Welcome to Terex Corporation's Third Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded.

I will now turn the conference over to your host, Randy Wilson, Director of Investor Relations for Terex Corporation..

Good morning, and welcome to the Terex third quarter 2020 earnings conference call. A copy of the press release and presentation slides are posted on our Investor Relations website at investors.terex.com. In addition, the replay and slide presentation will be available on our website.

I'm joined by John Garrison, Chairman and Chief Executive Officer; and John Duffy Sheehan, Senior Vice President and Chief Financial Officer. Their prepared remarks will be followed by Q&A. Please turn to Slide 2 of the presentation, which reflects our Safe Harbor statement.

Today's conference call contains forward-looking statements, which are subject to risks that could cause actual results to be materially different from those expressed or implied. In addition, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance.

Reconciliations for these non-GAAP measures can be found in the conference call materials. Please turn to Slide 3, and I'll turn it over to John Garrison..

Good morning and thank you for joining us and for your interest in Terex. Most importantly, I hope you and your families are remaining safe and healthy. Throughout these challenging times, we are proud of all of our Terex team members who are keeping themselves and others safe, meeting the needs of our customers and helping our communities.

I would like to recognize and thank our team members around the world for their continued commitment to our Zero Harm safety culture, and Terex Way Values. Safety is and will remain the top priority of the company driven by Think Safe, Work Safe, Home Safe.

Our team members remain vigilant by carefully following the COVID-19 safety protocols and continuing to keep their guard up. Our crisis response teams remain active and our facilities continue refining their preparedness and response plan to ensure they can respond swiftly as local pandemic conditions change.

I'm proud of our team members’ commitment to safety, but I'm equally proud of their dedication to the Terex Way Value of citizenship.

Despite the challenges presented by COVID-19, our team members continue to give back to the local communities, whether it's the AWP team members continuing to produce mask and face shields or MP team members donating PPE equipment. Our team members are living our values.

Our dedicated team members are delivering value for our stakeholders and shareholders. Turning to Slide 4. Despite the challenging markets, the team is meeting customer demand, tightly managing all costs, aggressively reducing net working capital, especially AWP inventories and delivering positive free cash flow.

Q3 revenue, which was in line with our outlets in the beginning of the quarter and prove sequentially almost 11% as end markets continue to recover from the lows in the second quarter. AWP revenue improved sequentially by almost 8% in Q3, while MP revenues improved approximately 18%. Customer bookings in Q3 represented a dramatic improvement from Q2.

Unlike the first half of the year, we did not experience any material customer booking cancellations or pushing out of orders. Sequentially AWP bookings were up almost a 100% compared to Q2 and MP bookings were up 36%. In addition to sequential strength in bookings, all segments on improvement on a year-over-year basis.

Demonstrating the strength of our Q3 bookings, Terex backlog was consistent with backlog at the end of Q2 and down year-over-year by only 5%. Although revenue was consistent with our outlook as a result of our laser-focused 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, approximately 5% operating margin was achieved with both segments, generating positive operating margins. Our MP segment achieved outstanding financial results, reporting a 13% operating margin, while revenues were down 19% year-over-year.

Both segments and Terex overall achieved our targeted 25% decremental margins or better. We are not satisfied with AWP’s operating margins. We must drive significant improvement to restore the segment to industry competitive margins. And we will continue to take the actions necessary to deliver on that improvement.

Throughout 2020, we right-sized our inventory levels to the customer demand environment, especially in our Aerial products business. Their inventory levels are now at a level consistent with 2016, which was the last time there was an industrial downturn. Going forward, we are now at a level where Aerial products can manufacture to customer demand.

Our focus on net working capital management grew $54 million of free cash flow in the third quarter, delivering positive year-to-date free cash flow. Overall, our financial performance strengthened significantly in Q3. I assure you that we will remain laser-focused and consistently improving these results in 2021. Please turn to Slide 5.

Our strategic priorities will continue to strengthen our business operations. So we can succeed through all market cycles, including these uncertain times. We are taking action and we are implementing steps to improve, strengthen, and grow Terex.

Through operational excellence, we are strengthening accountability with each team member doing what he or she said they would do. To win in the marketplace, requires more than just knowing the score. We must understand the score and the process discipline to drive continuous improvement in the business.

On the cost side, we've been looking at every aspect of the business to ensure we can maximize our ability to be globally cost competitive. We are laser-focused on maximizing revenue, aggressively taking out costs, not just manufacturing costs, but also SG&A costs. Terex targets SG&A as a percent of sales to be 12.5%, which we achieved in 2019.

However, as sales have declined, our 2020 SG&A percent of sales has increased to over 14%. We are executing on an SG&A cost reduction initiative with a target of SG&A percent of sales for 2021 of 12.5%. This initiative is replacing temporary 2020 cost savings with permanent cost reductions.

We are evolving until leaner organization with fewer organizational levels. Also as we right-size our organization, we've been re-evaluating and reducing our related company-wide footprint. We recognize that's a 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 and returns on invested capital for our customers, allowing us to support their growth. Finally, Terex is well positioned for future growth, because we have strong businesses, strong brands and strong market positions upon which we can grow.

We will continue to invest in and grow our high performing businesses, including investing in new products and manufacturing capacity where demand calls for it. And we are more focused organization. I am confident this will result in Terex’s emerging from these uncertain times as an even stronger company.

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

Thanks, John. Turning to Slide 6. Let me begin by reviewing our Q3 financial results. I'd like to call your attention to our financial reporting structure. As you will notice consistent with Q1 and Q2, we did not report adjusted Q3 2020 financial results. Instead, we are identifying specific financial call-outs, which impacted our Q3 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 million, 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 million, compared to adjusted operating profit of $90 million in the third quarter last year.

The lower operating profits resulted from revenues being down from Q3 2019, combined with adverse impacts from a product liability judgment, severance and restructuring charges.

We achieved this positive operating results through very disciplined cost control and adapting to the market environment, while lower revenues impacted our gross margins and resulted in an elevated SG&A as a percent to sales.

Our aggressive cost reduction actions allowed Terex to achieve an approximately 19% decremental operating margin for Q3, more favorable than our targeted 25% decremental margin. This decremental margin was achieved just by $5 million of gross profit charges, primarily due to a product liability judgment.

In addition, SG&A was adversely impacted by $8 million due to team member severance and restructuring. Neither of these impacts were considered in our outlook going into the quarter. Excluding these charges, operating profits what has improved by $13 million and Terex’s decremental margin would have been approximately 14% in the quarter.

Below operating income, interest and other expense was $3 million lower than Q3 2019 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 million 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 U.S. treasury revised the regulations that permit the U.S. taxpayer under certain circumstances to exclude from U.S. taxable income, non-U.S. income subject to a high rate of foreign tax.

This way [indiscernible] change significantly benefits Terex in 2020 by increasing our U.S. net operating loss. Most importantly, we expect that in connection with our 2020 U.S. 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 million.

Finally, our reported EPS of $0.31 per share includes the adverse operating impacts to cost of good sold and SG&A, which were more than offset by the tax benefits that I just discussed. Turning to Slide 7, and our segments financial results.

AWP sales of $445 million 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 remains soft in certain customer segments.

We continue to aggressively manage Aerial products production levels to ensure we are not building excess inventory. During Q3, our Aerial products production was 47% lower than Q3 2019.

This continued aggressive production control producing below customer demand allowed us to achieve almost a $290 million reduction in Aerial product inventory levels since the beginning of 2019. As John mentioned, Aerial product inventory 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 cost to align with end market demand.

The AWP team achieved strong decremental margin performance of 18% in the quarter, which includes almost $7 million 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.

Q3 was challenging for our utility team from a production and product output standpoint, as they worked through the move into the new facility. However, throughout the quarter, the team improved their production output.

AWP third quarter bookings of $404 million or 10% higher than Q3 2019, while backlog at quarter end was $478 million, 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 2019.

Now turning to Materials Processing. MP had another solid quarter, achieving 13% operating margins despite challenging markets. It is a testament to the MP teams’ operational strength to deliver these strong, positive operating margins and revenues down almost 20%. Sales were lower at $311 million 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 million, was 8% lower than last year, but up 10% sequentially. MP’s SIOP 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 8. Now I would like to provide you with some perspectives 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 2019.

Consistent with what we said during our Q2 earnings call, we continue to expect revenue for the second half of 2020 to be similar to the first half of this year. From a segment perspective, we continue to anticipate that year-over-year Q4 revenue declines will be greater in AWP versus MP.

However, we expect the year-over-year revenue decline in Q4 to be smaller than Q3 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 million of severance and restructuring charges in Q4.

We remained 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 Q4 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 first and second halves of 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 Q4 free cash flow generation.

Because of our strong liquidity position, we have significantly reduced and expect to continue to reduce our sales of receivable 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 9.

And I will review our disciplined capital allocation strategy. Despite the challenging environment, the Terex team drove positive free cash flow of approximately $54 million in the quarter, resulting in Terex being approximately $13 million free cash flow positive on a year-to-date basis. This accomplishment is ahead of our outlook communicated in Q2.

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 billion 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% that our reduced level of capital expenditures is still approximately $65 million, 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 SG&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..

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

Our Aerial’s team has always been customer focused. So we listened and acted on our customer's feedback. We reorganized our teams and our 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 in year-over-year revenue growth in China, aggressively taking costs out of the business to improve margins and swiftly bringing online the new utilities facility.

It is a competitive industry, so we are controlling what we can control, superior execution and aggressively reducing cost to improve margins and win in the global marketplace. Turning to Slide 11. Material processing demonstrated once again strong operating performance in challenging market conditions.

MP continues to develop product adjacencies and new geographies for its leading products and brands, all demonstrating strong operational execution. The financial performance of MP relative to market conditions by achieving an operating margin of 13% demonstrates the MP team’s strong execution.

MP’s booking stabilized and increased throughout the third quarter resulting in bookings being up 24% year-over-year. MP is a diversified and consistently strong performer. Turning to Slide 12. To wrap up our remarks. Terex team members around the world are focused on the right things, safety, health, customers, and improve productivity.

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

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

Operator?.

Great. Good morning guys.

Can you hear me okay?.

Good morning, Steve. Yes, fine..

It wasn't totally clear if that was a done deal, but anyway thanks for taking the question. I guess if I could just kick it off John. You've been out in managing AWP now for a while. I think you probably have got your hands around some of the key issues and you're certainly talking strongly about the margin sort of efforts there.

So I'm wondering if there's a time when you can sort of layout 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 a key to getting margins where you want them to be? Is there some of the tool boxes that you've used in the past as it's sourcing is that head count, is it facilities reduction, skew reduction, just any details you can give us because as you pointed out, you still have a fair amount of work to do.

Thanks..

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

Steve, I have been out there for a couple months, working with the team. And 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 Q3. We also implemented some additional restructuring actions here in Q4 that Duffy referenced in his opening comment.

Those restructuring actions are looking at all costs throughout the business both SG&A costs as well as manufacturing costs. Your comment around inventory, the team has significantly improved our SIOP management process. And we now believe we're in a position that we can produce to end market demand.

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

That will be a combination of using the tools that will be implemented around our commercial excellence initiative. I think our sales team is doing a great job in these challenging times, staying close to the customer, maintaining price discipline in a challenging marketplace.

And so, you're going to continue to see us execute on our commercial excellence side. The other thing that's going to help market share as we move forward in revenue is our product development efforts. The team has implemented an aggressive product development plan over the last couple of years. We will continue with that as we go forward.

Our new products that have come into the marketplace, the J-Series Boom is going to help, our FE booms, our XC line of booms now that the ANSI standards are in effect. We think all of that is going to help us in the marketplace. 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, this – the other being very clear what 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 and 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 got to thank the global team and AWP team because they've done a great job reducing inventories in a challenging time, but we've also done a great job 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 receivable side.

So safety margin improvement, market share, and cash flow generation is what we're focused on. 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 can as we move forward, because this business will return to, industry competitive margins.

That's what we're focused on and we're going to get it done..

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

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?.

Yes. Thanks for that Steve. And obviously, we will provide 2021 financial guidance during our Q4 earnings call. And I think that the way to think about 2021 is that we will be fully committed to our 25% or better decremental or incremental margin. And quite honestly, we look forward to returning to revenue growth in 2021.

And the other metric that we are absolutely committed to is the 12.5% SG&A to revenue that I referenced in my comments, John referenced in his comments. And we are absolutely committed to driving the team there.

So it’s hard to say a specific restructuring benefit at this point in time, or the restricting we are doing today will allow us to be successful with those incremental margins at 25% or better in 2021..

Great. Thank you guys..

Absolutely..

Your next question comes from Joe O'Dea. Your line is open..

Hey Joe..

Hey good morning..

Good morning Joe..

A question on AWP in managing some of the volatility, John, and it sounds like there's a very clear focus on, you had to get a bunch of inventory out you don't want that coming back into the system.

But as you think about some of the uncertainty heading into next year and the steep CapEx cuts across the rental companies this year, how do you anticipate managing a move off of the bottom? In scenarios where it could be a sharp move, how do you do that without inventory? How are you going to manage this differently from how the company has done it in the past?.

Thanks Joe. So first, it really goes back to that commercial excellence process and staying close to our customers, and really working with the customers to understand the range of outcomes customers are looking at. So we can then plan based on those ranges and incorporate that into our SIOP plant.

It's not that we're not going to have inventory, we will have inventory. We'll manage inventory very closely based on days on hand by model and by region to ensure that we have competitive lead times going into the marketplace. The genie team historically has demonstrated the ability to flex up pretty dramatically.

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 has been through last 18 months taking inventory out, we would love the opportunity to respond to an increase in market demand as we go forward.

And I would say the genie team historically has demonstrated very strong competency in doing that.

So it's really managing the SIOP process with a commercial excellence and our sales team, staying close to the customer, understanding what their demand profiles look like, having the appropriate level of inventory to meet those needs, and then ramping our supply chain up and again, with the strategic sourcing initiative that we've implemented working with fewer suppliers we feel confident we have the ability to do that.

And again, that would be a challenge that the team would truly welcome is to figure out how to ramp up significantly versus the challenges that the team has been facing here over the course of about the last 18 months.

So that’s how we’ll do it and again it’s process discipline, it’s process tools implementing and executing those will drive our ability to meet customer demand. And we’re not against inventory, we just want to make sure we have the right level of inventory and we will manage going forward.

The good news is, is now we can ebb and flow inventory up and down, based on the retail demand. So our inventory levels may increase based on customer demand. So we’ll manage that aggressively as we move forward and team is doing a better job of that..

I appreciate that color.

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

Thanks, Joe. Overall, I think, the word that we use across the entire business is being disciplined on pricing by not over-producing inventory. I think our customers are being very disciplined in their CapEx, in their rate pricing, so we're being disciplined as well.

Within AWP, going forward, we’re going to offset the increases related to ANSI and ANSI standards implementation. We've been very transparent with customers on what those costs increases are, again disciplined SIOP process that we talked about to make sure that we have the right inventory, at the right price, at the right time.

And then on the other side, pricing is part of our commercial excellence initiatives. It's really pricing waterfall management, and again, the process and tools in place to do that and to prevent leakage of what price you're able to obtain.

And so I think the team is doing a better obviously room for improvement across everything, but the team has been doing a good job on pricing, waterfall management If we look at the MP, given that 70%, 80% of that business is through a dealer channel, we do believe that we'll have the ability to offset input cost increases 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 going to be disciplined on pricing. We provide tremendous value for our customers.

And that's how we're looking at pricing as we move forward into the fourth quarter and into 2021..

Thanks very much. .

Your next question comes from Mig Dobre with Baird.

Good morning everyone.

Can you hear me okay?.

We can hear you fine Mig..

All right great. So I want to go back to the comment that you made about SG&A as a percentage of sales being 12.5%.

I'm wondering kind of how you are thinking, how you essentially, you came up with this figure? And how we should be thinking about actual dollars spent on a go-forward basis? I mean, the idea here that you're going to keep SG&A flat and get a leverage of that, or can we actually see maybe a further decline in SG&A dollars spent next year? If you could elaborate on that, I think that'd be really helpful..

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

So Duffy would you comment on that please?.

Sure. Thanks very much, John. So Mig our focus is really on the 12.5% SG&A to sales. Looking here at Q3 and Q4 – to Q2 and Q3, we've had a run rate of about a $100 million where SG&A in both of those quarters. Now that's here in 2020. That's a fall of 12.5% of sales because of the low level of revenue that we've been experiencing.

And here in Q3, we also had about $7.5 million of restructuring charges that were included. So $100 million run rate, that $100 million run rate does include the benefit of the temporary cost reductions that we took in the beginning of the second quarter, reductions in compensation, no merit increases, reduced bonus opportunity for 2020.

All of those costs, they will return in 2021. So what our program has been focused on is not just bringing down the absolute level of SG&A, 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. If every single day, absolutely questioning every expenditure and making the business more efficient, 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 were wanted such that we're in a position to continue to drive growth into 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 SG&A percent of sale will be 12.5% or less to sale each quarter through 2021..

Okay. And then I guess my follow-up John going back to AWP it's very clear that the inventory situation is well on hand at this point. And you've made quite a few changes to the business.

So I guess my question is looking beyond the fourth quarter and recognizing that you've got additional restructuring and things that you're going to do there, do you think that most of the changes that you had to implement structure lead to that business segment are in the rear view mirror? And now we're just kind of looking at hopefully getting some better volume and traction on that, or is this still more structural work that you need to do in 2021? Thanks..

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

Okay. Thank you..

Your next question comes from Ann Duignan with JP Morgan..

Hi, good morning everybody..

Hi, Ann..

Hi, Ann..

Hi. I appreciate all the discussion about SG&A as 12.5% of sales, but that's not much value to us unless we know what the sales level is going to be.

So can you talk about what you are hearing out there from your customers, both the large customers, 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, obviously, but just directionally, what are you hearing?.

So I’ll talk and thank you for the question. And I know all of us are hooking for what they look like as we move forward. So I'll give a little kind of market commentary, and then I'll ask Duff to kind of speak to what we look like from a revenue development standpoint for 2021.

So as we look at the AWP business and we have seen equipment utilization improve as we move through the quarter if not up to 2019 levels, but we have seen utilization improve within North America. I think that was indicative of seeing our bookings level improve in the quarter. We do believe that the replacement cycle is going to be strong.

It's not absolutely clear when it starts, but if you just look at the age of the aerial equipment there is going to be a small tailwind associated with the replacement cycle in the future.

I would say similar story again in Europe, but little bit more of a mixed story in Europe, more based on country specific Southern Europe has been slower to recover than frankly, Northern Europe. But again, we did see orders improve.

We saw substantial improvement in China that market continues to accelerate, not just the economy recovering from the COVID situation, but also with the adoption of aerial products in that marketplace. So that market is continuing to grow very significantly.

And then our utilities business we saw a little slower demand this year in the rental, specialty rental customer channel, but that's beginning to pick up and relative stability with the regulated utilities and in the co-ops in that market.

So we would anticipate the rental channel within the utility segment to show improvement on a year-over-year basis. If we then look at across our MP and that's how I 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 moved through the quarter, orders were up significantly in that part of the business. I think that, I think, there's going to be some tailwinds there in that businesses as customers respond 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 Fuchs business and that was really two factors.

Number one, steel prices 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 we've moved through. And we think that will improve as we move into 2021. Continue to see growth in our environmental businesses to 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 the result of a lot of the storms. And then the concrete business, this is an interesting one.

On the concrete side it was very weak in Q1, but we began to see an improvement in Q2 and into Q3 orders are actually above significantly above prior year. And I think, that's speaking to the strength of the residential construction market and in multifamily housing, which is very strong that that business serves that market segment.

We continue to see the other business that’s performed quite well is our Pick and Carry business down on Australia. And we think that will continue into the next year. And then our cranes business, cranes has been a bit of a challenge. Our tower crane business saw order recovery in, in Q3 on the tower side.

Not necessarily on our RT business, the RT business, Rough Terrain crane businesses is challenged where we building 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 as that ameliorates through the course of the fourth quarter and into next year, that would begin to see India return to a strong market for us. So that's just a quick around the world look and what we're anticipating, what we're seeing now, and what we're anticipating we’re loss headed.

It really does depend on the pace of recovery on the pandemic and how that changes over time. And we're going to adapt and respond to that market. So that's a bit of an around the world by company look at how we're seeing the markets develop.

And Duffy, would you like to talk about the 2021 revenue outlook?.

Yes, sure. Just building on what John said a moment ago, about the degree of uncertainty that we're experiencing, I'll refrain from providing an absolute level of expected revenue for 2021.

But recognizing that you'll be building out models over the next months what I would say is that what we're currently anticipating in terms of revenue development over the course of the year is that our total company revenue for 2020 will be similar to the development we saw here in 2020.

The 2021 development will be similar to what we saw here in 2020 with revenue being relatively, evenly split between the first and the second half of the year. As it’s normal for our business we are expecting that the second quarter revenue will be the highest of the year and that we won't 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 second half of 2021. And quite frankly Ann, 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 provide more absolute amounts of 2021 financial guidance during our Q4 earnings call..

I appreciate that. And just one quick follow-up.

When you talking about the progression of potentially revenue for 2021, could you just distinguish between AWP versus MP? How are you expecting similar across both?.

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

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

Thank you, Ann..

Your next question comes from Jamie Cook, Credit Suisse..

Hi, good morning..

Good morning, Jamie..

A nice quarter. I guess just two questions most have been answered.

One, can you just talk to what you saw and sort of demand trends in October and understanding what you said about 2021 revenue and how to think about the progression? Are customers saying anything differently about how to think about order trends, whether we're hearing potentially there's risks, they could make decisions sort of later in the year as lead times are short.

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

Thanks Jamie. In terms of the progression and in conversation with customers we haven't seen – we continued to see the improvement as we move through the quarter. Obviously it's subject to what occurs with COVID. But we have seen it improve through the quarter.

In terms of customers on the AWP side Jamie, they're basically to their, what I'd call their standard annual operating plan process. 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 what customers are looking for. And I would say 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 much greater clarity at the end of Q4 and into early Q1 in terms of what the customer demand opportunity is. And in terms of Jamie you are absolutely right, in the way you phrase the market share side.

Market share is a balance, it's a balance we're driving improvements in our product and product offering, listening to the voice of the customer to ensure that we bring products to marketplace with the right feature and benefits set at the right price.

And it's a balance of having inventory and lead times that are competitive in the marketplace, not too much, not too little. 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 maintaining and/or growing.

And our expectation is when we bring new market – new products to the marketplace that we should expect an increase 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 China it's really increased in the market as well as the increase in the number of reporters in the market. But we have to be focused on market share. You've got to balance market share and margin to be successful and competitive. And it is a balance. And we will continue to find the right balance between those two elements as we move forward..

Thank you. I'll get back in queue.

Operator..

I'm sorry. Your next question comes from David Raso from Evercore..

Hi, thank you for taking the question..

Good morning David..

Good morning. Can you just clarify when you speak to 12.5% of sales with be SG&A and let's just keep the revenues as they are right now for 2020, it equates to roughly $80 million, $85 million of savings year-over-year.

Are we saying that's a similar amount of cost that come back and it shows up in COGS? I just want to make sure we all understand when you say 12.5%, is that before cost come back and they come back and they don't – and they come back and SG&A? Can you just help us understand exactly is it a 12.5% number even after cost return?.

It is a….

You want to take it? Go ahead Duff..

Yes, sure. So David, I will confirm to you, it is a 12.5% SG&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 comeback effective January 1, 2021.

And I do want to also say that the 12.5% SG&A to revenue, that's always been our go in terms of target. And so today it is our objective and our target to be at 12.5% SG&A to revenue in 2021.

We are in a very uncertain time and so that if revenue doesn't increase we'll have work to do, but we will always right-size our SG&A to the size of the business that we're operating in at any point in time..

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

Yes..

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

You're asking about 2021 I presume..

Yes, I mean, if you can give me the fourth quarter it would be interesting given [indiscernible]..

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

Yes..

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

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

So I’ll make we’ll level set and that’s what we’re underlying..

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

And lastly, do you expect to be EPS positive in the fourth quarter? The $0.15 of cost that’s flowing may be makes a little more challenging and is always a little bit of fourth quarter kind of accrual accounting catch up and the margins are a little lower.

But given the revenues aren’t terribly different between 3Q and 4Q, just trying to make sure I appreciate how we’re thinking about profitability in the fourth quarter?.

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

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

Of course, yes..

Thanks just for sharing for me..

Yes..

Really appreciate the time. Thank you so much..

Thank you, David..

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

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

Good morning Ross..

Absolutely..

I just wanted to, I was just curious in terms of free cash flow. I mean, clearly you guys are trying to – you've been trying to address that for a long time and are seeing some improvement over the last several quarters, at least year-to-date.

Is there some type of like free cash conversion ratio we can think of, do you think of it all a cash flow from op as a percentage of sales, or free cash flow as a percentage of EBITDA? I'm just wondering for modeling purposes just directionally how do we think about it? I get that your intention is to have the number to be positive for the next several years.

But anything else you can help with there?.

You want to take that Duffy?.

Sure. So Ross would say is that we are absolutely focused on driving free cash flow generation. And if I take you back to 2016 John 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 want to bring home to mom and dad over the last couple of years, that's a lot to do with the level of CapEx investment that we've made, it's a lot to do with the aerial work platforms, inventory challenges that we've been working through.

But in general, the metric we're focused on is free cash flow equal to a 100% of net income. And 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 at 2016 levels, $54 million of free cash flow in the third quarter.

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

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

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

Okay. And then just my follow-up was on the AWP – the 10% order increase year-on-year.

Can you give any color as to where that is coming from, is it coming from the national rental companies, is it more from the utility business, more from China or kind of all of the above?.

Yes, Raso I would say it’s a bit off all of the above. Clearly in China, we saw a good year-over-year growth in China on the order side. We also saw in the backlog we have a higher percentage of national accounts in the backlog.

So we saw the national accounts as they adjusted from Q2, into Q3 and Q4 that was also an important part of the booking increase as we ended the quarter. So it’s pretty much all the above..

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

Well, I would say the national accounts are taking some incremental fleet and that has been planned and they have been executing to that plan. So there is deliveries in Q4, but some of that will across the board, both independence and national accounts crossover into 2021 this year..

Got it. Thanks guys. .

Thank you, Raso..

Gentlemen, do you have any closing remarks?.

Yes. Thank you, operator. Thank you for your interest in Terex. Most importantly, I hope that you and your families are remaining safe and healthy by following the appropriate COVID-19 protocols. I think it behooves us all to do that. Thank you for your interest in Terex. And we’ve discussed the Terex team members, I want to thank them.

We are executing well. We're improving our execution in these very challenging times. And we believe we're positioning this business for 2021 and beyond so that we can have success in a challenging – 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 Randy Wilson. Have a great day. Thank you,.

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