Terex - Earnings Call - Q4 2016

Transcript

Speaker 0

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Terex Corporation Fourth Quarter and Year End 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.

I would now like to turn the conference over to Brian Henry, Senior Vice President, Director of Investor Relations. Sir, you may begin.

Speaker 1

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

All per share amounts in the presentation are on a fully diluted basis. We will post a replay of this call on the Terex website under Audio Archives in the Investor Relations section. Let me turn your attention to Slide two, which is our forward looking statement and description of non GAAP financial measures. We encourage you to read this as well as other items in our disclosures because the information we will be discussing today does include forward looking material. With that, please turn to Slide three, and I'll turn it over to John.

Speaker 2

Thanks, Brian, and good morning, everyone. Thank you for joining us and for your interest in Terex. I will start by discussing the progress we are making executing our strategy, including our recent divestiture activities. Kevin will cover our financial results, including details of our restructuring program and significant improvements we've made to our capital structure. I will follow with information about our segments and our guidance for 2017 before we open the line to your questions.

The three key elements of our strategy are focus, simplify and execute to win. We discussed each of these in detail at our Investor Day in New York City. Since then, we've been executing to our plan, taking important steps in each of these areas. In the fourth quarter, we put into operation a professional program management infrastructure, the transformation program office. This will ensure accountability and process discipline.

As we enter 2017, we are not expecting our major markets to improve. In fact, we expect most markets to be as challenging as 2016. In this environment, it's essential that we execute our operating plan and make the transformational changes that will enable our longer term success. Turning to slide four. We are delivering on our commitment to focus the company on the aerial work platform, mobile lifting, materials processing and handling industries.

Closing the sale of MHPS to Kona Cranes was a complex process. We set a deadline of January 4 to close the deal, and our team worked tirelessly to make that happen. We executed on our commitment. Last week, we monetized 9.5% of our ownership interest in Kona Cranes. We are confident in the industrial logic of the combination of MHPS and Kona Cranes and therefore we retained a 15.5% interest.

Other focus actions include the announced contract to sell our dumper and loader backhoe business based in Coventry, England. We also decided to sell our utilities business in Brazil and loader backhoe business in India. We will continue to operate these businesses and consolidate their results, but our intention is to divest them in 2017. With these actions, we are near completion of the focus phase of our strategy. Turning to Slide five, we continue to simplify the company, which means reducing our global footprint and cost structure.

Since the beginning of 2016, we've either closed or sold eight facilities, not including MHPS. We announced plans to sell or close an additional six locations and are in the process of reducing the footprint at our manufacturing complexes in Redmond, Washington and Slybrucken, Germany. In total, these actions will reduce our global footprint by over 3,000,000 square feet or approximately 32%, increasing flexibility and efficiency without sacrificing our ability to meet customer demand. We continue to take action to reduce our cost structure with emphasis on our functional, general and administrative costs. After adjustments, we reduced SG and A in 2016 by approximately $41,000,000 We will continue to make reductions in 2017.

We're also reducing our workforce in our cranes business as we adjust to lower production volumes. Moving to Slide six, at the Investor Day our business leaders described our three Execute to Win priorities, life cycle solutions, commercial excellence and strategic sourcing. Through these initiatives,

Speaker 3

we

Speaker 2

are developing capabilities and implementing common processes to increase operating leverage and improve performance across the company. For example, within Lifecycle Solutions, we're assessing all aspects of our parts and service business. We have best practices within Terex today. Our opportunity is to share those across the company. Within commercial excellence, we made progress in the fourth quarter deploying sales management and pipeline tracking tools and implementing common Terex processes.

We're starting to see the results of increased visibility and process discipline on the commercial side of our business. As we announced in December, we're developing a global strategic sourcing organization. We're moving from a decentralized structure to essentially coordinated structure with consistent tariffs wide processes to leverage our direct and indirect material spend. The organization has taken shape. We appointed a global leader who reports directly to me and we're starting to launch Wave one.

I will continue to communicate our progress on our transformational priorities. Turning to Slide seven, we remain committed to our disciplined capital allocation strategy and the actions we have taken over the past few months are consistent with that strategy. We utilized cash from operations and the divestiture of MHPS to make significant improvements in our capital structure, which Kevin will cover in more detail. We are investing in our business, building capabilities and developing new products. We are funding significant restructuring programs that will remove structural costs and simplify our company.

We are returning capital to shareholders through dividends and share repurchases. Yesterday, we announced an increase in our quarterly dividend and a new share repurchase authorization for up to $350,000,000 This is in addition to the $70,000,000 remaining on our existing $200,000,000 program. This is the disciplined allocation strategy that will govern how we deploy capital as we move forward. And before I hand it over to Kevin, I would like to acknowledge that this will be his last conference call with us. I want to personally thank Kevin for many years of dedicated service and leadership at Terex, including his roles as president of financial services, president of cranes, and chief financial officer.

We wish Kevin all the best. Kevin?

Speaker 4

John, I wanna I wanna thank you, and I I also wanna thank the Terex board and the many team members of Terex for what has been for me a terrific eleven years here at the company. I also want to just thank the investors and the analysts on this call. Many of you have had a chance to build a relationship with over the years and I've really appreciated that relationship. I also want to mention that I've had the time to meet with John Sheehan. I think his knowledge and experience are going to make him a terrific add to this leadership team.

I feel like Terex is in the right place and is well positioned for the future with the right strategy and the right leadership team starting with John Garrison to execute against that strategy. So I'm very pleased and very grateful for the time I've had here. So with that, let's turn to Slide eight and I'll review our financial performance. We took significant steps in the fourth quarter to better position Terex for the future. As a result of these moves, we recognized significant adjustments, which are reflected in the difference between our reported net loss per share of $2.96 and earnings per share as adjusted of $07 This translates to full year adjusted EPS of $0.88 Strong cash performance in the fourth quarter drove full year net cash from operating activities of $367,000,000 and free cash flow of $189,000,000 The improvement was driven by our continued focus on working capital.

We reduced net working capital by $366,000,000 compared to December 2015. This outpaced the sales decline resulting in an improvement in net working capital as a percentage of sales from 25.2% to 20.8%. Let's turn to Slide nine and I'll walk through the adjustments. We incurred pre tax charges of $89,000,000 associated with restructuring actions in Q4, principally in our Cranes segment. These included workforce reductions in our manufacturing site in Zweibrucken and the announced closure of a satellite facility in Bierbach, Germany.

We took charges associated with closing our cranes facility in Jinan, China and relocating our North American crane facility to Oklahoma City. We also incurred charges at our Brazilian utilities business as we prepare it for sale. The $9,000,000 transformation charge was associated with the Execute to Win priority areas of commercial excellence and strategic sourcing. The $9,000,000 deal related benefit in the quarter was driven by an FX translation gain on the pre closing activities related to the MHPS divestiture. We also excluded a gain on the sale of our German compact construction business.

The $222,000,000 non cash impairment charge was primarily associated with Crane's goodwill. We also incurred impairment charges associated with focusing our portfolio and updating our ERP strategy. In total, the net impact of the pre tax adjustments was $3.00 $9,000,000 in the quarter. We also took a $34,000,000 in adjustment charge for U. S.

Tax expenses associated with the anticipated repatriation of proceeds from the MHPS sale. The positive full year tax adjustment relates to tax benefits that were also associated with the MHPS sale. Overall, these actions will benefit our company over the longer term. Slide 10 summarizes the comparative quarterly income statement on an as reported and as adjusted basis. Net sales for the quarter decreased 16.5% compared to the prior year.

Sales declined 18% in AWP and 20% in cranes. Material processing sales declined 2%, but excluding the impact of foreign exchange rates, MPE sales grew 3%. On an as adjusted basis, our operating margin was 2.4% compared to 5.4% prior year. Lower volume in our AWP and cranes businesses, unfavorable mix in our AWP business and global pricing pressure were the primary drivers of the margin compression. These headwinds were partially offset by cost reduction activities.

Slide 11 summarizes our full year results. Sales were down 11.5% for the full year. AWP was down 12%, cranes declined 19% and NP was about flat compared to twenty fifteen, but up 4% on a currency neutral basis. The adjusted full year operating profit was $207,900,000 Operating margins on an as adjusted basis were down two ten basis points to 4.7%. Our continued focus on reducing costs helped to partially offset the challenging market conditions.

Moving to Slide 12, I'll describe the improvements we made in our capital structure. The sale of MHPS and favorable conditions in the capital markets in January provided the opportunity to resize and refinance our debt. The refinancing included our senior notes and the term loans and revolver within our credit facility. We issued $600,000,000 worth of eight year five and five eighths senior notes and we issued $400,000,000 of seven year term loans at LIBOR plus 2.5%. These are the lowest rates in the company's history.

In the process, we will achieve a debt reduction of approximately $600,000,000 In summary, our new capital structure is highly efficient and appropriately sized for the focused company we have, providing a strong financial foundation for the future. With that, let me turn it back to John.

Speaker 2

Thanks, Kevin. Starting with AWP on Slide 13, I will discuss our segment performance. Please note that the financial highlights, backlog and book to bill information can be found in the appendix. AWP finished the year in line with our expectations. Sales were down about 12% for the full year due to lower demand in North America for replacement machines.

Europe was up modestly for the year and the Latin American market continued to be extremely weak. We increased sales in the Asia Pacific region. We see these regional market trends continuing into 2017. The fundamentals of the North American rental industry are strong, driven by growth in nonresidential and residential construction and a generally positive sentiment. The constraint on new equipment demand is the replacement cycle.

As we've communicated in the past, the volume drop in 02/2010 means there are fewer machines in our customers' fleet that need to be replaced. While we will benefit from some customers' anticipated fleet expansion, it will be outweighed by the overall lower demand for replacement machines. We expect Western Europe to remain fairly stable. There is uncertainty associated with the upcoming political events, but we believe the underlying markets are resilient. Our innovative new products, including the extra capacity line and the hybrid drive system are being well received by our customers.

We are committed to making the investments required to maintain Genie's position as the leader in innovation for our customers. Finally, the cost reduction actions taken in 2016 and the actions the AWP team is planning to take this year helped align the costs with the lower volumes and positioned the business very well for the upturn in the cycle. Turning to cranes. Our crane segment had a very difficult year. With few exceptions, all major crane markets declined in 2016.

We are planning for additional market declines in 2017. In North America, oil prices are still too low to stimulate new demand and there's a significant inventory of low hour used cranes available to compete with new crane sales. Our customers are looking to see consistent improvement in utilization and rental rates before they order new machines. In Europe, the changing dynamic in the German energy market continued to impact demand for crawler cranes in the fourth quarter. We remain positive in our longer term view of this sector, but believe caution will prevail in 2017.

Australia, The Middle East, Latin America and other commodity driven markets were very weak and are expected to remain so in 2017. Given this global market environment, as Kevin indicated, we took significant charges in 2016 related to reducing Crane's footprint and cost structure. Structure. As most of the restructuring will take place in Europe, we will incur costs upfront with multi year payback. We are in the process of working through the regulatory and social requirements associated with these actions.

We're also exiting our operations in China and Brazil that have negatively impacted our results over the past several years. The team remains focused on the actions required to turn this business around. Moving to Materials Processing. Our MP segment is a consistent performer. MP grew operating profit on essentially flat sales.

Aggregate markets are steady in North America and Europe, supporting stable demand for our mobile crushing and screening products. The mining side of the market, particularly in Latin America remains weak, although we did see signs of renewed activity in Australia in the fourth quarter. Demand in India continues to grow. Weak scrap metal prices and high channel inventory levels constrained demand in our Fuchs material handler business. We continue to see growth in sales and profits in our concrete product lines and are expecting continued growth in 2017.

Overall, our MP business is well positioned to benefit from increased construction spending. Turning to Slide 16. As we communicated during our Investor Day, we expect 2017 to be another challenging year. The North American market for AWP products is expected to decline on lower replacement demand. We believe the major crane markets will remain weak and we expect modest growth in our materials processing business.

We continue to implement our strategy, reduce our cost structure and enhance our commercial and operational execution. Turning to Slide 17, I'll review our segment guidance for 2017. AWP sales are expected to decline about 12% and generated operating margin of approximately 8%. Our crane sales in December were higher than we had forecasted as several customers requested earlier delivery dates. That higher finished combined with weakening markets translates to an updated outlook for sales of down approximately 11%.

Given the lower volume, the magnitude of the restructuring actions and the uncertainty of timing of some of the benefits, particularly in non U. S. Jurisdictions, we believe it's prudent to forecast an operating loss for the segment of about 2%. We expect MP to grow slightly factoring in an FX headwind with an operating margin of about 9.5%. Turning to Slide 18, the total company outlook for sales is approximately 3,900,000,000.0 with earnings per share of between $0.60 and $0.80 Our EPS estimate does not reflect any change from year end share count or any impact from our ownership interest in Kona Cranes.

We anticipate our EPS to be more back end loaded than historical seasonal patterns due to the timing of restructuring benefits and interest savings. We expect free cash flow between 0 to $50,000,000 in 2017. Included in that total is the continued funding of our restructuring and transformation actions of approximately $140,000,000 and about $40,000,000 associated with our recapitalization actions for a total of $180,000,000 In summary, we're not relying on the markets. We're focused on executing our operating plan and our strategic transformation plan. Terex is in a stronger position than we were a year ago.

We're a more focused company, we have a stronger balance sheet and we have the team in place to execute on our commitments. With that, let me turn it back over to Brian.

Speaker 1

Thanks, John. As a reminder, during the question and answer session, we ask you to limit your questions to one and a follow-up to ensure we have time to get to everyone. With that, I'd like to open up it up for questions. Regina?

Speaker 0

Our first question will come from the line of Steven Fisher with UBS. Please go ahead.

Speaker 5

Great. Thanks. Good morning. Good morning, Steve. Good morning.

What if you could talk about the visibility to the minus 11% sales on cranes? You've got about one quarter's worth of sales in backlog. How did you get to the 11% forecast? And what's the confidence that you have that we've now kind of got the downside risk baked in?

Speaker 2

Thanks, Stephen. So as we look at cranes and looking at cranes in 2017, the the way we're we're looking at it is we expect the first half of '17 to be down to mid to high teens compared to the first half of '16. And we expect the second half of '17 to be to be about flat with the with the second half of of six of 16. Steve and and the team are working hard to rebuild customer relationships. As a matter of fact, he's on a plane back from from India.

We had a we had a nice win for a large project in India that Steve was over there for. And then we are driving improvement and implementing our commercial excellence program. We launched the program, that really is about funnel and channel management. We launched it in the fourth quarter in Europe. We'll be bringing that out around the rest of the world.

That program, that focus on commercial excellence in the funnel does help to provide visibility, better visibility for us. But we don't have perfect visibility throughout the year. We have to book and bill to achieve our forecast. But that's how we believe it's going to unfold in 2017.

Speaker 5

Okay. That's helpful. And then how do you expect to execute the $350,000,000 buyback authorization, I guess, plus the extra 70,000,000 you still have left? And are we now thinking that your buybacks through 2020 should be in fact in that $1,000,000,000 to 1,000,000,000 point dollars range now that you're selling down the Coney Grain stake?

Speaker 2

Yes. Thanks, Stephen. I'd like to start by kind of the broader strategy around how our disciplined capital allocation strategy. And as we said, we started in the first focus was our balance sheet. So we'll pay down about $600,000,000 in debt as we go forward.

Next is around organic growth. So funding our new product development opportunities, maintenance CapEx. The third element is restructuring. And as we've indicated, substantial investment in restructuring and transformation activities in 2017. And then finally, how do we efficiently return capital to our shareholders?

And the first is the dividend. As you saw, we announced last night an increase in our dividend. And the second is the share buyback program. So we did announce $350,000,000 program. Our objective that we announced at Investor Day has not changed of $1,000,000,000 to 1,000,000,000 point dollars through the 2020 time period.

The timing of the share repurchase program will be based on available liquidity. Obviously, think we're in a pretty good position there. Our cash flow, we do consume cash early in the year as we build inventories. And finally, from an execution, it could be executed through various methods, including open market purchases. So that's how I'd like to answer that question about the share repurchase program.

Speaker 5

Okay. Just to clarify, dollars 600,000,000 of debt reduction, was it $700,000,000 before?

Speaker 4

Kevin, you want to take that? Yes. We've got it's going to be 600 of firm debt. Now throughout the year in 2016, we were in and out of the revolver from time to time. So, and there's about $40,000,000 worth of cash based fees for that pay down of debt, the refinancing of the debt.

But the firm debt, term loans and bonds, the reduction is $600,000,000

Speaker 5

Okay. Thank you.

Speaker 2

Thank you, Steven.

Speaker 0

Your next question will come from the line of Ross Gilardi with Bank of America Merrill Lynch. Please go ahead.

Speaker 3

Hey, good morning. Good

Speaker 2

morning, Ross.

Speaker 3

Hey, John, you've in the process of making some big changes at Terex, obviously, for the last year. And now, Mercado is joining the Board. And can you hear me okay, by the way? I hear a little background noise.

Speaker 2

Yes. There's a little background, but we can hear you, Ross. Go ahead.

Speaker 3

Okay. Well, thanks. So yes, I'm just wondering, how should we interpret this? I mean should we take this to mean that you're contemplating even bigger changes than you were previously? And on that note, in your opening remarks, you mentioned your key business units going forward.

And I think you used the term mobile lifting, but you didn't use the term cranes. Was that just a word choice? Or are you reevaluating whether cranes will remain part of the portfolio?

Speaker 2

Thanks, Ross. So no, there is no let me be absolutely clear here. Our and if I use the word choice there, Ross, we'll we'll get that cleaned up on the next one. But our our strategy is is is is and will remain. We're focusing our portfolio.

And so on the focused portfolio, obviously, a major step was the sale of MHPS. As we announced, we had, some smaller businesses that were held for sale. Our Coventry business that we're we're under contract, Brazilian utilities business, and our loader backhoe business in India. At the completion of those activities, really the focus element of our strategy will be complete and we'll be focused on the three segments that we have going forward. So that part has not changed.

We continue to simplify the company. And again, that's around the restructuring activities of manufacturing footprint and SG and A and then driving excellence through our Execute to Win system. So there is no change in the strategy as announced, and that is our consistent strategy going forward. So focus is almost done as we finish those relatively small pieces remain of our businesses going forward.

Speaker 3

Okay. And then just I wanted to clarify. Just on forecasting, mean, accountability has been a big part of your platform, John, and you guys have accomplished a ton over the last year. You're still having to take the outlook down a little bit. It sounds like some of that was timing.

But from a forecasting perspective, what's happening at Terex to drive increased accountability? And do you have confidence that you're getting the proper market intelligence from each of your business units to formulate an accurate forecast?

Speaker 2

Thanks, Ross. On the forecasting side, yes, it has been a challenge. These dynamic markets and dynamic industry issues. I've spent most of my career in capital goods, so I know it is a challenge. But part of the commercial excellence side of our business is really focusing in the channel phase, not just on orders but upstream.

What are the opportunities? How are we quantifying the opportunities? And then putting in place systems and processes, the discipline, if you will, to manage that funnel process. We made good progress, for example, in our AWP segment. It's been launched.

We're actually using salesforce.com in our AWP segment. Initial launch was was in in in North America. So that that data, that information is helping drive greater visibility and clarity to the funnel. In our cranes business, we didn't wanna wait for a Salesforce implementation, so we put in place some modified tools to use to help again drive the the visibility to the funnel, the discipline to the funnel, and understanding before we miss, you know, where are we or or exceed. Do we know it sooner than we have previously?

So it's a work in process. We we we operate in dynamic markets, but we're we are making, you know, good process with our commercial excellence. But, again, AWP has basically been rolled out in in North America. Cranes has basically rolled out in Europe. Throughout the course of the year, we'll be rolling the system out through the rest of the regions, which will help provide greater clarity and benefit for us going forward.

Speaker 3

Thanks a lot.

Speaker 0

Your next question will come from the line of David Razo with Evercore ISI. Please go ahead. David, you may be on mute.

Speaker 6

Hi, it's David Raso here. Just wanted to clarify the guidance. So it looks like the debt reduction implications, that's in the guidance. But when it comes to any use of the last week's sale of the Kona stock, be it share repo or whatever it may be, that is not in the guidance. Is that correct?

So the idea of if you utilize that cash per share repo this year that is still upside because I noticed the EPS guidance only includes the current share count. Is that correct?

Speaker 4

Right. We just it only assumes enough share buyback to offset any management stock comp nothing beyond that in the guidance.

Speaker 6

And the equity income, appreciate the accounting for it. You're still figuring that out. But can you help frame a little bit for us how you think about the potential EPS impact? And should we expect that to be put in the guidance at some point this year?

Speaker 4

Sure. So with the recent sell down bringing us to 15.5% ownership, we're looking at the implications of that from an accounting standpoint and how we'll treat that going forward. So that's one thing. The other side of that coin is obviously Konecranes hasn't given guidance yet and probably won't until the end of their Q1. So for those reasons there's nothing included in our guidance.

Speaker 6

Okay. But conceptually using consensus numbers for their net income and your stake in it as we know it now with the sale down last week, there's nothing we should be thinking about that isn't logical to use your 15% plus for the rest of the year on that net income. Is that fair?

Speaker 4

Yes. I'd really rather not speculate on what the guidance is going to be. Obviously, they've got significant synergies to go after restructuring and adjustments. I think we want to wait for Konecranes to put their thinking out to the market before we speculate.

Speaker 6

That's fair. And on aerial work platforms, the backlog and orders year over year are down 11%, 12%. You're guiding the full year sales down around 12%. Can you give us some sense of the cadence as you expect sales to play out for the year in aerials? And maybe any color year to date on what you're hearing on the order book?

Speaker 2

Sure. Thanks, David. In terms of the overall cadence, don't think we'd anticipate any significant change to historical patterns. As I said, David, in my underlying my opening remarks, the underlying rental market is relatively healthy. Customers' attitudes are pretty good.

I'll be down at the rental show next week, so I'll be able to get some firsthand experiences on what they're seeing. But the replacement cycle is real, and and and, you know, we saw it in in in '16. We we're forecasting and believe we'll see it in '17. And, you know, obviously, I don't wanna get in the in the in the monthly, you know, forecast or or quarterly forecast, but I can say this that forty five days in, we're basically on our plan in terms of shaping up the way our plan incorporates it. No real variation from what our plan is forty five days in.

Speaker 6

Okay. Thank you.

Speaker 0

Your next question comes from the line of Ann Duignan with JPMorgan. Please go ahead.

Speaker 7

Yes. Good morning.

Speaker 2

Good morning, Ann.

Speaker 7

Good morning. In your opening remarks, talked about pricing remaining a headwind. Could you just talk a little bit more about pricing by segment and where you're seeing obviously, probably cranes, but can you talk about pricing across the different businesses and where you're seeing the pressures?

Speaker 2

Yes. Thanks, Ann. In terms of the pricing pressures we're seeing in AWP, we are seeing global pricing pressure in North America and in Europe. Some reasonable pricing okay in in in Asia. And then in in cranes, you know, it's a difficult market globally.

So we're seeing, you know, we're seeing pressure on pricing for the availability of of business out there. So it is a difficult, challenging global pricing market. I will say that as we continue to look at pricing, the point I continue to emphasize is we have to drive pricing hard. But the thing that we can control is to ensure that we're not over oversupplying the marketplace and not oversupplying causing increased downward pressure on pricing. Because as you know, these are capital goods and it's the upfront price, it's the cost to operate, and it's residual value.

And so you don't want to destroy that long term value by oversupplying. So we're the team did a good job, think, in 2016, our net working capital improvements. A lot of it were around inventory and inventory management going into 2017. We're trying to do our part to not make a challenging global pricing environment any more challenging.

Speaker 7

Okay. I appreciate that. And my follow-up question is more conceptual. If I look at the amount of heavy lifting you guys have done over the past year across Life Cycle Solutions, Commercial Excellence, Strategic Sourcing, etcetera, could you help us out, where do you think the company was when you started on this journey maybe on a scale of one to 10? Where are you today?

And when do we get to 10 or as close to commercial excellence as possible? Just want to put a framework of how much heavy lifting has been done and how much more has to be done?

Speaker 2

Thanks, Ann. I don't know if I'll necessarily put things on an operating scale, but I'll say this. Throughout Terex, there are pockets of excellent execution on commercial and operational activity. The challenge for Terex is that over time that those best practices were not necessarily shared horizontally throughout the company. And so as we did our strategic reviews and went out and spent time with the businesses, we saw some opportunity to improve on the commercial side of the business.

And so that's why we started in needing to build some capability. We're making some investments on the commercial upfront side of our business. What I tell the team is you can have the same discipline you have in your lean operations on the manufacturing floor. You can have that same process discipline on the commercial side of the business. And I think there's opportunity across our portfolio to drive improvement there.

So we have done some heavy lifting, more heavy lifting to go. On strategic sourcing, we have not coordinated spend across the enterprise. And there's heavy lifting to go there. As I said during the Investors Day, we're gonna make investments in '17, and we won't we won't see the benefits of that until 1819, and beyond. And so we're we're putting in place.

We're using some third party assistance, again, to build capability to accelerate the learning, to train, and put in place rigorous processes that we can leverage across the company to drive improvement in how we we purchase a direct and indirect material. So in that area, again, pockets of excellence, but we've got a long way to go, to leverage the the total spend of Terex. And so that's an area that that came out. And, so those are why we're focused on those, you know, respective areas. And then life cycle solutions, again, in some areas we're doing a really great job, but I don't find that consistently across the company.

So I can't rest or we can't rest until we have consistent excellence across the company and there's opportunities to drive. That's an important part of our business. It's a huge impact to the to the brand equity of the company from a customer's perspective. So there's a lot of work that that we're doing on life cycle solutions as well. So detailed plans, rigorous implementation, on course, off course.

If you're off course, then we gotta countermeasure and understand why we're off course. And that consistently applied over time will lead to the results that we talked to at the Investors Day at driving this business to a 10% OP by 2020.

Speaker 7

I appreciate the color, John. And just FYI, I've heard from several of your employees that they really appreciate the fact that you do manage by walking around. So wish you luck on that.

Speaker 2

Thanks, Ann. Sometimes they don't want to see me, but most of the time

Speaker 8

they're happy to see me.

Speaker 7

I know the feeling. Good luck.

Speaker 0

Your next question will come from the line of Jerry Revich with Goldman Sachs. Please go ahead.

Speaker 9

Hi, good morning everyone.

Speaker 2

Good morning Jerry.

Speaker 9

I'm wondering if you folks can update us on how we should think about the minimum cash position that you folks would like to keep on the balance sheet in addition to the revolver availability. Obviously, a lot of changes in the portfolio. Can you just update us? And if you're willing to just give us a sense for post the Kona Crane share sale, Kevin, where do you folks stand on cash at any given point post the transaction? If you could just help us understand the pro form a balance sheet to make sure we're capturing the moving pieces, that would be helpful.

Speaker 2

Yes, Gerry, thanks. And I'll have Kevin take us through that. But obviously, from an operating standpoint, continued rigorous focus, our biweekly cash calls, driving working capital improvements is that the foundational element of how we drive operating cash flow. With that, Kevin, you want to talk about it a little bit more strategically in the Sure. Versus the give you a little bit

Speaker 4

of a walk on cash, Sherry. So ended the year roughly at about $05,000,000,000 in cash, 500,000,000. Cash that we've gotten in so far from the transaction includes $820,000,000 as well as the monetization of shares at $2.67. So $1.87 of cash in. Now we've talked about paying down debt at 600.

There's also associated fees and costs with that of about 40 and then tax and other fees for the transaction, bankers etcetera. Total usage is about $710,000,000 So that leaves us with cash from the transaction of about $375,000,000 okay? You add that to our year end cash around $875,000,000 We typically seasonally will consume cash in the first half of the year. We've done that each of the last four years. We'd expect that to be in the 200,000,000 to $250,000,000 range this year.

It's higher than typical because of the deal related and the refinancing related cash outflows, okay? As John mentioned, we've got typical given the seasonality and the geographic mix of the business, we think the appropriate sizing for cash kind of through the season average in the two fifty million or so to $300,000,000 So that's kind of where we stand.

Speaker 9

Okay. I appreciate the color. And then just to switch gears, can you talk about within cranes based on your customer discussions, which end markets are starting to see an improvement in order trends? And that's I'm sure that's a relative question. Maybe the better way to ask it is which markets are at least bad at this point?

Speaker 2

Thanks. In terms of the kind of the overall crane markets, Europe, we did see on the large crawler cranes, as I spoke about, energy side on wind did impact it. But again, we think that market is going to be relatively stable going forward. We did have a large win of a major project in India that Steve's traveling back. So India in general across our business segments looks to be a good growth.

In North America, we're bottoming out. Hope at the bottom of the trough. Oil and gas is if you look at the Baker Hughes numbers, it's up 60% off an incredibly low base over the last six or seven months. Again, numbers, but I believe we're seeing the bottoming out on the oil and gas side. That part and the rotation and movement of equipment away from like the tar sands in Canada, we think that's complete.

So it's difficult right now to to you know, it's it's really project specific, customers working on large projects where they know they're gonna be committed for extended period of time is really where the where the demand is coming through. And then Latin America is again very challenging market for us and we're not seeing any signs of any type of recovery down in Latin America, principally driven by Brazil. I said in my opening comments Australia is an important market for us. It's still bottoming out and going along at the bottom. Just only general replacement machines.

That's some overall color for the global cranes market.

Speaker 9

Thank you.

Speaker 0

Your next question comes from the line of Andy Casey with Wells Fargo Securities. Please go ahead.

Speaker 10

Thanks a lot. Good morning.

Speaker 2

Good morning, Andy.

Speaker 10

A follow-up on the cash question from Jerry. What and if you said it Kevin, I apologize. What timing should we expect for the $180,000,000 cash restructuring?

Speaker 4

So like with the benefit, John mentioned that most of it's in cranes and most of that is going to be in Europe. So the timing is going to be more back half. So the cash impact will be largely in the back half from the restructuring and so will the benefit also contributing to kind of a more back end loaded EPS pattern than we normally see in the company.

Speaker 10

Okay. Thank you. And then on the Crane segment, I appreciate the comments about I believe it was North America still has an inventory overhang to work through. But I'm wondering if you've seen any increase in North American channel quoting activity? And then separately, do you think the upcoming CONEXPO show is having any influence on order placement timing?

Speaker 2

So in terms of ordering activity, can't say we've seen any precipitous change. It's challenging on the crane side in North America. On CONEXPO, we're excited about CONEXPO. We're going to have over 40 machines there. We're going to have a lot of new products on our stand.

I think that's the key to driving excitement, to driving incremental sales. On the crane side, when we announced new AC line in Mbama last year, we had good bump. That's doing well. We'll introduce those at CONEXPO here in North America. So what large trade shows do is they don't necessarily create new business, but it does kind of force the orders in closing.

Things kind of get delayed to the show where the final deal is signed. If somebody is a bit on the fence, you may have the opportunity to move them off the fence. So I'm not a believer that trade shows create new demand, but they do create a point of, hey, let's move to the next step. And we would anticipate seeing some of that at CONEXPO across all three of our segments this year.

Speaker 10

Okay. Thank you very much.

Speaker 4

Andy, can I just add one thing? You asked about the $480,000,000 I talked about the timing on the restructuring and transformation related January the refinancing related cash impact of roughly 40,000,000 is going to be in the first quarter. Some of that will spill into April.

Speaker 10

Okay, great. Thanks Kevin and good luck.

Speaker 0

Thanks. Your next question will come from the line of Nicole DeBlase with Deutsche Bank. Please go ahead.

Speaker 11

Yes, thanks. Good morning,

Speaker 2

Good morning, Nicole.

Speaker 11

So my first question is around the rest of the Kona Crane stake. You guys highlighted in your opening remarks that you still have 15.5% stake in the company and want to take advantage of the synergy opportunities. And I guess if you could provide some updated thoughts around the process of selling down the rest of that stake.

Speaker 2

As I said in my opening comments, Nicole, we do believe in the industrial logic and the industrial synergies of the transaction. And I think what you what we saw was that the market realized that from the time we announced the transaction to, you know, the price that we sold some down. So, you know, we just felt it was prudent given that appreciation in the stock price. It was prudent to take some of that off the table and take some of that to cash. And so that's what precipitated the decision for us to sell down that 9.5% interest.

And again, the remaining 15.5%, I don't want to speculate about timing, but I will say we fundamentally believe in the industrial logic as the market has seen in the combination of the two companies.

Speaker 11

Okay. That's helpful. Thanks. And then my second question is just around Cream. So I mean your backlog is down 21%.

You're guiding for an 11% revenue decline. So it does seem like there's a possibility of revenue slippage. We'll see. I mean the comments that you gave around the first half versus the second half are really helpful. But if that doesn't come through and there's a bit of slippage in the revenue, I guess what I'm trying to get at is how much risk there is to the margin guidance based on what you guys are doing within the Crane segment from a restructuring perspective this year?

Speaker 2

Again, based on the restructuring activities and a predominant amount of these restructuring activities in 2017 taking place in Europe, we thought it was prudent to guide to minus 2% level. You know, right now, the team is driving hard, to implement and execute the plan. If if volume were to and, again, I I don't wanna speculate. We think we've guided appropriately, given the market and the market dynamics. Clearly, if if volume were to fall off precipitously off our guide that given the low volume levels, that would have an impact on our operating margin.

So I don't want to speculate about that. But clearly, these levels, would have an impact. But again, Steve and the team, laser focused on driving this business to profitability, turning this business around and that's what the team is focused on.

Speaker 11

Okay, got it. Thanks. I'll pass it on.

Speaker 0

Your next question will come from the line of Mig Dobre with Baird. Please go ahead.

Speaker 12

Good morning gentlemen. Just Good looking to clarify a couple of things. So in terms of the equity income from Kona Cranes, I'm trying to understand if you're simply not guiding to it because you're waiting for them to put forth their plan for the year end guidance and we should expect that to be included at a later point in the year or if you're simply going to be treating your own financials and reporting going forward on an excluding Kona Crane's basis?

Speaker 4

Mig, so the way we're looking at it is with the sell down, we're evaluating the accounting to whether or not we will record it as equity earnings. So we're making that evaluation now and therefore we've left it out of our guidance. So that's the primary reason.

Speaker 12

Well, understand. I'm just trying get from you as to how basically you would like investors or the sell side or member to think about this going forward in terms of whether or not it should be just purely excluded or we should be thinking that this is coming into the numbers later on in the year.

Speaker 4

Yes, would say we're guiding specifically for that reason. So I would suggest that the guidance be followed.

Speaker 12

Okay. And then my follow-up is also a detail on interest expense. On your updated debt structure, I'm trying to get to that $70,000,000 number that you've got for 2017 and I'm having a bit of a hard time. What am I missing there?

Speaker 4

I'm not sure exactly what you're missing. Reduction in the reason it's it's kind of a two step reduction, right, is because the timing of when we did the refinancing. So we're gonna have roughly $600,000,000 less debt, But the tendering process in Q1 through Q2 will have some overlap. So we're going to be paying for basically two sets of bonds. So there's some frictional costs within 2017 that don't allow us to get to the full run rate benefit of the reduction and the improved pricing on the debt.

Speaker 12

And that's not included in the $40,000,000

Speaker 4

Not included right. The $40,000,000 are more call premiums on the bonds, fees that will go to, our bankers who supported us on the transactions, things like that.

Speaker 12

Okay. I appreciate it. Thank you. Sure.

Speaker 0

Your next question will come from the line of Millie Padawala with Morgan Stanley. Please go ahead.

Speaker 11

Just had a question some tax policy. I know obviously it's too early to tell, but just given the political rhetoric and the letter that several Cap Good CEOs sent to Congress yesterday, I would just be curious how you're thinking about the border adjustment tax and what impact that would have on Terex given your kind of importexport dynamic?

Speaker 2

Right. Thanks, Millie. I'll kind of take that go up one level a little higher and then maybe pass it to Kevin for a second. So in terms of the President Trump effect, we're kind of looking at it as three potential, and again the words potential positives and one potential negative. On the positive side, when you talk to our customers, the reduction in the regulatory burden, that's meaningful because many of our customers across all three of our segments are small businesses.

As well as they also the banking reform, if it frees up banking for the small and regional bankers to get capital into marketplace. Our customers do talk about the regulatory burden and reform and they're excited about potential opportunity however that unfolds. On tax reform, it clearly will help us as a global company, but it will also help the smaller businesses that we deal with. I think it's very difficult right now to understand which direction, the tax reform is going to go. Clearly, spending.

If in fact, there there is an infrastructure bill, that that will clearly help all three of our segments. We don't anticipate any of that in 'seventeen. Frankly, it probably if it shows up, it's going to be late 'eighteen to 'nineteen just given municipal, state, and federal contracting laws. And then the one potential negative is the trade friction and what happens as a result of trade actions, things like border taxes and the like. From a Terex perspective, we're about a net exporter exporting out of The US.

We do import our MP machines, our Fuchs machines, and some of the large crawler cranes and all terrain cranes are the products that we import. But we are, in fact, a net exporter. So we're not clear on what the border tax implication would have. Clearly, don't think it has the dramatic impact on us that it would necessarily the retail channel, if you will, and the Walmarts of the world, But it will have an impact. And then the other thing that we need to understand that we're working through is what impact would it have on our tier one suppliers and their tier two and tier three suppliers, where are they getting those supplies from.

So we're starting to engage our tier one suppliers on those types of conversations as, you know, what's the potential impact. So overall right now, I'd say there's a net positive sentiment as a result of the of the president Trump impact with a whole lot of question marks that we're all trying to to understand. And so that's how I'd answer that question. It's about

Speaker 0

Okay, got it.

Speaker 11

That's helpful. I'll pass it along.

Speaker 2

Thank you.

Speaker 0

Your next question comes from the line of Steven Volkmann with Jefferies. Please go ahead.

Speaker 8

Hi, good morning. I was just hoping maybe for a little bit more color on a couple of things you said in your prepared remarks, John. We talked a little bit about AWP mix and pricing being a challenge. I think you talked about pricing a little bit on the crane side too and then inventories on both as well. So I'm trying to get a sense, pricing just a point or two of a headwind?

Is it worse than that? How much inventory is actually out there that we'd have to sort of work through before things could get better if they were to turn? Any kind of color you'd like to give us on that would be great.

Speaker 2

Thanks. In terms of let me just talk on the AWP side. In terms of pricing, it's a challenging pricing environment out there. I don't necessarily want to talk about specific percentages, but it is a challenging marketplace. In terms of inventory, my comments on inventory on AWP were that our team did a good job managing our finished goods inventory and not oversupplying the marketplace.

So we drew down our finished goods inventory fairly substantially given the reduction in sales. Because that's predominantly a rental channel, there's not a lot of inventory, if you will, in the distribution channel. And so as the market picks up, as the replacement cycle improves, we would expect to see demand to flow through. So that's on the AWP side. On the crane side, it's just all the markets are pretty challenging right now.

The markets are at trough levels and so every transaction is difficult and customers realize that they have some negotiating advantage in that environment. And so again, globally pricing dynamics are a challenge in cranes. Again, we modulated our production throughout the year to reduce our finished goods inventory. And, from a channel inventory standpoint, there's not significant channel inventory in there. There's just not significant demand to drive the need for you for new cranes really globally.

It's really become a very project specific type of business. If there's a definitive project, customers are making the investment. Without definitive projects, they're not willing to make the investment.

Speaker 8

Okay. Good. That's helpful. And then obviously, there's been some animal spirits released lately. And I'm just curious, if things were to come out a little bit better than you expected on the top line, how would you encourage us to think about incremental margins relative to kind of where you are in all the cost cutting and programs and so forth?

Speaker 2

Well, obviously, one of the things that we're clearly focused on and to simplify is taking out structural costs. So we would anticipate with volume improvement increases or improvement in our incremental margins. Part of the reason our guidance is, what our guidance is this year is because our volume is off about $05,000,000,000 and on relatively flat OP margins. And that's being driven by improvements in our decremental margins as a result of our simplify focus activity. So again, what we're driving to is we're driving this business to be on relatively modest revenue with 10% OP business in 2020, and that's what we're focused on going forward.

Speaker 8

Okay, great. And if I could just slip one more in. You keep talking about the sort of the second half weighting and certainly makes sense relative to what you've told us this morning. But do you think one quarter first quarter could be an up quarter for you? Or is there any more detail you'd like to give us about Q1?

Speaker 2

Yes, I don't I really don't want to get into the quarterly guidance. And given it's Kevin's last call, I won't let him get into the quarterly guidance either. But no, it's going to the dynamics are we expect to see improvements in the back half of the year. So we're weighted to the back half and that's why we specifically made those comments in my opening remarks. And again, it's driven by the restructuring activities, seeing that in the benefit later half of the year and the interest expense later half of the year.

Speaker 8

Great. Much appreciated. Thanks.

Speaker 0

Your next question will come from the line of Joe O'Dea with Vertical Research. Please go ahead.

Speaker 13

Hi, good morning. Good morning, Joe.

Speaker 6

First one, you talked about some

Speaker 13

of the mix headwinds with AWPs. If you could just flush that out a little bit in terms of customer mix, product mix, regional mix and whether or not we're going to see continued mix headwinds in 2017 or whether that's pretty much baked in with your experience through 2016?

Speaker 2

I think the specific response there is that we're kind of baked in our anticipation of the product mix implications as well as the regional mix implications. So that's baked into our 8% OP guidance for AWP.

Speaker 13

Just specifically on the product side exactly what you're seeing with some of the movement there?

Speaker 2

Again, it's basically playing out as we forecasted. We saw a precipitous decline in, you know, booms in in telehandlers in in in '16. We don't think it'll be quite as steep in in '17, but but but still a continued, decline. And so that that that's what we're anticipating. I would say one, you know, again, positive to help the overall market to also explain the replacement cycle and to drive, you know, improvement as we move through the replacement cycle is that there was good news, you know, here recently on the auctions on on aerial products.

There's very little inventory, which speaks to the supply and demand associated with the replacement cycle. There's just not that many machines being replaced. And the re you know, the the used pricing in in the auctions was was was good. And so that that's a good sign, in a challenging market. Are the green shoots that you're looking for.

Speaker 13

Great. And then on the free cash guide, I think a lot of moving pieces with some of the adjustments to that. So when you look at the adjusted free cash and the current guidance relative to what you gave in December, it looks like that's up pretty nicely. And just whether or not in fact you have seen some improvement in that outlook and if that's more working capital related or if it's just some of the one time adjustments that are now being factored in?

Speaker 4

Right. So just going back to New York and the Investor Day, we talked about an as adjusted cash flow because at that time we knew we were going be taking restructuring. We didn't know how much and what the cash impact would be. And obviously, we've been able to solidify the accounting on the adjustments and estimate the cash impact. So that's the primary difference between what we said in New York and what we're saying now for free cash flow.

That roughly $180,000,000 of incremental cash impact from the refinancing and the restructuring and transformation charges. That's really the difference. So if you net that out, obviously there is a slight improvement from what we talked about in New York in December.

Speaker 13

Okay. And then just one last one, John, think at the Analyst Day you had also talked about how Terex is not portfolio manager and so your longer term view with respect to the Konecranes position seem to be that it wasn't something to hold on to. Just to confirm that you do appreciate and like the synergies of the combined entities, but at the same time that this would still be something that you don't view yourself as a portfolio manager?

Speaker 2

Yes. As I said in my comments, we absolutely believe in the fundamental business logic of the combination and we think there's opportunity going forward. But we aren't we're not portfolio managers. We're operators to operate the businesses that we have. And so that has not changed.

Speaker 13

Okay, great. Thanks very much.

Speaker 0

Your next question comes from the line of Joel Tiss with BMO. Please go ahead.

Speaker 10

Hey, made it. How's it going guys?

Speaker 2

Good, Joel.

Speaker 10

Anything unusual in the fourth quarter on SG and A? It was 20% of revenue, so it just looked a little high.

Speaker 4

Yes, nothing Joel out of the ordinary. We adjusted for any of the major unusual items.

Speaker 10

And then prior management used to talk just kind of on the big picture, they used to talk that a lot of these, especially cranes and aerials, didn't really lend themselves to a lot of aftermarket opportunities. So I just wondered, as you've been out talking to customers and the employees and all that, was that a little bit misguided? Or what have you discovered in that regard?

Speaker 2

I won't comment on previous comments, but we produce a capital good. And part of the capital good is the cost to operate productivity and uptime. And, so we're we're focused on that on that solution side, of the business. And, again, I I think there's opportunity for us to improve that, to focus on that element, and that's why we put in place Scott in his role to treat it as a business and and really focus the the organization around. It's it's an important part of our business, and it's absolutely critical to the customer.

And so that's, that's why we called that out as one of

Speaker 3

our our strategic priorities,

Speaker 2

life cycle solutions. I think there's opportunity for improvement both from a customer perspective and from our overall performance and financial perspective.

Speaker 10

Okay. All right. Thank you very much.

Speaker 0

Your next question will come from the line of Seth Weber with RBC Capital Markets. Please go ahead.

Speaker 14

Hey, good morning and thanks for extending the call here. You've talked a couple of times about the cadence on the restructuring. I'm just wondering on the Crane business specifically, whether you think the Cranes will be profitable by the end of the year in the fourth quarter, say, will that be enough to kind of get you across the profitability threshold? Thanks.

Speaker 2

Thanks, Seth. I don't again, I don't I want to try to avoid quarterly guidance within the segments. Obviously, we've guided to a 2% OP for the year based on the volume. Steve laid out at Investor Day, we've got a detailed plan to drive the fundamental improvement in this business going forward, and we'll continue to report out the progress we make on that restructuring plan and keep you up to date as we move through the quarters.

Speaker 14

Okay. Fair enough. And then I guess maybe just going back to the Analyst Day, I think in response to a question on the AWP business, you talked about your expectation and you thought 2018 could be an up year in North America. Do you still feel that to be the case?

Speaker 2

Thanks, Seth. As we said, the replacement cycle is real. We're in it. Matt and the team have pretty good in continuing to improve sophisticated modeling, engaging with customers. And so it's obviously too early to predict.

But right now, on what we see, we're going to stick to what we said. We should be able to see an inflection point and a flattening out to slight upturn in 2018. And obviously, we'll update that as we go through the year, but we haven't seen anything from Investor Day to now that would change that viewpoint.

Speaker 14

Okay. Thank you very much, guys. Appreciate it.

Speaker 4

And if I could just go back Joel to your question about the SG and revenue, I just want to make sure we're clear on that. The 20% basically the reported but the adjusted number is about 14.5%. Just wanted to make sure we were clear.

Speaker 0

And at this time, there are no further questions. I'll turn the conference back over to management for any concluding remarks.

Speaker 2

Again, thank you for your interest. Thank you for your in-depth questions. If you have any additional questions, please follow-up with Brian. He'd be more than happy to help answer any questions that you have. And again, thank you for your interest in Terex.

Speaker 0

Ladies and gentlemen, this concludes today's conference. Thank you all for joining and you may now disconnect.