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Edited Transcript of TEX earnings conference call or presentation 2-May-18 12:30pm GMT

Q1 2018 Terex Corp Earnings Call

WESTPORT May 5, 2018 (Thomson StreetEvents) -- Edited Transcript of Terex Corp earnings conference call or presentation Wednesday, May 2, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Jerome Henry

Terex Corporation - SVP of Business Development and IR

* John D. Sheehan

Terex Corporation - Senior VP & CFO

* John L. Garrison

Terex Corporation - President, CEO & Director

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Conference Call Participants

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* Andrew Millard Casey

Wells Fargo Securities, LLC, Research Division - Senior Machinery Analyst

* Ann P. Duignan

JP Morgan Chase & Co, Research Division - MD

* Benjamin J. Burud

Goldman Sachs Group Inc., Research Division - Research Analyst

* Courtney Yakavonis

Morgan Stanley, Research Division - Research Associate

* David Michael Raso

Evercore ISI, Research Division - Senior MD, Head of Industrial Research Team & Fundamental Research Analyst

* Jamie Lyn Cook

Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst

* Michael Shlisky

Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst

* Stanley Stoker Elliott

Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst

* Steven Fisher

UBS Investment Bank, Research Division - Executive Director and Senior Analyst

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Presentation

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Operator [1]

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Good morning. My name is Matthew, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the First Quarter 2018 Terex Corporation Earnings Conference Call. (Operator Instructions) Brian Henry, Senior Vice President of Business Development and Investor Relations, you may begin your conference.

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Brian Jerome Henry, Terex Corporation - SVP of Business Development and IR [2]

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Good morning, everyone, and thank you for joining us for today's first quarter 2018 financial results conference call. Participating on today's call are John Garrison, President and Chief Executive Officer; and John Sheehan, Senior Vice President and Chief Financial Officer. Following the prepared remarks, we will conduct a question-and-answer session.

Last evening, we released our first quarter 2018 results, a copy of which is available on 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 Events and Presentations in the Investor Relations section.

Let me direct your attention to Slide 2, which is our forward-looking statement 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'll turn it over to John.

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John L. Garrison, Terex Corporation - President, CEO & Director [3]

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Good morning, everyone, and thank you for joining us and for your interest in Terex. Terex had a very strong start to 2018. We increased sales, operating margin and backlog in all 3 segments. We significantly improved our first quarter earnings per share compared to last year and we are forecasting better results for the balance of the year, raising our full year sales, operating profit and EPS guidance.

AWP continued to gain momentum in Q1, building off its strong finish in 2017. While Crane sales grew and results improved over the last year, things got off to a slower start than anticipated, driven largely by supply chain challenges in our mobile cranes operations. Materials Processing continued to execute, recording margin improvement for the sixth consecutive quarter. We also continued to execute our disciplined capital allocation strategy, repurchasing 5 million shares of Terex stock in Q1 for $205 million. Overall, a very strong start to 2018 with improving prospects for the balance of the year.

Turning to Slide 4. With the Focus element of the Terex strategy complete, we remain committed to simplifying the company and deploying our Execute to Win business system. We are entering a period of broad-based growth potential. In this environment, it is important that we execute at a high level. And in parallel, continue to drive the transformational changes that will fundamentally improve Terex for the long term.

Turning to Slide 5. We continue to simplify Terex. On the operations side, our focus is on improving performance and meeting growing customer demand. We recently approved an investment in our Utilities business, with the support of the State of South Dakota, to build a new facility in Watertown. This state-of-the-art manufacturing center will allow us to consolidate from 10 buildings to 1 and meet the growing needs of our utility customers.

On the administrative side, we continue to shift the balance of our SG&A spending away from G&A to greater investment in engineering, innovation and customer-facing sales and service. To facilitate that shift, we are reducing complexity associated with our history of acquisition. Our finance team, for example, is implementing a new operational financial management system, including a common chart of accounts, that will give us a much deeper, consistent view of our internal financial information across our businesses.

Execute to Win is about dramatically improving our capabilities by investing in people, processes and tools in our 3 priority areas: commercial excellence, lifecycle solutions and strategic sourcing. Our sales and marketing leaders partnered with a world-class industrial sales training organization to develop the Terex proven sales process. We'll be training our entire sales team over the next 2 years.

We're also implementing salesforce.com, a world-class CRM, which goes hand-in-hand with this structured sales training. We announced on Monday, that Boris Schoepplein will join Terex on June 1 to lead our global Parts and Service businesses. Boris has considerable experience, having spent more than a decade leading the Parts and Service organization of a major industrial equipment manufacturer.

Our strategic sourcing initiative continues to make progress. In Q1, we made global supply award decisions in the paint and computer hardware categories. On paint, we reduced the number of suppliers by over 50% and achieved savings in line with our objectives and expectations. While the absolute value of the paint savings is small in the context of the overall strategic sourcing initiative, the percentage savings provided an indication of the potential ahead as we implement the other Wave 1 categories and launch subsequent wave.

Turning to Slide 6. We are increasing our full year guidance. Building on our strong first quarter performance and improving outlook in our key markets, we now anticipate sales to grow by approximately 15% to about $5 billion. This represents an increase of over $200 million over our original guidance. We expect to increase operating margin to approximately 7.1%, a 200 basis point improvement compared to 2017. This increase is driven by operating leverage on higher volumes. These operational improvements and the disciplined capital allocation strategy actions we took in Q1 translate into a significant increase in our full year EPS outlook. We now anticipate 2018 EPS of between $2.70 and $3, more than double our 2017 results.

With that, let me turn it over to John.

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John D. Sheehan, Terex Corporation - Senior VP & CFO [4]

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Thanks, John. I will spend a few minutes reviewing our Q1 financial results before providing more details around our improved 2018 guidance. Overall, our financial performance in the first quarter was very strong. AWP increased sales by $167 million or 35% compared to last year, driven by growth in North America and Western Europe.

AWP demonstrated its ability to leverage higher volume, generating 9.4% operating margin, 480 basis points higher than last year. In Q1 last year, AWP incurred a onetime $2.2 million charge associated with the transactional tax issue outside the U.S. Excluding this charge from the prior year, the incremental margin this quarter was 22%. AWP entered Q2 with a backlog of $891 million, $266 million or 43% higher than last year, setting up a very strong full year.

While Cranes' results improved compared to last year, the segment performed below our expectations in the quarter. Sales increased 19%, roughly split between higher demand and the impact of foreign exchange rate. However, our operating results were negatively impacted by disruption in our mobile cranes factory, caused by material shortages as we ramped up production, leading to lower productivity and throughput. After several years of lower production schedules, elements of the supply base were not able to ramp up as quickly as needed. We are working closely with our suppliers and have a team focused on addressing the supply continuity issues.

Materials Processing continues to deliver strong financial performance. Sales of $303 million were 22% higher than last year, driven by global demand for crushing and screening products, Fuchs material handlers and environmental equipment. The MP team increased year-over-year operating profit by more than 40% on an adjusted basis, representing margin expansion of 160 basis points. Q1 orders were up 50% and backlog was up 77% over the prior year, reflecting strong market momentum. A great start to the year for MP.

Turning to Slide 8. Overall, Q1 consolidated sales were up 25% or approximately 18% on a constant currency basis. The strong top line performance allowed us to generate 4.5x more operating profit than last year, achieving an incremental margin of approximately 23%. We reduced net interest expense by $7 million year-over-year, principally reflecting the 2017 recapitalization of our balance sheet and improved interest rate spreads.

It is important to note that in Q1 2017, we earned a dividend of $13.5 million on our Konecranes holdings, which is reported as other income. This dividend contributed approximately $0.09 to our earnings per share last year. Setting aside that $0.09 impact, on an adjusted basis, we improved from a $0.04 loss per share in Q1 2017, to a Q1 2018 earnings per share of $0.55. This Q1 EPS reflects the significant operational and capital structure improvement we continue to make.

Turning to Slide 9. Every quarter of 2017, we exceeded the key elements of our guidance and subsequently increased full year guidance. That trend continued in Q1 2018. As John noted, we expect full year sales of approximately $5 billion. The increase is driven by higher sales at AWP, now expected to be up approximately 18%, and MP now expected to grow about 15%. We also expect AWP to achieve an operating margin of between 10.25% and 11.25%. This translates into approximately 55% greater operating profit than last year.

We are continuing to address our operational challenges in Cranes. We expect performance to improve over the course of the year, however, given the supply disruption, it is likely that Cranes will generate an operating loss in Q2, before returning to profitability in the second half of the year. Accordingly, we believe it is prudent to reduce our full year operating margin guidance for Cranes to approximately breakeven.

We continue to expect MP operating margin of between 11.5% and 12.5%. The MP team is working to offset headwind associated with the strong British pound and higher material costs with productivity improvements and pricing actions.

We are maintaining our free cash flow guidance of $100 million. However, we did increase our capital expenditure outlook from $60 million to $80 million to reflect the utilities facility project and other targeted investments.

Overall, for Terex, we expect this strong operational performance to result in higher 2018 EBITDA, now anticipated to be between $410 million to $440 million, approximately 45% to 55% higher than 2017. From a quarterly perspective, we still expect a normal historical sales pattern, with our EPS to be generated roughly 20% in Q1, 30% in Q2, 25% in Q3 and 25% in Q4.

Turning to Slide 10. We continued to deliver on our commitment to follow a disciplined capital allocation strategy. Higher volumes and operational improvements are driving better cash performance. We reduced net working capital as a percent of sales in Q1 to 19.9%, a significant improvement over the prior year's 24.1%. We continued to improve our balance sheet and reduced the cost of our debt. We repriced our U.S. dollar term loan in the quarter, improving upon the favorable terms we put in place last year. And in April, we increased our revolver to $600 million providing $150 million of additional liquidity. These targeted investments in high-impact areas are starting to pay off and will result in performance improvements over the longer term.

Finally, we repurchased approximately 5 million Terex shares in the quarter for $205 million. As of March 31, $120 million remained available under our previously announced share repurchase authorization. Based on market condition, we will continue to buy back shares.

We expect our 2018 ROIC to improve to approximately to 16%, an important step towards our 2020 objective of 20%. The Terex team has and will continue to generate shareholder value through the execution of our disciplined capital allocation strategy.

With that, I'll turn it back to John.

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John L. Garrison, Terex Corporation - President, CEO & Director [5]

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Thank you, John. Before I review the dynamics we're seeing on our segment, I'll spend a few minutes on an important development in the first quarter, the announcement of Section 232 tariffs on steel imports into the United States. Steel prices had already been trending up on the assumption and threat that the Commerce Department would take some action. The market prices and the futures prices for steel rose dramatically when the administration announced the tariffs. We're looking at steel pricing for the balance of 2018 that was about 50% higher than the fourth quarter last year, when our 2018 pricing was set. Our supply chain, finance, sales and marketing teams worked hard to understand the impact on our product cost and develop a plan to share the increases with our customers.

Unfortunately, as a result of the administration's action, we implemented steel surcharges on product lines that were impacted by the higher steel prices. As explained in my letter to customers, we will continue to monitor steel prices and if prices normalize, we will remove or adjust the surcharges.

Another potential headwind on the horizon are the proposed Section 301 tariffs on the imports from China. Our team is assessing the potential magnitude and timing of the impact. At this point, we do not anticipate any impact until late Q4 and into 2019. We will take the necessary steps to adjust our supply chain and potentially take pricing action to mitigate any increased costs.

Turning to AWP. We believe we are in the early point in the growth cycle for Aerial Work Platforms, both in North America and Western Europe. China and other developing markets are still in the early phase of adopting work at height regulation, and we expect significant growth ahead. Detailed modeling of the fleet, macroeconomic fundamentals and discussions with our customers all suggest we are entering a multiyear growth period. We are planning for that growth across our global operations.

In February, I attended the American Rental Association trade show in New Orleans. This is the largest equipment rental show in North America. As always, Genie was very well represented. The booth looked great and customers showed enthusiasm for our brand and products. Genie products were prominently displayed, including our extra capacity S-85, our fuel electric Z-60 and the new LED gas light tower, which launched at the show. It was clear to me that our customers are preparing for continued strong growth, and they value the prominent role that Genie plays driving innovation in the industry.

A key element of commercial excellence is managing all aspects of the pricing waterfall. AWP is utilizing a new tool that facilitates a disciplined approach to all aspects of pricing. To help offset the higher steel prices, on March 7, we implemented a steel surcharge on all new AWP orders. Since implementing the surcharge, our bookings rate have remained strong. There are clear signs that our markets are entering into an extended period of growth, and we're well positioned to meet our customers' growing needs. We're excited about the prospects for AWP for the balance of 2018 and beyond.

Turning to Cranes. Our Cranes team had a mixed start to the year. The global crane markets were fairly stable, with pockets of growth as expected. We increased sales and backlog in mobile cranes, tower cranes and utility equipment. On the operations side, it's going to take us several months before our mobile cranes production schedule is fully back on track. We are working with our customers to align our machinery delivery date and expect productivity to normalize in the second half of the year.

Cranes continue to roll out new products. We delivered the first AC 300-6 production unit in Q1. This the latest addition to the Demag line of all-terrain cranes that is reestablishing the Demag brand as the global leader in all-terrain segment. We also introduced a new flat top tower crane, the CTT 472. The new crane responds to our customers' desire to increase productivity on the job site.

In summary, for Cranes, we believe the global markets are stabilizing and there are opportunities for growth. Our focus is on operational execution to meet our commitment.

Turning to MP. Materials Processing continues to solidify its reputation as a consistent performer, with a proven ability to execute its plan. Following the pattern status last year, MP exceeded its plan in the first quarter. And with strong markets and a significantly higher backlog than last year, is well positioned to have another great year.

We expect global demand for crushing and screening equipment to continue to grow. Construction activity and aggregate consumption continue to be the primary drivers of growth. Our Fuchs material handlers and our broad line of environmental products continue to grow in improving global markets.

In March, I attended the Global Powerscreen Dealers Conference in Miami. I joined customers and dealers from every corner of the globe to watch outstanding demonstrations of 20 machines, 6 of them newly launched. This was a great opportunity for Powerscreen to showcase new technology. We spent time on telematics and how this is changing the customer service model and it underscores the importance of innovation in our industry. The customers and dealers were very positive about our new product offerings and outlook for their markets. We're looking forward to another strong year for MP.

To wrap up our prepared remarks, we had a great start to the year in AWP and MP. We understand the operational challenges in Cranes and are addressing them. Our backlog is up significantly in every segment and our global markets are improving. We are increasing our full year guidance. We will continue to execute our transformational program, simplifying the company and building capabilities in our Execute to Win priority areas. Finally, we will continue to follow our disciplined capital allocation strategy and create value for our shareholders.

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

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Brian Jerome Henry, Terex Corporation - SVP of Business Development and IR [6]

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Thanks, John. (Operator Instructions) With that, I'd like to open it for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Andy Casey with Wells Fargo.

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Andrew Millard Casey, Wells Fargo Securities, LLC, Research Division - Senior Machinery Analyst [2]

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I would just like to get a little more information on Cranes. Is it -- is the cadence basically, loss Q1, Q2, modest profit and then a step back in Q4? Is that what you're kind of thinking about?

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John L. Garrison, Terex Corporation - President, CEO & Director [3]

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Thanks, Andy. Yes, this is exactly the cadence that we're looking at. As I indicated, we did have some supply continuity challenges that disrupted our manufacturing line and our assembly line, which we experienced in Q1, we'll carry over into Q2 and then the back half of the year, we'll return to profitability. And again, I think the good news on the Cranes side is the markets have stable -- they're stable. We are seeing pockets of growth. The execution of the restructuring plan last year, we've got that out of the way. It's now really is focusing on our assembly operations with our supply base to ensure that we've got continuity of supply and deliver to our commitment.

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Andrew Millard Casey, Wells Fargo Securities, LLC, Research Division - Senior Machinery Analyst [4]

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Okay. And then just on -- within the crane market, our checks kind of say all-terrain boom trucks remain -- are getting stronger. That puts a little bit of a pinch on your new product startup over in Germany. But are you seeing any improvement in the rough terrains at this point?

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John L. Garrison, Terex Corporation - President, CEO & Director [5]

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Thanks, Andy. So as we look at the markets, clearly, the new product introductions on our all-terrain are helping us, no matter where we are in the globe. And in terms of rough terrain specifically, we're not seeing a significant pickup of rough terrains in North America. We are seeing a modest increase of rough-terrain cranes out of our European facilities into the Middle East. But right now, the rough-terrain crane market is -- it's not robust. But again, with oil prices increasing, we would anticipate to see that market begin to recover a bit. That's one, right now, that we haven't seen the recovery like we've seen -- in the improvement, I should say, like we've seen in all-terrain crane.

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Operator [6]

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

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Jamie Lyn Cook, Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst [7]

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I guess a couple of questions. Just to follow up on the Crane segment. John, when you guys have talked about order strength before, you thought it was more product driven versus the markets are improving. So can -- are you getting more confident that the cycle is improving versus it's just a Terex-specific thing? And then my second question is, what are your -- I was surprised by your ability to improve margins in the Aerial business, in particular, given the material cost headwinds. And so can you talk about, are there mix factors, your success passing through price, just your confidence level there. And then what are your new assumptions in the guide for steel costs at the low end, at the high end? Because I think you addressed that last quarter for the broader company.

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John L. Garrison, Terex Corporation - President, CEO & Director [8]

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Thanks, Jamie. I'll -- I think there's 3 questions there, so I don't get all 3 of them, jump in, remind. In terms of the cranes markets, again, it has stabilized with pockets of growth as we had anticipated. We have seen growth in our all-terrain cranes in Europe. We have seen growth in tower cranes in Europe and in North America. And we've seen good growth in our utility segment in North America, with some sales also into China. We've also experienced the pickup, it was off a very low base, but we've experienced the pickup in our Pick & Carry crane down in the Australia market. So we're seeing a good pickup in those areas, stable markets and pockets of growth. The one area that we have not seen growth and our backlog has not improved is in large crawler cranes. I think we've mentioned that for some time, that's been soft. And again, on the RTs I talked about. So again, we've seen the market. I think it's stable. We're seeing pockets of growth. And it's not robust, but it's very encouraging compared to where we were the last couple of years in terms of the market dynamic.

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Jamie Lyn Cook, Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst [9]

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Okay. So fair to say just not a Terex new product introduction thing. There's something more here.

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John L. Garrison, Terex Corporation - President, CEO & Director [10]

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I think so. I think so. And your second question was around...

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Jamie Lyn Cook, Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst [11]

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It just on the confidence in Aerial margins that are mixed factors, et cetera, that are -- and your success on pricing. And the second question was just for broader Terex. What are your assumptions on steel today in the high end and the low end of your guidance?

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John L. Garrison, Terex Corporation - President, CEO & Director [12]

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Thanks. I'll start and then I'll turn it over to John on that. Overall, I think AWP continued and really had a good first quarter and we think it's going to have a strong year. We believe that they're at the early stage of a multiyear growth pattern. We're seeing good rental channel demand, strong end markets there and that's really truly global. The headwinds that we've had to deal with were a material cost inflation. We started the year with a modest price increase to start the year. And as I said in my opening comments, the 232 steel and the dramatic increase in steel required that we pass that steel cost on or we share that, if you will, with our customers. So we implemented that early March, and that will carry in for all new orders through the remainder of the year. So -- and finally, I'd just say with the margins at AWP that Matt and the team, the operations team, have really done a nice job leveraging the incremental volume. They've executed quite well, really, around the globe in our operations, in our facility. So I think that's what's really driving the margin is the operational improvement and really leveraging the volume that we've been able to achieve. John, would you like...

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Jamie Lyn Cook, Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst [13]

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So there's no mix in terms of big booms or customer that's helping?

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John L. Garrison, Terex Corporation - President, CEO & Director [14]

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No, Jamie. I would say our mix is pretty much historical mix in terms of the type of customer and mix in terms of products. We've had good strong backlog, good strong sales across our product line in that segment.

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John D. Sheehan, Terex Corporation - Senior VP & CFO [15]

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From a -- Jamie, from a steel price assumption that's inherent in our guidance, it really reflects the high cost of steel that is in the market today including the forward curve out over the remainder of this year. The steel price surcharge that we -- steel surcharge that we put in to place is intended to offset that high cost of steel. And we're not seeking to make money on the steel surcharge, we're solely seeking to offset the high cost of steel that's in the market. And as we indicated, as steel prices fluctuate, we'll continue to evaluate that steel surcharge.

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Operator [16]

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Our next question comes from the line Ann Duignan with JPMorgan.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [17]

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A lot of my operational questions have been answered. But just philosophically, maybe, can you talk about the steel surcharges in AWPs and how you anticipate the large rental companies to react? I mean, they're not generally in the market this time of the year. But I can imagine them saying, "Gee, we've got scale, we've got volume, we are not taking no steel surcharge." Can you -- is there any precedent or can you just talk about how you expect that conversation to go?

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John L. Garrison, Terex Corporation - President, CEO & Director [18]

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Thanks, Ann. Well, as we said, we did -- and I use the word unfortunately, because it is unfortunate. It's really a policy action that caused it. So we did implement a steel surcharge across our businesses, not just in AWP. And as John said, it's to share the significantly higher cost. Without question, and let's face it, customers are not happy and they don't like additional cost, and we clearly understand that. But when we describe what has occurred, how it's occurred, they don't like it but most customers do understand it. And as I said, our order rates remain relatively strong. In terms of customers' procurement strategies, they vary by customers. There are customers that place almost all of their orders very early in the year and late into the fourth quarter. There are other customers that spread their acquisitions across the year. And again, this was a surcharge that went in place in the case specifically for AWP, went in place for all new orders after March 7. So any orders that were in backlog prior to that were not subject to the surcharge. So it really depends on the procurement strategies that specific customers use in their business. And it does vary by customer, Ann.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [19]

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But is there any precedent for this? I mean, my point was the large-scale rental companies probably won't be back in the market 'til later in the year. How is that conversation going to go?

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John L. Garrison, Terex Corporation - President, CEO & Director [20]

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As again, we've been consistent, Ann, with the application of the surcharge across our customer base, and we'll remain consistent in the -- it is consistent. It may or may not be modified. We'll see what happens in terms of steel pricing as we go through the year. But it will -- it has been and will be consistently applied as we go forward.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [21]

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Okay. And on the Cranes operational challenges, can you just give us any color you can in terms of what specifically is happening in the supply chain? I mean, are we short of chassis, or? It just reminded me of when I was working in the Southern car startup, they ran out of ashtrays, so I doubt that you're running out of ashtrays in this environment but are we talking like things that can be put in after the assembly or are we talking like core, major components that basically shut down the assembly?

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John L. Garrison, Terex Corporation - President, CEO & Director [22]

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Thank you, Ann. In this case, it's across the couple of commodities that we've experienced disruption. And it has, in some cases, caused the complete line stoppages. In other cases, we're allowed to continue to produce on the assembly line, but we're not doing it efficiently and effectively and it requires rework, which then drives the cost. In terms of supply of commodity or types specific to Cranes, we really had 3 that impacted us, that are impacting the pace of schedule. And the first one was electronics or wiring harness. That's actually a very -- a smaller supplier that actually went into receivership. So we had to step in to that supplier, help, run, get material, resource that. That had an impact on us and it impacts our schedule as we went forward, so that's now planned in. You did mention weldments. We did have capacity constraints on some weldments. Suppliers couldn't keep up with the demand, so we resourced some of it. We actually had to insource some, we had some of that capability. So we insourced some of the weldments, again, to drive better tack time, if you will, and on-time delivery. And then finally, we had a major international hydraulic supplier that was struggling. But it really was one specific plant that was impacting our production. And we've had a good conversation with the relevant senior executives to understand where they are and what they're doing about it. So I think we understand it. We've got definitive actions in place to get back on track. But it is going to take some time because it was a disruption of our assembly operation.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [23]

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Okay. And you emphasized international hydraulics supplier as opposed to a U.S. hydraulics supplier. Am I reading too much into that?

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John L. Garrison, Terex Corporation - President, CEO & Director [24]

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Probably too much, Ann. But let's just say, it's a well-known company. But I'm not going to mention any company.

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Operator [25]

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Our next question comes from the line of Steven Fisher with UBS.

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Steven Fisher, UBS Investment Bank, Research Division - Executive Director and Senior Analyst [26]

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I think you've talked about $300 million as sort of a breakeven level for Cranes. This quarter, it was clearly an anomaly with the supply issues. How do you think about the levels of sales and mix where you'll be squarely profitable in that mid-single-digit margin range?

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John D. Sheehan, Terex Corporation - Senior VP & CFO [27]

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Yes. I'll take that one, Steve. Appreciate the question. And that the supply chain challenges that are affecting our mobile cranes business right now are really a temporary issue. During the course of 2017, we did, through the restructuring of this Cranes segment that took place, we lowered the breakeven point for the segment down to $1.2 billion. During the first quarter, we had actually planned for a higher level of revenue and production. The supply continuity issues prevented us from building to the plan. And as a result, we did experience the negative manufacturing performance that resulted in the larger loss than we had otherwise intended or had planned for in Q1. But those issues, as I said, they're temporary. They will spill over into Q2 before normalizing in the manufacturing, normalizing in the second half of the year. So I think the bottom line to your question is, we still see our breakeven point for the segment at the $1.2 billion level or $300 million of revenue a quarter. I would also point out that the -- Steve and the team in Cranes have been booking orders over the last year at a rate in excess of $300 million a quarter. They had a backlog at the end of Q1 of $643 million, up substantially from the prior year. So that -- we expect that the Cranes segment will come back to profitability in the second half of this year.

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Steven Fisher, UBS Investment Bank, Research Division - Executive Director and Senior Analyst [28]

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That was part of my point because your bookings have an average of about $375 million a quarter over the last few quarters. So it seems like that should start to really pick up in the profitability if operations normalize. And just as a follow-up to that, and you guys have fixed a lot of things over the last year plus and it's starting to show through nicely into the results, but it still seems like there are some things that are coming up, like the supply -- the crane supplier issue. How close do you think you are to -- the team better able to manage the things that are actually within your control and then being able to react to things more efficiently that are outside your control, like when these supplier issues come up?

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John L. Garrison, Terex Corporation - President, CEO & Director [29]

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Yes. Thanks. I think the team has done a really good job over the last couple of years executing our Focus, Simplify and Execute to Win strategies. And if you really look at the AWP and MP teams, significant ramp-up in production, significant increase in their sales, significant -- a great job executing on the higher volume and driving the margin through on the higher volume. So really, we've got 2 segments that are executing well in a strong environment, managing the supply disruptions day-to-day. And on the Cranes side, Cranes is a lower volume, highly specialized operation with much longer lead times, and I think that has impacted our ability and the level that we like to produce at. And so suppliers are pacing that. So we're going to work with the suppliers to increase their capacities so that we can increase our capacity, especially on the Cranes side.

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Operator [30]

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

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David Michael Raso, Evercore ISI, Research Division - Senior MD, Head of Industrial Research Team & Fundamental Research Analyst [31]

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I have a question about the relationship of your backlog at Aerials and your full year guidance. Just what is it reflecting about -- does the backlog extend further than normal? Did the industry order that much earlier than normal? Because if you look at the backlog relationship to your sales guide for the full year, the sales guide seems low. I mean it's to the tune of almost, if you put it in EPS terms, I mean literally $1 to $2 of earnings, right? The backlog is usually 25% to 30% of the full year at the end of the first quarter. Right now, it's 36% to 37% of your full year guide. Is there something about your ability to fulfill that backlog? Is there something about they ordered that much earlier this year? Or is that backlog extending into '19?

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John L. Garrison, Terex Corporation - President, CEO & Director [32]

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Yes. So overall, David, so as we've said, I think the markets are improving. The 18% growth we think is a reasonable growth forecast. Again, we've seen it across all regions. It's a relatively short cycle business, as you know. Our backlog, we're in a better position than we were a year ago in terms of a backlog coverage. We haven't seen a dramatic shift in terms of composition of backlog by customer mix, composition of backlog by product and/or timing. And again, we still need orders to close out the year. So we feel it's a reasonable forecast. It's a forecast that the manufacturing teams believe they can achieve. And so we're driving to that internally. And again, we'll see how the year plays out. But I think the message that we'd like to convey is that the overall aerial market globally is in a strong period. And we're seeing underlying strong economic fundamentals, coupled with the replacement cycle. And we believe, on a global basis, that the Aerials business is in really good shape for the next couple of years. We're excited about that.

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John D. Sheehan, Terex Corporation - Senior VP & CFO [33]

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And I would just add that although the definition of our backlog is the orders that extend out over the next 12 months, given the short cycle nature of the AWP business, the backlog at AWP is not extending into 2019 at this time.

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David Michael Raso, Evercore ISI, Research Division - Senior MD, Head of Industrial Research Team & Fundamental Research Analyst [34]

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Yes. I just want to make sure we're reading this properly because -- again, I just want to make sure you're not indicating, A, we can't ship, or B, we think the orders slow a lot from here based on conversation. Because, again, if that backlog is, say, a more typical 30% of the full year, 27.5% of the full year sales, you're literally talking about sales guide that could have been $500 million, $700 million higher than -- which in EPS terms, with that incremental margins, a hugely different EPS guide. I just want to make sure we're not walking away saying we got orders early, we see the orders slowing from the conversations. You don't feel that's the case?

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John L. Garrison, Terex Corporation - President, CEO & Director [35]

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No. David, we do not. Matt just got back from Europe, he spent a week in Europe. And he came back and saying, Europe has been strong, continues to be strong. So we're seeing strong global demand in AWP around the world. So -- and again, the order rate, I normally don't like to comment in terms of mid-quarter, but the April order rate continued to be strong in our AWP business globally. So we're not saying -- we think that there's a multiyear period of growth ahead of us for those factors that we've said. And in terms of a production standpoint, if you look at the rate of ramp that the AWP team has done, they've done a great job, and we're going to continue to increase production as we go forward. The other thing that we like about our AWP team, Matt and the operations team, for the last couple of years, has really been working hard on their global footprint. And we think we've got the global footprint that we need and the capacity that we need going forward to meet the potential demand that's out there. So we feel really good about where we are right now in the AWP business. Obviously, this steel surcharge has created a temporary setback but we think we're dealing with that appropriately for our customers and for ourselves. But all in all, we're feeling really good about where we stand on the AWP business as we look out.

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Operator [36]

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Our next question comes from the line of Mike Shlisky with Seaport Global.

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Michael Shlisky, Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst [37]

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I've got a follow-up question on your Cranes, on your Cranes operational issues here. I guess, are you seeing any kind of shortages in certain parts or components? Is that happening -- is that possibly happening elsewhere in the other segments? I know there are plenty of wire harnesses, there are plenty of hydraulics on your work platforms et cetera. Or is this just going to be confined to Cranes and you've gotten out in front of this for the other segments at this point?

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John L. Garrison, Terex Corporation - President, CEO & Director [38]

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Thank you. Right now, in terms of the other 2 segments, both AWP and MP, they've had supply disruptions but they've managed those. We think we have factored in a reasonable build schedule based on supplier communications with us. So we feel good about the production schedules we have there. We feel good about the revised production schedule that we have for Cranes at the lower levels due to the supplier constraints. So it is definitely more acute for the reasons that I specified earlier in the Cranes segment. And the other -- AWP and MP are doing a really good job managing through it.

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Michael Shlisky, Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst [39]

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Okay. And maybe if I could just do a bit of a gear switch here. So you just hired a new President of Parts and Service. Can you update us on kind of where you want to take that business from a mix or margin perspective? And is it your view that parts can be a much bigger part of your sales going forward from where it is today?

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John L. Garrison, Terex Corporation - President, CEO & Director [40]

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Yes. We are excited that Boris is going to be joining us here, and he's actually going to start, as the announcement said, on the 1st of June. And really, on the Parts and Service side, it's an opportunity for us to do a couple of things. One, continue to significantly improve our performance to our customers. That's first and foremost, and we believe there's an opportunity for us to do that. We're looking at how do we optimize our delivery channel, so Boris will take the lead in that. How do we optimize our pricing in that space and then how do we integrate our services going forward. The Parts and Services will still continue to be reported within our respective 3 businesses. We think that's important. But we do believe there's an opportunity for us to grow in lifecycle solutions Parts and Services and enhance our performance in the marketplace. Because that, at the end of the day, our ability to service and support the capital goods that we manufacture is what enables us to sell the next unit. So it's an area that has had focus but I think bringing in someone like Boris and his experience will really enable us to take it to the next level as we go forward.

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Operator [41]

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

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Benjamin J. Burud, Goldman Sachs Group Inc., Research Division - Research Analyst [42]

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This is Ben Burud on for Jerry. Just wanted to touch on Cranes and what you guys are seeing in the used market. Can you kind of give us an update on what you guys are seeing in terms of values and used equipment volumes?

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John L. Garrison, Terex Corporation - President, CEO & Director [43]

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Yes. In terms of used equipment value, again, stable to slight increase on -- especially on AWP side, we saw some real stabilization and some improvement in used equipment there. On the Cranes side, I think the word is stable. It's not robust. We are taking in trades on new equipment sales. We're able to realize the values that we hadn't anticipated on those sales. RTs, over the course of 2017, improved a little bit. Large crawler cranes, again, the crawler crane market is softer so large crawler crane values are not doing great. But overall, again, the word I'd use is stabilizing and the rate of decline is definitely slow in used equipment value.

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Benjamin J. Burud, Goldman Sachs Group Inc., Research Division - Research Analyst [44]

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Got it. And then you guys call out Utilities as performing strongly. Can you kind of help frame the outlook for the Utilities business for the balance of the year and maybe even longer term? And I believe that's a double-digit margin business. Can you kind of frame the margin expansion opportunity there as well?

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John L. Garrison, Terex Corporation - President, CEO & Director [45]

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Yes. Go ahead. Go ahead, John.

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John D. Sheehan, Terex Corporation - Senior VP & CFO [46]

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Maybe I'll start and then John can jump in with the broader Utilities business. And the Utilities business is a very steady performer for us and one that performs really well. We don't break down the financial results of the Cranes segment into the individual components. So I won't comment specifically on the margins within the business itself other than to say, as I said, it's both a very strong performer for us, and number 2, a consistent performer and that we really like both of those aspects of the business.

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John L. Garrison, Terex Corporation - President, CEO & Director [47]

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Yes. And I'd just add, it's a core business for us. We're making the investment. It's a business that's kind of grown organically in the Watertown area over the last 40 years and it's really suboptimal from a manufacturing, operations, customer interface perspective. So we're excited about the investment that we're making. We're excited about remaining in Watertown. Great support from the State of South Dakota. Great support from our team members there. And the Utilities business, if you think about infrastructure, we'll become a digital society. That requires electricity. And there are investments that need to be made in transmission and distribution along electrical grids. So we think we're well positioned to take advantage of those trends longer term. And we've also well positioned using our resources in China and some exports out of here into China on some of the utility products that we put into China. So overall, Utilities is a good, core business for us. That's why we're making the investment in that business. And again, it's a good -- its demand profile is a little bit more -- less cyclical than some of the other demand profiles that we have in some of our other businesses. So that's the other reason we like that demand profile in Utilities.

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Operator [48]

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Our next question comes from the line of Courtney Yakavonis with Morgan Stanley.

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Courtney Yakavonis, Morgan Stanley, Research Division - Research Associate [49]

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Just on the AWP guidance, can you just break out for us, when will the surcharge start to hit? Just given the backlog that you have, will it start to hit in the second quarter? Do we have to wait 'til the third quarter for it? How much of the guidance raise is really just relates to the surcharge versus FX versus the accelerating replacement cycle that you guys have been talking about? And do you think any of this growth is in excess of the replacement cycle and really contributing to fleet growth?

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John D. Sheehan, Terex Corporation - Senior VP & CFO [50]

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Maybe I'll take the first aspect associated with the steel surcharge and then I'll leave John with you on the aspect associated with the growth in the AWP segment. So as it relates to the steel surcharge, the steel surcharge relates to all orders after March 7. And therefore, there are -- there will certainly be production in the second quarter, sales in the second quarter, that the steel surcharge will be a component of that sale. We, obviously, will not break out the steel surcharge separately. And I would also just say that we will also have the impact of higher cost steel in the second quarter. That's what the surcharge is intended to offset. And just to reemphasize what I said earlier, we're not looking to make money on the steel surcharge but rather just simply to cover the additional cost. So it'll flow through in the second -- both aspects will begin to flow through in the second quarter. John, you want to...

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John L. Garrison, Terex Corporation - President, CEO & Director [51]

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No, I think that's fine.

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Courtney Yakavonis, Morgan Stanley, Research Division - Research Associate [52]

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Okay. And then just on the replacement cycle, are we just seeing the strength from the replacement cycle or are you guys seeing strength in excess of that?

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John L. Garrison, Terex Corporation - President, CEO & Director [53]

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No. In terms of the -- again, the market dynamics within AWP, we're seeing, again, globally, global growth across the globe in our Aerial businesses and it's really driven by 2 factors. First is underlying strong economic fundamentals in construction, utilities businesses and the like. You're seeing the rental companies see improvements in their utilization, which is obviously critical. You're seeing some increase in rates. Again, we're seeing that globally. And so that's helping to drive that demand. And then that, coupled with we're entering into a replacement cycle, is why we believe that there -- we're looking at the possibility of a good couple of years in our AWP business. So it's the foundation of the strong underlying economics, coupled with the replacement cycle, gives us a lot of encouragement for the next couple of years that we're going to experience growth in our AWP segment.

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Courtney Yakavonis, Morgan Stanley, Research Division - Research Associate [54]

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Okay. Great. And then just switching to MP, you guys guided up on the sales there but didn't adjust the margin guidance as slightly lower incremental. I was just curious, is that a place where you guys are seeing similar price cost pressures and is the surcharge also flowing through over there?

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John L. Garrison, Terex Corporation - President, CEO & Director [55]

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Thanks. And again, we're -- MP is a great performer for us. It's been consistent. Strong performance in 2018. If you look at their performance, sales up 22%, operating profit up 41%, 160 basis point margin improvement and then if you look at their backlog, up 77%. Again, the important thing for us there is that synchronized global growth because we're seeing it -- the backlog across our core crushing and screening business globally. We've seen our Fuchs Material Handling business increase its backlog based on -- the positive side for that business is higher steel leads to higher scrap steel prices, and that stimulates demand in the material handling side. But we've also expanded our distribution and our market coverage there. And our environmental business, a relatively new business for us, has done quite well and we're seeing real good growth on that year-over-year. And finally, we don't talk about it a lot, but we've got a very successful India business in our MP segment, both for the Indian market and for an export market out of India that's really helped our overall MP segment. So they're a consistent performer. They keep doing a really, great consistent job. And John, did you want to comment on the margin?

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John D. Sheehan, Terex Corporation - Senior VP & CFO [56]

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Yes. So the MP team achieved an incremental margin in the first quarter of 19%. And the incremental implied in the guidance we provided today is a 14% incremental margin. So just a reminder that the aggregate crushing and screening businesses for MP are located in Northern Ireland. The British pound, as it has strengthened both against the U.S. dollar and the euro, is a headwind for them. And that's what has been challenging the incremental margin to be at the 25% incremental margin that we expect for our businesses. But that said, Kieran Hegarty and the entire MP team are really strong operators of their business, and they will maximize their opportunities in 2018.

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Operator [57]

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And our final question comes from the line of Stanley Elliott with Stifel.

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Stanley Stoker Elliott, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [58]

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A quick question on the sourcing piece. Could you remind us what the expectations were for the savings in the back half of the year? And has this inflationary cost environment changed the outlook in any way?

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John L. Garrison, Terex Corporation - President, CEO & Director [59]

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Yes. We have not given specific percentage guidance, but we have said that we expect to see the positive benefit from some of the early decisions in our commodities to start flowing in the second half of the year. Frankly, I think it's a good time, given the dynamics in the supply environment now, to be out with the strategic sourcing initiative. The teams have been doing an incredible amount of work. We've got over 850 suppliers that have submitted proposals to us. And so the team, right now, is downselecting, doing supplier visits and entering into detailed negotiations to make award decisions. We'll be making those award decisions across the commodities here over the next couple of months. And then we will begin, by commodity, the transition phase to the extent that we do transition suppliers. So again, this year, it's investment with a little bit in the back end side, but really the improvement is starting to show up in 2019 and beyond.

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Stanley Stoker Elliott, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [60]

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Perfect. And then, secondly, was there any sort of a time frame on completing the repurchase authorization that you guys have outstanding right now?

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John L. Garrison, Terex Corporation - President, CEO & Director [61]

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No. There's no real timeline. It's just based on market fundamentals and market dynamics.

Thank you for your interest in Terex. And again, if you have any follow-up questions, please don't hesitate to reach out to Brian. And just -- as I've said during the course of the call, we're off to a strong start this year. We're encouraged about what we have going forward in the future and we're excited about the opportunities here at Terex.

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Operator [62]

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This concludes today's conference call. You may now disconnect.