Q4 2019 Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Terex Corporation Q4, 2019 earnings call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during the session you'll need to press star one on your telephone if you acquire any.
Other assistance. Please press star Zero I'd now like a hand the conference over to Mr., Randy Wilson Director of Investor Relations. Please go ahead.
Good morning, everyone and thank you for participating in today's fourth quarter 2019 financial results Conference call.
Participating on today's call or John Garrison, Chairman and Chief Executive Officer, John Duffey, Sheehan, Senior Vice President and Chief Financial Officer.
Following the prepared remarks, we'll conduct a question and answer session. We released our fourth quarter 2019 results a copy which is available on parent stock comp.
Today's call is being webcast and accompanied by a slide presentation, which includes a reconciliation of GAAP to non-GAAP financial measures that we will use during this call and it's also available on our website.
All adjusted per share amounts in the presentation on a fully diluted basis.
We will post a replay of this call on the Terex Investor Relations website under events and presentations.
Let me direct your attention to slide two which is our forward looking statement and description of non-GAAP financial measures.
We encourage you to read this as well as other items in our disclosures because the information we will be discussing today does include forward looking material.
With that please turn to slide three and I will turn it over to John garrison.
Good morning, and thank you for joining us and for your interest in Terex.
For Terex operating within a zero harm environmental health and safety culture is an absolute way of life.
I am proud of our team's dedication commitment and focus on a zero harm safety culture.
The global team made great progress during the year, reducing our recordable injuries by 39%.
Significant accomplishment.
What we realize we can and will continue to make further progress in our zero harm culture.
The fourth quarter completed a year, where we face considerable market driven and operational headwinds.
Principally within our a WP segment.
Our Q4 results reflect the headwinds of the challenging global industrial equipment markets.
And our operating results were generally in line with our expectations on lower revenue.
Hey, WPS fourth quarter revenue was down 21% from Q4 2018.
This demonstrates the cautious customer sentiment and our largest markets in North America in Europe.
Hey, WPS revenue decline, coupled with the need to produce below retail demand to reduce inventories.
Adversely impacted operating margins.
Our MP team continued to execute well.
Maintaining 12% operating margins, despite Q4 revenues being down 10% in the quarter.
Driving parts and service growth is one key element of our execute to win initiatives.
Despite the challenging global equipment markets.
Our parts and service teams drove 7% sales growth on a currency neutral basis.
Overtime continued growth from this initiative will help reduce our cyclicality.
Given the environment in which we are operating we have maintained our absolute focus on our disciplined capital allocation strategy.
We generated positive free cash flow in the fourth quarter.
In generated $86 million of positive free cash flow during 2019.
Combined with the $160 million of cash proceeds from dispositions.
Our extended 29 team with a strong balance sheet.
Including over $1.1 billion of liquidity.
Our global team continues to be committed to generating cash and improving our working capital efficiency.
Turning to slide four.
Terex remains committed to its goal of establishing a corporate culture based on process discipline and accountability that will consistently deliver high performance and all phases of the business cycle.
Turning to slide five now let me share some 2019 highlights that continue to move terex forward.
We essentially completed the focus element of our strategy.
By finalizing two significant portfolio actions and our former Crane segment.
The remaining businesses in our portfolio have industry, leading competitive positions.
We have also demonstrated their ability to consistently out earn their cost of capital over the course of multiple cycles.
At the start of this year, we moved the tower in rough terrain crane businesses to the material processing segment.
These moves complete the transformation of terex into a two segment organization.
We have brought online new manufacturing capabilities.
Including our Tam see facility in Northern Ireland.
And expanded our hosts or India MP facility.
Allowing terex to be even more responsive to global demand.
Our new utilities facility will consolidate multiple production buildings into one stated the our world class manufacturing and engineering facility.
Commercial excellence begins and ends with the customer.
We completed our global rollout of Salesforce.
Increasing process discipline throughout the entire sales process.
Technology is a critical part of our global parts and service business.
To deliver industry, leading customer service.
We are providing our distribution partners.
Easy to use digital tools that help them to service their customers more efficiently.
Maximizing their opportunity to win business.
This is allowing terex to build a competitive advantage and accelerate parts growth.
Strategic sourcing finished 2019 with strong momentum as a team continues to implement ways, one into and launching a new round of strategic projects.
With a high quality portfolio, a specialized equipment businesses.
Our strong financial position and the investments in our facilities in systems.
We are well positioned to perform throughout the cycles.
Looking ahead to 2020.
We recognize that we must drive improvement in our operational excellence. So that we can consistently deliver on our commitments to our team members customers and shareholders.
At Terex, we're driving towards zero harm safety culture.
We are doing this with open communication reporting and putting our team members first.
Terex is also committed to responsible environmental stewardship do energy and water conservation efforts in our facilities.
And by developing innovative products that reduce admissions.
Turning to innovation, we're continuing to invest in innovative products to serve our specialized markets.
A few examples are the terex ecotax rutter expands our offering in recycling markets.
Also the Terex advance mixer trucks reflects improved performance value and entry into new markets.
In addition to expanding our product offerings, we are investing at our manufacturing capabilities, which leads to future growth.
The new utilities manufacturing facility in South Dakota remains on schedule and within budget.
Another important facility for charities future global growth as our change, though China facility.
Which will undergo an expansion in 2020 to accommodate the market growth in China for Aero products.
In addition, MP and utility product lines will be added.
We are localizing manufacturing to take advantage of increasing adoption of these products.
Our parts and service team is focused on growth by delivering a best in class experience for our customers.
These investments enable.
Improved manufacturing productivity.
Industry, leading customer offerings and growth.
As we communicated during our Q3 earnings call.
We expect the global industrial markets to remain challenging in 2020.
We expect sales to be down 8% to 11%.
In 2019 to a midpoint of $3.9 billion.
The lower anticipated sales will result in lower production levels, which will have an adverse effect on operating margins.
Based upon this current outlook for 2020.
We are anticipating full year earnings of $1.85 cents to $2.35 per share.
We will continue to enhance shareholder value by executing our disciplined capital allocation strategy.
Which includes dividend increases in each of the last four years.
With that let me turn it over to Duffy.
Thanks, John.
Turning to page eight.
Let me begin by reviewing our Q4 segment highlights.
Hey, WP sales of $500 million contracted by 21% compared to last year.
Driven by continued challenging market in North America and Europe.
During the fourth quarter, we saw a 55% increase in China sales, where the aerial market continues to grow through increased product adoption.
Overall, lower sales and significantly reduced production levels challenged a WPS operating margins in the quarter.
As we discussed last quarter to align customer demand and to manage inventory, we have been significantly reducing production.
During Q4, we reduced production levels, 45% compared to Q4 2018.
This resulted in lower manufacturing absorption and lower material cost savings.
Eight WP fourth quarter bookings of $755 million were 22% lower than Q4 2018.
But the book to Bill ratio did improve sequentially.
Backlog at year end was $753 million down 31% from the prior year.
However, eight WPS year end 2019 backlog is not fully comparable to the prior year as not all Twentytwenty advanced purchase orders from our National account customers work completed by December 30, Onest 2019.
Additionally.
National account customers placed a smaller percentage of their planned 2020 capex on advanced purchase orders.
When adjusted for these year over year customer ordering patterns, our backlog supports our a WP revenue guidance.
Materials processing closed out the year with another solid quarter, achieving 12% operating margins despite challenging market.
Sales were $321 million down 10% from the fourth quarter 2018.
Driven by cautious customer sentiment delaying capital purchases of crushing and screening products.
Material handlers and environmental equipment.
Operating margin decreased off the levels, we experienced during the first three quarters of the year, but we're still double digits as the MP team has been aggressively managing all elements of cost in the challenging market environment.
Backlog of $295 million was 42% lower than last year.
However.
Peas year end 2018 backlog was an anomaly.
In the fourth quarter of 2018 dealers ordered a much higher percentage of their 2019 full year equipment requirements due to extended lead times.
As we enter 2020 dealer ordering patterns have returned to historically normalized levels as lead times are shorter.
Within corporate and other we saw a lower rough terrain and tower Crane sales.
Operating margins for tower cranes were modestly impacted by the lower sales, but rough terrains operating margins performed inline with expectations.
Turning to slide nine to review our Q4 consolidated results.
Total sales decreased by approximately 16%.
MPS operating margin and lower corporate expenses, partially offset the volume and lower production headwinds that impacted AWB margins.
Leading to an overall contraction of operating margins.
Restructuring related charges and to a lesser extent investment in our execute to win priority areas, where the primary differences between our as reported in as adjusted operating profit.
Our full year 2019 tax rate came in lower than we had previously anticipated.
As a result of a more favorable jurisdictional mix of sales and pre tax income.
Combined with favorable adjustments between our tax provisions and tax returns.
These adjustments resulted in our recording a tax benefit in Q4 of $8.8 million to adjust our full year 2019 tax rate to approximately 16%.
On an adjusted basis, we generated quarterly earnings per share of 36 cents.
Turning to slide 10 to review our full year consolidated results.
Overall 2019 was a challenging year for terex.
Net sales for the year contracted 3.6% to approximately $4.4 billion.
This revenue decline was attributable to aid WP.
Whose sales declined almost 8% for the year.
ADW PS revenue declines were greatest in North America, and Western Europe as concerns over the global market for industrial equipment caused rental customers to reduce their capital equipment purchases.
Partially offsetting ADW PS revenue decline NPS revenue increased almost 4% in line with our expectations from the beginning of the year the nearly $1.4 billion.
Eight WPS lower sales and significantly reduced production levels Challenge total company operating margins for the year.
MP had a strong 2019 with a full year adjusted operating margin over 14% up 130 basis points from 2018.
Turning to slide 11.
Our Twentytwenty guidance is based on our two segment operating model.
Eight WP and MP.
The rough terrain and tower Crane businesses are reflected in MP.
To assist to your modeling of our business, we have recast our segment results for the full years 2018 in 2019, including 2019 by quarter.
These analyses are included in the appendices to our Q4 earnings presentation and posted to our Investor Relations website.
Today's guidance includes all currently anticipated expenses.
As we simplify our financial reporting to the investment community and have completed investments in our transformation program.
In 2020, we currently expect our operating margins to decrease by approximately 150 basis points.
To between 6.3 and 7.3%.
On approximately 8% to 11% lower sales.
Reduced operating leverage on the lower sales volumes, both in our eight WP and MP segments are partially offset by ongoing operational improvements.
With respect to the Corona virus.
We are not currently anticipating any material impact on our full year results.
We do expect to have lower sales and earnings from our AWB, China facility in the first half of the year.
Which will be made up in the second half.
We expect 2020 earnings between $1.85 and $2.35 per share.
This EPS guidance assumes a full year 2020 expected tax rate of 19%.
But excludes any benefit associated with our existing share repurchase authorization.
This guidance also assumes extension of our existing three elwen tariff exclusions for machine and components that are imported into the us from China.
From a quarterly perspective, we expect a normal historical sales pattern.
However, on a year over year basis revenue in the first half the year will be down approximately 15% and flat in the second half of the year.
We expect our EPS to be generated roughly 5% in Q1.
45% in Q2 and 25% each in Q3 in Q4.
The abnormally low level of profitability in Q1 is driven by AWB revenues being down 25% year over year.
Combined with Unabsorbed overhead on production below retail demand and finally, the impact of the Corona virus on our China operations.
For the full year, we're estimating free cash flow approximately $140 million.
Reflecting a strong year of positive cash generation.
We expect to improve first quarter year over year cash flow performance.
However, we do expect Q1 cash flow to be negative consistent with historical patterns.
We also estimate capital expenditures will be approximately $100 million.
This level of Capex reflects continued investment in initiatives designed to drive long term earnings growth and shareholder returns.
Turning to our segment guidance.
We expect the caution being exhibited by our Genie rental customers during 2019 to continue into 2020.
Resulting in a WP sales being down 7% to 10% and operating margin of 6% to 7%.
We expect materials processing revenues, including our towers and rough terrain cranes businesses.
To be down 8% to 11%.
Which will result in MPS operating margins being approximately 12% to 13%.
While we continue to monitor development associated with the UK exit from the European Union, we do not anticipate any material impact to tear acts in 2020 associated with the Briggs at process.
We are guiding for our corporate expenses to be approximately $80 million during 2020.
Up $10 million from 2019.
The increase is due to planning for 2020 incentive compensation at target payout.
And lower gains on sales of financing receivables.
Overall, we have been managing our corporate cost structure aggressively and we'll continue to do so in 2020.
Turning to slide 12 to review, our disciplined capital allocation strategy.
Since we introduced our disciplined capital allocation strategy at our analyst day in 2016, we have made tremendous progress in strengthening our balance sheet.
Reducing our cost of capital and reducing our debt by over $500 million.
As a result, our 2019 year end net leverage which is net debt divided by adjusted EBITDA.
Was less than 1.6 times.
Nearly a full term better than our targeted 2.5 times through the cycle.
Additionally, we reduced our pension obligations by more than $300 million over this period.
During the last three years, we have made substantial investments in terex.
In fact.
We have invested almost a quarter of a $1 billion into our businesses over the last three years.
Which is significantly higher than our annual maintenance capex of $45 million.
These investments demonstrate our commitment to long term growth.
We are excited by the portfolio of businesses, we have each of which out earns their cost of capital.
We have deployed the proceeds from the sales of businesses to return capital to shareholders.
First we have approximately 34% fewer shares now than we are outstanding at our 2016 analyst day.
Second we have increased our quarterly dividend by 71% to 12 cents per share.
As I have said consistently that terex team has and will continue to generate shareholder value through the execution of our disciplined capital allocation strategy.
With that I'll turn it back to you John.
Thank you Debbie.
Review, our segments starting with AWB.
The North American and European markets for Aero work platforms are challenging however, the north American utilities market remains strong.
Our north American rental customers continue to be cautious in their capital expenditure decisions.
They are prudently managing their fleet utilization.
As we move into the latter half of the year and into 2021, we expect the replacement cycle in North America in Europe to increase.
Finally, the ongoing adoption of aerial work platforms in China is fueling growth.
To improve margins. They W.P. team is fully committed to executing their strategic sourcing plans.
Including transitioning significant volume to new suppliers.
We are seeing savings rates consistent with our expectations.
However, the lower production levels have impacted the total value of savings realized to date.
And the aerials market the Genie brand is synonymous with technological leadership and innovation.
In 2020, we will continue to add more fuel efficient highbred products and fill out the extra capacity line, which will be on display at conexpo.
The equity line is important for Genie as a new ANSI standards governing load levels are currently due to take effect in March.
Utilities team will transition to their new manufacturing and engineering facility during the summer.
This new facility will improve efficiency and increase capacity.
Which together with new products and services.
We will enable terex utilities to continue to grow.
For example, the tariffs utilities TL 80 pictured on the slide is a new products, serving the transmission line distribution market.
The electric grid require significant continued investment to support the electrification and innovation that is occurring around the world.
We invite you to visit us at our Conexpo at our Terex boost the CR exciting new product and service offerings.
Turning to empty on slide 14.
Materials processing as a high performing segment that consistently delivered strong results and meet the its commitments.
MP is well positioned heading into 2020 with their new product offerings.
The MPG and continues to innovate.
The Eva equip coat screen pictured here will launch in Q1 2020.
It delivers higher capacity telematics and value to our customers.
The MPG and continues to expand its penetration into emerging markets for environmental and mobile crushing and screening equipment.
MPS innovation was recognized in Q4 2019 with three separate industry Awards.
Omni by Terex is a new first of its kind innovation that improves efficiency and reduces the risk of injury on crushing and screening sites.
Omni and all of MPS industry, leading innovation will be on display at Conexpo.
I expect our MPG and to continue to execute at a high level and deliver on its plans again this year.
To wrap up our prepared remarks.
In a challenging global environment, our global Terex team continues to focus on meeting commitments to our customers and shareholders. Jamie Despite the near term market conditions, we will continue to invest in innovative products and services to win and grow in the marketplace.
We will continue to invest in the initiatives that improve our operating and commercial capabilities.
We will also continue to follow our disciplined capital allocation strategy.
And create additional value for our shareholders.
And finally, we are confident in achieving our 2020 objectives.
With that let me turn it back to Randy.
Thanks, John as a reminder, during the question and answer session. We ask you to limit your questions. So one and a follow up to ensure we have time to get to everyone with that I'd like to open up for questions operator.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key please standby, we compile the Q and a roster.
Your first question comes from Jerry Revich with Goldman Sachs.
Yes, hi, good morning, everyone.
Good morning Jared.
Can you expand more on your outlook for the second quarter for earnings to the level.
So call. It 95 cents at the midpoint of guidance I think essentially you'd be within 100 basis points of your aerials margins in second quarter of 19 can you just fact check that for me and just stepped through.
Moving pieces in terms of while the second quarter. This year is expected to be.
Disproportionally significant compared to prior years.
Yes, Thanks, Jerry I'll take that question and.
When you look at.
The dispersion of our EPS guidance for the year.
It reflects that to the challenging Q1 will have with our expectation that a WP revenue would be down year over year by 25% in Q1 and that we would have.
Almost 25% lower.
Production on a global basis for a WP also in the first quarter and then the the impact of the Corona virus in the second quarter. It is as you certainly know our at seasonally adjusted this quarter of the year and both the.
For both the aerials business as well as our utilities business and.
So we are expecting a a strong Q2.
Production will be coming more in line with retail demand in the second quarter. After a down Q1, and so where we are expecting both our aerials and utilities businesses to perform which would drive.
Strong operating performance for Terex as a whole.
And John maybe expand on that point. So how much are you expecting production to be up sequentially in the second quarter versus the first quarter.
Compared to normal seasonality to get that big margin ramp that you're looking for just correct me if I'm wrong was you're embedding about 800 900 basis points sequential improvement in.
Yes.
Twoq versus one Q. So if you when my interest.
Building, our comfort level around that that'd be helpful.
Probably at all I don't disagree with the.
Range in which you're estimating the margin improvement in eight WP from Q1, two Q2 and that would be on the.
The production would increase as I said, a few moments ago production down year over year in Q1 by.
20, 425% and.
Production from Q.
Two of 19 to Q2 of 20 would be down in the.
Tenish percent range, which would be inline with where revenue was so that we'd be at you'd see a sequential improvement.
By.
10%, 10% to 15% actually.
So we're done with destock as of Q1 essentially.
The biggest portion of it that is absolutely correct.
Okay. Thank you.
Thank you Gerry.
Next question comes from Andy again with JP Morgan.
Hi, good morning.
Good morning.
No no concerns about backlog and the outlook for materials processing means we left and the United States and in Europe, I mean fundamentals are not by bad debt and new ads for infrastructure investment is booming can you just talked about your outlook for material processing.
Leading advertising businesses and what's going on regionally and with that business. What are you seeing that there's any should we be worried that you're losing market share similar.
Thanks, and thanks for the question about MP, we're excited about RMB business, it's been a very strong consistent performer.
It has done well over the course last couple of years and we think it will continue to do well, but the global macroeconomic environment is impacting demand, but different dynamics and are driving for for each business. As we look at backlog, we added historically high backlog going into 2019 and.
Historically, the business did not operate at that level backlog normally it's a much shorter cycle of book to business.
Type of business. So if you look going into 19, our backlog was almost 50% higher than it had been in the previous three years. So I would say the backlog, obviously, we'd like to have higher backlog, but I would say the backlog now is up along a more normal pattern.
Historical pattern when we went into 19 when it was tight we did strongly encouraged our dealer network around the world to get their orders in for the full year demand and with our lead times being shorter. This year. There is not that need for the dealers to place that level of demand. This early in the year. So that is a key dynamic that is impacting.
The overall backlog and if we look at the businesses as you asked and so if we look at crushing and screening in North America retail utilization rate of the dealers rental equipment is is stable, they're seeing good utilization, but theres a hesitancy a caution on the customers to convert the rental to ownership.
Which is which is delaying the restocking of of the networks overall the market still good utilization still good there's if customers are being generally cautious on on the on the crushing and screening side.
Now material handlers, and our folks business teams executed well, but with scrap steel prices coming down pretty significantly specifically in North America, but really around the world that have impacted the folks business now they've done a good job.
Expanding their distribution channels, expanding the offering there coming into but scrap steel prices still drive the food. So if I look at the businesses within MP the folks business from a backlog standpoint is actually off the most.
Offsetting that is our environmental businesses during the team has done a good job, bringing some new products to the to the marketplace. So we're continuing to see growth really globally across our environmental portfolio like our eco Tech brands.
When we looked at the concrete mixer business again for us that's principally a regional North American business Us North American business that was relatively stable and we're looking at it to be relatively stable year over year and then the picking carry business that that was in the MP throughout all of last year operates.
Well down on Australia, again, relatively stable up a little bit down a little bit. So that's how I'd characterize it is customers are being there being cautious but the markets are still in our still strong but dealers customers are cautious seeing how the year is going to play to play out and im confident that the team will capitalize on the opportunities.
In the markets as we head into 2020 and I'm not concerned at all about any share erosion associated with the backlog for the revenue outlook.
Okay. That's helpful color and did you quantified the impact of Corona virus on your Q1 EPS are Kenya.
So let me if you don't mind after before you quantified just a broader comment on the current about virus I want to say first our priority is to our team members and we have been fortunate that none of our team members have been reported with the virus.
We do have a world class manufacturing facility for our AWB segment in change though.
Due to the virus, we did the way opening of the plant like most companies in China. Our plan did open this week on February 11th, but the ramp has been slowed because the only team members that are allowed to come back to the plant as a team members that did not travel out of the city during the lunar.
New year holiday, so it's going to be a slow ramp because they have to self quarantine for for 14 days. So we're working that with our AWB team, we're working that with our suppliers and his Duffy said in the guidance. We have incorporated the impact of the Corona buyers, we believe and our Q1 in Q2 performance and our.
Our guidance does assuming that we will make up the Q1 in Q2 shortcoming as we move through Q3 in Q4 definitely want to add anything that no I would say that.
From a revenue perspective.
Since the situation is still evolving.
We have for purposes of guidance any way at the moment. There is a say 25 to 30 million dollar revenue impact built into the guidance for Q1 and negative $25 million to $30 million revenue impact and a.
The $5 million to $10 million.
Opie impact that's been built into that.
Okay. That's very helpful. Thank you I appreciate on the back in line.
Thank you and next question comes from Jamie Cook with Credit Suisse.
Hi, Good morning, I, just from other marketing materials I understand that.
Can you hear me.
Yes, we have I cant Jamie.
Oh, sorry, just another question on the aerial business for the first quarter understand were down 25%.
Im assuming youre, losing money again in the first quarter, if there's any way you could sort of handicap, how much we lose in the first quarter.
And then we're going to producing in the first quarters that just the Corona buyers consists sales assumption doesn't seem to materially different from what we said before.
And just my last question segments, what you guys said on supply chain benefits in that and whats implied in guidance and.
The cadence of that for the year. Thank you.
So let me start of the Atwood is that.
When you look at our aerial work platforms segment.
The the aerial work platforms business did have positive operating margin in Q4, 2019 and will have positive operating margin in Q1 2020. So.
The segment is into losing money.
The revenue is certainly ahead, the the the market environment, resulting in 25% lower revenue is certainly a headwind and our bringing inventory levels down and therefore, producing significantly below retail demand has been challenging the profitability of the bill.
Yes.
And once we get ourselves past both of those those impacts we do expect the margins to improve.
You want to goes supply chain, yes, so Jamie and I think your last question was around supply chain within specific to strategic sourcing.
Is that your questions Jamie.
Yes that was my question.
Assumption, India on guidance.
So thank you so in our 2020 guidance, we're anticipating a full year impact of about $50 million as I said in my opening comments were experiencing good savings rates on what on what we're doing but the lower production volumes is taking longer to consume the raw and wip inventory.
In the pipeline. So were built that am I will say the teams are really doing a good job, we literally changes thousands of of parts over the course of 19, Anik and we were able to do that with limited to no disruption to our manufacturing facility. So.
Teams within.
Internalize these processes to developing viasat capability is critical to us and we're going to continue to drive improvements.
In strategic sourcing and I think you see that clearly show up as we go through the year and the incremental or decremental margins that will enjoy and I will say that of the largest percentage of savings that we're seeing and strategic sourcing is associated with our HBP segment.
Okay. Thanks, I appreciate the color.
Thank you Jamie next question comes from David Raso with Evercore ISI.
Hi, Good morning, my questions on morning cash flow guidance.
When you adjust for the lower capex year over year, but also absorb the extra 25 million for the retirement obligation it implies the.
Free cash flow you. Thanks, and then grow 60 $70 million and that's despite EBIT being down 95 million DNA is going to be down about six 7 million just trying to get comfortable with bodily specs such a strong working capital performance.
Performance throughout the year, especially if it's very concentrated in the first part of the year and then production ramps back up just trying to gain gain comfort with that.
So David.
Ill take that and.
In the.
In the down revenue environment, a headwind it market environment that we anticipate for 2020 and the will result in a shrinking of the balance sheet.
So that we do expect that accounts receivable.
We'll be a.
Source of cash as we bring our inventory levels down and don't restock them that the level of accounts payable will also result in a.
Source of cash so it's really about the dynamics associated with.
Reductions in the inventories that collection of the receivables that result in working capital being a source of cash so.
I can assure you that our team is absolutely focused on.
Yes.
The working capital generation and free cash flow generation and that.
Well I acknowledge that our free cash flow generation has got to improve and John and I have been all over our teams on that subject and you will see us achieved the $140 million a free cash flow.
Performance in 2020.
I appreciate that I mean, I've just last year, we spoke to being very committed to the free cash flow and it still proved elusive and.
And I'm just trying to send has anything changed with how people are being compensated anything John how you're thinking about being willing to give up sales to make sure that the cash flows there just trying to understand why should we believe the guidance. This year when last year in a big under production year, where you would have thought it would have generated some decent working capital inflows.
It didn't materialize right.
Thanks, David So so yes for the management team net working capital as part of our incentive compensation plan.
It was significantly below target in 2019, obviously, we want to drive to that target in in.
2020, so from a compensation standpoint, I can assure you that the management team is focused on driving the networking capital and one other things David is we're being very disciplined on production and even in the fourth quarter. The revenue was down a little bit more than we had forecasted and so we're still trying to ensure that we're we're producing but.
Hello, retail dam demand to bring our inventories in line and we are going to be very disciplined I think it's important in these types of businesses and the in these markets. We very disciplined on your production because it doesn't help anybody to overproduce and build inventory and put it put yourself in a position where you may have to do.
To some things on pricing that you don't want to do so we're going to attack inventory, we're going to attack our production schedules and we're going to adjust our production schedules based on the revenue level to drive that net working capital is Duffy said.
Into free cash flow for the year and as you mentioned, we're continuing to spend we are sizable investments great organic growth our capex.
Remains elevated we think thats in the best long term interest of our shareholder. So it has intense focus it as part of our incentive compensation plan highly disappointed in our performance this year and it was reflective in EMEA might be payment.
Of our leadership team and we've got to turn that around in 2020.
Lastly related to that lets say if you did do the free cash flow 140, the dividends, probably only call it 35 million.
The excess 105 million roughly how should we expect.
The use of that.
Do hit those free cash flow targets.
Yeah, So will that will follow our disciplined capital allocation strategy, David and.
That will include.
Returning capital to shareholders during this.
Market headwind portion of the the economic cycle, we have been preserving liquidity through the downturn. We ended 2019 with $1.1 billion of liquidity on the balance sheet and between our cash on the balance sheet and available revolver and.
Realty borrowings, we think thats a good place to be.
Net debt to EBITDA 1.6 times, so we will continue to.
Consider what the right level of liquidity is and to make sure that we are following the disciplined capital allocation strategy, including efficient return of capital to shareholders.
So no it does make it clear here I mean started the year, so probably easier time to ask but any commitment from management on where that would be utilize again, if everything played out as you thought that excess one on five.
Are you comfortable with the leverage amounts the EBITDA will be down a bit this year's the leverage naturally goes up if you maintain it the debt levels, but.
Would you look at this is a share repo opportunity or are you more sensitive to keeping the leverage down as EBITDA drops.
David as we hit a through cycle EBITDA target net debt to EBITDA target, two and a half we'd like to position we're going into the year, we have an outstanding share repurchase authorization.
Outstanding with the board has approved and we will be opportunistic in the market against that outstanding share repurchase authorization, but we will manage our liquidity to ensure that we don't create any liquidity issues for sales, but we like the position we're in now David.
Going into a softer year.
All right I appreciate the time. Thank you thanks, David.
Next question comes from Mcgilvery with Baird.
Good morning, everyone.
Let me when I dig and good morning, I wanted to dig in a little more on a WP just understand the moving pieces there.
So can you can you talk a little bit about the utility business in 2019. So on that 2.7 billion of revenue how much of that was associated with the utility business and can you maybe give us a little clarity as to how youre thinking about that portion of the business.
As far as a 2020 guidance, where the segment is concerned.
Yeah. Thanks make yes utilities is part of our AWB segments.
It's a really solid business and what's different about the utilities business is it doesnt experienced the same seasonality and cyclicality of our aerials business. So it's a little bit more constant as we go through.
The course of the year.
As we've said it was about 400. So you can plan between 400 $450 million of revenue reasonably split equally across the quarter Q1's, a little lower Q2 picks up but but relatively consistent across the year and as we've said generating 9% to 10% level operating margins our Q threes.
Going to be a bit challenging for for the team. This year. We're we've anticipated that in in our guide as we move from our manufacturing facilities into our state of the art facility that will occur in Q3. So.
As we move as we get into the new facility, we expect to thanks to occur one increased capacity to take advantage of a growing market. The electrical grid market is a good space to be there's a lot of infrastructure investment required for that and we think thats going to give us increased capacity because right now we are capacity constrained and have lead times.
That our extended in our utilities business and then we also believe it's going to improve and drive efficiency for us as we go forward but.
If you think about $400 million to $450 million reasonably spread across the year, 9% to 10% operating margin. That's a good way to think about that business in 2020.
So it's fair to say that does businesses you expected to be up some.
In 2020.
Slightly yes.
Right. Okay. So then if I look at the low end of your guidance I mean that implies.
Your your WP business to be.
Below $2 billion in revenue can you frame this number for us historically, because there has been so much noise into settling with stuff kind of going in and coming out where with.
That revenue be versus say 2016 coming out of the industrial recession, and how should we think about that level of revenue versus older modeling that you've done historically as far as replacement demand is concerned are we back to replacement demand levels.
Really help us out a framework.
Right. So let me I don't have 16 in front of me. So we'll have we'll have to get back the on that makes sorry about that we'll have that for the next time, but let me frame the replacement cycle commentary.
As we.
Go into 2020 is again I think customers are being highly disciplined in their capex plans I was at air a this week and talk to multiple customers across the customer spectrum. They are being disciplined they do say as we move in the back half of 2020 and into 2021 the replacement cycle in the aerials Bill.
Yes.
Should begin to kick in there already talking about it is they look at their longer range, our capital plans and that's a result of the products that were purchased seven to eight years ago because in general.
The the equipment maintains its first life in the rental channel for seven to eight years. So the replacement cycle wasn't topic of conversation with with customers just.
Even this week and we do think as we move into the 2021 time period that the replacement cycle in the air aerial business will kick in.
Going forward and help to build.
Bill demand as we move from 2020 into 2021, obviously, it's only February of 2020, but longer looking longer term intermediate term, we clearly would expect the replacement cycle to kick in in North American and also in Europe in Europe is on a very similar cycle to North America.
Yes, as John said, a moment ago.
We don't have 2016.
With us here in the room, so apologies for that I would say that.
The.
The aerials or Genie portion of our business.
In the guidance, we provided today with the information John gave you is still above revenue of $2 billion and is in the same area that it was in 2017. So I would say it's up versus 2016, because obviously 16 was lower right.
All right Thats helpful. Thank you.
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Next question comes from Stephen Volkmann with Jefferies.
Hey, Steven.
Hi, Good morning, guys I just had a quick follow up.
On this utilities thing as well so once we consolidate these plants into the new one.
Do we still think about this as a 9% to 10% EBIT business John.
We're challenging the team to do better than that Steven.
And if I look at production efficiency the number there what kind of put out there is around 20% improvement in production efficiency associated with.
The the move to the new facilities Al will take.
Time to ramp it's not going occur on day, one, but I wouldn't be disappointed if we didn't see an improvement around 20% than our production efficiency within the within the plant Yeah, I think it'd be fair to say the business case, certainly did anticipate growth in the top line.
For the business as the utilities business continues to take market share and then secondly that to the manufacturing efficiency drives stronger gross margins that's correct.
Okay, and then I think in the past you said that there might be some other things you could do in that facility as well. So is there any sort of positive benefit anywhere else and the company.
No vis vis the facilities the special purpose of facility for utilities product lines for both our installs and what we manufacture on the on the boom side. So we're not currently anticipating using that facility for any other product lines. What we are doing as we have 19 service centers in.
Ladies business and those are in those 19 service centers are working very closely with our aerial customers and we've seen a very nice growth in parts and service revenue associated with the service centers focusing more on the aereo customers and so having the utilities business on.
Underneath.
WP as a segment has helped to drive some of that synergy we did see growth in that in 19, and we'd anticipate that to continue in $2000 beyond that that was more of the synergy not necessarily manufacturing synergy in the Watertown plant.
Got it got it okay. Thanks, and then finally does Capex go back to kind of maintenance. After this has done or is that are more to do.
Steve or we're not going to I don't think it goes all the way back to 40 million of maintenance Capex as we continue to look at the opportunities for organic growth in our business the opportunities to invest in some of our systems and processes. So I, we think it's going to come down from 100, but I don't I don't want to put out there that is going to go.
So all the way down the maintenance capital.
Levels in 2021.
Okay. Thanks, guys appreciate it.
Thank you soon.
Next question comes from Steven Fisher with you the yes.
Thanks, Good morning.
Just wondering within the M.T. segment, what degree of of revenue decline do you assume for the rough terrains and towers for 2020 I'm not sure. If that was included in the answer to Ann's question and then how are the Decrementals have you assumed in the crane component of materials processing versus.
The legacy materials processing component.
Yes, so I would say really no difference with the parties in the towers in terms of in terms of the top level revenue guide so somewhere in that 10% down ranges or is what we're assuming for that business and from a from a margin standpoint pretty consistent with actually a little lower actual.
We call that nine to 10, we did have.
A good guide in 2019, but you know 9% to 10% operating margins associated with the Crane business and down at the same same revenue proportion is the overall segment I think as a reasonable assessment that's correct.
Okay. That's helpful. And then just over on the W.P. side thinking about the order patterns for the year I think you mentioned that some of the annual purchase orders.
I didn't get finalized in Q1, really just kind of thinking about how.
The order pattern is now set up for both the rest of the first half and into the second half from yet I'm curious how does conexpo fit into the ordering plans for the year.
Is it too early for the customers to kind of be definitive about the second half at this point. So maybe you can just kind of walk us through the order patterns you expect here from the rest of the year.
So thank you and specific to AWB in the backlog dynamics. It really what impacted this year was timing of negotiations with the national accounts and the other dynamic was the percentage of their full year capex that they were willing to put on advanced purchase orders. So as I said the mass.
Accounts being very disciplined with their plans.
Our lead times industry lead times were much shorter so our national account negotiations flowed into January and into into early February those negotiations now or are principally complete.
You can argue that it's a bit more of a more normal pattern. If you go back to 16 17 than it was as we ended 18 going into into 19. So that's where we stand now in terms of Conexpo from an aerials perspective Con Expo is not as big as.
Selling show is perhaps cranes and some of the other MP businesses as I said I was just a are a this week you do sell a little bit A.R.A. I think it will be too early in the year given that it's the second week of March that Conexpo would have a significant impact on eight WP customers, we would expect MP to see some some pick up with some of them.
Dealers and customers so.
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That that's how I'd look at Conexpo I would put it in the shameless plug for everyone to come visit us at Conexpo, We've got some incredibly new exciting innovative products across our portfolio of product lines.
That demonstrate the technology that we're investing in the telematics is that we're investing in and positioning the business for for longer term growth so that.
Hope that answers your question in terms of the.
The flow, but conexpo is not going to be a big big selling show for eight WP segment.
I guess just.
I'm wondering if we should be anticipating any particularly.
Big.
Q1 swing in orders year over year.
Or is it more starting to neutralize.
I'd say, it's given the demand is I used the word more neutralize obviously, where we're going to record some that flowed into the first quarter.
But it's still going to be difficult comps year over year until we get to the back half of the year, that's right got it thanks a lot.
At this time I will turn the call back over to Mr. Wilson.
Thank you operator. This concludes our Q in a session I will now turn it over to John garrison for concluding remarks John.
First of all I want to thank you for your interest in Terex and I would encourage you I know many of you do attend Conexpo, we will be there we would love to host you at Conexpo and show you exciting things that we have across the portfolio of terex that we're going to be on demonstrating and showing to our customers. So again. Thank you for your interest.
Good to see at Conexpo and if you have any questions. Please follow up with Randy and John.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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