Ladies and gentlemen, thank you for standing by, and welcome to the Terex Corporation third quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' 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. If you would like to withdraw your question, press the pound key. Thank you. I will now turn the call over to Brian Henry, Senior Vice President, Business Development, Investor Relations. Please go ahead, sir.
Good morning, everyone, and thank you for joining us for today's third quarter 2016 financial results conference call. Participating on today's call are John Garrison, President and Chief Executive Officer, and Kevin Bradley, Senior Vice President and Chief Financial Officer. Following the prepared remarks, we will conduct a question-and-answer session. Last evening, we released our third quarter 2016 results, a copy of which is available on our website at terex.com. Today's call is being webcast and is accompanied by a slide presentation, which includes a reconciliation of GAAP to non-GAAP financial measures that we will use during this call and is also available on our website. All per share amounts in the presentation are on a fully diluted basis. We will post a replay of this call on the Terex website under Audio Archives in the Investor Relations section.
Let me direct your attention to slide 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.
Thanks, Brian, and good morning, everyone. Thank you for joining us today. I will begin by providing an update to our strategy and our recent divestiture activities. Kevin will cover our financial results, and I will follow with our segment updates before we open the line to your questions. Focus, simplify, and Execute to Win. These are the key elements of our strategy. While we continue to operate in challenging markets, it's important that we aggressively address our current reality while taking the steps to position the business for the longer term. We are transitioning to a focused portfolio of businesses that compete in the aerial work platforms, mobile lifting, and mobile materials processing and handling industries. Each of these businesses is at a different point in their respective market cycles, and each faces different near-term challenges and opportunities. We are addressing complexity across the company.
We are simplifying our organizational structure and reducing our functional costs with the sale of the MHPS. We're also reducing our footprint across the company. Central to Execute to Win is commercial and operational excellence, which extends from the factory floor to all aspects of our business, including sales execution, pricing, as well as product and service innovation. We are taking action to ensure we consistently meet our commitments to our customers, shareholders, and team members. We are developing a winning culture centered on execution excellence. Turning to slide four. We continue to make progress on refocusing our portfolio. We completed the sale of our German Compact Construction business to Yanmar for $60 million in cash. Included in the sale was the manufacturing facility located in Crailsheim, Germany, and the parts distribution center located in Rothenburg, Germany.
The team executed well and closed the transaction on time in accordance with our plan. We're also on track to close the sale of MHPS to Konecranes in early 2017. Turning to slide five. Terex's history as an acquisition company has created complexity throughout our organization. This complexity impacts our ability to leverage our scale. We are taking action to address this and simplify the company. An important step was streamline our operating structure from five segments to three. It simplifies reporting and increases accountability, and it's critical to reducing our overhead structure. We announced several footprint reduction actions. We successfully executed on schedule the complex move of our mobile crane production from Waverly, Iowa, to our facility in Oklahoma City. The material and equipment have been moved, and we're ramping up production in OKC.
The soft market condition enabled us to make this move that will benefit us for years to come without disrupting deliveries to customers. Our AWP segment is consolidating the scissor-lift manufacturing from three locations to two and reducing its overall manufacturing footprint, including its main campus in Redmond, Washington. AWP also closed a facility in Stockton, California, and recently announced plans to close its Waco, Texas, facility, consolidating into Oklahoma City. We're also on track with the closure of our Austrian MP plant, moving its products to our facilities in Northern Ireland. The Austrian plant will close in the fourth quarter. Turning to slide six. We continue to deploy the Execute to Win business system. The third quarter focus was on our talent review process. We conducted detailed on-site reviews around the world.
We will continue to work to ensure that we have the talent and leadership necessary to execute our strategies. Let's turn to page seven for an update on the MHPS sale. During the quarter, the European Union approved the transaction, subject to Konecranes divesting of STAHL CraneSystems. They also received approval in the U.S. from both the antitrust and CFIUS authorities. In addition, the Konecranes shareholders voted in favor of the transaction. Both teams are working through the close process. The transaction remains on schedule to be completed in early 2017. As we indicated last quarter, MHPS is in Discontinued Operations. We are not reflecting any of the benefits of the transaction, the 25% equity interest, the Konecranes dividend, and the proceeds from the sale that will strengthen Terex's balance sheet. These benefits will be realized after we complete the sale.
With that, let me turn it over to Kevin.
Thanks, John. Good morning, everyone. Please turn to slide eight and I'll review our financial performance. We reported earnings per share in the third quarter of $0.31, and earnings per share as adjusted of $0.19. We achieved a net benefit from non-recurring items in the quarter, driven by favorable tax treatment associated with the recognition of tax benefits for certain net operating losses. We generated net cash from operating activities in the quarter of $106 million, and free cash flow of $47 million. We repurchased $80 million worth of Terex shares in the quarter, consistent with our capital allocation strategy. Backlog at the end of September was down 9% on a year-over-year basis. Declines in Cranes and AWP were partially offset by growth in backlog in our MP segment. Slide nine summarizes the comparative quarterly income statement on an as reported and as adjusted basis.
Net sales for the quarter decreased 16% compared to the prior year, down approximately 14% on a currency-neutral basis. Crane sales declined by approximately 25%, which was more than we had anticipated. AWP sales were down 17%, and MP was down 4%, or about flat on a current FX basis. Our operating margin was 3.7% compared to 7.3% last year. Excluding non-recurring charges, our operating margin was 4.6%, down from 8.5% last year. Lower volume, unfavorable mix, pricing pressure, and operational factors, partially offset by cost reduction activities, were the primary drivers of margin compression. Return on invested capital was 25.6% compared to 9.7% in 2015, driven by tax benefits. Let's turn to slide 10 and I'll review our guidance. We were disappointed with the overall performance in the quarter, and the impact it is having on full-year expectations.
We executed well in certain areas, but that was more than offset by the shortfall in our Cranes segment. Our previous estimate for full-year AWP sales was a decline of approximately 15%, with operating margins of between 8.5% and 9.5%. We are improving that slightly to sales down approximately 13%, with an operating margin of approximately 9.5%. In our Cranes segment, we had forecasted higher volumes in the third quarter. However, the global crane market continued to weaken. We had anticipated an improvement in product mix, but our more profitable products were disproportionately impacted by the market decline. In Germany, changes in subsidies in the wind energy sector led to a reduction in crawler crane sales as customers digest the impact of these changes. Lower volumes also impacted our ability to improve absorption rates in our factories. In addition, quality issues resulted in increased warranty expense.
We expect many of these trends to continue into the fourth quarter. As a result, we are lowering our full-year outlook for Cranes. Sales are now expected to be down approximately 20%, with an operating loss of approximately 2.5%. We are maintaining our previous outlook for MP and lowering the estimated operating loss from corporate and other to approximately $40 million. We are addressing all elements of our cost structure and will continue to reduce our cost base in the fourth quarter, but it will not be enough to offset the impact of the challenges in our Cranes segment. As a result, we are revising our full-year continuing operations sales outlook to between $4.2 billion and $4.4 billion, with earnings per share of $0.70 to $0.80, and free cash flow of $150 million to $200 million. With that, let me turn it back to John.
Thanks, Kevin. Starting with AWP, I'll provide an overview of our segment performance. 50 years ago, an innovator named Bud Bushnell saw a need in the marketplace and developed an innovative solution in his garage in Seattle. That simple pneumatic lift was the seed that grew into the global leader that Genie is today. That same innovation was on display at the Genie 50th anniversary celebration in Seattle in September, where we launched the innovative Genie Xtra Capacity, or XC product line. This family of boom lifts responds to a widespread need to enable people to work at height safely with heavier loads using a single machine. These products demonstrate our commitment to invest in new products throughout the cycle. Over 200 customers from 47 countries joined us at the 50th anniversary to celebrate and focus on building a future together.
Looking at the third quarter, sales were in line with our expectations, down about 17% from last year, driven by the replacement cycle decline in the North American rental market. Our European volume is up year-to-date, but sales slowed in the quarter as the market began to level off. Latin America remains very weak. Asia, on the other hand, was up sharply in the quarter, driven by growth in China and South Korea. Lower volume, foreign exchange, and pricing pressure were the primary drivers of the margin compression, offset in part by the ongoing SG&A reduction actions. The AWP team is taking action. It lowered its SG&A by over $4 million in the quarter compared to last year and continues to rationalize its manufacturing footprint. We also reduced inventory by about $75 million year-over-year.
Pricing discipline starts with aligning supply with demand. We intend to manage our inventory appropriately. We expect to close out 2016 with full-year sales slightly better than our original guidance. Global pricing dynamics, geographical mix, and lower production volumes, offset in part by cost reduction actions, will continue to pressure our margins in the fourth quarter. Looking ahead to 2017, the most influential market dynamic will continue to be the North American replacement cycle. We are in the midst of a reduction in replacement demand as a result of the 2008-2010 market decline, which is impacting our sales and backlog. We expect this dynamic to continue through 2017. We'll work with our customers through the fourth quarter to develop a clearer picture of their demand. Moving to Cranes. The third quarter did not unfold the way we had anticipated for our Cranes segment.
I'm disappointed with our results. With few exceptions, all major crane markets were down. In North America, we continue to see reduced demand due to the overhang of the oil and gas boom and then bust cycle. There are a significant number of relatively low-hour used cranes that are available on the market, which continues to reduce the demand for new cranes. No other sector or region has offered a counterbalancing stimulus to offset this headwind. In Europe, the crawler crane market was disrupted by recent changes to Germany's wind power subsidies. Although the long view is for growth in this sector, customers are cautious and postponed, and in some cases canceled their orders as they try to understand the implication of the recent changes. The Latin American market reached a new low in the quarter.
Not nearly enough to offset the broad-based global declines. We are taking action to address our performance. As we announced last week, Steve Filipov is the President of Terex Cranes and will lead the turnaround process. Steve started his career at Terex in the crane business and previously served as President of Terex Cranes. Steve's intimate knowledge of the crane industry and its customers makes him the best person to improve and grow this segment. We completed the relocation of our North American manufacturing from Waverly, Iowa to Oklahoma City. In addition, our French facility, which is a combined MHPS cranes operation, will be going to Konecranes with the sale. Our new Demag line of all-terrain cranes is selling well in a tough market. We also launched a 40-ton pick and carry crane in Australia.
This is another example of investing in our products throughout the cycle. Our current pick and carry sales in Australia are about a quarter of our historical average, driven by low commodity prices. This market will return, and we will be well-positioned when it does. Finally, the demand for utility products in North America was lower than last year. The lower volume led to factory under absorption and compressed margins. However, our backlog and bookings are up compared to last year, indicative, we believe, of an improving market for utility equipment. Turning to materials processing. Another example of the rich history of our company, Powerscreen, also celebrated a 50th anniversary this summer. I joined many of our Powerscreen dealers from around the world in Belfast to celebrate 50 years of power.
For half a century, MP has been at the forefront of innovation in the mobile crushing and screening market. That remains the case today. The MP team results were consistent with our expectations. The team continues to execute well, driving improved operating margins on stable overall revenue for the year. For the third quarter, our mobile crushing and screening sales were similar to last year. Aggregate markets are steady. The mining market remained weak. A headwind for the MP segment is the soft market for Fuchs machines, driven by low scrap metal prices. The team is working to expand distribution and diversify into other material handling applications. Concrete sales and profits were up sharply again in the quarter. The 46% growth in backlog. The 24% increase in bookings reflect continued strength in the mobile crushing and screening, and North American concrete markets.
In summary, our end markets remain challenging. We will continue to focus on our core businesses, simplify the company, and improve our fundamental processes. We will further reduce our cost structure consistent with our market reality while investing in products and services. We will make the changes needed to consistently deliver on our commitments. On another note, I'll be joined by our segment presidents and other members of the leadership team to provide further insight into our financial and operational strategies as we transform Terex into a simpler, more focused company. With that, let me turn it back over to Brian.
Thanks, John. As a reminder, during the question and answer session, we ask that you limit your questions to one and a follow-up to ensure we have time to get to everyone. With that, I'd like to open it up for questions. Lauren?
As a reminder, if you'd like to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Ross Gilardi of Bank of America Merrill Lynch.
Yeah. Good morning, gentlemen.
Morning, Ross.
My first question is just on Cranes. How comfortable are you that you can get back to Cranes breakeven in 2017 if end market conditions don't improve?
Thanks, Ross. I'm going to answer that in a broader context around restructuring activities. Kevin will take us through the timing and impact. As we focus the company and we simplify the company, on the simplified side, we're really focused on two aspects, our G&A reduction and our footprint rationalization. As you look at our performance and return on invested capital through the cycle, one of the challenges is, and especially in our Cranes segment, is that we have too much fixed cost for the market. We have been addressing that with the things that we've announced this year in terms of reducing our overall fixed cost in our Cranes segment, specifically the Waverly plant reduction. We're going to continue to look at our fixed cost, across the company, obviously in Cranes, as we move forward.
There will be more to come, as we begin to further implement and execute the plans. There's two other things that I'll talk about here. As we talk about restructuring as a broader organization, there is a bit of a limiting factor on how fast we can move, and the pace that we can implement complex movements. Waverly to Oklahoma City was a difficult and challenging move. The team did a good job. You need the talent to execute that complex move. We also, as we go around the globe, have regulatory challenges that we need to deal with as we implement our restructuring activities. Those two aspects will pace. We need to move quickly. We need to move aggressively. As it pertains to Cranes, Kevin will walk through the details of restructuring, the actions that we've implemented will get us a long way towards.
Our focus for 2017 is to drive a plan that gets us to break even on Cranes margins with similar type of revenue volume. We are not going to assume the market is going to rebound and recover. We are going to attack this issue through our product offering. We will continue to invest in engineering, but we have got to get after our underlying cost structure. That will be the focus of Steve and the team, is to put in place a plan that we can get to break even, no worse than break even on similar volumes in our Cranes segment in 2017. Kevin, you want to take it through a little bit of the details?
Sure, John. There has been a lot of restructuring. We have got another $5.8 million in Q3. Aggregate restructuring that we have called out from a cost perspective in the three-quarter cumulative is about $45 million. That has got an annualized benefit of about $49 million. We have said, from the first quarter restructuring charges, we would get about 75% of that in 2016, and we are still holding to that. That is about $22 million of benefit that is in our guide for 2016. In addition to that, the three quarters' worth of named restructuring would generate an incremental $26 million in 2017. That does not include what we talked about from an MHPS. You remember we got about $34 million full-year expense in corporate and other from the unallocated overhang from MHPS going into Discontinued Operations.
We are now saying we can get about $10 million of that, at least, in year in 2017 of that $34 million reduced, which would be an aggregate full-year reduction year-over-year in costs of about $36 million. To your question, Ross, we think there is about $15 million in the already named restructuring dollars that impact Cranes directly in a positive way for 2017.
Okay, thanks, guys. Can you talk about the 25% stake in Konecranes that you will take on in early 2017? How are you thinking about holding that versus monetizing it? Does a 25% non-controlling stake in a Finnish company really fit with your goals of simplifying Terex?
Thanks, Ross. The proceeds of sale from MHPS, first is the cash component, approximately $770 million on an after-tax basis. As we look at that clearly will go towards reducing our debt as we look at an optimal debt structure, capital structure of about two and a half times net debt to EBITDA through the cycle. The first element of the cash proceeds will definitely go towards repayment of debt. As you say, we have a 25% ownership interest. That is a liquid stock. It does provide us tremendous flexibility and liquidity in terms of what we can do with the asset. We do firmly believe in the fundamental business logic of the combination. I think you see the markets responding to that as a result of the Konecranes share appreciation. It does create a global leader in the lifting and port solutions business.
To your point, we also understand that we're not portfolio managers. As we look at that asset over time, we will determine what's in the best interest of our shareholders to maximize the return for our shareholders, realizing that our shareholders are not paying us to be portfolio managers. That's how we'd look at that asset over time, realizing, again, we're not portfolio managers. We get paid to operate companies. That's what we'll do. We do have this flexible liquid asset called the Konecranes shares. Over time, we'll look to see what's the best use of that asset going forward.
Thanks very much.
Your next question comes from the line of Nicole DeBlase of Deutsche Bank.
Yeah, good morning, guys.
Morning, Nicole.
I also have a question on crane. I guess, what does current capacity utilization look like? Given that we're theoretically getting pretty close to trough levels of volumes, or at least let's hope so, what's the ideal level of capacity utilization that you would want to operate at this point in the cycle?
We're doing an in-depth review and analysis of our capacity and capacity utilization. In basically no area around the world are we operating on multi-shift environments. All of our plants are at single-shift environments. The footprint capacity utilization is low. It's especially low in our overall Cranes segment. One of the things that we're looking at, Nicole, is now and then going forward is what's our revenue per square foot of manufacturing space, and then what do we need to drive that revenue per square foot going forward. As we develop those plans, that's a metric that we're going to be looking at. Right now it's in the low 400s. It needs to be considerably higher than that, going forward. That's how we're looking at manufacturing capacity utilization.
Okay, got it. That's helpful. Just with respect to the color that Kevin provided around the restructuring payback, the payback that you highlighted, the incremental payback for 2017, is that predominantly back-end loaded, or will you start to see the benefits in the first half of 2017?
Nicole, that's an in-year impact, right? That's during the full year. Obviously, it gets greater towards the end of the year. For example, a chunk of that would be the Waverly move to OKC. We think that's a benefit that we're going to be seeing in Q1. Some of the footprint-related impacts in Europe would be more towards the back half.
Okay, got it. Thanks. I'll pass it on.
Our next question comes from the line of Ann Duignan of J.P. Morgan.
Hi, good morning.
Morning, Ann.
Morning. I think in your opening remarks, you noted that each of your businesses are in different points of their cycle. Could you just walk us through where you think each of the businesses are relative to the cycle?
Yes. Thank you, Ann. As we look at AWP, in terms of the replacement demand, especially the North American rental replacement demand cycle from the 2008-2010 timeframe, that is clearly driving our AWP and where we are in the cycle because North America is still the lion's share of our revenue. Europe, as we said, we saw a strong first half on the AWP side. We're seeing some moderation of the growth, but Europe remains solid. Continue to see growth in the Asia Pacific region with our AWP segment. Then in Latin America, South America, and this is for all 3 segments, that part of the world is virtually getting close to zero in terms of sales. Latin America, across all 3 segments, it's getting close to zero. We're not seeing a lot of activity there.
That's how I'd describe where we think we are on the AWP side. On the Cranes side, we're clearly seeing continued disruption in the North American market associated with the oil and gas boom-bust as I talked about. I recently had a business meeting with one of our larger customers, and he was talking about how he had moved here recently 100 cranes that were basically sitting idle in the tar sands area of Canada and moving those to other applications in the U.S. In the cycle for cranes in North America, we are at or below trough levels for rough terrain cranes or boom trucks and the products basically that we're making now in our OKC facility. All-terrain cranes and crawler cranes are okay when you talk to customers in terms of the utilization. Their utilization is better on those products.
In North America, we'd like to believe at or bumping along the bottom of the trough. Europe has been solid, if you will, and not contracted quite nearly as strong as North America. We think that we did have a blip with this German subsidy issue that impacted us both from a mix and a volume standpoint. Again, when we talk about the Middle East Again, the Middle East is hard to gauge, but it's off, and I don't know if we can say that the Middle East area has hit more of a trough bottom yet. It is clearly off. That's how I'd describe the world on the Cranes side.
We don't sell a lot of cranes into Asia Pacific, but the ones we do sell are the larger ones that are important to us, and that is project specific. On the MP side, we're seeing some strength there as our backlog indicated, especially on our concrete business. We've seen an uptick on the concrete side. We've seen an uptick in North America on our mobile crushing and screening side. That market in the North American market appears to be recovering and we're seeing growth. Similar, steady, we don't see big swings in Europe right now. We don't have much of a presence, if any, in our MP business in China, that's something that we're going after. I will counter that we saw a very nice order that we'll receive in the fourth quarter here on our MP business in India.
They're starting to see some growth in there. The headwind for that segment is really our Fuchs business, material handling based on scrap metal prices. We're at or near that trough bottom, we believe. Our job there is to expand our product portfolio into other applications and expand distribution. As I go around our three segments in the world, that's kind of how we're seeing it, and we're not seeing any dramatic shifts going into 2017. Does that help, Ann?
Yes, it sure does. Thank you. Just a point of clarification, I know we'll probably get more of a long-term view in December, but given the eight-year replacement cycle in North America, AWPs, should we expect 2018 to be weak also? I'd ask the same question on oil and gas. We really have to soak up all this excess equipment in 2017 and probably into 2018. Is it possible that we bump along the bottom in those two segments for beyond 2017, do you think?
Thanks, Ann. Again, we'll provide more color at the analyst day. Right now I'd focus on 2017 and our crystal ball gets a little bit fuzzier as we go further out. Clearly the North American replacement cycle we're projecting and we'll determine how much down it is in 2017. Probably starting, we believe based on our models on the AWP side, seeing a recovery in that 2018 time period, and 2017 most likely being the bottom. Again, that's 18 months out, but right now that's how we're modeling it and that's what our information indicates. On the crane side, Ann, I think we've all been wrong there, I'm not willing to hazard a guess right yet in terms of as we look at it. We're continuing to work with our customers and model that and see.
Again, the thing that is helping, we don't talk about it a lot because there was so much capacity associated with the oil and gas, is the underlying construction market in North America, both non-res and residential construction is not bad. That will help to absorb some of the products that were in the oil and gas segment. When does it recover? We don't have clear guidance on that yet, Ann.
Okay. I appreciate it. I look forward to the December 13th event, I'll get back in queue. Thanks.
Your next question comes from the line of Mig Dobre of Baird.
Yes, good morning. Thank you for taking my question. Going back to Crane. I am trying to understand how you are thinking about the fourth quarter guide here, really in terms of the book to bill and the way you are thinking backlog is going to be positioned coming out of this year.
In terms of the backlog that we have, what we have in backlog is all out for delivery, obviously in 2016, and some of it will go into 2017 going forward. The overall backlog being down 21% is consistent with our sales view and our sales outlook. As we look at the business across the 3 segments, we see the most pressure on our mobile products. Towers are holding in there, and as I said, utilities we expect to see, based on our backlog, a modest recovery.
I just would add to that, Mig, in Q3 we did have a few cancellations and pushbacks. We are assuming, as I said in my comments, that some of those trends continue into the fourth quarter. Some of the backlog that might be deliverable from a scheduling perspective in Q4, we are assuming like in Q3, that some of that slips into next year and that is reflected in the guide.
Okay. Well, here's what I'm really trying to get at here. When I'm looking at your backlog, you're down, let's say you're going to have backlog down something like 30% year-over-year coming out of the fourth quarter. Orders are also down double-digits. Mathematically, in my mind, there's really no way we're not going to have a, call it double-digit decline on a top line in Cranes for next year. You're talking about having a goal internally to be able to get the business to break even if volumes are flat, but volumes are clearly not going to be flat next year. My question is, are you doing enough in this segment? Are we going to hear about more restructuring at the Analyst Day? How should we think about this?
Thanks, Mig. Clearly you're going to hear more about the restructuring activities in the Cranes side as we attack the underlying footprint. Yes, more work to come there. In terms of, again, we'll be providing more guidance as we get into 2017, but as we look at the markets, in some cases, the markets are at trough or near low levels that we haven't seen before. We anticipate and the teams and our focus will be to try to drive to a consistent level of revenue on a year-over-year basis. There is more downward pressure unequivocally than there is upward pressure, and that as we factor into our plans and what we're doing going forward, we're going to have to consider that in our restructuring activities. Okay, thanks.
Your next question comes from the line of Steven Fisher of UBS.
Thanks. Good morning. You talked about the $10 million of expected MHPS overhead cost savings in 2017. Should we then assume that the remaining $24 million would all be realized in 2018 or might that have a longer tail?
Right now, we're looking at about an additional $15 million, so cumulative of $25 million between the two years. Obviously, we'd like to do better than that, but right now that's what we've got line of sight to. We wouldn't get the full $34 million out until 2019. Obviously, we're working aggressively at that. We're hoping there's upside in the $10 million for 2017, but that's our math as we stand today, Steven.
Okay.
Part of that's coming from functional costs, finance, IT, HR, legal. We're sized, as you know, as a company, for a much bigger level of activity. Now that we're going from five to three segments, it's time for us to do some repair work on the corporate functional structure. We do need to wait a little bit until after we close the deal, obviously. We've got good plans in place, so we're thinking about $15 million incremental in 2018.
Okay. Can you talk a little bit about the competitive dynamics? Are you seeing signs of stabilization and pricing anywhere in your business, or are you anticipating that the year-over-year pricing headwind will extend for much of 2017?
As far as what we're seeing this year is clearly across the segments, especially in AWP and our Cranes segment, we are seeing competitive pricing headwinds. As we think about pricing in my opening comments, I think one of the most important things that we can do as a manufacturer is to balance supply and demand so we don't exacerbate a competitive pricing dynamic. We'll be focusing on ensuring that our production schedules meet the market demand so that we can help to influence a competitive pricing dynamic. Right now, pricing headwinds are a headwind, and we would anticipate them remaining a headwind as we look forward into 2017.
Okay, thank you.
Your next question comes from the line of Andy Casey of Wells Fargo.
Thank you very much. Good morning.
Morning, Andy.
We've touched on volumes and competitive pricing as a headwind. You've addressed a lot of that. Are you facing any additional incremental cost headwinds that might become bigger in Q4 than persistent to next year?
In terms of Q4, no. As we look at our material and our material spend, we have seen a modest blip a little bit on steel and steel pricing in the quarters. Again, that pricing reversed out. We've got about a 90-day lag. We are going to be pushing our strategic sourcing teams to help offset some of this competitive pricing dynamics and volume impact. Those are the two things as we look going forward. We don't anticipate anything further beyond that. Kevin, you want to comment?
No, not really in the cost category, obviously keeping a close eye on the impacts of Brexit on a translational impact. We should have kind of continued $2 million-$3 million drag on the translational impact from the currency drop. Other than that, John, I think it's really the steel side that we're looking at.
Okay, great. Then one follow-up on the corporate and other. You have some small group of assets in there. Are you looking at any additional dispositions?
We did move some of the smaller companies into corporate and other. The reason, as we look again, the screen that we look at is the business has scale and the opportunity to out earn its cost of capital through the cycle in a relative competitive marketing position. The businesses that we'll put into corporate and other are smaller businesses. They don't necessarily meet that characterization. So over time, we'd be looking to potentially dispose of those companies, assuming that we can get a reasonable value for the companies. Strategically, they don't match our screen, and so we would be looking for potential sales of those companies going forward. Again, assuming we can get reasonable value for our shareholders.
Let me just give a little bit more color on corporate and other, because I know we've been moving things in there. Our latest guidance for a full year loss of about $40 million. Now that includes the $34 million of drag from the MHPS unallocated costs, leaving you with about $6 million negative impact. That includes about $11 million of loss for the construction-related businesses that are in there for the full year. Then the rest, which would be things like Terex Financial Services, government programs, a little bit of the unallocated administrative costs from corporate would be kind of a net positive in corporate and other, just to give you a little bit of the anatomy.
Okay. Thank you very much.
Your next question comes from the line of Jerry Revich of Goldman Sachs.
Hi, good morning.
Morning.
John, in the past you've spoken about return hurdles across the portfolio of at least beating cost of capital through the cycle, obviously that's a challenge in Cranes. You've done some restructuring, I'm wondering, are you looking at more drastic actions beyond just the incremental facility restructuring that we've spoken about to get the type of market performance you would need to hit that hurdle rate, or does that goal still apply?
Thanks, Jerry. No, the goal still applies, we do believe that we can get the Cranes business. Historically, it has been a performer where it's earned significantly greater than its cost of capital. We believe that the goal is achievable. Clearly, we have to get after the underlying cost structure, that's what the restructuring activities are about. Both, I might add, in terms of physical assets, property, plant, and equipment, also we've got to get after our underlying cost structure within the organization. I will say that as we do this across all the segments, we're going to aggressively attack our G&A costs, we're going to protect the engineering and product development. That's especially important in Cranes because if we have updated products, we've seen that our customers will buy that, we can expand our scope and bring new customers in.
We will continue, despite the downturn, to invest in our products and services going forward. Then we just have to look at our global footprint and reduce the fixed costs and associated costs within the business to get us to a reasonable medium-term EBIT margin, operating margin that yields our 10% cost of capital hurdle. That's what Steve and the team is going to be focused on. Obviously, I'll be focused on this significantly as well going forward.
Okay. This year, you mentioned that the margin performance has disappointed you in Cranes, and obviously you've got the management transition. Can you just talk about what part of the turnaround didn't get as much traction as you had hoped for this year and how we should be thinking about Steve's action plans over the next, call it six to 12 months?
Yeah. I think it really folds into two broad categories. The Cranes industry is a relatively small industry, customer intimacy and customer knowledge is incredibly important. I think as Steve will help drive and to help mitigate some of the headwind pressures that we have on the top side, on the revenue side. I think Steve brings a unique capability there. Also, on the restructuring side, we have to move aggressively and as quickly as we can, again, paced by the talent to implement the complex moves and regulatory hurdles. Steve's had to deal with a lot of that in his last assignment. I think he's perfectly suited for the knowledge of the customer base, plus his past experience of how we have to move aggressively and decisively on restructuring activities to position the business for future success. Those are just two areas.
Again, Ken did a great job. I just think when we're shrinking the organization from five segments to three segments, you've got to make the choice on who you think the best person is for the job going forward, I think Steve's that person.
Okay. Thank you.
Your next question comes from the line of Seth Weber of RBC Capital Markets.
Hey, good morning, everybody.
Morning, Seth.
Just given your comments on the pricing environment, I'm wondering, do you think that you guys can hold a 30% decremental margin in the AWP business next year?
I think, Seth, the focus Matt and the team have on cost is no different than the other segments. They fully appreciate the realities of the replacement cycle, Matt. They're preparing for it, and we do have a fair amount of flexibility. Being largely North American-based, our ability to augment our cost structure is a little bit easier, actually, than MP and Cranes. I do believe we can maintain reasonable decrementals going into 2017.
30% is a good number to think about then?
30% or better.
Or better. Okay, thanks. I'm wondering, can you give us any color on the warranty expense that you guys called out in the Crane business? Can you quantify it? I guess it sounds like that's going to continue here in the fourth quarter, but have you kind of ring-fenced that, and do you not expect that to continue into 2017?
Yeah. We've had a number of items that we've called out over the three-quarter period. Roughly aggregate drag on year-to-date earnings for Cranes is about $15 million from total quality, warranty, product campaigns, et cetera. Certainly an anomaly for that segment, but it's been a meaningful part of the miss that we're experiencing this year. Not going to get into specifics by product, but it's been fairly broad-based.
Okay, do you expect that to be done by the end of 2016, or do you think that that will bleed into 2017 as well?
No. We believe it'll be complete in this year.
Go to more historical product warranty reserve levels going forward. That's one of the things that we have to drive improvement on. One of the other talent moves we made there is we've got one of our senior executives who's been helpful on the construction side and been engaged in a lot of the restructuring activities. We've moved George over to be the head of operations on the Crane side, again, to bring the executive horsepower we need to drive improvements in that segment. I think that will also help on some of the product-related issues we've had as an organization.
Okay. Sounds good. Thanks very much, guys.
Your next question comes from the line of Stephen Volkmann of Jefferies.
Hi, good morning. Just a quick follow-on to that one. You had also talked about some operational issues, I think, in Crane. Do those also go away as we get into 2017?
Yes, I think we had some disruption in our facilities. The other key challenge here is we had sizing the organization for the volume that you're going to have. We had some unabsorbed costs that we could have frankly handled a little better in the course of the year. As we lay out the plans for next year, driving the headcount, it's not just physical assets, but it's also people, the headcount for the volume, that we can absorb that going forward is another aspect. That'll be something that we work on as well on the restructuring side. It's not just physical assets, but it's also on the people side, unfortunately.
Okay, got it. You had mentioned also, I think, some inventory destocking. I don't even remember which business that was in, but maybe more broadly, how do you feel about inventory as either yours or in the distribution channels for AWP and cranes, do we have to continue that process or where are we in that?
We spoke in the opening comments of about a $75 million year-over-year reduction in AWP inventory. The distribution channel there is really a rental distribution channel. That is the channel. Again, there, it's again about matching supply and demand so that we don't oversupply in the marketplace to put further downward pressure on competitive dynamics. On the crane side, it's more of a mixed model between direct distribution, direct to customers, and then through the distribution channel. We do not have a significant amount of inventory in the distribution channel. We did produce some carryover industry at Waverly prior to the closing to cover us through the ramp-up period. We believe that level of inventory was appropriate. We don't, in general, unlike some other industries, have a large distribution channel with significant inventory that we have to move through going forward.
On the net working capital side, we're down about $370 million as a percentage of sales from about 29.7% to 26.5%, which is decent improvement in a challenging environment, not near what we were driving for internally as we go forward as our internal plan. We'll continue to manage the SIOP process aggressively so that our supply and demand is in balance so that we don't build up excess inventory and, in my view, an inappropriate use of cash.
Great. Thank you. See you in December.
Thanks.
Your next question comes from the line of Robert Wertheimer of Barclays.
Hey, good morning. If I could just follow up on the last one. The comments on inventory are great, and it's doing better, in our view anyway, than some of the other verticals we see. We have, though, seen pricing go outright negative in a few different machinery end markets. Do you guys have any negative pricing, or is it just softening?
We have had year-over-year pricing erosion. In some models, in some segments, we start with an annual price increase for the year, we have seen some pricing erosion by model. One of the other things that we're working on as a team to drive in our commercial excellence is around pricing and the leakages that you get based from your list on down. We've got a lot of work going on to stem the tide in leakages because we are, in many of the segments, at or close to being a market leader. How we set price does impact the overall market. We have seen in some products, in some regions, year-over-year price declines.
Okay, perfect. Let me ask you a different question, if I may. You gave a nice walkthrough where you are in the cycles. I wanted to ask a little bit more detail on aerials in Europe. At least to us, it seems as though you never really, the industry rather, never really fulfilled a replacement cycle there. We have one in the U.S. I'm not sure we did in Europe. Is that your view? Is there a chance that there's underlying strength in Europe despite the recent softening? I'm not sure why it's soft, in other words, if replacement should be relatively okay.
We clearly have not seen the same pronounced replacement cycle in Europe that was seen in North America. The underlying demand has been more stable with less volatility. We are seeing a bit of a pause associated with Brexit in the U.K. There has been some pause there. The underlying market does not appear based on what we've currently modeled to have this relatively significant decline associated with the replacement demand cycle.
Great. Thank you.
Your next question comes from the line of Joel Tiss of BMO.
Hey, guys. How's it going?
Going well, Joel.
There's been a lot of questions about the businesses. I just wondered if we could spend a minute to talk about the internal restructuring. When do you think we're going to feel kind of the full benefits? When is the new Terex going to come together? It sounds like it's more of a 2018, or is that going to bleed into 2019, you think?
I'll turn it over to Kevin, but I'll just start. As I said the other day, we have more work to do with our restructuring activities. Obviously, we'd like to get it done sooner rather than later. We'll implement more actions here and most likely in the fourth quarter, some more actions in 2017. We'll realize the benefits of those in 2018 and beyond. That's kind of the timeline that I'm looking at. We'll move as aggressively as we can with some of the limitations going forward to right-size the organization for the markets that we're in. Kevin, you want to talk about it?
Yeah, no. I think clearly not a wait till 2018 activity. As John's mentioned, still not complete in our portfolio evaluation, so that work continues. There are some things we're doing right now on costs. There are also a large chunk of cost-related activities, reduction activities that trigger on the sale of MHPS, so late Q1. As we said earlier, we see the footprint rationalization beginning in earnest but also accelerating through 2017 into 2018. There's a lot of activity. It's not a wait and see by any stretch, Joel.
Just to follow up, it's probably too early to tell, but are these the three right segments to be riding for the next 5 to 10 years, or there's still more work to be done to get to the answer there?
No, Joel, right now, the reduction from five down to three segments and competing in the aerial work platforms industry through our AWP segment, the mobile crane side through our tower cranes, mobile cranes, and our utility products, and then Material Processing. If you look that these are businesses where we have a scale on a global basis. We have, in many businesses, consistently outearned our cost of capital in the case of AWP and MP. On the crane side, it is fundamentally a good business in terms of the competitive dynamics in the marketplace. It is clearly a cyclical business, and we have to get our cost structure in line with that reality.
As we go forward, these three industry segments are three industry segments that we can compete and win in and return capital and returns to our shareholders that reward them for being in these three segments. That's clearly how we're looking at the business for the next five-year time horizon plus, is that these are the three industries we're in. We're going to compete aggressively and win in these three industries.
That's great. Thank you very much.
Your next question comes from the line of Steve Barger of KeyBanc Capital Markets.
Hey, guys. Thanks. I got on the call late.
Hi, Steve.
I'm just trying to think about the consolidated SG&A ex MHPS for next year. Did you guys give what that run rate could look like?
We didn't share 2017 numbers at this point, Steve. We did kind of walk through a lot of the cost restructuring actions and what impact they would have on 2017.
Okay. I'll go back and check the transcript. Then just to the comment that you just made about crane being fundamentally a good business but at the bottom of the cycle, do you mean that in the context that globally it's not oversupplied or it's rational? I guess, why is it fundamentally a good business on a go-forward basis if we stay at a relatively constrained level of end markets for a while?
Right. I think if you look at the global marketplace and the number of global competitors, there are barriers to entry in terms of these are complex, highly engineered products. It does create that level of barrier to entry within the industry segment. There has been us and other competitors in the industry are rationalizing footprint and taking cost out, capacity out of the system. I think that overall will help the industry going forward. When I say fundamentally, those are kind of the underlying fundamentals that you can look at and say the business should, through the cycle, always cover its cost of capital, and that's what we're setting ourselves up to do. That's the fundamentals that I look at.
Understood. Thanks.
Your next question comes from the line of Ante Sudderland of Danske Bank.
Yes. Hi. Could you talk about the MHPS business? How much was sales and how much was EBIT in the quarter?
In terms of the MHPS, I'll comment and then turn it over to Kevin real quickly. Sales overall were down in the quarter about 10%. That was really driven by our port business that was down. The material handling business was down low single digits in terms of revenue, but actually increased on the material handling side, increased our profitability by about 100 basis points. I don't have the specific EBIT in front of me. I'll ask Kevin to get that, or we'll break that out and follow up on your call. Overall, the business port has been tough with the container traffic, we've had a decrease in port business order intake. We've got a fourth quarter that we've got the material harbor cranes that we've got to deliver here in the fourth quarter.
On the MH side, greater stability, off a little bit, good performance on margin expansion on lower volume in our MH side of the business.
Yeah. I'll just add to that, John. The GAAP EBIT for the quarter was $79.5 million. That included a good guy of about $55 million. You guys will recall that in Q2, we took an impairment based on the sale proceeds expected of $55.6 million. Given the stock appreciation that we saw during the third quarter, we were able to fully reverse that. When you back that out and some other small restructuring adjustments, we've got an EBIT as adjusted of about $26 million for the period.
All right. Is this before or after corporate allocations, this $26 million?
That does not have any corporate allocation in it. It also reminds you that under Discontinued Operations accounting, we freeze the depreciation and amortization. That $26 million doesn't have depreciation and amortization or a corporate charge.
Thank you very much.
Once again, if you'd like to ask a question, please press star one. Your next question comes from the line of Yoma Abibi of JP Morgan.
Thank you. Good morning. My first question is you mentioned that you expect to reduce debt with expected proceeds from the Konecranes transaction. Has your view changed today versus prior quarter in terms of how much of that proceed you expect to reduce debt by?
No. Again, we're trying to drive towards an optimal capital structure as we've looked at this, somewhere in the range of two and a half times net debt to EBITDA through the cycle. That implies somewhere around in the range of $700 million of debt repayment in the year next year post-closing.
Okay.
One other just piece I would add to that is I think most of you probably saw that we went out and were able to get amendments on our credit facility, which allows us now with that debt repayment to go after our higher cost debt, our senior notes at 6.5% and 6%. We're looking at 2017 once we accomplish that, roughly a $40 million reduction in interest expense.
Okay. Just to be clear, you expect to reduce debt at closing by about $700 million, and it looks like you're looking at the senior notes for debt reduction here.
That's correct.
Great. Thank you very much.
At this time, there are no further questions. I'll now return the call to management for any additional or closing remarks.
Well, thank you again, all, for your interest in Terex. If you have any additional questions, please follow up with Brian. He'd be more than happy to answer those questions. I really do look forward to seeing you at our analyst meeting in New York City on December 13th. Again, thank you for your participation.
Thank you. That does conclude the Terex Corporation third quarter financial results conference call. You may now disconnect.