Terex Corporation (TEX) Q3 2013 Earnings Report, Transcript and Summary

Ronald M. DeFeo - Executive Chairman and Chief Executive Officer Kevin Bradley - Chief Financial Officer and Senior Vice President Timothy A. Ford - President of Terex Cranes Stoyan Filipov - President of Terex Material Handling & Port Solutions Matthew Fearon - President of Terex Aerial Work Platforms George Ellis - President of Terex Construction

Ann P. Duignan - JP Morgan Chase & Co, Research Division Nicole DeBlase - Morgan Stanley, Research Division Jerry Revich - Goldman Sachs Group Inc., Research Division Jamie L. Cook - Crédit Suisse AG, Research Division Eli S. Lustgarten - Longbow Research LLC Robert Wertheimer - Vertical Research Partners, LLC Christopher Schon Williams - BB&T Capital Markets, Research Division Andrew Kaplowitz - Barclays Capital, Research Division Ted Grace - Susquehanna Financial Group, LLLP, Research Division Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division Seth Weber - RBC Capital Markets, LLC, Research Division Alexander M. Blanton - Clear Harbor Asset Management, LLC Joel Gifford Tiss - BMO Capital Markets U.S. Andrew M. Casey - Wells Fargo Securities, LLC, Research Division Steven Fisher - UBS Investment Bank, Research Division Adam Fleck - Morningstar Inc., Research Division Yilma Abebe - JP Morgan Chase & Co, Research Division

Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Terex Corporation Third Quarter 2013 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Ronald DeFeo, Chairman and CEO of Terex Corporation. Please go ahead, sir.

Thank you, Tiffany, and good morning, ladies and gentlemen. We appreciate your interest in Terex today. On the call with me this morning is Kevin Bradley, our Senior VP and Chief Financial Officer; as well as Kevin O'Reilly, Vice President of Operational Finance; and Tom Gelston, Vice President of Investor Relations, and several of our leadership team members, including our business segment presidents, are also available on the call this morning for your -- for the Q&A period. As usual, we'll have a replay that'll be archived on the Terex website, www.terex.com, under the 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, and I'll -- and then I'll give you some comments and summarize before we open it up to your questions. We will be following the presentation that accompanied the earnings release and is available on our website. [Operator Instructions] Let me direct your attention to Page 2, which is the forward-looking statement and non-GAAP measures explanation. We encourage you to read this, as well as other items in our disclosures, because the information we'll be discussing today does include forward-looking material. So now, let me begin. Turning to Page 3. Third quarter results were generally in line with our expectations. Although sales and order environment remains on the softer side, we did see improved net income versus the prior year, driven mainly by lower interest expense and a lower effective tax rate. We achieved an earnings per share of $0.77 in the quarter versus an adjusted result of $0.62 per share for the same quarter in 2012. Our segment results were mixed in the quarter. Aerial Work Platforms had a strong quarter, delivering both excellent growth, up 22% versus the prior year, as well as solid operating margins of 15%. Construction continues to be challenged, and we continue to trim noncore businesses from this segment, as well as simplify our cost structure overall. The Cranes business continues to see a mix of business conditions globally. The Material Handling & Port Solutions business returned to a profit on slightly higher sales than a year ago. Improved performance by the Port business, as well as the parts and service portion of the Material Handling business led to the operating profit in the quarter versus the losses posted in the 3 prior quarters. Materials Processing executed their operating plan about as expected, and we're pleased with the profit contribution, especially in light of the end market uncertainty. Clearly, there are some near-term challenges in many markets. As such, we continue to focus on those aspects, as we have said previously, of our business that we can control. We will continue our efforts associated with the restructuring and streamlining of many of our segments. Lastly, free cash flow of $87 million in the quarter brings our 9-month free cash flow total to $262 million. We continue to expect free cash flow to be in excess of $400 million, as previously communicated. I will return in a couple of minutes to provide some segment highlights. But first, I'd like to turn it over to Kevin, who will go through the financial results for the quarter. Kevin?

Thanks, Ron, and good morning, everyone. Turning to Slide 4. I'll review our financial results for the quarter. Our net sales for the quarter of $1.8 billion was essentially flat when compared with the prior year quarter. Our AWP business led the segments with growth of 22% versus the prior year, with Cranes and Construction offsetting that with decreased sales of 12% and 17%, respectively. MH&PS was up slightly at 3.5% growth, and Material Processing was relatively flat, down 1.5%. Gross margin increased 40 basis points to 21.4% from the as-adjusted prior year quarter. Favorable mix in business, including significant growth in AWP, contributed to the increase. SG&A remained relatively consistent with the as-adjusted prior year quarter. Engineering spending increased as we continued to invest in new products and Tier 4 engine compliance. This increase was substantially offset by previous cost-reduction activities, primarily in Construction and Material Processing. Operating margin increased slightly to 7.8% of sales for the quarter. Net interest and other expense was down substantially, roughly $13.4 million, when compared with the prior year quarter as adjusted. The improvement in this line item was driven by debt reduction and refinancing actions executed in 2012 and in the second and third quarter of this year, which accounted for substantially all of the improvement. The third quarter effective tax rate was 19%. This compares to an as-adjusted tax rate of 28.6% in the prior year quarter. The lower track -- the lower tax rate was mainly driven by a release of uncertain tax provisions, partially offset by a reduction in the U.K. income tax rate for 2013. For the full year, we are now forecasting an adjusted effective tax rate of approximately 33%. For Q3, earnings per share was $0.77. This compares to $0.62 as adjusted and $0.27 as reported EPS in the prior year quarter. Net working capital as a percentage of annualized sales was 26%, a slight decrease from the 26.6% reported in Q3 of 2012. We continue to target an end-of-year result of 22%. And finally, return on invested capital decreased to 6% from 7.7% in the prior year. The current ROIC reflects the impacts of restructuring actions taken earlier in the year, where a significant amount of the benefit of these actions will not be realized until 2014. With that, let me turn it back to Ron.

Well, thank you, Kevin, and let me provide some detailed commentary following the presentation beginning on Page 5. Our Aerial Work Platforms business continues to benefit from the recovery in the North American rental channel, a strong Latin American market, as well as early signs of a beginning European replacement cycle. We continue to be optimistic about the prospects for this business as demand seems healthy, our expanded product range is being well received and our margins appear sustainable. Backlog up 35% versus prior year is giving us an early read that 2014 will likely see continued growth in this business. Turning to Page 6, our Construction segment. The business continues to see the same operating environment for its mix of products, namely reduced demand for our scrap-handling equipment, lower off-highway truck sales, mostly as a result of a scale back in China by our partners, and continued spotty demand for our compact equipment business. We continue to look at additional steps to further reduce the complexity and cost structure in this segment. Turning to Page 7. For our Crane segment, the global crane market remains soft as we have previously communicated. Softness in Australia, in particular, and a few other select products and markets, more than offset any growth achieved elsewhere, as well as impacted our margin mix negatively in the current reporting period. The Middle East remains the leader in growth in our cranes, and we anticipate this continuing. As noted on Page 8, the Material Handling & Port Solutions segment had a fairly positive quarter, especially following the tough first half of 2013. Overall, sales were a slight improvement versus the prior year, up 4%. Industrial cranes were down, actually, versus Q3 2012, although the parts and services portion of this business performed as expected. Conversely, our Port Solutions business was up quite nicely. The Material Handling side of the business is expected to remain soft for a while, driven by global weakness from industrial capital expenditures. On the Port Solutions side, we are seeing the anticipated reversal in the negative sales trends that we had in the first half of 2013, and the backlog supports the growth assumption in the fourth quarter and meaningful growth in 2014. The improved backlog, which is up 34% versus the prior year, combined with substantial restructuring efforts that are underway and mostly impacting 2014, make us optimistic about the ongoing contribution from this group. Lastly, on Page 9. Our Materials Processing segment, while essentially flat on the top line, delivered substantially better operating margins at 12.8% versus 10.1% on a year-over-year basis. From the demand side, mineral-driven markets globally, such as Australia and South America, combined with a sluggish European Construction market to continue to pressure this business from a revenue perspective. That has been a bit offset by some growth we've seen in North America. As we've stated previously, this business is one of our better businesses in reacting to the fluctuations in end market demands, and the business is actively managing its cost structure to mitigate whatever end market risk exists. So turning to the last page and summary. We have choppy markets, but our execution in these markets, we feel, is improving. The whole company is focused on execution and doing the things that we can control. Our earnings per share in the third quarter of $0.77 was achieved mainly through a lower tax rate and $11 million of lower interest expense versus the prior year. We believe we turned the corner in our Material Handling & Port Solutions business, but overall, Aerial Work Platforms is the only business where global demand drivers remain quite predictable. Importantly, the Architectural Billing Index supports a future recovery in nonresidential construction. For the full year of 2013, we continue to expect to generate over $400 million of free cash flow, and we have increased our EPS guidance to between $2.05 and $2.25 a share as a result of the lower anticipated 2013 effective tax rate, although now we've modified -- moderately lowered our revenue guidance to $7.3 billion to $7.5 billion. So with that, I'd like to now open it up for questions, operator. And thank you, and we'll take the first question.

[Operator Instructions] Your first question comes from the line of Ann Duignan of JPMorgan. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Ron, could you talk a little bit about the decline in the backlog in the Cranes business and how that sets you up for 2014, particularly in the context that we've got CONEXPO in March? Are people going to be holding back now until after that event and we're looking at kind of a back-half 2014 before we see Cranes really improve?

Okay. Ann, I'll initially comment, and then I'll turn it over to Tim, who is a lot more familiar with the specifics than I am. As we started this year, we were expecting that the Crane business would have a more positive year. We expected some to come from new products and some to come from market growth. Really, the market growth didn't materialize, and it actually was worse than we expected. Australia, for us, has been historically a very strong market with good product, and Australia has -- is down in the range of 50%, almost in all of our business as a company, and in our Crane business, it's kind of most pronounced. So it kind of took some of the opportunity in our Crane business off temporarily. Having said that, I'm really pretty positive about what's happening in our Crane segment, because I think we remain focused on a good execution and preparing for what will be better times. And I'll let Tim handle the specifics about CONEXPO, current backlog and that kind of thing. So, Tim?

All right. Ron, thanks. And, Ann, your question is very apropos. We spent a lot of time order intake, as you might imagine. I think as I look at the business today, I feel like we're at a turning point. I don't want to say that the 2014 outlook is incredibly robust compared to where we are today, but it's certainly getting better than it has been in the last 6 to 8 months. Our order intake in the third quarter, I think, was a little bit muted for several reasons. One, we did not get any stock orders from our dealers when we might typically get some at this time of year. Second, our overall organization is going through a pretty substantial change in terms of a new alignment. And I think, to be perfectly honest, we may have lost a little focus in the third quarter. But as I sit here today and as we look at the early part of October, October's actually shaping up to be our best order intake month of the year. So I feel pretty good about where we are. I think -- or the rest of 2013 will see continued strength, and I'm positive as we look ahead to 2014. What I don't know today is whether or not many of our dealers will hold back on order placement or whether or not they'll get in front of CONEXPO. That's unclear to me today, and we're going to be working that over the next few months with our North American and European customers. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Okay. I appreciate the color, and I appreciate the outlook ahead of CONEXPO. And then a follow-up question, Ron. You have an activist investor who has taken a 2% ownership in Terex. Have you had any conversations? I mean, I know it's touchy to ask specifically about activists. But have you had any conversations with any of your larger shareholders? And any color you could give us on that would be great.

Usually, Ann, we don't have, obviously, communication with our major shareholders in the first couple of weeks leading up to an earnings release, but we have had no contact with the activist shareholder that you mentioned. And our view is that we're open to any and all conversations with shareholders and actively reach out to those shareholders and encourage them to visit our facilities and encourage them to give us their points of view. We're interested in their points of view. We want to run Terex as if we were the most active activists ourselves. So we're open. Your specific reference, there's been no contact with, I think, the one that you're referencing.

Your next question comes from the line of Nicole DeBlase of Morgan Stanley.

So in Material Handling & Port Solutions, I think one of the highlights of the quarter for me was the 4% margin performance. Can you just comment on what that means for 4Q from a seasonal perspective? I know that 3Q is typically a seasonally strong quarter for MHPS margins. And then what that means -- is that -- does that mean that 2% to 3% is achievable as we move into 2014?

Nicole, thank you for the question. I'll turn it over to Steve in a second. I was encouraged by the Q3 performance in Material Handling & Port Solutions. I must say I expected it, but I was glad that we achieved it. And I think it is on the basic plan that we've kind of laid out for this business over the next several years. Typically speaking, the fourth quarter of the calendar year is one of the slower quarters for this business. But I do think we have some unusual things happening, in that our Port Business continues to strengthen. I am optimistic that we are on the longer-term trend to achieve the 2015 margin goals of 7.5%, as we've kind of laid out. And so I'll let Steve comment from there. Steve?

Yes. Thanks, Ron. Thanks, Nicole. For sure, I would say that in Q4, we're going to make money. So we want to continue the trend. It is a slower quarter for us in the Material Handling business, but I think we've got a few orders that we need to get out in December, which could be good news. As Ron mentioned, on the Port side, we've got deliveries of the large projects, which have started in Q3. We've started to deliver part of those. We'll continue to deliver some of those in Q4 and then, obviously, into '14 on the large projects. The other side of the business, what I call kind of the conventional Port business, the rubber-tired gantry cranes, the straddle carriers, the reach stackers, at the beginning of the year, it was pretty slow. And we've gotten orders, really, in the summertime that have helped us pick up deliveries in Q3 and Q4. So I feel better about the conventional Port business, so to speak. So I think that Q4, for us, is going to be another good quarter, probably not as good as Q3. As you mentioned, it's a big quarter for MH, more on the service side. But for '14, I think we're pretty excited about the opportunities that are there in '14.

Okay, got it. That's really helpful. And one more, if I may. I noticed that you guys didn't include the slide on updated segment guidance for the full year. I don't know if that's just a function of where we are in the year. But -- I know it's a broad question, but maybe you could just touch a bit on where you expect to be relative to your last full year guidance by segment and, I guess, where the revenue reduction came by segment.

Yes, Nicole. This is Ron. I think it's just a function of where we are in the year. That level of precision in terms of segment-by-segment guidance is really not what we want to do by quarter. I think what we try to frame going into the year is where we think each and every one of the segments is going to be. I think if I'd have to make a general statement, I would say AWP continues to have opportunity. We continue to be positive, although it is always the weakest quarter of AWP typically, the fourth quarter. On the other hand, I think our Crane business has been weak all year, and what we're really working on is building the order bank for 2014 for this business. But we also feel we'll have a solid quarter in the fourth quarter, okay? And as I look at Construction, I think Construction has pretty much bottomed out and is in a pretty good place. I mean, not good from an overall performance point of view, but good from probably not a lot more deterioration from here. End markets' still relatively weak globally, in particular the Chinese portion of our truck business has caused us to suffer, but they've given us some indications that 2014 will actually be better than 2013. So that's not a bad situation. Material Processing, that's a business that is unlikely to see a lot of revenue uptick, but I think the overall execution there is pretty darn good. The dealer inventory, we know where -- what that is. It is a -- it's in a -- it's in good shape. It's not like our dealers are loaded with inventory. We think they'll want to buy some product before the end of the year. And lastly, the Material Handling & Port Solutions business, I think you just heard Steve comment on. So overall, I know our fourth quarter revenue expectations are higher than the year-ago period, if you just take our $7.3 billion to $7.5 billion of guidance, and it does concern us a little bit, just looking on a year-over-year basis. But at the same time, we're pretty positive about our margin opportunity. So that's how I'd kind of shape it out.

Your next question comes from the line of Jerry Revich of Goldman Sachs.

Steve Filipov, I'm wondering if you could talk about now that you've had the segment, on MHPS, for the past, I believe, 9 months, can you just give us an update on the restructuring program and where exactly you stand organizationally? And just step us through the changes that have been implemented thus far and what we're looking for over the next 6 to 12 months.

Of course, Jerry. So where we are in the restructuring, I think we're on plan for all of it. Where we are is -- as you know, earlier in the year, we started a restructuring on SG&A, and we're on plan with that and have probably exited close to 300 team members. In Q2, as you know, we took a $47 million charge for restructuring. And within that restructuring, there was an additional add of about 200 team members in Germany. We're in the process of negotiating that with the Works Council. If you would have asked me the question about 3 or 4 weeks ago, I felt like we were kind of behind the curve on really getting an agreement with the Works Council and making progress on those 200 team members in Germany. Today, I think things are progressing well. We have another meeting with the Works Council next week. I'm -- I feel positive like that's going to happen. So I think we're on plan. I'd say the savings for Q3 so far that have hit, because of those restructuring programs, is about $4 million, and Q4 we'll probably have another $4 million. And then the bulk of -- I think in 2014, we'll see the savings from Germany really flow through the P&L. So Germany, we need to get done. Some of that's going to hit it -- some of the savings's going to hit in Q2, but probably most of it really into '14. So I feel good about the restructuring. I feel good about the environment and the relationship now with the Works Council. So we've made good progress on the SG&A side and also on the -- on kind of the German workforce side.

And then, Ron, across your businesses in Europe, can you just talk about how you feel about the 12- to 24-month outlook? Clearly, we're seeing some positive signs in freight volumes and industrial demand, but it looks like Construction spending is still soft. I'm wondering, how do you think about where we are in the cycle, when do you think we'll see demand for your products really picking up?

The good news about Terex is that we have a pretty diversified revenue base. And over the years, we've tried to build it and diversify it by product and by geography. So on one hand, Europe is a critical market to us because, historically, it has represented as much as 40-plus percent of our total business. Today, that's a little bit less. And in general, Europe has been a bit of a drag for us overall. And as I've looked to 2014, I guess I'd say most of the negative trends, actually, are -- seem to be more or less behind us. If I look forward, based on where we are right now, I think we're beginning -- we've turned the corner on Aerial Work Platforms, beginning to grow. Our Crane business, at least is no longer declining in our European business. Our Materials Processing business is beginning to see some growth. And overall, at Terex, I'd say our European business is fairly flat year-over-year. And so my personal view is that, 2014, we'll see a return to growth in Europe for the overall company. I wouldn't expect it to be double-digit growth, but I'd expect it to be mid single-digit type growth, and that'll be quite encouraging for us. Conversely, the U.S. business, which I think is -- has been pretty good for our Aerials business and showing some signs for our Cranes business, our Material Handling & Port Solutions business has been pretty positive, but our Cranes business actually had a negative Q3 over 2013 compared to 2012. And I -- but I don't see that continuing into 2014. I see the U.S. returning to some amount of growth. So -- and those are the big markets. The commodities pressure that we experienced this past year from Australia, I think that commodity pressure is still there, but I don't see the downdraft that we had this year. So the net-net of all that is, markets, we think, will be moderately better for the company in 2014 than 2013, but again, most of what we have to do are things that we can control.

Your next question comes from the line of Jamie Cook of Credit Suisse. Jamie L. Cook - Crédit Suisse AG, Research Division: A nice quarter. I have 2 questions. First, Tim, just back to the comments you made with regards to Ann's question, can you just talk -- you talked about, I think October is setting up to be one of the best order months. Can you just talk about sort of where that strength is coming from and why dealers didn't take stock in the third quarter? And I guess just assuming -- Cranes has had a lot of false starts, assuming that Cranes don't get better next year and we're sitting here in this flat environment, is there an opportunity for you to grow your margins next year based on some internal initiatives? And then, Ron, my second question is to you. Just more strategically, one, an update on the Construction business and possibly divesting some of the unprofitable businesses. And then as you sit here today, how do you think about your 2015 targets?

All right, Jamie, thank you. I'll -- a lot in that question. I'll try and see if I can address that. With respect to orders for Cranes, the thing that's encouraging to me is that while we're not in a position of robust growth, there's more, I think, selective buying that's happening as opposed to selective shopping that was happening earlier in the year. As I've said on this call previously and in other forums as well, we have a regular call with our global sales leaders. And one of the things that we look at is where's the order quotation activity happening. About half of our quotes that are out there today are for delivery in the first half of next year, and our quote activity has been fairly strong over the past several weeks. And the quote activity is coming from places that you would hope you'd begin to see some growth. Europe. Even North America, we're seeing a number of quotes for very large machines on projects that are out there. We're going to have to flush through a little bit of channel inventory in North America. But when you get past a 4 to 6 weeks period of excess inventory out there in the channel, 2013 and the first half of 2014 begins to shape up very well. As Ron noted, the biggest drag for us this year has been a decline in our Australian business. It's a very profitable business for us. And that drag has been substantial on our margin performance. So when I kind of sum it all up, I'm actually increasingly optimistic about the rest of this year and going into next year.

So now let me deal with your strategic question, Jamie. I'm going to start with that first, because I -- as you probably expect, you can never answer a divestiture question. When we set our 2015 targets, we expected 2013 to be the first year of multiple-year growth. And frankly, that is the one big disappointment that we have had this year. And we, generally, are going to have a year of 2013 with very little, if only moderate, revenue growth compared to the prior year. But the positive side of what we have said is that we're actually delivering on our operating margins more or less as we said. And if you recall, what I said about 2015 was that about 2/3 of the opportunity to achieve that goal was within our control and about 1/3 had to come from the market. And I still feel that way. But with little or no revenue growth, obviously, the hill is a little bit steeper climb. But that doesn't mean we don't all, in this company, believe we could still climb that hill. Obviously, I'm going to talk specifically in January or early February about 2014. But in general, we think the fundamentals in our business is to achieve approximately the kind of revenue and the kind of operating margin that's implied in the outlook -- or goals I set up, rather, for 2015, we still feel is there. So business-by-business, AWP is on track. I think Material Handling & Port Solutions is turning the corner to get on track, and pretty positive they will get on track. I think Materials Processing is behind a little bit from a revenue point of view, but on track from a margin perspective. Construction is a mixed bag. I think we have worked really hard this year to get real, sustained, structural cost out of that business, and I think 2014 is shaping up to be a much improved year in each and every one of the operations without a lot of revenue increase. Which leaves us with Cranes, and there's no doubt that the Crane business is a highly cyclical business and there's no doubt that we are not at the top of the cycle. And so 2014 is probably a lot harder to handicap right now than 2015, which is going to be a stronger year. It's just a matter of is it 10% stronger or 30% stronger, and that's what we are going to need to try and figure out at this stage. So I hope I answered your question. I know it's been a general answer, but I don't think you could expect me to be more specific than that.

Your next question comes from the line of Eli Lustgarten of Longbow.

A couple of quick questions. One, pricing. I mean, one of the disappointments we had from Caterpillar yesterday was price competition, particularly in Europe, well, over in the Construction, what have you. Can you talk about pricing in -- that you're seeing across the markets, particularly in some of these new orders, and you talked about some strengthening of orders, whether pricing's a factor in any of these things?

Yes, okay. I'm going to give you an overview comment, kind of go through a couple of the segments. And then I'll open it up to a couple of our key businesses so they can comment more specifically. One of the things I've tried to do at Terex is to get us into specialty businesses, where the competitive environment was clear, the competitors were specific and where pricing could be understood, maybe not completely have confidence in it. But you take our key businesses: in our Cranes business, if you set aside the Chinese competition, which really is not invading the developed world, we've got a couple of very big successful competitors who have a price history. We know how they act, we can understand them, I think they understand us; Aerial Work Platforms, not a whole lot different; Material Handling & Port Solutions, not a lot different, whether you're in the overhead Crane business or in the Port business, say, perhaps, one big Chinese player in the Port business. And so in general, we've tried to create a Terex where we're a specialty manufacturer, where there can be some price discipline. Now obviously, in our Construction business, we're in a cross-section of product categories, and they can be a little bit more price competitive, and we have consolidated customers who do put price pressure on us periodically. So I just wanted to kind of give you that overview, Eli, because I think it's important to understand Terex a little bit from that point of view. But I -- let me turn it over to Matt, who can comment on pricing, in particular, in the AWP business, and then maybe Tim in -- on the Crane area.

Sure, Eli. Yes, from a pricing standpoint, it is one of the pieces for -- in our goals to keep our margins expanding. And I'd say, in AWP, the environment remains rational. We're -- we just came out with a 2014 price increase, 2% on average. What we're seeing is that most of the major competitors have also announced increases for 2014. The other big piece of pricing in the AWP industry is going to be around the Tier 4 increases. They are completely independent of the 2% average that I talked about. And so starting -- we started that transition in Tier 4 in the middle of this year. So we're seeing that people are accepting. They're not happy about the Tier 4 price increases, people are never happy about any price increases. But we are seeing that the major competitors are raising prices and people are accepting them. And so there's pretty good discipline in the AWP segment.

Tim?

Eli, let me make a comment here on the Cranes pricing. Though as a Cards fan, I know you had a tough night last night. But the good thing...

Don't remind me.

There's always today, right?

There's always mañana, yes.

Overall, I would say in the Crane business, we're actually pleased with price performance. On a year-to-date basis, our price performance is actually positive, which is a good thing for us. We've maintained a great deal of discipline internally, and frankly, the market has actually responded similarly. I hear very rarely today about deep discounting happening from our competitors. It's not common today, where it was maybe 6 to 12 months ago, to hear about deals that were going on out there that might have been deeply discounted. So I'm actually relatively pleased with the discipline that the market is showing. I would say, looking forward, I think we will see some discounting, though I don't expect a bloodbath in the marketplace. There is some excess inventory in the channel, particularly in North America, as I mentioned earlier. Typically, you'd want to see about 2 to 2.5, 3 months worth of inventory, and we probably have somewhere between 2.5 and 4 months of inventory. So there will be a little bit of discounting to go off -- to get the equipment out the door. I don't expect it to be extraordinary. And overall, I'm relatively pleased with how we're performing.

Can I have one follow-up question? I'm trying to sense -- there's -- last month, there was a big AWP order that was canceled, I believe, by United Rentals or so, and the reason given actually was extended lead times that you're hearing. So I mean, you talked about the order patterns in AWP is going there. And with that bigger order canceled, I mean, it involved -- was it lead time that actually caused it?

Let me kind of take that and pass it over to Matt. I think United Rentals is doing the industry a service in being disciplined themselves and only taking on the fleet they can take in and manage and making sure that their branches execute on their rental rate strategy. And I think they want their branches to have rate discipline, and I don't think they want accelerated growth. And I really want to compliment United Rentals for that. I think if they execute against that plan, that'll help everybody. I think that resulted in some order cancellations for ourselves and probably some substantially greater order cancellations for others. But Matt has probably more particulars than me.

Yes. I think Ron's got the situation right. In specific, your question about was it related to lead times, I'd say only on a few product categories. If -- telehandlers, the lead times have been out there. And I think that what United looks at is do they really want to be loading up with equipment late in Q3 and into Q4. Most rental companies try to get their fleet in hand late Q1 through Q2 so they would back off. But in general, lead times on -- across our product lines are good right now.

Your next question comes from the line of Rob Wertheimer of Vertical Research Partners.

Question on Cranes. Can you mention the normal portion of the mix that goes to dealer stock? I'm not sure I know that number, and you mentioned it was a little soft in the quarter.

Yes. Thanks, Rob. This is Tim. Overall, our dealer stock number is a meaningful percentage of our sales, but it's not a dramatic number. So I don't have an absolute number for you. But I'd say 20% of our total year purchases would typically come from dealer stock, something in that order of magnitude. Keep in mind, however, that the way we've got the segment organized, we have utilities and our services business in here as well. So I don't -- I'm not talking about 20% of the overall segment. In Cranes, products makes up probably about 70% of our overall segment, so.

That was helpful. And then just in general, I think you had expected sort of a margin, or at least the last quarter segment guide implied it into the back half, and I know things wobble, but you didn't get the margin sequential improvement. Was the surprise in Australia most of it, or was there some other driver there?

Definitely, Australia had the biggest impact but we had a couple of other onetime unusual items. We had a warranty charge in our utility business that was for some equipment that we produced between the years 2000 and 2007, and we had an asset impairment charge that we took as well in the quarter, along with a little bit of higher engineering expense for some of the Tier 4 changeover work and some additional SG&A from a corporate cost standpoint. But overall, I think the Australian impact was the most significant.

If I can sneak in one more, Ron or anybody, I guess. The government shutdown had maybe less an impact than many had feared, but we did hear CAT mentioned the other day that smaller contractors are affected by the confidence in the economy and the political situation. Are you seeing that at all and maybe especially in smaller AWP customers who you'd like to see come through to support the cycle over the next couple of years?

Okay, Rob. Seeing any impact from a government shutdown is way beyond my pay grade. I don't think we could ever be able to estimate something like that. What I'd say is the overall attitude of what's the long-term implications for a MAP-21 or a new transportation bill, how are we going to get funding for the Highway Trust Fund, the sequestration. Sequestration will affect the Highway Trust Fund if it doesn't get resolved. I think that overall effect is creating a level of uncertainty out there that is diminishing what should be a bullish recovery into a very moderate recovery, and that's the kind of operating environment that we're seeing as reality, okay? So until we see leadership in those areas I mentioned, we're going to kind of expect a moderate U.S. economic environment.

Your next question comes from the line of Schon Williams of BB&T Capital Markets. Christopher Schon Williams - BB&T Capital Markets, Research Division: I wondered if we could -- we spent quite some time talking about some of the restructuring savings in Material Handling, but there should be some contribution on the Cranes and Construction side. I mean, can you just talk generally about whether -- where we are with those plans?

I'm going to first go to George and then to Tim. George?

Thank you. Thank you, Schon, for the question. On the Construction side, we are -- I would say, in the last quarter this year we'll complete all of the previously announced restructuring activity, and it is obviously going to help us as we go into 2014 to have all of this behind us. So I'm pretty pleased with the activity, as painful as it is. But you'll see that as we move forward completing out this year.

And, Schon, this is Tim. We announced the restructuring activity in Cranes in the second quarter. And as is customary with -- in Germany, we're in the process of negotiating the agreement with the Works Council. Our expectation is that we'll have that completed here in the fourth quarter and begin to realize some of the benefits of that in 2014.

And for reference, the Cranes restructuring was $15 million with an annualized benefit in that neighborhood. Christopher Schon Williams - BB&T Capital Markets, Research Division: Okay, perfect. And then just as a follow-up. There's been some press about maybe some reorganization within one of your Oklahoma facilities on the Construction side. Can you just talk about -- I mean, it sounds like there was a -- there's going to be a substantial CapEx spend there. I think reports were around $30 million. Can you just give a little bit of color there, kind of what's going on and what you think you'll need to invest in that facility?

Well, Schon, one of the good things about Terex is that we're pretty diverse and we have a meaningful amount of real estate around the world. And one of the situations that we faced was a declining U.S. Roadbuilding business. And so our position in that business -- with our position in that business, we decided to divest most of the products, which left us with a pretty substantial 700,000 square-foot facility positioned in the middle of the country with access to supply bases south of us and the Midwest. That gave us a great opportunity to build products there for our global customer base and, in particular, our North American customer base. And so we're refilling that facility. We've got some facilities around the country where we are not sure whether their long-term leases will be renewed, and we haven't announced specifically what we're going to move into this facility. But it'll be a facility that will pay back probably in less than 2 years. So we're really pretty encouraged by what we think we can do there. Christopher Schon Williams - BB&T Capital Markets, Research Division: And were there some tax incentives that may be coming along with that investment?

Well, any time you make this kind of a move, you always want to ask for help from the local authorities, and we're pretty positive about how the local authorities are dealing with us. And I don't want to frontline any of those conversations, but I think there'll clearly be some good help from the local authorities.

[Operator Instructions] Your next question comes from the line of Andrew Kaplowitz of Barclays.

Ron, so you sound pretty confident in growth in 2014 for AWP. Maybe you or Matt can parse out what kind of growth you see in the different markets you're in, whether it's the national rental companies or the independents in the U.S. Europe, which you've been pretty positive about this year, what do you expect there? And then in Brazil and China if you could.

Okay. Andy, I'll ask Matt to handle that. But I just want to make sure we're not going to give specific percentage increases, but we are also in early conversations with most of our major customers. So we're not dealing from no knowledge here. So, Matt, why don't you comment on that?

Sure, Andrew. Yes, we're continuing to see a strong market. And one of the most encouraging things is the geographic mix, which is part of your question. The replacement cycle continues in North America, but we're also seeing fleet growth here in North America. And when we shift over to Europe, we're seeing the beginning signs of the replacement cycle, and we've had really good growth in Latin America. And China, it's small when you look at our overall sales. But if you look at year-over-year, that's improving, and we're having a good year there. The only place that's stalled is Australia. So when I look at 2014 and I look at the fundamentals, and what I mean there is looking at what is the utilization in the rental companies, what are the fleet ages, what's the profile of their fleet, we're feeling really good about next year. We're still in the middle of the planning cycle, and we're in negotiations with the major companies. But we're spending a lot of time with all the major rental companies around the world, and everybody's feeling basically positive about next year. You've referenced the independents, and we just had a group of them together this week and it's the same story there. They're feeling better than they did last year. So when we look forward, nothing's finalized, but it feels very positive.

Maybe I can ask one clarification question on Crane margins, if I could. If you excluded Australia and the warranty issue that you had and the asset impairment, is it fair to say that margins would've been close to last year or at least closer to last year's third quarter?

Yes, definitely. We're -- we were significantly impacted by the Australian mix and the onetime items that I mentioned. We would've been much closer year-over-year than we were.

Your next question comes from the line of Ted Grace of Susquehanna.

So, Ron, you made a comment that, at least, in my interpretation, was third quarter orders may have been a little shy of internal expectations and that the near term remains challenging. And so just as we look at the orders from third quarter and we think about fourth quarter, how would you encourage us to think about fourth quarter, and how do you feel about the set-up entering 2014? I know you said you don't want to give percentage guidances, but just some flavor on how you think we should be calibrated for fourth quarter orders, given kind of the shaky near-term environment, would be really helpful.

Yes. I think what I'd emphasize is that the environment is a little bit harder to predict than I would like, than any of our team leaders would like. And -- but if you peel that onion back, it really comes down to pretty positive outlooks in AWP, and Material Handling & Port Solutions. A fairly negative outlook in the short term on Construction, but not getting worse. In other words, we think we hit the bottom there. And the Cranes is -- we're seeing some -- finally, some positive order momentum. But will it be sustainable? And the Materials Processing business, which is one of our smaller segments, but their business has historically been pretty good in Europe, but Europe has been pretty challenged, so it -- the net-net big swing factor is how does Tim Ford's Crane business do. And so I really can't give you much more specificity than that, but let me just say that I feel very good about our company's diversity. Because, many of you were worried about, golly, MHPS was a loser and was a strong loser in the first 6 months, actually, in the past 9 months, but we really felt that this was going to be a good business long term. It's not performing at a good business level yet, but fundamentally, it has all the characteristics of a good business. And so I feel very positive about the mix of the operations. So how high is high in 2014 will very much depend upon just how we handicap the Crane business in that year.

Okay. And then on Aerial business, if my recollection is correct, a year ago the third quarter had slippage of a URI order, I think, in the 4Q, so that you had an unusually strong fourth quarter order number in Aerials. Just, when we think about calibrating our expectations for fourth quarter orders in '14, how would you encourage us to just kind of like factor that dynamic in, if I've got it correct?

Yes. You have it correct, but I would always urge caution on forecasting the business off of a backlog number, okay? Matt is going to sometimes get an order, a big order in the third quarter, he's -- may get a big orders in the fourth quarter. What you really want to look for is what's the overall book-to-bill ratios, what are the trends, when -- and what's kind of the commentary around the business. And the commentary around this business is fleet ages, utilization of equipment, valuation of used equipment, Architectural Billing Index. If all of those things are fairly positive toward our business, whether we get a big order in the third quarter or a big order in the fourth quarter, this is a pretty decent oligopoly. So the positive opportunity sits here. So at least, that's how I think we should think about AWP.

Your next question comes from the line of Mig Dobre of Robert W. Baird. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: Great. Looking at Construction, performance here, especially on the margin side, a lot better than what I expected. And I guess I'm wondering, especially as we're looking at SG&A expenses ticking quite a bit lower year-over-year, what sort of run rate should we be applying here, especially keeping in mind that you've got some restructuring activity coming, if I understood you correctly, in the fourth quarter.

Well, I would say, Mig, that the restructuring activity is running through the fourth quarter, and actually, we're carrying some of the expenses. We've already announced the restructuring activities, but carrying some of the extra expenses in the fourth quarter that'll run off as well into next year. Do I have that right, George?

Yes.

Okay. So I think it's hard to give you a specific number on what the -- what's the SG&A trend going to be in 2014, because we're not exactly ready for that yet. But I would say that this is a business where, at this a fairly low level, we feel we're at breakeven or damn close to it. And with any kind of a revenue uptick, we're going to start beginning to show decent black numbers. And let me pick apart the 3 basic businesses. The Material Handling business, which is our Fuchs material handler, it's a scrap steel product, okay. Scrap steel prices have been in the toilet. Consequently, our business has been in the toilet. And we are beginning to see the pricing of steel improve and the interest level and activity among our primary distributors and customers showing a more positive trend. We have a phenomenally lean facility in Germany that's ready for an efficient order intake -- for an efficient performance with a moderate order intake. So that's business one. Business two is our Compact business, both North America and Europe. The European has undergone the biggest restructuring, and we have simplified that business phenomenally, taken about half the headcount out of it. And the European Compact Equipment business, though, has been very weak. We've got about 6 months more of finishing our production planning and assembly process, and we believe we'll have a highly efficient operation there. And then next year, later on in the year, we've got some new products that we're working on. So I don't expect, though, 2014 Compact Equipment in Europe to strongly recover, but I do expect it to improve. And the last piece that I'll emphasize is our teletruck business or our big dump truck business. As -- that business would be a little harder to handicap. And probably in the short term, we've bumped up against a small mining category in our rigid trucks. And as I mentioned earlier, we really have suffered because of the China slowdown. So we see China beginning to improve in '14. That will help that business. So I don't see a huge bounce back, but I see an improvement in '14 over '13. So net-net, I'm cautiously optimistic about all the hard work we've done here contributing to a decent performance. I'm a little worried that our revenue expectations for 2014 maybe a bit high, but we'll see how it goes.

Your next question comes from the line of Seth Weber of RBC Capital Markets.

I guess just, first, a clarification. Did -- on the MHPS business, did the service component, were service revenues up year-over-year in the quarter?

Steve, you want to comment on that?

Yes. Seth, year-over-year is slightly down, but sequentially, for the past, really, 2 quarters, up in both parts and service.

Your next question comes from the line of Alex Blanton of Clear Harbor Asset.

I've got a question on the Aerial Work Platforms, perhaps for Matt. And that is that in the past, that industry has been characterized by -- in various regions of the world at various times, by a shift from the prior practices of lifting people into the air for work, such as ladders and scaffolding, and other kinds of machines like truck-mounted cranes in Europe. And the shift from those practices to aerial work platforms took place, first, in the U.S. and is pretty much finished. But how do you characterize that shift in other regions, like Europe, China or South America? Because that's a big source of growth in that business for the future, I think, in those regions.

Go ahead, Matt.

All right. Thanks, Alex. That's a great question, because clearly, one of the things that drives, if you kind of zoom out and look at what drives ariel platform demand, you're exactly right. When people move from scaffolding or other methods of getting up to do work at heights safely, they find that aerial work platforms are the solution. What drives that is standards. And each of the developed nations have had standards in place for years, and those standards have evolved. But as you start to look around the world at developing markets, you see that these standards are starting to be implemented in places like Mexico, and you do see, a couple of years down the road, a significant change in what the market dynamics are. The most recent one is in China. They're starting to implement some standards. So we are still seeing that trend. It takes time as these markets develop. It takes a while to convert people from scaffolding to aerial work platforms. But in the end, there's a -- there's kind of a threshold on height where the efficiency really goes up, and the safety concerns go up once you get way up there. But that being said, the underlying economics of it, they have to have enough money to afford them. But we think that's a positive trend for us going forward, and it just spells opportunity for AWP over the next few years and even decades.

And I think, Matt, we're very well positioned. We just have -- we have a factory -- I was in China last week. We have a factory there that is making money. It's got a lot of production capacity in front of us. We're working with the Chinese government on standards. So I think we're really well positioned in what has the potential to be one of the best markets for aerial work platforms in the future.

Your next question comes from the line of Joel Tiss of Bank of Montréal.

All right, just real quick. Ron, can you talk about any other leverage you might have in addition to the operations, the restructurings and the margin improvement if -- in the kind of a slow recovery, to try to drive towards those 2015 goals?

I think the most important thing we have in this company is the dedication of our people. We have a great leadership team, experienced. Everybody on the leadership staff has well over 7 to 8 years experience, on average double-digit years of experience with the company. They understand what it's like to be part of a cyclical capital goods business. We've got a organization where the individual can make a big difference in the outcomes of the company. We've got great values, a commitment to compliance, and I think that's really our secret weapon as a company. It's the dedication and the focus of our team members. That doesn't mean that we can overcome negative markets, because the reality of a cyclical capital goods business is that in a hurricane, you're going to get wet. But we do know how to come out of it, and we know how to focus. And I think our team members are pretty committed folks.

Your next question comes from the line of Andy Casey of Wells Fargo Securities.

A couple of short questions on Cranes, and I'll glue them together. Last quarter, you talked about potential second half weakness in the U.S. rough terrain crane demand. Did that happen, and is that the part of the market where the inventory headwind you referred to is located? Then quickly, on top of that, are you hearing anything about any difficulty in some contractors getting financing for cranes, given that they lived through a pretty extended period of low utilization?

Tim?

Sure. The North American market is where we see the excess channel inventory. And again, as I said earlier, it's 4 to 6 weeks of excess. It's not months of excess. So I think it's a modest market. It's -- we're kind of chugging along. Our Rough Terrain business is down a little bit year-over-year, mostly due to the North American softness. But we're seeing pockets of strength in North America, too, particularly in the energy market. The -- anything to do with oil and gas right now is very strong. And if you look at where the opportunities are for us, it's in the Gulf, it's in the upper Midwest and it's in Canada, and that's where the North American opportunity is. So we'll bleed through this channel inventory over the next 3 or 4 months. And I'm pretty sure that by the time we get into 2014, we'll be back to kind of normal levels of inventory.

Your next question comes from the line of Steven Fisher of UBS.

Just on the Middle East Cranes, which you characterized as the only pure growth market. What kind of growth rate in backlog or sales have you seen there? Is it single digit or double digit? How steady is it quarter-to-quarter? And then is there any particular country you're seeing strength in?

Yes. Our business in the Middle East is doing very well. We're up 150-plus percent this year, so we think we've both gained share in that region and benefited from a growing market. So when you look at the opportunity for us in that part of the world, it's very strong. And I might expand, as a Middle East comment, to include some of the 'stans and Turkey, in that it's that general region of the world that's doing very well for us. In terms of backlog and order strength, that's where a lot of our -- where our backlog is today. And when we look at our weekly order quotation activity, we continue to see a lot of strong work there. So I'm pretty bullish on that part of the world and continue to think it's going to be strong into 2014.

Your next question comes from the line of Adam Fleck of Morningstar.

Just a quick housekeeping on working capital. I appreciate the confirmation you're still targeting 22% of sales. I'm just curious how you're going to get there. Is that an inventory story, or is there another line item we should be looking at?

Yes. No, we're absolutely looking at getting a fair amount of that improvement out of inventory across most of our businesses actually.

Your next question comes from the line of Yilma Abebe of JPMorgan. Yilma Abebe - JP Morgan Chase & Co, Research Division: If you can remind us, please, your debt reduction targets going forward. And then secondly, to get to your free cash flow guidance for the year, it looks like it implies, I mean, low working capital. Perhaps, if you can comment on which segment of your business we should expect to see lower -- low working capital.

Okay, I'll take that question. So we've been pretty active, right, in terms of activity this year on the balance sheet. It's $220 million out in Q2. We took out the largest portion of our minority interest in our Demag business. There was another chunk of Italian debt that we took out in July. So we've been very active in terms of deleveraging the business this year, and that will continue into '14. From a free cash flow perspective, we're still very confident that we'll be over $400 million for the year. That will put us at above $138 million in Q4. And yes, we do expect some of that to come from inventory reductions. I think we'll see inventory reductions in AWP, certainly in Cranes and in Construction would be the primary business segments that we'd expect it -- for it to show up.

Great, Kevin. Thank you. I think that finishes the questions. And I want to thank everyone for your interest and patience with us today. I apologize if some of you didn't get to ask your whole question or finish your question, it was not for lack of trying here. We had a lot of interest in our call and information this morning. I encourage any and all to follow up with Tom Gelston or Kevin Bradley or any of us that can help. Thank you for your interest in the company.

Thank you. This concludes today's conference call. You may now disconnect.