Terex (TEX) Q2 2019 Earnings Call Transcript

Terex (TEX 0.80%)
Q2 2019 Earnings Call
Jul 30, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Lisa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Terex Corporation's second-quarter 2019 financial results conference call. [Operator instructions] Brian Henry, senior vice president of business development and investor relations, you may begin your conference.

Brian Henry -- Senior Vice President of Business Development and Investor Relations

Good morning, everyone, and thank you for participating in today's second-quarter 2019 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. We have reduced our second-quarter 2019 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 adjusted 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 in our disclosures because the 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 Garrison -- Chairman and Chief Executive Officer

Good morning, and thank you for joining us and for your interest in Terex. First, I want to thank our global team for their intense focus on creating a zero-harm safety culture, delivering value for our customers and their commitment to implementing our strategy. Terex continued to grow in the second quarter. Global demand for our leading products and services remained stable, and we continued to meet the needs of our diverse customer base.

MP continued its excellent operating performance, increasing sales and expanding operating margins again in the second quarter. They achieved strong growth across their global portfolio. AWP markets in North America have moderated slightly but remained at healthy levels. In Europe, demand is being impacted by the overall economic environment leading to cautious customer sentiment.

We continue to see strong growth in the Asia Pacific region, including China. As John will discuss in more depth, AWP operating margins in the quarter did not meet our expectations. Margins were impacted by the weak euro, our decision to lower production volume to better align global inventory levels with demand and product mix. I was extremely pleased with our free cash flow performance as we generated $168 million in the quarter, more than double last year's Q2 result.

This strong cash generation performance reflects our global team's continuing focus on improving working capital efficiency. Our improving financial results with adjusted operating margins greater than 10% and adjusted EPS increasing 23% from what we presented in our Q2 earnings release in July 2018 demonstrates the financial improvements we are realizing by focusing our portfolio and implementing our strategy. Turning to Slide 4. We continue to implement our strategy to focus the portfolio on great businesses, simplify the organization and enhance the capabilities needed to win in the marketplace.

A foundational element of our execute-to-win business system is the annual business strategy we use. Over the past several weeks, I've met with the leadership teams of each of our businesses for comprehensive, multi-day reviews on their strategic plans. These reviews ensure our investment priorities are aligned with the growth potential in our global markets. In developed markets, we expect industrial and nonresidential construction demand, including the need for infrastructure investment, and the size and age of the fleet to drive medium- and longer-term growth.

Looking at the developing markets, we expect economic growth and adoption of more advanced mobile equipment to fuel growth over our planning horizon. We're making strategic investments in production capacity and product and service innovation to ensure we capitalize on broad-based growth potential. Turning to Slide 5. We continue to make progress implementing our strategy.

The sale of Demag mobile cranes is expected to close in the coming days. We'll execute our plans to ensure a smooth transition for our customers and team members to Tadano. We remain committed to the rough terrain and tower crane product lines in North America and around the world. We've implemented a new sales and service organization in North America and are investing in our capabilities to support our customers into the future.

We continue to simplify Terex. The transition to a more focused two-segment structure, combined with the significant progress we made improving processes, tools and leadership talent in our priority areas enabled us to refine our corporate operating model. Each functional area is implementing plans to continue to deliver essential services in an efficient and cost-effective manner that reduces operating expenses. Implementation will continue into the second half of 2019.

We continue to execute the organic growth element of our disciplined capital allocation strategy by investing in innovative products and services and global manufacturing capability. The new utilities manufacturing facility in South Dakota remains on schedule and within budget. MP's capacity expansions in India and Northern Ireland also remain on track. These investments enable simplification, improved manufacturing productivity and growth.

We continue to invest in our execute-to-win priority areas. Our commercial organizations operate with more process discipline enabled by investments in training and systems. Our life cycle solutions strategy is taking shape. We have a world-class leadership team in place, and we'll be making investments to dramatically increase our share in the growing markets of parts, services and related opportunities.

Finally, on strategic sourcing, teams in each of our manufacturing facilities are implementing their Wave 1 savings. Wave 2 savings are starting to be realized as certain opportunities are being fast-tracked, while other savings plans are being developed. Based upon AWP's lower production levels and spend forecast, we expect savings of approximately $30 million this year. Turning to Slide 6.

Based on our first-half performance and changes to the outlook in AWP for the balance of 2019, including lower-than-previously expected sales growth, reduced production volume, adverse foreign exchange and product mix, we expect full-year EPS to be between $3.40 and $3.80 on net sales of approximately $4.6 billion. We continue to focus on working capital and improving cash flow, and we are reaffirming our free cash flow guidance of approximately $165 million. With that, let me turn it over to John.

John Sheehan -- Senior Vice President and Chief Financial Officer

Thanks, John. Let me begin by reviewing our Q2 segment highlights. AWP sales totaled $870 million in the quarter, up about 5% on an FX-neutral basis. Sales in North America were steady and volume in EMEA was down modestly.

We increased sales in Asia, including China, driven by market growth and increased product adoption. AWP's operating margin in the quarter was lower than we expected and impacted by several headwinds. First, a relatively weak euro, which declined 7% versus U.S. dollar compared to Q2 last year, which translated to slightly over $6 million of operating profit headwind.

As we have discussed in the past, a weak euro pressured AWP margins in Europe as a large portion of the product sold in the region is produced in North America and China. Margins were also impacted by lower factory overhead absorption, resulting from our decision to reduce production to better align global inventory levels with demand. Global AWP production volume in Q2 2019 was approximately 20% lower than Q2 2018. And lastly, while overall sales were steady compared to last year, the mix of sales was queued to telehandlers, which also impacted AWP margins in the quarter.

Backlog was stable at at approximately $750 million, and bookings were similar to last year, up modestly on an FX-neutral basis. Materials processing continued its strong performance, achieving another excellent quarter. Sales were $365 million, up 9% or up 13% on an FX-neutral basis, driven by continued strong global demand for crushing and screening products, material handlers and picking harry cranes. The MP team delivered a very strong operating margin of 15.4%, representing an expansion of 220 basis points, generating 27% more operating profit than the prior-year quarter.

These results were driven by improved operating performance across the portfolio and effective price cost management. The British pound to U.S. dollar exchange rate provided a modest tailwind to MP margins in the quarter. Backlog of $364 million is consistent with our full-year outlook.

MP is well positioned across its portfolio of businesses to continue to deliver excellent results. The rough terrain and tower crane businesses that are reported in corporate continued to perform in line with expectations in Q2. Let's turn to Slide 8 to review our consolidated results. Total sales of $1.3 billion were up 4% or up approximately 8% on an FX-neutral basis.

The currency, production and mix headwinds that impacted AWP margins were partially offset by the strong performance in MP and reductions in corporate expenses, leading to an overall adjusted operating margin of 10.1%. Investment in our execute-to-win initiatives and restructuring-related charges were the primary differences between our as-reported and as-adjusted operating profits. Net interest expense increased approximately $7 million year over year, resulting from increased borrowing and higher interest rates on floating rate facilities. On an adjusted basis, we generated earnings per share of $1.21.

While this quarter's EPS was lower than the prior-year quarter on a comparative basis, the result is 23% better than the $0.98 per share as adjusted EPS we presented in Q2 2018, demonstrating the benefits of our strategy execution. Turning to Slide 9. We continue to deliver on our commitment to follow a disciplined capital allocation strategy. I was proud of our global team's focus on improving working capital and free cash flow performance in the second quarter.

We generated $168 million, more than double last year and more than double our net income in the quarter. We reduced inventory by $92 million since March. However, we continue to hold more than the prior year. As I mentioned earlier, we adjusted production rates down significantly in AWP and expect inventory levels to continue to normalize during the second half of the year.

In addition to free cash flow, we are generating cash through our portfolio actions. The sales of Demag mobile cranes and our shares of ASV are expected to generate approximately $150 million in cash proceeds in Q3. As of June 30, our net debt-to-adjusted EBITDA ratio was a healthy 2.0 times, down from 2.4 times at March 31. We expect our net leverage ratio to decline further in the second half of the year.

We continue to invest in our execute-to-win priority areas, although the level of investment will taper off during the second half of 2019 as our internal capabilities continue to mature. Looking at return on invested capital. For the second consecutive quarter, we achieved a greater than 20% return on invested capital. The Terex team has and will continue to generate shareholder value through the execution of our disciplined capital allocation strategy.

Turning to our full-year financial guidance, on Page 10. Based on our actual performance in the first two quarters and outlook for the second half of 2019, we are updating our guidance for the full year. We now expect full-year 2019 sales to grow between 1% and 3% to a midpoint of approximately $4.6 billion, our operating margin outlook is now 8.8% to 9.3%, and our EPS guidance range has been updated to $3.40 to $3.80 per share. We are reaffirming our full-year free cash flow guidance of $165 million.

From a segment perspective, we expect overall AWP performance in the second half of 2019 to be similar to the second half of last year from a revenue and margin perspective. The lower-than-previously expected sales and production volume and adverse foreign exchange rates and product mix implies a full-year outlook for a stable top line with operating margins between 9% and 9.5%. A significant driver of this operating performance update is the euro-dollar exchange rate, which is an approximately $30 million negative impact for the full-year 2019. We expect MP to continue its strong operating performance.

We are increasing full-year guidance to sales growth of between 4% and 7% and operating margin of 14% to 14.5%. MP operates several facilities in the U.K. Our guidance range assumes there are no major disruptions associated with Brexit. We continue to monitor events as the Brexit process unfolds.

Finally, we anticipate the distribution of the remainder of our 2019 earnings per share to be approximately 55% in Q3 and 45% in Q4. And with that, I'll turn it back to you, John.

John Garrison -- Chairman and Chief Executive Officer

Thank you, John. Turning to Slide 11. I'll review our segments, starting with AWP. The overall global market for AWP is moderating but remains at a healthy level.

The North American rental customers are maintaining a generally positive outlook and continue to be disciplined in their fleet management, based on utilization and rate expectations, and the North American utility market remained strong. We are seeing overall demand moderate in Europe. AWP continues to grow in the Asia Pacific region, fueled by increasing product adoption. We're providing Asian customers with a winning value proposition, advanced products, Lifecycle Parts & Service and tailored financing solutions.

We continue to expect strong, long-term growth in the, Asia Pacific region. Overall bookings in the quarter were similar to last year, up slightly on an FX-neutral basis. A key to improving margins in AWP is the execution of our Strategic Sourcing plans, including transitioning significant volume to new suppliers. We deployed Wave 1 implementation teams in each of our manufacturing facilities, and this transition to new suppliers is going well.

Wave 2 savings plans are also taking shape as the global demand and supply dynamics normalize. We're seeing more opportunities to fast-track savings. We're working with several incumbent suppliers to generate savings that we expect to ramp up in the fourth quarter of 2019 and into 2020. We'll change some suppliers in Wave 2 but to a lesser extent than Wave 1.

As I mentioned, our full-year 2019 savings is now expected to be approximately $30 million, given our lower production levels and spend forecast. Most of these savings are in AWP. The rollout of our Genie Lift Connect telematics solutions is going well. Using advanced diagnostics, this system can alert customers to performance issues, help optimize maintenance and increase our participation in the life cycle economics of the equipment.

From a customer's perspective, Lift Connect helps increase operator safety, improve rental revenue and reduce maintenance cost. Genie has a robust product development pipeline and will continue to fill out our extra capacity line and launch a series of products over the coming months and years that address specific customer needs and differentiate Genie in the markets around the world. Turning to Terex Utilities. The team continues to execute well in a strong market.

Construction of the new state-of-the-art production facility remains on track. This is an important investment for Terex. It will improve our position in the utility equipment market that has considerable growth potential in North America and in developing markets. The new site will increase capacity and significantly improve productivity.

Both our aerials and utilities businesses are well positioned in their respective markets and are implementing strategic plans to grow and expand margins over the medium- and longer-term planning horizons. Turning to MP. Materials processing is a high-performing segment that delivers strong results and consistently meets its commitments. Global demand for crushing and screening equipment is generally stable at healthy levels.

Construction activity, aggregate consumption and environmental regulatory change were the main drivers. The global market for material handlers remained supportive. However, we are seeing a degree of caution in the end markets in North America and Europe for both of these product categories. Our cement mixer truck business in the United States is stable, and our Pick & Carry crane business continues to execute well.

The value proposition of our material processing equipment extends beyond its traditional crushing and screening applications into environmental applications, and our global environmental business continues to grow. The picture on the slide shows an EvoQuip crusher processing material at our new MP site in the U.K. The material from the excavation was processed on site and is used as a base layer to expand and strengthen the local roads. Not only this reduced the cost of excavation in road construction, but it kept 650 cubic meters of materials from being transported to a landfill.

During our strategy review, we discussed MP's significant growth potential in environmental and across this product range in developing markets as customers are just starting to appreciate the benefits of highly efficient mobile equipment. We will continue to make strategic investments enable growth in materials processing. MP also continues to make progress on the digital front. Dealers from around the world recently attended the Powerscreen's digital dealer forums in Ireland and Chicago.

The MP team showcased its vision for the full enabled dealer of the future. The emerging technology enabled best-in-class life cycle solutions, including closer connections to end customers to improve uptime and overall customer experience. Reactions from the forums were quite positive and dealers believe these tools would differentiate us in the marketplace. I expect the global MP team to continue to execute at a high level and deliver on its plans again this year.

Turning to Slide 13. To wrap up our prepared remarks. Our global team continues to work hard to improve execution and meet the needs of our customers. We are implementing our strategic plans, the focus the portfolio on high-performing businesses, simplify the organization and enhance capabilities in our execute-to-win priority areas.

We expect to significantly improve our financial performance again in 2019, including generating approximately $165 million of free cash flow. We are confident in achieving our 2020 objectives of 10% operating margin and greater than 20% ROIC. Finally, we'll continue to follow our disciplined capital allocation strategy while investing in future growth and creating additional value for our shareholders. With that, let me turn it back to Brian.

Brian Henry -- Senior Vice President of Business Development and Investor Relations

Thanks, John. [Operators instructions] With that, I'd like to open it up for questions. Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] And our first question comes from the line of Jamie Cook from Credit Suisse. Your line is open.

Jamie Cook -- Credit Suisse -- Analyst

Good morning. I guess a couple of questions.

John Garrison -- Chairman and Chief Executive Officer

Good morning, Jamie.

Jamie Cook -- Credit Suisse -- Analyst

Good morning. Specifically on aerials, you talked about cutting production in the second quarter, I think 20%. What are your assumptions specifically in the back half of the year? And then if you could help us understand your assumptions to get to your margins in back half of the year, whether it's currency, price, cost, production mix, just so we get comfortable there. And then I guess my second question, in 2020, you talked about your ability to achieve your goals.

I mean, at this point, is it more driven by materials processing versus aerials? And can you grow your aerial margins in 2020, assuming a flat market? Like what would be the Terex-specific drivers behind that outside of the market? Thank you.

John Garrison -- Chairman and Chief Executive Officer

Thanks, Jamie. A couple of questions here, so we'll try to tick them off. Let's start with, first, the margin and the margin guidance. As we indicated in our comments, we did see demand moderating.

But overall, demand in the AWP and aerials remains at a healthy levels. But it's not growing at our previously anticipated rates. So we did make the decision to reduce production volumes to better align our inventory with global demand, which did contribute to our margin performance in the quarter, and on the positive side, did contribute to our positive cash flow for the quarter. In terms of production, I'll have Duffy talk in greater detail on the margins.

But in terms of production, Jamie, I think it's important to put it in context. Just member, at the end of last year, Q3 and Q4, we did produce at a higher level, frankly, above global demand, say, roughly 10%. And that really was to maintain continuity in the tight labor market. And we did build up the inventory to prepare for what we expected to be modest growth rates this year.

This year, we made the decision in the quarter that we're going to under produce the global demand, again, roughly around 10%. And if you think about our normal production schedules, it's normally seasonal production is lower in the second half. So what we basically did is accelerated that lower production into the second quarter. And we will produce at lower levels in Q3 and Q4 than we did in 2019.

And again, our plan is to reduce inventory over the second half. And we expect it to be aligned with the demand by year-end. So John, can you cover in greater detail the margin guidance?

John Sheehan -- Senior Vice President and Chief Financial Officer

Sure. Thanks. So Jamie, as it relates to the guidance and the AWP assumptions, I mean the biggest impact -- the biggest headwind that we've been facing throughout 2019 for AWP has been foreign currency rates, specifically the euro-dollar exchange rate. I talked in my comments about that we're seeing a $30 million impact versus our original guidance.

If you go back to when we prepared our annual plan during the fourth quarter of 2019 and looking at lowered currency rates at that time, the forward curve for the euro-dollar was in the $1.22 range. And we've seen a constant deterioration of that forward curve here over the last six, nine months. That has -- that caused us to move our assumption with respect to the euro-dollar exchange rate for the full-year 2019 down to $1.12, and that's what's driving the most significant impact to us. As I talked about in my remarks, we do ship a significant amount of our product for the European market from the United States and from China into the European Union.

In terms of production volumes in the second half of 2019 for AWP, as we continue to align our inventory with global demand, we would expect that the production levels in AWP would be similar to what we saw -- year-over-year production levels for AWP would be similar to what we saw for the second quarter of this year, and that is built into the guidance that we provided. We have been seeing a higher proportion of telehandler sales in our product mix for 2019. As you know, we've talked about the margin profile for telehandlers is different than for booms and scissors. And again, that higher telehandler sales is built into the guidance that we're providing.

And then lastly, we also talked about the strategic sourcing savings and with the production levels for AWP being lower that we had reduced modestly from $35 million down to $30 million the amount of strategic sourcing savings that we would be realizing in 2019, and most of that savings is in the back half of 2019. So hopefully, that's a good run-through of the principal assumptions that go into the guidance that we're providing for AWP today.

Jamie Cook -- Credit Suisse -- Analyst

Thank you. And sorry, just to follow up on 2020, I mean you guys sort of reiterated your confidence level in getting to the 10% or above. Is that more driven by materials processing? And can aerials improve their margins in a flat market in 2020?

John Garrison -- Chairman and Chief Executive Officer

Thanks, Jamie. Yes. On the second part of the question, in terms of AWP or aerials driving margin improvement on flat volume. Yes, that would be our expectation, principally driven by our strategic sourcing savings.

Again, we're anticipating about $30 million this year. Again, that's back-end loaded that will run into next year. And then overall, we expect it in the $70 million to $75 million range for 2020 as we get full implementation of Wave 1 and begin implementation of Wave 2. So margin expansion on flat volumes would be our expectation when we execute our strategic sourcing savings.

Jamie Cook -- Credit Suisse -- Analyst

OK. Thank you.

John Sheehan -- Senior Vice President and Chief Financial Officer

I would just add, though, that -- just to the first part of your question, Jamie, right, materials processing has been a consistently strong executor for us. You saw in the first half of the year their sales up 9% and the operating margin with a 220 bp improvement year over year. So MP is becoming an increasingly more important part of our overall portfolio and will also be a contributor to successful 2020.

Jamie Cook -- Credit Suisse -- Analyst

Thank you.

John Garrison -- Chairman and Chief Executive Officer

Thank you, Jamie.

Operator

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

Steven Fisher -- UBS -- Analyst

Thanks. Good morning, guys.

John Garrison -- Chairman and Chief Executive Officer

Good morning, Steven.

Steven Fisher -- UBS -- Analyst

I wonder if you could just offer a little bit more color on what really changed in your view of the market dynamics over the last three months because it was a fairly abrupt change to go from producing more to now underproducing. So was it more what you saw in Europe? Was it more in North America? I think you've cited industrial markets, but just talk a little bit about where deterioration was. Was it how weather impacted? It would be helpful. Thanks.

John Garrison -- Chairman and Chief Executive Officer

Thanks, Steven, will do. So in terms of aerial, the North American rental channel outlook remains positive. Customers believe that they've got good visibility as they go forward. They are being very disciplined in their capex and their capex plan, closely monitoring their utilization rates and rental rates.

So I would say, in North America, highly disciplined. And basically, it didn't grow at the rate but it's just a slight modest decline. And I would -- we're characterizing it, frankly, as relatively stable. But the customer base, which I think is going to be good for the industry, is being very disciplined around their capex.

We -- our drop-off was in Europe. We did see a decline -- a moderation in Western Europe. And that is being impacted by cautious customer sentiment and principally what's transpiring on the continent and then Brexit-related activity. So clearly for us, Europe was a disappointment in terms of the volume in our expected forecast for the year.

Offsetting that to some extent was we continue to see strong growth in Asia Pacific and China region, up almost 40%. And again, that secular growth trend of adoption. So we think that's intact. We continue to see strong growth.

And so if we look at the back half of this year, we expect it to kind of be similar to the back half of last year as we look for the second half of this year.

Steven Fisher -- UBS -- Analyst

OK. That's helpful. And then cash flow has been one of the elements of your strategic plans where you feel you still had some work to do to achieve your goals. Where do you stand on the operational elements of trying to improve your cash flow? Obviously, we saw the results in the quarter, but maybe not from operational-type things.

John Garrison -- Chairman and Chief Executive Officer

So I'll go ahead and have Duffy respond on the free cash flow. Again, we were pleased with our free cash flow generation in the quarter. With that said, I always believe there's obviously room to continuous improvement, which we will continue to do. And net working capital improvement is a focus that we have at the management team.

Duffy, you want to comment on the cash flow?

John Sheehan -- Senior Vice President and Chief Financial Officer

Sure. Well, I guess I would tell you the following that when you look at the free cash flow generation in the quarter at $168 million, I would attribute that to be operationally driven, very strong collection of receivables in the quarter, as well as driving down the inventory levels in AWP, which generated free cash flow. When you look at the reiteration or the reaffirming of our full-year guidance of free cash flow of $165 million for 2019, that means, Steve, that we're going to generate $250 million of free cash flow in the second half of this year. That's really being driven by two operational factors.

First is that with the disposition of our mobile cranes businesses, which were a significant user of cash, we will see much greater -- much less cash usage from the mobile cranes businesses. And then No. 2, we will drive down operationally the inventory levels of AWP significantly in the second half of the year and that will drive significant cash flow. So that -- we're fully committed to achieving $165 million of free cash flow in the -- in 2019.

And I would just add on top of that that -- as I talked about in my prepared remarks, that on top of that in the second half of the year, specifically in the third quarter, we'll generate $150 million of cash flow or liquidity from the sale of our Demag business, as well as the sale of our shares of ASV. So we have liquidity of $400 million coming in, in the second half of the year. So I want to assure you that we are absolutely focused as a leadership team and as a total company in the operational needs of generating free cash flow.

Steven Fisher -- UBS -- Analyst

Got it. Thanks a lot.

John Sheehan -- Senior Vice President and Chief Financial Officer

Thanks, Steven.

Operator

Our next question comes from the line of Ann Duignan from JP Morgan. Your line is open.

Ann Duignan -- J.P. Morgan -- Analyst

That's the first time I heard that last name, but anyway...

John Garrison -- Chairman and Chief Executive Officer

Good morning, Ann.

Ann Duignan -- J.P. Morgan -- Analyst

Good morning. I just want to circle back on the free cash flow. I mean you generated $168 million in Q2, but $165 million for the full year. What am I missing? Am I missing Q1 or something, just simply put?

John Sheehan -- Senior Vice President and Chief Financial Officer

Yes. Sorry for interrupting, Ann Duignan.

Ann Duignan -- J.P. Morgan -- Analyst

All right.

John Sheehan -- Senior Vice President and Chief Financial Officer

So we -- I'm just kidding. So we -- I hate to have to bring it up, but just a recollection that we had a significantly negative free cash flow in the first quarter as we were paying for inventories that we built during the fourth quarter and paid for in the very beginning parts of 2019. So our free cash flow generation for the first half of the year is a negative $88 million. And that's the -- that gets you to then the $250 million for the second half of the year to get to the full year of $165 million.

And we're absolutely committed to generating that $165 million plus the $150 million from the Demag proceeds and sales of ASV for $400 million of liquidity in the second half of this year.

Ann Duignan -- J.P. Morgan -- Analyst

OK. Thank you. I should have known that myself. I apologize.

John Sheehan -- Senior Vice President and Chief Financial Officer

No issue, Ann.

Ann Duignan -- J.P. Morgan -- Analyst

And then secondly, my -- yes. My follow-up question is the mix on telehandlers. I mean why was that a surprise in the quarter? I mean you had a backlog coming into quarter. Why wouldn't you have known that the mix was going to swing toward telehandlers in Q2?

John Sheehan -- Senior Vice President and Chief Financial Officer

Yes. I would say, Ann, that we have seen a continued level of strength of telehandlers. We certainly did expect some level of elevated telehandler sales. I'd say, they're even more elevated than we had anticipated, and we've extended out through the year the period of time in which those elevated telehandler sales would continue.

So that's -- but as I think I talked about in relation to our guidance that when you look at the principal factors that are driving the guidance change, they're really the euro-dollar exchange rate headwind, the production volume reductions for manufacturing, and then lastly, the lower sales growth than we anticipated, the telehandler and the strategic sourcing points that I made are lesser factors.

Ann Duignan -- J.P. Morgan -- Analyst

OK. I appreciate it. I'll leave it there. Most of my other questions have been answered.

John Sheehan -- Senior Vice President and Chief Financial Officer

Thanks, Ann.

John Garrison -- Chairman and Chief Executive Officer

Thank you, Ann.

Ann Duignan -- J.P. Morgan -- Analyst

Thanks.

Operator

Our next question will come from the line of Stephen Volkmann from Jefferies. Your line is open.

Stephen Volkmann -- Jefferies -- Analyst

Hi, good morning, guys.

John Garrison -- Chairman and Chief Executive Officer

Good morning, Steven.

Stephen Volkmann -- Jefferies -- Analyst

Can I just -- maybe I have my numbers wrong, but it looked like you actually didn't change your full-year free cash flow expectations. I guess I would have assumed it be a little higher with the inventory reduction.

John Sheehan -- Senior Vice President and Chief Financial Officer

No. You are correct that we did not change our full-year free cash flow expectation. The -- when -- in our Q1 call, we did talk about the fact that we expected to be free cash flow positive in the first -- the next three quarters of the year. And then we expected to be meaningful -- the word I used was meaningfully free cash flow positive in the second quarter.

So while -- certainly, I will give our team kudos for a really strong quarter in cash flow. I'd say it that it's not above the full-year expectation for what we expect to do. So at the moment, we're maintaining our commitment to $165 million of positive free cash flow for the year.

Stephen Volkmann -- Jefferies -- Analyst

OK. All right. Thanks. And then I guess just when you think about the liquidity that you just mentioned, it sounds like you're going to pay down some debt if you're going to have a better net debt-to-leverage ratio at year-end.

And I guess, it looks like your stock may break $30 today if the pre-market is correct. I guess I'm just curious why you wouldn't see that as maybe a better use of cash.

John Garrison -- Chairman and Chief Executive Officer

Thanks, Steven. We will -- we've been rigorous and following our disciplined capital allocation strategy. So we will continue to do that. We do have $200 million remaining on our previously announced share repurchase program.

We did -- we do believe that share repurchase, especially at the levels you mentioned, is a good use of our cash and a good investment. And so we will give a consideration to that. But as Duffy indicated, we do want to reduce our leverage with the initial proceeds. So we're committed to creating long-term shareholder value through our disciplined capital allocation strategy.

And again, we have room on our share repurchase program to purchase shares.

Stephen Volkmann -- Jefferies -- Analyst

OK, fair enough. I'll pass it on. Thanks.

John Garrison -- Chairman and Chief Executive Officer

Thanks, Steven.

Operator

Our next question comes from the line of David Raso from Evercore ISI. Your line is open.

David Raso -- Evercore ISI -- Analyst

Hi, thank you. I'm just trying to drill down on the inventory reduction...

John Garrison -- Chairman and Chief Executive Officer

Good morning, David.

David Raso -- Evercore ISI -- Analyst

Hi, good morning. I'm trying to drill down to the inventory reduction in AWP for the year now. Can you give us a better sense of the inventory drawdown expected from the end of '18 to the end of '19 now?

John Sheehan -- Senior Vice President and Chief Financial Officer

Yes. So David, we would expect that the ending finished goods -- let me start a little differently, I apologize. So you recall that at the end of last year, we had built significant inventories in AWP and that we had about $600 million of inventory at the end -- for AWP at the end of 2018. And our plans would be that we would reduce that inventory by down to about $400 million or $200 million lower at the end of 2019 versus 2018.

David Raso -- Evercore ISI -- Analyst

And has that number now changed? So basically, the inventory reduction is as previously explained?

John Sheehan -- Senior Vice President and Chief Financial Officer

We've achieved about half of that reduction already, David, through the first half of the year.

David Raso -- Evercore ISI -- Analyst

I appreciate that. I was just trying to digest, have we looked at the market, thought about where the year could end or go into '20 and decided to take more inventory out. And is the issue in a way, maybe, the market weakened a bit so we're still at the $400 million target. It's just the market weakened a bit, right? So is that the way to think about it? There isn't a lower inventory target now.

It's just the adjustment for the end demand. Is that a fair assessment?

John Garrison -- Chairman and Chief Executive Officer

Yes. I think, David, that's a fair assessment of -- again, slight weakening in North America. We did see a reduction in Europe, strengthened Asia Pacific. But net-net, a moderation in demand, again, still at healthy levels.

And we believe, looking at our 2020 forecast and outlook, that historically, we've operated closer to that $400 million of inventory range. And we think that's a good place for us to be as we go forward. And again -- and I'd encourage investors to look. We did publish in August of last year kind of a long-term industry outlook, and it's on our Investor website.

So I want to be clear. I'm not providing guidance dated for 2020 today. But when you look at what we said then, we anticipated 2019 to be up slightly. And it's turning out that it's flat is basically what we're calling now.

At that time, we said 2020 would be flat to slightly down. We're not going to change that at this point in time. And we said 2021 and beyond is the replacement cycle kicks in that you'd see potential substantial growth in replacement cycle coupled with what we expect to continue to see strong growth in the Asia Pacific, China region with adoptions. So we're not changing our longer-term outlook.

It's just with the level of inventory we had and slight moderation in demand and the fact that we did produce -- again, we produced at a higher level last year with a conscious decision to maintain continuity in a tight labor market, and we just decided we needed to adjust that. So unfortunately, we have to produce at lower than the demand forecast to bring our inventory levels down in line with what we're looking for.

David Raso -- Evercore ISI -- Analyst

OK. So as a framework then we can look at that $400 million as a number you're generally comfortable with, with a flattish environment in 2020? I assume that's...

John Garrison -- Chairman and Chief Executive Officer

I think that's -- right now, David, what I provided in 2020 guidance, I think that's a good assumption. It's a good operating assumption.

John Sheehan -- Senior Vice President and Chief Financial Officer

And it's totally fair.

David Raso -- Evercore ISI -- Analyst

No, I appreciate that. Really appreciate your help. Thank you.

John Garrison -- Chairman and Chief Executive Officer

Thank you, David.

Operator

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

Seth Weber -- RBC Capital Markets -- Analyst

Good morning.

John Garrison -- Chairman and Chief Executive Officer

Good morning, Seth.

Seth Weber -- RBC Capital Markets -- Analyst

Good morning. I just wanted to go back to the kind of slight moderation in North America rental comment for a second and try and better understand that. Because in the first-quarter call, you talked about March orders actually being better. And so can you characterize what happened? Was it the large nationals canceling or pushing orders out? Or just you're not seeing the pickup from the independents or the smaller regional guys? Is there any way you could frame kind of that softening for us?

John Garrison -- Chairman and Chief Executive Officer

Yes. I'll try to put it this way. I would say, the word that we used is being very disciplined around capex. The national accounts clearly are, but we're also seeing it in the independents, where they're paying very close attention to utilization and their rental rates.

And they're modifying their capex in the short term around how their utilization and rental rates are flowing. And so we have seen pushouts. We have not seen cancellations necessarily. But we have seen pushouts of demand and indications that their back-half expectations weren't as high as they originally started in the year.

So in our SIOP process -- the sales forecast, we fed that in. And then the team made the management decision that it was time to reduce our production levels given our growing in inventory position.

Seth Weber -- RBC Capital Markets -- Analyst

OK. That's helpful. Thank you. And then just can you give any more color on the -- you made a comment about some caution in the North America MP business.

I'm sorry if I missed how you characterized that. But is there anything else you can add as to what's driving that and how -- are you concerned about it? Is that something we should be thinking about going into 2020? Thanks.

John Garrison -- Chairman and Chief Executive Officer

Thanks. Again, we as we've said, MP has been a great consistent performer. We really like the fact that they've got good diversification, both geographically and across our portfolio of businesses. What we saw in North America, in the crushing and screening business, is we've seen dealer inventory.

And again, this isn't really a stocking level like a yellow iron dealer. They bring inventory and then it usually goes out on rent. The good news is, we're seeing high rent and utilization, but we haven't necessarily seen the conversion from rental to purchase. So that's what we'll be watching here in the last six months of -- the last five months or so of the year is what happens to the dealer inventory converting from the rental fleet into a sale.

Overall market is still strong, being driven by aggregate consumption and construction spending. We did see some modification or some hesitation in Europe as well, not that dissimilar to AWP, given what's going on in the European continent. But again, offsetting that is the adoption in areas like India. Now that the election is over in India, that's become a very important market for our overall MP business and we've seen good growth there.

And then finally, material handlers is in that segment, and we've seen really strong growth in material handlers over the course of the last year or so and they continue to execute well. What we will watch there as material handlers scrap, steal pricing will have an impact on that demand. So that will be something we're watching closely. But overall, we believe the MP -- material handler market looks good.

I discussed strength in the environmental. And then finally our concrete mixer business in the U.S. is relatively stable. So again, overall consistent performance, 9% growth year-to-date.

We increased the sales forecast slightly for the full year based on a strong first-half performance. But we're watching it. And again, good strong underlying demand, but there's things that we're watching closely to see what that leads to future demand. But again, they execute well.

And if there's opportunities in the marketplace, we'll be able to take advantage of them.

Seth Weber -- RBC Capital Markets -- Analyst

Thank you very much. I appreciate the comments.

John Garrison -- Chairman and Chief Executive Officer

Thanks Seth.

Operator

Our next question comes from the line of Courtney Yakavonis from Morgan Stanley. Your line is open.

Courtney Yakavonis -- Morgan Stanley -- Analyst

Thanks for the question. I guess I just wanted to understand kind of how your thought process progressed through the quarter. And when it was that you decided to make the reduction in production? Was it something you saw early in the quarter? Was it really a pretty significant drop-off in June? And maybe just how we should be thinking about orders trending quarter-to-date and July? And then secondly, how we should be thinking about pricing in this increasingly more cautious environment given that you were expecting to roll in some pretty significant pricing this year? Thanks.

John Garrison -- Chairman and Chief Executive Officer

Thanks, Courtney. A couple of questions here. I'm not sure I got them all but if I don't, you guys jump in. So on the first one, we have a monthly SNOP or SIOP process, and as we got into the quarter, seeing what our demand forecast looked like given our existing levels of inventory, that's when the team made the decision that it was time to reduce our production levels for the remainder of the year.

So it's a month-to-month process that we review looking at our demand and supply balance and forecast and they made the call -- I would say, pretty much in the middle of the quarter is when the decision was made. Overall pricing. Pricing in the marketplace is competitive. We are getting positive price in the year.

Price is offsetting for the most part material cost increases. We are being very disciplined around our pricing with our commercial excellence and also around -- that also feeds into our inventory and inventory levels. We don't want to be in a position with more inventory than we need because that's a negative on overall pricing. So I think pricing in the marketplace is holding, and we are seeing positive year-over-year price.

But again, as we've said along, it's designed to help offset material cost increases that we've experienced here the last couple of years. Did I get all your questions there, Courtney?

Courtney Yakavonis -- Morgan Stanley -- Analyst

Yes. And sorry, I just had one more. Just on Terex Utilities, is that also a segment where you're seeing some caution right now? And are you producing production there? Or should we expect that to be relatively in line with your expectations this year?

John Garrison -- Chairman and Chief Executive Officer

Thank you, Courtney. No. Terex Utilities is really having a good year. They're in line with expectations.

We're not seeing -- given the electric grid and the needs in the electric grid in North America, some good international sales. So I would say utilities is performing in line with expectations. No changes to that environment. And as we've indicated, it's about $400 million.

So it's about 15% of our AWP segment. Operating margins about 9% to 10% and it's consistent. And the other thing about aerials -- I'm sorry, utilities is that $400 million, it's about $100 million, plus or minus, a quarter. So it's pretty consistent through the year.

It doesn't have the same seasonality factors that the aerial business does. So again, the team is executing their strategies around new product development. We're working hard on the new manufacturing facility. That's going to help us significantly simplify and drive some manufacturing productivity and give us some incremental capacity that we need going forward.

So no. I would say utilities is in line with expectations.

Courtney Yakavonis -- Morgan Stanley -- Analyst

I'm sorry. I think I also just asked if you have any quarter-to-date trends on orders?

John Garrison -- Chairman and Chief Executive Officer

No. We haven't commented on quarter-to-date trends on orders.

Courtney Yakavonis -- Morgan Stanley -- Analyst

Thank you.

Operator

Our final question today will come from the line of Jerry Revich from Goldman Sachs. Your line is open.

Jerry Revich -- Goldman Sachs -- Analyst

Yes. Good morning, everyone.

John Garrison -- Chairman and Chief Executive Officer

Good morning, Jerry.

Jerry Revich -- Goldman Sachs -- Analyst

You folks have been really focused on making sure you can scale production up and down with the cycles. Can you talk about where capacity utilization stands today in terms of number of shifts you folks are running and over time? And if in aerial platform demand is weaker in North America from here? What should we look for in terms of your ability to manage costs on a production cut, if we need a greater one for North America?

John Garrison -- Chairman and Chief Executive Officer

Thanks, Jerry. So overall, I'd say, right now most of our assembly operations are operating on single shift. There are a couple of exceptions. Some of the back shops paint, in some cases, is running on multiple shifts.

So we do have capacity. AWP has historically dealt with seasonal productional swings and the ups and downs. So we'll continue to focus on the ability to execute production volume changes and doing it efficiently. So we have capacity.

And again, most of the issues that we're talking about now really are our North American plants, our European plants and our major facility in China. China is actually operating closer to two shifts. So it really is the issues that we're talking about are in the North American plant.

John Sheehan -- Senior Vice President and Chief Financial Officer

And greater than 80% of our cost of goods sold is variable. And so when there is a reduction in demand, we can take the cost structure out and the AWP operational team knows how to do that. So we would -- in a reducing or declining production environment, AWP operations will take cost out.

John Garrison -- Chairman and Chief Executive Officer

And again, Jerry, I just want to reiterate for subsequent years execution of the Strategic Sourcing is important to drive margin improvement.

Jerry Revich -- Goldman Sachs -- Analyst

OK. And then we've heard very good things about your product performance in China and your margin profile in China compared to the rest of the aerial platform business. Can you just talk about what order cadence has been like in that part of the business? And are you considering plans for expansion? I believe the entire industry is approaching full capacity utilization, in China, specifically.

John Garrison -- Chairman and Chief Executive Officer

Yes. So we've seen good order rates, good strong demand for China. China itself. Asia Pacific region, it's become a more important manufacturing site for us globally in China.

And I'll be over there the first week of September. We are making an investment to expand our capacity in -- production capacity in China both for AWP, our utilities business. And we believe there's going to be an opportunity to create a mobile MP business in China that virtually right now we don't have much of anything, but we're starting to see the mobile MP side of the adoption equation start to pick up in China. So we believe that that's a potential good trend for us longer term.

So yes, we -- China is important to us as a production site for global production for the Chinese market, and we are planning an expansion in China.

Jerry Revich -- Goldman Sachs -- Analyst

And are you willing to comment the order of magnitude of the expansion, John?

John Garrison -- Chairman and Chief Executive Officer

From a capex standpoint, I'd say I'll hold that for right now. And -- we haven't finalized the approval of it, Jerry. So let me hold off on that.

John Sheehan -- Senior Vice President and Chief Financial Officer

In terms of square footage increase, though, it is a really significant increase in our manufacturing capacity.

John Garrison -- Chairman and Chief Executive Officer

Right. I just don't want to say capex yet, Jerry, until we sign off on things. Don't want to put myself on the negative negotiating position.

Jerry Revich -- Goldman Sachs -- Analyst

I appreciate that. Thank you.

Operator

I will now turn the call back over to John Garrison for closing remarks.

John Garrison -- Chairman and Chief Executive Officer

Again, thank you for your interest in Terex. If you have any additional questions, please follow-up with Brian. Again, thank you.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

Brian Henry -- Senior Vice President of Business Development and Investor Relations

John Garrison -- Chairman and Chief Executive Officer

John Sheehan -- Senior Vice President and Chief Financial Officer

Jamie Cook -- Credit Suisse -- Analyst

Steven Fisher -- UBS -- Analyst

Ann Duignan -- J.P. Morgan -- Analyst

Stephen Volkmann -- Jefferies -- Analyst

David Raso -- Evercore ISI -- Analyst

Seth Weber -- RBC Capital Markets -- Analyst

Courtney Yakavonis -- Morgan Stanley -- Analyst

Jerry Revich -- Goldman Sachs -- Analyst

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