My name's Adam Seiden, I lead the U.S. Machinery and Construction franchise at Barclays. Thanks for joining us for this session here. We're here with Julie. Joining us from Terex is Simon Meester, Chief Executive Officer, as well as Julie Beck, the Chief Financial Officer. So what we're going to do for this session here is we're going to start off with a couple of words from Simon, and then we'll lead into some Q&A with myself and the broader team. We'll also be inviting your participation via the audience response system, which hopefully most of you guys are pretty familiar with by now. You can access by using the clickers in front of you. So with that, Team Terex, thank you so much for being here.
Yeah, thanks for having us. Thank you for your interest in Terex. Yeah, so I thought I would start with sharing some thoughts on the company, where we're coming from. For those who don't know me, I've been in this role now for about six weeks, taking over from John Garrison, who was our previous CEO. And so obviously I'm still very much in learning and listening mode, and meeting the team, and traveling around the globe, and meeting all the Terex team members. But so happy to be at this conference here. And what I thought I would do for the next couple of minutes is kind of maybe give a little bit of color on how I look at the company as an incoming CEO, where we're coming from, and maybe where we go from here. That's what I had in mind.
I think what you will hopefully quickly realize is that, at least that's how I'm looking at the company, is we're coming off about eight years of transformational work, kind of fixed type of work. We were perceived for a very long time as a mining and construction company of sorts. And actually today we're everything but a mining and construction company. And I know it's probably a term that's been used too often, but we're very much now kind of an aerial industrial. And so coming off the transformation, now as an incoming CEO, strong balance sheet, market-leading businesses, which I will share with you in a minute. So it's really kind of a privileged position to be in as a CEO. It just gives you a lot of going forward. So obviously forward-looking statements.
Our council wouldn't agree for me to be up here without showing you this slide first, so please keep that in mind. But yeah, so what's going to happen, what has happened with Terex, and what's going to happen with Terex going forward? A big thing for us has always been our safety, our values, the way we run the company, the way we operate the company. It's very much going to continue to be a big part of our story going forward. And not just because we feel it's the right thing to do, obviously, to how we want to work, and how we want to conduct ourselves in the industry, and how we want to take care of our team members, but also because we're correlated to high-performing teams.
In our mind, it is: show us any high-performing team in the industry, and you'll see a team that performs great on values and great on safety. So for us, there's kind of a double reason there to continue to focus to have the results most. So starting with 2023, it was a great year for us, another great year. Our sales up 17%, our Adjusted EPS up 63%, our Return on Invested Capital 28.5%. And even within the company, MP is now running at 16% operating margins. They grew by about 14% in 2023. AWP grew by about 18% in 2023, up 480 basis points. And we now have a company with about seven verticals grouped into two segments, and all of them are running at double-digit margins, which is really a CEO delight if you think about it.
But it's not just that 2023 was not just a year about improving, continuing to improve our financial performance. It was also making sure that we continue to invest in our future. So we're building the largest facility we've ever built in Monterrey, Mexico. We're now in the last year of that investment and finishing that work by the end of this year. But we're also continuing to invest in our products. We're going to continue to invest in technology. We've also made some strategic minor interest transactions in a battery supplier and a robotics supplier. So overall, I think a great story for 2023. But what I really wanted to get to, it's not just the last year where we did really well. If you go back to the work that we've done over the last 8 years, it's been a real remarkable story.
Just if you think about operating margins coming from 5.4% in 2015 to 12.4% where we are today, our earnings per share $1.30 in 2015 to adjusted $7.06 in 2023. I mentioned return on invested capital has been a real strong story. It's really because of two things. First of all, as I mentioned, because we transformed the portfolio in the last eight years. But secondly, we kind of instilled operational discipline in how we run the company going forward. Those are the two pillars. Very much I need to give my predecessor all the credit for having done that work. It really makes my job a lot easier. Just to give you a little bit of color on both of those, the transformational work and the operating model that we have implemented.
In terms of transformation, if you just go back to 2015, where this journey really started, is we started by just, okay, let's go back to basics. Let's try to just get back to running a company as it should be run. And so we started to digest basically all the businesses that we felt were not a leader in their respective segment. They were not the number 1, but number 2, but they were the number 5. We started to digest businesses that had strong technicality attached to them, that were dilutive in terms of operating margins. And that's been our journey all the way up to 2020. So the end game was that we now have a portfolio of market-leading, strong-performing businesses. But at the same time, what we started in 2015, something that we don't talk about enough, is we started our MP growth journey.
So in 2015, we started to really flex our muscle in the mineral processing side of our house. And since then, for the last 8 years, consistently, that business has been growing double digits and is now up to [inaudible] operating margin. But every single year, their top line grew by almost double digits consistently for 8 years in a row. So those were really the 2 transformational things that happened. And by the time we got to the pandemic in 2020, that's really where the AWP operational excellence started to kick in. So the resulting next 2 years, from 2020 to 2023, we took $230 million of cost out of AWP to really improve the through-cycle margin performance of that business. And that led us to where we are today.
So we accelerated growth in MP, transformed the portfolio, and we really restructured AWP and made it kind of a way more agile, lean mean hiding machine, as we call it in Terex. So I mentioned this. This is where we are today. Again, if you look at the title alone, $34 billion addressable market, we're a $5 billion company in a $34 billion addressable market that gives us $27 billion of opportunity to grow into this organically. And with return on invested capital of 28%, there's a lot of white space there for us to go after. And I can give you multiple examples of what we're doing and what we have done. But probably the most recent one is how we continue to use our MP portfolio to grow into new segments in adjacent markets.
So now we have bundled a variety of NP products into a new brand, which is called Green Tech, where we now go after vegetation management, which is a very nice late-cycle opportunity for us. So plenty of organic growth opportunities here, purely from an addressable market standpoint. I mentioned the NP journey, and this is just to put some numbers to it. Since 2015, a little over $1 billion in size, and now it's $2.2 billion. It's kind of interesting. One of the questions I get in the one-on-ones is, what's the number one thing that kind of surprised you the most as incoming CEO? What surprises me the most is that 60% of our operating profit is NP, yet 10% of the questions we get is NP. Because obviously, the other side of our house has a much more public ecosystem that everyone can relate to.
But if anything, what Julie and I really have taken on and tried to kind of communicate is, we really want to get the MP story out there, because we feel that that's really the foundation and the underlying secret of our success and the transformation that we've gone through. So double-digit growth, very consistent performance. You can see even in the pandemic, only the top line only went down by about 20%. That's way better than pretty much any industrial you can think of when the 2020 pandemic happened. So very strong resilience through the cycle. So then where are we today? What I inherited is the current strategic framework. So another question I get is, what are you going to do with this framework?
Well, at the end of the day, I think the lesson that a lot of companies learn, including ourselves, is you can have any kind of strategy you want, but if you don't have a way to execute, if you don't have resilience around your execution in the way you run your company, then any strategy will fail. So going forward, I very much believe that execute will continue to be a big part of our strategic framework. Secondly, we are a product company. We develop products in order to delight our customers. That's what we do. So innovate will need to be another big piece of the strategy. But maybe the third pillar is something that I can put more emphasis on as incoming CEO, is maybe just accelerate, grow, and just tap into that growth piece of the cycle more.
So I don't know if the framework needs to change that much. I think as a CEO I do want to make sure that we keep our operational momentum, that we keep focusing on our bottom line performance, that we keep focusing on execution, that we keep focusing on innovation. But I think what I can do as a CEO is just try to tap into some growth opportunities that we have as a company going forward. So where are we in terms of our Investors Day targets? This is what we laid out 15 months ago. We laid out these targets. We're nicely ahead of those targets. So obviously the question I now get, okay, you're ahead, so are you going to pick up the targets? So again, I'm six weeks in. I don't want to commit just yet to higher targets.
But I want to just make sure we stay ahead of this glide path on both sides, on our top line and on our bottom line. That's going to be my charter. This slide we've shared a couple of times before, and I think it tells, it speaks volumes. If you think about our addressable market, the $34 billion that Terex plays in, it's pretty much tied, 80% of it, to any kind of government stimulus you can think of. And not just infrastructure, it's also electrification. It's digitalization. You think the construction of data centers. Not only do our products help build a foundation for data centers, to help construct the data centers, also maintain these data centers, and also recycle the data centers. So Terex plays in all steps of the project's life cycle, not just the construction or the early stages. And then obviously, waste and recycling.
15% of our portfolio now dabbles in waste and recycling, very late cycle, which we really like. So 80% of all this is tied to stimulus one way or the other that's coming our way. So we like where our addressable market is. We like where it's going. We like where the puck is going, and we like how our portfolio is positioned. So this is my summary slide. At the end of the day, as incoming CEO, I mentioned I feel privileged. I hope you can see why, because there's just a lot to play with. Strong portfolio, strong balance sheet, strong operating model, strong values, market-leading businesses, strong returns. So that's why I think as a company, we've earned the right to now really focus on sustainable growth. That's really kind of where I'm coming from.
Thank you. Excellent. Well, that was a great overview. I appreciate that. So following up on some of those thoughts, and you got to some of this, but you're really talking about growth a lot. So when you think about growth, it's coming from multiple levers, both organically and inorganically. So how generally do you see that balance over, at least on your six weeks in view of the CEO's seat?
Yeah. I mean, obviously, the tiebreaker will be whatever brings the greatest shareholder value. So I would say mixed with all that is also share buybacks, because we feel that we're still very much undervalued. We're at $55 a share, which we think is a great discount on our stock. So we're going to obviously prioritize everything we do with buying back as well in the short term. But for the longer term, there's $27 billion to play for organically. And then there's a lot of adjacencies as well around that $34 billion that we can look into. So I call it killing as many birds with one stone as possible. And what that means, the birds, you can think about it, whatever makes us more stronger as a portfolio from a synergy standpoint, wherever it's financially creative.
But we would only be interested in businesses that are market-leading in its own right, because we're not looking for another fixer-upper, for example. We just did the fixing, and we don't want to get back to fixing. Even though I think we're good at it, we really want to take it to the next level. So at the moment, everything is fair game, Adam. We're not really forcing ourselves in one way or the other. We have a very active pipeline in M&A. We have a very active pipeline on organic opportunities as well. And with 28% return on invested capital organic, it needs to be higher as well.
Excellent. Maybe Julie on that. This is going to bridge to you anyway here. So if you were to find that asset that's not the fixer-upper and it does strategically well in the portfolio, have a spot in the portfolio, how willing would you guys be to go over your 2.5 times net through cycle?
So yeah, we have a 2.5x in net debt, so through the cycle. And so if we had the right opportunity, we might step above that. But at the same time, we communicated such transaction, we would be communicating our glide path to get back down and take our leverage down. We'd be very disciplined and ensure that it's cash accretive as well as EPS accretive after the purchase accounting gets through. It's got to be financially accretive and provide a nice return for our shareholders.
Got it. And you had a nice slide there where you showed all different verticals across MP and AWP. And I promise I'll ask an MP question first. So raising the percentage. So if the MP segment, on MP, the guidance was for it to be relatively flat. So if you think about among those verticals, which of the five verticals would you say would be up more than this segment and which are below?
Yeah. Obviously, we have a strategic outlook, and we have a tactical outlook for the year. So if you think about, just to put it on a spectrum, if you will, the businesses that are within NP that are thriving the most from a short-term perspective, surprisingly, is concrete and environmental. Crushing and screening is probably a good third. Then the ones that are struggling a little bit is because of their European kind of footprint, is our Fuchs business and some of our crane businesses. Not all of our cranes' businesses. For example, Franna is doing really well because of its presence in Australia. But Powerscreen and RTs are because they depend on European demand. And within Europe, it's some of the more mature markets like Germany and the U.K. that's really pulling it down.
But in terms of MP, I would say Environmental is the one really leading the pack, but concrete is a good second. And to me, that's a great example of what these mega projects are doing to the portfolio, because that's all what's driving that concrete demand.
Got it. And the question we've asked at every one of these chats has been around the delta in the customer conversations that you're having today versus six months ago or a year ago. How has that trended? And I think for you guys particularly, there was a large show on the AWP side just recently or going on. So ultimately, how have conversations been there?
Yeah. And you asked for both businesses?
Yeah. So maybe starting MP and then going to AWP.
Okay. So on the MP side, I think that the discussions have become a little bit and now I'm generalizing, mostly because there's that European exposure. I think in North America, again, everyone's pretty optimistic and bullish about the outlook, not just for 2024, but for 2025. But on the MP side, it's really Europe. And MP is a little bit more toggled towards Europe than AWP is. There's a little bit of more bearish thinking there. On the AWP side, I think it's quite interesting, because similar, by the way, dynamic. European customers are a little bit more pessimistic than the North American customers are mostly optimistic. But even I would say what surprised me the most with this change in the last 6 months is that discussions have become way more long-term than they used to be.
Because I think as an industry, we've learned it the hard way, that we used to be on/off quite a bit in terms of supply/demand. But then the way we went off in the pandemic and struggled to get back on, I really think has been an eye-opening to both the supply and the demand side of the industry. And so our discussions are now become way more long-term. We're having discussions about 2025 and 2026. And obviously, as a mature supplier to the industry, we know what we supplied in 2018. We know what we supplied in 2017. So we know what comes off rent in 2023, 2024, 2025. So what I really like, and maybe it's a silver lining, obviously, nobody wishes that we would go back through a pandemic.
But the silver lining is that I do think it kind of matured us as an industry and made us think more proactively and more longer term. So the dynamics, six months back, a little bit more optimistic than today in Europe. But secondly, what has changed is that there's much more debate now going on about 2025 and 2026.
Got it. Well, it sounds like still, like you said, normal replacement kind of plays itself out. You got seven or eight years. You have some sort of visibility as to when that comes. So you mentioned Monterrey earlier in your prepared remarks. So to get the 200 basis points of margin growth, what sort of volumes is that dependent on?
Yeah. So when we put together a business case for the Monterrey facility, which was done pre-pandemic, really remarkable that the facility, the largest, is on time and on budget. The team's just done a really nice job. And so when we think about the margins, we're talking about in 2024, the first six months, that facility continues to ramp. The supply chain continues to ramp. We have about 600-700 employees there now. And so we're starting to ramp and produce more and more each day. Okay? And so we expect that we're going to run some unabsorbed burden on manufacturing and efficiency for the first six months. And that diminishes in the third and fourth quarter as we get more productive. We would expect that facility to be up and running in 2025. And then we would expect to see 200 basis points of margin.
That's going to come from the operating costs of the plant as well as lower labor costs and lower supply chain costs. Remember, that facility is being built not for capacity reasons, but for cost-competitive reasons.
Got it. So making it all very plain and simple here, so based on what you're saying there, in 2024, it's still a net headwind, but in 2025, it turns into the positive.
First half, headwind, H2 , still in.
For 2024?
Yeah. But if you balance the two, I guess, between H1 being a headwind, H2 seems like positive, it's ramping. The overall year, is it still is it accretive to your?
So yes, it becomes accretive as we get through the year in the first year.
Got it. All right. So maybe what we'll do is we'll go over to the audience response questions before pivoting into the next question. So first question, do you currently own this stock? Yes or overweight, market weight and underweight, or no? No. 35%. That's fairly consistent, to be honest, with what we've seen in other places. Next question. Thank you. What is your general bias towards the stock right now? Positive, negative, neutral? All right. So had an even split between positive and neutral. All right. And you've got a bunch of folks that may own shares. In your opinion, through-cycle EPS growth for Terex will be above, in line, or below peers? Now, I'm curious what people think of this when they think of this question, who the peer set is. Is it more AWP-focused? All right. So it's about in line with peers?
That's a good point.
Okay. Next question. I'm happy with that answer, by the way.
I think that's progress.
Great.
Yeah. That's right.
That is right.
[guess] . I'll give him a call. There you go.
In your opinion, what should Terex do with excess cash? Bolt-on M&A, larger M&A, repos, dividends, debt paydown, or internal investment?
Only pick one?
Only one. Need to give Julie focus.
There you go. So ROIC at 40%, 30% on bolt-on M&A. Moving forward, in your opinion, on what multiple of 2024 earnings should Terex trade at? And it ranges from less than 10x to higher than 21x. And this is a standardized range across the country. All right.
We'll take it. Can we get a screenshot of this?
Exactly.
Yeah. After the conference, oh, here's the ARS guys ahead of me. After the conference, we have to do a reconciliation to see where these are versus so this next question here is, what do you see as the most significant share price headwind facing Terex? Is it core growth, margin, capital deployment, or execution strategy? Doesn't seem like it's number three. Good. Yeah. So core growth. So core growth gets about two-thirds of the responses on that one. So maybe just finishing the dialogue in AWP and we'll move to some of that cash stuff. A question we always get all the time is that there is quite a bit of capacity coming online. Julie, I know you mentioned that it's not necessarily the purpose of Monterrey. But from your peers, there is capacity.
So I'm curious, how do you look at the competition dynamics among AWP, whether it's from that capacity or just other folks trying to make their inroads into the U.S?
Yeah. It's a great question. I would say, first of all, we're not adding significant capacity. I would just call that organic. It's not that we're adding massive capacity. We're just basically replacing and on the margin, we have slightly more when we're going to be done with it. But it's going to be significantly lower cost. And that's really what matters to us. And to be honest, to put it into perspective, we're still not supplying at 2,000 unit levels. So we still have capacity. So we don't need to expand capacity. But yeah, the two headwinds, you can probably split it into Western competitors and non-Western competitors. The non-Western competitors, quite frankly, doesn't bother me that much, because we've taken into account kind of the quality of those headwinds and the quality of those investments.
We feel strong enough about our own position, our own value prop geographically, but also in terms of just what we offer to our customer, that it doesn't really bother us too much. On the Western side, other than ourselves, obviously, I can't speak on behalf of my peers. Some of that doesn't really compute with me. And I can only speculate, which I don't want to. But maybe there's a little bit of apples and oranges going on, that it's not all necessarily tied to our space or capacity that can be used in other businesses as well. It doesn't completely compute with me either.
Got it. So this one, I guess it's for you, Julie, just on free cash flow. The free cash flow conversion here, if you go back to the slides, on the slides, there's a lot of things that have accelerated and grown across the business. On the free cash flow side, it's a little bit more challenging. So when you look at 2024, you do have a guidance out there. It seems like it's implied more it's a lower in the range. So what's holding back free cash flow?
Free cash flow has improved. If you look at it on a free cash flow per share basis, it's really improved dramatically, up over 500%. It has improved. I would say that for this year, last year, and for we are investing in our Monterrey facility. So that's a use in free cash flow. In our investor day, we talked about 1%-3% of our sales being our CapEx, 3% on the high end. We're at about 2.7%. Who knows what our outlook will reflect for this year with the Monterrey investment? We would see CapEx returning to a lower level in 2025 and able to generate free cash flow that way. In addition, we still are having supply chain issues.
Our utilities business in particular, still getting the right body at the right capacity at the right time to build a truck has been a challenge. So we do carry additional inventory for supply chain disruption, as well as to support some of the moves that we have from Monterrey. So we would expect working capital to improve going into 2025 as well. So we're at that lower end of our range, 70%-100%, both in 2023 and 2024, but see free cash flow improving even more in 2025. And we encourage everybody to look at what free cash flow per share is.
We just said this is the third and last high Capex year because of the Monterrey investment. And then we do have upside on Free Cash Flow conversion in 2025.
Got it. So to end with a nice softball for your first session here with us at Barclays, what I would say is you talked about earlier when you go into investment meetings where people are hoping that this is actually the split of where our profits are and where the questions are. But along those lines, essentially, where are folks underestimating within the portfolio that you guys have now today? What's the strategy?
Thanks for the question, Adam. I owe you one. I appreciate it. But yeah, obviously, the MP story for us. And we take full responsibility for having we need to do a better job in communicating this. But just the strategic moat we have in that business, the growth opportunities we have in that business, the momentum we have in that business, the cash flow that we have in that business, it's just a lot there. And there's still so much white space that we can go after. And especially in crushing and screening and I just gave one example on the data center. Crushing and screening is not just about supplying aggregates. But now when buildings need to be demolished and need to be recycled, they're being crushed as well. So really, that product plays into a lot more than just feeding aggregates for new builds.
But yeah, the environmental product line is obviously something that excites us a lot. And then I would say we have a lot of leverage in India as well, because we've been in India for 13 years. We have a very large facility in India. We have a large engineering center in India. India is now at the beginning of their boom, we think, especially when it comes to infrastructure spend. So we have just a whole host of products that we can apply in India, in which we are. So I get most excited about just explaining the opportunities that we see in the MP segment.
Got it.
Thanks for the question.
You got it. Well, thank you, Simon. Thank you, Julie, for being here. I'll see you around a while.
Yeah. Thank you.