Good morning. My name is Holly, and I'll be your conference operator today. At this time, we'd like to welcome everyone to the Terex Corporation Second Quarter 2013 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 1 on your telephone keypad. If you would like to withdraw a question, press the pound key. I'd now like to turn today's conference over to Ronald DeFeo, Chairman and CEO. Sir, you may begin.
Thank you, Holly, and good morning, ladies and gentlemen. We appreciate your interest in Terex today. On the call with me this morning is Kevin Bradley, Senior Vice President and Chief Financial Officer. With him is 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'll begin with some overall commentary and highlights, Kevin will follow with a more detailed financial report. Then I'll give some comments and summarize before we open it up to questions. 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 direct your attention to page two, 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 today does include forward-looking material. Now let me begin. Turning to page three. The second quarter results for Terex reflected the lighter order environment for many of our products that we highlighted in our earnings revision back in June. We did end the month of June fairly strong, accounting for our modestly better results versus the $0.50-$0.60 EPS range that was anticipated. On an adjusted basis, that is, we achieved earnings per share of $0.65 and a reported EPS of $0.18.
The difference is primarily for charges for reductions in workforce and restructuring activities in our MHPS, Cranes, and Construction segments, along with charges taken in relation to the retirement of $220 million of debt in the quarter and the accounting impact of purchasing much of the remaining equity of the MHPS segment. As our results demonstrate, our segment results were mixed in the quarter. Aerial Work Platforms had a strong quarter, both from a growth perspective, up 17% versus the prior year, as well as solid operating margins of 17%. Construction continues to be challenged as we continue to trim non-core businesses from this segment as well as simplify our cost structure overall. Cranes business continues to see a flat operating environment, with weakness continuing in Europe as well as Latin America and Australia in particular. The MHPS business continues to show softness across its core markets.
As previously mentioned in the first quarter release, we're focusing on aggressive cost control. This segment incurred a pre-tax charge of approximately $47 million associated with these cost adjustments. Materials Processing executed their operating plan as expected, and we're pleased with their profit contribution, especially in light of relatively light end market activity. Clearly, there are some near-term challenges reflecting the continued uncertainty in many of our markets. As such, we continue to focus on those aspects of our business we think we can control. The most significant undertaking in the quarter was the collective $65 million in expense associated restructuring and streamlining of the three segments noted. When fully implemented, we expect to have savings of roughly the same amount annually.
Free cash flow of $40 million in the quarter brings our first half cash generated to $175 million, reasonably good overall execution in the part of the year that we would have traditionally seen us using cash. Turning to page four, the page that's titled Keys to Success 2013 to 2015. As we continue to make progress on the four short-term areas of margin improvement, cash generation, MHPS integration, and debt paydown, we've broadened our view toward the keys to achieving our 2015 goals. Simply stated, these are threefold. Number one, portfolio management. That is both by products and geography. This does not mean acquisitions, but rather continuous pruning. We've started this process, as you know, and we will continue. Secondly, simplification. We're a complicated company built over many years and through acquisitions, as you know.
We have a focus on simplification in the company today that we feel will reduce complexity and improve our execution. Third, financial efficiency. We want to operationalize the diverse businesses that we have into more of a one company approach where it makes sense and keep local activities also where they make sense so we can achieve a better return on invested capital. We have numerous projects in this area, as we have previously discussed, and we are executing. In the broadest of all terms, we will apply the 80/20 methodology, focusing on the critical few items that we think will be helpful to speeding our way to achieving our goals. This isn't a new direction for the company, but rather an operating framework through which we can run all our portfolio, capital allocation, and project decisions.
This will ensure that we maintain the right focus and commitment to accelerate actions that improve our chances of making our 2015 goals. I'll come back in a few minutes and provide some segment details, but I'd like to turn it over now to Kevin Bradley, who will go through the financial results on an adjusted and reported basis for the quarter. Kevin?
Thanks, Ron. Good morning, everyone. Turning to page five, I'll take us through the financial results for the quarter. Our net sales for the quarter of $1.9 billion declined from the prior year period by 5.1%, or approximately $104 million. Our AWP segment led with growth of 17% versus the prior year, and our Cranes segment posted 3% growth. The balance of the segments showed year-over-year declines as the softer than anticipated macro environment continued to dampen our commercial efforts. Gross margin, as adjusted, decreased 40 basis points to 20.9% from the prior year period. Improved price realization and manufacturing efficiencies in our AWP segment were more than offset by the impact of net sale declines in our Construction and MHPS segments. Negative sales mix in our Cranes segment also contributed to the reduction.
SG&A, as adjusted, increased to 13% of net sales from 12.6% in the prior year quarter. On a dollar basis, SG&A spending levels declined as we continued to cut costs in both Construction and MHPS. These reductions were partially offset by increased engineering investment in both AWP and Cranes. Income from operations, as adjusted, declined $25 million to $150 million or 7.9% of sales from $175 million or 8.7% of sales in the prior year quarter. Our AWP segment posted solid incremental margins during the quarter, approximately 26%. However, performance declined in the balance of the company, driven primarily from volume reductions. We are taking aggressive action to reduce future costs and remove complexity from our operations, as evidenced in our reported numbers. Net interest and other expense was down roughly $13 million when compared with the prior year quarter.
Net interest expense reduction stemming from the refinancing and de-leveraging actions executed in 2012 accounted for substantially all of the improvement. In the second quarter, we also paid down an additional $220 million in senior term loans consistent with our strategy to further de-leverage the company. The effective tax rate in Q2 was 58.9% compared to 35.4% in the prior quarter. The increase was mainly due to losses in the quarter that did not produce tax benefit and changes in uncertain tax provisions. As reported, earnings per share for Q2 was $0.18 versus $0.75 in the prior year. For the quarter, earnings per share as adjusted was $0.65 compared to $0.75 in 2012. I'll walk through a bridge detailing these adjustments in a moment. Net working capital as a percentage of annualized sales was relatively flat at 23.4%, a slight improvement from the 24.2% reported in Q2 of last year.
Return on invested capital declined to 5.6% from 7.9% in the prior period, with our restructuring and related actions in the quarter, as well as the reduced operating performance of the business, being the main drivers of the change. Now turning to page six. In the second quarter, we continued to focus on some major initiatives that position the company for stronger results going forward. The first adjustment is related to the retirement of $220 million in senior term loans previously discussed. As a result of this transaction, we recorded a loss on the early extinguishment of debt of $5.2 million or $0.03 per share. We have taken significant restructuring and related actions in Construction, Cranes, and Material Handling and Port Solutions segments. In our Construction segment, we continue to focus on reducing overhead and complexity. We completed the sale of our German Compact Components businesses during the quarter.
The combination of these activities resulted in charges of $0.05 per share. In our Cranes segment, we have implemented cost reduction actions to better align production in our all-terrain crane facility in Wallerscheid, Germany, with our current view of the marketplace. This action resulted in a charge in the quarter of $0.09 per share. For MHPS, we communicated in April that we would have restructuring and related charges in the range of $30 million to $50 million. The actions taken during the second quarter resulted in charges of $46.5 million or $0.33 per share. These actions help to position us for a profitable second half in MHPS. In aggregate, restructuring and related expenses accounted for $65 million of expense in the quarter and impacted EPS in the quarter negatively by $0.47.
Ron will comment on some of the specific impacts of these actions in a moment when he goes through the segment results. Lastly, we show the impact of completing the purchase of approximately 14% of the shares of Terex Material Handling & Port Solutions, formerly known as Demag Cranes AG. That was executed yesterday for approximately $225 million. This transaction was funded through the short-term use of our revolving credit facility, which will be paid down with existing cash and cash from operations in the coming months. Consistent with our purchase of these shares, we reversed the guaranteed payment accrual in the first quarter, and this impact of the reversal was an incremental income in the quarter of $3.1 million or $0.03 per share. This purchase puts our ownership position above 95% and enables us to acquire the remaining shares of the company through a squeeze-out process.
This action will allow us to further integrate the business and remove the public company cost and complexity. All this brings us to a Q2 adjusted EPS of $0.65. With that, I'll turn it back to Ron.
Thank you, Kevin. I'll review the segment detail. I'll go through these charts somewhat quickly, starting on page seven, and beginning with a conversation on Terex Aerial Work Platforms. A pretty good second quarter. We've got reasonable visibility through the second half of 2013. Global demand, we feel, continues to strengthen. Our margins are pretty solid. We're happy with the reported 17% operating margin in the second quarter. Our backlog is up compared to prior year, about 38%. We see some expansion happening through our telehandler product line as we're adding a few new products and improving our capacity. A couple of noteworthy points on revenue mix. You see our North American business represents 68% of our total business, down from 71% last year, and a flat European percentage of 13%.
Encouraging to us because 13% this year versus 13% last year on a business that's up 17% means that our European business is growing, which is a good sign for an overall difficult market in many of our other product categories. Latin America also had a very strong period for this business. Turning to page eight, our construction business. The construction business, as many of you on the call clearly recognize, has had some difficult end-market performance. Certainly, our performance reflects that. Global markets remain soft for dirt and scrap handling equipment. Our revenue was down 29% compared to the prior year. We're focusing this business on some simplification and cost structure reductions. We sold our Compact Components businesses, as we said we would. We're restructuring further cost initiatives to take some people and related expenses out, $2.7 million of charge and a $3.4 million benefit.
We've eliminated four facilities with a 12% reduction in team members. Of note on the numbers, we lost $2 million on 29% reduction in volume compared to last year's $10 million profit. It does appear to us, though, that the backlog is stabilized, $180 million this year compared with $179 million last year, except for our scrap steel-related product category of Fuchs. You can see the split revenue-wise. North America actually becomes more important here as North America performance is down less than the other markets. Europe actually dropped here 38% to 35%. Overall, this construction segment, we understand, continues to require a lot of attention. We're working very hard to return this business to profitability. We continue to see some headwinds, but we expect that we'll make progress, and we'll position it for a better 2014. Turning to page nine, Terex Cranes.
Here as well, some mixed performance by markets globally. Cranes actually are a bit softer than we anticipated coming into the year. We have had some order improvement on large crawler cranes, a category where we have a very strong position globally. On the other side of this, there's been some negative product mix impacts, and it's impacted our margins. In particular, a couple of areas of the world where we have strong performance have softened up. There's been a number of improvement operationally from our utilities business. We have implemented a restructuring and related charge of $15 million in this business and expect to achieve $16 million of gains as a result of that into 2014. You can see the numbers as we reported a $38 million adjusted EBIT or income from operations, rather.
Backlog is one of our biggest challenges here, down from the $815 million of last year. As we've previously stated, that $815 million did include more than $100 million of backlog that we canceled that was pre-positioned in an attempt by our customers to secure pricing from prior periods. Net, we've got some strengthening that's happened in North America, but we see the North American market softening a tad. Latin America is down meaningfully, and Western Europe is weak. We realize that the second half of the year, we need to hustle to make our goals. We've got a lot of activity that is encouraging, but it's hard to bring it to conclusion at this stage. Turning to page 10, our Terex Material Handling & Port Solutions business. Spending a minute on this. Revenue declined 16%.
That's a moderately smaller decline than the 23% in the first quarter. We see revenue improving pretty meaningfully in the second half of this year. The industrial cranes business was down 13%, Port Solutions down 26%. Ports has a very big backlog. Key to this business has been to adjust our cost structure based upon the realities of the current market environment, which we don't see changing that much going forward. Western Europe, as a percentage of our total, dropped to 42%. The Latin America increase from 8% to 19% reflects delivery of a couple of big Port orders in June. I don't think Latin America will, on an ongoing basis, represent 19% of our overall business. On page 11, we really want to focus you to the restructuring costs.
We had some broad-based headcount reductions across many functions: SG&A, direct, indirect manufacturing, Germany, Italy, Brazil, India, Austria, Dubai. Across the board, we think these actions were necessary to return this business to profitability at the lower volume levels. We also took some aggressive action in our Port Solutions business. The Italian operations had charges of about $16 million related to the redesign of this business and to improve the results in the light port equipment business, some of the smaller port products that we have. Overall, it's important to mention that we expect almost as much cost savings annualized as the restructuring charges. Anytime we can take action that has a one-year payback, we want to do those projects all day long. Turning to page 12, Terex Materials Processing business. This business is reflecting the fact that the minerals markets are down.
We had decent profitability in a challenging environment. Europe remains weak here. We are focusing our cost structure to help offset that. We think we performed reasonably well in this segment with $25 million of income from operations compared with $29 million in the year-ago period. As you can see in the mix of business, not a lot of change year-over-year. Overall, this business is being led and managed with a focus on good execution. Turning to page 13, which summarizes our best view by segment on how we believe the revenue and operating margins will develop across the year. Obviously, looking at this by segment, there's areas where we might feel that we've got a better chance of meeting these numbers or a weaker chance. Overall, I just want to focus you to the company in total.
We believe revenue will be $7.5 billion-$7.7 billion, with an operating margin of 6%-7%. We know, compared to what we started the year, that it's a full margin point down with a meaningful amount of revenue reduction from the $7.9 billion-$8.3 billion that we originally expected. While that is reduced, we're focused on each one of the segments of trying to achieve both the revenue and the operating margin. We're happy to answer your questions as we go through this on any detail related to this. In summary, our company, we feel, is trying to extract value from the business by executing on what we can control. We reduced debt. We've taken out our highest cost capital. Those are things that we think will be important to leverage our earnings in the years forward.
We're lowering our cost structure, in particular, addressing aggressively the Material Handling and Port Solutions issues, some issues in our Cranes business and in our Construction business. We're going to, for the midterm, manage our portfolio aggressively. We will work on simplification and financial efficiency because we think there are meaningful areas to harvest from those categories, as we previously stated. We understand that our revenue goals require some improvement in the back half of the year in a relatively uncertain market. But we expect to do our best efforts to make this year as good as it possibly can be. We're certainly not giving up on the full year, and you can expect that we will do our best in the coming months. Thank you, and I'd now like to open it up to your questions. Holly?
Thank you. As a reminder, if you would like to ask a question, press star one on your telephone keypad. Again, that's star one for questions. Your first question will come from the line of Eli Lustgarten, Longbow Research.
Good morning, everyone.
Good morning, Eli.
It could have been a lot worse, right?
Yes.
Can you give me some idea, you talked about a little stronger June at the end, which helped with above, yet obviously the June 17th guidance was held despite the beat. As I look through the new segment forecast. You set up one of the questions is obviously, we have risk in some places. Can you talk about the segments of ways, your confidence level in these as guidance? Particularly AWP, you actually have the margin going down in the second half of the year, I believe, versus what you had in the first half, despite a little stronger market. Then the other markets, there's some uncertainty, particularly in cranes and the European networks. Can you give us some color on what's going on as you look at the risk for the rest of the year?
Okay, Eli, I think you hit on the main opportunities and risks for sure. I think, the AWP forecast is really structured in how this business would traditionally perform, with the fourth quarter being the most uncertain quarter of all, as customers really like to get delivery of products in the first and second quarters, with a slowdown of their deliveries in the third and fourth quarter. We've structured our information here fairly traditionally. Having said that, the marketplace is telling us that they need equipment, they want equipment in general, and that may be an upside. At this stage, it's hard to tell. On the flip side, we obviously got to go get some business in our cranes area. I think we did $992 million of revenue in the first half, and the midpoint of that guidance we're providing is $2.1 billion.
Obviously, there's $100 million-$125 million of incremental revenue performance that we have to go get. We realize that, and we realize that the current backlog probably doesn't support that. However, our team is pretty dedicated. We've got good lines of sight to opportunities. That doesn't mean we'll win those opportunities, but we've got good lines of sight to those things, and clearly, Tim can comment later on if you want. Those are the yin and yang, so to speak, of the business. I do want to also point out the importance of the material handling and port solutions turnaround, and our forecast is for that business to actually be profitable in the second half of the year and to show meaningful revenue growth in the second half of the year. Clearly, the backlog supports that.
If you look at the backlog and examine the third quarter of 2012, that business's backlog really bottoms out, and that is really what resulted in the weakness of the first and second quarters in the revenue from that side. It's a bit of a mixed story. We know the end markets aren't going to help us a whole heck of a lot, but I think you hit on the basic issues and opportunities.
A quick follow-up. As you go after business in the second half of the year or so, can you talk a little bit about what you're seeing in pricing across the markets? We were even surprised a little bit with Caterpillar talking about some very competitive price market, particularly outside North America, and particularly as it reflects to getting better margins in cranes, and of course, the other businesses. Can you talk about the pricing environment?
Yeah. I think pricing is different by business, and obviously, the stronger markets will have the stronger pricing environments. The one that's most probably on people's minds would be the cranes area. Ron and I ask Tim to comment on that.
Yeah. Thanks, Ron. Eli, one of the things we've been focused on for the last couple of years is improving margins in our crane business. If you look at our performance on a quarterly basis and on a year-to-date basis, year-over-year, price is actually slightly positive. If you look at it on a sequential basis, we're also slightly positive. I feel pretty good about the discipline that we're maintaining in the marketplace. I see our competitors being relatively disciplined. There's always a deal that you lose here or there based on price. Generally speaking, it feels to me like the market is fairly disciplined, even in an environment where it's a challenge to get the orders.
Great. Thank you very much.
Okay, Eli.
Your next question will come from the line of Jamie Cook, Credit Suisse.
Hi, good morning. Ron, a couple questions. One, back on the aerial side. I guess still, if I could just dig a little deeper, because your margins in the second half versus the first half assume you're down. I think margins go from 15.5% in the first half to 13.5% in the second half. With United Rentals coming out saying that their CapEx forecast could be positive, and I would also assume that material costs probably are a tailwind for you in the second half versus the first half. I just want to make sure I'm thinking about this correctly. Also, I think last year, people came out and announced price increases in August. Are you going to do that again this year? Because it could have implications for ordering trends. I guess my second question relates to the construction business.
Just trying to understand at what point. First of all, I think you guys sold the components business within construction. Is that a benefit in the back half of the year, and how much? If so, I guess I'm just disappointed that we'll still be losing money if that is a benefit. After that, I'll get back in queue.
Okay. I'm going to ask Matt and George to comment on this in a second. I do want to make a point about the construction business, and we're very conscious of what we need to do in construction to get this business to a more respectable profit performance. The two principal businesses in construction that have the greatest historical profit contribution are TEL Trucks business, that's Terex Equipment Limited Trucks business in Scotland, headquartered in Scotland, and our material handler business or what has traditionally been called our Fuchs business. Both of these businesses have a good history of profitability more years than not. Having said that, the current outlook in trucks has been very challenged, in particular because we bump up against the small mining size and in the non-residential construction on articulated trucks.
A substantial portion of this business also went into China through our Chinese joint venture and the kits and products that we sold into China. All of those product categories industry-wide, for this year at least, have been pretty challenged. The Fuchs product line is a steel scrap product. Frankly speaking, the price of steel is a real benefit to Terex overall, but for Fuchs in particular, embedded in our construction business, it's a real headwind. All the work that we've done within the construction segment to get our breakeven costs down and to address a fairly poor end market environment, we're still not able to capitalize on because of those two primary end markets of those historically fairly strong contributors. I think we'll keep working this. We understand the issues. That's the nutshell of the construction.
Maybe, Matt, you can comment on first half, second half AWP and the pricing environment, et cetera, to answer Jamie's question there.
just to be clear, Ron, just the components business, was that losing money? Is that a benefit in the second half or no?
George, you want to answer that?
Jamie, thank you for the question. The answer is yes. With that sale completed, it was losing money in the construction business in total. Ron mentioned the two main drivers being down in the first half. We are definitely seeing some improvement on the truck business as we look into the second half of the year, which will help, the losses have been mitigated on the component business sale. We're still working through the remaining road building businesses that had been losing, that will flush through as we go forward for the rest of the year. When you say what is the clearer picture, the compact business is doing well. We hope for some improvement on the truck side, the relief from the road building improvements will take effect in the second half.
One of the things, Jamie, on the components business is it relieves us of several hundred people in Germany. While it was losing money, it is not going to be the change that turns the segment from negative to positive. It's a net positive, but it's a big change relative to the amount of people liabilities that we have going forward in that operation and provides an ability of our team to clearly focus on the product itself of mini and mid excavators and small wheel loaders that we can be the best we can be in that and get out of all the component nonsense where we really don't have a lot of value that we can add. I hope I've answered that question completely for you.
Yes. Thank you.
Okay. Matt?
Yeah. Good morning, Jamie, and thanks for the question. In regards to the margins in the second half versus the first half, as Ron said, we set the margins traditionally. It's an obvious question when we're expecting strong top-line growth. Some of the things that come into it is as we move into the back half of the year, we've been adding quite a bit of capacity on our telehandler line, and they are traditionally a lower margin product. There's a mix component in there. In addition to that, we are starting to prepare for a big 2014. We're adding second shifts. With that, as you do the switchover, there's a little bit of operational inefficiency. The other piece on the pricing environment, it's remained stable and predictable. The biggest price increase that customers will experience next year will be related to the Tier 4 engines.
We're starting to do that conversion, and it'll carry through 2014. With that being said, we are considering a modest price increase for 2014.
Okay. When will that go out to the market? You'll announce it before January, right? I'm just trying to figure out whether or not that would create a pre-buy ahead of the price increase.
Yeah, it'll be similar to last year. It'll be effective for January 1st.
When will you announce it? Would you announce it January 1st or August of this year?
No, it'll be before that.
Okay.
It'll be before that.
Do you get a material cost benefit in the back half?
The material cost has been favorable this year. Up year to date, the commodities have been flat. In particular, steel plate has been flat. We have seen coil start to tick up a little bit. In general, you're right, it is a tailwind for us.
Okay. Thanks. I'll get back in queue.
Okay. Thank you, Jamie.
Your next question will come from the line of David Raso, ISI Group.
Hi, good morning. You weren't breaking completely new ground with the comment by any means, just want to make sure I'm reading it properly. You seem to be emphasizing the portfolio management pruning commentary a little bit stronger this morning. Am I reading that properly? Are there some things afoot that there's going to be further actions coming in the next six months or so?
David, I'm dedicated to managing our business and our portfolios appropriately. I think if you know me a long time, you know that every day I wake up in the morning, I look at our portfolio as critically as I possibly can and say, "Where can we be a winner? Where will we not be a winner?" Even though these things take time and they take energy, we're going to continue that emphasis. I wouldn't read that my desires and emphasis has changed at all, okay? I would say that it's an important thing to emphasize because we look at the realities of the market. The markets tell us something. We're listening to those markets. Our performance tells us something. We're listening to those performances. If there are things that we can do to improve or accelerate or adjust, we're going to do those things.
The problem we have is we can't tell you when we fail at trying to do something. We only tell you when we succeed. The only thing I can say to you is please have confidence that we look at the same numbers you look at.
My direct questions. MHPS, the second half of the year, I know it's a lumpy business with some of the port shipping and so forth in the second half and into early next year. Trying to get a feel looking into 2014, how you're thinking about this business on a profitability level. The back half of the year, the revenues are implied at $940, a lot higher than the $710 or so you had in the first half. In the second half of the year, the business is slightly profitable, implied in the guidance. Just roughly speaking, frame it for us to some degree, knowing what's afoot with the work councils in Europe and other actions you're taking. If the second half of this year became ideally somewhat run rate revenue, $1.8 billion-$1.9 billion kind of annualized.
Knowing the actions afoot, how should we think about, I'm not trying to ask for 2014 margin guidance exactly for MHPS, but how should we think about the profitability of that business in 2014 if you could have similar revenues as the second half of the year?
I'm going to throw that to Mr. Filipov. Steve?
Yeah. Thanks for the question, David. For sure, we've got a big back half of the year. As Ron said, we're going to be profitable in the back half of the year, we're starting in a pretty big hole from the first half of the year. For sure, 2014 is going to be a better year for MH and PS. As you know, the 2015 target is to get to 7.5% operating profit. I think it's fairly easy to kind of do the math there on where we need to be in 2014. What I will say is on the other point of the works council negotiations and the restructuring, you're right, that's going to take some time.
That's why we're doing that today, because we want to get it done with by the end of this year so that we're set up for a good 2014. Hopefully that gives you some color. I think you also should consider that next year, we still have about $200 million of large automation projects that we're going to be delivering to the tune of probably about $300 million. That's going to help us in 2014. Now we're starting to deliver-
Steve, is that the Rotterdam?
We've got three projects right now. We have two in Rotterdam. One is Rotterdam World Gateway, the other one is APMT. We've got Long Beach, California, which is the third one. Long Beach really won't start until 2014 through 2016 and 2017. There's a big book there. We've got those three. I would say that there's some other projects that are on the table. I think the other thing is we tend to think of the automation business as a one-off business. The reality is it's an ongoing business for us. There's probably 11 ports that are running our automated guided vehicles throughout the globe today. We're the market leader in that business. It does tend to be lumpy, but the market is really moving towards automation.
Well, what I was sort of fishing for is the idea of the business doesn't get a ton of attention except for some negative news the last couple of quarters. If this business does have those shipments in place for next year, and you're modestly profitable in the second half, let's take the guidance for face value the rest of the year. If you could even do 3% margins next year on $1.9 billion of revenue, it's almost a $0.50 per share earnings swing year to year, just in MHPS. I'm just trying to get some framework for us here on how you're thinking about the business at that revenue level.
Even a 3%, which is not even halfway to the long-term target, is that even realistic or am I not appreciating maybe some of the pricing was challenging to win the Rotterdam or the other projects?
I think the other piece, David, is the MH business, the material handling business, the industrial crane business. We're off substantially from last year, 13%-15%. That is the real
question that we've got to address. We're going to have some challenges there because half of that business is in Europe, so we've got to fix that business. Why it's so critical for us to really lower that break-even point, and that's what we're focused on. MH and PS is really two businesses. The MH business is the bigger piece of it, to be honest with you. That's kind of the question mark. I think port, we've got good visibility to what's going on. At the same time, I am really pushing to get margins up. We're going to pass on some deals because we have to get our margins up in the port business, as we do in the material handling business. We're going to be selective on getting the deals.
Last two quick things. Matt, you mentioned preparing for a big 2014. Was that just a telehandler comment, or was that a division comment?
In general, we continue to see that the market is going to continue on the growth pattern that it has. Looking at our guidance that we've provided out to 2015, that sets us up that we have to see steady growth over the next couple of years. Telehandlers continue to be the strongest of the product categories. We expect that'll slow down and the rest of the product portfolio will continue to grow.
Is this based off of your theory on how the industry should play out, or are you already getting some indications for customers on 2014 for teles and aerials?
It's both. In other words, we have modeling that goes out longer term. Typically, when we're talking to customers, it's six to nine months out where those conversations are. We use a combination of conversations with customers and some modeling that we do internally.
Thank you very much. I appreciate it.
David, I'll make a point because we've spent a bunch of time around this. The point I want to make is Terex is not a one-trick pony, okay? There are opportunities in each of our segments to meaningfully change the 2014 and 2015 performance, and we don't have to hit on all cylinders to make really good progress. Whether that's the points you made on MHPS, opportunity in construction, opportunity in cranes, and in general, there are more positive opportunities than there are negative, but there's clearly some negative places. I think this continues to be some of the challenge that we have, but we've got really some decent things that we feel we can accomplish if we just stay focused on our basic execution. Okay, next question.
Your next question will come from the line of Rob Wertheimer, Vertical Research.
Hi, good morning, everybody.
Hi, Rob.
I guess this is for Tim, the nature of the decision you made on a little bit of restructuring in Cranes. Is there anything as you continue to sort of move into the business that you see that is more structural and you're seeing opportunities to take, or was this really a cyclical decision?
Thanks for the question, Rob. The decision that we took in Germany in particular really was one where we had to make a decision on how we want to structure our workforce. For the last couple of years, we've been using a methodology to manage our workforce called short work, which includes temporary reductions and shorter work weeks for our team members. By law in Germany, you run out of time, and you've got to make a decision on how you want to manage that. Our view was that we'd be better to take the action now and the hard decision to reduce our workforce basically to the level we've been operating at, but to do it in a permanent way.
This may, on the surface, look like we're reducing or restructuring our overall capacity. The reality is what we're doing is aligning our workforce with the way we've been running the business for the last couple of years.
we think this will be more cost effective.
Absolutely.
Makes sense. Do you see many more opportunities or situations rather like that right now, or do you wait and see what arises?
I would say that we're always looking at aligning our workforce and our production volumes with our outlook in the marketplace. Where markets are soft or need to be managed, we will adjust workforce accordingly. You can look around and see where the markets have been softer this year, have been a little bit in Australia, we've taken some modest actions with our team there. The North American market, which has been very strong in the first half, is going through a little bit of a pullback as inventories get aligned, we're evaluating our production needs out of our North American factories.
You can look around and see how those markets are playing out, we're trying to be much more disciplined and much more aligned in our sales, what we call sales value of production, really the production value, managing it on a very close basis to our outlook from a revenue standpoint.
Thank you. If I can ask just one small follow-up. Is there any competitive or market overspill in Materials Processing? Ron, you mentioned on the Arctic trucks, just the tiniest bit of maybe interaction with low end of the mining side. Do you think there's any forward-looking risk in Materials Processing from other folks in mining?
Kieran Hegarty, you want to answer that?
Yeah. Clearly we have, as Ron pointed out earlier in the piece, some exposure to minerals. The majority of our mineral production is actually what we would consider periphery mineral production, so it tends to be construction roads and mine sites, et cetera. Overall, the biggest correlation to our business is general construction activity. To be honest, probably more aligned better with just broad construction, whether that's commercial or housing, because the vast majority, probably 90% of our products actually produce aggregate, which is used in construction, as opposed to a non-mineral aggregate. Whilst we have some mineral exposure, we're much greater exposure to the general construction cycle.
Sure, I'm sorry if I wasn't clear, but is there any competitive impact as folks who might have more overlap in both markets, see mining off?
In terms of what respect, sorry?
Pricing pressure from your competitors.
Similar to the other segments in construction, our competitive landscape varies tremendously by market. There's a good pricing environment in North America based on demand. In Europe, again, it's competitive specific because there's not a uniform picture. It depends on the country. U.K. is, at the moment, highly price sensitive. You have other markets that are a bit more conservative. There's not a uniform picture. Overall, there's probably a reasonable degree of stability in pricing, it can vary dramatically by market.
Thank you.
Yeah.
Thank you.
Your next question will come from the line of Ted Grace, Susquehanna.
Hey, guys. How you doing?
All right, Ted.
Ron, I realize that folks at this point is on the back half of this year and the realities of where we are in the backlog front limit the visibility. In a couple of discussions around segments, there's been at least a brief kind of commentary on 2014. Could you give us maybe just kind of a framework, since I realize you haven't introduced any kind of formal guidance on 2014, and then how we should be thinking about the 2015 goals that you introduced at the Analyst Day? You've got a lower trajectory, for sure. There's a lot of time between now and then, just any kind of framework or commentary would be helpful.
Okay. I don't really want to do this by segment and with a tremendous degree of specificity because our process requires that we go through each of our businesses toward the end of the year, reflect upon what's doing well, what's not doing well. In order to provide guidance for 2014, it'll be a more detailed analysis. The goals we have for 2015 haven't changed. In my opinion, there's a reasonably big difference between goals and guidance. I think the goals are set out there because we believe that's the potential we have in our business. I think that potential would add up to a $10 billion company with $1 billion of operating income, and approaching $5 a share of earnings.
In order to do that, we obviously have to perform substantively better in a couple of our key segments, continuing the positive trend in AWP, turning our cranes business into a little bit more growth oriented. Although, I do want to point out that the cranes revenue is not expected to get back to the prior peak, nor is the revenue in our material handling and port solutions business intended to get back to the prior peak. I think, having lowered our guidance in 2013, it obviously makes that 2015 goal seem a little bit harder to achieve. Having said that, about two-thirds of what we have to do we feel is within our own control, with about a third having to come from better markets.
I can't predict better markets, but we're going to keep working on those things that we can control, and if we can get some better markets, cranes for material handling port solutions products, for some of our construction products, et cetera, I think we got a good chance of making those 2015 goals. I can't tell you at this moment whether it's a direct line, a hockey stick, or a minor hockey stick between 2014 and 2015. We're going to do our best to try, and none of the members of our management team at all have given up on trying to achieve those goals. The key to those goals, portfolio management, simplification, and financial efficiency.
That's helpful. In terms of the two-thirds of the improvement that you have more control over, how should we think about the cadence of the benefits of the restructuring in terms of what you think you'll realize in the back half of this year from a cost-saving standpoint versus what we should anticipate and build into our expectations for next year?
We've got some minor benefits in the back half of this year, but almost all of those benefits will take place in 2014. That's nearly $65 million, maybe $50 million of which will be incremental in 2014.
Okay, that's great. The last question I just wanted to ask is, to get to the $5 piece from minus, is there any need for incremental restructuring beyond what we're aware of today?
If I was aware of the restructuring I'd have to do, I'd already have done it. I think that's one of our real challenges. I do think as part of this, we got to keep working on our balance sheet as well. By that I mean, pay down some more debt. I think the opportunity to get at that convert in 2015 is possible. I think, that's an element of what we have to do also.
Got it. Great. Best of luck this quarter, guys.
Thank you.
Your next question comes from the line of Schon Williams, BB&T Capital Markets.
Hi, good morning.
Morning.
I wonder if we could just touch again, maybe dig a little deeper on the crane margins in the quarter a bit. Incremental margins, much weaker than I expected. Just talk about, I think you mentioned some mix issues. Does that continue into the back half? Could you talk a little bit about maybe just addressing BAUMA and the orders? Obviously, not a lot of sequential improvement in orders in Q2 versus Q1, is there still opportunity to capture some orders as we go down the road here a little bit, just from your discussions that you had back in Q2 at the BAUMA show?
Well, I'll turn this over to Tim in a second, I'd say at BAUMA, we had a lot of love, not a lot of conversion when we got home. I think the emotion of the market was good, you got to work still pretty darn hard to convert that business. Tim, maybe you want to comment about the margin and-
Yeah, Schon, thanks for the question. I would characterize our cranes market as a choppy but recovering market. I think to Ron's point, we left BAUMA with maybe a false sense of enthusiasm around where we were in the recovery. If I look at our order intake rate on a sequential basis, we're up from second half last year to first half this year. Our segment revenues orders are up about 10%. Second half last year, first half this year, our order intake is up about 10%. That's encouraging. In addition, I also look every Monday morning on a phone call with our sales leaders around the world at our quote activity. Since April, our quote activity is up 30% in cranes, and on a year-over-year basis, it's up 13% in utilities.
That gives me some degree of encouragement that there's an opportunity for growth out there. That being said, a lot of these deals are taking a very long time to close. These are big, complex transactions, and our customers are uncertain about where the economy is. They're waiting until they're absolutely sure they have the business before they place an order with us. I think that's kind of giving us a sense of encouragement on the one hand, recognizing that it's a long gestation period to get these orders in, on the other. From a margin standpoint, clearly, we were looking for and continue to look for a margin improvement. As I said, our pricing is up slightly on a year-over-year basis as well as on a sequential basis. Where we've lost a little bit is on the product and geographic mix.
Australia, for us, is down 20%-25% year-to-date, Australia's been a very good market for us for the past couple of years. We've had some increase in some of our lower-margin product categories and a slight decline in some of our higher-margin product categories. I think from a mix standpoint, we've seen a little bit of decrement to our overall margin standpoint. I'm not overly concerned about it. I think as we go into the back half of the year, we'll see a more normalized balance, I'm confident that we'll be able to get back to the levels that we would've expected.
Okay, thanks. Then as a follow-up, could we just talk a little bit about the cadence of the quarters in the back half of the year? I know material handling, I believe, has some large shipments going out in Q3. Can you just talk about what we should be expecting Q3 versus Q4, again, versus normal seasonality?
Yeah. Let me just quickly comment because we got a number of other people on the line that I think would like to get a question in here. I think in general, we expect a little bit stronger performance in the back half of the year that's different than what might be a normal cadence. It varies by business. We've commented on AWP already. What I'd say about material handling and port solutions is the third quarter tends to be the strongest quarter from a standpoint of services and parts, the fourth quarter will be better because of some bigger shipments. The third quarter in cranes is likely to be a little bit weaker due to the traditional vacation periods, this year will probably be no different than that, meaning we expect a little bit stronger fourth quarter. The material processing business is probably pretty normalized.
Weaker third quarter, stronger fourth quarter kind of situation. I think those kind of even out. If I looked at the company overall, I'd probably say a little bit weaker third quarter than fourth quarter, that's not that unusual. All right. Thank you.
Your next question comes from the line of Andrew Casey with Wells Fargo Securities.
Good morning, everybody. Thanks for taking my questions.
Okay.
On cranes, could you talk a little bit more about your comments related to North American adjustment? Is that related to any specific product areas? Is it basically all except crawlers? I'm just trying to understand that.
Yeah, Andy, thanks for the question. North America is, for us, a large rough terrain crane market. I would say the North American market probably got a little ahead of itself in the first half of the year. Housing is improving, but there's really a second order effect in the crane business with housing. The housing development goes up and it's the retail, the school, that sort of thing that drives the crane activity. Oil and gas has been particularly strong in the crane market. I think Matt would also say the same thing for the AWP business as well, and it's particularly strong in the Gulf states, right through the Midwest and the heartland of the U.S. and up into Canada for that matter.
When I talk about a bit of a pullback on the North American market, I think it has to do more with distribution, managing its inventory levels than any overall correction happening in the marketplace.
Okay. Thank you for that. Could you also provide a little more color around the Latin American market? Lastly, on the back half opportunity, given everything in the commentary in the release, I'm just wondering what region should we look to for you to help fill the gap in terms of the opportunity described in the revenue guidance and what we're seeing in the backlog right now?
Yeah. Latin America has been weaker than we thought it would be year to date. We've been in that business, or in that market I should say, for several years now. I think the overall tone and economic environment in Latin America is more uncertain today than it's been in several years, largely driven by Brazil. I think the potential for that market still exists long term. As we sit here today and try and handicap the second half of the year, it's very difficult to get a sense that particular market is going to be substantively better than it has been in the first half of the year. We've kind of baked in a relatively flat second half in our guidance. I don't think an improvement is necessary in Latin America for us to hit our revenue guidance.
We're going to see some benefits in some markets like the Middle East and some other areas that we've been working hard on. Those are where some of our opportunities are.
Okay. Thanks, Ron and Tim.
Your next question comes from the line of Andrew Kaplowitz, Barclays Capital.
Good morning, guys.
Good morning.
Ron, you've talked about a pretty quick payback on restructuring across the company and in your MHPS business. How realistic is it that you get that sort of one-year payback? What's your confidence level about that, given it is Europe, it's hard to sort of do these kind of things. How confident are you that you can get it here in 2014?
Highly confident. These are definable, already determined individuals for the most part. We're well on the road to having negotiated conclusions with virtually all of what we've announced. This is why on the previous quarter conference call, we gave you the indication that we were going to do this because we had already started the process.
Got you. Then, maybe a follow-up on MHPS. One of your main competitors has talked about a pretty big pickup, maybe even a record intake in its service business in overhead cranes in 2Q. Have you seen any of that yet? You talked about 1Q being pretty weak. Did you see any rebound in that service business as we went into 2Q?
Steve, do you want to comment on that?
Yeah, sure. Andrew, our business has pretty much been flat Q1 this year to Q2 this year. Q2 last year to Q2 this year, services was a little bit off, but single digits, minor stuff, mainly driven by some of the slowness in Europe. I pay attention to my business. I don't know who the competitor is, but I'd be surprised if they're not seeing some slowdown on that side of the business also.
Steve, how's your share? Are you maintaining share or have you still been losing share in that business?
I think we're probably maintaining share. I think we lost some share in the past couple of years, but I think we're maintaining that at this point.
Okay. Thanks, guys.
Your next question comes from the line of Ross Gilardi, Bank of America Merrill Lynch.
Hey, good morning. Thanks for taking my question.
If you look at slide 15, your Cranes backlog, Ron, has been shrinking pretty steadily for the last two years. It fell again in the second quarter, and you cited negative product mix. Can you just talk a little bit more about what's happening with the long-term steady downtick in the Cranes backlog, getting away from the noise of what's happened since April and what's expected in the third quarter? Why does the backlog for the Cranes business seem to go down every single quarter? On the back of that, your new guidance seems to be implying second half earnings acceleration for Cranes. I realize that you highlighted some of the challenges, but why forecast earnings acceleration for Cranes if you've got some notable headwinds and don't know necessarily when some of the orders are going to come through?
Well, a funny thing's happened here. Our backlog has gone down, but our shipments have stayed fairly flat. That's kind of odd, don't you think? Backlog is an indicator. It is not the indicator. It is really how we convert an order taken in today to a shipment delivered tomorrow. Okay? We said, I don't know how many times we can say this, that the $815 million backlog of last year at this time included over $100 million of pre-positioned orders by our customers thinking that they would get pricing for the future year, and we canceled their orders. Our initiative is to get margins up and to get a return for the business that we have. Okay? That's what we continue to try and achieve. Okay? I am not that focused just on backlog.
We have to focus on geographic mix, we have to focus on product mix, and we have to focus on getting value out of our customer base. This is a business where historically, many of our customers expected us to inventory product for them, and hold it after we produced it. Kevin Bradley started to change some of that, and Tim is continuing to execute on that. I realize, and I said this at the beginning, that one of the hardest numbers we had was to achieve the incremental revenue in the back half of the year. That's why Tim Ford went through a painstaking analysis of the amount of quotes that he sees, the activity, how that compares with what it was three months ago, but we're not getting the complete closure on some of those deals. We think we can, but we're not completely sure.
A business is about managing the broad spectrum of opportunities that we have. Okay? We're probably a little bit aggressive in the crane business. Maybe we're not aggressive enough in the AWP business. Okay? If you inspect each one individually, you'll find a speckle or a problem, and that's there. In general, please be careful about the backlog, because backlog is a indicator. It is not the indicator. What you really want me to do is convert and have a healthy book-to-bill ratio. Okay? That's what we're after, and that's what we're trying to achieve. We share the backlog because it's something that historically has been important to the company. You could take the simultaneous position on here and, gee, look at that Material Handling & Port Solutions backlog. It's grown from $228 million to $860 million. My God, that business must be increasing tremendously. It's not.
Okay? Please, I've talked about this a lot. I want to make sure we don't misunderstand this.
Just, Ron, on that point about trying to get the best mix you can, you did cite negative mix in your commentary. What's happening there? Is it a competitive issue? Can you just elaborate a bit more on what's driving negative mix if you're trying to optimize the mix?
Yeah. Well, Tim said our Australian business is down 25%. He said it's one of our more profitable businesses. That's the answer.
Okay. Thanks very much.
Your next question comes from the line of Jerry Revich with Goldman Sachs.
Good morning. Ron or George, a lot of progress on the construction manufacturing footprint over the past six to 12 months. I'm wondering if you could just give us an update on any initiatives you have on the distribution side and any longer-term targets for distribution. Then, Ron, in the portfolio discussion earlier, you didn't touch on ASV. I'm wondering if you could just talk about how that business is tracking and the opportunity set.
George, you want to comment on that?
Yeah, Jerry, thank you very much for the question. Your point is well taken. Last year, we talked quite a bit about focusing on different channels to market. I must say, through the first half of the year, particularly in the U.K. and North America, we have really focused on the rental market on our compact equipment. What you're seeing, even though our total segment sales are off by 29%, we have significant uptick on the compact side, specifically into the rental market, and then also with our private label initiatives that we've been successful to close on in the first half of the year, and you can see the contribution that it's making. This is also helped by our relationship with our AWP friends.
It's really helping the compact piece of our business, and we're going to continue on that as we go forward with those initiatives as we continue to work on some support from our larger equipment in the construction segment. Thank you.
Ron or Tim, can you talk about, within the crane business, what your customers are seeing in terms of utilization levels and pricing? Through the first quarter in the U.S., we were starting to see excellent price realization in crawlers. I'm wondering if that continued into the second quarter based on your customer discussions, and if you could just touch on what your customers are seeing in utilization and pricing in Europe as well.
Jerry, I would say the utilization rates are commensurate to the overall economic condition of the geography. North America, utilization rates and pricing, utilization rates are high and pricing is improving. Europe, utilization rates are mediocre and pricing is challenging. Middle East, they're very high and pricing is very strong. I think it depends on which market you're focusing on, and you can almost draw a straight line between the kind of economic conditions of that geography and the utilization rates and the pricing.
Tim, just briefly on Latin America, a lot of volatility in that market for cranes. Can you just talk about how much visibility you have there and 6-12 month outlook?
Well, I have as much visibility there as I have in any other market. As I mentioned earlier on the call, I hold a weekly sales meeting with our global sales leaders to review their quotations and activities. I would say the opportunity that we see in Latin America, it's been modestly improving over the past couple of months, but it's not robust at this point, for sure.
Thank you.
Next question comes from the line of Eric Crawford, UBS.
Morning. Thanks for taking my question.
All right, Eric.
On AWP, the commentary on improvement in Europe's positive, clearly. With North America the key driver, I'm just curious, the longer-term AWP growth you see equally spread out between geographies, and if you see any potential risk that demand in North America plateaus?
Eric, the indications we have from the customer base today is that the market environment, utilizations, age of fleet, all would indicate continued positive trends in the North American market. Certainly, that's built into what we think is going to happen. Having said that, I think you go back to what are a couple of irrefutable facts. One, they bought a ton of equipment between 2004 through 2008. That equipment is now getting older by the minute, in order to just maintain the average age of their fleet, they've got to buy a bunch of equipment. That factor, as long as there's not a fundamental decline in demand, is going to drive replacement. The second factor that's important is rate of growth. We've now seen the Architecture Billings Index, which is an important indicator for this business, remain strong, get better.
If you couple growth over an extended period of time with age of fleet, you end up with a pretty good market, that's what we expect. If you add to that a developing and strong Latin American market, maybe not a great recovering European market, but at least a no longer declining market and a moderately improving market with an Asian business opportunity, you end up with a pretty darn strong AWP business. That's what gives us confidence. Unless there's a substantive global economic downturn, I think this business is in for a number of really decent years.
That's great. Thank you for that. Lastly, just not to beat a dead horse on portfolio management, I'm curious if you could speak a bit more about the pruning geographies comment. Does that refer only to selling businesses to another player, does it also include winding down via lack of investment? Maybe just how you're framing the puts and takes more broadly.
Well, Eric, I don't ever want to think that we've got a dead horse around here. Once it's dead, we'll tell you it's buried. I think it's a good question. We've made substantial investments in geographies, it's paid good dividends for us. However, we've seen meaningful changes in some geographic performance. The Indian outlook or the outlook for the country of India isn't very good. We're gonna examine our cost structure in India and make some changes. The same thing could be said in Latin America. We want to be responsive to those things. I think our investment in China is for the long term, we want to examine all of our areas of investment to make sure we've got them properly positioned. All I'm trying to say to everyone on the call here is that we're sensitive to the realities of the market.
Where we've made investments and we have gotten returns, we'll keep those investments in place. Where there's pullbacks, we have a responsibility to make adjustments.
Okay, great. Thanks, Ron.
Due to the time, we will take one final question, and your final question will come from the line of Seth Weber with RBC Capital Markets.
Hey, guys. Adam on here for Seth. Thanks for taking the call or the question. Two quick ones here. One on the mix of independent rental companies stepping up right now. What you're seeing now, what you're seeing in backlog and your quotation activity there. Just secondly, on MHPS, the service component, is there some catch-up that might come, or is that sort of track with the activity at the ports? Thanks.
Yeah, I'll answer the last question I'll turn the first question over to Matt. I don't think there's any catch-up here. I think that opportunity is behind us. I don't think people catch up on service in general. I do think as utilization improves in overhead cranes, et cetera, in factories, they will get them serviced again. I don't think there's a catch-up implied in our forward outlook. There's a more realistic assessment of what our forward outlook is. In AWP, why don't you answer that question, Matt?
Yeah. Good morning, Adam. The independents, they continue to be significant and important to us. If you look at year-over-year, the percentage of independents actually improved in the first half, which is a good sign for us. If you look at them, they're the niche players, and they typically, they continue to buy through Q3 and Q4, whereas some of the large consolidators are heavy in the first half of the year. The other thing with the independents is they are able to get financing now, so we continue to see them in the market, and we see them being healthy.
Very good.
Great. Thanks, guys.
All right. Well, I want to thank everybody for participating in our call today. Obviously, Tom, Kevin, myself, and the rest of the management team want to be responsive to any additional follow-up questions you have. We look forward to answering and addressing any and all of those questions. Thank you very much for your interest.
Thank you for your participation in today's Terex Corporation Second Quarter 2013 Financial Results Conference Call. You may now disconnect. Speakers, hold the line.