Terex Corporation Q3 FY2025 earnings call

Terex delivered $1.50 EPS on sales of $1.4 billion with 200% cash conversion and maintained full-year outlook. Announced merger of Terex and REV Group to create a U.S.-centric large-scale specialty equipment manufacturer with complementary operations. Terex shareholders to own 58% and REV shareholders 42% of combined company; REV shareholders to receive $425 million cash. Plan to exit Aerial segment, evaluating sale or spin-off. Combined company expected to have mid-teens adjusted EBITDA in fiscal 2025, strong balance sheet, and low capital intensity. REV Group's efforts in transforming business through operating system, supply chain improvements, and product simplification. Terex's rationalization exercises and ESG integration. $75 million in annual synergies targeted, with half expected in first 12 months post-closing.

Expect to achieve about half of $75 million synergies within first 12 months post-closing. Combined company expected to have mid-teens adjusted EBITDA in fiscal 2025 on pro forma basis. Strong balance sheet and liquidity position with ~2.5x leverage pro forma, with opportunity to delever further post-Aerial exit.

The conference call contains forward-looking statements subject to risks that could cause actual results to differ. No specific operational failures discussed, but general risks associated with mergers and integrations.

Q: Congratulations. I guess I'm curious maybe as a starting point, Simon, you talked about the sort of more stable profile and the cost synergies, which all kind of makes sense. But what are you thinking strategically relative to growth going forward?

A: Yes, Steve, thanks for the question. And yes, thank you. We are obviously very excited announcing the merger this morning. We think it checks all the right boxes. And to your point, it creates a new significantly less cyclical combined portfolio with attractive and growing addressable markets. And yes, besides the synergies that this brings and the more predictable profile, we do see a lot of growth potential, as I mentioned in our prepared remarks, across all of our verticals. And a lot of that is tied to just urban expansion, population growth, electrical grid upgrades, infrastructure investments, but also more waste and recycling. And that's just the addressable markets as they grow. But then as this group comes together, we also see a lot of opportunities in customers that we both cover in products that we can develop together. I'm thinking about the digital use cases that we referenced in our prepared remarks that we see use cases, for example, in some of the REV applications with our 3rd Eye products. So we see a lot of growth upside in both purely addressable market and in terms of revenue synergies.

Q: And then maybe just a follow-up relative to the AWP sale or spin. That's interesting from a timing perspective because I guess one might argue that things are sort of bumping along a bottom there. Why not sort of hold on to that until it's a better business and sell it at some other point?

A: Yes. Great question. We think that the Aerial's journey is very well documented on how it performs through the cycle. Our Aerial's business has a strong brand, strong team, strong footprint, strong legacy. We are excited about the product portfolio and its pipeline. And obviously, the level playing field now that we have these 2 favorable antidumping rulings in both North America and in Europe. And we are convinced that there will be plenty of suitors out there who will recognize the through-cycle value that we believe the Aerial's business will bring to their portfolio. So we think that, that is transparent enough.

Q: I guess I would have a question for Mark, and this is a REV Group perspective here. I'm just sort of curious, Mark, to get your thoughts in terms of how this transaction came to be and how you evaluated value creation from the standpoint of the REV Group shareholders. Your Specialty Vehicles business has done well, and you're clearly on a path to expand margins with a lot more to come as we look at the next couple of years, right? So that opportunity is still ahead. So as you think about this business now being part of Terex, why does it make sense to enact this merger at this point? And from a valuation standpoint, I don't know if I'm doing the math correctly, but it looks to me like the transaction implies about 11x EBITDA on 2026. If that's correct, how did you think about the right valuation framework to apply in this transaction?

A: Yes, sure. So obviously, from how it came about just through the normal course of banker discussions and the opportunity that was presented was really compelling, as we've said in our prepared remarks. But as we also talked about, it's just a natural step in the transformation journey. I think, Mig, in the past, we've talked about what kind of products that we'd be looking for, what kind of companies we'd be looking for. And obviously, we've stressed something in the refu or utility space was always on our radar. When you look at the leading brands that come together in this portfolio, it was just a natural fit for us, especially with the exit of the Aerial's business when you put these 2 companies together. And from a valuation perspective, when you look at the mix of the consideration, it treats both shareholders very well and it provides the ability to participate in future upside of the company, the combined company. And the $425 million of cash consideration still leaves a strong balance sheet for the new company. So if you look at our shareholders specifically, they continue to participate in the upside that you are quoting there, but also get to participate in the synergy realization, the $75 million and to participate in the value unlock associated with the Aerial exit, which we've included in that -- in the deck. So I think that really was the construct and how we came about it and how I looked at it, both from an operational good tangential products and ultimately, the value creation that it gives our shareholders.

Q: $75 million of synergies, certainly not a bad number, but as a percentage of sales for the combined entity, it doesn't seem like a big hurdle. So I'm kind of curious to what degree this number might prove conservative over time. And we haven't really talked about RV. I know this has been part of the REV portfolio a smaller business, but perhaps less of a focus? Is RV considered for potential sales divestiture in the near term as well?

A: Yes. Thanks, Mig. So yes, $75 million run rate going into 2028. We think 50% is -- will be achieved within 12 months after closing. We have very similar operating systems, very similar culture. So we do think we will hit the ground running, and we have a good pipeline. We just want to walk before we run. And I think similarly to when we announced the ESG synergies, we just want to make sure that we manage the pipeline accordingly. And then obviously, we're going to try to overdrive the number, but that is the number that we're currently communicating, and we're going to do our best to exceed that expectation. And when it comes to the RV business, first and foremost, we're going to focus on the things that we are announcing today, the integration of the 2 companies, the execution on the synergies and then the Aerial's exit. But going forward, we will continue to assess the effectiveness of our portfolio as both companies have done and will continue to do and just -- and make the right decisions for our shareholders.

Q: The question I had was on distribution, specifically as it relates to Terex's ES segment and the Specialty Vehicles group of REV Group. I'm just curious if there is any overlap there. I'm thinking -- I know there's some mix of direct sales as well as what goes through dealers. And so again, I'm just thinking to the extent there's overlap or any potential kind of channel conflict just given that a lot of these specialty dealers will carry multiple lines and multiple brands. And so I'm just thinking if that's any issue that has to be thought through.

A: Tim, this is Mark. And from our perspective, and we've looked at that, there is no overlap across these channels, which sort of is again, the beauty of this transaction, bringing these complementary products together. So there is no overlap that we're aware of that will cause an issue.

Q: I was curious, Simon, the decision to exit Aerial's, when was that strategic decision made? Was that something you thought about when you became CEO about 2 years ago? Was that already on the agenda? Or would you say it was more related to the potential swap here in businesses?

A: Yes. We have always had the intent to make our portfolio less cyclical. And the first step, we kind of diluted the cyclical part of our portfolio by means of the ESG integration. And I think that's exactly what happened, and our stock has shown more resiliency as a result of it in the last 12 months. And it's been a very successful integration. And then as this deal was -- or this opportunity was presented to us, we just started to analyze and we saw the merit and we saw the clear value that it would bring to our shareholders and that it would be that next step in terms of making the portfolio less cyclical. So no, it's just something that's kind of evolved organically over the last couple of months. And then we felt that it was a really compelling case and hence the reason we pushed forward with it.

Q: The question I had was on integration of these 2 entities over time. It looks like there's some operational cost revenue synergies, especially between the ES segment and REV Group's businesses, but also looks like these 2 will kind of run as individual segments. So any thoughts there would be helpful.

A: Yes. Thanks for the question. Yes, first of all, in terms of integration, the plumbing, so to speak, will follow the same playbook that we used for the ESG integration. And we think we have a strong process there and a strong track record on doing these kind of integrations. And then the way we will complete the segments makeup, so to speak, is that the REV segment will become a dedicated third segment to the Terex portfolio.

Q: Congratulations on the deal announcement. Simon, just wanted to go back to the point on cyclicality on Aerial's, I understand, and I think this has been asked in a number of different ways, but I just wanted to touch on it a little bit more. Just given you don't need the proceeds to kind of delever to a reasonable range here, why not keep Aerial's as a means of kind of maintaining some diversification in terms of kind of end market exposure near term? And maybe just kind of -- that's just kind of a different way of asking basically, if you don't mind kind of expanding on some of the implications of the intention to sell Aerial's on kind of your view of either the near-term upside opportunity associated with the U.S. rate cycle or kind of improvement there and also the longer-term views of the ability of Aerial's to kind of achieve mid-teens margins kind of through the cycle, I believe that I think that was kind of the longer-term target. So if you could just talk about -- are these positives getting pushed out to the right? Any structural changes to kind of how you look at that business would be helpful.

A: Yes. Thanks for the question. So yes, we're basically -- with this merger, we wanted to rebaseline the company. That's what we wanted to do. So with these -- with the REV Group and our Materials Processing segment and our Environmental Solutions segment, we're basically becoming a new company. And what we want to pursue is a more predictable, much less cyclical kind of earnings profile. That's what we want to do with the company going forward. And we believe that Aerial's is a proven business. It's a strong business. There is a lot of upside coming from the mega projects alone in the United States. And then obviously, we see now Europe starting to invest in infrastructure, public construction as well, which will fuel further demand. We're not going to get into guiding, obviously, for 2026 here on this call today, but we think there is a lot of upside for the Aerial's business for years to come. And then combine it with, I think, a well-documented proven track record on how it performs through the cycle, we think it's a very nice business for anyone.

Q: And sorry, I didn't have time to look this up, but can you tell me the dollar amount and duration in years of REV Group's backlog and maybe the concentration of it by product category, if you report that?

A: We don't report it by product category, but maybe, Amy, you want to take that. But it's about $4.5 billion all in and 2- to 2.5-year backlog. I don't know if you want to comment on. Amy Campbell: You answered the question pretty well there, Mark. No, that's correct. We have a $4.5 billion backlog. We do break that out, $4.2 billion of that is in what we consider our Specialty Vehicle segment and about $300 million is in our Recreational Vehicle segment. And that 2- to 2.5-year backlog is strictly for those fire trucks and ambulances.