Terex Corp (TEX) 2016 Q3 法說會逐字稿

Welcome to the Terex Corporation third-quarter financial results conference call.

(Operator Instructions)

I would now turn the call over to Brian Henry, Senior Vice President Business Development, Investor Relations. Please go ahead Sir.

Good morning everyone and thank you for joining us for today's third-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 third 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 GAAP to non-GAAP financial measures that we will use during this call, and is also available on our website.

All per-share amounts in the presentation are on a fully diluted basis. We will post a replay of this call on the Terex website under audio archives in the investor relations section.

Let me direct your attention to slide 2 which is our forward-looking statements and description of non-GAAP financial measures. We encourage you to read this as well as other items in our disclosures because the information we will be discussing today does include forward-looking material.

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

Thanks Brian and good morning everyone. Thank you for joining us today. I will begin by providing an update to our strategy and our recent divestiture activities. Kevin will cover our financial results and I will follow with our segment updates before we open the line to your questions.

Focus, simplify, and execute to win. These are the key elements of our strategy. While we continue to operate in challenging markets, it's important that we aggressively address our current reality while taking the steps to position the business for the longer-term.

We are transitioning to a focus portfolio of businesses that compete in the era work platforms, mobile lifting, and mobile materials processing and handling industries. Each of these businesses is at different point in their respective market cycles. And each faces different near-term challenges and opportunities. We are addressing complexity across the company. We are simplifying our organizational structure and reducing our functional costs for the sale of the MHPS. We're also reducing our footprint across the company.

Central to execute to win is commercial and operational excellence which extends from the factory floor to all aspects of our business, including sales execution, pricing, as well as product and service innovation. We are taking action to ensure we consistently meet our commitments to our customers, shareholders, and team members. We are developing a winning culture centered on execution excellence.

Turning to slide 4, we continue to make progress on refocusing our portfolio. We completed the sale of our German compact construction business to Yanmar for $60 million in cash. Included in the sale was the manufacturing facility located in Crailsheim, Germany, and parts distribution center located in Rothenberg Germany.

The team executed well and close the transaction on time in accordance with our plan. We are also on track to close the sale of MHPS to Konecranes in early 2017.

Turning to slide 5, Terex history is an acquisition company has created complexity throughout our organization. This complexity impacts our ability to leverage our scale. We are taking action to address this and simplify the company.

An important step was streamlining our operating structure from five segments to three. It simplifies reporting and increases accountability. And it's critical to reducing our overhead structure.

We announced several footprint reduction actions. We successfully executed on schedule the complex move of our mobile crane production from Waverly, Iowa to our facility in Oklahoma City. The material and equipment have been moved, and we're ramping up production and OKC. The soft market condition enabled us to make this move that will benefit us for years to come without disrupting deliveries to customers.

Our AWP segment is consolidating the scissor lift manufacturing. From three locations to two and reducing its overall manufacturing footprint. Including its main campus in Redmond, Washington. AWP also closed the facility in Stockton, California, and recently announced plans to close its Waco, Texas facility consolidating into Oklahoma City.

We are also on track with the closure of our Austrian MP plant. Moving its products to our facilities in northern Ireland. The Austrian plant will close in the fourth quarter.

Turning the slide 6. We continue to employ the execute to win business system. The third quarter focus was on our talent review process. We conducted detailed on-site reviews around the world. We will continue to work to ensure that we have the talent and leadership necessary to execute our strategy.

Let's turn to page 7 for an update on the MHPS sale. During the quarter European Union approved the transaction subject to Konecranes divesting of Stahl Crane Systems. They also received approval in the United States from both antitrust (inaudible) authorities. In addition, the Konecranes shareholders voted in favor of the transaction. Both teams are working through the close process. The transaction remains on schedule to be completed in early 2017.

As we indicated last quarter MHPS has been discontinued operations. We are not reflecting any of the benefits of the transaction. The 25% equity interest, the Konacranes 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 good morning everyone. Please turn to slide eight and I will review our financial performance. We reported earnings per share in the third quarter of $0.31, in earnings per share as adjusted of $0.19.

We achieved a net benefit from nonrecurring items in the quarter driven by favorable tax treatment associated with the recognition of tax benefits for certain net operating losses. We generated net cash from operating activities in the quarter of $106 million, and free cash flow a $47 million. We repurchased $80 million worth of Terex shares in the quarter consistent with our capital allocation strategies.

Backlog at the end of September was down 9% on a year-over-year basis. Declines in Cranes and AWP were partially offset by growth in backlog in our MP segment.

Slide 9 summarizes the comparative quarterly income statement on an as reported and as adjusted basis. Net sales for the quarter decreased 16% compared to the prior year, down approximately 14% on a currency neutral basis.

Crane sales declined by approximately 25%, which was more than we had anticipated. AWP sales were down 17% and MP was down 4% or about flat on our current FX basis.

Our operating margin was 3.7% compared to 7.3% last year. Excluding nonrecurring charges, our operating margin was 4.6% down from 8.5% last year. Lower volume on favorable mix, pricing pressure, and operational factors partially offset by cost reduction activities, were the primary drivers of large in compression. Return on invested capital was 25.6% compared to 9.7% in 2015 driven by tax benefits.

Let's turn to slide 10 and I will review our guidance. We were disappointed with the overall performance in the quarter. And the impact it is having on full-year expectations. We executed well in certain areas but that was more than offset by the shortfall in our cranes segment.

Our previous estimate for full-year AWP sales was a decline of approximately 15% with operating margins of between 8.5% and 9.5%. We are improving not slightly to sales down approximately 13% with an operating margin of approximately 9.5%.

In our cranes segment we had forecasted higher volumes in the third quarter. However, the global Crane market continued to weaken. We had anticipated an improvement in product mix, but our more profitable products were disproportionately impacted by the market decline. In Germany changes in subsidies in the wind energy sector led to a reduction in Kronecrane sales as customers digest the impact of these changes.

Lower volumes also impacted our ability to improve absorption rates in our factories. In addition, quality issues resulted in increased warranty expense.

We expect many of these trends to continue into the fourth quarter. As a result we are lowering our full-year outlook for Cranes. Sales are now expected to be down approximately 20% within operating loss of approximately 2.5%.

We are maintaining our previous outlook for MP and lowering the estimated operating loss from corporate and other to approximately $40 million. We are addressing all elements of our cost structure, and will continue to reduce our cost base in the fourth quarter. But it will not be enough to offset the impact of the challenges in our Cranes segment. As a result we are revising our full-year continuing operations sales outlook to between $4.2 billion and $4.4 billion. With earnings per share of $0.70 to $0.80, and free cash flow of $150 million to $200 million. With that we turn it back to John. Thanks Kevin.

Starting with AWP I will provide an overview of our segment performance. 50 years ago an innovator named [Bud Bushnell] saw a need in the marketplace, and developed an innovative solution in his garage in Seattle. That simple pneumatic lift was the see that grow into the global leader that Genie is today.

That same innovation was on display at the Genie's 50 anniversary celebration in Seattle of September. Where we launched the innovative Genie Extra Capacity or XC product line. This family of boom lifts responds to a widespread need to enable people to work at height safely with heavier loads using a single machine. These products demonstrate our commitment to invest in new products throughout the cycle.

Over two hundred customers from 47 countries joined us at the 50th anniversary to celebrate and focus on building a future together.

Looking at the third quarter, sales were in line with our expectations, down about 17% from last year, driven by the replacement cycle decline in the North American rental market. Our European volume is up year to date, but sales slowed in the quarter as the market began to level off.

The Latin America remains very weak. Asia on the other hand was up sharply in the quarter driven by growth in China and South Korea. Lower volume, foreign-exchange, and pricing pressure were the primary drivers of the margin compression, offset in part by the ongoing SG&A reduction actions.

AWP team is taking action. It lowered its SG&A by over $4 million in the quarter compared to last year, and continues to rationalize its manufacturing footprint.

We also reduced inventory by about $75 million year-over-year. Pricing discipline starts with aligning supply with demand, and we intend to manage our inventory appropriately.

We expect to closeout 2016 with full-year of sales slightly better than our original guidance. Global pricing dynamics, geographical mix, and lower production volumes offset in part by cost reduction actions will continue to pressure our margins in the fourth quarter.

Looking ahead to 2017 the most influential market dynamic will continue to be the North American replacement cycle. We are in the midst of the reduction and replacement demand as a result of the 2008 to 2010 market decline which is impacting our sales and backlog. We expect this dynamic to continue through 2017. We will work with our customers through the fourth quarter to develop a clearer picture of their demand.

Moving to Cranes, the third quarter did not unfold the way we had anticipated for our cranes segment. I'm disappointed with our results. With few exceptions all major Crane markets were down. In North America we continue to see reduced demand due to the overhang of the oil and gas boom and then bust cycle.

There are significant number of relatively low hour used cranes that are available on the market which continues to reduce the demand for new cranes. No other sector or region has offered a counter balancing stimulus to offset this headwind.

In Europe the crawler crane market was disrupted by recent changes to Germany's wind power subsidies. Although the Longview is for growth in this sector, customers are cautious, and postponed, and in some cases canceled their orders. As they try to understand the implications of the recent changes.

The Latin America market reached a new low in the quarter. There were pockets of growth in Southeast Asia but not nearly enough to offset the broad-based global declines.

We are taking action to address our performance. As we announced last week Steve Filipov is the President of Terex Cranes, and will leave the turnaround process. Steve started his career at Terex in the crane business, and previously served as President of Terex Cranes. Steve's intimate knowledge of the crane industry and it's customers makes him the best person to improve and grow this segment.

We completed the relocation of our North American manufacturing from Waverly, Iowa to Oklahoma City. In addition, our French facility which is the combined MHPS cranes operation will be going to Konecranes with the sale.

Our new Demag line of [altering] cranes is selling well a tough market. We also launched a 40 ton pick and carry Crane in Australia. This is another example of investing in our products throughout the cycle. Our current pick and carry sales in Australia are about a quarter of our historical average, driven by low commodity prices. This market will return and we will be well-positioned when it does.

Finally, the demand for utility price in North America was lower than last year. The lower volume led to factory under absorption and compress margins. However, our backlog and bookings are up compared to last year, indicative we believe of an improving market for utility equipment.

Turning to materials processing. Another example pf the rich history of our company, power screen, also celebrated a 50th anniversary this summer. I joined many of our power screen dealers from around the world and Belfast to celebrate 50 years of power. For half a century and [MP] has been at the forefront of innovation and the mobile crushing and screening market and that remains the case today.

The MP team results were consistent with our expectations and the team continues to execute well, driving improved operating margins on stable overall revenue for the year. For the third quarter our mobile crushing and screening sales were similar to last year. Aggregate markets are steady. But the mining market remains weak.

I had went for the MP segment the soft market for Fuchs machines driven by low scrap metal prices. The team is working to expand distribution and diversifying into other material handling applications.

Concrete sales and profits were up sharply again in the quarter. The 46% growth in backlog and the 24% increase in bookings reflect continued strength in the mobile crushing and screening, and North American concrete markets.

In summary, our end markets remain challenging. We will continue to focus on our core businesses, simplify the Company, and improve our fundamental processes. We will further reduce our cost structure, consistent with our market reality while investing in products and services. We will make the changes needed to consistently deliver on our commitments.

On another note I hope you'll join us at our upcoming analyst meeting in New York City on December 13, 2016. I'll be joined by our segment presidents other members of the leadership team to provide further insight into our financial and operational strategies as we transform Terex into a simpler more focused company.

With that let me turn it back over to Brian.

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

(Operator Instructions)

Your first question comes form Ross Gilardi, Bank of America Merrill Lynch.

Yes, good morning gentlemen. My first question is just on cranes and how comfortable are you that you can get back to cranes breakeven in 2017 if that market conditions don't improve?

Thanks Ross. I'm going to answer that in a broader context around restructuring and restructuring activities. So, -- and Kevin will take us to the timing and impact.

But as we focus the Company and we simplify for the Company, on the simplified side we're really focused on two aspects, our G&A reduction, and then our footprint rationalizations. As you look at our performance and return on invested capital through the cycle, one of the challenges is an especially in our cranes segment, is that we have too much fixed cost for the market. And so we have been addressing that with the things that we've announced this year in terms of reducing our overall fixed cost in our cranes segment, specifically the Waverly plant reduction.

So we are going to continue to look at our fixed costs across the company, obviously in cranes as we move forward. There will be more to come as we begin to further implement and execute the plans.

And there's two other things I will talk about here. As we talk about restructuring is a broader organization, there is a bit of a limiting factor on how fast we can move and the pace that we can implement complex movements.

Waverly to Oklahoma City -- I'm sorry was a difficult and challenging move. The team did a good job. You need the talent to execute that complex move. We also, as we go around the globe, have regulatory challenges that we need to deal with as we implement our restructuring activities. Those two aspects will pace. We need to move quickly we need to move aggressively.

As it pertains to cranes, and Kevin will walk through the details of restructuring, the actions that we've implemented will get us a long way towards.

Clearly our focus for 2017 is to drive a plan that gets us to breakeven on Crane margins with similar type of revenue volumes. We're not going to assume the markets going to rebound in recover. We're going to attack this issue through our product offering, we will continue to invest in engineering, but we've got to get out there underlying cost structures.

So that will be the focus of Steve the team is to get -- to put in place a plan that we can get the breakeven, no worse than breakeven, on similar volumes in our cranes segment in 2017.

Kevin you want to take it?

Sure John there's been a lot of restructuring we've got another $5.8 million in Q3. Aggregate restructuring we've called out from across perspective and the three-quarter accumulative is about $45 million. That's got an annualized benefit of about $49 million.

We said in the first quarter restructuring charges we get about 75% of that and 2016, and we're still holding to that. That's about $22 million of benefit that's in our guide for 2016. In addition to that the three quarters worth of named restructuring we generated incremental $26 million in 2017.

That does not include what we talked about from an MHPS -- you remember we got about $34 million full-year expense in corporate and other from the unallocated overhang from MHPS going into discuss. We're now saying we can get about $10 million of that at least in year in 2017 of that $34 million reduced which would be in aggregate full year reduction year-over-year in cost of about $36 million.

To your question Ross, we think there's about $15 million in the already named restructuring dollars that impacts cranes directly in a positive way for 2017. Okay thanks guys. And then can you talk about the 25% stake in Konecranes that you'll take on an early 2017?

How are you thinking about holding that versus monetizing it -- I mean does the [nine] 25% non controlling stake in a Finnish company really fit with your goals of simplifying Terex?

Thanks Ross. The proceeds of sale from MHPS is first is the cash component of approximately $770 million on an after-tax basis. As we look at that, that clearly will go towards reducing our debt. As you look at an optimal debt structure capital structure of about 2.5 times net debt to EBITDA through the cycle. So the first element of the cash proceeds will definitely go towards repayment of debt.

As you say we have a 25% ownership interest, and that is a liquid stock so it does provide us tremendous flexibility and liquidity in the terms of what we can do it the asset. We do firmly believe in the fundamental business logic of the combination. And I think you see the markets respond to that the result of the Konecranes share appreciation. It does create a lift -- a global leader in the lifting import solutions business.

But to your point, we also understand that we are not portfolio managers. And so as we look at that asset over time we will determine what's in the best interest of our shareholders to maximize the return for our shareholders, realizing that our shareholders are not paying us to be portfolio managers. So that's how we look at that asset over time. Realizing again we're not portfolio managers.

We get paid to operate companies and that's what we'll do. But we do have this flexible liquid asset called the Konecranes shares, and over time will let to see what the best use of that asset going forward.

Thanks very much.

Your next question comes from Nicole DeBlase, Deutsche Bank.

Yes good morning guys.

Good morning Nicole.

I also they question on cranes. I guess what is current capacity utilization look like? And given that we are theoretically getting pretty close to trough levels of volumes or at least let's hope so, what's the ideal level of capacity elevation that you would want to operate out at this point in the cycle?

So in terms of -- we're doing an in-depth review and analysis of our capacity and capacity utilization. And basically no area around the world are we operating on multi-shift environments. So all of our plants are at single shift environments. The for place -- the footprint capacity utilization is low -- is especially low in our overall Crane segments. One of the things that we're looking at Nicole is, now and then going forward, is what's our revenue per square foot of manufacturing space. And than what do we need to drive that revenue to manifest -- per square foot going forward.

And so as we develop those plans, that's a metric that we are going to be looking at. Right now it's in the low 400s and needs to be considerably higher than that going forward. So that's how we're looking at manufacturing capacity utilization.

Okay got it. That's helpful.

And then just with respect to the color that Kevin provided around the restructuring payback. Is that -- the payback that you highlighted the incremental payback for 17 -- is that predominately backend loaded or will you start to see the benefits and the first half of 17?

Nicole, that's in an year-end impact -- right so during the full-year -- obviously it's greater towards the end of the year. But for example a chunk of that would be to Waverly move to OKC. So we think that's a benefits that we're going to be seeing in Q1. But some of the footprint related impacts in Europe would be more towards the back half.

Okay got it. Thanks I will pass it on.

Your next question comes from Ann Duignan of JPMorgan.

Good morning. I think in your opening remarks you notice that each of your businesses are in different points of their cycled. Could you just walk us through where you think each of the businesses are relative to the cycle?

Yes. Thank you Ann.

As we look at AWP in terms of the replacement demand -- especially the North American [rental] replacement demand cycle for this 2008 to 2010 time frame -- that is clearly driving our AWP and where we are in the cycle. Because North America is still the lions share of our revenue.

Europe as we said we saw a strong first-half on the AWP side. We're seeing some moderation of the growth but Europe remains solid.

Continue to see growth in the Asia-Pacific region with our AWP segment. And then in Latin America -- South America and this is for all three segments -- that part of the world is virtually getting close to zero in terms of sales. Latin America across all three segments it is -- it's getting close to zero. We're not seeing a lot of activity there. So that's how I describe how we think we are on the AWP side.

On the cranes side we are clearly seeing continued disruption in the North American market associated with the oil and gas boom bust as a talked about. I recently had a business meeting with one of our larger customers, and he was talking about how he had moved here recently 100 cranes that were basically sitting idle in the tar sand area of Canada and moving those two other applications in the US.

So in the cycle for cranes in North America we're at or below trough levels for rough terrain cranes or boom trucks in the products basically that were making now in our OKC facility.

All-terrain cranes and crawler cranes are okay when you talk to customers in terms of the utilization. So there utilization is better on those products.

In North America we are at -- we would like to be at or are bumping along the bottom of the trough.

Europe has been solid if you will, and not contracted quite nearly as strong as North America. And we think that -- we did have a blip with this German subsidy issue that impacted us both from a mix in a volume standpoint. So Europe we think -- in that middle ground our new products are clearly helping us to offset the market attention.

But again, when we talk about the Middle East again the Middle East is hard to gauge. But it's off and I don't know if we can say that the Middle East area has hit more of a trough bottom yet. But it is clearly off. So that's how I would describe the world on the cranes side.

We don't sell a lot of cranes to Asia-Pacific, but the ones we do so are the larger ones that are important to us and that is projects specific.

On the MP side we're seeing some strength there as our backlog indicated, especially on our concrete business. So we have seen uptick on the concrete side, we've seen an uptick in North America on our mobile crushing and screening side. So that market in the North American market appears to be recovering and we're seeing growth. Similar steady, we don't see big swings in Europe right now.

We don't have much of a presence if any in our MP business in China. So that's something that we're going after. But I will counter that we saw very nice order that we'll receive in the fourth quarter here in our MP business in India. So they're starting see some growth in there.

The headwind for that segment is really our Fuchs business. Material handling, based on scrap metal prices, we are at or near that trough bottom we believe. So our job there's to expand our product portfolio into other applications and expand distribution.

As I go around our three segments in the world, that's kind of how we're seeing it. And we're not seeing any dramatic shifts going into 2017. Does that help Ann.

Yes it sure does. Thank you. And just a point of clarification and I know we'll probably get more of a long-term view in December. But given the [eight year] replacement cycle in North America AWP's should we expect 2018 to be weak also?

And then I would ask the same question on oil and gas. I mean we really have to soak up all this excess equipment and 2017 and probably into 2018. So is it possible that we would bump along the bottom in those two segments for beyond 2017 do you think?

Thanks Ann and again we will provide more color at the analyst day.

So right now the focused on 2017 and our crystal ball gets a little fuzzy or as we go further out. But (inaudible) the North American replacement cycle we're projecting and will determine how much down it is in 2017. But then probably starting we, believe based on our models, on the AWP side seeing in recoveries in that 2018 time period and 2017 most likely being the bottom. Again, that's 18 months out. But right now that's how we are modeling it, and that's what our information indicates.

On the cranes side, Ann, I think we have all been wrong there. So I'm not willing to hazard a guess right yet in terms of -- as we look at it we are continuing to work with our customers and model that and see.

Again the thing that is helping -- and we don't talk about it a lot because there was so much capacity associated with the oil and gas -- is the underlying construction market in North America. Both nonresidential and residential construction is not bad. That will help to absorb some of the products that we are in in the oil and gas segment. When does the recover we don't have clear guidance on that yet.

Okay. I appreciate it and I look forward to the December 13, 2016 event. I'll get back in queue thanks.

Your next question comes from Mig Dobre, Baird.

Yes good morning thank you for taking my question.

Going back to Crane, I'm trying to understand how you're thinking about the fourth quarter guide here. Really, in terms of the booked to bill and the way you're thinking backlog is going to be positioning coming out of this year?

In terms of the backlog that we have -- what we have in backlog is all out for delivery obviously and 2016 and some of it will go into 2017 going forward.

The overall backlog being down 21% is consistent with our sales view in our sales a outlook. And as we look at the business across the three segments, we see the most pressure on our mobile products. Towers are holding in there and as I said utilities we expect to see based our backlog a modest recovery.

I just would add to that Mig, and Q3 we did have a few cancellations and pushback. So we're assuming as I said in my comments, that some of those trends continuing to the fourth quarter. So some of the backlog that might be deliverable from a scheduling perspective in Q4, we are assuming like in Q3 that some of that slips into next year and that's reflected in the guide.

Okay. While, -- so here's what I'm really trying to get at here -- when I'm looking at your backlog you were down, let's say you're going to have backlog down something like 30% year over year coming out of the fourth quarter. Orders are also down double digits. I mean mathematically in my mind there's really no way we're not going to have a -- call it double-digit decline on a top line in cranes for next year.

You're talking about having a goal internally to be able to get the business to breakeven if volumes are flat. But volumes are clearly not going to be flat next year.

My question is are you doing enough in the segment? Are we going to hear about more restructuring at the analyst day? How should we think about this?

Thanks Mig, clearly are going to have more about the restructuring activities in the cranes side as we attack the underlying footprint.

So yes, more work to come there. And in terms of -- again we will providing more guidance as we get into 2017 -- but as we look at the markets in some cases the markets are a trough or near low levels that we haven't seen before. We anticipate -- the teams in our focus will be try to drive to a consistent level of revenue on a year-over-year basis.

There is more downward pressure on equivocally then there is upward pressure. And that as we factor into our plans what we're doing going forward we're going to have to consider that in our restructuring activities.

Okay. Thanks.

Your next question comes from Steven Fisher, UBS.

Thanks good morning.

You talked about the $10 million of expected MHPS overhead cost savings in 2017. Should we then assume that the remaining 24 would all be realized in 2018? Or might that have a longer tale?

Right now we're looking at about an additional $15 million. So a cumulative of $25 million between the two years. Obviously we would like to do better than that, but right now that's what we've got in the line of sight. So we wouldn't get the full $34 million out until 2019.

Obviously we're working aggressively at that. We are hoping there's upside in the $10 million for 2017. But that's our map as we stand today Steven.

Okay.

Part of that is coming from functional cost of finance, ID, HR, legal.

We are sized as you know as a company for a much bigger level of activity. Now that we are going from five to three segments it's time for us to do some repair work on the corporate functional structure. And that's where we are -- we do need to wait a little bit until after we close the deal obviously, but we've got good plans in place so we are thinking about $15 million incremental in 2018.

Okay. And can you talk a little bit about the competitive dynamics -- are you seeing any signs of stabilization in pricing anywhere in your business. Or are you anticipating that the year-over-year pricing headwinds will extend for much of 2017?

As far as what we're seeing this year is clearly across the segments especially in AWP, and our crane segments. We are seeing competitive pricing headwinds. As we think about pricing in my opening comments, I think one of the most important things that we can do as a manufacturer is to balance supply and demand. So we don't exasperated competitive pricing dynamics.

So we will be focusing on ensuring that our production schedules meet the market demand so that we can help the influence of competitive pricing dynamics. So, right now pricing headwinds are headwind in we would anticipate them remaining a headwind as we look forward into 2017.

Okay. Thank you.

Your next question comes from Andy Casey, Wells Fargo.

Thank you very much good morning.

Good morning Andy.

I mean we touched on volumes and competitive pricing as a headwind -- you've addressed a lot of that. Are you facing any additional incremental costs headwinds that might become bigger in Q4 than persistent into next year?

In terms of Q4 no. As we look at our material and our materials spend we have seen a modest blip a little bit on steel and still pricing in the quarter's. But again that pricing reversed out. We've got about a 90 day lag. We are going to be pushing our strategic sourcing teams to help offset some of this competitive pricing dynamics and volume impact.

Those of the two things as we look going forward so we don't anticipate anything further beyond that. Kevin you want to comment?

No not really in the plus category, but honestly keeping a close eye on the impacts of Brexit. On a translational impact we should have kind of continue $2 million to $3 million drag on the translational impact from the currency drop. But other than that John I think it's really the steel side. Okay.

Okay great and then one follow-up on the corporate and other -- you have some small group of assets in there. Are you looking at any additional dispositions?

We did move some of the smaller companies into corporate and other. The reason, as we look again the screen then we look, does the business have scale and the opportunity to out earn the cost of capital through the cycle in a relative competitive marketing position. And so the businesses that we'll put into corporate and other are smaller businesses. They don't necessarily meet that characterization.

So, over time we would be looking to potentially dispose of those companies assuming that we can get a reasonable value for the company. But strategically they don't match our screening, and so we would be looking for potential sale of those companies going forward. Again, assuming we can get reasonable value for our shareholders.

Let me just give a little bit more color on corporate and others. I know we have been moving things in there.

Our latest guidance for full-year loss of about $40 million, and that includes the $34 million of drag from the MHPS unallocated costs leaving with about $6 million negative impact. That includes about $11 million of loss for the construction related businesses that are in there for the full-year.

And then the rest which would be things like, Terex financial services, government programs. A little bit of the unallocated administrative costs from corporate would be kind of a positive -- net positive in corporate and other. Just to give you a little bit of the anatomy.

Okay. Thank you very much.

Your next question comes from Jerry Revich, Goldman Sachs.

Hello good morning.

Good morning.

Gentlemen, in the past you've spoken about return hurdles across the portfolio [at least beating] cost of capital through the cycle and obviously that's a challenge in cranes. And you've done some restructuring, but I'm wondering are you looking at more drastic actions beyond just incremental facility restructuring that we spoken about to get to the type of margin performance you would need to hit that hurdle rate? Or does that goal still apply?

Thanks Jerry. No the goal still applies, and we do believe that we can get the cranes business. Historically it has been a performer where it's earned significantly greater than its cost of capital. So we believe that the goal is achievable.

Clearly we have to get after the underlying cost structure, and that's the restructuring activities are about. Both I might add in terms of physical assets, property plant and equipment, but also we've got to get after our underlying cost structure within the organization.

I will say that as we do this across all the segments, we are going to aggressively attack our G&A costs. But we are going to protect the engineering of product development. And that's especially important in cranes because if we have updated products we've seen that our customers will buy that in we can expand our scope and bring new customers in.

So we will continue despite the downturn to invest in our products and services going forward. And then we just have to look at our global footprint and reduce the fixed costs and associated cost within the new business to get us to a reasonable medium-term added margin, operating margin, that yields our 10% cost of capital hurdle. So that's with Steve and the team is going to be focused on, and obviously I will be focused on this significantly as well going forward.

Okay. And then this year you mentioned that the margin performance has disappointed you in cranes and obviously you've got the management transition.

Can you just talk about what part of the turnaround -- you didn't get as much traction as you had hoped for this year -- and how should we be thinking about these action plans over the next call it six to 12 months.

I think it really folds into two broad categories. The cranes industry is a relatively small industry. So the customer intimacy and customer knowledge is incredibly important. And I think as Steve will help drive and to help mitigate some of the headwind pressures that we have on the top side of the revenue side. So I think Steve -- he brings a unique capability there.

Also on the restructuring side we have to move aggressively and as quickly as we can. Again, paced by the talent implement the complex moves, and regulatory hurdles. Steve's had to deal with a lot of that has last assignment. So I think it's perfectly suited for the knowledge of the customer base, plus his past experience of how we have to move aggressively and decisively on restructuring activities to position the business for future success.

So those are just two areas and again Ken did a great job. I just think when you are shrinking organizations from five segments to three segments, and you've got a mix choice on who think the best person is for the job going forward and I think Steve is that person.

Okay. Thank you.

Your next question comes from Seth Weber, RBC Capital Markets.

Hey good morning everybody.

Good morning that.

Just given your comments on the pricing environment, I'm wondering do you think that you guys can hold a 30% decremental margin in the AWP business next year?

I think Seth, the focus Matt and the team have on cost is no different than the other segments. They fully appreciate the realities of replacement cycle math. They're preparing for it, and we do a fair amount of flexibility. Being largely North American-based our ability to augment our cost structure is a little bit easier actually than MP and cranes. So I do believe we can maintain reasonable decrements going into 2017.

Okay so 30% is a good number to think about then?

30% or better.

Or better. Okay thanks.

And then I'm wondering could you give us any color on the warranty expense that you guys called out on the crane business. Can you quantify it and I guess -- it sounds like that's going to continue here in the fourth quarter -- but have you kind of [ring fest] that and you not expect that to continue into 2017?

Yes we've had a number of items that we've called out over the three-quarter period. Roughly aggregate drag on year to date earnings per cranes is about $15 million from total quality, warranty, product campaigns et cetera. Certainly an anomaly for that segment. But it's been a meaningful part of the missed that were experiencing this year.

Not going to get into specifics by product but it's been fairly broad-based.

Okay but do you expect that to be done by the end of 2016 or do you think that will bleed into 2017 as well?

No we believe it will be complete this year. We go to more historical product warranty reserves levels going forward. That's one of those things we're to drive improvement on.

Also one of the other (inaudible) made there is we've got one of our senior executives who has been helpful on the construction side and been engaged in a lot of the restructuring activities. We've moved George over to be the head of operations on the cranes side. Again to bring the executive horsepower we need to drive improvements in that segment. And I think that will also help on some of the product related issues we've had as an organization.

Okay. Sounds good. Thanks very much guys.

Your net question comes from Stephen Volkmann, Jefferies.

Hey good morning just quick follow-up to that one. You had also talked about some operational issues I think in cranes. Did those also go away as we get into 2017?

Yes I think we had some disruption in our facilities. Again, the other key challenge here is we had siphoning the organization for the volume that you are going to have, and so we had some unabsorbed cost that we could have frankly handled a little better in the course of years.

As we lay out the plan for next year driving the headcount is not just physical assets but it's also people, the headcount for the volume, and so that we can absorb that going forward is another aspect. That will be something that will work on as well on the restructuring side. It's not just physical assets but it's also on the people side unfortunately.

Okay. Got it.

And then you had mentioned also I think some inventory destocking, I don't even remember which business that was in, but maybe more broadly how do you feel about inventory either yours or in the distribution channels for AWP and cranes? And do we have to continue that process -- where we in that?

In terms of -- we spoke in the opening comments about a $75 million year-over-year reduction in AWP inventory. So the distribution channel there is really a rental distribution channel. So we don't -- that is the channel and again, it's again about matching supply and demand so that we don't oversupply in the marketplace to put further downward pressure on competitive dynamics.

On the cranes side it's more of a mixed model between direct distribution, direct to customers, and then to the distribution channel. We do not have a significant amount of inventory in the distribution channel. We did produce some carryover industry at Waverly prior to the closing to cover us to the ramp-up period. We think we believe that level of inventory was appropriate.

So we don't -- in general unlike some other industries have a large distribution channel with significant inventory that we have to move through going forward.

On the networking capital side we are down about $370 million as a percentage of sales from about 29.7% to 26.5%, which is decent improvement in a challenging environment, but not near what we were driving for internally as we go forward as our internal plan. But we will continue to manage the [site out] process aggressively so that our supply and demand is in balance so that we don't build up excess inventory -- in my view an inappropriate use of cash.

Great. Thank you. See you in December.

Thanks.

Your next question comes from Robert Wertheimer, Barclays.

Hey good morning

If I could just follow up on the last one. The comments on inventory our great, and it's doing better in our view in anyway than some of the other verticals we see. We have though seen pricing go out right negative in a few different machinery end market. You guys have any negative pricing or is it just softening?

We have had year-over-year pricing erosion -- in some models -- in some segments we start with an annual price increase for the year. And so we have seen some pricing erosion by model.

One of the other things that we are working on as a team to drive in our commercial excellence is around pricing in the leakages that you get based on your list on down. So will got a lot of work going on to spend the tide in leakages. Because we are in many of the segments at or close to being a market leader. So how we set price does impact the overall market. We have seen -- in some products -- in some regions year-over-year price declines.

Okay. Perfect. Let me ask a different question if I may. You gave a nice walk through where you are in the cycles. I wanted to ask a little bit more detail on aerials in Europe. At lease to us it seems as though you never really -- the industry rather -- never really fulfilled a replacement cycle there. I mean we have one in the US. I'm not sure we did in Europe.

Is that your view is there a chance that there's underlying strength in Europe despite the recent softening? And not sure why it's soft other words if your placement should be relatively okay.

We clearly have not seen the same pronounced replacement cycle in Europe that we have seen in North America. So the underlying demand has been more stable with less volatility. We are seeing a bit of a pause associated with Brexit in the UK. There has been some pause there. But the underlying market does not appear based on what we're currently modeled to have is relatively significant decline associated with the replacement demand cycle.

Great. Thank you.

Your next question comes from Joel Tiss, BMO.

Hey guys how's it going.

Going well Joel.

There's been a lot of questions about the businesses, and I just wondered if we could spend a minute to talk about the internal restructuring. And when do you think we're going to feel kind of the full benefits?

When is the new Terex going to come together? It sounds like it's more of a 2018 or is that going to bleed into 2019 you think?

I will turn it over to Kevin, but I would just start -- as I said we had more work to do with our restructuring activities. Obviously would like to get it done sooner rather than later. We will implement more actions here most likely in the fourth quarter and similar actions in 2017. We will realize the benefits of those in 2018 and beyond.

But that's kind of the timeline that I am looking at. We will move as aggressively as we can with some of the limitations going forward to get to right size the organization for the markets that were in. Kevin do you want to talk about --.

Clearly not a way to 2018 activity. John has mentioned still not complete in our portfolio evaluations that work continues. There are some things we're doing right now on costs.

There are also a large chunk of costs related activities, reduction activities, that trigger on the sale of MHPS. So late Q1. And as we said earlier we see the footprint rationalization beginning in earnest, but also accelerating through 2017 into 2018. So there's a lot of activity it's not a wait-and-see by any stretch Joel.

And then just a follow-up. Are these -- as you -- is probably too early to tell, but are these the three right segments to be riding for the next 5 to 10 years? Or is there still more work to be done to get to the answer there?

No I think Joel, l right now the reduction from five down to three segments, and competing in the (inaudible) platforms industry through AWP segments. The mobile cranes side to our tower cranes, mobile cranes, and our utility products, and then material processing. I think if you look that these are businesses where we have scale on a global basis.

We have in many businesses consistently out earned our cost of capital in the case of AWP and MP. And then on the cranes side it is fundamentally a good business in terms of a competitive dynamics in the marketplace. It is clearly a cyclical business and we have to get our cost structure in line with that reality.

So I think as we go forward, these three industry segments are three industry segment that we can compete and win at and return capital and returns to our shareholders that will reward them for being in these three segments. So that's clearly how we are looking at the business for the next five year time horizon plus, is that these are the three industries that we're in, we're going to be compete aggressively and win in the three industries.

That's great. Thank you very much.

Your next question comes from Steve Barger, KeyBanc Capital Markets.

Hey guys thanks I got on the call late. I'm just trying to think about the consolidated SG&A ex MHPS for next year. Did you guys give what that run rate could look like?

We didn't share 2017 numbers at this point Steve. We did kind of walk through a lot of these cost restructuring actions in what impact it would have in 2017.

Okay. I will go back and check the transcript. And then just to the comment that you just made about crane being fundamentally a good business, but at the bottom of the cycle. Do you mean that you -- you mean that in the context that globally it's not oversupplied or its rational?

Why is it fundamentally a good business on a go forward basis if we stay at a relatively constrained level of end markets for a while?

I think of you look at the global marketplace in a number of global competitors, there are barriers to entry in terms of either are complex highly engineered product. And so it does create that level of barrier to entry within the industry segment. There has been us and other competitors in the industry are rationalizing footprint in taking cost out capacity out of the system.

I think that overall will help the industry going forward. And so when I say fundamentally those are kind of the underlying fundamentals that you can look at and say the business should -- through the cycle always cover its cost to capital. And that's what we're setting ourselves up to do. That the fundamentals that I look at.

Understood thanks.

Your next question comes from [Ante Sutherland], [Danske Bank].

Can we talk about the MHPS business, how much with sales and how much was EBIT in the quarter?

In terms of the MHPS and I will comment and then turn it over to Kevin real quickly -- sales overall were down in the quarter about 10%. That was really driven by our core business that was down. The material handling business was down low single digits in terms of revenue. But actually increased on the material handling side increased our profitability by about 100 basis points.

I don't have the specific EBIT in front of me. I will ask Kevin to get that or we will break that out and follow-up on your call. But overall the business port is been a [tough] with the container traffic. So we've had a decrease in Port business order intake. We've got a fourth quarter that we've got material harbor cranes that we've got to do deliver here in the fourth quarter.

On the MH side greater stability off a little bit, but good performance on margin expansion on lower volume in our MH side of the business.

I would just add to that John, the gap EBIT for the quarter was $79.5 million, and that included a good guide of about $55 million.

You guys will recall that in Q2 we took an impairment based on the sale proceeds expected of $55.6 million. Given the stock appreciation that we saw during the third quarter we were able to fully reverse that. So when you back that out and some other small restructuring adjustments we've got an EBIT as adjusted about $26 million for the period.

All right. Is this before or after corporate allocations?

We did not have any corporate allocations in it. It also, remind you that under [discoff] accounting we freeze the depreciation and amortization. So that $26 million doesn't have depreciation and amortization or corporate charge.

Thank you very much.

(Operator Instructions)

Your next question comes from Yilma Abebe, JPMorgan.

Thank you good morning.

My first question is -- you mentioned that the expected use of debt with expected proceeds on a Kronecranes transaction has our view changed today versus prior quarter in terms of how much of that proceed expected do you [reduce] by?

No, again we are trying to drive towards an optimal capital structure as we look at this somewhere in the range of 2 1/2 times net debt to EBITDA through the cycle. So that implies somewhere around in the range of $700 million of debt repayment in the year next year post closing.

Okay. (Multiple Speakers)

One other piece I would add to that is I think most of you probably saw that we went out in were able to get amendments on our credit facility. Which allows us now with that debt repayment to go after our higher cost debt, our senior notes at 6.5% and 6%. So we're looking at 2017 once we accomplish that of roughly a $40 million reduction in interest expense.

Okay. So just to be clear you expect to reduce debt at closing by about $700 million and it looks like you're looking at the senior notes for debt reduction here?

That's correct.

Great. Thank you very much.

At this time there are no further questions. I will now turn the call to management for any additional or closing remarks.

Thank you again all for your interest in Terex. If you have any additional questions please follow up with Brian. He would be more than happy to answer those questions. And I really do look forward to seeing you at our analyst meeting in New York City on December 13, 2016. Again, thank you for your participation.

Thank you that does conclude the Terex Corporation third-quarter financial results conference call. You may now disconnect.