Before the open this
morning, construction platform, crane, and materials processing company Terex (TEX 36.60, +1.31, +3.71%) issued strong 4Q18 results while providing upside EPS guidance for FY19.
Furthermore, during its earnings call earlier this morning, the company offered
some encouraging commentary regarding the global construction markets, helping
to ease concerns about the health of the overall macroeconomic environment.
It isn't only the healthy business climate that is boosting TEX's performance, though. Back in 2016, TEX began implementing its "Focus, Simplify and Execute to Win" initiative. This program works to re-shape its product portfolio in order to focus on its highest-performing segments, while also working to simplify its structure and systems.
This strategy was put in the spotlight a couple days ago when the company announced the divestiture of its Demag Mobile Crane unit by selling the business to Tadano for $215 mln. TEX has exited the North American mobile crane business altogether as it will shut down production at its Oklahoma City facility.
These actions followed the disposition of its MHPS segment in January 2017, which comprised two of its six previous reporting units. The sale of MHPS to Konecranes represented a major shift in its strategy away from universal, process, and mobile harbor cranes.
Combined, TEX says that these moves will significantly increase its operating profit, margins, cash flow, and EPS, which is evident in the strong guidance it provided for FY19. The company believes it is well-positioned to ramp up capital expenditures this year, targeting $140 mln to fund manufacturing capacity expansion. On that note, the company is currently constructing a new utilities manufacturing center in South Dakota, along with new Materials Processing locations in the UK and India.
Overview of 4Q18
For the quarter, TEX generated EPS of $0.51, up 55% yr/yr, and also beat consensus by $0.04. On the top line, revenue climbed 16% to $1.23 bln, also exceeding the $1.19 bln expectation. Taking a look at a couple other metrics, income from continuing operations increased 33% to $46.2 mln and total backlog was higher by 29% entering 2019.
Breaking the results down by segment, Aerial Work Platforms (AWP) saw a 19% increase in sales, driven by growth in North America (~53% of revenue) and Asia (~20% of revenue). However, operating margin slid to 4.9% from 6.7% in the year ago period as higher material costs -- including higher steel costs -- tariffs, and unfavorable product created headwinds during the quarter.
In the Crane segment, which is undergoing a transformation, revenue was up 12% to $364.5 mln and returned to profitability due to improvements in materials management and better operational performance.
The outperformer, though, was the Materials Processing (MP) unit as sales jumped by 20% with operating margin expanding by 150 basis points -- despite material cost headwinds. Additionally, backlog in MP surged by 54% to $490 mln. The growth in this segment is being driven by strong global demand for crushing and screening products, materials handlers, and environmental equipment.
In its earnings press release, TEX issued strong guidance for FY19, seeing EPS of $3.60-$4.20, well ahead of the $3.41 consensus. At the mid-point, it also represents impressive yr/yr growth of 45%. It also forecast revenue of $4.7 bln, which excludes elements of its former crane segments that are being divested. Therefore, this outlook does not compare to the $5.25 bln consensus.
On a comparative basis, the company expects to grow revenue by 3-6% with operating margin of 9-10%, as compared to about 6% in FY18, while generating free cash flow of $165 mln.
Based on its upside earnings guidance, TEX is feeling confident about its prospects in 2019 and that was made clear during its earnings call this morning. Management stated that the underlying construction, utility, and industrial markets in North America remains strong and that its rental customers continue to see improving rental rates and higher equipment utilization. TEX also commented that product adoption is continuing to fuel growth in China and other developing areas around the globe.
Given the healthy construction market and considering that backlog is higher in each of its segments, TEX is looking at 2019 as an investment year to expand production capacity, which we touched on above. At the same time, the company will seek to further simplify its operations and manage its General and Administrative expense line.
As we begin to exit the fourth quarter earnings season, fears about a sharp global macroeconomic downturn have substantially eased. While many executives agree that growth has slowed around the world, the general consensus is that conditions are still relatively healthy overall. TEX, which is a pretty good barometer for economic conditions, was actually quite bullish on the prospects for the underlying construction markets. The resiliency of the global economy, combined with its efforts to streamline its business, focusing on its top-performing segments, is driving strong growth, profitability, and cash flow generation for the company.