Terex Corp (TEX) 2015 Q4 法說會逐字稿

Welcome to the Terex Corporation fourth-quarter 2015 financial results call. (Operator Instructions). I would now like to turn the conference over to Mr. Tom Gelston. Please go ahead, sir.

Thank you, Paula. And good morning, everyone. And thank you for joining us for today's fourth-quarter 2015 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 prepared remarks we will conduct a question-and-answer session. Last evening we released our fourth-quarter 2015 results, a copy of which is available on our website at Terex.com.

Today's call is being webcast and is accompanied by a slide presentation which includes a reconciliation of non-GAAP to GAAP financial measures that we will use during this call and is also available on our website. All per-share amounts in the presentation are on a fully diluted basis. And as usual, we will post a replay of this call on the Terex website under Audio Archives in the Investor Relations section.

Now let me direct your attention to slide 2, which is our forward-looking statement and explanation of non-GAAP financial measures. We encourage you to read this as well as other items in our disclosure because the information we will be discussing today does include forward-looking material. With that, please turn to slide 3 and I will turn it over to you, John.

Thanks, Tom, and good morning, everyone. Given this is my first earnings call with Terex I wanted to start by saying how pleased I am to be leading Terex in these dynamic, exciting and challenging times.

Kevin and I will cover three topics today before we take your questions. First, I will offer my initial insights on my first 100 days at Terex. Next we will review our results for the fourth quarter of 2015, the full-year 2015 and provide our perspectives on 2016. Finally, I will provide an update on our announced plan of merger of vehicles with Konecranes and comment on the Zoomlion nonbinding acquisition proposal.

It certainly has been an exciting and informative first 100 days. We recently completed our annual Terex senior leadership meeting, the theme of which was Proud Past, Better Future. Yes, there have been some rough patches, but what is important is that the team recognizes we need to improve our overall execution.

With that recognition, there is a lot to be proud of at Terex. We have outstanding businesses and brands that are leaders in their respective industries. We have innovative industry leading products and services that provide our customers a competitive advantage. We have dedicated and hard-working team members. And we have a strong value system in the Terex way, which quite honestly is one of the areas that attracted me to Terex.

The team has good reason to be proud of its past, but to create a better future we have to improve our execution. The team is focused on implementing an execute-to-win business system. This is a system that we will use to critically evaluate our strategy, our operations and our talent development to ensure that we consistently achieve our commitments to our customers, shareholders and team members.

Without question we need to improve our return on invested capital, our margins and our cash flow generation, especially in the troughs of the business cycle. An integral part of our strategy will be to continually invest in development of new products and services. To win in a competitive environment we need to have products and services that provide our customers a compelling, competitive advantage.

We will also work on all elements of our cost structure to ensure we can fund our new product development while maintaining acceptable rates of return, returns above our cost of capital.

I'd like to now turn to slide 4 and discuss our overall performance. We intensified our focus on cash flow generation in the quarter and delivered strong cash flow performance. We see cash flow generation as one of the key metrics going forward. Sales declined 11.8% in the fourth quarter; 6.2% of the decline relates to a stronger dollar versus other currencies, especially the euro.

Earnings for the quarter were $0.50 per share on an adjusted basis. Full-year earnings were $1.84 per share on an adjusted basis. We ended the year with free cash flow of $290 million, well above our target of $200 million to $250 million established in early 2015. This was good performance by our team under tough conditions.

Demand declined in the quarter as customers became more cautious in their outlook. Compared to a year ago we ended the quarter with lower order book and backlog in our Aerial Work Platforms, Material Handling & Port Solutions and Crane businesses, but with increases in Construction and Materials Processing.

Turning to slide 5, global markets were challenging in the quarter and we anticipate they will remain so in 2016. We expect global macroeconomic uncertainty to continue with headwinds from countries that are commodity dependent along with persistent challenges from low oil and gas prices as well as from foreign exchange volatility.

Our largest market remains North America, which declined 4% for the quarter on a year-over-year basis. Although markets in North America were mixed by segment, adjusting for the divestiture of our ASV business in late 2014, we were essentially flat.

We saw significant declines in demand in Latin America, Middle East and Africa due to economic and geopolitical uncertainty along with low oil and commodity prices. In Asia and Oceana we did see a year-over-year increase in fourth-quarter demand due to large crane deliveries in China as well as increasing AWP sales in the region.

Demand for our products in Europe continues to be flat reflecting an uncertain business environment and slow economic growth. Outside of North America FX negatively impacted net sales by approximately 8%. Kevin?

Thanks, John, and good morning, everyone. I will be reviewing results for the fourth quarter on a quarterly and full-year basis. Let's turn to page 6 which shows the comparative quarterly income statement.

Sales for the quarter decreased 11.8% as compared to the prior year. As John pointed out earlier, currency movements, particularly the US dollar to the euro, continued to have significant impact in our year-over-year comparison. Over half of the decline in sales, or approximately $120 million, was driven by currency.

Operating margin for the quarter was 3.2% compared to 3.9% in the prior year. On an as adjusted basis operating margin was 5.8%, a decline of 80 basis points from 6.6% in 2014. Decremental margins for the overall Company were reasonable at 12.8%.

Adjustments for the quarter fell into three main categories, the first being transaction-related costs associated with the announced merger with Konecranes, which totaled $5.9 million in the quarter. The second category is restructuring and related activities which accounted for $4 million in the quarter. The third category included impairment charges related to certain goodwill and intangible assets within our MHPS segment in the amount of $34.7 million.

Adjusted earnings per share of $0.50 compares to $0.72 per share in the fourth quarter of 2014 driven primarily by lower operating earnings in four of our five segments with AWP being the exception. We finished the year strong with $247 million in free cash flow in the quarter.

Turning to page 7, net sales for the full year decreased $765 million or 10.5% with approximately 75% of the decline driven by currency. As adjusted income from operations increased from $481 million to $410 million. Reflecting the decline in volume, decremental margins for the overall Company were 9.3%.

Adjusted earnings per share for the full year was $1.84 compared to $2.35 in 2014. The lower operating profit was partially offset by improvements in our capital structure in the form of lower interest expense as well as a lower share count. 2015 full-year free cash flow generation was $290 million. With that let me turn it back to John.

Thanks, Kevin. Now I would like to take a few minutes to provide a quick review of each segment starting with Aerial Work Platforms on slide 8. Aerial Work Platforms is an outstanding business. Genie is a market leader that this summer will celebrate 50 years of driving innovation in the industry.

The team improved operating profit compared to the same quarter in 2014 offsetting pricing, currency and volume pressure with material costs and manufacturing productivity improvements. The demand environment remains challenging, which is reflected in the reduction in backlog. Our North American rental customers are conscious about their CapEx requirements for the first half of 2016.

In addition, North American rental companies are lowering their replacement demand for equipment. AWP equipment is replaced on average after seven to eight years. The financial crisis reduced AWP sales in 2009 and 2010. In line with replacement cycle, we expect this have to some dampening effect on demand for new equipment in 2016 and 2017.

AWP continues with its new product development program with the successful launch of the SX-150, 150 foot telescopic boom, several new articulated booms and a new 6K and 12K Telehandler as we continue to expand our product offering. The segment also continued its globalization efforts with revenue growth in Western Europe and Asia as it expanded its product offering. Overall it was a good performance in a tough market.

Turning to slide 9 for an overview of our Crane business. While backlog with stable with the third quarter, it was down by about 20% when compared with the prior year. Uncertainty in the global oil and gas market continues to be the biggest pressure on demand.

The North American crane market and rough terrain cranes in particular remain weak. The strongest performer in this segment continues to be our utilities division, although we have seen recently some softening for this product category.

On the product side, our newly launched Explorer series 5 axle all-terrain crane is being well received and gaining market acceptance. Our Crane team must continue to work hard to improve our margins in this challenging market with new product development, manufacturing productivity improvements and G&A reductions.

Turning to slide 10, our Material Handling & Port Solutions business sales in the quarter were down 24% compared with the prior year. During Q4 2014 we delivered on a large port automation contract and significant gantry crane orders which were not replicated in 2015. This made for a tough year-over-year comparison. As we head into 2016 we expect mobile hardware cranes to remain stable after a strong finish to 2015 and improvement in our gantry crane business.

For the Material Handling business industrial capacity remains sluggish, which is negatively impacting MH sales. On the product development front we marked a successful EU and US launch of our new modular Demag rope hoist that complements our V girder design, both of which you can see here on the picture on the slide.

Turning to slide 11, the Materials Processing business continues to perform steadily in terms of demand with a book to bill ratio of 95% in the fourth quarter and slightly improved backlog versus the prior year. We have invested in new products to expand our portfolio into aggregate washing systems and recycling.

The integration of these products and acquisitions has been accretive to our results. The North American market is the principal driver for improved performance; however, low commodity prices and weakness in the mining sector remain global headwinds for this business.

Now turning to slide 12, Construction, which lost $9 million in the quarter, is clearly our most challenged segment. These losses were generated by our compact construction business which continues to experience weak demand in Europe. Our concrete business, however, is doing well growing its backlog, sales and improving margins for both the quarter and the full year.

Given our performance in this segment over the last several years, we are conducting a thorough strategic review to determine what course of action will best deliver consistent returns that exceed our cost of capital. Within the next 90 days we plan to discuss this in greater detail along with the actions we are taking.

Turning to slide 13, let's review our current expectations for 2016. Our customers remain cautious in the current global market environment. They are adjusting to the challenges of global commodity price declines, volatile currency markets, slower growth in China and overall geopolitical uncertainty.

In this environment our focus will be on what we can control and what we can afford. In that spirit we are aligning our cost structure and production volumes with market reality. We are moving forward implementing a G&A expense reduction program throughout the Company.

We are analyzing our global manufacturing, distribution and office footprint. We are also evaluating businesses that have not delivered an appropriate return in initiating actions to improve margins or make strategic portfolio decisions.

Detailed action plans are being developed in all these areas and we will be in a position to share these plans within the next 90 days. We will not, however, sacrifice in the areas of new product development or team member development. Both are critical to our long-term success and we need to invest in these areas through the cycle.

As a global Company it is critical to remain competitive in difficult markets. It will also better position us to capture the upside when the markets improve. Now Kevin will outline our 2016 expectations.

On slide 14 we outline our expectations by segment. Four of the five business segments are expected to remain under top-line pressure in 2016 with Materials Processing being the one exception. The largest impact on earnings will be from AWP which is expected to post operating margins in the range of 10% to 11% on sales that will be 15% below 2015 levels.

The Crane segment faces similar top-line trend, down around 15% with operating margins in the 3% to 4% range. The MHPS segment expects to remain flat with prior year with an operating margin of roughly 2% to 2.5%.

On slide 15 you can see what the segment estimates mean in terms of overall Company expectations. Net sales are expected to decline approximately 10%. Overall margin is expected to decline slightly to a range of 5.25% to 6.25%. Reducing our cost structure is important -- is an important part of this plan. These assumptions yield an EPS range of $1.30 to $1.60 per share.

Given the lower AWP and Crane backlog for Q1 delivery, and that most of the additional benefits from cost reduction activities will occur in the second half of 2016, expectations are for a lower start to this year when compared to 2015.

Lastly, we expect another healthy year of free cash flow in the target range of $200 million to $250 million. John?

Thanks, Kevin. Lastly, as you all know, this past summer Terex announced the merger with Konecranes. As you also know, Terex recently confirmed that it received an unsolicited non-binding acquisition proposal from Zoomlion Heavy Industry to acquire all of the outstanding shares of Terex for $30 per share in cash.

The Zoomlion proposal is conditioned on, among other things, receipt of US and Chinese regulatory approval and Zoomlion shareholder approval. At this time the Terex Board of Directors has not changed its recommendation on the proposed combination with Konecranes. The teams are making progress in the antitrust filings and the US and the EU as well as the required securities filings in the US and Finland.

The merger with Konecranes remains subject to both Terex and Konecranes' shareholder approvals, antitrust regulatory approvals and other closing conditions.

However, consistent with our fiduciary duties, the Terex management and Board of Directors, working with our legal and financial advisors, are in discussions with Zoomlion and are carefully reviewing the Zoomlion proposal to determine the course of action that is in the best interest of our shareholders. This process will take time and we will have no further comment on the Zoomlion proposal until the discussions and analysis are complete.

Before we open it up to questions I'd like to summarize by saying, these are exciting times at Terex. We have some outstanding businesses and brands. Yes, our global markets are challenging and we will confront that reality by executing to win.

We will focus on the things that we can control, taking the appropriate actions with our production volumes and cost structures to improve our returns on capital throughout the cycle, and by listening to our customers and investing in new products and services that provide our customers a competitive advantage.

Finally I will say the dedicated Terex team is focused on meeting our commitments. Back over to you, Tom.

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

(Operator Instructions). Ted Grace, Susquehanna.

John, the first thing I just wanted to ask -- and I know you said you won't have more comments, so I want to be fully appreciative of that. But just in terms of could you tell us which inning you are in from the standpoint of evaluating the Zoomlion offer? It's obviously arguably the single most important factor people are looking at even the stock is at $20; the offer is $30 in cash.

And so, from the standpoint of kind of like the timeline that you are using to evaluate Zoomlion relative to the timeline you have outlined for Konecranes' closure, can you just help us kind of understand those two timelines and how they are kind of converging?

Yes, thanks, Ted, and I am a former baseball player, but I don't want to use a baseball innings analogy. We are working very closely with our advisors, legal and financial, to evaluate the Zoomlion proposal. As that work continues and once the analysis is complete we will be making public statements on the analysis and the direction. But until such time -- and I think you can appreciate this, Ted -- and until that work is done we really cannot have any further comments on the Zoomlion proposal.

Yes, that is fair enough. So I guess the thing I was next hoping to run through is the guidance. You look at the revenue guidance down 10%, obviously there are six -- or there are the five segments and their margin.

But could you walk through, either you or Kevin, kind of how you would bookend kind of key ranges on Aerial sales of Cranes and MHPS? I am guessing from a revenue perspective those would be the most important. You've given some pretty specific guidance down 15% or so in the case of some of those.

And then similarly, Kevin, I think you made the comment that restructuring costs will be a key part to reaching these numbers. Can you walk through kind of the game plan on the restructuring side? How should we think about COGS versus SG&A? And any color you can share there would be great and I will get back in queue.

I will kick it off and then turn it over to Kevin. In terms of the markets, as we said, on the AWP side we are saying down approximately 15%. That is principally on the headwind side really being driven by the North American rental market. North American rental customers are in fact being cautious in their demands.

We do believe we are entering into that replacement cycle impact. Offsetting that on the AWP side is that we are experiencing some growth in Europe and Asia, but clearly not at the level that the impact has in North America.

Likewise in Cranes, the Cranes business is the oil and gas impact or low oil prices of our Crane business, especially in North America, has been profound. On the rough terrain crane side of the business our backlog is at levels that we experienced in 2009.

So the rough terrain crane business is under pressure both in North America, the US and Canada, it's under pressure in the Middle East, again all associated with oil and gas. But we are also seeing -- they are not big markets for us, but we are seeing significant declines in places like Brazil, Australia, Russia, those other markets.

So the Crane business on the headwind side, the mobile crane side, rough terrain cranes have been impacted. On the positive side we are seeing some reasonably solid volume in our tower cranes business that is helping to offset. So those are the two principal drivers in the AWP and the Cranes of what is impacting the volume side.

And then clearly our job is given that volume environment is to take the appropriate actions to drive to margin rates that are acceptable in this part of the trough. And so, that is what the team is focused on, our 202 plan plus increased activities that we need to take to ensure that as we go through the trough that these businesses can yield reasonable rates of return in the market dynamics. Kevin, do you want to add to that?

Yes, I will just -- maybe a quick comment on MHPS. We do have new product, John mentioned the rope hoist, we do expect some traction from that. What is really happening to offset it is really a lack of industrial expansion on our customer side in this economy. So that is why we are calling for flat in MHPS.

On the MP side we have got an increase of about 5%, but really the core crushing and screening component of that business is still under some pressure. A lot of that increase is coming from acquisitions that we made throughout the year in 2015 allowing for some financial upside on the top line.

Okay, I'll go back to John for this. But down 10% overall, is it plus or minus margin 250 basis points either way? Just could you frame kind of how you are thinking about that downside scenario versus the upside scenario in the context of down 10%?

Yes, I would say -- I wouldn't want to give you a specific bracket around that. Certainly we are not going to call it exactly at 10%. But where we are obviously keeping close attention to is the AWP side. It has got the most leverage on the income and has the most influence. Right now we feel pretty good about 15% as the range there, but as 2Q begins to come into full view, that is the one that we are watching.

Okay. Well, best of luck this quarter, guys.

Jamie Cook, Credit Suisse.

I guess just a couple of questions. One, sorry, back to the Aerial Work Platform side. Can you discuss what you expect this year just in terms of seasonality or how do we think about the cadence of orders or sales relative to history? And could you speak to just the competitive environment with one of your competitors still sitting on some excess inventory?

And then my second question relates just to Cranes. You know, the 3% to 4% margin I think would be heroic in a down 15% sales year. So can you just, again, provide a little more color, how much of that is sort of restructuring?

Okay, on the AWP side, in terms of the seasonality, I think we expect to see I would call it a historical seasonal trend. The reduction in backlog at AWP really was associated with the large North American rental companies pre-buys being lower on a year-over-year basis. So I think we expect to see on the AWP side the historical trend.

In terms of the market dynamics, I don't want to necessarily comment about competitors' inventory levels. We are seeing some pricing headwinds in the marketplace, and so sometimes pricing headwinds are the result of a demand/supply imbalance. So we are focused on what we believe the appropriate level of demand is.

I will say that in these challenging times from an operational perspective one of the things that we have to focus on or tighten up is our overall pricing. And so we have looked at a delegation of authority to control pricing to offset some of these pricing headwinds that we are seeing in the marketplace, especially in the AWP side.

On the Cranes side, there is two elements there that -- one is the utility segment which is incorporated in our Cranes business. That business -- we had a good year in 2015; we saw a little softness in the second half of the year. But that business from a margin rate perspective does well.

The Cranes activities in terms of the initiatives and taking cost out of the business will be important for us to generate the 3% to 4% operating margin that we have listed on the range. So there are execution focus and challenges on our Crane segment to deliver that 3% to 4% operating margin.

All right, thank you. I will get back in queue.

Jamie, I will just add to that from my opening remarks, I think John is right. It is typical seasonal pattern with the one exception being really when we look at the specific backlog deliverable in Q1 for both AWP and Cranes it does look like it is going to be softer than a typical seasonal pattern we might suggest.

Okay, that is helpful. Thank you.

David Raso, Evercore ISI.

You mentioned the potential of some portfolio changes, but I am curious the relationship right now with Konecranes, the Zoomlion offer -- how is the decision making process of those portfolio decisions impacted by what is going on with Kone and Zoomlion, especially when it comes to timing?

Right. Thanks, David. In terms of our decision making at this point in time is that we are going to make the right decisions for the best interest of the business. And so, we are looking at all three scenarios. And if the decision is right under all three scenarios then we will make that decision and we will implement that decision going forward.

So, we are factoring in there are three scenarios that we have to look at. There are some decisions that, frankly, I think are appropriate under all three scenarios and those are the decisions that we will make and those are the actions that we will take and implement.

Is there some consultation though taking place among the three parties, two parties, whatever the dynamic may be, related to those decisions?

On terms of the Konecranes and ourselves, we do have an active process on the integration with Konecranes. And so we do exchange information with both sides. They are taking some actions to deal with the market reality; we are taking some actions to deal with the market reality, as well as discussions with Zoomlion. We do talk about our portfolio.

And one clarification, I mean for Kevin and Tom. To be clear, these guidances by business segments are not apples-to-apples, it is pro forma for some of the re-lasses that took place, is that correct?

That is correct, David. For example, in [MP] the Fuchs business is in there in the forward-looking but not obviously in 2015.

In the reported 2015. But the guidance, the change in sales would account for it as if it was in the 2015 numbers. So the 2016 is an apples-to-apples comparison.

But just to be clear though, if you say Aerial is down 15%, it is not versus 2015 the year ago reported sales, it is year ago with part of that Cranes service business?

Yes.

Yes.

Okay, thank you very much.

Relatively small piece there though, David.

Correct, correct. Thank you.

Vishal Shah, Deutsche Bank.

Vishal, are you there?

Andy Casey, Wells Fargo.

Just wanted to dig in a little bit on the 2016 guide. You mentioned that it is going to start lower than 2015. Can you give us a little more detail about the spread within 2016?

Kevin.

Yes, Andy, we are not going to give quarterly guidance other than what we mentioned which is really the Q1 pressure. Other than that it is basically typical seasonal pattern.

Okay, thanks, Kevin. And then within the AWP forecast, if I go through the numbers it seems to include low to mid 50% decremental margins. And I am trying to understand how that may or not be conservative, especially given the business had some early 2015 margin issues. Can you kind of walk through a little bit of the detail behind that, the margin assumption?

Yes. One second.

Yes, we are not seeing those same decrementals, Andy. I am looking at decrementals more in the 20% to 25% range. So I am not following your math on the 50% decrementals.

Okay, I will follow up with Tom off-line.

Okay.

Thanks.

Ann Duignan, JPMorgan.

Just one clarification on the MP guidance of up 5%. Can you tell us how much of that is organic and how much is acquisitions? What would you be guiding to if it were organic?

The organic piece would be down, Ann. So the increase is really all acquisition-related. I will see if I can get you a rough range on that on the organic side.

Okay, that would be helpful just to understand. And then can you talk a little bit about controlling what you can control? Your inventory stood at about 104 days versus 92 days a year ago. Can you just talk about inventories by segment and what you can control there going into 2016?

Yes, I will take that and then turn it over to Kevin. Ann, focusing on working capital and working capital improvement in a seasonal cyclical business is something that we have to focus on and, frankly, I think we acknowledge that we have to improve.

We did have a growth in inventory, specifically a growth in our AWP segment. In that case Ken and the team made a strategic decision to build some inventory to put on the water for our European sales, so that made sense. We did see lower customer advances in our MH&PS sector principally driven by the Port side.

But also we are seeing some favorability. We did see improvements in our AR balance partially as a result of lower revenue, but also improved collections efficiencies with our shared service centers. Likewise on the AP side, we are seeing some improvement on the AP side as we have negotiated better terms with our suppliers.

This is an area of focus for the team. We have instituted a biweekly cash call, net working capital call with all business segments that I lead. And we literally go down through their sales and inventory planning process, their receivables, their payables, raw WIP and finished goods inventory and we understand where we are so that we can get that laser focus on reducing the amount of working capital that's tied up in our business.

So, that's a new process that we've implemented here in the last couple weeks. It will take some time for it to gain traction, but the team is focused on driving improvement in that working capital. So the point, Ann, that we've actually changed our incentive compensation system and there's an element now associated with net working capital improvement.

Good, great. That is good color, I appreciate that. Just one quick follow-up. Is there any sense that orders are being delayed maybe in some of the larger equipment ahead of the bauma equipment show or not really this year?

I would say based on my conversations with my folks, I put in a not really camp. And we haven't had any -- there will always be some orders announced at the big shows, but those are in work long before the show. So I can't tell you that my team is saying they are seeing a delay in orders associated with the upcoming bauma show. If that changes we will let you know, but that is where we currently stand.

Okay, great. I will get back in line. Thank you.

Yes, Ann, I just want to get back to you though on your first question. It is actually split, both the core, the organic crushing and screening and the acquisitions contributing about half. So it is split between the two in terms of the 5% growth. I had that wrong, I apologize.

Okay, I am not sure I follow. Organic then was how much?

About half of the increase coming from the core historic crushing and screening and then about half from acquisitions on that 5% increase per (inaudible).

Okay. Thank you, appreciate that.

Nicole DeBlase, Morgan Stanley.

So my first question is just kind of a nitpicky one on the re-segmentation that you guys are doing. So I completely understand what you are doing with sales. But are there any major puts and takes on margin from that re-segmentation or not really much change?

Yes, so the biggest one would be you will see some compression in MP margin from moving our Fuchs business over. That business is in the rough area about $150 million with margins that were slightly negative in 2015, are expected to be flat to maybe slightly up in 2016.

So, that is probably the most significant of the restructuring. As John mentioned, the portion of North American services that is going into Matt's business isn't extremely material and that is pretty much the total.

Okay, thanks, that is helpful. And then the second question is just around cost savings. I think under the previous management team you guys were targeting $202 million of run rate cost savings in three years. I am just curious how you feel about that prior cost-saving program. Is that still on the table?

And if it is not, what you are doing a little bit more specifically with SG&A, manufacturing costs, et cetera, in 2016. And also I guess what you have embedded in guidance from a restructuring payback perspective?

Yes, Nicole, on the 202 improvement program, by no stretch of the imagination are we walking away from that. That is a focus area for us. As you know, the team increased the objective last year to about $100 million, actually came out of the year I would say in the $115 million range. So actually some good improvement.

We are tracking to the remaining 87 to deliver in this year. Again from a management operating review process there is 50 of those projects that we review on our monthly operating calls, they are green or red. And if they are red the team explains what they are doing to get them back to being green.

So overall we are tracking those. The challenge that we have is the market changed from the time we put those in place. And so we need to be a little bit more adroit at modifying our cost structure as a result of those changes so that we can focus on acceptable margins throughout the business cycle. So the 202 program remains a focus. The team executed well in 2015. We have to execute well in 2016 to ensure that we deliver on those commitments.

And then on top of that we are also looking at some incremental G&A activities, those activities have started in the United States where you have a little bit greater labor flexibility. They will be implemented globally in accordance with regional labor laws as we go forward to adjust some of our G&A expenditures given the volume levels that we are now anticipating as compared to when the 202 plan was put in place.

Okay, thanks. I will pass it on.

Rob Wertheimer, Barclays.

One quick question on those biweekly I think you said -- anyway, the working capital reports that you are doing. Are you seeing anything sort of structural in the aging of inventory or other accounts that makes you worried that you have any stuck assets? Or is it more just process in flow that you are trying to work down?

I think it is more process in flow. I am sorry, I've not been made aware of any issues and I'm looking at Kevin and he is going no. So it is really process and flow driving your fundamental underlying business processes to utilize less assets in the business.

Principally it surrounds our S&OP, or sales and operations planning process. And really focusing a lot of discipline in that process to take out frankly assets in the system that we don't need.

It involves now, it does take time because in some cases it does require lean implementation -- improving our lean implementation, reducing cycle times and things of that nature. But those are the types of things that we focus on in these reviews. So I would say it is flow and process, not any stuck inventory.

Perfect.

I would just add to that another objective in addition to getting lower working capital is getting a more consistent level of working capital. Again, back to process, we do have -- we tend to have a little bit of heroics at end of month, end of quarter.

Bottom line we are trying to get sustainable usable cash off the balance sheet, which means we have got to have disciplined processes that apply throughout the quarter and throughout the year. So that is another focus of the monthly rigor.

I will stop there. See you tomorrow, guys. Thanks.

Mig Dobre, Robert Baird.

Guys, if we can go back to inventories -- relatively flattish year over year here and obviously your outlook for next year is down 10% on the top line. How do you see inventories coming out of 2016? And any color as to where maybe the biggest potential drawdown in inventory would be by segment level?

We are not forecasting inventory -- just kind of full disclosure, flattish but on a currency neutral basis, not a positive for 2016. So we have got work to do in inventory. I think we see the opportunity for reduction candidly being broad-based, not specific to any one business. I think it will come out of -- we are looking for it to come out of all of them because the process opportunity really exists across Terex.

I see. And then maybe this is just clarification. I am trying to understand the guidance once again given the moving pieces. When I am looking at your Crane guidance down 15%, is this number a core number or does this also include the $130 million of service business that is moving out of Cranes?

That does include the service business coming out of Cranes and into Steve's world.

Okay, so core it would be more like down 7% or 8% or something like that, right?

I think it would still be double-digits, I can confirm that. Let me confirm that math for you.

That growth percentage or in this case the decline of around 15% is as if the 2015 number had those businesses out of it such that the 2016 reporting numbers -- that would be the comparable for 2015. Now when you look at what we reported as reported it wouldn't tie to that. But what we wanted to do was give you something that you could look and model 2016 on the current structure basis.

Thanks, Tom.

Okay, thank you.

Jerry Revich, Goldman Sachs.

John, can you talk about your plan to improve the distribution for the Construction business and just flesh out for us the stuff that you are taking looks like the move of Fuchs to Materials Processing is a step in that direction. I'm wondering if you'd just flesh out for us the opportunity from widening the distribution there and the broader plan for the rest of the businesses within Construction.

Thanks, Jerry. In terms of moving Fuchs into the MP section, I think that business actually in terms of the other businesses, sales and marketing distribution, distribution channel management, the opportunity to leverage in the environmental side, move away from just solely dependent on scrap and scrap metal.

So, I think we are looking for Kieran and his team to drive some improvements in distribution around the Fuchs business given their existing distribution channel and that their business is a third-party distribution channel management business.

So we are looking for Kieran in his team to take that Fuchs business to a different level, if you will. It will take some time getting the distribution up and in place, but we think there are some real synergy opportunities there and that is why that business was moved into Kieran and to the MP segment.

In terms of construction overall, clearly this is a segment that has been under -- has underperformed for quite some period of time. The Company has taken action in the Construction business and we have exited certain businesses, our skid steer business, trucks, road building.

And so, we are analyzing the existing pieces of that business that remain and we're asking ourselves the fundamental question: Can those businesses sustain long-term rates of return on capital greater than our cost of capital? If they can we will keep them and improve them. And if they can't they may be able to return something to a third-party other than Terex.

And so, those are the strategic analysis that I am doing. And again, it is going to take a little bit of time. As we look at it there is a lot going on right now at Terex. But that is the analysis that we are doing on the construction side.

In the construction business portfolio there are some businesses like the concrete business that frankly is performing quite well. And that is a business where the team has worked hard, come back, invested in their products and have got competitive product in the marketplace now and they are building backlog, building sales and driving some margin improvement.

So, it is not universal, when I say construction there are businesses within the construction segment that we need to analyze and make decisions on and that is what we intend to do.

Okay, thank you. And then in Europe, can you just update us on where your sales are in Aerials and Cranes versus prior cycle highs? And you touched on Tower Crane demand picking up. Can you just calibrate us what is the magnitude of the pickup that you expect in Europe for your Cranes and Aerials business embedded in your guidance?

We do see for Aerials sustained strength in Europe modest but sustained certainly relative to what we are seeing in the US. On the Cranes side we are getting a little bit better traction, especially on our larger ACs and our crawler cranes. We are expecting some of that to continue, some of that is in Europe, probably all I have in terms of Europe.

And then just in terms of the other side on the globalization efforts that AWP is undertaking. About 40% of their [Amir] machines were produced in Amir in 2015. With the ramp-up in production of our Z60 and S60 in our production facility in Italy we expect to see that grow to about 46%, 47% range. So an increase year over year.

I think that is important. It gets us closer to the customer from a service and support standpoint. And also helps to ameliorate some of the currency pressure that we are seeing. So that is a strategy that Matt and the team have been on and it is one that they need to continue to execute as we go forward.

Okay. Thank you.

Joe O'Dea, Vertical Research Partners.

Just on AWP orders, a pretty tough comp in the quarter and in absolute still a pretty good level. So just trying to get a sense in 1Q whether or not you are seeing some incremental softness from 4Q levels. Or just because we can normally see some shifts from 4Q to 1Q, but how you think that plays out over the remainder of this quarter?

I think I would answer it in this way. In terms of the biggest part of that backlog is pre-orders associated with the rental companies. And we do see some movement historically, right, guys, from Q4 to Q1. But I think the cautious outlook that the large rental companies have gone out with their CapEx in terms of their CapEx requirements, I don't think we are anticipating a big shift from Q4 to Q1 in this environment. So that is how that we are looking at the AWP side.

And again, that is principally being driven by the North American rental market. And the large customers, our team is in daily contact with them and we think we are tight in terms of what their needs and expectations are. And they are being cautious, kind of a wait-and-see attitude for 2016. And we think that really explains the backlog and also explains why we are not expecting to see a dramatic increase like I believe we did a year ago or two years ago that shifted from Q4 to Q1.

Thank you. And then just on the restructuring front, it sounds like more details to come. But as you consider some of the options you have are you able to give any sort of magnitude around the additional savings that you could wind up achieving in 2016?

Good question, but we need some more time to work on that and to ensure that we have detailed actionable plans that we can execute to. And as I get comfortable that we've got those detailed actionable plans that we can execute to, we will indicate what the savings are, and then also what the restructuring charges associated with that are. But unfortunately right now I am not prepared to discuss the details.

Okay, thanks a lot.

Brian Chan, Bank of America Merrill Lynch.

A lot of the question are [answered]. But just had a quick question with the changing operating earnings expected for 2016 and 2017 it seems like mostly from the AWP segment. Is there any adjustment in thinking for the $1.5 billion for the share repurchase after the Konecranes merger on both the $500 million and the $1 billion afterwards?

We haven't looked at that. I can say as part of the Konecranes integration efforts we have teams looking at the purchasing and purchasing synergies. But to that level of detail I can't say what we have looked at, Brian.

And Brian, (multiple speakers) any share repurchase will be based on where the business is performing at that time. But at this point, as John said, no change in expectations.

Okay.

I am sorry, did you say share repurchase program?

Yes, the share repurchase program, right.

No change in terms of any of our previous announcements as it pertains to a share repurchase program. Sorry, about that. I misunderstood.

No worries. And is there any type of like -- so if you do the $500 million immediately and the $1 billion afterwards, are you going to base that on some type of leverage guidance or liquidity? Or if you can help us think through what those decisions will be based off of that would be very helpful.

Right. So obviously those decisions, as we previously indicated, were based on market conditions and market dynamics. And so, that is -- and obviously our covenant and leverage ratio. So, as we get to that point in time that is how we will make the determination of quantity and when.

Okay, great. Thanks a lot, guys. Appreciate it.

Eli Lustgarten, Longbow.

Just one (inaudible) quick clarification. The guidance excludes foreign currency impact and there is no pension accounting changes at all?

That is correct. We don't expect currency to move us outside of the range up or down in 2016.

Okay.

And there is no material expectation around changing pension.

Okay. And can we talk a little bit about how you are handling your dealer network at this particular point? You have got product changes, you have got two negotiations of merger acquisition or so. What is going on with the dealers? How are they responding to it and how are you handling them as you go through this period of uncertainty?

Right. And so one of the things that we are laser focused on is focused on customers and dealers. And what is going on in terms of the potential merger does not impact them. And so part of our opportunity and challenge is to keep the management team of the segments laser focused on their customers and customers and distribution channel partners.

If they have got any questions or concerns we address and answer those questions and concerns. But fundamentally those aspects of the business are not being impacted by the Konecranes merger or the potential Zoomlion situation. So the focus is on execute the business today, address any concerns that they have. But really it is about execution.

All right, thank you.

Vishal Shah, Deutsche Bank.

Hi, this is Chad Dillard on for Vishal. So can you just walk us through the moving parts behind the MHPS outlook of flat? How do you think about the Materials Handling [part of the] Port Solutions? And then also if I look at your 4Q revenues, they are a little bit lower than expected considering that you typically gat a seasonal bump from the service business. So how should we think about the year-over-year comps as we move through 2016?

In terms of the MH&PS segment we are -- in terms of Port Solutions we came off a strong year on mobile hardware cranes as I indicated in my comments. And we expect that to remain basically at that level, not any significant growth. On the gantry crane side we expect a similar type of performance, slight growth.

And that is actually pretty good performance because overall container traffic right now on the Port Solutions -- or the Port side of the business isn't growing at the rate that we thought it was. So those are the two principal drivers on the Port Solutions side.

On the Material Handling side what is really driving a flattish type of demand on the Material Handling side is really around factory capacity utilization both in North America and Europe. And factory capacity utilization is relatively low/modest right now. And it is causing manufacturers to delay acquisition and purchases for equipment.

So those are the kind of driving forces behind. The offset to those is really driving new product and new product development. And things like our V girder and our new chain hoist give the customer the opportunity and the need to change what they currently have.

And so, that is why product development in that segment, both on the Port side and the Material Handling side, is important for us as we go forward. But those are the dynamics, if you will, in the overall marketplace and the reason our guidance is what it is.

Okay, that is helpful. And then just jumping over to Aerial Work Platforms. What are your pricing assumptions for 2016 and how do we think about that netting out with material savings?

I don't want to put a specific percentage on, but we have had pricing headwinds in certain markets. In North America it has been a headwind and then we have also experienced what I'd call the currency headwinds in other markets.

So it is a headwind and that is part of the challenge that we have is to offset the headwinds in that segment going forward. And the team did a good job with the material price and manufacturing productivity, as I indicated in my initial comments. And we are going to have to continue that performance to offset the headwinds that we are seeing in the AWP segment.

Okay, thanks. I will jump back in queue.

Kwame Webb, Morningstar.

I just wanted to follow up on your R&D commentary. So number one, could you explicitly give us an idea of will it be up or down? And then also I was fascinated by the emphasis on increasing research and spending in terms of development of service lines.

So I would like a little bit more thought on that and also what that might mean for reworking distribution and dealer relationships down the road if you were to maximize the value of an increased service offering.

So thank you for the question. I have a fundamental belief that you need to invest in your products and your services to be competitive in a competitive marketplace. And even in seasonal and cyclical businesses it is hard to time a cycle. And so you have got to have product plans that are focused on meeting the needs of customers and providing them with a compelling advantage.

And so, as we go through difficult times we will look to cut other areas other than our research and development. In 2015 we spent about $119 million on engineering and R&D, expect to be in the same basic range this year. Obviously I don't want to give segment specific information. I think that is competitive sensitive.

But the philosophy is very important, which is you must continue to invest in products and services, because we are capital goods, we sell it once and we maintain it and service either through distribution or ourselves for 7 to 10 to 15 to 20 years. And so, that is the area in our strategy and our strategy development that we will focus on.

I am a firm believer in organic growth first through investment in research and development and driving the organic growth in that area. So that is why there is an emphasis on we are in difficult, challenging times, our margins are under pressure, our job is to find ways to fund our R&D and not cut that to drive to incremental margin improvement.

That needs to maintain at a certain level. Frankly, I would like to increase it over time -- this isn't the time to do it. But I would like to increase it over time and I would like to be more efficient in other areas to fund that R&D growth. And that is what we are going to focus pretty rigorously on with our teams.

And just as a quick follow-up, will any of those sort of new service or R&D offerings require any sort of rework of either third-party distribution, direct distribution, dealer relationships to really maximize them?

No, not really. I mean you adjust your distribution based on certain geographical areas. So the distribution model is specific to a business and business segment and to a region. And your R&D efforts may impact the distribution channel on the margin, if you will.

But fundamentally you are looking at what products and what services need to be delivered to that customer. In some cases, in some of our business it is factory direct on the service side. In other cases it is through an independent distribution channel. And so, as we look at the offering we will consider is it direct or is it through a third-party distribution partner.

Great, thank you.

Now different models are different for our different segments. And we have to have the ability to operate in different segments because the businesses on a global basis are in fact different.

Great, thanks.

Emily McLaughlin, RBC Capital Markets.

So, on the AWP side you provided a lot of detail on what you're seeing from the national rental customers. I was wondering if you could go into some detail about what you are seeing from the independents or if it is more of the same.

On the independents in terms of what we are seeing, I think it is more aligned with what our historical -- it ebbs and flows a little bit quarter to quarter, but in terms of the independents we are not seeing a substantial change in terms of the percentage of sales through the independents versus the major rental company.

Okay. And then just a housekeeping question on your tax rate. I think you guys in the past have messaged that you are going to try to lower this each year. So I was just wondering what the puts and takes were around 2016's guidance?

Kevin?

Right. So, the tax rate, as you guys know, we have been investing in our global trading platform. We are getting a pickup from that both commercially, operationally and in tax line. Our issue in terms of not being able to really lower dramatically our tax rate has been -- a lot of that has been offset by losses not benefited, which actually were up in 2015.

So, as John mentioned, we are putting together plans in terms of additional cost out. Some of that is going to be specifically direct to the countries where we have got this compounded issue of losses not benefited affecting our effective tax rate. So that is an area that we have got to improve on.

Okay, great. Thank you for that.

That concludes the question-and-answer session of today's conference. I would now like to turn the floor back over to management for any closing remarks.

Thanks, everyone. We appreciate your time and interest in Terex today. If there are further follow-up questions, please reach out to myself. My contact information is available on the website or any press release -- or other members of John or Kevin Bradley. So, with that, I will say goodbye and we will talk soon.

Thank you. This concludes your conference. You may now disconnect.