Good morning. My name is Phyllis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Terex Corporation First Quarter 2015 Financial Results 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 would like to ask a question during this time, simply press star then the 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the conference over to Mr. Ronald DeFeo. You may begin your conference.
Thank you, Phyllis, good morning, ladies and gentlemen. We appreciate your interest in Terex today. On the call with me this morning is Kevin Bradley, our Senior Vice President and Chief Financial Officer, Kevin O'Reilly, Vice President of Operational Finance, Tom Gelston, VP of Investor Relations, several of our leadership team members, including our business segment presidents available for your questions. As usual, a replay of this call will be archived on Terex website, terex.com, under Audio Archives in the Investor Relations section. I'll begin with some overall commentary, Kevin will follow with a detailed financial report. I will then provide some specific segment information and an overall summary before we open it up to your questions. As always, we will be following the presentation that accompanied the earnings release and is available on our website.
I'd like to request that you ask one question and a follow-up in order to give everyone a chance to participate. Let me now direct your attention to page 2, which is the "Forward-Looking Statement and Non-GAAP Measures Explanation." We encourage you to read this as well as other items in our disclosures because the information we will be discussing includes forward-looking material. Now let me begin turning to page 3. The first quarter was challenging, the overall outlook for 2015 remains very much intact. Three drivers behind the results in the quarter. They were AWP margins, a change in currency rates, an unusually high tax rate. Let me briefly touch on each. As we described back in February, our expectations for the AWP business was to have a slower Q1 than traditional, as many customers were asking for deliveries with later ship dates.
This was compounded, though, by continued uncertainty in the North American oil and gas industry, unusually cold and snowy weather in many parts of the U.S., the lingering impact of port labor issues in the Pacific Northwest and on the West Coast in general that have now been resolved. We have also communicated that we intended to not pre-build as much inventory this year, rather match production specifically to the seasonality of customer demand in order to avoid the reconfiguration and other expenses experienced during the balance of 2014. All of these factors compressed margins somewhat on a year-over-year basis, as did a slightly different mix of products and customers and the strong dollar. Kevin will cover these items in more detail in a few slides.
The movement of currency around the world is well known by the global investment community, and certainly we weren't immune to its impact. Our sales were approximately 10% lower in the first quarter as a result of the impact of the change in currency rates. On a currency-neutral basis, we were essentially flat in terms of sales on a year-over-year basis. Lastly, our tax rate was unusually high in the quarter due to the mix of earnings and losses by country. We continue to expect the full-year tax rate to be between 30% and 32%. As for our segment outlook, we enter the second quarter with a strong AWP backlog, up 34% and 44% when you exclude the impact of currency translation. This, as well as improvements in manufacturing efficiency during the quarter, is expected to lead to significantly better margins sequentially.
The crane market remains stable at relatively low levels with continued strength in our North American utilities business. We remain on track and committed to delivering on the improvement initiatives previously outlined. We continue to execute against our share repurchase program, repurchasing approximately $48 million of 2015. Overall, the level of ordering activity and our book-to-bill rates provide us with confidence in our full-year outlook. In total, our full year has not changed, and we see good momentum going into the second quarter, which as many of you know, is a much more important quarter for Terex. With that, let me now turn it over to Kevin, who will walk you through the specific numbers.
Thanks, Ron. Good morning, everyone. I'll be reviewing our results for the first quarter of 2015 and comparing them to prior year results. Let's turn to page 4, where I'll review the operating results for Q1 on a consolidated and segment basis. Net sales for the quarter of $1.5 billion decreased from the prior year by 9.6% or $159 million. Foreign exchange impact can account for the entire decline. Our AWP business declined 13%, approximately 10% excluding the impact of currency. Although we had expected Q1 to yield lower sales than Q1 of 2014, it was a slower start than we planned. In North America, we did experience some shipping delays due to weather conditions, primarily in the Northeast. However, roughly 70% of the decline relates to the Latin American and European markets. These markets were impacted by different drivers.
In Latin America, the decline was driven largely by the macro environment and an overall slowdown in the Brazilian economy, resulting in sales decline of over 90% over last year. In Europe, our business actually remains quite strong, with backlog up 37% compared to the prior year. In the first quarter, however, AWP sales in Europe were impacted by the prolonged labor issues in U.S. West Coast ports, which had a meaningful negative impact in the quarter. Construction had a decline of sales of $42 million or 21%, approximately 12% on a currency-neutral basis. This decline was driven primarily by the divestiture of ASV, which is included in the prior year period. Our Cranes, MHPS, and MP businesses all reported a decline in sales this quarter, but on a currency-neutral basis, increased sales by 11%, 4%, and 7% respectively.
Operating profit for the quarter decreased $31 million compared to the prior year. As a percentage of sales, operating margins decreased from 4.5%-3% for the quarter. The driver in the quarter from an operating profit and margin perspective was AWP, as the operating profit in that business declined $39 million and margins decreased from 14.1%-8.5%, impacting margins for the overall company. In the lower right-hand corner of the page, you will see a breakdown of the margin compression in AWP. A combination of lower production rates in Q4 and Q1 2015 impacted the margins by approximately two percentage points in the quarter. Although much of the production decrease was planned in Q1, our production ramped up towards the end of the quarter, which will mitigate the absorption impact going into Q2.
Product mix, customer mix, and pricing reflects the impact of higher telehandler sales as a percentage of overall sales, a higher percentage of sales to our larger rental customers, and some competitive pricing pressure in certain products and regions. Lastly, the lower volume in the quarter impacted margins by approximately 1.7 percentage points. As we head into the heaviest shipping quarter of the year with strong backlog, we are confident that we will return to mid- to low-teen margins for the full year. The balance of the segments, despite flat to lower sales, made nearly as much or slightly more operating profit than the prior quarter. Turning to page five, you'll see the full financial statement. I'll focus my comments on the items below operating profit.
Other income and expense increased by $2.1 million versus the prior year, as larger foreign exchange losses totaling $6.5 million more than offset the lower interest expense. The effective tax rate was approximately 114.9% in Q1, compared to 26.7% in the prior year quarter. The higher rate was mainly due to greater losses not benefited, combined with reduced profit for tax in the current period. For the quarter, earnings per share was a loss of $0.02 compared to EPS of $0.28 in 2014, primarily driven by the performance in our AWP business and the unusually high tax rate just described. EBITDA for the quarter was $75.8 million or 5.1% of net sales, compared to $111.8 million or 6.8% in Q1 2014.
Net working capital as a percentage of annualized sales was 28.2%, up from the prior year quarter of 27.6%, primarily related to the changing customer advances in our port business. Return on invested capital increased to 9.8%-8.6% in the prior year. The improvement in ROIC is primarily related to a lower effective tax rate in the trailing four quarters compared to the same period for 2014. Page six provides a bridge breaking down the $238 million decrease in liquidity for the quarter. Free cash flow, excluding the changes in TFS assets, was a use of $95 million as our business ramped up inventory third quarters. During the quarter, we grew our TFS assets by $42 million. We continue to invest in and grow our TFS business as we believe it provides long-term strategic advantage.
As previously discussed, we will be launching an asset-backed credit facility to fund a significant portion of our current TFS portfolio in the U.S., as well as new originations going forward. We expect to have this facility in place and partially drawn by the end of Q2. We continued to repurchase stock during the first quarter, and combined with our dividend, represented a use of cash of $47 million. Lastly, we completed an acquisition in our utility business during the quarter using $24 million in cash. Changes in foreign exchange rates negatively impacted liquidity by $30 million. We reconfirm our full-year free cash flow guidance of $200 million-$250 million. With that, I'll turn it back to Ron.
Thank you, Kevin. Turning to page seven, we presented our geographic footprint, our revenue geographic footprint. Our largest markets remain North America, which showed a slight decline of 2% for the quarter on a year-over-year basis and now makes up 45% of our total revenue base. Most of the global markets were down, however. Some, such as Western Europe, were down mainly as a result of lower euro and British pound valuations versus the U.S. dollar. Europe continued to represent about a third of our overall business. Global markets other than Europe were mostly negative, especially Latin America and Australia, as investments in oil and gas and infrastructure has substantially slowed in these markets. Sales for AWP in Latin America were down 73% year-over-year, and together with MHPS, drives most of the 55% decline in sales in that market for Terex overall.
As a result, sales for the rest of the world declined to 23% of total sales, down from 27%. We did see a slight improvement in the Middle East in the quarter, which we believe will continue throughout 2015. I'd like to take a few more minutes to provide a quick review of each segment, starting with Aerial Work Platforms on page 8. As I stated earlier, AWP is well-positioned going into the second quarter with a meaningfully higher backlog than a year ago at $699 million. The order patterns from our customers developed pretty much as we expected, with major accounts placing their large stocking orders in the fourth quarter and expecting delivery in late Q1 and into Q2. This is best highlighted by the chart in the upper right that shows net bookings and the book-to-bill ratio on a trailing six-month basis.
This highlights the overall trends and removes the vagaries of the exact timing of large orders. The net bookings over this time period is a record $1.44 billion, and having a slightly slower delivery quarter in Q1 due to seasonal factors positions us well going into Q2 with a book-to-bill ratio of 151%. As for the resulting margins, we feel confident that margin performance will be significantly better sequentially, and for the full year, we continue to expect margins in the low teens. We cover our construction business on page nine. Similar to AWP, construction saw a substantial improvement in its book-to-bill ratio, coming in at 149% in the quarter. Backlog for this business stands at $204 million, which is down from the $214 million in the prior year's first quarter.
It's important, however, to remember that ASV, while not reported in our current results, is still included in our historic periods. Adjusted for this, as well as the impact of currency in the backlog, the construction business actually shows an improvement. Most of the segment's businesses are improving as the North American, and to a lesser extent, European construction markets strengthen. This is most evident in our North American concrete mixer truck business. The material handling business has stabilized, but at a relatively low level, mainly due to low scrap steel pricing. On page 10, we show our cranes business, which continues to operate in a fairly stable but muted demand environment.
Although backlog is down versus the prior year, the book-to-bill in the quarter was 107%, and we continue to build momentum in certain product categories like the four and five-axle all-terrain class and our crossover crane in North America. The strongest performer in this segment continues to be our Utilities division, and we continue to look for growth here, as well as new opportunities to leverage this customer base. As part of that, we see continued expansion of our North American services business. Lastly, we don't expect to see much change in the challenging markets of the Americas and Australia for our main mobile crane products. Order levels from these markets remain disappointing. The Middle East showed improvements in the quarter and is expected to partially offset the impact of the weaker markets. Turning to page 11, our Material Handling and Port Solutions business.
Those results for backlog reflect the delivery of the substantial port automation solutions projects in 2014. Our backlog is down versus the first quarter of last year by approximately 32%. However, much of that change can be isolated to the automation projects and that order book and is illustrated by the shaded part of the bar graphs on this page. MHPS continues its transformation into a leaner, more agile enterprise, and while sales were down $46 million in the quarter, operating results improved $2 million. The relative profitability of the segment continues to strengthen as a result of previous restructuring activity. Our team is introducing and demonstrating a number of new products, especially on the material handling side of the business, such as our V-girder crane design and a new hoist design. We will see these products gaining traction in the marketplace this calendar year.
Lastly, on page 12, we discuss the Materials Processing business. This business continues to perform steadily in terms of demand, posting its strongest book-to-bill ratio in a number of years, and an improved backlog versus the prior year's first quarter, even when not adjusting for currency. Low commodity prices remain a headwind for this business, especially in markets such as Australia and Russia. In 2014, we invested in new products to expand our portfolio into aggregate washing systems and recycling. This as well as growth in the North American market and stability in the remaining global aggregates markets has us optimistic for improved results. In summary, on page 13, we see AWP well-positioned to deliver a strong Q2, both in terms of sales and profit. We expect to see meaningful improvement in the year-over-year reported operating margins.
This will go a long way to improve results for the company overall. The other businesses remain on track to hit their 2015 targets. The currency will continue to negatively impact our results as the EUR weakened another 4% from the assumptions we used when we issued guidance in February. We expect to offset some of these pressures through select growth opportunities in certain products and in certain markets, such as the new products in AWP, MHPS, and Materials Processing. We continue to focus on our capital structure, where opportunities to remain to improve the overall effectiveness in delivering value to our shareholders. Our convertible bonds mature in early June. We purchased approximately $48 million of common stock in the quarter.
Our tax rate, while unusually high in the first quarter, for reasons you've already heard, is expected to be in the range of 30%-32% for the full year. These factors lead us to reconfirm our EPS guidance of $2-$2.30 per share on net sales of between $6.2 billion and $6.6 billion. With that, I'd like to open it up for questions. Operator Phyllis, could you do that, please?
At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Again, that was star, then the number 1 on your telephone keypad. Your first question comes from the line of Ann Duignan with JP Morgan.
Hi, guys.
Hi, Ann.
Hi. Ron, could you just walk us through, specifically your segment guidance sales growth? I know you talked about in the presentation backlog, the book-to-bill being up, but net orders were down in every segment. Where is the greatest pressure as you look at each segment in terms of revenues or sales?
Well, I think our order intake was fairly consistent with what we expected in almost every one of our businesses. Essentially, we're not making any significant changes to the guidance we previously provided, both in revenue and margins. The quarter's really, while it's disappointing, it's really pretty simple. The story is AWP margins and a little bit of volume, but a very nice backlog and a very positive momentum into the second quarter. Cranes pretty much had a quarter as expected. Weak North American business, improving in some other areas. Our outlook is actually encouraging in the crane business. Construction, as anticipated, had a weak Q1. We'll have a significantly improved Q2. Our full year still looks like a little bit around the break-even.
The material handling or scrap steel product that we have, which is probably our embedded most profitable business has stabilized, not really delivering the level of profit that would push this whole segment over the goal line. Material Handling and Port Solutions almost always has a weak early part of the year with its business strengthening in Q3 and Q4, and that we expect will continue. Although, the restructuring activity that's underway there will begin also contributing positively later in the year as we have expected. Materials Processing had a very good Q1, and is right on track for the rest of the year at a small acquisition that we just made in Materials Processing to position us better in the wood processing and environmental products category.
That really will be a wash in the short term due to purchase accounting, et cetera, but will be a nice positive contributor. When I say small, it's a business that's in the range of $40 million to $50 million of revenue. A nicely profitable business once we get through the purchase accounting side of that business. In general, I want to express a reasonable amount of confidence as we sit here in the second quarter. I'm not happy with posting a $0.02 loss, but as you dissect it, I think it is pretty much as we would have expected, barring a couple of things we already commented about.
Okay. I appreciate that, Ron. Just as a follow-up, I think you had guided earlier to kind of a 40%-45% of EPS in the first half with the balance in the back half. Are you still comfortable with that kind of split first half versus back half, or have we now pushed more into the second half?
I think as we look with reality of the effects of some of the currency and the tax rate, it's more likely that we'll be 35%-40% first half versus 40%-45%. That's not out of our historical context. In 2013, for example, our first half was 39% of our adjusted earnings for that year. That's a similar business profile that we have today.
Okay, Ron, in interest of time, I'll get back in queue. Thanks so much for the color.
All right, Ann.
Your next question comes from the line of Nicole DeBlase with Morgan Stanley.
Good morning, everyone.
Good morning, Nicole.
My first question is on AWP. I guess, one of your bigger customers mentioned on their earnings call that they could potentially cancel some CapEx towards the second half of the year if oil and gas remains an issue. I guess my question is, how much of a risk is that to your full year earnings guidance?
I'll answer that, Matt, you can provide some additional commentary if you like. Our customers always like to highlight the fact that they have that option, and of course, they do in a certain sense. We're also pretty much partners with them, and they work with us on planning their fleets and giving us visibility to how they see the year. We plan our business pretty much with a positive relationship with our customers. Our customers are telling us right now that they see the year fairly positively. Events can always change, but then places strengthen as well. One customer doesn't always set the entire tone for the marketplace. Matt, you want to add anything to that?
Yeah, I'll just add that we work with our customers throughout the year, and it's quite often that we do mix changes as we move through the year. There are no cancellation clauses in our agreements. It would take something pretty drastic, for them to do large, significant cancellations. We don't see that on the horizon. If there was something large and drastic, putting a bunch of gear in their hands when they don't need it, that's not good for anyone in the long run. Right now, we don't see anything like that coming. We stay connected with the customers, and they're still positive.
Okay, got it. That's helpful. My follow-up is on FX, I guess. You guys are in a kind of a unique position since you have such a big European manufacturing base. I think you had talked on the last call about potentially shifting some production to Europe to take advantage of the currency situation. I'm just curious if you guys have made any moves so far or if you envision making moves in the rest of the year.
Well, we're fortunately pretty well positioned with a decent footprint in Europe by our segments. What we don't want to do on this call is indicate what we've already decided and what we're going to do, because we know our competition listens to the calls. There's clearly a few adjustments that we're making that will address some of the currency. Frankly, we think we're in a reasonable place. The currency movements will challenge us over an extended period of time, particularly as the euro stays pretty weak. We will be making some changes, because I don't believe the currency goes back to where it was just six months or so ago.
Okay, that's helpful. Thanks. I'll pass it on.
Your next question comes from the line of Ted Grace with Susquehanna.
Good morning, gentlemen.
Good morning, Ted.
Ron, as a follow-on to Ann's question about kind of the second quarter and the first half, could you maybe talk about how people should be calibrated for orders in the second quarter? Typically, they're flat to down 15% sequentially. You've obviously got the AWP dynamics from the fourth quarter being as strong as it was kind of manifesting in the first quarter. Just from the standpoint of helping people understand kind of what orders need to look like in the second quarter, could you give us some handholding there?
Sure, Ted. In fact, rather than I do it, I'm going to hit our top three segments, starting with AWP, then I'll go to Steve, then Material Handling and end it with Cranes. Matt, why don't you provide some color on that question?
Yeah. On page eight, we gave that chart on the right to try to give you a view that each year it can be a little deceiving because this year in particular, we got a lot of orders for the year in Q4, whereas the prior year, we got them in Q1. The way I look at it is in the Q4, and it's going to start, then you build your backlog then, and it's going to start to decline as you move through the year.
Pushed out more towards Q2. Orders will come. They will continue to flow in. The backlog will go down. When you get into Q3 and Q4, the visibility of filling your order book, it shrinks as you go through the year. We expect good orders as we move through Q3 and Q4. The large orders are basically all in, and it comes into more as they look at their fleets, what's out on utilization, they place the orders in smaller chunks.
Steve?
Yeah. Hi, Ted. Yeah, on MH and PS, I'd say slide 11 kind of tells the tale. I see a similar year this year as to what it was last year. You can see we're gaining momentum right now on increasing our book-to-bill, and that's a good sign. We're increasing the backlog in our core products, which we've said that we're going to go out and do. I look out a little bit, we've got good coverage on the Straddle Carriers, we've got good coverage on our Rubber-Tired Gantry Cranes, on our Ship-to-Shores. We pushed really hard on our Mobile Harbor Cranes, and we've doubled the backlog in our Mobile Harbor Cranes year-over-year. We're going to continue to push.
This is important because a weak backlog going into this year in Mobile Harbor Cranes caused the Material Handling and Port Solutions business, in particular, to have an unabsorbed manufacturing operation, which was a pretty big negative drag in Q1. Our Q1 would've been a lot better had we had the backlog that we now have.
Right.
I think the market's there for us, in the Mobile Harbor Crane business to get.
We're pushing that pretty hard, Ted. I'd say on MH, on Material Handling, it's still kind of flat year-over-year, and it's hand-to-mouth. I mean, there's a lot of velocity in that business. I often talk about the $80 million order intake a month, and we're kind of sitting right about there. I don't see a much different picture this year than it was last year.
Tim? Tim Ford.
I would say in the Cranes segment, Ted, you've got a little bit of a mixed market. The utility business, Utilities and Services business, is actually an area of continued strength for us. It had a good first quarter in orders, and I expect the second quarter to be strong as well. The Crane business is a bit of a mixed bag. We've got three negatives and two positives. North America, for sure is struggling. Rough terrains, all terrains, and boom trucks are down significantly, in that space. You've got European large crawlers, which are down, and our Australian pick and carry business is down. I don't expect any material change in those three negatives. The two positives I would characterize are the Middle East, which had a significant improvement in the first quarter in both all-terrains and rough terrains, and I expect that to continue.
The all-terrain business in Western Europe is actually improving. Those feel like the net pluses and minuses for me in the Cranes segment.
Right. That's super helpful. If I could just ask the second question. In terms of the cost-saving plans, you've outlined $50 million target. Could you maybe give us a sense for where we are exiting one Q and incrementally what we should look for in two Q?
Yeah, Ted. Essentially the initiatives across the segments are pretty much on track. We did say that the bulk of the $50 million impact this year would be largely in the second half of the year. We still feel that to be the case. We do intend to give a fairly comprehensive update with Q2 earnings in July, but so far on track.
Okay, great. Well, that's helpful. Best of luck this quarter, guys. Thanks a lot.
Thank you.
Your next question comes from the line of Vishal Shah with Deutsche Bank.
Vishal?
Vishal, your line is open.
Go ahead then, Phyllis.
Your next question comes from the line of Jamie Cook with Credit Suisse.
Excuse me. Hi, good morning. Ron, I guess just a question. Sorry to harp on the guidance again. I understand the issues, the specific issues that happened in the first quarter. You didn't make money in the first quarter. You had said before earnings should be 7%-9%. I think a traditional first quarter for Terex's earnings to be sort of 10%-12% of the first full year earnings. I guess my question is, how do you think we make up for the hole in the first quarter, or do you think it's more prudent for investors to think that the low- to mid-end of the range is more likely just because of the issues that were sort of out of your control, weather, FX type of stuff?
I guess just my second question, as it relates to energy, again, I feel like you were a little more prudent relative to some of the other companies in saying that, "Look, energy, yeah, really could be a headwind, even if it happens sort of later in the year, whether it relates to aerials and cranes." I guess I just don't hear that as much of a concern in your voice or in your commentary. Do you still see that as a big risk? I guess it gets back to, again, why not say the low- to mid-end of the range is more likely because of that? Thanks.
Okay, Jamie. The guidance, if you dissect the first quarter, the tax rate itself is about a $0.08 impact. The FX losses, which are non-recurring unless the currency deteriorates meaningfully from what it was at the end of March, the FX losses were $0.04. That's $0.12 delta. Operationally, we missed about $0.08. $0.08 in our view was within the margin of error, certainly for the guidance that we've provided. We're not going to try and shave the guidance or narrow the guidance at this point in time because we believe we've got as much upside opportunity still left in our company as we have some downside risk. If the energy and all those headwinds really hit us really hard, the probability is we'll be on the lower side of that guidance.
If our competition and others may be right, that the headwinds from energy aren't as bad, there's a possibility we'll be on the upper side of that guidance. That's how we see it with 3 quarters left, and we'll have a much better picture of how we're performing really in July at the end of our Q2. That will give us a window into our second half order rates for AWP, a window into our second half order rates for cranes. Cranes has got to perform in the second, third, and fourth quarters. Frankly, I think construction's going to contribute some, and material processing is going to continue to perform pretty well. All is certainly not lost at this stage.
It would've been great not to have only had the operational challenges because the operational challenges are pretty straightforward and pretty understandable in our AWP business in particular.
Okay. I guess just a follow-up question. On the aerial side, it sounds like most of the strength has come from the large national companies. Can you talk about the conversations that you're having with the independents and whether they're coming in the market and ordering, and how you think that progresses throughout the year?
Well, okay. I'll answer this a little bit and turn it over to Matt. We had great orders from our top 15 major rental customers. They still represent just a little over half of our business. The order rate also includes a meaningful amount of orders from independents. Matt, what are you seeing from the rest of your customer base?
Yeah. From the rest of the customer base, what's normal, the independent rental companies are typically a smaller percentage of our sales in the first half, in Q1 and Q2, just because the nationals, they come in early, and they take up a lot of the capacity. When you have conversations with the independent rental companies, they're still very optimistic. They find niches in the market. They're seeing good opportunity out there. I think if you talk to an independent rental company down in the Texas area, that's a different story because they can't move fleet around. There's a lot of other places outside of the oil and gas parts of the country. If you go around the Eastern Seaboard and the upper Midwest, I'd say the independent rental companies are feeling really good. I'll let Matt.
All right. Thanks. I'll get back in queue.
Thanks, Jamie.
Your next question comes from the line of Ross Gilardi with Bank of America Merrill Lynch.
Good morning. Thank you.
Good morning, Ross.
Ron, I just wanted to ask you, just on AWP and just sort of the working capital strategy. I mean, your competitor seems to have taken the opposite approach on working capital and built a lot of inventory into this year, whereas you emphasized in your opening comments that you're taking more of a make to order approach. Do you feel like that's costing you some market share and accounts for a lot of the differential in sort of what they're showing in terms of growth versus what you're showing, and do you feel tempted to reverse course on that particular strategy?
Yeah. We're not going to reverse course. I think our course and our view of the market is the appropriate one. I'm going to let Matt comment on this because this is certainly something we've had pretty extensive conversations on for quite a while. Matt, why don't you give Ross your views on this?
Yeah. On the last three earnings calls, I've been discussing and explaining a lot of the manufacturing absorption issues that we ran into, and we said, "Hey, we are going to drive productivity as we move into the year." As we were in fourth quarter last year, looking at the backlog we had, we could tell that first quarter was going to be light. We intentionally shifted our ramp-ups into first quarter because we were trying to time the demand with the order seasonality. That being said, we did build $50 million of inventory between the beginning of the first quarter to the end of the first quarter, but a lot less than last year. When we say that we are going to drive productivity, those are the kind of decisions that you have to make. Sitting where we're at, I'm really comfortable.
I like where we're at. I feel that we can fill the orders. We're not getting every order. We set the year up knowing that we wouldn't chase every order, because we're looking at the full year and trying to drive our productivity as deep into the year as possible. That's why you can expect to see the margins improve for AWP as we move through the year.
I'd like to add to that, the fact that this is not a science. There's no right answer, the approach of our competition could work for them for a while, and we believe our approach is the right one for ourselves. I do think you really have to watch your configuration. In an uncertain market, and I still would say this market is somewhat uncertain, it's very expensive if you have the wrong mix of product and the wrong configurations. Despite the fact that we all have great relationships with our large rental customers, their loyalty to tell you what specs are the right specs will change as their markets change. While some of them are excellent at predicting, no one is perfect and has a perfect crystal ball. It's very expensive when you change later on in the year.
We paid that price in 2014, we don't want to repay that price just to chase the last point of market share.
Okay, thanks. That's helpful. I just want to clarify what you're saying about AWP margin in Q2. Do you expect to be above or below that low- to mid-teens level in Q2? Can you clarify what exactly has led to the improvement in the month of March? Are those just the operational issues, or is that more of timing of deliveries, or anything there would be helpful?
Matt, why don't you answer that?
Yeah. We had the slow start in January and February, and then as we moved through March and orders started to release, and we started to produce at higher levels, we began to see our OP run rate improve significantly. Couple that with what we see in the backlog for Q2 and into Q3, is there's a bit of a shift. In other words, on first quarter, our telehandlers were up almost 20%, whereas our boom and scissors volume was down 22% on booms and 11% on scissors. We can see that that mix improves more towards booms as we move into the second quarter. That right there, the combination of the volume and the product mix, is what's going to drive the improvement, plus the productivity gains that you get at those higher volumes.
That's why we're saying that we think that the mid-teens in Q2, more of the historic range of Q2 OP, that's what we're expecting.
Okay. Got it. Thank you.
At this time, we would like to limit each caller to one question in order to allow everyone in the queue to have a chance. Your next question comes from the line of Jerry Revich with Goldman Sachs.
Good morning.
Good morning, Jerry.
I'm wondering if you folks can just give us an updated view on the Europe CapEx cycle with the move in FX and based on the data points that you're seeing, customer inquiry levels, et cetera, and maybe specifically comment on how much industrial production would have to pick up to see new industrial crane orders for your business there. Would appreciate any color you're comfortable providing. Thanks.
Okay. Steve?
Yeah. Jerry, I'd say industrial production is starting to tick up in Europe, which is a good sign. We expected our business in Europe to actually be a bit better in the quarter. We've got a lot of quotes out there. We're just not getting closure. There's a bit of a lag. I think the team feels pretty confident that over the course of Q2 and Q3, a lot of that CapEx is going to open up. I feel a little bit better about the spend, I'd say, later in the year than right now.
I think confidence is building in Europe in particular, as they effectuate the lower currency becomes an opportunity for them to export. Confidence is building.
I guess, can you give any color on number of inquiries or any additional detail around?
Not really. It's not something that we could feel we could provide any trend information on because you'd have to have a good historical context.
Yeah.
It's just a bit of an overall view. This is a business we've owned now for three-plus years, and I guess it's the first time in the time we've owned it that we're beginning to see the European industrial activity picking up. We think it will also support a stronger parts and services business later on in the year when the repair and maintenance cycle hits.
Yeah, I think, Jerry, just to add to what Ronald was saying, we track the quotations that are out there, as I said, there's improvement there, it's just the closure is not happening. On the services side, it's pretty flat. We have signed a couple of large long-term servicing contracts, like three to five years out, that are very positive. That's happened over the past couple of weeks or months. That means that the CapEx is kind of coming out. It's difficult to give it to you by market. Germany is obviously our biggest market, but we have good market and market shares in France and the U.K. and Scandinavia. That business is still doing okay, I'd say.
Thank you.
Your next question comes from the line of Seth Weber with RBC Capital Markets.
Great. Thanks. Good morning, everybody.
Hello.
I guess just first a clarification, do you expect that the European AWP orders that were hurt by the port issues, will those revenues hit in the second quarter? I guess my question is really on pricing. I think in your prepared remarks, you did call out some competitive pricing in the AWP business. Can you just give us a little bit more color there, whether that's coming from foreign OEMs or whether that's a regional issue, and can you comment on currency-related pricing in the crane market as well? Thank you.
That's a good one question, Seth, thank you. We'll try to address that, starting with Matt.
Okay, Seth, I'll address the Europe business for AWP. Yeah, the cumulative effect of the port slowdown that started in November, lasted through most of February. That's when we typically are putting machines coming from the U.S. over there, and that was slowed down. It had an impact on us. If you look at our backlog for Europe, it's at 4.7 months versus 2.7 months last year at this time. We had a great year in Europe last year. Yeah, we are a little bit bottled up. We do expect to have a good year in Europe. You also have to take into consideration the currency. We expect that the currency changes. We don't expect it's going to change dramatically from where it's at today. We'll have a headwind with that.
In general, the business in Europe is solid and customers are ordering. We're feeling good about that. As far as the pricing environment, I would say that the pricing environment has become slightly more competitive in the past two quarters. Some of it is certainly related to the strengthening dollar, giving the non-North American or non-U.S. manufacturers an advantage, and they're using that rather aggressively. There's other places where people were dealing with a slow Q1, and there was some competitive nature there. It's not out of control. The bottom line with pricing, we're not expecting to get a lot of pricing in what we're planning for the year. Where we're going to get margin expansion is through productivity gains and margin improvements on the initiatives that we have going. It is getting a little bit tougher.
We won't chase all the prices down, but we'll stay competitive. I'd say it has gotten a little bit more competitive.
That's in both AWPs and cranes, that comment works for?
Well, we're going to ask Tim to comment on cranes.
Okay.
I would say, Seth, in cranes, probably 70% of my business in the crane business is Euro-based. That's really a translation effect more than it is pricing. The U.S. dollar-based markets are pretty consistent. There's the natural competition. We're all producing in the same places, but I haven't seen any material change in product pricing based on foreign exchange.
Okay, terrific. Thank you very much, guys.
All right, Seth.
Your next question comes from the line of Eli Lustgarten with Longbow Research LLC.
Good morning, everyone.
Hello, Eli.
One clarification and part question. We talked a lot about the oil and gas businesses. Can you give us your experience of what you identified? I think you talk about 10% of the revenue, oil and gas. What you actually saw in the first quarter and second quarter. The real question is, with the Latin American business down so sharply and Brazil being a mess, what have you, should we be looking for any restructuring or charter or some changes over that part of the world, given that it looks like it is going to be a mess for an extended period of time?
It's difficult for us, as you might imagine, to completely handicap oil and gas impact. Up until a few quarters ago, we were measuring the impact of oil and gas in the category, really, of non-residential construction activity. To segment it more refinedly, we really can't do. What we can do is we can kind of provide our perspectives that we see from our customers, in particular the crane customers and in particular the AWP customers, that generally tell us, "Well, the number of well heads are way down. Equipment is coming off jobs. That equipment that comes off jobs is being placed in other places, which has a knock-on effect to new equipment ordering and to new equipment." Our customers are going to manage their utilization. Fundamental to their business is their utilization rates. Their utilization rates are acceptable.
They're generally high from a historic point of view, they're generally not improving. Their equipment fleets are probably pretty much in balance. You're into a classic situation of replacing old with new, and that is pretty much what happens. Oil and gas provides that negative umbrella that's offsetting other non-residential growth, and so we feel it's kind of neutralizing what might have been some growth. With that, I think it was the second part of your question.
Latin America and Brazil and
Yeah
The sharp declines and how you're handling it. There's a restructuring or approach to a market, it looks like it's going to stay
Yeah
slow for probably an extended period of time.
Okay. Steve has got the.
Yeah
has got a big facility there.
Yeah. Eli, we're doing restructuring for sure. Part of our improvement initiatives, a piece of it, is actually the restructuring we're doing in Brazil. We've taken out probably 50 team members so far, and we continue to restructure that business. Now, the savings you're going to see-
That's already.
Embedded in.
Embedded in what we've.
Right
Taken charges for.
Right. I guess we're getting our cost in line with the market from an MH perspective, and material handling is probably the largest footprint that we have in Brazil right now.
The rest of the stuff we mostly
Import
import into Brazil. We're fortunate in that we didn't chase that crane market and didn't chase that market and put in extra production.
Okay. Thank you.
Your next question comes from the line of Andrew Casey with Wells Fargo Securities.
Morning, everybody. Can you please provide a little more color on the productivity-driven AWP margin improvement through Q1, really in the context of the total $30 million productivity called out within the longer-term improvement initiatives at least going back to the Q4 presentation. Specifically meaning, did you realize most of that productivity improvement already, or is the productivity comment more a short-term driven mainly by mix and the longer-term benefit has yet to be realized?
Yeah. Andy, I'm going to set this question up for Matt a little bit. The productivity opportunity for us is twofold, really. One is to not repeat the mistakes of yesterday. We had anticipated in 2014 that the market would be stronger than it actually was. We had too many people, and we had equipment that was pre-built, as we said earlier, in configurations that weren't exactly what we wanted. We had too many people for a market that wasn't as strong as we expected, and need to reconfigure, therefore, we had pretty severe productivity issues last year. The other side of that is simply running our business closer to the market and having a better control of our labors. Let me ask Matt to comment on that because he's deep into this.
Yeah, we have a productivity target for the year, the full year of $30 million, as you brought up. We are on track after Q1. The gains really start to kick in when you get the volumes of Q2, and where our productivity really dipped last year, Q3 and Q4. To date, we're on track a little bit with the volume miss, a little bit behind. The $30 million, we had more built into it than that $30 million. That is the primary focus of what we're doing within AWP to make sure that we get that corrected. We feel like we're in good space, and you'll see the real benefits begin to kick in in Q2. Q3 is where they'll really have a substantial impact.
Okay. Thank you very much.
Your next question comes from the line of Stephen Volkmann with Jefferies.
Hi. Good morning. Most of my question's been answered, but I guess I'm curious about how we should think about working capital sort of against the backdrop of not building inventories and so forth, and where do we think that could end year-end, and do we still think there's a longer-term opportunity there?
Well, we had an $80 million headwind in customer advances in the port business that contributed to the working capital increase. If you set that aside and understand that that dealt with big projects, I think we expect to make good progress this year-over-year working capital. It remains a critical focus for us in every area, whether it's raw material, work in progress. In particular, the big areas of working capital that need to come out of the company are in the crane business, in particular in our European operations. That's going to take a little bit of time, but we've got new management really initiating substantial lean changes in the Zweibrücken plants that Tim is responsible for. We think there's a couple of other targeted areas of inventory which will come out. It's a constant battle in the area of receivables and receivable management.
We think part of solving that problem longer term is a much more robust Terex Financial Services organization, which we're putting in place, and we'll have the securitizations to support this quarter. Lastly, our accounts payable has been a very active area for us. We are asking for terms and terms improvements from many and most of our vendors and have been successful in getting them. It's tough to predict exactly what our working capital sales ratio will be as we go through the year, but it's an area we're pretty engaged in.
Okay, thanks. I think in the past, we might have bandied about a 20% target. I can't remember if you've actually blessed that or not, but is that a way to think about it?
Well, certainly, Steve, with our mix of businesses, that 20% target should be achievable for us. To accomplish that, we've got to do what I just said, really. You have to, of course, have stable, steady markets. In growing markets, of course, it's likely that you can improve your working capital ratios. 20% is not unreasonable.
Thank you.
Your next question comes from the line of Rob Wertheimer with Vertical Research Partners.
I wanted to ask a question about port congestion. It seems like the West Coast issue is in one sense diminished, but maybe a trucker strike is rising. I don't know whether the risk is gone or not. Then in Rotterdam, there's been sporadic reports of port congestion. I don't know if that's a positive sign because it's so automated, and they're sending bigger and more ships and haven't figured out to sequence it, or if there's any risk of equipment having issues. Thanks.
Okay, Rob. Steve, do you want to handle?
Yes, sure.
I'll come back to the port and trucks.
Rotterdam, Rob Wertheimer, I'd say, the automated ports that we put in place are just getting ramped up. They're starting to take effect, but to be honest with you, they're still in the ramp-up phase. As to what's creating the backlog, so to speak, it's probably the larger ships that are coming in, the Triple-E's and all of that, and just trying to gauge the right equipment to offload 18,000 TEU type ships. I think that's probably a big part of it in Rotterdam. As these new projects get up and running, it's going to help, obviously, the throughput. Turning to the West Coast, Long Beach, that I think is going to be a showcase for us and for the Port of Long Beach with our automation project there, everything's still on track to go live at the end of Q4.
I think all eyes are going to be on what happens there.
What I would say, the West Coast ports' slowdown, it was a labor slowdown, was a very difficult thing for us in AWP, in part because we have a lot of suppliers, Asian-based suppliers, that put their products on the ship, and we have just-in-time delivery through some local consolidators. What was hard about that is we just couldn't predict when our material would get unloaded, which caused us to air freight a bunch of things. Then the compounding factor was the shipping of our own product out to Europe through those same ports. When it could get loaded, how long it waited at the port, just no one could predict what would happen, and it lasted for months.
We also didn't want to highlight this too much because it's kind of a unique situation to us compared with our major competitor in that we're located on the West Coast. With regard to a trucking strike, boy, who knows what'll happen there. We'll all learn, and we'll all have to adapt if something happens in that area. I don't want to make any comments about what that'll do.
Thanks, Rob.
Okay.
Your final question comes from the line of Vishal Shah with Deutsche Bank.
Yeah. Hi, can you hear me?
Yes, we can now, Vishal. Sorry.
Yeah. Thanks a lot for taking the question. Just wanted to better understand the inventory levels in the cranes segment, how you think the inventory levels are at the dealer levels as well.
Dealer levels. Okay, Tim.
Yeah. I would say, Vishal, the real visibility we have on dealer inventory is in North America. That's where we have the most significant dealer network. Looking at where we were at the end of the year and where we are today, they're up slightly, but not materially different from where we were three months ago. It's a little higher than we'd like, but not anything that I would say is overly concerning at this point.
Okay, great. I don't know if this was asked earlier, but given the slower than expected start to the year in terms of margins, what latitude do you have to pull forward some of the $50 million of cost savings from the second half or maybe to increase the cost savings overall?
Well, Vishal, this is part of how we've explained the year overall. Our cost savings are on target. The backlog is strong for the company. There's very definable reasons for the first quarter miss. We think they are recoverable, so we're going to bring in our cost savings as fast as we possibly can. As Kevin had indicated, we'll give a pretty good report on that when we report our Q2 performance.
That's helpful. Thank you.
Okay. Thank you, everyone. Operator?
Thank you. That does conclude today's conference. You may now disconnect.