentially and is in line with pre-COVID nobs. MP has returned to its traditional book-to-build with approximately 3 months of backlog. Environmental Solutions backlog of $1.1 billion continues to demonstrate strong demand in both ESG and tax utilities. Now turn to slide 15 for our 2025 outlook. We are operating in a complex environment with many macroeconomic variables and geopolitical uncertainties, and results could change negatively or positively. Our outlook assumes approximately 40 cents of net Paris impact, which includes easing of the current rate. We continue to expect full-year 2025 shows up between 5.3 and 5.5 billion, representing between 200 to 400 million higher sales than prior year as the ESG acquisition more than offset 8 to 12 percent lower organic sales consistent with our previous outlooks. We continue to expect segment operating margin of approximately 12 percent resulting from the plan improvements in areas and MPs, continued strong performance in ES, and ongoing actions to largely mitigate the impact of tariffs. We also continue to expect interest in other expenses of about $175 million, an effective tax rate of 20%. As a result, we are maintaining a full-year EPS outlook of 470 to 510. From the quarterly EPS perspective, we still expect Q2 and Q3 to be stronger than Q1 in Q4. We continue to expect a significant increase in free cash flow compared to 2024, anticipating between $300 million and $350 million in 2025 driven by working capital reduction and a full year of ESG cash generation while continuing to invest in our business with expected capex of approximately $120 million. Looking at our segments, we're maintaining our ARIOS and MP sales expectations and increasing our sales outlook for ES. In ARIOS, we have planned conservatively with the assumption that our rental customers are primarily deploying replacement capex this year. Our booking, actual deliveries, and ongoing discussions continue to give us confidence in the ARIOS outlook of down low double digits. We expect ARIOS to return to double-digit margins in Q2 including the impact of tariffs. In MP, our backlog coverage as well as the underlying machine utilization rates, part consumption, and productivity continue to give us confidence in our downed high single digit outlook for the year. We expect MPs to achieve full year decremented margins well within our 25 percent target. EF had a great first quarter and we're increasing our four-year outlook of sales up high single digits. And with that, I'll turn it back to Simon.
Thanks, Jen. I will now turn to slide 16. Terex is well-positioned to navigate the current dynamic environment and deliver long-term value to our shareholders. We have a strong, more synergistic portfolio of industry-leading businesses across a diverse landscape of industrial segments with attractive end markets. We will improve our through-cycle financial performance as we integrate ESG and realize synergies across the company. As always, I want to close by thanking our team members around the world. We have embarked on the exciting path forward, building and growing a new terrace. And with that, I would like to open it up for questions. Operator?
Operator
Thank you. Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. And if you'd like to withdraw that question, simply press star one again. We also ask that you limit yourself to one question and one follow-up. Your first question comes from the line of Jerry Rivage with Goldman Sachs. Please go ahead.
Yes, hi. Good morning, everyone.
Good morning. I was really impressed by the ES margin improvement in the quarter. I'm wondering if we could just expand on the comments you made, Jennifer, on the margin outlook in coming quarters. Looks like you were right about 17% margins for most of last year. If that's the cadence for this year, it looks like operating profit for the business would be up over 30%. so I just want to make sure I understand the moving pieces within that and drivers of the really strong margin performance in the first quarter.
Sure. Good morning, Jerry. So a strong Q1 ES performance is driven by three factors. That's, of course, the 6% of sequential increase in sales from Q4 to Q1 on a pro forma basis. And second, we did like what Simon mentioned, we had a record q1 in terms of throughput so that actually drove very favorable factory absorption in emg um and in and also we also had some integration synergies um realizing in q1 as we go into the remaining of the three quarters we see that moderating back to the normalized rate mainly because we are we don't see that the um there were some expenses that we will be incurring to ram up the production and to support some of our one-off expansion as well.
Yeah, we had a couple of one-off items in the first quarter that we don't think repeat in the next three quarters.
So we did have a really good quarter.
Well done. And then just to shift gears, Simon, I appreciate the comments you made about maintaining price-cost neutrality. Can you just talk about how you're handling orders that you folks are booking today? is there a surcharge mechanism in place? And, you know, I saw the guidance comments spoke about the assumption around where tariffs move going forward. Can you just expand on those assumptions and if tariffs are worse, how is what's pricing backlog going to play out to maintain price cost neutrality?
Yeah. Yeah. Thanks for the question. Obviously, you know, we're in a very dynamic environment and things change all the time and it's difficult with what will happen in the next couple of months and um we laid out some assumptions that we are operating by but obviously um you know we we are in full mitigation mode actually we have been in full mitigation mode for quite some time because as early as late last year beginning of this year we started pulling forward um material so we we have a little bit we bought ourselves a little bit of time there and material and and finished goods we also started to pull back on discretionary spend um and now the priority is is fully on mitigating uh you know the net the the tariff impact through our supply chain and exploring alternatives um we're kind of pausing on the on the longer term actions just to see things stabilize first but then obviously to your point pricing is is one of the levers as well um and um we have we have taken uh some some surcharges in certain areas uh already but you know the price cost dynamics are very different by business by segment even by vertical because you need to put it in the context obviously of how much we can mitigate by business by segment what our competitive position is or market conditions and so on and so forth. But overall, our strategy is to maintain that price cost neutrality and where price is one of our levers to pull. But the priority for now is to mitigate through supply chain. Thank you.
Operator
Your next question comes from the line of Jamie Cook with Truist Securities. Please go ahead.
Hi, good morning and congratulations on a nice you know, start to the year. Just want to understand, I guess, Jennifer, the puts and takes of the guidance. Obviously, we beat the first quarter, but I think you said you're going to have a 40-cent headwind related to tariffs. So, if you can just walk us through, and I guess maybe ES is a little better, but just the puts and takes of how we're maintaining the guide, given the different dynamics there. And then, I guess, my second question is not what we know about tariffs today and where you're manufacturing your products? Because it looks like a lot of your products are manufactured in the U.S., which is just wondering if there's a market share or competitive advantage for tariffs in certain product lines or segments. And if so, could you just highlight where that could be? Just wondering if there's a market share or outperformance story here. Thank you.
Hey, Jamie, you broke up at the beginning of your second question.
Can you repeat um sorry yeah sorry the second question just you know um based on what's going on with tariffs and you're saying you manufacture 75 of your products in america are made in america i'm just wondering if there's certain product lines where you have a competitive advantage because of your manufacturing footprint and if so where that would be so that you could potentially gain market share thanks thank you hey jamie good morning um so i'll take the first question i'll Simon, on to the second question.
So our Q1s, we bid our original outlook by about 30 cents, and that's largely, like you see, driven by ES, and we expect that to flow through the year. And that will offset partially the 40 cents Paris that we're big into our outlook. And then we also offset that by our share count that will actually drive our EPS are higher and also some of our operational efficiencies as you can see we continue to reduce our sgna itself so that actually walks back out how we actually maintain our guide at this point in time yeah and with regards to your question on on market share and product lines we yeah we like our our overall position uh jamie if i break it down by segment starting with environmental solutions.
I mean, it's all made in the United States and sold in the United States. So, obviously, we like our position there. In aerials, 95% of you include USMCA, you know, built in North America, for North America. So, we like our position there. And in materials processing i i don't see any major difference between us or our competitors um in terms of where we're sourcing from uh maybe in the margin a little bit but overall i i don't see i don't see the global footprint uh to be actually i actually think we're at an advantage more so than a disadvantage overall but it would be hard for me to call out a specific product line it would certainly be at an advantage versus, obviously, some of our Asian competitors.
Operator
Your next question comes from the line of David Russell with Evercore ISI. Please go ahead.
Hi, thank you. Two questions. One on the aerial margin progression, 1Q to 2Q, and then the full year thoughts around material processing. For aerials, can you give us some help on how you're viewing your revenue growth? sequentially. I'm just trying to get a sense of what the sequential incremental margin is implied to go from the 3% operating margin in the first quarter to 10%.
Yeah. So obviously we were very pleased with our booked bill in the first quarter. So we're set up to make a nice jump going to Q2. It would be our normal seasonal jump up, David. And so overall, our full year sales outlook is still to be down low double digits, but with a nice ramp up in Q2. I don't think we have actually articulated specifically what the number is, but it's the normal seasonal jump up. And that volume will obviously help us to get back to that double-digit operating margin in aerials that we spoke about in the prepared remarks. And then on MP, yeah, MP has a three-month backlog coverage. We were pleased with our Q1 bookings in MP. But obviously, that's a slightly lower backlog coverage than in aerials. In aerials, we have more than seven months forward visibility. So with MP, the current sales outlook assumes kind of a sequential ramp up. It's not going to be kind of a V-shape versus 2024 but uh you know much more like a u u shape if you will but technically what our outlook is implying is that q1 would be a bottom for mp now that's all all within the context of you know what what's going to play out with tariffs in the remainder of the year and what's that going to do to confidence but inventories are roughly where they need to be our fleet is being used in mp in aerials. And some of that fleet starts to age now in MPs. So we're looking at a potential compounded replacement effect there as well. But the current assumption is a very gradual ramp by quarter in the MP sales outlook.
Thank you. I wanted to ask an MP question. I'm so sorry. I wanted to follow up on the 1Q to 2Q margin comment for aerials. When you say the normal ramp, obviously, utilities pulled out, right? So I can go back and restate, obviously, some of the years. But are we saying about a 20% to 25% sequential on revenue, roughly? When you say normal, how do you define normal in the new aerial segment with utility? Just so I'm clear.
Yeah, I'll let Jen chime in on the margins.
But if you think about what we said in the opening remarks is that half of our Q1 revenue was booked in March. you just draw that forward to this kind of the ramp up for q2 right hey david good morning um so in terms of like walking from q1 to q2 on the double digit margins we mentioned earlier that um in q1 we had about 550 basis points of impact and margin due to the deliberate production cuts that we took so if you add that that will not repeat again in q2 and then on top of that the step up and volume that will get us to the double digits.
And the idea of maybe some landed product, I'm trying to get a sense of the tariff impact on 2Q. Is it fairly light on aerials, particularly given another manufacturing base is already helpful? But, you know, the idea, you sort of seem to get ahead of the curve a bit on steel and a variety of things. I'm just trying to get a sense of the things that can make that easier. And as you said, underabsorption is reduced. You have some volume sequential. And then on price cost, it seemed like, if I remember correctly, you got a bit ahead on some of the cost issues, too. Just to gain more comfort, because obviously that's a big driver, the sequential EPS 1Q to 2Q.
Right. Yeah, I mean, it's a great question. When it comes to the net tariff impact, we spoke about $0.40 in the prepared remarks. That is mostly going to be on raw material imported from China, and it's mostly impacting aerials, and it's mostly in Q3, although some of it will hit Q2 and some of it will hit Q4. It's important to know what our assumptions are on the 40 cents, and that's that we're not assuming a dramatic change in any of the other tariffs other than the de-escalation of the China tariffs. So we baked in some sort of conservative continuation on the tariffs of the rest of the world, but we do expect a de-escalation of the China tariffs to kick in in the next month or two. That's what that $0.40 is baked on. And then obviously that USMCA qualified goods continue to remain tariff-free. That's baked into that $0.40. sense. But to answer your question directly, we do think we have line of sight to get back to double digits in aerials in Q2. We might just get there in Q3, maybe high single digits in aerials for Q3, and then back to normal decrementals in Q4. That's kind of the walk for aerials.
I appreciate that. That's what I was thinking. The idea you have enough cost, land it for 2Q, you get some volume ramp. The tariff issues look more of a back half story for aerials, but maybe that gives you a little bit of time to try to push price where you can and mitigate in other ways. Okay, I got it. I really appreciate it. Thank you.
Operator
Your next question comes from the line of Meg Dolbray with Baird. Please go ahead.
Thank you. Appreciate all the good color on what's baked into this 40 cent. But one thing that I guess I did not hear you talk about is any tariff on the UK. Now, I don't know if I have my facts straight here, but that reciprocal tariff of 10%, I guess it's there. And I'm wondering how that impacts MP and what's baked in at this point.
Yeah, I mean, it's a fair question. As I mentioned earlier, our focus is to first and foremost offset this through our supply chain and explore alternatives. So that's the lion's share of the 40 cents is just basically raw material on China. So then there are obviously also some finished goods tariffs that we're dealing with. And, you know, we're trying to absorb as much as we can to basically not burden our customers. But yeah, surcharges and pricing is one of the levers that we'll pull if we have to, if we can't find the mitigation.
Just to be clear, are you raising the price on MPN?
This is basically the offset or is this in fact just not factored into the 40 cents at this point i'm not i'm i i wasn't giving a specific comment on what we're actually doing because uh we um we just want to we just want to highlight the you know the difference in in price cost dynamics by business so i i'm not comfortable in actually going to into specific detail what we do for each business makes.
Very well. And then my last question is on ES. Really good margin performance here. I guess, you know, going back to the way this business, I recall performing under previous ownership some years back, the margin profile here is quite a bit better than what used to be here historically. Now that you're the owner of this asset and you're kind of looking into what has happened from a cost perspective and margin perspective, how sustainable do you think current margins are beyond maybe 2025? Is there something unique in the price-cost dynamic or anything else that investors need to be aware of as they think maybe two to three years out? Thank you.
Hi, good morning. So, yes, like what you saw, what we disclosed in the pro format, so you did see a big improvement in ES margin throughout the years. And we also mentioned that the synergies just now um simon mentioned 25 million largely that's analyzed for 2026 so that you would see that too into our profitability increasing however right now the q1 is our record throughput we would definitely need to make some investment to keep on continuing up and catching up with the demand our backlog is really strong in es with about eight months and we're a good set up for a good start for the year. But we'll expect that the synergies that come to you in 2026 that will further improve the margin profile as well.
Operator
Your next question comes from the line of Tammy Zakaria with JPMorgan. Please go ahead.
Hey, good morning. Thank you so much and very good results. So I wanted to follow up on that 40 cents comment. And is that assuming China tariffs stay at the 145% or what rate is assumed for China to get to that 40 cent? Because I think in the presentation you mentioned you expect some easing of tariffs. So I just wanted to clarify.
Yeah, thanks for the question, Tammy. Yeah, so what is included in the 40 cent assumption is that there will be some level of easing on particularly the China tariffs to the tune of roughly 50% of where it is today. So we don't expect it to go all the way to zero, but there would be a significant de-escalation happening in the next month or two.
Understood. That's very helpful. And then my second question is on MP, or broadly for Europe. I think there was a stimulus package that was passed for Germany. How big is Germany for you and any thoughts on which end markets could benefit from a package like that and how that relates to your portfolio, especially MP, that might benefit in the coming quarters or even years?
Yeah, great question. We were at the Balna Trade Show a couple of weeks ago, and it was talking to customers and talking to dealers and partners. It was the first time that we really started to hear some positive news coming out of me, to be very honest. And, yeah, that will definitely have a favorable impact, which, by the way, is not baked into our sales outlook for now, because we think it will mostly start to kick in for us in 2026. but it would directly benefit our material handling business, which is very Germany-dependent. It would favorably impact aerials, and it would favorably impact MPs' aggregate business. And the German economy, as you know very well, obviously being very important as part of the greater EU economy. So that was an encouraging bit of news that came out. So we're...
Operator
Your next question comes from the line of Tim Fien with Raymond James. Please go ahead.
Great. Thank you. Good morning. I'll just pack the two questions together. The first is, on the ES performance in the corridor, I'm curious if there were any uh purchase price adjustments that were included in the in the quarter uh and then the second question just is on on operating costs and that separate from the um the tariff discussion just just curious how uh you are i believe hedged uh uh from a steel perspective for the year obviously that that's just in north america but maybe just a discussion regarding uh general operating costs just in light of some of the fluctuations in commodity markets, how you're thinking about the balance of the year. Thank you.
Yeah, there was no, I'll take the first and then I'll ask Jen to take the steel hedge question. Yeah, there was no specific pricing action for the first quarter other than what was part of the normal annual negotiations that drove that overperformance in Q1 for ES. It was predominantly just execution. Execution drove the overdrive, and there were a couple of one-off orders that we were able to fill in the first quarter that gave us the upside. It wasn't driven by any surcharge or anything.
Jen, you want to take the steelhead question? I'm sorry, I wasn't clear on that. I meant if there was an accounting adjustment, like a purchase price adjustment related to the merge accounting. I'll add that on to Jen as well.
So, hi, Gabrani. So, yes, we have about $10 million purchase price adjustment in ES, just as typical based on the acquisition accounting. And so, with regards to your second question on the still, we do not have any material impact from still inflation because, first of all, we do not import any raw stills. And then about 70% of what we use is HRC, and we also have 50% of that hatch at a very favorable rate. So the imported spilling pre-fiberated parts are already part of our 40 cents, and the others are not material.
Operator
Thanks. Your next question comes from the line of Kyle Menges with Citigroup. Please go ahead.
Thank you. It sounds like you guys are now expecting the ESG synergies to come in a little bit more than that 25 million target. So we'd just love to hear what's giving you confidence in that and just where so far synergies are looking to be a little bit better than expected.
Yeah, thank you for picking up on that. That is correct. And we just go by our pipeline of projects, which is going really well. So we're just very, very pleased with what ESG is already doing in terms of within its own segment, within environmental solutions and the synergies that it brings with the Terex utility business, but also what it brings with other parts of Terex. it's really unlocking the full Terex portfolio. And we see synergies everywhere we look. And we have adjusted our pipeline for probability, for execution, for risk. So it's not that we are counting ourselves rich here. And so we're confident with our line of sight to exceed that $25 million run rate by the end of 2026. Going really well.
And then just a second question on the Monterey facility, just how are you thinking about production shifts from the U.S. to Monterey? Assuming that you've kind of paused that for now. And then just how are you thinking about looking at alternative sources into that Monterey facility just in the supply chain? And sorry if I misheard, but I thought you guys had said that only 20% of the products from the Monterey facility are USMCA compliant.
Sorry if I misheard that, but just if you could comment. on that as well no we said that 20 um if you include um the usmca uh source uh that would fall under the usmca um would would get us to 90 of what we sell uh in um in north america comes out in north america um the uh so yeah the monterey facility so obviously in the current environment We're not going to take any drastic long-term action until we see things stabilize first. So we have been kind of pacing ourselves a little bit on our product moves. You know, we're very happy with our Monterey facility because it's a world-class, state-of-the-art facility, and it's a very competitive facility. So that's another tool that we have in the toolbox to leverage and gives us optionality that once we see things stabilize, that we can leverage that facility more than what we do today. But, yeah, at the moment, we're kind of taking a breather to see where things are going to pan out over the next couple of months.
Operator
Your next question comes from the line of Angel Castillo with Morgan Stanley. Please go ahead.
Good morning and thanks for taking my question. I was hoping you could put a little bit of a finer point on the ES segment and just the margin moderation that you expect in 2Q and as we think about the progression of maybe tariffs as we get maybe toward the back half of the year, if you could just fold that in along with maybe greater success on the synergies as well as maybe sizing the one-offs that you mentioned would be helpful.
Hi. So, yes, when I say that it's moderating in Q2 and throughout the rest of the year, like what I mentioned, there are some one-off good guys that we took in Q1. We had a record output in Q1 that actually drove up the factory adoption really favorably. And we do not think that that would sustain itself till the end of the year. Second, in terms of when I say one-off, there are also one-off expenses that will be incurring for the next nine months that we're actually to drive up and support the volume growth that we will to support the backlog conversion as well. And then when I mentioned the synergies, we did see a piece of the synergies coming through in Q1, but not mature enough. Like what Simon mentioned, we expect the annualized 25 million synergies to come to in 2026.
Got it. That's helpful. And then maybe just on, I wanted to go back to MP. I think this was the first quarter where you saw backlog growth since maybe kind of 2022. And I know that that's been normalizing, but just curious if there's anything specific, maybe even related to what you were talking about with Germany or more broadly, any step change in that business that gives you maybe confidence that we've found about them and maybe can even grow from here or just how should we read that improvement in the backlog and what you're hearing from customers?
Yeah, I wouldn't say that it's coming from Germany. it's so we are at a three months backlog which is our kind of normal season from a historic standpoint our normal backlog coverage and so yeah dealer inventories have been largely adjusted this has been historically a book to build business so in that regard it's it's a pretty normal pattern and q1 bookings did come in you know favorably year over year so we were pleased with that because you know quite frankly that the fleet in north america and that's what driving probably most of the upside uh is uh the fleet utilization is still healthy fleets starting to age and there is uh there is work there's pull through from mega projects from infrastructure projects the smaller projects are are still kind of sluggish so to say but what we're seeing is mostly that North America is ready for that replacement demand. Now, having said that, we also obviously are cautious that the tariff talk doesn't become some sort of self-fulfilling prophecy and will start to eat into confidence. So we'll have to see how that's going to pan out in the next couple of months. But the current outlook assumes that there will be a gradual, slow recovery in MP and mostly driven by North America and driven by replacement demand.
So just to be clear, that assumption is embedded in the 2025 cadence. Got it. Thank you.
Operator
And that concludes our question and answer session. And I will now turn the conference back over to Simon Meester for closing comments.
Thank you, operator. If you have any additional questions, please follow up with Jen and Derek. Thank you for your interest in Terex. And with that, operator, please disconnect the call.
Operator
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.
