Terex Corp (TEX) 2016 Q1 法說會逐字稿

Good morning, my name is Kim, and I will be your conference operator today. At this time I'd like to welcome everyone to the Terex Corp first quarter 2016 financial results conference call. (Operator Instructions)

Tom Gelston, you may begin your conference, sir.

Thank you, Kim, and good morning, everyone, and you for joining us today's first-quarter 2016 financial results conference call. Participating on today's call are John Garrison, President and Chief Executive Officer, and Kevin Bradley, Senior Vice President and Chief Financial Officer.

Following the prepared remarks we will conduct a question and answer session. Last evening we released our first quarter 2016 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. 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 disclosures because the information we will be discussing today does include forward-looking material. And with that please turn to slide 3, and I'll turn it over to you, John.

Thanks, Tom, and good morning, everyone. We appreciate your interest in Terex. I will begin by providing an update on our M&A activities and a brief commentary on our markets. Kevin will review our financial results for the first quarter and I will follow with an operating summary and segment updates before we open up the line to your questions. So let's get started.

Concerning the M&A activities I hope you respect I will be limiting my discussion on this topic to these prepared remarks. As we disclosed a few weeks ago, Terex received a revised nonbinding proposal from Zoomlion Heavy Industry to acquire all the outstanding shares of Terex for $31 per share in cash. We are holding discussions with Zoomlion to determine whether we can obtain a binding and fully financed proposal which provides for a high degree of closing certainty.

Working with our financial and legal advisors we are focusing on critical issues such as the certainty of Zoomlion's financing, Zoomlion's shareholder approval, government approvals and the security and amount of a reverse breakup fee. At the same time Zoomlion has continued to undertake its due diligence of Terex. Both sides are working diligently. However, I cannot commit to when this work will be completed or whether an agreement can be reached.

On the Konecranes merger, we are moving forward with all necessary filings to achieve antitrust, regulatory, and shareholder approvals that are required to complete the merger transaction. At this time the Terex Board of Directors has not changed its recommendation in support of the proposed combination with Konecranes.

These are exciting, dynamic and challenging times at Terex. We have multiple M&A transactions in process. The global marketplace is very competitive. Each sale is hard fought.

Industrial production in many regions is flat to down and low commodity and oil prices are impacting many markets. In this environment it is critical that we keep our team members focused on executing our plans and delivering on our commitments to our customers, shareholders, and to each other.

On our last call I announced that we were implementing an Execute to Win business system to critically evaluate our strategy, our operations and our talent development to ensure we meet our commitments. We are focused on delivering returns that are consistently above the cost of capital through the cycle.

We are in the early stages of deployment. We have executed well in some areas and we need improvement in others. I will cover these in more detail in the segment updates.

As we committed, we have been evaluating all aspects of our cost structure. We are executing plans that will remove approximately $60 million of cost from the Company. Unfortunately, this has impacted team members, but it is necessary in this market environment. Our focus has been mainly been on SG&A and these actions will reduce SG&A team members by approximately 7%.

We will continue to review our cost structure to drive improvements in our margins, return on invested capital, and cash flow generation. I believe we have more opportunities in strategic areas such as portfolio management and manufacturing footprint. However, we will need to consider these decisions in the context of the potential M&A transactions. With that, let me turn it over to Kevin.

Thanks, John. Good morning, everyone. Please turn to slide 5 and I'll review our financial performance.

The Q1 loss per share of $0.05 as adjusted was in line with our expectations. We had adjustments of $0.63 per share in the quarter and a reported loss per share of $0.68. Sales for the quarter decreased 4.6% as compared to the prior year, with 3.1% driven by currency movements, primarily the euro. Free cash flow was a negative $146 million in the quarter, which is consistent with the seasonality of our business.

We have traditionally consumed cash in the first quarter as we build for our seasonal peak. We still expect to generate free cash flow for the full-year of between $200 million and $250 million.

Let's turn to page 6 which shows the comparative quarterly income statement on an as adjusted and as reported basis. Please note the current and prior-year period results included in the earnings release and presentation reflect the resegmentation of our scrap handling business from construction into MP, and part of our North American services business from cranes into MHPS and AWP.

Adjustments for the quarter of $74.6 million fall into two main categories. The first being transaction related costs associated with the announced M&A activity, which totaled $10.5 million. The second category is restructuring and related activities, which totaled $64.1 million.

Of the total charges, $67.1 million was reported in operating income, while $7.5 million was reported in interest and other. The restructuring actions were broad-based with an emphasis on reducing our SG&A cost structure. Total reductions will be approximately 670 team members across all segments as well as Corporate.

The annualized savings from these actions is approximately $60 million, and we expect to realize approximately 40% in 2016. From an operating perspective, sales were mixed during the quarter. Aerial work platforms and construction reported an increase in sales over the prior year. This was more than offset by declines in our cranes, MHPS and MP businesses.

Operating margin as adjusted declined to 1.8% compared to 3% last year. The year-over-year decline in margin is being driven primarily by performance in our cranes and MHPS segments. Our AWP segment reported a slight decline while construction and MP both reported improvements. We saw some early benefits from the cost reduction actions we have taken during the quarter but we expect these to increase as the year progresses.

Below operating income we reported improvements in interest and other compared to the first quarter of 2015. These occurred primarily for two reasons. The first being a reduction in net interest expense driven by the retirement of our convertible notes. Second was a foreign exchange loss reported in 2015 which did not repeat in 2016.

The as-adjusted effective tax rate of 211% was driven by losses not benefited in certain jurisdictions. For the full-year we still believe our effective tax rate will be between 30% and 32%. EBITDA as adjusted for the quarter was $54 million or 3.8% of sales.

Return on invested capital was 5.4% for the quarter compared to 9.8% in 2015. The main drivers for the decline were higher restructuring charges in the March 2016 period and a lower effective tax rate in the March 2015 period.

ROIC is an important measure for the Company and our goal remains to outperform our cost of capital over the cycle. Based on our first-quarter performance and the expected impacts of our most recent restructuring plan we reconfirm our full-year earnings per share guidance of $1.30 to $1.60 on a 10% reduction in sales. With that I will turn it back to John.

Thanks, Kevin. Before reviewing our operating performance, let me talk about Bauma. I really enjoyed spending time with many customers from around the world. Our customers highlighted opportunities and challenges. They varied by region and market segment. The prevailing tone was one of caution. Our customers are competing in markets that are changing driven by low commodity prices, low to no growth environments, volatile exchange rates and other dynamics.

They have to compete aggressively to win business, and the visibility to the next job or product is not as clear as it has been in the past. The result is a more cautious approach to investing in new equipment.

However, I would add I was encouraged by the attention that our new products received. I was very proud of the presence we had at Bauma. Terex stood out as a truly global Company with the breadth of products and services needed to support our customers in these challenging times.

Turning to slide 8. For Terex this sentiment played out in the first quarter. Our largest market remains North America, which declined 7% for the quarter on a year-over-year basis.

Europe, at 34% of sales, was our most consistent market. Adjusted for currency, sales are up in Europe for all units except port solutions. Growth in Asia Pacific region is primarily due to a large port deal in India.

Now let's look at each segment. Aerial work platforms had a good start to the year. From a market perspective the demand environment remains challenging. The reduction in backlog is a result of our customers taking a wait-and-see approach.

Sales in North America are down year-over-year as our rental customers remain cautious about their CapEx requirements. Although construction activity is strong, purchase decisions will be delayed until rental companies see utilization and rental rates improve.

Europe remains a strong market for us with double-digit growth in the quarter and a strong order book. APAC continues to be mixed by country.

The team did a good job offsetting pricing and currency headwinds with productivity and material cost savings. Overall it was a good performance in a tough global market.

Let's move on and talk about our cranes business. Similar to AWP, the various crane markets around the world are at different points in the cycle. The North American market remains very weak which is reducing the demand for our rough terrain and boom truck products. The redeployment of fleet from oil and gas to other sectors is a significant headwind.

In Western Europe, the market is growing moderately. Our redesigned Demag all-terrain cranes are gaining acceptance. We had a good showing with this new line at Bauma. We are seeing a rise in all-terrain crane volume in the Middle East, but it's not nearly enough to offset the decline of rough terrain volume.

On a positive note we are seeing growth in Northern Europe and North America for our tower crane product line. As we indicated on our call in February, the market for utilities equipment is slowing and we experienced a year-on-year decline in sales.

The operating loss in the cranes segment was driven by several factors. We had lower volume due to challenging markets, unfavorable mix, which included a higher portion of used machines, and a competitive pricing environment.

We also had execution issues, including warranty charges and factory underabsorption. Our cranes team is taking action and developing plans to improve their global cost structure while they continue to develop new products.

Terex is only one of a handful of companies with the global scale and breadth of product line to compete effectively in the global cranes market. We need to leverage this while executing at a higher level.

Turning to slide 11. Sales in our material handling and port solutions segment were down 8% in the quarter compared to prior year, about half the decline related to foreign exchange rates. In our material handling business volumes were up slightly in Western Europe but down in North America and other markets. We believe this mirrors the higher industrial activity in Western Europe compared to the United States.

Lower growth rates in global container traffic are impacting sales of our port solutions business. While we are competing hard and maintaining our market position, we are taking action to improve the profitability of this segment. We initiated a restructuring program that will save approximately $30 million per year. As a result we booked a restructuring charge of roughly $50 million in the quarter. This is the right move to make in this environment to position the business for future success.

Moving on to materials processing. Net sales declined 2% compared to the prior year but rose about 2% on an FX-neutral basis. There are pockets of growth around the world but the global market remains sluggish, driven in large part by the lack of investment in the mining segment. While the recent upturn in commodity prices is encouraging, it will take a more sustained rally to drive capital spending. Consistent with our past performance, the MP team executed well delivering an improved operating margin in the quarter.

Our final segment is construction. This segment improved its performance compared to last year earning $2.1 million operating profit in the quarter on an adjusted basis. Good execution in the North American concrete business more than offset ongoing weakness in our German compact business. The team introduced a new mini excavator line and made improvements to our backhoe and dumper line, which are helping to drive sales. These new products were well received at Bauma.

In summary we find ourselves in a similar situation to many industrial companies. The markets are mixed with pockets of opportunity, but most are soft. We need to compete aggressively for every order. We will compete, but we will compete intelligently. We will continue to drive change across the organization, reducing overhead and scaling production to meet market demands.

We will not, however, sacrifice the core principals of our Execute to Win business system. We will invest in product development and innovation. We will invest in developing our talent, and we will critically evaluate our businesses and take the steps necessary to put each of them on a winning track. With that let me turn it back over to Tom. Tom?

Thanks, John. As this call is scheduled for just one hour, we ask that you please limit your questions to one and a follow-up so we have time for everyone's question. With that let's open it up for questions. Kim?

(Operator Instructions) Seth Weber, RBC Capital Markets.

Great, thanks. Good morning, everybody. I just wanted to go back to your comment about the restructuring and the footprint rationalization. Are you precluded from doing anything from a footprint perspective as long as these potential transactions are hanging in the balance? Or can you start moving forward with some footprint decisions here before anything is decided?

Thanks, Seth. As we look at the decisions that we need to make, as I said in my comments, we consider the two different outcomes and does the decision that we make make sense in those two different scenarios. If it does we go ahead and implement and execute that. If not, we may delay the implementation of that until either one of these scenarios plays itself out.

Okay. So the $60 million of savings that you referenced does not include any kind of footprint change savings?

That is correct, Seth. It does not include any manufacturing footprint rationalization.

Okay. Great. And then I just had a question on, in your prepared remarks, touched on pricing, the pricing challenges in AWP and cranes. In your opinion is that an inventory issue? Is it competitors competing with currency? Can you give us any color on the categories as it relates to pricing, the pricing environment? Thank you.

Thank you. In terms of the pricing environment, the overall environment in AWP -- Q1 was consistent with our expectations, and the pricing environment, the biggest impact that we did see was the currency headwinds that we faced in Europe. We are producing in North America and still shipping to Europe. Matt and the team are working to shift some of the production to Europe and over time that will improve.

So that was a currency headwind, and then the other part of pricing is the net pricing on used equipment and used trade-in. And we did see some valuation over-allowances if you will on used equipment that impacted pricing. So I think those are the factors that are principally driving the pricing environment, but again I think it is been consistent with our expectations and consistent with the overall level of demand in the marketplace.

Okay, so you think -- in your view inventories are pretty good across both AWP and cranes then?

Yes. In terms of AWP and inventories, Matt and the team made a strategic decision to have some inventory forward-placed in Europe, and I think that decision has proven out to be an accurate one and will unfold as the second quarter evolves. He also had some inventory set aside for the North American market. And he feels that that inventory will be consumed in the second and third quarter. He made some strategic decisions on inventory placement and we think they are the right ones.

Terrific. Thank you very much.

Jerry Revich, Goldman Sachs.

Morning, everyone. I'm wondering if you could talk about the order environment in April. Presumably your first quarter orders were impacted by some folks waiting to place bigger orders at Bauma. Was that the case? Can you characterize the inquiry environment over the past month for us, just put the quarter in perspective?

Yes, in terms of Bauma it's always a challenge. And first of all, I thought we had a great show at Bauma. And again, the environment was positive and the team worked hard. Were there some orders delayed until the show or until after the show? I've been doing this for 25 years. It's always hard to tell in terms of the order environment.

There is no doubt, however, that the new products that we showed at the show generated some orders and generated excitement across the product segments. With the Demag line, rebranding of Demag and our all-terrain cranes, that stimulated some demand. AWP with their Z60 product stimulated some demand. So overall I think Bauma was a positive experience in a challenging market, but the takeaway was new products help customers to make purchase decisions and we saw that.

From an order standpoint going forward in the quarter, it's still early. We are in April and the team is working hard across all the segments to achieve our sales forecast.

Okay. Thank you. And it's encouraging to see sales growth for you folks in Latin America, not a lot of machinery product lines are seeing that. Can you flesh out for us what you are seeing in the market? What drove the 15% organic growth in the quarter, and how much visibility do you have on that continuing, which businesses are driving that?

Yes, we are a little less positive on that. I think the percentage growth is really off a low base. The Latin American market, with the exception of Mexico, Mexico especially in the AWP has been a good market for us. But Latin America in general, and Brazil specifically, has been a very difficult market across all of the business segments. I think that was just a relatively low number and a high percentage off of a low number.

And are those comparisons just as easy in the coming quarters, John?

Yes, they will be. But again our expectations are not high for Latin America. It is a difficult market right now in Latin America.

Okay. Thank you.

Ann Duignan, JPMorgan.

Hello, guys, it's Ann Duignan. How are you? We are restricted on Terex right now, so I'm very limited in terms of what kinds of questions I can ask. So I suppose I'll just focus on your regional outlooks and your regional actuals.

Can you just talk about the Middle East and what you're seeing there? We have heard some comments from other competitors that activity is drying up, that a lot of money is being diverted out of construction activity into defense. What are you seeing in the Middle East specifically?

Ann, I think our comments would be similar to that. On the cranes side or all-terrain cranes, we did see a couple orders in that area, but the rough terrain crane market that really does serve that oil and gas industry was down significantly. So I think in terms of -- the Middle East is a difficult market.

Okay. That's helpful. And maybe the same question for Asia then. You did comment on a port order for India, I think. So maybe just some color on that region.

Right, in terms of the Asia Pacific region it really varies by country. Off to a bit of a slow start in China, but the team thinks that we'll catch back up on that. India has had some positive activity. Of the customer segments at Bauma, the Indian customers were perhaps the most buoyant. They believe that there's going to be some funds released for major infrastructure projects. So we will be looking forward to seeing that turn into orders as we go forward.

So I think it varies by region and again, Ann, what's impacting a lot of the countries in that market is the commodity bust cycle, and so the countries that are tied to commodities are relatively slow. Australia being one. Australian market is also another challenging market as a result of the commodity bust. So it really does vary by specific country and segment in terms of what we are seeing in the Asia-Pacific region.

Okay. Thank you very much. I appreciate the color. I'll get back in line.

David Raso, Evercore.

Questions on the aerial work platform business. The quarter had better revenue than I think most of us would expect. Can you help us understand, was there any pull forward of business, and how do we think about the rest of the year? Because I'm just trying to think about the full-year segment guidance that we received 3 months ago.

If you hold that, it's implying after a flattish first quarter the rest of the year is down, call it 19%, 20%. So I'm just trying to make sure I understand exactly what played out in the first quarter and how to think about the rest of the year.

Thanks, David. In terms of AWP, first of all we would say Q1 was consistent with our expectations. And I think if you look at the backlog and the order rates, that's really indicative of that cautious rental channel, where the rental companies are really looking to drive improvement in utilization and improvement in rates. So we did see a little bit of timing early second quarter versus late first-quarter shipments, and so there was a little bit of that at the end of Q1. But not a significant amount.

And as the year plays out, Matt and the team, we continue to see strength and he positioned some inventory in Europe to take advantage of that, so we see strength in Europe.

North America obviously is going to play out really over the next 60 to 90 days as we see what the major rental houses and independents do in terms of their orders. It is -- the overall market in North America around construction segments is really pretty strong and so that's what they are looking to see. So we think based on where we are in the year that our expectations haven't changed in terms of AWP, and the guidance that we provided earlier in the year we think still holds based on where we are.

Given the timing the rental houses typically like to take their machines, how far away, if they've shared this with you maybe, how far away are they from hitting certain metrics that could improve the rest of the year versus their cautious view right now? Because obviously they must only have another, say 3 to 4 months to really make a hard decision that would really impact your 2016.

I think the -- to be honest, and that conversation is basically almost a daily conversation with our sales team and the major rental houses. So it really is Q2, and what we see here in the next, as you said, in the next 60 to 90 days will provide the clarity that we need to see how the full-year will turn up. Because obviously Q2 is the big quarter for us in the AWP volumes.

Okay. All right, I appreciate it. Thank you very much.

Steven Fisher, UBS.

Just to broaden up David's question on the guidance, just trying to reconcile the down 10% on revenues with the 20% decline in backlog in the quarter. Are you expecting year-over-year growth in backlog at any point during the year, and what are the most important things, broadly for the whole, all segments, that you are counting on to happen to hit the guidance?

So in terms of the full-year guidance, as you said, we did reconfirm the down 10% in terms of what the full-year will look at. Looking at AWP as we just spoke, it started off as expected, perhaps slightly better than we expected. The second quarter is key for us, our seasonality is heavily weighted to the second quarter.

Cranes is off to, whereas AWP was off to a bit of a better start, cranes was off to a slower start and so cranes is an area of focus for us as we look forward in terms of the topline on cranes. And so again, based on where we are in the year and what we have seen, we called maintaining our guidance.

And the other thing I would add is that we really are focused on controlling the cost elements as well. We had some good execution and we had some other areas in the quarter where we didn't execute as well as we need.

So as we go forward in the remaining three quarters of the year (technical difficulty) pick up in some of the places where we had some execution shortfalls so that we can achieve our EPS guidance on the lower revenue. So that's where we are in the quarter and how we are seeing going forward.

Okay. That's helpful. And then you had previously said that within 90 days you'd have some portfolio related decisions. Can you give us kind of give us an update on where you stand on that, or is that now all on hold given the transaction thoughts that are in process?

The portfolio decisions really fall under the criteria of there's two different scenarios that we're operating under right now. We will delay major portfolio decisions until we have greater clarity on what scenario plays out.

Okay. Thank you.

Jamie Cook, Credit Suisse.

Good morning. I guess a couple of questions. One, you noted the pricing deterioration in the quarter, although in line with expectations. But I mean how big of a risk do you see price material cost in 2016 given it looks like material cost could potentially be a headwind, not a tailwind, relative to maybe three to six months ago?

And then I guess my other question on the used pricing comment that you made with regards to aerial work platforms. Can you just give a little more color, how broad-based was that across product line or by geography? Thank you.

Thanks, Jamie. Let me start, I think, with the first part on the material side. We did have some good material price variance productivity in the quarter. Some of that is still benefiting from the drop in steel prices that we had last year, particularly in the fourth-quarter. So that was used and did help to offset some of the pricing headwinds that we had.

We are working very hard with our procurement teams across the organization and managing it very aggressively to see positive pricing variances, if you will, negative material variances across and leveraging our spend a little bit better, and again using that to offset some of the pricing headwinds that we have had.

The other element of pricing is used equipment in North America. And again there is some good news there. There was some stabilization on Rouse rates on used equipment sales, and so that is a good sign. Our realization was close to that, and so on the used equipment side if we continue to see some stabilizing of used equipment values that will help as well in the overall pricing dynamics.

Okay. Thank you.

Mig Dobre, Baird.

Good morning, everyone. John, maybe you can help us a little bit with the way you're thinking about the earnings cadence through the year, just given your announced costs savings and all the moving pieces. And I'm also wondering if your expectations at segment level have changed at all versus the prior guidance?

So to take the first question about the cadence of the earnings through the year. I think we are looking at it as our historical norm. We don't see any significant shifts in terms of the earnings across quarters. So I would say historical norms for that. And the second question, I'm sorry?

If your expectations at segment level have changed at all from the prior guidance.

No, in terms of our overall guidance I think we are consistent. As I said, AWP got off to a little bit faster start, cranes off to a little bit slower start. On our MH and PF business, on the material handling side, kind of in-line. Port, you know, clearly with the slowing of the container traffic, we saw a slower port side of the business.

MP was pretty much in-line, our materials process business, and construction, you know, it was good to see a positive move on the construction. Our North American concrete business executed well in the quarter and had a good quarter, and it looks like that can be sustained going forward to help offset the challenges that we've had in our compact business. So that's how I would kind of look at the full-year guidance by segment.

Okay, and then my follow up on MHPS, if I look back there's been a lot of restructuring in this segment. I think it's something north of $100 million over the last four years. I'm wondering from your perspective at this point, what needs to be done here in terms of maybe the, potentially the footprint longer-term, or some of the fixed cost base in order to get the segment in the black?

Thank you. Steve and the team have been working hard for several years to position the business from a cost structure standpoint to be successful. The actions that Steve took in the quarter were necessary.

The SG&A side of that business if you look at it as percent of sales is quite high. And so attacking that from an SG&A standpoint was important. They have been taking cost out. Unfortunately, the volumes have been coming down about same level, or actually a little more than the cost side, so that has impacted the business.

I might add as part of our Execute to Win business strategy, one of the elements we talk about is strategy and obviously we continue to look at strategy. But we will be spending several days on the ground with Steve and his management team going through in-depth their strategy to see how we can break out of the recurring restructuring going forward. But they are doing the things they need to do to face the environment that we are facing into, and I suspect we are going to need to continue to take action until we get this to a profitable level at the current volumes.

Thanks.

Robert Wertheimer, Barclays.

The question is on cranes, and as you sort of take a look at the cranes business, do you think that it's just suffering from a lack of volume right now, or do you find that there have been bigger structural changes with the competitive balance, whether it be the euro or the yen? And how do you do -- anyway, do you think the structure of the business has changed, and do you have to respond more radically? Or are we just at a low point that you hope will come back in a year or two?

Clearly the cranes business is in a difficult trough. Especially in the United States, we are at 2009/2010 levels in rough terrain and boom trucks and truck cranes. We are seeing some growth in Europe with the launch of our new Demag brand. I think the dual branding strategy is going to help with Demag for all-terrain cranes and our crawler cranes, and the Terex with the rough terrain cranes and our boom trucks, so Ken and the team have worked there on the up-front side.

And then we have to evaluate the overall cost structure of the business. One of the things that we are stressing is that we have to earn our cost of capital through the cycle, which means we've got to be profitable at these levels of volumes. So what are the actions and steps that we need to take to have a return that covers our cost-to-capital not just at the peaks, but in the troughs. So that's what they are focused on.

Ken and the team also had some execution challenges in the quarter that impacted us. Some product warranty and some product recall type things that we need to do a better job of executing. At lower volumes everything is magnified and we saw that in the quarter with a couple of warranty related activities that really hurt us on the lower volumes.

So Ken and the team is working hard, as I said, Execute to Win strategy. The month of May is going to be spent visiting, in-depth reviews with the teams, and one of the things we will look hard at is the cost structure as well as new product and new product development.

And I think the encouraging thing for the crane side is we've made some modifications, we've made some upgrades to our cranes, and those that we did, we are seeing a response in terms of order inquiry on the equipment. So Ken and the team have a lot of work to do and the competitive environment, it is a competitive marketplace. But as I said in my comments, we're one of the few companies in the world that has the product breadth to compete across the product line and to compete globally, and I think there's a solid foundation for us to build on going forward.

That's very helpful. Thank you. Are you seeing -- just a follow-up on the question earlier on raw materials -- are you seeing increases in steel, in the high-strength steel that is more often used in cranes, or is it not seeing that kind of pressure? It feels like it could be a difficult six months from now.

I would say on the steel side we are not yet seeing some of these pricing increases. Where we do it unequivocally is in the high tensile strength steel, that's the first place it shows up. But we are going to be working hard to make sure that we can push back on some of these increases. There's still an oversupply of steel in the global market place.

Thank you.

Joe O'Dea, Vertical Research.

Morning. Also on cranes and related to margin and progress through the course of the year, there's sort of the balance between what you can control and what you can't, and so obviously the volume and the mix challenges are there. But you also noted some warranty and execution issues in the quarter. So just to think about what the trajectory looks like for that margin over the course of the year and whether you think the corrective action is in place, such that we see a nice step up in 2Q, or how that trends based on what you're planning.

Thank you. In terms of the trends, we do believe we'll see -- we had a tough first quarter in our utilities segment that's reported under our cranes segment. We expect that that will come back more as the year progresses. Some of the action that Ken is taking, near-term actions, I think are going to help later in the year on the margin side.

And then they also, some of the new products that we're introducing, have some better gross margin opportunities as we bring those into the marketplace. So without question cranes' operating margin and progression is one of the challenges that we have, given our guidance. But for now we are going to stick to that until we see how the year unfolds a little bit more.

Okay. And then going back to the Konecranes merger and some of the contemplated synergy benefits there and then the press release this morning from them. Just in terms of how, if you have revisited that, how that affects the year one savings that you had put out versus the three year savings? If there's any just updated framework on that?

Yes. Thank you. In terms of the Treasury or IRS notices that came out, they did have and will have an impact on our announced synergies. At the time of the merger we had announced $119 million of pretax operational synergies, but including in that was $35 million of post tax benefits in tax in structuring. As a result of the Treasury notices most if not all of that $35 million of tax synergies will be eliminated.

Obviously we are learning. It's a very dense document, but our initial analysis is that there will be at least a $35 million reduction in the announced synergies at the time of the merger.

Okay. And one last one, you probably can't say anything; but just timing: it's been a month since we got a press release from you on Zoomlion. I know there are, you know, a couple things that you're pursuing to try to get more confirmation and confidence in the closing there. Is there anything that you can point out for us in terms of what to expect on the calendar and what comes next, or wait and see?

You know the Board and management, we understand the -- we want to resolve the uncertainty as quickly as possible, and as I indicated in my prepared remarks, both sides are working diligently to do that. And again we are focused on the financing, their shareholder approvals, the governmental approvals and security and amount of a reverse breakup fee. So those discussions are ongoing and we will announce as soon as we can which direction this will go.

Great. Thanks very much.

Ross Gilardi, Bank of America.

Thank you. John, I just wanted to follow-up on MHPS. Obviously results are very weak, and I'm just curious, how are you managing the competitive environment, and particularly given that your biggest competitor is also a company that you might be merging with. Are you seeing customers delaying purchasing decisions, be it in MHPS, cranes, AWPs, anywhere, while they wait to see whether there's a change in ownership or whether your transaction with Konecranes even happens?

Thanks, Ross. In terms of -- you are absolutely right. At this point in time we are intense competitors in the marketplace and we also have a merger agreement. So there's very strict firewalls that we established as part of the merger planning integration activities. So there are very strict firewalls in place.

In terms of the market development, I do not believe that customers are delaying their purchase decisions based on the potential outcome of the merger transactions at this time. I really do think that if you look at the underlying fundamentals in the business, on the material handling side I think it's tracking pretty closely to factory utilization. It's in the low 80%s in Europe and we are seeing some growth there. In the United States, factory utilization is in that 75% range, so that's not great, it's not bad, but it's not great. So I think that's driving the purchase decisions on the material handling side.

And on the port solutions side the slowdown in growth rate in container traffic is really causing ports around the globe to delay some of their purchase decisions and saying we can get by with the existing equipment that we have, that we don't need new equipment. And so across the product line on the port side we are seeing customers delay their purchase acquisitions. I am not aware of any situation where a customer has said, I'm delaying this decision because I am uncertain about the acquisition and the merger.

Got it. Thank you. I mean are you getting any feedback from your key customers on the potential change in structure or ownership of Terex in any of your business and what that might mean for future relationships?

In terms of conversations, most of the conversations that I had at were around Bauma and they inquire just because obviously it's a major issue. Not an issue, it's a major uncertainty right now in terms of the ownership structure. But the message that we've conveyed to the customers and frankly to the employees is that in either scenario they are going to be dealing with the same great people they deal with every day. The same products and service organizations that they've been dealing with.

And so the impact of who owns the equity of the Company is frankly not that significant on a customer's transaction. And most customers when you talk to them about that, they get that and then they move on to the business.

Got it. Thanks. And then just lastly, a quick housekeeping one, on interest expense can we use the Q1 number as a run rate for the full year?

Yes.

Okay. Thanks.

Joel Tiss with BMO. Joel Tiss, your line is open. And your next question comes from the line of Andy Casey, Wells Fargo Securities.

Thanks. Good morning. Just a question on the $60 million benefit. Do you expect the benefits to really start in Q3 and do you anticipate exiting 2016 at the roughly implied quarterly rate of about $15 million?

In terms of the $60 million in restructuring, as Kevin indicated in his remarks, we are anticipating about 40% of that in the year with most of it coming later in the third and fourth quarter. So I think that's, from a flow standpoint, how we are looking at the benefits from the restructuring.

Okay. Thanks, John. And then on the cranes price pressure comment, did you see any of that in the larger crane categories or was it primarily related to rough and all-terrain and boom trucks?

I would say it was clearly impacted on the rough terrain boom truck market segment. The large crawler crane market is competitive but we've got a very strong position especially with our 3800 in that market space. So we can demand a good price because we provide a significant value to the customers.

Also one other thing on pricing that I think is important is, we've said we are going to compete aggressively but we are going to compete intelligently. Price can't always stimulate incremental demand, and we understand that we are in a capital goods business, so it's the upfront initial price plus the operating cost through the life cycle plus the residual value and resale value.

So as we look at a transaction, we are having our sales team really focus on the value add and being overly aggressive to try to stimulate a market that's not there with an upfront price doesn't help anybody in the value chain. And so we are going to compete aggressively but we will compete intelligently on the pricing side.

Okay, thanks. And then last question going back to an answer you gave previously on the MHPS. Within material handling you've commented on seeing some growth in I believe Europe. Did that get progressively bigger during the quarter, or was it just pretty consistent all the way through?

I would say pretty consistent all the way through. That's a -- relative to our other businesses, that's a relatively rapid velocity business in terms of order and ship rates, and so I would say it was pretty consistent through the quarter.

Okay. Thank you very much.

Stanley Elliott, Stifel.

One of the first times we met, you spent a lot of time talking about working capital and improvements that you thought you could find within the business, and you kind of talked about the free cash flow for the year. Could you update us on some of the progress that you've seen so far and maybe where we could think of ending the year, working capital, it's a percent of sales, or however you want to frame that for us to think about? Thanks.

Thank you. Net working capital is a focus, such a focus that we redesigned our management compensation scheme to put a big part at risk with our net working capital improvements. We are being rigorous, we have our biweekly cash calls/net working capital calls with all the segments where we focus on all elements of net working capital.

Where we are starting to see some progress, and again I will caution it does take time to implement these changes throughout the organization, but we are seeing improvements in things like APs. Where we look at the AP terms and making sure we've got contracts that are in the bucket of what we believe are acceptable and the teams are making progress there.

AR on the receivables side, looking at receivables, receivable collections, reducing the days late across the business segments. We are continuing to make progress there.

On the raw, WIP, and finished goods, that is about improving our S&OP process, and the team's working hard around that on their sales and sales forecasting, and then driving down through the operations with changes in the ERP system so they actually see a reduction in raw, WIP, and finished goods. And it's going to take some time. But we are focused on it.

In terms of the percent of sales and absolute dollars we are basically flat on net working capital. Slightly higher in Q1 to prior year, but again I think that was due to some strategic decisions specifically in AWP that Matt made about positioning some inventory. I think as we look AWP, I'm sorry, as we look at net working capital to sales on a full year basis, probably in that 24% to 25% of sales range is what we are looking for to drive to by the end of the year.

David Raso, Evercore.

Help me with that comment, and Kone made the same comment this morning about the tax benefits potentially lost, eliminated with some of the tax reg proposals. That is almost 30% of the total combined synergies of the two companies, so I was just curious: has this been fleshed out or has it reopened the negotiated terms on the Kone deal?

It's obviously not an immaterial percentage of the total savings and it depends on what kind of share repo the combined Company would do. But even if you just did the $500 million repo overnight, as you suggested at the beginning, it's almost $0.30 of a rough $1.00 of synergies of the combined Company, so it's not immaterial. So I was just curious: has this started a new negotiation around the terms, and any implications of how Zoomlion thinks about the Terex deal and the price paid?

David, in terms of the, as I indicated, the Treasury notice did have a significant impact on the savings. We are going through what the implications of that are to the overall transaction. In terms of -- at that this time I don't want to comment about negotiations or renegotiations with Konecranes, but we are collectively, Konecranes and Terex, working through the implications of the Treasury and tax notices to understand what it means to this transaction.

And at this stage the Board even with the reduced synergies at Kone as of now hasn't changed their recommendation? We're still looking for that more of a binding definitive proposal from Zoom, right? That's kind of where we stand right now?

Correct. As I said in my prepared remarks, the Board has not changed its recommendation for the Konecranes merger. We continue with our discussions with Zoomlion across the elements that I've discussed to ensure that we can have a firm and binding commitment proposal going forward. And so that's what we are working on.

I appreciate it. Thank you very much.

I would now like to turn the call back over to Mr. John Garrison.

Again, I want to thank you all for your interest in Terex. If you have any additional questions, please follow-up with Tom. He would be more than happy to address your questions. And again, thank you and have a good morning.

Ladies and gentlemen, this concludes today's conference call and you may now disconnect.