Terex Corp Q1 FY2025 Earnings Call

Good morning, and welcome to the Terex first quarter 2025 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 today by Simon Meester, President and Chief Executive Officer; and Jennifer Kong, Senior Vice President and Chief Financial Officer. Their prepared remarks will be followed by a 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. 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 3, and I'll turn it over to Simon Meester.

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 Terex 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 4. Our overall Q1 financial performance exceeded our initial outlook. We delivered earnings per share of $0.83 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 Terex Utilities, accounted for one-third of our global sales in the quarter and earned a 19.4% operating margin thanks to 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. The good news is that we have been proactive in terms of forward-placing inventory. Like everyone else, we are working around the clock to mitigate what is currently right in front of us. We are maintaining our full-year EPS outlook of $4.70 to $5.10, 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 low year-over-year sales in Aerials and MP in line with our previous 2025 outlook, with slightly better growth in Environmental Solutions. Moving to Slide 5. And in ESG makes Terex a more U.S.-centric company, which is obviously benefiting us in the current environment. Approximately 75% of our 2025 U.S. machine sales are expected 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, contractors, and digital solutions are all designed and made in America. Genie manufactures the vast majority of the booms and scissors sold in the U.S. in Washington State, representing about 70% of its U.S. sales. Telehandlers and other products manufactured in Monterrey, Mexico, totaling approximately 20% of its U.S. sales qualify under the USMCA trade agreement and are currently exempt from the recently announced tariffs. Materials Processing is our most globally diverse footprint, with approximately 40% of the segment’s 2025 U.S. sales, including cement mixers and certain environmental and aggregate products made in the United States. It is important to note that our primary aggregates product lines are produced in Northern Ireland, which is part of the United Kingdom and not expected to be targeted by long-term trade action. In total, about 85% of MP's 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 MP's U.S. sales. Like other industrial companies, we have a global supply base and are 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/cost neutrality.

Thank you, Simon, and good morning, everyone. Let's look at our Q1 financial results on Slide 9. Total net sales of $1.2 billion were 4.9% lower than the 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 the timing of our backlog conversion. Our book-to-bill was 124%, demonstrating a second consecutive quarter of book-to-bill above 100%, and our backlog remains strong at $2.6 billion, up 13% sequentially. ES delivered a strong quarter, representing one-third of Terex sales, confirming Simon's point that we are becoming a more resilient and less cyclical company. Our operating margin was 9.1%, 350 basis points lower than the prior year and slightly better than anticipated due to strong performance in ES. I do want to mention that while our segment operating margin was lower than the prior year, it showed a 130 basis points sequential improvement versus Q4 '24 on similar volume. Excluding ESG, our organic operating margin declined by 760 basis points. Approximately 75% of the organic margin decline was driven by volume with the remaining 25% margin decline driven by unfavorable absorption, partially offset by $20 million of SG&A reduction and cost productivity. Interest 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 the prior year. EPS for the quarter was $0.83 and EBITDA was $128 million. It is important to note that in type of factory under absorption associated with the production rate takedown in Aerials and MP was approximately $0.31 per share in Q1. Free 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 segment results, starting with Aerials. Sales of $450 million were consistent with our expectations. Approximately half of these 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. The operating margin was up 3% but was down from last year, though 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 Aerials to return to double-digit operating margins in the second quarter as we ramp up production in line with seasonal demand.

Turning to Slide 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 dealer network was positive with inventory stock levels declining slowly. However, macro uncertainty and higher interest rates remain a headwind for rent-to-own conversion, and the European market remains weak. Our concrete business delivered a solid Q1 with increased 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% or $6 million as compared to last year. We expect Q1 to be the lowest margin quarter for MP as we anticipate sequential improvement over the course of the year.

Please turn to Slide 12 to review Environmental Solutions. Our ES segment had an excellent quarter, generating approximately $400 million in sales, which represents one-third of our total sales in Q1. As Simon mentioned, ESG achieved record throughput resulting in record sales. Q1 shipments and COGS were higher than the prior year. Operating margins for ES was 19.4%, which included consistent year-over-year margin performance in Terex Utilities and meaningful improvement at ESG. On a pro forma basis, this translates to a year-over-year 420 basis point margin improvement when we include ESG in our 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 secured and unsecured debt and variable versus fixed rate. As stated previously, we can prepay or reprice a certain portion of the debt as 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 deleverage in the 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 profitability improvements. In Q1, we reported a return on invested capital of 15%, well above our cost of capital. Returning capital to shareholders remains a priority. In the first quarter, we repurchased $32 million of Terex stock and paid $11 million in dividends. We will continue to take advantage of market conditions to repurchase shares at favorable price levels. Terex 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 backlog on Slide 14. Our bookings and backlog trends have returned to seasonal patterns supported by strong bookings in Aerials in the first quarter. Our current backlog of $2.6 billion is up $300 million or 13% higher than the prior quarter, consistent with seasonal historical levels and supportive of our outlook. We continue to see a strong Aerials book-to-bill of 144% in the quarter, predominantly driven by replacement demand. MP's backlog increased 33% sequentially and is in line with pre-COVID norms. The Environmental Solutions backlog of $1.1 billion continues to demonstrate strong demand in both ESG and Terex Utilities. Now turning 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 $0.40 of net tariff impact, which includes easing of the current rate. We continue to expect full year 2025 sales of between $5.3 billion and $5.5 billion, representing between $200 million and $400 million higher sales than the prior year as the ESG acquisition more than offsets 8% to 12% lower organic sales, consistent with our previous outlook. We continue to expect segment operating margins of approximately 12%, resulting from the planned improvements in Aerials and MP, continued strong performance in ES, and ongoing actions to largely mitigate the impact of tariffs. We also continue to expect interest and other expenses of about $175 million and an effective tax rate of 20%. As a result, we are maintaining our full-year EPS outlook of $4.70 to $5.10. From a quarterly EPS perspective, we still expect Q2 and Q3 to be stronger than Q1 and 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 reductions 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 Aerials and MP sales expectations and increasing our sales outlook for ES. In Aerials, we have planned conservatively with the assumption that our rental customers are primarily deploying replacement CapEx this year. Our bookings, actual deliveries and ongoing discussions continue to give us confidence in the Aerials outlook of down low double digits. We expect Aerials 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, power consumption, and productivity continue to give us confidence in our down high single-digit outlook for the year. We expect MP to achieve full year decremental margins well within our 25% target. ES had a great first quarter, and we're increasing our full-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 the 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 an exciting path forward, building and growing in new markets. And with that, I would like to open it up for questions.

Your first question comes from the line of Jerry Revich with Goldman Sachs.

I was really impressed by the ES margin improvement in the quarter. I'm wondering if you could just expand on the comments you made, Jennifer, on the margin outlook. In coming quarters, it looks like you were right at 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 the drivers of the really strong margin performance in the first quarter.

Sure, I can clarify, Jerry. So, a strong Q1 ES performance was 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 ESG. And also, we had some integration synergies realizing in Q1. As we go into the remaining three quarters, we see that moderating back to the normalized rate, mainly because we will incur some expenses to ramp up production and support some of our one-off expansion as well.

Yes. We had a couple of one-off items in the first quarter that we don't think will repeat in the next three quarters.

So we did have a really good quarter.

Well done. And then just to shift gears, Simon, 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 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 priced in backlog going to play out to maintain price cost neutrality?

Yes. Thanks for the question. Obviously, 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. We laid out some assumptions that we are operating by, but obviously, 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 material. So we bought ourselves a little bit of time there in material and finished goods. We also started to pull back on discretionary spending, and now the priority is fully on mitigating the net tariff impact through our supply chain and exploring alternatives. We're kind of pausing on the longer-term actions just to see things stabilize first. But then obviously, to your point, pricing is one of the levers as well. We have taken some surcharges in certain areas already, but the price cost dynamics are very different by business, by segment, even by vertical because you need to put it in 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.

Your next question comes from the line of Jamie Cook with Truist Securities.

Congratulations on a nice 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 $0.40 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 what we know about tariffs today and where you're manufacturing your products because it doesn't look 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?

Jamie, so I'll take the first question. I'll let Simon answer the second question. So our Q1, we bid our original outlook by about $0.30, and that's largely driven by ES, and we expect that to flow through the year. That will offset partially the $0.40 tariffs that we've baked into our outlook. We also offset that by our share count that will actually drive our EPS higher and also some of our operational efficiencies. You can see we continue to reduce our SG&A itself. So that actually walks back out how we actually maintain our guide at this point in time.

Yes. And with regards to your question on market share and product lines. Yes, we like our overall position, 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% if you include USMCA build in North America for North America. So we love our position there. And in Materials Processing, I don't see any major difference between us and our competitors in terms of where we're sourcing from, maybe in the margin a little bit. But overall, I don't see the global footprint as being a disadvantage. I think we're at an advantage, more so than at a disadvantage overall, but it would be hard for me to call out a specific product line. We would certainly be at an advantage versus some of our Asian competitors.

Your next question comes from the line of David Raso with Evercore ISI.

Two questions. One on the Aerial margin progression from Q1 to Q2, 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%.

Yes. So obviously, we were very pleased with our book-to-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 ramp 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, yes, MP has a three months 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 as we progress through the year. It's not going to be a reshape versus 2024, but more like a 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 within the context of 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 fleets are being used in MP and Aerials. And some of that fleet starts to age now in MP, so we're looking at a potential compounded replacement effect there as well. But the current assumption is a very gradual ramp-up on the year in the MP sales outlook.

I wanted to ask an MP question. I'm so sorry. I wanted to follow-up on the Q1 to Q2 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 the utility guide just so I am clear?

Yes. 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, and you just draw that forward. So that's kind of the ramp-up for Q2.

Right, David. So in terms of like walking from Q1 to Q2 on the double-digit margins. We mentioned earlier that in Q1, we had about 550 basis points of impact on margin due to the deliberate production cuts that we took. So if you add that back, that will not repeat again in Q2. And then on top of that, the step-up in volume that will get us to the double-digit.

Okay. I'm trying to understand the impact of tariffs on Q2, particularly regarding Aerials. It seems like the situation is manageable due to the solid manufacturing base. You appear to have anticipated some issues with steel and other materials. I'm looking for ways to ease potential challenges. As you mentioned, under absorption is down, and there’s some sequential volume growth. Regarding pricing and costs, it appears you've made progress on some cost issues as well. This is crucial since it significantly influences the change in EPS from Q1 to Q2.

Right. Yes. 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 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 $0.40. And as said, we are 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 based on. And then obviously, that USMCA qualified goods continue to remain tariff-free. That's baked into that $0.40. 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 Aerial margins for now.

I appreciate it. That I was thinking the same thing about how you have enough costs landed for Q2, you get some volume ramp, and the tariff issue is 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.

Your next question comes from the line of Mig Dobre with Baird.

I appreciate all the good color on what's baked into this $0.40. But one thing that I guess I did not hear you talk about is any tariff on the U.K. Now I don't know if I have my facts correct here, but that reciprocal tariff is at 10%. I guess it's there. And I'm wondering how that impacts MP and what's baked in at this point?

Yes. 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. The lion's share of the $0.40 is on raw material from China, so then there are obviously some finished goods tariffs that we're dealing with. We're trying to absorb as much as we can to not burden our customers or our competitive position. But yes, surcharges and pricing is one of the levers that we'll pull if we have to, if we can't find the mitigation.

So just to be clear, are you raising the price on MP and this is basically the offset? Or is this impact just not factored into the $0.40 at this time?

I wasn't giving a specific comment on what we're actually doing because we just want to highlight the difference in price cost dynamics by business. So I'm not comfortable in actually going into specific detail of what we do for each business.

Very well. And then my last question is on ES. Really good margin performance here. I guess going back to the way this business performed 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 a margin perspective, how sustainable do you think current margins are beyond 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?

Yes, as we disclosed in the pro forma, there has been a significant improvement in ES margins over the years. We also referred to the synergies, which Simon mentioned as $25 million, primarily projected for 2026, contributing to our increasing profitability. Currently, we achieved record throughput in Q1, but we will need to invest to keep up with the demand. Our backlog in ES is strong, at about eight months, positioning us well for a solid start to the year. We anticipate that the synergies expected in 2026 will further enhance the margin profile.

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

And very good results. So I wanted to follow-up on that $0.40 comment. Is that assuming China tariffs stay at the 145% or what rate is assumed for China to get to that $0.40? Because I think in the presentation, you mentioned you expect some easing of tariffs. So I just wanted to clarify.

Yes. Thanks for the question, Tami. Yes, what is included in the $0.40 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. 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 plan 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?

Yes. Great question. We were at the bauma trade show a couple of weeks ago, and I 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 Germany, to be very honest. And yes, 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 impact favorably Aerials and would favorably impact MP's aggregate business. So, and the German economy, as you know well, is obviously very important as part of the greater EU economy. So that was an encouraging bit of news that came out. So we're excited about that.

Your next question comes from the line of Tim Thein with Raymond James.

Great. I'll just pack two questions together. The first is on the ES performance in the quarter. I'm curious if there were any purchase price adjustments that were included in the quarter? And then the second question just is on operating costs and separate from the tariff discussion. Just curious how you are, I believe, hedged from a steel perspective for the year. Obviously, that's just in North America. But maybe just a discussion regarding general operating costs, just in light of some of the fluctuations in commodity markets, how you're thinking about the balance of the year?

Yes. There was no specific pricing action for the first quarter apart from the usual annual negotiations that contributed to the overperformance in Q1 for ES. It was mainly due to execution. Execution was the key factor in the overdrive, and we were able to fulfill a few one-off orders in the first quarter that provided us with the extra benefit. It wasn't influenced by any surcharge or anything. Jen, would you like to address the steel hedge question?

Yes, we have about $10 million of purchase price adjustments in ES, just a typical based on the acquisition accounting. And so with regard to your second question on the steel, we do not have any material impact from steel inflation because, first of all, we do not import any more steel and then about 70% of what we use as HRC. We also have 50% of that hedged at a very favorable rate. So the imported steel in prefabricated parts are already part of our $0.40, and the others are not material.

Your next question comes from the line of Kyle Menges with Citigroup.

It sounds like you guys are now expecting the ESG synergies to come in a little bit more than that $25 million target. So I would 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?

Yes, thank you for bringing that up. That is correct. We are progressing well with our pipeline of projects, and we are very pleased with the execution of ESG within its segment and the synergies it brings to the Terex Utility business, as well as its impact on other areas of Terex. It is truly unlocking the entire Terex portfolio, and we are observing synergies in multiple areas. We have adjusted our pipeline considering probability, execution, and risk. So we are not assuming we are in a wealthy position here. We are confident that we can exceed the $25 million run rate by the end of 2026. Things are going very well.

And then just a second question on the Monterrey facility. Just how are you thinking about production shifts from the U.S. to Monterrey, assuming that you've paused that for now? And then just how are you thinking about looking at alternative sources into that Monterrey 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 Monterrey facility or USMCA compliant? I'm sorry, if I misheard that, but just if you could comment on that as well.

No, we said that 20% if you include the USMCA source that would fall under the USMCA would get us to 90% of what we sell in North America comes out of North America. So yes, the Monterrey facility. Obviously, in the current environment, we're not going to take any drastic long-term action until we see things stabilize first. We have been kind of pacing ourselves a little bit on our product moves. We're very happy with our Monterrey 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, we can leverage that more than what we do today. But yes, at the moment, we're taking a breather to see where things are going to pan out over the next couple of months.

Your next question comes from the line of Angel Castillo with Morgan Stanley.

I was hoping you could clarify the ES segment and the margin moderation you expect in Q2. Additionally, as we consider the potential impact of tariffs in the latter half of the year, it would be helpful if you could incorporate that, along with any expected success from the synergies and the one-off items you mentioned.

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 items that we took in Q1. We had a record output in Q1, that drove up the factory adoption really favorably. We do not think that would sustain itself until the end of the year. Second, regarding one-offs, we will incur some one-off expenses for the next nine months that will support the volume growth that we will need to convert backlog as well. And then when I mentioned the synergies, we did see a piece of the synergies coming through in Q1, but it is not mature enough. Like what Simon mentioned, we expect the annualized $25 million of synergies to come through in 2026 to further improve the margin profile as well.

Got it. That's helpful. And then maybe just on 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 confidence that we found the bottom and maybe you can even grow from here? Or just how should we read that improvement in the backlog and what you're hearing from customers?

Yes, I wouldn't say that it's coming from Germany. We currently have a three-month backlog, which is normal based on historical trends for our traditional backlog coverage. Our dealer inventories have been largely adjusted. Historically, this has been a book-to-bill business, so it's following a typical pattern. Our Q1 bookings showed a favorable increase compared to the previous year, which we were pleased about because, quite frankly, the fleet in North America is driving most of the upside—its utilization remains healthy, although the fleet is starting to age. There is demand driven by mega and infrastructure projects. However, smaller projects are still somewhat sluggish. Overall, North America is showing readiness for replacement demand. That said, we are cautious that discussions around tariffs don't become a self-fulfilling prophecy and negatively impact confidence. We'll need to monitor how that develops over the next few months. The current outlook anticipates a gradual recovery in MP, primarily led by North America and driven by replacement demand. Correct.

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.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.