Earnings Call Transcript - TEX Q2 2022

Operator, Operator

Welcome to the Terex Second Quarter 2022 Results Conference Call. This call is being recorded. I am pleased to introduce your host, Jon Paterson, Vice President and Treasurer. Please proceed.

Jon Paterson, Vice President and Treasurer

Good morning, and welcome to the Terex Second Quarter 2022 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 Julie Beck, Senior Vice President and Chief Financial Officer. Their prepared remarks will be followed by Q&A. Please turn to Slide 2 of the presentation, which reflects our safe harbor statement. Today's conference call contains forward-looking statements, which are subject to risks that could cause actual results to be materially different from those expressed or implied. In addition, we will be discussing non-GAAP information 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, Chairman and Chief Executive Officer

Thank you, Jon, and good morning. I'd like to welcome everyone to our earnings call and appreciate your interest in Terex. I'd like to begin by thanking all Terex team members for their efforts in this challenging global operating environment, with inflationary pressures, production disruptions, and COVID impacts. Terex team members have worked diligently to improve our performance for our customers, dealers, and shareholders. We are proud of all Terex team members for keeping themselves and others safe. I would like to thank our team members around the world for their continued commitment to our Zero Harm safety culture and Terex Way Values. Safety remains the top priority of the company, driven by Think Safe, Work Safe, Home Safe. Please turn to Slide 4 to review our strong financial results. The team delivered solid financial performance for the quarter, which Julie will cover later in her remarks. As a result of our resilient team members' strong execution in the first half of the year and our strong backlog, we are raising full-year EPS outlook to $3.80 to $4.20. Please turn to Slide 5. Terex participates in attractive end markets that are supported by favorable trends. And we have strong brands and the capacity to support long-term growth. Our MP segment is a diversified and consistent high-performing portfolio of businesses. MP's brands have leading market positions with excellent end market product and geographic diversification. Importantly, these businesses are less cyclical in nature. The overall business continues to benefit from strong equipment utilization rates and dealers looking to replenish their inventory and rental fleet. MP's global demand remains strong, demonstrated by a backlog of $1.1 billion, up 32% year-over-year, with an additional $100 million scheduled to be delivered beyond 12 months. Environmental and recycling solutions are driving demand for our Ecotec and CBI products. The MP team is taking the existing product design and modifying them to service the fast-growing environmental and waste recycling markets. The Powerscreen and Finlay brands are benefiting from strong global aggregate demand. We have a leading market position with our mobile crushing and screening products and anticipate tailwinds from increased spending on global infrastructure investments. MP's market diversification is a strength. Markets are growing and provide strong demand for our leading MP brands. And I repeat, end markets are also strong, demonstrated by a record backlog of $2.3 billion, up 62% year-over-year. An additional $500 million of backlog with deliveries scheduled beyond 12 months demonstrates a healthy customer environment as fleets age, and customers have strong utilization rates. Globally, increased adoption of Aerial Work Platforms continues to improve labor efficiency and job site safety. Construction, infrastructure, and industrial applications are driving demand for Genie solutions. Applications for Genie products include data centers, warehouses, and manufacturing facilities. Our utilities business will benefit from the electric grid multiyear infrastructure spending ramping up in 2023. The business has robust demand as customers look to reserve production slots. Please turn to Slide 6. Consolidated Q2 bookings of $1 billion were the second highest in recent history as customer demand remains very strong. Elevated customer fleet ages and historical dealer inventory levels continue to support robust demand. Utilities bookings remain very strong. Overall, our future outlook is supported by a strong backlog position that is up 70% versus the prior year when including orders that are scheduled to be delivered beyond 12 months. Turning to Slide 7 for an update on our strategic operational priorities. Our Execute, Innovate, and Grow strategy will continue to strengthen our operations and allow the company to capitalize on strong demand in our end markets. Company-wide investments in new product development and continued deployment of digital customer and dealer solutions will help to deliver long-term growth. In the coming slides, I'll highlight 2 examples of purposeful innovation in our MP and utilities businesses. We continue to be active in the M&A growth element of our strategy. The strength of construction and infrastructure spending supports our advanced mixture in Bid-Well concrete products. This week, we announced the acquisition of ProAll, which expands our concrete product offering in the MP segment. ProAll is an industry leader in the mobile volumetric concrete mixers that make concrete to specification on site as an alternative to central batching. Genie recently made an investment in Acculon Energy, an engineering and connectivity company focused on battery technology and electrification. Today, 30% of Genie booms and 66% of our scissors have electric options. By partnering with Acculon, Genie is reinforcing its leadership role by accelerating the industry's move towards electrification through the delivery of next-generation battery technology. This acquisition and the investment demonstrate our commitment to executing attractive growth priorities that support our strategy.

Julie Beck, Senior Vice President and Chief Financial Officer

Thanks, John, and good morning, everyone. Let's take a look at our second quarter financial performance found on Slide 12. We demonstrated solid execution in a dynamic environment, including significant supply chain challenges and continued inflation with reported sales of $1.1 billion, up 4% year-over-year, primarily due to increased prices. Foreign currency translation negatively impacted sales by $51 million or approximately 5% in the quarter as the euro and British pound weakened against the dollar. Gross margins declined by 250 basis points in the quarter as pricing actions partially offset cost increases. The year-over-year gross margin decline was in our AWP business; however, margins in this business did improve sequentially. MP was able to effectively overcome cost increases with pricing actions. Although the inflationary environment continues, SG&A was flat to prior year. SG&A percent of sales at 10.1% decreased by 40 basis points from the prior year as business investment was offset by continued strict expense management and favorable foreign exchange translation. Operating margin of 9.6% was down 220 basis points compared to the prior year and up 220 basis points sequentially from increased pricing and disciplined cost control. We are pleased with achieving a 39% incremental margin improvement from the first quarter. Although price/cost dynamics have improved sequentially from the first quarter, operating profit in the second quarter of $104 million decreased $19 million from the prior year as price realization was offset by continued cost increases, manufacturing inefficiencies caused by supply chain disruptions, and the negative impact of changes in foreign exchange rates. Current quarter operating profit includes $1 million of charges in corporate and other associated with the litigation settlement on a former product line. Interest and other expense was approximately $21 million lower than Q2 of 2021, as we recorded a $26 million loss on the early extinguishment of debt related to refinancing a significant portion of our capital structure and prepayment of term loans in the prior year. We also had an unfavorable year-over-year foreign exchange variance of $4 million. The second quarter global effective tax rate was approximately 17%. The slightly higher tax rate is primarily due to lower favorable discrete benefits in the current quarter, largely offset by reduced tax on the geographic distribution of income. Second-quarter earnings per share of $1.07 increased $0.05 over last year and reflects an unfavorable EPS impact of $0.09 from foreign exchange translation. Also in the prior year, we had $0.26 of unfavorable financial callout, primarily in connection with the refinancing of a significant portion of the capital structure. Our return on invested capital remains strong at 17.3% as we continue to invest in the business and return cash to shareholders through share repurchases and dividends. Free cash flow for the quarter of $44 million was consistent with our expectations for the second quarter.

John Garrison, Chairman and Chief Executive Officer

Let's look at our segment results, starting with our Materials Processing segment found on Slide 13. MP had an excellent quarter with sales of $481 million, up 9% compared to the second quarter of 2021 with growth across all product lines. On a foreign exchange neutral basis, sales were up 16%. The business ended the quarter with a backlog of $1.1 billion, up 32% from a year ago. The strong backlog supports our sales outlook and is approximately 3x historical norms. We also have $100 million of additional backlog delivered beyond 12 months. In these challenging markets, MP increased their operating profit to 16.5% and increased their margins by 230 basis points from the first quarter. MP has been able to demonstrate strong performance even in this inflationary environment with approximately 20% incremental margins on a reported and operational basis, excluding FX. The team continues their excellent operational execution.

Julie Beck, Senior Vice President and Chief Financial Officer

On Slide 14, we see our Aerial Work Platform segment financial results. AWP sales of $598 million were slightly higher compared to the prior year, increasing 4% on an FX-neutral basis. Backlog at quarter end was a record $2.3 billion, up 62% from the prior year. Both Genie and utilities have taken multiple price actions over the course of 2021 and 2022 to address inflationary cost pressures. In addition, both businesses have been battling parts shortages constraining their growth. AWP delivered operating margins of 7.7% in the quarter, down from last year by 330 basis points, but up sequentially from the first quarter of 2022 by 180 basis points. The sequential improvement was a result of strong execution on strict expense management and disciplined pricing actions.

John Garrison, Chairman and Chief Executive Officer

Please see Slide 15 for an overview of our disciplined capital allocation strategy. Free cash flow for the quarter was $44 million and consistent with our expectations. Free cash flow includes $38 million of IRS refunds but was negatively impacted by $63 million of hospital inventory as well as unfavorable foreign exchange. Now let me detail some usage of our cash in the quarter. We continue to reinvest in our business with capital expenditures, acquisitions, and technology investments of $32 million. A large portion of our capital expenditures is related to our Monterrey, Mexico facility, which remains on schedule. In addition, we prepaid $23 million of our term loan, reducing the outstanding balance to $55 million.

Julie Beck, Senior Vice President and Chief Financial Officer

Returning cash to shareholders is an important element of our disciplined capital allocation strategy. The company continued its quarterly dividend per share of $0.13, an 8.3% increase over the prior year. We also repurchased $61 million of shares in the quarter as we believe that Terex shares are an attractive investment. We have $61 million remaining on our share repurchase program. The company's strong balance sheet has allowed us to return approximately $100 million of cash to shareholders year-to-date. The company has significantly delevered over the past 4 years and strengthened its balance sheet. Outstanding gross debt has been reduced by $524 million since the second quarter of 2019, a 39% decrease, and $66 million since the second quarter of 2021 or a 7% increase. We have no near-term maturities until 2024, and 72% of our debt is at a fixed rate of 5% until the end of the decade. Our net leverage remains low at 1.56x, which is well below our 2.5x target through the cycle. We have ample liquidity of $678 million. The company is in an excellent position to run and grow the business.

John Garrison, Chairman and Chief Executive Officer

Now turning to Slide 16 and our full year outlook. Thanks to the strong execution of our team members and our robust backlog, we are raising our 2022 outlook that we shared with you in February and April. We expect earnings per share of $3.80 to $4.20 on sales of $4.1 billion to $4.3 billion. This outlook incorporates an additional unfavorable $0.25 per share due to foreign exchange from our initial outlook. Supply chain challenges, inflation pressures, geopolitical uncertainty, and highly restrictive China COVID policies continue, but the team has successfully navigated these challenges for the first half of 2022 and we expect continued improvement in price/cost dynamics throughout the year. Our strong backlog supports our sales outlook, which in total remains unchanged and reflects the ongoing dialogue with our suppliers. Sales are not a function of demand, but rather the ability of the supply chain to deliver components. We have the internal capacity to produce more, which we have demonstrated in the past. For the full year, our sales growth is based upon improved price execution of approximately 9%, volume growth of 6%, partially offset by unfavorable FX of 6%. SG&A cost management has been excellent, and we have reduced our full year outlook to 10.6% of sales. Interest and other expenses increased $5 million on higher interest rates and unfavorable FX. Our global effective tax rate for the year has been reduced to 20% based on a more favorable full year geographic mix. We estimate a share count of approximately 70 million based on repurchase activities in the current year. We continue to expect sequential free cash flow improvement in the second half but have lowered our full year outlook to $150 million to $200 million as a result of negative foreign exchange. Corporate and other loss has been increased to $80 million. Operating expenses are in line with our initial outlook. However, results have been adversely impacted by unfavorable foreign exchange and $7 million of year-to-date financial callout associated with restructuring, severance, and litigation settlement expenses on former product lines. We expect our incremental margins in the second half to be above our 25% target. Turning to the segment outlook. Based upon MP's successful mitigation of persistent input costs, supply chain challenges, and first half performance, we are increasing the operating margin range to 14.8% to 15.3% with relatively balanced margins throughout the second half of 2022. For AWP, supply chain challenges continue to be more disruptive in this segment with the majority of our total hospital inventory. This segment has been performing well, and we expect sequential quarterly margin improvement to continue through the balance of 2022. Therefore, we have increased the bottom end of the margin range to 8% and maintained the top end of 8.5%. We are extremely pleased to be in a position to raise our earnings per share outlook to $3.80 to $4.20. And with that, I will turn it back to you, John. Thanks, Julie. Turning to Slide 17 to conclude my prepared remarks. Terex is well positioned and has a strong foundation to deliver long-term value for all stakeholders, because we have great businesses, strong brands, and strong market positions upon which we can grow the company. We will continue to invest in new products and manufacturing capacity, along with strategic inorganic growth. We'll continue to execute our disciplined capital allocation strategy, and we have demonstrated resiliency and adaptability in an increasingly challenging environment. I'm confident this will result in Terex being an even stronger company. And with that, let me turn it back to Jon.

Jon Paterson, Vice President and Treasurer

Thanks, John. As a reminder, during the question-and-answer session, we ask you to limit your questions to 1 and a follow-up to ensure we answer as many questions as possible this morning. With that, I would like to open it up for questions. Operator?

Operator, Operator

Our first question comes from Stephen Volkmann from Jefferies.

Stephen Volkmann, Analyst

Going around maybe slightly left field, but I'm curious if you can just comment around sort of the ramp-up in Monterrey, your plans for that, sort of how that progresses? And I guess what I'm really trying to think about is what's the margin impact of that over the next medium term as that ramps up?

John Garrison, Chairman and Chief Executive Officer

Thanks for the question, Stephen. As we indicated, and Julie said, Monterrey, Mexico is one of our major capital investments for the year and important to us. I think the team is doing a really good job in a challenging environment. The project is on time and on budget. We completed the telehandler move from our Oklahoma City facility. So we stopped the telehandler production in Oklahoma City and moved that to Mexico, Monterrey, into the temporary facility. So the primary and permanent facility is under construction and doing well. At the same time, we're moving other product lines in Mexico as well. Those are products that were originally scheduled to be manufactured in China but we moved into Mexico, and some of the products in the Redmond facility, where labor is tight, we're moving into the Mexico facility. And again, that is on time and on schedule. Commensurate with that, we're also developing our Mexico supply chain, and we think that's also going to provide a competitive advantage for us as we go forward. What we've said there, Steve, in terms of the margin improvement of Mexico is, over the next couple of years, '24, '25 time frame, when it's complete and the transition and movement of product lines in there, we anticipate about a 200 basis point overall margin improvement in our Genie business as a result of the complete utilization, if you will, of the Monterrey facility. So again, we think this is going to help improve our global cost competitiveness, position us to be effective in the North American market. And again, the team is doing a really good job in a challenging environment, not just challenging to manufacture things, it's challenging to build things and the project's on schedule, on budget. And the other thing we're excited about, Steve, is our ability to attract incredible talent, both managerial talent and direct labor talent in the Monterrey, Mexico area. So the project is going really well. And like I say, over the next several years, we anticipate it's going to add 200 basis points of margin improvement in the Genie business.

Stephen Volkmann, Analyst

Super. I appreciate it. And then my follow-on, just on hospital inventory, John, can you just sort of comment on the trends that you're seeing there? If it's changed in terms of what is missing or anything? And then how you see that progressing toward the end of the year, and I'll pass it on.

John Garrison, Chairman and Chief Executive Officer

Thanks, Steve. So yes, we're still talking about hospital inventory. And we, like many manufacturing companies, have continued to experience disruption. In terms of the components, I don't think it's a word unique in the sense that we're dealing with electronic components, doing a lot of work there. Engines driven by electronic components are creating challenges, and then hydraulic systems are really the 3 principal areas that we're dealing with. The team is aggressively managing it. We've got an escalation process up to and including me. So I spend a lot of time during the week dealing with supply chain issues. What we saw, Steve, is that we saw the inventory cost; we saw hospital inventories climb. Really, in the first week of June, they were up to about over $100 million. The team did a good job over the last 3 weeks of the quarter, brought it down into that $60 million, $62 million range. So it's up about $12 million quarter-over-quarter, but it did peak at over $100 million during the quarter. So that describes the disruption that the teams are dealing with and what we're having to overcome to deliver for our customers. And again, I want to congratulate our teams. It's an incredibly challenging environment, but they're demonstrating resiliency and adaptability and finding ways to deliver products for our customers, but we're still experiencing disruption. And in terms of what we're anticipating, Steve, for the rest of the year, if you look at our outlook, we're kind of in that $1.1 billion range of revenue. So we're not assuming any significant improvement in the supply chain over the back half of the year. We are assuming that the hospital inventory comes down a little bit from where we are, helping to drive some improvement in free cash flow, but we're not assuming that the hospital inventory goes dramatically better than where we are right now as a result of the disruptions we're continuing to see.

Operator, Operator

Our next question comes from Nicole DeBlase from Deutsche Bank.

Nicole DeBlase, Analyst

Could you provide some insight into your expectations for the revenue trends between the third and fourth quarters, considering your previous comments on margin expectations for both segments?

Julie Beck, Senior Vice President and Chief Financial Officer

Nicole, so as we think about our operating flows and our revenue, we've been doing consistently with the supply chain. Remember, our sales forecast is a function of supply chain, not as customer demand. So we think about our supply chain being in that $1 billion to $1.1 billion range, which is what we've been doing for the last 6 or 7 quarters. So we're forecasting a slight increase in Q3 and Q4, but relatively consistent with what we've done, a slight uptick in Q3 and Q4.

Nicole DeBlase, Analyst

Got it. And then I guess maybe on the MP side, the margins looked really strong during the quarter. Was there anything kind of unique going on or onetime in nature? Just trying to think about how the 2Q performance balances against a step down in margins in the back half.

Julie Beck, Senior Vice President and Chief Financial Officer

For Terex, we expect our operating margins to see a slight increase throughout the year. In Q2, MP had an impressive second quarter with margins of 16.5%. We have adjusted the margin outlook for that business from 14.8% to 15.3% for the rest of the year. We anticipate balanced margins in the second half of the year with continued year-over-year growth. The quarter benefited from a favorable geographic and product mix. However, the second half of the year may be affected by typical holiday and summer factory shutdowns, potentially less favorable product and regional mixes, and increasing investments that are considered essential for that business in technology, engineering, R&D, and digital customer solutions.

Operator, Operator

Our next question comes from Stanley Elliott from Stifel.

Stanley Elliott, Analyst

John, could you just go back and talk a little bit about the Acculon investment? You mentioned 1/3 of the Genie booms, 2/3 of the scissors. How quickly can you accelerate the electric offering within kind of the AWP segment? And then how fast can you take that technology and put into other products that you have?

John Garrison, Chairman and Chief Executive Officer

We recently announced our investment in Acculon, which we believe will significantly accelerate their growth. Genie is already a leader in the electrification of our industry, and Acculon brings over 13 years of expertise in advanced battery solutions, not just lithium-ion. This investment allows us to combine their technology and knowledge with our own. Acculon excels at technology certification, which is crucial because even the best technology cannot succeed if it cannot be certified in a cost-effective and timely manner. They will assist us in that process. Additionally, they provide artificial intelligence capabilities and cloud-based technology that we intend to leverage, which we believe will enhance our market offerings. We are beginning from a position of strength, and we expect acceleration in our progress. As we collaborate with Acculon and our technology centers, we will also explore how to apply that technology across other areas of our business, including utilities and MP. While we are starting this initiative with Genie, we will quickly expand its use throughout our portfolio. Furthermore, this investment not only supports our growth but also positions us to benefit financially as the company expands, and we anticipate substantial growth in the coming years.

Stanley Elliott, Analyst

That's great. And then you mentioned $600 million of kind of MP and AWP revenues or, I guess, looking out beyond 12 months, how do you think about pricing for these longer-dated sorts of delivered items kind of given the volatility that we've seen here in the marketplace recently?

John Garrison, Chairman and Chief Executive Officer

Yes, thank you. You are correct that we are currently taking orders and have a backlog that extends into 2023, driven by strong customer demand across our various businesses. In the case of MP, the lead times are now significantly longer than our historical averages due to this strong backlog. MP has effectively managed pricing during this period, especially as we approach delivery dates. The units scheduled for 2023 are priced based on our anticipation of pricing for that year, but we will adjust as needed in response to the current inflationary environment. Regarding Genie, they also have a backlog for 2023, and the strong customer demand provides us with confidence in the longer-term outlook, particularly concerning the replacement cycle. Genie's team has been maintaining pricing discipline, having implemented price increases in April. All 2023 orders will reflect 2023 pricing, and we will continue to make necessary adjustments due to inflationary pressures. A similar situation exists in our utilities business, where demand remains strong. Our total backlog has increased by 70%, which boosts our confidence about the future, and we will continue to address pricing as needed considering the inflationary challenges we are facing.

Operator, Operator

Our next question comes from David Raso from Evercore ISI.

David Raso, Analyst

With your stock in the low 30s, it's clear that the market might be convinced about the $4, but it seems skeptical about your growth potential for next year. I'm considering 2023 in light of AWP, where your backlog exceeds $2.8 billion, including orders beyond 12 months. Even if you don't secure any more orders for the remainder of the year and meet your revenue guidance for AWP, you would still finish the year with over $1.6 billion in backlog, which is about 70% of a full year's sales. Therefore, I'm curious about the 2023 outlook and whether you're implementing any measures to enhance the reliability of those orders. Is there a possibility of increasing cancellation penalties or any other factors that could provide reassurance regarding the backlog? This backlog alone suggests that even if you receive only half the orders in the next six quarters compared to the first half of this year, your revenues for AWP would still grow. The key question here seems to be the credibility of the backlog, which appears to be what the stock is questioning at this point. While I understand the difficulty in persuading large rental companies to maintain their orders if they want to cancel, could you help clarify the reliability of some aspects of this backlog that we should feel confident about?

John Garrison, Chairman and Chief Executive Officer

Yes. Thanks, David. We share your enthusiasm for the backlog and the potential outlook. Obviously, it's too early, David. We're going to learn a lot. It's August. So we're not going to provide 2023 guidance at this time. But you're absolutely right. We have an incredibly strong backlog and we have significant coverage that's going into 2023. So we are anticipating growth in both segments based on the backlog in 2023, based on the backlog that we have. Now let me be clear, David, we're going to need to see improvement in our supply chain to capitalize and to drive growth as we move into the next year. If you look specific to the AWP, the market is incredibly strong. The rental companies in North America and Europe, for that matter, are seeing very robust business. They're seeing record levels of utilization. They're seeing very strong rental rates. They're seeing very strong used equipment values. They're being very disciplined in their business, and they're executing incredibly well. They're actually growing their business into other areas. And so the underlying secular rental trends are quite strong. That backlog is in there. I can tell you, David, every customer conversation I have, it's not about, hey, we're worried about canceling orders. It's about, can you get us the gear sooner and quicker? If you look at the replacement cycle and where we are in the AWP Aerial segment, it's been delayed because the industry has struggled to meet the needs of the industry. You've got the natural replacement cycle. You've got underlying infrastructure and infrastructure builds. If you just look in North America, there is no money currently being released or spent on the infrastructure bill. That's going to come in 2023 and beyond. There's a strong foundation for the rental companies going forward, and they're quite confident in their outlook, and that's been relayed to us in terms of their expectations for equipment going forward. I think the demand is there. They need the gear. They're going into the cycle with an aging fleet, and that creates a strong demand environment and there's scarcity right now because of production challenges. I think those things all go to creating a good demand environment for us going forward. You're right, what do we know? What we know is we've got historically high backlogs in that business at this time. The rental companies are doing well. They're looking at their markets, and they're robust about their outlook.

David Raso, Analyst

Sure. I mean, look, there's 2 things to do off of that, show some increased features that make it stickier than normal to let investors feel more confident that demand will be there, and/or if everybody's confidence in the backlog is what it is, obviously, the response for capital allocation is more share repurchase, right? So I know you're balancing building the portfolio. But I mean that's the crux of the story of the stock. Do we believe the backlog will be there in '23, right? Because it's obviously suggesting growth for '23. So I appreciate the commentary, though.

John Garrison, Chairman and Chief Executive Officer

Your question on capital allocation, David. We bought back a significant amount of shares in the quarter because we believe that these prices, that that's an incredible IRR. We want to grow the business. We have a bias towards growing the business. But at these share prices, at these IRRs, it's hard not to be active in the market for repurchasing shares.

Operator, Operator

Our next question comes from Michael Feniger from Bank of America.

Michael Feniger, Analyst

Following up on David's question, Materials Processing is now on track to achieve a new margin high, which is a significant milestone. Recently, one of your European competitors acquired a screening and crushing business at a valuation of 10 times EBITDA. John, where does your leverage currently stand? Is it below your target? How can we unlock the value in Materials Processing that the market is recognizing in other companies' operations? Is share repurchase the path forward? How should we consider mergers and acquisitions as we aim to expand Materials Processing? What are your thoughts on this for the future?

John Garrison, Chairman and Chief Executive Officer

Thanks for the question, Michael. First of all, MP has clearly demonstrated incredibly strong performance in the cycle. It's highly diversified and consistent and it drives significant margin improvement as we go forward. What do we like about it? And you're absolutely right; it contributes more than 60% of our operating earnings, and it's consistent as we go through time. Our job is to help the market understand the strength, the diversity, the capabilities of that segment as we go forward. Part of the reason it's been so successful is regional diversification. We're not bound to one region; it is truly a global segment. Second is product and customer diversification around aggregates, lifting, concrete, our handling, and environmental business, and then end market diversification. It is construction, yes, but it's waste handling, recycling market. So we serve many markets. We also think from an M&A activity that it's still highly fragmented within the verticals that we compete in. You've seen much of our M&A activity; the most recent acquisition of ProAll is in that space. So near adjacencies where we believe we can build out the MP segment and over time actually create multiple segments if we're successful within the MP space. You're also right that we've got a strong balance sheet. Our debt-to-equity is at 1.5x. We've talked about 2.5x net debt-to-EBITDA through cycle. We have the balance sheet. We're going to be disciplined. We've made some acquisitions, and we continue to look in this area, because it is an area that's underappreciated, and it's an area that we've got to do a better job explaining to our investors the power of this segment and the difference in the Terex portfolio as a result of MP being 60% of our operating earnings. We're going to work hard to get that message out. When you see our M&A activity, you can expect to see more M&A activity, again, we'll make technology investments, but you can expect to see more M&A activity in and around the MP space as well because we like the dynamics in that space, and we'd like to build that out, and ultimately, over time, create at least multiple segments within the MP segment.

Michael Feniger, Analyst

Thanks for that response. And on the AWP side, obviously, the guidance implies a strong margin in the second half and Q4 potentially 10% or higher. So it's a good starting point, obviously, for next year. I guess just bigger picture, investors always wonder if you can drive cycle-over-cycle margin improvement in AWP. I mean how different is this energy business today from your last peak in 2018?

John Garrison, Chairman and Chief Executive Officer

Great question. Hats off to our Genie team because they've really been focused on improving the global competitiveness of our Genie business. That team completed a significant restructuring in 2020 that took out over $90 million of cost, significantly improving profitability, but also improving the resiliency and breakeven point if we were to face a downturn. I spoke about the market activities and the strength that we're seeing in the market. But on the operational excellence initiatives, the team has really done a good job the last couple of years driving pricing discipline and pricing improvement, driving process efficiency and effectiveness, and even driving some cost productivity, what we call flex productivity improvement despite the significant disruption that we've been seeing. We talked about OKC and Mexico. That's going to help. That's different. We're going to continue to leverage China that also is a cost-effective base to export to other regions of the world. Julie mentioned in her comments and the team there has done a fantastic job, aggressively managing SG&A while investing in product development. But the team realizes that we have to be disciplined on our SG&A spend and not allow it to grow as revenue grows, and they've done a heck of a job there. Our strategic sourcing team. It's been tough in the market for strategic sourcing and our purchasing teams. But despite that, they're still out there working to expand our supply base. They're out there working on cost-out initiatives. They're working to develop our Mexico supply base. All of that didn't exist back in 2018. Likewise, new products and new product development. The team is doing a really good job of purposeful innovation, bringing things to market with features and benefits, but also are lower cost to manufacture, so design for manufacturability, and design for assembly, VADE work in our product development. The team is doing a great job there. We're investing in technology and systems in that business that didn't exist. But one for us to be easier to do business with our customers, but also to do the digital thread within our own operations. So we can improve the speed of decision-making and improve the decision-making process with systems and processes within the business. We've got a major initiative underway. The last part is our parts and service team in that business. Over the last 3 or 4 years, they have done a wonderful job growing the business, expanding the business, and that is also countercyclical for us as we go forward. That team is working hard in an incredibly challenging environment. I think they've done a really good job restructuring that business to ensure it's adaptable and resilient to respond to whatever market conditions that that team faces. So they've done a heck of a job and a lot of hard work over the last couple years.

Operator, Operator

Our next question comes from Tami Zakaria from JPMorgan.

Tami Zakaria, Analyst

My first question is, and I apologize if I missed it. You're expecting 9% pricing for the year and 6% volume. Can you provide some details on the price and volume expectations by segment for the year?

Julie Beck, Senior Vice President and Chief Financial Officer

In general, we are expecting a 9% increase in pricing overall for the year and a 6% increase in volume. Both businesses are experiencing rising prices as the year progresses. They have implemented various pricing strategies starting last year and have been adjusting them throughout the year in response to rising costs. Therefore, both businesses are seeing increased prices moving forward.

Tami Zakaria, Analyst

So price increases across segments have been similar? Can we assume that?

Julie Beck, Senior Vice President and Chief Financial Officer

Yes.

Tami Zakaria, Analyst

Got it. I have one quick follow-up to what John just mentioned earlier about an inventory influx in June. So when you began the quarter, you were expecting top line to grow only modestly quarter-over-quarter, and you expected that to be driven mostly by the MP segment, but your top line came in well above expectations for both segments, excluding FX. So what really drove that? Was June an exceptionally strong month that drove the upside? Or did you have better-than-expected sales sort of throughout the quarter?

John Garrison, Chairman and Chief Executive Officer

It's a good question. Remember, early in the quarter we were dealing with the COVID disruptions and lockdowns in China. The quarter started off pretty slow as a result of those lockdowns, not just disruption to our existing facilities but also through the supply chain and the logistics. As the lockdowns in China eased, our teams did a great job literally sleeping in the plants to produce products; it's those ease that improved the supply chain. I would say we saw an improvement as we went into June as the COVID policies were relaxed in China.

Operator, Operator

Our next question comes from Seth Weber from Wells Fargo.

Seth Weber, Analyst

Maybe, Julie, another pricing question for you. The implied kind of high single, low double-digit margin for AWP in the back half of the year, does that reflect you're on the positive side of price cost by the end of the year? And can you just give us any indication on AWP, how much is structural pricing versus surcharges?

Julie Beck, Senior Vice President and Chief Financial Officer

Yes. Overall, the operating margins are expected to steadily increase throughout the year as price dynamics improve. We expect to be price cost neutral for the year. AWP delivered operating margins of 7.7% in the quarter, an increase of 180 basis points compared to the first quarter. This sequential improvement was due to strong execution, strict expense management, and disciplined pricing actions. We anticipate continued sequential improvements in the second half through disciplined price-cost management, and we expect our incremental margin target to exceed our expectations in the latter half of the year.

Seth Weber, Analyst

Okay. Is there any flavor for how much of that is structural versus surcharge?

Julie Beck, Senior Vice President and Chief Financial Officer

Yes. So the Genie business and AWP, both businesses have taken price increases. So in our utilities, it's been a combination of price increases and surcharges; the same is true for the Genie business. Both of them have a combination of list increases and surcharges.

Seth Weber, Analyst

Okay. And then maybe just following up on the MP segment and the strength in the margins there. Is there anything with the acquisitions that you've done or investments that you're making that would prevent a 20% to 25% incremental margin for next year as you're thinking about it?

Julie Beck, Senior Vice President and Chief Financial Officer

Overall, we're not giving 2023 guidance at this point in time, but we're pleased that MP had 20% incremental margins in Q2 and we expect strong incremental margin performance for the rest of the year. We're pleased with the absolute overall profitability, but our overall target for Terex remains at 25% incremental margin.

Operator, Operator

Our next question comes from Steven Fisher from UBS.

Steven Fisher, Analyst

You mentioned before, John, that the key thing for next year is just to be able to deliver your backlog. I imagine you're going to be doing some of your 2023 planning in the next few months. So I guess, with a clean slate on the year and still maybe 5 months away from the start of the year, can you put better contingency plans in place to manage supply chain risk for 2023? To what extent are you now thinking multiple moves ahead to be able to manage next year a little bit better, if possible?

John Garrison, Chairman and Chief Executive Officer

Yes. Great question. We spent a lot of time on that. From the actions into response, first, our strategic sourcing initiative did help identify multiple suppliers for key commodities. That initiative has provided at least a list of suppliers to go to. So even in this environment, we have expanded the supply base and that's helped. With that said, it's still highly constrained. The engineering redesigns I've mentioned. The team has done a really good job of redesigning some of the components for what's available. Part of those redesigns are for what's available not just now but also into the future. We think that will help potentially mitigate some of the electronic challenges and microchip challenges that we've had as a team. Continued engagement at senior levels with the key suppliers, up to and including at the CEO level. Those engagements are going to continue. We've been very transparent in terms of what our needs are as we go forward and the relative performance of the key suppliers. With that said, I don't want to be totally negative on the supply chain, because they're also highly motivated to deliver for us, so that we can deliver for our customers. So these are challenging times, they're difficult conversations at times, but the supply base is motivated. We're expanding the supply base, making engineering design changes as we can, and then looking to reshore in some cases, for example, building up the Mexico supply chain over time. We think that's going to provide a greater degree of resiliency for us as we go forward. It's a multitude of steps across both businesses, AWP and our MP business as we go forward. The other piece, I think, that we'll see some improvement on is our utility business has been significantly impacted by chassis and bodies. I think chassis supply, as we move into 2023, we will begin to see some improvement there because that has adversely impacted that part of our business. Just a couple of things that the teams are doing. We're continuing to do to provide that resiliency that we're going to need to have the opportunity for growth in 2023.

Operator, Operator

Our last question will come from Jamie Cook from Credit Suisse.

Jamie Cook, Analyst

Congratulations on a great quarter. I have two follow-up questions. First, can you share your observations on order trends in Europe compared to the U.S. and China, and whether those trends have continued into July? Second, regarding your assumptions for price costs in the second half of the year, I recall that you previously estimated hot-rolled coil to be $1,800 for the first half and $1,400 for the second half. What are your current expectations or what is included in your guidance?

John Garrison, Chairman and Chief Executive Officer

Thanks, Jamie. The good news is, it's similar to North America on the Genie side, the multiyear replacement cycle is going to help. We're actually seeing stable backlog in order rates despite the challenges in Western Europe. Similar story. We've seen backlog increase, sales increase in those markets. Clearly, those are the markets that we're watching. We're watching all the markets, but obviously very focused on what's transpiring in Western Europe. But right now, I think the word I would use is stable in terms of demand in bookings and outlook standpoint, but there's actually growing backlog.

Julie Beck, Senior Vice President and Chief Financial Officer

And Jamie, our second half HRC for the U.S. North America is $1,050.

Operator, Operator

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

John Garrison, Chairman and Chief Executive Officer

Thank you, operator. And please, if you have any additional questions, please follow up with Julie or Jon. Again, please stay safe and healthy, and thank you for your continued interest in Terex. Operator, please disconnect the call.

Operator, Operator

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