Terex Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Terex Corporation third quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Brian Henry, Senior Vice President of Investor Relations. Sir, you may begin.

Good morning, everyone, and thank you for participating in today's third quarter 2019 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 third quarter 2019 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. First, I want to thank our global team. for their intense focus on creating a zero harm safety culture, delivering value for our customers and their commitment to implementing our strategy. Looking at the global market environment, it became clear to us towards the end of the third quarter that we are in a softening environment for industrial equipment. Demand in the major markets for aero work platforms has declined, putting pressure on sales. We lowered production in the third quarter, and are reducing production in the fourth quarter to align with global demand, which is impacting margins. A bright spot for AWP continues to be growth in China. In the quarter, materials processing continued its strong performance, increasing sales and generating over 15% operating margin again. However, bookings and backlog levels are pointing to weaker demand in their global markets. In this environment, I was very pleased with our free cash flow performance as we regenerated $104 million in the quarter, a significant improvement compared to last year. Our global team continues to focus on generating cash and improving working capital efficiency. As we enter a more challenging macro environment for industrial equipment, we are intensely focused on maintaining a strong liquidity profile. We are well positioned entering the fourth quarter with approximately $1.1 billion in available liquidity. One of the commitments we made back in 2016 was to generate returns greater than our cost of capital throughout the cycle. By executing our strategy, focusing the portfolio on great businesses, dramatically improving our balance sheet, reducing corporate overhead, and making significant improvements to our operations, We are well positioned to deliver on that commitment and have the ability to execute at a high level through the challenging phases of the equipment cycle. I acknowledge and the team understands that we have more work to do as a company to establish a consistent high level of execution across our businesses. Turning to slide four, we continue to implement our strategy and enhance the capabilities needed to win in the marketplace. A core element of our Execute to Win business system is talent development. We recently completed our annual talent review process. This is a global activity that requires every leader in the company to evaluate his or her team, update development plans, and address talent gaps. As I travel to our sites around the world, I'm always encouraged when I meet emerging leaders. We have many high energy, passionate team members that are taking on more responsibility. To harness this talent, we're investing in company-wide leadership development and mentoring programs and supporting local training initiatives. From a leadership perspective, we recently announced that three executives who I would describe as builders of Terex, Eric Cohen, Kevin Barr, and Brian Henry, will be leaving the company at the end of the year. Eric led the legal function and provided counsel to the senior leaders of Terex for 22 years. Eric was instrumental in the company's acquisition and disposition strategy and building and improving the company, including establishing our corporate governance and ethics and compliance strategy. Kevin joined Terex 19 years ago to build the human resource function. He was a leader in implementing the cornerstone of our culture, the Terex Way values. The fact that we have internally developed leaders taking on these executive roles going forward is a testament to the quality of the talent development structure that Kevin put in place. Finally, many of the folks on the call have worked with Brian Henry. Over his 29-year career with the company, he has been a driving force in the strategic decisions, including the acquisitions and divestitures that shape the Terex of today. I want to thank Eric, Kevin, and Brian for the many contributions they have made to Terex over the course of their distinguished careers. I want to thank each of them for their insights and counsel. Turning to slide five. We continue to make progress implementing our strategy. In August, we completed the sale of DMAG mobile cranes. Team members from across Terrax worked incredibly hard to close the sale and ensure a smooth transition. In the remaining rough terrain and tower crane businesses, we rebuilt our commercial organization to position the businesses for success. We are committed to these businesses and investing to support our customers into the future. We continue to simplify Terex. We completed the transition to a two segment organization. A significant portion of the general and administrative costs associated with the former crane segment has been eliminated. The simplified structure also allowed us to reduce expenses in our corporate functions. Our leadership team continues to scrutinize every expense to ensure our operating model is efficient and appropriate for the current structure and market environment. We continue to execute the organic growth element of our disciplined capital allocation strategy by investing in innovative products and services and our global manufacturing capability. The new utilities manufacturing site in South Dakota remains on schedule and within budget. MPs expansions in India and Northern Ireland are on track. The new CANSI facility, pictured here, celebrated its official opening last month. The new site manufactures mobile conveyors and ecotech waste management and recycling equipment. These investments enable simplification, improve manufacturing productivity, and underpin our long-term growth. We also continue to invest in our execute-to-win priority areas. Our commercial excellence team achieved a significant milestone in the quarter. by completing the final deployment of Salesforce. All of our businesses worldwide are now on the system. And Lifecycle Solutions, the leadership team is in place. We're investing in systems and infrastructure to enable longer-term growth. A high-performing parts and service business is important throughout the cycle as demand for new equipment moderates. Finally, we continue to implement our strategic sourcing program as we are moving significant volume to new suppliers. Lower production volume, which is reducing spending levels, is impacting the overall savings. However, we are achieving good savings rates. Based upon AWP's lower production levels and spend forecast, we expect savings of approximately $25 million this year. Turning to slide six, based on our year-to-date performance, the slowing global market environment, reduced production volume, and adverse foreign exchange rates, We now expect full-year EPS to be between $3 and $3.20 on net sales of approximately $4.4 billion. While we continue to focus on working capital and improving cash flow, we are adjusting our free cash flow guidance for 2019 to approximately $110 million based on our updated earnings outlook. Looking ahead to 2020, While we're not providing financial guidance today, from an operational perspective, we are planning for sales to be potentially 10% lower than 2019 due to the softening macro environment for industrial equipment. We are planning conservatively but are ready to react to the changing market conditions.