Q1 2024 Terex Corp Earnings Call

Participants

Neil Frohnapple; IR; Terex Corp

Simon Meester; President, Chief Executive Officer, Director; Terex Corp

Julie Beck; Chief Financial Officer, Senior Vice President; Terex Corp

Jamie Cook; Analyst; Truist Securities, Inc.

Stanley Elliott; Analyst; Stifel Financial Corp.

Steven Fisher; Analyst; UBS Group AG

David Raso; Analyst; Evercore Inc

Steve Volkmann; Analyst; Jefferies Financial Group Inc.

Nicole DeBlase; Analyst; Deutsche Bank AG

Tami Zakaria; Analyst; JPMorgan

Jerry Revich; Analyst; The Goldman Sachs Group, Inc

Steve Barger; Analyst; Key Banc

Angel Castillo; Analyst; Morgan Stanley

Presentation

Operator

Greetings, and welcome to the Parex First Quarter 2024 Results Conference Call. At this time, all participants are in a listen only mode A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded, and it is now my pleasure to introduce your host, Neil Frohnapple, Vice President of Investor Relations.

Neil Frohnapple

Good morning, and welcome to the Terra First Quarter 2024 for our earnings conference call. A copy of the press release and presentation slides are posted on our Investor Relations website at investors dot teradyne.com. In addition, the replay and slide presentation will be available on our website.
We are joined by Simon, Mister President and Chief Executive Officer, and Julie Beck, Senior Vice President and Chief Financial Officer. Their prepared remarks will be followed by Q&A. Please turn to Slide 2 of the presentation, which reflects our Safe Harbor statement.
Today's conference call contains forward-looking statements, which are subject to risks that could cause actual results to be materially different from those expressed or implied. These risks are described in greater detail in the earnings materials and in our reports filed with the SEC. In addition, we will be discussing non-GAAP financial information 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 4, and I'll turn it over to Simon Eastern.

Simon Meester

Thanks, Neil, and good morning, I would like to welcome everyone to our earnings call and appreciate your interest in Terex. I'd like to begin by thanking all Voltaire's team members for delivering outstanding performance in Q1 the team executed really well and delivered strong results to start the year with we increased sales by 5% and expanded operating margins by 20 basis points from last year.
The company also delivered earnings per share of $1.60 in the quarter and achieved a return on invested capital of more than 27%. These outstanding results demonstrate our ability to execute, the team continues to perform at a high level.
Additionally, we are raising our 2024 sales and profit outlook and now expect earnings per share in the range of $6.95, to $7.35 during the quarter. We also continued to advance our strategic initiatives to drive long-term shareholder value. We launched several new products across the portfolio and continued to make good progress ramping up our new facility in Monterrey. This new facility continues to absorb more of GE's global production mix and is expected to improve the segment's through-cycle margin performance.
Please turn to Slide 5. Customer demand remained healthy across most of our businesses, supported by favorable end market conditions. Our Q1 backlog of $3.1 billion is significantly above historical levels and gives us confidence in the sales outlook for the remainder of the year.
As expected, backlog continues to moderate from peak levels, which reflects more normal lead times, improving supply chain and continued efforts by our team members to improve overall throughput.
Consolidated bookings in Q1 of more than $1 billion were down from last year, which reflects the return to more normal seasonal order patterns combined with softer demand in Europe.
In the E&C segment, backlog is still above historical norms and bookings increased sequentially from the fourth and the third quarter. Additionally, our AWP backlog now covers the 2024 outlook with our utilities business actively taking orders for 2025 overall, based on customer feedback, our backlog coverage, our bookings and leading indicators, we feel confident about raising our 2024 outlook.
Please turn to Slide 6. The overall market outlook remains strong for many of our primary end markets, especially in North America, which represents over 60% of total company sales. In fact, we saw double digit sales growth in North America in Q1 our businesses remain well positioned to benefit from higher US government spending modernized infrastructure over the coming years with an increasing number of projects continuing to be not traditionally construction spending on manufacturing is up more than 30% year over year, driven by onshoring and mega projects related to semiconductor manufacturing, clean energy and EV battery projects.
These favorable end market trends combined with replacement cycle tailwinds and high equipment utilization rates are beneficial for our aerials business. Additionally, increasing adoption of our products in emerging markets such as India is another positive utilities market is expected to continue to grow, supported by investment in grid upgrades and expansion required for zero carbon and amplified electrification needs by power generation for future AI applications in the US power related spending has been increasing at double digit rates by utilities.
Business is benefiting from this growing demand and was up double digits in the first quarter as the team is working hard to overcome ongoing shortage systems. Why change strength in US infrastructure, general construction and residential end markets will continue to benefit.
And these aggregates and concrete businesses. We expect these tailwinds to offset softness in businesses with high European exposure. We expect and these environmental business to continue its growth driven by increasing demand for waste recycling and our Fuchs business is focused on expanding into new geographies and new products to help offset the near-term demand softness. Overall, we see continued strength in the infrastructure, utilities, manufacturing and recycling markets and remain positive on the 2024 market outlook for our portfolio.
Please turn to slide 7, and I wanted to take a step back and provide a few reasons on why I'm confident in tariffs, growth trajectory over the coming years. Permits paired with a diverse product portfolio that provides differentiated value to our customers at all points of the project lifecycle. Notably, our equipment is utilized by customers across various applications from foundation to building repair maintenance and the eventual recycling of materials for reuse.
We also remain committed to developing new products to address our customers' evolving needs and maximize their return on investments. In fact, the innovative part of our strategy continues to generate incremental growth for the Company. For example, approximately 20% of our annual sales are from new products introduced in the last three years. This is a testament to our team members' collaboration with our customers to provide innovative solutions for support and development across the globe.
Please turn to Slide 8. There also remains well positioned to capitalize on megatrends and emerging technologies that will favorably impact our end markets over the coming years. In total, around 80% of our addressable market is aligned with stimulus from megatrends and from increasing government investment and incentives.
Our market-leading businesses all benefit to varying degrees by more investments in infrastructure, digitalization, waste recycling and electrification. For example, M. team has leading positions in global crushing and screening markets that benefit from the growth of on-site demolition and infrastructure projects in general and the associated demand for aggregates.
Keep in mind that aggregates represents around 15% of segment sales and feed also serves customers across all project life cycle phases, including growing demand for environmental and waste recycling solutions. Our utilities business is well positioned to capitalize on investments required to upgrade the U.S. electrical grid to support the accelerating demand as the industrial world continues to move to the use of more electrical power.
And our Genius Products are benefiting from demand from infrastructure projects, data centers, manufacturing, onshoring, and investments in the entertainment sector, overall very diverse product portfolio positions us very well for 2024 and beyond.
Let's turn to Slide 9. It has been an exciting first few months as CEO of carriage and I would like to provide a few more thoughts on our strategic priorities as we look ahead to the future.
Our execute innovate growth strategy has built strong momentum over the last several years. We now have a diversified portfolio of market-leading businesses that are generating higher levels of performance through the cycle. In fact, we're on track to achieve more than $7 of earnings per share and greater than $300 million of free cash flow for the second consecutive year.
I'm confident that tariffs has significant upside for many years to come looking ahead, I strongly believe we can create even more value for shareholders by accelerating the growth elements of our strategy over the coming years. And it starts with our strong balance sheet and cash flow generation, which provides plenty of firepower to pursue opportunities, it will drive sustainable long-term value.
With respect to organic growth, we are focused on increasing product vitality and targeting opportunities to drive incremental growth across the portfolio. The team is also moving with urgency to capitalize on the megatrends and emerging technologies that I highlighted earlier.
And finally, we continue to grow the M&A pipeline to identify opportunities that are financially attractive, broaden our market reach and strengthen our portfolio. Keeping in mind, we continue to evaluate potential inorganic action against other alternative uses of capital, which is a good position to be in Overall, I'm excited for the opportunities that lie ahead, and I'm confident we will elevate Therics to new levels of performance. And with that, let me turn it over to Julie.

Julie Beck

Thanks, Simon, and good morning, everyone. Let's take a look at our strong first quarter financial performance found on Slide 10. And we posted sales of $1.3 billion, up about 5% from last year, reflecting strong demand for our products across multiple businesses. Geographically, we delivered significant growth in North America, while Europe declined and flat to a very strong first quarter, gross margin of 23% increased by 40 basis points over prior year on improved manufacturing throughput and disciplined price cost management.
Sg&a expense increased over the prior year due primarily to higher compensation expense. Also, structural costs came in largely as expected as G&A as a percent of sales was 10.8%, up slightly from last year. Note that SG&A includes $4 million of discrete financial call-outs due to accelerated vesting and severance charges.
Excluding these charges, SG&A came in at 10.4% of sales better than last year. Income from operations was $158 million with an operating margin of 12.2%, a 20 basis improvement over prior year. Operating income also includes a $4 million impact of vesting and severance charges. Interest expense was relatively consistent with the previous year, while other expense increased $7 million from the prior year, primarily due to unfavorable mark to market adjustments.
First quarter global effective tax rate was 20.5% compared to 17.5% in the first quarter of 2023 first quarter earnings per share of $1.60, consistent with last year as expected, with a return to more seasonal pattern. Free cash flow for the first quarter was negative as increasing operating profits were more than offset by working capital added to support the sales outlook as to why we continue to carry a higher level of inventory to support increased Q2 and Q3 sales volumes as well as our Genie production business.
Let's take a look at our segment results. Please turn to Slide 11. Our team has gotten off to another good start in 2024 and executing well despite more challenging macro conditions for a few of the businesses.
If I go into more detail on the quarter.
Let me first provide more perspective on the segment. On a high level. We have nearly doubled the size of the E&P segment over the last seven years. And expanded operating margins by almost 700 basis points during the period today and to consistently generate mid-teens operating margins and represents about half of our total annual operating profit and this segment remains on track to achieve the Investor Day targets we established for 2027 and back delivering on the long-term sales target of $2.7 billion represents an incremental [dollar per share] of earnings power for the total company relative to our 2024 outlook for the first quarter, energy sales declined by 6% to $520 million compared to the exceptional first quarter of 2023.
In primarily the softer demand in Europe, partially offset by growth for aggregates entities recorded operating profit of $72 million was down $13 million due to the impact of lower sales volumes, unfavorable product mix and product liability reserve.
Although entities operating margins were down 150 basis points from last year, they were 50 basis points better than expected. Npas ended the quarter with backlog of $712 million, still above historical norms, while our bookings increased 7% sequentially from the fourth quarter. Keep in mind that the E&P business is shorter cycle and continue to transition back to more traditional book-to-bill dynamics as supply chain continued to improve which impacted the comparison for bookings relative to the prior year.
Turn to slide 12, a W team delivered excellent performance in the first quarter with sales of $773 million, up nearly 13% from last year, primarily reflecting higher demand as well as improved supply chain and manufacturing throughput.
Awp reported quarterly operating profit of $107 million, an increase of 29% over the prior year. The increase was driven by strong operational execution on the higher volume, improved supply chain performance and disciplined price cost management operating margins expanded by 180 basis points with an incremental margin of 28%, reflecting strong performance overall by the team.
And finally, I will note that AWP backlog is strong at $2.4 billion, which is more than two times the historical norm.
Please see Slide 13. Coeur has a strong balance sheet with ample liquidity our net leverage remained low at 0.5 times. We're below our 3.5 times target through the cycle, providing us plenty of flexibility as we look ahead and our outstanding bonds are at an attractive fixed rate of 5% until the end of the decade. We are reaffirming our 2024 free cash flow outlook range of $325 million to $375 million.
As you can see on the slide, 13 is on track to generate more than $1.1 billion of free cash flow over this five-year period. This cash generation has allowed us to strengthen the balance sheet and invest for profitable growth, all while returning significant cash to shareholders.
We're planning for capital expenditures this year of approximately $145 million or about 2.7% of sales at the expected midpoint. With the largest investment related to our Monterrey facility note that we would expect CapEx to take a step down next year and to be a benefit to free cash flow conversion in 2025.
We recorded a return on invested capital of 27.6%, up 370 basis points year over year. Peter is in an excellent position to continue advancing our strategic growth initiatives while returning capital to shareholders.
Not turn to Slide 14 and our full year outlook. It's important to realize we are operating in a complex environment and many macro economic variables and geopolitical uncertainties that results could change negatively or positively. With that said, This outlook represents our best estimate as of today. Following the strong start to the year, we are raising both our sales and earnings per share outlook for 2024, we are increasing our earnings per share outlook to the range of $6.95. It's $7.35 up from the previous outlook of $6.85 to $7.25.
We are also raising our sales outlook to a range of $5.2 billion to $5.4 billion, up $100 million compared to the prior outlook. Midpoint of our sales outlook incorporates healthier customer demand and improved operational throughput. With that said, the outlook reflects strong demand in North America and plans for continued softness in Europe over the balance of the year.
We expect the first half sales to be slightly higher than the second half with the second and third quarter sales higher than the first and fourth quarter. As we return to more seasonal customer delivery patterns. We anticipate full year operating margin in a range of 12.8% to 13.1%, consistent with our prior outlook and solidly above full year 2023.
Performance and margin expansion reflects strong operational execution and the impact from the higher sales outlook. We are also driving ongoing cost reduction activities to offset softer demand in Europe and continued inflation at the midpoint of the outlook range. The implied incremental margin range for the full year is above 30%.
From a modeling perspective, we do want to emphasize the strong second quarter performance in 2023 when making year-over-year comparisons for the remainder of the year. We expect corporate and other expenses to be around $25 million in the second quarter and then approximately $20 million per quarter in the second half of the year.
We now expect interest and other assets of $65 million for the full year. Higher than the prior outlook primarily reflects the financial callout in the first quarter. Outlook for the rest of the low line items are largely unchanged from our previous outlook. And as I highlighted earlier, we continue to estimate free cash flow in the range of $325 million to $375 million.
Let's review our segment outlook. We expect MPC sales to be $2.2 billion to $2.3 billion for the full year with margins in the range of 15.6% to 15.9%, both consistent with the previous outlooks for the second quarter sales and margins are expected to step up from Q1 levels.
Profitability is expected to steadily increase through the balance of the year. Our AWP, we now expect 2024 sales of $3 billion to $3.1 billion, up $100 million from our previous outlook. We are slightly raising our operating margin outlook to a range of 13.5% to 13.8% for the full year, representing upwards of 100 basis points of expansion over 2023.
We expect Q2 sales to be up from the prior year, while margins are anticipated to be around 150 basis points lower compared to last year's very strong second quarter note that margins will be impacted by moderate efficiency and unfavorable mix, partially offset by continued cost-out activities. We anticipate the quarterly cadence of our AWP sales to be closer to historical patterns with a higher sales in Q2 and Q3 which will also drive higher profitability for those quarters. Overall, our increased full-year outlook reflects our confidence that 2024 will be another outstanding year for Keryx. And with that said, I will turn it back to Simon.

Simon Meester

Turning to Slide 15. In summary, the Perrigo team delivered excellent results to start the year, and we now expect even stronger performance for 2024. We have a diversified portfolio of industry leading businesses that are generating higher levels of performance through cycle growth, so well positioned to continue to benefit from megatrends and emerging new technologies like electrification, digitalization and AI.
The team remains focused on operational execution to drive greater efficiencies and high returns on invested capital. We have a strong balance sheet and generate significant cash flow and will continue to fuel our profitable growth strategy and return of capital to shareholders. And we have a global experience, diverse and highly engaged team that is committed to continuing to create value for our customers and our shareholders over the coming years.
With that, let me turn it back to Neil.

Neil Frohnapple

As a reminder, during the question-and-answer session, we ask you to limit your questions to one and a follow-up to ensure we answer as many questions as possible this morning. And with that, I would like to open it up for questions. Operator?

Question and Answer Session

Operator

Thank you. If you would like to ask a question, please press star followed by the number one on your telephone keypad. Our first question comes from Jamie Cook from Truist Securities. Please go ahead. Your line is open.

Jamie Cook

Hey, good morning. Congrats on a nice quarter. I guess, Julie, my first question on materials processing, you noted margin came in 50 basis points ahead of expectations, but you're not changing your model margin guidance for the year. And then just also surprised or not the sales guidance reiterated when the markets seem weaker, in particular with the European exposure within materials processing.
So if you could just help me on the MPS VI. And I guess in Simon, now that I guess you're you know, close to five months in on. Can you just talk to what your I know your strategy sort of accelerate growth? And can you talk to what you're seeing on the M&A sort of pipeline, whether you think there's an opportunity to do deals in 2024? And then just sort of the size of the deals that you're looking at and where you'd be interested?
Thank you.

Julie Beck

I'll take the JV. I guess I'll start with the MP. outlooks of the E&P business is that we had on a better quarter than anticipated, and they were about 60 basis points ahead in operating margin from what we had anticipated. And they had some favorable geographic mix that we had more North American exposure they were also impacted in the quarter and about 50 basis points for that product liability charge that I mentioned.
We do anticipated, and that is that the some of the European markets, in particular, our material handling business that the German business type of scrap is a challenge going forward. And we see upside in our environmental businesses and our on our concrete business in aggregate continued to perform well. And and so there is, as you know, from a margin perspective, we're expecting our margins to improve sequentially as we go throughout the year. And we expect that sales to take a step up from Q1 levels as well. So overall, we're expecting another nice year from the NPE business.

Simon Meester

Yes, Jamie, good morning. Thanks.
Thanks for the question.
Yes.
So it's been it's been four months. Some has been very exciting so far. And obviously, looking back over the last couple of years, I don't think there's any denying that we have built very strong operational momentum, further Execute and Innovate and Grow strategy. We truly transformed the company. We have a strong portfolio that we feel very good about that. So I would say my first priority is to make sure we maintain that positive momentum that we're currently on.
But there's no doubt that we now have are in a position where we can also focus on now that we have strong operational momentum and how we can accelerate growth. And two points, obviously, we look at inorganic options.
We're also looking at organic options, you know, we're a $5 billion business in a $34 billion addressable market. There's still a lot of white space to go after organically and with good return on invested capital that is on the table for us just as much as inorganic action when it comes to inorganic action for the reasons I just laid out, we're not really in a hurry and we didn't set ourselves a target. We didn't set ourselves a tight time line because we are in such a strong place.
And because we have strong demand for our existing businesses. And for the next couple of years, we're going to do we're going to take our time for this, but we do have active pipeline of opportunities we're looking for anything inside and outside our current addressable markets that would be attractive that would strengthen our portfolio that would make us stronger and widen our moat, but obviously needs to be financially attractive and ultimately help us further strengthen our future earnings profile. But again, I can't emphasize this enough it all needs to rank favorably versus all the other actions that we have available to those like share buybacks like investing in our current businesses and dividends. And so that's how we force rank those opportunities. But anything's on the table.

Jamie Cook

Okay. Thank you.

Simon Meester

Thanks, Jenny.

Operator

Our next question comes from Stanley Elliott from Stifel. Please go ahead. Your line is open and more to say.

Stanley Elliott

Good morning, Julie. Thank you for the question. I guess piggybacking on that deal with leverage, you guys have a kind of a 2.5 kind of net target through the cycle. You're probably going to be close to debt free by the end of the year. How large of a deal would you want to pursue if something were to pop up and if that doesn't materialize this year, then then maybe kind of help us again with your opportunities for buyback and things like that.

Julie Beck

It was on daily and we will evaluate and we're evaluating all sources of if we will align pipeline. So we'll be looking at smaller things and maybe some larger things as well and that we're not prescriptive. I think we're just trying to follow the criteria that Simon mentioned before on when we think about share repurchases, certainly we've repurchased $1.6 billion of shares.
And over the last three years last year, we returned over 28% of our free cash flow to shareholders. And we have $130 million remaining on our current authorization for share purchase repurchases. So again, we'll continue to evaluate share repurchases and inorganic opportunities along the way and make the decisions that provide the greatest return.

Stanley Elliott

And I guess secondly, the comments, I mean, you had about 20% new products your past three years. This comes at a time and you guys are generating very strong margins, returns and making accelerated CapEx that accommodations typically does not happen. What's what are you guys doing differently is it is a voice of customer. Is it kind of moving into some kind of nichey white space, but it sounds like the new product piece is probably exceeding expectations?

Simon Meester

Yes, definitely at the end of the day, we're a product company. That's what we do. That's what excites us that that's what makes us go every single day. We're excited to bring new products to the market. We we deliver. You know, most our products goes into businesses that are looking for return on investments. So whatever improves, you know, the return on investment for our customers and makes our customers more successful. But yes, in MP., we've been expanding our hybrid in our Plug Power alternatives. We announced a Cummins partnership to collaborate on hydrogen powered. We've extended our recycling and environmental solutions offerings like a Greenpac.
And I know right now, the newest low-speed credit that I talked about in the presentation is really all that all the combinations you can think of new products in existing markets, existing products in new markets we're exploring at all. We have opportunities to take existing products into new markets, we have opportunities to take new markets and new products to existing market.
Am I on the GE side, Genie has been a leader in the development of electric and hybrid products for for some time. I know with the excess capacity in 2018 and even before the regulations changed, GNER has already brought that to market. But today with our hybrid boosted really being trendsetters. The new telehandler setup come out with significantly improved total cost of ownership.
And then lastly, on the utility side, introduced the first all electric bucket truck combined with an EPCO. on an all electric chassis that was now two years, if I remember correctly, a big opportunity going forward there. And so yes, we're playing the MPG card really hard because again, the data that I think what makes our Company what it is and gives us a competitive advantage that it happens.

Stanley Elliott

Perfect.
Thanks.
So much. Congrats and best like.

Simon Meester

Thank you.

Operator

Our next question comes from Steven Fisher from UBS. Please go ahead. Your line is open.

Steven Fisher

Thanks. Simona, you mentioned it was really a bit of a benefit from price versus cost management. Can you maybe just give us some quantification of that in the quarter? How did it compare to your expectations? And what do you have embedded in there for the rest of the year on price versus cost advantage.

Julie Beck

And if I can add that in the first quarter and the team did a really performed well, particularly in AWP units. They were able to we saw improvement in the supply chain. We were able to bring the labor that we needed in Washington state as well as in Monterrey, which was terrific. And we were able to, you know, to ship more than we expected.
And of course, that helps with the overall margin. And when we talk about pricing and price costs, you know, are we always talk about our price cost being price cost neutral and we're anticipating, you know, pricing through the year in about that mid low mid single digit range.
So that's sensible, rational price costs. We continue to monitor price costs and you know, the NPS business is very dynamic in their pricing and their quoting averagely every every piece of equipment.

Steven Fisher

That's helpful. And then just you mentioned, Simon, I think the utilities orders for 2025. Can you just talk a little bit more about how the discussions around 2025 have evolved in utilities and also more broadly for the Company?

Simon Meester

Yes, it really is. So we're not there definitely for MP because AMP is really returning more to kind of a boots individual agents. Typically, we have about three or four months forward visibility aerials mostly covered for 2024. We could take some more bookings probably in 2024 it, we would find the labor and materials for it, and we expect to start discussions for 2025 typically as we do in Q3 and Q4.
But then your utilities is already actively taking orders for 2025 and just a lot of demand for still struggling with a little bit of throughput because of bodies and chassis chassis. But some overall, that business has a lot of a lot of upside for the next the coming couple of years.
You know, every everything everything equal, it would just be, you know, obviously the mega mega projects alone, but grid upgrades that need to happen. The grid expansion. And I spoke about a I know it's a little bit of a buzzword, but thinking about AI applications that will make their way into the market. They're all that, you know, very low-power intense power intensity means grid upgrades means through expansion into exactly in our wheelhouse. So that's why we're very excited about that business going forward.

Steven Fisher

Terrific.
Thank you.

Operator

Our next question comes from David Raso from Evercore ISI. Please go ahead.
Your line is open.

David Raso

Yes, thank you. Following up on the order conversation, I think clearly 24 people are trying to figure out why can't we do maybe a little better on the margins, given what already on visibility with the backlog? And you mentioned some of the manufacturing challenges, I think that allies, maybe parts of Europe within AWP, but can you help us understand sort of what's in the backlog today when it comes to mix, product type, which channel you're selling to just so we can better understand it, particularly why the margins should be lower the rest of the year versus the first quarter? I know you said the second quarter and the number you provided will be better than the first quarter, but I'm talking to the rest of the year, the implied margins are below first quarter, which is a little surprising. So again, is there something in the mix or just conservatism on some of some manufacturing issues.
And then on the ['25] order conversation, anything you can help us with on the end markets you just described, are those more big booms, midsize booms. Just trying to get a sense of the and Telis versus aerials. Just trying to set up a little bit why the margins lower the rest of the year and also any thoughts around ['25] for mix? Thank you.

Julie Beck

How so when we think about the operating margins for the year, we're expecting improvement and from year over year, and we're expecting a 30% incremental margin and so on, we see margins improving over last year and we see margins improving sequentially in Q2, Q3. And then, of course, they come down in Q4 because we have usually looking due to seasonal patterns and lower production days and in the fourth quarter.
And but we're anticipating higher and higher margins and a 30% overall incremental for the year

Simon Meester

would certainly, I would just say no, no big material swings in the backlog that should be accounted for on top of my head. But yes, we're just going back to more normal, a normal kind of seasonal behavioral is where our Q2 and Q3 are going to be from a top line and probably going to be our stronger quarters Q4 because of Julie, what Julie said, less working days going to be traditionally probably one of our below average quarters. So that will just make its way in terms of incrementals that down to the bottom line.
And then Q2, we just have a little bit of headwinds because we're ramping up in Monterrey, and that's how we account. We don't see we see sequential improvement, David will be higher in Q4

David Raso

For AWPs, specifically the rest of the year's implied at 13.6% margins. We just did 13 nine. I know the fourth quarter seasonally can be lower than the first quarter, but I'm just making sure we understand this or some like understandable Europe of all the risks that are out there I'm just making sure there isn't something you're missing where it's logical without just trying to be a little cautious, which I appreciate why would the rest of the year margins be below the first quarter because that's what the implied numbers are. I just want to make sure we're not surprised that quarter two from now a big negative issue or the first quarter had a unique price cost that were given back in the rest of the year. I just want to make sure we understand that the base case here.
Yes.
Thank you.

Julie Beck

I mean what we would say, David, that you know that we will have a Q2, as I mentioned, would be, and we and we mentioned in our remarks, would be impacted by the down at more inefficiencies in Monterrey. But really the first quarter will be a stronger quarter than the fourth quarter, I guess. And that would be the only only reason there's nothing else other than some some some further start-up inefficiencies, and that's about it. But overall, again, after that AWT, they're going to have an incremental margin posting at 35% for the year.

David Raso

Yes.
Okay. I just want to make sure I really appreciate it.
Thank you.

Operator

And our next question comes from Steve Volkmann from Jefferies. Please go ahead.
Your line is open.

Steve Volkmann

Thanks, guys. Just a couple of cleanups for me. Julie, have you changed at all your view of the sort of total start-up cost impact on 2024?

Julie Beck

And we would say that we guided to at least that $15 million to $20 million number.
It was it came in a bit favorable in the first quarter was probably about $5 million impact. We would expect that to increase and be higher in the second quarter as we mentioned. And then we would expect that to go down through the rest of the year and more first half weighted than second half,

Steve Volkmann

but for the full year tenants, that same range that you've been talking about?

Julie Beck

Yes.

Steve Volkmann

Okay.
And then I had a question on the Utilities business as well. Because if I remember correctly, that had some very kind of specific and I think significant margins headwinds through the COVID interruptions and supply chain and so forth. I'm just curious if you can sort of bring us up to date, how are margins in that utility business now? Is there still sort of meaningful upside as we go forward just how to think about that.

Simon Meester

And we had the other top three last year and since when we kind of have been granted the teams to continue to improve. So we're actually very pleased with how the team executed in the first quarter.

Julie Beck

Yes, the third quarter, as I mentioned, they had a supplier quality issue which impacted them significantly and have recovered from that. And so we're expecting some improvement in that business as well.
And that business still does you know, it had some more supply chain disruption due to body and chassis, but we are expecting improvement in that business as we go as well. And we're on, as Simon mentioned earlier, we think there's that it is it has a tremendous amount of potential on the Lakehead system for the field

Simon Meester

Functional supply load, That's the challenge to that. And there's some big swings like custom bodies and truck chassis. We thought we were out of the woods and truck chassis and it kind of came back. So it is really there are some uncontrollables there as well.

Steve Volkmann

Okay.
Thank you.

Operator

Our next question comes from Nicole Nicole DeBlase from Deutsche Bank. Please go ahead. Your line is open.

Nicole DeBlase

Maybe just first, you raised the EPS guidance for the full year, but less free cash flow as is it just, you know, early in the year to be raising the free cash flow commitment, is it more working capital investment can we just discuss that

Julie Beck

We kept the range early in the year and the quality agree with that. And we are hearing we do expect inventory levels to come down through the year and improved working capital management is incorporated in that, as we mentioned, that we do carry some more inventory in the first quarter. We built inventory to support the second and third quarter higher sales volume. And we have higher inventory right now for the production moves.
And so but we are expecting that to come down in net working capital to be a source of cash this year. And we expect cash flow to gradually improve throughout the year and be more no more traditional with our seasonality with the uses of free cash flow in the first quarter, improving subsequently throughout the summer.

Nicole DeBlase

Got it.
Thanks, Julie. And then I guess can we just hear a little bit more about what you guys are seeing in Europe. This has been definitely a trend that we've heard from multiple companies. So it's not particularly surprising, but just would you say things like getting worse, just kind of bouncing along the bottom, it would be really helpful if you could characterize what you're seeing there. Thank you.

Simon Meester

Yes, look, for us is into so the brightest spots in that region, if you include the broader region is for us at the Middle East, but the parts where where it's really affecting us, it's Germany, UK and France. And I guess technically both UK and Germany are hinting towards. I think the technical recession, I haven't seen nearly the GDP numbers, but if Germany and the UK would recover and we think the UK might recover a little before. Germany does because Germany's over overly dependent on exports. But as again, our outlook currently confirms that it doesn't get worse in the UK and in Germany, but those are the two markets that are really hurting us and hurting us the most.

Nicole DeBlase

Thank you. I'll pass it on.
Thank you.

Operator

Our next question comes from Tami Zakaria from JPMorgan. Please go ahead. Your line is open

Tami Zakaria

Good morning. Thank you so much. So could you comment on the inventory in the channel for MP.? I think I remember you expected some destocking and the first quarter, is that largely done?

Simon Meester

It is stocking up in Zone A.?
I am sorry, I think you can read so yes, we are that is largely done. Our dealer inventories are where they need to be. So it's an interesting dynamic because obviously, you know, when backlogs come down, an indicator of Fuchs where demand came down because scrap prices, we have to do some adjustment in supply that's largely done. That's behind us now. And so we're from a dealer inventory and pipeline standpoint, we think we are where we need to be going forward that.

Tami Zakaria

Okay. That's on time and thank you for extending them.

Operator

Our next question comes from Jerry Revich from Goldman Sachs. Please go ahead.
Your line is open.

Jerry Revich

Yes, hi. Good morning, everyone.
And in your prepared remarks, you spoke about the company's opportunity in leveraging digital and technology advancement. Can you just expand on that. What are the opportunities with your telematics offerings elsewhere? What exactly you mind fleshing out for us, what exactly you have in mind in terms of the most significant opportunities for you folks given existing installed base of telematics and any other developments you're focused?

Simon Meester

Yes.
Thank you. So I see I see external opportunities for us. Mnc internal opportunities for us are external. But besides just what makes its way into our products today, I'm talking about hybrid. I talked about in our first of all, electric talking chart, EPTO. and so on and so forth. But we also made some longer term technology investments in Exelon and Atronic, which you've announced last year.
And I believe with a late 2022. We believe that we're very excited about our Exelon investment because that will give us control over the and importantly, the supply chain for us and an electronic. We're excited because you know that kind of the next generation of robotics, Tom, you know, and we can start applying that in some of the applications in not just aerials, but in other areas of torics as well.
So over the long term technology investment, and this is just as exciting as what we're currently playing. But then internally, we see here a eye is to sit next to the next opportunity to just drive efficiency, drive productivity, drive real time decision-making. You know the way we balance supply and demand with a eye we can we can make that a real time process. So we're excited on how we can leverage that both externally and internally, we will we mostly see it as opportunities for us.

Jerry Revich

Great. Thank you.
And then lastly, can I ask you to please comment on what you're seeing in terms of the telematics data for rail for booms in North America in terms of where your utilization stands. It looks like used equipment inventories are rising off of a really low base. But I'm wondering what the utilization data shows if you'd be willing to share it please?

Simon Meester

Yes, no, it is a tight correlation between what our customers are telling us and what we're seeing from the data. And then when I when I mentioned leading indicators in one of my opening remarks, this is one of the leading indicators that obviously we look at that we look at telematics because we see with the utilization of leases and all of our customers are reporting high utilization, and that's what telematics is kind of confirming. I'm talking North America in Europe, we see we see some lower utilization, again, confirmed by what our customers are telling us through the telematics data correlates with the high usage we're seeing in North America.

Jerry Revich

Thank you.

Operator

Our next question comes from Steve Barger from KeyBanc Capital Markets.
Please go ahead. Your line is open.

Steve Barger

Thanks. And I just want to look forward a little bit to accelerating profitable growth on slide 9 when the team modeled out opportunities and mega trends, emerging technologies and outgrowth initiatives. What's the range of orders growth you envision in the next three to five years?
Yes.

Simon Meester

So for now, we're still sticking to our Investors' Day targets as the firm. So we have a we have a commitment of $6 billion. We're ahead of that trajectory, and we're comfortably ahead on both the top and the bottom on six $6 billion and 13% to 14% operating margin is the commitment we made. We made that commitment to five quarters ago.
It's a five-year commitment. We're five quarters in. We don't think that we should we should start talking about raising that kind of commitment because we'd like to have a few more quarters under our belt before we reassess where we want to be in 2027 and beyond.

Steve Barger

Yes, that was really the motivation for the question. You only need a 3.5% kegger. If you hit the high end of your guidance for this year, you get to $6 billion. So I guess if you have to frame it up from a growth perspective, is that what you expect or is $6 billion too? Or when do you think you might update that will

Simon Meester

everything else equal I mean, obviously, you know, you could argue that we're probably in a comfortable place to beat that expectation. But so there are more variables in play. And as I said, we would like to get a few more quarters under our belt before we start looking into a changing our longer-term outlook.

Steve Barger

Okay. And then with Terex being a product company, as you noted, when you think about mega projects like semi fabs, EV plants renewables, is there room to differentiate with a new purpose-built machine for specific markets? Or is it really more about modifying existing machines? And then just I don't want to downplay that but quality and delivery to take share?

Simon Meester

No, yes, to both. So we were applying existing products, for example, our Greenpac offering. We're basically applying existing products to a new segment, which is visitation management business. And so we're leveraging our portfolio existing portfolio and new markets in any other way around. We are also developing based on certain platforms that we already have been providing. We're expanding our recycling portfolio and embedding new technologies in our in our refreshers and shredders and repurpose them to to broaden our reach in the recycling space.
So we're applying technology and we're leveraging the existing portfolio. That's kind of what I believe is the strength of VMP. vertical is that we have so much white space just to leverage the existing portfolio. And I think the MPG business has demonstrated just that in the last seven, eight years, they have they've booked on a double digit growth margins consistently every year for the last eight, nine years, and one of the things that they did was just finding new use cases for a for their for their portfolio.

Steve Barger

Thanks.

Simon Meester

Thanks, Steve.

Operator

Our next question today will come from Angel Castillo from Morgan Stanley. Please go ahead. Your line is open.

Angel Castillo

Hi.
Thanks for taking my question. So just going back to the first quarter performance and you noted kind of stronger throughput, a number of kind of points here. I just wanted to go back a little bit. Can you just give us an update on just kind of hospital inventories and whether that's kind of it seems like some of this might have improved just throughout the quarter. If you could give us a little bit more color along with that on the supply chain.
And then just last point on this, you gave better throughput and stronger deliveries in the first quarter. Generally, it sounds like what we're hearing from some of the public rental companies is that they're really taking deliveries anymore kind of normal cadence. So was this more driven by independents in the first quarter or what are you seeing from a customer mix perspective and in terms of who's taking deliveries of kind of a stronger company?

Julie Beck

Okay, a lot there. So let me help you do that. You have, I think about our customer, our customer mix, our customer mix in general stays relatively consistent over time, and there may be puts and takes in any one given quarter but I wouldn't say that that customer mix had anything to do with the locomotive deliveries in the first quarter, if you will, or deliveries. I wouldn't say that that will be and we are returning to those. The more seasonal patterns with the large national accounts will get online. What things in Q2 and Q3 that were moving back to that were in the past when we were resource constrained, they were taking the equipment when we could when we could make it.
So we're returning to the more normal delivery patterns that supply chain improves. And then if we you asked about margin in the first quarter, what it allowed us, yes, you know what that supply chain improved. We were able to get our labor in our Washington State locations as well as our Monterrey facility and which certainly that more manufacturing throughput, of course, helped margins in the quarter as well. So that was all very helpful. We still have a hospital inventory, and we're still dealing with with issues that were parked issues, but they vary. And of course, supply chain is much improved over. It was a year ago.

Angel Castillo

Got it.
That's very helpful. Thank you. And then I wanted to go back to one of the earlier questions around the 2027 targets on that, maybe others kind of doing the math a little different. But I was just looking at the carryover imply between 2023, Tom and Ray in 2027, and it seems to be closer to kind of a 4% top line kegger. And I think the guide for this year at the midpoint puts it at 2024 k. or '24 growth of kind of 3% as we think about kind of getting to that, 4% kegger for 2027, delivering on the targets you mentioned you feel you're comfortably ahead of some of the range there given 2024 seems to be a little bit below that despite pretty strong backlogs and pretty kind of good visibility should we anticipate that '25, '26 and '27 accelerate for some, I guess, underlying factors organically? Or is that 1% kind of difference generally, what do you think about kind of the M&A that you're trying to kind of work back toward to get to kind of 2027.

Julie Beck

But indeed, we had we had significant growth in 2024, you know, out in 16%, 17%, we had really strong growth in sales in 2023 and so on.
So that will be it puts us ahead of the targets that loaded we think about on the HAM going out to 2027. It's still early to upgrade and update those targets it is. And so we remain ahead of those, and that's just where we are right now.

Angel Castillo

Yes.
Thank you.

Operator

And we are out of time for questions today. I would like to turn the call back over to Simon, Mr., for closing remarks.

Simon Meester

Thank you, operator, if you have any additional questions, please follow up with Julie or Neil. And with that, thank you very much for your interest in tariffs. Operator, please disconnect the call.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.