Terex - Earnings Call - Q1 2016

Transcript

Speaker 0

Good morning. My name is Kim, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Terex Corporation First Quarter twenty sixteen 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. Tom Gelfin, you may begin your conference, sir.

Speaker 1

Thank you, Kim, and good morning, everyone, and thank you for joining us today's first quarter twenty sixteen financial results conference call. Participating on today's call are John Garrison, President and Chief Executive Officer and Kevin Bradley, Senior Vice President and Chief Financial Officer. Following the prepared remarks, we will conduct a question and answer session. Last evening, we released our first quarter twenty sixteen results, a copy of which is available on our website at terex.com. Today's call is being webcast and is accompanied by a slide presentation, which includes a reconciliation of non GAAP to GAAP financial measures that we will use during this call and is also available on our website.

All per share amounts in the presentation are on a fully diluted basis. We will post a replay of this call on the Terex website under Arduino Archives in the Investor Relations section. Now let me direct your attention to Slide two, which is our forward looking statement and explanation of non GAAP financial measures. 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. And with that, please turn to Slide three and I'll turn it over to you John.

Speaker 2

Thanks Tom and good morning everyone. We appreciate your interest in Terex. I will begin by providing an update on our M and A activities and a brief commentary on our markets. Kevin will review our financial results for the first quarter and I will follow an operating summary and segment updates before we open up the line to your questions. So let's get started.

Concerning the M and A activities, I hope you respect, I will be limiting my discussion on this topic to these prepared remarks. As we disclosed a few weeks ago, Terex received a revised non binding proposal from ZoomLine Heavy Industry to acquire all the outstanding shares of Terex for $31 per share in cash. We are holding discussions with Zoomlion to determine whether we can obtain a binding and fully financed proposal which provides for a high degree of closing certainty. Working with our financial and legal advisors, we are focusing on critical issues such as the certainty of ZoomLine financing, ZoomLine shareholder approval, government approvals and the security and amount of a reverse breakup fee. At the same time, ZoomLine has continued to undertake its due diligence of Terex.

Both sides are working diligently. However, I cannot commit to when this work will be completed or whether an agreement can be reached. On the Kona Cranes merger, we are moving forward with all necessary filings to achieve antitrust, regulatory and shareholder approvals that are required to complete the merger transaction. At this time, the Terex Board of Directors has not changed its recommendation in support of the proposed combination with Kona Crane. These are exciting, dynamic and challenging times at Terex.

We have multiple M and A transactions in process. The global marketplace is very competitive. Each sale is hard fought. Industrial production in many regions is flat to down, and low commodity and oil prices are impacting many markets. In this environment, it's critical that we keep our team members focused on executing our plans and delivering on our commitments to our customers, shareholders and to each other.

On our last call, I announced that we were implementing an Execute to Win business system to critically evaluate our strategy, our operations and our talent development to ensure that we meet our commitments. We are focused on delivering returns that are consistently above the cost of capital through the cycle. We are in the early stages of deployment. We've executed well in some areas and we need improvement in others. I will cover these in more detail in the segment updates.

As we committed, we've been evaluating all aspects of our cost structure. We are executing plans that will remove approximately $60,000,000 of cost from the company. Unfortunately, this has impacted team members, but it is necessary in this market environment. Our focus has been mainly on SG and A, and these actions will reduce SG and A team members by approximately 7%. We will continue to review our cost structure to drive improvements in our margins, return on invested capital and cash flow generation.

I believe we have more opportunities in strategic areas such as portfolio management and manufacturing footprint. However, we will need to consider these decisions in the context of the potential M and A transactions. With that, let me turn it over to Kevin.

Speaker 3

Thanks, John, and good morning, everyone. Please turn to Slide five and I'll review our financial performance. The Q1 loss per share of $05 as adjusted was in line with our expectations. We had adjustments of $0.63 per share in the quarter and a reported loss per share of $0.68 Sales for the quarter decreased 4.6% as compared to the prior year with 3.1% driven by currency movements, primarily the euro. Free cash flow was a negative $146,000,000 in the quarter, which is consistent with the seasonality of our business.

We have traditionally consumed cash in the first quarter as we build for our seasonal peak. We still expect to generate free cash flow for the full year of between 200,000,000 and $250,000,000 Let's turn to Page six, which shows the comparative quarterly income statement on an as adjusted and as reported basis. Please note that the current and prior period results included in the earnings release and presentation reflect the resegmentation of our scrap handling business from construction into MP and part of our North American services business from cranes into MHPS and AWP. Adjustments for the quarter of $74,600,000 fall into two main categories. The first being transaction related costs associated with the announced M and A activity, totaled $10,500,000 The second category is restructuring and related activities, which totaled $64,100,000 Of the total charges, 67,100,000.0 was reported in operating income, while $7,500,000 was reported in interest and other.

The restructuring actions were broad based with an emphasis on reducing our SG and A cost structure. Total reductions will be approximately six seventy team members across all segments as well as corporate. The annualized savings from these actions is approximately $60,000,000 and we expect to realize approximately 40% in 2016. From an operating perspective, sales were mixed during the quarter. Area work platforms and construction reported an increase in sales over the prior year.

This was more than offset by declines in our cranes, MHPS and MP businesses. Operating margin as adjusted declined to 1.8% compared to 3% last year. The year over year decline in margin is being driven primarily by performance in our cranes and MHPS segments. Our AWP segment reported a slight decline, while construction and MP both reported improvements. We saw some early benefits from the cost reduction actions we have taken during the quarter, but we expect these to increase as the year progresses.

Below operating income, we reported improvements in interest and other compared to the 2015. These occurred primarily for two reasons. The first being a reduction in net interest expense driven by the retirement of our convertible notes. Second was a foreign exchange loss reported in 2015, which did not repeat in 2016. The as adjusted effective tax rate of 211% was driven by losses not benefited in certain jurisdictions.

For the full year, we still believe our effective tax rate will be between 3032%. EBITDA as adjusted for the quarter was $54,000,000 or 3.8% of sales. Return on invested capital was 5.4% for the quarter compared to 9.8% in 2015. The main drivers for the decline were higher restructuring charges in the March 2016 period and a lower effective tax rate in the March 2015 period. ROIC is an important measure for the company and our goal remains to outperform our cost of capital over the cycle.

Based on our first quarter performance and the expected impacts of our most recent restructuring plan, we reconfirm our full year earnings per share guidance of 1.3 to $1.6 on a 10% reduction in sales. With that, I'll turn it back to John.

Speaker 2

Thanks, Kevin. Before reviewing our operating performance, let me talk about Bauma. I really enjoyed spending time with many customers from around the world. Our customers highlighted opportunities and challenges. They varied by region and market segment.

The prevailing tone was one of caution. Our customers are competing in markets that are changing, driven by low commodity prices, low to no growth environments, volatile exchange rates, and other dynamics. They have to compete aggressively to win business, and the visibility to the next job or product is not as clear as it has been in the past. The result is a more cautious approach to investing in new equipment. However, I would add, I was encouraged by the attention that our new products received.

I was very proud of the presence we had at Bauma. Terex stood out as a truly global company with the breadth of products and services needed to support our customers in these challenging times. Turning to Slide eight. For Terex, this sentiment played out in the first quarter. Our largest market remains North America, which declined 7% for the quarter on a year over year basis.

Europe at 34% of sales was our most consistent market. Adjusted for currency, sales are up in Europe for all units except Port Solutions. Growth in Asia Pacific region is primarily due to a large port deal in India. Now let's look at each segment. AeroWork platforms had a good start to the year.

From a market perspective, the demand environment remains challenging. The reduction in backlog is a result of our customers taking a wait and see approach. Sales in North America are down year over year as our rental customers remain cautious about their CapEx requirements. Although construction activity is strong, purchase decisions will be delayed until rental companies see utilization and rental rates improve. Europe remains a strong market for us with double digit growth in the quarter and a strong order book.

APAC continues to be mixed by country. The team did a good job offsetting pricing and currency headwinds with productivity and material cost savings. Overall, it was a good performance market. Let's move on and talk about our cranes business. Similar to our AWP, the various crane markets around the world are at different points.

The North American market remains very weak, which is reducing the demand for our rough terrain and boom truck products. The redeployment of fleet from oil and gas to other sectors is a significant headwind. In Western Europe, the market is growing moderately. Our redesigned Demag all terrain cranes are gaining acceptance. We had a good showing with this new line at BAMA.

We're seeing a rise in all terrain crane volume in The Middle East, but it's not nearly enough to offset the decline of the rough terrain volume. On a positive note, we're seeing growth in Northern Europe and North America for our tower crane product line. As we indicated on our call in February, the market for utilities equipment is slowing and we experienced a year on year decline in sales. The operating loss in the crane segment was driven by several factors. We had lower volume due to challenging markets, unfavorable mix, which included a higher portion of used machines and a competitive pricing environment.

We also had execution issues, including warranty charges and factory under absorption. Our cranes team is taking action and developing plans to improve their global cost structure while they continue to develop new products. Terex is only one of a handful of companies with the global scale and breadth of product line to compete effectively in the global cranes market. We need to leverage this while executing at a higher level. Turning to Slide 11.

Sales in our Material Handling and Port Solutions segment were down 8% in the quarter compared to prior year, about half of the decline related to foreign exchange rates. In our Material Handling business, volumes were up slightly in Western Europe, but down in North America and other markets. We believe this mirrors the higher industrial activity in Western Europe compared to The United States. Lower growth rates and global container traffic are impacting sales of our Port Solutions business. While we're competing hard and maintaining our market position, we are taking action to improve the profitability of this segment.

We initiated a restructuring program that will save approximately $30,000,000 per year. As a result, we booked a restructuring charge of roughly $50,000,000 in the quarter. This is the right move to make in this environment to position the business for future success. Moving on to materials processing. Net sales declined 2% compared to the prior year, but rose about 2% on an FX neutral basis.

There are pockets of growth around the world, but the global market remains sluggish, driven in large part by the lack of investment in the mining sector. While the recent upturn in commodity prices is encouraging, it will take a more sustained rally to drive capital spending. Consistent with our past performance, the MP team executed well, delivering an improved operating margin in the quarter. Our final segment is Construction. This segment improved its performance compared to last year, earning $2,100,000 operating profit in the quarter on an adjusted basis.

Good execution in the North American Concrete business more than offset ongoing weakness in our German compact business. The team introduced the new mini excavator line and made improvements to our backhoe and dumper line, which are helping to drive sales. These new products were well received at Bauma. In summary, we find ourselves in a similar situation to many industrial companies. The markets are mixed with pockets of opportunity, but most are soft.

We need to compete aggressively for every order. We will compete, but we will compete intelligently. We will continue to drive change across the organization, reducing overhead and scaling production to meet market demands. We will not, however, sacrifice the core principles of our Execute to Win business system. We will invest in product development and innovation.

We will invest in developing our talent. And we will critically evaluate our businesses and take the steps necessary to put each of them on a winning track. With that, let me turn it back over to Tom. Tom?

Speaker 1

Thanks, John. As this call is scheduled for just one hour, we ask that you please limit your questions to one and a follow-up so we have time for everyone's question. With that, let's open it up for questions. Kim?

Speaker 0

And your first question comes from the line of Seth Weber with RBC Capital Markets. Your line is open.

Speaker 4

Great, thanks. Good morning, everybody.

Speaker 2

Good morning, Seth.

Speaker 4

I just wanted to go back to your comment about the restructuring and the footprint rationalization. Are you precluded from doing anything from a footprint perspective as long as these potential transactions are hanging in the balance? Or can you start moving forward with some footprint decisions here before anything is decided?

Speaker 2

Thanks, Seth. As we look at the decisions that we need to make, as I said in my comments, we consider the two different outcomes. And does the decision that we make make sense in those two different scenarios? If it does, we go ahead and implement and execute that. If not, we may delay the implementation of that until either one of these scenarios plays itself out.

Speaker 4

Okay. So the $60,000,000 of savings that you referenced does not include any kind of footprint change savings?

Speaker 2

That is correct, Seth. It does not include any manufacturing footprint rationalization.

Speaker 4

Okay, great. And then I just had a question on in your prepared remarks, touched on pricing, the pricing challenges in AWP and cranes. In your opinion, is that an inventory issue? Is it competitors competing with currency? Can you give us any color on the categories as it relates to pricing, the pricing environment?

Thank you.

Speaker 2

Thank you. In terms of the pricing environment, the overall environment in AWP, think Q1 was consistent with our expectations. And the pricing environment, the biggest impact that we did see was currency headwinds that we faced in Europe. We're producing in North America and still shipping to Europe. Matt and the team are working to shift some of the production to Europe and over time that will improve.

So that was a currency headwind. And then the other part of pricing is the net pricing on used equipment and used trade in. And we did see some valuation, overall ounces if you will, on used equipment that impacted pricing. So I think those are the factors that are principally driving the pricing environment. But again, I think it has been consistent with our expectations and consistent with the overall level of demand in the marketplace.

Speaker 4

Okay. So you think, in your view, inventories are pretty good across both AWP and cranes then?

Speaker 2

Yes. In terms of AWP and inventories, Matt and the team made a strategic decision to have some inventory forward placed in Europe. And I think that decision has proven out to be an accurate one and will unfold as the second quarter evolves. He also has some inventories set aside for the North American market, and he feels that that inventory will be consumed in the second and third quarter. So he made some strategic decisions on inventory placement and we think they're the right ones.

Speaker 4

Terrific. Thank you very much.

Speaker 0

And your next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open.

Speaker 5

Good morning, everyone.

Speaker 2

Good morning, Jerry.

Speaker 5

I'm wondering if you could talk about the order environment in April. Presumably, your first quarter orders were impacted by some folks waiting to place bigger orders at Bauma. Was that the case? Can you characterize the inquiry environment over the past month for us, just to put the quarter in perspective?

Speaker 2

In terms of Bauma, it's always a challenge. First of all, I thought we had a great show at Bauma. And again, the environment was positive and the team worked hard. Were there some orders delayed until the show or until after the show? I've been doing this for twenty five years.

It's always hard to tell in terms of the order environment. There is no doubt, however, that the new products that we showed at the show generated some orders and generated excitement across the product segments. With the Demag line, rebranding of Demag and all terrain cranes, that stimulated some demand. AWP, with their Z60 product, stimulated some demand. So overall, I think BAMA was a positive experience in a challenging market.

But the takeaway was new products help customers to make purchase decisions and we saw that. From an order standpoint going forward in the quarter, it's still early. We're in April and the team's working hard to across all the segments to achieve our sales forecast.

Speaker 5

Okay. Thank you. And it's encouraging to see sales growth for you folks in Latin America. I think not a lot of machinery product lines are seeing that. Can you just flesh out for us what you're seeing in the market?

What drove the 15% organic growth in the quarter and how much visibility do you have on that continuum, which businesses are driving that?

Speaker 2

Yes, we're a little less positive on that. I think the percentage growth is really off a low base. The Latin American market, with the exception of Mexico, Mexico especially in the AWP has been a good market for us. But Latin America in general and Brazil specifically has been a very difficult market across all of the business segments. So I think that was a low number and a high percentage off of a low number.

Speaker 5

And are those comparisons just as easy in the coming quarters, John?

Speaker 2

Yes, they will be. But again, our expectations are not high for Latin America. It is a difficult market right now in Latin America.

Speaker 5

Okay. Thank you.

Speaker 0

And your next question comes from the line of Ann Duignan with JPMorgan. Your line is open.

Speaker 6

Hey guys, it's Ann Duignan. How are you?

Speaker 2

Great Ann, how are you?

Speaker 6

Doing good, doing good. We're restricted on Terex right now, so I'm very limited in terms of what kinds of questions I can ask. I suppose I'll just focus on regional outlooks and your regional actuals. Can you just talk about The Middle East and what you're seeing there? We've heard some comments from other competitors that activity is drying up, that a lot of money is being diverted out of construction activity into defense.

What are you seeing in The Middle East specifically? Ann, I

Speaker 2

think our comments would be similar to that. On the crane side, our all terrain cranes, we did see a couple of orders in that area, but the rough terrain market that really does serve that oil and gas industry was down significantly. I think in terms of The Middle East is a difficult market.

Speaker 6

Okay, that's helpful. And maybe the same question for Asia then. You did comment on that port order for India, think, so maybe just some color on that region.

Speaker 2

Right. In terms of the Asia Pacific region, it really varies by country. Off to a bit of a slow start in China, but the team thinks that we'll catch back up on that. India has had some positive activity of the customer segments at BAMA, the Indian customers were perhaps the most buoyant. They believe that there's going to be some funds released for major infrastructure projects.

We'll be looking forward to seeing that turn into orders as we go forward. I think it varies by region. Again, Ann, what's impacting a lot of the countries in that market is the commodity bust cycle. The countries that are tied to commodities are relatively slow, Australia being one, Australian market is also another challenging market as a result of the commodity bust. It really does vary by specific country and segment in terms of what we're seeing in the Asia Pacific region.

Speaker 6

Okay. Thank you very much. I appreciate the color. I'll get back in line. Thanks.

Thanks, Ann.

Speaker 0

And your next question comes from the line of David Raso with Evercore. Your line is open.

Speaker 7

Questions on the aero work platform business. The quarter had better revenue, I think, than most of us would expect. Can you help us understand was there any pull forward of business? And how do we think about the rest of the year? Because I'm just trying to think about the full year segment guidance that we received three months ago.

If you hold that, it's implying after a flattish first quarter, the rest of the year is down, call it 19%, 20%. So I'm just trying to make sure I understand exactly what played out in the first quarter and how to think about the rest of the year.

Speaker 2

Thanks, David. In terms of AWP, first of all, would say Q1 was consistent with our expectations. And I think if you look at the backlog and the order rates, that's really indicative of that cautious rental channel, where the rental companies are really looking to drive improvement in utilization and improvement in rates. So we did see a little bit of timing, early second quarter versus late first quarter shipments. And so there was a little bit of that at the end of Q1, but not a significant amount.

And as the year plays out, Matt and the team, we continue to see strength and he positioned some inventory in Europe to take advantage of that. So we see strength in Europe. North America obviously is going to play out really over the next sixty to ninety days as we see what the major rental houses and independents do in terms of their orders. It is the overall market in North America around construction segments is really pretty strong. And so that's what they're looking to see.

So we think, based on where we are in the year that our expectations haven't changed in terms of AWP and the guidance that we provided earlier in the year we think still holds based on where we are.

Speaker 7

Given the timing the rental houses typically like to take their machines, how far away if they've shared this with you maybe, how far away are they from hitting certain metrics that could improve the rest of the year versus their cautious view right now? Because obviously, they must only have another, say, three to four months to really make a hard decision that would really impact your 2016.

Speaker 2

I think that to be honest, that conversation, it's basically almost a daily conversation with our sales team and the major rental houses. It really is Q2. And what we see here in the next you said, the next sixty to ninety days, we'll provide the clarity that we need to see how the full year will turn up, because obviously Q2 is the big quarter for us in the AWP volumes.

Speaker 8

Okay. All right.

Speaker 7

I appreciate it. Thank you very much.

Speaker 2

Thank you.

Speaker 0

And your next question comes from the line of Steven Fisher with UBS. Your line is open.

Speaker 9

Thanks. Good morning. Just to broaden up David's question on the guidance, just trying to reconcile the down 10% on revenues with the 20% decline in backlog in the quarter. Are you expecting year over year growth in backlog at any point during the year? And what are the most things important things broadly for the whole all segments that you're counting on to happen to hit the guidance?

Speaker 2

So in terms of the full year guidance, as you said, we did reconfirm the down 10% in terms of what the full year will look at. Looking at AWP, as we just spoke, started off as expected, perhaps slightly better than we expected. The second quarter is key for us. Our seasonality is heavily weighted to the second quarter. Cranes is off to whereas AWP was off to a bit of a better start, cranes was off to a slower start.

So cranes is an area of focus for us as we look forward in terms of the top line on cranes. And so again, based on where we are in the year and what we've seen, we called maintaining our guidance. And the other thing I would add is that we really are focused on controlling the cost elements as well. We had some good execution and we had some other areas in the quarter where we didn't execute as well as we need. So as we go forward in the remaining three quarters of the year, looking to pick up in some of the places where we had some execution shortfalls so that we can achieve our EPS guidance on the lower revenue.

So that's where we are in the quarter and how we're seeing going forward.

Speaker 9

Okay, that's helpful. And then you had previously said that within ninety days you'd have some portfolio related decisions. Can you just kind of give us an update on where you stand on that? Or is that now all on hold given the transaction thoughts that are in process?

Speaker 2

The portfolio decisions really fall under that criteria. There's two different scenarios that we're operating under right now. And so we will, you know, delay major portfolio decisions until we have greater clarity on what scenario plays out.

Speaker 9

Okay, thank you.

Speaker 2

Thank you.

Speaker 0

And your next question comes from the line of Jamie Cook with Credit Suisse. Your line is open.

Speaker 10

Good morning. I guess a couple of questions. One, you noted the pricing deterioration in the quarter although in line with expectations. But I mean how big of a risk do you see price material cost in 2016 given it looks like material cost could potentially be a headwind not a tailwind relative to maybe three to six months ago? And then I guess my other question on the used pricing comment that you made with regards to aerial work platforms.

Can you just give a little more color how broad based was that across product line or by geography? Thank you.

Speaker 2

Thanks, Jimmy. Let me start I think with the first part on materials side. We, you know, we did have some good material price variance productivity in the quarter. Some of that is still benefiting from the drop in steel prices that we had last year particularly in the fourth quarter. So that was used and did help to offset some of the pricing headwinds that we had had.

We're working very hard with our procurement teams across the organization and managing it very aggressively to see positive pricing variances if you will, negative material variances across and leveraging our spend a little bit better. And again using that to offset some of the pricing headwinds that we've had. The other element of pricing is used equipment in North America. And again, there is some good news there. There was some stabilization on routes rates on used equipment sales.

And so that is a good sign. Our realization was close to that. And so on the used equipment side if we continue to see some stabilizing of used equipment values that will help as well in the overall pricing dynamics.

Speaker 10

Okay. Thank you.

Speaker 0

And your next question comes from the line of Mig Dobre with Baird. Your line is open.

Speaker 11

Yes. Good morning, everyone. John, maybe you can help us a little bit with the way you're thinking about the earnings cadence through the year, just given your announced cost savings and all the moving pieces. And I'm also wondering if your expectations at segment level have changed at all versus the prior guidance?

Speaker 2

So to take the first question about the cadence of the earnings through the year, I think we're looking at it as our historical norm. We don't see any significant shifts in terms of the earnings across quarters. So I would say historical norms for that. And the second question, I'm sorry.

Speaker 11

If your expectations at segment level have changed at all from the prior guidance?

Speaker 2

No. In terms of our overall guidance, think we're consistent. As I said, ADWP got off to a little bit faster start, cranes off to a little bit slower start on our MH and PS business. On the material handling side, kind of in line port. Clearly, the slowing of the container traffic, we saw a slower port side of the business.

MP was pretty much in line, our materials process business. And construction, it was good to see a positive move on the construction. Our North American concrete business executed well in the quarter and had a good quarter. It looks like that can be sustained going forward to help offset the challenges that we've had in our compact business. So that's how I would kind of look at the full year guidance by segment.

Speaker 11

Okay. Then my follow-up on MHPS, if I look back, there's been a lot of restructuring in this segment. I think it's something north of $100,000,000 over the last four years. And I'm just wondering from your perspective at this point, what needs to be done here in terms of maybe potentially the footprint longer term or some of the fixed cost base in order to get this segment into black?

Speaker 2

Thank you. Steve and the team have been working hard for several years to position the business from a cost structure standpoint to be successful. The actions that Steve took in the quarter were necessary. The SG and A side of that business, if you look at it as a percent of sales, quite high. And so attacking that from an SG and A standpoint was important.

They have been taking cost out. Unfortunately, volumes have been coming down about the same level or actually a little more than the cost side. So that has impacted the business. I might add as part of our Execute to Win business strategy, one of the elements we talk about is strategy. Obviously we continue to look at strategy, but we will be spending several days on the ground with Steve and his management team going through in-depth their strategy to see how we can break out of the recurring restructuring going forward.

But they're doing the things they need to do to face the environment that we're facing into. And I suspect we're going to need to continue to take action until we get this to a profitable level at the current

Speaker 11

volumes. Thanks.

Speaker 0

And your next question comes from the line of Robert Wertheimer with Barclays. Your line is open.

Speaker 12

The question is on cranes. And as you sort of take a look at the cranes business, do you think that it's just suffering from a lack of volume right now? Or do you find that there have been bigger structural changes with the competitive balance, whether it be the euro at the end? How do you anyway, do you think the structure of the business has changed and do you have to respond more radically or are we just at a low point that you hope to come back in a

Speaker 8

year or two?

Speaker 2

Clearly, the cranes business is in a difficult trough, especially in The United States, where we're at 2,000 and nineten levels in rough terrain and boom trucks and truck trains. We are seeing some growth in Europe with the launch of our new Demag brand. I think the dual branding strategy is going to help with Demag for all terrain cranes and our crawler cranes and the Terex for the rough terrain cranes and our boom trucks. Ken and the team have worked there on the upfront side. And then we have to evaluate the overall cost structure of the business.

And one of the things that we're stressing is that we have to earn our cost of capital through the cycle, which means we've got to be profitable at these levels of volumes. So what are the actions and steps that we need to take to have a return that covers our cost of capital, not just at the peaks, but in the troughs. So so that that's what the they're focused on. Ken and the team also had some execution challenges, you know, in the quarter, that that that impacted us, some product warranty and some product recall type things that we need to do a better job of executing. At lower volumes, everything is magnified and we saw that in the quarter with a couple of warranty related activities that really hurt us on the lower volume.

So Ken and the team is working hard. As I said, execute to win strategy. The month of May is going be spent visiting in-depth reviews with the teams. And one of the things we'll look hard at is the cost structure as well as new product and new product development. And I think the encouraging thing for the crane side is we made some modifications, we made some upgrades to our cranes, and those that we did, we're seeing a response in terms of order inquiry on the equipment.

Ken and the team have a lot of work to do. In the competitive environment, it is a competitive marketplace. But as I said in my comments, we're one of the few companies in the world that has the product breadth to compete across the product line and to compete globally. I think there's a solid foundation for us to build on going forward.

Speaker 12

That's very helpful. Thank you. Are you seeing just a follow-up on the question earlier on raw materials, are you seeing increases in steel in the high strength steel that's more often used in cranes? Is it not seeing that kind of pressure? It feels like it could be a difficult six months from now if so.

Speaker 2

Yes. I would say on the steel side, we're not yet seeing some of these pricing increases. Where we do see it unequivocally is in the high tensile strength steel. That's the first place it shows up. But we're going be working hard to make sure that we can push back on some of these increases.

There's still a oversupply of steel in the global marketplace.

Speaker 12

Thank you.

Speaker 0

And your next question comes from the line of Joe O'Dea with Vertical Research. Your line is open.

Speaker 8

Good morning. Also on cranes and related to margin and progress through the course of the year, there's sort of the balance between what you can control and what you can't. And so obviously, volume and mix challenges are there. But you also noted some warranty and execution issues in the quarter. So just to think about kind of what the trajectory looks like for that margin over the course of the year and whether you think the corrective action is in place such that we see a nice step up in 2Q or how that trends based on what you're planning?

Speaker 2

Thank you. In terms of the trends, we do believe we'll see we had a tough first quarter in our utility segment that's reported under our crane segment. We expect that that will come back more as the year progresses. Some of the actions that Ken's taken, near term actions, think are going to help later in the year on the margin side. And then also some of the new products that we're introducing have some better gross margin opportunities as we bring those into the marketplace.

So without question, Crane's operating margin in progression is one of the challenges that we have given our guidance. But for now, we're going to stick to that until we see how the year unfolds a little bit more.

Speaker 8

Okay. And then going back to the Kona Cranes merger and some of the kind of contemplated synergy benefits there and then the press release this morning from them. Just in terms of how if you've revisited that, how that affects the year one savings that you had put out versus the three year savings? If there's any just updated framework on that?

Speaker 2

Yes. Thank you. In terms of the treasury or IRS notices that came out, they did have and will have an impact on our announced synergies. At the time of the merger, we had announced $119,000,000 of pre tax operational synergies, but including in that was $35,000,000 of post tax benefits and tax and structuring. As a result of the treasury notices, most if not all of that $35,000,000 of tax synergies will be eliminated.

And so now obviously we're learning. It's a very dense document. But our initial analysis is that there will be at least a $35,000,000 reduction in the announced synergies at the time of the merger.

Speaker 8

Okay. And one last one, you probably can't say anything, but just timing, it's been a month since we got a press release from you on Zoom line. I know there are a couple of things that you're pursuing to try to get sort of more confirmation and confidence in the closing there. Is there anything that you can point out for us in terms of what to expect on the calendar and what comes next or wait and see?

Speaker 2

The Board and management, we understand we want to resolve the uncertainty as quickly as possible. And as I indicated in my prepared remarks, both sides are working diligently to do that. And again, we're focused on financing, their shareholder approvals, the governmental approvals and security and amount of a reverse breakup fee. So those discussions are ongoing and we will announce as soon as we can which direction this will go.

Speaker 8

Great. Thanks very much.

Speaker 0

And your next question comes from the line of Ross Gilardi with Bank of America. Your line is open.

Speaker 7

Thank you. John,

Speaker 1

yes,

Speaker 7

I just wanted to follow-up on MHPS. I mean, results are very weak. And I'm just curious, how are you managing the competitive environment? And particularly given that your biggest competitor is also a company that you might be merging with, are you seeing customers delaying purchasing decisions, be it in MHPS, cranes, AWPs, anywhere, while they wait to see whether there's a change in ownership or whether your transaction with Kona Cranes even happens?

Speaker 2

Thanks, Ross. In terms of you're absolutely right. At this point in time, we're intense competitors in the marketplace and we also have a merger agreement. So there's very strict firewalls that we'd established as part of the merger planning integration activity. So there are very strict firewalls in place.

In terms of the market development, I do not believe that customers are delaying their purchase decisions based on the potential outcome of the merger transactions at this time. I really do think that if you look at the underlying fundamentals in the business, on the material handling side, I think it's tracking pretty closely to factory utilization. It's in the low 80s in Europe, and we're seeing some growth there. In The United States, factory utilization is on that 75% range. That's not great.

It's not bad, but it's not great. So I think that's driving the purchase decisions on the material handling side. And on the Port Solutions side, the slowdown in growth rate in container traffic is really causing ports around the globe to delay some of their purchase decisions and saying we can get by with the existing equipment that we have, that we don't need new equipment. And so across the product line on the port side, we're seeing customers delay their purchase acquisitions. And I am not aware of any situation where a customer has said, I'm delaying this decision because I'm uncertain about the acquisition and the merger.

Speaker 7

Got it. Thank you. I mean are you getting any feedback from your key customers the potential change in structure or ownership of Terex in any of your business and what that might mean for future relationships?

Speaker 2

In terms of conversations, most of the conversations that I had were around VAMA, they inquire just because obviously it's a major issue, not an issue, it's a major uncertainty right now in terms of the ownership structure. But the message that we've conveyed to the customers and frankly to the employees is that in either scenario, they're going be dealing with the same great people they deal with every day, the same products and service organizations that they've been dealing with. And so the impact of who owns the equity of the company is frankly not that significant on the customer's transaction. And most customers, when you talk to them about that, they get that and then they move on to the business.

Speaker 7

Got it. Thanks. And just lastly, a quick housekeeping one. On interest expense, can we use the Q1 number as a run rate for the full year?

Speaker 2

Yes.

Speaker 7

Okay. Thanks.

Speaker 0

And your next question comes from the line of Joel Tiss with BMO. Your line is open. Joel Tiss, your line is open. And your next question comes from the line of Andy Casey with Wells Fargo Securities. Your line is open.

Speaker 13

Thanks. Good morning. Just a question on the 60,000,000 benefit. Do you expect the benefits to really start in Q3? And do you anticipate exiting 2016 at the roughly implied quarterly rate of about 15,000,000

Speaker 2

In terms of the $60,000,000 in restructuring, Kevin indicated in his remarks, we're anticipating about 40% of that in the year with most of it coming later in the third and fourth quarter. So I think that's from a flow standpoint how we're looking at benefits from the restructuring.

Speaker 13

Okay. Thanks, John. And then on the cranes price pressure comment, did you see any of that in the larger crane categories or was it primarily related to rough and all terrain and boom trucks?

Speaker 2

I would say it was clearly impacted on the rough terrain boom truck market segment. The large crawler crane market is competitive, but we've got a very strong position, especially with our 3,800 in that market space. So we can demand a good price because we provide a significant value to the customers. Also one other thing on pricing that I think is important is, we've said we're going to compete aggressively, but we're going to compete intelligently. Price can't always stimulate incremental demand.

And we understand that we're in a capital goods business. So it's the upfront initial price, plus the operating cost of the life cycle, plus the residual value and resale value. So as we look at a transaction, we're having our sales team really focused on the value add and being overly aggressive to try to stimulate a market that's not there with an upfront price doesn't help anybody in the value chain. And so we're going to compete aggressively, but we're going to compete intelligently on the pricing side.

Speaker 13

Okay. And then last question going back to an answer you gave previously on MHPS within Material Handling. You commented on seeing some growth in I believe Europe. Did that get progressively bigger during the quarter or was it just pretty consistent all the way through?

Speaker 2

I would say pretty consistent all the way through. That's relative to our other businesses, that's a relatively rapid velocity business in terms of order and ship rates. And so I would say it was pretty consistent through the quarter.

Speaker 13

Okay. Thank you very much.

Speaker 0

And your next question comes from the line of Stanley Elliott with Stifel. Your line is open.

Speaker 13

Hey, good morning guys. Thanks for fitting me in. John, one of

Speaker 1

the first times we met, you'd spent a lot of time talking about working capital and improvements you thought that you could find within the business. I mean, you've kind of talked about the free cash flow for the year. Could you update us on some of the progress that you've seen so far and maybe where we could think of ending the year of working capital as a percent of sales or however you want to frame that for us to think about? Thanks.

Speaker 2

Thank you. Net working capital is a focus, such a focus that we redesigned our management compensation scheme to put a big part at risk with our net working capital improvements. We are being rigorous. We have our biweekly cash callnet working capital calls with all the segments where we focus on all elements of net working capital. Where we're starting to see some progress, and again I will caution, it does take time to implement these changes throughout the organization.

But we are seeing improvements in things like APs, where we look at AP terms and making sure that we've got contracts that are in the bucket of what we believe are acceptable. The teams are making progress there. AR on the receivable side, looking at receivables, receivable collections, reducing the days late across the business segments. We're continuing to make progress there. On the raw, WIP and finished goods, that is about improving our S and OP process.

The team is working hard around that on their sales and sales forecasting and then driving down through the operations the changes in the ERP system so that you actually see a reduction in raw in finished goods. And it's going to take some time, but we're focused on it. In terms of the percent of sales in absolute dollars, we're basically flat on net working capital, slightly higher in Q1 to prior year. But again, I think that was due to some strategic decisions, specifically in AWP that Matt made about positioning some inventory. I think as we look at networking capital to sales on a full year basis, probably in that 24% to 25% of sales range is what we're looking for to drive to by the end of the year.

Speaker 0

And your final question comes from the line of David Raso with Evercore. Your line is open.

Speaker 7

Can help me with that comment and Kona made the same comment this morning about the tax benefits potentially lost, eliminated with some of the tax rate proposals. I mean that is almost 30 of the total combined synergies of the two companies. So I was just curious, has this been flushed out where has it reopened the negotiated terms on the Kona deal? I mean it's obviously not an immaterial percentage of the total savings. And it depends on what kind of share repo the combined company would do.

But even if you just did the $500,000,000 repo overnight, as you'd suggested at the beginning, I mean, it's almost $0.30 of a rough dollar of synergies of the combined company. So it's not immaterial. So I was just curious, has this started a new negotiation around the terms and any implications of how ZoomLine thinks about the Terex deal and the price paid?

Speaker 2

David, in terms of the as I indicated, the treasury notice did have a significant impact on savings. We're going through what the implications of that are to the overall transaction. At this time, I don't want to comment about negotiations or renegotiations with Konecranes. But we are collectively, Konecranes and Terex, working through the implications of the treasury and tax notices to understand what it means to the transaction.

Speaker 7

And at this stage, the Board, even with the reduced synergies at Kona as of now, hasn't changed their recommendation. We're still looking for that more of a binding definitive proposal from Zoom, right? That's kind of where we stand right now.

Speaker 2

Correct. As I said in my prepared remarks, the Board has not changed its recommendation for the Kona Cranes merger. We continue with our discussions with Zoomlion across the elements that I've discussed to ensure that we could have a firm and binding commitment proposal going forward. And so that's what we're working on.

Speaker 7

I appreciate it. Thank you very much.

Speaker 2

Thank you.

Speaker 0

I would now like to turn the call back over to Mr. John Garrison.

Speaker 2

Again, I want to thank you all for your interest in Terex. If you have any additional questions, please follow-up with Tom. He'd be more than happy to address your questions. And again, thank you and have a good morning.

Speaker 0

Ladies and gentlemen, this concludes today's conference call and you may now disconnect.