Terex - Earnings Call - Q1 2013
April 25, 2013
Transcript
Speaker 0
Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Terex Corporation First Quarter twenty thirteen Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. I would now like to turn the conference over to Ron DeSayo. Please go ahead sir.
Speaker 1
Yes. Thank you, Stephanie, and good morning, ladies and gentlemen. We appreciate your interest in Terex today. And on the call with me this morning is Kevin Bradley, our Senior Vice President and CFO and also Kevin O'Reilly, Vice President of Operational Finance and Tom Gelston, Vice President of Investor Relations as well as our leadership team members including our segment presidents. As usual, a replay of this call will be archived on the Terex website www.terex.com under Audio Archives in the Investor Relations section.
I'll begin with some overall commentary. Kevin will follow with a more detailed financial report and then I'll come back and discuss each one of the segments and open it up to your questions. We'll be following a presentation. It's the presentation that accompany the earnings release and it's available on our website. I'd like to request that you ask one question and a follow-up in order to give everyone a chance to participate.
Let me direct your attention to page two, which is the forward looking statement and non GAAP measures explanation. We encourage you to read this as well as other items in our disclosures because the information we will be discussing today does include forward looking material. Turning to page three, let me begin. The first quarter results for Terex were generally in line with company expectations overall, although the results of the individual reporting segments clearly were mixed. On an adjusted basis, we achieved earnings per share of $0.23 and a reported EPS of $0.18 The difference primarily relates to charges in the Material Handling and Port Solutions business as well as charges taken in conjunction with the sale of certain road building assets.
As I mentioned, our segment results were mixed in the quarter. Aerial Work Platforms had a strong quarter delivering both excellent growth, up 21% versus the prior year as well as solid margins at 14%. The Cranes and Materials Processing business both executed their operating plan about as expected. Challenges in the quarter came from construction which is off to a slower start sales volume wise and we've taken some additional actions to streamline this business. Lastly, our Material Handling and Port Solution business continues to show softness across its core markets and there we are focusing on further actions to get at the base cost in future periods.
In the earnings release, we indicated that these cost measures will likely result in Terex taking a restructuring and related charge of about 30,000,000 to $50,000,000 in the second quarter. We expect however to realize a similar amount in savings over the next twelve to twenty four months. Clearly there are some near term challenges reflecting the continued uncertainty in many markets. Nevertheless for the company overall, the year is progressing about as we expected. Earnings wise at least our 2013 EPS guidance remains unchanged.
We expect 2.4 to $2.7 of earnings per share on an adjusted basis with net sales between 7,900,000,000 and $8,300,000,000 And our performance was better than expected in terms of first quarter cash generation. Historically, we used cash in the quarter. However, free cash flow of $135,000,000 in the quarter reflects good progress to our overall goal of a second straight year of $500,000,000 in free cash flow. I'll come back in a few minutes to discuss our segments, but first I'd like to turn it over to Kevin, who will go through the next couple of pages discussing the specific financial results on an adjusted and reported basis. Kevin?
Thanks, Ron, and good morning, everyone. Turning to slide four, I'll review our financial results for the quarter. I'd like
Speaker 2
to highlight upfront that changes from foreign exchange rates did not play a major role in either the sequential or prior year quarterly comparisons for the total company. Our net sales for the quarter of $1,700,000,000 declined from the prior year quarter by 5.3% or approximately $96,000,000 Our AWP segment increased net sales by 21.3% as we continue to benefit from improving replacement demand particularly in North America. We are also seeing early signs of a fleet replacement cycle taking hold in Europe. The increased order activity for AWP that began in late twenty twelve continued into 2013 and is reflected in our backlog at the end of the quarter. Our Cranes and Material Processing segment net sales were in line with our expectations for the first quarter.
The Construction segment had a difficult start to 2013, posting a 22.9% decline in net sales for the quarter. Contributing to this decline were our compact and material scrap handling businesses in Europe as well as a decline in our rigid and articulated truck sales for most markets globally. MHPS also had a weak first quarter with net sales declining 22.6% compared to the prior year quarter. This decrease was driven largely by softer demand for port equipment across most product segments most product categories and to a lesser extent a decline in our industrial material handling cranes, which was spread broadly across geographies. Gross margin as adjusted increased 100 basis points to 19.2% from the prior year quarter as improved price realization and manufacturing efficiencies in our AWP and Crane segments more than offset the impact of the significant net sales decline in our Construction and MHPS segments.
SG and A as adjusted remained relatively consistent with first quarter of the prior year. Decrease in spending in construction and MHPS was substantially offset by increased investment in AWP as their end markets continued to strengthen. Income from operations as adjusted remained relatively flat despite the 5% decline in net sales as we had more favorable mix of AWP and Crane net sales during the quarter. Our AWP and Crane segments both posted strong incremental margins AWP at 37% and Cranes at 46%. This favorable mix was largely offset by the revenue declines of roughly 23% in both our Construction and MHBS segments.
Net interest and other expense was relatively flat versus the prior year quarter as the benefit of debt reduction and refinancing actions executed in 2012 was offset primarily by the guaranteed payment to our minority shareholder of Demag AG. As you remember in 2012, we began accruing for this payment. So as we move further into the year, it will be neutral in our year over year comparisons. The effective tax rate after adjustments was approximately 42% in Q1 twenty thirteen compared to approximately 21% in the prior year quarter, which negatively impacted our year over year earnings per share comparison by approximately $08 This our was mainly due to discrete benefits in the prior year period that did not reoccur. For the full year 2013, we are still forecasting an effective tax rate of 36%.
For the quarter, earnings per share as adjusted was $0.23 compared to $0.29 in 2012. As reported earnings per share for Q1 twenty thirteen and Q1 twenty twelve was periods. I will walk through a bridge detailing the adjustments in a moment. Net working capital as a percentage of annualized sales was 25.7%, a decrease from the 27.3% reported in Q1 twenty twelve. The decrease was driven primarily by inventory reductions in several of our segments as well as increases in customer advances.
Return on invested capital improved to 7.7 from 5.1% in the prior year period as our profitability continues to be the main driver of ROIC performance for Terex. Turning to page five. In the 2013, we continued to execute on the initiatives launched in 2012 that position us for improving results in the future. The Construction and MHPS segments have been the primary focus of these initiatives as we are committed to materially improving the financial contribution these segments have on Terex's overall results. During the quarter, we closed on the previously announced sale of our Brazilian and certain U.
S. Road building businesses. We took charges in the quarter of approximately $03 per share related to the finalization and closing of this transaction. We also had charges related to reorganization in our MHPS segment. The impact during the quarter was $02 per share.
Now let me turn it back to Ron.
Speaker 1
Thank you, Kevin. Turning to page six. I'm now going to go through the presentation for each one of our business segments. First, our Area Work Platforms business. Overall, strong demand continues in North And South America.
As Kevin mentioned, very good incremental margins of 37%. The backlog is solid up 13% sequentially and 10% over the prior year. And very nice, we see the European business which is different than all of our other businesses. The European businesses are actually beginning the replacement cycle. Our European business was up strong double digits in the first quarter versus the prior year quarter.
Net sales overall for the segment was up 21%. And as you can see, we had a strong operating margin of 14% compared with the 9% of last year and the 10 of the prior quarter. Also interesting is the fact that 63% of our revenue comes from North America and the mix of our customers in North America has been different this year versus last year with a couple of the bigger customers really strongly getting deliveries in the second quarter as opposed to the first quarter on a year over year basis. Western Europe you see there is 16%, but I would be remiss if I didn't emphasize Latin America which had a very nice quarter over quarter performance. So overall, I think our AWP business is headed in the right direction and if nothing else to be said about this business is a great contributor and we expect that to continue this year.
The construction business a little bit of a different story continuing to have this business go through a period of reconstruction so to speak. We sold portions of our road building business and we have a few more product lines to go, but that was good progress. We are in the process also of reconstructing our compact business in Europe. We're going to be selling our components businesses in Germany. That will allow us to reduce substantially the number of people that work for us and focus on the most important value added activities.
We have had a pretty substantial reduction in working hours in the first quarter of this year versus last year with very weak European demand. A substantial portion over 50% of the demand that weakened in this business came from Europe. A little bit of an offset in the concrete mixer truck business and we see the North American business improving. By the numbers $280,000,000 of revenue, obviously 23% down from last year, a negative $13,000,000 as reported operating margin and as adjusted $9,000,000 Obviously, we're not happy with that financial performance, but we do believe the changes underway plus a moderation of some of the reductions in revenue will contribute to meaningfully improving the bottom line performance in the back half of this year. Looking at the split of the business Western Europe is 30% and that's a pretty significant reduction from where it had been historically where Western Europe had been well over 50% for this segment.
So some good work being done to try and diversify the revenue of the construction segment. Turning to the cranes business on page eight. Great incremental margins in this business at 46% in Q1 versus the prior year reflecting the pricing and margin focus that we had put on business. Rough terrain cranes continue to be the strongest performing product category. As predicted, our Australian crane business came down 25%.
It's a very profitable business for us, but tied to the mining industry and tied to commodities we did anticipate that this business would come down. We also as I think everyone knows have re segmented and the North American Services and Utilities business has been added to this segment. The Utilities operating margin discretely was up 2.3 points year over year, which is a nice improvement and a continued emphasis on this business to get margins up. Turning to the numbers. Net sales $471,000,000 up 4% from prior year, down 8% from the prior quarter, not unexpected and as reported margin of $33,000,000 and then as adjusted at 33,000,000 compared with the 25,000,000 of last year.
So 5% to 7% improvement in operating margin. Backlog is weaker than perhaps we would like, but we had a very good Bauma show encouraged by customer activity, encouraged by the reception to our new products. I'm sure we can talk about that in a little bit. But net net it's harder to say whether that backlog would have been higher had Bauma not occurred in April. But we're really positive about what we saw from Bauma.
And as you know the revenue expectation we have for cranes is probably one of our hardest numbers to achieve, but we're still pretty positive. Also because of the utilities and services business, you might note that now 47% of our Q1 business occurred in North America versus 14% in Western Europe. The good news is that 47% is in North America. The bad news is we'd like that European number to be a bit higher. So that's some of our opportunity going forward.
Speaker 3
Turning to
Speaker 1
page nine on the Material Handling and Port Solutions business. Clearly a disappointment for us as a company during the quarter. This is a lumpy business. The revenue suffered 23 decline versus Q1 twenty twelve. Industrial cranes was down 12% on global weakness.
What happened here is many of our customers had pushed out their requirements for cranes, whether it was a new factory that needed cranes or new cranes that were going in old factories many of our customers delayed that. And that occurred pretty broadly pretty much across the world from India, China as well as Europe and Africa there was a lot of push out of business. The Port Solutions business was down 40% versus Q1 twenty twelve. We do expect some top line growth in the second half as these large projects that we have sold begin to ship. Many of you know that's what's impacted our backlog here.
But the underlying port business, we really had a hole in our backlog that was created about a year ago at this time with soft orders and that just showed up pretty substantially in Q1. We did expect it, but the absolute negative margin contribution was probably a little bit more than we thought that would happen. Additional actions however are going to be taken. As I mentioned earlier, we expect a restructuring charge of 30,000,000 to $50,000,000 but it will have a one to two year payback. By the numbers you see what they are $339,000,000 versus $438,000,000 in sales down 23% as adjusted operating loss of $26,000,000 versus basically a breakeven during last year.
The backlog is up, but a lot of that backlog won't be delivered until the second half of this year and into 2014. And as many of you know, we only report backlog that's deliverable in the next twelve months, meaning that that $679,000,000 actually is a larger backlog number than we're reporting here because some of the projects are for delivery second, third and fourth quarter of next year. You can see the concentration of our sales not a huge concentration in North America, pretty big exposure to Western Europe. I think that's contributed to our results. I believe the change in management is going be helpful for this business.
Steve Filipov is on the line and I'm sure can take some and any of your questions as we'll discuss this business in some more depth. Turning to page 10. Materials Processing business delivered pretty much as expected. Mineral markets are down slightly mainly Australia and South America. European general construction is weak.
North America is stronger. SG and A was flat by the numbers $154,000,000 down 9% compared to prior year, dollars 12,000,000 of operating profit down moderately from $15,000,000 a year ago. Backlog at $85,000,000 up sequentially from the 70, but down from the year ago position. We expect this business to continue to be a solid performer. It has its pockets of problems, but it also has its pockets of opportunities.
Turning to page 11. I'm not going go through this page in detail. We're providing it to you to have the details. We've structured this on the basis of the old reporting structure, the 2013 guidance that we initiated when we reported the 2012 numbers. On a resegmented basis, you see where that guidance is.
We did not go back and try reconstruct the guidance by segment at this stage. Obviously, there are areas where we believe we will overachieve. There are areas where we think we'll struggle to get to those numbers. But net net, we still feel very good about the company overall. And we wanted to also put this in context of our twenty fifteen goals, which we're driving towards.
So while we had mixed results as I indicated, some positive, some negative, We continue to remain we remain committed to the $10,000,000,000 of revenue, 10% operating margin which results in a $5 plus per share objective for 2015. It's an objective that we think the company is focused very much on trying to get to. So in summary on page 12, it's important to reflect on who we are and what we're trying to achieve. We're a lifting and material handling solutions company. We are focused on operational improvement.
And as obvious, we've been successful with some operational improvement and have ways to go in other areas. We believe we're a leader in substantially all product categories. We're a geographically diverse company, which gives us exposure to many of the end markets both up and down. And we believe profitable growth and consistent cash generation is an important area of emphasis and we're really encouraged by the cash generation as is the last point here strong free cash flow in the quarter. More work to do in the MHPS business, a little slower start of the year than perhaps was anticipated, But I think within the context of our overall guidance, we remain committed to achieving those targets.
With that, I'd now like to open it up Stephanie to questions and we'll take your questions encouraging you to have one and a follow-up.
Speaker 0
Your first question comes from the line of Jamie Cook with Credit Suisse.
Speaker 4
Couple of questions, Ron. I'm trying to you had very strong margin performance in the Aerial Work Platform business of 14.2%, in particular given it's only the first quarter and Q2, Q3 is generally stronger. So I'm trying to think about that in context with your full year guidance and your, I guess, twenty fifteen goals. And then also could you talk about what you're seeing in terms of the competitive environment in Aerial Work Platform first in terms of pricing, but also how I would assume margins also get better in the back half of the year as sort of the small and medium guys start to come back into the market if you think that happens.
Speaker 5
Okay. Thanks.
Speaker 1
Okay, Jamie. I'll comment a little bit and Matt Fearon is on the call here with me and he add to this. As you look at the AWP business, we are encouraged by the first quarter. It was a bit stronger perhaps than we were expecting, but at least on a margin basis. That is something that we feel is a reflection of the discipline that's taking place in the market.
It's also the stage of the cyclical recovery that we're at. We have a situation where our customers are healthy and they need equipment and our supply base is positive about supporting us, which means that we have a little bit more leverage there. So we're getting some cost reductions from our supply base, steel and other costs. On the flip side of that, our business is good and probably one of our biggest challenges is having our suppliers meet our needs as we go forward. We had a tremendous reception to our SX-one 180 product introduction, the tallest, largest boom at least in the market that's not truck mounted.
We believe that will be a great profit opportunity contributed to our customers as well as to ourselves. So as I look forward, we have a rational industry with a couple of players. There are some risks in the industry. We always hear about the Chinese player that wants to come into the business, but we haven't seen a lot of activity there. So we're being a little bit cautious in our outlook perhaps.
But we're probably balancing that against an optimistic outlook perhaps in our MHPS business. So we're not really going to go in and change anything at this stage until we see how the second quarter comes in.
Speaker 4
I guess Ron just to follow-up how much did the sort of steel or supply chain benefits help the first quarter? And does that I mean do you assume that goes away in the back half of the year or material costs etcetera come up? If you could just say how much that helped actually the margins?
Speaker 1
Matt, you want to comment on
Speaker 6
I'll comment on the OP. Obviously, we're very happy with the performance in the first quarter. And if you look at the way we entered the year, the pricing environment was very positive and we've held to that. We had a 3.4% average price increase that we announced. But the other place that we're getting a boost is from the productivity.
As we start to run the plants at the levels that we're at right now, our manufacturing productivity is really helping us out from an absorption standpoint. And then on the supply chain, what we're seeing is that's also favorable. It's been relatively flat. For second quarter, we think that is going to maintain. Beyond that, it's difficult to tell, but we're in good shape there.
And then the customer mix that we mentioned earlier was also very good in first quarter. So obviously, if you look at first quarter, it was outstanding for us. If you compare first quarter of this year, it's very, very similar to the second quarter of last year's performance, which was our best quarter. So we're set up for quite a good second quarter and hopefully third and fourth as well. So we're feeling really good about the competitive environment.
We think that we're positioned well to take advantage of a very strong market. Jamie, we have difficulty
Speaker 1
quantifying in a way to present it externally what our supply chain contributed and didn't contribute. It was positive. Steel costs were positive for us. We're not sure if that will carry through for the full year however. And also the fourth quarter is always hard to handicap for the AWP business as customers really do take delight to take deliveries in second and third quarters as you know.
Speaker 4
Okay. All right. Thanks. I'll get back in queue.
Speaker 1
Congrats. Okay. Thank you.
Speaker 0
Your next question comes from the line of Ted Grace with Susquehanna.
Speaker 7
Hey, guys. How are doing?
Speaker 1
All right, Ted. Thank you.
Speaker 7
Ron, I was hoping to kind of come back to MHPS and see if we could walk through the Industrial segment and the Port Solutions a little more. I know the in the deck you outlined Industrial is down I think 10% or 12% year on year and I know you mentioned it was broad based. In terms of just what gives you encouragement that that comes back in the back half in the second quarter hopefully and thereafter. Can we just start there?
Speaker 1
Yes. Let me give you a sense. We really have two businesses here. One we call Material Handling which is the overhead crane business and the other is the Port Solutions business which is the one that's down 40%. In the Material Handling business, I said it was fairly broad based decline.
We had about year over year maybe about a 12% or $34,000,000 decline year over year. It was spread across The U. S, Europe, Latin America, India. India was really pretty disappointing even Africa. So it was fairly broadly based.
And what will give us some encouragement is talking to our customers and while we stay on this we'll go to port in a second. Steve, do you want to add anything to that?
Speaker 8
Yes. On material handling Ted, I would just say that Ron mentioned at the beginning there were some large projects that got pushed out into Q3 and Q4. So I think we're optimistic that those are going to happen. And those orders were in places like China, Latin America, The Middle East and India. So although we saw some slowdown in order intake in Europe, some of the other businesses are pushed out into Q3 and Q4, which should help us a little bit.
Jo Anne?
Speaker 9
And the
Speaker 1
other thing I would add is, this is a business with a very solid services area. But we saw the services business slow down pretty markedly in Q1. And so we believe many of our customers also pushed off servicing their cranes in part because industrial production being down they didn't need the services. So this is not a business that goes away. We just think it will be pushed off into.
If I can comment on the pork business, the pork business is a little bit more dramatic and has always been and will be lumpier. We had about a $44,000,000 decline year over year. That came from Western Europe and even The Middle East, which is the only place where our Middle Eastern business really slowed down. And the port business we have big orders for and our factories are strong. They're performing now, but building product that won't be shipped until the latter part of this year.
And because of our revenue recognition policies that's different than IFRS, we're not going to recognize that revenue until they actually get installed on the customer's job site.
Speaker 8
Yes. I'll just add, Ron, that we're shipping product, Ted, take an example, in January and February from China to Latin America for orders. And those products aren't going to get revenue recognized until Q3 and Q4. So that gives you we've got big products moving across the ocean that need to be reinstalled and commissioned by our customers. So that will happen later in the year.
And as Ron referenced, the larger projects is really into Q4 and into Q1 and Q2 of next year. But clearly Steve not
Speaker 1
to make excuses here. Our mobile harbor crane business which has been the stalwart of the business is about half as strong as it was a year ago. And the Lutigione factory that we have from the historical Fantuzzi business is an underperformer that needs additional work and these things are going to be addressed in our Q2 efforts.
Speaker 7
Okay. And so that comes to the second thing I was hoping to ask you is just on the restructuring, how should we think about that kind of flowing through either COGS or SG and A? And in terms of just I know you said a one to two year payback, but how quickly might we look for realized benefits of the initiatives?
Speaker 1
Well, some will be SG and A and some will be manufacturing. And we're really not in a position yet to split it out between direct indirect COGS and SG and A. So when we conclude that and when the plan gets finalized, we'll be able to explain that in detail. What we did want to do is give you some general information that said we understand we're you should understand that we've got a plan that will address a couple of these areas that we're going to finalize in the second quarter.
Speaker 7
Okay. Guys, best of luck this quarter.
Speaker 1
Thank you, Ted.
Speaker 5
Your next question comes from
Speaker 0
the line of Seeshan Williams with BB and T Capital Markets.
Speaker 1
Hey, good morning. Good morning, Sean. I wonder if
Speaker 5
we could just maybe delve into the order activity that you've seen here in April and maybe what that means for backlog in Q2. I mean, seems like there's been a flurry of articles out there about kind of record order activity in April by some of your distributors. I think, Bauma, you talked about being very strong. And even within Material Handling, I think there was some press out there about some successes you've had on the automated guided vehicles there. I mean, could you just talk about was there a material change for you in April maybe versus what we saw in Q1 and what is what are the implications for the
Speaker 6
backlog going into Q2? Well,
Speaker 1
this may sound a little bit odd, but we kind of expected the year to develop this way. And part of the reason we provided guidance was we ended the year with a pretty weak revenue picture. We expected the first part of this year to be a fairly weak revenue picture and we did expect the Bauma show as well as general economic activity to pick up and result in some orders. If we look at the backlog which is on in our appendix on page 14, you see that the backlog is split there by product type. Although again our backlog is twelve months is what's shippable in the next twelve months.
So the $679,000,000 of MHPS backlog compared with the prior quarter of $577,000,000 is certainly a positive, but that backlog is substantially bigger than $679,000,000 but that would be out for shipments beyond twelve months. And so it's a weak current period with a strengthening back half of the year and that's what gives us a little bit more encouragement for this business. It won't be easy to make a ton of money on this. So we still have work to do to get our margins up in this business. But a 23% decline in year over year revenue like we experienced in MHPS, we don't think that will be the case each quarter going forward.
The MP backlog isn't that significant fee and not surprising. But the cranes backlog six thirty four versus six forty two, we don't I don't frankly see that very different. But maybe I'll ask Tim to comment on how he is seeing the trends in the mobile cranes business. At the analyst meeting a month ago,
Speaker 6
I talked about cranes being a business with potential. And I would actually characterize it today as being a business with potential that's turning into momentum. If you look at the first quarter order pattern, each month was better than the prior month. So February was better than January and March was significantly better than February. As we went into last week, we knew that a lot of customers had pushed off orders in the first quarter going into Bauma and we saw the level of activity that we would have expected.
So I'm actually pretty enthusiastic about the business as we ahead. We're coming out of a little bit of a hole, but I feel like the business opportunity is gaining strength and the momentum is beginning to build so we can turn this potential into real opportunity.
Speaker 1
Yes. I'll take a minute more on this question because it gives us an opportunity to look at future revenue trends. Construction, the backlog of $191,000,000 down from $2.00 9,000,000 and meaningfully down from the $267,000,000 of the prior year. But maybe I can ask the operator to open George's lineup for a second because we had a hole in our Terex truck business and in our Fuchs business, but maybe you can comment on the overall Bauma effect George. Yes.
Speaker 10
Thank you, Ron. It was quite exciting last week to be candid. We expected activity, but it came in and started very quickly at the beginning of the show and it was not focused on one part of the world. We saw it coming from Russia, Latin America, Africa and also some activity in Europe. And what we're seeing is it's starting at the lower or smaller end of our construction line where the momentum is really starting to pick up and it really hit hard last week which was very good which will help us through Q2 and into Q3.
And we did see a lot of activity on our larger construction equipment which was quite exciting for us. So I would say it was quite refreshing. And similar to Tim and Cranes, the beginning of the year kind of started with some slowness, but then turned into momentum and feel very comfortable coming out of the show that will really help us as we progress through the rest of the year.
Speaker 1
Okay. Thank you, George. And I think we've already commented on AWP, so we don't need to go over that ground again.
Speaker 5
And then if I could just as a follow-up on maybe on MHPS. It sounds like in some of your commentary, the restructuring that you're putting in place, I'm just I wanted to get a little bit more detail there as to maybe what you're targeting. I mean, because I'm a little bit confused. I mean, it sounds like some of the issues that we saw in MHPS are more kind of timing issues of shipments. I'm just wondering if you had a hole in the backlog this quarter, I mean that seems to be going away.
Why do you feel it's necessary to do the additional restructuring? It's certainly welcome, but maybe why do you think it's necessary at this point if most of the decline that we've seen seems to be timing issues? And then could you talk a little bit more detail about what we are actually putting in place?
Speaker 1
Sure. Well, we are not going to be happy with this business getting back to a slightly profitable position. We need to get back we need to get this business in 2015 goal is about 7.5% margin, but I know Steve's goal is even higher than that. If you look at what's contributed to the negative performance, obviously we have a big issue on volume in the short term. But stepping further back from the business, you'd say our SG and A is too high.
This is a business particularly in the Material Handling side that's running 23% SG and A. That's an anathema to Terex. We'd like to see that substantially below that. But let's say there's three or four margin points for sure we believe in that SG and A that can come down. We also know we have some unproductive and excess manufacturing capacity that we have to deal with that's going to be expensive for us to deal with, but we need to deal with that.
And so we will work with the unions and the workers' representatives to address those plans appropriately. So short term, yes, issue, but there's also some structural costs and there's some SG and A. And if you do those things and then the market does begin to solidify and improve getting back to where it might have been a few years ago, you can get this business to a much healthier position. And this is a good business that's performing poorly. We've got good franchises in the Nemag crane business, a franchise that many companies would love to have, but it's expensive the product and its cost structure is a bit too high.
And in the port business, we've put together a range of products that really are first class, but we are at the early stages of integrating them into a real business plan that can attract even customers. So a lot of work to do here. I know this is a quarter that none of us like, but we're going to keep a steady hand and we're going to move down the path of doing what we need to do to get this business performing correctly. Operator?
Speaker 0
Your next question comes from the line of Seth Weber with RBC.
Speaker 11
Hey, good morning guys.
Speaker 1
Hi,
Speaker 11
Going back to the aerial business,
Speaker 1
you talked about
Speaker 11
the Europe aerial revenues up double digits in the quarter. Can you talk about is that a sustainable type number? I'm just looking into where the order book looks for Europe specifically. Has momentum continued there? Are you still getting orders at that type of level?
Or has that slowed down now?
Speaker 1
Thank you, Seth. The encouraging thing for me and Matt will comment specifically on your question. But the encouraging thing for me is that AWP is an early cycle business. And I could go through each one of our other product lines and show you the weakness in Europe and it's substantive and meaningful, okay, that weakness. On the flip side, AWP is early cycle meaning products get old and they rust out and they need to be replaced.
And we're seeing that from the customer base that's basically telling us, hey look economic activity is certainly not robust in Western Europe, but we're in business, we add products and we need to order material. So Matt maybe you can comment kind of more detailed about what your sense is.
Speaker 6
Yes. I just spent the last two weeks in Europe, the Bauma show and then the week before visiting with customers. And as you know historically the Europe piece of our business is much bigger. It's been down longer than North America. And it's really encouraging to see the signs that we started to see actually in fourth quarter.
We started to see a little bit more life and that continued through first quarter. And the people that are buying are the large rental houses. It's the companies that are well capitalized. And it's certainly not all over Europe. When you go when you talk to customers in Europe, I'd describe it as tepid.
They are it's reached a point where their fleets have aged. Some of the larger ones have got to the point where they've decided it is time to replace. So it's not like just taking off, but it is encouraging. And as far as was this a one time deal for first quarter, I don't think so. I think looking at our backlog, we're seeing some continued good activity, especially coming right out of Bauma.
We're feeling good about Europe continuing to nudge up and that offers some great potential for us.
Speaker 12
Okay. Thanks. And then in The U.
Speaker 11
S, one of your large customers talked about pulling some CapEx forward for this year. Is that are you seeing that from multiple customers on the aerial side? And is that contributing to the first half strength? I think you actually said second quarter was going to be sort of tilted towards the larger national guys. I mean, can you just give us any color what you're seeing there from the demand perspective?
Speaker 6
Yes. The I guess, I was going to describe the demand, to me it's getting much more predictable. In other words, we work closely with all the big national rail houses about what their CapEx plans are in fourth quarter and then we lay out our plan for the year. And as we progress through the year, we stay close with them to understand how is it looking. And what I'm seeing is that people are getting to the they've been through first quarter, they're performing well and they are stepping forward with some additional orders.
So not everybody. Some people placed early because they were concerned about lead times. But in general, we're seeing steady predictable growth and we think that we're set up to handle it really well.
Speaker 11
But have orders actually pulled from third quarter delivery up to second quarter delivery or is that just kind of a one off type scenario?
Speaker 1
If you ask all the big rental companies, they'd like to get everything in a two month period of time. So there's a lot of noise in the system about when they want to pulling up is a funny term in this business, okay? There's a definite push and pull between manufacturer and rental company and we work it out. So I wouldn't wouldn't assess any significance of consequence to that view.
Speaker 11
Okay. Thank you very much guys.
Speaker 0
Your next question comes from the line of Rob Wertheimer with Vertical Research.
Speaker 1
Hey, good morning
Speaker 13
everybody. My first question was on cranes. Obviously, margins were good and you talked about the sort of order flow. The gross margin was I think down year over year adjusted. Was there anything mix related or your pricing has I think been fairly disciplined?
I'm just curious about what drove that?
Speaker 12
Go ahead.
Speaker 6
Rob, this is Tim. The gross margin decline that you're referencing really I think there's I think the primary contributor to that is going to be a mix related dimension. We had as Ron mentioned, had a decline in our Australian business pretty substantial year over year. Though I would say that business is still very healthy, but last year was an extraordinary year. And the Australian business for us is a very positive and profitable business.
We had some growth in our BoomTruck business, which is actually a lower margin business, but one that we're seeing positive improvement on overall. So I think if you kind of look at it on balance, mix was probably the most significant aspect of that. Pricing has remained steady. We've been very disciplined on that. And I think the improvement we'll see over time will come from continued operational performance both on the Crane side and in the Utilities business as well.
Speaker 13
Okay. Thanks. That was helpful. And I know people have talked a lot about MHPS. But Ron, I wondered if the change from the Investor Day to now and what you decided to do from the restructuring, how much did you see coming?
I'm just curious if you feel like you had any holes in your information systems or in the speed at which you're able to see things developing versus maybe things really did fall apart quickly. Just wanted your thoughts on that.
Speaker 1
Yes. At the Investor Day, we had a good sense of where we were and I think I even set up the fact that there'll be additional charges coming, maybe 30,000,000 to $50,000,000 a bit more than what people have thought. When you're dealing with European manufacturing locations, it's easy to have that number become a fairly substantial number. But the offsetting of course is the fact that the savings is substantial. We had sense of this.
We've had a domination agreement in place less than one year. It will be one year in May. And the domination agreement really provided us the depth and the window to see what was going on more clearly. The revenue reduction is stronger than we thought was happening, but it is there. We knew we needed to take SG and A cost and the manufacturing some of the manufacturing costs down.
And the one thing that we probably looking backward is in the one year between the time we got domination and after we bought it, while we were working hard to lower cost through elimination of corporate cost that they had, There was some embedded cost creep that was happening in the SG and A area particularly in services and in some other areas that really didn't pay off. So they were adding cost at a time when the market was weakening, okay. And if you look at what our competitors like Kony were doing, you actually see that they were experiencing some of the same issues. So I think we're on it now. I think the management team that's led by Steve gets this and we're going to go back and take out some of that additional cost that was added as well as making sure we harvest our integration savings as planned.
Speaker 6
Thanks.
Speaker 0
Your next question comes from the line of Andy Kaplowitz with Barclays.
Speaker 14
Good morning, guys.
Speaker 1
Good morning, Andy.
Speaker 15
Ron or Tim, you guys have highlighted products and cranes were going to be a decent portion of your business this year, specifically a new crawler crane and new all terrain crane. Could you update us on what you've seen in terms of sales in those particular products? And then maybe you can talk about crawler trends in general. I know you guys aren't big in The U. S, but at Bauma we kind
Speaker 1
of heard
Speaker 15
crawlers sounding a little bit better. Maybe you can comment on that.
Speaker 6
Andy, thanks. This is Tim. The guidance we gave back in February was that our revenue in cranes would be about 10% from the market or half from the market I should say half from the market and half from new products. And as we kind of look at the first quarter results and as we project forward through the course of the year, I think we still feel pretty good about that split fifty-fifty new products and end market. The interest level we saw at Bauma for our new products was fantastic.
We had sold a number of our new Superlift 3,800, six fifty ton crane product going into Bauma. And we had a lot of interest at Bauma. We actually had a number of deals closed there and a number of deals where we're continuing to finalize negotiations and hopefully bring some of those to closure as well. We had terrific interest in our new five axle product, which won't be available until first quarter of next year and some of our other rough terrain categories as well that we've brought out. So I actually feel pretty good about the new product rollout that we've got.
I think it's playing out pretty much as we thought it would. And I think we're in a good position to be able to deliver on those orders throughout the course of this year and into the first part of next year.
Speaker 15
Ron, you've talked in the past about the competition in cranes as maybe not as focused on prices you'd like or maybe at times discounting. Have you seen any mitigation in price competition within cranes this year yet? Or is it kind of just more of the same?
Speaker 1
At this stage, it's more of the same. Think we've established the right bar and that is that we got to get money for what we produce and we have to continue to concentrate on margin and margin improvement. We believe we lost a little bit of market share while doing that and we expect that may rebalance or at least we're hopeful that it may rebalance in the coming twelve to twenty four months. But not a lot new at this moment, but we'll stay in touch. I think that's right, Tim, correct?
Absolutely. Yes.
Speaker 15
Thanks guys.
Speaker 5
Your next question comes from the
Speaker 0
line of Jerry Revich with Goldman Sachs.
Speaker 16
Good morning. Hi, Jerry. Ron, big gear in construction equipment with the road building divestiture here. I'm just wondering if you could frame out for us the building blocks that gets you to your margin targets in 2015 for the remaining business. How much of that do you need to see a market recovery?
And what additional structural changes in the business would you be comfortable flushing out here?
Speaker 1
Yes. I'm not sure I can give it to you in clear building blocks Jerry exactly because the base period has shifted a little bit with the weakening revenue base, okay. But without a doubt as George presented at the meeting at the Analyst Day, if
Speaker 10
you
Speaker 1
were to have pulled out road building, he had been profitable, he would have been profitable for most of the past several years, okay. So road building was a big anchor. But while we now are pulling that out, The most profitable business in construction, Fuchs or Terex Fuchs has actually gone through a pretty severe weakening. It's still profitable, but a pretty severe weakening because of scrap steel costs. And scrap steel and that business has been cut probably by 40% as well as our tail truck business has weakened.
We do expect given what we saw at the Bauma show and some feedback from our customers that those businesses will both will begin to grow again. And with that growth plus the last piece which is the German component sale which will take out about half of our total German headcount, we think will get us to the profitability targets that we've laid out. I don't want to give you a waterfall explanation because it's been a bit of a moving target, but I just want to give you assurance that we think the pieces and the changes that we have in place help get us there.
Speaker 16
Okay. And separately in cranes, I'm wondering around if you or Tim can expand on the comments on the strength you saw at Bauma. How much of that do you see continuing into the second quarter? A couple of U. S.
Rental houses are finally pushing pricing in crawlers and towers. I'm wondering if are you optimistic about a sustained acceleration in quoting activity there? And on Europe cranes, nice to see the replacement cycle starting for aerials. I'm wondering how far behind do you
Speaker 12
think the crane business is?
Speaker 6
Jerry, one of the things Kevin started when he was in this role was a weekly tracking of opportunities and I've continued that since I've taken over the business in January. And what we're seeing is the opportunity list is continuing to grow. We talk to all the sales leaders around the world on a weekly basis. And the opportunities that we're quoting and realizing is continuing to increase as we go forward. So I actually feel pretty good about the continuing potential of this business turning into momentum and those that momentum turning into orders.
Speaker 16
And Tim, is that a comment on both U. S. And Europe?
Speaker 6
Yes, absolutely. I would say both. Europe is surprisingly strong to be honest with you.
Speaker 1
Yes. The question about Europe though is always does the product stay in Europe or does it is it bought in Europe and ends up being used someplace else. And a lot of our European customers, the equipment that they buy finds its way into a lot of markets.
Speaker 6
That's a really good point. I think the demand that we're seeing from our European customers is going into places like the stands, The Middle East, some in Asia that sort of thing. So I think it can be misleading to look at where the customer is based. I think we need to look at more where the project is based. That's good point, Ron.
Speaker 12
Thank you.
Speaker 5
Your next question comes from
Speaker 0
the line of Matt Vitorioso with Barclays.
Speaker 17
Yes. Good morning. Thanks for taking my question. Just curious, you've got a very healthy cash balance here. It looks like you guys could and should continue to generate cash over the course of the year.
As you approach potentially $900,000,000 cash, at what point will you actually pay down some debt with that cash?
Speaker 2
Kevin? Yes. Thanks Matt. As we said, we were pleased with the first quarter cash generation. And we've signaled that we're going to use cash generation within the year to pay down debt.
That's still the plan. As we get further into the year, we'll decide exactly how much and the timing on that. So I would expect us to be signaling later in the year our plans for debt reduction.
Speaker 17
Could you just remind us what you feel is your minimum cash balance that you need to carry just to support the business working capital and whatnot?
Speaker 2
Historically, think we've signaled something in the area of about 4 to $500,000,000 as a healthy Obviously, things are changing in the world. Predictability is different. So as the business evolves, we'll continually update that. And the location of that cash
Speaker 1
makes a difference. Historically, we've had a bunch of that cash in Europe. As we generate cash in North America, the location of that may cause us to feel differently about it. But at this stage, we're not changing as but we'll keep everybody updated on the conference calls.
Speaker 17
And one last follow-up question just on the cash flow. Again, good performance on first quarter free cash flow, particularly looking back at last year's first quarter. What would say is the biggest year over year change in cash flow? I mean your EBITDA is pretty similar. Working capital looks relatively similar.
Was it Terex finance activity like helping finance customers last year that was the big drag on cash flow? How did you improve cash flow so meaningfully this first quarter?
Speaker 1
I think we turned our inventory a little bit faster. Okay. And now I know the EBITDA is pretty similar, but we got more orders in and we turned them faster. I also think we turned some inventory into cash, particularly from our construction business. And then we sold a piece of the road building, which contributed to that.
Speaker 2
And just to remind you Matt too, we did have a significant tax payment in twenty twelve Q1 that also contributed to the variance year on year. That's right. Ron points out a lot of it was from good operational results.
Speaker 17
Great. Thanks very much.
Speaker 0
Your next question comes from the line of Mig Dobre with Robert W. Baird.
Speaker 12
Yeah. Good morning. Thanks for taking my question guys. Unfortunately, I missed some of your early comments and I'd like to ask just about AWP. Can you provide some commentary as far as growth that you've seen from the developing markets?
Apparently, Europe was strong. What about Asia and Latin America?
Speaker 1
Yes. I'll turn it over to Matt, but I can just easily answer that question. I mean our developing market business in particular Latin America was phenomenal. We had a strong fourth quarter in Latin America and we had a very strong first quarter, nearly 3x what we were in the year ago period. Our developing markets business was up over 50% in the AWP business which is our strategy.
Really this was our strategy is to diversify, globalize this business and harvest the North American recovery, position ourselves to continue to engage in Europe, but then build out capability in the developing markets. And under Tim's leadership, we did that. It was expensive and with Steve's help when he was running the developing markets, got all the teams aligned and Matt is just going to continue to execute on that same game plan.
Speaker 12
That's great. And I'm seeing here that Latin America and Asia was about 18% of your business. I think that's clearly higher than where it was last year. As we're looking at 2015, what sort of contribution from these emerging markets do you see to your AWP overall revenue mix?
Speaker 1
Yes. We really haven't publicly laid out the 2015 by geography. Obviously, are a number of ways to get to the 2015 number. You can probably get there and even surpass that number if you really think developing markets accelerate a lot. I'm not convinced that the Chinese market becomes a huge market yet.
That's the number that's hard impossible to handicap. But if China does continue to develop and Ken is on the call between China and The Middle East, those are two big opportunities. Ken is working hard to get the as well as our competitors are to get the Chinese government to state that AWP products are a safe way to take people to work at height. Ken, you want to comment on that?
Speaker 16
Yes, Ron. We continue to essentially work on the advocacy to improve the safety for people working at Heid in China. I think we're making progress. But like you said, it's real hard to predict when the government will actually start to enforce those rules.
Speaker 12
Excellent. And I know I'm a hog here, but if I may squeeze one last one on the crane. I guess, we've heard that some of your Japanese competitors might be using movements in the end to their advantage as far as pricing. I'm wondering if you can comment at all on that. And I'll leave it at that.
Thanks.
Speaker 6
Okay. Yes Mig, we do expect and we've begun to see or hear that our Japanese competitors will use currency to their advantage. But also keep in mind, we have a supply relationship with a Japanese manufacturer as well and we're working with them to make sure we bring that currency advantage to our capability as well. So it's a concern, but we'll continue to work our way through it. And our customers will buy the value that they see and we're going
Speaker 5
to continue to work hard to
Speaker 6
get the business that we believe is rightfully ours.
Speaker 12
Appreciate the comments. Good luck guys.
Speaker 1
Thank you.
Speaker 5
Your next question comes from the
Speaker 0
line of Damian Fulton with JPMorgan.
Speaker 9
Hi, it's Ann Duignan.
Speaker 1
Hello, Ann.
Speaker 9
Hi, guys. Rob, we missed you at Bauma last week. So I'm sure you were there, but
Speaker 1
we didn't I want to was there for four days, but I had two days with Steve Filipov and MHPS beforehand. So I'm sure he would have preferred me to be at Bauma all those days.
Speaker 9
I'm sure. You mentioned something interesting on the Material Handling business. You noted that the services side of the business was down in Q1. When you acquired the business that was the services business was described as sort of an annuity. So are we now to believe that that business is cyclical and highly correlated with industrial production?
Was there an anomaly in the quarter?
Speaker 1
Ann, I think we're trying to figure that out. I think we've got that business now split. Tim Ford has the North American services business and the North American services business was down. Am I wrong Tim? I mean it was solid.
Speaker 12
It was solid. We had
Speaker 1
a quarter. Okay. But so it was the European business that was down. Maybe you can comment on that. No.
Speaker 6
I think
Speaker 8
it's what you referenced earlier around. The industrial production was down in Europe and that's what affected our services businesses really in Europe. As Tim said, North America was up and a lot of other regions were also up. So Europe where we have a big footprint Ann is where things are kind of down. I don't think that necessarily correlates to new equipment sales.
It's really just a factor of the first quarter being slow in industrial production in Europe. But I think it's still a good business for us and we're still investing in it.
Speaker 1
So we made money, but we didn't make as much or nearly enough to offset a 23% decline in overall revenue.
Speaker 9
Okay. Then just a quick follow-up. You noted that the SG and A in that business is too high. But Ron, again, isn't there kind of a fine balance between it is a services driven business, you need the SG and A there. Was there some specific program they embarked on that you think just won't deliver returns?
Speaker 1
And there is a fine balance there and it is a different business than the rest of Terex. Having said that, the structure that's been in place in this business, which is a structure of regional or countrywide CEOs, which have their own finance people and their own salespeople and that pretty heavy structure is what Steve is addressing.
Speaker 8
Yes. And I would say, you saw a charge actually in the first quarter on some SG and A reduction and some of that was attributed to reorganizing the services business. So we're reorganizing things, decentralizing the business and just trying to kind of figure out where what battles we want to fight in what regions. That's kind of the work that we're doing in the Q2 and in Q3 on services side.
Speaker 9
Okay. I appreciate the color. I think most of my other questions have been answered. Thanks guys.
Speaker 1
All right, Ann. Thanks.
Speaker 5
Your next question comes from the
Speaker 0
line of Sarah Magers with Wells Fargo Securities.
Speaker 4
Good morning. Most of my questions have been answered. I just wanted to quickly follow-up on the free cash flow guidance. And wondering if that's consistent with what you provided in Q4. I know you mentioned $500,000,000 number, but I don't know if it was explicitly given in terms of
Speaker 7
Yes, it is.
Speaker 1
It's consistent with what we've said before.
Speaker 4
Okay, great. All right. Thank you very much.
Speaker 1
Okay, Sarah.
Speaker 5
Next question comes from the
Speaker 0
line of Adam Flake with Morningstar.
Speaker 14
Good morning. Thanks for taking my questions.
Speaker 11
Sure.
Speaker 14
I had a follow-up for George in the construction business. I appreciate the update regarding the activity at Bauma, but can you maybe help us with the pricing environment you're seeing within that activity or maybe more generally?
Speaker 1
Yes. So operator, can you open George's line up?
Speaker 10
Thank you very much for the question. We're seeing a little bit improvement in the pricing as compared to last year. Candidly to improve the volume, we are backing down just a little bit, but it is positive to where we ended last year. And I think it will be helpful for us as we progress through the rest of the year.
Speaker 14
Okay. Great. Thanks. Then just a quick follow-up on the free cash flow discussion. Your working capital improvement was pretty substantial in the quarter.
I think you had talked about 22% of sales for the full year. Is that still a good target?
Speaker 2
That's still a full year target. Yes.
Speaker 14
Okay. Great. Thanks guys.
Speaker 1
All right, Adam.
Speaker 5
Your next question comes from
Speaker 0
the line of Alex Blanton with Clear Harbor Asset Management.
Speaker 3
Hi, good morning.
Speaker 1
Alex, how are you?
Speaker 3
Fine. I wanted to ask about the rough terrain strength, rough terrain cranes. Where is that coming from? Is there a significant market in fracking for you?
Speaker 6
Rough terrain Alex, is Tim Ford. The rough terrain strength that you're referencing, we've had really good business in North America. I'm not sure that I'm that I can pinpoint it to a specific vertical market at this point, but we've had strong North American business. We've also had really good growth in our Middle East business. We sell a lot of product, rough terrain product out of Waverly, Iowa as well as our Crespolano, Italy factory into The Middle East.
So we've had some really good receptivity in those two markets in particular and to a lesser extent, but still significant Latin America as well. So I'm not sure I can tie it to a specific vertical market, but the potential that we have in rough terrains is continuing to grow. And I think the strength that we have in those markets will help us as we continue to build some momentum.
Speaker 3
Okay. Thanks. Second question is on your 2015 goal for operating profit. It's not too difficult to move that to the earnings per share line. If you assume 100,000,000 in interest and 35% tax rate, you come out to about $5 a share.
So I was wondering why you just didn't state that and put it instead of operating profit just give us your earnings per share guidance as well.
Speaker 1
We have said Alex that we expect earnings per share to be $5 plus. We just didn't put it on this chart because that's what it translates to. We said $5 plus because it depends upon how much debt we pay down and that would be a little bit harder to handicap. So that's why rather than doing it purely on EPS. And frankly, Alex, I think a lot of people invest in Terex off of an enterprise value to EBITDA multiple.
And I think it's less about PE and more about enterprise value to EBITDA. And as we reduce the amount of debt that we have, we think a lot of the opportunity for value creation will come from debt reduction and the EBITDA going up. And during the Analyst Day, if you may recall, we tried to say that we thought that the opportunity for a $75 stock value was there with this kind of EBIT performance, EBITDA performance and valuations within the same range as they're currently at.
Speaker 3
Okay. Thanks very much. Excuse
Speaker 6
me, Alex,
Speaker 2
it's Kevin Bradley. Just want to clarify, I think you mentioned the 2015 as a guidance, it's actually a goal. I just want to be clear on that. Yes.
Speaker 3
Okay. Semantics. All right. Thanks.
Speaker 0
Your last question comes from the line of Yulma Abibi with JPMorgan.
Speaker 1
Thank you. Good morning. One quick one on the credit rating of the company. As you look at your debt reduction goals and financial policy, any thought in terms of moving up the current rating of the enterprise? Good question.
I think Asterix focuses on our future plan, which is to be an operating company and the lifting of material handling categories of solutions provider without an emphasis on acquisitions and with a focus on cash generation, we ought to be able to see meaningful credit rating improvement. But that as you know is a process and I think the rating agencies will want to see us live by our commitments of being less oriented to acquisitions, focused on debt pay down, focused on cash generation. And so we think all of that is part of the opportunity that exists within our existing portfolio of businesses. Is there particular ratings category that you'd be targeting at this moment? No.
I don't think we have set a ratings category, environment, we do think there's improvement in front of us. I don't want to say at this stage, but we'd like to see this move better, improve. Thank you. That's all I had. Thank you.
All right, operator.
Speaker 0
At this time, I would like to turn it back over for to management for closing remarks.
Speaker 1
Okay. Thank you everyone for your interest in Terex. We appreciate it. Please follow-up with Tom or the management team here for additional questions. We appreciate your interest in the company.
Speaker 0
Thank you. This concludes today's conference. You may now disconnect.
