Terex Corp (TEX) 2021 Q3 法說會逐字稿

Greetings, and welcome to Terex Corporation Third Quarter 2021 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Randy Wilson, Director of Investor Relations for Terex Corporation. Thank you, sir. You may begin.

Good morning, and welcome to the Terex Third Quarter 2021 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'll be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures can be found in the conference call materials.

Please turn to Slide 3, and I'll turn it over to John Garrison.

Good morning, and thank you for joining us and for your interest in Terex. I want to take a moment and emphasize once again that Terex actions are always guided by our values. We consistently act with integrity, operate with excellence and care for our team members, customers and communities. I would like to thank our team around the world for their continued commitment to our Zero Harm safety culture and Terex Way values.

Safety remains the top priority in the company, driven by Think Safe, Work Safe, Home Safe. All Terex team members have contributed to our effort to continue to produce and service equipment for our customers while maintaining a safe working environment.

Please turn to Slide 4. The team is built on the existing strong foundation for long-term success with our environmental, social and governance, or ESG initiatives. A few key points that I would like to highlight as we progress on this journey.

Leading with strong governance. Our ESG efforts are led by senior management with oversight from our Board of Directors.

Turning to social. Diversity, equity and inclusion is being embraced and driven by our senior leaders as we increase the dialogue and training around this important topic.

On the environmental front. You'll hear more later about how our teams continue to deliver sustainable and innovative products, which our customers are demanding.

Finally, we continue to communicate with stakeholders about our ESG journey. We recently released our second ESG report, which can be found in our Investor Relations website. The team looks forward to continuing to engage with investors about ESG matters.

I am pleased with our efforts to date, but the team recognizes there is more work to do around this important topic, and we will drive execution of our ESG priorities.

Please turn to Slide 5. Now let me highlight some of our third quarter results, which Duffy will describe in greater detail. During the quarter, we continued to deliver strong year-over-year top line revenue growth. We were impacted by supply chain challenges, limiting our production output, especially within our AWP segment. As a result of the supply chain challenges, revenues were approximately 9% below our expectations from the beginning of the quarter.

Global end market demand remains very robust, as demonstrated by our quarterly bookings in Q3 be double the prior year. Even when compared to historically good end market demand environments, such as Q3 2019, our bookings were up approximately 140%. We do expect end market demand to remain strong through the remainder of this year and into 2022.

Our operating margins and earnings per share in the quarter improved significantly versus the third quarter of last year, but were lower than our prior expectations because of the revenue shortfall, supply chain challenges impacting the efficiency of our manufacturing operations and inflationary cost pressures, which were only partially offset by our pricing actions. We expect the supply chain environment we experienced in Q3 to continue through the fourth quarter and into 2022. Today's updated financial outlook for 2021 reflects this expectation.

I'm extremely proud of our team's management of working capital and free cash flow generation. With $43 million of positive free cash flow in the quarter, we posted our sixth consecutive quarter of positive free cash flow. Year-to-date, we have now generated more than $180 million of free cash flow. This strong performance allowed us to use available cash to prepay another $150 million of debt in October. Today, Terex enjoys one of the strongest balance sheets it has ever had.

During the third quarter, our team worked tirelessly to manage supply chain and logistics disruptions by delivering for our customers, tightly managed all costs and delivered improved margins and positive free cash flow. Our financial results demonstrate that our strategic priorities are working to improve the company and to deliver positive financial results for shareholders.

Please turn to Slide 6. We continue to improve Terex' global cost competitiveness. For the full year 2021, our SG&A as a percent of sales will be substantially below our target of 12.5%. During 2021, we have been treating nearly all SG&A costs as fixed, taking advantage of higher revenue to leverage the cost structure. We will continue to maintain strict cost discipline while recognizing that growth in the business will necessitate some investment spending.

In the third quarter, we started production of our telehandlers in Monterrey, Mexico. This action is on track and will reduce the cost of manufacturing our telehandler products for the North American market.

Turning to innovation. We remain focused on purposeful innovation, delivering electrification, digital and other offering enhancements that provide value to our customers. In Utilities, we've rolled out our high-power solution, which operates the boom electrically and eliminates noise and emissions. And Genie is producing e-Drive scissors, which addresses the need for hybrid and fuel electric product offerings. Approximately 2/3 of Genie scissors and 1/3 of Genie booms are offered with hybrid and electric technology.

MP has launched 28 new products in 2021. The segment also continues to develop and deploy digital offerings for dealers and customers. More than 7,000 units in the installed base are now fitted with telematics hardware that is enabling these offerings. MP is also implementing digital dealer solutions, including connected dealer inventory or CDI. The number of active dealers using CDI doubled in 2021 and more growth is anticipated.

Finally, we are investing for growth. In China, we're increasing production in both segments. We produced our first Genie boom in our recently expanded Changzhou facility and our MP production is progressing according to plan.

We launched a new product line in waste and recycling called Terex Recycling Systems, or TRS. The new product line led modular offerings for stationary systems. The TRS offering complements our Ecotec and CBI businesses, which offer mobile waste and recycling equipment.

Turning to Slide 7. Our AWP and MP segments continue to demonstrate resiliency and flexibility to capture the benefits from the positive market fundamentals that we are seeing.

First, in Genie. The current market dynamics point to a multiyear replacement cycle for Genie equipment. The average age of fleets globally is increasing and customers need to replenish their fleets, so the replacement cycle is here.

Adoption is taking place in emerging markets such as China. Nonresidential investment indicators are positive. These factors are leading to strong order activity.

Materials Processing. We expect global demand for crushing and screening equipment to continue to grow. Broad-based economic growth, construction activity and aggregate consumption are the primary market drivers. We are seeing strong markets for our concrete mixer truck, material handling and environmental businesses.

Overall, we are seeing robust market conditions around the world for our industry-leading products and solutions. However, while demand remains strong, we anticipate ongoing supply chain disruptions to persist throughout the fourth quarter and into 2022. It is a dynamic situation, which is constantly changing, and we're not expecting significant improvement in the near term.

Freight and logistics have also been a growing issue with delays and increased costs. The availability of containers, ships and increasing offload times are impacting our production and delivery schedules. Our production and supply chain team members are doing a remarkable job, demonstrating resilience and flexibility to maximize the number of machines we can ship to our customers.

Our strategic sourcing initiative has produced stronger relationships with suppliers, resulting in more (inaudible) transparency and communication. This has helped our teams work with suppliers to ensure we are receiving a higher allocation of components. Our engineering teams have worked with suppliers to redesign components to maximize availability of critical electronic subsystems.

These are dynamic times. And I am confident that Terex will deliver continued operational progress due to the tireless efforts of our team members.

With that, I'll turn it over to Duffy.

Thanks, John. Turning to Slide 8. Let's look at our third quarter results. Overall, revenues of almost $1 billion were up nearly 30% year-over-year with both of our operating segments revenues up more than 25%. As John mentioned earlier, revenues were lower than our expectations going into the quarter. As a result of the higher revenues, our absolute amount of gross profit in the quarter increased 22%.

The current global supply chain dynamics materially increased the cost of our operations for both segments through reduced efficiency in our manufacturing facilities and higher material, logistics and labor costs. In the short run, given previously committed customer purchase orders, especially in our AWP segment, we have been unable to pass all of these increased costs on to our customers. As a result, gross margins contracted year-over-year in the third quarter.

To mitigate the negative impact of the operating environment, our teams have been maintaining strict discipline in our SG&A spending. Despite this quarter's revenue being 30% higher than the same quarter last year, SG&A was $6 million lower than the prior year.

For the quarter, we recorded an operating profit of $74 million compared to $37 million in the third quarter of last year, achieving an operating margin of 7.5%. Interest and other expense was approximately $3 million lower than Q3 of last year, resulting from lower outstanding borrowings combined with reduced rates on the debt we refinanced earlier this year.

Our third quarter 2021 global effective tax rate was approximately 23%, driven by a mix of discrete items in the quarter. Our tax rate estimate for the full year remains 19%, consistent with our previous outlook. Finally, our reported EPS of $0.67 per share more than doubled year-over-year.

Turning to Slide 9 and our AWP segment financial results. Sales of $573 million were up 29% compared to last year, driven by continued strong demand in all global markets. AWP delivered improved operating margins in the quarter, driven by increased production and aggressively managing all costs.

Third quarter bookings of $981 million were up dramatically compared to Q3 2020 while backlog at quarter end was $1.7 billion, almost 4x the prior year. Approximately 70% of AWP's September 30 backlog is scheduled for delivery in 2022. A portion of this backlog represents orders with 2021 pricing that were scheduled for delivery in 2021 that have now carried over into 2022. As a result, we expect the first half of next year to be price cost negative. However, we do expect AWP to be price cost neutral for the full year 2022.

Now turning to Slide 10 and Material Processing's Q3 financial results. MP had another excellent quarter. Sales of $419 million were up 35% compared to last year, driven by strong customer demand across all end markets and geographies. The MP team has been aggressively managing all elements of costs as end markets improve, resulting in an operating margin of almost 14%. It is a testament to the MP team's operational strength to deliver these robust operating margins.

MP's business strengthened through the quarter with bookings up approximately 62% year-over-year. Backlog of $1 billion is more than 3.5x higher than last year and was up 18% sequentially.

Turning to Slide 11, and I'll now review our updated financial outlook for the full year. This outlook takes into consideration the current end market demand environment as well as the increased supply chain and input cost headwinds that we have discussed today. As for commercial demand, we have seen our end markets remain robust over the course of the third quarter. We expect continued global end market strength over the remainder of the year and into 2022.

Our full year revenue outlook for the company as a whole in both segments is limited due to the availability of components from our supply chain. We now expect our AWP segment revenues for the full year to be slightly lower than our previous sales outlook communicated in July. In addition, we are expecting our operations to be impacted over the remainder of this year and into 2022 by accelerating cost increases.

As we've already contracted with customers for nearly all of our remaining 2021 revenue, most of the benefit of price increases which we have been implementing to offset inflationary pressures will not be realized until 2022, especially in our AWP segment. We have slightly lowered our total company outlook for operating margins as a result of lower AWP margins, partially offset by improving MP margins.

As a result of positive first half call-outs, corporate and other costs continue to be expected to be slightly higher in the second half versus the first half of the year. Finally, we continue to plan for total company incremental margins for the full year 2021, which exceed our 25% target.

Our full year EPS outlook, including charges of $0.27 per share for the refinancing of our capital structure and other year-to-date call-outs has been revised to $2.75 to $2.85 per share based on sales of approximately $3.85 billion. For the full year 2021, we are estimating free cash flow in excess of $200 million, reflecting a strong year of positive cash generation. The year free cash flow continues to include approximately $75 million from income and back tax refunds, which are not expected to reoccur. We now plan for capital expenditures of approximately $80 million. The largest project included in capital expenditures is for the Genie Mexico manufacturing facility.

Turning to Slide 12. Our updated 2021 full-year EPS outlook takes into consideration: first, the small reduction in our full year outlook for AWP segment revenues; second, the inflationary cost pressures we are experiencing in most areas of our businesses; third, the benefit of price increases we have been implementing, which currently is only partially offsetting these cost increases; and finally, the operational efficiency and SG&A cost mitigation actions we have been taking to improve the business.

Overall, our 2021 outlook continues to represent a significant improvement in operating performance when compared to 2020. We will continue to aggressively manage costs while positioning our businesses for growth.

Turning to Slide 13, and I'll review our disciplined capital allocation strategy. Our team members remain vigilant and will continue to efficiently manage production and scrutinize every expenditure. The positive free cash flow of $43 million in the quarter demonstrates the focus and discipline of our team members who have tightly managed net working capital.

Terex has ample liquidity. At the end of the quarter, we had approximately $1.2 billion available to us with no near-term debt maturities so we can manage and grow the business. Our strong liquidity position and cash generation allowed us to prepay $150 million of term loans in October, which is in addition to the $279 million prepaid earlier this year. All this while the company continues to pay our quarterly dividend.

We are committed to continuing to strengthen Terex' balance sheet while maintaining flexibility to execute our growth plans. And with that, back to you, John.

Thanks, Duffy. Before we go to your questions, I would like to acknowledge that this will be Duffy's last conference call with Terex. As announced a few weeks ago, the entire team is excited to welcome Julie Beck, who will be joining us next week, and you will meet Julie at our upcoming conferences in November and December.

On behalf of the Board of Directors, the executive leadership team and all Terex team members, we want to thank Duffy, as he will be retiring after 5 years of exceptional service and leadership at Terex. He's been a great leader, mentor and teammate, and he has created tremendous value for our company. In his 5 years as CFO, Duffy's guidance has been especially important to me as he has helped lead our transformation journey and position Terex for a strong future.

Thanks for that, John. I'd like to take a moment to thank each Terex team member for their support. I know you will continue to do the same for Julie.

I also want to thank you, the analysts and investment community whom I've interacted with on these calls and at conferences. Your pushing and prodding made me a better CFO for Terex. And most importantly, to you, John, for giving me this opportunity. We are a great team and good friends. And with that, let me turn it back to you, Randy.

Thanks, Duffy. (Operator Instructions) With that, I'd like to open up for questions. Operator?

Your first question comes David Raso with Evercore ISI.

Congrats, Duffy. My question is on the first half margins for AWP. I know you don't want to give exact guidance, but just trying to think through. I mean, to be fair, your third quarter AWP margins held up pretty well. You're implying the fourth quarter AWP still is solidly profitable at $3.7 million. Obviously, we heard from a main competitor where maybe their margins are under a little more pressure than that. So I'll leave it open ended. Can you at least help us how you're thinking about first year-over-year margins for AWP when you think through what's in the backlog, what you already have lined up your steel cost, anything from accounting? You're more FIFO, they're are more LIFO.

Just help us. I think that's kind of the key. People are just trying to figure out how much of a hole is the first half in AWP earnings and how much is second half where it will make sense that the price cost is better, but maybe your steel cost depending on how you purchased are up or down year-over-year as well in the second half. So a lot in that question. I'll let you answer it as you will.

Thanks for the question, David. And I'll start. Well, first, let's start at the top, which is we are in a strong demand environment across the businesses, but especially within the AWP segment, as you see the rental companies are doing well. Their CapEx needs are increasing. We're entering into the -- we are in the replacement cycle. We think that's going to be an extended cycle as we go forward. So the good news in the aerial business, and I would say globally is that we are in a strong demand environment. So that is the good news.

The challenge is, like most manufacturers, we're experiencing input cost increases. We have been taking price actions throughout 2021. But those price actions were overtaken by material cost increases we've had. So in 2021, we've been price/cost negative in our AWP segment. As we look to go into 2022, and we're in discussions with customers right now, we're being very transparent with customers in terms of what we are seeing in terms of our input costs, the fact that we have not covered our input cost in our business in 2021.

So we are taking price actions. And what we believe, David, is from a price/cost neutral standpoint that through the first half of the year, we're still going to be underwater from a price/cost standpoint, and that's given the backlog that we have. We've had backlog that's priced at 2021, that was supposed to deliver in 2021, did not move into 2022 now. So that backlog is at 2021 pricing. All other backlog will be 2022 pricing.

So as we move through the year, we believe that we're going to be price/cost negative in the first half of the year, making progress. But in the second half of the year and for the full year 2022 in our AWP segment, that includes both Genie and our Utilities business, we believe we can get to price/cost neutral for the full year in that segment. And so that's what the team is focused on, and that's what we need to do to drive -- continue to (inaudible) customers and drive the margin improvements that you as investors expect us to deliver.

I guess I would also just add, David, that I do -- I think John would agree with me that we do expect our AWP segment to be solidly profitable in the first half of next year for sure. We're also going to continue to be very disciplined in the SG&A area, as we've seen here through the course of 2021.

And so that I think the AWP segment, our leadership team there is extremely focused on continuing to bring the segment back to double-digit margins. I'm not saying in the first half of next year, just in general, they are very focused on restoring the business back to historical margin levels.

Yes. I think we're just trying to figure if you could maybe give a sense of should we expect sales up year-over-year, but margins down? Because when you look at the fourth quarter, even if you add back from fourth quarter of '20 the $11 million of onetime cost, you still have margins that are 150 bps higher year-over-year implied for fourth quarter year-over-year.

And I think people are just trying to understand, should we think of the first half as at least, hey, the price cost is challenging enough, and you don't have maybe the same year-over-year cost structure savings just as T&E comes back and a variety of things come back, that should we just think of it as probably down margins (inaudible).

Thanks, David. There's a lot in there. And we're right in the middle, obviously, the planning cycle for 2022, and we don't want to give guidance for 2022. But again, we believe the demand environment is going to be strong, and so it's not a demand issue at all. The ability to meet the demand will be a supply chain related and supply chain constraint related activity that we're going to have to manage through. So that, if you will, will be the governor for 2022.

And the team continues to focus on all aspects of cost to continue to drive margin improvement in all environments. And so the team is -- I can assure you they are laser focused on how do we drive margin improvement in that business going forward. And I'm confident that we can do that even in a challenging market environment like we saw this year.

Your next question comes from Stephen Volkmann from Jefferies.

Duffy, I'm tearing up a little bit here. So all the best and thanks for putting up with us over the years here. And just to end on a great note, I'm going to sort of pile on to David's question and see if I can ask it a different way.

It feels like the major kind of swing factors for the first half in AWP are going to be how much of the deliveries have '21 versus '22 pricing on one side. And on the other side, sort of how much have you been able to lock in costs like you did early in '21. So maybe to ask this is sequentially I would assume some portion of first quarter deliveries have '22 pricing in them. So sequentially, is it reasonable to think that you'd have some modest amount of margin improvement 1Q over 4Q in AWP?

So thanks for that, Steve. And as John was explaining a few moments ago, the supply chain is a very dynamic situation right at the moment. And so that's why you feel our reluctance to be really out with an outlook guidance with respect to Q1 of 2022. We're really living quarter-to-quarter right at the moment with the supply chain. John would tell you, quite honestly, that we're living week-to-week or day-to-day with suppliers.

I do think that the -- that when you look at Q4 to Q1, that we expect the business, our AWP segment, which is where your focus is, to remain solidly profitable. And that would drive -- continue to seek to drive margin improvement. Exactly where the revenue will be to be able to say whether it will be higher or lower in terms of the margin in Q1 of next year, I think it's premature to say that.

And again, Steve, it's just a challenge right now. But the great news is the demand environment there, it will really be driven by supply chain availability. And as we continue to navigate through that, there's an opportunity for good growth as we go into 2022.

And I would encourage not to be just focused on one quarter, to be very honest with you. We're planning for the long game here at Terex. And what we have said today and we're absolutely committed to, not just John and I, but the entire leadership team, is being price/cost neutral for the full year 2021 -- 2022, excuse me, 2022. And I think that's what the important thing is it's not about Q1. It's about the full year.

Right. Absolutely understood. And look, no, we're fans of the long game, but you sort of have to figure out where the inflection is to get people comfortable with the longer game. So understood around the supplier issues and we'll stay tuned there.

Just a quick follow-up, though, on SG&A, John. It felt like you were sort of saying something there about continued investments. Do we continue to target that below 12.5%? Is there some trend there that we should be aware of?

Yes. No. I think that this company will continue to take advantage of the growth in the top line, while maintaining discipline in SG&A. We're very proud of being meaningfully below 12.5% SG&A to sales this year. And I'm fairly confident that, that will be the case. Maybe more than fairly, I am confident that will be the case in 2022 also.

Your next question comes from Ann Duignan from JPMorgan.

Switching gears a little bit. If we could just compare and contrast what's going on in Material Processing versus AWPs. You didn't have to take down your guidance for revenue. You're not talking about price cost in that segment. Is that primarily because of where that business is geographically located? Or are there -- is there something more structural going on with the components of supply for Aerials versus Material Processing? If you could help just break the 2 businesses down and whether it's geographic or structural, that will be helpful.

Thanks, Ann. And our MP segment, as we indicated in our prepared remarks, really had another strong quarter. And they are very close to being price cost neutral in 2021, and we anticipate them, the remaining, price cost neutral for 2022.

That's really driven by a couple of factors. I think the biggest factor in is that about 75% of our MP business -- and again, MP is a collection of specialized equipment businesses, goes through distribution channels. And so from a price cost standpoint, with distribution, we've been able to be more price dynamic, if you will, given the cost inputs that we've seen through the distribution channel. And that has clearly helped that business in 2021, and will continue to help that business in 2022.

I would also say, Ann, and one of the great things about the MP business is the diversification geographically. We've got a good geographical split in our MP segment and we've got a good diversification of businesses within the MP segment. And we're seeing some real strength in some of those businesses. Our aggregates business has been quite strong, again, globally, our Material Handling business. And one of the good things about high steel prices -- frankly, the only thing, is scrap steel prices are up, which has really helped our Material Handling business. So is a diversified portfolio geographically. By business line, 75% going through the distribution channel. And so that's a very different dynamic, especially through the distribution channel when as compared to our AWP segment.

Okay. I appreciate that. And then just to pile on, on the back of the other questions. Maybe the question Steve didn't get answered was what percent of your backlog for AWPs has 2021 pricing?

So we talked about the overall percentage of backlog that was in -- that is at the end of September for AWP. 75% of that backlog will be for delivery in 2022, but we have not broken out how much of that is with -- of that 70%, how much of it has 2021 pricing associated with it.

Your next question comes from Mig Dobre from Baird.

Congrats for being -- pretty sure you're going to miss these calls. So the way I would ask the same sort of questions that you've been asked thus far is I just look at the orders that you've taken in, in the third quarter in AWP, so $981 million. Clearly, these are not for delivery in 2021. So is it fair to assume that they carry 2022 pricing?

Yes, maybe it's fair to assume that the majority of that backlog will carry 2022 pricing. It's just at this time...

What happened about backlog? I'm asking about the orders that you've taken in, just to be clear.

Yes. Yes, that's a fair relationship. Yes, that's fair.

Okay. And then my recollection is that last quarter you had $300 million of backlog -- of backlog that you had in the second quarter that was going to get converted and delivered into the first '22, it looks like that number went up maybe another $50 million. How should we think about the sort of cost pressures that have developed here a few months for this portion of deliveries? Is it that we should be thinking that these deliveries are essentially approaching breakeven type margins as we're framing Q1? Or is it maybe a little bit better than that? And I'll end there. Sorry for beating up this topic.

Yes. The only thing, I guess, I would say, Mig, is when you look at our AWP segment here in the third quarter or even the implied guidance for the fourth quarter, the business is solidly -- the segment is like solidly profitable. And so is at the current level of cost inputs that especially like fourth quarter. If you look at the fourth quarter, the business is solidly profitable.

And so we're going to continue to be solidly profitable. I don't think we're prepared today to say whether that solidly profitable means 3%, 5%, 9% segment margin. But what I can tell you is the segment is going to continue to be solidly profitable. And over the long run, over the entire year, we're going to be price cost neutral. And so our leadership team is driving hard for improving the price in the business to offset the inflationary cost inputs that we're experiencing.

Your next question comes from Stanley Elliott from Stifel.

Duffy, congratulations and best wishes.

Thank you.

Guys, when you're thinking about the MP business, we've done a nice job of driving that. It's still an incredibly highly fragmented industry. Are there larger chunkier deals out there where you could pursue? Or would it be more of a bolt-on sort of focus as you're looking to expand that business?

Yes. As we look -- if you look at the structure of our MP businesses and the businesses within MP, it still remains fragmented. And so as we look to grow the business, and the good news is with our free cash flow generation, strengthening of the balance sheet, we continue to invest organically in our MP business. In our Campsie facility, we did a small -- 2 small acquisitions in the quarter.

We do believe that there are opportunities in the businesses within our MP segment that we can do some M&A activity. And bolt-on near adjacencies, the funnel does have companies that are larger than the first 2 that we've done. And so as we look to grow the business, we believe we can grow it inorganically. And our initial focus really is in and around our MP businesses given the fragmentation in the businesses and given the opportunities we believe to grow that business, especially around near adjacencies that we can utilize some of our existing distribution, manufacturing to get some real operational synergies in that business.

And so the 2 acquisitions are small. The MBS acquisition is small. But we're already seeing the benefit of being able to put that product line through our global distribution channel. So we're excited about the growth opportunities that we have. Would we like for larger ones, so that we can see some more meaningful growth? Absolutely. And we're looking in our funnel in terms of where we can invest. That's an ongoing process as we go forward. So you could look for us to do some more things in and around that MP space when it comes to M&A. And the good news is we've got the cash flow, we've got the balance sheet now to do that.

Well, that's the other thing, too, right? I mean you guys have done did a nice job of improving the return on invested capital. How do you balance kind of the M&A piece versus maybe buying your shares back? I'm just curious how you're thinking about that high level.

Right. So just from a macro level, obviously, we've strengthened the balance sheet, paid down another $150 million of debt here in October, continued to invest capital. We are investing organically in our business and we still believe we have the opportunity to invest via M&A activity. So we're deemphasizing share repurchases over the last 5, 6 years, we've significantly reduced the amount of float outstanding.

So from a share repurchase standpoint, we'd deemphasize that, looking more to the M&A. But let me be clear, we're going to be very disciplined in the M&A environment that we're in right now. And valuations are, to some extent, elevated. And so we'll be disciplined there, share repurchase we'll look to offset any incentive comp dilution with that and take advantage of market dislocations that occur through time. But again, the good news is we got a strong balance sheet, strong cash flow. It gives us optionality now on capital allocation, and we reinstituted the dividend, which for our investors is also important.

Your next question comes from Nicole DeBlase from Deutsche Bank.

Congrats, Duffy.

Thank you, Nicole.

Maybe just starting with free cash flow, kind of piggybacking off the last question. That was something I was really impressed with this quarter, especially since a number of your machinery peers have had weaker free cash flow as we've been holding excess inventory in response to the supply chain situation.

So can you talk a little bit about the inventory position? And to the extent -- to what extent are you guys holding a lot of WIP inventory and facilities that's missing a couple of components and waiting to go out to customers?

Yes. Thanks, Nicole, for recognizing the free cash flow. As John mentioned in our remarks, right, we've been free cash flow positive now 6 quarters in a row, and we expect to be free cash flow positive in the fourth quarter. So our teams are really focused on disciplined management of net working capital.

I probably, to be honest, would say that they would want more inventory available to them to be able to produce more products, but we have been managing the inventories, the accounts receivables. Quite honestly, our past dues have never been lower than they are. Over the last 5 years, they've never been lower.

And so we're pleased with the net working capital management that we've had. We've also looked to make sure we're monetizing opportunities on our balance sheet, and that's included, for example, the liquidation of our TFS portfolio and working with a third-party service provider there. So we've also collected a substantial amount of tax receivables that were outstanding. So team has just done a really good job of making sure that we're monetizing our balance sheet.

And to the last question, what that does is it drives up our return on invested capital. And that's what we're really focused on.

And then just on the inventory side, as Duffy said, given the demand environment, we frankly want to have more inventory. Our raw and WIP inventory had increased and finished goods inventory have gone down, Nicole. Just as you indicated, we call them the hospital units and those are the units that we partially complete. We have to move off the line, wait for the components to arise, bring them back on the line, complete and then ship to our customers. And so that's part of the adaptability and the flexibility now that our supply chain teams are happening to exhibit given the dynamic environment that we're in when it comes to the supply chain.

So as Duffy said, frankly, right now, we would enjoy more raw WIP and finished goods. The mix right now is a little bit too high to raw and WIP because of the hospital inventory and would really like that to be finished goods that we could ship immediately to customers. We don't have a lot of finished goods waiting for customers. When we complete it, it's being shipped as soon as we can arrange the shipment and logistics.

Got it. Okay. That was really helpful. And just from a demand perspective, I think we all know that the environment in North America for AWP is super, super strong. We couldn't see the CapEx forecast that your customers have. But can you talk a little bit about what you're seeing from Europe and China?

Yes. So great question. And from a Europe standpoint, I would say it's very similar to the North American market. We're seeing really good order activity. We're seeing backlog increase. So the European market is very similar to the North American market in terms of what we're seeing.

China, we had dramatic growth last year in China. So China, I would say, is a little bit flat year-over-year. Again, adoption continues, but it had a pretty difficult comp compared to last year because that was the one market last year that we did see substantial year-over-year growth. So it's continuing in China, but we have seen the growth slow again against a pretty difficult comp in China.

And then in the Asia Pacific region, we saw good growth, we're seeing growth pick up there as well. So really, Nicole, it's strong global growth. It's just not North American growth. And really, that's across the portfolio. It's not just AWP, but it's also MP. And that's what's encouraging, it's the demand environment is quite strong. And as we work through these supply chain issues, it's going to be a good environment. Because the challenge is, it's dynamic right now as it pertains to the supply chain.

Your next question comes from Steven Fisher from UBS.

So you guys talked about the pricing contribution for the second half of '22. The improvement there in the price cost equation. What do you assume for the cost side in the second half there, mainly steel prices, I presume? Are you assuming that they'll be coming down? Or it's just there's sort of going to be staying at a steady level based on sort of your accounting treatment and you just get the price to cover it?

Yes. So we're obviously cognizant at the moment that steel prices have started to decline some. I'd say that as we go through the fourth quarter here, we will finalize our plans. But at the moment, we're assuming steel prices really in the hot rolled coil in the $1,800 range, which is really where it was during the course of Q3 and then coming down somewhat in the second half of 2022.

Okay. That's very helpful. And I guess you've done a lot of work on the supply chain already over the last few years. I'm wondering to what extent you think you need to redouble your efforts there, expand the number of suppliers? And if you are, do you think there's going to be any sort of quality issues coming out of the combination of new suppliers or rushing production to get units out? Are we going to need to be aware of higher warranty reserves you might be taking over the next few quarters?

So as of now, we're not seeing that. Obviously, we have -- as part of our strategic sourcing initiative, we have been changing suppliers. And actually, throughout the course of this year, our supply chain teams have implemented supplier changeovers and new suppliers, which frankly has helped mitigate some of the significant increase in material costs that we're seeing. We're going to continue to do that. As I mentioned in my earlier comments, our engineering teams are working with suppliers around electronic components. We're adjusting production schedules. But in no way, we have the same quality standards. And so it does not shift until it meets our quality standards. If you look at our Genie quality by design, that's key to the brand. And so there's no shortcuts on quality standards.

Now if there are quality issues, does it create further disruption to your operations? Yes, it does. With no inventory in the channel, if we end up with a quality issue on the line from a supplier, we -- that does impact us and we have to correct it. But in terms of shipping out, the answer is no. We have a rigorous quality process throughout the businesses and that have to meet our quality standards before we ship to our customers.

Your next question comes from Tim Thein with Citigroup.

All the best, Duffy. It's nice of you to hand over the keys to Julie with the balance sheet like it is today versus the one you inherited.

Thank you.

Just first question is on the footprint moves that have been made in AWP in terms of the telehandler production moving to Monterrey and closure of Rock Hill and I may be leaving others out. But should we think about that as -- I mean, are those savings meaningful as we think about kind of the run rate into '22? Or is this -- is that not the case? Just maybe help us on that in terms of potential savings?

Yes. So from a timing standpoint, really, we're in a temporary facility now. As I indicated, the team has done a good job to build our first telehandler. We're actually in the construction phase of the plant. And so from a phasing limited impact, frankly, in 2022 of the operations, we'll get some benefit but it really begins to kick into '23 and '24 as we ramp up full production, if you will, of the facility in Monterrey and then continues as we go forward. So that's how I would think about it in terms of the flow of margin improvement. Not a lot in '22 but begin to pick up in '23 and definitely into '24. Do you want to comment?

Yes, I just think that the -- one of the things that John has -- John Garrison has really emphasized is the importance of our being globally cost competitive. And that's what the Mexico facility is going to provide for us, is a very competitive global cost footprint. And so as that facility ramps up '23, '24 and beyond, we do believe that it will be a contributor -- a substantial contributor to the continued improvement in our AWP segment margins.

Got it. Okay. And then sticking with AWP. I'm curious, as you think about that business in a given year, maybe you have 1%, 2%, 3% pricing in a big year. And if you look at kind of the cumulative pricing actions from you and some of your peers, we may be approaching double digits in some cases in some products.

I'm curious, have you encountered any -- what has been the feedback as you think about customer reactions and not so much demand destruction per se, but maybe, do you anticipate maybe some downscaling or maybe some of the features that you would have expected in the past, maybe the economics don't work given the severity and the magnitude of these price increases? And maybe it's early days on that. I'm just curious, should we be thinking about a potential mix impact in '22?

Thanks. On the broadest level, we talked about purposeful innovation. And purposeful innovation is really defined at reducing the life cycle cost for our customers and reducing the cost for us to manufacture and service the equipment through that life cycle. So as we look and bring new products to marketplace, we try to bring more value add for the customers. There's no doubt it is difficult right now engaging in conversations with customers, but we're being very transparent with customers in terms of the actual cost increases we're seeing and the need for pricing actions to offset that.

It's never easy. But in this environment, I think most people understand that for the first time in many, many years, we are in an inflationary environment, and we can't be the shock absorber between material input cost increases and the end customer. We all have to pass it on through the channel. Our job is to get efficient, to be effective, to negotiate effectively with our suppliers. But doing all of those things in this environment, still the input cost, and we have to share those input costs with our customers. Difficult conversations, but we are being transparent with our customers.

Your next question comes from Jamie Cook from Credit Suisse.

Congrats, Duffy. So Duffy, I'll ask you another question on access and you can really miss us (inaudible). Just one, I understand what you said about the full year and being price cost neutral in the first half, second half. If volumes are up next year, do you think for the full year, we can hold at least a 25% incremental margin?

And then my second question is back to the mix sort of a backlog. Can you help us understand what's in the backlog? Is it bigger booms? Is it telehandlers? Is it pretty broad-based? I'm just wondering if we have a positive, negative or neutral mix issue for next year?

Jamie, I'll answer the first question and I'll let Duffy answer other -- the second question, and I'll let Duffy answer the first question. In terms of mix, both product mix, customer mix. Right now, we're not seeing any significant difference in product mix and/or customer mix. Duffy, do you want to handle the first part?

Yes. So I'm going to use a term that John uses quite often, and that is, is that the team is laser-focused on achieving 25% incremental margins next year. And while we're not providing an outlook or guidance today, I can tell you our team is absolutely committed to it. And I -- and yes, I expect we would achieve those.

Okay. Thank you. And congrats again. Thanks for all your help.

Thanks.

Your next question comes from Ross Gilardi from Bank of America.

Duffy, all the best to you on your next steps.

Absolutely.

All my questions have been answered really at this point, but I just had a couple of ones I'll try to squeeze in. So in terms of MP adjacencies that you might look to acquire, do they generally sell a meaningful multiple premium to your own stock pricing? And what's the max you would take leverage to? And I just had a quick follow-up on spare parts.

Some great questions there. So as you look at some of the transactions within the MP space, I would say they're more normalized valuation levels and multiples, perhaps not as elevated as other areas at this point in time. And we also believe there's real opportunities for synergies so that you can actually capture some value through the synergies that we can create given the types of businesses we're in, operationally, distribution channels. And so we do think there are good value opportunities where we can be disciplined about valuation while at the same time creating shareholder value, especially as we look around return on invested capital and -- from that perspective. So that -- and again, time will tell. Valuations in this world right now are elevated, but we're going to be disciplined.

Yes. And I just would add on, Ross, that we'll end 2021 with our net leverage below 1x. So we have plenty of capacity to add to our MP portfolio and to drive inorganic growth for that segment.

To the specific question surrounding what would we be willing to take leverage to. We talked about that, look, targeting a net debt-to-EBITDA leverage through cycle of 2.5x. I think you've seen John and I being somewhat on the more conservative side of that 2.5. So not to say that for the absolute right transaction that John wouldn't take the leverage above 2.5. But I think we're generally trying to be on the lower side or take the under on the 2.5.

All right. Could I maybe kind of just squeeze one more, last one?

Yes, go ahead.

I guess what portion of revenue these days comes from spare parts? I know the spare parts intensity in AWP isn't as large as it is in a lot of other businesses. But I would think spare parts demand right now would be booming with all the constraints on new equipment production. I'm wondering if that's actually the case. And if it's a meaningful...

Yes. So our parts and service team, Lifecycle Solutions team has really done a nice job. And you're right, we have seen good growth in that business. You're also correct, the intensity of repair parts around booms and scissors and what it is in MP or on the telehandler side. But the team has done a good job growing that business, good, strong margin support. And roughly, we're in the 15% range, plus or minus in any given quarter. We think there's opportunity to continue to grow that as we go forward. And again, the team has done a nice job in that space. We are investing in that area, especially around technology to improve our offering and our interface to customers. And again, we think there's opportunity to continue to grow the parts and service. And clearly, it helps with our cyclicality. And so we like the countercyclical nature of the parts and service business.

And your next question comes from Jerry Revich with Goldman Sachs.

We still have you, Jerry? Operator, let the record show, we try to get Jerry and...

Can you hear me now?

Yes, there you go.

All right. Duffy, congratulations and we'll miss working with you. I just wanted to ask you folks have obviously made the smart move to lock in the cost structure early heading into '21. How does that impact the way you think about structurally setting up the business? Will you be in a position to lock in cost structures early on a sustained basis? And any other differences in terms of how you're managing the supply chain going forward?

So we do -- we utilize a steel hedging program in order to provide us with certainty with respect to our cost structure as we head into the following year. So we're -- and the reason for it, our objective with it is that when we're having discussions with customers about price for the following year, we have greater insight into what our cost structure would be.

We did enter into some steel hedges in 2020 for 2022, much less volume than we had for 2021. And we've done some limited amount of steel hedging here in 2021. But quite honestly, given the elevated level of the forward contracts, we have not done as much of it as we did in the prior year. And we are very focused on being and committed to being price cost neutral for 2022. So to the extent that -- and I mentioned earlier, the planning levels with respect to steel prices, and we will be price cost neutral by making sure that those elevated steel levels and other component cost increases that we're able to pass those on to our customers.

Okay. Great. And lastly, with your telematics, you have great insights on where utilization levels are. Can you talk about in North America and Europe in the third quarter? Was utilization for your customers all the way back to prior cycle highs? Or is there room for utilization to be higher versus a very good third quarter historically?

Yes. I would say utilization improved -- timely improved for the customers. It varies by country in terms of where if it was back to 2019 levels. But broad-based comments, utilization across our portfolio of businesses continue to improve as we went through the quarter.

We'll talk to you soon, Jerry. So thanks, everyone, for your questions. And now I'd like to turn it back to John Garrison for his closing remarks.

Thank you, everyone, for your time this morning. We went over a little bit in your questions. Let me just conclude with a few takeaways. We are focused on execution as I think you heard today. Team members around the world are focused on the right things: safety, health, customers and improved productivity. Our end markets are strong. Our supply chain teams are working tirelessly to mitigate the supply chain headwinds that we're facing. We are driving positive free cash flow, and the team continues to invest in innovative products. We are focused on growth. And again, thank you for your interest and time with Terex.

Operator, please disconnect the call.

This concludes today's conference call. You may now disconnect.