Everyone to the Terex Corporation fourth quarter 2014 financial results 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 number one 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. DeFeo. Please go ahead.
Thank you, Melissa, good morning, ladies and gentlemen. We appreciate your interest today in Terex. On the call with me is Kevin Bradley, our Senior Vice President and Chief Financial Officer, and Kevin O'Reilly, Vice President of Operational Finance, Tom Gelston, Vice President of Investor Relations, and several of our leadership team members, including our business segment presidents. As usual, a replay of this call will be archived on the Terex website, www.terex.com, under Audio Archives in the investor relations section. I will begin with some overall commentary and highlights. Kevin will follow with a more detailed financial report, I'll return to provide some additional comments on where we're headed and summarize before we open it up to your questions. We will be following the presentation that accompanied the earnings release and is available on our website.
I would like to request that you ask one question and a follow-up in order to give everyone a chance to participate. Let me direct your attention now to page two, which is the forward-looking statement and non-GAAP measures explanation. We encourage you to read this as well as all other items in our disclosures because information we'll be discussing today does include forward-looking material. Now let me begin. Turning to page three. 2014 had many positive developments and a number of challenges as well. Operationally, our Material Handling & Port Solutions business improved profitability by $54 million as they executed the ongoing integration plan delivered on the large port automation projects and launched some newly designed products as anticipated. Our construction business returned to profitability and today is a more focused business following the divestiture of our off-highway truck business and 51% of ASV.
These transactions together deliver cash benefits in excess of $275 million to Terex. In addition, our cash flow performance in the year was very good, delivering $329 million or $2.88 a share in free cash flow. We've partially used this to repurchase 5.3 million shares during the year, with just under 70% of this done in the fourth quarter. We did this while reducing our leverage to 2.1 times EBITDA. Lastly, our return on invested capital improved 310 basis points to 11.2%. We believe Terex, even in a challenging environment, continues to strengthen. On page four, we highlight some of the challenges we faced. End markets for our equipment in general were unpredictable, if not declining. This was especially true with our cranes and materials processing segments.
Our Aerial Work Platforms business conversely had improved sales, but the combination of manufacturing inefficiencies, rising material costs, and the startup costs of Oklahoma City muted the margin performance. Company-wide, the recent sharp move in oil prices has caused uncertainty for some of our customers, especially in the fourth quarter. Lastly, we saw significant move in currency exchange rates also in the final weeks of 2014. On page five, we highlight the net sales and operating profit bridges for both the fourth quarter and the full year periods. While Q4 sales were fairly similar on a year-over-year basis, currency did negatively pressure the Cranes and Material Handling & Port Solutions segments enough to hide slight growth on a constant currency basis. The largest change in our fourth quarter results was the lower profitability of the AWP segment.
We did expect below year-ago performance as AWP focused on cash generation in the fourth quarter of 2014, whereas in 2013 Q4, we built inventory preparing for 2014 growth. Other factors were higher steel costs and the product mix shifting towards telehandlers versus a higher mix of booms in the year-ago quarter. Some of this was influenced by Tier 4 engine conversions in both periods. For the full year, AWP and MHPS posted sales growth rates of 11% and 5% respectively. Cranes finished the year down 7%. Mobile crane customers continued to be hesitant to place orders for fleet in the face of uncertain market conditions. Incremental profitability for our construction and MHPS segments were very strong, as both reflected the ongoing effort to streamline operations and remove overhead costs. AWP results were disappointing as less profit was made on more sales.
As I mentioned on the last slide, staffing decisions, input cost, product mix, and startup expense for a facility all contributed to that result. On page six, we presented our geographic footprint. This is for your information. You'll see that our largest market remains North America, which showed a slight 3% growth for the year. Our most improved market was Western Europe, which was up 28% for the year, and now accounts for 31% of our net sales. The balance of our markets were negative, resulting in a decline in sales from the rest of the world to 28% of total sales, down from 34% the prior year. In the fourth quarter, however, we saw a slight improvement in Latin America and the Middle East, which seems to point to a more stable environment for these areas in 2015.
I'd like to now turn it over to Kevin, who will walk through the detailed financial results in the quarter. Kevin?
Thanks, Ron. Good morning, everyone. I will be reviewing earnings per share detail for the 2014 full year and comparing them to prior year results. I will also review some of the progress we made in 2014 on our capital structure and the impact it has had on key financial metrics. Let's turn to slide seven, which bridges our earnings per share from 2013 to 2014. Adjusting for restructuring charges taken in 2013, our as-adjusted EPS was $2.23. Overall results for the business in 2014 led to a $0.12 increase in EPS, with the majority of that improvement coming from lower interest expense and a lower tax rate. The adjusted EPS of $2.35 removes the impact of the following items: a $0.26 charge for restructuring actions taken in our MHPS business. In addition to lowering costs, the restructuring action will delayer and simplify the organization.
The $0.17 adjustment for portfolio management primarily represents a loss on the sale of our Australian Material Handling business, which more than offset the gain we recorded on the sale of ASV. The $0.36 adjustment for net tax impact was a tax benefit triggered by the ASV transaction, partially offset by a valuation allowance recorded in the period. Lastly, $0.52 was reported related to discontinued operations in 2014, which includes the gain on sale of our Off-Highway Truck business. Page eight bridges the $342 million increase in liquidity for the year to approximately $1.1 billion. Free cash flow was $329 million, well above our previous guidance. Improvement in working capital reflects some early results from our accounts receivable and accounts payable improvement initiatives. We repurchased roughly 5.3 million shares of stock during 2014. This, combined with our dividend, represent a $192 million usage of cash during the year.
We also used $171 million to repay debt and other debt-related expenses during 2014. This includes revolver repayments and maturing debt in Italy. Portfolio activities resulted in a net benefit of $214 million generated from the sale of our Off-Highway Truck business and the ASV joint venture formation. During the year, we refinanced our senior credit facility, which lowered our borrowing costs and added $100 million in revolver borrowing capacity. On page nine, you will find graphs of key financial metrics over the last three years. As I previously mentioned, our working capital performance has continued to progress as a percentage of sales from 24.8% to 22.5% in 2014. Approximately 45% of this improvement, however, was driven by foreign exchange. Our free cash flow was $329 million, a solid increase from the 2013 results. Our ROIC for 2014 was 11.2%, a 310 basis point improvement from last year.
Continued focus on improved capital efficiency and tax rate, as well as the targeted use of cash to delever Terex are the main reasons for the improved ROIC performance. Page 10 covers key capital structure and coverage ratios. Our debt to total capital was reduced to 46.7%, continuing the trend to delever Terex since our acquisition of Demag Cranes AG back in 2011. As a result of the deleveraging and the new senior debt facility with its lower interest rate, our coverage ratio expanded to 5.6 times. Our net debt to EBITDA ratio improved to 2.1 times. The lower ratio reflects good progress in a relatively flat operating environment. We remain focused on our debt structure and would expect to see net debt to EBITDA ratio continue to trend lower. With that, let me turn it back to Ron.
Thank you, Kevin. I'll take the next couple of minutes to go through each of our segments in a bit more detail. On page 11, we discuss the Aerial Work Platform business. Of note is the very strong order intake in the quarter of $936 million, leading to a book-to-bill ratio of 207% and a year-ending backlog of $698 million. This is a good way to start a somewhat cautious year. As the lower-left chart shows, the order patterns for the last year's deliveries were entered into mainly in the first quarter. Whereas for this year, the more traditional order pattern of larger orders being placed in the prior fourth quarter took place. This should not suggest a stronger first quarter. As we know, most of our customers want deliveries starting in late March. Unlike last quarter, when we were shipping earlier. Unlike last year, rather.
We are adding a number of new products to our lineup this year, such as the 150-foot boom lift and a more complete telehandler range with the introduction of our new six and eight-ton machines. We continue to ramp production in Oklahoma City for telehandlers, and in China, we are ramping production on a broader range of Aerial Work Platform models. We believe this business is back in balance overall from a labor and efficiency perspective. We are gradually addressing various manufacturing footprint issues. Furthermore, while 2014 experienced significant increases in the price of steel, we expect 2015 to be a slight improvement in this area over prior year costs. Lastly, we are prepared for some level of headwinds associated with demand that was driven by the upstream oil activities in North America and some negative currency pressure.
For the full year, we believe net sales will be down mid-single digits versus 2014, with margins in the low teens. Turning to page 12, our construction business. It had a book-to-bill ratio of above 100%, coming in at 103%. I should note, however, that while ASV is not included in our consolidated figures going forward, the historic periods prior to Q4 do still reflect ASV in our consolidated results. That sale, along with the sale of our off-highway truck business, has led to a far more streamlined and focused business, but with several markets still weak, it's not yet a healthy business. We continue to see strong demand for our concrete mixer truck product line in North America, while the strong dollar relative to the euro, and to a lesser extent, the pound sterling.
With that, we are looking to export as an opportunity from Europe, and that may afford us some short-term opportunities. We have been essentially locked out of the U.S. for nearly eight years. We've just launched a push on compact equipment into the rental channel with a purpose-built product to a rental spec, and we would expect some uptick from this during the year. However, one of our historically more profitable products in this category, our material or scrap handler, is still seeing a challenging marketplace with very low scrap steel pricing. Overall construction, with net sales excluding ASV, should be flat to the prior period, considering the currency headwind. With currency and excluding the divestiture of ASV, net sales are likely to be down about mid to high single digits, and the overall business is likely to break even or slightly be better.
On page 13, we show our crane business, which continues to operate in a fairly muted demand environment. Backlog was up roughly 8% versus the year-ago period, but still generally below the level we'd like to see for this business. We've launched a revamped all-terrain crane product line in the 4- to 5-axle size classes, and we feel this better positions us from a selling perspective and enhances our productivity from a manufacturing perspective. The strongest performer in this segment continues to be our utilities business, and we continue to look for growth here, as well as new opportunities to leverage our customer reach. As part of that, we've continued to see some expansion of our services business in North America. Lastly, we don't expect to see much change in the challenging markets of the Americas and Australia for our main mobile crane product lines.
Visibility in these two markets is challenging. Overall, we expect net sales for the segment to decline as a result of currency and end market uncertainty by high single digits to low double digits, and margins to be similar to up slightly from a comparison with 2014. Turning to page 14 on our Material Handling & Port Solutions business. Results for backlog and book-to-bill ratios reflect the delivery of a substantial port automation solutions project in 2014. We previously indicated that this dynamic will likely cause a lower sales level in 2015 as a result, and the book-to-bill ratio of 70% highlights this dynamic. Our backlog is down versus 2013 by approximately 29%. Much of that change can be isolated to the automation product order book and is illustrated in the shaded part of the bar graphs on this page.
Backlog for all other products was down 12%, but relatively flat when adjusted for currency. The relative profitability of the segment, however, continues to strengthen, reflecting the impact from restructuring activities done to date. As mentioned back in our November Analyst Day, we have a number of new products coming out, especially on the material handling side of the business, such as our V-girder crane design and our new hoist design. This business is expected to have significant currency translation headwinds as a result of the weaker EUR. We do expect overall net sales to decline for the segment in total mid to high teens percentages, and margins to be at or slightly better than the 2014 period, despite the lower business levels. Lastly, on page 15, we discussed the materials processing business.
This business continues to perform steadily in terms of demand, although still at softer levels from mining-related markets such as Australia. In 2014, we invested in new products to expand our portfolio into aggregate washing systems and recycling. This, as well as stability in the global aggregate markets, has us more optimistic for improved results on a unit basis. The business is headquartered in Northern Ireland and will have similar currency challenges as the rest of our businesses. This also may present some increased export opportunities. Lastly, lower commodity prices such as iron ore and coal continue to drag sentiment down, exacerbated by geopolitical uncertainty, especially in markets like Russia and Ukraine. We expect net sales to be high single digits, lower as a result of currency, with margins at or about the 2014 levels. Turning to page 16.
Summarizing the improvement initiatives underway in the company. We discussed a few months ago expectations for $202 million of profit improvement to be implemented across the business by the end of 2016. We are on track to achieve this. We anticipate approximately $50 million will be realized in the 2015 income statement, and exiting the year, we will be exiting at a higher run rate than that. We expect continued improvement in our tax rate, with roughly half of the 300 basis point improvement in our rate expected to occur in 2015. Our working capital efficiency gained traction and is expected to continue throughout 2015, and our newly authorized share repurchase program enhances our ability to deliver value to shareholders. We are on track with these programs. On page 17, we present our outlook for 2015.
We are calling for net sales to be in the range of $6.2 billion-$6.6 billion. The impact from currency and the deconsolidation of ASV results represent about $650 million-$750 million of this decline. The balance is a combination of lower MHPS sales, given the impact of not having the large port automation projects that occurred in 2014, and that won't repeat in that size in 2015, as well as some headwind assumptions associated with the oil and gas markets. We're expecting operating margins to be in the 7%-7.5% range, mainly as a result of improved AWP performance and the impact from the savings initiatives for our programs overall. Our resulting earnings range is for $2-$2.30 per share, a slight decline from the $2.35 we delivered in 2014 as adjusted.
We anticipate interest will be approximately $115 million, with the interest being slightly lower in the second half than the first half due to the timing of the maturity of our convertible bonds in June 2015. Our tax rate is anticipated to be 30%-32%, and our share count approximately 113 million. Free cash flow is targeted at $200 million-$250 million. For the cadence of our earnings, we expect that our first half EPS will be roughly 40%-45% of the full year, similar to this past year, with the first quarter starting more slowly, as AWP deliveries will be below year ago. Consequently, the first quarter EPS should be about 7%-9% of our full year versus the roughly 10%-12% that occurred in the past two years.
In summary, on page 18, our organization's focused on simple and straightforward objectives for the year: Drive improvement in those activities we can control. With that, we are on track. AWP did have a challenging year in terms of profit margin. We think we've addressed much of these causes in 2014 and feel most of them are behind us. The market dynamics of currency and the volatility in oil pricing does create a headwind for us in 2015. Financial efficiency opportunities remain, however, through the company. It will be as we concentrate on working capital, tax, interest expense, and share count improvement opportunities. We are working all these aspects and expect to unlock value from these in 2015 and beyond. We expect modestly weaker markets and significant currency volatility.
Like 2014, we think we can make meaningful improvements during this period that will position us for better days when and if they arrive. Thank you, and Melissa, could you open the line up for questions?
At this time, I would like to remind everyone, in order to ask a question, press star then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from David Raso with Evercore ISI.
I appreciate the color on the cadence for total sales, can you take us through a little bit on organic sales, how you see the year progressing? I'm just trying to square up. You have the orders up around 13% at the end of last year, the full-year sales guidance is for organic down 2%-3%. I'm just trying to square up how we see that play out. Obviously, I'm thinking of the oil impact as a little more of a lag. Maybe if you can help frame just organically how you see the sales growth for the year playing out because the earnings seem to be a little more back-half-loaded than normal. I'm just trying to make sure I understand the cadence.
Okay, David. Without trying to give a complete reconciliation, I'll try to give what I think is overall perspective that's going on here. Relative to Aerial Work Platforms, which I think is one of the drivers of our cadence, while we definitely have highly encouraging orders from the main rental companies and generally feel that the overall markets are pretty positive, we also know that these rental companies are more likely to want less equipment earlier and more equipment during the height of the season, which will cause a modest change in the cadence of that AWP business. Also, if you do a comparison year-over-year, most of us, including our customers at this point in time a year ago, were expecting an even stronger AWP business.
Our effort to build equipment earlier to get more inventory into the system so that we could capitalize on what our customers were telling us was a pretty damn strong market, drove our year-ago performance, allowed our customers to want to take equipment earlier. This year, I think they're much more balanced on their views, including some concerns that they already have seen from the oil and gas environment. Fundamentally, the equipment we're selling today continues to be replacement-driven equipment. We're not expecting a lot of growth from non-residential construction improvements because we're not seeing it. That overall comment impacts our AWP business. It's not a very different picture in a certain sense from our crane business in that the North American business we'd like to see and the Australian business we'd like to see improve, but those are pretty weak.
We have seen some growth in some other parts of the world, nothing that I would say would substantially offset that comment. If you net all these out across our segments, including a recognition that the MHPS business tends to be somewhat back-half loaded, it causes us to be more cautious in our first half outlook. Not that different from this past year, I think the tendency will be to be a bit more cautious. There's one offset that I would say, that is some of Steve's businesses look like we could have a little bit stronger order entry earlier in the year for some of the port business and some others. That's really more a commentary on how we see the market than when our actual revenue will be realized.
I'm just trying to think about the guidance is $0.20 lower year-over-year. If I heard your first quarter EPS comment correctly, I already lose about $0.10, $0.11 of that $0.20 year-over-year in the first quarter. I'm just trying to make sure as the year plays out, I'm just trying to think about the EPS risk in the back half of the year. It sounds like what you're saying, Steve's business, AWPs may be a little later in the year this year than last year. Does the restructuring savings accelerate as the year goes on? I'm just trying to make sure we don't set up-
Yes
$0.17 in the first quarter, then we're kind of in a hole-
Yeah.
for the rest of the year again in 2015.
They do. The restructuring savings definitely accelerate in the second half of the year and into 2016. Some of the charges we took to end this past year will not really benefit us until mid to late part of 2015.
All right. I'll pass it on. Thank you very much.
Okay.
Your next question comes from Jamie Cook with Credit Suisse.
Hey, guys. This is Andrew Buscaglia on behalf of Jamie. Can you guys talk a little bit more about your orders so far in January and February? I think things were pretty impressive sequentially for AWPs and cranes, but can you give just a little more color so far what you've seen now that we're halfway through February?
No. We don't comment on orders in the middle of a quarter. The best commentary you'll get from me on that topic is the overall outlook and sense that I've provided on the marketplace. Frankly, the reason for that is you never really know where you are until the quarter is over. I've seen over my 22 plus years big swings between month one and month three of quarters. I don't think it's really appropriate to try and give you that sense.
Got it. That's all right. I guess, going back to cranes then, things seemed a little bit surprisingly better sequentially. You talked about utilities, cranes being stronger. Can you give us a little more commentary, specifically what you're seeing in the other crane products?
Tim, do you want to comment on that?
Sure. Andrew, thank you for the question. Let me give you an overall picture of the segment. The crane products business is about 70% of the overall revenue. The utilities and services pieces, which are the remaining 30%, are important, but in the grand scheme of things, not the real driver. The crane products business saw, I would say, significantly improved order intake in the fourth quarter over a pretty meager third quarter. Utilities and services continue to strengthen. The utility market is actually quite strong right now, and our services business got progressively better each month and each quarter through the year. I'm pretty encouraged about the outlook for our utilities and services business.
As Ron indicated in his opening comments, some of the areas that we need to continue to pay attention to in the cranes business are going to be the impact of oil and some of the other foreign exchange effects. Overall, I think it's a pretty balanced view. I think services and utilities is strong, and we'll have to wait and see how cranes unfolds.
All right. Thanks, guys.
Sure.
Your next question comes from Jerry Revich with Goldman Sachs.
Good morning.
Good morning, Jerry.
I'm wondering if you could just talk about your order trends for your European business over the course of the quarter, and particularly touch on whether you're seeing any early signs of benefit for the MHPS business, in particular, from the weak currency.
We think the currency presents some headwinds overall, but also presents some opportunities. I think it is far too early to try and categorize or calculate the opportunities. I don't want to give any kind of mid-quarter commentary about order trends for any of our segments at this point.
Can you touch on it from a fourth quarter perspective, Ron?
Okay. Fourth quarter really had little to no impact from currency. I think, Jerry, if you want to ask what our Material Handling team is seeing, Material Handling and Port Solutions team is seeing, I'll turn it over to Steve to see if you can provide some commentary there.
Yeah, thanks, Ron. Yeah, Jerry, your question was specific to Europe. I think in the MH business, fairly flat in the fourth quarter. Some markets are down, but there is some momentum in places like Spain. We're seeing some orders coming in. France was a little bit down. Germany was flat. Scandinavia was up a little bit. On the Port Solutions business, actually, Europe was up quite a bit, and that's promising a lot of investment in the Benelux, in the U.K. From a Western European perspective, I think MH flat and some momentum in the Port business.
Okay, thank you. As follow-up on Aerial Work Platforms, I'm wondering if you could talk about your expectations for pricing net of material costs, net of FX in 2015. Obviously, a lot of moving pieces with the new engines, I think some transactional headwinds. I'm wondering if you just update us on the proportion of European content or U.S. content that's sold in Europe for the Aerial Work Platforms business at this point.
Okay, Jerry, that's a complicated question. A lot of moving pieces there, I'll turn it over to Matt to kind of give you some perspective.
Yeah. You covered a lot of different things there. Starting with pricing. The pricing environment as a whole, it has been relatively stable, we're expecting to get margin improvement through initiatives, not through pricing in 2015. There are some non-U.S. manufacturers who are using currency to their advantage, as you would expect. As far as the content and what we have produced in Europe versus the U.S., we are primarily manufacturing in the U.S. even for the European market, although we do manufacture in the U.K. all of our electric scissor lifts for the European market. We also manufacture in Italy our articulated booms, we bring telehandlers from the U.S. That will help us from a foreign exchange standpoint. We also have expanded in China, which now makes 11 of our different models, that will also help us for the entire Southeast Asia region.
When you start peeling it into content, we do have European content. When you start to look at the engines that we use
Some of the big bearings and gearboxes that we use. We are going right at those suppliers right away to help offset some of the impact of the currency. You had a lot packed into that question. Margins are our primary focus in 2015, and things that we can control, which you brought up in the question, that's where we'll be putting all our efforts.
Good. Thank you very much.
Your next question comes from Andrew Kaplowitz with Barclays.
Morning, guys. It's Vlad Mistreanu on for Andy.
Okay.
Talking about your initiatives, can you talk a little more on the $50 million improvement you expect for next year? Can you talk about which initiatives you see as having the most impact, your level of confidence in achieving that $50 million next year?
Well, it's this year.
Yes, this year.
Just to be clear. Why don't I, instead of giving you the precise dollar amounts, let me just give you my sense of where we are on some of these initiatives. If you look at the AWP category, we have $69 million identified there, $30 million of which is in productivity and headcount. We're going to make a lot of progress in the productivity and headcounts and in the supply chain area this year. Part of that is simply being more efficient in deploying our labor and productivity percentages in a very disciplined way. 2014, we anticipated a stronger market. It didn't materialize. We had excess cost. The delta is going to be pretty meaningful one year to the next there. In the cranes area, we're going to make progress here, but some of the design and product issues really will bleed more over to 2016. Okay?
We'll have real progress in the productivity and the supply chain areas in the crane arena. In Material Handling & Port Solutions, good solid progress here. I'd say about a third of that overall is going to come from a cross-section of these. We've already announced the closure of the Luisenthal factory. The product and design simplification initiatives are underway. I think pretty good progress there. Materials Processing, new products, and the supply chain. The new products are probably mostly 2016, although we're implementing them today, but the real benefits come next year. Supply chain's probably much sooner than that. Construction, probably a good portion of those new products will come in 2016, although I did mention a couple of new products we're introducing right now, that we think are new to our range and will make a difference.
The corporate, very little of those corporate savings will happen in 2015. Most of those will be 2016 related.
Okay, that's very helpful. Maybe just a quick question on inventory. Inventory came down nicely in the quarter. Given your sales outlook, should we see inventory as a source of cash in 2015 again, or is there anything else we should think about?
Yes. We would expect inventory to contribute modestly to working capital reduction in 2015.
Okay, thanks.
Your next question comes from Ann Duignan with J.P. Morgan.
It's Ann.
Hello, Ann.
Hi. My question is a little bit more philosophical, Ron. Just curious, you spent $170 million buying back 5.3 million shares. That implies about $32 per share versus your current share price, about $25. I'm just curious, given the lack of visibility around your end markets and the volatility that we see around your stock price, why pursue share repurchases at all? Why not do a special dividend?
It is a philosophical question, Ann. Of course you know there's no right answer to this. Providing some returns to our shareholders of the cash we generate, I think is appropriate given some of the uncertainties that we see in our businesses and the difficulties of actually deploying that cash in accretive acquisitions. We're not just at the acquisition challenges from a purchase price point of view, but actually the risk associated with making an acquisition at this point in time. The reason why 70% of the share repurchase took place in the fourth quarter, was because we had a program in place that was much more gradual earlier on, when our share price was substantially higher. I think we did a fair job to get the average down to $32.
In reality, we got pretty good pricing, relative to our share repurchase plan in the latter part of the year. We think it's prudent to have a share repurchase plan in place with our shares trading where they are. Obviously, I'm not going to try and articulate where I think the right price point is for buying our shares. I do think being in the market regularly with a share repurchase plan is a good use of our capital when our stock is trading the way it is. It's hard for us to predict the turn of our end markets. We know our end markets eventually will get better, but we are really no longer trying to handicap when that turning point is. With that reality, using your cash on a regular basis where the stock is currently trading seems to make sense to us.
Okay, that's helpful, Ron. I appreciate the color. Secondly, can you just talk a little bit about the impact of the labor dispute on the West Coast, if that's having any impact on your ports automation orders? Have you seen any cancellations, any delays in orders, et cetera?
I'm going to turn that over to Matt. I would say the one thing I'd caution here is that if we have any customers listening, I'm sure we'll be able to be competitive with any deliveries. We don't want to lose any business as a result of this. I'll turn it over to Matt.
Ron's turning it over to me because the majority of AWP manufacturing is in Washington State, and we've been experiencing slowdowns at the ports for our inbound materials and our outbound shipments. Because it's a slowdown and not a strike, it's been very sporadic about receiving components. The teams have done a great job of managing it to limit the disruption. It has been a disruption. We've had to airship a lot of components in. We've had to change routings of ships to go around to come in to other ports. The visibility on when we're going to receive things, it's been hand to mouth since about the middle of November. Most recently, this past weekend, they actually shut down for four days.
The good news is that they finally have put in, the federal government has stepped in, and they're starting to take action. We're hoping that that gets behind us. To date, we've been able to manage it without a significant financial impact. The longer it goes, the harder it is to manage. It's something we're keeping a close eye on. We're working with our representatives, and we're hoping that we get through that here in the next few weeks.
We have pretty close relationships with the Port of Long Beach because in Steve's business, they're the tip of the spear, so to speak, on the automation initiative. They're providing us with some good perspective, and they're very much dedicated to finishing the job with automation. It's a pretty critical change that's underway.
Okay. Thank you. I'll get back in line. I appreciate the color.
Thanks, Ann.
Your next question comes from Andrew Casey with Wells Fargo Securities.
Hey, everybody.
Hi, Andy.
Little different question on inventory as a source of cash. In Q4, you generated, I think, almost $138 million in cash benefit from inventory. Was there anything one-time in that change? I'm just really trying to understand how to frame the impact of efficiency improvements on future cash flow.
Yeah. Well, in December, Andy, currency did impact our levels. That was a fairly significant contributor within the quarter. It wasn't all that. Obviously, the MHPS business, actually most of our businesses, had very strong late quarter December deliveries, which we had telegraphed. It was good execution to get the inventory out, combined with the drop in the euro that contributed to that.
Okay. Thank you. I guess back to the cadence question that a couple people have asked. The Q1 guidance midpoint of around $0.17, could you give more color behind the biggest drivers of the anticipated year-to-year decline? I know we're focused really on the short term, are the major drivers the slow start for AWP and currency headwinds and AWP gets better through the year? I'm just trying to understand the cadence a little bit more.
Sure. The main driver is AWP performance on a year-over-year basis. That comparison as deliveries will be a little bit more into the second quarter and perhaps a little bit later in the year. The margin rate obviously was held down a little bit given our production levels. That is probably the principal change from one year to the next.
Thank you very much.
Your next question comes from Ted Grace with Susquehanna Financial Group.
Hi. Ron, I was hoping to zero in on some comments you made on Latin America and the Middle East. I think you indicated that things feel like they've started to stabilize, I was just wondering if that was in the context of revenue or orders or both.
In the context of both I think our sense is that they've hit the bottom. We don't expect a lot of upside short term, but we don't expect a lot more downside at this point in time. Both the Middle East and Latin America have been good contributors to Terex's net sales and order intake. For the most part of 2014, we were on a pretty good decline level. We think we've hit the bottom there for those markets, for the most part.
As it pertains to the Middle East, would cranes have the greatest exposure of the five segments?
Yes.
Okay.
Tim, you want to comment on that?
No. The Middle East is an important market for cranes. I would say that's driven principally by two countries, primarily. Saudi Arabia and the UAE. I was in the Middle East in the fourth quarter. I would say the attitude there is generally optimistic, even in spite of the overall oil price decline. In fact, if you talk to people in Saudi Arabia, the real influence on volume opportunities in 2015 and '16 isn't necessarily petrochem related. It's infrastructure related. Saudi Arabia is building 11 football stadiums and a metro system in Riyadh, that's going to demand a lot of cranes. There's opportunity there. It's not happening today. It's more a late '15, '16 kind of thing. Clearly, there's continued opportunity in the Middle East.
That's super helpful. The next question is for Steve. Steve, can you talk about the project pipeline for automation? My recollection is you guys may have framed a half dozen or so global opportunities are on the short-term radar screen between 4Q of 2014 and through 2015. Could you just maybe update us on what the broader pipeline looks like for automation projects?
Steve?
Sure, Ted. Sure, Ted. As I mentioned, there's probably 12 projects that we're staying pretty close to should come out in the next two years, and some of those have been postponed. What I would say is we've got clear line of sight now to probably two or three projects that are going to open up tenders pretty soon. We're getting ready for that, and obviously, we're going to bid it to win it, but it's going to be competitive. I think it still looks positive. That pipeline is still there. Some things moved around a little bit, but at this point, I don't see anything really coming off the rails. Actually our software business has increased quite a bit, and that's the lead into a lot of these project developments and simulations and things.
If you look at that piece of the business, I think we're going to push up to close to $30 million of software revenue, which is probably double of what it was the year before. That's showing some positive trends. A couple are up and coming, I think, pretty soon.
Okay. The last one, if I could squeeze it in for Kevin. Kevin, could you just talk about the impact of FX on profits in the fourth quarter, and then what the embedded profit impact on the $2-$2.30 of EPS is in 2015? Just trying to think about how you're expecting FX to impact profits this current year.
Well, let me start with 2015. We're looking at, as we said, $0.15-$0.20, but that includes the ASV transaction. Currency is the vast majority of that impact year-over-year that's in our guidance.
It's the vast majority of that.
Yeah.
That's super helpful.
In the fourth quarter, it was relatively small impact. I don't have the exact amount, but the way things fell off largely towards the end of the year, and we used the prior month's ending currency for the period. It didn't have a major impact in the fourth quarter.
Okay. Well, best of luck this quarter. Best of luck this year, guys.
Thank you.
As a reminder, we ask that you limit your questions to one due to the time. Your next question comes from Vishal Shah with Deutsche Bank.
Chad Dillard for Vishal. Thanks for taking my question. Could you provide a little bit more color on your AWP outlook in terms of what to think about for a regional basis?
Matt?
Yeah. From a regional perspective, I'll start with overall, that we're expecting 2015 to be another good year. Our focus is going to be on margin improvement in the things that we can control, like productivity and delivering the backlog that we have secured. We recognize that there may be some headwinds from oil and gas, and the strong dollar, but we have initiatives in place that we believe will offset those headwinds. There's certainly some uncertainty out there, but there are also many opportunities for AWP to drive improvements. For now, we have orders, and our inventory is where we want it, and we're focused on what we control. I would sum it up by saying North America, there's a little bit of caution because of oil and gas. Although a lot of our backlog is for the large North American rental companies.
The Europe market is very good. It continues to be good, and the backlog that we have there is high also. If you look at the growth that we had in 2014, the strongest percentage growth that we had was in Asia Pacific and China. The only place that we've been down, and we expect to stay down, is in Latin America. Although it's a little bit muted here in North America as people shake through what's going to happen with the oil and gas, that's the reason that we're taking our revenue and saying that it's going to be down mid-single digit. The rest of the world is looking good.
What's the body language of the independent rental companies? Are you seeing them coming back, or are they going to be holding off? This is particularly for North America.
Yeah, the independents, they're following the same trend as in the past. Looking at Q4 of 2014, the North American percentage of independent sales was almost identical to the fourth quarter of 2013. They're still there and an important part of the market. I'd lump them in with everybody else. Everybody's kind of cautious about what's going to happen. There's a lot of these independents that are not tied to oil and gas. They're in niche markets, and they're feeling pretty good. Independents, there hasn't been a major shift.
Got it. Just lastly, how much of your buyback is baked into your EPS guide for 2015?
Nothing.
Okay. Thank you.
Your next question comes from Eli Lustgarten from Longbow Research.
Good morning, everyone. You're implying almost a $500 million FX hit in sales. Can you give us some of what the assumptions of currency are in there? I'm not sure how you're doing that. What euro and pound, I guess are the big ones. Just to get some idea of how you're looking at that.
Basically, it's currency rates in effect the end of January.
Okay.
It's over $500 million. Well over $500 million.
Your next question comes from Mig Dobre with Robert W. Baird.
Oh, I'm sorry, Eli.
Okay. Good morning, gentlemen. Just going back to Aerial Work Platforms. I appreciate the net sales guidance, maybe can you provide us with a little bit of color as to how you're thinking about orders for the full year? You had 45% growth in 2014, ConExpo in 1Q, you had the telehandler pre-buy in 4Q. Is it possible to see further growth in orders in 2015? If we're talking about a potential decline, how do you sort of gauge the magnitude of that at this point?
Okay. Mig, it's an interesting question as to when orders come in and when they don't in the Aerial Work Platforms business, because we've seen two different orientations within 18 months. One where rental companies did a big pre-buy. We also saw them not do a pre-buy. I think that drives the overall level of backlog that we have. At this stage, we're pretty positive about the level of backlog that we have, but we're also pretty cautious about the fact that many of the rental companies are telling us that, and I'm going to speak for Matt here a little bit, that at this stage, this is a replacement-driven kind of planning horizon, not a lot of growth.
As we get deeper into the year, the oil and gas provides a little bit of a headwind, and we may actually see a little bit of a pause in terms of the amount of orders and the amount of business they want to have in the aerials category. We don't think it's the kind of pause that causes you to fall off a cliff, because this is good, solid fleet management. The flip side of this is we haven't seen any growth capital of consequence related to non-residential construction. Normally in a cycle, you see non-residential construction provide the energy for growth capital. It's not there at this stage. Overall, I think our guidance is a reflection of how we see order patterns coming in. We're not going to get order patterns, big order patterns in, and look to see mid-single digits declines in revenue.
My follow-up is in Crane. My best guess right now is that your guidance implies a very slight decline in organic growth for the full year. I guess I'm wondering how to square that with your comments on energy and with prior comments that energy has been a pretty big driver of demand for Crane.
I would answer this quite simply. I think there are two effects going on here. One is the impact of oil and gas, and secondly is FX. FX is going to have a negative drag on overall revenue. When I look at the volume pieces of this, I'm not overly concerned. In fact, when I look at the
Anticipated for 2015, it's reasonably consistent with where we've been over the past 12 to 18 months. We've got two big areas of concern. One is Australia continues to be down, and that's a very important and very profitable market for us. The second area of concern is what's going on with oil and gas. We'll pay attention to those two areas, then we'll have to play in the effect of foreign exchange.
That's my point. If oil and gas is a headwind, why would we see sort of relatively stable, just slight organic decline in 2015? Why not more, especially in the back half?
Keep in mind, as I said earlier, the crane business makes up 70% of the segment, but utilities and services makes up the remaining 30%. The utilities and services business have a pretty strong outlook for 2015. I think when you kind of balance those against one another, that's where we end up.
Thank you.
Your next question comes from Joe O'Dea with Vertical Research Partners.
Hi, good morning. First, just on AWPs and production and the adjustments that you've made to build rates over the past couple of quarters. Are you now in a position with given your outlook, you feel like you're sort of in a level load kind of situation for production? Or is it more a factor given the strength in the backlog that you would be ratcheting that up over the course of the year?
I think we'll be more in balance as we enter the second quarter. We made the adjustments in the third, fourth quarter, first quarter, and we'll be more back in balance in the second quarter in total. Nevertheless, I think, depending upon order rates, we may have a little bit of scarcity of product if the order rates are strong, but we're not planning on that at this stage.
Okay, thank you. Just on the cranes margin outlook, a strong fourth quarter to end the year with an outlook that is kind of flat year-over-year. Could you just talk about the kind of mix element to the cranes margin? Maybe why some of that sequential progress in Q4 doesn't carry over a little bit more year-over-year lift into 2015?
Yep. I think if you look at the overall mix impact for cranes, as I just mentioned, the Australian business is important to us. That continues to decline, and we frankly don't see any upside opportunity there. The second, I would say most important product category for us is our North American rough terrain business. That market was down mid-teens in 2014, and our expectation is it'll continue to be around the same level in 2015. We're looking ahead and making improvements upon the product lines that Ron mentioned earlier, the all-terrain category. That's historically been one of our lower margin businesses, and it's one that's actually growing and improving. We've got to get the cost out of those products to maintain and improve our margins. That's one of the areas we're focused on pretty intently.
The lattice boom crawler market is a better category for us, that seems to be a little less bullish in 2015 than it was in 2014.
Okay, thank you.
Your next question comes from Seth Weber with RBC.
Hey, this is actually Daniel Polcer on for Seth. Just going back to Europe, two questions. On AWP, the commentary we've seen coming out of the rentals and two industry associations suggest low single digits growth, somewhere in that range. I was wondering if you could kind of just reconcile that with what you're seeing in terms of the order strength. I guess the second question would be in Europe also, within the MHPS, what are you guys seeing on the material handler side? Historically, it's tracked capacity utilization, industrial production, which seem to be doing well. I guess looking for some color there as well.
Matt then Steve.
Okay. As far as Europe goes, the last two years we've seen double-digit growth, strong double-digit growth. When you take a look at the backlog that we've received for Europe year to date, it indicates that it's going to continue to grow a little bit above what you have indicated. We also have to consider the headwinds that we have related to FX that will curb that a little bit. The European fleet is older, and they're at a point where they need to replace the fleet, especially the large rental companies. We continue to think that Europe is on an improvement path, and that's the way that our plan is for 2015.
Steve?
Yeah. I guess Daniel, from the MH side, industrial utilization, capacity utilization is not bad. It's in the high 70s. That's good news, and it actually shows in our services business. Our services business is up
single digits over prior year. The equipment business is still, I'd say, in a flattish type market. As I mentioned earlier on the call, I'd say, going forward, I think Europe is just, there's a lot of puts and takes. Southern Europe is very slow. Germany's not bad. France is down a little bit. Our general outlook for industrial cranes is flattish in Western Europe.
Okay, next, just a quick follow-up. On the MHPS, for margins, it looks like it sustained in 2015 versus 2014. Is that really coming from service, or are there any specific categories there that supports that?
No, I think, obviously, the restructuring is paying off through both businesses. Not a lot of mix differences, I'd say, between either businesses. No real mix effect. Parts and services, as I said, is up single digits, that's not going to be a big change factor. We've kind of committed that we're going to see flattish type revenues, but we're going to continue to improve our operating profit in both MH and PS businesses.
All right. Thanks a lot.
Your next question comes from Philip Faccili from Deutsche Bank.
Good morning. I was hoping you could talk a little bit about the Dueco acquisition that you just completed. What exactly do you plan to do with that operation? Will you be just servicing equipment, or will you be actually leasing equipment to customers?
Yeah, good question, Philip. Dueco was one of our longest-standing distributor partners. We'll be using the operation there for both manufacturing as well as expanding our footprint nationally on our services business.
Right. It is not our intention to compete with our customers-
Right
on a rental fleet.
Understood. Great. Thank you very much.
Your next question comes from Michael Shlisky from Global Hunter Securities.
Good morning, guys. I was curious, is there a certain oil price that you've assumed in your guidance today that's kind of baked in? If we were to see, let's say, a 25% increase in the price of oil or a decline of that magnitude, give us a feel for how much that might change on your top line or your earnings outlook.
Mike, there is not a specific oil price that we would assume in our guidance, because what happens is it's a confidence factor that drives our customers' attitudes, and it varies quite differently between our product categories. Oil fell off precipitously. When oil falls off precipitously, it raises the eyebrows of capital goods buyers. First in the crane business, but certainly also in the AWP business and related businesses. It's not because there's a huge drop in actual equipment being used, but it's because people get concerned that there may be something more there. So any products that can be postponed, they postpone the acquisition of that equipment. I believe the reciprocal will be true as oil prices go back up. Frankly, I don't see oil prices going back up any time soon.
We're going to have to let this adjust, then demand will be adjusted. Our customers will realize that they can make money with the oil prices the way they are. In my view, global GDP or U.S. GDP actually may respond because remember, two-thirds of the economy is consumer. The consumer has more money in their pocket because of lower gas prices. Net-net, a short-term drag on our business, but we've got to get the economies, the global GDPs, the U.S. GDP, growing a little bit faster for our business to be healthier long-term.
Got it. Just a quick follow-up here on your oil and gas business. You've mentioned that a lot of the heavy lifting here have been mainly on upstream-type projects, and what we've been hearing clearly is midstream and downstream aren't doing quite so poorly right now, given what's been booked out there by some of the major construction companies and some of the major MLPs. Can you give us a sense for how much of your upstream rental business on either aerials or even on cranes, is there any fraction of that can be transferred over by the fleets from upstream to midstream or downstream projects? Or if they do see some pretty solid downstream business here, does that require entirely new equipment?
All of our products could go downstream as well as upstream. Okay. It's just a matter of adapting to the product. I don't think there's one rule of thumb that we could apply.
Okay. Thanks, guys.
Your next question comes from David Raso with Evercore ISI.
Yeah, apologize. One modeling question here. The share count for 2015 being above the fourth quarter share count, is that related to the converts at all, or how should we think about just share creep on top?
Good question, David.
Yeah, thanks, David. It's a combination of an assumption on a little bit more dilution from the convert between now and their expiration June 1st of this year, as well as stock comp.
Great. Quick, Matt, if you want to give us a little color on the backlog in aerials. When you look at the backlog's up 137% year-over-year at December 31st, can you give us a little color on North American backlog year-over-year? Within that, just curious, is it more of the larger booms? Is it the scissors, 40-footers? I'm just trying to get a feel for mix with that sort of organic up, I guess, implied mid-single, low single for North America for the year.
Yeah. The backlog, it is heavy with the North American large rental companies. Most of the deliveries start in late March through July, August. The mix inside there is what I would call a traditional mix for Genie as far as booms, scissors, and telehandlers. We've looked at it, and it is nothing surprising in there. Part of what we saw in fourth quarter, we referenced the telehandler, the run on telehandlers because they convert to Tier 4 in second quarter. The first quarter, I would expect a little bit heavy in telehandlers. As we move through the rest of the year, because we have visibility on that backlog, it is more of a traditional mix.
All right, that's helpful. I appreciate it. Thank you.
All right, David. Thank you.
There are no further questions at this time.
All right. Well, we appreciate everybody staying with this call for this length of time. Thank you for your interest in Terex today. Our team is available for follow-up. Thank you.
This concludes today's conference call. You may now disconnect.