Terex - Earnings Call - Q4 2015
February 17, 2016
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to the Terex Corporation Fourth Quarter twenty fifteen Financial Results 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. I would now like to turn the conference over to Mr. Tom Gelson.
Please go ahead, sir.
Speaker 1
Thank you, Paula, and good morning, everyone, and thank you for joining us for today's fourth quarter twenty fifteen 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. Last evening, we released our fourth quarter twenty fifteen 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.
And as usual, we will post a replay of this call on the Terex website under Audio Archives in the Investor 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 disclosure because the information we will be discussing today does include forward looking material. With that, please turn to Slide three and I'll turn it over to you, John.
Speaker 2
Thanks, Tom, and good morning, everyone. Given this is my first earnings call with Terex, I wanted to start by saying how pleased I am to be leading Terex in these dynamic, exciting and challenging times. Kevin and I will cover three topics today before we take your questions. First, I will offer my initial insights on my first one hundred days at Terex. Next, we'll review our results for the 2015, the full year 2015 and provide our perspectives on 2016.
Finally, I will provide an update on our announced plan of merger of vehicles with Kona Cranes and comment on the Zoomlion non binding acquisition proposal. It certainly has been an exciting and informative first one hundred days. We recently completed our Annual Terex Senior Leadership Meeting, the theme of which was Proud Past Better Future. Yes, there have been some rough patches, but what's important is that the team recognizes we need to improve our overall execution. With that recognition, there is a lot to be proud of at Terex.
We have outstanding businesses and brands that are leaders in their respective industries. We have innovative industry leading products and services that provide our customers a competitive advantage. We have dedicated and hard working team members. We have a strong value system in the Terex way, which quite honestly is one of the areas that attracted me to Terex. The team has good reason to be proud of its past, but to create a better future we have to improve our execution.
The team is focused on implementing an Execute to Win business system. This is a system that we will use to critically evaluate our strategy, our operations and our talent development to ensure that we consistently achieve our commitments to our customers, shareholders and team members. Without question, we need to improve our return invested capital, our margins and our cash flow generation, especially in the troughs of the business cycle. An integral part of our strategy will be to continually invest in development of new and services. To win in a competitive environment, we need to have products and services that provide our customers a compelling competitive advantage.
We'll also work on all elements of our cost structure to ensure we can fund our new product development while maintaining acceptable rates of return, returns above our cost of capital. I'd like to now turn to slide four and discuss our overall performance. We intensified our focus on cash flow generation in the quarter and delivered strong cash flow performance. We see cash flow generation as one of the key metrics going forward. Sales declined 11.8% in the fourth quarter, 6.2% of the decline relates to a stronger dollar versus other currencies, especially the euro.
Earnings for the quarter were $0.50 per share on an adjusted basis. Full year earnings were $1.84 per share on an adjusted basis. We ended the year with free cash flow of $290,000,000 well above our target of 200,000,000 to $250,000,000 established in early twenty fifteen. This was good performance by our team under tough conditions. Demand declined in the quarter as customers became more cautious in their outlook.
Compared to a year ago, we ended the quarter with lower order book and backlog in our aerial work platforms, material handling and port solutions and crane businesses, but with increases in construction and materials processing. Turning to Slide five, global markets were challenging in the quarter and we anticipate they will remain so in 2016. We expect global macroeconomic uncertainty to continue with headwinds from countries that are commodity dependent along with persistent challenges from low oil and gas prices as well as from foreign exchange volatility. Our largest market remains North America, which declined 4% for the quarter on a year over year basis. Although markets in North America were mixed by segment, adjusting for the divestiture of our ASP business in late twenty fourteen, we were essentially flat.
We saw significant declines in demand in Latin America, Middle East and Africa due to economic and geopolitical uncertainty along with low oil and commodity prices. In Asia and Oceania, we did see a year over year increase in fourth quarter demand due to large crane deliveries in China as well as increasing AWP sales in the region. Demand for our products in Europe continues to be flat reflecting an uncertain business environment and slow economic growth. Outside of North America, FX negatively impacted net sales by approximately 8%. Kevin?
Speaker 3
Thanks, John, good morning, everyone. I'll be reviewing results for the fourth quarter on a quarterly and full year basis. Let's turn to Page six, which shows the comparative quarterly income statement. Sales for the quarter decreased 11.8% as compared to the prior year. As John pointed out earlier, currency movements particularly the U.
S. Dollar to the euro continued to have significant impact in our year over year comparison. Over half of the decline in sales or approximately $120,000,000 was driven by currency. Operating margin for the quarter was 3.2% compared to 3.9% in the prior year. On an as adjusted basis, operating margin was 5.8%, a decline of 80 basis points from 6.6% in 2014.
Decremental margins for the overall company were reasonable at 12.8%. Adjustments for the quarter fell into three main categories. The first being transaction related costs associated with the announced merger with Kona Cranes, which totaled $5,900,000 in the quarter. The second category is restructuring and related activities, which accounted for $4,000,000 in the quarter. The third category included impairment charges related to certain goodwill and intangible assets within our MHPS segment in the amount of $34,700,000 Adjusted earnings per share of $0.50 compares to $0.72 per share in the fourth quarter of 'fourteen, driven primarily by lower operating earnings in four of our five segments with AWP being the exception.
We finished the year strong with $247,000,000 in free cash flow in the quarter. Turning to Page seven. Net sales for the full year decreased $765,000,000 or 10.5 percent with approximately 75% of the decline driven by currency. As adjusted income from operations increased from $481,000,000 to $410,000,000 reflecting the decline in volume. Decremental margins for the overall company were 9.3%.
Adjusted earnings per share for the full year was $1.84 compared to $2.35 in 2014. The lower operating profit was partially offset by improvements in our capital structure in the form of lower interest expense as well as a lower share count. 2015 full year free cash flow generation was $290,000,000 With that, let me turn it back to John.
Speaker 2
Thanks, Kevin. Now I'd like to take a few minutes to provide a quick review of each segment starting with Aerial Work Platforms on Slide 8. Aerial Work Platforms is an outstanding business. Genie is a market leader that this summer will celebrate fifty years of driving innovation in industry. The team improved operating profit compared to the same quarter in 2014 offsetting pricing, currency and volume pressure with material cost and manufacturing productivity improvements.
The demand environment remains challenging, which is reflected in the reduction in backlog. Our North American rental customers are cautious about their CapEx requirements for the 2016. In addition, North American rental companies are lowering their replacement demand for equipment. AWP equipment is replaced on average after seven to eight years. The financial crisis reduced AWP sales in 2009 and 2010.
In line with the replacement cycle, we expect to see this to have some dampening effect on demand for new equipment in 2016 and 2017. AWP continues with its new product development program with the successful launch of the SX-one 150, a 150 foot telescopic boom, several new articulated booms and a new six ks and 12 ks telehandler as we continue to expand our product offering. The segment also continued its globalization efforts with revenue growth in Western Europe and Asia as it expanded its product offering. Overall, it was a good performance in a tough market. Turning to Slide nine for an overview of our Crane business.
While backlog was stable with the third quarter, it was down by about 20% when compared with the prior year. Uncertainty in the global oil and gas market continues to be the biggest pressure on demand. The North American crane market and rough terrain cranes in particular remain weak. The strongest performer in this segment continues to be our Utilities division, although we have seen recently some softening for this product category. On the product side, our newly launched Explorer Series five axle all terrain crane is being well received and gaining market acceptance.
Our crane team must continue to work hard to improve our margins in this challenging market with new product development, manufacturing productivity improvements and G and A reductions. Turning to slide 10, our Material Handling and Port Solutions business sales in the quarter were down 24% compared with the prior year. During Q4 twenty fourteen, we delivered on a large port automation contract and significant gantry crane orders which were not replicated in 2015. This made for a tough year over year comparison. As we head into 2016, we expect mobile harbor cranes to remain stable after a strong finish to 2015 and improvement in our gantry crane business.
For the Material Handling business, industrial capacity remains sluggish, which is negatively impacting MH sales. On the product development front, we marked a successful EU and U. S. Launch of our new modular Demag rope hoist that complements our V girder design, both of which you can see here on the picture on the slide. Turning to slide 11, the Materials Processing business continues to perform steadily in terms of demand with a book to bill ratio of 95% in the fourth quarter and slightly improved backlog versus the prior year.
We have invested in new products to expand our portfolio in the aggregate washing systems and recycling. The integration of these products and acquisitions has been accretive to our results. The North American market is the principal driver for improved performance. However, low commodity prices and weakness in the mining sector remain global headwinds for this business. Now turning to slide 12, Construction, which lost $9,000,000 in the quarter is clearly our most challenged segment.
These losses were generated by our compact construction business, which continues to experience weak demand in Europe. Our Concrete business however is doing well growing its backlog, sales and improving margins for both the quarter and the full year. Given our performance in this segment over the last several years, we are conducting a thorough strategic review to determine what course of action will best deliver consistent returns that exceed our cost of capital. Within the next ninety days, we plan to discuss this in greater detail along with the actions we are taking. Turning to Slide 13, let's review our current expectations for 2016.
Our customers remain cautious in the current global market environment. They are adjusting to the challenges of global commodity price declines, volatile currency markets, slower growth in China and overall geopolitical uncertainty. In this environment, our focus will be on what we can control and what we can afford. In that spirit, we're aligning our cost structure and production volumes with market reality. We're moving forward implementing a G and A expense reduction program throughout the company.
We are analyzing our global manufacturing, distribution and office footprint. We're also evaluating businesses that have not delivered an appropriate return and initiating actions to improve margins or make strategic portfolio decisions. Detailed action plans are being developed in all of these areas and we will be in a position to share these plans within the next ninety days. We will not however sacrifice in areas of new product development or team member development. Both are critical to our long term success and we need to invest in these areas through the cycle.
As a global company, is critical to remain competitive in difficult markets. It will also better position us to capture the upside when the markets improve. Now Kevin will outline our 2016 expectations. On Slide 14,
Speaker 3
we outline our expectations by segment. Four of the five business segments are expected to remain under top line pressure in 2016 with materials processing being the one exception. The largest impact on earnings will be from AWP, which is expected to post operating margins in the range of 10% to 11% on sales that will be 15% below 2015 levels. The Crane segment faces similar top line trend, down around 15% with operating margins in the 3% to 4% range. The MHPS segment expects to remain flat with prior year with an operating margin of roughly 2% to 2.5%.
On Slide 15, you can see what the segment estimates mean in terms of overall company expectations. Net sales are expected to decline approximately 10%. Overall margin is expected to decline slightly to a range of 5.25% to 6.25%. Reducing our cost structure is an important part of this plan. These assumptions yield an EPS range of 1.3 to $1.6 per share.
Given the lower AWP and Crane backlog for Q1 delivery and that most of the additional benefits from cost reduction activities will occur in the 2016. Expectations are for a lower start to this year when compared to 2015. Lastly, we expect another healthy year of free cash flow in the target range of 200,000,000 to $250,000,000 John?
Speaker 2
Thanks, Kevin. Lastly, as you all know this past summer Terex announced the merger with Kona Cranes. As you also know Terex recently confirmed that it received an unsolicited non binding acquisition proposal from Zoom Lion Heavy Industry to acquire all of the outstanding shares of Terex for $30 per share in cash. The Zoomlion proposal is conditioned on among other things receipt of U. S.
And Chinese regulatory approval and Zoomlion shareholder approval. At this time, the Terex Board of Directors has not changed its recommendation on the proposed combination with Konecranes. The teams are making progress in the antitrust filings in The U. S. And The EU as well as the required securities filings in The U.
S. And Finland. The merger with Konecranes remains subject to both Terex and Konecranes shareholder approvals, antitrust regulatory approvals and other closing conditions. However, consistent with our fiduciary duties, the Terex management and Board of Directors working with our legal and financial advisors are in discussions with and are carefully reviewing the Zoomlion proposal to determine the course of action that is in the best interest of our shareholders. This process will take time and we will have no further comment on the ZoomLion proposal until the discussions and analysis are complete.
Now before we open it up to questions, I'd like to summarize by saying these are exciting times at Terex. We have some outstanding businesses and brands. Yes, our global markets are challenging and we will confront that reality by executing the win. We will focus on the things that we can control, taking the appropriate actions with our production volumes and cost structures to improve our returns on capital throughout the cycle and by listening to our customers and investing in new products and services that provide our customers a competitive advantage. Finally, I will say the dedicated Terex team is focused on meeting our commitments.
Back over
Speaker 1
to you, Tom. Thanks, John. As a reminder, during the question and answer session, we ask that you be limit your questions to one and a follow-up to ensure that we have time to get everyone's question in. With that, Paula, I'd like to open it up for questions.
Speaker 0
Your first question comes from Ted Grace of Susquehanna.
Speaker 4
Good morning, gentlemen.
Speaker 3
Good morning, Ted. John, the
Speaker 4
first thing I just wanted to ask and I know you said you won't have more comments, I want to be fully appreciative of that. But just in terms of could you tell us which inning you're in from the standpoint of evaluating the ZoomLine offer? It's obviously arguably the single most important factor people are looking at given the stock's at 20%, the offer's 30 in cash. And so from the standpoint of kind of like the time line that you're using to evaluate ZoomLine relative to the timeline you've outlined for Kona Crane's closure. Can you just help us kind of understand those two timelines and how they're
Speaker 5
kind of converging?
Speaker 2
Yes. Thanks, Ted. And I am a former baseball player, but I don't want to use a baseball innings analogy. We are working very closely with our advisors, legal and financial, to evaluate the Zoomlion proposal. As that work continues and once the analysis is complete, we will be making public statements on the analysis in the direction.
But until such time and I think you can appreciate this Ted and until that work is done, we really cannot have any further comments on the Zoomlion proposal.
Speaker 4
Yes. That's fair enough. The so I guess the thing I was next hoping to run through is the guidance. You look at the revenue guidance down 10%. Obviously, are six there are the five segments and their margins.
But could you walk through either you or Kevin kind of how you would bookend kind of key ranges on aerial sales and cranes and MHPS? I'm guessing from a revenue perspective, those will be the most important. You've given some pretty specific guidance down 15% or in the case of some of those. And then similarly, Kevin, I think you made the comment that restructuring costs will be a key part to reaching these numbers. Can you walk through kind of the game plan on the restructuring side?
How should we think about COGS versus SG and A? And any color you can share there would be great. And I'll get back in queue.
Speaker 2
Yes. I'll kick it off and then turn it over to Kevin. In terms of the markets, as we said, on the AWP side, we're saying down approximately 15%. That's principally on the headwind side really being driven by the North American rental market. North American rental customers are in fact being cautious in their demands.
We do believe we're entering into that replacement cycle impact. Offsetting that on the AWP side is that we are experiencing some growth in Europe and Asia, but clearly not at the level that the impact has in North America. Likewise in cranes, the cranes business is the oil and gas impact or low oil prices of our crane business, especially in North America has been profound. On the rough terrain side of the business, our backlog is at levels that we experienced in 02/2009. So the rough terrain business is under pressure both in North America, The U.
S. And Canada. It's under pressure in The Middle East, again, all associated with oil and gas. But we're also seeing they're not big markets for us, but we're seeing significant declines in places like Brazil, Australia, Russia, those other markets. So the crane business on the headwind side, the mobile crane side, rough terrain cranes have been impacted.
On the positive side, we are seeing some reasonably solid volume in our tower cranes business that's helping to offset. So those are the two principal drivers in the AWP and the cranes of what's impacting the volume side. And then clearly our job is given that volume environment is to take the appropriate actions to drive to margin rates that are acceptable in this part of the trough. And so that's what the team is focused on our two zero two plan plus increased activities that we need to take to ensure that as we go through the trough that these businesses can yield reasonable rates of return in the market dynamics. Kevin, do you want to
Speaker 3
add to that? Yes. Just maybe a quick comment on MHPS. We do have new product. John mentioned the rope hoist.
We do expect some traction from that. What's really happening to offset it is really a lack of industrial expansion on our customer side in this economy. So that's why we're calling for flat in MHPS. On the MP side, we've got an increase of about 5%, but really the core crushing and screening component of that business is still under some pressure. A lot of that increase is coming from acquisitions that we made throughout the year in 2015 allowing for some financial upside on the top line.
Speaker 4
Okay. Maybe I'll get back to you after this, down 10% overall, is the plus or minus margin two fifty basis points either way? I mean, just could you frame kind of how you're thinking about the downside scenario versus the upside scenario in the context of down 10%?
Speaker 3
Yes. I'd say, I wouldn't want to give you specific bracket around that. Certainly, not going to call it exactly a 10%. But where we're obviously keeping close attention to is the AWP side, right? It's got the most leverage on the income and has the most influence.
Right now, we feel pretty good about 15,000,000 as the range there. But as the as 2Q begins to come into full view, that's the one that we're watching.
Speaker 4
Okay. Well, best of luck this quarter, guys.
Speaker 2
Thanks, Ted.
Speaker 0
Your next question comes from Jamie Cook of Credit Suisse.
Speaker 6
Hi, good morning.
Speaker 7
Good morning, Jamie. I guess just a
Speaker 6
couple of questions. One, sorry, back to the aerial work platform side. Can you discuss what you expect this year just in terms of seasonality or how do we think about the cadence of orders or sales relative to history? And could you speak to just the competitive environment with one of your competitors still sitting on some excess inventory? And then my second question relates just to Crane.
The 3% to 4% margin, I think, would be heroic in a down 15% sales year. So can you just, again provide a little more color how much of that is sort of restructuring?
Speaker 2
Okay. On the AWP side, in terms of the seasonality, I think we expect to see, I'd call it, historical seasonal trend. The reduction in backlog at AWP really was associated with the large North American rental companies pre buys being lower on a year over year basis. So I think we expect to see on the AWP side, the historical trend. In terms of the market dynamics, I don't want to necessarily comment about competitors' inventory levels.
We are seeing some pricing headwinds in the marketplace. And so sometimes pricing headwinds are a result of demand supply imbalance. So we're focused on what we believe the appropriate level of demand is. I will say that in these challenging times from an operational perspective, one of the things that we have to focus on or tighten up is our overall pricing. And so we've looked at our delegation of authority to control pricing to offset some of these pricing headwinds that we're seeing in the marketplace, especially in the AWP side.
On the Crane side, there's two elements there that one is the Utility segment, which is incorporated in our Cranes business. That business we had a good year in 2015. We saw a little softness in the second half of the year, but that business from a margin rate perspective does well. The cranes activities in terms of the initiatives and taking cost out of the business will be important for us to generate the 3% to 4% operating margin that we've listed on the range. So there are execution focus and challenges on our Cranes segment to deliver that 3% to 4% operating margin.
Speaker 6
All right. Thank you. I'll get back in queue.
Speaker 3
Jamie, I'll just add to that from my opening remarks. I think John's right. It's typical seasonal pattern with the one exception being really when we look at the specific backlog deliverable in Q1 for both AWP and cranes, it does look like it's going to be softer than a typical seasonal pattern we might suggest.
Speaker 6
Okay, that's helpful. Thank you.
Speaker 0
Your next question comes from David Raso of Evercore ISI.
Speaker 8
Hi, thank you. You mentioned the potential of some portfolio changes, but I'm curious the relationship right now with Kona Cranes, the Zoom Lion offer. How is the decision making process of those portfolio decisions impacted by what's going on with Kona and Zoom Lion, especially when it comes to timing?
Speaker 2
Right. Thanks, David. In terms of our decision making at this point in time is that we're going to make the right decisions for the best interest of the business. And so we're looking at all three scenarios. And if the decision is right under all three scenarios, then we'll make that decision and we'll implement that decision going forward.
So we are factoring in our three scenarios that we have to look decisions that frankly I think are appropriate under all three scenarios and those are the decisions that we will make and those are the actions that we'll take and implement.
Speaker 8
Is there some consultation though taking place among the three parties, two parties, whatever the dynamic may be related to those decisions?
Speaker 2
On terms of the Kona Cranes and ourselves, we do have an active process on the integration with Kona Cranes. And so we do exchange information with both sides. They are taking some actions to deal with the market reality. We are taking some action to deal with the market reality as well as discussions with Zumayan. We do talk about our portfolio.
Speaker 8
And one clarification, I mean for Kevin, Tom. To be clear, guidances by business segments are not apples to apples. It's pro form a for some of the reclasses that took place. Is that correct?
Speaker 3
That's correct, For example, in NP, the Fuchs business in there in the forward looking, but not obviously in 'fifteen. The reported
Speaker 1
'fifteen, but the guidance, change in sales would account for it as if it was in the 'fifteen number. So the 'sixteen is an apples to apples comparison.
Speaker 8
Well, just to be clear though, if you say Aerial is down 15,000,000 it's not versus 15,000,000 the year ago reported sales, it's year ago with part of that crane service business?
Speaker 4
Yes.
Speaker 8
Thank you very much.
Speaker 2
Relatively small piece there though.
Speaker 8
Correct, correct. Thank you.
Speaker 0
Next question comes from Shah of Deutsche Bank. Again, your next question comes from Vishal Shah of Deutsche Bank.
Speaker 1
Vishal, are you there?
Speaker 0
Okay. Your next question comes from Andy Casey of Wells Fargo.
Speaker 9
Thanks. Good morning, everybody. Good morning, Andy. I just wanted to dig in a little bit on the 2016 guide. You mentioned that it's going to start lower than 2015.
Can you give us a little more detail about the spread within 2016?
Speaker 3
Andy, we're not going to give quarterly guidance other than what we mentioned, which is really the Q1 pressure. Other than that, it's basically typical seasonal pattern.
Speaker 9
Okay. Thanks, Kevin. And then within AWP forecast, if I go through the numbers, it seems to include low to mid 50% decremental margins. And I'm trying to understand how that may or may not be conservative, especially given had some early twenty fifteen margin issues. Can you kind of walk through a little bit of the detail behind that, the margin assumption?
Speaker 3
Yes. One second. Yes, we're not seeing those same decrementals, Andy. I'm looking at decrementals more in the 20% to 25% range. So I'm not following your math on the 50% decrementals.
Speaker 9
Okay. I'll follow-up with Tom offline.
Speaker 8
Okay.
Speaker 7
Thanks.
Speaker 0
Your next question comes from Ann Jordinan of JPMorgan.
Speaker 7
Hi. Good morning,
Speaker 2
Good morning, Ann.
Speaker 7
Good morning. Just one clarification on the NPE guidance of up 5%. Can you tell us how much of that is organic and how much is acquisitions? What would you be guiding to if it were organic?
Speaker 3
Yes. The organic piece would be down Ann. So the increase is really all acquisition related. I'll see if I can get you a rough range on that on the organic side.
Speaker 7
Okay. That would be helpful just to understand. And then can you talk a little bit about controlling what you can control? Your inventory stood at about 104 versus ninety two days a year ago. Can you just talk about your inventories by segment and what you can control there going into 'sixteen?
Speaker 2
Yes. I'll take that and then turn it over to Kevin. Anne, focusing on working capital and working capital improvement in a seasonal cyclical business is something that we have to focus on. And frankly, I think we acknowledge that we have to improve. We did have a growth in inventory, specifically a growth in our AWP segment.
In that case, Ken and the team made a strategic decision to build some inventory to put on the water for our European sales. So that made sense. We did see lower customer advances in our MH and PS sector, principally driven by the port side. But also we are seeing some favorability. We did see improvements in our AR balance partially by as a result of lower revenue, but also improved collections efficiencies with our shared service centers.
Likewise on the AP side, we've seen some improvement on the AP side as we've negotiated better terms with our suppliers. This
Speaker 9
is
Speaker 2
an area of focus for the team. We've instituted a biweekly cash call networking capital call with all business segments that I lead. And we literally go down through their sales and inventory planning process, their receivables, their payables, raw WIP and finished goods inventory and we understand where we are so that we can get that laser focus on reducing the amount of working capital that tied up in our business. So that's a new process that we've implemented here in the last couple of weeks. It will take some time for it to gain traction, but the team is focused on driving improvement in net working capital to the point and that we've actually changed our incentive compensation system and there's an element now associated with net working capital improvement.
Speaker 7
Good, great. That's good color. I appreciate that. Just one quick follow-up. Is there any sense that orders are being delayed maybe in some of the larger equipment ahead of the Bauma equipment show or not really this year?
Speaker 2
I'd say based on my conversations with my folks, I'll put it in the not really camp. And we haven't had any there'll always be some orders announced at the big shows, but those are in work long before the show. So I can't tell you that my team is saying they're seeing a delay in orders associated with the upcoming BAMA show. If that changes, we'll let you know, but that's where we currently stand.
Speaker 7
Okay, great. I'll get back in line. Thank you.
Speaker 3
Yes. Ann, I just want to get back to you though on your first question. It's actually split both the core, the organic crushing and screening and the acquisitions contributing about half. So it's split between the two in terms of the 5% growth. I had that wrong, apologize.
Speaker 7
Okay. I'm not sure I follow. Organic then how much?
Speaker 3
About half of the increase coming from the core historic crushing and screening and then about half from acquisitions that 5% increase for Kieran.
Speaker 7
Okay. Thank you. Appreciate that.
Speaker 0
Next question comes from Nicole DeBlase of Morgan Stanley.
Speaker 10
Yes, thanks. Good morning.
Speaker 2
Good morning, Nicole.
Speaker 10
So my first question is just kind of a nitpicky one on the re segmentation that you guys are doing. So I completely understand what you're doing with sales, but are there any major puts and takes on margin from that re segmentation or not really much change?
Speaker 3
Yes. So the biggest one would be you'll see some compression in MP margin from moving our Fuchs business over. That business is in the rough area about $150,000,000 with margins that were slightly negative in 2015 and are expected to be flat to maybe slightly up in 2016. So that's probably the most significant of the restructuring. As John mentioned, the portion of North American services that's going into Matt's business isn't extremely material and that's that's pretty much the total.
Speaker 10
Okay. Thanks. That's helpful. And then second question is just around cost savings. I think under the previous management team, guys were targeting $2.00 $2,000,000 of run rate cost savings in three years.
I'm just curious how you feel about that prior cost saving program, if that's still on the table? And if it's not, what you're doing a little bit more specifically with SG and A manufacturing costs, etcetera, in 2016? And also, I guess, what you've embedded in guidance, from a restructuring payback perspective?
Speaker 2
Yes, Nicole. On the 02/2002 improvement program, by no stretch of your imagination are we walking away from that. That is a focus area for us. As you know, increased the objective last year to about $100,000,000 actually came out of the year, I'd say, in the $115,000,000 range. Actually some good improvement.
We're tracking to the remaining 87,000,000 to deliver in this year. Again, a management operating review process, there's 50 of those projects that we review on our monthly operating calls, they're green or red. And if the red, the team explains what they're doing to get them back to be in green. So overall, we're tracking those. The challenge that we have is the market changed from the time we put those in place.
And so we need to be a little bit more adroit at modifying our cost structure as a result of those changes so that we can focus on acceptable margins throughout the business cycle. So the two zero two program is remains a focus. The team executed well in '15. We have to execute well in 2016 to ensure that we deliver on those commitments. And then on top of that, we are also looking at some incremental G and A activities.
Those activities have started in United States where you have a little bit greater labor flexibility. They will be implemented globally in accordance with regional labor laws as we go forward to adjust some of our G and A expenditures given the volume levels that we're now anticipating as compared to when the 02/2002 plan was put in place.
Speaker 10
Okay. Thanks. I'll pass it on.
Speaker 0
Your next question comes from Rob Wertheimer of Barclays.
Speaker 3
Thanks and good morning. Hi, Rob. One quick question on those biweekly, I think you said anyway, the working capital reports that you're doing, are you seeing anything sort of structural in the aging of inventory or other accounts that makes you worried that you have any stuck assets? Or is it more just process inflow that you're trying to work down?
Speaker 2
I think it's more process and flow. I'm sorry. I'm not been made aware of any issues and I'm looking at Kevin and he's going no. So it's really process and flow driving your fundamental underlying business processes to utilize less assets in the business. Principally, it's around their S and OP or sales and operations planning process and really focusing a lot of discipline in that process to take out frankly assets in the system that we don't need.
It involves now it does take time because in some cases it does require lean implementation or improving our lean implementation, reducing cycle times and things of that nature. Those are the types of things that we focus on in these reviews. So I'd say it's flow and process not any stuck inventory. Perfect.
Speaker 3
I'd just add to that another objective in addition to getting lower working capital is getting a more consistent level of working capital. Again, back to process, right? We do have kind of we tend to have a little bit of heroics at end of month, end of quarter. Bottom line, we're trying to get sustainable usable cash off the balance sheet, which means we've got to have disciplined process that apply throughout the quarter and throughout the year. So that's another focus of the monthly rigor.
I'll stop there. See you tomorrow guys. Thanks. Thanks, Rob.
Speaker 0
Your next question comes from Mig Dobre of Robert Baird.
Speaker 5
Yes, good morning. Guys, if we can go back to inventories, relatively flattish year over year here and obviously outlook for next year is down 10% on the top line. How do you see inventories coming out of 2016? And any color as to where maybe the biggest potential drawdown in inventory would be by segment level?
Speaker 3
Yes. We're not forecasting inventory. And just kind of full disclosure, flattish, but on a currency neutral basis, not a positive for 2016. So we've got work to do in inventory. I think we see the opportunity for reduction candidly being broad based, not specific to any one business.
I think it will come out of we're looking for it to come out of all of them because the process opportunity really exists across Terex.
Speaker 5
I see. And then maybe this is just clarification. I'm trying to understand the guidance once again given the moving pieces. When I'm looking at your Crane guidance down 15, is this number a core number? Or does this also include the $130,000,000 of service business that's moving out of cranes?
Speaker 3
That does include the service business coming out of cranes and into Steve's world.
Speaker 5
Okay. So core would be more like down seven or eight or something like that, right?
Speaker 3
I think it would still be double digits. I can confirm that. No. Let me confirm that math for you.
Speaker 1
That growth percentage or in this case the decline of around 15% is as if the 2015 number had those businesses out of it such that the 2016 reporting numbers that would be the comparable for 2015. Now when you look at what we reported as reported, it wouldn't tie to that. But what we wanted to do is give you something that you could look and model 2016 on the current structure basis.
Speaker 3
Thanks, Tom.
Speaker 11
Okay. Thank you.
Speaker 0
Your next question comes from Jerry Revich of Goldman Sachs.
Speaker 2
Hi, good morning.
Speaker 4
Good morning, Jerry.
Speaker 12
John, can you talk about your plan to improve the distribution for the construction business and just flush out for us the steps that you're taking? It looks like the move of Fuchs to materials processing is a step in that direction. I'm wondering if you just flush out for us the opportunity from aligning the distribution there and the broader plan for the rest of the businesses Ryan, within
Speaker 2
Yes. Thanks, Sherri. In terms of moving Fuchs into the MP section, I think that business actually in terms of the other businesses, sales and marketing, distribution, distribution channel management, the opportunity to leverage in the environmental side, move away from just solely dependent on scrap and scrap metal. So I think we're looking for Karen and his team to drive some improvements in distribution around the Fuchs business given their existing distribution channel and that their business is a third party distribution channel management business. So we're looking for Karen and his team to take that Fooks business to a different level, if you will.
It will take some time getting the distribution up and in place, but we think there's some real synergy opportunities there and that's why that business was moved into Karen and into the MP segment. In terms of construction overall, clearly this is a segment that has been under has underperformed for quite some period of time. The company has taken action in the construction business and we've exited certain businesses, our skid steer business, trucks, road building. And so we're analyzing the existing pieces of business that remain and we're asking ourselves the fundamental question, can those businesses sustain long term rates of return on capital greater than our cost of capital? And if they can, we'll keep them and improve them.
And if they can't, they may be able to return something to a third party other than Terex. And so those are the strategic analysis that I'm doing. And again, it's going take a little bit of time. As we look at it, there's a lot going on right now at Terex. But that's the analysis that we're doing on the construction side.
In the construction business portfolio, there are some businesses like the concrete business that frankly is performing quite well. And that's a business where the teams worked hard, come back invested in their products and have got competitive product in the marketplace now and they're building backlog, building sales and driving some margin improvement. So it's not universal. When I say construction, there are businesses within the construction segment that we need to analyze and make decisions on and that's what we intend to do.
Speaker 12
Okay. Thank you. And then in Europe, can you just update us on where your sales are in aerials and cranes versus prior cycle highs? And you touched on tower crane demand picking up. Can you just calibrate us what's the magnitude of the pickup that you expect in Europe for your crane and aerials business embedded in your guidance?
Speaker 3
Yes. We do see for Aerials sustained strength in Europe, modest but sustained certainly relative to what we're seeing in The U. S. On the Crane side, we are getting a little bit better traction, especially on our larger ACs in our crawler cranes. We're expecting some of that to continue.
Some of that is in Europe. Probably all I have in terms
Speaker 2
then just in terms of the other side on the globalization efforts that AWP is undertaking, about 40% of their Amir machines were produced in Amir in 2015 With the ramp up in production of our Z60 and S60 in our production facility in Italy, we expect to see that grow to about 46%, 47% So an increase year over year. I think that's important. It gets us closer to the customer from a service and support standpoint and also helps to ameliorate some of the currency pressure that we're seeing. So that's a strategy that Matt and the team have been on and it's one that they need to continue to execute as we go forward.
Speaker 12
Okay. Thank you.
Speaker 0
Your next question comes from Joe O'Dea of Vertical Research Partners.
Speaker 13
Hi, good morning. Good morning, Just on AWP orders, a pretty tough comp in the quarter and in absolute still a pretty good level. So just trying to get a sense in 1Q whether or not you're seeing some incremental softness from 4Q levels or just because we can normally see some shifts from 4Q to 1Q, but how you think that plays out over the remainder of this quarter?
Speaker 2
I think I'd answer it in this way. In terms of the biggest part of that backlog is preorders associated with the rental companies. And we do see some movement historically, right guys, from Q4 to Q1. But I think the cautious outlook that the large rental companies have gone out with their CapEx in terms of their CapEx requirements, I don't think we're anticipating a big shift from Q4 to Q1 in this environment. So that's how that we're looking at the AWP side.
And again, that's principally being driven by the North American rental market and the large customers. Our team is in daily contact with them and we think we're tight with in terms of what their needs and expectations are. And they're being cautious, kind of a wait and see attitude for 2016. And we think that really explains the backlog and also explains why we're not expecting to see a dramatic increase like I believe we did a year ago or two years ago that shifted from Q4 to Q1.
Speaker 13
Thank you. And then just on the restructuring front, it sounds like more details to come, but as you consider some of the options you have, are you able to give any sort of magnitude around the additional savings that you could wind up achieving in 2016?
Speaker 2
Joe, good question. And but we need some more time to work on that and to ensure that we have detailed actionable plans that we can execute to. And as I get comfortable that we've got those detailed actionable plans that we can execute to, we'll indicate what the savings are and then also what the restructuring charges associated with that are. But unfortunately, right now, I'm not prepared to discuss the details.
Speaker 13
Okay. Thanks a lot.
Speaker 0
Your next question comes from Brian Chan of Bank of America Merrill Lynch.
Speaker 14
Hi, guys. Thanks for taking my call here. Lot of the questions are But just had a quick question with the changing operating earnings expected for 2016, 2017, it seems like mostly from the AWP segment. Is there any adjustment thinking for the $1,500,000,000 worth of share repurchase after the Kona Grange merger, both the $500,000,000 and the $1,000,000,000 afterwards?
Speaker 2
We haven't looked at that. I can say as part of the Kona Cranes integration efforts, we have teams looking at the purchasing and purchasing synergies. But to that level of detail, I can't say we'll look that, Brian.
Speaker 3
Yes, Brian, any share repurchase will be based on where the business is performing at that time. But at this point, as John said, no change in expectations. Okay. I'm sorry, missed that.
Speaker 2
Did you say share repurchase program?
Speaker 14
Yes, the share repurchase program, right.
Speaker 2
No change in terms of any of our previous announcements as it pertains to the share repurchase program. Sorry about that. I misunderstood.
Speaker 14
No worries. And is there any type of like so if you do the 500,000,000 immediately and the $1,000,000,000 afterwards, are you going to base that on some type of leverage guidance or liquidity or if you can get help us think through, what those decisions will be based off of that would be very helpful?
Speaker 2
Right. So obviously, those decisions, as we previously indicated, were based on market conditions and market dynamics. And so that's and obviously, our covenant and leverage ratio. So as we get to that point in time, that's how we will make the determination of quantity and when.
Speaker 14
Okay, great. Thanks a lot guys. Appreciate it.
Speaker 0
Next question comes from Eli Leshgaardin of Longbow.
Speaker 15
Good morning, everyone. Just one quick clarification. Excludes foreign currency impact and there's no pension accounting changes at all?
Speaker 3
That's correct. We don't expect currency to move us outside of the range up or down in 2016. There's no material expectation around changing pension.
Speaker 15
Yes. And can we talk a little bit about how you're handling your dealer network at this particular point? You've got product changes, you've got two negotiations of merger or acquisition or so. What's going on with the dealers? How are they responding to it?
And how are you handling them as you go through the period of uncertainty?
Speaker 2
Right. And so one of the things that we're laser focused on is focused on customers and dealers. And what's going on in terms of the potential merger does not impact them. And so part of our opportunity and challenge is to keep the management team of the segments laser focused on their customers, end customers and distribution channel partners. If they've got any questions or concerns, we address and answer those questions and concerns.
But fundamentally, those aspects of the business are not being impacted by the Kona Cranes merger or the potential Zoom line situation. So the focus is on execute the business today, address any concerns that they have, but really it's about execution.
Speaker 15
All right. Thank you.
Speaker 0
Your next question comes from Vishal Shah of Deutsche Bank.
Speaker 11
Hi. This is Chad Dillard on for Vishal.
Speaker 2
Hi, Chad.
Speaker 11
Hi, how are you? So can you just walk us through the moving parts behind the MHPS outlook of flat? How do you think about the materials handling part versus the pulp solutions? And then also if I look at your 4Q revenues, they're a little bit lower than expected considering you typically get a seasonal bump from the service business. So how should we think about the year over year comps as we move through 2016?
Speaker 2
In terms of the MH and PH segment, we're in terms of Port Solutions, we came off a strong year on mobile harbor cranes, I indicated in my comments, and we expect that to remain basically at that level, any significant growth. On the gantry crane side, we expect similar type of performance, slight growth. And that's actually pretty good performance because overall container traffic right now on the port solution the port side of the business isn't growing at the rates that we thought it was. So those are the two principal drivers on the Port Solution side. On the Material Handling side, what's really driving flattish type of demand on the Material Handling side is really around factory capacity utilization, both in North America and Europe.
And factory capacity utilization is relatively lowmodest right now. And it's causing manufacturers to delay acquisition and purchases equipment. So those are the kind of driving forces behind. The offset to those is really driving new product and new product development and things like our V girder and our new chain hoist give the customer the opportunity and the need to change what they currently have. And so that's why product development in that segment both on the port side and the material handling side is important for us as we go forward.
But those are the dynamics if you will in the overall marketplace and the reason our guidance is what it is.
Speaker 11
Okay. That's helpful. And then just jumping over to Aerial Work Platforms. What are your pricing assumptions for 2016? And then how do we think about that netting out with material savings?
Speaker 2
I don't want to put a specific percentage on, but we have had pricing headwinds in certain markets. In North America, it's been a headwind and then was also experienced what I'd call the currency headwinds in other markets. So it is a headwind and that's part of the challenge that we have is to offset the headwinds in that segment going forward. And the team did a good job with the material price and productivity as I indicated in my initial comments and we're going to have to continue that performance to offset the headwinds that we're seeing in the AWP segment.
Speaker 11
Okay. Thanks. I'll jump back in queue.
Speaker 0
Your next question comes from Kwame Wab of Morningstar.
Speaker 16
I just wanted to follow-up on your R and D commentary. So number one, could you explicitly give us an idea of will it be up or down? And then I was fascinated by the emphasis on increasing research and spending in terms of development of service lines. So I'd like a little bit more thought on that and also what that might mean for reworking distribution and dealer relationships down the road if you were to maximize the value of an increased service offering?
Speaker 2
So thank you for the question. On the I have a fundamental belief that you need to invest in your products and your services to be competitive in a competitive marketplace. And even in seasonal and cyclical businesses, it's hard to time a cycle. And so you've got to have product plans that focused on meeting the needs of customers and providing them with a compelling advantage. And so as we go through difficult times, we will look to cut other areas other than our research and development.
In 2015, we spent about $119,000,000 on engineering and R and D, expect to be in the same basic range this year. Obviously, don't want to segment specific information. I think that's competitive sensitive. But the philosophy is very important, which is you must continue to invest in products and services what because we're capital goods, we sell it once and we maintain it in service either through distribution or ourselves for seven to ten to fifteen to twenty years. And so that's the area in our strategy and our strategy development that we'll focus on.
I'm a firm believer in organic growth first through investment in research and development and driving the organic growth in that area. So that's why there's an emphasis on we're in difficult challenging times. Our margins are under pressure. Our job is to find ways to fund our R and D and not cut that to drive to incremental margin improvement. That needs to maintain at a certain level.
Frankly, I'd like to increase it over time. This isn't the time to do it, but I'd like to increase it over time. And I'd like to be more efficient in other areas to fund that R and D growth. And that's what we're going to focus pretty rigorously on with our teams.
Speaker 16
And just as a quick follow-up, will any of those sort of new service or R and D offerings require any sort of rework of either third party distribution, direct distribution, dealer relationships to really maximize them?
Speaker 2
No, not really. I mean, you adjust your distribution based on certain geographical areas. And so the distribution model specific to a business and business segment and to a region. And your R and D efforts may impact the distribution channel on the margin, if you will. But fundamentally, you're looking at what products and what services need to be delivered to that customer.
In some cases, in some of our business, it's factory direct on the service side. In other cases, it's through an independent distribution channel. And so as we look at the offering, we'll consider is it direct or is it through a third party distribution partner. Great. Thank you.
Models are different for our different segments and we have to have the ability to operate in different segments because the businesses on a global basis are in fact different. Great. Thanks.
Speaker 0
Your final question comes from Emily McLaughlin of RBC Capital Markets.
Speaker 17
Hey, guys. Good morning.
Speaker 9
Good morning, Emily.
Speaker 17
So on the AWP side, you provided a lot of detail on what you're seeing from the national rental customers. I was wondering if you could go into some detail about what you're seeing from the independents or if it's more of the same?
Speaker 2
On the independents in terms of what we're seeing, I think it's more aligned with what our historical the ebbs and flows a little bit quarter to quarter. But in terms of the independents, we're not seeing substantial change in terms of percentage of sales through the independents versus the major rental companies.
Speaker 17
Okay. And then just a housekeeping question on your tax rate. I think you guys in the past have messaged that you're going to try to lower this each year. So just wondering what the puts and takes were around twenty sixteen's guidance?
Speaker 3
Kevin? Right. So the tax rate, as you guys know, we've been investing in our global trading platform. We are getting a pickup from that both commercially, operationally and in tax line. Our issue in terms of not being able to really lower dramatically our tax rate has been a lot of that's been offset by losses not benefited, which actually were up 15.
So as John mentioned, we're putting together plans in terms of additional cost out. Some of that is going to be specifically directed at countries where we've got this compounded issue of losses not benefited affecting our tax effective tax rate. So that's an area that we've got to improve on.
Speaker 17
Okay, great. Thank you for that.
Speaker 0
That concludes the question and answer session of today's conference. I would now like to turn the floor back over to management for any closing remarks.
Speaker 1
Thanks, everyone. We appreciate your time and interest in Terex today. If there are further follow-up questions, please reach out to myself. My contact information is available on the website or any press release or other members of John or Kevin Bradley. So with that, I will say goodbye and we'll talk soon.
Speaker 0
Thank you. This concludes your conference. You may now disconnect.
