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Edited Transcript of TEX earnings conference call or presentation 1-May-20 12:30pm GMT

Q1 2020 Terex Corp Earnings Call

WESTPORT May 21, 2020 (Thomson StreetEvents) -- Edited Transcript of Terex Corp earnings conference call or presentation Friday, May 1, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John D. Sheehan

Terex Corporation - Senior VP & CFO

* John L. Garrison

Terex Corporation - Chairman, President & CEO

* Randy Wilson

Terex Corporation - Director of IR

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Conference Call Participants

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* Ann P. Duignan

JP Morgan Chase & Co, Research Division - MD

* David Michael Raso

Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team

* Jamie Lyn Cook

Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst

* Jerry David Revich

Goldman Sachs Group Inc., Research Division - VP

* Mircea Dobre

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst

* Stephen Edward Volkmann

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Terex Corporation Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Randy Wilson, Director, Investor Relations. Thank you. Please go ahead, sir.

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Randy Wilson, Terex Corporation - Director of IR [2]

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Good morning, and welcome to the Terex First Quarter 2020 Earnings Conference Call. We are conducting today's call following the Centers for Disease Control and Prevention guidelines by using both social distancing and technology for remote access. 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 complete safe harbor statement. There are a few items I'd like to cover. First, today's conference call, including our remarks and answers to your questions, contains forward-looking statements, which are subject to risks that 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 to John Garrison.

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John L. Garrison, Terex Corporation - Chairman, President & CEO [3]

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Thanks, Randy. Good morning. Thank you for joining us and for your interest in Terex. First, our thoughts go out to all who have been affected by COVID-19, as well as the dedicated health workers, first responders and volunteers who are on the front lines all over the world, battling this pandemic. The Terex Way values, along with our commitment to safety, gives us strength to face this pandemic together. I am proud of and want to thank all of our team members for their dedication, commitment and focus on our Zero Harm safety culture. I am pleased with their attention and focus on adhering to the COVID-19 protocols. We have operations in China, Italy, Washington State and our Connecticut Corporate office near New York City, all hot zones for the coronavirus. That said, most of our Terex global parts and service and logistics teams have remained open to service the needs of our customers. It is a testimony to our Zero Harm culture that we have only had 7 confirmed cases. Although we suspect we may have more. By practicing and rigorously following the COVID-19 protocols, we are helping to keep team members and families, customers and communities safe.

At Terex, we have confidence in our sales and in our purpose that as a team, we have quickly taken action to address the current situation, and we will rapidly respond to market conditions. We are focused on controlling what we can control. We're in constant communication with our customers, safely meeting their needs, producing to actual customer demand, and providing essential equipment parts and services. We are proactively maintaining our financial flexibility. We're a highly experienced management team, and we will successfully navigate this crisis. And our Terex team members are resilient and are facing this pandemic by demonstrating the Terex Way values.

Please turn to Slide 4. Citizenship, which is one of our values, helps us navigate this crisis and improve the lives of people around the world. In Redmond, our AWP teams brainstormed on how to help the community after their region endured the first major COVID-19 outbreak in the United States. The Genie team produced and donated 4,500 protective face shields for local medical professionals. In Watertown, Terex Utilities received a request from a local vocational college to use our 3D printer to help make parts needed for face shields. Thanks to the efforts of our Utilities team, approximately 1,000 shields were distributed to health care providers in South Dakota and Minnesota. Our China and Northern Ireland teams donated over 5,000 masks to our COVID-19 Community Group that is supporting local hospitals and care workers with PPE supplies. In India, Terex team members voluntarily contributed a full-day salary to purchase almost 20,000 pounds of food for a community kitchen in Delhi. I want to thank all of our team members who are assisting others and exhibiting our value of citizenship.

Turning to Slide 5. Safety is and will remain the top priority of the company. We have response plans in place, following guidelines from governmental authorities that are intended to slow the virus spread. Team members who can work remotely are doing so. Given the lessons learned from Changzhou, the company is implementing protocols to further safeguard team members who perform jobs that must be done at our facilities or customer sites. We've launched daily and weekly communications to stay in close contact with the status of each of our sites. We continue to educate our team members and share best practices across the company. Safety and the well-being of our team members is our first priority, followed by the company's financial health.

Turning to Slide 6. As a result of the COVID-19 pandemic, AWP and MP saw a significant number of customer cancellations and requested delivery delays in the second half of March. In response to this unprecedented situation, we took swift action. We have implemented a comprehensive cost reduction program that includes salary reductions, furloughing of team members and reductions in force, temporarily suspending manufacturing operations to align with customer demand and partnering with suppliers to limit the incoming supply of materials, receiving only what is needed to support current production schedules. While the environment continues to be uncertain, we are implementing cost savings in excess of $100 million. The Terex team is committed to taking the proper steps to protect the financial well-being of the company.

Please turn to Slide 7. In addition to cost savings, we are focused on having ample liquidity to run the business. As of March 31, we had $945 million in available liquidity. We are participating in tax and other government relief programs. We're also utilizing worker assistance programs in the United States, U.K., Germany, Australia and other countries to help keep our talented workforce in place while easing the financial [burden] to Terex. We've begun a global effort to reduce indirect expenses. In short, we're asking all team members to look for opportunities to reduce the company's cost. We have taken 35% out of our CapEx budget for 2020. However, we are investing in the future on a more targeted basis. We are still funding the completion of our Watertown, South Dakota manufacturing facility, and the expansion of our Changzhou, China facility. Changzhou is an important manufacturing facility for us. The China market is growing, and it is essential to have the capacity for future demand. Working with our banks, we successfully extended and amended our revolving credit facility. Additionally, we suspended our dividend and share repurchases for the remainder of 2020. As a result of these actions, I am confident that we will have more than sufficient liquidity through the downturn and that we will be able to grow when we get to the other side of this pandemic. With that, I want to turn it over to Duffy.

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John D. Sheehan, Terex Corporation - Senior VP & CFO [4]

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Thanks, John. Turning to Slide 8. Let me begin by reviewing our recently completed credit amendment. We are pleased with the support demonstrated by our bank group regarding the amendment and extension of our revolving credit facility. The amendment addresses the short-term concern with our financial covenants and provides the flexibility needed to manage the company during these challenging times. The amendment provides us an extra layer of comfort during this period of uncertainty. It is important that Terex's stakeholders have confidence that Terex has the operational and financial strength to manage successfully through the current environment. Let me walk you through some of the highlights. The 1-year extension of the existing revolver from January 2022 to January 2023 is part of our broader amendment and liquidity enhancement objectives. Lending ahead, we did not want to be in a position in early 2021 where the revolver was considered a current liability instead of long-term debt. During 2020, as a result of the amendment, we are only subject to a minimum liquidity covenant, then during 2021, we are subject to a maximum secured leverage covenant that is only applicable at 30% or more of revolver utilization. The credit agreement does revert to the existing financial covenant on January 1, 2022. It is important that Terex's stakeholders, including customers, suppliers, team members and both credit and equity investors have confidence that Terex has the operational and financial strength to manage successfully through this period of uncertainty. That is exactly what this amendment provides us.

Turning to Slide 9 to review our Q1 consolidated results. I will call your attention to our financial reporting structure. As you will notice, we did not report adjusted Q1 2020 financial results. Instead, we called out specific financial impacts from COVID-19. We have sought to provide information that will help the investment community more easily compare our year-over-year results going forward. Looking at our first quarter financial results. Revenue of $834 million was down 27% year-over-year. We were operationally planning for first quarter revenue to be lower than the prior year. And during the months of January and February, our sales were tracking in line or slightly above our expectations but the market fell off dramatically in March. Also, as discussed during our Q4 earnings call in February, we were planning to make strategic investments in 2020, which we started in January and February. However, we have since taken substantial steps to cut back on our investment and to reduce our overall cost structure, and those reductions in SG&A will show up from April onward.

Gross profit was impacted by $8 million due to several COVID-19 related impacts. First, reserves were established against U.S. government tariff recoveries as a result of the anticipated lower product exports qualifying for duty drawback recoveries. Second, we were required to record charges associated with the cost for the temporary closure of manufacturing facilities. Also, SG&A was adversely impacted by $5 million, primarily due to a reserve on a customer financing receivable and other items resulting from COVID-19. For the quarter, we recorded an operating loss of $7 million compared to adjusted operating income of $106 million in the first quarter last year. The operating loss resulted from $300 million of lower revenues versus Q1 2019 as well as the COVID-19-related charges in the quarter. Other income was impacted by $2 million related to the marking-to-market of a publicly traded holding.

It is very important to note, despite the challenging month of March, a Q1 free cash flow use of approximately $110 million improved on a year-over-year basis from a free cash flow use of approximately $255 million in Q1 2019. The year-over-year improvement in free cash flow of approximately $145 million resulted from 3 factors. First, free cash flow from continuing operations increased approximately $40 million as lower earnings but higher capital expenditures were more than offset by lower net working capital. Second, cash payments for interest, taxes and other operating costs, decreased approximately $35 million. And third, as a result of the sale of our Mobile Cranes businesses, we did not repeat the cash used in these businesses in Q1 2019 of approximately $70 million. During Q1 2020, our continuing operations free cash flow benefited from our producing below retail demand. As a result of the COVID-19 impact on commercial demand in March, we aggressively reduced manufacturing production further, especially within our AWP segment, which further benefited our Q1 free cash flow. We expect net working capital will be a source of liquidity for the remainder of 2020.

Turning to Slide 10. Starting with AWP. AWP sales of $512 million contracted by 30% compared to last year, driven by continued challenging global markets. End markets in the U.S. and Europe sharply contracted in March, despite starting the year in line with expectations. We aggressively responded to customer cancellations and delays by reducing or stopping our production to ensure we were not building excess inventory. Our Changzhou, China facility was shut down for operating at a reduced level for most of the quarter. However, starting in March, the China business has gradually ramped up production. The utilities market softened in the quarter, but not at the same rate that we experienced in the aerials business.

AWP first quarter bookings of $498 million were 29% lower than Q1 2019. The bookings in the quarter are net of approximately $175 million of orders, which were canceled by customers. Backlog at quarter end was $717 million, down 34% from the prior year. During the quarter, we experienced a shifting of customer orders from Q2 to the second half of 2020. The reduction in machine utilization by our customers provides an opportunity for increasing our parts and services offering as customers are using the downtime of their machines to perform maintenance to be ready when the construction markets normalize.

Now turning to Materials Processing. MP started the year with another solid quarter, achieving 8% operating margin despite challenging markets. It is a testament to the strength of this segment as the team delivered relatively strong positive operating margins on lower revenues. Sales were $316 million, down 23% from the first quarter 2019, driven by extremely cautious customer sentiment resulting in delaying capital purchases of crushing and screening products, material handlers and environmental equipment. The MP team has been aggressively managing all elements of costs in a challenging market environment. Backlog of $272 million was 52% lower than last year, including order cancellations from the dealer network. However, customers in both segments continue to operate through the COVID-19 crisis, and existing equipment is being utilized. Both our AWP and MP businesses are industry-leading in their respective segments with very strong brands. They will be well positioned as we come out of this current downturn to grow in their respective markets.

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

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John L. Garrison, Terex Corporation - Chairman, President & CEO [5]

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Thanks, Duffy. Turning to Slide 11. In both AWP and MP, our teams are aggressively managing their production operations by accelerating their SIOP cycle. We are bringing in partial staff for certain product lines where we have demand. Partial operations adversely impact our decremental margins. And under normal times, this would not be an efficient way to operate our facilities. The benefit is we can produce to actual customer demand thereby minimizing our cash burn. A benefit of our strategic sourcing initiative is we have reduced the number of suppliers. As a result, we have closer relationships and have been able to work collectively to reduce the amount of material coming into the plants. Our teams are doing a good job of managing material flow while also ensuring we have continuity of supply. We are responding to short-term customer demand, but we're also focused on the longer-term market dynamics, whether it's our new facility in Watertown, expanding our China facility, digital innovation in parts and services, our new product development. These are important investments to position Terex for growth as business conditions improve.

Turning to Slide 12. Free cash flow execution is our principal financial objective in 2020. As Duffy discussed in detail, we took decisive action with our banks to ensure we have ample liquidity to manage the business. We also reduced CapEx by 35%, but we continue to fund the investments important for future growth. As business conditions improve, we will reinstitute returns of capital to shareholders.

Turning to Slide 13. To wrap up, our Terex team continues to live our Zero Harm culture in a challenging global environment. We are intensely focused on meeting commitments to our customers and supporting them during these difficult times. Our businesses have a strong future, so we will continue to invest in innovative products and services, to be prepared as market demand returns. Our management team is highly experienced and cycle-tested, and we will navigate through this crisis by aggressively managing cost and liquidity.

With that, let me turn it back to Randy.

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Randy Wilson, Terex Corporation - Director of IR [6]

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Thanks, John. (Operator Instructions)

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Stephen Volkmann of Jefferies.

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Stephen Edward Volkmann, Jefferies LLC, Research Division - Equity Analyst [2]

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So maybe, John, we could just start by talking about the trends you're seeing in AWP. Thank you for the information around the cancellations. But I guess I'm trying to -- I was a little bit surprised that the net orders were actually a little better than I expected. So what did you see in April? And just maybe broadly, are you expecting much of any production in the second quarter there off of that backlog? Or is that mostly for kind of later in the year?

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John L. Garrison, Terex Corporation - Chairman, President & CEO [3]

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Thanks, Steve. So as you recall, we came into 2020, and we were planning on our AWP markets to be down in that 7% to 9% area. And in January -- in February we actually -- we're actually performing at that expectation and slightly better. And then when COVID hit, it created as the world now knows a significant amount of uncertainty. And we saw the -- and so our teams worked with our customers to basically scrub the order book globally. To ensure that the orders that were in there, we had cancellations. We did have some push-outs as well. And when we look at it, it really -- I think it's illustrative to think about the markets the way the pandemic spread around the world. And we saw in China very, very -- almost 0 utilization of our equipment in the month of February, began to increase in March. And then in April, we saw utilization rates begin to get back up into that 60-plus percent range. We also saw commensurate with that order and order activity increase in China. So as we said in our opening comments, China was down for most of the first quarter, but we did begin to see our production increase and the market increase.

If you then go to where the pandemic went, for us, we've got our AWP site in Umbertide, Italy, North Central Italy. When the pandemic hit there in Europe, we saw the same phenomenon in that, utilization fell dramatically, and it moved kind of from Southern Europe up to the North. And what we saw was utilization rates come down pretty dramatically and the market basically went into a shutdown, not to the same extent that we saw in China. China was an absolute lockdown. And then from Europe, then we saw the pandemic move here into the United States and that -- some of us were together in CONEXPO in the middle of March. And what we saw there is it was -- the market was actually pretty solid. But in -- from the middle of March, early to middle of March, then utilization started to fall pretty significantly and then customers began to either cancel or delay, push out their orders. So our teams worked with the customers to understand what's in the order book. And to be honest with you, if they couldn't give us a ship to date or location, we moved it out and/or canceled it. And as we've seen April, and I think you've heard several of the publicly traded companies and I can confirm in my conversations with our customers in the AWP space, both the national accounts and the major independents, they saw utilization plummet really from the third week of March into the middle of April and stabilized now in the middle of April at that level. And it really -- in the United States, it really is dependent on where they're located.

So an independent in an area that's not dramatically impacted is actually having a pretty good business right now. If you're an independent in the Northeast or the Northwest, the market conditions are very, very difficult for them. So I think as we think about it, it's really how the pandemic has flowed around the world, and that's impacted customer demand, customer order behavior and what we're doing, and we'll talk about it as we go forward is we're matching our production around the world to that demand and trying to be as flexible as possible, realizing that all of us are trying to figure out what's the near-term and intermediate future look like in a very -- in an unprecedented time. So that's how I would say it unfolded as from kind of March into where we are now. And our approach is we're going to be in constant contact, constant communication with our customers to understand their needs and to meet their needs. And as Duffy said in our comments, and I'm going to reiterate this, we are really not going to overproduce. We are not going to produce inventory. We're going to keep production to match the retail demand or actually below retail demand because we think in this unprecedented time, that's the best approach that we can take as a company.

So that's the dynamic that we're seeing, Steve, a long answer, but it's been an unprecedented time. And as a global company, we see impacts as this pandemic has moved around the world globally. And we're learning from it and applying lessons learned from one region to the next as we move forward.

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Stephen Edward Volkmann, Jefferies LLC, Research Division - Equity Analyst [4]

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Great. Okay. That's actually helpful. And as a quick follow-up, you mentioned cost actions, SG&A declining, although you didn't say how much. And I guess I'm just trying to think about how we should broadly think about decremental margins. I assume they get worse because production goes down more, but whatever bookends around that would be great.

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John L. Garrison, Terex Corporation - Chairman, President & CEO [5]

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Sure. And I'm going to let Duffy take that call and as this is unique and unprecedented times, Duffy and I are not only not in the same room, we're actually not in the same state. As you know, our region of the country has been a really significant hot bed for the coronavirus so we thought it was prudent for us to separate. So Duffy, would you go ahead and take that question on decremental margins?

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John D. Sheehan, Terex Corporation - Senior VP & CFO [6]

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Sure. Thanks very much, Steve. And when you look certainly at our Q1 financial result, the impact on Q1 from the COVID-19 pandemic with a very fast fall off in revenues and as well as the stopping of production, especially during the month of March, that did have an impact on our decremental margin for the first quarter. We continue to target with all of our businesses, the 25% incremental or decremental margins. And we do believe that we can operate to that level. The cost savings that we laid out in our prepared remarks and are described in the earnings presentation take effect really from Q2 onwards. As we developed them, we started to implement them during the month of March. So those are impacts, which actually begin immediately in Q2 or began immediately in Q2 and will continue throughout the year as we adjust our demand, our production to the customer demand environment. And so we do continue to target the 25% decremental margin. The cost reductions that we're taking will support our getting to that or to working to achieve those targets.

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Operator [7]

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Your next question comes from Mig Dobre of Baird.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [8]

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I also want to kind of stick with this discussion on cost savings. Is there a way maybe to help us understand how you're thinking about these savings at segment level? And maybe related to this, when I'm looking at your unallocated corporate expense line item, this one has remained pretty robust. And I mean, I dare say, based on what I recall our discussion to be last quarter that the expenses here in Q1 have been running a little bit ahead of where you are guiding the full year on a full run rate basis. So how do we think about corporate expenses? And then maybe some color on the $100 million breakdown at segment level?

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John L. Garrison, Terex Corporation - Chairman, President & CEO [9]

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Thanks, Mig. I'm going to ask Duffy to respond to that question.

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John D. Sheehan, Terex Corporation - Senior VP & CFO [10]

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Sure. So when you look at the $100 million of cost reduction -- as I said a few moments ago, the $100 million really is Q2 through the remainder of 2020. And the $100 million began immediately at the beginning of Q2. The $100 million is spread across our business -- both of our segments as both of our segments are taking similar cost reduction actions. And so while we haven't specifically provided information with respect to the allocation of the $100 million across the businesses, I think it would be fair to think about those cost savings in proportion to the contribution of the businesses to overall tariffs. On the cost savings side -- sorry, on the corporate side, when you look at our corporate, unallocated corporate costs in the first quarter of 2020 of $26 million, that compares to corporate costs in the first quarter of 2019 of $15 million. Really, there's 2 factors that are leading to the increase year-over-year. First is, in the first quarter of 2019, we did record a $6 million positive health care expense credit as a result of lower health care expenses than had been anticipated, and we did not have a similar repeat of that credit in 2020. So that is a year-over-year impact. And then #2, we did record, as I discussed in my prepared remarks, we did record a reserve in Q1 of 2020 for a specific financing receivable.

That charge was as a result of the COVID-19 and the impact of COVID-19 on this customer's -- this financing receivable from a customer there and the question of recoverability. So those 2 impacts, which really account for the full difference year-over-year is what's driving the increase in corporate and other in Q1 of 2020.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [11]

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And how are you thinking for this for the year? I mean you used to think $80 million for this line item. Is that still the number that you're using? Or is it something different?

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John D. Sheehan, Terex Corporation - Senior VP & CFO [12]

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Well, look, Mig, as you know, we're not providing guidance for 2020. But I guess what I would like to try to bring across with my -- was trying to bring across with my comment is that there were specific factors, COVID-19 or otherwise associated with the credit last year that caused the differential. We're continuing to focus on controlling our overhead costs and delivering our -- all of our services to the segments from corporate in the most efficient manner. And we have not increased the cost structure of our corporate team. So maybe that's another way of answering your question is we haven't added any cost to the corporate segment.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [13]

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I see. Last question for me is on working capital. It would continue to be a source of liquidity. I'm wondering if we can get more color on that. And in your slides, you talked about working capital as a percentage of sales, running at 22%. Is there a view as to where you might be exiting the year?

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John D. Sheehan, Terex Corporation - Senior VP & CFO [14]

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I'll also take that one. And you know that -- so just a couple of points there, right, is our free cash flow in the first quarter of this year improved by $145 million. In my prepared remarks, I talked about the fact that when you look at our continuing operations, they -- the reduction in operating income and higher capital expenditures that we saw was more than offset by lower net working capital in those businesses and led to a $40 million increase in the cash flow from operations for -- from continuing operations. We will be continuing -- as John talked a few minutes ago, that we're only producing to customer demand. And so we will be bringing down our inventories over the course of the year. And as I've said, net working capital will be a source of cash.

For the same reason, we talked about a few moments ago related to corporate, I can't say specifically what the going forward, working capital as a percent of sales is going to be in future quarters. But what I can tell you is that net working capital will be a source of cash. This company has more than -- has ample liquidity to operate throughout 2020 and 2021, even with the uncertainty associated with the COVID-19 pandemic.

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Operator [15]

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Your next call comes from Ann Duignan of JPMorgan.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [16]

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A couple of questions, more clarifications, I think. Could you give us more details on the $5 million charge on the customer receivables? What happened there? How can you give us confidence that that's one-off and that we don't start to see more of these? What region was it in? What segment are you -- there aren't going to be more of these going forward?

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John L. Garrison, Terex Corporation - Chairman, President & CEO [17]

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I'm going to have Duffy cover that as well.

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John D. Sheehan, Terex Corporation - Senior VP & CFO [18]

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So Ann -- and it's a follow-on to the point that Mig was asking a moment ago. So the particular customer situation is one associated with our Terex Financial Services business. And actually, it's a customer that we had -- have extended on book financing too, to support the customers' purchases of equipment. It's a customer which was financially challenged even before the COVID-19 prices. And as a result of August '19, we believe that the prudent thing to do was to take the reserve that we did in the first quarter. What I can also assure you of is that in conjunction with our Q1 financial close, we did do a full review of all of our on book Terex financial services receivables as well as for that financing receivables as well as all of our open account receivables. And there were no other charges which we took or that we, at the current time, anticipate that we will be taking.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [19]

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Okay. That's helpful. Appreciate the color on that. And then just more strategically, I think you said that dealers canceled orders in Materials Processing. I'm just curious whether there are any financial ramifications for dealers canceling orders. I know some of your competitors, maybe not competitors but peers do not allow dealers to cancel orders and particularly for large ticket items like equipment and material processing.

So can you talk a little bit more about what happened there? What's going on there? And are there any financial ramifications, any costs associated for dealers to cancel orders like that?

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John L. Garrison, Terex Corporation - Chairman, President & CEO [20]

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Ann, so overall, if you look at the backlog in MP, there's a couple of dynamics. Last Q1, we still had the dealers placing really their full year demand, especially on our core aggregate crushing and screening business. And this year, that was not the case, obviously, given the level of uncertainty on the core crushing and screening business.

In our Material Handling business, that business we did see some lower ordering, some slight cancellations as well as the market changed. And then on our concrete business in the United States, our truck business, we saw some order cancellations. But I'll also comment on our concrete business. That occurred in March, Ann. And then 2 weeks later, in April, the specific customer came back with another -- with an order to replenish some of the orders that they had canceled. In terms of penalties, there's not significant penalties, Ann, for us. We work with the dealers. And basically, in this environment, Ann, what we did -- one of the lessons learned from prior crisis is, is that you really want to scrub the order book. And when a dealer says, "Hey, I'd like to delay that," then you've really -- your red flag's got to go up.

So we basically said to dealers, "If you can't give us where you want us to ship to and a delivery date, we're going to go ahead and cancel that order and you reenter the order when you actually can have the clarity of where that demand is going to." I would also say, Ann, in our MP business, about 75% of the business goes through distribution dealer channels. But it's not what I would call traditional yellow iron distribution. These are specialized dealers and distributors. And in many, many cases, their inventory is really a rental fleet. And they're putting it out on rental for RPO-type activities and that then converts to a sale.

So their inventory levels are in good shape. We don't believe there's excess inventory in that channel. We have seen the dealer utilization come down. But again, new equipment, new technology that we've invested in that we think over time is going to help is our telematics in that distribution channel, especially around our core crushing and screening. And what's interesting is we've actually seen the number of machines on work be relatively constant, especially in the month of April in North America, in Europe. But the hours have come down 15% to 20%. And so we're going to continue to work with the dealer organization, watch it. But again, it's not a -- our dealers are highly specialized in their market segments. It's not a traditional, what I call yellow iron distribution channel. And so that's how we've managed it. It was a lesson learned from the prior crisis to really understand that order book in detail and (inaudible) and a good job we had it.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [21]

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Okay. Just can you quantify the amount of cancellations in NPE?

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John L. Garrison, Terex Corporation - Chairman, President & CEO [22]

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We didn't quantify that, Ann. I don't have that right here, but it did lead to some of the backlog reduction that we saw.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [23]

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Yes. That's what I was hoping to understand is how much of the backlog reduction was cancellations. Okay. Well, I can follow-up offline. I appreciate that.

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Operator [24]

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Your next question comes from Jerry Revich of Goldman Sachs.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [25]

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Glad to hear you're all doing well.

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John L. Garrison, Terex Corporation - Chairman, President & CEO [26]

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Great. Good to hear from you, Jerry. It seems like the last time we were together was a real, real long time ago, and it was what, only 7, 8 weeks ago. So glad you're doing well as well.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [27]

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A long 7 weeks, yes. I'm wondering if we could continue the discussion that you just started on telematics operating hours for the MP business and we joined taking that conversation over to aerial platforms and giving us an idea of how trends evolved over the course of April by region, specifically. And so we've -- one of your customers nice pickup in utilization over the course of April. I'm wondering if your data shows that as well and any color by region you'd be willing to share would be helpful.

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John L. Garrison, Terex Corporation - Chairman, President & CEO [28]

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Sure. And again, we've invested heavily in telematics across our Genie business. And in general, again, kind of going back to my earlier comments, China, the market stopped for the month. There was virtually no utilization in the month of February. Utilization rates in March kind of climbed from 0 in February to around 40% based on our best estimates. And then Jerry, by April, utilization had climbed into the 60% mark.

In North Europe, I'll go there from the pandemic, a similar story. Utilization, there was still some activity because the rules weren't as clear. In China, they locked it down. In other parts of the world, we are essential services, and our customers have been able to operate. So utilization fell dramatically, stayed down and began to increase in that middle of April time frame. We began to see utilization increase. And kind of stabilize and stop falling about the second week of April, and it stabilized at a lower level.

And then in North America, very similar story overall. And I think the rental companies have been pretty clear that they saw a pretty significant decline from the second -- third week of March really down to about the second week of April, stabilizing around that second week of April and trending slightly up, but still no big dramatic moves. And again, the other comment I would say is it really does depend on what specific states you're in, it does impact the level of utilization based on local government regulations and rules as it pertains to construction sites, maintenance, maintenance sites and the like.

So I would say the telematics data that we have is very consistent with what rental companies have been saying publicly. And I can say in conversations with independents, very similar. But again, the independents, it really depends on what markets they're in as to their level of business based on the opening of the markets.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [29]

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I really appreciate the color. And then in terms of the new products that you folks have rolled out over the past couple of years and the telematics features have really enabled you folks to realize pricing over the past couple of years. And I'm wondering in this environment, are you getting any pushback on pricing, given the change in the demand environment? And what do you think of the pricing discipline that you're seeing among your competitors?

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John L. Garrison, Terex Corporation - Chairman, President & CEO [30]

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It's a great question. And we're really focused on the value-based pricing that we've been working on here for the last couple of years and really being disciplined with our commercial excellence tools to remain disciplined in pricing and provide value to our customers, either feature benefit set.

If you think about our Genie Boom line, our XC line, that's done really well. Our Z or hybrid FE line. And then we introduced the new J series, which is anti-compliant to a 660-pound range. So we are being disciplined on pricing. We've been transparent with customers as it pertain to the ANSI standard increases and what those costs were. And we're going to be -- we have been, and we will remain disciplined around pricing. In the AWP segment, you're hearing that the pricing discipline with rental companies has improved over time. They're being very disciplined about pricing, and we're going to be very disciplined about pricing. And the biggest thing that we can do to be disciplined about pricing is not overproducing and building a lot of excess inventory and feel compelled to need to take action.

So right now, Jerry, I'd say I think the market's being disciplined. I think we all recognize that this is a situation where, going to the price lever is not the appropriate lever in this dynamic. So we provide tremendous value over the life cycle of this equipment for our customers, and that is in -- that's AWP and MP. And over the life cycle of the equipment, we provide tremendous value. So discounting the upfront purchase price is not something we're looking to do to stimulate demand.

So we're going to remain disciplined in the team and the tools that we've put in place over the last couple of years, give us that visibilities that we are in control of the pricing and can see very clearly the pricing waterfall.

So it's going to -- it's always a challenging market, of course, when volume declines. But we're going to focus on the value that we're creating over the life cycle of those products and remain disciplined on pricing in this environment.

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Operator [31]

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Your next question comes from David Raso of Evercore ISI.

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David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [32]

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So my question focuses on thinking about how do we get AWP back to profitability. Could you help us think about where do you see the revenue breakeven point, especially in light of, it appears there's about $60 million to $65 million of savings that should be earmarked toward AWP, the rest of the year? And I have a related question to that, thinking through your revenue answer.

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John L. Garrison, Terex Corporation - Chairman, President & CEO [33]

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So I'm going to let Duffy take the first part, and I'll follow-up on the second part of that question, David.

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John D. Sheehan, Terex Corporation - Senior VP & CFO [34]

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Yes. So David, when you think about AWP and the results that they had for the first quarter, right, revenue was approximately $500 million and a small loss in the quarter. And I think there's a couple of factors that went into that Q1 result by AWP. First of all, it's important to recognize that the production volumes that Genie was planning for going into the quarter were going to be down 25% year-over-year and the lower production in the manufacturing facility does drive inefficiency in their cost structure. Then as a result of the COVID-19, Genie reduced their production volumes even further. When you look by the end of the quarter, Genie's production volume year-over-year for the first quarter was down 47% as they were producing below retail demand.

So that creates -- definitely created a fair bit of inefficiency in their manufacturing, unabsorbed overhead that was reflected in the financial results, the operating losses that Genie reflected in the first quarter. On top of that, Genie did record about a $4.5 million charge associated with the government receivable that they reserved associated with reduced expectation or duty drawback recoveries, that also contributed to the first quarter results. So if I think about those factors, while I can't give you specifically what the breakeven point it would be, I would say to you that it's definitely less than $500 million.

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David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [35]

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So then when we think about the usual pattern, 2Q revenues would be higher than 1Q. All else equal, you would normally return to profitability for AWP in 2Q. Needless to say, it's not as per usual. So I assume it's fair to say the revenues take a step down 1Q to 2Q. And maybe let me know if you think that the savings are enough to offset that, that even 2Q might be breakeven.

But I'm really trying to think about normally your backlog at the end of 1Q, there's a certain percentage that ships 2Q and a certain percentage that ships 3Q as the bulk of when your customers take machines. I'm curious how much those percentages have changed given your commentary and what we know in the channel about your customers pushing 2Q into 3Q. So I guess that's a 2-part question, and I'll leave it there.

The 2Qs comment about breakeven and how much of the revenues you believe got shifted from 2Q to 3Q versus normal for your backlog?

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John L. Garrison, Terex Corporation - Chairman, President & CEO [36]

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Yes. David, I'll take that first part. Clearly, Q2 is going to be a very challenging quarter. As we've discussed, with the economy basically globally being shut down. So there is no normal revenue flow in these unprecedented times. So I would just say that Q2 is going to be a very challenging quarter for us and many companies, given the dynamics that COVID-19 has created.

Duffy, did you want to comment at all about the breakeven comment?

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John D. Sheehan, Terex Corporation - Senior VP & CFO [37]

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Well, I think that to the point that you just made, when revenue is going to be challenged in Q2, that that is going to certainly be a dynamic for the second quarter, which is going to be why we are implementing the cost savings, the $100 million across the total company with those actions. So we're going to be -- we are taking actions to reduce our overall cost structure in line with the customer demand environment that we're experiencing. I can't stand -- I can't sit here on this call and say what Q2 results are going to be. But what I can say is, is that revenue is going to be a challenge in Q2, and we're taking action to match our cost structure to the revenue environment in which we will be operating.

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David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [38]

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And I'm sorry to interject, but no my question was, I mean, look, we know 2Q is going to be a loss. I'm just trying to figure out. We have an abnormal AWP revenue decline sequentially. How much can we think about 3Q being abnormal that the revenue might go up from 2Q to 3Q in AWP? Now we could get cancellations, no doubt. But I'm just trying to think about the backlog, what percent usually ships in 2Q and what percent's 3Q, and now is it a lot heavier, 2Q -- not 2Q, it's now 3Q. And we can debate cancellations and how the rental companies might come back to you in a month and change their mind. But again, as we sit here today, how abnormal is the backlog shipping dates versus normal? How much now 3Q versus what it normally would be?

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John L. Garrison, Terex Corporation - Chairman, President & CEO [39]

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David, as a result of the COVID crisis, everything has been pushed out. The uncertainty -- and the uncertainly is created. So there's been a push out. So there is no normal cycle right now in AWP in terms of the orders. What -- there has been orders pushed out and what customers are looking for is what happens to their utilization rates, and they've been very straight with us, and we've been very straight with them. They're going to give us as much indication as they can in terms of what their needs are, and we're going to adjust our production to match those needs. And that's why part of what -- in my opening comments, especially around AWP, we're taking a unique step to actually produce partial. We're opening up plants partially. And we've posted this on our website, so everybody can see, that's an unusual step to take. But we're going to build to the retail demand. So we may bring in a plant, start-up a plant and only run it at 25% or 50% for the lines that we have, customer demand and keep the other team members out on unemployment benefits. One of the benefits of where we are in Washington state is quite flexible. And so we can bring our team members in and out of the plant as needed to match the retail demand.

But David, I think it's fair to say, and I think we all understand this. There is no normal right now in the middle of this crisis. So we're going to do things that, under normal circumstances, you wouldn't run a plant partially like that because it would be inefficient. But under these circumstances, I'll work the team to be more efficient. But under these circumstances, we're willing to take some inefficiency to just meet the needs of the customer and their actual demand and not build a lot of excess inventory. So that's the approach that we've taken, having gone through these crisis now, David, for many crisis over -- I told the team is probably my fifth one. Each crisis is somewhat unique and different. But one thing's for sure is you got to get on top of it quick, and you've got to adjust to that situation. And this situation is we don't -- do not have a lot of forward visibility. And so we're going to be as flexible as possible to adjust to the actual customer demand.

And just summing it up, David, you're right. There is no normal and customers have pushed what was the second quarter into the third quarter, third quarter into a fourth. And again, they're looking for stabilization as they see stabilization, as they see the economy increase, as they see their utilizations pick up, they're going to need equipment. And we're going to be there to match that need. But we do not have -- David, the simple truth is, we don't have the visibility that we normally have. And that's because our customers don't have the visibility that they normally have.

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David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [40]

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That's completely fair, yes. I mean, it's all about the 3Q. It's really a pushed out backlog. The backlog number is actually not that low, but the question is, how much is it still going to be there for 3Q to maybe even try to get yourself moving back toward profitability. Lastly, sorry, real quick. The backlog at the end of April versus the end of March. Any color at all would be helpful just to get some sense of the vitality of that backlog thinking about 3Q, 4Q would be great.

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John L. Garrison, Terex Corporation - Chairman, President & CEO [41]

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Thanks, David. I will say this. We track the back -- orders bookings backlog every day. And what we can say is that the cancellations basically have stopped, push-outs had stopped, the backlog has stabilized as we've moved through the month of April is what I can say.

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Operator [42]

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And your final question for today comes from Jamie Cook of Crédit Suisse.

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Jamie Lyn Cook, Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst [43]

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I guess my first question, can you just provide an update on the strategic sourcing initiatives, understanding we want to reduce the number of suppliers that we use, that could be challenging in COVID when people are having component shortages. So what you're seeing there and what the risk is there? So that's my first question. And then second question, any color just sort of on the Crane business, how that performed and just sort of trends you're seeing there?

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John L. Garrison, Terex Corporation - Chairman, President & CEO [44]

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Thanks, Jamie. In terms of the strategic sourcing initiative, we remain committed to it. And I will tell you the work that we have done leading up to this crisis has really helped us because in the product lines of the commodities that we've put through the process, we're dealing with upwards of 80% fewer suppliers, which dramatically improves the level of communication and partnership, if you will, with the supply base. So I think our team has done a really great job ensuring that we have the materials that we need at the quantities we need. And then maintaining continuity of supply, it has been a challenge, as it has been for supply chains all over the world. But I think the team has done a great job.

In terms of, obviously, the savings that we've anticipated, they're going to be lower based on the volume, the actual rates that we're seeing, we still are seeing the rates that we had anticipated going into the year. And I'm sorry, Jamie, what was your second question?

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John D. Sheehan, Terex Corporation - Senior VP & CFO [45]

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Cranes, John...

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Jamie Lyn Cook, Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst [46]

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Sorry, just Cranes.

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John L. Garrison, Terex Corporation - Chairman, President & CEO [47]

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Cranes. I'm sorry. Okay, yes. So, thanks Jamie. So cranes is obviously now reporting inside our MP business. On the tower side, it did meet with some -- with construction headwinds, but they are -- have been deemed essential, and so they have been able to operate on and off through the crisis. We did take some decent orders for the tower business in -- at CONEXPO. So I was pleased with that. On the RT side, principally European business, it has slowed as well as the European markets have slowed, and the Middle East markets have slowed. But I would say, Jamie, just basically in line with our other businesses, RT is off a little bit more, tower's held in a little bit better but still under pressure.

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Operator [48]

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That was our final question for today. I will now return the call to Mr. John Garrison for closing remarks.

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John L. Garrison, Terex Corporation - Chairman, President & CEO [49]

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Again, thank you for your interest in Terex. And during this unprecedented pandemic, please stay safe, stay healthy. Please follow the protocols because it will help you, help your family and help the communities that you live and work. And that's one of the messages that we've been stressing here at Terex. And if you have any follow-up questions, please do not hesitate to follow-up with Randy and/or Duffy. And again, be safe and stay healthy.

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Operator [50]

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