Terex Corp (TEX) 2021 Q2 法說會逐字稿

Greetings, and welcome to the Terex Corporation First 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 Second 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 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. I want to take a moment and emphasize once again that Terex's actions are always guided by our values. We consistently act with integrity, operate with excellence and care for our team members, customers and communities. That is true every quarter, but it has been especially important in the past 18 months as the world has dealt with unprecedented challenges brought on by the COVID-19 pandemic. While risks remain, many of the world's economies are moving forward. I would like to thank our team members 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 serve with equipment for our customers while following the protocols and maintaining a safe working environment.

I would like to offer my gratitude to our team members and distributors that have worked through so many unique circumstances over the last year. We owe our results to the incredible efforts of our operations and parts team members who kept our facilities running, our sales and service team members, along with our distributors have also gone above and beyond to meet the needs of our customers. Finally, we are proud to be a values-based company with process leadership in environmental, social and governance practices.

This past quarter, we spent time speaking to some of our investors regarding ESG. If you'd like to learn more about our initiatives, please see our Investor Relations website. We would welcome the opportunity to speak with you regarding our ESG program.

Please turn to Slide 4. Now let me recap some of our results, which Duffy will describe in greater detail. We continue to deliver positive results as customer demand remained strong during the quarter. While revenues were below our expectations due to supply chain challenges, limiting production output, we increased operating margins and bookings in both AWP and MP dramatically year-over-year.

We significantly improved our second quarter earnings per share compared to last year, and we are increasing our earnings and free cash flow outlook for full year 2021. AWP and MP continued to effectively manage supply chain disruptions. As a result of the strong execution in both segments, second quarter 2021 operating margins improved dramatically to 11.8% for the company, with both segments delivering double-digit operating margins. This represents a 170 basis point adjusted operating margin improvement on revenues 20% lower than the second quarter of 2019.

Our intense focus on net working capital management and improved profitability drove $101 million of positive free cash flow in the quarter and more than $140 million of free cash flow year-to-date.

During the second quarter, our team continued to respond to increased customer demand, effectively manage supply chain and logistics disruptions, tightly managed all costs and delivered improved margins and outstanding positive free cash flow. Our financial results demonstrate that our strategic priorities are working to improve the company and deliver positive financial results for shareholders.

Please turn to Slide 5. We delivered strong financial results as our strategic operational priorities of Execute, Innovate and Grow, continue to make excellent progress. First, we continue to improve Terex's global cost competitiveness. We expect our SG&A as a percent of sales to be below our target of 12.5% for the full year 2021. We are maintaining strict cost discipline while recognizing that growth in the business will necessitate investment spending.

In the first quarter, we announced the planned move of our Oklahoma City telehandler production to Monterrey, Mexico. This action is on track and will reduce the cost of manufacturing of our telehandler products for the North American market.

The team is addressing continued supply chain disruptions across various supply inputs and product lines. Suppliers and logistics providers are currently working hard to ramp up and meet our production requirements, and we are committed to meeting customer demand. Our team members in both segments have worked hard to adapt and maintain production schedules.

Turning to innovation. We continue to listen to our customers, ensuring our products and services have the features and benefits that provide value. We have also invested in our connected assets and digital capabilities to better serve customers. For example, our new Genie microscissors increases on-the-job productivity. Terex utilities recently introduced a new bigger derrick for construction and maintenance of the electric grid. And MP continues to develop, implement and roll out digital solutions such as connected dealer inventory, telematics and e-commerce.

Finally, we are investing in inorganic opportunities for future growth. We recently completed 2 acquisition. First, we acquired a facility in China to localize production to meet increasing demand for our industry-leading mobile pressing and screening products, and we are excited about the growth prospects in China. Second, we completed a bolt-on acquisition, purchasing MDS International, which is a well-established business of heavy-duty aggregate trommels that broadens our product offerings. While this is not a financially significant investment, it demonstrates our progress with inorganic growth via bolt-on acquisitions, as we've previously communicated.

Terex is well positioned for growth in 2021 and beyond because we have strong businesses, strong brands and strong market positions. We continue to invest, including a new innovative products, digital capabilities and manufacturing capacity.

Turning to Slide 6. Our AWP and MP segments continue to perform well, allowing us 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 access equipment. The average age of fleet globally is increasing and customers need to replenish their fleets, so the replacement cycle is kicking in. We are beginning to see positive indicators for nonresidential investment as well as continued strong order activity.

Before wrapping up my comments regarding Genie, I am pleased that we announced earlier this week that Simon Meester was named President of Genie. I thoroughly enjoyed working with Simon and the Genie team over the past year. Simon is the right leader for the Genie business.

Turning to our utilities business. Demand is strong across its end markets of tree care, rental and investor-owned utilities. In addition, we are experiencing strong growth in our utilities parts and service business.

Next in 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 the cement mixer, material and handling and environmental businesses. In addition, global monetary and fiscal stimulus programs have supported stronger demand in our end markets.

Overall, we are seeing robust market conditions around the world for our industry-leading products and solutions.

With that, let me turn it over to John.

Thanks, John. Turning to Slide 7. Let's look at our second quarter results. Overall, revenues of $1 billion were up 50% year-over-year with both of our operating segments' revenues up significantly. For the quarter, we recorded an operating profit of $123 million compared to only $7 million in the second quarter of last year.

We achieved an operating margin of approximately 12% through disciplined cost control and fulfilling as much customer demand as possible, given the realities of the global supply chain during the quarter.

The second quarter operating profit does include $4 million of benefits from the release of a financing receivable reserve and the recording of that receivable related to prior years, offset by a $1 million charge for a business impairment and restructuring. Improved gross margin and lower SG&A as a percent of sales allowed Terex to expand operating margins significantly year-over-year.

Interest and other expense was approximately $22 million higher than Q2 of last year, driven by $26 million of costs in connection with the refinancing of a significant portion of our capital structure, offset by $4 million in interest savings.

Our second quarter 2021 global effective tax rate was approximately 17%, 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 $1.02 per share includes $23 million of interest charges and other callouts that I just discussed had amounted to a $0.26 per share reduction in EPS in the quarter.

Going to Slide 8 and our AWP segment financial results. AWP sales of $595 million were up 44% compared to last year, driven by a dramatic improvement in all our global markets. The utilities market improved significantly as evidenced by strong customer bookings. AWP delivered double-digit operating margins in the quarter, driven by increased production and aggressively managing all costs. Second quarter bookings of $747 million were up dramatically compared to Q2 2020, while backlog at quarter end was $1.4 billion, close to 3x the prior year.

Now turning to Slide 9 and Material Processing's Q2 financial results. MP had another great quarter. Sales of $441 million were up 67% compared to last year, driven by strong customer sentiment across all end markets and geographies. The MP team has been aggressively managing all elements of cost as end markets improve, resulting in an operating margin above 16%. It is a testament to the MP team's operational strength to deliver these robust operating margins.

Backlog of $868 million more than tripled from last year and was up 22% sequentially. MP saw its business has strengthened through the quarter with bookings up approximately 160% year-over-year. Customer demand in both segments is very positive. Equipment is being ordered, utilized and serviced as end market demand continues to remain strong.

Turning to Slide 10. I will 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 supply chain headwinds that we have discussed today. As for commercial demand, we have seen our end markets remain robust over the course of the second quarter. All other things being equal, we expect continued end market strength in both segments over the remainder of the year and increasing levels of AWP customer fleet replenishment.

Our full year revenue outlook is limited, though, as a result of the availability of components from our supply chain. From a quarterly perspective, we now expect revenues for the full year to be slightly higher in the second half than the first half of the year with the third quarter being the strongest of the year.

We continue to expect both our operating profit and margins to increase each quarter year-over-year in 2021. However, as a result of commodity cost increases outpacing customer price increases, the absolute amount of operating profits in the second half of 2021 is expected to be lower than the actual operating profit achieved in the first half 2021.

We continue to plan for total company incremental margin for the full year 2021, which meet or exceed our 25% target.

As a result of positive first half callouts, corporate and other costs are expected to be slightly higher in the second half versus the first half of the year, including $0.26 per share of cost for refinancing of our capital structure and the other callouts in Q2, our full year EPS outlook is increased to $2.85 to $3.05 per share based on sales of approximately $3.9 billion.

Quarterly earnings per share are expected to be generally consistent with the development of operating profits during the year.

For the full year 2021, we are estimating free cash flow of approximately $200 million, reflecting a strong year of positive cash generation. Full year free cash flow includes approximately $75 million from income and VAT tax refunds, which are not expected to reoccur. During the first half of 2021, we received approximately $35 million of these refunds.

We continue to plan for capital expenditures net of asset dispositions of approximately $90 million. The largest project, including in capital expenditures is for the Genie Mexico manufacturing facility.

Turning to Slide 11, and I'll summarize our updated 2021 EPS outlook. We expect the strong customer sentiment demonstrated in Q2 by our AWP and MP customers to continue throughout 2021. Our 2021 full year EPS outlook reflects: first, our outperformance over the first half of the year; second, the operating profit contribution on additional revenue for Q3 and Q4; and third, net cost pressures from material cost headwinds.

Overall, our 2021 outlook represents 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 12, 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 strong positive free cash flow of $101 million in the quarter demonstrates the focus and discipline our team members continue to demonstrate to tightly manage net working capital.

Terex has ample liquidity. We have over $1.1 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 $83 million of term loans during Q2, which is in addition to $196 million of term loans prepaid in early February. In addition, we continue to pay our quarterly dividend.

We are committed to strengthen Terex's balance sheet while maintaining flexibility to execute on our organic and inorganic growth plans.

And with that, John, I'll turn it back to you.

Thanks, Duffy. Turning to Slide 13 to wrap up our remarks. Terex team members around the world are focused on the right things: safety, health, customers and improved productivity. End markets are strong, and the team is managing supply chain headwinds. We are driving positive free cash flow. We are continuing to invest in innovative products to meet increased customer demand we are focused on both organic and inorganic growth. As a result of these actions, Terex is well positioned to deliver strong 2021 results.

With that, let me turn it back over to Randy.

Thanks, John. (Operator Instructions)

With that, I'd like to open up for questions. Operator?

Your first question comes from Mig Dobre with Baird.

So I guess where I'd like to start in AWP, you had a good order intake, you got about $1.4 billion of backlog. But obviously, based on your updated guidance here, sales in the back half expected to be only about $1.1 billion. You talked about the supply chain being challenging, obviously, and having some issues with parts availability. We heard that from one of your competitors as well. I guess I'm wondering, how much of this discrepancy backlog versus second half revenue is driven by this element as opposed to just customer deliveries being scheduled into '22 and showing up in a backlog at this point?

I would say almost all of the deliveries for -- in the AWP group now specifically gain really are a result of the supply chain disruptions that we're seeing in production schedule sliding as a result of disruptions that we are seeing. Our teams staying in very close contact, and we can talk more about that on the supply side and with customers. But I would say most of that is a result of the supply chain disruptions and sliding of production schedules as it pertains specifically to the Genie business.

I see. Okay. And then looking at Slide 11, you detailed $0.10 of cost pressure there. By my math, this is what, call it, $8 million, $9 million of pressure. To me, at least, that seems like a relatively low number given your revenue base and all the things that are happening out there. Can you give us a sense for what's behind it in terms of how you came up with this figure? And is this sort of a number that we can carry into next year? Or are there things that can mitigate this cost pressure as we think about '22?

I'll start there, Mig. It's Duffy. And we certainly have mounting inflationary material cost pressures over the course of this year. If you go back to Q1 and our updated outlook at the end of Q1, we had included about $0.55 of cost pressure at that time. And since then -- and that was really mostly steel related, but we've seen the inflationary cost pressure expand to other products such as resin-based products, freight, other commodities. And so we're -- as a team, we're working hard to mitigate those price increases by suppliers. And so the $0.10 a share that you see outlined on Chart 11 represents our best estimate at this point in time of the amount that would be needed to be absorbed in order to meet production in the second half of the year.

To your -- the second part of your question about 2022. Certainly, we talked in Q1 and it certainly continues to be true here at the end of Q2, is that where our price cost for 2021 is not level, it's negative. We didn't reprice the backlog when we increased prices in the first quarter of the year. And so as we go into 2022, it certainly would be our objective to be price cost neutral. And that will, of course, depend upon what develops with respect to material costs during the second half of 2021.

Your next question comes from the line of Nicole DeBlase with Deutsche Bank.

Can we just talk a little bit about -- a little more about the supply chain constraints. So what I'm curious about is, has this actually caused production stoppages, whether it's rolling like days where you have to send people home? Or have you guys been able to produce? And maybe a similar question, like do you have excess equipment kind of sitting on the line in sort of finished mode waiting for like a few components to come through before it can be shipped?

Thank you, Nicole, and great question. So the supply chain disruption that we're experiencing. And again, we're not unique as a global manufacturer as demand has dramatically increased. A year ago, we were staring at it the best. And now we're -- and I hope we get some questions about the market, but the market demand has been quite strong.

What has happened is a global integrated supply chain, there's been disruptions rolling in that supply chain as a result of COVID. That, coupled with disruptions in global logistics both sea lanes, air freight and ground freight have created deliberately challenges for us. So what our teams have to do is they have to decide what parts are going to be available and then make the schedule. In many cases, exactly as you indicated, Nicole, we will build a unit and put it out, what we call it into the hospital and then bring the unit back in when the parts arrive.

In terms of absolute plant shutdowns, we have not experienced that. The team has done a great job of managing this, but we have had to shut value streams down for a couple of days, awaiting parts, a lot of overtime, as you can imagine, on the rework and it impacts our productivity. But the team is focused on meeting the needs of the customer, overcoming this disruption and the supply chain will continue to improve.

But as we look forward over the next 2 quarters, quarter to 2, we are seeing this level of disruption on a day-to-day basis, but our team is doing a masterful job of overcoming but it does impact our ability to ship and it does impact our cost position in terms of our labor productivity. So yes, we are doing that literally around the globe.

The team can figure out what we can build, we build it. And sometimes we build it partially and have to bring it back into the shop back into the line, put on the parts and then ship it. And again, the team did a great job in the second quarter. Over time, we think this is going to improve. But that is the world that we're operating in today from a supplier disruption and a supplier uncertainty standpoint.

Got it. That was really helpful. And maybe just as a follow-up on the SG&A guidance, taking it down to 11.75%. I guess what is the biggest driver of that? Is that anything to do with like the temporary cost cuts not coming back as quickly or maybe just return to work happening slower? Just trying to get a sense of if we should be expecting a return to the 12.5% target as we move into 2022?

So thanks, Nicole. And I think there's 2 factors that go into the SG&A, I'll say, movement versus our guidance at the beginning of the year. The first is, obviously, the top line revenue that is the denominator in the calculation has increased, which brings the percentage down.

That said, as we went into the year, the incentive compensation was planned at 100% of achievement or let's call it, target. And with the increase in our outlook for the year, we are accruing incentive compensation for the team at above target levels, which increases the amount of SG&A. In fact, the absolute increase in SG&A is virtually 100% attributable to increased incentive compensation.

And I think that's important to note because we're really treating SG&A for this year as a fixed cost. And irrespective of the revenue increasing other than the incentive compensation, which we would owe under the plan, we're not -- we're -- the team is maintaining really strict cost discipline.

Out in future periods -- to your point about in the future, in future periods, I do believe that there will be investments that will be required to grow our business and to maintain the customer relationships to invest in systems. But our objective is to continue to be at 12.5% SG&A or lower. And I would expect that if we're looking at a positive commercial environment, demand environment again in 2022 that we would be on the lower end of our target.

Next question comes from the line of David Raso with Evercore ISI.

John, for you to pass the baton on to Simon at AWP, obviously, the second quarter margin is pretty strong. You obviously had gained comfort time for you to sort of back away from that role and obviously, confidence in Simon to move forward. But curious, given how big the backlog is right now, extending into '22, more than we normally would see right now. If you had to frame how you think about what you know from visibility, but also how you left the business, the condition it was in. If we had to think about incremental margins for AWP next year, how should we think about that?

Thanks, David. Well, first, the entire Genie team has done incredibly -- actually across Terex, the team has done an incredible job dealing with the uncertainty and the challenges associated with the pandemic. And so Simon is the right leader, as I said in my prepared comment, has got a great team at Genie and they've got a strategy in place to drive improved operating performance in our Genie business.

At the macro level, the secular trends, David, as you know, in the rental industry are positive, and we can talk about the positive nature of the replacement cycle that's forthcoming.

So we think there's a strong market environment coming forward with the AWP team. Simon and the team are implementing a strategy to continue to drive improvement so that we're globally cost competitive as we compete in a global marketplace for the aerial business. And we're going to continue to drive margin improvement in our operations, in our sales and marketing and our product development offerings, all driving towards David, we're not going to back away from at least a 25% incremental margin improvement in the business.

And it's a business that can continue to drive over time and continue to drive margin improvement so that we consistently deliver double-digit operating margins in the business. We're not there right now as you look through the quarter, the seasonality is not going to change. But over time, that's what we're focused on as a team is to drive the margin of that business consistently to the double-digit range.

And regarding the increased visibility on '22, just trying to quantify it a bit. And course, if you can give us any insights on the mix geographically, pricing on the new equipment, the product type, and just because the backlog is huge. I mean normally at this time of the year, the backlog for AWP is anywhere from 40% to, say, 60% of the second half AWP revs right now, it's 130% of what you're guiding. So obviously, that's a huge incremental visibility for the following year. So again, open to you, any color you can give us on that extra visibility, what it looks like?

Thanks, David. And you're, right. I mean we're absolutely encouraged by the strength that we're seeing across our business utilities for that matter as well, David. But if you look at North America, you asked about customer mix, we're seeing strength across our independents and the national accounts product mix. We're not seeing any fundamental change in the product mix and growth that we've seen in terms of our backlog and orders in North America.

Likewise, David, in Western Europe, we've seen a nice strong recovery there from an order standpoint. Again, nothing is substantially different in terms of customer or product mix. We've seen growth in China. China didn't dip like the western part of the world did. And so we'll continue to experience growth in China.

In China, for us, it's primarily a boom market. So that's what we're seeing there. And in terms of the visibility, David, yes, the backlog is great. As we go into 2022, and we're having those conversations now, I think customers are buoyant. They're seeing strong utilization. They're seeing improving rates. They're seeing strong used equipment values, and we're engaging in the conversations for 2022, and we're starting to have the pricing conversations. As Duffy, indicated our price-cost ratio this year hasn't been what we would like to have and we're going to get -- we need to get an improved price/cost ratio given the material increases that we're seeing as we go forward into 2022.

Now David, the backlog (inaudible) because we couldn't produce, that will be a '21 pricing.

The commitment to Deliver 2022 products will be a 2022 pricing, and that work is underway.

Your next question comes from the line of Stephen Volkmann with Jefferies.

So a question on MP actually. Can you just provide a little more color on sort of specifically which of your MP product lines are kind of the strongest? And where the demand is most robust there, and then I have a quick follow-up on margin.

Sure. I'll take the demand. And Duffy, you can comment on the margin side as we go. But Stephen, the good news is we're seeing strong global momentum really across our businesses or product lines within the MP business and really across the globe.

On the core crushing and screening business, we saw a significant growth in orders, dealers' inventory levels are low. There are high utilization on their rental fleets and they're ordering back. And again, across our product portfolio in aggregates and again, across the globe, we've seen strong orders.

In our concrete business, which is our Terex advanced concrete trucks, very strong growth in that segment associated with the residential construction that we're seeing in the U.S. So that business has rebounded quite strongly.

Our Materials Handling business, our Fuchs business. So one of the only positives of high steel prices is that we're seeing high scrap steel prices. A big part of that business services that market. And we've seen that globally recover in terms of orders in backlog. We're also investing in new products and capacity expansion to branch out into other segments. But again, the Fuchs business has recovered quite nicely.

Our environmental business within MP, that's a newer business for us. And again, we're seeing really strong growth there. Again, Western Europe, North America, Asia Pacific, where we're seeing growth across that business. Our Pick & Carry business down in Australia and Australia really weathered the pandemic pretty well. And we're seeing strong order activity and consistent order activity through the pandemic in our Pick & Carry business.

And last but not least, our RTs and tower business, especially in the European area, we saw some good recovery in strength with orders. And last but not least, despite the significant COVID challenges in India, we've seen strong orders and strong bookings in India as they come out of the depths of the pandemic.

So as we look at the MP business, Stephen, we see strong growth across the product portfolio and literally across the globe. So we're pleased at what we're seeing on the demand side for the MP. You had a question about the margin?

Margin and follow-on.

Yes. Go ahead.

Yes. So obviously, a very big margin in the second quarter, but then it seems to step down, I guess, in the second half. Just with the right way longer term, is this a mid double-digit kind of margin business going forward? Or was there something special in the second quarter?

No. I think that if you look back over the last 4 quarters for our Materials Processing segment, the -- they've demonstrated maybe not full mid-teens margins, but certainly, let's call it, in the 13% to 15% range. I think that, as you noted, the second half of the year does reflect the uncertainties surrounding supply chain disruption and material costs that is bringing it slightly down below the 13% number I just referenced. But still, they're a consistent double-digit margin consistent in the teams performer and we would expect that to continue in 2022 and beyond.

Your next question comes from the line of Jerry Revich with Goldman Sachs.

John, now that the turnaround of AWP is complete, can you just talk about your strategic priorities from here? And if the answer's capital deployment towards M&A, maybe just give us a bit more on the parameters that you're looking at in the pipeline if that's the biggest focus from here?

Yes. Thanks, Jerry. Well, again, the team -- we have work to be done at our Genie business, and I'm confident in our Genie team to continue to execute the strategy that we have going forward. But your broader question is a really good one. As we look at our disciplined capital allocation that we've been focused on in the last several years, one was to improve the cash flow capabilities of the business, and we've done that. Second was to improve our balance sheet, we paid -- further pay down debt this quarter after paying down debt in the first quarter as well. So our balance sheet is in really good shape, good cash flow generation.

So now we're looking at how do we grow the business via inorganic activities. We do believe that there will be opportunity in that area to deploy capital to grow. Specifically, we're looking in and around our MP businesses. Jerry, if you look at the market verticals that we compete in, there's still a pretty high degree of fragmentation in those specialized equipment and specialized markets around the MP segment, so we're building a pipeline there. We believe in the utilities area, given what's needed around the world for electrification that there's opportunities in the utility space. And then also on life cycle solutions.

So we are building a pipeline as again, we did 2 transactions here in the second quarter, so we're spending up the pipeline to deploy capital for inorganic growth. We think the business is positioned now for us to be able to do that and we're actively pursuing things in those 3 areas that I just spoke. And I will say, we're going to be very disciplined about it, but we absolutely believe there's going to be opportunities for growth via inorganic.

Okay. And separately, in the last deal inflation cycle, once steel inflation slowed, you folks essentially wound up getting pricing that made you whole on the cycle. So can you talk about the plan here? So as we think about what '22 pricing actions will look like, will you look to fully recap the price cost headwinds from this year in your initial '22 pricing or anything that's changed in the industry structure or otherwise that would prevent you from doing what you did in the last cycle?

No, across all the businesses, we're being transparent with our customers and their distributors about the input costs we're seeing. We did, as Duffy said, take some pricing action, continue to take pricing actions. We will look to offset the material cost increases that we're seeing to include steel in our 2022 pricing.

And at least the price cost neutrality, whereas this year, as Duffy said, we're a bit upside down on price cost. So as we go forward, we will look to offset those cost increases with pricing actions. And again, it will vary, Jerry, by business, by region around the world, but the strategy is we provide value-added products that provide significant value over a duration of a lifetime for our customers. And we do have to pass on the cost that we cannot absorb and that's what we're going to be working on.

Very difficult conversations. I know that, but that's what we need to do going forward because we're having those same difficult conversations with our suppliers, and we're pushing back hard on their cost increases that they're trying to pass on to us. Some of them we're going to have to accept, and we're going to have to pass that through to our customers, and they're going to have to pass it through to their customers. That's just the nature of the cycle, I think, that we're in right now. And it's not going to be easy, but that's what we need to do.

Your next question comes from Steven Fisher with UBS.

Just on the supply chain, I know there's a real high degree of uncertainty here on the supply chain. But John, do you have any thoughts on when is really the kind of peak pain point for this? And when we could start to see some improvements there? I couldn't tell from your earlier comments if you're already seeing signs that it's getting better or if it's just an expectation that at some point, it will get better.

So that's a great question. I'm chuckling, peak pain. It just depends on what day and what product, what supplier. But no, it is going to get better. I mean, as the system gets back in sync, the logistics system is creating a big disruption right now, and that's going to work itself out. We ended up with containers in the wrong place, ships in the wrong place, no ability to air freight, that's starting to improve. So the logistics side, it's going to take some time to get everything back in balance, but that is going to improve.

Every supplier in the chain is doing the same thing we're trying to do, which is they're highly motivated to meet our needs so that we can meet our customer needs. I've been personally engaged with CEOs in the supply chain, Tier 1 down to Tier 4. We're all working on the same thing. Our teams are working hard to mitigate the disruption, to produce what we can produce and get back to what I would call normal operations.

In terms of when that exactly happens, I think we're going to be in this challenging period of time for the next couple of quarters because the other thing is we're a manufacturer. We need 100%, 1 part missing, we can't ship. And so even though if I improve to 99, I need that final part before I can ship and that's what we're focused on as a team.

So it is going to get better. Everybody in the system is highly motivated to continue to drive the improvement. It's just going to take time as this global integrated supply chain, it was like a Swiss watch, it got stopped and now it's starting back up. And we're experiencing disruptions. Our suppliers are working hard. Our teams are doing incredible work to build what we can build as efficiently as we can build it, and it is going to get better. When exactly? I don't know, but I'm absolutely confident that we'll get better over the next couple of quarters.

Steve, if I was to just give you a couple of data points. The supply chain is getting better if you just measure it in terms of the production, for example, at our Genie business, the production in Q2 of this year was more than double Q2 of last year and increased every quarter between Q2 of last year and Q2 of '21.

But when you look at the production we had in the second quarter, it was still only, say, 60% of the production we had in quarter -- in the mid quarters of, call it, Q2, Q3 of 2018, and our backlog is higher than we had in 2018. So demand increased exponentially overnight and our ability to ramp up production from components from suppliers to be able to ramp up our production to meet that overnight demand has been what the challenge is.

Very helpful. And then just a follow-up in terms of the size of acquisitions. You guys have done a great job with cash flow and the balance sheet, and you'll have flexibility on doing some bigger deals if you wanted to. So can you maybe just give us any color on the range of sizes of deals you consider? Or are the things available in your sites more just smaller bolt-ons?

Yes. So thanks for the question. And given our improved balance sheet and our low leverage, especially as we continue to drive free cash flow and debt down. We will look at transactions and really look at our where does our endpoint leverage end up. And we haven't changed. We're consistent at 2.5x net debt-to-EBITDA, kind of through the cycle. So that would be the gauge that could give an indication of what we would be willing to -- or comfortable taking on more debt for the size of this transaction.

So it does give us some flexibility in terms of size. And we will, again, we're going to be very disciplined, but I feel good about our capabilities, our balance sheet capabilities, cash flow capabilities to do things larger than the 2 small transactions that we've done. But think about the 2.5x net debt through EBITDA through the cycle, and that will give you a range to think about. That's how we're thinking about it.

Your next question comes from Jamie Cook with Crédit Suisse.

Most of my questions have been answered. Just one, can you just talk to within the Aerial Work Platform side just with all the material costs and pricing that we're trying to get through. Can you talk to the competitive environment? And whether you're seeing everyone sort of act rationally so that -- or are we trying to go for potentially market share?

And then just one quick follow-up on the backlog for AWP. What is the dollar amount associated with backlog going into 2022?

Yes. Thanks, Jamie. So the pricing dynamics in the industry, especially in the western part, North America and Europe, the pricing dynamics, I believe, irrationally in that we are all experiencing material cost inflation and we're all having those challenging conversations with customers about the need to seek pricing.

The only potential exception to that, Jamie, is I will say the pricing dynamics inside of China are quite aggressive. And sometimes there's some pricing dynamics there that, frankly, we just won't participate in. And so I would say rational, reasonable competition is what we're experiencing in the western part of the world, North America and Europe, Asia as well. Within the confines of China, we're seeing some pricing at times that you would have to say that's not rational. And so that's the pricing dynamics as of now. Duffy?

In terms of AWP backlog at the end of Q2, the total segment backlog was about $1.4 billion. I would say that $200 million to $300 million of that represent amounts that would be for deliveries based upon the second half outlook that we provided with the deliveries in 2022. And I would say most of that represents carryover from 2021. We will certainly be seeking to increase our production throughout the second half of this year and accelerate the delivery to customers into 2021, if at all possible.

The only other thing I'd add on that, Jamie, is that does include our utilities business. I mean some of the utility business is actually quoted out in 2022, but that would be at 2022 pricing. That's not unnatural for the utilities business. There are some longer lead vehicles in that segment within AWP.

Your next question comes from the line of Ross Gilardi with Bank of America.

Look, you guys have done a great job of turning around the free cash flow. I mean, it looks like your conversion this year from EBITDA at your midpoint of the guide is going to be a little bit above -- a bit above 50%. Do you think that's a reasonable way to look at it going forward? Or is there another sort of conversion metric that you think might be appropriate, more appropriate?

Yes. So thanks for recognizing our free cash flow generation, Ross. And you, in particular, have been a proponent for us getting better in that area and quite honestly, making me better. I think it's important when you -- in the comments I provided the prepared remarks I provided, right? Of the $200 million, there is a free cash flow outlook for the year, there is $75 million that represents our recovery of amounts -- tax amounts from prior years.

That amount that we had from Europe that had been outstanding for some time as well as income tax refunds carrybacks in the United States as a result of tax losses in the U.S. last year that we were able to carry back. Those 2 combined are about $75 million of the $200 million. We're going to continue to maximize free cash flow every single year.

And so ostensibly, our free cash flow target for the business is -- over the cycle is 100% of net income. And in some years, we've done better than that like last year, for example. But we are absolutely, I assure you focused on free cash flow generation, which allows us then to use that free cash flow to grow the business organically and inorganically.

Okay. That was helpful. And then can you talk a little bit more about this utilities business and the drivers there? And you've been in that business for a while, and it's done well by you. But can you give us a sense of how big it is within AWP? And just how sustainable those growth drivers are? And then you can talk about EV infrastructure and so forth, but just really more like the everyday drivers of the business for like utility maintenance type activity or for (inaudible).

So thanks. Utilities is about $400 million, and we think it's a business that can grow. Part of the reason we made a substantial investment in Watertown was to have the capacity to grow the underlying fundamentals and dynamics, especially in North America, but it really expands beyond North America, the utility sector are strong.

The reality of it is, there needs to be investment in the electric grid to accomplish any of the electrification that we're talking about. And that electric grid distribution to the house as well as plant transmission. And so there is substantial investment required in one, maintaining the electric grid; and two, building out the electric grid.

The other thing that's helped with the unfortunate situation out in California is that the -- what we call the maintenance side, tree care, vegetation management, that has really caused utilities and rate regulators to ensure that they're making the appropriate investment and vegetation management and the appropriate investment in the grid so that you don't end up with the situation like they've had at PG&E. And so the underlying fundamentals of the utility business, we think, are quite strong, and are going to be quite strong for some period of time.

That also coupled with the 5G investment level, if you put a 5G repeating tower and especially in rural America, that's going to have to go most likely on top of electrical poles. If it has to go on top of an electric pole, it has to be an insulated system, that's what we specialize in at Terex Utilities. So we think that gives us an opportunity for growth.

And then we also -- we've been in China. We've had some success with China Grid. We're localizing some of our production for the China market. So the utilities area, we think, is a strong area that we can grow organically, but we also think there's going to be some opportunities, especially as we look globally around the world because it's not dissimilar in other parts of the world as it is in North America that this is a segment that we want to be in that can provide excellent growth and excellent returns going forward.

So again, we've made a sizable investment in our utilities business. And the team is working hard to ensure we get a return, get the capacity out that we need going forward in that business. So it's a business we like. It's a business we've been invested in. And if opportunity presents itself, there will be a business that we continue to invest in.

It will be from Steve Barger with KeyBanc Capital Markets.

With 3Q being the strongest revenue quarter, should we think that both segments will see sequential increases from 2Q? Or will regional shutdowns or anything else caused that not to happen for 1 segment?

Sequential increases in revenue, right?

Right.

Yes. Yes. The answer to that question is generally yes, probably more so in the AWP segment than the MP segment.

Got it. And the outlook suggests the margin steps down in both segments in the back half. Are the supply chain impacts or parts availability issues evenly distributed across the 2 segments? Or is 1 more affected than the other?

I would say more evenly, the Genie business is a faster cycle time business, higher volume. And so if we do have a disruption there, it does impact it. But across the globe in our MP business, they are experiencing disruption as well, and again, doing a great job overcoming it, but a little bit slower tack time on those. So they have the opportunity to make it up a little bit better than Genie just given the tack time of the 2 assembly operations.

Got it.

Thank you. If you have any further questions, please don't hesitate to reach out to Randy. Thank you for your interest in Terex, and as I sign off with all my team members, be safe and stay healthy. Thank you.

Ladies and gentlemen, thank you for participating. You may now disconnect.