Terex - Q4 2022
February 10, 2023
Transcript
Operator (participant)
Greetings and welcome to the Terex Q4 and year-end 2022 results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paretosh Misra, Head of Investor Relations. Please go ahead.
Paretosh Misra (Head of Investor Relations)
Good morning and welcome to the Terex Q4 and year-end 2022 earnings conference call. A copy of the press release and presentation slides are posted on our investor relations website at investors.terex.com. The replay and slide presentation will also be available on our website. We are joined by John Garrison, Chairman and Chief Executive Officer, and Julie Beck, Senior Vice President and Chief Financial Officer. Their prepared remarks will be followed by Q&A. Please turn to slide 2 of the presentation, which reflects our safe harbor statement. Today's conference call contains forward-looking statements which are subject to risks that could cause actual results to be materially different from those expressed or implied. We will be discussing non-GAAP information and performance measures we believe are useful in evaluating the company's operating performance. Reconciliations for these non-GAAP and performance measures can be found in the conference call materials.
Please turn to slide three, and I'll turn it over to John Garrison.
John Garrison (Chairman and CEO)
Thank you, Paretosh, and good morning. I would like to welcome everyone to our earnings call and appreciate your interest in Terex. We are proud of our team members' performance that delivered strong results in 2022. It was another year of addressing a challenging global operating environment, including inflationary pressures, production disruptions, and COVID impacts. The Terex team members worldwide work tirelessly to improve our performance for our customers, dealers, and shareholders. I would like to thank our team members for their continued commitment to our zero harm safety culture and Terex Way values. Safety remains the top priority of the company, driven by think safe, work safe, home safe. Please turn to slide 4 to review our financial results. The team delivered an excellent quarter. Sales of $1.2 billion were up 23% from last year and up 31% on an FX neutral basis.
We ended 2022 with a backlog of $4.1 billion, up 22% from prior year, driven by strong global customer demand. Operating margins of 9.9% improved 290 basis points from the prior year. An EPS of $1.34 increased 63%, reflecting strong execution by our team members. Please turn to slide 5. We significantly strengthened our business in 2022 through our execute, innovate, and growth strategy. We proactively managed supply chain disruptions and inflation to deliver a 28% increase in operating income, a 41% improvement in EPS, a return on invested capital of 21.3%, and we achieved price cost neutrality for the year. We introduced the first and only all-electric utility bucket truck. We expanded our concrete product offering with the acquisition of ProAll.
We prioritized our focus on the circular economy by introducing new system solutions to our environmental and recycling customers, and through the acquisition of ZenRobotics. We invested in Viatec and Acculon, which accelerated our product electrification strategy. This week, we announced an equity investment in Apptronik and entered into a co-development agreement to create potential robotic applications for Terex products. We continued our investment in technology, new product development, and our Mexico facility, which continues to progress on time and on budget. I am proud of our team members' accomplishments. Turning to slide six. In our recent Investor Day, we presented five key themes to our strategy that will drive our growth for the next several years. The first is capitalizing on mega trends, which are driven by an increasing focus on sustainability. Our products are well-positioned to benefit from electrification, waste recycling, and infrastructure investments.
We'll continue to grow our materials processing segment through innovation and by expanding into adjacent markets and categories. We will optimize Genie's performance through the cycle in sales growth and margin improvement. We see attractive opportunities for growth in our utilities business driven by electrification. We have a strong and growing parts and service business, which not only offers us countercyclical growth, it also provides critical value to our customers. This year, we'll continue to make progress on our strategic growth priorities, including Genie's focus on continuous margin improvement. The Genie team is going to have a busy year. We anticipate moving multiple production lines throughout our global footprint and opening our new permanent facility in Monterrey, Mexico.
The new facility and local Mexico supply chain are expected to improve our operating margins by 200 basis points when fully up and running in late 2023. These moves will negatively impact production volumes and manufacturing efficiencies in 2023, and our outlook reflects this. Please turn to slide 7. Our MP and AWP segments participate in diverse end markets globally, which is a strength providing many growth opportunities. We believe our growth will be further accelerated by global mega trends. At the center of these mega trends is sustainability. The increasing global focus on sustainability is driving a fundamental shift in how the world operates, providing additional opportunities for Terex. The global demand for waste recycling solutions is increasing, driven by regulatory and societal changes. Our MP brands, including Ecotec, CBI, and Terex Washing Systems are at the forefront of meeting demand for circular economy initiatives.
The increasing reliance on electrification to reduce greenhouse gas emissions requires grid capacity expansion. Terex Utilities is well-positioned to capitalize on the investments needed to enhance electrical grid infrastructure. Our Genie business will benefit from new products driving digitization and onshoring in the United States. All of our businesses will benefit from increased government-sponsored infrastructure spending throughout the globe. As we discussed at our Investor Day, we see many growth opportunities by providing solutions that support our customers' ESG objectives. Please turn to slide eight. Our innovative products are delivering sustainable solutions for our customers. Fuchs material handlers, part of our MP segment, are versatile machines capable of handling various materials. Importantly, Fuchs is diversifying into port applications. You can see a Fuchs material handler, which is powered by the ship's battery hybrid system, unloading bulk materials.
As a result of our products, these ships' operations produce zero emissions and reduce noise levels in the harbor. Another example of Terex helping our customers in achieving their sustainability goals. Please turn to slide nine. We are proud to report that in 2022, Newsweek recognized our commitment to sustainability, naming Terex one of America's most responsible companies. We recently published our 2022 ESG report, where we highlighted the results of our first ESG materiality assessment. Our products and our people were identified as among the most essential to our sustainability journey. Terex products help our customers meet their sustainability goals and reduce negative impacts to the environment. At the end of 2022, approximately 60% of MP and 70% of Genie products offered electric or hybrid options.
Terex Utilities was the first to market and continues to offer the only all-electric utility bucket truck. MP will continue to expand its waste and recycling offerings. Additionally, we commenced energy audits at our sites, enabling us to identify and implement actions that are important for achieving our goal of a 15% reduction in both greenhouse gas and energy intensity by 2024. With respect to our team members, diversity, equity, and inclusion continues to be embraced and driven throughout the organization. Our affinity groups further expanded in 2022 from eight to nine. Participation rose twofold. In summary, Terex remains highly active in ESG activities. We will provide updates throughout the year. Turning to slide 10 to review our current macroeconomic environment. Our 2023 growth will continue to be constrained by supply chain issues.
Supplier on-time delivery has improved sequentially, but remains well below historical norms. The team was able to reduce but not eliminate the obsolete inventory in the Q4, which is a clear indication of the level of disruptions our teams continue to face. Although selective costs have improved in some markets, we continue to see overall cost increases from our suppliers as inflation works its way through the various tiers of the supply chain. I am confident in the team's ability to continue to adapt and overcome the macroeconomic challenges that we have been facing. With that, let me turn it over to Julie.
Julie Beck (SVP and CFO)
Thanks, John, and good morning, everyone. Let's take a look at our Q4 financial performance found on slide 11. Terex team members continued their solid execution in a dynamic environment. Sales of $1.2 billion were up 23% year-over-year on higher volume and improved price realization necessary to mitigate rising costs. Sales in constant currency were up 31% as foreign currency translation negatively impacted sales by $82 million or approximately 8% in the quarter as the euro and British pound weakened against the dollar. Gross margins in the quarter increased by 190 basis points over the prior year as volume, pricing, favorable mix, and cost out initiatives offset cost increases and the negative impact of foreign exchange rates.
Both of our segments increased their gross margins from last year, and we were price-cost neutral for the year. SG&A was in line with expectations, but up over the prior year as a result of inflation, incremental spend due to acquisitions, and prudent investments in new technology and new product development. SG&A was 9.4% of sales and decreased by 90 basis points from the prior year as business investment was coupled with continued expense management. Income from operations of $121 million was up 73% year-over-year. Operating margin of 9.9% was up 290 basis points compared to the prior year. Interest and other expense of $15 million was higher than the Q4 of 2021 due to increased interest rates.
The Q4 of 2021 benefited from a one-time $12 million gain associated with the Genie administrative office relocation. The Q4 global effective tax rate was approximately 13% due to one-time discrete items, including the reversal of a German valuation reserve. Q4 earnings per share of $1.34 increased 63%, representing a $0.52 improvement over last year. This strong performance was driven by volume, price, and disciplined cost control. Current quarter results reflect an unfavorable EPS impact of $0.12 per share from foreign currency, and the Q4 of 2021 results included a $0.14 gain due to the Genie administrative office relocation. Free cash flow for the quarter was $126 million. I will discuss free cash flow later in more detail.
Let's look at our segment results, starting with our Materials Processing segment found on slide 12. MP had yet another excellent quarter with strong operational execution resulting in sales of $550 million, up 21% compared to the Q4 of 2021, with robust customer demand for our products across multiple businesses. On a foreign exchange neutral basis, sales were up 32%. The business ended the quarter with a total backlog of $1.2 billion, up 12% from a year ago. The strong backlog is approximately 3x historical norms and supports our 2023 sales outlook. MP benefited from favorable regional and product mix and effectively overcame cost increases resulting in price cost neutrality. This drove an increased operating margin of 200 basis points to 15.8% while integrating several acquisitions.
This quarter and for the full year, MP represents approximately 60% of the overall Terex operating income and continued its strong and consistent revenue and operating margin performance. On slide 13, see our Aerial Work Platform segment financial results. AWP delivered sales of $672 million, up 26% compared to the prior year on higher demand and pricing. On a foreign exchange neutral basis, sales increased 32%. Total backlog at quarter end was $2.9 billion, a record, up 27% from the prior year. Customer demand continues to be strong due to high utilization rates, aging fleets, and electrification projects. AWP more than doubled their operating profit and delivered operating margins of 8% in the quarter, up 320 basis points from last year.
The improvement was a result of higher sales volumes, favorable mix, cost reduction initiatives, strict expense management, and disciplined pricing actions, partially offset by product liability expenses in our Utilities business. Turning to slide 14 and full year 2022 financial highlights. Our performance in 2022 reflected strong improvement in the business and the extraordinary efforts of our team members. Earnings per share increased 41% from $3.07 to $4.32, a $1.25 improvement, including a negative FX impact of $0.42 per share. Sales of $4.4 billion were up 14% year-over-year, 20% on an FX neutral basis as end markets remained strong. Operating margin of 9.5% expanded 110 basis points driven by prudent cost management as well as price realization.
SG&A was 10.2% of sales and decreased by 80 basis points from the prior year, reflecting focused cost management. Free cash flow of $152 million was up 21% year-over-year, including additional inventory as supply chain disruption continued. Please see slide 15 for an overview of our disciplined capital allocation strategy. Our financial performance this year continued to strengthen our balance sheet and provide financial flexibility. Our ROIC of 21.3% significantly exceeded our cost of capital. We returned $132 million to our shareholders in share repurchases and dividends. We prepaid the remaining $78 million of our term loan. We continued to invest in our business with capital expenditures of $110 million, and we deployed $50 million on acquisitions and investments.
We have no debt maturities until 2026, and 77% of our debt is at a fixed rate of 5% until the end of the decade. Our net leverage remains low at 1x, which is well below our 2.5x target through the cycle. We have ample liquidity of $727 million. Yesterday, we announced a 15% increase to our quarterly dividend to $0.15 per share. The increase reflects our continued confidence in the company's strong financial position and future prospects. In December, our board expanded the size of our share repurchase program by $150 million, leaving us with approximately $193 million of remaining authorization to purchase shares. Terex is in an excellent position to run and grow the business. Please turn to slide 16 to review our backlog.
Consolidated 2022 bookings remained at healthy levels and were the second-highest booking rate in recent history. Elevated customer fleet ages and historic low dealer inventory levels continued to support robust demand. We had minimal cancellations and pushouts. Our total backlog position is up 22% versus the prior year, demonstrating the strength of our end markets and giving us visibility into 2023. Turning to slide 17 to review our full year outlook. As we move into 2023, it is important to realize we are operating in a challenging supply chain environment with many variables such as high inflation, volatile exchange rates, and geopolitical uncertainties. Results could change negatively or positively. With that said, this outlook represents our best estimate as of today.
We anticipate earnings per share of $4.60-$5.00 based on sales of $4.6 billion-$4.8 billion, which reflects progression towards our five-year financial targets we reviewed with you at our Investor Day in December. Our sales outlook incorporates the latest dialogue with our suppliers and our current supply chain expectations. We anticipate higher volumes as customer demand remains strong and expect pricing actions to offset cost pressures. We expect the H1 and the H2 sales to be comparable, with the second and Q3 sales modestly higher. SG&A of approximately 10.5% of sales reflects prudent investment in the business, including our team members, new product development, engineering and digital initiatives, and the full year impact of 2022 acquisitions. We expect corporate and other to be evenly spread throughout the year.
We anticipate operating margin for the year to be in a range of 10%-10.4% as we remain price-cost neutral for the year. Based upon global tax laws, we expect a 2023 effective tax rate of approximately 21%. This is an increase from 2022 as discrete items are not expected to repeat. Unfavorable foreign exchange rates, higher interest and other expenses, and the normalization of our income tax rate combined amount to a $0.35 per share unfavorable impact. We estimate free cash flow of $225 million-$275 million, including capital expenditures of approximately $135 million, with the largest component being our Genie Mexico facility. Let's review our segment outlook.
MP sales of $2 billion-$2.1 billion and AWP sales of $2.6 billion-$2.7 billion reflect strong customer demand with continued supply chain constraints. MP's strong segment margins are expected to continue to increase to approximately 15.5% for the full year and are anticipated to be lower in the Q1 due to slightly reduced volumes and higher marketing costs, and relatively balanced for the remainder of the year. The AWP segment continues to be impacted by supply shortages. AWP segment operating margins of approximately 9% are expected to be comparable in the H1 and the H2, with the second and third quarters being slightly higher. Operating margin expansion is expected due to price realization, increased volume, continued strict expense management, partially offset by unfavorable manufacturing efficiencies.
As mentioned earlier, our scheduled production line moves are expected to impact manufacturing efficiencies throughout the year. The Terex team will continue to demonstrate resiliency to deliver sales growth, operating margin expansion, increased free cash flow, and higher earnings per share in 2023. With that, I will turn it back to you, John.
John Garrison (Chairman and CEO)
Thanks, Julie. Turning to slide 18 to conclude our prepared remarks. Terex is well positioned for growth to deliver long-term value for our stakeholders in 2023 because we participate in strong end markets, including infrastructure, electrification, and environmental. We'll continue to execute our disciplined capital allocation strategy while investing in new products and manufacturing capability along with strategic inorganic growth. We have demonstrated resiliency and adaptability in an increasingly challenging environment. We have great team members, businesses, strong brands and strong market positions. With that, let me turn it back to Paretosh.
Julie Beck (SVP and CFO)
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 would like to open the
Operator (participant)
Thank you. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. Our first question comes from Michael Feniger from Bank of America. Please go ahead. Your line is open.
Michael Feniger (Managing Director of Equity Research)
Hey, guys. Thanks for taking my questions. Just like to ask actually about Materials Processing. It keeps outperforming, delivered a record high operating margin in the Q4. Just what is underpinning that strength? Can that continue in 2023? Maybe just why only 20 basis points margin expansion in the guide for next year?
John Garrison (Chairman and CEO)
Thanks, Michael. Also thank you for recognizing, you know, the MP performance. MP continues to deliver consistent outstanding performance. You know, as Julie indicated in her opening comments, you know, represents, you know, more than 60% of our overall Terex operating margin. The strength really comes, you know, from the global presence of the businesses. If we look at it, we're seeing strong sales, healthy bookings, elevated backlogs. We've got almost 3x the normal level of backlog in this business as we look forward into 2023. You know, healthy backlog, healthy bookings. Then if we look at our respective verticals that we compete in. In our aggregates business, the largest portion of the MP segment, again, similar story. The global healthy bookings and backlog.
I think it's important for investors to understand that this business caters not just to virgin aggregates, but it also caters to the recycling side. When you see construction demolition waste, when you see changes in practices around the world, that creates opportunities for our aggregates business. We're seeing good strength globally in our aggregates business. In our concrete business, Advance Mixer, we, you know, that we did see a good order activity, good backlog. We watch that very closely because that one's tied a little bit closer here in the States. It's a U.S.-based business to residential construction. The team just came back from World of Concrete. They had a good showing, and they're anticipating good continued strong order growth and backlog there on the concrete side.
ProAll, the acquisition that we made in the middle of last year, continues to see strength. That's more tied to infrastructure investment and continues to see strength in their bookings and backlog as well. In my comments, I mentioned Fuchs. Fuchs, we did see that soften somewhat as we talked about last in our last earnings call. That principally was driven by conditions in Europe, and, you know, the decline in scrap metal prices because they are levered to scrap metal. They're diversifying, as we indicated, into ports and other applications. Again, historically pretty decent position from a backlog standpoint, but we did see a modest slowdown in bookings around Europe in our Fuchs business. Environmental continues to grow. Substantial increase year-over-year globally, both in bookings and backlog associated with our environmental business.
Our RTs and tower businesses. Again, more levered to Europe. We did see some weakness or slowdown in orders, but overall backlog against history still remains in a healthy position. Again, more levered to Europe there. We did see some modest slowdown in our bookings in that segment of the business. Finally, our pick and carry business down in Australia continued to show strong strength. I was in India last week at the Conexpo Bauma show and, you know, Indian market customers were strong. We just launched our Franna product there. Met with several customers and dealers that had taken delivery of the product. Again, our pick and carry business remains strong. Overall, Michael, we're just seeing strong, healthy bookings.
The other important factor that we'll continue to report on, because I think it's important given the level of backlog that we're experiencing, is we're not seeing cancellations and pushouts. That's the first sign for us, if we begin to see the backlog begin to move around with cancellations and pushouts. We're just not seeing that at this time. That'll be the first indication. We acknowledge there's, you know, macroeconomic uncertainty out there, but despite that, we're seeing strong bookings, great backlog, great visibility as we look into 2023, in the MP segment.
Julie Beck (SVP and CFO)
Michael, just to add on about, you know, MP represents 60% of our operating income, and they had a terrific year in 2022. We expect margin expansion to continue in 2023, and we expect them to continue to be price-cost neutral for the year. They are operating in a disruptive environment too. They have all of the supply chain disruptions, and they've still been able to deliver a strong OP margins. We expect them to expand, but we're also gonna invest in this business. We're gonna invest in new product development. We're gonna invest in digitalization, and we're gonna invest in. People are traveling again and trade shows and things like that. There's gonna be some marketing expenses in this business as well.
They also will have some unfavorable foreign exchange from the British pound to the USD in 2023. They've just done. It will absorb some additional SG&A due to the acquisitions that we did in 2022. We're expecting continued strong financial performance from MP and, you know, expanded margins.
Michael Feniger (Managing Director of Equity Research)
Thank you. Just to follow up on that, I mean, when you look at the Materials Processing comps in the public market, Terex is trading at a notable discount. Is there anything structurally disadvantaged with your Materials Processing unit compared to those peers? How do you try to close that valuation discount? You know, could you use your balance sheet to repurchase shares? Just any thoughts on that would be helpful. Thanks.
John Garrison (Chairman and CEO)
Thanks, Mike. Some broad questions. You know, I think part of our job is to better explain the great portfolio of businesses that we have in MP. You know, we did start doing that during our Investor Day, we'll continue. If you look at that portfolio, it's consistently performed throughout time, in terms of driving revenue growth and margin expansion. In terms of our disciplined capital allocation strategy, you know, we're gonna continue to invest in organic growth. First and foremost, we're gonna invest in dividend. We increased the dividend. I hope everybody saw that announcement of 15% increase in dividend. We'll continue to do that. We have the ability to invest for M&A activity, so we'll look there. That's a focus area.
Then we did increase our share repurchase authorization. You can anticipate that being definitely to offset dilution associated with incentive comp is more the focus right there for now. We're always looking at ways to enhance stakeholder and shareholder value in the corporation, and we'll continue to do so, Mike.
Operator (participant)
Our next question comes from Stanley Elliott from Stifel. Please go ahead, your line is open.
Stanley Elliott (Managing Director)
Hey, good morning, everyone. Thank Thank you for the question. Congratulations. Quick question on the backlogs? Up 22%, you know, at the same time you guys are mentioning low dealer inventories in MP, aged fleet and, you know, across the channel really. Do you think kinda what's in your backlog will have much of an impact on either replenishing dealer inventories or bringing down the fleet age in the coming year? I guess it's kind of a, you know, a way to say, you know, maybe some of that could spill over into 2024.
John Garrison (Chairman and CEO)
Thanks for the question, Stan. We do have historically high backlogs as we go into the year, if you just look at our coverage for 2023. In our backlog, Stan, is already $700 million for delivery in 2024. A lot of that is associated with supply chain. I do believe and again, on the MP side, dealer replenishment, dealer inventories are low. I think this is gonna help. They're seeing strong growth. As soon as products come in, they're, you know, In that business, about 70% goes to the distribution channel, especially rental. They do a lot of rental purchase agreement type contracts, so it's being heavily utilized. The customers are converting it from the rent to ownership. We're having a hard time replenishing the dealer inventory.
I think that's part of the strength there. Then on the AWP side, we can talk more about that, but clearly with the constraints on the industry, in terms of meeting the needs of the rental customers, the fleet replacement has been delayed. One of the benefits of 2023, and we think even beyond 2023, is that fleet age has increased, which is going to increase the replacement cycle as we go forward. That comment's specific to, you know, to the Genie business, Stan.
Stanley Elliott (Managing Director)
Perfect. I apologize if you all touched on it at the first part of the call, but, the robotics announcement from earlier this week I thought was very interesting. Could you kind of talk high level how you think this will end up playing out from this co-investment that you've put together?
John Garrison (Chairman and CEO)
Yeah, thanks, Stanley Elliott, and I hope everybody had the opportunity to see that. It was an equity investment in Apptronik that we made, but the biggest part for us is co-development of robotic technology, and really is to provide our customers with solutions to help safely and efficiently conduct work. If you think about job sites, labor constraints, skilled labor trade constraints, there's an opportunity to enhance job site productivity and safety through robotic technology. Apptronik is on the forefront of that. If you take their capabilities with our capabilities of our existing machines, marry the two together, you have the opportunity to potentially provide solutions to the end market customers, to enhance, again, their productivity and safety. That's the reason we made the investment.
We view this as an investment in technology that enhances the solution offering that we provide our customers going forward. You know, we're excited about the investment we've made, very excited about the co-development agreement and we're excited about what the potential opportunity is of this going forward.
Stanley Elliott (Managing Director)
Yeah. It sounds like there'd be a lot of opportunities, I guess, on the MP side from a sorting perspective, but, thanks very much for the color and, congratulations. Best of luck.
John Garrison (Chairman and CEO)
Thanks, Stan.
Operator (participant)
Our next question comes from Seth Weber from Wells Fargo. Please go ahead, your line is open.
Seth Weber (Equity Research Analyst)
Hey, good morning, everybody. Hey, John, I just wanted to get a little bit more clarity around your comments around the Monterrey move and the disruption to I guess, productivity and margin that you expect for 2023. I guess first question is, did that impact Q4 AWP margin? Just sort of how should we think about that, you know, flowing through the year? Do you exit 2023 at a, you know, fully operational level and then 2024, you know, should reflect all these benefits, or does this continue to bleed into 2024? Thanks.
John Garrison (Chairman and CEO)
Yeah. Thanks. I'll start, Julie, and then you can jump in on the longer-term margin side. You know, the disruption, it really doesn't start until Q1. We begin to move into the permanent facility, Seth, in the Q1, and we have a significant number of product line moves. You know, first Genie has done this. They've got a detailed process for doing this. In the environment we're in now, both sides of the transaction, i.e. the sending plant's gonna have some disruption associated with the supply chain and the receiving plant, in this case, Monterrey, is gonna have some disruption, which impacts manufacturing efficiencies. We've factored that into our outlook.
It will take place during 2023, and we'll continue into 2024. As we indicated in our prepared remarks, and as we spoke during Investor Day, it ultimately is gonna add about 200 basis points of operating margin improvement when we're up fully and running, as we really get closer to the back half of 2024. That's our current outlook. Again, it's gonna be a busy year for the team. They're excited. The construction's gone well. It's on time, it's on budget, and now it's time to start, you know, moving the product lines in there and reaping the benefits of the investment that we're making.
Julie Beck (SVP and CFO)
Seth, just to follow up on some of the Q4 margin commentary. The AWP, their margins were up 320 basis points from last year. Really nice results in higher sales volumes and they had strict expense management and cost reduction initiatives and they had disciplined pricing. When we look at Q4, the margins were really as expected. We had talked about last time, some fewer production days, less favorable geographic and product mix and unfavorable foreign exchange impacting AWP. Our utilities business continues to experience the supply disruptions due to chassis and bodies. They had unfavorable manufacturing efficiencies.
Some things that were maybe newer, I guess, that we, you know, we had some weather-related shutdowns and product liability expenses in the utility business, as well as the Changzhou facility was temporarily shut down, due to COVID cases. You know, the team did a really great job to more than double their operating profit and increase their margins by 320 points in the Q4. You know, it pretty much, we had some nice performance by the team.
Seth Weber (Equity Research Analyst)
Yep. Okay. That's helpful color. Thank you. Then just a quick follow-up. You know, John, I think you called out some softness in Europe in the Fuchs business and the crane the tower business. Are you seeing, you know, the pausing on European orders on the access business as well? Or is it really just the ones you called out?
John Garrison (Chairman and CEO)
We did see a modest slowdown in orders on the AWP side in the quarter. With that said, we still have strong, you know, historically strong backlog. A little bit of moderation on the booking level, but strong backlog as we go into 2023.
Seth Weber (Equity Research Analyst)
That's just to clarify, that's your comments around Europe?
John Garrison (Chairman and CEO)
Yes.
Seth Weber (Equity Research Analyst)
Okay. Super. Okay. Thank you very much. I appreciate it, guys.
John Garrison (Chairman and CEO)
Thank you.
Operator (participant)
Our next question comes from David Raso from Evercore ISI. Please go ahead. Your line is open.
David Raso (Senior Managing Director and Partner)
Hi. Thank you for the time. With AWP for 2023, right, you've got 94% of the sales guide in the backlog that ships this year. Clearly, this is a year about, I mean, supply chain inefficiency, supply chain broadly is the gating factor, I should say. The question I have, though is, the order books for 2024, how are we handling the out year maybe differently than the past? I wanna go back to the Mexico risk of that transition. I know it's justified, 200 basis points of margin improvement's worthwhile, but I'm just trying to make sure we don't look up in a couple quarters and Mexico in this challenging supply environment becomes more of a risk, more of a drag on that transition. Again, two questions there.
24 AWP, how are we handling the order books versus history? Again, just how do we get more comfort that it's not the easiest time to be transitioning production?
John Garrison (Chairman and CEO)
Thanks, David Raso. In terms of the order book, as we indicated, we've got about $700 million of total company tariff slide of backlog into 2024. You know, it's more of that actually is utilities than the Genie business, where especially some of our highly customized units are booked well out into 2024 in that business. In terms of the Monterrey, Mexico, as again, you know, we just thought it was appropriate given the level of change to highlight it as part of the Genie plan for this year. Again, David, we've done this numerous times. The supply chain remains the gating factor.
We will closely manage this and ensure we've got the appropriate level of material on the sending plant as well as the receiving plant to mitigate the disruption to the maximum extent possible. Given the level of magnitude of change, we thought it was important for us to at least highlight it, and that explains some of the margin or why it's taking time. You know, why aren't you just getting 200 basis points of margin immediately? That's the why. It takes time to bring the plants up, to get the plants up and operating, get the supply chain up and operating and stabilized. Then over time, quite confident it's gonna deliver that level of margin improvement for the Genie business.
David Raso (Senior Managing Director and Partner)
Can you touch on the order books, how you're handling 24 or let's call it the out year differently than the past?
John Garrison (Chairman and CEO)
In terms of the.
David Raso (Senior Managing Director and Partner)
How early the order... I mean, opening the window up earlier or is somehow handling it. I mean, you don't usually start the year with 94% of your guide-
John Garrison (Chairman and CEO)
Yeah, we don't.
David Raso (Senior Managing Director and Partner)
backlog, I'm curious to understand the impact.
John Garrison (Chairman and CEO)
You're right, David. We don't usually start the year with 90+% booked for the year. Yes, we are. We're working with our customers. Frankly, in the AWP segment right now, the customers are asking for more than we can currently deliver. We're in constant dialogue with our customers. If we see some improvement in supply chain by specific models, we let them know. We are taking orders into 2024. Most of that, David, is because of the supply chain, not that the customers necessarily are looking for it in 2024, but that's when we're able to deliver the product is in 2024.
Seth Weber (Equity Research Analyst)
All right. Thank you for the time.
John Garrison (Chairman and CEO)
Thank you, David.
Operator (participant)
Our next question comes from Nicole DeBlase from Deutsche Bank. Please go ahead, your line is open.
Nicole DeBlase (Managing Director)
Yeah, thanks. Good morning, guys.
John Garrison (Chairman and CEO)
Morning, Nicole.
Julie Beck (SVP and CFO)
Good morning.
Nicole DeBlase (Managing Director)
Hi, Julie. Just maybe to continue the conversation that David just started, one more question on this backlog that extends to 2024. How are you guys handling the pricing aspect of that, given all of the uncertainty around inflation?
Julie Beck (SVP and CFO)
Nicole, we're making our best estimate of what that is going to look like. You know, that's the answer. You know, we just make a best estimate. We would factor in inflation.
Nicole DeBlase (Managing Director)
There's a list price associated with that. It's not like the customer has to wait until pricing is confirmed at some point in the future.
John Garrison (Chairman and CEO)
Yes, that's correct.
Nicole DeBlase (Managing Director)
Okay. Okay, understood. To follow up, just with respect to what you guys are embedding for free cash in 2023, can you talk a little bit about the expectation for working capital?
Julie Beck (SVP and CFO)
Great question. Thanks, Nicole. We, you know, we are expecting our free cash flow to improve in 2023. It improves for two reasons. Number one, you know, improved earnings and net income. Then second, we had a significant investment in inventory in 2022. We expect additional working capital to support the additional volumes in an absolute dollars term in 2023, but a much less, a lower inventory build in 2023 than we had in 2022. We'll be more working capital efficient going into 2023 than we experienced in 2022.
Nicole DeBlase (Managing Director)
Thank you. I'll pass it on.
Julie Beck (SVP and CFO)
Thank you.
John Garrison (Chairman and CEO)
Thank you, Nicole.
Operator (participant)
Our next question comes from Steve Barger from KeyBanc Capital Markets. Please go ahead, your line is open.
Steve Barger (Managing Director and Equity Research)
Thanks. With supply chain being the limiting factor, how much revenue did you deduct from the 2023 range you provided? Can you just tell us what revenue level each segment could ship to unconstrained?
John Garrison (Chairman and CEO)
I'll take it, Steve. If you look at our revenue guide for the year, and you think about 2022, you know, we were between $1 billion... Just at the macro level across Terex, we were between $1 billion and $1.1 billion, and then stepped it up in the back half of the year to, you know, $1.05 billion to, you know, $1.2 billion type of range. We're anticipating modest supply chain improvement, but not anywhere near historical performance. If you kind of look at our Q4, you know, runway, we've kind of extended that into 2023. Again, that's based on the current estimates from suppliers and managing to the current constraint. The challenge is this constraint continues to move around. We...
You know, our guide is predicated, as you can see based on, you know, our backlog and the coverage rates. The guide really is predicated on the supply chain. It's our best estimate in current conversations with suppliers in terms of what they can deliver to, that's what we've built our 2023 outlook on. In terms of what could happen, you know, you can go back, you know, years before, and we were significantly above those levels, you know, especially in the AWP segment. Again, it's really the constraint is the supply chain, and that's the governor for 2023 as of today. Julie?
Julie Beck (SVP and CFO)
Yeah, I just was gonna add that, you know, we had been, you know, running at $1 billion-$1.1 billion for consistently. In Q4, we were able to, you know, go up to $1.2 billion. Our guidance for this next year is $1.1 billion-$1.2 billion, which is consistent with what our supply chain's been able to, you know, been able to deliver.
Steve Barger (Managing Director and Equity Research)
Yeah, no, totally understandable. I guess what I'm trying to get to is could you run comfortably above $5 billion in an unconstrained environment, given how you're thinking about capacity and the footprint shifts you've made?
John Garrison (Chairman and CEO)
In the future, yes. Again, we, you know, we're at our... I think it's important, you know, Monterrey, Mexico does add some incremental capacity, but what it fundamentally does is alter our competitive position for being globally cost competitive as we go forward. Again, if you go back in time, we've definitely, you know, produced, especially in AWP segments, but as well in the MP segment, we've produced at higher levels. We would have that opportunity if the supply chain could support. There are some labor constraints in certain markets that we'd have to, you know, navigate. And the biggest labor constraint that we have is in our Redmond area. We're relieving that with our move into Monterrey, Mexico. Yes, there is opportunity in the future to produce more.
Given our footprint, it really is getting the supply chain to deliver consistently both continuity and quantity. I might add, there's a lot of work that we're doing with our supply chain now, not just on the continuity of supply, i.e., on-time delivery, but also with the suppliers about in terms of what we need in the future as we think about the future growth opportunities for the business, giving them those indications. It's both continuity of supply, we're working on the supply base, as well as quantity. The constraint in 2023 is the supply chain.
Julie Beck (SVP and CFO)
Just to add on to that, you know, Steve, you know, As we move from Redmond, you know, we're just, you know, some moves from Redmond. There, there'll still be production facilities in Redmond going forward. It's just a partial, several lines moving down to help with some of the labor shortage we've experienced in Redmond.
John Garrison (Chairman and CEO)
Yeah.
Steve Barger (Managing Director and Equity Research)
Got it. Then just one quick one. I watched the Apptronik videos. It seems like interesting technology, and John, I hear you on enhancing safety and productivity, but can you be more specific about how you're imagining that embedded into Terex projects?
John Garrison (Chairman and CEO)
Yeah. You know, Stan mentioned we did the ZenRobotics, that was picking and sorting. There may be some overlap.
Steve Barger (Managing Director and Equity Research)
Yeah
John Garrison (Chairman and CEO)
... In terms of the, of the two there.
Julie Beck (SVP and CFO)
In terms of Apptronik, think about we're enhancing an operator, a skilled trade on a scissor lift or on a boom lift or in a bucket truck. Is the opportunity to enhance that, reduce the amount of labor instead of two, you know, two skilled tradesmen or women in a boom lift, can you cut that to one? So we've got some ideas. We've got some concepts. They have some ideas and concepts. We, we put the two together, and there may be a real opportunity to bring some technological advancements into that construction center that. You know, the EPC contractors will tell you it's desperately needed because one of their biggest constraints is labor.
We're trying to provide labor productivity improvements and safety improvements, and we're excited. We'll see where it goes, but we think there's gonna be some real opportunity there.
Operator (participant)
Our next question comes from Steven Fisher from UBS. Please go ahead. Your line is open.
Steven Fisher (Managing Director and Equity Research Analyst)
Thanks. Good morning.
Julie Beck (SVP and CFO)
Good morning.
Steven Fisher (Managing Director and Equity Research Analyst)
I'm just trying to get a sense of the volume growth that you have embedded in your guidance for the Materials Processing segment for 2023. I know you mentioned, John, a lot about the strength of the bookings and the backlog, the revenues and the guidance are only up kind of mid-single digits. I guess presuming you do have some pricing, it doesn't seem like the volumes are up much unless there's a big FX drag on the revenue guide. I don't know if it's maybe you're just taking orders that the supply chain won't allow you to deliver, just kind of think about the volumes embedded there for 2023.
Julie Beck (SVP and CFO)
As Steve makes your question, I would say that, you know, the MP business has been dynamic throughout the year, and they've been price cost neutral throughout 2022. You know, they've done a really nice job of managing that, and we expect that to continue into 2023. We would expect them to have, you know, more volume than price and being offset by, you know, a couple percentage points of foreign exchange in 2023.
Steven Fisher (Managing Director and Equity Research Analyst)
Okay. That's helpful. On the AWP bookings year-over-year, I'm just curious, are we comparing apples to oranges there in the Q4? Meaning, I guess to what extent are you restricting orders now versus maybe you weren't doing that a year ago? Or is it a fair comparison that, you know, there's really no restriction on the bookings timeframe at this point?
Julie Beck (SVP and CFO)
That's a good question, Steve. Really in both segments because of the extended backlog, booking patterns have been disrupted. We have continuing ongoing discussions with our Genie customers, our Utilities customers, and our MP distributors as well. In the case of MP, some of the order books weren't open, and they'll open up. In the case of AWP, it's the ability to take the orders, be very clear with customers what we can commit to, what, you know, what we can't commit to, and the timing. It's a fair assessment that, you know, the historical booking patterns have been disrupted in both businesses as a result of the strong order activity, strong backlog. It has disrupted the traditional flow.
In the case of Genie, continuing ongoing discussions with our national accounts as we speak.
Steven Fisher (Managing Director and Equity Research Analyst)
Okay. Thanks, John.
Julie Beck (SVP and CFO)
Thank you.
Operator (participant)
Thank you. Our next question comes from Tami Zakaria from J.P. Morgan. Please go ahead. Your line is open.
Tami Zakaria (Executive Director)
Hi. Good morning.
Julie Beck (SVP and CFO)
Morning, Tami.
Operator (participant)
Hi, Tami.
Tami Zakaria (Executive Director)
Hi. How are you?
Julie Beck (SVP and CFO)
Good.
Tami Zakaria (Executive Director)
My first question is, can you remind us how much of your SG&A is fixed versus variable? Should you see some unexpected slowdown in demand, let's say sometime in the near future, how quickly can you dial back on SG&A?
Julie Beck (SVP and CFO)
Tami, I thank you for the question. I think we've done a really you know, nice job of managing SG&A, and we will continue to manage SG&A going forward. As you know historically, the business over the last several years, particularly the AWP business, has taken out significant costs in SG&A. We have, you know, we at this time feel that it's appropriate to invest in the business in terms of product, new product development, in terms of digitalization, in terms of those types of initiatives. There will be some increases, as I mentioned, you know, just things like trade shows. We have three of them this Q1, and people are traveling, some expenses that we didn't have in 2022 due to COVID.
We're making prudent investments, and we'll continue to prudently manage SG&A, going forward.
Tami Zakaria (Executive Director)
Got it. That's very helpful. Going back to your price cost neutral assumption for the year, seems like you have some pricing embedded in your top line, but raw material costs have come down notably from last year. Why wouldn't you be price cost positive in 2023?
Julie Beck (SVP and CFO)
Let's talk about. First of all, thanks for the question. Let's talk about costs. First of all, you know, we are still seeing overall inflation in the supply chain, so our suppliers are still coming with increases. Even though there are certain things like an HRC steel that may be coming down, overall, it takes a while for the inflation to work through the various tiers of the supply chain. We're still seeing increased costs going into 2023 at this point in time. We don't see prices coming down. We will offset. Our goal is to be price cost neutral for the year, and we're pricing our products according to that, and we're very transparent with our customers.
Tami Zakaria (Executive Director)
Got it. Thank you so much.
Operator (participant)
Thank you.
Julie Beck (SVP and CFO)
Thank you, Tami.
Operator (participant)
Our next question comes from Jamie Cook from Credit Suisse. Please go ahead. Your line is open.
Jamie Cook (Managing Director of Equity Research)
Hi. Good morning, nice quarter. two questions. One on the utility side, understanding utility was a drag on your AWP margins in 2022. Can you quantify that? Does that continue to be a drag on margins in 2023? I guess my second question, understanding what you just said about price cost for the year, is there anything to be cognizant of when we're thinking about the cadence of price cost throughout the quarter's H1 versus H2? Thank you.
Julie Beck (SVP and CFO)
Okay. Thanks, Jamie. First of all, yes, the utilities business, you know, was especially impacted by supply chain shortages this year. You know, the bodies and chassis were really difficult. You know, as we said that the utilities margins had been, you know, have been below the segment average in 2022. Going into 2023, we expect the utilities margins to improve along with the Genie margins. We expect this overall segment margins to improve. In terms of price cost and et cetera, you know, we're at this point in time at H1, H2, you know, pretty much the same.
You know, we'll have the H1 will have, you know, some pricing increases, you know, that we took, you know, later in, like, the second quarter that'll come through, that, you know, into Q1. From a cost perspective, we expect that to be relatively balanced throughout the year.
Jamie Cook (Managing Director of Equity Research)
Thank you.
Julie Beck (SVP and CFO)
Okay.
John Garrison (Chairman and CEO)
Thank you, Jamie.
Operator (participant)
Our last question will come from Stephen Volkmann from Jefferies. Please go ahead. Your line is open.
Stephen Volkmann (Equity Analyst and CFA)
Great. Thanks, guys. Most of my questions have been answered. John, I think you mentioned that, 60% of MP and 70% of Genie product has sort of an electrical option. I'm curious what you're seeing in your backlog, given how long it goes. Are you seeing meaningful uptake of those electric units? Then I have a quick follow-up.
John Garrison (Chairman and CEO)
In terms of the backlog, yes, we are seeing, you know, an improvement. Meaningful, I would say, is an improvement in the electrical options across the business, especially as we bring out the new products in both those categories. In the case of MP, it really is predicated on what application it's going into and is there grid or what they call mains power available as to whether or not the machine goes out with a ICE engine or goes out electric. Again, a lot of customer interest, as we bring out new products, as the industry brings out new products, I think you'll continue to see a transition to the electrical side.
That was part of the, you know, the investments that we made, you know, last year in Viatec and Acculon were designed to help accelerate our electric, our electric offering, as we go forward. I think over time, I think we're gonna see more of it in the current backlog, not substantially different than historical, but an increase in the electrical products.
Stephen Volkmann (Equity Analyst and CFA)
I guess the follow on, over the next few years, presumably there'll be some transition. Do you think that's a margin accretive event for Terex, or is it more a margin headwind because of sort of startup and development costs?
John Garrison (Chairman and CEO)
In terms of the startup and development costs, those are really captured in our ongoing SG&A. We capture our R&D and development in our SG&A. That's in there. One of the things that is occurring over time, and it's part of the reason why the uptick hasn't been as strong, is that the electrical options are more costly than the internal combustion engine or our hybrid models. As we continue to move down that cost curve, as more and more industries adopt the electrical technology, specifically around battery and battery technology, that it'll come down the cost curve, and we believe it will be more affordable. From a margin standpoint, pretty much right now our long-term assessment is margin neutral. Again, that does...
You know, we are assuming that over time, which is happening, that you see the cost of those units come down as the cost of the battery technology comes down the cost curve, you know, globally for those types of products.
Stephen Volkmann (Equity Analyst and CFA)
All right. Great. Appreciate it.
John Garrison (Chairman and CEO)
Thank you.
Operator (participant)
We are out of time for questions today. I would like to turn the call back over to John Garrison for closing remarks.
John Garrison (Chairman and CEO)
Thank you, operator. If you have any additional questions, please follow up with Julie or John or Paretosh. Again, thank you for your interest in Terex. Please stay safe and stay healthy. Again, thank you for your interest in Terex, and we look forward to seeing you on the shows in the upcoming quarter. Thank you.
Operator (participant)
This concludes today's conference call. Thank you for your participation. You may now disconnect.