Terex - Earnings Call - Q3 2020

Transcript

Speaker 0

Welcome to Terex Corporation Third 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 TREX Corporation.

Speaker 1

Good morning, and welcome to the Terex Third 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.

Please turn to Slide two of the presentation, which reflects our Safe Harbor statement. Today's conference call contains forward looking statements, are subject to risks that could cause actual results to be materially different from those expressed or implied. In addition, we'll 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 to John Garrison.

Speaker 2

Good morning, and thank you for joining us and for your interest in Terex. Most importantly, I hope you and your families are remaining safe and healthy. Throughout this challenging time, we are proud of all of our Terex team members who are keeping themselves and others safe, meeting the needs of our customers, and helping our communities. I would like to recognize and thank our team members around the world for their continued commitment towards zero harm safety culture and Tariff's Way values. Safety is and will remain the top priority of the company driven by think safe, work safe, home safe.

Our team members remain vigilant by carefully following the COVID nineteen safety protocols and continuing to keep their guards up. Our crisis response teams remain active, and our facilities continue refining their preparedness and response plans to ensure they can respond swiftly as local pandemic conditions change. I'm proud of our team members' commitment to safety, but I'm equally proud of their dedication to the tariffs way value of citizenship. Despite the challenges presented by COVID nineteen, our team members continue to give back to the local communities. Whether it's the AWP team members continuing to place mask and face shields or MPT members donating PPE equipment, our team members are living our values.

Our dedicated team members are delivering value for our stakeholders and shareholders. Turning to slide four. Despite the challenging markets, the team is meeting customer demand, tightly managing all costs, aggressively reducing networking capital, especially AWP inventories, and delivering positive free cash flow. Q three revenue, which was in line with our outlook from the beginning of the quarter, improved sequentially almost 11% as end markets continued to recover from the lows in the second quarter. AWP revenue improved sequentially by almost 8% in q three, while MP revenues improved approximately 18%.

Customer bookings in q three represented a dramatic improvement from q two. Unlike the first half of the year, we did not experience any material customer booking cancellations or pushing out of orders. Sequentially, AWP bookings were up almost a 100% compared to Q2 and MP bookings were up 36%. In addition to sequential strength in bookings, both segments saw improvement on a year over year basis. Demonstrating the strength of our Q3 bookings, tariffs backlog was consistent with backlog at the end of Q2 and down year over year by only 5%.

Although revenue was consistent with our outlook as a result of our laser focus on cost control and only producing in line with customer demand, profitability for the quarter outperformed our outlook from the beginning of the quarter. Importantly, our approximately 5% operating margin was achieved with both segments generating positive operating margins. Our MP segment achieved outstanding financial results reporting a 13% operating margin while revenues were down 19% year over year. Both segments and tariffs overall achieved our targeted 25% decremental margins or better. We are not satisfied with AWP's operating margins.

We must drive significant improvement to restore the segment to industry competitive margins, and we will continue to take the actions necessary to deliver on that improvement. Throughout 2020, we right sized our inventory levels to the customer demand environment, especially in our aerial products business. Their inventory levels are now at a level consistent with 02/2016, which was the last time there was an industrial downturn. Going forward, we are now at a level where aerial products can manufacture to customer demand. Our focus on networking capital management drove $54,000,000 of free cash flow in the third quarter, delivering positive year to date free cash flow.

Overall, our financial performance strengthened significantly in q three. I assure you that we will remain laser focused on consistently improving these results in 2021. Please turn to slide five. Our strategic priorities will continue to strengthen our business operations so we can succeed through all market cycles, including these uncertain times. We are taking action and we are implementing steps to improve, strengthen, and grow Terex.

Through operational excellence, we are strengthening accountability with each team member doing what he or she said they would do. To win in the marketplace requires more than just knowing the score. We must understand the score and have the process discipline to drive continuous improvement in the business. On the cost side, we've been looking at every aspect of the business to ensure we can maximize our ability to be globally cost competitive. We are laser focused on maximizing revenue, aggressively taking out cost, not just manufacturing cost, but also SG and A cost.

Tariff's target SG and A as a percent of sales to be 12.5%, which we achieved in 2019. However, as sales have declined, our 2020 SG and A percent of sales has increased to over 14%. We are executing on an SG and A cost reduction initiative with a target of SG and A percent of sales for 2021 of 12.5%. This initiative is replacing temporary 2020 cost savings with permanent cost reductions. We are evolving into a leaner organization with fewer organizational levels.

Also, as we right size our organization, we've been reevaluating and reducing our related company wide footprint. We recognize that to win in the marketplace, we must have globally cost competitive company wide footprint. We have been and will continue to take the actions necessary to achieve this objective. Turning to innovation. We are listening to customers to ensure our products and services offer the features and benefits that provide value.

We will provide the right features at the right price to meet customer demand. Purposeful innovation drives improvement in returns and invested capital for our customers, allowing us to support their growth. Finally, Tariff is well positioned for future growth because we have strong businesses, strong brands, and strong market positions upon which we can grow. We will continue to invest in and grow our high performing businesses, including investing in new products and manufacturing capacity where demand calls for it, and we are a more focused organization. I am confident this will result in Terex emerging from these uncertain times as an even stronger company.

And with that, let me turn it over to Duffy.

Speaker 1

Thanks, John. Turning to slide six. Let me begin by reviewing our q three financial results. I would like to call your attention to our financial reporting structure. As you will notice, consistent with q one and q two, we did not report adjusted q three twenty twenty financial results.

Instead, we are identifying specific financial callouts which impacted our q three reported results. We continue to provide information that will help the investment community more easily compare our year over year results. Looking at our third quarter financial results, we achieved net sales in line with our outlook from the beginning of the quarter. Overall, revenue of $766,000,000 was down 25% year over year. That said, throughout the quarter, we did see the markets in which we operate continue to stabilize and improve.

For the quarter, we recorded an operating profit of $37,000,000 compared to adjusted operating profit of $90,000,000 in the third quarter last year. The lower operating profit resulted from revenues being down from q three two thousand and nineteen, combined with adverse impacts from a product liability judgment, severance, and restructuring charges. We achieved this positive operating result through very disciplined cost control and adapting to the market environment. While lower revenues impacted our gross margin and resulted in an elevated s g and a as a percent of sales, our aggressive cost reduction actions allowed Terex to achieve an approximately 19% decremental operating margin for q three, more favorable than our targeted 25% decremental margin. This decremental margin was achieved despite $5,000,000 of gross profit charges, primarily due to a product liability judgment.

In addition, s g and a was adversely impacted by $8,000,000 due to team member severance and restructuring. Neither of these impacts were considered in our outlook going into the quarter. Excluding these charges, operating profit would have improved by $13,000,000, and Perrigan's decremental margin would have been approximately 14% in the quarter. Below operating income, interest and other expense was $3,000,000 lower than q three two thousand and nineteen because of lower borrowings versus a year ago, principally related to our revolving credit facility being undrawn this past quarter. In addition, other income was reduced by $1,000,000 due to marking to market of a third party investment.

We now estimate our 2020 full year global effective tax rate benefit to be approximately 52% compared to our previous estimate of 17%. During the third quarter, the US Treasury revised the regulations that permit a US taxpayer under certain circumstances to exclude from US taxable income, non US income subject to a high rate of foreign tax. This regulatory change significantly benefits Terex in 2020 by increasing our US net operating loss. Most importantly, we expect that in connection with our 2020 US federal tax return that we will be able to carry back our 2020 net operating loss to 2015 and expect to receive a cash refund in 2021 of approximately $30,000,000. Finally, our reported EPS of 31¢ per share includes the adverse operating impacts to cost of goods sold and s g and a, which were more than offset by the tax benefits that I just discussed.

Turning to slide seven and our segment's financial results. AWP sales of $445,000,000 contracted by 29% compared to last year, driven by end markets in North America and Europe being lower. The aerial products market and our sales in China remain robust. The utilities market stabilized in the quarter, but remained soft in certain customer segments. We continue to aggressively manage aerial products production levels to ensure we are not building excess inventory.

During q three, our aerial products production was 47% lower than q three two thousand and nineteen. This continued aggressive production control, producing below customer demand, allowed us to achieve almost a $290,000,000 reduction in aerial products inventory levels since the beginning of 02/2019. As John mentioned, Aerial Products inventories at the end of the third quarter were consistent with 2016 levels. AWP delivered a positive operating margin in the quarter of approximately 3%, driven by aggressively rightsizing production and costs to align with end market demand. The AWP team achieved strong decremental margin performance of 18 in the quarter, which includes almost $7,000,000 of charges for a product liability judgment, severance, and restructuring.

Excluding the impact of these charges, AWP's decremental margin performance would have been 14%. As expected, AWP's decremental margins were adversely impacted by the opening of our new Watertown, South Dakota facility, where a dozen production buildings were consolidated into one new state of the art facility. Q three was challenging for our utility team from a production and product output standpoint as they work through the move into the new facility. However, throughout the quarter, the team improved their production output. AWP third quarter bookings of $404,000,000 were 10% higher than q three two thousand and nineteen, while backlog at quarter end was $478,000,000, down 3% from the prior year.

At the end of this quarter, a higher proportion of our backlog in AWP was scheduled for product delivery in the subsequent year as compared to the end of the third quarter two thousand and nineteen. Now turning to materials processing. MP had another solid quarter, achieving 13% operating margin despite challenging markets. It's a testament to the MP team's operational strength to deliver these strong positive operating margins on revenues down almost 20%. Sales were lower at $311,000,000 driven by cautious customer sentiment.

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 $289,000,000 was 8% lower than last year, but up 10% sequentially. MP slice business is strengthening through the quarter with bookings up 24% year over year and up 36% sequentially. Customers in both segments continue to operate through this uncertain time, and existing equipment is being utilized but at lower levels. Turning to slide eight.

Now I'd like to provide you with some perspective on how we currently anticipate the remainder of 2020 to develop financially. It is important to realize we are operating in unprecedented period and results could change negatively or positively very quickly. With that said, as for commercial demand, we have seen our market stabilize in the quarter, although at a much lower level of demand than 02/2019. Consistent with what we said during our q two earnings call, we continue to expect revenue for the 2020 to be similar to the first half of this year. From a segment perspective, we continue to anticipate that year over year q four revenue declines will be greater in AWP versus MP.

However, we expect the year over year revenue declines in q four to be smaller than q for both segments. As a result of actions taken principally by Aerial Products during the month of October, we are planning for at least $15,000,000 of severance and restructuring charges in q four. 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 and the final quarter of the year for the company as a whole and for each of our segments, including the q four charges that I just mentioned. Finally, as previously communicated, 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.

Year to date, we are already free cash flow positive, and traditionally, the fourth quarter of the year is our strongest from a free cash flow perspective. Based upon current customer demand outlook and cost reductions, we expect our full year 2020 free cash flow generation to be approximately the same as in 2019 and significantly lower revenue and earnings. Net working capital reductions will continue to be a primary source of q four free cash flow generation. Because of our strong liquidity position, we have significantly reduced and expect to continue to reduce our sales of receivables as a low cost source of financing. Finally, we anticipate having ample cash on our balance sheet during the remainder of 2020 and would not expect to utilize our revolving credit facility.

Turning to page nine, and I will review our disciplined capital allocation strategy. Despite the challenging environment, the Terex team drove positive free cash flow of approximately $54,000,000 in the quarter, resulting in Terex being approximately $13,000,000 free cash flow positive on a year to date basis. This accomplishment is ahead of our outlook communicated in q two. However, our team members remain vigilant and will continue to aggressively manage production, especially within our AWP segment and scrutinize every expenditure. So Terex continues to generate positive free cash flow.

We have ample liquidity with $1,000,000,000 available to us and the right capital structure with no near term debt maturities so we can manage and grow the business. Turning to growth. We may have reduced our expected 2020 capital spending by 35%, but our reduced level of capital expenditures is still approximately 65,000,000, which demonstrates our commitment to investing in the business. The completion of the new utilities manufacturing facility is one of the largest capital expenditures in Terex's recent history. Also, we are taking strong and swift actions to right size the business so Terex can profitably grow in the future.

As John discussed earlier, we remain resolute in tightly managing production and s g and a. We will continue to aggressively manage the business and generate strong free cash flow while ensuring we have the right capital structure to manage and grow Terex. And with that, I'll turn it back to you, John.

Speaker 2

Thanks, Duffy. Turning to slide 10. I continue to lead AWP as segment president with a laser focus on improving profitability and growth. The leadership team's execution of our improvement plans is yielding results as demonstrated by the positive operating margin this quarter. But we clearly understand that we have more work to do.

Our Aerials team has always been customer focused, so we listened and acted on our customers' feedback. We reorganized our teams and are putting the processes and tools in place to increase the ease of doing business with AWP. We are investing in the expansion of a world class manufacturing facility in Changzhou, China. The AWP team is well positioned with our strong brands and product offerings to participate in this market's growth. From an operational perspective, AWP team executed in Q3 by driving sequential and year over year revenue growth in China, aggressively taking cost out of the business to improve margins, and swiftly bringing online the new utilities facility.

It is a competitive industry, so we are controlling what we can control, superior execution, and aggressively reducing costs to improve margins and win in the global marketplace. Turning to slide 11. Material processing demonstrated once again strong operating performance in challenging market conditions. MP continues to develop product adjacencies and new geographies for its leading products and brands, all while demonstrating strong operational execution. The financial performance of MP relative to market conditions by achieving an operating margin of 13 demonstrates the MP team's strong execution.

MP's bookings stabilized and increased throughout the third quarter, resulting in bookings being up 24% year over year. MP is a diversified and consistently strong performer. Turning to slide 12. To wrap up our remarks, Terex team members around the world are focused on the right things, safety, health, customers, and improved productivity. We are reducing cost to improve margins, especially within AWP.

We are driving positive free cash flow by reducing working capital. Our businesses have a strong future, so we are continuing to invest in innovative products and services to be prepared as market demand returns. With that, let me turn it back to Randy.

Speaker 1

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

Speaker 0

Thank you. We will now begin the question and answer session. Our first question will come from

Speaker 3

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

Speaker 1

Yes, I

Speaker 3

wasn't totally clear if that was a done deal. But anyway, thanks for taking the question. I guess if I could just kick it off, John, with you, you've been out in managing AWP now for a while. I think you probably have got your hands around some the key issues and you're certainly talking strongly about the margin sort of efforts there. So I'm wondering if there's a time when you can sort of lay out some detail here.

Is this going to take a sort of a significant restructuring program that will be announced at some point? Or is volume kind of the key to getting margins where you want them to be? Is there some of the toolboxes that you've used in the past? Is it sourcing? Is it headcount?

Is it facilities reduction, SKU reduction? Just any details you can give us because as you pointed out, you still have a fair amount of work to do. Thanks.

Speaker 2

Thanks. Thanks, Steve. First, let me say that our AWP team is is focused on driving margin improvement. We're also doing that by maintaining our focus on the customer. This business has a long history of being customer focused, and we're gonna continue, to be customer focused as we drive the margin improvement that's required.

Steve, I have been out there for a couple months, you know, working with the team. And, you know, first and foremost, number one, safety. As I said, it's the most important thing we do, and the team had really done a great job on COVID safety and industrial safety on a year over year basis. So we can build off of that as we go forward. The second area is around margin improvement.

There's near term actions and intermediate term actions that we're taking. On the near term actions, we've taken restructuring actions that we implemented in q three. We also implemented some additional, restructuring actions here in q four that Duffy referenced in his opening comment. Those restructuring actions are looking at all costs throughout the business, both SG and A costs as well as manufacturing costs. Your comment around, you know, inventory, the team has significantly improved our SIOP management process.

And we now believe we're in a position that we can produce the end market demand. It would dramatically reduce our inventory during the course of this pandemic in in our AWP business. And I think the good news is, as we go forward, we'll be much closer to producing to to to retail demand. I might also say, Steve, the third thing the team is focused on is market share. We can't lose sight of driving revenue in all environment.

That will be a combination of using the tools that we've implemented around our commercial excellence initiative. I think our sales team is doing a great job in these challenging times, staying close to the customer, maintaining price discipline in a challenging marketplace. And so, you know, you're gonna continue us, see us execute on our commercial excellence side. The other thing that's gonna help market share as we move forward in revenue is our product development efforts. The team has implemented an aggressive product development plan over the last couple of years.

We will continue with that, as we go forward. Our new products that have come into the marketplace, the J Series boom's gonna help. Our FE booms. Our XC line of booms, now that the ANSI standards are in effect, we think all of that is gonna help us in the marketplace, and we are releasing an ANSI complete line of scissors. And again, from a product positioning standpoint, we think we're well positioned as market conditions improve as we move forward.

And then finally, Steve, the other being very clear with the team is cash flow generation, just like we do throughout Terex. And that really is tightly managing all expenses. Every single dollar of expense in the enterprise has to be tightly managed while continuing to still invest because we are investing in capital. We are investing in our IT systems as we move forward. And then aggressively manage working capital.

And I gotta I gotta thank the global team and AWP team because they've done a great job reducing inventories in a challenging time, but we've also done a great job, on our strategic sourcing initiative, which also will help us drive margins as we go forward, but also on our payables, and finally, working very closely with customers on the unreceivable side. So safety, margin improvement, market share, and cash flow generation is what we're focused on. And and and, Steve, from a timing standpoint, it's always a challenge. It won't happen as fast as I want it, but we're pushing it as fast as we as we can, as we move forward because this business will return to, you know, industry competitive margins. That's that's what we're focused on, and and we're gonna get it done.

Speaker 3

Okay. Great. And just as a quick follow-up, may can one of you guys maybe quantify the restructuring benefits you're expecting in 2021? And I'll pass it on. Thanks.

Speaker 2

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

Speaker 1

Yeah. No. Thanks for that, Steve. And, obviously, we will provide, 2021 financial, guidance during our q four earnings call. And I think that, the way to think about 2021 is is that, we will be fully committed to our 25% or better decremental or incremental margins.

And quite honestly, we look forward to returning to revenue growth in 2021. And our the other metric that we are absolutely committed to is the 12 and a half percent s g and a to revenue that, I referenced in my comments, John referenced in his comments, and we are absolutely committed to driving the team there. So I rather than, you know, any I it's hard to to say a specific restructuring benefit, at this point in time. All the restructuring we are doing today will allow us to be successful with those incremental margins at 25% or better in 2021.

Speaker 3

Great. Thank you, guys.

Speaker 1

Absolutely.

Speaker 0

Your next question comes from Joe O'Dea.

Speaker 4

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

How are you gonna manage this differently from, you know, how the company's done it in the past?

Speaker 2

Thanks, Joe. So first, it it really goes back to that commercial excellence process and and staying close to our customers and really working with the customers to understand the range of outcomes customers are looking at. So we can then plan based on those ranges and incorporate that into our SIOP plan. It's not that we're not gonna have inventory, we will, have inventory. We'll manage inventory very closely based on days on hand by by by model and by region to ensure that we have, competitive lead times, going into the marketplace.

The Genie team historically has demonstrated the ability to flex up pretty dramatically, and that's a competency that's been built over years. That competency will remain, as we move forward. I can assure you, Joe, after what the team's been through for

Speaker 1

the

Speaker 2

last eighteen months taking inventory out, we would love the opportunity to to respond to, to an increase, in in market demand as we go forward. And I and I would say the Genie team historically has demonstrated very strong competency in doing that. So it's really managing the style process with our commercial excellence and our sales team, staying close to the customer, understanding what their demand profiles look like, having the appropriate level of inventory to meet those needs, and then ramping our our our our supply chain up and again with the strategic sourcing initiative that was implemented working with fewer suppliers. We feel confident we have the ability to do that. And and again, that would be a challenge that the the team would would truly welcome is is to figure out how to ramp up significantly versus the challenges that the the team's been facing here, over the course of about about the last eighteen months.

So that's how we'll do it. And and again, it's process disciplines, process tools, implementing and executing those, will drive our ability to meet, you know, customer demand. And I'm not we're not against inventory. We just wanna make sure we have the right level of inventory, and we will manage going forward. The good is that now we can ebb and flow in the inventory up.

And down. Based on the retail demand so our inventory levels may increase based on on on customer demand so. We'll manage that. Aggressively as as we move forward and the team's doing a better job of that.

Speaker 4

Appreciate that color. And and then, just a second one on on price cost, how you're thinking about, inflationary pressures in the next year, your comfort level with with the ability to offset what you have on-site there.

Speaker 2

Thanks, Joe. Overall, I I think the word that we use across the entire business is being disciplined on pricing by not overproducing, inventory. I I think our customers are being very disciplined in in their CapEx and in their rate pricing. So we're being disciplined as well. Within AWP, going forward, we we we're gonna offset the increases related to to ANSI and the ANSI standards, implementation.

We've been very transparent with customers on what those costing increases are. Again, disciplined process that we talked about to make sure that we have the right, inventory at the right place at the right time. And then on the other side on pricing is part of our commercial excellence initiatives, it's really pricing waterfall management and again the process and tools in place to do that and to prevent leakage of what price you're able to obtain. And so I think the team is doing a better, obviously, moving for improvement across everything, but the team has been doing a good job on on pricing waterfall management. If we look at the MP, you know, given that 70 to 80% of that business is through a a a dealer channel, we do believe that we'll have the ability to offset, input cost increases, as as we go through the year.

And again, the MP business has done a good job managing their inventory, throughout. And so we haven't had the significant adjustments in inventory on the MP side, as we go forward. So we're gonna be disciplined on pricing. We provide tremendous value for our customers, and, that's how we're looking at pricing as as we move forward into, into the fourth quarter and into 2021.

Speaker 4

Your

Speaker 0

next question comes from Mig Dobre with Baird.

Speaker 5

Good morning, everyone. Can you hear me okay?

Speaker 2

Can hear you fine, man.

Speaker 5

Alright. Great. So it I I wanna go back to to the comment that you made about SG and A as a percentage of sales being 12 and a half. You know, I'm I'm wondering kinda how you're thinking how how you're essentially you came up with this with this figure and how we should be thinking about actual dollars spent on a go forward basis. I mean, is the idea here that you're gonna keep SG and A flat and get leverage of that?

Or can we actually see maybe further decline in SG and A dollars spent next year? If you could elaborate on that, I think that'd really helpful.

Speaker 2

Yeah. Thanks, May. I'm a I'm have Duffy comment on that. He's leading the charge for us as we look at SG and A as a percent of sales to, you know, throughout the entire company. Duffy, would you comment on that, please?

Speaker 1

Sure. Thanks very much, John. And so, Mick, our our focus is really on the 12 and a half percent s g and a to sales. You look looking here at q three and q, '2 q two and q three, we've had a run rate of about a $100,000,000 for s g and a in both those quarters. Now that's a here in 2020.

That's above 12 and a half percent of sales because of the low level of revenue that we've been experiencing. And here in q three, we also had about 7 and a half million dollars of restructuring charges that were included. So $100,000,000 run rate. That $100,000,000 run rate does include the benefit of the temporary cost reduction that we took, in the beginning of the second quarter, reductions in compensation, no merit increases, reduced in, bonus opportunity for 2020. All of those costs, they will return in 2021.

So what our program has been focused on is not just bringing down the absolute level of s g and a, for sure, we're doing that. But also being in a position that when we get to 2021, we have replaced the temporary cost reductions that we're benefiting from here in 2020 with permanent cost reductions. And they are, there's no silver bullet here. It's every single day absolutely, questioning every expenditure and making the business more efficient and both, within the businesses themselves and in our corporate, cost structure. I also don't want to make sure that, you understand that we are balancing between cost reduction and making investments where warranted such that we're in a position to continue to drive growth in the business.

Charts and services, engineering and new product development are examples of that. So I would say is that, as you think about your 2021 model, our objective would be that, our s g and a percent of sales will be 12 and a half percent or less to sale to to sale each quarter through 2021.

Speaker 5

Okay. And then I guess my follow-up, John, going back to AWP. It's very clear that, you know, the inventory situation is well on hand at this point. And and you've you've made quite a few changes to the business. So I guess my question is, looking beyond the fourth quarter and recognizing that you've got additional restructuring and things that you're gonna do there, do you think that most of the changes that you had to implement structurally to that to that business, to that segment, are in the rearview mirror.

And now we're just kind of looking at, hopefully getting some better volume and and traction on that. Or is there still more structural work that that you need to do in 2021? Thanks.

Speaker 2

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

Speaker 1

Okay. Thank you.

Speaker 0

Your next question comes from Ann Duignan with JPMorgan.

Speaker 6

Hi, good morning everybody.

Speaker 5

Hi.

Speaker 6

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

Speaker 2

So I'll talk, Anne. Thank you for the question. And and I know all of us are looking for what does it look like as as as we move forward. So I'll give a little kind of market commentary, and then I'll I'll ask Duffy to kinda speak to what we look like from a revenue development standpoint for 2021. So as we look at the AWP business and, you know, we we have seen equipment utilization, improve, as we move through the quarter.

It's not up to 2,019 levels, but we have seen utilization improve within North America. I think that was indicative of of seeing our bookings level, improve, in the quarter. We we do believe that the replacement cycle is is going to be strong. It's not absolutely clear when it starts. But if you just look at the age of of the of the aerial equipment, there is going to be a strong tailwind associated with the replacement cycle in the future.

I would say similar story in in Europe, but a little bit more of a story in Europe, more based on on country specific. Southern Europe has has been slower to recover than, frankly, Northern Europe. But, again, we did see orders improve. We saw substantial improvement, Anne, in, in China, that market continues to accelerate not just the the economy recovering from the COVID situation, but also with the adoption of aerial products, in in that marketplace. So that that that market's continuing to grow, very significantly.

And then our utilities business, we saw a little slower demand this year in in the rental, especially rental comp customer channel. But that's beginning to pick up and it relative stability with the regulated utilities and the and the co ops in that market. So we we would anticipate the rental channel within the utility segment to show improvement on a year over year basis. If we then look at our across our MP, and I won't necessarily go through each and every one of the businesses. But if we look at our crushing and screening side of the business, we did see improvement, as we move through the quarter.

Orders were up, significantly in that part of the business. I think that, you know, I think there's gonna be some tailwinds there in that business as as customers respond to the to the market conditions to government stimulus around the world. One of our businesses within MP that has been challenged this year was our material handling folks business, and that was really two factors. Number one steel prices are being down pretty substantially drove scrap metal prices down we're starting to see that recover- and recover pretty quickly as well as. That was one business within our MP segment.

That did have some dealer inventory at higher levels coming into the year. So the dealers have had to bleed off that inventory as as we've moved through. And we think that will improve, as we move into to '21. Continue to see growth in our environmental business. It's a smaller business within MP, but we've seen some really substantial growth, in that, business.

Again, smaller, but we've seen really like our CBI business has performed extremely well here this year. I think that's a result of a lot of the storms. And then, you know, the concrete business. This is an interesting one. On the concrete side, it was it was very weak in q one, but we began to see an improvement In Q.

Two and into Q. Three orders are actually above significantly above prior year and I think and that's that's speaking to the strength of the residential construction market and in multi family housing. Which is very strong that that business serves that market segment. Continue to see, the other business that's performed quite well, is our pick and carry business down in Australia, and we think that will continue into next year. And then our cranes business.

Cranes has been a bit of a challenge. Our tower crane business saw order recovery in Q3 on the tower side. Not necessarily on our RT business. The RT business, rough terrain crane businesses. Is challenged.

We're rebuilding the commercial team there, and that's been more of a challenge. And then finally, and India has been a good growth market for us within the MP segment. The COVID crisis has impacted, India fairly substantially. And so we would anticipate is is is is that ameliorates through the course of the fourth quarter and into next year that we begin to see India return to a strong market for us. So that's just a quick around the world look in what we're anticipating, what we're seeing now, and what we're anticipating is what you know, we've all said it really it really does depend on the pace of recovery on the on on the pandemic and how that that changes over time.

And we're gonna adapt and respond to that to that market- so that that's a bit of an around the world by company- look at how we're seeing seeing the markets develop and Duffy would you like to talk about the 2021. Revenue outlook.

Speaker 1

Yes sure it's just building on what John said a moment ago about the degree of uncertainty that we're experiencing, I'll I'll refrain from providing an absolute level of expected revenue for 2021, But, recognizing that you'll be building out models over the next months. What I would, say is that what we're currently anticipating in terms of revenue development over the course of the year is that our total company revenue for 2020 will be similar to, the development that we saw here in, 2020. The 2021 development will be similar to what we saw here in 2020 with revenue being relatively evenly split between the first and the second half of the year. Is as is normal for our business, we are expecting that the second quarter revenue will be the highest of the year, and that we will turn to growth in the second quarter of the year. And we are currently anticipating that we'll continue to sustain that revenue growth year over year during the 2021.

And, you know, quite quite frankly, and we're looking forward to being able to return to growth to revenue growth in 2021. So those are a few thoughts, and we'll we'll provide more, absolute amounts of, 2021 financial guidance during our q four earnings call.

Speaker 6

I appreciate that. And just one quick follow-up. You know, when you talk about the progression of potential revenue for 2021, could you just distinguish between AWPs versus NP or you expect similar across I

Speaker 1

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

Speaker 6

Okay. I appreciate it. In the interest of time, I'll get back in line. Thank you.

Speaker 2

Thank you, Anne.

Speaker 0

Your next question comes from Jamie Cook with Credit Suisse.

Speaker 7

Hi, good morning. Good morning, And nice quarter. I guess just two questions, most have been answered. One, can you just talk to what you saw in sort of demand trends in October and understanding what you said about 2021 revenue and how to think about the progression? Are customers saying anything differently about how to think about order trends, whether we're hearing potentially there's risk they could make decisions sort of later in the year as lead times are short.

So I'm wondering how you're thinking about that and whether that's changed since last quarter. And then my second question, John, I think you alluded to opportunities to improve your market share in certain markets, just sort of where you're targeting and how you balance sort of you know, returns margins versus pricing as you think about gaining market share? Thank you.

Speaker 2

Thanks, Jamie. In terms of the, you know, progression in in conversation with with customers, you know, we haven't seen we continue to see the improvement, as as we moved, through the quarter. Obviously, it's it's subject to what what occurs with the, with COVID, but we have we have seen it improve through the through the quarter. In terms of customers on the on the AWP side, Jamie, they're they're basically sticking to their, what I'd call their standard annual operating plan process. And so that's continuing as we move through the third excuse me, the fourth quarter.

So we'd anticipate as we get to the end of the fourth quarter and into the early first quarter to have much better clarity in terms of the what what customers are looking for. And I would say that's that's North America and Europe and likewise in China. So right now, we're seeing customers plan their business on their normal planning schedules, and that's what we're anticipating as we move forward. And again, we'll have, you know, much greater clarity at the end of Q four and in in in the early Q one in terms of what the customer demand, opportunity is. And in terms of, again, you're absolutely right in the way you phrased the market share side.

And market share is a balance. It's a balance. We're we're driving improvements in our product and product offering, you know, listening to the voice of the customer to ensure that we bring products to marketplace with the right feature and benefit set at the right price. And it it's a balance of having inventory and lead times that are competitive in the marketplace. Not too much, not too little.

And and and as I say that from a process improvement standpoint, the team has really improved our processes of looking at that, to ensure that we have the appropriate level of inventory to ensure that we are are are maintaining and or growing. And and our expectations is when we bring new market, new products to the marketplace that we should expect, an increase in in market. I would say overall, Jamie, our market share has been relatively consistent, with the exception being in China. And we have seen market share decline, but we've seen dramatic revenue increase. In in China, it's really the increase in the market as well as the increase in the number of reporters in the market.

But, we are we have to be focused on market share. You've gotta balance market share and margin to be successful and competitive. It's and it is a balance. And and we will continue to find the right balance between those two elements as we move forward.

Speaker 7

Thank you. I'll get back in queue.

Speaker 0

Operator? I'm sorry. David your next question comes from David Rosso from Evercore.

Speaker 8

Hi. Thank you for taking the question. Good morning, David.

Speaker 5

Good morning. Can you

Speaker 8

just clarify, when you speak to 12.5% of sales will be SG and A, and let's just keep the revenues as they are right now for 2020, it equates to roughly 80,000,085 of savings year over year. Are we saying that's a similar amount of costs that come back and shows up in COGS? I'm just I just want make sure we all understand. When you say 12.5%, is that before costs come back and they come back and they don't they come back in SG and A? Or can you just help us understand exactly, is it a 12.5% number even after cost return?

Speaker 2

It is a You want to go ahead, Devin.

Speaker 1

Yeah. Sure. So, David, I will confirm to you. It is a 12 and a half percent s g and a to sales after the temporary cost reductions, compensation to reductions, lack of merit increases, lack of bonuses that we, imposed on our team members in 2020 come back effective 01/01/2021. And I I do wanna also say that the 12 and a half percent s g and a to revenue, that's our always been our long term target.

And so, today, it is our objective and our target to be at 12 and a half percent s g and a to revenue in 2021. You know, we're in a very uncertain time. And, so that, you know, if revenue doesn't increase, we're you know, we'll have work to do, but we will we will always right size our s g and a to the size of the business that we're operating in at any point in time.

Speaker 8

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

Speaker 1

Yes, sir. That's what I said. Yep.

Speaker 8

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

Speaker 5

Yeah. From the SG and savings.

Speaker 1

You're asking about 2021, I I presume. Yeah.

Speaker 8

Mean, if you give me the fourth quarter, it'd be interesting given it's it's moving along

Speaker 5

a lot

Speaker 1

of the savings.

Speaker 5

I talked I talked in

Speaker 1

my prepared remarks about our expectation of a 50% annualized tax benefit for Yep. 2020. So that that carries through through the year for the full year. And as it relates to 2021, you know, we'll provide more specific financial guidance during our q four earnings call. But I would say is that if you look back over the last, couple of years, we've been, operating in a about, you know, mid mid twenties tax rate.

So, yeah, I guess for modeling right now, you could use something like that.

Speaker 8

Yeah. I'm just trying if if that's the case, we're we're talking about and I know you said if revenues don't grow, it might be a little more challenging. But the target is 12.5%. That is about $0.85 to $0.90 a share of year over year earnings growth simply from that cost down, that percent of revenue decline in s g and a. Just wanna make sure we're level we're level set on that's what we're we're implying.

Speaker 1

And and and what you just said is absolutely, that is absolutely correct, which is is that to the extent there's no revenue growth, it will make that target more challenging for us. Perhaps it takes a little longer to get to it. But, we're absolutely committed to 1212.5% of the revenue level. It's only a question of how long it takes to get there. And lastly, do you expect

Speaker 8

to be EPS positive in the fourth quarter? The $0.15 of cost that's flowing maybe makes it a little more challenging, and there's always a little bit of fourth quarter kind of accrual accounting catch up and the margins are a little lower. But given the revenues aren't terribly different between 3Q and 4Q, I'm just trying to make sure I appreciate how we're thinking about profitability in the fourth quarter.

Speaker 1

I think that the fourth quarter in terms of the profitability or otherwise, with the fifth with $15,000,000 of, restructuring that we took is, you know, you know, right around the breakeven level. And I think that's what's implied by the, guidance that we provided today. Yes. That's EPS

Speaker 8

breakeven, not EBIT

Speaker 1

breakeven, just to be clear. Of course, yes. Thanks for That for me.

Speaker 0

Your final question comes from Ross Gilardi with Bank of America.

Speaker 9

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

Speaker 1

Morning, Ross. Matt.

Speaker 9

I just wanted to I was just curious in terms of free cash flow. I mean, clearly, you guys are are trying to they've been trying

Speaker 1

to address that for a

Speaker 9

long time and are are are are seeing some improvement, you

Speaker 1

know, over the last several quarters, at least year to date.

Speaker 9

Is there some type of like free cash conversion ratio we can think of? Do you think of it all as cash flow from ops as a percentage of sales or free cash flow as a percentage of EBITDA? I'm wondering for modeling purposes,

Speaker 1

just directionally, do we think about it? I I I get that your intention is to have the number be positive for the next,

Speaker 9

you know, couple of years. But any anything else

Speaker 1

you can help with there?

Speaker 3

You wanna take that, Debbie?

Speaker 1

Sure. Sure. So, Ross, what I would say is is that we are absolutely focused on, driving free cash flow generation. And, you know, if I take you back to 02/2016, John's scorecard, at the time was that we were seeking to have our free cash flow be, 100% of net income. Now I will acknowledge that we've been that the report card hasn't been quite what we would wanna bring home to mom and dad, over the last couple years.

That's a lot to do with the level of CapEx investment that we've made. It's a lot to do with the aerial work platforms, inventory challenges that we've been working through. But in general, the metric we're focused on is, free cash flow equal to a 100% of net income. And, you know, the team I assure you that, the team is very focused on networking capital, management. You see what we've been able to do now with the aerial product inventory levels, the at 2,016 levels, $54,000,000 of free cash flow in the third quarter.

So we're we're intensely focused on continuing to drive positive free cash flow to generate shareholder value. And and is that is

Speaker 9

it a 100% of GAAP net income or adjusted net income? Because, obviously, there's been a big difference, you know, one versus the other.

Speaker 1

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

Speaker 9

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

Speaker 2

Yes Ross. Would say it's a bit of all the above. Clearly in China, we saw we saw good year over year growth in China on the order side. We also saw in in the backlog, have a higher percentage of national accounts in in in the backlog. So we saw the national accounts as as they adjusted from Q two into Q three and Q four.

That was also an important part of their booking increase as, as we end of the quarter. So it's pretty much all the above.

Speaker 9

And that would go with what you were saying, you know, a higher percentage of the backlog is for the subsequent year. Would that be true for the national accounts as well? Because I imagine they they're not looking at take on additional fleet at this this time of the year.

Speaker 2

Well, I would say the national accounts, are taking some incremental, fleet, and and that that has been planned, and they have been executing to to that plan. So there is deliveries in q four, but some of it will across the board, both independent and national accounts crossover into 2021 this year.

Speaker 1

Got it. Thanks, guys.

Speaker 2

Thank you, Ross.

Speaker 0

Gentlemen, do you have any closing remarks?

Speaker 2

Yes. Thank you, operator. Thank you for your interest in in Terex. And most importantly, I hope that you and your families are are remaining safe and healthy by following the appropriate COVID nineteen protocols. I think it behooves us all to do that.

Thank you for your interest in Terex. And as we've discussed, the Terex team members, I wanna thank them. We are executing well. We're improving our execution in these very challenging times. And we believe we're we're positioning this business for 2021 and beyond so that we can, have success in a challenging in in in all markets, to include challenging markets.

So thank you for your interest in Terex. If you have any further questions, please don't hesitate to reach out to, Duffy and and Randy Wilson. Have a great day. Thank you.

Speaker 0

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