Terex Corporation

Good morning, my name is Shelly and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2018 Terex Corporation earnings conference call. All lines will be placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. And if you would like to withdraw your question, press the pound key. Thank you. Brian Henry, Senior Vice President, Business Development and Investor Relations. You may begin your conference.

Good morning, everyone, and thank you for participating in today's fourth quarter 2018 Financial Results Conference Call. Participating on today's call are John Garrison, Chairman 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. We have released our fourth 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 adjusted for 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 two, 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 three, and I'll turn it over to John Garrison.

Good morning, and thank you for joining us and for your interest in Terex. Overall, our global team executed well in the fourth quarter, completing a year of significant growth and considerable earnings improvement. We made progress implementing our strategy and are seeing the results in our performance, expanding operating margins, and doubling full-year earnings per share. Our global markets remain strong. We increased backlog in every segment, up 19% overall. This growth is on top of the strong backlog we had at the end of 2017, a clear indication that our commercial strategies are working and the markets we serve continue to grow. AWP grew sales by 24% in 2018 and expanded their operating margin by 200 basis points. We are encouraged by the strength of the North American rental markets, where our customers continue to anticipate growth and continue to increase Their capital expenditure plan. Crane's delivered on its commitment to generate a profit in the fourth quarter. Improvements made in materials management enabled better manufacturing productivity and customer deliveries. MP continued to execute at a high level, growing their fourth quarter sales by 20% and expanding operating margin by 150 basis points. For the full year, MP grew sales by 17%, and increased operating profit by 32%. A great year for our global MP team. Turning to slide four, we made progress implementing our strategy in 2018. An area of intense focus for us is safety. We're developing a zero harm safety culture across Terex that puts safety first in every aspect of our business. We continue to make progress in 2018, reducing our lost time rate by 27% and improving total recordable rate by 13%. Good results by our team in a year that saw us onboard thousands of new team members across our global sites. It is important to understand that safety performance is highly correlated with overall performance. Companies that execute well on safety execute well in all aspects of their business. Turning to slide five, we have announced the sale of our DMAG mobile cranes business, which sells all-terrain and large crawler cranes produced at our facilities in Freiburg in Germany. The DMAG mobile cranes business has been an important part of Terex for many years, with dedicated team members that have made significant contributions to Terex and to the crane industry. However, after a strategic evaluation, we determined that as a standalone business, DMAG Mobile Cranes was unlikely, within an acceptable time period, to out-earn its cost of capital over the cycle. The combination is based on strong industrial logic. The DMAG Mobile Crane business will become part of a global crane company that is well-established in the industry. Subject to customary regulatory approvals, We expect this transaction to be completed mid-year, and we'll use the proceeds to invest in our existing businesses and reduce outstanding borrowings. We're also exiting the North American Mobile Crane product lines, manufactured in Oklahoma City. These changes will simplify the OKC operation, which will continue to produce telehandlers and refurbished units for AWP and products for materials processing. Reshaping our mobile cranes portfolio is consistent with our strategy to focus on businesses that provide the greatest return to our shareholders. These actions will significantly increase our operating profit, margins, and earnings per share, and will improve our free cash flow and lower our net leverage. We will continue to manufacture Terex-branded rough terrain, tower, and pick and carry cranes. We will also maintain parts, Thank you for joining us today. Our global team will continue to provide exceptional service to our customers. Turning to slide six, during 2018, we continued to implement the simplify and execute to win elements of our strategy. We initiated strategic investments to expand our global manufacturing footprint, including the new utilities manufacturing center in South Dakota and MP locations in the UK and India. These actions are consistent with our disciplined capital allocation strategy. Execute to Win is about dramatically improving our capabilities by investing in people, processes, and tools in our three priority areas, commercial excellence, lifecycle solutions, and strategic sourcing. The improved process discipline from our commercial excellence program is translating into growth and margin improvement. We continue to develop our parts and service organization in the fourth quarter and completed the implementation of a new best-in-class parts pricing system in AWP, utilities, and portions of the MP business.

Finally, our strategic sourcing initiative continues to make progress.

Savings associated with our Wave 1 award decisions are in line with our objectives and implementation is underway. On a continuing operations basis, we anticipate savings of approximately $75 million to be realized by 2020. Turning to slide seven, we have an aggressive strategy deployment plan for 2019. We will complete the DMAG mobile crane sale and exit the OKC mobile crane product lines. Our team has a proven track record of executing these types of transactions. We will continue to reduce general and administrative expenses to reflect the more focused portfolio while continuing to invest in our strategic priority areas, including engineering, new product development, and innovation. We also plan to invest approximately $140 million in capital expenditures in 2019, substantially more than 2018. The increased investment will fund manufacturing capacity expansion underpinning our multi-year global growth strategy. Our commercial excellence teams will focus on improving the customer experience and driving process discipline by completing the deployment of the Terex proven sales process in Salesforce.com. Our global parts and service organization is taking shape. The team has an aggressive plan to improve operations, which will dramatically improve customer service. Finally, on strategic sourcing, Implementation teams in each of our manufacturing facilities are working through supplier transitions, starting with the highest impact opportunities. On a continuing operations basis, we are planning to achieve savings of approximately $35 million this year. Turning to slide eight, the 2019 guidance we are providing today is based on our continuing operations, which excludes the elements of our former crane segment, that we are divesting and exiting. We expect these portfolio actions and the ongoing implementation of our simplify and execute to win strategy to dramatically improve our financial performance again in 2019. We expect to increase sales and significantly improve earnings per share and free cash flow. Overall, we're excited about 2019. We will execute our plans to deliver strong financial results and make fundamental changes that will dramatically improve Terex for years to come. With that, let me turn it over to John.

Thanks, John. Let me begin by reviewing our Q4 segment highlights. AWP increased sales by $86 million, or 19% compared to last year, driven by growth in North America and Asia. Fourth quarter bookings were similar to last year at a very healthy $831 million, fueling year-end backlog of $868 million, a 14% year-over-year increase. AWP's operating margin of 4.9% was significantly impacted by material cost headwinds, including higher steel costs, direct and indirect tariffs, and unfavorable product mix. Moving to cranes. Improvements in materials management and operational performance enabled revenue growth of 12% and, as expected, the crane segment returned to profitability in the fourth quarter. Materials processing closed out the year with another excellent quarter. were $340 million, up 20%, driven by global demand for crushing and screening products, material handlers, and environmental equipment. The MP team increased year-over-year operating profit by 34% and expanded operating margin by 150 basis points despite material cost headwinds. Backlog grew 54% to $490 million. Both AWP and MP are well positioned for another strong year heading into 2019. Let's turn to slide 10 to review our Q4 consolidated results. Total sales increased by 16%. MPs higher operating margin and lower corporate expenses more than offset the impact of margin pressure at AWP, leading to overall margin expansion and 30% higher operating profit on an adjusted basis. Investment in our transformation program and asset impairment charges related to our Oklahoma City-based cranes operation were the primary differences Thank you for joining us today. We reduced our effective tax rate in the quarter to 18% to account for our full year tax rate of 22%, which is lower than our previous estimate due largely to tax settlement outside the United States. On an adjusted basis, we generated earnings per share of 51 cents, 55% greater than last year. Turning to slide 11. Overall, 2018 was a good year for Terex. AWP achieved global sales of approximately $2.6 billion and expanded its operating margin by 200 basis points. MP had an excellent year, approaching $1.3 billion in global sales and expanding its operating margin to 13.1%. Cranes underperformed through the first three quarters, inhibited by supply chain issues, but returned to profitability in Q4. Overall, we grew sales by 18% to $5.1 billion, improved our operating margin by 160 basis points, and generated 52% more operating profit than the prior year. Executing our discipline Thank you for joining us today. We continue to deliver on our commitment to follow a disciplined capital allocation strategy. In 2018, we generated free cash flow of $15 million. Higher inventory levels, principally in AWP, and the timing of 301 tariff recoveries impacted cash flow. We expect to reduce AWP inventory during the upcoming selling season. We are making strategic investments in our businesses. In 2018, we invested nearly twice as much CapEx as the prior year, and we plan to substantially increase CapEx again in 2019, with the new utilities manufacturing facility in Watertown, South Dakota being the largest investment. We will continue to invest in our transformation priority areas at lower levels than in the past couple years as our internal capabilities are maturing. In Q4, we annuitized our U.S. pension plan, removing $109 million in gross pension liability from our balance sheet and eliminating future administration and funding costs associated with the plan. We continue to return capital to shareholders. Throughout 2018, we repurchased over 11 million shares of Terex stock, reducing our outstanding shares by 14%. Finally, we generated 17% return on invested capital in 2018 and are on track to achieve our 2020 objective of 20% ROIC. The Terex team has and will continue to generate shareholder value through the execution of our disciplined capital allocation strategy. Let's turn to our 2019 guidance. We expect to achieve significant financial improvement by executing the portfolio action that John described. In addition, We will benefit from the ongoing implementation of our Simplify and Execute to Win initiatives. The guidance we are providing today is for continuing operations, which excludes the elements of our former crane segment that we are divesting and exiting. We expect to increase revenue on a comparative basis by 3 to 6 percent to a midpoint of approximately $4.7 billion with operating margins between 9% and 10%. We anticipate higher interest and other expense up about $12 million due to increased borrowing and higher rates on floating rate facilities. Our 2019 tax rate assumption is 21%. We expect this operational performance to result in 2019 EBITDA between $465 and $525 million and pre-cash flow of $165 million. We expect 2019 earnings from continuing operations of between $3.60 and $4.20 per share. This represents an improvement Thank you for joining us today. I would like to point out that as a result of the recent winter storm in the Northwest United States, our AWP, Washington State Manufacturing Facilities, representing the majority of our North American production, have been closed for over a week. We are evaluating the impact of this unusual winter storm on our Q1 results. We have made several changes to the reporting structure of our business segments. Our utilities business is now included in aerial work platforms and the pick and carry business is in materials processing. The rough terrain and tower cranes businesses are in corporate. We expect AWP to increase sales by three to six percent on a comparative basis to a midpoint of approximately $3.1 billion and improve operating margins to between 10.5 and 11.5%. Materials processing is a consistently strong performer. We expect to grow sales in 2019, anticipating an increase of between 2% and 6% on a comparative basis to a midpoint of approximately $1.4 billion while achieving an operating margin of between 13 and 13.5%. MP operates several facilities in the UK. Our guidance assumes that there will not be any major disruptions associated with Brexit. We are taking precautionary measures to mitigate potential supply chain disruption and will continue to monitor events as the year unfolds. Finally, within corporate, we expect sales from the towers and rough terrain cranes businesses to be approximately $245 million. Corporate also captures the investment we continue to make in our execute to win initiatives. With that, I'll turn it back to Jon.

Thank you, Jon. I'll review our segments, starting with AWP, which now includes Terex Utilities. The global markets for the aerial work platforms are stable at healthy levels, and the North American utility market remains strong. Following a strong 2018, our AWP team enters 2019 with a backlog, including utilities, of $1.1 billion. The underlying construction, utility, and industrial markets in North America remain strong. Our rental customers continue to see improving rental rates and higher equipment utilization. Rental market growth and replacement cycle demand is driving the anticipated growth in 2019. Product adoption is continuing to fuel growth in China and other developing areas around the world. Material costs rose considerably in 2018, driven by higher steel prices and tariffs. We reset prices heading into 2019 to help offset these higher material costs. To improve margins, the AWP team is fully committed to executing their strategic sourcing plan, including transitioning significant volume to new suppliers. In the aerials market, The Genie brand is synonymous with technological leadership and innovation. The Genie team maintains a steady cadence of new product introductions and enhancements. In 2019, we'll continue to add more fuel-efficient hybrid products and fill out the extra capacity line. The extra capacity line is important for Genie as the new ANSI standards governing load levels take effect later this year. The AWP team used the NC standard chains as an opportunity to innovate and add customer value. Our new XC family of booms increases the platform capacity, allowing contractors to safely lift more workers, tools, and equipment. In some cases, a single XC machine can do the work of two competitive machines. These innovations were part of a long-term product development strategy. The Extra Capacity Line will create value for our rental customers and end users, another great example of Genie innovation. Now part of AWP, the utilities team will remain focused on implementing its manufacturing strategy and executing its new product and service development plans, designed to gain share in a stable market environment. In summary, our dedicated and passionate AWP team will continue to meet the growing demand of our customers around the world. Turning to MP, materials processing is a high performing segment that consistently delivers strong results and meets its commitments. MP finished strongly, increasing backlog by 55%. It's well positioned heading into 2019. Global demand for crushing and screening equipment is expected to remain strong. Construction activity, aggregate consumption, and environmental regulatory change continue to be the main demand drivers. Demand for material handlers is also expected to remain strong and the markets for our environmental products are growing. The MP team continues to expand its penetration into emerging markets for environmental and mobile crushing and screening equipment with considerable growth coming from India. Finally, our pick and carry business in Australia expects sales to remain steady in 2019 After achieving considerable growth over the past two years. New product development will continue to differentiate our MP businesses, with new crushing and screening products being launched in the PowerScreen and Finley lines this year. Our new FOOPS products are designed to open adjacent markets, including timber yards, ports, and other waste processing. To support MP's growth plans, The team is implementing a global manufacturing strategy to increase capacity in the UK, India, and China. The team will execute these plans throughout 2019 and into 2020. I expect our MP team to continue to execute at a high level and deliver on its plans again this year. Turning to slide 16. To wrap up our prepared remarks, our global tariffs team achieved significant growth and many meaningful improvements in 2018. We are taking action to focus the portfolio on high performing businesses. We will continue to execute our transformation program, simplifying the company and building capabilities in our execute to win priority areas. We expect to significantly improve our financial performance again in 2019. We are confident in achieving our 2020 objectives of 10% operating margin, and 20% ROIC. Finally, we will continue to follow our disciplined capital allocation strategy and create additional value for our shareholders. With that, let me turn it back over to Brian.

Thanks, John. As a reminder, during the question and answer session, we ask you to 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? James.

At this time, I'd like to remind everyone, in order to ask a telephone question, please press star then the number one on your telephone keypad. Your first question comes from the line of Jamie Cook from Credit Suisse. Your line is now open.

Hi, good morning. I guess two questions to start off. One, just on the announcement on the sale of the part of the crane business there. I'm just trying to understand... The timing, given that we're at the bottom of the cycle, would it make more sense to wait until the cycle improves and perhaps catch a better price tag? And just how we should think about your ability to compete competitively on the remaining crane business and whether or not that's strategic to you. And then my second question, just some help on the aerial guide. Obviously, as we look from 2019 to 2018, it's sort of an apples and oranges comparison. So within your core Ariel Business, can you help us understand what you're assuming in terms of volumes, price, cost, mix? Thanks.

Thanks, Jamie, and good morning. Just a couple comments on the transaction that we announced on Friday. First and foremost, it is consistent with the focus element of our strategy, selling the DMEG mobile crane business to Donald. I think if you take a step back and look at independent of where you are in the cycle, There's clear and compelling industrial logic for the combination in the global crane market. We ultimately believe that this combination will be good for the customers, team members, and our shareholders and it's going to create a combined company that's much stronger together than either of the companies could have been independently and they're a common core focus on the business of lifting. From selling the DMEG to Todano, we just think there's very strong, compelling logic independent of where one may believe you are in the cycle. As it pertains, the second part of the announcement, which is also important, is that we are exiting the OKC produced North American mobile crane product lines. And that we have an ongoing strategic analysis and review. And we basically came to the conclusion that the current and anticipated return profile of these products did not meet our criteria. would require substantially more investment in the time to get a return on that investment was not acceptable. And it was for that reason that we decided to exit those OKC product lines. Now, with that said, the crane businesses that we're retaining are strong businesses. The rough terrain cranes out of our Crespolano facility in Italy enjoy a strong presence, especially in Europe and the Middle East. We're going to continue to operate our tower cranes business, again, has a strong global presence and executes well. And our pick and carry business, which we're reporting under our MP segment, there's logic for that. That's an Australian, Southeast Asia-based business, strong customer overlap with our MP business, and that's a very strong performing business for us. and overall we'll talk about utilities. It's a very strong business. It's a business that we're excited about. It's a business that we're making significant investments in to continue to grow that. So overall we think the transactions that we've announced are going to drive substantial improvement, make Terrax stronger, improve our financial metrics and again are consistent with the focused element of our strategy. In terms of the, Jamie asked a question about the segmentation. Just looking at the revised segmentation and I'll let John kind of take over on the AWP side. Moving utilities into AWP, we think that makes sense. There are synergies on the product and the customer side and clear synergies on the service and support side between our utilities business and our AWP business. I spoke about the pick and carry business with MP. And again, the RTs and tower businesses are good businesses. that operate and execute well, and we think there's opportunity to invest and grow those businesses going forward. So those are the reasons why we announced when we did, and it entered into the transactions. John, would you want to comment on the AWP?

So in respect to AWP, as we indicated, revenues of $3.1 billion does include the Terex Utilities business, which comprises and a 9 to 10% operating margin. Therefore, the AWP growth rates, the 3 to 6% revenue growth and the operating margin that we are providing guidance for today wouldn't be different with or without the utilities businesses included.

Sorry, and your assumptions on price cost on access this year?

In terms of the pricing for AWP, Jamie, so the pricing actions that we're taking are designed to offset the higher material costs, and it does represent a majority of the revenue increase in our 2019 guide. I think it's well chronicled what's happened on material costs over the course of 2018. We've been very transparent with our customers about the cost increases we're seeing as we went into our 2019 negotiations. Our commercial excellence initiative, the teams are working hard on that to maintain process discipline and reduce any leakage that you get. It's a challenging pricing environment. The team's doing a good job. We're really focused on selling that value proposition of the acquisition price or cost to operate and residual value. met on pricing in AWP in 2019, our intentions to offset the input cost increases with our 2019 pricing. We did roll our surcharge from 2018 into our 2019 pricing. So that was designed to offset material cost increases that we'll see.

Okay, thank you. I'll get back in queue.

Your next question comes from the line of Stephen Fisher for UBS. Your line is now open.

Thanks. Good morning. Good morning, Stephen. Good morning, Jon. I wonder if you could talk about the visibility that you have to achieving the midpoint of the guidance in terms of what you're assuming for AWP orders for the second half of the year, both from the national rental companies and the independent rental companies. And then maybe since it's a bit of a wide range, what does the upper end and lower end of the guidance range reflect?

Thanks. I'll take the first part overall, kind of just looking at the markets, and then I'll have John talk about the guidance range. As you saw, we did end the year with backlog up 14%, and that's on our traditional AWP products. If you include the utilities business, backlog's up about 21%. What we're seeing in North America is the rental channel remains strong, and their CapEx plans show year-over-year increases. I will say that that does vary by major customer. There's good utilization, good rental rates. Fleet growth, we're anticipating fleet growth in 2019. Clearly, that's slowing over the 2018 fleet growth that we saw, but we do believe the replacement demand cycle is beginning to increase. That's North America. If we look at Europe, we're anticipating Europe to be flat. There's geopolitical challenges in Europe, and so year over year, we're seeing a flat impact in Europe. Again, mature market. We're seeing some of the replacement cycle kick in there. And we're continuing to see good growth in Australia, Asia Pacific, Australia, and China as we continue to see increasing product adoption. So we think we're going into the year in a reasonably good position with the backlog that we have for the year. John, would you like to comment on the guide?

In terms of our AWP guide as well as the overall guide for the company in the first quarter, I did mention in my prepared remarks the impact of the winter storms that we saw in the Pacific Northwest here over the last 10 days, which actually were quite unusual and resulted in our principal AWP manufacturing facilities being closed for over a week. We are currently assessing the impact of those winter storms on our results and may have some impact on the Q1 results for AWP. That said, we aren't anticipating that the storms would have any impact on our full year guidance that we're providing today. Our teams are now back up and running and they're meeting customer demand.

Thanks, but I guess curious, just sort of the upper end and lower end of the ranges, I mean, would upper end mostly be driven by buybacks or better than expected buying in the second half of the year or something in the remaining crane businesses, if you could kind of frame that range?

Yeah, I think that the ranges reflect the The markets in which we're operating and recognition that there is a lot of orders still to be booked for the full year that would play into that. Material costs also, you know, very dynamic area with respect to material costs and steel prices at the moment. So that's a factor that goes into the guidance range that we provided. The guidance that we're providing today does not include any share repurchase assumption, so it assumes the currently outstanding shares. So those are some of the factors, I guess, that I would refer to, Steve.

Okay, and then just to follow up, now that you have done some of the resegmenting, and I guess it sounds like on AWP maybe the margins are not that different, but just curious, Since you've talked in the past about 25% incremental margins for the business, how should we think about those incremental margins going forward for the overall company given some of this resegmenting and maybe within some of the segments?

We've talked about the expectation that we have for our businesses to achieve 25% incremental margins and That holds true, actually, for the remaining Cranes businesses that we still have in our portfolio. And so I wouldn't think about our expectation changing there in any material way.

Terrific. Thanks a lot.

Your next question comes from the line of David Rasso for Evercore ISI. Your line is now open.

Hi, good morning. You touched on this a little bit earlier about the remaining crane business, but sort of bigger picture, let's assume the Sedano proceeds come in, you're going to end 2019 with your net debt to EBITDA down about 1.2 times. And I'm just trying to think philosophically, Jon, now that we've made some hard decisions on the crane business, looking forward, and I know end markets, how they're acting will dictate this to some degree, but how should we think about how you think of the leverage? Any cash flow kind of beyond 19? How do you think about the business that historically tariffs have been pretty acquisitive? But how do we think about post-19 and the new framework and you running the company? How to allocate cash flow moving forward?

Thanks, David. Again, we embarked a couple years back on a strategy of focus, simplify, and execute to win. And the actions that we've taken over the course of time have been clearly significant. are all indicative of the focusing on businesses that have the opportunity to out-earn their cost of capital through the economic cycle. So we've also been focused on simplify, and we have more work to do as a result of the transactions that we've announced today. And then our execute to win priorities around commercial excellence, lifecycle solutions, and most importantly, strategic sourcing. We've made significant investments in strategic sourcing, and we need to begin to see the impact of that Margin. Around that, David, we've had a disciplined capital allocation strategy where we fundamentally believe in focusing and improving our free cash flow. We have to drive improvement in our free cash flow in 2019. And using that free cash flow to invest in organic opportunities, as you see, our CapEx for the year is up substantially. We believe those are significant returns to shareholders, these types of projects. So we're going to continue to invest in that. We're going to continue to invest in engineering and innovation. and if there's capital available, we'll continue to look at share repurchases and returning capital to shareholders via repurchases and dividends. So right now, David, I would not anticipate a significant change to the strategy that we've embarked on. As we grow, as we execute, there could be a change as we go forward in the future, but right now, we believe that the strategy we're on is driving value for our customers, our team members and our shareholders, so we're gonna remain consistent.

Can I take that answer to mean we should not think of a reduced leverage at the end of the year as a recipe to look toward acquisitions? It should be more about reinvest organically and more debt reduction or repo?

Is that a fair... That is a fair summary, David. Thank you for joining us today. And lastly, related to the asset sale, to Dono's interest in a tower crane business or even the RTs, where that conversation go? I would have thought that might be something they would also think would be attractive given to Dono's lack of

Exposure and Towers in particular.

David, I will just say that the conversations that we've had really did focus on the product lines in our Swybrook and our DMAG mobile cranes business. That was their principal area of interest and I think was a mutual area of interest for both companies. All right.

I appreciate it. Thank you.

Thank you, David. Sorry, your next question comes from the line of Andy Zinn from J.P. Morgan. Your line is now open.

Yeah, hi, good morning. Maybe you could talk a little bit more about strategic sourcing. You know, were you negatively impacted? You were looking for $40 million in savings and then $80 million by year 2020. You reduced those a little bit this morning. Can you just talk about what the impact of the sale of the mobile crane business had on strategic sourcing? Does it take out some of the volume, some of the savings? You know, just a little bit more color around... Wave 1 and Wave 2, please.

Thank you, Anne. Again, we're continuing to execute on the strategic sourcing process that we've outlined over the course of the last year, year and a half. You're correct, Anne. It did decrement the savings that we had anticipated slightly. Previously, we were anticipating about $40 million of savings in 2019 and $80 million of savings by the end of 2020. That was decremented by about $5 million in 2019, and that $5 million carried over into 2020. So I would say not a substantial decrement in the strategic sourcing savings. The significant savings in strategic sourcing really are being generated in our AWP business, to some extent some of the MP businesses. The teams are in the implementation phase now. Significant number of suppliers are changing hands. The good news is we are seeing the savings that we had anticipated. We are reducing the number of suppliers that we're working with, which I believe over time is going to help us. Clearly, it's been a very dynamic environment on the supply side to be engaged in a strategic sourcing process, but the teams are executing and we need to deliver savings this year and next year. And then As you indicated, our Wave 2 teams now are right in the middle of the process, beginning to get the RFPs and RFQs back, beginning to determine which suppliers we're going to visit to enter into detailed negotiations. So Wave 1's implementation, Wave 2's in the supplier selection process, and we're committed to continuing to execute this to drive margin improvements.

And, you know, John, I would just add in response to the previous question asking about what would drive us in the upper end and the lower end of the range, right? One thing that I didn't mention was strategic sourcing. That's certainly an opportunity that I should have mentioned. That's correct.

Okay, I appreciate that. And then a similar question on the $140 million of CapEx. Your depreciation is running about $53 million, so that's A significant multiple on depreciation. Can you just talk about specifically what you're investing in? Should we be concerned that we're over-investing at the peak of the cycle? Just give us some confidence in where that capex has been spent and why now.

Sure. Happy to, Anne. You know that if you follow our disciplined capital allocation strategy, it starts with making organic investments in the businesses that are going to drive growth for us in the future. The $140 million of capex that we're projecting for 2019, the largest single investment is for our Utilities Business and a new manufacturing center in Watertown, South Dakota. The utilities business, as I talked about a little bit earlier, is a $400 million business, 9% to 10% operating margin, and they're constrained in their ability to grow and to expand margins by the manufacturing industry. and all of the structure that they have in place today. So that's our largest business and we're really excited, our largest investment and we're excited about the investment in that business. Aside from that, we are also investing in Northern Ireland in our materials processing businesses. We also have IT investments that we're making in 2019. And you look, so that for 2019, The CapEx is exceeding the depreciation that we have, but I also would say that over time we do see our CapEx converging with the level of depreciation that we're spending. So good investments from our perspective. We're going to continue to follow the disciplined capital allocation strategy and generate strong returns from those investments for our shareholders.

Okay, I appreciate it. Just real quick, of the 140, how much is going to South Dakota? And then I'll turn it over.

Yeah, no problem. Roughly 50% of the capex for 2019 is related to our facility in Watertown, South Dakota.

Okay, thank you. I appreciate it.

Absolutely. Thank you, Anne.

Your next question comes from Steve Volkman from Jefferies. Your line is now open.

Hi, good morning. Morning, Steve. Maybe just a couple of cleanup items. What's the cash that you're expecting from the sale of DMEG?

We would expect to have net proceeds from the transaction of approximately $125 million, Steve.

Okay, thanks. And then would you expect any write-downs or charges as you exit the U.S. businesses?

So we did take a charge in the fourth quarter of about $6 million that's included in our US GAAP results here for the fourth quarter. We obviously will be winding down those businesses in the North American cranes. over the first half of the year. And at this point, I won't comment on whether there would be future charges that we need to take.

Okay, fair enough. And then maybe just sort of a bigger picture question, John, other John. I noticed you sort of still talking about your 10% EBIT margin target, but obviously the transaction gets you quite a bit of the way there. Are you being sort of aggressive enough in your view? Is there a way to take that target higher now that you have a different business mix, or is this still the right way to think about it?

I think right now, Steve, I think it is the right way to think about the business. Clearly, the announcements have taken us a significant way towards achieving that objective. We're going to continue to drive growth. You know, revenue and margin improvement in our MP and AWP business. Obviously, strategic sourcing is a very important part of that margin opportunity growth as we go forward. So, I would hold that for now and then, you know, as things unfold, we'll be back to you in terms of any potential changes.

Sounds good. Thank you.

Your next question comes from the line of Joe O'Day from Vertical Research Partners. Your line is now open.

Hi, good morning. Morning, Joe. Could you expand a little bit on the AWP 4Q margin and then the 2019 doesn't really seem to appear to carry over any of the softness that we would have seen in the fourth quarter, so just kind of what happened there and then the confidence and no carryover from that?

Yeah, sure. I'll start there, Joe. In terms of the fourth quarter for AWP, and I'll start with they had a really strong 2018 revenue up 24% expanded their margins by 200 basis points in the fourth quarter there were three primary issues that affected the segment first was material costs and that really had the largest impact on our operating margins it was really a dynamic period in the fourth quarter for material costs and especially when you look at the 301 tariffs and the impact both on a direct tariff as well as an indirect tariff basis. So material cost was the number one impact. Second were freight costs that were higher than the prior year. And then lastly, the product mix profile was unfavorable. We did have a higher share of telehandlers in the fourth quarter with a different margin profile. So we did have some challenges in Q4, but we did increase the overall operating margin for the business by 200 basis points over the course of 2018. From a looking forward to 2019 perspective, as John Garrison indicated earlier, our 2019 pricing does encompass the material cost increases that we experienced here over the course of 2018, including the fourth quarter. And so that's why the issues will not continue into the first quarter or into our 2019 guidance.

That's helpful. Thanks for those details. And then a second question on the remaining cranes piece and really the RTs and towers and Whether or not there's any synergy value to a broader product line from a revenue perspective and as you move forward without the DMAG line and some of the mobile lines, what that means from an ability to compete? Do you lose some of that synergy opportunity on deals and just kind of how you feel about your competitive positioning in those product lines with a much smaller Cranes footprint moving forward?

Yeah, thanks, Joe. You know, with respect to the RTs and towers, you know, both are stable in their profitable business with good relative market positions. Towers really has always been operated as an independent, you know, a fairly independent business, independent of the mobile crane operations. So, you know, frankly, I don't think there's going to be that much impact. There's not a lot of package deals, you know, with towers necessarily in mobile cranes. So we don't think there's going to be a significant impact there. On the rough terrain crane side, you know, it's going to be our global manufacturing center. There may be some impact in the North American market associated with RTs, but that Crespolano business has a very strong European RT presence and Middle East RT presence. Again, operates relatively independently of the other elements of the crane business. So we think there's opportunities for these businesses going forward. They're good businesses, well run, well managed, and we think there's opportunity for us as we go forward into the future. Thanks a lot.

Your next question comes from the line of Andy Casey from Wells Fargo Securities. Your line is now open.

Good morning, everybody. Good morning. Just a couple follow-up questions. On Joe's question about AWP, is there any delay that we should expect in the pricing realization outside of the one-week production issue that you mentioned?

No, Andy, the pricing for 2019 for the vast majority of what is in backlog is at 2019 pricing. So no, there should not be any impact. There's a very small number of units that carry over that we had, you know, a delivery commitment in 18 that, you know, for whatever reason we could not achieve that would carry, but it's a very small percentage. The majority of the backlog, the vast majority of the backlog is at 19 pricing.

Okay, thanks, John. And then on the The movement of towers and RTs into corporate and other, a few questions there. First, I'm not sure if my understanding is correct, but I historically thought RT was a bigger product for the North American market. First, is that right? And is that why you're highlighting EU and Middle East? You might have some dis-energies from the divestiture.

We were a little bit inverse compared to most. You're right, the RT market in North America is the largest market. Our relative market position there was the weakest. We have a much stronger market position in the RT business in Europe and Middle East. So we were a bit unique there compared to the overall industry.

Okay, thank you. Go ahead. Any incremental stranded costs from the divestiture incorporated into the corporate and other guide for 2019?

Yeah, so when you look at our, well, first, when you look at SG&A in total, SG&A in total for 2018 at 12.3% was actually below the commitment that we made in December of 2016 in our investor day for a 2020 SG&A target of 12.5%. When you look at the corporate and other segment. We have been centralizing costs into corporate, strategic sourcing, global parts, elements of the commercial excellence initiative, and IT are all examples of that. And to your exact question, there is in the corporate and other up to $20 million of stranded costs that we will be getting after and reducing over the course of 2019. So we're continuing to manage our overall cost structure as you can see by the discipline we've had in the overall SG&A as a percent of sales. But we're also going to continue to invest in the execute to win priority areas.

Okay, thanks, Jon. And then one last question on If I look at the placement of towers and RTs into corporate and other, historically, Terex has ultimately walked away from some of the revenue that you put into corporate and other. Can you discuss what metrics you're considering to determine whether that revenue that's now in corporate and other remains a part of Terex?

Yeah, the core reason we're putting it into corporate really has to do with the SG&A efficiency. Maintaining a three-segment organization with $750 million of revenue or so, we just didn't believe was efficient. And so these two businesses that have been put in, they're strong businesses. As I've indicated, they've operated relatively independent anyway. And these are in businesses that are strong market positions. Good return businesses that we're going to invest in to continue to grow those businesses going forward.

Thank you.

And your final question comes from the line of Seth Weber from RBC Capital Markets. Your line is now open.

Hi. Thanks for fitting me in here. This is Brendan on for Seth. Just kind of touching on AWP, again, your commentary has been very optimistic, very positive. and it was a little bit of a difficult comp year over year but I was wondering any more color you could give on the two percent decline this quarter in orders?

No I think just if you look at the relative backlog you know we had a very very strong 2017 we were able to build the backlog up 14 percent on a year-over-year basis off a very strong comp and so overall no I wouldn't read anything more into that it's still a good solid environment stable and healthy is what is the words that we've used, so I wouldn't read too much into that. I'd look more at the backlog and the relative size of the backlog, given that we had a strong backlog in 17. Okay, thanks. That's all for me.

I'd now like to turn the call back over to John Garrison for closing remarks.

Thank you all for your interest in Terex, and if you have any additional questions, please do not hesitate to follow up with Brian. Again, thank you for your interest.

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