Terex - Earnings Call - Q2 2020
July 31, 2020
Transcript
Speaker 0
Good morning. Welcome to Terex Corporation Second Quarter twenty twenty 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. Thank you. Mr. Wilson, you may begin.
Speaker 1
Good morning and welcome to the Terex second quarter twenty twenty 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 and A.
Speaker 2
Please turn to Slide two of
Speaker 1
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 three and I'll turn it over
Speaker 3
to John Garrison. Good morning. Thank you for joining us and for your interest in Terex. Safety is and will remain the top priority of the company. Globally, very few of our team members have tested positive for the COVID-nineteen virus.
This reflects our zero harm safety culture of think safe, work safe, home safe. The vigilance of our team members, both inside and outside of work, and the rigorous COVID-nineteen safety protocols we implemented early on have made a real difference and have helped us to avoid any significant impact to our operations. We will keep our guard up as we remain focused on protecting the health and safety of our team members, their families, and communities. Turning to Slide four, after suspending production in most of our facilities around the world in March, we resumed manufacturing in all of our plants globally beginning in late April and increasing in May and June. This resumption was accomplished with a rigorous focus on safety protocols and production that has been calibrated to meet customer demand.
Our teams are continuing to work closely with our customers to understand their demand, proactively manage their production operations, closely partner with suppliers to control the incoming supply of materials and maintaining supply chain continuity, and utilize available government furlough programs. These and other actions have enabled us to tightly manage our variable manufacturing expenses, which make up over 80% of our cost of goods sold and dramatically reduce our cost base. In addition to rigorous cost control, we have remained focused on having ample liquidity to operate the business. As of June 30, we had approximately $1,000,000,000 of available liquidity. We may not be able to control the macroeconomic factors that drive the demand of our products, but we are aggressively executing on the levers that are within our control.
Please turn to Slide five. Q2 sales stabilized, but were below pre COVID-nineteen levels. As a result, we continue to take swift action in response to changing end market demand. In addition, we delivered strong overall decremental margin performance of approximately 20%. During our last earnings call, I discussed the actions that we were taking to right size our cost structure, highlighting that we were taking out at least $100,000,000 of cost.
We implemented these and other actions during April and our decremental margins reflect these decisive actions. To be specific, in the second quarter, we took out over $40,000,000 of SG and A cost, which was down 30% year over year from furloughs, permanent layoffs, team member salary reductions and deferral of merit increases. Finally, we generated positive free cash flow of $71,000,000 in the quarter. We achieved this by reducing net working capital by $180,000,000 or more than 20%, reflecting great teamwork by our supply chain, commercial and financial teams. We will execute and are focused on delivering positive free cash flow for the 2020.
Turning to Slide six. In the 2020, we transitioned our strategy to execute, innovate and grow, the natural evolution of our focus, simplify and execute to win strategy. The Focus and Simplify elements were essentially completed and it was time to emphasize execution driving innovation and growth, specifically focused on profitable growth. Terex has done a great job of innovating our products and technology. Our innovation needs to include lowering our manufacturing costs and what it costs customers to operate our equipment.
Our ANSI compliant JBOOM is an excellent example of this purposeful innovation, offering operators the essential performance they need to get work done at height with an unrestricted platform capacity of six sixty pounds. It offers rental companies the opportunity to increase their return on invested capital by mixing their fleet with a range of Genie booms, matching the right boom to the right application. In addition, our innovation will improve our ease of doing business through the lifecycle of the product by delivering industry leading customer service. In parts and service, we are providing our distribution partners easy to use digital tools, which are highly integrated and consolidated into a convenient and optimized digital portal, them serve our customers more efficiently. Terex is well positioned for future growth.
We have clear objectives to deliver on our Execute, Innovate, Grow strategy by driving continuous improvement and execution, winning with more customers around the world, driving profitability and shareholder returns and equipping the organization to win in the global marketplace. This will result in Terex emerging as an even stronger company. And with that, let me turn it over to Duffy.
Speaker 2
Thanks, Sean. Turning to Slide seven, let me begin by reviewing our Q2 financial results. I would call your attention to our financial reporting structure. As you will notice, consistent with Q1, we did not report adjusted Q2 twenty twenty financial results. Instead, we are identifying the specific financial impacts from COVID-nineteen and certain other amounts affecting our Q2 reported results.
We continue to provide information that will help the investment community more easily compare our year over year results going forward. Looking at our second quarter financial results, revenue of $690,000,000 was down 47% year over year. As discussed during our last earnings call, we were operationally planning for a challenging quarter. That said, throughout the quarter, we did see the markets in which we operate stabilize and begin to recover. For the quarter, we recorded an operating profit of $7,000,000 compared to adjusted operating profit of $132,000,000 in the second quarter last year.
The lower operating profit resulted from revenues being only approximately half of Q2 twenty nineteen combined with significant unabsorbed manufacturing costs. These costs were due to the combination of fixed costs associated with plant closures and production levels below customer demand to reduce finished goods inventories, principally within AWP. As John discussed a few minutes ago, with the onset of the pandemic, we took aggressive steps in April to reduce our overall cost structure to align with the current level of customer demand. While lower revenues impacted our gross margin and increased SG and A as a percent to sales, our aggressive cost reduction actions allowed Terex to achieve an approximately 20% decremental operating margin for Q2, more favorable than our targeted 25% decremental margin. This decremental margin was achieved despite $22,000,000 of gross profit charges primarily associated with fixed costs at our manufacturing facilities for the period they were closed.
In addition, SG and A was adversely impacted by $4,000,000 primarily due to employee severance and restructuring. Excluding these charges, Terence's decremental margin would have been 16% in the quarter. Below operating income, interest expense was $7,000,000 lower than Q2 twenty nineteen as a result of lower borrowings versus a year ago, principally related to our revolving credit facility being undrawn for most of this past quarter. In addition, other income was positively impacted by $1,000,000 related to the marking to market of a publicly traded holding. For Q2, we recorded a tax benefit of 48%, which reflects the impact of adjusting our Q1 tax rate to our forecast tax rate.
In general, when the pretax earnings amount is low, as was the case in the first half of this year, small changes to the tax benefit or expense can have a relatively large impact on our quarterly tax rate. Finally, our reported EPS loss of $05 per share includes the COVID-nineteen and other impacts that I just discussed, amounting to pre tax charges of approximately $25,000,000 or $0.25 per share. Turning to Slide eight and our segment's financial results. Starting with AWP, AWP sales of $414,000,000 contracted by 52% compared to last year, driven by continued challenging global end markets. The U.
S. And Europe remained significantly below last year's levels. We continue to aggressively manage production levels to ensure we are not building excess inventory. Our Changzhou, China facility ramped up production over the course of the second quarter to pre COVID-nineteen levels. Overall, the utilities market stabilized in the quarter, but remained soft in certain customer segments.
AWP delivered strong decremental margin performance of 20% in the quarter by aggressively rightsizing production and costs to align with end market demand. Backlog at quarter end was $5.00 $9,000,000 down 32% from the prior year, while second quarter bookings of $190,000,000 were 63% lower than Q2 twenty nineteen. Aerial Products Q2 bookings and backlog at June 30 were impacted by customer booking administrative changes, which resulted in the cancellation of their orders and the push out of orders due to delays in availability of financing. These customer booking changes reduced AWP Q2 bookings and backlog by approximately $100,000,000 Most of these orders are expected to be rebooked and shipped in the 2020. Excluding the impact of these customer orders, Q2 bookings were down approximately 40% and backlog was down approximately 20%.
During the quarter, we also continued to experience a shifting of customer orders from the second quarter to the 2020, although to a much lesser degree than we experienced this past March. Now turning to Materials Processing, NP had another solid quarter, achieving 9% operating margins despite challenging markets. It is a testament to their operational strength to deliver relatively strong positive operating margin on significantly lower revenues. Sales were $264,000,000 down 39% from the second quarter twenty nineteen, driven by extremely cautious customer sentiment resulting in delaying capital purchases. The MP team has been aggressively managing all elements of cost in a challenging market environment, resulting in decremental margin performance of 25%.
Backlog of $262,000,000 was 36% lower than last year and down low single digits sequentially. However, MP customer bookings trended up each month in the quarter with June higher year over year, which gives us optimism going into the second half of the year. Customers in both segments continue to operate through the COVID-nineteen pandemic and existing equipment is being utilized, but at lower levels. Both our AWP and MP businesses are industry leading in their respective segments with very strong brands. They are well positioned to grow in their markets as conditions improve.
Turning to Slide nine. Now I would like to provide you with some perspective on how we currently anticipate the 2020 to develop financially. It is important to realize that with COVID-nineteen, we are operating in an unprecedented period and customer demand could change negatively or positively very quickly depending upon developments with respect to the pandemic. While we believe it is important to provide you with insights into our business expectations for the 2020, you must understand the potential for variability of results to our expectations is higher than normal. With that said, as for commercial demand, we have seen our markets stabilize, although at a much lower level of demand than 2019 or we expected at the 2020.
We currently expect revenue over the second half twenty twenty to be approximately the same as the first half of this year with the revenue generated being relatively evenly split between each of the remaining quarters. From a segment perspective, we anticipate the year over year quarterly revenue declines will be greater in AWP versus MP. We remain fully committed to aggressively managing our overall cost structure in line with reductions in customer demand such that we maintain our decremental margin target of 25% for the full year for the company as a whole and for each of our segments. We also remain committed to these decremental margin targets for the 2020, although as a result of summer shutdowns in many of our facilities, we do expect our fourth quarter decremental margin will be better than the third quarter. Finally, we expect the full year 2020 corporate and other cost structure will be incurred equally between the 2020.
We are intensely focused on overall liquidity and free cash flow generation. Based upon our current customer demand outlook and cost reductions, we expect to be free cash flow positive for calendar year 2020. As is typical in our business, we were approximately $40,000,000 free cash flow negative during the 2020 and would expect to generate more than this amount of free cash flow in the back half of the year. Net working capital reductions will be a primary source of second half twenty twenty free cash flow generation. Finally, we view our $600,000,000 revolving credit facility, which is fully available to us as an insurance policy for demonstrating the financial security of Terex to our customers, suppliers, team members and shareholders.
We anticipate having ample cash on our balance sheet during the remainder of 2020 and would not expect to utilize our revolving credit facility. Please turn to Page 10 and I'll review our disciplined capital allocation strategy. Despite the challenging environment, the entire Terex team drove positive free cash flow of approximately $71,000,000 in the quarter. Our continuing operations free cash flow benefited from our producing below retail demand. As a result of the COVID-nineteen impact on commercial demand, we continue to aggressively manage production, especially within our AWP segment, which further benefited our Q2 free cash flow.
We continue to expect net working capital will be a source of liquidity for the remainder of 2020. With the support of our revolving credit facility banks, we have sufficient liquidity available to be successful through this global pandemic, such that we will be positioned to come out the other side and grow again. Given the economic uncertainty, we have reduced our 2020 capital spending by 35%. While we remain prudent in our capital spending, we are investing for growth as demonstrated by our new utilities manufacturing facility and Changzhou, China facility expansion. We continue to align our cost structure with commercial demand and have taken aggressive cost reduction actions.
Most importantly, we have aggressively reduced the supply of material into our manufacturing facilities. To illustrate, 70% of our cost of goods sold are materials from suppliers that we are assembling into machines. These actions reduce the liquidity requirements of paying suppliers for that material. We have been adjusting our cost structure very aggressively to the demand environment in which we are operating. We continue to temporarily suspend our dividend and share repurchase activity.
In conclusion, we will continue to aggressively manage the business and generate strong free cash flow, while assuring we have the right capital structure, a strong capital structure, which we do have today. And with that, I'll turn it back to you, John.
Speaker 3
Thanks Duffy. And turning to Slide 11. First, let me take a moment to acknowledge Matt Fearon, who is leaving the company after twenty five years of service. Matt is a dynamic leader who has helped Genie grow from a regional brand to a global powerhouse in the aerial work platform industry. As announced, I have assumed responsibility as President of AWP for the foreseeable future.
I'm excited to work even more closely with the Genie and Utilities teams to improve profitability and growth. AWP's future success will be driven by investing in new technology and industry leading products, investing in world class manufacturing at Watertown and Changzhou and rigorously following our zero harm safety culture. We like our global position, global brands and long term prospects and we are investing to enable future growth. But investment can only happen when you execute, which the AWP team demonstrated by safely ramping up production and driving sequential and year over year revenue growth in China, proactively and swiftly taking significant SG and A reductions in response to lower demand, and aggressively managing working capital by delivering strong inventory performance. It is a competitive industry, so we must be laser focused on controlling what we can control, superior execution and aggressively reducing costs to improve margins and win in the global marketplace.
Turning to Slide 12. Materials processing demonstrated again this quarter that it continues to win in the marketplace. As MP continues to grow by finding product adjacencies and new geographies for its leading products and brands, all while demonstrating strong operational execution. The MP team has integrated the cranes business into its portfolio of specialty businesses. As an example, our Australian based Fauna business is growing globally.
Pictured here is a Fauna crane being delivered in Mongolia, an excellent example of how the MP team continues to find new geographies for MP products. The expansion of MP's environmental business under the Terex Ecotec brand to deliver environmental solutions is an example of the business finding logical product adjacencies for continued growth. For example, the Terex EcoTec pictured here will further enhance an already significant range of shredding products. The new machine will be manufactured in our new state of the art manufacturing facility in Derry, Northern Ireland, which supports the ongoing growth and development of Terex Ecotec's expanding product portfolio. The strong financial performance of MP relative to market conditions, achieving an operating margin of 9% and decremental margins of 25% demonstrates the MP team is executing well.
Finally, MP's bookings stabilized and increased throughout the second quarter, resulting in bookings only being down 10% year over year at the end of the second quarter. MP is a diversified and consistently strong performer even in these challenging times. Turning to Slide 13. To wrap up our remarks, we are laser focused on our strategy. While many things are difficult to predict today, what is certain is Terex team members around the world are focused on the right things health, safety, customers and improved productivity.
We will reduce complexity and cost and drive returns with a focus on improving margins, especially within AWP. Our businesses have a strong future, so we will continue to invest in innovative products and services to be prepared as market demand returns. And with that, let me turn it back to Randy. Thanks, John. With
Speaker 2
that, I'd like to open
Speaker 1
it up for questions. Operator?
Speaker 0
Our first question comes from the line of Mig Dobre with Baird. Your line is now open.
Speaker 4
Thank you. Good morning, gentlemen. My first question is really sort of a clarification on the disclosure you have on Slide seven. I'm curious to learn more about the $22,000,000 of fixed manufacturing charges. Is this are you essentially adjusting footprint and that's what that refers to?
Or is there something else going on there that we need to be aware of?
Speaker 2
So I'll take that one, Mig. This is Duffy. And under U. S. GAAP, which is what we're reporting U.
S. GAAP results. We're not adjusting anything out of the reported results. So under U. S.
GAAP, when our manufacturing facilities are closed and not producing, the fixed costs, a lot of them were in the especially during the month of April, May, U. S. GAAP doesn't permit you to capitalize those costs into inventory. So there was $22,000,000 of fixed costs, which were charged directly to the income statement for the periods when those manufacturing facilities were closed. I hope that helps to explain.
Speaker 4
It does. Thank you for that. And then I guess my follow-up, I'm
Speaker 2
looking
Speaker 4
for you to put maybe a finer point on your cost savings. You talked about better than $100,000,000 But I'm curious as to how much of that was realized in the second quarter? What else is there still to come in Q3 and Q4? And is there maybe a view here in terms of what percentage of these costs could potentially reverse as we look beyond 2020? Thank you.
Speaker 3
Thanks, Mig. This is John. I'll take the first part and then Duffy can follow-up with any clarifications. We have been decisive, Mig, adjusting our cost structure to the market demands that we had. And as we said, we're using all available opportunities to do so, things like furloughs.
Our great team members have had salary reductions, MIB type of reductions. So some of the reductions are temporary. I will say the salary reductions in MIB are temporary and those will be reinstated as we move forward into the 2021 time period. Other of the cost reductions are permanent. We had reductions in force in our AWP businesses and our utility businesses as well.
So Mick, it is a combination. We are committed to exceeding frankly the $100,000,000 that we laid out. And as Duffy said in our outlook, our target as a team, as an organization is to drive to this 25% decremental margin level. And we will continue to adjust the cost structure of the organization such that we can deliver on that target. That's the focus, that's the target of the team as we go through this down period.
Speaker 2
Yes. The only thing I would add, Mig, is that, that aggressive cost reduction of taking the actions to reduce the cost structure really started at the beginning of Q2, March, very beginning of Q2. And that's what allowed us to achieve the better than 25% decremental margins in Q2. And they will and those savings will continue through Q3 and Q4, which as John said a moment ago, allows us to have the confidence to be talking in our outlook about our commitment to the decremental margin targets.
Speaker 4
Great. Thank you.
Speaker 3
Thank you, Mig.
Speaker 0
Our next question comes from the line of Joe O'Dea with Vertical Research. Your line is now open.
Speaker 5
Hi, good morning, everyone.
Speaker 3
Good morning, Joe. First,
Speaker 5
just if you would elaborate a little bit on back half revenue expectations at the segment level and whether we're looking at a narrower gap in trends between the two segments and MP that might be down high teens and AWP down sort of low 20s? Or is it a bit wider spread than that? So just trying to understand kind of what you're looking at for the different segment trends.
Speaker 3
Duffy, if you could take a shot at that and then I can perhaps talk a little bit on the market commentary.
Speaker 2
Sure. So when you look at our second let me try to frame your question or my response to your question from what occurred in Q2 to what we see in the back half of the year. So when you look at the second quarter, our AWP segment revenue down 52%, the MP segment revenue down very high 30s. So MP was not down as much as the AWP segment. I think that as we move into Q3 and Q4 for that matter, the trend that the MP segment will not be down as much as AWP will continue.
And then number two, that neither segment will be down as much in the third or fourth quarters as they were in the second quarter, right? We're providing an outlook. Don't want so I can't give you exact percentages here. Obviously, the world is highly variable and volatile at the moment. But I would just simply say is that as we went through the course of the second quarter, we saw stabilization in the markets in which we operate.
Orders increased, within the AWP segment excuse me, especially within the MP segment as we went through the course of the quarter and that will allow the Q3, Q4 revenues Q3, Q4 revenue change. I want to be clear about that. Q3, Q4 revenue change year over year will be not as negative as it was in Q2. And does outlook for flattish
Speaker 5
embed that the $100,000,000 of sort of cancellations delays you saw in AWP is fully recovered in the back half or only a portion of it? How are you thinking about that in a flattish back half?
Speaker 2
Think in Joe, go ahead.
Speaker 3
Yes, go ahead, Duffy. I'm sorry. Go ahead, Duffy.
Speaker 2
I was just going to I would say, we use the word most. And so the answer is that the outlook does contemplate that most of those orders are both rebooked and machines delivered in the back half of the year. John, you can expand, sorry.
Speaker 3
Yes. And I think just to add on that, Joe, again, it's an outlook. But as we look at the market now in our AWP segment, we did see utilization improve as we went through the quarter, likewise in our MP segment around the world. So again, it's just an outlook. As we sit here today, that's our outlook.
It's not a financial forecast. It's not financial guidance. But looking at the businesses, we're seeing everything here today. That's how we see the back half unfolding. And obviously, it could change, as we said, dramatically either way depending how the COVID pandemic plays out.
But as we sit here today, that's the outlook that we see.
Speaker 5
And then last one on AWP inventory, a lot of sort of attention and effort on getting that to comfortable levels. Can you talk about where you are today, the degree to which you've got any more work in the back half of the year and your comfort level with exiting the year and allowing you to produce to retail?
Speaker 3
Thanks. I'll take that one, Joe. We've talked a lot over the course of time here about aligning our AWP inventories with the market demand. And we have been under producing to retail demand for quite some time and we continue to do that in the second quarter. Our production sales were down, but our production was down 66% in the quarter after being down 47% in Q1.
As a result of that, we are seeing our inventories and the teams did a great job. We are seeing our inventories come online. We saw a reduction in inventory sequentially and year over year, which is helping to drive our cash flow performance. So this is one, Joe, now that I'm there as part of the business, it will continue with the same degree of intensity. We're really close with the customers understanding their demand day by day and adjusting our production schedules such that we're continuing to under produce the retail demand.
Yes, we do have finished goods inventory, but we're closely managing finished goods inventory by model, by category around the world to ensure that we're not overproducing to that retail demand. So we've had to take dramatic production reductions this year to get the inventory in line. And we will continue that is our strategy. We're not going to overproduce to retail demand such that we end up in an adverse inventory position. And as we move through the year, Joe, it is important to understand, in the AWP business, and this is where we have to be close to our customers and understand what they're seeing, what we're seeing is because the market will rebound and it can rebound sharply.
Being on top of this consistently and constantly will be a focus area for us as a team as we go forward. And again, I'm pleased with the team's performance in terms of what they've been able to do to align our inventory with what our current outlook is for the segment.
Speaker 5
Got it. Thank you.
Speaker 3
Thank you, Joe.
Speaker 0
Our next question comes from the line of David Raso with Evercore ISI. Your line is now open.
Speaker 6
Hi, thank you. John, now that you're even closer to the AWP business being out in Washington State of Times and obviously it's under your watch 100%. For the stock to really work, right, it's about AWP kind of having a real up cycle. And just given the last couple of years, the divergence between AWP margins versus your largest competitor, it's been really stark. So just given you've gotten even a little closer to the business, can you explain kind of the last couple of years kind of what happened in diverge because you used to not be that different than the competitor on the margins.
And what are you looking at to give us comfort that you could get the margins back to where your competitor, even where they are right now, even in a down market?
Speaker 3
Thanks. Thanks for that question, David. And let me start by saying, as I said in my opening remarks, I really am excited to be working closely with our AWP team, both our Genie team and our utilities team. I can do this because I've got a great team at corporate that can cover a lot of our corporate opportunities and workload. And we've got a great team at Genie and at Terex Utilities.
We also created a new position in our Genie business, AWP Aerials business with Simon Meester as the COO, again to give us the focus that we need. So we are going to be and the team and I will operate the business, David, with a laser focus on process efficiency and execution so that we can significantly drive margin improvement. There's no doubt, David, our underproducing the retail demand for quite some time has contributed to our margin challenges at AWP. So as we begin to bring that in line, that clearly will help. But we're going be looking at every aspect of the business, reviewing all opportunities that we have to be more efficient in all aspects of the business from SG and A to manufacturing and selling.
And one thing that won't change, David, is the team has an intense focus on customer and customer satisfaction. So we'll build on that as we go forward. But I and the GD team understand that we have to address underlying cost issues and challenges in the business such that we can and we will deliver future margin performance improvement.
Speaker 6
I appreciate the comments, but can you
Speaker 4
just help us a little
Speaker 6
bit more understand? Because underproduction obviously hurts, but even your competitors had similar, say, sales declines this year as you're seeing. And again, the margin spread is really wide. So I was just curious if you've seen something being even closer to it that the expansion of the Chinese facilities is a big cost save coming versus other facilities in the past, something glaring within the business that maybe we don't see in the disclosure when it comes SG and A or whatever it may be, just because it's such a wide gap. I think it's a question people are going to have, how do I gain comfort in the margin improvement?
Because clearly, you can go back to where you were, the margins, the operating leverage is huge. But is there something structural that you're seeing that you feel you can attack? Because as we know, the competition is getting harder this decade in aerials than we've probably ever seen over the roughly twenty five year history of the product being of real full scale. So I'm just curious if there's something you're seeing that can explain that the big margin gap and why it can be gotten rid of?
Speaker 3
Right. Again, David, that underproduction to retail demand and lowering inventories in a rapidly declining revenue environment is a big driver on the AWP margin. So that's obviously something we as we move forward, we have to do a better job in making sure our sites align, do it with retail and production demand because we've actually had to cut harder to bring inventories in line. So that is clearly a process that we will continue to focus on and drive improvement. But David, again, all I will say is we're going to look at every aspect.
We understand aspects of the business. We like our footprint. As you mentioned in places like China, it is a good footprint for us, not only for the growth in China, but it is an opportunity for us to export out of China to the Asia Pacific market and into Europe. We think that will give us a good cost advantage as we move forward in time. And no stone is going go unturned, David, as we look at every aspect of the business.
And it's not lost on the team that there's a margin differential and it's not lost on us that there's a margin differential between our margin performance and other participants in the industry. And we will work to close that gap.
Speaker 6
I appreciate that. Thank you, John.
Speaker 3
Thanks, David.
Speaker 0
Our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is now open.
Speaker 7
Yes, hi. Good morning,
Speaker 3
Good morning, Jerry.
Speaker 7
John, I'm wondering if you could talk to us about what utilization levels you're seeing for your equipment in the field based on your customers' reports. It looks like they're running roughly 10% down year over year in terms of fleet on rent. And I'm wondering, is it similar for your products? Can you just give us some context? And can you talk about the cadence that you've seen into July?
Any areas any let up in areas where we've seen the coronavirus pick back up?
Speaker 3
Yes. Thanks, Gerry. And there's really two avenues of information we gain. One is being very close with our customers and trying to understand what our customers are seeing in terms of their utilization. The next aspect, and this is newer, we have now a little over 20,000 machines with telematics information.
And the combination of our telematics, the information our customers are sharing with us through the telematics is giving us better insights. And over time, we think it's going to help us when it comes to forecasting and things like that. So if I just go around the world quickly, Jerry, first and foremost, China. China was closed as we talked early in the first quarter, but we've seen the China market recover. Their utilizations have increased dramatically.
And we've actually seen sequential and year over year sales growth in China. So China is absolutely on the road to recovery in the China market. In North America, what customers have told us and what the publicly traded companies have said is they saw utilization and our telematics data confirmed that or I should say our customers' telematics data confirmed that. The low point really was somewhere in that April timeframe. I will say, Jerry, it did vary slightly by region within The United States, I.
E, the East was slower to start back up when we saw the utilization. Other parts of the country increased. We have seen a significant decline in Texas, not surprised based on both COVID, but also the oil and gas market area. So we did see a decline in utilization in Texas. So what's happened is it's increased over the quarter and it's stabilized.
In most cases, Gerry, slightly less or lower than pre COVID levels. I don't want to give you a percentage, but we could say it has not recovered fully to pre COVID levels. And then I would say in Europe, Jerry, similar story with what customers are saying and then also what the telematics data is indicating, similar story, again, varied in timing based on when the COVID crisis hit. So Southern Europe hit earlier, utilization was down and then recovered Northern Europe where the COVID hit a little bit later, several weeks later, you saw that in the utilization data. So that's how we've seen the markets unfold.
So the good news is we've seen utilization increase over the course of the second quarter. We have seen it stabilized over the course of the quarter. And it is below COVID levels. But in some cases, they're getting close to pre COVID levels in certain markets like China and other parts in The U. S.
And a few markets in Europe as well. So it has improved is what we've seen and that's what customers are telling us and that's what our telematics data is showing as well.
Speaker 7
And John, just to make sure we're on the same page, that pace of improvement, it sounds like has continued into July. Is that correct?
Speaker 3
I'm going to be careful, Gerry, not to go in quarter commentary. So my comments were to the second quarter. So I'm going to leave it there, if that's okay, Jerry. I'm going to try to avoid in quarter commentary.
Speaker 7
Okay. Fair enough. And then as we think about incremental margins in 2021, obviously, really nice decremental margin performance this quarter. Anything we should keep in mind because things like no travel will obviously unwind or hopefully, I should say, will unwind. So any of the steps that are driving attractive decremental margins in 2Q that we should think about that potentially don't follow through into higher decrementals in 2021?
And hopefully, pricecost will be a tailwind depending on how pricing sticks, but can you just talk to those points please?
Speaker 3
Yes. Duffy, could you comment on that real quick and Sure.
Speaker 2
I mean, I guess I would start, Jerry, by saying our priority focus quite honestly right now is about the 2020. So with respect to 2021, first of all, I hope we're talking to you about incremental margins as opposed to decremental margins because the with COVID-nineteen becomes hopefully in the rearview mirror that where the markets in which we operate are growing and as such our top line is growing. Obviously, time will tell with respect to that. I would say as it relates to the margins in 2021, we're going to continue to be vigilant on our cost structure and taking out cost to match with the demand commercial demand environment in which we're operating. We are fully committed to 25% incremental or decremental margins.
And the other thing I guess that I would say investors should have on their radar screen is obviously incremental or decremental margins are a factor of the year over year change. The year over year change in revenue and the year over year change in operating income. And so with the low levels of operating income that we've been seeing here in 2020, at least in the first half of the year as a result of the COVID-nineteen, I'd say does portend well for incremental decremental margins in 2021.
Speaker 7
Okay. Thank you.
Speaker 3
Thank
Speaker 0
next question comes from the line of Jamie Cook with Credit Suisse. Your line
Speaker 8
is
Speaker 3
good morning.
Speaker 8
Jamie. So Duffy, just to and I apologize because I'm working through multiple earnings calls this morning. But to follow-up on Gerry's question, I mean, so the view on 2021 if the volumes came back and who knows, right?
Speaker 5
But
Speaker 8
just given your comps, your incremental should be much better than the 25% that you guys target. That's my first question. My second question is, I know you're under producing retail and aerials. What is the expectation when you start to produce in line? Is it the fourth quarter or is it 2021?
And then as we approach 2021? And then my last question, can you just give an update on sort of where we are in the strategic sourcing and the potential cost savings associated with that? Maybe it's not 2020, maybe it's 2021, but any color you could provide there? Thank you.
Speaker 2
That was a lot of questions there. Yes, a
Speaker 3
of questions. But Jamie, let me I'll try to I guess go ahead Duffy.
Speaker 2
Why don't I just cover the first one surrounding the question on incremental, decremental margins in 2021 and only to say is that I understand the point you made. I think I was effectively making the same point, Jamie. Go ahead, John, sorry.
Speaker 3
Yes. As it pertains to production levels, Jamie, we're going to be laser focused on ensuring we have the correct level of inventory as we felt that we had too much finished goods inventory. So we've been under producing the retail demand to bring that inventory level in place. Again, where we end up at the end of this year, Jamie, is a lot of that is going to depend on what the forecast, what we think about 2021. It's too early to call that as we are here right now.
But again, the strategy of ours will be to show the same discipline that our customers are showing, which is not to overproduce. We're going to be disciplined about what we produce so that we have a good price cost environment that we don't feel compelled to do anything on pricing because we're sitting on incremental flat excess inventory. So we're going to be very disciplined on our production schedules to match what's needed for retail demand, while recognizing that these markets do pick up and can pick up quickly. And so that's where we've got to be in close contact with our customers from a production level standpoint. But that strategy will not change.
And Jamie, in terms of the strategic sourcing initiative, in my prepared remarks, I called out our sourcing teams. I think they've really done a great job in an incredibly challenging environment where we're asking suppliers to reduce the amount of product coming into our facilities, the raw and whip as our production levels have been cut, while also simultaneously ensuring that we have continuity of supply was a significant amount of supply chain disruption around the world. And so the teams have done a great job with that. As it pertains to the savings, Jamie, I will just say that the savings rates, the percentages that we're getting are in line with what our expectations were. Obviously, with the volumes being down so dramatically, the actual dollar savings are not there, but the rate savings are.
And so as volumes continue to pick up, we would anticipate that that would be a tailwind for us as we go forward. In terms of implementing the strategic sourcing process in the COVID pandemic period, Jamie, the teams continue to move their sourcing activities. It has slowed in some cases, especially if we're in a position where we're thinking of changing a supplier and we need to do on-site visits to check the quality systems, production systems, so on and so forth. So COVID has impacted the timing of the strategic sourcing initiatives. But even with that said, the team is continuing to progress it and where we can go with existing suppliers and vendors, we're making those types of awards as well.
But we would anticipate it being a tailwind for us as we move forward into the future.
Speaker 8
Okay. Thanks. I appreciate the color.
Speaker 3
Thanks, Jamie. Our
Speaker 0
next question comes from Courtney Yakavonis with Morgan Stanley. Your line is now open.
Speaker 9
Hi, good morning guys.
Speaker 3
Good morning, Courtney.
Speaker 9
Maybe just first on cancellations, appreciate you gave us some color on utilization through the quarter. But I think last quarter you kind of talked about taking a pretty heavy hand with the cancellations and the push outs, yet it continued this quarter. So I was just curious, is that kind of something that was more at the early part of the quarter and has since stopped? Or did you see it kind of reaccelerate as we've seen some of the utilization trends maybe falter a bit in some of these areas where the outbreaks have been? Just any color you can kind of give us on how cancellations are trending?
Speaker 3
Yes. I'll take that one. As it pertains to AWP, that was earlier in the quarter. We have advanced purchase orders and when customers weren't either had an issue with financing or timing of financing or were not able to give a ship to types addresses, we decided to administratively remove them. And we anticipate, as I said, that they will be booked back.
So it was, Courtney, more earlier in the quarter in AWP. I can say as we track through the second quarter, we track it daily. The number of cancellations and delays decreased as we went through the quarter. In the case of MP, they scrubbed their backlog really hard at the end of the first quarter and really took out orders where dealers were not willing to say when and where the product needed to be shipped. And so they didn't have the same level of cancellation and or delays in backlog and order books with our MP team.
And again, so that was pretty consistent throughout the quarter. So that's how I'd quantify the changes in the backlog as we progress through the second quarter.
Speaker 9
Okay. That's helpful. And then just within AWP as well, just on the utilities business, I think you mentioned that it's stabilized, but still soft in certain customer segments. Any more color you can kind of give us there just quantify how much that market is down relative to Aerials more broadly? And just how you're thinking about that business in the second half of this year relative to the year?
Speaker 3
Thanks, Courtney. So overall, the utilities business in this environment has been more stable than the aerials business. So its rate of sales decline was at the overall segment level. So that's how I would say it there. And really there's kind of three principal customer segments in that group and they're all exhibiting different dynamics.
One customer segment has been very steady is the investor owned utilities, the major integrated utilities. Their CapEx plans have not changed. We did have some delays, Courtney, in deliveries because a lot of these are customized vehicles and the customers couldn't come because of travel restrictions and the like to accept their vehicles. But that part of the market remains, I would say, remains buoyant. The market that we have seen some contraction is there's a specialty utility contractor market and that has softened a little bit as most rental channels have as we progress through the pandemic and we're looking to see that stabilize.
And then finally, we have some specialty products in there like our tree care type products. That's actually been buoyant as well because electrical utilities have to spend money on the maintenance side. And so we haven't really seen much of an impact there. So overall, yes, it's been impacted by COVID, but not nearly to the same level as our AWP Genie side of the business.
Speaker 9
Okay. Thanks. And just any comment on the outlook for that business given that you opened the new utilities facility?
Speaker 3
Yes. The team is in the process here in the late second quarter and into the third quarter moving into the new facility. They're excited. We do still believe Courtney that this business is a good growth business for us given the dynamics of electrification, five gs requirements that are ongoing. And then we also had the opportunity, as China has picked up, reserves manufacturing space in our Phase three Changzhou expansion for manufacturing of utilities products.
So the utilities business within AWP is a strong business for us and we anticipate it to continue to grow as we move forward.
Speaker 0
Thanks.
Speaker 3
Thanks, Thank you, Courtney.
Speaker 0
Our last question is from Seth Weber with RBC Capital Markets. Your line is now open.
Speaker 10
Hey, guys. Good morning. Good morning, Seth. Just squeaking in here under the wire. Appreciate it.
I guess I wanted to go back to the $100,000,000 cancelpush out comment. Can you just talk to are you seeing distress among some of your smaller customer, rental customers, the independents or whatnot? And then I guess the follow-up is, if a financing issue for them, would you consider getting more aggressive with Turks Financial to step in and help them there? Thanks.
Speaker 3
Duffy, could you take the financing side of that and I'll follow-up at the end.
Speaker 2
Yes, would say is that the financing were actually a fairly limited set of situations and that in general, I would say our independent customers have been operating very successfully through the pandemic. We're not seeing a ton of financial stress. I think they have taken advantage of government programs where available to them. And there were a limited set of situations where as a result of the pandemic, the customers needed extra time to put the funding in place for their the orders that they wanted to make here in 2020. And so as a result, until such time as they had the funding in place, we took the order out of the backlog and we have seen progress with that limited set of customers and expect that they will both have the financing that we placed the order and we will ship the equipment here in the second half of the year.
Speaker 10
Okay. But you're not inclined to get more aggressive with Terrex Financial then on your end? You're just you're leaving it up to the customers to get the financing?
Speaker 2
No. Look, think we work very closely with our customers to provide financing where appropriate recognizing that it's a combination of third party funders as well as our own balance sheet. And I think we've been exercising an appropriate level of aggressiveness to support our customers through this pandemic.
Speaker 10
Okay. And have you seen any uptick in bad debt
Speaker 2
over the No. I mean we did have an individual situation that we handled in Q1 and we talked about that during our Q1 earnings call. We've had no additional situation stress that over the course of the pandemic.
Speaker 10
Super. I appreciate it guys. Thank you very much.
Speaker 3
Thanks, Thanks,
Speaker 0
are no further questions at this time. I'll turn the call back over to Mr. John Garrison for closing comments.
Speaker 3
First and foremost, thank you for your continued interest in Terex. Please stay healthy. I would encourage all of us to please continue to follow the COVID-nineteen protocols so that you can keep yourself, your families and your communities safe. If you have any further or additional questions, please do not hesitate to follow-up with Duffy and Randy. And operator, you can now disconnect the call.
Have a great day.
Speaker 0
This concludes today's conference call. You may now disconnect.
