Terex - Earnings Call - Q3 2015

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the Terex Corporation Third Quarter twenty fifteen 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 will now turn the call over to Ron DeFeo, Chairman and CEO.

Please go ahead, sir.

Speaker 1

Thank you, Laurie, and good morning, ladies and gentlemen. We certainly appreciate your interest in Terex today. And on the call with me this morning is Kevin Bradley, our Senior Vice President and Chief Financial Officer Kevin O'Reilly, Vice President, Operational Finance Tom Gelston, Vice President of Investor Relations and several leadership team members, including our business segment presidents prepared for any of your follow-up questions. As usual, a replay of this call will be archived on the Terex website, www.terex.com, Audio Archives in the Investor Relations section. I'm going to begin with some overall commentary.

Kevin Bradley will follow with a more detailed financial report. I'll then provide some segment information and an overall summary before we open it up to your questions. We'll be following the presentation that accompanied the earnings release and it is 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. So now let me direct your attention to Page two, which is the forward looking statement and non GAAP measures explanation.

I 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. So now let me begin turning to Page three. The 2015 was a solid quarter overall. Several areas actually showed notable year on year improvements. Our aerial work platform business, our materials processing businesses had excellent profitability with strong incremental margins.

For the company overall, the adjusted operating margin was 70 basis points above last year, which supports progress from our internal cost and productivity initiatives. Lastly, bookings were up in four of our five segments compared with year ago, but clearly the environment remains challenging. Looking forward, we continue to experience shifting global market conditions. The U. S.

Market is flat overall for us, although in key categories such as cranes, is quite negative. The market in general continues to be negatively impacted by lower oil and gas investments. Europe is mixed and has been for a while. China growth is slowing, Brazil falling and Australia is bouncing along the bottom. The overall pricing environment remains a headwind for the industry and we are not immune nor are our suppliers.

Consequently, material cost reductions remain ahead of expectation offsetting some of the price driven margin squeeze we've experienced. In total, we had a respectable quarter in a challenging environment. Kevin will now walk you through the detailed operating performance summaries beginning on page four. Thanks Ron and good

Speaker 2

morning everyone. I'll be reviewing results for the third quarter twenty fifteen and comparing them to the prior year. Let's turn to page four which bridges the change in net sales. Net sales for the quarter of $1,640,000,000 decreased from the prior year by 9% or $169,000,000 driven primarily by changes in foreign exchange rates, which accounted for about 90% of the decline. Given the significance of currency on the year over year comparison, I will discuss net sales on a constant currency basis to provide a better understanding of the underlying performance of the business.

In our AWP segment, excluding the impact of currency, sales were essentially flat. The business recorded growth in many markets around the world, including China, The Middle East and continued growth in Europe to name a few. This growth however was offset by a decline in North America primarily driven by the impact of oil and gas as large rental companies continue to rebalance their fleets. The Brazilian economy continued to present a challenge for the quarter in AWP. If we remove the impact of the ASV divestiture, the construction segment is up on a year over year basis under constant currency conditions.

This improvement was primarily driven by the concrete mixer business in that segment. The Crane segment excluding the impact of currency is up 9% compared to the 2014. This is driven by growth in our crane products in Europe and a small acquisition in our utilities business. The MHPS segment excluding the impact of currency was down 9% driven by a combination of lower port automation sales during the quarter as well as reduced demand in China, Brazil and South Africa in our material handling business. We also had a small divestiture in our MH Australia business in 2014, which negatively impacts the year over year comparable.

The MP segment, excluding the impact of currency and acquisitions, is up year over year driven primarily by sales growth in India. Page five shows that despite the decline in sales, operating profits on an as adjusted basis for the quarter was essentially flat at $127,000,000 compared to last year of $128,000,000 as operating margins expanded 70 basis points to 7.7% in the quarter. For AWP, increased productivity and lower material costs more than offset lower sales and pricing headwinds. A less favorable product mix and continued pricing pressure in our Crane segment drove margins down 1.1 percentage points with lower RT and Pick and Carry Crane sales. For MHPS, the primary drivers of operating profit decline were lower sales and an unfavorable mix in both the Material Handling and Port Solutions businesses.

These headwinds were more than offset the benefits of restructuring and improvement initiatives savings in the quarter. The MP segment produced a strong quarter with margins expanding to 10.7%, nearly doubling year over year. Increased productivity and a positive impact from acquisitions in MP drove the improvement in operating profit. Page six shows the comparative quarterly income statement on both an as reported and as adjusted basis. During the quarter, we had $18,600,000 in adjustments or $0.17 per share.

These adjustments related to merger costs associated with the Kona Cranes transaction, certain restructuring costs as well as an historical product campaign. This compares to an adjustment of 9,100,000 or $08 per share in the third quarter of last year. My comments will focus on the as adjusted comparisons. Gross margin increased 0.6 percentage points to 20.9% from the prior year as gains in our AWP and MP businesses were partially offset by unfavorable product mix in our cranes and MHPS businesses. SG and A as a percentage of sales was essentially flat at 13.2% for the quarter versus 13.3% in the prior year, but declined $24,000,000 in line with the sales decline.

You can also see that operating profit expanded 70 basis points as we discussed on the prior page. Net interest and other expense decreased versus the prior year driven largely by lower interest rates under our new credit facility and the maturity of our converts this past June. The effective tax rate was 35.6% in the third quarter compared to 32% in the prior year quarter. This difference was mainly due to the current period's increase in provision for uncertain tax positions, other discrete items and the impact of losses not benefited. For the full year, we still see the tax rate being in the previously provided guidance range of 30% to 32%.

For the quarter, earnings per share was $0.58 down $01 from the prior year. EBITDA for the quarter was $152,300,000 or 9.3% of net sales compared to 9.1% in the prior year quarter. Net working capital as a percentage of annualized sales remained high at 27.9%, up from the prior year quarter of 25.9%. The biggest driver is a decrease in customer advances normally associated with our Port Solutions business. Return on invested capital was essentially flat at 9.7% compared to 9.8% in the prior year.

Page seven provides a bridge breaking down the $11,000,000 increase in liquidity for the quarter. Free cash flow, which we define as cash from ops less CapEx, but excluding the impact of Terex Financial Services, was $62,000,000 in the quarter. During the quarter, we had a usage of $24,000,000 in our Terex Financial Services business as we continue to expand and improve this business. Our dividend represented a use of cash of $7,000,000 We completed M and A activities in the quarter primarily in our MP business representing a use of cash of approximately $12,000,000 And lastly, the change in the value of the U. S.

Dollar versus other currencies negatively impacted liquidity by $8,000,000 in the period. With that, let me turn it back to Ron.

Speaker 1

Thanks, Kevin. On Page eight, we presented our geographic revenue footprint. Our largest market remains North America, which showed a decline of 2% for the quarter on a year over year basis, but makes up 43% of our revenue base compared with 40% in the year ago quarter. Most of our markets were down year over year with the loan exception being what we classify as the other category, which largely was influenced by large equipment sales in The Middle East. And as you can see, revenue on a straight basis was up 13% in that category and FX adjusted 31%.

When the impact of currency is removed, the major markets of North America, Europe and Latin America were generally in line or just slightly below the prior year's results. Europe continues to represent about 30% of our business overall and the AsiaOceania about 12%. Revenue results from the rest of the world markets remained stable at 27% of total sales. Now I'd like to take a few minutes and review each of our segments beginning with Area Work Platforms on Page nine. AWP is reasonably well positioned going into the fourth quarter with a higher backlog than a year ago at two ninety eight million dollars including the headwind from currency.

Both the net bookings and the book to bill ratio are the highest they have been for a Q3 reported period dating back several years, including the four data points highlighted on the chart in the lower right hand side of this page. However, we are watching our markets very closely, particularly North America where the ripple effect of the oil and gas impact is clearly being felt. We do expect some customers to be more cautious going into 2016, but there's also some offsetting optimism among some other customers. We are seeing some pricing intensity, which we expect to be more or less offset by improvements in material costs, lower costs from our supply base. Overall this business continues to perform as expected.

Next, our construction business is highlighted on Page 10. Backlog for the business stands at 119,000,000 down from $132,000,000 achieved in the prior year's third quarter or $123,000,000 if you pull out ASV. Adjusted for the impact of currency in the backlog, the construction business actually shows an improvement compared with year ago excluding ASV. Similar to the first two quarters of this year, construction's improvement is from the North America concrete truck business and to a lesser extent the site dumper business both of which products are represented on the photos you see on this page. The material handling business has stabilized but at a relatively low level mainly due to very low scrap steel pricing.

As mentioned last quarter, our European compact construction business remains soft, especially in Germany and in Central Europe. And our backhoe product in general and in India specifically was fairly weak in the quarter. On Page 11, we show our Crane business which continues to operate in a fairly weak demand environment. Although backlog is down versus the prior year, the book to bill in the quarter was a small improvement over the prior year results at 76% versus 69%. In absolute terms, bookings were up 6% despite significant year over year currency headwinds.

Rough terrain cranes remains weak overall. The strongest performer in this segment continues to be our utilities division, although the rate of growth is moderating. Lastly, we don't expect to see much change in the challenging markets of The Americas and Australia for our main mobile crane products. Order levels from these markets remain disappointing. We have to continue to work on improving competitiveness in this segment which is being led by Ken Luesberg, the new segment President.

Turning to Page twelve, our Material Handling and Port Solutions business, that backlog decline reflects the delivery of the substantial port automation projects that took place in 2014. Our backlog is down versus the 2014 by about 23%, but much of that change can be isolated to the automation product order book and as illustrated by the shaded part of the bar graphs on this page. Automation orders are hard to come by frankly and difficult to predict. It's a lumpy business. For perspective, the total backlog declined about 7% as a result of the currency alone.

Both bookings and the book to bill ratio were meaningfully better than year ago levels, up 11% on bookings and up to 93% of the prior year and 66% book to bill ratio, 93% compared with 66%. Our Material Handling business remained steady with an order book and entered the fourth quarter with an FX neutral backlog about equal to last year. We're making positive change in that business including the recent launch of a new modular Demag rope that you can see pictured on this page. This pretty exciting new product we've just introduced reflects a year and a half of development and we expect it to be a highly competitive and sought after product in the coming year. We continue to see demand for port equipment below expectations with the exception of the mobile harbor crane that is gaining some momentum but after a weak first quarter.

The softness in port equipment will be mostly offset with improvement initiatives and we expect the 2015 to have operating margins similar to last year despite lower sales. Lastly on page 13, we discuss the materials processing business. This business continues to perform steadily in terms of demand posting a relative strong book to bill ratio for the third quarter and an improved backlog versus the prior year. In 2014, we invested in new products to expand our portfolio into aggregate washing systems and recycling. And the integration of these products and some targeted acquisitions continues on track.

The North American market is the principal driver for the improved performance. However, low commodity prices and the general persistent weakness in the mining sector remain a headwind for this business especially in markets such as Australia and Russia. Turning to Page 14, in summary, we've performed reasonably well in a challenging environment. Generally speaking, we do not see our markets improving in the near term. But as mentioned previously, our improvement initiatives are offsetting these challenges and perhaps adding extra.

Regarding the full year outlook, we are expecting to be at or near the low end of the previously announced earnings guidance. The merger with Kona Cranes continues and it is progressing as planned. We continue to target a first half twenty sixteen closing. Let me end by saying that it has been a privilege for me to lead and help build Terex for the last twenty three years. For some of you new to this journey, it has been a short and perhaps a bit rocky over the past few years.

This is both a reflection of our industry and what it takes to compete in a cyclical low barrier to entry business. But for others of you that have been around a little bit longer, you've seen this company built and rebuilt numerous times. I'm delighted that we've been able to attract such a competent and excellent leader as John Garrison and I'm excited to have many of you meet him in the coming months. But I'm also proud of the work that has been done over the years by the Terex team at large, my executive leadership team as well as the other 22,000 of the Terex family across the world. And for the support that the investment community has extended to us, I am also gracious and thank you very much for that.

A thank you though is not enough, but it is a good beginning to the next chapter. So with that, I'd like to open it up for questions. Operator?

Speaker 0

Your first question comes from the line of Ted Grace of Susquehanna.

Speaker 3

Hi, good morning gentlemen.

Speaker 1

Hi, Ted.

Speaker 3

Ron, congrats on a good quarter and more importantly congrats on really the incredible accomplishments of building Terex. And Thank we'll miss

Speaker 1

you, Tim.

Speaker 3

You kind of wrapped up your commentary talking about I think markets remaining challenging at least in the near term. And I know you haven't given formal '26 guidance on the business. And I know there are multiple factors you have John joining the company, you've got the merger with Cone Cranes. But I was just wondering if maybe you could step through the markets particularly aerials, cranes and MHPS in a little more granularity on kind of what you think next year might hold? And if you might be able to give any kind of bookends on growth potential on a consolidated basis?

I think that would be super helpful at this point of the year as everybody's kind of really focused on 2016.

Speaker 1

Yes. It's difficult for me to do Ted as we are right in the middle of our budgeting process and frankly John is going to be the key reviewer of that information in the coming month or two. But in general, I don't see 2016 being a strong revenue driven year. I see 2016 having some challenges in some of our core markets around the world. But I also don't see it as a year where things will come apart.

We've had a rough year in North America in our crane business. The crane markets are down somewhere between 20% to 40% depending upon the product category. That's not happen again. It will bottom out and our crane customers are actually beginning are quite healthy in general. And I think their attitude will be positive going into 2016.

But that might not that might take a little bit longer to be reflected in business. The AWP business is going to be a little harder to handicap. And we've said it that we expect it to be down in the range of 5% to 10%. And at this stage, we don't see anything that really would change that. Our construction business will evolve.

We're working on that business. And I think that story will play out as the business solidifies a little bit in some of our better categories. Our MHPS business, that could change with a reasonable automation order, but we don't have a reasonable automation order as we sit here today. So net net, Ted, without really giving you the kind of meat that you'd like to have from me, I'd say the team will have its work cut out for it. It'll have to drive more productivity and cost savings, but those things are available and are on our docket for implementation and being implemented.

And then the exciting part will be to make sure when the gun goes off with the Kona Cranes Terex merger, that we are implementing as opposed to analyzing. And I think that's the commitment that I will have in turning the baton over to John that the team will have. And that I believe is also shared by the Kona Cranes company as well.

Speaker 3

That's super helpful. The second one if I could just squeeze it in. Could you just talk about the cadence of business across the quarter maybe through October maybe focusing on orders? And the question really is, I feel like there's some sense that markets in general may taken a turn for the worse more recently September, October versus trends maybe in July, August. And I'm just wondering if that's anything that you've seen across any of the businesses or more broadly?

And I'll jump back in queue after that.

Speaker 1

Well, Ted, no doubt that the stock valuations took a turn for the worse. I mean we saw that, but our business pretty much played out as planned. I wouldn't characterize our business as hitting any kind of short term wall. I do think that there's still a lot of wood to chop to deliver the final quarter. But we were facing the same thing in 2014 and frankly the same thing in 2013.

And if I look back on my over 90 quarterly conference calls, I probably would say that's been the case more often than not.

Speaker 3

Okay. Well, that's super helpful. Again, most importantly, congrats to you and your family and best wishes. Thanks, Ted.

Speaker 0

Your next question comes from the line of Andy Casey of Wells Fargo Securities.

Speaker 4

Thanks a lot. Sundar, good luck to you as well, Brian.

Speaker 1

Thanks, Danny.

Speaker 4

Sorry if I missed this, but can you help us understand what run rate cost savings you guys realized in Q3 compared to the $100,000,000 target you expected for 2015 as of the second quarter?

Speaker 2

Yes, Andy, it's Kevin. In the quarter, we had announced the year to date number of roughly $40,000,000 realized in savings in the first half of the year. We closed to double that. So there was in the area of another $40,000,000 that was realized in improvement initiatives in Q3. We're well on track to attain the new number that we gave last quarter, which was $100,000,000 for the year and maybe even slightly up from that.

Obviously, as Ron explained, we need it, right? It's not showing as incremental, but we're happy with our focus on it and so far the businesses are realizing it.

Speaker 4

Great. Thanks, Kevin. And then if I could ask one related to the Koning Cranes merger. They talked about submittal of regulatory files a little bit earlier today. And I'm wondering if you could give us a roadmap to really help us interpret potential future regulatory approvals, meaning what country or countries do you expect to encounter the biggest challenge.

So if we see those approvals, we can gain more confidence the merger is going to actually take place?

Speaker 1

Sure. Well, we always expected this to be the longest pole in the tent, so to speak. And handicapping regulatory approvals is not something that any of us including those people that professionally do this would venture into. So the question you're asking me is really hard to give a concrete answer to. What I would characterize Andy is that our expectation is kind of early twenty sixteen, meaning the first couple of months of 2016.

The European approvals will be pretty important for us but the North American approval or The U. S. Approval is not insignificant also. But it's not unusual for some of the Asian countries particularly the biggest one to take long not necessarily because there's a problem but simply process wise. So but all of those things have to come together and I think they are.

Filings have either happened or are happening and our conclusions from those filings are that what we're presenting is consistent with what we expected to present.

Speaker 4

Okay. Once again, best of luck, Ron.

Speaker 1

Thanks a lot.

Speaker 0

Next question comes from the line of Jamie Cook of Credit Suisse.

Speaker 5

Hi, good morning. And Ron, once again congrats and best wishes to you and your family. I guess, so a couple of questions. One, Ron, you did mention on the call some of your customers are rebalancing their portfolio as it relates to oil and gas headwinds. Can you talk about how sort of where are we in this process and to what extent does this push into 2016, I would say both on the aerial and on the crane side?

And then my second question relates to the competitive pricing environment, which you started talking about early on. Can you talk about whether or not that's deteriorated relative to last quarter? And also one of your competitors on the aerial side has talked about having too much inventory at this point. It will take several quarters for them to right size that. Has that contributed to additional pricing pressure?

Thanks.

Speaker 1

Okay, Jamie. As usual, you give me a mouthful of questions to try and dissect, but

Speaker 5

Well, I only there's only so much time left with you Ron, so I have to get them all in there.

Speaker 1

That's all right, Jamie. I appreciate it. Hey, Matt, why don't you try and take that a little bit and I'll try and address the crane side of it. That's a pricing question and inventory question and a market question, Matt, all right?

Speaker 6

Sure. I think good morning, Jamie. The customer rebalancing due to oil and gas definitely is one of the variables with the aerial work platforms. But most of that transpired through Q1, kind of everybody faced into it. And the rental company realized they had certain product categories, too many of them out in the oilfields that were coming out.

They moved them around the country, and that's mostly behind us. And I think that everybody's kind of settled in. They've got the fleet where they want it. Still the overall decline of investment in oil and gas that's going to have an impact. It was driving a lot of use.

But it feels like most of that is behind us. From a competitive pricing environment, we have been getting pricing pressure throughout the entire year. The non U. S. Manufacturers, they've had a currency advantage and they're using it.

And also the inventory that you referenced in certain product categories in certain regions that's driving some model specific discounting. So we've been feeling that. But our efforts on material costs, productivity and new products are more than offsetting that pressures and you can see that in our results. So as we the way the year has played out, we've said that we are focused on what we can control and on margin improvement. And we can't drive margin improvement if we're not disciplined about price.

So we're choosing when and where we go fight back. And yes, there are some headwinds from that, but I don't think it's going to continue to get worse and worse. That's where I'm at now.

Speaker 1

Okay. And let me cover the crane business because Ken is still relatively new seven weeks or so into that leadership position. Oil and gas has been a real issue and an impact for the Crane business in North America and to a degree in parts of the world like The Middle East. Oil and gas is one of the biggest consumers of cranes. So when things change, it does impact the business.

However, cranes are long lived products. So what it does is it moves the utilization around perhaps not as fast of an impact as you would see in the AWP business, but it still moves the product around. And our customers become a little bit more cautious, don't buy equipment. So when you have an engine change like we have gone through and are going through coupled with a pullback in a key consumption category, you see a disruption in the overall market. So non residential construction is a primary driver of the crane business globally.

We know it, it's historical And now we're in about the third or fourth year of a relatively weak crane business. I could point back to 2012 and say, hey, that looks like it was the last somewhat strong year. But that was the last strong year of commodity prices. So I don't think we should get discouraged here by the crane market and by the oil and gas impacts because I don't expect tomorrow to get weaker. But I don't think we can be encouraged because I don't expect it was going to get a whole hell of a lot stronger in the short term either.

There is an inventory in the channel. That inventory will have to be worked through. That causes some pricing pressure. And think that will impact what our forward forecast is. While that is all ongoing, Ken will be working to build our franchise capability.

We've got new products on the horizon. We've got lower cost executions of our current products about to be introduced. So overall, I think we'll come out of this with a crane franchise that's more capable of global competition than it was a couple of years back.

Speaker 0

Your next question comes from the line of Rob Wertheimer of Barclays.

Speaker 7

Ron, congratulations on having built Terex to what it is, outstanding career. So, a quick question on emerging markets. You guys gave a lot of detail, which is great. I'm just one of the surprises in the quarter for me was just relative stability Latin America, maybe in some of the other markets incorporated in The Middle East. So I wonder if you can kind of take a spin through emerging markets and just talk about whether you think there's real stability there or signs of weakness ahead or why LatAm was so good?

Speaker 1

Yes. Well, Rob, I wouldn't quite characterize it as stability, but I would well, let's put it this way. I would characterize it as stability at a low level, okay? And part of the reason it's not falling much from here is because it's fallen quite a bit. Our business in Latin America on adjusted basis is down 3%.

I don't think we're going to see FX move quite as much as it has in the foreseeable future, but beats me really to be a forecaster of FX. And fundamentally, there's a lot of work still needs to be done down in Latin America. Russia is a different story. I wouldn't want to handicap a positive move in Russia at this stage. It's just too uncertain.

India, India I think will unfold to be a positive story in the near future. But short term, it's a mixed bag for us. Our materials processing business is doing quite well. Our compact construction business, which is highly competitive in India, is the whole market is quite weak. And if you turn to China, I'm really proud of our Chinese team because we picked our spots.

And while the business on an FX adjusted basis is down 10% in the quarter, our area work platform business is doing very well there. The products that we're focusing on are doing well and we're making a pretty positive return. So we're not competing in the most competitive categories in China where there are strong domestic players. So overall, I think developing markets has been in the past three years for us a headwind. That will turn around but probably not in 2016.

Speaker 7

That was great. Thank you. Just one quick one. I'm sorry, The Middle East, did you see cancellations there? There's been I guess maybe some indications of that?

Speaker 1

Let me turn it over to Ken Lewisburg. Have you heard cancellations in The Middle East, Ken?

Speaker 8

No, Ron. We would have had a few cancellations in the first quarter and third quarter, but none that I'm aware of in the third quarter.

Speaker 9

Okay.

Speaker 7

Thanks much.

Speaker 0

Your next question comes from the line of Nicole DeBlase of Morgan Stanley.

Speaker 10

Yes, good morning. And Ron, I'll add my good luck wishes to you as well.

Speaker 1

Thanks Nicole.

Speaker 10

Thanks. You're welcome. And so I guess maybe let's start with free cash flow. It was a bit weaker than expected. And I know you guys mentioned the MHPS segment in particular there.

But you also said that there's still hope that we could get to the 200,000,000 to $250,000,000 range for the full year. So I'm just curious about the puts and takes on free cash flow in the fourth quarter.

Speaker 1

Yes. I would correct you from the standpoint of hope, okay? We plan to, okay? Okay. And I think it's important and we're focused on this.

And part of the issue so far was customer advances were not as strong. But we've got an active plan. Kevin, you want to comment there? Yes.

Speaker 11

I'll add a little bit to

Speaker 2

that, Ron. What I guess the disappointing piece of where we are year to date is largely around working capital, right? And Ron mentioned that the largest issue has been the decrease in customer advances. We've also been seeing some expansion in receivables and inventory, are kind of related to the selling environment. So as we go out in a pretty difficult market and try to expand our sales, we are using some tools in terms of structures, rentals, RPOs, operating leases, well underwritten products, but tend to be heavy on the working capital side.

But as Ron said, we do see the opportunity to get into the range. We are working across the company to make sure we do that. There's a fair amount of things. You'll remember that last year, the vast majority of our free cash flow came in the fourth quarter. I think this will be very similar to that as we get focused and get the inventory out of the system towards the last two months of the year.

Speaker 10

Okay, thanks. That's helpful. And then my second question is just on AWP margins. So we spent a lot of time talking about backlog and top line, but you guys did deliver pretty strong margins this quarter. I know a lot of that was driven by material cost productivity.

So I'm curious, can that strength continue into the fourth quarter or is there a risk to Q on Q margin performance?

Speaker 6

Matthew? Sure. Yes, we're really pleased with the margin improvement that we've seen in Q3. We knew all along that we would get the largest benefits from the productivity in the third quarter and we expect it to carry in through Q4. Some of it is volume related and fourth quarter is typically our lowest quarter of the month.

But we if you look at the bookings and the backlog, we're real pleased with where we're at. And so some although some of that backlog is for twenty sixteen deliveries, We will be building it because a lot of it is Europe destined, and that will help us from a productivity standpoint. So we certainly are very focused on that, and we don't intend to give up any ground that productivity. The teams have done a fantastic job. We've been very disciplined with inventory.

And so as we come into fourth quarter, we know it's going to be a light quarter, but we're not going to change the focus that we've had all year.

Speaker 10

Okay. Thanks, Matt. And good luck again, Ron. I'll pass it on.

Speaker 1

Thanks, Nicole.

Speaker 0

Your next question comes from the line of Seth Weber of RBC Capital Markets.

Speaker 12

Everybody's congratulations to you, Ron.

Speaker 1

Thanks, Seth.

Speaker 12

I just wanted to actually Matt, your comment that you just made about the AWP backlog, I think you what I think I heard you say was a lot of that shipment is going to Europe. Is that what I is that what you said? And should we assume that a lot of the bookings strength in the quarter was related to customers from outside North America?

Speaker 6

Well, there's a if you look at our business, it's high 60% are North America. So you're always when you look at the backlog, there's always going to be a high percentage of North America. So I wouldn't characterize the backlog that we have as albeit Europe, Destin. It is heavy in Europe because they first of all, the European market is very strong. We've been working with them on planning early and they want to get the equipment in time for the height of the season.

So yes, it is strong with Europe, but that's not the only place that we're seeing strength.

Speaker 1

It's important that we get the product to Europe at the beginning of the selling season. So sometime when the North American market is really strong, we're always struggling who do we ship first. Right now I think that's why our European team has got the orders in. But our third quarter FX adjusted for AWP was up about 20% business wise in Europe. So we had a very good Q3 AWP performance.

Maybe it won't stay that strong next year, but it's a good indicator.

Speaker 12

Okay. And would you say that the relative resilience in the North American order activity, is that coming from national customers or more of the kind of the independent local guys?

Speaker 6

Matt? Yes. Well, the nationals are always the largest. But as you get to the later parts of the year, Q3 and Q4, the independents, the percentage that we sell them typically shifts to more to the independents. So it's pretty much what we see every year.

It's a mix of both, but independents as a percentage grows in fourth quarter in North America.

Speaker 12

Okay. And if I could just ask a question on the MHPS margin commentary that you gave, just to clarify. Did I think did you say that the margin for the fourth quarter for that category should be about flat year over year? I'm just trying to understand how you get there from kind of the three percentage number that you put up in the third quarter, which is usually a strong service quarter, which usually has good margin.

Speaker 1

Well, we think that the fourth quarter will be a little bit stronger relative to the third quarter of this year, but consistent with last year. Steve, you want to add to that?

Speaker 13

Yes, sure. Morning, Seth. Yes, as we said, we should be right around that 5% operating profit business in the business. And in Port, it's really about execution. I think if you go and look at the book to bill rates over the past couple of quarters, you see some stability there.

So we have the orders and just like last year, it's going to be about executing on those orders. On the MH side, order intake was a bit slower in the first half of the year. But really in the I'd say after the September 15, we really saw the order intake starting to pick up. And the components business, there's about a four to six week lead time to get that product out to market. So I think as long as there's stability in the MH side, which we think that there's going to be, we should be able to hit those numbers.

So that's kind of how we're going to get back to that operating profit is getting the port orders out and then getting the backlog out of the system for the year end from annual side.

Speaker 12

Was the service business as you would have expected in the third quarter or is that a little bit lower than expected?

Speaker 13

I'd say, Seth, it was I'll use a metric of book to bill. I think that's the best way to look at it. But book to bill was about one to one in the quarter. The first part of the quarter was a bit slower. There was just a bit more shutdown.

Obviously, mentioned in a couple of the commentaries, Brazil market right now. South Africa is a tough market right now. But the order intake started to pick up really after, I'd say, about the September. And we saw that kind of pick up through the end of the quarter. So that's what gives me a bit more confidence even on the services business.

Speaker 12

Great. Perfect. Thank you very much guys. And congrats again, Ron.

Speaker 1

Thank you.

Speaker 0

Your next question comes from the line of David Raso of Evercore ISI.

Speaker 14

Hi, good morning. The question on AWT margin looking at 16%, I know you're not going give guidance, but just trying to think of the moving parts that we know. For the European market, you're trying to help offset the currency by moving more production content to your facilities in Europe, right? So that's a positive. You've got the restructuring savings for 2016 versus 2015.

The key negatives, of course, are pricing and let's for base case assume overall volumes are down a bit. What we're missing is the mix. And I know you don't have a backlog that goes that far into 'sixteen, but could you help us with what is the mix inside the current backlog? And maybe even highlight a little bit how pricing is in that backlog right now?

Speaker 1

Do want me to do this Matt or you want to do it?

Speaker 6

No, I can take it. That's a loaded question David.

Speaker 1

As usual. After all

Speaker 14

these It's Ron's last call. Okay. Come on

Speaker 6

So your the question focuses around margins in 2016. Just starting at before I get into the mix, what I would say that we should expect for next year is that margins, we would be able to keep margins at the low teen level as we move into next year despite the headwinds that we have from FX and from the pricing pressure. And where we're going to get that is by our continued focus on the margin improvement. The material costs, the productivity that we've been driving, we're going to continue to do that. And we've also got new products that are going come in.

The transfer of production over to Europe that will help, but it takes a long time. So we've already started production of one model in Europe that wasn't in production at the beginning of the year. At the end of the year, we'll have another one and we're going to continue as we move through 2016. So that will help some of the FX headwinds that we're having. As far as the mix in the backlog, the backlog is it's a snapshot in time.

And we already talked about Right now there's a fair amount from Europe, but we also have a lot from other parts of the world and a lot from North America. If you when you're referring to mix, if you're talking about product mix, there have been some shifts in product mix, in particular the large telehandlers. We're not expecting them to come back next year, which from a revenue standpoint hurts. But from a margin standpoint, those are ones that have a lower margin.

Also the larger booms, what we saw as we went through the oilfield fleet coming out, we saw that the demand for the largest booms went down, but it transferred down to smaller and midsized booms. And we expect that to carry through next year. And we expect scissors to stay strong. So there are some when you talk mix, it can be product mix, it can be region mix, it can be a lot of different things. Hopefully, answered your question, David.

Speaker 11

I mean you

Speaker 14

did, obviously, low teens. I think The Street would take that if you can really pull that off in what could be a down volume year. Can you help us a bit though? Because pricing obviously could be particularly damaging on margins, right? I mean 100% decremental when you lose price.

Can you help us a bit with how the pricing is in the backlog today versus say a year ago?

Speaker 6

Right. Well, it's down. I mean, if you look at just in Q3, where the pricing went, there was more pressure because referenced before inventory pockets and non U. S. Manufacturers.

It's down a little. I wouldn't say it's spiraling down by any means. Fourth quarter people are always looking for orders. And so you're going to see people pushing for deals. But in the height of the season, they'll be much more disciplined, so as you come back into first and second quarter.

So there's nobody doing what I would consider desperate acts. The big players, the main players continue to be disciplined. They are going after some deals and they're moving the inventory they have. But I expect that there'll be good discipline next year.

Speaker 14

And that all wrapped in you're still saying low teens next year with all that?

Speaker 1

Yes. Not saying low teens, David, yet, but that's what your analysis would suggest and we're not going to argue with you.

Speaker 14

Okay. That's good to hear. One quick one if you could for Steve. On the port side of MHPS, you mentioned the mobile harbor cranes have been one of the stronger areas. Are above average margins, I know.

But I mean, how significant is that as a positive mix? And if you can help us a little bit on port looking into next year, can we think of it as a year where mobile, at least at the moment, appears to be what will be the driver for whatever equipment sales you do have? I'm just trying to get, again, a feel for mix.

Speaker 13

Yes, David. I'd say so in the mobile harbor crane business, just probably better if I tell you in units, right? So in 2014, we did, I'd say, about 35 mobile harbor cranes. This year we'll deliver about 62. So a significant improvement is coming from the mobile harbor crane business.

And the margins are okay, but they're not great which is why we're taking some restructuring, some cost out of the port organization, and we're also looking at some cost reduction alternatives. So we've got to improve our margins in the mobile harbor crane business. So I think that's something that the team next year is going to have to work on. But it's significant from a shift perspective in the revenue side. I don't want to comment too much on 2016, David, other than the automation, as Ron mentioned, still going to be kind of a big question.

We have line of sight to three or four different projects that are out there. But I think mobile harbor cranes will be okay. Straddle carriers is still planned to be a pretty good business for us moving into next year. So those will be kind of the key pieces of the business. Our business in China and Xiamen has been a really good business for us this year also.

So I think we'll just see some stability out there and not a major shift in the product portfolio.

Speaker 14

That's helpful. I appreciate it. Thank you very much.

Speaker 0

Your next question comes from the line of Ross Gilardi of Bank of America Merrill Lynch.

Speaker 14

Hey, good morning. Thank you.

Speaker 13

Just a couple of questions. I was

Speaker 14

just hoping you could maybe clarify just the source of the modest guidance revision for 2015, what geography and what business?

Speaker 1

I don't think we will clarify that, Ross, because it generally applies to a combination of things, tax rate, corporate spending, a little bit spread geography around all of our businesses. So it's not that big of a change from where we've been, but there's a little bit of negativity across a range of things. And I guess that rather than try to say it's all coming from here.

Speaker 14

Yes. Got it. Thanks, Ron. Then I want to just understand your Matt's comments a little bit more on the rental companies because Matt, you were commenting that you think the fleet has already largely been reallocated out of the oil patch and that's kind of behind us. If that's the case, where do you think the incremental weakness is coming from?

Speaker 6

Yes. We've been spending a lot of time with the rental companies around the world, because we're in the budgeting process. And what I would say is that there's still some caution out there and there's mixed opinions about how next year is going to be, but no one is doom and gloom. And if you look at the fundamentals, non residential construction, utilization, rental rates have slowed a little. But where our concern for North America comes from is all around the we refer to it as the donut hole or the echo effect from the 02/2008, 02/2009, where they didn't buy much fleet at all.

And the replacement cycle is going to get impacted by that. And so that's really the driver for our caution in the North American market. That being said, this is no surprise, okay? We've known it's been coming for years. And we've been talking with the rental companies, and they're each dealing with it a little bit different way.

We've had an intense focus on new product development over the last four years and a lot of those are going to soften that. So, our caution about the North American market is almost exclusively related to the fleet replacement, not the overall construction market health. And then we also have some good things going on with Europe. Ron gave you some of the numbers that we have there. That's going to help us between there's we have the European market, we've got new products.

And at those levels, we can operate very efficiently and have good performance.

Speaker 14

Got it. Thanks very much.

Speaker 1

All right. Thanks, Ross.

Speaker 0

Your next question comes from the line of Shah of Deutsche Bank.

Speaker 8

Hi, this is Jed Dilaud on for Vishal. Just want to go back to your comments about the utility weakness within cranes. Can you just give a little bit more color on that? And how would that mix shift affect your margins going forward?

Speaker 1

Yes. What I said was that the utilities business rate of growth is moderating. It's been a very strong segment in general for us. But growth in that utilities business won't continue forever. And it's been a substantial portion of the profitability in the cranes segment.

I think that's what we've said over the years. And we expect it going forward to basically stay that way. The expectation into the future is that eventually the crane business will strengthen itself and will have an underlying based upon which to build to go forward. So we don't usually describe each of the component pieces of our business within the segment and I'm not going to start today other than to give that general kind of commentary.

Speaker 8

Got it. And then just going back to the material cost benefits, you have about 200 to 300 basis points of upside opportunity here. Just trying to weigh the balance with the pricing pressure and see if you have how much more room you have before you start filling the pricing pressure and won't be able to offset it with the materials cost?

Speaker 2

Kevin, do you want to? Yes. So material cost, certainly one of the better parts of our story this year and really gaining traction. I'll give an example on steel. Our total steel purchase is in the area of $1,000,000,000 a year.

As you know, the steel prices have dropped in The U. S. Roughly 30% year on year and that bleeds in over time into our results. But whether it's raw fabrications or castings, we're starting to realize an accelerated benefit from steel pricing. For example, in AWP, I would say roughly half of the year to date benefit from steel drop was in the third quarter.

So we would expect that to continue to improve as the indexing bleeds into our cost of sales.

Speaker 8

Great. That's it for me.

Speaker 1

Thank you.

Speaker 8

Thanks and good luck and congratulations, Ron.

Speaker 1

All right. Thanks, Jeff.

Speaker 0

Your next question comes from the line of Ann Duignan of JPMorgan.

Speaker 15

Hi, good morning and good luck Ron. We've known each other for a long time. I wanted to take a step back to the $100,000,000 in cost savings. You noted that there will not be incremental. Could you talk about $100,000,000 plus as gross savings?

What would you expect to fall to the bottom line heading into 2016?

Speaker 1

Ann, we're 70 basis points ahead of last year. I'm sure that wouldn't have happened had we not put the kind of pressure on cost that we have. The real question becomes does the pricing environment stabilize? There's two sides to that. If the pricing environment stabilizes that's good news for our business in general because that means the end markets stabilize and eventually we'll get revenue growth.

So this is a little bit of a Rubik's Cube to and figure out. And I think you know that just from your in-depth experience in the business. We are going to continue to try and outperform whatever the market does though in the coming year or two. I think the $2.00 $2,000,000 of savings we said we would exit 2016 at that rate or greater. If we exit this year at $100,000,000 we're ahead of schedule.

I would expect that same level of pressure to stay on. And I would think there's more than $2.00 $2,000,000 to get because there'll be new projects that get added. And I think that's what the team is going to go through when it goes through its budget planning process in the next month or two.

Speaker 15

Okay. I appreciate the color on that. And then on the liquidity bridge, your Q3 liquidity bridge, could you just give some color on Terex Financial Services, the buckets of cash used and generated?

Speaker 2

Yes. I'll take that, Ann. It's Kevin. So we continue to increase our penetration of the sales of Terex. And as you know, we've got a full service captive in The U.

S. So we're actually originating that paper versus referring it to third parties who would originate it for us. We expanded that activity for about $85,000,000 in the quarter. There's natural amortization that occurs, which kind of bleeds that down during the quarter. And also, we described our ability to kind of self fund our U.

S. Book through securitizations. So the securitization activity is a way for us to bring in some liquidity to the company at a very efficient interest rate and match fund our receivables for TFS. So all in, it was a net negative in terms of liquidity, but it's a positive investment in TFS with a nice little return. We don't really talk about it much, but TFS was mildly profitable in the third quarter, a few million dollars of OP.

Speaker 15

And so that $85,000,000 of cash used to grow assets, is that, so my understanding is correct, that's Terex equipment being sold through the Terex financial services? Is that the way we should about that or is it leasing? Just want

Speaker 2

to understand our finance leases versus operating leases. So it's actually equipment being sold to third parties where TFS is providing the capital for the end user. So it's typically retail financing and we're selling the equipment to an end user not operating leases. It's probably 90 plus percent finance leases or loans. But we're providing the liquidity for the customer and charging an interest rate on a small margin.

So classic captive activity in The U. S. For Terex Financial Services.

Speaker 15

Okay, great. Thank you so much and good luck again, Ron.

Speaker 1

Thanks, Dan.

Speaker 0

Your next question comes from the line of Jerry Revich of Goldman Sachs.

Speaker 9

Good morning. And Ron, congratulations as well and appreciate you putting up with over 80 quarters of conference calls.

Speaker 1

That's all right.

Speaker 9

I'm wondering if we could just talk about the visibility you have in MHPS. I know with a lot of projects you have maybe bids out a couple of years. Steve, can you just flush out what the broader pipeline looks like? And separately, can you touch on inquiry levels for industrial crane demand in Europe? Any signs of pickup there at all?

Thanks.

Speaker 13

Okay. Yes, thanks. Good morning, Gerry. On the automation front, I think there's probably about four orders or four potential orders that are out there that are in the kind of Q1 to Q2 next year that we've got visibility to. I will say that we booked an automation order in September.

It's a small one, but we'll take anything that we can get at this point. It's about a $15,000,000 order for our automated stacking cranes in Europe. The other four that I mentioned are more in Europe and The Middle East without going into too much detail. Yes, I will tell you that we lost two orders in China this past quarter really in Q2 and in Q3, which is unfortunate. But China is just a difficult market to judge what's really going on there.

And the customers chose a competitor that has never delivered on an automation project, which will be interesting to watch to see how that develops. So you never know that may come back around at us. So hopefully that gives you a little bit of visibility as to what's out there. In the quarter also, our software business is doing better than last year. So they're getting orders for simulation and some of the automation projects that are out there.

So the software business is doing okay. Hopefully that helps on the port business. Shifting to the industrial cranes in Europe, it's kind of flat here. No big changes or shifts there. The big drag for us as we mentioned before has been kind of The Middle East, Brazil, South Africa, those markets are kind of tough for us right now.

But in Europe, there's general stability there.

Speaker 9

Okay. Thank you. And Ron, for the crane business, you characterized the quarter as impacting as impacted by product mix. So with rough terrain cranes down, I'm wondering if you just flush out how we should think about product mix over the next couple of quarters, any tailwinds for you either high capacity cranes or otherwise?

Speaker 1

Generally speaking, the tower crane business has remained pretty good and somewhat positive. But we're not that big of a player in the tower crane business. And the large crawler crane business, we have a very strong franchise in. But the end markets are pretty weak in a couple of places. The rough terrain business is a fairly profitable business for us, particularly in both our factories, Waverly, Iowa and Crespolano in Italy.

So with that market just generally weakening both the European Middle Eastern market and the North American market, it's a tough drag. And the last thing that I'd say is really a challenge is our Australian business, which has gone from I think we'll be lucky this year to report as much revenue as we did in profit in 2012 from that business. So it's been just a big shift down. So it's really kind of across the board in the crane business with a couple of small pockets of strength. As I look to 2016, I see the business and the markets more bottoming than I see projected growth.

But if there's any growth, it'll probably be in a couple of product categories where we have some strength such as large lattice booms.

Speaker 9

Okay, perfect. Thank you very much. Your

Speaker 0

next question comes from the line of Stephen Volkmann of Jefferies.

Speaker 9

Hi, good morning. Hi, Steve.

Speaker 16

My congrats as well, Ron. I think I've been through most of the 90 conference calls with you. So thanks for putting up with me.

Speaker 1

My pleasure, Steve. It's my privilege.

Speaker 16

So most of this stuff has been answered, but I guess I'm just curious a couple of finer points. It sounds like price cost and I don't want to put words in your mouth, but looking at both sides of that equation could still be kind of flat to positive next year given some tailwinds we're seeing on the cost side and if you think pricing is sort of stabilizing. And I don't know if that's just my interpretation or if that's your view, but could you comment on that?

Speaker 1

Sure. I think your interpretation is pretty accurate from my perspective. I think we certainly see tangibly how we're achieving cost reductions from our supply base and from some discipline in our own productivity metrics and some minor and in a couple of cases major product initiatives, product change initiatives from a cost point of view. So that's things we can control and do. From a pricing point of view, I think Matt characterized it in general for the company at large.

There's places where there's pretty intense price competition, but it's not across the board, everything going down all at once. The only way you get a deal is when you lower your price. That's not the case. But certainly there's no upside in pricing. Okay.

So when there's no upside that means there's always a bit of an erosion. And when there's no upside in pricing, people expect salary increases. So that means you've got to find at least that cost reduction to stay even. So that's the general tone. But net net, Steve, probably a little bit more on the positive side than on the negative side.

Speaker 16

Great. That's really helpful. And then just the second thing. You talked a little bit about in the AWP segment, the kind of oil and gas shrapnel basically being absorbed across the rest of the industry. I'm wondering if you have a view a similar view for the crane space?

Speaker 1

It takes more time to get absorbed across the Crane space. And I think by the end of this year, it will have been absorbed. Whereas I think what Matt would have said is that it got absorbed kind of in the early part of 'fifteen. And my view is it will take all of 'fifteen to flow through in the cranes business. Business.

But that's a bit of a how should I say it, an experienced educated perspective. There's not a lot of research that I could point to that support that.

Speaker 16

Great. Again, I appreciate that and I hope you have a good bucket list.

Speaker 1

Thanks a lot.

Speaker 0

Your next question comes from the line of Eli Lusgarten of Longbow Securities.

Speaker 11

Good morning. Thanks for taking my questions. Ron, it's been a pleasure all these years. Thank you, Eli. Just a clarification, the material cost savings that we're seeing, you sort of characterizing that you're finally getting your fair share flow through the system.

Is that what's going on as opposed to another step down of cost, the material cost prices, second wave of drop or it's just that it's finally flowing through to your income statement? And more importantly, if that is true, it sounds like the benefits won't anniversary until at least the middle of next year. Is that correct?

Speaker 1

I think that's generally true, Eli. I think the savings we're getting today, we worked on six months ago. And it takes time for them to flow through. But in order for them to keep going, we got to be working on that same level of next level of savings right now for next year. And I think our team is doing that, although it's harder to handicap at this stage.

Speaker 11

And the oil and gas market, we talked a lot about the conditions and working equipment through. We already know that the first half of 'sixteen will have negative oil and gas comparison versus 2015 because of the downturn it's hitting now, it just stays here, it's just a very it's a mathematical weakness. Are there any parts of your business that have production holes or backlog holes or something that we have to look at and as we go through particularly the first half of next year from the impact of this downturn? Know things may stabilize, but are we looking at any backlog or issues that could cause some hiccups or a different kind of quarterly profile as we get into next year based on current conditions?

Speaker 1

I don't see any overall. There's probably a product line or two that's small within our Crane segment such as a boom truck or a couple of RT cranes that still will be impacted a little bit. But in general, we experienced more of those holes in late 'fourteen and early 'fifteen. So I would open that up to my team to see whether or not they agree because that's my if anybody disagrees, please feel free to come forward and disagree. All

Speaker 11

right. Thank you very much. And I said, I wish you all the best in the future.

Speaker 1

Thanks. See you, I.

Speaker 0

Your next question comes from the line of Steven Fisher of UBS.

Speaker 17

Thanks. Good morning and certainly best wishes, Ron.

Speaker 1

Thanks,

Speaker 17

Steven. Can you maybe discuss in a little more detail some of the things you're working on to improve the competitiveness of the crane business. I think you mentioned two things, new products and lower cost. But maybe if there's any more granularity you can provide or maybe also the process you're going through to figure out what needs to be changed?

Speaker 1

I'm going to give Ken a little test here because he's not new to the cranes business. So that's the good news. He spent a large portion of his time in cranes. I think he's got a perspective to add and he's excited about it. So why don't I turn it over to you, Ken?

Speaker 8

Sure. Thanks, Ron. Well, Stephen, the way I would answer that is I do feel like our team over the last couple of years has put a good strategy together. It's been very focused on customer satisfaction, cost reduction and easier to do business with. And we're certainly the way I would put it is really intensifying our efforts on execution with regard to that.

So it's somewhat too just back to the basics of doing what we're good at. So we'll continue to work on our new product development, intensify our cost reduction efforts and do the basics around working capital efficiency, really basic things.

Speaker 17

Okay. That's helpful. And then good progress on the construction business this quarter. I guess the bigger picture question is, how is the strategy going and can this be a viable business that generates positive returns on capital consistently for you guys going forward?

Speaker 1

Yes. Well, there are parts of the construction business. The answer I would say on that is yes. And there's other parts of the business that's an open question and we're evaluating that.

Speaker 17

Okay. I'll stay tuned on that. Thanks very much.

Speaker 0

Your next question comes from the line of Joe O'Dea of Vertical Research Partners.

Speaker 18

Hi, good morning. First question, Matt, you talked about kind of the donut hole related to replacement on the aerial side and obviously leads to a wide range of potential outcomes. And so I know it's a little sort of early to start giving any specific guidance, but I don't know as you go through early conversations with some of the rental companies, if you can offer any kind of framework for thinking about what kind of a drag that is in markets that are otherwise maybe a little bit softer year over year?

Speaker 6

Yes. What we're expecting for North America is in the range of 5% to 10% down, primarily driven by the effect of the doughnut hole. The thing that we've got in our favor is that non residential construction is still good and expected to remain good. If you look at the fleet ages, telehandlers are on the young side, whereas booms and scissors are they haven't dropped significantly. So there's the fleets are up there at an age where the little bit that they do have to turn in is going to need to be refreshed.

So, that's what we're expecting. And when I talk to the rental companies who are obviously all very focused on this, Again, when you talk year over year what's your CapEx looking like, nobody is saying that there's going to be dramatic dive in their CapEx. They've known it's coming. They try to feather it in. And so that's why we're putting it in the 5% to 10% range down in North America.

And we have some other offsetting regions, Europe in particular.

Speaker 1

Thanks, Meyer.

Speaker 18

That's really helpful. Thank you. And maybe a related follow-up is that, I mean, we've seen kind of seasonal shifts in order patterns in AWPs over the last couple of years with last year 4Q is pretty heavy, the year before 1Q is pretty heavy. So just as we get into that time period and you talked about some of the pricing pressure maybe in 4Q, should we expect that related to that maybe you do higher orders in 1Q of next year, but just to get in front of any surprises on orders because you've got a tough comp year over year this year?

Speaker 6

Yes. And it's the timing, as you pointed out, whether it comes in fourth quarter or first quarter, sometimes it's hard to tell. What I would say sitting here now is that I expect that we're going to see probably not to the levels that we saw in twenty fourteen Q4, but I think that we'll see a nice spike as we move through Q4 as the large North American rental companies prepare for the year. That being said, if anything spooks them in between now and the end of the year and they decide to than they would just push out in the first quarter. But I'm expecting it more in fourth quarter.

Speaker 1

Okay. Thanks, Matt.

Speaker 18

Thanks very much.

Speaker 0

Your next question comes from the line of Mig Dobre of Baird.

Speaker 19

Good morning. Matt, maybe just kind of going back to that last question on AWP. I want to clarify that when you're talking about down 5% to 10% in North America, you're talking about orders rather than tariffs revenues into next year?

Speaker 6

I'm talking about AWP North American revenues.

Speaker 19

Revenues. Okay. And I'm asking that because obviously this year revenues have been running quite a bit ahead of orders just on backlog depletion.

Speaker 1

But that always happens. I mean, it's just a matter of turning over the orders. I mean, to get 5% to 10% down in revenue, you have to have 5% to 10% down in orders more or less. It's just a matter of timing, how the timing plays out. Don't miss don't try to misread anything in the comment between orders versus revenue because the parts business, which is the only other stable part of the product category, generally is going to be fairly consistent, but it's only 12% of the total revenue or something like that.

Got it?

Speaker 19

Okay. Okay. I think I understand that part. Then maybe looking at the Crane business, can you give us any color on any potential share shifts occurring out there? I mean, your tone is pretty different than one of your bigger competitors, especially surrounding tower cranes.

I don't know if this is a one off or maybe a bigger trend.

Speaker 1

Well, again, on tower cranes, we have a smaller tower crane business. So our concentration on the tower crane business is going to be with a few customers in a few select markets. And those just happen to be somewhat stronger for us. So I wouldn't try to characterize the overall global tower crane business the same way. But for us, it's been pretty positive.

I would say Cranes, the share that we have has been fairly stable. We've lost a little bit of share, to mostly a particular Japanese player who's a strong global player. But it's stabilized when I look at year to date results and most of that share loss took place in 2014, although the year isn't over yet. So part of what Ken is working on will be those things that help us get back some of that share.

Speaker 19

All right. I appreciate it and good luck Ron. Thank you.

Speaker 0

Your next question comes from the line of Joel Tiss of BMO.

Speaker 8

Yes, I made it.

Speaker 1

You did, Joel. We wouldn't have done it without you.

Speaker 18

Yes. Well, it's definitely been an adventure

Speaker 9

and a pleasure to work

Speaker 8

with you, Ron, all this time.

Speaker 1

Thank you, Joel.

Speaker 18

Since everyone keeps asking the same question, I wondered if you can talk a little bit about John Garrison. I just wondered what you see in him or what the Board sees in him? And what would you think I don't want you to speak for him, but just sort of you've been around this company for a long time. What would you think his first one hundred day plan would be?

Speaker 1

Well, it's going to be hard for me to say what his first one hundred day plan is other than the basics. But I do appreciate the question and it gives me a chance to praise Mr. Garrison. First of all, he's a man of high integrity and high relevant experience and complicated capital goods, highly engineered product categories. He's not afraid of the cyclicality that's embedded in our business.

I'd say he is a disciplined thinker and a disciplined process implementer. And he's a good next leader for this company. This company will benefit from deepening process and lean implementation. John's got all of that and more. I think the other thing I'd like to emphasize about John is his integrity and his personal characteristics.

He will relate well to our customers. He will relate well to our team members. And I'm just excited that the investment community get to know John a little bit. Relative to the one hundred days, I think his first focus is going to be to meet the people, to learn the issues, to meet some of our customers and of course to meet the investment community and hear from the investment community what you believe is important. And he'll take a balanced view on that.

The exciting part about adding John to the leadership team is he'll be very complementary with some of the strengths that we have in the executive leadership team of Terex overall. So finding the right leader for this company has not been an easy challenge because we have to balance both our past with our future. But we always knew that we hand off leadership. It's been part of our plan to do it through the end of 'fifteen. And I think John's got the experience and it's just a good time for him to take over this company.

It's not a great environment to operate in, but it's a great environment where if you put in place improvements in process discipline, go after cost, go after product innovation like I know he's enthusiastic about. And the merger integration as the leader of Kona Cranes, Terex, which he will be, I think it's just an exciting time.

Speaker 11

All right. Thank you. Your

Speaker 0

next question comes from the line of Mike Schlisky of Seaport Global Securities.

Speaker 20

Good morning, guys. Just wanted to touch quickly on your utility cranes business just on an earlier question. Can you give us a little more color on the used market for some of these cranes? Are you seeing increased inventories in the channel? Are you seeing lower prices in the channel or perhaps both or perhaps a lot more cranes going through the auction channel?

Just a little color there would be appreciated.

Speaker 1

I think in general Ken you can correct me or just add to this if you like. But I think in general we see a stable marketplace. It's slowing a little bit from its rate of prior growth. There's a number of distribution sources of equipment in the utilities business. But in general, the business is a pretty strong one and a fairly stable one.

I think the rate of growth will be less, but I don't see any massive change in auction prices or any of those concerns that you might see a more rapidly slowing kind of business. Ken, you want to add to that?

Speaker 8

Yes. On the utility side of the business, I would say that's absolutely true. On the crane side of the business, we've definitely seen RT prices on the used side decrease over the last, I would say, two to six months with units coming out of the oilfields. The other thing I would say is we're seeing a lot more a move to quality. So a lot of cranes were added into fleets of poor quality or a lower quality level, primarily from Asia, from China.

And those are moving out, quite quickly. Our for us, the only impact we would see would be around our RT pricing right now.

Speaker 4

All right, guys. Thank you.

Speaker 20

Thanks and Ron, best of luck.

Speaker 1

Thank you very much, Mike.

Speaker 0

Thank you. That does conclude the Q and A portion of today's call. I'll now turn the call to Ron DeFeo for any additional or closing remarks.

Speaker 1

Just see everybody around the ranch. Appreciate everybody's interest in Terex and look forward to any future interactions we have together. Thank you.

Speaker 0

Thank you. That does conclude today's Terex Corporation third quarter twenty fifteen financial results conference call. You may now disconnect.