Earnings Call Transcript - TEX Q3 2020

Operator, Operator

Welcome to Terex Corporation's Third Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Randy Wilson, Director of Investor Relations for Terex Corporation.

Randy Wilson, Director of Investor Relations

Good morning, and welcome to the Terex third quarter 2020 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. I'm joined by John Garrison, Chairman and Chief Executive Officer; and John Duffy Sheehan, Senior Vice President and Chief Financial Officer. Their prepared remarks will be followed by Q&A. Please turn to Slide 2 of the presentation, which reflects our Safe Harbor statement. Today's conference call contains forward-looking statements, which are subject to risks that could cause actual results to be materially different from those expressed or implied. In addition, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures can be found in the conference call materials. Please turn to Slide 3, and I'll turn it over to John Garrison.

John Garrison, CEO

Good morning and thank you for joining us and for your interest in Terex. Most importantly, I hope you and your families are remaining safe and healthy. Throughout these challenging times, we are proud of all of our Terex team members who are keeping themselves and others safe, meeting the needs of our customers and helping our communities. I would like to recognize and thank our team members around the world for their continued commitment to our Zero Harm safety culture and Terex Way Values. Safety is and will remain the top priority of the company driven by Think Safe, Work Safe, Home Safe. Our team members remain vigilant by carefully following the COVID-19 safety protocols and continuing to keep their guard up. Our crisis response teams remain active and our facilities continue refining their preparedness and response plan to ensure they can respond swiftly as local pandemic conditions change. I'm proud of our team members’ commitment to safety, but I'm equally proud of their dedication to the Terex Way Value of citizenship. Despite the challenges presented by COVID-19, our team members continue to give back to the local communities, whether it's the AWP team members continuing to produce masks and face shields or MP team members donating PPE equipment. Our team members are living our values. Our dedicated team members are delivering value for our stakeholders and shareholders. Turning to Slide 4. Despite the challenging markets, the team is meeting customer demand, tightly managing all costs, aggressively reducing net working capital, especially AWP inventories and delivering positive free cash flow. Q3 revenue, which was in line with our outlook in the beginning of the quarter, improved sequentially almost 11% as end markets continue to recover from the lows in the second quarter. AWP revenue improved sequentially by almost 8% in Q3, while MP revenues improved approximately 18%. Customer bookings in Q3 represented a dramatic improvement from Q2. Unlike the first half of the year, we did not experience any material customer booking cancellations or pushing out of orders. Sequentially AWP bookings were up almost 100% compared to Q2 and MP bookings were up 36%. In addition to sequential strength in bookings, all segments showed improvement on a year-over-year basis. Demonstrating the strength of our Q3 bookings, Terex backlog was consistent with backlog at the end of Q2 and down year-over-year by only 5%. Although revenue was consistent with our outlook as a result of our laser focus on cost control and only producing in line with customer demand. Profitability for the quarter outperformed our outlook from the beginning of the quarter. Importantly, an approximately 5% operating margin was achieved with both segments generating positive operating margins. Our MP segment achieved outstanding financial results, reporting a 13% operating margin, while revenues were down 19% year-over-year. Both segments and Terex overall achieved our targeted 25% decremental margins or better. We are not satisfied with AWP’s operating margins. We must drive significant improvement to restore the segment to industry competitive margins, and we will continue to take the actions necessary to deliver on that improvement. Throughout 2020, we right-sized our inventory levels to the customer demand environment, especially in our Aerial products business. Their inventory levels are now at a level consistent with 2016, which was the last time there was an industrial downturn. Going forward, we are now at a level where Aerial products can manufacture to customer demand. Our focus on net working capital management grew $54 million of free cash flow in the third quarter, delivering positive year-to-date free cash flow. Overall, our financial performance strengthened significantly in Q3. I assure you that we will remain laser-focused and consistently improving these results in 2021. Please turn to Slide 5. Our strategic priorities will continue to strengthen our business operations so we can succeed through all market cycles, including these uncertain times. We are taking action and we are implementing steps to improve, strengthen, and grow Terex. Through operational excellence, we are strengthening accountability with each team member doing what he or she said they would do. To win in the marketplace requires more than just knowing the score. We must understand the score and the process discipline to drive continuous improvement in the business. On the cost side, we've been looking at every aspect of the business to ensure we can maximize our ability to be globally cost competitive. We are laser-focused on maximizing revenue, aggressively taking out costs, not just manufacturing costs, but also SG&A costs. Terex targets SG&A as a percent of sales to be 12.5%, which we achieved in 2019. However, as sales have declined, our 2020 SG&A percent of sales has increased to over 14%. We are executing on an SG&A cost reduction initiative with a target of SG&A percent of sales for 2021 of 12.5%. This initiative is replacing temporary 2020 cost savings with permanent cost reductions. We are evolving into a leaner organization with fewer organizational levels. Also, as we right-size our organization, we've been re-evaluating and reducing our related company-wide footprint. We recognize that to win in the marketplace, we must have a globally cost competitive company-wide footprint. We have been and will continue to take the actions necessary to achieve this objective. Turning to innovation, we are listening to customers to ensure our products and services offer the features and benefits that provide value. We will provide the right features at the right price to meet customer demand. Purposeful innovation drives improvement and returns on invested capital for our customers, allowing us to support their growth. Finally, Terex is well positioned for future growth because we have strong businesses, strong brands, and strong market positions upon which we can grow. We will continue to invest in and grow our high performing businesses, including investing in new products and manufacturing capacity where demand calls for it. And we are a more focused organization. I am confident this will result in Terex emerging from these uncertain times as an even stronger company. And with that, let me turn it over to Duffy.

John Duffy Sheehan, CFO

Thanks, John. Moving to Slide 6, I want to discuss our financial performance for the third quarter. As in the previous quarters, we have not reported adjusted financial results for Q3 2020. Instead, we are highlighting specific factors that influenced our reported financial outcomes. We aim to provide clarity for the investment community to facilitate year-over-year comparisons. In the third quarter, our net sales met our expectations from earlier in the quarter. We reported total revenue of $766 million, reflecting a 25% decrease year-over-year. However, we observed continued stabilization and improvement in our operating markets throughout the quarter. We achieved an operating profit of $37 million, which is down from an adjusted operating profit of $90 million in the same quarter last year. The decline in operating profits stemmed from lower revenues compared to Q3 2019, compounded by costs related to a product liability judgment and severance and restructuring expenses. We reached this favorable operating result through strict cost management and adjustments to the market environment, even though reduced revenues affected our gross margins and led to a higher SG&A percentage of sales. Our proactive cost reduction measures resulted in a decremental operating margin of about 19% for Q3, better than our targeted 25%. This margin reflects $5 million in gross profit charges associated with a product liability judgment. Additionally, SG&A costs were adversely affected by $8 million due to severance and restructuring. These impacts were not included in our initial outlook for the quarter. If we exclude these charges, operating profits would have improved by $13 million, and our decremental margin would have been around 14%. Below operating income, interest and other expenses were $3 million lower than Q3 2019 due to reduced borrowings compared to the previous year, mostly because our revolving credit facility was undrawn this quarter. Other income also dropped by $1 million due to adjustments on a third-party investment. We estimate our full-year 2020 global effective tax rate benefit to be about 52%, significantly higher than our prior estimate of 17%. In the third quarter, changes in U.S. treasury regulations allow certain U.S. taxpayers to exclude non-U.S. income taxed at a high foreign tax rate from U.S. taxable income. This update positively impacts Terex in 2020 by increasing our U.S. net operating loss. Notably, we expect to carry back our 2020 net operating loss to 2015 and project a cash refund of approximately $30 million in 2021. Our reported EPS of $0.31 per share takes into account the negative impacts on cost of goods sold and SG&A, which were offset by the aforementioned tax benefits. Moving on to Slide 7, regarding our segment financial results, AWP sales amounted to $445 million, down 29% from last year, primarily due to lower end market activity in North America and Europe. However, the Aerial products market and our sales in China remain strong. The utilities market showed some stabilization but continues to be weak in certain areas. We are carefully managing Aerial products production levels to avoid excess inventory. During Q3, production for Aerial products was 47% lower than Q3 2019. This strict management allowed us to reduce Aerial product inventory levels by nearly $290 million since early 2019, aligning inventory with 2016 levels by the end of Q3. AWP achieved a positive operating margin of about 3% for the quarter, driven by aligning production and costs with market demand. The AWP team delivered an impressive decremental margin of 18%, which included nearly $7 million in charges related to a product liability judgment, severance, and restructuring. Excluding these charges, AWP’s decremental margin performance would have been 14%. As anticipated, the new Watertown, South Dakota facility impacted AWP’s margins as operations were consolidated into a modern facility. The utility team faced challenges in production during the transition to the new site, but they improved output as the quarter progressed. AWP's bookings in Q3 were $404 million, representing a 10% increase from Q3 2019, while backlog at the end of the quarter was $478 million, down 3% from the previous year. A growing portion of our AWP backlog is scheduled for delivery next year compared to the end of Q3 2019. Now, turning to Materials Processing, MP had a solid quarter with 13% operating margins despite tough market conditions, showcasing the operational strength of the MP team with revenues down approximately 20%. Sales were $311 million due to cautious customer sentiment. The MP team has effectively managed costs in this challenging environment, resulting in a decremental margin of 25%. Backlog stood at $289 million, down 8% year-over-year but up 10% sequentially. MP's SIOP business gained momentum during the quarter, with bookings up 24% year-over-year and 36% sequentially. Customers in both segments are navigating this uncertain period with existing equipment, albeit at lower utilization levels. Moving to Slide 8, I want to share our expectations for the remainder of 2020. It's essential to acknowledge that we are in an unprecedented situation, and results could shift quickly in either direction. That said, we see a stabilization in the markets, though still at lower demand levels compared to 2019. As we mentioned in our Q2 earnings call, we expect revenue in the latter half of 2020 to be in line with the first half. From a segment perspective, we anticipate larger year-over-year revenue declines in AWP than in MP for Q4, but we expect these declines to be smaller than in Q3 for both segments. Due to actions primarily in Aerial products during October, we foresee at least $15 million in severance and restructuring charges in Q4. We remain committed to managing our cost structure in line with reduced customer demand, aiming to maintain our target of a 25% decremental margin for the full year and for each segment, including the Q4 charges mentioned. Furthermore, we expect the full-year 2020 corporate costs to be evenly distributed between the first and second halves. We are focused on maintaining liquidity and generating free cash flow. Year-to-date, we are positive in free cash flow, and typically, Q4 is our strongest quarter for free cash flow. Based on current demand and cost reduction efforts, we anticipate our full-year 2020 free cash flow generation to be similar to 2019, despite significantly lower revenues and earnings. Reductions in net working capital will continue to be a primary source of Q4 free cash flow generation. Thanks to our solid liquidity, we have significantly reduced and plan to keep reducing our receivables sales as a cost-effective financing source. We expect to maintain a healthy cash balance through the rest of 2020 and do not anticipate using our revolving credit facility. Now, on to Page 9, where I'll discuss our disciplined capital allocation strategy. Despite the challenging conditions, the Terex team achieved a positive free cash flow of around $54 million this quarter, putting Terex at approximately $13 million positive in free cash flow year-to-date, surpassing our earlier outlook from Q2. Our team remains diligent in managing production, especially in our AWP segment, and is closely monitoring all expenses. Terex continues to generate positive free cash flow, supported by strong liquidity with $1 billion available and a favorable capital structure with no imminent debt maturities, enabling us to manage and grow the business. Regarding growth, while we have reduced our expected 2020 capital spending by 35%, we still plan to invest about $65 million, demonstrating our commitment to advancing the business. The new utilities manufacturing facility is one of our largest capital investments in recent years. We are also taking decisive steps to resize the business for future profitability. As John mentioned earlier, we are committed to closely managing production and SG&A. We will continue to focus on managing the business effectively and generating strong free cash flow while ensuring we maintain an appropriate capital structure for the future growth of Terex. And with that, I'll hand it back to you, John.

John Garrison, CEO

Thanks, Duffy. Turning to Slide 10. I continue to lead AWP, a segment President with a laser-focus on improving profitability and growth. The leadership team's execution of our improvement plans is yielding results demonstrated by the positive operating margins this quarter. But we clearly understand that we have more work to do. Our Aerial’s team has always been customer-focused. So we listened and acted on our customer's feedback. We reorganized our teams and are putting the processes and tools in place to increase the ease of doing business with AWP. We are investing in the expansion of a world-class manufacturing facility in Changzhou, China. The AWP team is well positioned with our strong brands and product offerings to participate in this market's growth. From an operational perspective, the AWP team executed in Q3 by driving sequential and year-over-year revenue growth in China, aggressively taking costs out of the business to improve margins and swiftly bringing online the new utilities facility. It is a competitive industry, so we are controlling what we can control, superior execution and aggressively reducing cost to improve margins and win in the global marketplace. Turning to Slide 11. Material processing demonstrated once again strong operating performance in challenging market conditions. MP continues to develop product adjacencies and new geographies for its leading products and brands, all demonstrating strong operational execution. The financial performance of MP relative to market conditions by achieving an operating margin of 13% demonstrates the MP team’s strong execution. MP’s booking stabilized and increased throughout the third quarter, resulting in bookings being up 24% year-over-year. MP is a diversified and consistently strong performer. Turning to Slide 12. To wrap up our remarks. Terex team members around the world are focused on the right things: safety, health, customers, and improved productivity. We are reducing costs to improve margins, especially within AWP. We're driving positive free cash flow by reducing working capital. Our businesses have a strong future. So we are continuing to invest in innovative products and services to be prepared as market demand returns. With that, let me turn it back to Randy.

Randy Wilson, Director of Investor Relations

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

Stephen Volkmann, Analyst

Great. Good morning, guys. Can you hear me okay?

John Garrison, CEO

Good morning, Steve. Yes, fine.

Stephen Volkmann, Analyst

It wasn't totally clear if that was a done deal, but anyway, thanks for taking the question. I guess if I could just kick it off John. You've been out managing AWP now for a while. I think you've probably got your hands around some of the key issues and you're certainly talking strongly about the margin sort of efforts there. So I'm wondering if there's a time when you can sort of lay out some detail here, is this going to take a sort of a significant restructuring program that will be announced at some point or is volume kind of key to getting margins where you want them to be? Is there some of the toolbox that you've used in the past as it's sourcing, is that head count, is it facilities reduction, skew reduction, just any details you can give us because as you pointed out, you still have a fair amount of work to do. Thanks.

John Garrison, CEO

Thanks. Thanks, Steve. First let me say that our AWP team is focused on driving margin improvement. We're also doing that by maintaining our focus on the customer. This business has a long history of being customer focused, and we're going to continue to be customer focused as we drive the margin improvement that's required. Steve, I have been out there for a couple of months, working with the team. And first and foremost number one, safety, as I said, it's the most important thing we do. The team had really done a great job on COVID safety and industrial safety on a year-over-year basis. So we can build off of that as we go forward. The second area is around margin improvement. There are near-term actions and intermediate-term actions that we're taking. On the near-term actions, we've taken restructuring actions that we implemented in Q3. We also implemented some additional restructuring actions here in Q4 that Duffy referenced in his opening comment. Those restructuring actions are looking at all costs throughout the business, both SG&A costs as well as manufacturing costs. Your comment about inventory, the team has significantly improved our SIOP management process. We now believe we're in a position that we can produce to end market demand. We've dramatically reduced our inventory during the course of this pandemic in our AWP business. The good news is as we go forward, we'll be much closer to producing to retail demand. I might also say Steve, the third thing that team is focused on is market share. We can't lose sight of driving revenue in all environments. That will be a combination of using the tools that will be implemented around our commercial excellence initiative. I think our sales team is doing a great job in these challenging times of staying close to the customer, maintaining price discipline in a challenging marketplace. And so, you're going to continue to see us execute on our commercial excellence side. The other thing that's going to help market share as we move forward in revenue is our product development efforts. The team has implemented an aggressive product development plan over the last couple of years. We will continue with that as we go forward. Our new products that have come into the marketplace, the J-Series Boom is going to help, our FE booms, our XC line of booms now that the ANSI standards are in effect. We think all of that is going to help us in the marketplace. We are releasing an ANSI complete line of scissors. From a product positioning standpoint, we think we're well positioned as market conditions improve as we move forward. And finally, Steve, being very clear, the team is cash flow generation just like we do throughout Terex. That really is tightly managing all expenses, every single dollar of expense the enterprise has to be tightly managed while continuing to still invest because we are investing in capital. We are investing in our IT systems as we move forward and then aggressively managing working capital. I've got to thank the global team and AWP team because they've done a great job reducing inventories in a challenging time, but we've also done a great job with our strategic sourcing initiative, which will also help us drive margins as we go forward. Finally, on our payables, and we are working very closely with customers on the receivable side. So safety margin improvement, market share, and cash flow generation is what we're focused on. From a timing standpoint, it's always a challenge. It won't happen as fast as I want it, but we're pushing it as fast as we can as we move forward because this business will return to industry competitive margins. That's what we're focused on and we're going to get it done.

Stephen Volkmann, Analyst

Okay, great. And just as a quick follow-up, one of you guys may quantify the restructuring benefits you are expecting in 2021, and I'll pass it on. Thanks.

John Garrison, CEO

Duffy, would you like to comment more on the benefits? I think it will be in terms of our decremental and as we move forward incremental margins, do you want to comment on that Duffy?

John Duffy Sheehan, CFO

Yes. Thanks for that Steve. Obviously, we will provide 2021 financial guidance during our Q4 earnings call. The way to think about 2021 is that we will be fully committed to our 25% or better decremental or incremental margin. Quite honestly, we look forward to returning to revenue growth in 2021. The other metric that we are absolutely committed to is the 12.5% SG&A to revenue that I referenced in my comments, John referenced in his comments. We are absolutely committed to driving the team there. It’s hard to say a specific restructuring benefit at this point in time, but the restricting we are doing today will allow us to be successful with those incremental margins at 25% or better in 2021.

Stephen Volkmann, Analyst

Great. Thank you guys.

Randy Wilson, Director of Investor Relations

Hey Joe.

Joe O'Dea, Analyst

Hey, good morning.

John Garrison, CEO

Good morning, Joe.

Joe O'Dea, Analyst

A question on AWP in managing some of the volatility, John, and it sounds like there's a very clear focus on, you had to get a bunch of inventory out you don't want that coming back into the system. But as you think about some of the uncertainty heading into next year and the steep CapEx cuts across the rental companies this year, how do you anticipate managing a move off of the bottom? In scenarios where it could be a sharp move, how do you do that without inventory? How are you going to manage this differently from how the company has done it in the past?

John Garrison, CEO

Thanks, Joe. First, it really goes back to that commercial excellence process and staying close to our customers, and really working with the customers to understand the range of outcomes customers are looking at. We can then plan based on those ranges and incorporate that into our SIOP plan. It's not that we're not going to have inventory; we will have inventory. We'll manage inventory very closely based on days on hand by model and by region to ensure that we have competitive lead times going into the marketplace. The Genie team historically has demonstrated the ability to flex up pretty dramatically. That's a competency that's been built over years. That competency will remain as we move forward. I can assure you Joe, after what the team has been through in the last 18 months taking inventory out, we would love the opportunity to respond to an increase in market demand as we go forward. I would say the Genie team historically has demonstrated very strong competency in doing that. Managing the SIOP process with a commercial excellence and our sales team, staying close to the customer, understanding what their demand profiles look like, having the appropriate level of inventory to meet those needs, and then ramping our supply chain up again, with the strategic sourcing initiative that we've implemented working with fewer suppliers we feel confident we have the ability to do that. Again, that would be a challenge that the team would truly welcome to figure out how to ramp up significantly versus the challenges that the team has been facing here over the course of the last 18 months. So that’s how we’ll do it and again, it’s process discipline, it’s process tools implementing and executing those will drive our ability to meet customer demand. We’re not against inventory; we just want to make sure we have the right level of inventory, and we will manage going forward. The good news is, now we can ebb and flow inventory up and down based on retail demand. Our inventory levels may increase based on customer demand. We’ll manage that aggressively as we move forward, and the team is doing a better job of that.

Joe O'Dea, Analyst

I appreciate that color. And then just a second one on price cost, how are you thinking about inflationary pressures into next year, your comfort level with the ability to offset what you have line of sight to?

John Garrison, CEO

Thanks, Joe. Overall, I think the word that we use across the entire business is being disciplined on pricing by not over-producing inventory. I think our customers are being very disciplined in their CapEx, in their rate pricing, so we're being disciplined as well. Within AWP, going forward, we’re going to offset the increases related to ANSI and ANSI standards implementation. We've been very transparent with customers on what those cost increases are, again disciplined SIOP process that we talked about to make sure we have the right inventory, at the right price, at the right time. On the other side, pricing is part of our commercial excellence initiatives. It's really pricing waterfall management, and again, the process and tools in place to do that and to prevent leakage of what price you're able to obtain. The team is doing a good job on pricing, waterfall management. If we look at the MP, given that 70%, 80% of that business is through a dealer channel, we do believe we will have the ability to offset input cost increases as we go through the year. The MP business has done a good job managing their inventory throughout, and so we haven't had the significant adjustments in inventory on the MP side as we go forward. We're going to be disciplined on pricing. We provide tremendous value for our customers. That’s how we're looking at pricing as we move forward into the fourth quarter and into 2021.

Joe O'Dea, Analyst

Thanks very much.

Operator, Operator

Your next question comes from Mig Dobre with Baird.

Mig Dobre, Analyst

Good morning everyone. Can you hear me okay?

John Garrison, CEO

We can hear you fine, Mig.

Mig Dobre, Analyst

All right great. So I want to go back to the comment that you made about SG&A as a percentage of sales being 12.5%. I'm wondering how you are thinking, how you essentially, you came up with this figure? And how we should be thinking about actual dollars spent on a go-forward basis? I mean, the idea here is that you're going to keep SG&A flat and get leverage off that, or can we actually see maybe a further decline in SG&A dollars spent next year? If you could elaborate on that, I think that'd be really helpful.

John Garrison, CEO

Yes, thanks Mig. I’m going to have Duffy comment on that. He is leading the charge for us as we look at SG&A as a percent of sales through the entire company. So Duffy would you comment on that please?

John Duffy Sheehan, CFO

Sure. Thanks very much, John. Our focus is really on the 12.5% SG&A to sales. Looking here at Q3 and Q4 – to Q2 and Q3, we've had a run rate of about $100 million where SG&A in both of those quarters. Now that's here in 2020. That's a fall of 12.5% of sales because of the low level of revenue that we've been experiencing. And here in Q3, we also had about $7.5 million of restructuring charges included. So $100 million run rate does include the benefit of the temporary cost reductions that we took in the beginning of the second quarter, reductions in compensation, no merit increases, reduced bonus opportunity for 2020. All of those costs, they will return in 2021. So what our program has been focused on is not just bringing down the absolute level of SG&A; we're for sure doing that, but also being in a position that when we get to 2021, we have replaced the temporary cost reductions that we're benefiting from here in 2020 with permanent cost reductions. There's no silver bullet here; every single day we absolutely question every expenditure and make the business more efficient, both within the businesses themselves and in our corporate cost structure. I also want to be clear that we are balancing between cost reduction and making investments as we want to continue to drive growth in the business. Charts and services, engineering and new product development are examples of that. Our objective would be that our SG&A percent of sale will be 12.5% or less to sales each quarter through 2021.

Mig Dobre, Analyst

Okay. And then I guess my follow-up, John, going back to AWP it's very clear that the inventory situation is well under control at this point. You've made quite a few changes to the business. So I guess my question is looking beyond the fourth quarter and recognizing that you've got additional restructuring and things that you're going to do there, do you think that most of the changes that you had to implement structurally to that business segment are in the rearview mirror? And now we're just kind of looking at hopefully getting some better volume and traction on that or is there still more structural work that you need to do in 2021? Thanks.

John Duffy Sheehan, CFO

Thanks for the question Mig. We continue to look at all aspects of cost as we move forward to ensure that we're globally cost competitive. So maybe we're going to continue to do that again, to ensure that we're globally cost competitive as we move forward. We'll continue to look at all elements of our cost structure and make the appropriate decisions to ensure that we're globally cost competitive, and we return this business to more of a historical operating margin performance.

Randy Wilson, Director of Investor Relations

Hey, good morning.

Ann Duignan, Analyst

Hi. Good morning, everybody.

John Garrison, CEO

Hi, Ann.

John Duffy Sheehan, CFO

Hi, Ann.

Ann Duignan, Analyst

I appreciate all the discussion about SG&A as 12.5% of sales, but that's not much value to us unless we know what the sales level is going to be. So can you talk about what you are hearing out there from your customers, both the large customers and small customers? What do you think sales might look like for both segments as you head into 2021? I know you don't want to give guidance, obviously, but just directionally, what are you hearing?

John Garrison, CEO

So I’ll talk, and thank you for the question. I know all of us are looking for what revenue will look like as we move forward. I'll give a little kind of market commentary, and then I'll ask Duffy to speak to our revenue development standpoint for 2021. As we look at the AWP business, we have seen equipment utilization improve as we move through the quarter, if not up to 2019 levels, but we have seen utilization improve within North America. I think that was indicative of seeing our bookings level improve in the quarter. We do believe that the replacement cycle is going to be strong; it's not absolutely clear when it starts. But if you just look at the age of the aerial equipment, there is going to be a small tailwind associated with the replacement cycle in the future. I would say similar story again in Europe, but it's a little bit more of a mixed story in Europe, more based on country-specific differences. Southern Europe has been slower to recover than Northern Europe. Again, we did see orders improve and saw substantial improvement in China; that market continues to accelerate, not just the economy recovering from the COVID situation but also with the adoption of aerial products in that marketplace. So that market is continuing to grow very significantly. We saw a little slower demand this year in the rental, specialty rental customer channel, but that's beginning to pick up with relative stability with the regulated utilities and in the co-ops in that market. We would anticipate the rental channel within the utility segment to show improvement on a year-over-year basis. If we look at our MP, I will go through each and every one of the businesses. If we look at our crushing and screening side of the business, we saw improvement as we moved through the quarter, orders were up significantly in that part of the business. I think there are going to be some tailwinds there in that business as customers respond to the market conditions and government stimulus around the world. One of our businesses within MP that has been challenged this year was our Material Handling Fuchs business for two factors. Number one, steel prices being down pretty substantially drove scrap metal prices down. We’re starting to see that recover pretty quickly, as well as that was one business within our MP segment that did have some dealer inventory at higher levels coming into the year. So the dealers had to bleed off that inventory, as we've moved through. We think that will improve as we move into 2021. We continue to see growth in our environmental businesses, a smaller business within MP, but we've seen some really substantial growth in that business. Again, it's smaller, but we've seen really like our CBI business has performed extremely well this year. I think that's the result of a lot of the storms. The concrete business was very weak in Q1, but we began to see an improvement in Q2 and into Q3 orders that are actually significantly above prior year. That speaks to the strength of the residential construction market and in multifamily housing, which is very strong; that business serves that market segment. We continue to see the other business that has performed well is our Pick and Carry business down in Australia. We think that will continue into the next year. Our cranes business has been a challenge. Our tower crane business saw order recovery in Q3. Not necessarily on our RT business, which is the Rough Terrain cranes; that business is challenged. We are building the commercial team there, which is more of a challenge. Finally, India has been a good growth market for us within the MP segment. The COVID crisis has impacted India fairly substantially. We anticipate as that improves through the course of the fourth quarter and into next year that we will begin to see India return to a strong market for us. That's just a quick look and what we are anticipating and what we’re seeing now. It really does depend on the pace of recovery on the pandemic and how that changes over time. We are going to adapt and respond to that market. That’s a bit of an overview of how we see the markets developing. Duffy, would you like to talk about the 2021 revenue outlook?

John Duffy Sheehan, CFO

Yes, sure. Just building on what John said a moment ago about the degree of uncertainty that we're experiencing, I'll refrain from providing an absolute level of expected revenue for 2021. But recognizing that you'll be building out models over the next few months, what I would say is that what we're currently anticipating in terms of revenue development over the course of the year is that our total company revenue for 2020 will be similar to the development we saw here in 2020. The 2021 development will be similar to what we saw here in 2020, with revenue being relatively evenly split between the first and the second halves of the year. As is normal for our business, we are expecting the second quarter revenue will be the highest of the year and we won't turn to growth until the second quarter of the year. We are currently anticipating that we'll continue to sustain that revenue growth year-over-year during the second half of 2021. We're looking forward to being able to return to revenue growth in 2021, so those are a few thoughts, and we'll provide more absolute amounts of 2021 financial guidance during our Q4 earnings call.

Ann Duignan, Analyst

I appreciate that. And just one quick follow-up. When you talk about the progression of potentially revenue for 2021, could you just distinguish between AWP versus MP? How are you expecting similar across both?

John Garrison, CEO

I think it's similar across both in terms of the comments I just made, Ann.

Jamie Cook, Analyst

Hi, good morning.

John Garrison, CEO

Good morning, Jamie.

Jamie Cook, Analyst

A nice quarter. I guess just two questions most have been answered. One, can you just talk to what you saw and sort of demand trends in October and understanding what you said about 2021 revenue and how to think about the progression? Are customers saying anything differently about how to think about order trends, whether we're hearing potentially there's risks, they could make decisions sort of later in the year as lead times are short? So I'm wondering how you are thinking about that and whether that's changed since last quarter? And then my second question, John, I think, you alluded to opportunities to improve your market share in certain markets, just sort of where you're targeting and how you balance sort of returns, margins versus pricing, as you think about gaining market share? Thank you.

John Garrison, CEO

Thanks, Jamie. In terms of the progression and in conversation with customers we haven't seen – we continue to see the improvement as we move through the quarter. Obviously, it's subject to what occurs with COVID. But we have seen it improve through the quarter. In terms of customers on the AWP side Jamie, they're basically to their, what I'd call their standard annual operating plan process. That’s continuing as we move through the fourth quarter. We anticipate as we get to the end of the fourth quarter and into the early first quarter, we'll have much better clarity in terms of what customers are looking for. I would say that's North America and Europe and likewise in China. Right now we're seeing customers plan their business on their normal planning schedules and that’s what we’re anticipating as we move forward. We'll have much greater clarity at the end of Q4 and into early Q1 in terms of what the customer demand opportunity is. In terms of market share, you're absolutely right; it's a balance, it's a balance we're driving improvements in our product and product offering, listening to the voice of the customer to ensure that we bring products to the marketplace with the right feature and benefits set at the right price. It's a balance of having inventory and lead times that are competitive in the marketplace, not too much, not too little. The team has really improved our processes to ensure that we have the appropriate level of inventory to ensure that we are maintaining and/or growing. Our expectation is when we bring new products to the marketplace, we should expect an increase in market share. Our market share has been relatively consistent with the exception being in China. We've seen market share decline, but we've seen dramatic revenue increase. In China, it's really increased in the market as well as the increase in the number of reporters in the market. But we have to be focused on market share. You've got to balance market share and margin to be successful and competitive; it is a balance. We will continue to find the right balance between those two elements as we move forward.

Jamie Cook, Analyst

Thank you. I'll get back in queue.

Randy Wilson, Director of Investor Relations

Operator.

David Raso, Analyst

Hi, thank you for taking the question.

John Garrison, CEO

Good morning, David.

David Raso, Analyst

Good morning. Can you just clarify when you speak to 12.5% of sales with SG&A and let's just keep the revenues as they are right now for 2020, it equates to roughly $80 million, $85 million of savings year-over-year. Are we saying that's a similar amount of cost that come back and it shows up in COGS? I just want to make sure we all understand when you say 12.5%, is that before costs come back and they come back and they don't – and they come back and SG&A? Can you just help us understand exactly is it a 12.5% number even after costs return?

John Duffy Sheehan, CFO

It is a…

John Garrison, CEO

You want to take it? Go ahead, Duff.

John Duffy Sheehan, CFO

Yes, sure. So David, I confirm to you that it is a 12.5% SG&A to sales after the temporary cost reductions, compensation reductions, lack of merit increases, lack of bonuses that we imposed on our team members in 2020 come back effective January 1, 2021. I do want to also say that the 12.5% SG&A to revenue has always been our goal in terms of target. Today it is our objective and our target to be at 12.5% SG&A to revenue in 2021. We are in a very uncertain time, so that if revenue doesn't increase, we'll have work to do, but we will always right-size our SG&A to the size of the business that we're operating in at any point in time.

David Raso, Analyst

Okay. So just to be clear, then that's a number even after accounting for costs that would come back.

John Duffy Sheehan, CFO

Yes.

David Raso, Analyst

And just to be clear too, the tax rates moving around, what kind of base tax rates you'll be thinking about? And let's – and don't worry about Biden and potentially higher rates, just as we know the world today right now, is the 30% tax rate to use? I'm just trying to get a sense of the EPS impact from the SG&A.

John Duffy Sheehan, CFO

You're asking about 2021 I presume.

David Raso, Analyst

Yes, it would be interesting to receive the fourth quarter information given the context.

John Duffy Sheehan, CFO

Well, I talked in my prepared remarks about our expectation of a 52% annualized tax benefit for 2020.

David Raso, Analyst

Yes.

John Duffy Sheehan, CFO

So that carries through the year for the full year. As it relates to 2021, we'll provide more specific financial guidance during our Q4 earnings call. What I would say is that if you look back over the last couple of years, we've been operating in about mid-20s tax rates. So I guess for modeling right now is to produce something like that.

David Raso, Analyst

I'm just trying to – if that's the case then we're talking about, and I know you said if revenues don't grow, it might be a little more challenging, but the target is 12.5%, that is about $0.85 to $0.90 a share of year-over-year earnings growth, simply from that cost down that percent of revenue decline and SG&A. So I’ll make we’ll level set and that’s what we’re underlying.

John Duffy Sheehan, CFO

And what you just said is absolutely correct, which is that to the extent there’s still revenue growth that will make that target more challenging for us, perhaps makes it a little longer to get to it. But we’re absolutely committed to 12.5% irrespective of the revenue level. It’s only a question of how long you take to get there.

David Raso, Analyst

And lastly, do you expect to be EPS positive in the fourth quarter? The $0.15 of cost that’s flowing may make it a little more challenging and is always a little bit of fourth quarter kind of accrual accounting catch-up and the margins are a little lower. Given the revenues aren’t terribly different between 3Q and 4Q, I’m just trying to make sure I appreciate how we’re thinking about profitability in the fourth quarter.

John Duffy Sheehan, CFO

I think that the fourth quarter in terms of the profitability or otherwise with the $15 million of restructuring that we took is right around the breakeven level. I think that’s what is implied by the guidance that we provided today. The outlook…

David Raso, Analyst

That’s the EPS breakeven, not EBIT breakeven, so just to be…

John Duffy Sheehan, CFO

Of course, yes.

John Garrison, CEO

Thank you, David.

Ross Gilardi, Analyst

Good morning, guys. Thanks for squeezing me in at the end.

John Garrison, CEO

Good morning, Ross.

John Duffy Sheehan, CFO

Absolutely.

Ross Gilardi, Analyst

I just wanted to, I was just curious in terms of free cash flow. I mean, clearly, you guys are trying to – you've been trying to address that for a long time and are seeing some improvement over the last several quarters, at least year-to-date. Is there some type of like free cash conversion ratio we can think of, do you think of it all as cash flow from operations as a percentage of sales, or free cash flow as a percentage of EBITDA? I'm just wondering for modeling purposes, just directionally how do we think about it? I get that your intention is to have the number to be positive for the next several years. But anything else you can help with there?

John Garrison, CEO

You want to take that, Duffy?

John Duffy Sheehan, CFO

Sure. Ross would say is that we are absolutely focused on driving free cash flow generation. If I take you back to 2016, John's scorecard at the time was that we were seeking to have our free cash flow be 100% of net income. I will acknowledge that we've been – the report card hasn't been quite what we would want to bring home to mom and dad over the last couple of years; that's a lot to do with the level of CapEx investment that we've made; it's a lot to do with the aerial work platforms, inventory challenges that we've been working through. But in general, the metric we're focused on is free cash flow equal to 100% of net income. I assure you that the team is very focused on working capital management. You see what we've been able to do now with the aerial product inventory levels at 2016 levels, $54 million of free cash flow in the third quarter. We are intensely focused on continuing to drive positive free cash flow to generate shareholder value.

Ross Gilardi, Analyst

And is it a 100% of GAAP net income or adjusted net income? Because quite obviously there has been a big difference between one versus the other?

John Duffy Sheehan, CFO

So I would say that especially here in 2020 where we're not – we don't have any adjusted results, it's GAAP net income.

Ross Gilardi, Analyst

Okay. And then just my follow-up was on the AWP – the 10% order increase year-on-year. Can you give any color as to where that is coming from? Is it coming from the national rental companies, is it more from the utility business, more from China or kind of all of the above?

John Garrison, CEO

I would say it’s a bit of all of the above. Clearly in China, we saw a good year-over-year growth in China on the order side. We also saw in the backlog we have a higher percentage of national accounts in the backlog. So, we saw the national accounts as they adjusted from Q2 into Q3 and Q4 that was also an important part of the booking increase as we ended the quarter. So it’s pretty much all of the above.

Randy Wilson, Director of Investor Relations

Gentlemen, do you have any closing remarks?

John Garrison, CEO

Yes. Thank you, operator. Thank you for your interest in Terex. Most importantly, I hope that you and your families are remaining safe and healthy by following the appropriate COVID-19 protocols. It benefits us all to do that. Thank you for your interest in Terex. We’ve discussed the Terex team members; I want to thank them. We are executing well. We're improving our execution in these very challenging times. We believe we're positioning this business for 2021 and beyond so that we can have success in all markets, including challenging markets. Thank you for your interest in Terex. If you have any further questions, please don't hesitate to reach out to Duffy and Randy Wilson. Have a great day. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.