Terex Corp (TEX) 2016 Q2 法說會逐字稿

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

(Operator Instructions)

I would now like to turn it over to Tom Gelston. Please go ahead, sir.

Thank you, Nan. Good morning, everyone.

And thank you for joining us for today's second 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. As Nan mentioned, following the prepared remarks, we will conduct a question-and-answer session.

Last evening we released our second-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 the reconciliation of GAAP to non-GAAP financial measures that we will use during this call, and is also available on our website. All per-share amounts in the presentation are on a fully-diluted basis.

We will post a replay of this call on the Terex website under audio archives on the investor relations section. Let me direct your attention to slide 2, which is our forward-looking statements 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.

With that, please turn to slide 3, and I will turn it over to you, John.

Thank you, Tom. Good morning, everyone. We appreciate you joining us today.

I will begin by providing an update to our strategy and our recent M&A activities; Kevin will review our financial results for the second quarter; and I will follow with segment updates before we open up the line to your questions. Proud path, better future: I introduced this theme at our leadership conference earlier this year. Let's talk about how that better future is realized.

We have started the journey to transform Terex into a more focused and simpler company. Our new strategy consists of three outlets. The first is focus. We are transitioning to a tighter portfolio of businesses that are focused on the aerial work platforms industry, the mobile lifting industry, through our cranes and utilities businesses, and the mobile materials processing industry.

We are in the capital goods business. Our customers invest their capital in our equipment, and they must generate a return on that investment. We will focus on providing customer lifecycle solutions that maximize their return on investment. All of these businesses have scale in their industries, and either have or can achieve a sustained market-leading position, which will enable us to deliver returns greater than our cost of capital through the cycle.

The next is simplify. This starts with a straightforward organizational structure and operating model that supports our intense customer focus, while dramatically reducing administrative effort and cost. Simplifying the Company also means getting more leverage across our businesses to shared activities and facilities.

Finally, execute to win. We are implementing a Company-wide business system focused on driving accountability and execution to ensure we meet our commitments to our customers, shareholders, and team members. We will develop a winning culture centered on execution excellence.

Turning to slide 4, we took significant action in the quarter to focus our portfolio. We announced the sale of MHPS as a major step. MHPS is a good business, and combined with Konecranes, has the potential to be a great business.

We took another step forward with the announced sale of the German compact construction business. We decided to sell the business because as part of that Terex portfolio, this business was not able to achieve the scale and market position necessary to out-earn our cost of capital through the cycle.

Turning to slide 5, Terex has grown through many acquisitions over the last 20 years. This acquisitive growth has created complexity in the Company. We must attack the complexity to reduce our cost structure. We must radically simplify our legal entity structure, our reporting structure, our management structures, and our physical footprint. Again, we are taking action.

We streamlined our management reporting structures from five segments to three segments: AWP, Cranes, and MP. We are taking action on our general and administrative cost structure. We are executing the plans we announced on our last earnings call that will remove approximately $60 million of cost, of which $30 million will benefit continuing operations.

When we complete the sale of MHPS and the German compact business, we will need to align our cost structure, and we will do so. We have started to take action, and will continue to take action, over the rest of 2016 and 2017. We are taking action to rationalize our manufacturing footprint.

Two weeks ago, we announced the close of our crane facility in Waverly, Iowa, moving production to our multi-segment shared manufacturing facility in Oklahoma City. This will allow us to better leverage our manufacturing footprint, investments, and expertise at OKC. Our AWP segment is consolidating its scissors manufacturing from three to two production locations, and closed the refurbishment facility in California.

We announced the decision to close our originally-acquired materials processing plant in Austria and move its production to our facilities in Northern Ireland. We are continuing to evaluate our manufacturing footprint and believe there are additional opportunities to better leverage our global capabilities.

Turning to slide 6, the third element of our strategy is an intense focus on execution, which we call execute to win. You have heard me talk about this in our last two earnings calls. We understand that we have to improve our execution, and we will improve our execution in all of our businesses around the world.

Execute to win is about building strong core management processes in strategy development and deployment; commercial and operational excellence; and talent management. This is a journey; the foundational pieces are in place.

Turning to slide 7 for an update of the MHPS sale, the regulatory filing review process is proceeding, and the transaction remains on schedule to close in early 2017. From an accounting perspective, we are reporting MHPS as discontinued operations. This change removes MHPS results from our continuing operations. We are not reflecting any of the benefits of the transaction: the 25% equity interest; the Konecranes dividend; and the proceeds from the sale that will strengthen Terex's balance sheet. These benefits will be realized after we complete the sale.

With that, let me turn it over to Kevin.

Thanks John, and good morning, everyone.

Please turn to slide 8, and I will review our financial performance. We reported second-quarter earnings per share of $1.00, and earnings per share as adjusted of $0.64, in line with our expectations. We incurred pre-tax charges related to restructuring and deal activities of $40.5 million, of which $33.3 million impacts operating profit, and $7.2 million is recorded in interest and other.

In addition, the planned business sales enable us to release tax valuation allowances totaling $67.7 million, recorded as an income tax benefit. We generated net cash from operating activities in the quarter of $113.6 million and free cash flow of $72.2 million. This is consistent with the seasonality of our business and our expectation to generate $200 million to $250 million of free cash flow for the year. Backlog at the end of June was down 22%; this was driven primarily by reductions in AWP and Cranes.

Slide 9 summarizes the comparative quarterly income statement on an as-reported and as-adjusted basis. Net sales for the quarter decreased 10% compared to the prior year, but overall, was in line with our expectations. Double-digit declines in AWP and Cranes were partially offset by growth in material processing. Operating margin declined to 5.7% compared to 9.4% last year, driven largely by the restructuring and deal-related activities. Excluding these charges, we generated an operating margin, as adjusted, of 8.2%. Volume reduction was the single largest driver of the as-adjusted margin decline.

Reported interest and other remained relatively flat versus the prior year. The $6.7 million improvement on an as-adjusted basis was driven by savings achieved by retiring our convertible notes last year. Return on invested capital was 23.1%, compared to 9.9% in 2015. The increase was driven by tax benefits from the release of multiple valuation allowances in the quarter.

Slid 10 bridges the impact of our portfolio and business simplification actions: specifically, moving our concrete businesses from construction into material processing; the elimination of construction as a segment and moving the remainder of that business into corporate and other; and reporting MHPS as discontinued operations. Under the previous reporting structure, MHPS would have absorbed a $8.5 million of corporate costs in the quarter, which will remain in continuing operations. We will take action to further reduce our cost base and substantially offset that amount after the completion of the sale.

Let's turn to slide 11, and I will review our guidance. Including MHPS, through the first six months, we performed in line with our expectations. Under our previous reporting structure we would have maintained our original EPS guidance of $1.30 to $1.60. This excludes the impact of restructuring and other unusual items.

The removal of MHPS earnings from continuing operations and the overhang of the unabsorbed corporate management costs, have an impact of approximately $0.45. As a result, our new guidance range is $0.85 to $1.15. This excludes the impact of restructuring and other unusual items. We maintain our outlook for free cash flow of $200 million to $250 million for the full-year.

Slide 12 provides an update of our full-year segment outlook. Our original estimate was for AWP sales to decline by approximately 15%. We maintain that view. Margins for this business are now estimated at 8.5 to 9.5%. This is driven by increased market challenges.

We continue to estimate Crane sales to be down approximately 15%, consistent with the first six months. A combination of market and pricing dynamics, product mix, and execution issues are putting further pressure on margins for Cranes. Including our concrete business, we now see improved margins on flat revenue from the material processing segment.

We expect operating losses from corporate and other to improve by approximately $10 million, driven primarily by cost-reduction activities. The net result of these updates is full-year continuing operations sales of between $4.3 billion and $4.5 billion, on operating margins between 5.25% and 6.25%.

With that, let me turn it back to John.

Thanks, Kevin.

I will provide an overview of our segment performance, starting with AWP. Sales in the quarter were in line with our forecast, down around 14% from last year. The decline was driven by North America and South America. We partially offset the decline with higher sales in Europe and Asia-Pacific.

Lower volume, foreign exchange, and global pricing dynamics partially offset by SG&A and material reductions, led to the year-over-year margin decline. Looking ahead at the balance of 2016, we expect to generate sales consistent with our original guidance. Global pricing dynamics, geographical mix, and production reductions are causing some margin compression. While the market conditions are challenging, especially in North and South America, we are encouraged by the continued traction that our new, innovative products are gaining in the market, notably our Z-60 DC, FX 150 and the GTH-1256 models.

From a broader perspective, the most influential market dynamic impacting our AWP business is the North American replacement cycle. AWP products generally have an eight-year average replacement cycle. The market declined in late 2008 and stayed very low into 2010, when it started to rebound. We are seeing the implications of that decline in our backlog and our sales. With lower demand for replacement of machines, we expect this trend to continue through 2017.

We model and work closely with our customers to understand what they see in the market and what they are planning. In general, our North American customers have been cautious this year, reducing their purchases to support improvements in utilization and rental rates. Their focus on rates, utilization, and the replacement cycle will determine the rate of decline in 2017. We will continue to work with our customers over the third and fourth quarters to develop a clearer picture of demand the remainder of this year and for 2017.

Moving to our Cranes business, overall, the segment improved compared to Q1, but was well off its prior-year performance and well below what we expect from our global Cranes business. Our mobile Cranes business is a turn-around situation. We are taking action with the relocation of our North American manufacturing and the relaunch of our Demag line of crawler and all-terrain cranes, but more is needed, and there is more to come. This business will be a consistent and important contributor to our Company.

As we anticipated, demand for utilities products in North America was slower than last year. We saw margin compression, driven by product mix, and under-absorption in the factory, as we reduced production levels. We continue to pursue opportunities outside our traditional North American market. A great example is: we won an order for 500 units from a major Chinese customer in the quarter.

Turning to our Materials Process business, MP executed well. The segment grew by 2.6% year-on-year and improved profitability. The historical MP business, driven by the power screen and Finlay lines of mobile crushing and screening equipment, was flat with margins consistent with last year. We're seeing some strength in aggregates, but the mining market remains weak. Our cost reduction actions, both SG&A and building materials, helped offset pricing pressure in these product lines.

As Kevin mentioned, we moved our concrete business into MP, and that is reflected in the performance. Concrete sales and profits were up sharply over last year. A significant headwind for the MP segment is a soft market for Fuchs machines, driven by scrap metal prices. The team is focused on expanding our distribution and moving into other material-handling applications. Kevin and his team continue to address their manufacturing footprint with the closer of the Farwell, Michigan facility in the first quarter, and the closure of our Austrian facility this quarter.

In summary, in a challenging market, we are maintaining our full-year guidance while executing our new strategy. We have taken action to focus our portfolio and simplify our Company. We are on track to close the MHPS and German compact construction business sales, and we are taking action to improve our cost structure. Finally, the building blocks of execute to win business system are in place to consistently deliver on our commitments.

With that, let me turn it back over to Tom.

Thanks, John.

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

Thank you.

(Operator Instructions)

Your first question comes from the line of Steven Fisher with UBS.

Thanks for taking the question. This is Cleve Rueckert on for Steve.

Just looking at the MHPS sale, could you just give some more details on what the benefits are that are not included in guidance. It seems like there should be a tailwind from equity earnings going into 2017. Then I think initially the thought was to use cash for a buyback, but it seems like maybe now a debt reduction is more in the focus. Any update there would be appreciated.

In terms of, as we talk about MHPS, it is a major step forward in our strategy to focus and simplify our portfolio. As indicated, we are on track to close in early 2017. It will be an accretive transaction.

As I indicated in my remarks, we are not showing any of the upside of the 25% equity position in Konecranes or the dividends or the stock appreciation of the ownership interest. And in terms of capital allocation, that is a great question. As we execute the strategy to focus our portfolio and simplify our Company, as a result of cash from continuing operations and the sale of the MHPS and Compact business, we will have about $1 billion of cash. We are working with our Board and our lenders and advisors to determine the optimal capital structure for the new Terex.

Clearly, capital allocation is a critical driver in shareholder value creation, so how are we thinking about deploying the cash? First, organic growth -- growing through investments in our products and services, and CapEx required to do that. Second, restructuring. As we announced this quarter, significant restructuring activities. There is more to come as we rationalize our footprint and take costs out of the business, so we believe we need to fund that. And finally, efficient return of capital to shareholders through share buybacks. And so, we do have an existing program that has $150 million outstanding; we are continuing to execute on that. As we get closer and finalize the optimal capital structure, we will indicate what the share buyback will be and the amount of the share buyback. We're not prepared at this time to talk about the amount, but we will as we get closer and closer to sale and put into place our optimal capital structure.

Okay, thank you. It seems like buyback is still the priority.

Yes. The use of cash is as I explained: funding organic growth, restructuring, and then returning capital officially to shareholders through buyback mechanisms.

A quick follow-up. At this point does it make sense to add the right business to leverage the cost base? Just thinking about the portfolio, are you happy with the portfolio now? Or does it still makes sense to be looking for something new?

In terms of where we are from our portfolio, I think we would like the three major segments we are in. AWP and the Global Aerial Works Platform business, our Cranes, our Mobile Lifting business, through our Cranes and Utilities, and our MP and Material Processing. So we like those three primary segments and industries that we are in. And again, our focus is maximizing returns to shareholders and right now share buybacks are going to be a critical part of that. In terms of acquisitions, our philosophy on acquisitions is more bolt-on acquisitions within these three segments, to add product lines or reach in geographic areas were not currently in. So that is how we are thinking about the use of capital.

Thank you very much; I appreciate it.

Your next question comes from the line of Jamie Cook with Credit Suisse.

Good morning.

I guess my first question relates to the aerial business. You mentioned that there's a higher probability that 2017 is down, similar to what your competition has said. So my concern is, as we exit the year in aerials with mid to high single-digit margins, how much of a headwind -- how concerned should we be about the negative price or the deteriorating pricing environment and material cost potential headwind as we look to 2017? And my other question is, what can you do to try to offset that?

My second question is more strategic with regards to Cranes. Aerials and materials processing is putting up okay profitability in this type of environment, but Cranes continues to underperform. So based on the restructuring, what do you think an acceptable normalized margin is for Crane? And over what time period will you give yourself to fix that business? Thank you.

Thanks, Jamie. This a lot going on there. Let me start, and I may have Kevin jump in with me on the AWP side.

Clearly the replacement cycles, especially in North America, is driving our outlook. As I said, we will work with our customers to understand what the buy-in will be. It is a difficult pricing environment. And we will compete aggressively, but we are also going to compete intelligently. I think the best way in these capital good businesses to compete in the pricing environment is to ensure we're not over-supplying the marketplace. So we are laser-focused on ensuring that we're trying to match supply and demand. And so that is our focus, given that supply outlook that requires us -- in this case, AWP -- to remove some production and remove some cost out of the business.

So Matt and the team are focused on driving pricing discipline, ensuring that we're not over-supplying the marketplace, and then putting a cost structure in place for the revenue base that we have. And they are hard at work at that, and will continue to do that as we go forward. But again, the pricing discipline is important across all of our segments, and it starts with not over-supplying the market. So that is what we're focused on.

Again, AWP really is a great business and a great franchise. The long-term trends are going to be good; we've just got to get through this replacement cycle. As we get through this replacement cycle, we will see the market rebound, both from the volume and the margin standpoint. In the meantime, we've got to be aggressive managing our cost structure as we see the lower volumes.

Is your goal to be able to produce in line with retail demand as we shift to 2017?

That's correct.

Thank you. Sorry, last on the Crane business?

Cranes -- fundamentally, can and will be a good business. It has been historically; it is in a challenging pass right now. If you look at the business, it does have the scale and the market position to be successful; and frankly, the way we find success is the ability to out-earn the cost of capital through the cycle. Not currently doing that, but we believe we can do that over time.

Again, manufacturing footprint, sized too much, so we had to take action with the Waverly plan closure. We will look at other opportunities in our Cranes segment to restructure out some of the capacity to ensure that we are in a position to have a cost structure that matches the demand environment. It does take time. Part of the new effort -- and again, what is encouraging, as you see here, as we brought new products out under the Demag line, customers are willing -- they want an alternative in the marketplace. And so as we develop our new products and bring new products into the marketplace, we believe that's going to help to drive revenue and market position, as a result of that. So we are going to continue to invest in the product lines on our All-Terrain and Crawler Cranes.

And then finally, the Crawler Crane business -- it is episodic, in the sense that some of these machines are quite large. There are opportunities -- the pipeline is fairly robust, as we look at opportunities over the course of the second half of the year. And it will be important that we bring home some of these large Crawler Cranes in the quarter. So overall, as I said, the mobile part of the business is a turnaround. We are focused on turning around from a manufacturing and product development standpoint, and we believe it can be turned around, so that it's a consistent performer for Terex and our customers.

Okay, thanks. I will get back in queue.

Your next question comes from the line of Jerry Revich with Goldman Sachs.

Good morning, everyone.

Good morning, Jerry.

John, can you flesh out the point that you made in your prepared remarks about taking down the cost structure now that you're operating the Company in three segments versus growth by M&A previously. What kind of savings should we be thinking about? And just to clarify -- the $8.5 million corporate charge that we saw out of MHPS in the quarter -- how quickly can we expect that to be substantially gone, if and once you complete the divestiture?

Thanks, Jerry.

In terms of the restructuring actions -- and I will have Kevin kind of walk us through the timing of that as we go forward -- when we announced the MHPS sale, at the time, we talked about it being accretive, and we talked about a $12 million SG&A cost savings. Really, that was a variable part of the overhead, if you will, that was specifically associated with some of the MH&PS business. When you look at our corporate overhead structure, it is clear that, that is not enough. We are going to be attacking as we get through the sale of both of those businesses, our underlying corporate overhead expense -- the incremental $34 million -- so that will be a target in terms of timing. It will not occur in 2016. We will put the plans in place through 2017, and see some of that flow into 2017 through 2018. Fundamentally, as we have a tighter portfolio and a simpler business, we have to adjust our cost structure to that portfolio and to that business.

Kevin, do you want to walk him through a little bit of the timing of the actions we're taking and when we can expect to see results?

Sure, John.

So the $60 million, as John called out -- about half of that is for continuing operations. We should get about $30 million in continuing operations, and we should get about 75% of that in positive impact in 2016, and the full impact in 2017. What we called out in terms of cost reductions for Q2, which is a savings of about $16.5 million, we will not see much of that at all in 2016. But we do think we can get about half of that in 2017. A lot of that is not in the US, so it's a little bit more structurally difficult to get at, but we should get about half of it next year.

That is separate and distinct from when John talked about getting after the corporate overhang from the MHPS sale. That $8.5 million in the quarter, which is about $34 million for the full-year, we have said we're going to substantially offset all of that. That will take a little bit of time. We should be able to get a meaningful percentage of that leaving 2017. We will get more clarity as we get closer to the sale, and play out our plans to attack that cost base.

Okay. And then, on the Cranes business, can you talk about, with the manufacturing footprint actions that you've done here on the mobile side, how much margin expansion should we be thinking about in the business, run rate 2017 versus 2016? And how much progress towards the longer-term cost of capital targets do you expect the business to make in 2017?

Thanks, Jerry.

Obviously we are not in a position to give guidance into 2017, but as we look at restructuring the manufacturing facilities and taking out the fixed cost with the plants in the United States, we will get some of that savings sooner than we would in plant closures in other parts of the world. We would expect to see the Waverly margin improvement in our 2017 results. But again, in terms of providing guidance for 2017, we're not in a position to do that right now.

Kevin, do you want to comment?

Just to quantify, though: the second-quarter actions for Cranes should have an annualized benefit of over $10 million to give you some rough quantification, with a decent percentage of that should be accessible in 2017. I would think more than half in 2017.

Thank you.

And your next question comes from the line of Mike Shlisky, with Seaport Global.

Good morning, guys.

Hello, Mike.

In your effort to focus on a tighter portfolio of businesses, are there any plans to trim the product lines or the number of products or the number of models offered in your current Cranes -- Cranes, MP, and Aerial segments -- or are those going to stay as they are today, with the exact same models going forward?

Thanks, Mike.

As we look at the overall portfolio again, the focused portfolio with the MHPS sale and the German compact construction business, there are other, smaller businesses within the portfolio that we are looking at. And really, the lens that we are looking at is, do they have scale in the industries they compete? And do they have a market position, or do we believe they can create a market position? If they do, then we will keep them in the portfolio, and if we don't believe that can occur, that asset may have better value with somebody else, and we would look to prune that asset.

In terms of the ongoing strategy within our AWP, Cranes, and MP, we just completed our strategy reviews, and as part of their product development plans, they do look to prune certain product lines, certain product offerings, as they look to match what does the customer need and how can we produce that in a cost-effective manner? So from an ongoing strategy execution standpoint, a critical element of that strategy is the product plans, and the product plans will be adding products and deleting products from the product portfolio as we go forward. And that's an ongoing effort, and we look at that continually over time in terms of the product offering that we bring in those three segments.

Okay. Great. I just wanted to ask a quick housekeeping question on the tax guidance.

It seems a little bit lower than the last quarter's tax outlook. Is the tax rate outlook just strictly because of MHPS being moved to discops? Or Kevin, you mentioned in the past, efforts to get your tax rates down in general. Is it part of that?

Thanks for the question.

So yes, our guidance was 30% to 32%. 31% at the midpoint; now we are seeing 27%. What's really happening is, moving MHPS into discops -- if you look at the earnings profile of the Company up to this point, we have experienced a lot of losses not benefited negative impact. Candidly, a fair amount of that activity was generated by MHPS businesses. So with the income profile going forward under continuing ops, we expect a positive going forward, in terms of less losses not benefited. We are also accelerating our global trading model impact, which is another positive. We think structurally, going forward, our tax rate in the mid to high 20s is something that should be sustainable for Terex.

Okay, excellent, thank you very much, guys.

Your next question comes from the line of David Raso with Evercore ISI.

A quick question on Cranes, first. I see that second-half sales are basically similar to the first half, in the guidance. But the EBIT goes up over $42 million, $43 million sequentially. Can you help flesh that out? Exactly how do we bridge that wider gap on similar revenues for EBIT?

Yes, thank you, David.

The bridge really is three things; it's about one-third, one-third, one-third. In the first half, we had warranty and product issues that impacted our margins by about 200 basis points. We also had under-absorption, capitalized under-absorption, coming over from 2015. And we had some under-absorption, as I mentioned in my opening comments, on our Utilities segment; and we believe that is going to rebound with production in the second half. And finally, we had mix issues.

We are going to have a better mix in the second half than we had in the first half, higher percentage of our utilities business, some larger cranes where we earn a better overall profit margin. So those three factors, roughly one-third, one-third, one-third for each, contribute to the first-half EBIT performance transitioning to the second-half EBIT performance.

I guess the swing was larger than I would've thought. Your dealers are mentioning, with Waverly shutting down, you increased some production, you built some inventory, to bridge the gap -- the time from Waverly down and OKC starts up. So, I would have thought the second quarter would have had a little overhead benefit, and maybe a little less so when Oklahoma first starts up. I was curious -- the overhead absorption swing is going to be that positive in the first half to second half. Is there any way I should not be thinking of it that way? Again, I just heard you built up some inventory before Waverly shut down; which is logical, given that is going to be down for a little while before Oklahoma starts up.

We did, David, but again, the overhang from the capitalized absorption at the end of 2015 was really the bigger driver. We got a minor bump, if you will, in absorption in Waverly prior to closing it down, but again, it was operating at such a low capacity level as it was. Because again, on the Cranes side, the US market for rough terrain, boom trucks, is very low. It is at the level that we experienced in the 2009 time period. So it was operating underutilized, and we got a little bit of bump because we increased some inventory to carry us over until we start production, but it was very modest, David.

And my last question.

All else equal, right, the EPS is $0.45 lower out of continuing ops those two businesses. But of course that doesn't include all of the benefits that come from those proceeds. But you also now have some stranded operating costs that you hope to get down. There's a lot of moving parts in this question, but the simple question would be, how do you view the dilutive, accretive, neutral impact from MHPS and the German construction business going away for 2017?

Kevin, do you want to take that?

I know we have to speculate on what Konecranes' earnings are for your 25% stake -- there's a lot in there. But just given the corporate stranded costs, just so we can at least get your base case -- accretive, dilutive, neutral to 2017 these divestitures?

Okay. So I will come back on the $0.45 first. It is pretty simple math. We were expecting mid-$30 millions operating profit, and instead, we are getting a drag of the corporate overhang of about $34 million, so that tax effect is roughly what gives us the $0.45 impact from the deal.

In terms of the transaction, we have said it should be accretive; it will be accretive. To the extent that we get at more and more of that corporate overhang, when we called out the transaction, we had given a number of about $12 million of that $34 million going away. Obviously, as we have looked at it more structurally from a cost perspective, now we are saying substantially also. The deal was mathematically slightly accretive at taking out $12 million of $34 million. Obviously, going after all of it should improve that math.

And the German construction business -- rough math I run on it is at least another $0.05 or so, accretive. Is that a fair --

Yes, that business, slightly over -- and by the way, we are going to be posting the resegmentation math later today for everyone on the call. It will be on our website. You will be able to see that exactly, for 2015 and 2016. That business, slightly over $100 million, was a pretty negative drag, negative margins, high teens to 20%. So, yes.

I appreciate it. Thank you.

Thank you, David.

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

A question on your unchanged cash flow expectations: pretty much implies $260 million to $310 million in the back half. First, how should we look at that? Does that include MHPS cash? And are you looking for more working capital benefit than the original structure?

Okay, so yes, it does include MHPS. MHPS is in for cash, until we don't have it. It's a combination of everything. We are pretty confident of getting into that range.

There is a little bit of additional drag from the restructuring that we've got to get through, but we think there is opportunity, obviously from generating income, but there's still opportunity on the balance sheet that we are getting after. We're still confident in our range of $200 million to $250 million, including MHPS cash flow.

Thanks, Kevin.

And then as a follow-up do you have any different priority for that cash inflow than what you've already discussed in response to the $1 billion proceeds from the two deals?

When John mentioned the roughly $1 billion, we are including proceeds from the sale as well as free cash flow that we generate between now and year end. There is a seasonality to the business, so not all of the free cash flow we would generate between June and December is immediately available, because we do tend to consume cash, as you know, in Q1. That $1 billion is a rough estimate of how much we think we'd have in excess of operating needs at the end of the year.

Okay. And then last one: you talked about the $60 million benefit that you expect from the charges. Is there any future bucket of opportunity that we can look at from actions not yet taken?

Future benefit? I'm not certain I'm clear on that.

For the comment about more to come.

Yes, Andy this is John.

As we continue to look at our portfolio and look at our manufacturing footprint, our distribution footprint, we'll continue to evaluate if there is opportunities to reduce our cost structure without disrupting our ability to meet the market need. So I don't want to comment specifically about any opportunities right now, other than to say there is a pretty intense focus on looking at our manufacturing footprint, distribution footprint, to ensure that we've got a cost structure that enables us to out-earn our cost of capital through the cycle.

Okay. Thank you very much.

Your next question comes from the line of Robert Wertheimer with Barclays Capital.

Good morning.

Could you quantify, if any, the expected future cost increase from rising steel and other materials? And do you think there is pricing available in the market to offset that? Or would you need to offset it with cost?

In terms of steel, we had a good year, year over year, with steel in terms of our steel contracts from 2015 to 2016. We, like other players, did see a modest little bounce or bump, I would call it, in the first part of 2016, but that does not look sustainable long term. So we may have a very minor headwind for a short period of time, in terms of steel. So overall, comparison of 2015 to 2016, steel has been a tailwind, has been beneficial, with a modest bump here in the middle of the year. I will say that most of our steel contracts do have a lag impact, and they are based on indices, so we do lag in the neighborhood of 90-plus or -minus days in terms of when we see it in our actual POs that we place and receive.

Overall, one of the areas of focus is driving material costs down, and so the team is working hard at each one of the operations around the world to leverage our materials spend and to drive cost out of the operations through material and materials spend. It is an important area of focus for us, and it is something we've got to be laser-focused on to help offset, as you mentioned, the challenging pricing dynamics in the globe today. So we need it to help offset the pricing that we're seeing around the world.

Okay, that's helpful.

And then, apologies if I'm being obtuse here, but if I understand it right, on the old guidance, corporate and otherwise, there is a $60 million loss in slide 12. In the new guidance it's $40 million to $50 million. I think you put presumably the loss-making business in there. So what makes the corporate and other narrow?

Yes. With construction coming in there -- and I just want to make sure we're clear -- although the German Compact business is held for sale, it's not in discontinued operations. The negative impact is in there, and it is in corporate, and it will be until the deal closes. The remainder of the construction business that came into corporate and other is about a break-even business. That includes backhoe loaders and site dumpers and a few other Compact construction-related products.

The other things that are incorporated in other, our financial services business, which is fairly small; government programs and some other miscellaneous items. That's really what's making up corporate and other right now. The rest of the Compact construction and then a couple other small businesses from corporate.

And then, therefore it's just straight cost saves that reduces the operating loss from corporate and other? Or am I misunderstanding?

That's right. It's getting cost savings from within the segment that came in, as well as the cost savings benefit of allocations. I want to make sure we are also clear that the MHPS corporate management fee -- that $8.5 million that is not absorbed -- is also a negative drag in the quarter, and will be for Q3 and Q4 as well, until we close the deal. That $8.5 million is in corporate.

In corporate. Okay. Thank you.

Your next question comes from the line of Steve Barger with KeyBanc.

Good morning, it's Ken Newman on for Steve.

I wanted to go back to a comment you made about pricing in AWP. You said that the best way to compete is to make sure you're not over supplying the market. I'm just curious, are you seeing your competitors in that space acting rational, as it pertains to pricing action? And if not, how do you deal with it?

Competitive pricing dynamics are very important. I can't comment on competitors' behavior, one way or the other. But I can say that our job is to make sure that we are focused on the marketplace and balancing supply and demand.

We also, as I said in my opening comments, we are a capital goods business. Strategically, pricing really is the upfront -- from a customer's perspective, is the upfront cost. It is the cost to operate and it's the value of the used equipment at the end of the cycle. So we need to make sure that in our pricing activities we're not disrupting that balance, if you will, from our customers. So we're going to compete aggressively but prudently in these difficult times. Your delegation of authority gets a lot tighter, and you reduce less authority down for the sales team, and you hold that higher up in the organization to make sure that if you do have to reduce pricing, it is for a good, strategic reason. And so those are the steps that we have taken as we go forward. Again, supply-demand balance is very important in capital goods, and we're going to focus on making sure were not over supplying in the marketplace.

Okay. Staying with AWP, it looks like if I look at Q1 2015, decrementals got as high as, call it 50%. Given the headwinds that you are seeing in the market today, as it relates to rental rates and utilization, and in combination with the restructuring actions you have in place today, is there any reason to think that decrementals can get back to those levels -- call it, over the next 12 to 18 months, if the market stays as soft as it is today?

Yes. So there is pressure in the back half, given the volume drop, which is the primary driver. We don't see decrementals getting to 50%; that is part of the discipline we've got to bring to the business. I think Matt and the team are focused on cost to keep our decrementals at a reasonable level as we get through the rest of this replacement cycle. So no, we're not seeing 50% as a go-forward number.

Helpful. Thanks

Your next question comes from the line of Mig Dobre with Robert W. Baird.

Yes, good morning, and thanks for taking my questions.

Maybe we can go back to Cranes. I know several folks tried to ask this question, but I'm trying to think maybe longer term about this business. Can you help us frame where volumes are, say, versus the prior peak? And how you are thinking maybe two to three years out in terms of -- do you expect some kind of recovery? What is your base case for demand going forward? And what are you doing with your footprint as a result -- maybe your plans versus where you were at the prior peak?

Let me answer the question -- and thanks for the question -- let me answer it backwards.

In terms of the footprint, obviously the Waverly plant closure was an example of rationalizing our manufacturing footprint. We will be looking at other opportunities to consolidate manufacturing of our Cranes business. In terms of the market -- the North American market, especially on rough terrain cranes and the boom truck products -- it's really at levels we saw in the 2008 and 2009 timeframe. It is clearly at a trough in the cycle. There is an overhang of rough terrain cranes that was in the oil and gas sector, and so that overhanging has to work through the system.

I would also say, that is a similar comment in the Middle East for us on rough terrain cranes, in terms of the focus on the oil and gas. As construction remains relatively stable in North America and starts to pick up in Europe, we did see an increase in sales in Europe in the first half of the year, and we're seeing some orders in the second half of the year for our all-terrain cranes. In terms of where we are from a peak standpoint, we are significantly below the previous peaks. And when I say significant, in many cases it is 50% or more below our previous peaks in the cycle.

So again, North America, Middle East, and the other areas we're seeing dramatic falloff in our Cranes business -- and we talked about it a little bit on the last earnings call -- was our business down in Australia. Our pick and carry business. A great business, but that market virtually has gone to zero in the market from a $200 million. So as commodities recover, oil and gas stabilizes -- I don't know what price it is going to stabilize at -- but as it stabilizes, that is going to help to drive the demand cycle back in Cranes.

But in terms of area of where we are in several markets around the world, we are at the 2009-type levels. Over the course of time, the next couple of years, I don't think it will be a rapid snap-back money, stretch your imagination. But as things firm up, we can expect to see growth in the Crane side of our business.

I'm just trying to clarify here if it's fair for us to expect in the next, call it, six to nine months, some sort of a path or a plan to be laid out with some detail around what's going to happen with margin, footprint, et cetera, in what you're describing as a pretty modest demand recovery environment.

Yes, that is absolutely fair. As we get to later in the year and much closer to the sales of the MH&PS business, we will be looking to schedule an Analyst Day where we walk through in greater clarity the steps that we are taking and what we believe it will end up being as we go forward. Because obviously there is a significant amount of change in this quarter, and we need to get the analyst community up to speed with the actions we're taking. We can anticipate doing that later in the year, as we get closer to the MHPS sale.

Sure. And then my follow-up on MHPS.

Can you remind us here what some of the milestones that we should be watching for in terms of how the closing process is going to be happening here?

Yes. In terms of the MHPS sale, really what's going on now are the antitrust filings. In the EU, Phase I was filed a couple weeks back. We anticipate to hear back from the EU authorities here by August 8. The process is ongoing in the United States for antitrust and (inaudible). So that process continues. The shareholder vote for Konacranes will be in mid-September. There is not a shareholder vote required for Terex, but there is for Konecranes, and that will occur in mid-September. And again, driving towards an early 2017 close of the transaction.

Thank you.

Your next question comes from the line of Seth Weber with RBC Capital Markets.

Good morning, everybody.

Good morning, Seth.

I'm just trying to reconcile something.

It looks like your AWP orders were actually pretty decent here in the quarter, so I'm trying to piece together the relatively good orders versus your more cautious outlook -- or not cautious, but kind of your commentary about the outlook. Can you give us a little color where the orders are coming from? Is there something from a mix perspective, booms versus telehandlers, something that may be weighing on the margin as well? Anything that you can help us out with these two different data points.

Thanks, Seth.

As we look at it, I think the backlog is a good indicator of what we see the second half being, with the backlog being off about 22%. In terms of the orders and sales, what we are seeing is North America and Latin America: Latin America is off significantly, with Brazil being off. So North America is off, Latin America is off, Europe -- we are actually seeing some good growth, and we saw some decent growth in the Asia-Pacific markets, so we expect that to continue in the second half of the year.

As you know, it's a very seasonal business, so the back half of the year is traditionally much lower than the first half of the year. Again, the team is managing the orders closely, in constant contact with customers, to understand where customers are, in terms of their order placement. And then adjusting the production to those demand forecasts. The S&OP process, Matt and the team have had to accelerate that, if you will, or do it more consistently, given the dynamics in the marketplace.

So that's why we see the second half being what it is. We think the backlog is a good indicator; and again, the North American market is our biggest market, and it is down. And South America is completely down. And Europe and Asia-Pacific are not enough to offset it. So that is basically as we see it from a global perspective.

Okay, that's helpful.

Is there anything from a mix perspective, booms versus telehandlers, that we should think about as maybe not being helpful to margin here going forward, in addition to the general pricing environment? Or is mix pretty standard?

I think right now, I would say mix is pretty standard. I think we've said in the past, it kind of goes booms, scissors, and telehandlers. In my comments, I did speak to geographical mix. With sales being up in Europe, pretty considerably, and doing a really good job in Europe, we do not enjoy the same level of profitability for FX reasons and other reasons in Europe that we do in North America. So the geographical mix is also weighing on as a headwind to our overall margins.

Sure. Okay.

If I could ask a follow-up on the Crane business, the mobile cranes in particular -- do you feel that you have lost share? There have been some foreign competitors that have taken some share in the mobile crane business in particular. Does something else have to happen there in order for that business to get better for Terex? Or is share just lost permanently here. Can that business get better in a slow-growth environment, because you've lost some share?

Yes, we do believe the competitive position of business can improve. We had not done a great deal on our product development efforts, and we allowed some of our products to become stale, if you will. And Ken and the team have attacked that with some new product introductions and product upgrades. When we are in the market with a Demag brand and the Terex brand with updated products, our customers are interested in buying those products. And so we do believe, yes, there has been share erosion, that's never a good thing; but we do believe that we can gain some of that share back with the right products, the right service offerings, and the right competitive position from a pricing standpoint. That is what we're focused on as a team.

Okay. Thanks very much, guys. Very helpful.

In the interest of time, please limit your questions to one. Your next question comes from the line of [Ante Suddalen with Vance Bank].

I have a question on MHPS. I can see you reported a profit of $48 million negative. Now my question is, how much of this figure is due to one-off kind of costs?

Yes, Kevin will take that.

So thanks for the question.

We're showing an MHPS loss of $39 million. What's really driving that is an impairment. We took a write-down in the period because the sale the transaction on net assets of $55.6 million. We actually had a small operating profit in the period, but there's a lot of noise going on because of the discops accounting that is required. All-in, operationally, the business was about a small operating profit versus the $39 million negative that you're seeing in the financials.

And the last question comes from the line of Yilma Abebe with JPMorgan.

Thank you.

In response to a prior question on the $1 billion excess cash expected on the Konacranes transaction, I didn't hear debt reduction as part of your plans. Perhaps you can remind us if you expect to pay down any debt and if so, how much?

Thank you. Just a clarify, that would be in my comments, when I said the optimal capital structure. So in that analysis of what is the optimal capital structure, obviously the debt and equity piece will be the critical determinant. We are looking at different structures for the business going forward, and as part of that, obviously the debt will be a significant contributor to that capital structure. We are in the process of defining that optimal structure as we go forward.

To be clear, though, debt reduction is part of that plan, correct?

Yes. As we said, debt reduction will be part of that plan. The level of debt reduction, the level of share buybacks, are all what we're working on between now and the close.

Okay, great. Thank you very much.

This concludes our Q&A session for today. I would now like to turn it back over to John Garrison for any closing remarks.

Thank you for your interest in Terex. As you can see, there is a tremendous amount going on as we transform and position the Company for the future. We understand in this quarter there is a lot of complexity in terms of the changes to our reporting financial statements. So please, reach out to Tom and the team with your questions, so that if there is any confusion, we can get the confusion resolved. Again, we understand the tremendous amount of change in the quarter, so we're sure there's lots of questions, and so please reach out to Tom, and Tom will address your questions. And again, thank you for showing your interest in Terex.

Ladies and gentlemen, this does conclude Terex Corporation's second-quarter financial results conference call. You may now disconnect.