Terex Corp (TEX) 2014 Q2 法說會逐字稿

Good morning. My name is Jody and I will be your conference operator today. At this time, I would like to welcome everyone to the Terex Corporation second-quarter 2014 financial results conference call.

(Operator Instructions)

Thank you. I would now like to turn today's conference over to Mr. Ronald DeFeo, Chairman and CEO of Terex Corporation. Please go ahead, sir.

Thank you, Jody, and good morning, ladies and gentlemen. We appreciate your interest, as always, in Terex today. On the call with me this morning is Kevin Bradley, our Senior VP and Chief Financial Officer; Kevin O'Reilly, Vice President of Operational Finance; Tom Gelston, Vice President of Investor Relations; and most of our leadership team, including our business segment presidents, who will be available on the call to answer your questions later on.

As usual, a replay of this call will be archived on the Terex website, www.terex.com, under Audio Archives in the Investor Relations section. I'll begin with some overall comments, Kevin will follow with a more detailed financial report, and then I'll come back and provide a little bit more detail before we open it up to your questions.

We will be following the presentation that was sent out with the earnings release. And I'd like, when it comes to the question-and-answer period, to ask that you only ask one question with a follow-up to give everyone a chance to participate. And given the other news, other companies reporting today, we'll try to get this call done in a timely fashion and stick to about an hour, but we'll stay around as long as you have questions as well.

Let me direct your attention to page 2, which is the forward-looking statement and non-GAAP measures explanation. We'll encourage you to read this, as well as other items in our disclosures, because the information we will be discussing does include various risks and uncertainties, as explained in detailed in our 10-K and 10-Q public filings.

Now turning to page 3, second-quarter results for 2014 delivered earnings per share of $0.76 from continuing operations. This represents a $0.59 per share increase compared to the prior-year reported EPS of $0.17, and a $0.12 increase compared to the prior-year adjusted earnings per share.

Performance in the quarter was mixed, both from a geographic and product perspective. We continue to believe that an overall economic recovery is underway, as well as a recovery for our Lifting and Material Handling products. However, end markets remain somewhat difficult to predict and somewhat uncertain depending upon where you are around the globe.

Overall growth was an encouraging 10% compared with the prior-year period. Growth came primarily from our Area Work Platform and MHPS businesses, which grew at 18% and 17% respectively in the quarter.

Construction and MHPS performance were generally in line with expectations and our Cranes business, while down slightly compared with year-ago, had a positive order intake and continues to improve, supporting our expectations for a stronger second half 2014. Our MP business, Materials Processing business, is up slightly over the prior-year quarter, but a little bit below our expectations from a revenue perspective.

Free cash flow for the quarter was moderately negative at $19 million, in line with our expectations. We are reaffirming our 2014 guidance of $2.50 to $2.80 per share, with free cash flow of $200 million to $250 million.

We're making some minor modifications to that outlook that I'll cover later in the call. Let me now turn it over to Kevin Bradley who will take you through the specific numbers for the quarter and the half year.

Thanks, Ron, and good morning everyone. Let's turn to slide 4, which provides a year-over-year comparison of the second quarter on both an as-reported and as-adjusted basis. Although there were no adjustments in 2014, details of 2013 adjustments can be found in the appendix.

Net sales for the quarter of $2.1 billion increased from the prior year by 10.4%, or approximately $193 million. Changes in foreign exchange rates accounted for approximately 3 percentage points of the increase.

Our AWP business posted 18% growth and MHPS was up 17%. Construction was flat compared to the prior year and Materials Processing, although up 4%, fell slightly short of our expectations.

Our Cranes business, although down 3% compared to the prior year, showed strong sequential growth, up 28% over Q1. We are starting to see the benefits of a stronger order pattern reported over the last three quarters in this segment.

Gross margin as adjusted decreased 50 basis points to 20.6%, from the prior year, driven by product mix, primarily in AWP and Cranes, and start-up manufacturing costs related to our Oklahoma City facility. SG&A as a percentage of sales decreased from 13.1%, as adjusted in 2013, to 12.8% for the quarter.

Income from operations increased $12.5 million compared to the prior year as adjusted. As a percentage of sales, operating margins decreased slightly to 7.8% for the quarter. Net interest and other expense increased slightly over the prior year, driven largely by an increase in the average outstanding balance in our revolving credit facility.

The effective tax rate was approximately 31.2% in the quarter, compared to 38% as adjusted in Q2 of 2013. This improvement was mainly due to the reduced impact of losses not benefited in the period. For the quarter, earnings per share was $0.76 compared to and as-adjusted earnings of $0.64 in 2013. Our as-reported EPS for Q2 2013 was $0.17.

Networking capital as a percentage of annualized sales was 24.5%, an increase from the 22.9% reported in Q2 of last year. The increase was driven primarily by increases in accounts receivable, reflecting the higher sales in the quarter, as well as an increase in inventory levels anticipating strong second half growth, largely in our AWP and MHPS segments. Return on invested capital increased to 10.6% from 5.3% in the prior year.

Now turning to page 5, we show our year-to-date results compared to 2013. Sales growth for the period was 5.5%, again led by strong AWP business, up 17%, and growth in our MHPS business, up 13%. Construction and Cranes were down 4% and 10% respectively, while Material Processing was flat for the first six months.

Gross margins during the period were in line with the prior year as-adjusted results. Volume benefits in AWP and MHPS were offset by negative product mix in AWP and Cranes, and lower factory utilization in our Cranes segment, affecting Q1.

Operating margins remained unchanged for the first six months. Net interest and other expense increased slightly over the prior year and our effective tax rate was approximately 30% compared to 39.2% as-adjusted in 2013.

Similar to our quarterly results, the decrease was mainly due to the reduced impact of losses not benefited in the period. Earnings per share for the period was up $0.17, or roughly 20%, versus the same period in 2013 on an as-adjusted basis.

Now on page 6, we provide a bridge, breaking down the $148 million increase in liquidity during the quarter. Free cash flow, which we define as cash from ops less CapEx, was a use of $19 million, and in line with our expectations for the quarter.

During the quarter, we completed the divestiture of our Off-Highway Truck business for $160 million. The majority of the proceeds were utilized to reduce the outstanding revolver balance in June.

We continued our stock repurchase and dividend programs for a combined use of $37 million during the quarter. And lastly, the other category mainly reflects a reduction in the amount of LCs issued and outstanding under the Company's revolving credit facility. With that, I'll turn it back to Ron.

Yes. Thank you, Kevin, and moving onto page 7 of the presentation of the net sales bridge for the quarter. Revenue overall was up primarily, as mentioned, from AWP and MHPS, as noted on that slide.

Our Cranes segment revenue was down about [3%], but experienced [to that] 28% sequential improvement over the first quarter, which was, as you know, weak. Regarding AWP, it's interesting to note that this represents an all-time record quarter for net sales.

On page 8, we review the revenue performance for the Company by geography. In general, and this is a common theme, the traditional or developed markets of Europe and North America grew, while the balance of the world saw some softness. North America represented 44% of our business, while Europe was 29%, and the rest of the world was 27%.

While on this slide, I'm going to discuss some more details on each segment relative to our geographic performance, although that data is not included on the slide. For somewhat competitive reasons, I am not going to give you specific percentages, but general percentages on how our individual businesses performed by geography.

For AWP, the second-quarter performance was led by North America, where net sales rose more than 25% versus the prior-year period. Europe also grew more than 15%. However, on a year-to-date basis, European growth is actually outpacing North American growth, reflecting the improving trends in Europe, but still of course, Europe is way below the past prior peak.

Offsetting this is a challenging environment in Latin America, which declined over 30% in the quarter. Although this business is quite small, we're encouraged by the progress we are making in China. Orders and backlog for the segment overall continue to be quite solid. Customers are performing well for AWP and we expect continued strength, particularly in North America and Europe.

Turning to the geographic performance of Construction, North America was basically flat with year-ago, but Europe grew over 15%, and for this segment, Europe represents over 40% of our business. Our North American Concrete business is strong, but we are experiencing some weakness in our Compact business in North America. Overall orders and backlog are about as expected.

Cranes performance continued to be strong in Europe. In fact, Europe represented all of our growth, with revenue up well over 50% compared with the prior-year period for the second consecutive quarter. Conversely, North America was down 15% for the second consecutive quarter and Australia continues to decline.

Overall bookings were about in line with backlog, so for three consecutive quarters, we've had a positive book-to-bill ratio for this segment. First half orders were about 12% above last year, supporting our expectation for a stronger second half.

The Material Handling & Port Solutions business was mixed, with basically flat net sales from the Material Handling business, and about 50% growth from the Port business. We're encouraged by the stabilization of the Material Handling business compared with the prior-year period and deliveries related to the large port equipment projects continue, particularly in Europe.

The backlog remains flat on a year-over-year basis and is about as expected. Materials Processing net sales were positive in North America and Europe, growing double-digits in both regions, but somewhat offset by a meaningful decline in Australia and Latin America.

So overall, for the Company consolidated, developed markets are strengthening, while developing markets remain challenging. I do expect the developing markets will improve, if not later this year, probably in 2015.

On page 9, operating profit improved in the quarter, up about $13 million compared with the year-ago adjusted levels. Our AWP business continued to deliver good margins at 15.8%. While volume was strong, the mix of business, planned investments in new product development, and manufacturing footprint have continued to put modest pressure on the incremental margins in the short term.

Construction improved in the quarter to report a profit of $4 million. The decrease in operating profit for the Cranes segment is primarily volume-related, with a modest decrease versus last year.

MHPS performance improved as a result of the higher sales and volume and the restructuring actions of 2013, but we continue to expect MHPS to be profitable during the remaining quarters of the year. In fact, pretty similar to last year, the operating margins should improve meaningfully in the back half of the year. MP's performance was roughly in line with the prior year.

Now turning to page 10, and our 2014 outlook. Given that we're at the midpoint of the year, we thought it would be helpful to update our current view on guidance. As you see, we've lowered the upper end of the sales range as a result of a more tepid recovery in many markets.

The lower sales level has had a modest impact on margins, with our range lowered 25 basis points on both the high and low end. Essentially, lower volume will somewhat but not completely be offset by the effects of cost reduction activities and a better product mix.

Other small changes we expect include $5 million less in interest and other expense, as well as adjusting the tax rate down to 30% to 33%, from the prior 33% to 35%. We think we're getting the benefit from losses not benefited and actually expect our long-term tax range to be coming down over time. Other considerations, such as a slightly lower share count of $116 million (sic -- see slide 10, "116 million"), will let us reiterate the range of EPS, $2.50 to $2.80.

On page 11, we try to provide some commentary as additional perspective to the outlook change. Those changes are noted in bold. AWP is now anticipated to grow net sales for the full year at a slightly higher percentage, while moderating growth expectations for both MHPS and MP.

In terms of the operating margins, we're looking at slightly lower margins in both our Cranes and MHPS segments, as we believe underperformance in the first quarter for Cranes, and customer delays in MHPS, will make it too difficult to achieve the overall range previously given, despite both segments anticipating a stronger back half of 2014.

So to conclude on page 12, AWP is expected to continue to perform well, both in terms of sales and margin opportunities. We remain positive about Construction, MHPS, and MP segments, responding to improving our conditions.

We are encouraged by the recent order trends in Cranes, but we'd really like to see that momentum continue. We expect some acceleration of EPS in the back half of the year as happened in 2013, so consequently, we are reiterating our EPS guidance of $2.50 to $2.80 a share.

Fundamentally, we are positive about the improvements going on in the Company. Our operating environment remains somewhat challenged depending upon where you are in the world. Our Organization is functioning generally well, continuing to invest in new products and new sales initiatives.

We do have some margin challenges around the Company, but we're confidently addressing them. I'd now like to open it up to your questions, so operator, please open the lines and let's begin the questions.

(Operator Instructions)

Nicole DeBlase, Morgan Stanley.

Maybe just a question on the longer-term outlook. Clearly end markets are coming in a bit weaker than you had expected in the second half. But my question is, given that set-up and what we've seen in order and backlog trends, what's your level of confidence in your $5 target for 2016 at this point?

Nicole, I don't think anything has changed here for us. We set a goal of $5 a share, we believe that's achievable. We have said that, from this point on, about one-half of it has to come from the markets and about one-half will come from things that we can control and initiate ourselves.

We don't think that's changed. There's a few bumps in the road at this point in time relative to end markets and perhaps a little bit of our own execution. But we're in businesses that have performed at that level before and not all of our businesses have to perform at peak levels to achieve that in 2016.

Again, it's a goal. It's not guidance. But we think, as an Organization, that's within our reach to achieve, and we're going to do everything we can, within our ability to execute, to make that happen.

We've got strings we can pull relative to cost, relative to manufacturing, footprint, relative to sales initiatives, new products that are underway. And by 2016, all of the difficult challenges of the Tier 4 engine conversion will be behind us and we will have fresh new products in the marketplace.

So we're pretty confident that we can achieve that level. Timing is always a bit of a challenge when you're looking out two-plus years, but I don't think anything has changed.

Okay, that's really helpful, Ron, thanks. Then secondly, I'm going to dig a little bit into AWP margins. Can you guys give a sense of the impact of the manufacturing facility move there? I'm just trying to get a sense of -- 11% incrementals were a little bit weaker than we had expected this quarter, but where could they go in the second half given that mix is still a headwind?

No doubt that incrementals were a little bit disappointing for us. I've tried to guide the marketplace to a more balanced view of the margins for AWP because there's a whole mix of things underway within the segment. Fundamentally, 15%-plus operating margins for a business in this category are pretty good.

But we have a lot of work to do in our Aerial Work Platforms business to position this segment for better through-the-cycle performance. That includes changing our manufacturing footprint from being less west-coast centric to more balanced around the world.

It includes introduction of new products that position us competitively at the top end of the product range. It includes managing our supply base in a more global way. So there's a lot of things underway at the AWP business to position this segment for continued solid performance.

But it also includes some customer pushback to us on a few parts of the product category where they'd like to see a little bit better returns. Whenever our customer base is telling us things like that, we've got to make sure we stay competitive.

Also the Tier 4 engine conversion continues to affect us side of the business. You specifically asked about second-half margins, so I'm going to ask Matt to try and give you a sense of that, with that beginning commentary. Matt?

Yes. Okay, thanks, Nicole. Obviously, Q2, it was a historic record for us on the sales side at 18% year-over-year increase. But the margins only came up 11%, so our gross line--

Incrementally.

Incrementally. The gross profit line at 22.9% was down 1.3% and I'll try to give you a little bit more detail on the breakout of that. There's three main contributing factors to the incremental margin deterioration.

The first one is the mix and it's basically driven by a planned shift to the telehandler product line where we have typically not had a full product line. We have not had significant share. It's also the fastest growth category.

To give you a perspective on it, in the first half of the year, year-to-date, our sales on telehandlers were up 50%-plus. If you look at the other categories where we typically get our revenue, the second highest category is scissors and then booms would be the smallest. But all of those are double-digit growth, so they're all good healthy growth categories.

The second piece of the incremental margin deterioration is in manufacturing productivity. A lot of it has to do with the manufacturing start-up of telehandler production in Oklahoma City. Again, that's a planned investment in capacity; it's going to be a multi-year endeavor.

The first units shipped in June, which was a great milestone for us. What we expect going forward is we're going to continue to see efficiency gains out of the Oklahoma City plant as they get more unit production underneath their belt.

We also, from a manufacturing productivity perspective, we had a bit of inefficiency around inventory conversions. So we could see that the market was good as we went through Q1 and customers wanted a large part of the products in Q2. So we built up inventory and we had to do some inventory conversions and that required overtime and some inefficiencies that we will work through as we go through Q3 and Q4 because we know that we've got the inventory out of here and we are starting to really dial in on our productivity.

The final piece that contributed was steel. If you look at our North American plate costs, in 2013, we were getting benefits from the way we were buying steel. And in late 2013, the steel plate prices went up and we are seeing the effect of that. So we do expect to see some improvement over time, but we're sticking to the margins stable in the mid-teens.

Okay. Thanks guys. This was really helpful.

Thank you, Nicole.

Jamie Cook, Credit Suisse.

Hi. Good morning. Two questions. Ron, the first relates to your guidance. Just given that some of the markets are behind your expectations, and I understand that you have tax which is more favorable and slightly lower interest expense, but just based on the numbers you're putting out there, I have a hard time under any scenario getting to the higher end of the range.

If anything, I feel like the low end to the midpoint or between the low end to the midpoint is more of a reasonable expectation, given where we are in the second quarter. So can you just help me understand if you have good probability on hitting the high end or why even keep it out there, just given the headwinds that we've seen in the first half?

And then my second question is either Ron or Tim, it relates to Cranes. You mentioned strength in Europe. If you could just provide a little more color in why the US markets were weaker?

Is it a competitive dynamic thing, is it Terex market share, or is it market related? And just, overall, your confidence level that the Crane cycle is recovering? Thank you.

Okay, Jamie, thank you. Certainly this is something the range of our EPS guidance we've talked long about within the Company. We certainly did consider the possibility of taking down the top end of the range.

But when we examined our business, segment by segment, market by market, we still think there's a meaningful possibility that we can come within, if not the exact top end of the range, somewhere in the middle, if not north of the middle. But, of course, the same probability could he said with coming in at the bottom end of that range. So that's why we kept the range still at about $0.30 a share.

It's important to point out what the incremental margins have to be for us compared to the second half of last year. That they have to be in the low 20%s. That's not an unreasonable expectation for us, given where we see the revenue, which is now a little bit lower than what we had previously said. So all in all, segment by segment, we went through a pretty good analysis and we feel that the range is still the right range.

But Ron, in terms of the segments that would drive that, is it just Aerials, you'll work through some of the issues, the margins perhaps surprise on the upside in Crane? What are the one or two segments you think really need to drive the potential for the mid to the upper end?

Well, the big change that should happen, similar to last year, will be MHPS.

Okay.

And it typically gets a pretty strong service and parts business in the third and fourth quarters, as well as having a very strong expectation in the revenue from port deliveries. Steve could address that if you like. But we really are expecting a lot more port equipment deliveries in the second half of this year.

Now probably not as much as we would at the beginning of the year, would have liked, because as we've mentioned, we said there's about a $50 million push-out that's likely now to be pushed out into 2015. But it's not insignificant. The Crane second-half margins, particularly when you consider first quarter was basically $0.

So if you're going to be profitable for two quarters in the second half of 2014, meaningfully profitable, as we expect, with an order level that supports that, the incremental margins are going to be driven by Cranes, as well. So that's how I look at it. We can talk about it in more detail, but I want to have Tim answer your second question as well.

Great, thank you.

Jamie, your question about backlog and overall environment for North America and Europe, we saw at CONEXPO, a pretty healthy order intake by our North American customers. Many of those orders were for, let's call, it late 2Q and 3Q delivery.

So we've seen some improvement in overall order activity and our backlog in North America is at a very healthy level. A lot of those shipments will occur in the third and early fourth quarter.

The overall North American market is really driven by energy. It's heavily dominated by the Gulf region and some in Canada and the upper Midwest where the fracking activity that's taking place. So North America is down, but it's not unhealthy.

Europe, on the other hand, is improving. What we see going on there is strength in northern Europe, particularly in the UK and some of the northern European markets. And keep in mind that a lot of the largest Crane rental companies in the world are headquartered in northern Europe, so a lot of activity happens through those customers and we're seeing strength from the larger players who are taking jobs and placing equipment around the world.

So when you sum it all up, Europe is improving. The larger customers are seeing that and taking more product in, which we think is a healthy sign for the market.

But in terms of the North America commentary in just the strength and energy, in terms of with it there were more orders in the first quarter because of CONEXPO and it did not happen in the second quarter, so there was pull forward, or was there some competitive dynamic?

Well there is -- we've said for the last couple of quarters that there's been more field inventory that's been out there. And we saw even into the second quarter, that [sales growth] took a little longer than we anticipated it to happen.

But as we sit here today, we're feeling that there this is more balance in the overall field inventory compared to where we were, let's say, six months ago. I wouldn't characterize it as an extraordinary competitive dynamic.

Okay. Great. Thank you very much. I'll get back in queue.

Thank you, Jamie.

Ted Grace, Susquehanna.

Hi guys. How are you doing?

Good, Ted.

Ron, I just wanted to follow-up on Jamie's question on guidance and the comment you made on incrementals in the back half. I definitely don't want to get bogged down on math on the call, but when we played with the numbers that were in your deck versus what you did in the first half, we were coming out with an incremental closer to [60%]. I was wondering if you could just quickly bridge what you're -- the 20% you were talking about -- what that implies for -- or just what the revenue gain and the operating income improvements were, just so we are talking to apples to apples?

Sure, Ted. Really the difference we're talking here is I'm comparing it with the second half of last year and you're comparing it with the first half of this year. And a huge difference, of course, is the fact that in the first half of this year, there was 0% margin in the first quarter in Cranes and a little bit of a decremental in the AWP -- a situation or just clearly not the kind of incrementals we would like.

So let's not get bogged down. If you do compare it simply year-over-year, we've got to do a little bit better in the second half this year than we did in the second half last year, but if you compare the splits of 2013, we did a lot better in the second half than we did in the first half in 2013. So with a little bit more revenue, with Cranes on an upward trajectory versus a negative trajectory in 2013.

Remember, the Crane fall-off that bottomed in the first quarter, really began in Q2 of last year, so we had progressively negative performance in Q3, Q4, with the worst performance in Q1. We think, at least that's the Management team's view, that we are in a progressively improving environment. How high is high is something yet to be determined, but that's what we think is happening.

Okay, that super helpful. So related and the second question I was hoping to ask is -- and I don't know if it's Ron or Steve walking through MHPS -- but maybe just an update on where Rotterdam stands and Long Beach, and in terms of the, it looks like about $100 million of push-out based on your revenue revisions, just walk through what the composition of that looks like and how we should think about that timing?

Great. Steve, why don't you address that?

Yes, sure. Hi Ted. Let me walk through a couple things and maybe I'll also answer some of Jamie's questions. What makes me or the team believe in MH&PS in the back half is in the three buckets.

One is the backlog that we have just in our [core] business. We have several facilities that have a very nice backlog for the rest of the year. We know that we've got deliveries in Q3 and a lot in Q4, so many of us will not have a Christmas again like last year, but that's the nature of our business.

The second area is automation. As you mentioned, Ted, I don't think the gap is that big, so let me walk through it, but our plan was to deliver $294 million of automation project. We mentioned a $50 million delta, which we think will put us at about $255 million this year. Year-to-date, we delivered $67 million and our plan is to deliver $190 million in the second half of this year.

So we're pretty confident that, that's going to happen. As I said before, the product is at the port. It's really just a revenue recognition issue and I'm pretty confident that, that's going to happen.

The last bucket is really in the MH improvement, and as Ron mentioned, the back half of the year for MH is a big services business and we see momentum in the first half on services and parts, and we're going to continue to see that in Q3 and Q4. So hopefully that gives you a little bit more color to believe that, at least within MH&PS, we can deliver.

And then in terms of the cost savings (inaudible) realignment in the second quarter, can you maybe just walk through what you realized and how much incremental benefit we'll have in the second half?

Cost savings? Because it got muffled, what was it? Cost savings project?

Yes. I was just hoping to get an update on what the realized cost savings benefits were in the second quarter and what the update is on the second half expectation of benefits?

Hang on. Let me look that up.

Kevin Bradley has that.

I can take that. Steve, in the quarter, between $4 million and $5 million, and we are still looking at a total in the full year for Steve for MHPS of $20 million.

Okay, and Kevin, just the last thing I want to ask is, corporate expenses quarter was a little higher than we were modeling. Was there anything unusual in the second quarter and how should we think about that in the back half?

Yes. On a year-on-year basis, the quarter was high, up about $9 million. There were some things that we shouldn't anticipate in the run rate going forward. TFS was a little bit high on investment in rate buy down subsidies. We had some extra FX in the quarter.

And then lastly, I'd say, just the timing of when things hit between Q1, Q2. We should expect a run rate in corporate and other in the $6 million to $7 million and that's what we are seeing for the back half of the year per quarter, $6 million to $7 million negative.

Okay, great. That's very helpful, guys. Thanks a lot and best of luck this quarter.

Andrew Kaplowitz, Barclays. NAME

Good morning, guys. Ron, this is related to Ted's question a bit, but maybe if you could step back and talk about the progress you've made on self-help. It's been a big initiative for you guys. You just gave the cost breakdown from MHPS, but the segment there was still just above breakeven, which is a little disappointing to some people that, that's where it is.

Is that just the delays in the work and self-help has been what you thought? Or has it been a little harder than you thought?

Andy, the answer to your question is, there's a complicated answer, because it really crosses all of our segments and it includes both operating initiatives, as well as the kinds of initiatives that drive lower tax rates and improve our Corporate efficiency. Okay, so if your question is focused on MHPS, there is a number of things there that are progressing, but do take time, and the costs come out gradually.

The restructuring expense took place right away but the costs come out gradually. The last question was asked and answered on what that is and what we expect this year versus next year. But let's not get bogged down just in MHPS because it's a glass half empty or half full conversation there, because if I look at MHPS's second-quarter performance compared to last year, where we had a substantive operating loss with a little bit less revenue, we are at a breakeven and we had a number of unusual expense items in the second quarter of this year.

But businesses have unusual expense items, so I don't want to call those out as one-time costs, but that really hit that segment. But if I can back up and talk about the kinds of things underway in the Company, of self-help, it is about the manufacturing footprint changes at Aerial Work Platforms. It is about the new product initiatives at Aerial Work Platforms.

If I turn to the Crane business, it is about a complete redesign of several of our higher-cost products in Cranes to get substantive cost out of those cranes so that when we sell those cranes in the future, we make a greater margin than a lesser margin that we currently have. And it is about eliminating about 30% of the models that we offer in Cranes. Those are self-help initiatives.

If I turn to the MHPS business, there's more to be done in MHPS. I'm not about to make news today here, but we've got work to do in our manufacturing footprint. We have work to do in our sales and services centers around the world, and those are things that we have identified for a fair amount of time that we are still going to do.

If I then turn to the Construction business, while we made $4 million of profit in Q2, that certainly isn't the high watermark in our view of what that business can do. And we've got a number of, let's call it, product and market initiatives that are underway that will introduce some new products and product changes later this year, early next year, in that segment. And frankly, we are expecting that as steel prices increase, our Fuchs business, which has been a highly profitable business, will rebound and profits will improve there.

If I then turn to the kinds of Corporate initiatives that we've identified. Shared services, we're going to move from over 70 Corporate accounting locations to eight, okay? We are going to not just do accounts payables, receivables, management, but we're going to do the accounting initiatives and relieve a lot of our field teams from doing the kind of local accounting to consolidating them through enterprise controlled systems. That's an initiative over the next couple of years.

The tax changes that are underway are not just related to lowering our tax rate, but they are related to servicing our customers better. As we create Terex Global, we can now invoice our customers for 10 of our products that would have previously required 10 different invoices from 10 different legal entities, simplifying the lives for our customers and improving our own ability to collect receivables, which by the way, is a big working capital opportunity, while working capital on receivables and payables management.

So there's a lot of self-help still left in Terex. For me to give you a P&L balance sheet here today, and that's why I try to keep it simple. About one-half of what we're trying to do is going to come from self-help, but we do need some help from the market. That's why I try to keep it simple.

I hope that helps, Andy. We're unlikely to give you a reconciliation of all those things, but I think you can get a sense of that they are pretty significant.

Ron, that is helpful. So I'm just following up. You mentioned Construction, first time that I can remember a profit in a very long time. You still call for breakeven for that segment for the year, but why wouldn't margin continue to be -- continue to improve or at least be what it was in the quarter, if Europe is improving for you guys and Fuchs is slowly getting better? I know you got some North American weakness, but the cement mixes are pretty good, so maybe there's a little bit of upside there?

There might be, but at this stage, that little bit of upside is not going to move the needle for the Company right now so we really didn't think it was appropriate to change that outlook at this stage.

Okay. That's helpful. Thanks, guys.

Jerry Revich, Goldman Sachs.

Hey. Good morning gentlemen. It Matt Rybak on behalf of Jerry. Just starting off, could you just maybe talk a little bit about your prospect list for additional Port Solutions projects going forward?

Good question. I'm going to let Steve answer that carefully so that he doesn't give our competition a road map to our business.

Yes. Thanks, Matt. We have a pipeline for sure of automation projects and I would say we have good visibility to about half a dozen the right now. I don't want to mention where they are, but they're all over the globe. We are planning on at least trying to get hopefully one of those done by the end of this year, beginning of next year.

Got it. Thank you. That's helpful. And then could you maybe just talk a little bit about the cadence of orders in Europe that you saw over the course of the quarter?

In Port Solutions, Matt?

In general, for the entire business?

In general. Okay. Why don't we start with our Cranes guys? And then I'd ask Matt to comment on that, as well.

Yes. Okay. Matt, thank you. This is Tim. Europe, for us, has continued to improve through the really since the low point of the third quarter last year. We saw a number of customers continue to place orders for us and we're feeling strong or feeling good about our European business.

Our tower crane business, which is based in Europe, is seeing continued improvement. So we feel reasonably good about our European operations and our European order growth at least (inaudible).

Matt, be careful, someone on the call is moving papers around that makes a little noise. But Matt Fearon, why don't you comment on--

As far as the cadence of orders in Europe for AWP, what we saw is we had a very strong quarter right out of the chute in Q1. As Ron mentioned, Q2 it carried on at about 15%.

But the other thing that happened in Q2 is our backlog continue to climb, just slightly, but it climbed in Europe at the end of Q2. So we are seeing that it is continuing to be strong. One of the differences that we are seeing is that the UK, in particular, which has a large concentration of Aerial Work Platforms, has really kicked up and you can see it in the market data, so Europe, we are very encouraged about.

Okay.

Go ahead.

Matt, I'll just make another overall comment. If I compare Q2 2014 to Q2 2013, every business was growth north of 5%, more likely in the double-digits and even higher double-digits and that's a similar pattern to what we saw in Q1. So all of our businesses in Europe are beginning to show year-over-year meaningful improvements.

Thank you very much. This was very helpful.

David Raso, ISI Group.

Hi. Good morning. I just wanted to make sure, I just can't let it pass because the math is not making sense. It seems like from the guidance, when you look at the segment, it would seem roughly, you are looking for revenue upside to the $7.4 billion. If you just to the math on the segments, it would imply upside of revenues, that then, Ron, you can do 20% plus, 25% incrementals in the second half to get to the number.

But the way the guidance is laid out for total sales, it is implying you do need to do 45%, 50% incrementals in the second half. So just looking at the math, can we just summarize it as it maybe the revenue guide is on the light side on what you think you can do internally, then allow that lower incremental. Because the math is the math. It is implying a big incremental second half of the year if you really only do $7.4 billion in the second -- for the full year sales?

Compared to the first half, David, but not--

No, Ron, the realignment with the Volvo truck sales, when you sold hauler, the math is the math. The release that they sent out in late February, providing that restatement to the year-ago quarters, if you have revenue growth of only 3.4% in the second half of the year, to do the $7.4 billion for the full year, you're going to need margins. To be clear, that tax rate for the second half of the year is only 31.5%, right?

Right.

That the right tax rate?

The mid-point of the rate.

Yes. So I'm just trying -- it is what it is. But then on your segment guidance, I can see the implied -- yes, maybe we can do more like $7.5 billion. I'm just trying to make sure TheStreet understands leaving this call that if the revenue is what the total Company guidance is, it is a big incrementals, but maybe there's revenue upside?

Yes. David, obviously we've got to reflect the strong improvement in the back half. We've got to be at the top end or better of the range on revenue, we've got to get the low end of the range on tax, in order to get into the top half of that EPS guidance, as well as the interest and other has to be on the better side of that and we've got to get the mix, right?

The math is pretty clear. A lot of the growth has to come from that and it's going to have to be at a lot stronger it incremental margins than we've shown in the first half of the year, but we think we've got the ability to do that and deliver it. So is the risk to the top half of the range? Absolutely, just as Ron said. But we have a couple of paths to get there and a lot of it has to do with both AWP and Cranes having much stronger second half, both on growth and on their incrementals.

Yes and to that point, obviously, the volume per Cranes in the first half, but the second half, and I'm sorry, I hopped on the call late, the second half besides volume, you also have a better mix in Cranes, right? That's already -- the backlog already has a better mix for second-half shipments than we saw, right?

Yes, [definitely].

That's a big help. And last, I don't know if you gave a clear -- I'm not sure if you want to -- but the tax rate exceeding the year, if we had to model of tax rate for 2015, keep the second half run rate, or could it moved lower and if you don't mind, trying to quantify it would be helpful?

Sure. Yes. We see where we are at Q2, continuing through year-end, and certainly, that's being driven by the losses not benefited. Just to give a little bit of color on that, a lot of our losses not benefited has been coming out of southern Europe, India, and China. A lot of the initiatives that we've taken the lead on have addressed those in those geographies.

The restructuring that Steve did in Italy and in India has helped. Getting the profitability in our AWP factory in China has helped less losses in some of our JVs in the Crane side in China has certainly helped. So a lot of this self-help around addressing problem issues in P&Ls in these countries is improving, and David, we would expect that to continue into next year.

At the same time, and Ron touched on it, the jurisdictional mix, in particular, as we drive more of this global training model to improve our commercial, how we face off with our customers, it's also going to increase its impact going into 2015. So yes, I would expect this lower level as we leave the year to stay the same and potentially had the ability to improve into the first half of 2015.

Into all of 2015.

Yes.

That's great. I appreciate it. Thank you.

Eli Lustgarten, Longbow Securities.

Good morning, everyone.

Hello, Eli.

Yes. Answered a lot of question, but maybe can you give me maybe a little bit more help on the top-line guidance and what's really changed, because in order to -- when I play with the numbers, in order to stay in the $7.3 billion to $7.5 billion, almost all of your guidance has to be at the low end, it seems at this point. Because we knew this Volvo sale was going to go through and we've strengthened the AWP outlook, actually somewhat.

So what's really changed? Where are the big number changes? Because we knew about the sales of the division, we knew about the $50 million deferral of Port Solutions shipment. So what's really changed to drive the numbers down to $7.3 billion, $7.5 billion, or is that still maybe a little bit conservative number? I just have trouble getting there unless eliminations turns out to be a huge number?

Well I don't think it's going to be elimination. When we provided the initial range of revenue, it did not include the Port business being pushed out. It was pushed out of the first quarter into what we thought was the end of the year. It's now moving out of the year into next year. That's approximately $50 million, okay? So that's not the whole amount.

We also have seen weaker businesses in Latin America and in Australia than we expected. Those are pretty meaningful, but on the other hand, there's some more positive business in our European operations. So in the overall view of the Company, revenue has been hard to come by, even though we produced a 10 percentage point increase in revenue in the quarter, but only 5.5% for the first half.

So as we look at things, we don't want people to be overly optimistic, but at the same time, we don't want people to be overly negative either and that's a delicate balance to walk. So we thought it more appropriate to take the top end of the revenue guidance down a little bit and for us to work on those things that we can control to get the margins up.

Eli, at the end of the day, the revenue, we're to going to try and get as much revenue as we possibly can, because obviously if we grow our AWP revenue at 15% plus margin, it helps everything. If we can get the Cranes guys to grow their revenue and deliver, their margins are improving. So those are two really important areas that will drive the net/net for the Company.

Ron, the only thing I would add, too, is on the MP business, although not our largest segment, clearly, we were calling for growth that's not showing up. We were basically flat year-on-year in the first half. In the second half, growth that we had called out in the initial guidance doesn't seem to be materializing, so there's risk in the MP, although it's not the biggest segment.

Okay. And in the growth rates, you said 3% top line came from foreign currency, is what you said at the beginning.

That's right.

You have a foreign currency -- was there any impact in foreign currency on profitability and do you have -- are you basically foreign-currency neutral in the second half?

Yes.

Modest effect on profitability and really more from our European-based businesses and AWP. Trying to forecast foreign currency in the second half of the year, we are not doing, so I would say it's probably not built into our forecast.

Yes, so it's basically in the -- okay. Thank you very, very much.

(Operator Instructions)

Vishal Shah, Deutsche Bank.

(Inaudible) on the line for Vishal. Thanks for taking my question. I'd just like to get some questions answered on the demographics of the Crane backlog. What does your product mix look like? What are margins compared to where they are currently? What percentage of backlog will be delivered in 2014?

Okay. I'll take that. Our Crane backlog has three components to it. One is, of course, the Crane product businesses, and then we have fairly sizable backlog in our utility products business. The utility products are mostly North American-based and I would say the Crane piece of it, so the Crane products piece of our backlog, is strongly oriented to European delivery, with the second piece of that really being North American delivery.

The profile of the backlog -- I'm not going to get into the details of it, but I would say that the mix of the backlog from a profitability standpoint is moving in our favor, with some of the higher-margin products strengthening, and with the exception of our Australia business. But overall, the profile of our Crane backlog looks pretty good as we head into the second half of the year.

Great and I'll stick with Cranes for my next question. Could you give an update on where you think we are in terms of the rough terrain business? To what extent is there overcapacity still, to what extent is there inventory adjustments required, and how far off of the bottom are we?

Yes, the rough terrain product line really serves three markets -- it serves North America, it serves Latin America, and it serves the Middle East. The Middle East got off to a very slow start, we had a very depressed first quarter, but that's beginning to sell through and we're beginning to see some improvement. The Latin American business is still relatively weak, but we're seeing a few pockets of improvement, and I wouldn't characterize it as strength, but a few pockets of improvement.

In the North American business, as I said earlier on the call, we took a lot of orders at CONEXPO for rough terrain products that will start shipping here in the third quarter and into the early fourth quarter. And as we talk to the sales teams, we feel like the rough terrain business is beginning to improve. Its field inventories are more in line than they have been at any point in the last six to eight months and we feel like it's beginning to improve.

Great. Thank you.

Stephen Volkmann, Jefferies.

Why don't you take one more, Jody?

Mig Dobre, Robert W. Baird.

Yes, it is Mig Dobre. Good morning. My question here is on AWP. Just looking for some clarification from you, Ron. You talked about some of the headwinds to margin, such as mix, some investment. To me, it sounds like this is something that could be with you for a while. Is it fair to say that some of these challenges would extend beyond the second half of the year, maybe into 2015, or should we think otherwise?

In the context of excellent overall margins, we are going to continue to try and reshape the business somewhat. What I would like to just say at a high level is that I wouldn't want to model the margins where incrementals continue forever, okay? We have said that we expect mid-teens margins on the business and that's where we should model the business.

I don't think we should try and model the business at this stage at dramatically higher margin business. I don't think our customers would allow us to make that level of money. The long-term investment required for the business is such that we're going to have to continue spending some money on product and manufacturing footprint.

But at the same time, I expect multiple years of continued positive performance on this business and I think the net effect of our initiatives will actually be longer-term to get the margins up. But it's still a little bit in our future as opposed to what you should expect next quarter.

Okay. I appreciate it. Thanks.

All right, Mig.

At this time, there are no further questions. I will turn it back over to the presenters for closing remarks.

I want to thank everybody for their interest. We have tried to keep this call within about an hour. We recognize there's other people reporting today. But clearly, if there's any information or follow-up required, please call us -- Tom, Kevin, myself or anybody within the Company would be happy to address any and all of your questions. And thank you for your continued support of Terex. We appreciate it.

Thank you. That concludes today's conference call. You may now disconnect.