Terex (TEX) Q3 2019 Earnings Call Transcript

Terex (TEX -0.59%)
Q3 2019 Earnings Call
Oct 31, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Terex Corporation third-quarter 2019 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, Brian Henry, senior vice president of investor relations. Sir, you may begin.

Brian Henry -- Senior Vice President of Investor Relations

Good morning, everyone, and thank you for participating in today's third-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 released our third-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 & 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. Looking at the global market environment, it became clear to us toward the end of the third quarter that we are in a softening environment for industrial equipment. Demand in the major markets for aerial work platforms has declined, putting pressure on sales.

We lowered production in the third quarter and are reducing production in the fourth quarter to align with global demand, which is impacting margins. A bright spot for AWP continues to be growth in China. In the quarter, materials processing continued its strong performance, increasing sales and generating over 15% operating margin again. However, booking and backlog levels are pointing to weaker demand in their global markets.

In this environment, I was very pleased with our free cash flow performance as we generated $104 million in the quarter, a significant improvement compared to last year. Our global team continues to focus on generating cash and improving working capital efficiency. As we enter a more challenging macro environment for industrial equipment, we are intensely focused on maintaining a strong liquidity profile. We are well positioned, entering the fourth quarter with approximately $1.1 billion in available liquidity.

One of the commitments we made back in 2016 was to generate returns greater than our cost of capital throughout the cycle. By executing our strategy, focusing the portfolio on great businesses, dramatically improving our balance sheet, reducing corporate overhead and making significant improvements to our operations, we are well positioned to deliver on that commitment and have the ability to execute at a high level through the challenging phases of the equipment cycle. I acknowledge and the team understands that we have more work to do as a company to establish a consistent high level of execution across our businesses. Turning to Slide 4.

We continue to implement our strategy and enhance the capabilities needed to win in the marketplace. A core element of our Execute to Win business system is talent development. We recently completed our annual talent review process. This is a global activity that requires every leader in the company to evaluate his or her team, update development plans and address talent gaps.

As I travel to our sites around the world, I'm always encouraged when I meet emerging leaders. We have many high energy, passionate team members that are taking on more responsibility. To harness this talent, we're investing in companywide leadership development and mentoring programs and supporting local training initiatives. From a leadership perspective, we recently announced the three executives who I would describe as builders of Terex.

Eric Cohen, Kevin Barr and Brian Henry will be leaving the company at the end of the year. Eric led the legal function and providing counsel to the senior leaders of Terex for 22 years. Eric was instrumental on the company's acquisition and disposition strategy and building and improving the company, including establishing our corporate governance and ethics and compliance strategy. Kevin joined Terex 19 years ago to build the human resource function.

He was a leader in implementing the cornerstone of our culture, the Terex Way values. The fact that we have internally developed leaders taking on these executive roles going forward is a testament to the quality of the talent development structure that Kevin put in place. Finally, many of the folks on the call have worked with Brian Henry. Over his 29-year career with the company, he has been a driving force in the strategic decisions, including the acquisitions and divestitures that shaped the Terex of today.

I want to thank Eric, Kevin and Brian for the many contributions they have made to Terex over the course of their distinguished careers. I want to thank each of them for their insights and counsel. Turning to Slide 5. We continue to make progress implementing our strategy.

In August, we completed the sale of Demag Mobile Cranes. Team members from across Terex worked incredibly hard to close the sale and ensure a smooth transition. In the remaining rough terrain and tower crane businesses, we rebuilt our commercial organization to position the businesses for success. We are committed to these businesses and investing to support our customers into the future.

We continue to simplify Terex. We created a transition to a two-segment organization, a significant portion of the general and administrative costs associated with the former Cranes segment has been eliminated. The simplified structure also allows us to reduce expenses in our corporate functions. Our leadership team continues to scrutinize every expense to ensure our operating model is efficient and appropriate for the current structure and market environment.

We continue to execute the organic growth element of our disciplined capital allocation strategy by investing in innovative products and services and our global manufacturing capability. The new utilities manufacturing site in South Dakota remains on schedule and within budget. MP's expansions in India and Northern Ireland are on track. The new Campsie facility, pictured here, celebrated its official opening last month.

The new site manufactures mobile conveyors and Ecotec waste management and recycling equipment. These investments enable simplification, improve manufacturing productivity and underpin our long-term growth. We also continue to invest in our Execute to Win priority areas. Our commercial excellence team achieved a significant milestone in the quarter by completing the final deployment of sales force.

All of our businesses worldwide are now on the system. On Lifecycle Solutions, the leadership team is in place. We are investing in system infrastructure to enable longer-term growth. A high-performing parts and service business is important throughout the cycle as demand for new equipment moderates.

Finally, we continue to implement our strategic sourcing program as we are moving significant volume to new suppliers. Lower production volume, which is reducing spending levels, is impacting the overall savings. However, we are achieving good savings rates. Based upon AWP's lower production levels and spend forecast, we expect savings of approximately $25 million this year.

Turning to Slide 6. Based on our year-to-date performance, the slowing global market environment, reduced friction volume and adverse foreign exchange rates, we now expect full-year EPS to be between $3 and $3.20, and net sales of approximately $4.4 billion. While we continue to focus on working capital and improving cash flow, we are adjusting our free cash flow guidance for 2019 to approximately $110 million based on our updated earnings outlook. Looking ahead to 2020.

While we're not providing financial guidance today, from an operational perspective, we are planning for sales to be potentially 10% lower than 2019 due to the softening macroenvironment for industrial equipment. We are planning conservatively, but are ready to react to the changing market conditions. 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 Q3 segment highlights. AWP sales totaled $628 million in the quarter, down about 14% versus the prior-year period. Weakening demand in North America and EMEAR led to sales declines in both markets in the quarter.

We increased sales in China, driven by market growth and increased product adoption. Lower sales and reduced production volumes in the quarter resulted in lower margins for the segment. To align with customer demand and manage inventory levels, we reduced aerial production in the quarter by over 30% compared to last year. This resulted in lower manufacturing absorption and lower-than-expected material cost savings.

Margins also continued to be impacted by a weaker euro, which declined 4% versus the U.S. dollar compared to Q3 last year, leading to a $5 million operating profit headwind. A weak euro pressures AWP margins in Europe as a large portion of the products sold in the region is produced in North America and China. Finally, the mix of sales were more skewed to telehandlers, which also impacted margins.

Softening in the major markets led to lower bookings and backlog in the quarter. A portion of the year-over-year decline is attributable to the timing of annual purchase orders with three major customers. Their 2019 orders were booked in Q3 of last year. We are still negotiating their 2020 orders.

Excluding these three large orders, bookings would be down 19%, and backlog would be flat to the prior year. Materials processing continued its strong performance, achieving excellent financial results again in Q3. Sales were $339 million, up 8% or 12% on an FX-neutral basis on growth across the MP businesses. The MP team delivered a very strong operating margin of 15.6% on an adjusted basis, representing an expansion of 240 basis points.

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. MP is seeing lower backlog and booking levels as the global macro environment for industrial equipment is slowing.

That said, the MP team is diligent in their production planning and will manage the businesses appropriately. The rough terrain and tower cranes businesses that are reported in corporate continued to perform in line with expectations in Q3, although these businesses also experienced weakening demand in the quarter. Let's turn to Slide 8 to review our consolidated results. Total revenue of $1 billion was down 7% or approximately 5% on an FX-neutral basis.

The currency, volume and lower production 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 8.8%. Investment in our Execute to Win initiatives and restructuring-related charges were the primary difference between our as-reported and as adjusted operating profit. On an as-adjusted basis, total interest and other expense increased approximately $2 million year over year, resulting from increased borrowings offset by nonoperating FX gains. For the quarter, we generated earnings per share of $0.82 on an as-adjusted basis.

While this quarter's EPS was lower than the prior year's quarter on a comparative basis, the result is 21% better than the $0.68 as-adjusted EPS we presented in Q3 2018, demonstrating the benefits of our strategy execution. Turning to Slide 9. We are delivering on our commitment to follow a disciplined capital allocation strategy. Our global team continued to focus on improving working capital and free cash flow performance.

During the third quarter, we generated $104 million of free cash flow, a significant improvement compared to the third quarter of last year. We have reduced inventory slightly since the end of Q2. However, we continue to hold more inventory than last year. To better align with market conditions, we continue to scale back production levels, particularly in AWP.

We will continue to reduce inventory as we diligently manage working capital through the cycle. In addition to free cash flow, we are generating cash by executing our portfolio strategy. The sales of Demag Mobile Cranes and our shares of ASV generated approximately $150 million in cash proceeds in Q3. As of September 30, our net debt-to-adjusted EBITDA ratio was a healthy 1.5 times, down from 2 times at June 30.

While we continue to invest in our Execute to Win priority areas, the level of investment has been reduced as our internal capabilities are maturing. We are investing in our global manufacturing capabilities, with capital expenditures of approximately $120 million in 2019 and planning for approximately $100 million in 2020. Turning to our full-year financial guidance on Page 10. Based on year-to-date performance and outlook for Q4, we are updating our full-year 2019 guidance.

We now expect revenue for 2019 to be approximately 3% lower than 2018. The decline is driven by softening demand in our major AWP markets. Our operating margin outlook is now approximately 8.4%, and our EPS guidance range has been updated to $3 to $3.20 per share. We have lowered our expected full-year effective tax rate to 20%.

As a result of our updated earnings outlook, we are adjusting our full-year free cash flow guidance to approximately $110 million. From a segment perspective, we expect AWP performance in Q4 to continue to be impacted by the market downturn in North America and Europe, resulting in an expected full-year sales decline of approximately 7%. We are reducing production dramatically in the fourth quarter compared to last year, which will lead to substantially lower factory absorption. In addition, lower volume, adverse foreign exchange rates and product mix will continue to impact margins as we close out the year, leading to an expected full-year operating margin of between 7.25% and 7.75%.

The euro-dollar exchange rate will have an unfavorable full-year impact on AWP margin of approximately $30 million. We expect MP to deliver solid operating performance in the fourth quarter. We are updating full-year guidance. The sales growth of between 3% and 5%, 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. And with that, I'll turn it back to 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 the aerial work platforms is clearly softening.

Frankly, we expected a longer period of market stability, however, geopolitical and macroeconomic dynamics have led to a market downturn. Looking ahead to 2020, we are planning for demand in North America and Europe to be lower than 2019 and are working closely with our customers to align with their requirements. Looking beyond 2020, we expect growth in the developed markets to be driven by the replacement cycle, which we expect to kick in, in the 2021 time frame. We continue to be encouraged by growth in the developing markets.

Customers are seeing the benefits of adopting Genie equipment to safely and efficiently work at height. We expect strong long-term growth in the Asia-Pacific region. Turning to utilities. The North American market continues to grow, and the utilities team continues to deliver strong performance.

Our key to improving margins in AWP is the execution of our strategic sourcing strategy, including transitioning significant volume to new suppliers. Through the end of September, the AWP team has transitioned over 2,200 parts to new suppliers. We are encouraged by the saving rates we are achieving. However, lower spend levels are impacting the total value of savings in 2019.

Looking ahead and through the cycle, improving our supply base will mitigate some of the margin compression on lower volumes and will support margin expansion when markets improve. We continued to invest in growth in emerging markets and product innovation. The Genie team recently launched a new electric scissor lift, pictured here, featuring e-drive technology. The new model was designed as a global product to reach high locations in tight spaces, adhering to the new ANSI standards, as well as European and other requirements.

It's another great example of Genie innovation. I recently attended a utilities equipment show in Louisville, Kentucky. This is a major event for the utilities industry, and Terex had a strong presence. We are growing and gaining share in the utilities market by focusing on what's important to our customers: safety and innovation.

At the show, we introduced a new innovative TL series for the transmission lines segment. This enables us to compete in a new market segment with a cost-effective solution for doing higher level work on transmission lines. The utilities business will benefit from the new manufacturing facility we are building in Watertown, South Dakota. The new site will increase capacity and significantly improve productivity.

This is an important investment for Terex as the utilities equipment market has considerable growth potential in North America and in developing markets. Overall, for AWP, the investments we are making in our Execute to Win priorities, new product development and strengthening our global footprint will improve performance throughout the cycle. Turning to MP. Materials processing is a high-performing segment that delivers strong results.

Although sales grew across the MP portfolio in Q3, we are seeing signs that the market conditions are softening. Utilization of crushing and screening equipment remains high. However, conversion from rental to sales is slowing as uncertainty in both the United States and the European markets is impacting capital spending decisions. The global market for material handlers have softened, and our Q3 bookings were down sharply from last year.

We are monitoring scrap steel prices, an important driver for this business and working closely with our customers to align with the demand outlook. Our cement mixer truck business in the United States was relatively stable, and our pick and carry crane business continues to execute well, although demand is softening in Australia. We continue to invest in new products. The recently launched Powerscreen jaw crusher, pictured here, is the latest useful innovation in the crushing and screening business.

The lightweight machine is designed to maximize throughput at an aggressively low cost per ton, setting it apart from the competition. MP has a history of success developing new products and new markets, and our business in India is a great example. Our Hosur, India, plant celebrated an important milestone in August, achieving 10 years of growth in India. With Hosur as the cornerstone, Terex has established itself as the clear market leader in mobile crushing and screening in India.

In addition to the tremendous job the team has done, growing the business, I'm also proud of their safety record, achieving over 4.5 years with no lost time injuries. We are making investments to expand our capacity in Hosur, and we will capitalize on the dramatic growth potential in India and the surrounding market. In summary, for MP, great performance again in Q3. We are seeing signs that the U.S.

and European markets are softening, and we're evaluating production plans for every business. As MP has demonstrated, the team will continue to execute at a high level. 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 have made considerable progress implementing our strategic plan, focusing the portfolio on high-performing businesses and simplifying the organization to make our cost structure more agile. We enhanced our capabilities in Execute to Win priority areas. We implemented our disciplined capital allocation strategy, returning capital to shareholders and dramatically strengthening our balance sheet. With our current portfolio of businesses and strong balance sheet, we are well positioned to generate cash and significantly out earn our cost of capital throughout the cycle.

Finally, we will 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 Investor Relations

Thank you, John. As this is my last earnings call, I would also like to thank the members of the analyst and investor community that I have had the pleasure to work with over the past several years. I will continue to be your contact through the end of the year, at which time Randy Williamson, who I have worked with extensively over the past year, will assume the role of director of investor relations. Now let's get the Q&A started.

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

Questions & Answers:

Operator

[Operator instructions] Your first question comes from Jamie Cook with Credit Suisse. Your line is open.

Jamie Cook -- Credit Suisse -- Analyst

Hi. Good morning. I guess a couple of questions. First, on the aerial side.

One, can you just help us understand what the production cuts are implied for the back half of the year versus when you guided last quarter, and the risk that the production cuts will have to continue into 2020? Because obviously, that has implications on margins for 2020 given where we are in the back half. Second, on the supply chain, it sounds like you're a little behind. Because demand is lower, what are the new expectations in terms of what that will contribute in the back half of the year? Or is this push to 2020, and it is a lower number. And then last, the 10% sort of 2020 top line on outlook, the down 10%.

Understand you don't really want to give guidance, but with regards to aerial, should we assume you're someway -- somewhere in the range of what Oshkosh guided to yesterday for 2020?

John Garrison -- Chairman and Chief Executive Officer

Thanks, Jamie. Jamie, several questions there. So let me start with the production changes, and then I'll have Duffy speak to the -- to the margin impacts. I think we have to take us back to last year at this time in Q3 and Q4.

We made the decision to maintain a high level of production -- or higher level of production than normal in a tight labor market and built up the inventory in anticipation for a stronger 2019. As 2019 has turned out, it has not been as strong. I think our customers are being very disciplined in their CapEx plans, aggressively managing their utilization on rental rates and used equipment, which I think is going to be good for us as we move into '20 -- back half of 2020 and 2021. But in that environment, we made the decision to significantly reduce production volumes in Q3, down about 30%.

And again, in Q4, down about 45%. And again, we're going to be very disciplined to not overproduce to the global demand. And so with this lower production volume, it has clearly impacted our margins in Q3 and Q4. So Duffy, would you like to comment on the margin impact?

John Sheehan -- Senior Vice President and Chief Financial Officer

Yes. So I think, Jamie, as it relates to your other questions on strategic sourcing, we did lower the savings for the year, for '19 as a result of the lower production that we're seeing in AWP, that's buying down to $25 million. We still are very positive on our strategic sourcing initiative. The savings rates that we're getting are in line with our expectations, and we see that program continuing to contribute to our bottom-line profitability in 2020.

We've talked previously about a $70-ish million level of savings next year. And as you pointed out, we're not providing -- we will provide our financial guidance in February. And at that time, we'll update exactly where we'll be with respect to all of our financial performance for '20, including our strategic sourcing initiative. I would say as it relates to 2020 revenue outlook, as we indicated in our remarks, we are planning conservatively for revenue to be down 10%, and that's what we're using for our production planning purposes today.

When we provide financial guidance in February, we'll update exactly where we are from a financial perspective. Because at that point, we'll have much better visibility to the results of our discussions with our customers that take place here over the course of Q4 and into January.

Jamie Cook -- Credit Suisse -- Analyst

But Duffy, to be clear, is the expectation for you to produce in line with retail demand in 2020, at least for aerial, given where we are today?

John Sheehan -- Senior Vice President and Chief Financial Officer

That is correct. I didn't make that point. But as I thought, it was inherent in John's response. That is correct.

The reduction of the 30% for AWP production in Q3, 45% year over year in Q4 is intended to bring our inventories down, in AWP down $200 million over the course of 2019, such that we are producing in line with retail demand or customer demand, let me say, in 2020.

Jamie Cook -- Credit Suisse -- Analyst

OK. Thanks. I'll let someone else get in.

John Sheehan -- Senior Vice President and Chief Financial Officer

Thanks, Jim.

Operator

Your next question comes from Ann Duignan with JP Morgan. Your line is open.

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

Well, I can change my first name, but it is still me. Most of my questions have been answered, but I will ask one perhaps on materials processing. That business has been just a great performer in the up cycle, and I'm assuming has pretty high fixed costs, given that nature of the equipment. So what should we consider would be normal decremental margins for that business? I'm assuming they're going to be on the high side, somewhere around the 30%.

Is that correct? Or am I missing anything?

John Sheehan -- Senior Vice President and Chief Financial Officer

No. So, Ann, thanks for the question. And you are absolutely correct that the MP team has done a great job as they have increased their margins over the last several years, actually in excess of the 25% incremental margins that we have traditionally thought about for our businesses. On the downside in the decrementals, we would also expect that MP would be in the 25% range for their decremental margins.

I think that they have demonstrated that they are very cost-conscious on the upside and will be similarly cost-conscious on the downside. So say, 25% decremental margins is an appropriate place to think about for the MP business.

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

OK. And just a quick follow-up. On the Material Handling side, is this the first quarter where you've noticed a slowdown in customer demand? Or I -- did I just miss it in last quarter?

John Garrison -- Chairman and Chief Executive Officer

No. On material handlers, we've had a good rise in sales on our material handlers looks business over the last several quarters. And so yes, this is the first time we've seen kind of the bookings in the backlog begin to come down. And again, that's principally being driven by scrap metal prices around the world.

As scrap metal prices have come down, that impacts the demand for that segment. But the team's done a good job on the upside. I'm confident they'll do a good job as the volume comes down. And that team's also working to expand our regional mix and our customer mix moving beyond scrap metal.

But clearly, scrap metal is impacting our Material Handling business and will impact it as we go into 2020.

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

OK. Thank you. I appreciate it. I'll get back in line.

Operator

Thank you. Your next question comes from Seth Weber with RBC Capital Markets. Your line is open.

Seth Weber -- RBC Capital Markets -- Analyst

Hey, good morning, everybody. I wanted to ask about the AWP. Appreciate the color on the changing order cadence, but the -- but then you kind of called out, and I think it was 19% down kind of apples-to-apples. Can you just give any color where that's coming from? Is that spread pretty evenly, U.S., Europe? Or is there anything you would call out from that's contributing to that 19% delta?

John Garrison -- Chairman and Chief Executive Officer

Right. Thanks, Seth. Yes. Last year, in Q3, we actually had three large customer orders that booked the APOs in their annual plan in Q3 last year.

One of which was a large U.S. customer, two of which were larger European customers, about equally split in terms of the amount, approximately $240 million. And I think that was the environment that we were in last year, as customers were looking to plan earlier in the cycle. We had longer lead times, other competitors that had longer lead times.

And as we move into this year, I'd say the team is saying, we're seeing a normal pattern. As we're moving into November and December and early January, we're starting those conversations or engage in those conversations with the larger national accounts. So we did want to call that out that, that did occur last year, and it did not reoccur in Q3 of this year.

Seth Weber -- RBC Capital Markets -- Analyst

Right, right. Sorry, John. I thought I had heard that the -- excluding those three contracts, that the base business, the balance of the ordering was still down or almost 20%. That's what I thought I heard.

That -- was that not correct?

John Garrison -- Chairman and Chief Executive Officer

Yes, that is correct, Seth. It was down -- as we reported, it was down more. This explains that it wasn't down quite as dramatically as it seems.

Seth Weber -- RBC Capital Markets -- Analyst

Right. So I was just trying to get some color on that 19% or 20%, if that's equally spread. Is that Europe? Is it more U.S.?

John Garrison -- Chairman and Chief Executive Officer

Yes. Sorry, Seth. Sorry about that. So yes, let me just talk about the regional dynamics within the aerial work -- AWP business.

In North America, we're seeing our customers and in Europe to be very disciplined around their fleet and fleet utilization, aggressively managing the utilization, rental rates and used equipment. So we saw a very strong growth frankly in the -- on the '18 time frame and growth in our fleet. That's come down now. As we look into the back half of 2019 and into 2020, I will say the high utilization rates that our customers are experiencing will help as we move into the back half of 2020 and into 2021, with the replacement cycle that high utilization is clearly going to help in North America for the replacement cycle.

In Europe, we are seeing the macroeconomic environment is more severe in Europe. Our sales in Europe were -- in the quarter were down greater than 20%. Our bookings are down as well. I think the global economic uncertainty in Europe with Brexit, the situation in Germany, Italy, what was going on in France is just caused a pause in the European market.

And so we did see a decline in Europe. And obviously, we're monitoring that quite closely as we go forward to see how that business is going to perform going into 2020. But the macroenvironment in Europe was more severe of the environment that we saw in North America. And then offsetting all that was dramatic growth in China.

With the adoption story, we've got a fantastic manufacturing facility in China that produces not only for China, but the Asia Pacific region and exports into Europe. And so we continue to see strong growth in China, but ameliorating growth in Europe and to a lesser extent, in North America.

Seth Weber -- RBC Capital Markets -- Analyst

Great. That's super helpful, John. And just on China, is there any kind of -- are you banging up against capacity constraints? Or how are you set up there? Can you handle more demand on the current footprint?

John Garrison -- Chairman and Chief Executive Officer

Yes. So thank you, Seth. I was in China earlier in the quarter. And two years ago, we implemented the Phase two and grew our capacity in China, and we're already through that capacity in China.

So we're looking at a Phase 3 expansion at our plant in China. We're excited about it. We've got a fully integrated team in China, a great management team, local management team, a great Chinese cost structure. And so we will be expanding in 2020 in our Chinese operations.

And again, it's to meet the capacity needs, both within China, but also to export out of China into Asia Pacific and other regions. This is a very effective place for us to manufacture.

John Sheehan -- Senior Vice President and Chief Financial Officer

I would just add that the expansion of our China manufacturing facility is a contributing factor for the $100 million CapEx amount for 2020 that we highlighted in the presentation. And that, that as we organically invest in our business, it's important to invest in our high-performing businesses, and China is certainly one of those.

Seth Weber -- RBC Capital Markets -- Analyst

Thank you very much, guys. I appreciate it.

John Sheehan -- Senior Vice President and Chief Financial Officer

Thanks, Seth.

Operator

Your next question comes from David Raso with Evercore ISI. Your line is open.

David Raso -- Evercore ISI -- Analyst

Hi. Thank you. I was just curious -- I hopped on late, so apologize if I missed this, but the cash flow was a little disappointing to take it down in the guide, even more than the implied EBIT was cut. So I'm thinking about the net debt to EBITDA, it's improved, right, it went from 2.0 times to nearly 1.5 times at the end of the quarter.

When we think of anything to offset what appears to be a difficult cyclical situation for '20 on the down 10% sales, we can debate the decrementals. How should we expect the balance sheet usage to be utilized to push back against that operational downturn in 2020?

John Sheehan -- Senior Vice President and Chief Financial Officer

So thanks, David. When you look at the free cash flow forecast that we provided today or guidance that we provided today at $110 million, the reduction is really attributable to the reduction in earnings. I think that the difference between the reduction in earnings and the reduction in the free cash flow is within the range of noise. We generated over $100 million of free cash flow in the third quarter.

That's after generating $168 million of free cash flow in Q2. And the guidance we provided today implies about $100 million of free cash flow in the fourth quarter. So the business is clearly throwing off cash flow in -- even in this declining macroeconomic environment that we're operating in. I would say that the working capital, I would expect that in a declining revenue environment this year, that working capital will continue to be a source of cash.

We'll provide financial guidance specifically on 2020 free cash flow. But we do expect that free cash flow will continue to be strong, I would say, without providing guidance, at least as strong as 2019. And we'll finish this year with net debt-to-EBITDA or net leverage below the -- based upon the free cash flow of $100 million in the fourth quarter, below the 1.5 that we're at here in the -- at September 30. So we think the balance sheet is very well positioned.

Terex's balance sheet has never been stronger, and we are absolutely focused on managing and improving our working capital performance and increasing free cash flow.

David Raso -- Evercore ISI -- Analyst

Well, two things I'd say, though. One, when you cut your production that much at AWP, as much as you lose some earnings, you would think the cash flow from working capital would be a bigger beneficiary than simply having to give away the cash flow equal to the EBIT cut. So I would have thought the working capital offset where it may be.

John Sheehan -- Senior Vice President and Chief Financial Officer

Yes. I think the --

David Raso -- Evercore ISI -- Analyst

Well, at least it offsets some of the EBIT. And if you can answer my question, I apologize. But my question was more about, OK, so the balance sheet can be an asset going into next year. How should we think about the management's decision to push back against the EBIT declines? Share repo, things lined up for M&A.

Just wave some perspective.

John Sheehan -- Senior Vice President and Chief Financial Officer

So I apologize, I guess I didn't pick up on the last point specifically. On -- so I do believe that net working capital will be a contributor to free cash flow, and that will be more so in the early 2020 time period than necessarily here as we close out 2019. That's why I do believe that our free cash flow in 2020 will be stronger than 2019. As it relates to whether -- to other actions we may take with the very strong balance sheet that we have will follow our disciplined capital allocation strategy, invest in or -- in the organic growth in the business.

And then we will potentially return cash to shareholders. We've returned $1.35 billion of cash to shareholders over the last two-plus years. We do view Terex shares as a good investment, and we'll continue to strategically consider reinvestment back in our business. I'd say on the inorganic side, that certainly we'll continue to consider that.

But when we follow our disciplined capital allocation, right now, today, our focus is on organic investment in our business.

David Raso -- Evercore ISI -- Analyst

And I guess a little more, if you could. I mean, I'm not trying to push here, but just a sense of what's the target, say, net debt-to-EBITDA that you're comfortable with so we can at least think through whatever the EBITDA decline is next year? What are you comfortable with on the leverage? Again, this year, you're probably end a bit below 1.5. So if you can just --

John Sheehan -- Senior Vice President and Chief Financial Officer

No. So we've talked before, and really, nothing has changed that we're comfortable with net debt in the 2, 2.5 times. But I would also say that where we are in the industrial cycle right now, we're very pleased to have our net debt-to-EBITDA, substantially below that in the 1.5 times net debt-to-EBITDA at September 30, and we have over $1.1 billion of liquidity available to us as of today. And so we'll continue to consider how we use our balance sheet to drive shareholder value.

David Raso -- Evercore ISI -- Analyst

I appreciate that. OK. Thank you so much.

John Sheehan -- Senior Vice President and Chief Financial Officer

Thank you, David.

Operator

Your next question comes from Jerry Revich with Goldman Sachs. Your line is open.

Ben Burud -- Goldman Sachs -- Analyst

Hi. Good morning, everyone. This is Ben Burud on for Jerry Revich. Just want to start in aerials.

Two years ago, your aerial work platforms business was about the same size as Oshkosh is. And now you're, let's say, about 20% smaller. Can you help us think about what's driving that difference? Is this -- apparently, it could be a share loss? Or are your production adjustments playing a role on a relative basis?

John Garrison -- Chairman and Chief Executive Officer

So thanks, Ben. Obviously, as we spoke about, pretty significant production changes and reductions in 2019. As it pertains to the share based on AEM data, our market share is consistent. North America is stable on a product-by-product basis.

We have a higher mix of booms and scissors. Telehandlers are not as big a part of our overall business as other players in the industry. Our European market share is relatively constant. Booms are steady.

Scissors, we did see a small -- low single-digit market share change over the course of the last 12 months or so, but we're seeing that rebound in Europe. Telehandlers are quite small. So we're really not a player in the European telehandler market. And as I've talked, China would see dramatic -- significant growth in China as the China adoption story really takes off in the market.

And I was there in September. We'll continue to grow as we spoke earlier to invest in our plant in China. From a market share standpoint, the market share is changing, but that's really a result of the number of Chinese manufacturers that are reporting now in two things. So overall, we feel -- as we think about our commercial excellence, we're laser-focused on delivering value for customers, and that comes from product and service innovation.

If you look at our AWP line, we got out ahead of the market with our booms or extra capacity booms launch, which are ANSI-compliant, launched those in '18 and '19. The competitors are going to have to match an ANSI-compliant boom as we go from December 10 onwards. Our scissors, you see on the scissor side that we're investing in technology there. And we're also investing in telematics.

The -- all of the our machines are going out with telematics and telematics solutions. So we're providing a true value package for our customers, and our teams working hard on selling that value package so that we can continue to win in the marketplace. So -- and I might add, as we go through a challenging industry cycle, we will not be reducing our research and development spend across any of our businesses. We will continue to invest in new products and services.

These businesses are cyclical. We realize that. And -- but we're going to invest through the cycle to ensure that we've got the best products and services in the marketplace to win. And so that -- that's how I'd respond to that in terms of our relative position in the marketplace.

It's something, obviously, we pay very, very close attention to. And -- but again, we're focused on customers and how can we deliver customers value.

Ben Burud -- Goldman Sachs -- Analyst

Got it. Got it. And I was hoping you could just provide a little more granularity regarding what's embedded in that 10% revenue outlook for 2020. I'm assuming we'll see a meaningfully larger decline in aerials relative to materials processing.

But just wanted to check given the uncharacteristic weakness we've seen in materials processing book-to-bill ratios over the last two quarters. And I just want to make sure we're properly aligned given the higher-margin performance in materials as well.

John Sheehan -- Senior Vice President and Chief Financial Officer

Yes. So I think that number one is that the 10% that we're referencing today is what we're operationally planning for from a production perspective. And we will provide our financial guidance in February, just to reiterate that point. When you think about the production planning that we're doing right now, we're planning for about 10% down across our business lines or business segments.

So it's not one business planning for their production to be down significantly more than the other.

Ben Burud -- Goldman Sachs -- Analyst

Got it. Thank you.

John Sheehan -- Senior Vice President and Chief Financial Officer

Thank you, Ben.

Operator

Our next question comes from Mircea Dobre with Baird. Your line is open.

Mircea Dobre -- Robert W. Baird and Co. -- Analyst

Good morning, everyone. Just wanted to follow up on that last comment. So when you're sort of making this plan for a 10% production cut, is this a factor of the backlog erosion that you have seen in 2019? Or does this embed already some kind of a view as to where your orders are going to be in 2020 based on what you know from your customers and end market?

John Garrison -- Chairman and Chief Executive Officer

Thanks, Mig. It really is a combination of both. You've got a SIOP process that the teams run based on their sales forecast. Usually, out in most cases, 18 months.

So you continue to update your sales forecast and your production plans based on that sales forecast. Obviously, you are looking at orders in that case and backlog. So it is a combination, but really the biggest driver is looking out to the sales forecast as we go forward. And I might say in both AWP and -- in MP and AWP, we were at historically high levels of backlog in that '18 -- '17, '18 time period.

Likewise, with our MP business, coming into this year, we had historically high backlog of almost $400 million. Historically, that business is really not used to operating at that level of backlog. Normally, it's with -- it's more of a shorter cycle book-to-bill business. That business is about 75% of their sales go through a distribution channel.

So the team's monitoring it. It's an ongoing active process of the sales forecast, adjusting your production schedules. And then sometimes, we have to step in, like Matt and the team did at AWP and make decisions that based on labor and things of that nature. So that's why I explained the changes that we made at AWP.

And then MP, consistent process across their businesses, looking at what does that 12- to 18-month sales forecast look like and the production plans to that. Obviously, an output is orders in backlog. So it's a combination, Mig, of how you drive that forecast going forward.

Mircea Dobre -- Robert W. Baird and Co. -- Analyst

OK. Then my follow-up is on MP. Maybe a little more color on your aggregates business in there. You talked about conversion from rental slowing.

I heard one of your competitors say something similar recently. What's really going on in that market? And I guess my question is, now that we're fairly late in this current highway bill in the U.S., are you starting to see maybe some saturation of demand here? Do we -- are we relined, if you would, on anything legislative happening in order to get a bit of a demand boost as we look at '20 or '21?

John Garrison -- Chairman and Chief Executive Officer

Thanks, Mig. So if we look at our core crushing and screening business, and specific to your question, Mig, around North America, as we have commented our dealers, on the positive side, our dealers are seeing very high utilization of their rental fleets, which is good news. I mean the underlying activity remains strong. There's a degree of uncertainty, which has caused them not to convert those rental machines, the customers to convert the rental machines into owner, which then allows the dealers to restock their rental fleet.

So we -- that trend has continued as we've gone through this year. Again, the positive is very high utilization. In terms of the macro outlook, and specific to North America, any legislative action would be a positive. We're not counting on that in the underlying demand profile that we're looking at.

So if we were to get any major legislation on infrastructure, that will be a net positive. So as we look out -- and we're not assuming that in the forecast. Our customers and dealers are not assuming that, that we're going to get any major legislative breakthrough on infrastructure. I think it's just the underlying need for infrastructure, specifically in North America is there, which, again, is showing up in the high utilization rates of the aggregate crushing and equipment.

What we need to see, Mig, is does that then convert, and that's what we're going to be following quite closely over the coming months, does that -- does it -- the retail convert to ownership and then -- which allows us to -- our dealers to increase their rental fleet and purchase more machines from us. So that's what we'll be following quite closely, which we already do, but we'll continue to follow that as we go forward.

Mircea Dobre -- Robert W. Baird and Co. -- Analyst

I see. Lastly, are you seeing any price pressure given this delayed conversion, if you would, to ownership? That's it for me.

John Garrison -- Chairman and Chief Executive Officer

No. Overall, I think the MP team -- again, it's a collection of businesses. Across its businesses, with 75% of the business is going through a distribution channel. They manage the price cost ratio quite well.

And so we haven't necessarily seen anything significant in that. Of course, Mig, one-off deals here and there with a dealer to a customer always occur. But overall, I would say that the MP team has done a really great job managing price cost across their portfolio of businesses. And aggregate, crushing and screening is no difference.

There's no difference, I should say.

Operator

Thank you. Your last question comes from Andy Casey with Wells Fargo Securities. Your line is open.

Andy Casey -- Wells Fargo Securities -- Analyst

Thanks. Good morning, and good luck, Brian, and thanks for the help. Last and first, I guess. Anyway, the clarification on Slide 10.

Comment about exclusion of future divestiture impact, among other things from guidance. I know it's kind of been on there. But are you looking at further portfolio actions beyond those already announced?

John Sheehan -- Senior Vice President and Chief Financial Officer

No. I'd say, Andy, we're absolutely committed to our disciplined capital allocation strategy, which -- looking for exactly the page number, but I believe it's right behind it. And so we're not trying to highlight anything with that. As I mentioned in response to a previous question, our disciplined capital allocation strategy is primarily focused on organic investment and then it starts with maximizing free cash flow.

And then from there, organically investing in the business, having the right capital structure and then returning capital to shareholders efficiently. And as we continue to operationally drive the performance of Terex, we will consider changing that capital allocation strategy in the future and thinking about organic -- inorganic activity. But I'd say today, we're more focused on organic. And we -- just to close it out, we've never had a stronger balance sheet in the history of the company, leverage at 1 point -- at net leverage of 1.5 times.

We reduced our net debt by $250 million over the course of the quarter, $950 million down to $700 million. So that -- we like very much where the company is focused and the strength of our balance sheet. And we'll continue to evolve our capital allocation strategy as we move forward.

Andy Casey -- Wells Fargo Securities -- Analyst

OK. I mean, just to go back to that, John. The question was more around, are we looking at a stable portfolio, forget about the acquisition potential?

John Garrison -- Chairman and Chief Executive Officer

Yes. Yes, Andy, so this is John. So the focus element, focus, Simplify, Execute to Win, the focus element of our strategy is -- virtually is complete. The remaining businesses that we have in the portfolio are all businesses that have historically been able to out earn their cost of capital through the cycle.

They have relative leadership market positions in the respective segments that they compete in. And so with the sale of our Demag business that we completed in the quarter, that really completed the focus element of our strategy in terms of any further dispositions within the portfolio.

Andy Casey -- Wells Fargo Securities -- Analyst

OK. And then two follow-ups, if I may. I know it's getting late, but there really follow-ups on a couple of mix questions. That when you're looking at the segment forecast for next year, particularly AWP, you kind of commented about some forecasts from the second half of last year that turned out a bit optimistic, and you had to correct them this year.

Should we expect that you're kind of discounting that segment forecast to be conservative?

John Garrison -- Chairman and Chief Executive Officer

I would say, obviously, we've continue -- one of the things is continuous improvement, in trying to drive continuous improvement in all of our business processes. And so we want to learn from the previous forecast. We have systems to continue to improve the level of forecasting. One of the things I am excited about is we were able to put sales force now globally within that business.

So that'll give us a much better entirety in the sales opportunities as we go forward. So I just -- I'd answer that one, Andy, saying that, obviously, our job is to drive continuous improvement in all of our business processes and outcome, and we anticipate to continue to do that.

Andy Casey -- Wells Fargo Securities -- Analyst

OK. And then last one for me. When you look at the coincident backlog declines, AWP and MP, and your -- in your discussions with customers outside of maybe folks in the pick and carry. This seems to be from your comments, mainly uncertainty driven.

And if so, what are you hearing from your customers that they may be looking for to reaccelerate investment?

John Garrison -- Chairman and Chief Executive Officer

I think that's the broader geopolitical question, Andy. And when you talk to customers, if you talk to European or U.K.-based customers, clearly, Brexit is in the forefront. So driving clarity in Brexit. Trade policy, trade tensions, clarity in the trade, the global trade situation, especially as an equipment manufacturer and industrial equipment manufacturer will clearly help our customers and their insights.

So anything that helps to resolve some of the uncertainty on the trade side, on the Brexit side, those are things that impact customers that are making capital decisions. So anything, any progress that can be made over the course of the coming months in that area being positive for the global equipment business, industrial equipment business that we compete in.

Andy Casey -- Wells Fargo Securities -- Analyst

OK. Thank you very much.

Operator

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

John Garrison -- Chairman and Chief Executive Officer

Again, thank -- I'd like to thank everyone for your interest in Terex. If you have any additional questions, please follow up with Brian, at least for the next several months as Brian moves on. But again, thank you for your interest in Terex. And again, any questions, please follow up with Brian.

Thank you.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Brian Henry -- Senior Vice President of Investor Relations

John Garrison -- Chairman and Chief Executive Officer

John Sheehan -- Senior Vice President and Chief Financial Officer

Jamie Cook -- Credit Suisse -- Analyst

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

Seth Weber -- RBC Capital Markets -- Analyst

David Raso -- Evercore ISI -- Analyst

Ben Burud -- Goldman Sachs -- Analyst

Mircea Dobre -- Robert W. Baird and Co. -- Analyst

Andy Casey -- Wells Fargo Securities -- Analyst

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