Terex chairman and CEO Ron DeFeo has never been afraid of being candid, whether he’s discussing his own company, the industry as a whole or future trends in the market. RER editor-in-chief Michael Roth sat down with DeFeo at The Rental Show in New Orleans and talked about the company’s products and challenges, currency issues, going forward after Tier 4, Terex’s new focus, the rental market, oil prices and more.
Story and photo by Michael Roth, RER
RER: Tell me about Terex and 2014.
DeFeo: For us 2014 was a solid year. We had a lot of positive improvements for the company. We had a few challenges in a positive sense, and I think we performed well in a tough market, aerials being probably the primary market that was more positive than some of our other markets. We had adjusted earnings of about $2.35 a share, up a little bit from the prior year. All in all, we generated $329 million of free cash flow, which is a real test of a company’s performance. But on the negative side, we missed our operating targets in a few of our businesses. We thought the market for aerials would be stronger than it ended up. We grew 11 percent in AWP (aerial work platforms); we thought it would grow a little bit more than that.
But we had a 7 percent decline in our Cranes business, which is a bit of a challenge. We had some operating challenges throughout the year, but all in all, Terex’s financial statistics are pretty solid. Our leverage is as low as it’s been in many many years, so our credit coverages are pretty good. The stockholder had a tough year. The stockholder saw our stock decline about 30 percent from the beginning of the year to the end. I think that’s a function of uncertainty in the end markets, concern about oil, concern about currency. Those are two primary concerns and until there’s a bit more clarity around how big the currency negative will be and how big of a concern oil and gas is, I think we’ll see some weakness in the trading of almost all of the securities in the capital goods sector.
How do you see 2015?
I’m cautiously optimistic about 2015, although the outlook we provided calls for a pretty significant drop in revenue. But most of that drop in revenue is currency related. It’s hard perhaps for the outsider to see how important currency is, but when currency drops the last month of the year -- and we have as much business as we do outside the United States -- the magnitude of its drop impacts us somewhere around three quarters of a billion dollars of revenue.
Because of foreign currencies’ decline against the dollar?
The euro is weaker against the dollar, so when you report sales in euros back to dollars, they actually show fewer dollars being sold, when in reality it’s the same number of machines. But the dollar translation is substantially less. It does impact profitability a little bit. We think it will negatively impact us 15 to 20 cents a share of earnings, but it’s nothing we can control. So our attitude is focus on what you can control, and don’t chase the currency markets. From that standpoint, we feel like we can still grow our market positions and we can still grow our margins. There are a lot of good activities inside the company irrespective of external forces.
What strengths do you see in the company?
We’ve got some great new products at Terex coming out, some of which you see on the booth here, whether it’s the new 6-ton telehandler or the 12-ton telehandler, or the new Z33, or the new 4047 narrow-aisle scissorlift or the new backhoe. We’re able to bring a backhoe, sell it in the United States at a price point [less than] what our primary competitors are selling at. We’ve got a great opportunity to return profitability to the rental company in that product category. Today with the Tier 4 engine conversion, most loader backhoes have not been able to make money.
We’ve got a cadre of new cranes products coming out. In the material handling and ports solutions business that Steve [Filipov] runs, we have several really interesting new products. And in our mobile materials processing business, we’ve got new machines to wash aggregate as well as new environmental systems, crushing and screening applications for wood chipping. Those are brand new to our product line. So we’re at the beginning stages of getting Tier 4 behind us so we can now focus again on product innovation. That is a common theme throughout the company.
You’ve been so focused on Tier 4 for so long.
Now we’re going to see people focused on the basics. How do I make it better, faster, cheaper? How do you determine better? Usually it’s productivity. Faster? Get the job done more quickly, responsiveness. Cheaper? Everyone wants better returns on capital. You cannot sell to business and expect the prices to be able to go up; you’ve got to keep designing low costs into your product strategies from day one. It’s ubiquitous with new equipment.
Is the aerial business the most creative area of the company?
Our aerials business is the highest volume business we have. On a higher volume business, you can afford to make small changes that result in big dividends. Small modifications to products -- and sometimes big modifications to products -- can pay big dividends. We can’t do that in some of the niche products. In niche products, if you’re selling 20 a year, you’re going to look at it in a different way than if you’re selling 2,000 a year. So our AWP team is very creative and very lean in their thinking and probably the most customer responsive team we have. Genie has made its living off of taking care of customers and being responsive. That culture is alive and well at Genie, and in many other parts of Terex it’s growing in importance.
It seems as though Terex is a little more specialized in its focus on lifting products.
Without a doubt! We’re a lifting and materials handling solutions company today. We’re intending to define ourselves on the basis of being more of a niche, up in the air, specialty machinery company as opposed to a broad construction equipment company. And that’s very intentional.
Probably less likely to be looking for acquisitions than in the past?
We can do so much still to get more value from the businesses we own. So there’s no burning platform for us to grow through acquisitions anymore. And we divested the businesses that we thought didn’t fit with our profile. So I think eventually we’ll get back to the acquisitions business but it will be in the businesses that we’re concentrating on: lifting and material-handling solutions.
In aerial you’ve got everything from low-level to 180 feet, and now the 150. You’ve got the hybrid and environmental areas, quite a range.
I think that’s critical. It’s easy to elephant hunt, but you’ve got to be in the business of every day. I’m excited about some new light towers that are coming out in the company. I want to see the Terex brand name on that light tower on every roadside on every job in America. I’m passionate about that. The big boom category is benefitting a lot from some of the leadership we showed when we first came out with the 180. The customer base is going to make a good return on that product, because it’s going to put people to work in places they were never able to get to, and safely. A tremendous amount of product development took place to get that to happen. This is not just making something bigger. This is making a complicated machine that can put somebody up 180 feet.
How do you see the rental market these days?
It’s an exciting time for the rental market. The rental industry has figured out how to make money, how to generate good cash flow. How to balance returns for shareholders and still deliver good value for customers. I was an early adopter to the rental business and the difference between today and then is that the rental company is more focused on operations and understanding their fleet and their customer than they are on making acquisitions. That makes them better business people and when they’re better business people they are better buyers of equipment.
I don’t just want to sell equipment to rental companies; I want to help manage their fleet. And if I help manage their fleet, I’ll get my share of their purchases, but I’ll also understand what it takes to make money on the equipment over the life-cycle of the equipment. Because ultimately cost of ownership is fundamental to success for rental companies. Make good value, residual value, it’s very critical. We ought not to be in the game of selling as much as we possibly can today and not worrying about tomorrow. We ought to worry about tomorrow and that will help us figure out what the right amount to sell today is. The rental industry and the manufacturers that support it have decided that they’re in partnership, not in conflict.
It doesn’t do you any good if the customer is getting into financial trouble and is over-leveraged.
Right. Or if they have too much fleet and they have to discount disproportionately. That doesn’t work either.
Genie has played a leading role in training programs for the rental industry.
It’s very much a core value. We believe we’re in business because we have a safety and productivity tool. If we didn’t have a safety and productivity tool, we wouldn’t be in business today. And we’re hopeful that more parts of the world will appreciate that and that’s where more opportunities will come.
Are you still seeing a lot of vitality in small independent rental companies?
We encourage entrepreneurs. Where else could you take a couple of pieces of equipment, a little bit of market knowledge and a few customer relationships and turn it into a business? I’m a very big believer that the independents are the creators of value. Their entrepreneurial skills find new applications. Anybody can rent in the traditional ways but who’s going to rent to the people that didn’t know they needed a rental, didn’t know they could do something more cost-effectively. And independent capital helps find those answers out. And so I’m a big believer in helping the independents. But as a future trend, you’re going to see more big companies. That’s without a doubt. But the independents will never go away. Just like the good butcher will never go away, or the good patisserie will never go away.
How does the drop in oil prices affect Terex and are you concerned about that in the long term?
In the short term it’s a headwind, in the long term it’s a tailwind. In the short term, we’re going to have equipment that isn’t going to make money for people because at $45 or $50 oil prices, those projects are going to shut down or temporarily close. And equipment is going to come off the jobsite. But I don’t think it’s such a large portion of our business. I’ve talked to some people who have said it’s maybe 5 percent, it’s maybe 10 percent. It’s not 90 percent of their business so let’s not act like it’s 90 percent of our business, let’s act like it’s 5 or 10 percent and some of that business is slowing down. The industry can handle it, it’s one of the reasons why I’m a little bit more cautious about ’15 than I would have been before.
But that’s in the short term. In the longer term, a $40 or $50 per barrel of oil or a dollar per gallon less of gasoline is essentially a tax cut. It puts more money in everybody’s pocket. And that’s going to cause us to spend that money. And since 70 percent of the U.S. economy is a consumer economy, if we get the consumer economy going, we’ll get real GDP as opposed to what we’ve had for the past six years or more, which has been monetary policy. Monetary policy helps rich people like me and like the stock market, it’s great. But it doesn’t do anything for Main Street America. Lower price of oil, more money in your pocket gets us spending the money, that does do a lot for Main Street America and that’s the exciting part and I think that’s going to happen in the next few years.
That’s going to get non-residential construction going. We think we’ve had a strong recovery in AWP. We’ve had a replacement-driven recovery. We haven’t had a nonresidential-driven growth recovery. We haven’t. Where are the new shopping centers? Where are the new stadiums? Where are the new office parks? Why? Because it took eight years to absorb all the excess housing. So now the housing markets are starting to recover and until housing starts growing again, you’re not going to get the new strip malls, you’re not going to get the new developments to go in. That’s what will return growth to the industry.
Non-residential construction is essential to my crane business, for my aerials business, for virtually every one of our businesses. I’m all in if we can do things to encourage growth, absolutely.
Anything you’d like to add?
Every person involved in the rental industry ought to find one young person and help educate them on the value of this business. We need young talent that’s creative and energetic to get passionate about this business. That’s how we’re going to have this business be sustainable long term. We each have to do our job in attracting new talent to the industry. That to me is the biggest challenge this industry has. Old folks like me, we’re yesterday’s news. We need that talent that’s in the market today, whether they’re in the inner cities, the suburbs, or on the farms. We need to make this an industry that people want to come to work in.
