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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question- and- answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. Brian Henry, Senior Vice President in Business Development and Investor Relations, you may begin your conference.
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 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.
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 three segments. We significantly improved our first quarter earnings per share compared to last year. We're 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 last year, Cranes 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 improvements 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 four. 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 five. 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 one 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 acquisitions. 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 three priority areas: commercial excellence, life cycle 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 will be training our entire sales team over the next two years. We are also implementing salesforce.com, a world-class CRM, which goes hand in hand with the structured sales training. We announced on Monday that Boris Schoepplein will join Terex on June 1st 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 provide an indication of the potential ahead as we implement the other wave one categories and launch subsequent waves. Turning to slide six. We are increasing our full-year guidance, building 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.
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 a 9.4% operating margin, 480 basis points higher than last year. In Q1 last year, AWP incurred a one-time $2.2 million charge associated with a 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 rates. 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 eight. 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 improvements we continue to make. Turning to slide nine. 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 break-even. We continue to expect MP operating margin of between 11.5% and 12.5%. The MP team is working to offset headwinds 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 and $440 million, approximately 45%-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 continue 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 continue to improve our balance sheet and reduce 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.
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 improvement over the longer term. Finally, we repurchased approximately 5 million Terex shares in the quarter for $205 million. As of March 31st, $120 million remained available under our previously announced share repurchase authorization. Based on market conditions, we will continue to buy back shares. We expect our 2018 ROIC to improve to approximately 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.
Thank you, John. Before I review the dynamics we're seeing in our segments, 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 tariff. 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 actions, we implemented steel surcharges on product lines that were impacted by the higher steel prices. As I 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 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 an 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 Xtra 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 7th, 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 dates 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 is the latest addition to the Demag line of all-terrain Cranes that is reestablishing the Demag brand as a global leader in the all-terrain segment. We're also introducing 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 established last year, MP exceeded its plan in the first quarter, and with strong markets and 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, six 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.
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 for questions. Operator?
At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Our first question comes from the line of Andy Casey with Wells Fargo. Line is open.
Good morning. Sorry about that. I would just like to get a little more information on Cranes. Is the cadence basically loss Q1, Q2, modest profit, and then a snap back in Q4? Is that what you are kind of thinking about?
Thanks, Andy. Yes. That is exactly the cadence that we are 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, will carry over into Q2, and then the back half of the year will return to profitability. Again, I think the good news on the Crane side is that the markets have stable. They are stable. We are seeing pockets of growth. The execution of the restructuring plan last year, we have got that out of the way. Now, it really is focusing on our assembly operations with our supply base to ensure that we have got continuity of supply and deliver to our commitment.
Okay. Thank you, John. Then just within the crane market, our checks kind of say all-terrain boom trucks 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?
Thanks, Andy. 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. In terms of rough terrain specifically, we are not seeing a significant pickup of rough terrain 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 not robust. But again, with oil prices increasing, we would anticipate to see that market begin to recover. But that is one right now that we have not seen the recovery like we have seen, and the improvement, I should say, like we have seen in all-terrain cranes.
Okay. Thank you very much.
Thank you, Andy.
Our next question comes from the line of Jamie Cook with Credit Suisse. Your line is open.
Hi, good morning.
Morning, Jamie.
I guess, a couple of questions just to follow up on the Crane segment. John, when you guys had talked about order strength before, you thought it was more product- driven versus the markets are improving. Are you getting more confident that the cycle's improving versus it's just a Terex- specific thing? Then my second question is, I was surprised by your ability to improve margins in the aerial business, in particular, given the material cost headwinds. Can you talk about are there mix factors, your success passing through price, just your confidence level there? 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. Thanks.
Thanks, Jamie. I think there's three questions there, so if I don't get all three of them, jump in, remind. In terms of the cranes market, again, it has stabilized with pockets of growth as we had anticipated. We have seen growth in our all-terrain cranes in Europe. We've 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 have also experienced a pickup. It was off a very low base, but we've experienced a pickup in our pick- and- 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. On the RTs I talked about. 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.
Okay, so fair to say it's just not a Terex new product introduction thing. There's something more here. That's what I'm saying.
I think so.
Okay.
I think so. Your second question was around-
It was just on the confidence in aerial margins that are mix factors, et cetera, that are in your success on price. What are your assumptions on steel today in the high end and the low end of your guidance?
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 multi-year 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. 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 in early March, and that will carry in for all new orders through the remainder of the year.
Finally, I'd just say with the margins at AWP that Matt and the team, the operations team, have really done a nice job of leveraging the incremental volume. They've executed quite well, really around the globe in our operations, in our facilities. So I think that what's really driving the margin is the operational improvement and really leveraging the volume that we've been able to achieve. John, do you want-
So there's no mix in terms of big booms or customer that's helping?
No, Jamie, I would say our mix is pretty much historical mix in terms of-
Okay.
-the type of customer and mix in terms of products. We've had good, strong backlog, good strong sales across our product lines, in that segment.
Okay, thanks.
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, or steel surcharge that we put into 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.
Okay. Thank you. I will get back in the queue.
Thank you, Jamie.
Our next question comes from the line of Ann Duignan with JP Morgan. Your line is open.
Hi, good morning.
Morning, Ann.
A lot of my operational questions have been answered, but just philosophically, maybe, can you talk about the steel surcharges in AWP and how you anticipate the large rental companies to react? 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, where we ain't taking no steel surcharge." Is there any precedent, or can you just talk about how you expect that conversation to go?
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. 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 costs, 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. 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.
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. Any orders that were in backlog prior to that were not subject to the surcharge. It really depends on the procurement strategies that specific customers use in their business, and it does vary by customer, Ann.
But is there any precedent for this? My point was the large-scale rental companies probably won't be back in the market till later in the year. How is that conversation going to go?
Well, again, we've been consistent, Ann, with the application of the surcharge across our customer base and will remain consistent. 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 has been and will be consistently applied as we go forward.
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? Are we short of chassis, or it just reminded me of when I was working in the Saturn car startup, they ran out of ashtrays. So I doubt like you're running out of ashtrays in this environment. But are we talking things that can be put in after the assembly, or are we talking core major components that basically shut down the assembly?
Thank you, Ann. In this case, it's across a couple of commodities that we've experienced disruption, and it has, in some cases, caused complete line stoppages. In other cases, we're allowed to continue to produce on the assembly line, but we're not doing it as efficiently and effectively, and it requires rework, which then drives the cost. In terms of supply commodity or types specific to cranes, we really had three that impacted us, that are impacting the pace of the schedule. The first one was electronics or wiring harness. That's actually a very smaller supplier that actually went into receivership. So we had to step into that supplier, help run, get materials, 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 in-source some. We have some of that capability. So we in-sourced some of the weldments, again, to drive better takt time, if you will, and on-time delivery. Then finally, we had a major international hydraulics supplier that was struggling, but it really was one specific plant that was impacting our production. 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.
Okay. You emphasized international hydraulics supplier as opposed to a U.S. hydraulics supplier. Am I reading too much into that?
Probably too much, Ann. Let's just say it's a well-known company, but I'm not going to mention any company.
Okay. I'll leave it there. Thank you.
Our next question comes from the line of Steven Fisher with UBS. Your line is open.
Thanks. Good morning.
Morning, Steven.
I think you've talked about $300 million as a sort of a break-even level for Cranes. This quarter 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?
Yeah. I'll take that one, Steve. Appreciate the question. The supply chain challenges that are affecting our mobile cranes business right now are really a temporary issue. During the course of 2017, through the restructuring of this Crane 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, and the supply continuity issues prevented us from building to the plan. As a result, we did experience the negative manufacturing performance that resulted in the larger loss than we had otherwise intended or planned for in Q1. But those issues, as I said, they're temporary. They will spill over into Q2 before the manufacturing normalizing in the second half of the year.
I think the bottom line to your question is we still see our break-even point for the segment at the $1.2 billion level, or $300 million of revenue a quarter. I would also point out that 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. We expect that the Crane segment will come back to profitability in the second half of this year.
Thanks. Yeah, that was part of my point because your bookings have an average of about $375 million a quarter over the last few quarters.
Yep.
It seems like that should start to really pick up in the profitability if operations normalize. Just as a follow-up to that, you guys have fixed a lot of things over the last year+, and it's starting to show through nicely into the results, but it still seems like there's some things that are coming up, like 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 be able to react to things more efficiently that are outside your control, like when these supplier issues come up?
Yeah. 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. If you really look at the AWP and MP teams, significant ramp-up in production, significant increase in their sales, great job executing on the higher volume, and driving the margin through on the higher volume. So really, we've got two segments that are executing well in a strong environment, managing the supply disruptions day to day. On the Cranes side, Cranes is a lower volume, highly specialized operation with much longer lead times. I think that has impacted our ability and the level that we would like to produce at. Suppliers are pacing that, so we're going to work with the suppliers to increase their capacity so that we can increase our capacity, especially on the Crane side.
Okay. Thank you very much.
Thank you.
Our next question comes from the line of David Raso with Evercore ISI. Your line is open.
Good morning. Thank you.
Good morning, David.
I have a question about the relationship of your backlog at Aerials and your full-year guidance. 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. It is to the tune of almost, if you put it in EPS terms, literally $1-$2 of earnings, right? The backlog is usually 25%-30% of the full year. At the end of the first quarter, right now, it is 36%-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 2019?
No, go ahead.
Yeah. So overall, David, as [we've] said, I think the markets are improving. The 18% growth, we think, is a reasonable growth forecast. Again, we have seen it across all the regions. It is a relatively short cycle business as you know. Our backlog, we are in a better position than we were a year ago in terms of backlog coverage. We have not seen a dramatic shift in terms of composition of backlog by customer mix, composition of backlog by product and/or timing. Again, we still need orders to close out the year. So we feel it is a reasonable forecast.
It is a forecast that the manufacturing teams believe they can achieve. So we are driving to that internally. Again, we will see how the year plays out. But I think the message that we would like to convey is that the overall Aerials markets globally is in a strong period.
We are 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 are excited about that.
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.
Yeah, I just want to make sure we are reading this properly because, again, I just want to make sure you are not indicating, A, we cannot 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 or 27.5% of the full year sales, you are literally talking a sales guide that could have been $500 million, $700 million, $100 million higher, which in EPS terms, with that incremental margins, a hugely different EPS guide, and I just want to make sure we are not walking away saying, "We got orders early. We see the orders slowing from the conversations." You do not feel that is the case?
No, David, we do not. Matt just got back from Europe. He spent a week in Europe, and he came back saying Europe has been strong, continues to be strong. We are seeing strong global demand in AWP around the world. The order rate, I normally do not like to comment in terms of mid-quarter, but the April order rate continued to be strong in our AWP business globally. We are not saying we think that there is a multi-year period of growth ahead of us for those factors that we said. In terms of a production standpoint, if you look at the rate of ramp that the AWP team has done, they have done a great job, and we are 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 have got the global footprint that we need and the capacity that we need going forward, to meet the potential demand that is out there. 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 are dealing with that appropriately for our customers and for ourselves. But all in all, we are feeling really good about where we stand on the AWP business as we look out.
All right. I appreciate the color. Thank you.
Our next question comes from the line of Mike Shlisky with Seaport Global. Your line is open.
Hey, good morning, guys.
Good morning, Mike.
I got my own follow-up question on your Crane operational issues here. I guess, if you're seeing any kind of shortages in certain parts or components, is that possibly happening elsewhere in the other segments? I know there are plenty of wire harnesses and plenty of hydraulics on your AWP, et cetera. Or is this just going to be confined to Cranes, and you've got it now in front of it for the other segments at this point?
Thank you. Right now, in terms of the other two 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 crane segment. The other, AWP and MP, are doing a really good job managing through it.
Okay. Maybe I can just do a bit of a gear switch here. 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 a margin perspective? Is it your view that parts can be a much bigger part of your sales going forward from where it is today?
Yes, we are excited that Boris is going to be joining us here. He's actually going to start, as the announcement said, on the 1st of June. 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 channels, so Boris will take the lead in that. How do we optimize our pricing in that space? Then how do we integrate our services going forward? The parts and services will still continue to be reported within our respective three businesses. We think that's important.
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.
Okay, thanks. I'll hop back in the queue. Appreciate it.
Thank you.
Our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open.
Good morning, everyone. This is Ben Burud on for Jerry.
Good morning.
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?
Yeah. In terms of used equipment value, again, stable to a slight increase, especially on the AWP side. We saw some real stabilization and some improvement in used equipment values. On the Crane side, I think the word is stable. It is not robust. We are taking in trades on new equipment sales. We are able to realize the values that we had 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 would use is stabilizing, and the rate of decline has definitely slowed in used equipment values.
Got it. 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? I believe that is a double-digit margin business. Can you kind of frame the margin expansion opportunity there as well?
Okay. Go ahead. Go ahead, John.
Maybe I will start, and then John can jump in with the broader utilities business. The utilities business is a very steady performer for us and one that performs really well. We do not break down the financial results of the Crane segment into the individual components, so I will not comment specifically on the margins within the business itself other than to say, as I said, it is both a very strong performer for us, and, number two, a consistent performer, and that we really like both of those aspects of the business.
Yeah. I would just add, it is a core business for us. We are making the investment. It is a business that is kind of grown organically in the Watertown area over the last 40 years, and it is really suboptimal from a manufacturing operations customer interface perspective. We are excited about the investment that we are making. We are excited about remaining in Watertown. Great support from the state of South Dakota, great support from our team members there. The utilities business, if you think about infrastructure, we have become a digital society. That requires electricity.
There are investments that need to be made in transmission and distribution along an electrical grid. We think we are well-positioned to take advantage of those trends longer-term, and we are 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.
Overall, utilities is a good core business for us. That is why we are making the investment in that business. Again, its demand profile is a little bit less cyclical than some of the other demand profiles that we have in some of our other businesses. That is the other reason we like that demand profile in utilities.
Got it. Thank you.
Our next question comes from the line of Courtney Yakavonis with Morgan Stanley. Your line is open.
Hi. Thanks. 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 till the third quarter for it? How much of the guidance raise is really just related to the surcharge versus FX versus the accelerating replacement cycle that you guys have been talking about? Do you think any of this growth is in excess of the replacement cycle and really contributing to fleet growth?
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. As it relates to the steel surcharge, the steel surcharge relates to all orders after March 7, and therefore, 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. 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. 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. It'll flow through in the second.
Both aspects will begin to flow through in the second quarter. I don't know, John, you want to
No, I think that's fine.
Okay.
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?
Yeah, no. In terms of, 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 two 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. That's helping to drive that demand. Then that, coupled with we're entering into a replacement cycle, is why we believe that 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.
Okay, great. Thanks. Then just switching to MP, you guys guided up on the sales there, but didn't adjust the margin guidance to slightly lower incremental. I was just curious, is that a place where you guys are seeing some more price cost pressures? Is the surcharge also flowing through over there?
Well, thanks. MP is a great performer for us. It's been a consistent, strong performance in 2018. If you look at their performance, sales up 22%, operating profit up 41%, 160 basis point margin improvement. If you look at their backlog up 77%. 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're seeing 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. We've also expanded our distribution and our market coverage there. 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.
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. John, did you want to comment on the margin?
Yeah. So the MP team achieved an incremental margin in the first quarter of 19%.
The incremental implied in the guidance we provided today is a 14% incremental margin. 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. That said, Kieran Hegarty and the entire MP team are really strong operators of their business, and they will maximize their opportunities in 2018.
Great. Thanks, guys.
Our final question comes from the line of Stanley Elliott with Stifel. Your line is open.
Morning, guys. Thank you for fitting me in. Quick question on the sourcing piece. Could you remind us what the expectations were for the savings in the back half of the year? Has this inflationary cost environment changed the outlook in any way?
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, so the team right now is down-selecting, 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'll begin, by commodity, the transition phase to the extent that we do transition suppliers.
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.
Perfect. Secondly, was there any sort of a timeframe on completing the repurchase authorization that you guys have outstanding right now?
No, there's no real timeline. It's just based on market fundamentals and market dynamics.
Perfect guys. Thank you. Best of luck.
Thank you for your interest in Terex. Again, if you have any follow-up questions, please don't hesitate to reach out to Brian Henry. 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. We're excited about the opportunities here at Terex.
This concludes today's conference call. You may now disconnect.