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Terex Corp  (NYSE:TEX)
Q3 2018 Earnings Conference Call
Nov. 02, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Kelly and I'll be your conference operator today. At this time I'd like to welcome everyone to the Terex Third Quarter 2018 Financial Results Conference Call.

All lines have been placed on mute to prevent any background noise. After the prepared remarks, there will be a question-and-answer session. (Operator Instructions)

I'd now like to turn the call over to Brian Henry, Senior Vice President, Business Development and Investor Relations. Please go ahead.

Brian Jerome Henr -- Vice President of Business Development and Investor Relations

Good morning, everyone and thank you for joining us for today's third quarter 2018 financial results conference call. Participating on today's call are John Garrison, Chairman and Chief Executive Officer; and John Sheehan Senior Vice President and Chief Financial Officer. Following the prepared remarks, we will conduct a question-and-answer session.

Last evening we released our third quarter 2018 results, a copy of which is available on terex.com. Today's call is being webcast and is accompanied by a slide presentation, which includes a reconciliation of GAAP to non-GAAP financial measures that we will use during this call and is also available on our website.

All per share amounts in the presentation are on a fully diluted basis. We will post a replay of this call on the Terex website under Events and Presentations in the Investor Relations section.

Let me direct your attention to Slide 2, which is our forward-looking statement and description of non-GAAP financial measures. We encourage you to read this as well as other items at our disclosures because information we will be discussing today does include forward-looking material.

With that please turn to Slide 3 and I'll turn it over to John Garrison.

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

Good morning and thank you for joining us and for your interest in Terex. Global demand for our products continues to grow. Compared to last year, we increased sales, bookings, backlog, operating margins and earnings per share again in Q3.

AWP increased sales by 14% and bookings by 50% to $601 million, reflecting continued strong global demand for our AWP products. In Cranes, we have resolved many of our supply chain challenges as the quarter progressed. However, shortages did impact production and deliveries leading to lower revenue and margins than we expected.

MP improved its operating margin again this quarter as it continues to execute very well across its portfolio. With a 72% increase in backlog, MP is well positioned to finish the year strong and hit the ground running in 2019.

Turning to Slide 4; every organization needs a great team to achieve great results. A core element of our Execute to Win business system is talent development and planning. We recently completed our annual talent review process. This is a global activity that requires every manager in the company to evaluate his or her team and define plans to develop team members and address talent gaps.

It's been great to see the progression of some of our emerging leaders that have worked their way through the organization, in many cases, starting as engineers or plant supervisors, now leading engineering organizations or managing factories.

We have also supplemented our homegrown talent with key recruits to address specific needs. Boris Schoepplein our new President of Parts & Services is a good example.

Improving an organizational talent is an ongoing process. The key to being successful is to follow a disciplined process to nurture in-house talent and identify opportunities to enhance it.

Turning to Slide 5; we continue to implement the Simplify and Execute to Win elements of our strategy. We are taking actions to simplify the manufacturing and administrative side of the business. The new utilities manufacturing center we are building in Watertown, South Dakota, is a great example.

We will significantly improve material flow and increase productivity. This is an exciting project for the Utilities business and for Terex.

Our finance team has done an excellent job implementing a new state-of-the-art performance management system. The system went live across Terex in the third quarter. Our business leaders now have efficient access to detailed performance information, organized consistently across the company. This is a major step toward advanced data-driven performance management.

Execute to Win is about dramatically improving our capabilities by investing in people, processes and tools in our three priority areas; Commercial Excellence, Lifecycle Solutions and Strategic Sourcing. We designed the Terex proven sales process to raise the performance of our sales team members by teaching best-in-class industrial selling and relationship management techniques. Approximately 50% of our global sales team has completed the training so far.

Parts and Services has significant growth potential. Our new leader, Boris Schoepplein is aggressively adding talent to his organization. In the third quarter, we hired a new Vice President of Global Parts & Service for AWP and a global leader for commercial services and digital offerings and we will continue to build out the organization.

We're also deploying a world-class parts pricing system. The new system reflects our new strategic approach to parts pricing and enables efficient price adjustments based on market conditions.

Finally, our Strategic Sourcing initiative is making steady progress. This is the first time that Terex has followed a rigorous process to leverage its global purchasing power. We are learning from Wave 1 that we need to transition a larger amount of volume through a consolidated set of suppliers to generate savings. The savings are in line with our objectives. We anticipate savings of approximately $80 million to be realized by 2020.

Another positive outcome will be a significant reduction in the number of suppliers dramatically simplifying our supply chain. To manage the process, we have mobilized implementation teams in every major site and deployed new part level tracking tools in governance procedures.

Wave 2 is also making progress. Two weeks ago, we hosted our Wave 2 supplier show in Mannheim, Germany. Approximately 800 attendees from 400 incumbent and prospective suppliers attended the event. The leadership team and I communicated our requirement and generated excitement about the opportunity to remain or become a supplier to Terex.

With Wave 1 as a backdrop, a clear takeaway for the supply base was our commitment to the process and willingness to make considerable changes to achieve our cost reduction objectives. We expect significant savings from this initiative in 2019 and beyond.

Turning to Slide 6; looking at our full year guidance, we now expect sales growth of approximately 17% or roughly $5.1 billion. We expect to deliver approximately 6.6% operating margin and earnings of between $2.60 and $2.70 per share.

While our global markets remain strong, this guidance, which is lower than our previous expectations reflects our third quarter results, updated production planning print, higher input cost including tariffs and anticipated foreign exchange headwinds.

With that, let me turn it over to John to provide more detail on our Q3 results and updated guidance.

John D. Sheehan -- Senior Vice President and Chief Financial Officer

Thanks John. Let me begin by reviewing our Q3 segment highlights. AWP increased sales by $78 million or 14% compared to last year driven by growth in North America and Asia.

As the bookings growth of about $200 million or 50% indicates, global customer demand remained strong and we are confident in our outlook for continued growth. AWP improved its operating profit by 115 basis points compared to last year, driven by production efficiencies achieved on higher volume, which more than offset greater-than-expected input cost headwinds including tariffs.

Moving to Cranes; the production and delivery issues in Mobile Cranes had a significant impact on third quarter performance. We were not able to deliver approximately $30 million worth of equipment that was planned for Q3. This led to approximately $8 million of lost margin and factory under-absorption. Other factors, including higher material costs were partially offset by lower SG&A expense.

Materials Processing continues to deliver excellent financial performance across its portfolio of businesses. Sales grew by 14% to $295 million driven by global demand for crushing and screening products, material handlers and environmental equipment.

The MP team increased year-over-year operating profit by 36%, representing a margin expansion of 200 basis points and an incremental margin of 28%. Backlog grew 72% to $446 million. MP is well positioned for a strong Q4 with considerable momentum heading into 2019.

Turning to Slide 8, consolidated sales increased 11% in the quarter. Higher operating margins generated by AWP and MP were largely offset by the underperformance in Cranes. Net interest expense rose by approximately $3 million year-over-year. Increased borrowing and higher underlying interest rates were partially offset by improved interest rate spreads on our term loan.

Other income was also impacted by changes in FX rates, which were modestly unfavorable compared to last year. On an adjusted basis, we generated earnings per share of $0.68, 36% higher than last year, a good quarter but below our expectation.

Turning to Slide 9, as John noted, we now expect full year sales growth of approximately 17% representing an increase of about $740 million compared to last year.

We updated AWP's full year sales growth to be approximately 22%. AWP finished Q3 with a substantial backlog of $527 million, which is $170 million or 48% higher than last year. We continue to see strong order rates and based on discussions with our major customers, we expect to finish the year with a healthy order book heading into 2019.

We now anticipate full year operating margin for AWP of between 10.5% and 11%. This outlook represents a significant improvement over the prior year but, below our previous expectation, due largely to slightly lower sales growth, increased material costs including tariffs and to a lesser extent, anticipated foreign exchange headwinds.

Based on our backlog and operational improvements in Cranes, we anticipate fourth quarter sales of approximately $375 million and we expect to breakeven or generate a small operating profit in Cranes in Q4. We now believe that MP will achieve a full year operating margin near the high end of the previously announced range on approximately 16% higher revenue than last year. This represents an excellent year for Materials Processing.

The net result of these changes is an updated earnings range of $2.60 to $2.70 per share, which at the midpoint, represents a doubling of our EPS compared to last year. From a free cash flow perspective, we now expect to generate approximately $50 million.

The primary drivers of the update are the latest earnings estimates and higher net working capital, including the cash impact of the new 301 tariffs on Chinese imports into the United States. While we have a process in place to recover a significant amount of the tariffs the recovery will take place in future periods.

Turning to Slide 10, we continue to deliver on our commitment to follow a disciplined capital allocation strategy. Year-to-date, free cash flow is modestly better than last year. Cash flow performance in the quarter was impacted by higher net working capital due largely to the timing of deliveries and higher accounts receivables, partially offset by higher payables.

We are making strategic investments in our businesses. On a year-to-date basis, we have invested approximately 55% more in capital expenditures than last year not including the acquisition of the MP properties in the U.K. Investing in growth opportunities designed to return significantly more than our cost of capital is an excellent use of cash.

We also continue to invest in the transformation priority areas that underpin our long-term improvement plans. Subject to market conditions we will continue to buy back shares.

Finally, we continue to expect our 2018 ROIC to improve to 16%, an important step toward our 2020 objective of 20% ROIC. The Terex team has and will continue to generate shareholder value through the execution of our disciplined capital allocation strategy.

And with that, I'll turn it back to John.

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

Thank you, John. I will review the dynamics in each of our segments starting with AWP. We increased sales, backlog and bookings in the third quarter and we are planning for continued growth in every region.

The growth that we are projecting is driven by global construction growth, replacement demand and increased adoption in Europe and developing markets. Our global operations are managing the challenges of higher production rates, including material and labor continuity.

The benefits of higher productivity are helping to offset higher material cost, including tariffs, enabling positive incremental margins. The AWP team is fully committed to executing their Strategic Sourcing plan, including transitioning considerable volume to new suppliers. We expect to realize significant savings in 2019.

Another exciting factor when looking to the future of AWP is its position as the leader in innovation. The AWP team maintains a steady cadence of new product introductions and enhancements.

The Genie S-85 high flow telescopic boom pictured here was recently launched in North America. These new high flow booms combine Genie's extra capacity technology with an undercarriage designed for sensitive ground conditions such as finished floor or turf. This is another great example of listening to our customers and designing products that address their specific needs.

In summary, we continue to meet the growing demand of our customers around the world, thanks to the commitment of our experience and passionate AWP team.

Turning to Cranes; the mobile cranes team made progress in the quarter, but not as much as we expected. From a demand perspective, our new products including the Demag line of all-terrain cranes are selling well. Our customers want the product. The major issue remains building and delivering cranes on time.

Part shortages during the assembly process also lead to labor efficiency, which causes under absorption and higher cost of sales. While shortages persisted in Q3, the materials management team made progress over the course of the quarter, improving their processes and getting better visibility into the supply chain.

Turning to the global crane markets, we continue to see largely stable demand with pockets of growth. Oil prices are stimulating modest demand increases in North America and the Middle East. The global market for large crawler cranes remains soft while the new Demag all-terrain cranes continue to make inroads. Our Utilities business is a consistent performer in a stable market.

Finally, our tower cranes business continues to grow and to execute well. The team recently hosted an event in Italy to demonstrate its new products and customer-focused solutions. Over 100 customers from around the world attended and provided outstanding feedback on our new flattop crane pictured here, including a new elevator, anti-collision system and a new telematics solution; great work by our Tower Cranes team.

In summary for Cranes, demanded is stable with pockets of growth. We have a strong order book and new products that continue to be well received. We remain committed to improving Cranes performance and meeting the needs of our customers.

Turning to MP; Materials Processing is a high-performing segment that consistently delivers strong results. MP improved performance again in Q3 increasing sales, bookings, backlog and margin. Global demand for crushing and screening equipment continues to be strong. Broad-based economic growth, construction activity and aggregate consumption are the main drivers. MP is also capitalizing growing demand for material handlers and broad line of environmental products.

Our Fuchs business produced and sold significantly more material handlers in the first nine months of 2018 compared to last year. Two weeks ago, I attended the Fuchs 130-year anniversary celebration with over 200 dealers and customers. It was a great event, showcasing the proud history of innovation and performance of Fuchs.

The highlight was the dramatic unveiling of the brand-new MHL 375 pictured here, designed for the growing material handling market. It features advanced telematics and the option to be powered by a diesel or electric motor. This is another example of customer-focused innovation that clearly differentiates our products. Great execution all around by our Fuchs team.

Last month I also had the opportunity to attend a customer open house, our environmental equipment business in New Hampshire. Over CBI brand is a recognized leader for performance and quality in the wood processing market. The power of the CBI products including the new Magnum Forced Horizontal Grinder that can turn a 40-inch diameter tree into chips in a matter of seconds is truly awesome to see. This is another example of being well positioned to succeed in a growing market.

There is significant momentum across the MP portfolio and with 72% more backlog than last year, MP is well positioned to finish out the year with a strong Q4 and excellent prospects for 2019.

To wrap up our prepared remarks, AWP and MP both delivered higher sales and significantly increased bookings and backlog reflecting continued strong demand for their respective products with considerable momentum heading into Q4 and 2019.

AWP and MP both improved operating margins in spite the material cost and tariff headwind. The operational challenges in Cranes are understood and we are making progress. We will continue to execute our transformational program, simplifying the company and building capabilities in our Execute to Win priority areas. We are confident in achieving our 2020 objectives of 10% operating margin and 20% ROIC.

Finally, we will continue to follow our disciplined capital allocation strategy and create additional value for our shareholders.

With that let me turn back to Brian.

Brian Jerome Henr -- Vice President of Business Development and Investor Relations

Thanks John. As a reminder, during the question-and-answer session we ask you to limit your questions to one and a follow-up to ensure we have time to get to everyone.

With that, I'd like to open it up for questions. Operator?

Questions and Answers:

Operator

(Operator instructions) Your first question comes from the line of Steven Fisher from UBS. Please go ahead. Your line is open.

Steven Michael Fisher -- UBS Securities LLC -- Analyst

Thanks. Good morning, guys. John, a few months ago, you talked about having some weekly check-ins with Cranes suppliers. Where did this process not meet what your expectations were? Or is there just really little you could do about it?

And then what gives you the confidence that you'll be able to ramp up that production in your Cranes factories to hit the implied growth in Q4?

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

Thanks Steve. Yes we've had an intense focus on improving the continuity of the materials supply in Mobile Cranes. We are starting to see the process progress. I was there a week ago Friday and we spent time physically and then on follow-ups.

We've engaged some external support to assist. We have better visibility into the supply chain's delivery and quantity performance. And at the end of the day what's happened is we've had strong demand for our products, but our supply base could not keep up with the demand and as a result of the shortages, it's led to disruptions in our mobile cranes operations, which has led to the lower productivity and under absorption.

Now in terms of progress through Q3, we began to see progress clearly not at the rate that we had anticipated, but we did begin to see progress in Q3 in terms of on-time starts, on-time completions which will ultimately lead to improvement in on-time deliveries.

So it really is an intense focus part number by part number, supplier by supplier to ensure the parts are delivered to the assembly operations in a timely manner and again, we made progress and you can see the progress in the metrics, but clearly not at the pace that we had anticipated.

Steven Michael Fisher -- UBS Securities LLC -- Analyst

Okay. And then just a follow-up on Cranes, if we were to annualize the Q4 implied Cranes revenue, I think it's about $1.5 billion and so if the mix doesn't change, just curious what the normalized level of profitability or margins you might be able to get from that level of revenues after you sort out all these supply chain issues?

I think you had talked about say $1.2 billion as a breakeven level and I think John Sheehan, you mentioned you missed an opportunity of $8 million of profit on $30 million of revenue. So call that 26% or so incremental. So if you're at $1.5 billion versus your $1.2 billion breakeven, does that mean we should assume you could earn say $75 million on that annualized level?

John D. Sheehan -- Senior Vice President and Chief Financial Officer

Yes. Thanks for that question Steve and I'll take that. So I guess two aspects to that question. First as it relates to the revenue, while we are certainly not providing 2019 revenue guidance or profitability guidance for that matter in this call, I would say that the $375 million of revenue for Q4 for the Cranes segment also represents a catching up or a resolving of the supply chain issues and getting higher number of cranes out the door.

So I'm not sure that I would necessarily multiply Q4 by four for next year in terms of the revenue number. I do continue to embrace though that we have brought the fixed cost structure of our Cranes segment down and that to the $1.2 billion annual revenue number.

If I take you back to our original guidance for 2018 that was for a 2% operating margin for the Cranes segment, the issues we've had in the Cranes segment are solely in the Mobile Cranes operations. We will get those issues resolved here in the fourth quarter and therefore, I would be thinking about an operating margin for 2019 in line with what we had talked about for 2018 of at least 2% positive operating margin.

Steven Michael Fisher -- UBS Securities LLC -- Analyst

Great. Thanks a lot.

Operator

Your next question comes from the line of Jamie Cook from Credit Suisse. Please go ahead. Your line is open.

Jamie L. Cook -- Credit Suisse Securities (NYSE:USA) LLC -- Analyst

Hi. Good morning. The backlog obviously for Aerials looks pretty good as we sit today relative to last year and I think at your Analyst Day, you sort of talked about thinking about flat revenues for 2019. Oshkosh yesterday reported good backlog as well and is implying flat to sort of down-ish top line.

So can you talk about your expectations for Aerials for 2019? And then just some of the issues whether it's productivity, supply chain, material cost, should we assume that stuff goes away in '19 and to think about -- how to think about incremental margin for that business? Thanks.

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

Thanks Jamie. So overall you're right. I mean the AWP market remains strong globally as evidenced by the bookings being up 50% and backlogs being up 48%. I think what's encouraging Jamie is we're seeing growth across all major regions.

Consistent with the discussions we're having with our customers, they have confidence in 2019 and that confidence is being driven by higher utilization on larger fleets and they're seeing improving rental rates, both year-over-year and sequentially, which is leading to higher CapEx demand and they're ordering equipment for that.

So we are seeing strength globally in that business. I would say customer sentiment remains very positive as we go in and our customers are planning for growth for 2019 and so are we.

John D. Sheehan -- Senior Vice President and Chief Financial Officer

Yes. And so Jamie in terms of the cost that we're seeing here in the second half of the year and we talked about them in our prepared remarks, the higher steel costs flowing into steel-related components tariffs from our first and second tier suppliers and then also just from the industrial demand, higher inflationary pressure, all of those factors will absolutely or are absolutely going to be factored into our 2019 pricing and our 2019 pricing will offset the higher input cost. We are still fully committed to the incremental margin for this segment in the 25% range and believe there is a -- that we'll have a very strong 2019.

Jamie L. Cook -- Credit Suisse Securities (NYSE:USA) LLC -- Analyst

Okay. Thank you. I'll let someone else get a question in.

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

Thank you, Jamie.

Operator

Your next question comes from the line of David Raso from Evercore. Please go ahead. Your line is open.

David Raso -- Evercore ISI -- Analyst

Hi. Good morning. Just indulge me for a second, just to step back for a second, there's a lot of stocks trading on '19 less than 10 times and you're at $36 right now, earnings this year are $2.65 is the midpoint. You've got $0.10 of carryover from the share count into '19.

MP reasonable numbers just not that much leverage in the business call it could add $0.15. Cranes I appreciate the 2% margin comment. It's a show-me story. At best let's model a breakeven for next year.

Year-over-year from a $30 million loss to breakeven it adds $0.30. So you add those three pieces together, we're at $2.65 this year, we're at $3.20. That's 11 times more expense than other stocks we can look at. The key is Aerials.

So the comment you just made about 25% incremental margins, you run a 10% topline growth and you put a 25% incremental on it, you're talking $0.63 we're at $3.80 the stock looks relatively inexpensive. But the believability of that right now, we have implied incremental margins for Aerials at 12%, 13% for the fourth quarter. We just did sub-20% for the third quarter.

Can you help us understand price costs, price dynamics, what you're hearing mix any issues around currency to get comfortable with that number? Because if it's a 15% to 20% incremental. It sort of changes the dynamic of -- is this stock relatively inexpensive, can I get a lot of other names that I can you kind of rely on more to execute at lower multiples?

So for all the other conversations about repo, Cranes has to be a show me, MP is not that big. If Aerials are 70% of your earnings, can you help us understand the comfort to throw out a 25% incremental comment for 2019? I appreciate you indulge me on this. It's obviously the critical aspect of the earnings power for 2019.

John D. Sheehan -- Senior Vice President and Chief Financial Officer

So David, let me just jump in before going to John is we're achieving a 22% incremental margin for 2018. So it's not just a throw out a 25% incremental margin, we are basically there for 2018. But John I'll let you go from there.

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

Yes. And again David on the -- in the context of number one, the market looks to be strong as evidenced by the backlog the customer sentiment. Price-cost ratio has improved in 2018. In 2019 part of the improvement is we're going to have to cover our cost.

So as we think about 2019 pricing strategy with an AWP it's going to be intended to offset the input cost that we're seeing. It will be higher than a normal price increase that we've had previously. What we are doing is we're folding the surcharge plus an additional amount into our 2019 pricing.

And I will say we are being totally transparent with our customers about the cost increases we're seeing. As we all in the call know we've seen dramatic increases in fuel costs 40% to 60% and we're seeing labor, freight and things like that. Customers are also seeing those incremental increases.

Now these are not easy conversations. Any price increase is not an easy conversation, but we are being transparent to be clear with the customers to see the cost that we're seeing in this business.

Around the work that we're doing because pricing is critical it's important to our Commercial Excellence initiative and really we're improving our pricing waterfall management, our process discipline and we're reducing leakage. Every basis point of price matters and so that is driving improvement as we go through the year.

I also mentioned in my opening comments, our sales training and focusing on the value proposition. AWP products are high-value products. We put people into the air and they can do it safely and consistently. We're investing in technology and innovation to drive differentiation in the marketplace and we need to be able to convince our customers of doing that.

We're working with customers as we go through to understand that yes, the initial price is important, but it's also the cost of operation, it's also the residual value that you receive. So we're engaged in in-depth conversations, negotiations with our customers on the pricing dynamics as we've experienced them in '18 and clearly the pricing dynamics are better in '18 than they were in '19.

Obviously the price cost is roughly neutral. We'd like to do slightly better. But our intention as we move forward from '18 to '19 is to really neutralize the input cost that we're seeing all right with our 2019 pricing. We're going to remain disciplined and we've been disciplined this year.

Some of the potential revenue shortfall that we've seen in 2018 is we've been resolute on applying the surcharge and it frankly has cost us a little bit of business as we've gone through the back end -- back half of the year, but we believe, we're just not continue to work with our customers so they understand to be transparent.

And so price cost is going to help us drive and consistently deliver on that 25% incremental margin that you mentioned and as John said, we did achieve 22% incremental margin full year. Fourth quarter is lower, part of it is the cost issues, part of it's the lowest quarter from a production standpoint, but, the full year incremental margin is at 22% and Matt and his team are committed to driving that improvement on a year-over-year basis to that 25% level.

David Raso -- Evercore ISI -- Analyst

So the pricing actions you're taking, where do you see price equaling cost maybe even above cost? Is that a set up ideally? I know you're negotiating right now, but is that set up when you put out a 25% number that starting in the first quarter, we expect to have you name it 4% price, 5% price, even coming in at 0 margin,, we still think of this as a 25% business.

I know I need a lot of education on the currency. Trying to understand how the currency plays. Just for now we have to assume the dollar is on the strong side. Can you help us understand how currency impacts it and again price cost, when do you expect price cost to at least be neutral starting in '19?

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

Sure David. I'll take the first part and I'll ask David to talk through the FX. On the price cost the first thing is that we have a strong backlog. Obviously, some of the backlog that we have is for 2019 delivery. All deliveries after 1st of January will be at 2019 pricing. So I think that is important.

David Raso -- Evercore ISI -- Analyst

I'm sorry, I missed that. Maybe the phone cut out. All shipments after January and I didn't hear what you said...

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

One yes. Excuse me, David. I'll be clear here. All deliveries after the 1st of January will be at 2019 pricing, all right? And so we're pricing all deliveries as we go forward and again David, I think this is important. The pricing actions I would like to tell you the pricing actions are going to drive significant margin expansion.

The reality of it is, is we're telling our customers the pricing actions are really to cover our cost. We've got to drive productivity in those other things to enhance. So it really is to neutralize the cost -- of the cost inputs that we're seeing. So in terms of the price cost, that's what we're looking at. All deliveries after January 01 are at 2019 pricing and Duffy, if you wouldn't take a moment or two to explain kind of the FX impact on AWP?

John D. Sheehan -- Senior Vice President and Chief Financial Officer

Sure. So the AWP segment does manufacture in the United States and ships product to Europe and therefore a strong dollar, weak euro does have an impact on them a negative impact on them. We've been seeing the euro weakening here especially in the second half of the year and especially in the fourth quarter.

And our guidance and our forecast for 2019 will take the current level of the euro into account and so we have to as we plan our business, we have to be able to overcome currency and not allow it to be a crutch for why we don't perform.

David Raso -- Evercore ISI -- Analyst

Yes. My impression was the China facility sort of the secret sauce of offsetting some of that currency drag shipping from Washington State to Europe that you could start to ship more from China into Europe. So with Europe 20%, 25% of the business, is that part of diminishing the currency drag for 2019? Does that change those supply lines a bit?

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

Exactly David that is correct. Especially in AWP segment, we do have a global manufacturing strategy. We do have the capability of producing multiple models in different locations and clearly, part of the strategy for supplying Europe is to supply more of the European demand both out of our European plants of course, but also increasing the production out of our China plant into Europe, we think that will also help with some of the currency impacts that we've experienced as we go forward.

David Raso -- Evercore ISI -- Analyst

And lastly, then I'll hop off. We talk a lot about North America and I appreciate the significance of it for AWP. But 35% of the business is outside of North America. Can you give us some thoughts on those markets and we should think about this base case, the order books on volumes for 2019, which is kind of where you sit today? Thank you.

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

China the plan as we just spoke not only to produce for exports out of China, but obviously we're continuing to see good growth and we're potentially looking at expansions within China given the market demand that we're seeing in China. So yes, North America is clearly important, but the AWP business is a global business and right now the demand signals that we're seeing globally are strong.

David Raso -- Evercore ISI -- Analyst

Really appreciate the time. Thank you.

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

Thank you, David.

Operator

Your next question comes from the line of Seth Weber from RBC Capital Markets. Please go ahead. Your line is open.

Seth Weber -- RBC Capital Markets -- Analyst

Hey. Good morning, everybody.

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

Good morning, Seth.

Seth Weber -- RBC Capital Markets -- Analyst

Just wanted to -- another question on access. The backlog -- the orders backlog obviously very strong. Can you just comment on whether you're seeing any from your customers? Are they kind of delaying negotiations here or pushing back on any of your conversations? I mean it doesn't seem like that, but we've heard that from some other people and also can you talk about whether you're planning for your mix to be any different this year with respect to IRCs versus the nationals? Thanks.

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

Thanks Seth. I'll try to answer those going backwards. In terms of the current backlog, we don't really see any significant difference versus our historical mix between the customer bases within there. So I think -- I don't think there's any substantial change there.

John D. Sheehan -- Senior Vice President and Chief Financial Officer

On the first part of the question Seth with respect to the negotiations with our customers, for 2019 and whether there is push back or delay, I would say that Matt and his team have been as John described a little bit earlier been very resolute, very strident. Our 2019 pricing is designed to offset the input cost headwinds that we've experienced in 2018, higher steel and steel-related components prices, the indirect impact of direct and indirect impact of tariffs.

And so we're having very good negotiations and discussions with our customers and being transparent with respect to the cost increases that we've incurred and expect to continue to incur and I wouldn't say necessarily that the negotiations are delayed, but they are progressing through and will be concluded during the course of the fourth quarter.

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

Yes. And again given the nature of and there are challenging negotiations, there is multiple rounds of discussion that continue before you finally close on the deal. But again we're anticipating to see strong growth as we close out the year and we anticipate closing out a lot of these agreements here as we move through the fourth quarter and early into first quarter.

Seth Weber -- RBC Capital Markets -- Analyst

Okay. That's helpful. Thank you. And then just quickly follow up on the share buyback, the 77.5 (ph) guidance for the year so that implies no buyback in the fourth quarter then? Is that right?

John D. Sheehan -- Senior Vice President and Chief Financial Officer

Well we would not project in the share count guidance that we provide, we do not project future share repurchases into that guide. So I wouldn't necessarily read anything into that. We are continuing to follow our disciplined capital allocation strategy as it relates to share repurchases.

We believe that Terex shares have been and continue to be a good use of our cash and a good investment as demonstrated by the fact that we bought $1.25 billion of our shares back over the last less than two years.

And we will continue to create long-term shareholder value through our disciplined capital allocation strategy. But as it relates to the guidance, that don't read into that, that we don't intend to repurchase shares in the fourth quarter.

Seth Weber -- RBC Capital Markets -- Analyst

Okay. Thank you very much, everybody. I appreciate it.

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

Thank you, Seth.

Operator

Your next question comes from the line of Ann Duignan from JPMorgan. Please go ahead. Your line is open.

Ann Duignan -- JPMorgan -- Analyst

Hi. Good morning.

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

Good morning, Ann.

Ann Duignan -- JPMorgan -- Analyst

Just on AWP pricing again, can you reassure us that these are new list prices that they're not inflation clauses because last couple of days, we're now hearing that gee, maybe we'll get a deal with China and tariff will disappear and last thing we want to is midyear next year we find out that these we're surcharges and they've gone away by this all sorts. So if you could just assure us that these are real list price increases.

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

Thank you, Ann. A great question and again to be absolutely clear, for 2019 pricing we are not using a surcharge. We're rolling the surcharges that we've seen as a result of the steel this year into a list price increase in 2019.

Ann Duignan -- JPMorgan -- Analyst

Okay. Good. That's very clear. Thank you. And then taking a step back a little bit looking at your ROI and your target of 20% by 2020, can you talk a little bit about how much Cranes are weighing on your ROI this year and can you get to 20% with Cranes? Are you willing to do something structural with Cranes to get to 20%? Or are you willing to miss the 20% target? Thank you.

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

Thank you, Anne. Well, one thing we're not willing to concede is conceding on the target. We're committed as a leadership team to delivering on the 10% operating margin to delivering on the 20% ROIC and to deliver on our free cash flow that we laid out almost two years ago at this time in our investor meetings. So that -- those are the objectives for this leadership team and we're going to hold ourselves accountable to achieving them. So there's no looking back on those.

In terms of Cranes Ann, we have made progress, but unequivocally, we understand that we've got more sustainable improvement to be made. As we do the things that we've talked about, fix the supply chain, get the production -- the products out to our customers. We're going to see a pretty significant increase in the ROIC of their business.

Again the good news side here is that the new products that we've developed, they are doing well in the marketplace. And now we've just got to work our way through the disruptions that we've had and get back to delivering on our commitments to our customers for on-time delivery.

We continue to follow as Duffy said our rigorous capital allocation. You have to out-earn your cost of capital through the cycle. That rigorous application of our capital allocation strategy has not changed. But we believe we can drive with the continued improvement that we can drive improvement in our Cranes business, so that you can achieve the requirement of out-earning the cost of capital through the cycle.

Ann Duignan -- JPMorgan -- Analyst

Okay. But we've only got one year left before we hit 2020, and we're not even at breakeven yet. So when would you expect to hit -- deliver greater than the cost of capital?

John D. Sheehan -- Senior Vice President and Chief Financial Officer

So Ann I would say two things. First of all, we will resolve the Cranes -- Mobile Cranes supply chain challenges this quarter. I talked earlier in response to another question about getting back to at least 2% positive operating margin in 2019 and we would continue to improve upon that margin into 2020.

On top of that,, our performance to date has been devoid of the savings associated with our Strategic Sourcing initiative and we do expect that that initiative will also kick in that will benefit the entire company, including our Cranes segment when thinking about their profitability.

John talked about in his prepared remarks the savings that we expect to achieve from that out over the next two years from our Wave 1 initiative sorry.

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

I guess the only thing I'd add to that Ann is we're tracking toward about 16% this year return on invested capital with the underperformance -- significant underperformance in Crane. So I understand your concept, there's not a lot of time between now and 2020. But we're going get the supply chain fixed and begin to ship products and that will help on that ROIC commitment.

Ann Duignan -- JPMorgan -- Analyst

Okay. Thank you. I'll get back in line. Appreciate it.

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

Thanks Ann.

Operator

Your next question comes from the line of Stanley Elliott from Stifel. Please go ahead. Your line is open.

Stanley Elliott -- Stifel -- Analyst

Thank you, guys. Just to clarify on the Wave 1, Wave 2, was $80 million realized by 2020 from Wave 1 and if there was additional progress coming on Wave 2?

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

That's correct. On the Strategic Sourcing we're anticipating $80 million of savings by 2020. I think the way to think about it is about $40 million or so next year realizing a 100% of the $80 million in 2020.

As I indicated in our prepared remarks, we have kicked of Wave 2 in Mannheim. We had a very good event there. Wave 2 savings maybe the back half of 2020 but Wave 2 savings will then kick off 2020 and beyond. So you'll have Wave 1 plus Wave 2 as we go forward.

So again we're seeing with opportunities, good opportunity for cost reduction, excellent opportunity for simplifying our supply base, reducing the number of suppliers we're working with, entering into long-term agreements with suppliers so that when we get in challenging periods like this that we're able to ensure continuity of supply.

So we're committed to the process. We're spending a lot of -- we're investing in the process, in people and process and we're going to begin to see the benefits of this investment in 2019 and leading beyond '19 into '20.

Stanley Elliott -- Stifel -- Analyst

Perfect. And then quickly on the MP business, the U.K. acquisition was fairly small. The step up that we've seen in profitability is that just strictly the volumes that have come through or did the acquisition to open up some new avenues for you? And then quickly, could you parse out the backlog between kind of the Material Handling and then the actual crushing business?

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

Yes. Thank you. So again MP has really done a great job as we said in our opening remarks, really strong execution, significant increase in sales and backlog and driving a 210 basis point margin improvement. And the good news is it's coming from strong execution. They've had to overcome many of the same challenges we all had as manufacturers with the supply and the supply base, but they've done a really great job doing that.

We've seen growth really across their entire portfolio. Crushing and screening is up globally. Our Material Handling business, Fuchs, is showing broad-based growth in Europe and North America and that was a business that was down considerably. So we're seeing improvement there.

But one business that is slightly down is our concrete business in the United States but that's really as a result of not being able to produce refurbished trucks and basically just going to a new truck environment. And then our environmental business is gaining traction.

These are new businesses that Karen and the team have invested in and they've done a great job with the acquisition of CBI growing that business, but then also creating within their portfolio, some environmental businesses to take advantage of the regulatory changes across the globe.

So overall, we're seeing good growth across their portfolio and good, which I also think is quite encouraging, good broad, geographical dispersion of their growth and backlog.

Stanley Elliott -- Stifel -- Analyst

Okay guys. Thank you very much.

John D. Sheehan -- Senior Vice President and Chief Financial Officer

Stanley, just one point on John's comment is, on our concrete business, the refurbished trucks, not being able to produce those, that is a result of a regulatory change and not any internal production challenges by our Terex team.

Stanley Elliott -- Stifel -- Analyst

Thanks. Appreciate it.

Operator

And this will be our final question. Your next question comes from Andy Casey from Wells Fargo Securities. Please go ahead. Your line is open.

Andy Casey -- Wells Fargo security -- Analyst

Thanks. My questions have been answered.

John D. Sheehan -- Senior Vice President and Chief Financial Officer

Thank you, Andy. Thank you very much.

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

So first of all, I want to thank all of you for your questions and your continued interest in Terex. Clearly a challenging quarter, but we have made progress on our transformation strategy and our Execute to Win priorities. And we clearly understand that we have to accelerate the pace to achieve our objectives.

The team is committed to driving that improvement and as we move forward, we're confident that we can capitalize on the growth that we are anticipating in 2019.

With that, if you have any further questions, please do not hesitate to reach out to Brian and again, thank you.

Operator

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

Duration: 57 minutes

Call participants:

Brian Jerome Henr -- Vice President of Business Development and Investor Relations

John L. Garrison -- Chief Executive Officer and President of Terex Corporation

John D. Sheehan -- Senior Vice President and Chief Financial Officer

Steven Michael Fisher -- UBS Securities LLC -- Analyst

Jamie L. Cook -- Credit Suisse Securities (NYSE:USA) LLC -- Analyst

David Raso -- Evercore ISI -- Analyst

Seth Weber -- RBC Capital Markets -- Analyst

Ann Duignan -- JPMorgan -- Analyst

Stanley Elliott -- Stifel -- Analyst

Andy Casey -- Wells Fargo security -- Analyst

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